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MGIC Investment Corporation (NYSE:MTG)

Q1 2014 Earnings Conference Call

April 22, 2014 10:00 ET

Executives

Mike Zimmerman - Investor Relations

Curt Culver - Chairman and Chief Executive Officer

Pat Sinks - President and Chief Operating Officer

Tim Mattke - Chief Financial Officer

Larry Pierzchalski - Executive Vice President, Risk Management

Analysts

Bose George - KBW

Jack Micenko - SIG

Eric Beardsley - Goldman Sachs

Mark DeVries - Barclays

Seth Glasser - Decade Capital

Chris Gamaitoni - Autonomous Research

Geoffrey Dunn - Dowling & Partners

Christine Worley - JMP Securities

Amy DeBone - Compass Point Research

Ron Bobman - Capital Returns

Douglas Harter - Credit Suisse

Sean Dargan - Macquarie

Operator

Good day, ladies and gentlemen and welcome to the MGIC Investment Corporation First Quarter Earnings Conference 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. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to introduce your host for today’s conference call, Mr. Mike Zimmerman. You may begin, sir.

Mike Zimmerman - Investor Relations

Thanks, Adam. 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 2014 are Chairman and CEO, Curt Culver; President and COO, Pat Sinks; Chief Financial Officer, Tim Mattke; and Executive Vice President, Risk Management, Larry Pierzchalski.

I want to remind all participants that our earnings release of this morning, which maybe accessed on our website, which is located at mtg.mgic.com under Investor Information, includes additional information about the company’s quarterly results that we will refer to during the call and includes certain non-GAAP financial measures. As we have indicated in this morning’s press release, we have posted on our website the supplemental information containing characteristics of our primary risk in force and new insurance written, 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 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 time of this call or the issuance of 8-K.

With that, let me turn the call over to Curt.

Curt Culver - Chairman and Chief Executive Officer

Thanks, Mike and good morning. In the first quarter, we recorded net income of $60 million or $0.15 a share on a diluted basis. This marks the highest level of quarterly profitability since 2007. The positive quarterly financial results were driven primarily by the low level of incurred losses, which totaled $122.6 million and are down 37% from last quarter and 54% from the first quarter of last year.

As usual, there are multiple influences on the incurred losses. First, we received 9% fewer notices this quarter than we did in the fourth quarter and 16% fewer than the same period last year. Second, historically the first quarter has always been a strong quarter from a credit perspective, as there is a higher cure rate on notices received during the first quarter versus other quarters, which was the case again for us this year. Finally, during the quarter, we continued to see improvement in the cure rate on previously received delinquencies. Fewer new notices received combined with a lower claim rate on both new and recently received notices resulted in a lower level of incurred losses.

We believe that the improvement in the cure rate is a result of the positive housing trends and slowly improving employment. Further contributing to the improved credit profile is the fact that approximately 60% of the in-force booked was written since 2009 or took advantage of HARP and is generating very little delinquent activity. The delinquent inventory ended the quarter at 91,842 units, which is down 27% year-over-year and down 11% sequentially. After considering claims paid, we expect the inventory to continue to decline in 2014. Reflecting the overall origination market during the quarter, our refinance volumes totaled 15% of new writings versus 46% in the first quarter of last year and comprises approximately 15% of our current application pipeline. And while 30-year mortgage rates have risen, they remain very affordable and as a result the purchase market remains relatively healthy.

Since the beginning of the year, our purchase application volume is approximately 20% to 25% higher than for the same period last year while refinance applications are up nearly 70%. New business writings are typically slow in the first quarter. This year was no different. Not only was the overall mortgage market impacted by fewer refinance transactions, but I am sure our winter had some impact on purchase volume also. However, I think the purchase volume is business deferred to later quarters and not forgone.

In the quarter, we wrote $5.2 billion of new business, which was down approximately 20% when compared to the first quarter of 2013 with the annual decline due solely to a decrease in refinance transaction. While we would all like more new insurance written versus less especially given the credit cycle we are in, the fact that the matter is that a difference of 5% to 10% new insurance written does not materially impact our insurance in-force and associated premiums in any given year, especially when the same market conditions improve persistency of existing policies. For example, we wrote nearly $30 billion of new insurance in 2013 and I clearly write 5% less this year it would result in $1.5 billion less insurance in-force, over 100 basis point improvement in persistency on the other hand is the equivalent of adding approximately $1.6 billion to insurance in-force.

