Michael J. Zimmerman - Head-Investor Relations Patrick Sinks - Chief Executive Officer Timothy J. Mattke - Chief Financial Officer & Executive Vice President Stephen Mackey - Chief Risk Officer & Executive Vice President, Mortgage Guaranty Insurance Corp..

Bose George - Keefe, Bruyette & Woods, Inc. Patrick F. Kealey - FBR Capital Markets & Co. Mark C. DeVries - Barclays Capital, Inc. Mackenzie Aron - Zelman & Associates Eric Beardsley - Goldman Sachs & Co.

Jack Micenko - Susquehanna Financial Group LLLP Geoffrey Murray Dunn - Dowling & Partners Securities LLC Douglas Harter - Credit Suisse Securities (USA) LLC (Broker) Phil M. Stefano - Deutsche Bank Securities, Inc. Vic Agrawal - Wells Fargo Securities LLC Ronald David Bobman - Capital Returns Management LLC.

Good day, ladies and gentlemen and welcome to the MGIC Investment Corporation's Second Quarter Earnings Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Mr. Mike Zimmerman. Sir, you may begin..

Thank you. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2016 are CEO, Pat Sinks; Executive Vice President and CFO, Tim Mattke; and Executive Vice President of Risk Management, 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 Investor Information, includes additional information about the company's quarterly results that we'll refer to during the call and includes certain non-GAAP financial measures.

We have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information we think you will find valuable. During the course of this call, we may make comments about our expectations of the future.

Actual results could differ materially from those contained in those 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 an 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..

Thank you, Mike, and good morning. I'm pleased to report that we had another solid quarter, resulting in net income of $109.2 million or $0.26 per diluted share. Insurance in-force, the primary driver of our future revenues increased on a year-over-year basis by 5%, ending at $177.5 billion.

This growth reflects the expanding purchase mortgage market, our company's market share of approximately 19% and the hard work and dedication of my fellow coworkers to deliver stellar customer service.

The 2009 and newer books now comprise 67% of our risk in force and reflecting the credit quality of the loans and current economic conditions continue to generate low level of losses.

The pre-2009 books are still generating the majority of our incurred losses, while the rate of decline in new delinquent notices modestly slowing, we continue to experience positive trends relative to the number of new notices from these books.

The increasing size and quality of our insurance in force, the run-off of the older books, solid housing market fundamentals, such as household formations and home sales and our current capital status, positions us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers.

Despite the low interest rate environment, we did not see a material increase in refinanced transactions, which accounted for 17% of our new insurance written.

However, we do expect to see a modest increase in refinances in the second half of the year, which could put some pressure on persistency, but that would be highly dependent on the future level of rates. Most forecasts are calling for increased purchased activity in future periods, which is a net positive for our company and our industry.

We estimate that our industry's market share is approximately three times to four times higher for purchased loans compared to refinances, and MGIC tends to be at the higher end of that range.

For the quarter, we wrote $12.6 million of new business, which is up nearly 7%, with an increase of 3% in year-to-date purchase applications and a 19% decrease in year-to-date refinance applications from last year. And for the first half of 2016, we wrote $20.9 billion of new business or about flat to the first half of 2015.

Based on actual results to-date and the forecasted strength in our overall purchase activity for the full year of 2016, we now expect to write at least the same amount of new insurance that we did in 2015, and we continue to forecast that our insurance in force will increase approximately 5% in 2016 compared to 2015.

Turning to our industry's opportunity to further reduce the risk borne by the GSEs and ultimately the taxpayers, we believe that private mortgage insurers can assume risk before it even gets to the GSEs and that deeper coverage or front-end risk sharing would be the way to readily implement this.

As most of you are aware, the FHFA has asked for input about risk transfers, both existing back-end deals, but also front-end transactions. We are working with our trade association to formulate a response that is due August 29. We believe that other participants will also write letters in support of front-end risk-sharing.

It is difficult to predict how these responses will influence the FHA's and GSEs view of using mortgage insurance, but we feel that our industry has a strong case to make. Meanwhile, we continue to work directly with the GSEs on developing a pilot program that would involve mortgage insurance on the front-end.

Tim will now go through the financial details for the quarter..

Thanks, Pat. In the quarter we earned $165.2 million of pre-tax income versus $150 million (sic) [$115 million] for the same period last year. The primary driver of the increase was the net positive developments on our primary reserves, resulting from an improved claim rate on existing notices.

Specifically, in the quarter, there was positive development of $55 million on our primary loss reserves compared to positive development of approximately $22 million in the second quarter of 2015.

In addition to the positive prior year development, losses incurred on new notices were lower on a year-over-year basis and that was primarily a result of fewer new delinquency notices received.

During the quarter, we received approximately 8% fewer delinquency notices than we did in the second quarter of 2015, and 4% fewer than the first quarter of 2016.

The new notices received were estimated to have a claim rate of approximately 13%, which due to seasonal influences was up from the first quarter, but about the same as the second quarter of 2015. As we have previously discussed, we think of a 10% claim rate as the long-term average.

The pace of improvement is difficult to project given the unique performance of the pre-2009 book. The pre-2009 legacy book, especially chronic delinquencies, will continue to dominate the new notice activity for the foreseeable future.

In the quarter, those books generated nearly 90% of the new delinquent notices received while comprising just over 33% of the risk in force. Additionally, nearly 86% of the notices received have been reported delinquent previously.

We continue to expect fewer notices in 2016 than 2015, which is the material contributor to the level of losses incurred each quarter. And given the experience to-date, we continue to expect that the 2009 and forward books will generate very low lifetime loss ratios. The delinquent inventory was down 21% from last year and down 5.5% sequentially.

In addition to normal activity in the quarter, 135 loans that were included in the non-performing loan sale that was completed by one of our larger insurance counterparties were removed from inventory. The removal of these loans from our inventory did not have a material impact on our financial results during the quarter.

We expect to see the remaining inventories continue to decline due to the eventual resolution of older delinquencies, combined with the lower level of notices being received. The number of claims received in the quarter also declined, down 33% from the same period last year and down approximately 16% (08:06) sequentially.

Net paid claims in the second quarter were $172 million, including $4 million that was associated with the non-performing loan sale I just mentioned. Primary paid claims were $153 million, down 21% from the same period last year. The calculated weighted average effective premium yield for the quarter was 52.5 basis points.

For the first half of 2016, the effective average premium yield was 51.4 basis points, which compares to the full year 2015 effective yield of 52.8 basis points.

Volatility from quarter-to-quarter can result for a variety of reasons, including the pace of prepayments on older books of business which have higher premium rates than the business we are currently writing, premium refunds, premium resets as older books pass their 10 year anniversary, and the level of profit commission we earn on the reinsurance treaty, which is dependent upon the level of losses incurred that are ceded.

We expect that after considering the volatility I just described that the effective premium rate would continue to trend lower in future quarters. At quarter end, cash and investment totaled $4.9 billion, including $217 million of cash and investments at the holding company.

The investment portfolio had a mix of 70% taxable and 30% tax exempt securities, a pre-tax yield of 2.6% and a duration of 4.9 years. Turning to our capital position at the writing company. At the end of the second quarter, MGIC's available assets totaled approximately $4.7 billion and its minimum required assets are $4.2 billion.

Our statutory capital is $1.3 billion in excess of the State requirements. PMIERs is more the restrict of the two capital standards, and so over last several months, we have been analyzing what a prudent level above the PMIERs capital requirement should be.

We believe it is important to manage the capital position at the writing company to withstand a mild recession and to preserve the ability to continue to write new business without a remediation plan or need to access the capital markets.

It is also important to maintain capital for potentially higher volumes of primary business, new business opportunities and potential changes to PMIERs. At this time, we think it's prudent to maintain a level of capital that is 10% to 15% above the minimum required asset. Now let me address the holding company's capital position.

During the quarter, the holding company used its resources to repurchase $50.2 million par value of 2017 5% convertible senior note. The remaining par balance is $145 million and is expected to be repaid at maturity using holding company resources. The transaction resulted in a pre-tax loss of $1.9 million on the income statement.

But after considering interest savings, it was effectively done at par. The repurchase reduced potentially fully diluted shares by $3.7 million and further lowered our consolidated annual interest expense.

While ratings are not inhibiting our ability to write new business, we think that long-term it will be important to have the holding company return to investment grade.

Therefore, when analyzing various options for restructuring our capital, we consider the resulting leverage ratio and interest expense at the holding company as well as the ability to minimize potentially dilutive shares.

Of course, we also need to consider the fact that capital is being created at the writing company and its dividend paying ability is subject to insurance department approval. We continue to analyze the costs benefit of implementing various transactions to restructure our capital.