In this quarter, the annual persistency has improved to 160 basis points to 81.1%. After considering the influence of cure refinance transactions and the impact the weather had on purchase activity, we view this slowdown as seasonal versus a fundamental shift in demand for housing. As a result, I remain optimistic that the demand for home purchases will continue to recover as household formations return to their historic levels. And as the economy continues to improve consumers will have more confidence in their future employment and their ability to afford and finance a home. Since the majority of purchasers that need a mortgage do not have a 20% down payment we have significant opportunity in front of us. Our optimism has further strengthened by the fact that our industry continues to regain share of the whole down payment market from the FHA reflecting the better value we offer borrowers.

While first quarter numbers are not yet available, we estimate that our industry’s market share in the fourth quarter was approximately 14% of the overall market and we expect that this share will go to 16% during 2014 compared to 11% for 2013. And while only one other company in our industry has reported its new business writings to-date, we believe that within our industry MGIC’s first quarter market share has risen to be in the 18% to 18.5% range.

Insurance in-force totaled $157.9 billion at the end of the quarter down marginally from year end with approximately 56% included in reinsurance transactions with a substantial majority of that being covered by the reinsurance transactions that were effective last year. In the quarter, all reinsurance transactions including captives reduced net premiums earned by approximately $25 million, operating expenses by approximately $9 million, which reflects our ceding commission and losses incurred by approximately $6 million. The bottom line, the net impact and the quarter was approximately $10 million in line with our original expectations.

Paid claims in the first quarter were $343 million, down 27% from the same period last year and down 29% from last quarter, which included a $105 million associated with the implementation of rescission settlement agreement with Countrywide and GSE loans. Claims received in the quarter continued to decline and were down 29% from the same period last year and down 11% quarter-to-quarter. Given the claim filing patterns, we are experiencing – we continue to expect paid losses to be lower this year than last. At quarter end, cash and investments totaled $5.1 billion, including $542 million of cash and investments at the holding company. During the quarter, we purchased approximately $21 million of the 2015 senior notes at across close to par which saves us approximately $1 million through maturity. As a reminder, our total annual interest expense is approximately $66 million and our next schedule debt maturity is $62 million due in November 2015.

Now, let me take a couple of moments to discuss the regulatory environment. First, we continue to await the publication of the revised mortgage insurer eligibility standard including new financial requirements from the FHFA and the GSEs. The revised eligibility requirements could be issued as early as this quarter. However, the timing of their release and the specifics of what is included in the implementation timeframes still remain unknown at this time. So while we do not have any specifics to share, we remain confident that MGIC has a number of options available to comply once the standards are published and effective.

The NAIC review of capital standards, which the insurance or which the Wisconsin Insurance Regulator is leading also continues to move forward, although we are not aware of a timeframe for adoption of final language, which will then need to be adopted by each state. The debate over the role of FHA and the GSEs in the housing market continued during the quarter. Most recently, Senators Johnson and Crapo have presented a draft bill to address conventional housing finance market reform.

I’ll label it that way as there is not a comprehensive housing policy bill as it does not address the role of FHA. Regardless, the draft bill is scheduled for markup in the Senate Banking Committee later this month. And while it may pass out of committee, which is no sure thing by the way with elections looming this year, we do not expect any definitive action in 2014. Just more discussions as opinions on this topic remain as divided as ever.

Importantly, we continue to see in here that in the various scenarios we are aware of, there is a significant role for private mortgage insurance. For example, in Johnson-Crapo, there is an explicit provision that calls for a loan in excess of 80% loan to value to have credit enhancements, such as mortgage insurance or alternatives that needs similar capital and reserving standards.

In closing, during the quarter we made excellent progress on the path towards sustained profitability. We wrote $5.2 billion of high-quality business, the level of delinquencies and claim payments continued to fall, MGIC’s risk-to-capital ratio improved to 15.3 to 1 and we maintained our traditional low expense ratio. As a result, I feel our company is in an excellent position to take advantage of the housing recovery and the many opportunities provided to us and we are committed to maximizing those opportunities.

With that operator, let’s take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Bose George with KBW.