And when we determine that there is an opportunity to create long-term value for shareholders, we'll execute such transactions. Regarding MGIC's ability to pay quarterly dividends, the OCI approved another $16 million dividends that was paid to the holding company in June.

Our expectation is that we would receive similar size dividends on a quarterly basis for the balance of this year and are optimistic that these quarterly dividends would grow in the future especially as the difference between available assets and required assets under PMIERs grows as we expect.

Each dividend will be considered extraordinary versus regular, and therefore, requires OCI approval. 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, to review and updating of State Capital standards by the NAIC, which the Wisconsin insurance regulator is leading continues to move forward and an Exposure Draft was issued in May.

At this time, we still do not expect the revised State Capital standards to be more restrictive than the financial requirements of the PMIERs. At present, there is a great deal of activity around prescribing an end state for the GSEs that would be delivered to the new administration in early 2017, and we are actively engaged in those discussions.

However, I continue to believe that the current market framework is what we will be operating in for a considerable period of time.

Regarding the FHA, while we cannot say definitively that there will not be any further price reductions, based on public comments and actions to-date by FHA officials, we are not aware of any changes that are being planned at this time.

We don't believe that it makes sense to change FHA pricing without first addressing the larger question of the government's role on housing.

For example, recent data issued by HUD shows that 18% of the FHA's recent production had FICO scores between 720 and 850 with an additional 25% with FICO scores between 680 and 719, that is not the role that our government should be playing.

Simply put, another price reduction would likely shift business away from private capital and expose the taxpayer to increase risk at a time when private capital, primarily in the form of mortgage insurance, is ready, willing and able to take this risk.

However, if there is an annual premium reduction, we think it would primarily impact business below 700 credit scores, which was approximately 16% of our NIW in the quarter.

How much of this business would be at risk, is difficult to say, as we would need to take into account, lenders concern over legal risks associated with FHA lending and the 97% LTV programs that a number of lenders have recently introduced, and which continue to require private mortgage insurance. In closing, we continue to make great progress.

We had net income of $109.2 million, wrote $12.6 billion of high quality business. The in force portfolio grew to level of new delinquency notices and delinquent inventory continue to decline. MGIC's capital position and our market share within our industry is strong, and we maintained our traditionally low expense ratio.

We also took advantage of our financial position to reduce potential dilution to shareholders and lowered our interest expense through the debt repurchases and continued paying dividends out of MGIC to the holding company. I continue to see lots of opportunity for MGIC in the coming years.

I firmly 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 our shareholders, and we are committed to pursuing those opportunities. With that, operator let's take questions..

Thank you. And our first question comes from the line of Bose George with KBW. Your line is now open..

Hi, guys. Good morning..

Good morning..

Good morning..

The first question just on the average premium on your monthly new insurance written, it was down, I guess, it was 60 basis points.

So does that reflect the new pricing and does that kind of fully reflect the new pricing that's in place?.

Yeah. Bose, this is Tim speaking. I think that when we look at it, we think that is probably reflective of some of the new pricing. Obviously if you look at the mix of the business, a little bit higher credit quality as well on the new business with those premium rates and you can see that in the stat.

We'd expect that the with the mix of business that we're writing, that the average premium rates on monthly could come down a couple more basis points. We think that we enacted the pricing change in April and the NIW is reflective of all months, June was probably trending a little bit lower than what the full quarter was..

Okay. Great. That makes sense.

And then, I guess the flip side is the available assets required for the new business will also be lower, so the ROEs end up kind of in the same ballpark?.

Yes, we believe so..

Okay. Great. And then, actually just one on the FHA. In terms of competition with the FHA, Wells noted on its earnings call that your first mortgage program had $1 billion of applications in the first 30 days.

Do you think this could be a meaningful driver of shift towards away from FHA to private mortgage insurance?.

Hey, Bose, this is Mike..

Hey, Mike..

Clearly, with the banks, the depositories, we've all seen that migration away from FHA into these types of programs, but non-banks are filling the void within the FHA. So I think it's a little too early to tell if there's a long-term shift of market share away from the government to the private sector.

But clearly, with the depositories doing it in purchase business, we feel that that's to our advantage..

Okay. Great. Thanks a lot..

Sure..

Thank you. And our next question comes from the line of Patrick Kealey with FBR. Your line is now open..

Good morning everyone. Thanks for taking my questions..

Good morning..

So, first maybe kind of again on the regulatory front, but looking at a little bit differently.

Obviously there was the letter that included USMI to the FHFA regarding LLPAs so, can you maybe kind of walk through potential impact to the extent that there is adjustments on LLPAs and maybe how we should think about that, in comparison to an FHA price cut? Do you look at this as an opportunity that, to the extent there is movement in LLPAs, you essentially – you end up in a good spot in a competitive kind of FHA versus private MI landscape?.

This is Pat. Yes, we see it as opportunity, though it's difficult to handicap how the FHFA will respond. When they put out an RFI approximately a year ago, maybe a little longer relative to g-fees and pricing, they didn't adjust anything. So, I think it was important to put this letter out for all the various constituencies to sign it.

There's a lot of talk, as there's always been, about access to credit and we believe and the signers of that letter believe that should there be a reduction in LLPAs, that will bode well for the consumer. Now relative to us, it kind of depends on where they would drop the LLPAs, they're driven by FICO score as much as anything else.

And in fact, in many respects, it keeps us out of the 680 and below space, along with PMIER capital requirements and things of that nature. So, would it be exactly a one-for-one trade off, relative to an FHA – winning business from the FHA? I'm not sure. But we're hopeful that the FHFA can be responsive to the concerns..

Okay, great. And then kind of turning to your business, obviously nice growth here in NIW, you did note single premium ticked up as a percentage. So, maybe if you can kind of give us a thought process there, just as a kind of the dynamics within the quarter.

And then if you can also remind us with the new rate card, what do returns look like on single premium business maybe compared to what we would have seen in the year-ago period?.

Pat, this is Mike. First on the singles, it actually ticked down a little bit, it went from 22% to 21%.

And as we talked about when we made our changes to pricing last quarter, we're looking at returns – that we're trying to achieve mid-teens returns on the business that we write, and it's going to be dependent upon loss performance and everything else, but that's our expectation going forward..

Okay. Great. Thank you..

Sure..

Thank you. And our next question comes from the line of Mark DeVries with Barclays. Your line is now open..

Yeah. Thanks.

Could you comment on the level of stability you're seeing in pricing within the industry or are you seeing signs that we're starting to reach some level of equilibrium now that the industry is adjusted to PMIERs?.

This is Pat, and good morning, Mark. I think we're seeing a fair amount of stability, particularly in the borrower pay channel. All of the MIs have pretty much lined up, there is a little bit of difference in the credit union channel, but for the most part, we pretty much lined up.

And so, in the borrower-paid, we're not seeing the kind of competition we did. There still has a good amount of competition in the LPMI space, which is about 25% of the volume.

That said, it seems to be – our sense of it is that people are playing selectively, meaning the MI companies are playing selectively meaning, they may want to win a bid now and then, but not necessarily every bid, or they may want to win a bid at a particular customer that they're comfortable with. So, we still see some aggressive pricing there.

Specific to MGIC, we continue to be very true to our hurdle rates and make sure that when we bid, we're going to exceed those hurdle rates..

Okay. That's helpful.

And then I know it's early days of implementation, but is there anything you can report on what you're hearing or seeing on the implementation of the FHFA principal forgiveness program?.

Yeah Mark, this is Mike. Well first, I think the fact that FHFA revised downward about 10% their expectations, but we've heard very little activity at this point. So, it still is early. So, we're in contact with servicers, we'll wait and see.

But just like we said last quarter, we're not expecting any windfalls from this, but we'll have to wait and see how it all plays out..

Okay. Got it. And then just finally on the capital structure, I know you made some vague comments on kind of what you're thinking here going forward, but you still have a fair amount of holdco cash.

When you think about priorities, should we think about that the 2017 convert, what's outstanding to be the first priority?.

Yeah, Mark. This is Tim. I think the way that we look at the 2017s is we're going to use cash at the holding company to pay those off. So, that's the first priority and we've got the interest carry that's out there otherwise, but when you look at the holdco cash that's there now, it's effectively earmarked for the 2017 maturities..

Okay.

And as you look out to 2017, any thoughts on how much more you could potentially ask for in terms of the dividend up from the writing company?.

That's something that we'll obviously discuss with the regulator, I think it depends upon where our capital is in MGIC in relation to where it is now.

I don't think that you should think about significant increase in the dividends, but we'd hope there will be a little bit more, but I don't think there'd be anything that would be viewed as highly material..

Okay. Got it. Thanks..

Yep..

Thank you. And our next question comes from the line of Mackenzie Aron with Zelman & Associates. Your line is now open..