Bose George - KBW

Hi, guys. Good morning.

Curt Culver

Good morning.

Bose George - KBW

First, just wanted to ask about the benefit that your losses incurred number got from the lower claims on the existing delinquencies, just trying to breakout what’s being driven just by the new notices?

Tim Mattke

Yes, Tim speaking. I guess the way I look at it is what have we put on for the new notices that coming in the door. As Curt mentioned, the first quarter is traditionally good seasonally from a credit performance standpoint, both in terms of number of new notices, but also the inter-period tiers. So, from that perspective, think of it I guess in terms of it’s going to be a little bit better as far as the average reserves that we are adding out of it, it would be the rest of the year. And then from the already existing delinquencies, I would say we had improvement on those probably somewhere in the $30 million range.

Bose George - KBW

Okay, perfect. Thanks. And then in terms of the claim rate that you are assuming on new delinquencies, where is that running?

Tim Mattke

Well, we’ve been seeing last year that was running slightly better than sort of 80% ultimate cure rate. I would say in the first quarter, it’s a little bit better than that whether that – but that would just be a seasonal adjustment, whether it continues to improve for the rest of the year, we would have to see more information as we go through in the second quarter and the third quarter.

Bose George - KBW

Okay, great. Thanks. And then actually one last one just on the convert, just wanted to understand what triggered the conversion prior to March 31 and going forward does it have to stay above that 903 in order for it to remain in the share count?

Tim Mattke

It’s really a matter I guess within the share count based upon that it’s dilutive. The accounting guidance side isn’t real explicit, but it is dilutive if you look at and the fact that they could covert starting basically March 31 we thought it’s appropriate to put in. As far as where the stock price had to be, that really doesn’t factor into it. It’s going through and looking at the most dilutive convertibles figuring out of that would dilute our basic earnings per share and then if it is dilutive you put those into the calculation.

Bose George - KBW

Okay, great. Actually just one last thing on that, but the interest expense doesn’t come out, so I mean going forward this stays in the share count, but does your interest expense continue to be at that run rate as well?

Tim Mattke

Bose, if you tell about the, on the P&L, yes, for the dilutive EPS this might, but the dilutive EPS calculation must be taken out, but for the face of the financials to get to the numbers, the dollars, that would stay in.

Bose George - KBW

Okay, great. Thanks a lot.

Operator

Our next question comes from Jack Micenko with SIG.

Jack Micenko - SIG

Hey, good morning. Thanks. Looking at the early stage cures in the supplement, it looks like your early stage cure rate jumped pretty meaningfully this quarter versus fourth compared to last year that seems to me like it’s a bit more than seasonality and can you talk about what’s happening there, is that just better housing market overall or anything other that you are noticing in the portfolio in the early stage?

Larry Pierzchalski

This is Larry Pierzchalski. The first quarter is a seasonal friendly quarter and we see a pretty good jump in cure rates on new notices received in the last few months as well as a drop in new notices. That seasonality, the level of seasonality isn’t perfect. I guess we’d like to believe that it’s permanent fundamental shift, but at this point we think it just might be just the high seasonal impact here in the first quarter and that’s why Tim mentioned we will have to wait and see what happens in second and third quarters to see if that remains or drops back to more normal levels.

Jack Micenko - SIG

Okay. And then to quantify that differential on the loss incurred that’s for the $30 million number, correct?

Larry Pierzchalski

Yes, its $30 million as far as positive development on already existing notices, somewhere in that range.

Jack Micenko - SIG

Okay. The average claim has been coming down on a dollar basis nicely. And Curt talked about claims lower this year than last, where can that number go and is that curtailment or is that home price appreciation, is it both?

Larry Pierzchalski

Again, I think part of it is geography. The higher cost states we had a pretty significant decline in home prices and as a result we saw a lot of claims from the high cost areas for quite a while, that’s diminishing. From a policy year basis, the ‘06 and ‘07 are coming down more so over time. And then the last point like you say are mentioned our ability to mitigate the loss, we are starting to acquire or to have bit more properties in lieu of paying the percentage options. So, it’s a number of factors I guess, but the trend through time should point down as all those things play through.

Curt Culver

Yes, we should have – continue to increase relative to mitigation opportunities whether it’s short sales or buying the properties or whatever. So that will all be very positive longer term.