Thanks. Good morning. Of the $55 million positive development on the primary reserves, I know you mentioned that was due to improvement in the claim rates.

But just curious, was there any change in the assumption around severities this quarter, as I know that was one of the factors that impacted last quarter's $5 million development? So just trying to get a sense of how the $55 million was kind of broken down between severity and claim rates this quarter?.

Yeah, I would say, it was – the vast majority of it was from claim rates, there might've been very, very slight amount of positive from the severity. But when you're talking in those numbers, I view it as effectively flat. So, when you look at the $55 million that's primarily related to the claim rate improvement..

Okay.

And can you just talk a little more about, what changed this quarter relative to in the first quarter when only $5 million was released, what gave you the confidence for such a pickup in the pace of improvement this quarter?.

Sure. I mean, like I said in prior quarters we've had some positive development on the estimated claim rates. But, you mentioned, last quarter we had some negative trends on the severity, so that offset it.

But we saw this quarter in claim rate in particular, we had a little bit more positive development, because we saw again continued improvement on the claim rate, especially in the 12%-plus bucket and a little bit more than what we saw even in the first quarter.

So that gave us enough confidence to make a move onto claim rate on those notices in particular..

Okay. Great. And if I could just ask one more on the trend in the new defaults, the pace of improvement, it's been moderating, it was down 8% this quarter.

So just kind of how should we be thinking about going forward is that kind of single-digit pace the new run rate we should be thinking about, and was there anything that kind of drove, why they were only down 8% this quarter versus kind of the double-digit pace they had been declining at previously?.

This is Steve Mackey. I think what we're seeing is just a flattening out of the improvement to more stable environment. As we mentioned in the comments, much of the delinquencies from loans have been previously delinquent. So they are coming into the population and curing.

But I think we're getting to a point where it's going to be a more stable environment for our delinquency..

Okay, great. Thank you..

Thank you. And our next question comes from the line of Eric Beardsley with Goldman Sachs. Your line is now open..

Hi, thank you.

Just wondering if you could help us understand what led the sequential improvement in the premium rate this quarter?.

Yeah, if you look at the premium rate as we said, we think this is general downward trend, but this quarter we saw a little bit of improvement on the average basis points. I would say the biggest mover for this quarter was the impact of the profit commission on the reinsurance that was probably just under 1 basis point in the premium on its own.

And I think the other difference from last quarter, if you look at sort of the premium refunds probably a little bit more premium refund activity in the first quarter than what we had in the second quarter of the year..

Got it.

So the guidance, I guess, for the year which I think was down 2 basis points to 3 basis points relative to the fourth quarter level, is that still the right level to think about?.

Yeah, I think where we are right now, as I said in the opening comments, if you look at the first half of the year, we are in the 51.5 basis points, first quarter was below that, obviously, second quarter above that.

We still think it's going to trend downward from where we were at the end of the last year, which I think was closer to 52 basis points, above 52 basis points. So I think the guidance is still by the end of the year that we should see it down 2 basis points to 3 basis points on that level..

Okay. And just I want to better understand the commentary around, I guess where the average premium rate on the new monthly business was coming in, you said you expected a little bit further of a drift downward.

I guess what would lead to that? And if you have that pricing out there for almost all about three days, four days as a quarter, I guess, is there any shift that you haven't seen yet from lenders that you start to see in June? I guess, just if you could help us understand that trend..

Yeah. This is Steve Mackey. So, the shift in pricing, even though was announced – effective in April sorry, there were some customers that were rolled out little bit more slowly, because of just system issues as an example. So, Q2 was a complete transition from one pricing framework to the updated prices.

We expect in Q3 that everything on the BPMI side will be fully implemented with across the board with a lot of customers, that's where we're going to see the full impact. So we do think it's going to trend down a little bit.

But the mix shift that we were seeing between lower FICO and higher FICOs, the higher FICOs increasing, that's going to contribute to that, but on a return basis we're basically flat to improving..

Got it..

LPMI, there is a little bit more in play on the LPMI side, as Pat mentioned in his comments. But again that something where we'll see some stability as we go through Q3, I believe..

Got it.

Why then we actually see a step-up in the LPMI rates?.

Yeah. I think this is competitive pricing, I mean we adjusted our prices based on our hurdle rates and the new PMIERs capital requirements and we stuck to our hurdle rate there.

And many of our other competitors have not updated their pricing to reflect PMIERs, at least it looks like in the marketplace that they have not made a change to reflect PMIERs..

Got it.

And just last question, do you have the average FICO of the monthly NIW versus last quarter, I guess, where can we see that improvement?.

Eric, this is Mike. In the supplement you can see the weighted average of it and I think it's – on a weighted average basis it's the same (30:01) for the full year, it's flat to last year, but you can look at kind of the mix there, but maybe a couple of points on a quarterly basis..

Okay. Sorry, I actually said last question.

But should you actually see market share grow then, if not all lenders had shifted to your new pricing yet, until June?.

Well, this is Mike. And part of it, as Steve was saying that the transition there is that there is a period of time it takes 45 days, 60 days for apps (30:26) to convert to the NIW too. So, it's way too early to tell from a market share perspective, obviously we're the first company to report, we'll see how everything comes out.

That said, we think we're on 19% share at this point, but it's just too early to tell any share impact..

Okay, great. Thank you..

Thank you. And our next question comes from the line of Jack Micenko with SIG. Your line is now open..

Hey, good morning, everybody..

Good morning, Jack..

(30:54) there you go.

Tim, in the prepared comments, I think you had said a 10% to 15% PMIERs buffer and I just want to clarify, is that a change in your thinking, I mean, I had always sort of thought 10% was the number, but I don't remember, you guys crystallizing at that number – or were you sort of talking loosely and now you're more narrowing it? And then beyond that, is that 10%, 15% range consistent with the mid-teens ROE still?.

Yeah. Jack, I think, we haven't given a specific point before, I think we've been hovering in around the 10% and trying to determine what we thought was appropriate. We tried to figure out how we should talk about it.

We do think of it in terms of a range because of the availability to get dividends out of MGIC, as well as what might be available to us from new business opportunities at certain points. And so, we do think of it in terms of a range. So 10% to 15% is the first time we've really pointed to what we think the right level above the required assets are..

Okay. But there is no change to the ROE outlook, you've always considered that range in your ROE guidance..

Correct..

Okay. Okay. And then, on the FHA, I think a lot of investors are somewhat concerned more about the removal of the cancelability than they are maybe actual pricing changes. You can do the math on pricing changes and where FICO bands and what kind of business could potentially be at risk.

But have you – it's something I struggle with, how do you sort of quantify if any sort of mix or percentage of the business would be impacted by removing or I guess, including cancelability on FHA going forward as a potential amendment to their policies?.

Jack, this is Mike. I mean, one I think it's pretty difficult, it's kind of a second derivative, I would say of the equation borrowers go through.

They're mostly focused on the monthly payment, so clearly it's an additional selling feature of it, but the primary driver of selection is monthly payment when borrowers are considering taking out mortgages. It would be hard pressed to try to quantify what that would mean though otherwise..

Okay. That's fair. Making sure I wasn't missing anything in that thought process. All right. Thank you..

Sure. Thanks..

Thank you. And our next question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open..

Thank you. Good morning, guys..

Good morning..

A couple of questions. First Tim, ex the ceding commission, expenses were flat year-over-year. Can you give us an idea of what we should be expecting in terms of a growth rate from here? I was thinking mid single-digit plus as you think about investments in the platform, et cetera.

Can you frame that for me?.

Yeah. I think when you look at the expense ratio itself, obviously, it was just a little bit (34:00) quarter and I think at the end of the last year, we said we thought we might be a little bit higher than we were last year and in a (34:05) nominal expense basis.

If you take out the ceding commission, I think we would expect that we would be a little bit higher for the rest of the year, probably potentially even a few million dollars per quarter higher than the level we were in the second quarter..

Okay. And then, when you're looking at your incidence assumptions, can you talk about – have you adjusted how you think about the repeat defaulter? I mean, you've got the guys in there that are four times, five times, six times, even seven times defaulting.

Are you still reserving the same way as if they're a first-time defaulter? And what will eventually change that, if anything?.

Well, I don't think we changed our view on how we're doing it because the reality is, it's been true for a number of years now that we've had a lot of repeat defaulters that are cycling through there. And so, we think a lot of our experience from a reserve perspective is built upon the repeat defaulters that are coming through the pipeline right now.

So I'd say at a high level, we monitor that to see if there's any dramatic shift in that. But based upon the level that it has been repeat defaulters for a while now, we don't see any necessary change in behavior impacting reserves in the upcoming quarters..

Okay. And then my last question is from earlier question. LPMI rates, at least your average on new business, haven't changed at all. Your capital charges are up materially on the PMIERs when you look at the year-over-year.