Jack Micenko - SIG

Okay, great. And then just real quick, do you have any sense of the state regulators have gotten draft rules yet?

Mike Zimmerman

Jack, this is Mike. Given that we think it could happen as early as this year, it’s always logical to assume that they have whether they all have or not we don’t know, but…

Jack Micenko - SIG

It’s okay.

Mike Zimmerman

But given that – we think that it could happen as early this quarter, it will make sense if they do well.

Jack Micenko - SIG

Okay, got it. Yes, I want to make sure I interpreted that right. Okay, thanks guys.

Curt Culver

Thank you.

Operator

Our next question comes from Eric Beardsley with Goldman Sachs.

Eric Beardsley - Goldman Sachs

Hi, thank you. You talked about purchase applications being up 20% to 25% versus last year, are you seeing that come through NIW or you actually have purchased NIW up that much?

Tim Mattke

Yes. I mean, when you look at, yes, the application volume certainly translate over. As NIW, there is a lag of anywhere from one to two months if any – some converts in the same month of the application, the majority converts in the second month, I mean, a little trailing after that, but absolutely.

Eric Beardsley - Goldman Sachs

Got it. I know it’s relatively early in the second quarter here, but what type of trends have you seen in April thus far?

Curt Culver

Pat?

Pat Sinks

We have seen applications pick up.

Curt Culver

Pat Sinks?

Pat Sinks

I am sorry Pat Sinks speaking. We have seen application volume pickup our sense as we talk to lenders and our customers that they are seeing more volumes. So it’s moving in the right direction.

Eric Beardsley - Goldman Sachs

Okay, great. Thank you.

Curt Culver

Okay.

Operator

Our next question comes from Mark DeVries with Barclays.

Mark DeVries - Barclays

Yes, thanks. First question, where do you think the persistency rate can go from here? Is there a ceiling on how high that can get with refi already at really low levels?

Mike Zimmerman

Hi, Mark. This is Mike. I mean, you would expect it will probably still have some effect from the ‘09, ‘10, ‘11 book. So as you move through the year, you are going to see an annual persistency calculation. So, it should keep picking up. If there are ceiling, it should go higher, I mean, go above 90, certain book here is good, but on an overall portfolio basis that would be difficult to be able to do that.

Mark DeVries - Barclays

Okay. What are the primary sources of labs in an environment – in a quarter like this where you had very low refi activity?

Mike Zimmerman

Well, I mean, still the majority of it, I mean there are cancellations, I mean, the refi activity, there is some voluntary cancellation things obviously are included in that as well. I don’t have the exact mix along the way, but it’s predominantly I will say voluntary termination versus involuntary terminations. Most of the persistency improvement came from the ‘09, ‘10 and ‘11 books of business and just think about it as the interest rate, those books of business took advantage of the rate drop they were originated in the 4.5% to 5%r range back in ‘09, ‘10, ‘11 rates fell to 3.5% and 3.25%, now rates being closer to 4.5%. That’s kind of shutting down that refinance window, but that’s where the persistency improvement has come from. The other books haven’t exhibited that much change in persistency that’s ‘09, ‘10, and ‘11 larger the rate. So, how much more? A few more ticks, hopefully more than that, but I don’t think we’d get anywhere close to 90, maybe mid 80s would be a reasonable area to be thinking.

Mark DeVries - Barclays

That’s helpful. Could you talk about what if anything you heard about the profitability that FHA Director Watt may look to lower loan level pricing adjustments and what type of boost to market share related to FHA you could expect if we get that?

Pat Sinks

This is Pat Sinks speaking again. We have not heard anything specific. We had an opportunity to meet with Mr. Watt from our trade association, the USMI. I know, as he conveyed to us, he had spend the first couple of months of his tenure just trying to get his feet on the ground and he is just now starting to taking meeting slow. While we have good introductory meeting, we haven’t heard anything specific. So, I really can’t comment on what might happen.

Mark DeVries - Barclays

Okay, got it. Thank you.

Operator

The next question comes from Seth Glasser with Decade Capital.