Why should we be comfortable with that average premium rate? Unless you can tell us that the underlying credit quality has gotten a lot better..

I think that when we look at the returns that we're generating under PMIERs, we took a step back and put everything on a risk adjusted framework. And we're confident that what we're earning on the LPMI business meets our hurdle rates and exceeds it.

So, we look at the LPMI as a segment in the market that we're going to compete in as long as we can generate the returns where we think we need to add shareholder value and we're able to do that in the marketplace right now..

I guess just to push a little, mathematically, how does that work? If your capital charges are up 30%, and your pricing is actually versus the second quarter last year down, how do we get to the same return hurdle?.

I think we've got a little bit of a mix shift in there as well. But I don't have the numbers in front of me of what we were doing last year.

So, I can really talk about is where we are today, and being highly confident in the way we're looking at risk adjusted returns that we're meeting – adding shareholder value with the business we're doing in LPMI..

All right. And then just a last follow-up on that. When companies file a national rate card, is there a percentage band restriction about how much you can deviate off that card? For some reason, I remember a 25% spread..

Yeah, Geoff, this is Mike.

Yeah, there is a number of variations, the rate card is kind of an average prices are inflected (37:11), but there's a number of adders and tolerances within that that can vary around there, I don't have the code right in front of me obviously with it, but 25% clearly sounds to be right – to me it seems the right approach to take..

Okay, all right. Thank you..

Thank you. And our next question comes from the line of Doug Harter with Credit Suisse. Your line is now open..

Thanks.

Can you just talk about whether your outlook for use of reinsurance, whether that might change as some of the contracts come up for renewal?.

Yeah. I think as we said in the past, we like reinsurance as another part of our capital structure. We have – on our current deal, we have ability to cancel it at the end of 2018 if we feel like we are building up too much capital at MGIC, but also look it at as ability to build some of that excess for dividend capacity.

When we sort of look going forward, the reinsurance we have only covered the NIW through the end of 2016. So, we have been in discussions regarding our 2017 NIW. And unless something materially changes, we'd expect we move forward with covering that book of business.

We expect the terms and conditions to probably pretty similar to our current treaty and we'll sort of run to 10 years, so that we make sure it was covered and hopefully full credit from the PMIERs perspective..

So, when you look to renew the 2017, you would – as of now you would expect it to cover the same percentage of NIW?.

Yeah. I think it's something we'll look at, but I think in general that we think the terms will be fairly consistent with what we're covering right now on the NIW..

All right. Thank you..

Yep..

Thank you. And our next question comes from the line of Phil Stefano of Deutsche Bank. Your line is now open..

Yeah, thanks, and good morning. Historically you talked about a ceiling on persistency being in the mid-80%s, but there wasn't really an impact or at least on a material impacts from refinances in second quarter 2016.

To the extent that refinances do tick up in the second half, how can we think about persistency moving forward? Is there a floor that feels like it puts a range at the other ends of that mid-80% ceiling?.

This is Tim. I mean, as we said, we've been sitting right around 80% for a while and if there is a refi tick up that will obviously put some downward pressure on it, but we've seen some refi sort of activity for a certain period in each of the last few years and still consistently stayed right around that 79%, 81% persistency mark.

So things could change on that regards, but based on what we've seen in the last few years, we feel like somewhere around 80%, give or take a couple of points either way is probably a good way to think of the persistency right now..

Okay. Thanks. That's all I have..

Okay..

Thank you. And our next question comes from the line of Vic Agrawal with Wells Fargo Securities. Your line is now open..

Thanks, and good morning. So, JPM executed a credit risk transfer transaction earlier this year, and I think there is potential for more transactions in the coming quarters.

Have you guys looked at those bottom risk pieces or potentially the bank retained portfolios, I mean, is there a way for you to work with the banks if this becomes a more regular program?.

This is Pat. We've looked at all those transactions in the context of risk sharing in a broader sense, whether it be with the GSEs or otherwise. And we're not ready to move forward anything, but it perhaps is going to present an opportunity.

So again, the objective is to take advantage of our – and leverage if you will our core competency, which is understanding that risk, it's just taking in different form. So we have a little bit more work to do, but it is something we're looking at..

Okay. Because I know that you have the potential opportunity with GSEs, but I was thinking that maybe this is a new one. So...

Sure..

I guess, have you had discussions with the banks on these types of transactions?.

I can't comment on any specific conversations we've had. I would just tell you that we're very engaged with our thought process around these items..

Okay.

And then can you guys give us some color on severities in default trends in some of the – in the judicial states please?.

From a trend this quarter, I don't think we saw anything that led to different trajectory. Obviously, we keep an eye on how long those are sitting in the default inventory, but from what we've actually seen as far as the claim payment compared to the exposure we didn't see the worsening this quarter that we've seen the previous couple of quarters..

And default trends continue to be favorable, I think last quarter you said that defaults were down I believe and severities were slightly higher?.

When you say defaults, you mean Vic.....

Meaning that just workouts through the judicial system, I think you said that you started to see some thawing in those states..

Yeah. This is Steve Mackey. So, on the overall performance of the delinquent – late stage delinquencies, we continue to see that grind down.

We are seeing in some of the very slow states, New Jersey, New York, we're starting to see a little bit of movement in claims through those states, but it's slow, but it's at least progressing, where it was almost completely stopped for a long period of time. Florida, seems to have a good volume that's moving through consistently.

So, I think those are – our big concerns are right now is New York, New Jersey getting their judicial flow rate up, but, yeah, it continues to grind down in a positive direction..

Okay. Thanks for the comment..

Thank you. And our next question comes from the line of Ron Bobman with Capital Returns. Your line is now open..

Hi. Thanks a lot. Good morning. I had a question about the reinsurance profit commission.

And I was wondering, how that number compared to any recognition in sort of recently prior quarters? And was there anything to the reinsurance book that was eligible for a profit commission, that there was a sort of milestone reach or a some degree of seasoning that led to the recognition of the commission?.

No, it's something that is calculated based upon the ceded losses every quarter. And so, within the additional information we have out, we disclosed the profit commission for each of the quarter. So, it's $29.8 million this quarter versus $26.2 million last quarter.

That was really just a function of the amount of ceded losses in the quarter, this quarter was 6.1% versus 8.5% last quarter. So, no set triggers based upon timing impacts, just the mechanics of the quarterly calculations related to ceded losses to calculate profit commission..

Okay. And I had a question, you cited the mid-teen ROE on sort of the current cohort of business that you're writing or at least the target ROE and I think you said, you're assuming and you believe you're achieving that.

But what's the denominator as far as capital that you are using? Is it sort of marginally allocated capital, is it – to what degree sort of it is reflective of the entire insurance company balance sheet, could you discuss that a little bit?.

We're using the PMIERs regulatory capital requirements as the denominator. So, when we're looking at returns, it's how much capitals are the PMIERs going to require for that cohort alone based on kind of the LTV, FICO and age. But for new business that LTV, FICO that drive the return requirements..

Okay.

And so, just sort of following up on that, I think it was maybe two or three questions ago, in fact, the fact that you're choosing out of a degree of prudence to carry excess capital beyond the PMIERs number, the in fact return is somewhat lower than the mid-teens, is that right?.

No. I mean when we're looking at our overall return that we deliver to shareholders, we're adjusting our hurdle rates to reflect the amount of capital we're able to deploy through credit risks. So, that's adjusted for and considered in how we're pricing the business..

Okay. Thanks again. And nice quarter, real nice quarter. Bye, bye..

Thank you..

Thank you. And our next question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open..

Thanks. Tim, I just want to follow-up on the cushion on PMIERs.

When you think about a 10% to 15% cushion, if you're at the mid-to-upper end of that range over the next couple of months, I'm trying to figure, how much of that is in anticipation of the GSE review of PMIERs next year versus what you might be able to operate in the back half of 2017 once that review is done.

How do you think about leading up to that review?.

Yeah. I mean I would say when you think about it, we don't have specific dollar amounts set aside for the PMIERs review, although I would say for my share, I think I would lean more towards a conservative end of the range until we know how the adjust PMIERs the first go around.

I think it's something that we'll consistently look at the range that we think is prudent.

And that is one variable that we won't have insight for, for some time until probably next year, at this time we'll have more insight into it versus the other things that we talked about as far as being able to survive mild recession, and obviously we could update that regularly, but that's probably not going to change significantly overnight..

Okay, great. Thanks..

Yep..

Thank you. And I'm showing no further questions at this time. I'd like to turn the conference back over to Mr. Patrick Sinks for any final remarks..

Thank you everybody for your interest in our company and the calls and the questions this morning. So, thanks much. And with that, we'll sign-off..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day..