Seth Glasser - Decade Capital

Hey, guys. Thanks for taking my question this morning. I thought it was good to put the NIW, the potential drop in NIW volume, in the context of that 5% decline and what you actually gained in essentially effective NIW on the other side from the increase in persistency, because I think that that’s a point that, despite the fact that you guys have continued to make that point, I think it’s a point that the market doesn’t really fully understand. So, I like the way you guys framed that out this quarter. I guess my question is, when you look at NIW trends over the past few years, clearly Q2 and Q3 are your seasonal peak and last year from March through October, your NIW in that period accounted for about three quarters of your annual NIW. So, I guess the question is going into that peak period, what can we expect for NIW trends this year, especially relative to the same months last year? I mean, even with the weak start to the year, is it possible that NIW actually won’t shrink from the 2013 level?

Curt Culver

I’m still optimistic we will hit or exceed the 2013 levels. I mean, the first quarter who knows how much it was impacted by the winter and that’s the whole country experience. So that certainly played a role. We are going to regain more share from FHA. So that also will be positive. So I am still optimistic that we will indeed be at or above last year’s volume numbers.

Seth Glasser - Decade Capital

So, I mean if that’s the case given that the first few months of this year we are down pretty materially from last year than I mean, as you start to go through kind of this peak seasonal period, I mean, these year-over-year monthly numbers should actually start to be higher this year than where they were last year in terms of NIW, is that how you are thinking about it?

Curt Culver

Well, they certainly will be comparable too and I hope higher than. I mean we are seeing, as Pat mentioned, more lender activity, contract underwriters and other situations reflecting on volume pickup. And again, as I mentioned in my comments, the volume that I think we missed in the first quarter and probably the fourth quarter because of the winter periods is not business that’s forgone it’s business that’s deferred. So, I think a lot of that will happen in the second and third quarters. And throughout that, we should continue to pickup and I think strongly from the FHA program. So, my whole – the thing that we need to happen more is just more confidence in the economy and jobs.

Seth Glasser - Decade Capital

Right, right. So, I mean essentially modeling your numbers out assuming flat NIW for ‘14 you think is a reasonable assumption?

Curt Culver

Yes.

Seth Glasser - Decade Capital

Okay, great. Thanks guys.

Curt Culver

Thank you.

Operator

Our next question comes from Chris Gamaitoni with Autonomous Research.

Chris Gamaitoni - Autonomous Research

Good morning, guys.

Curt Culver

Good morning.

Chris Gamaitoni - Autonomous Research

I guess the two questions I have is first you said last year that the ultimate cure, our claim cure rate from the notice is assumed to be about 80%, how does that compare historically if we look at and say like the 90s or early 2000s pre-crisis, where was that level?

Larry Pierzchalski

This is Larry Pierzchalski. The old norm, good times, reasonable price appreciation 3%, 4% random, it will be basically a 90:10 split, 90% of the new notices come in at the door would cure ultimately 10% would go to claim and some of the high appreciation markets probably push 95% and 5%. So, I think the long-term expectation should be around 90:10 split.

Chris Gamaitoni - Autonomous Research

Okay, great. And at what point do you start kind of changing that if I look at the new notices that will previously delinquent with 83% for the quarter versus 78% a year ago, so it looks a lot of the new notices coming in had previously been delinquent and showed at least a propensity to cure in the past?

Larry Pierzchalski

Well, I mean, certainly the number is higher. I mean, it was as Tim mentioned higher than the 80% in this quarter. I guess we are just tempering things somewhat by as we probably I think we did last year when a doctor say this is the first quarter and we need more to play out before you make a call for victory there, but clearly, the number is higher and frankly it was a little higher than we expected. So, we hope this trend continues as strongly as we saw in the first quarter.

Chris Gamaitoni - Autonomous Research

Great. And then could you talk a little bit about you think that market share it looks like the last two quarters, could you talk about maybe the underlying dynamics of whether it’s customer difference, the difference between singles and monthlies compared to the refi cycle or is purchase, better penetration whatever maybe?

Curt Culver

Yes. I will offer my perspective of the impact that – I would say in particular was the strength of the purchase market, the single premium product that whoever competitor has dominated plays really well in a refinance market and not as well as in the purchase money market. So, I think the mix of how the business is coming in plays better for our market share.

Pat Sinks

I would add to what Curt said about the next couple of factors. So, first of all, I think that the steps we took from a capital perspective in 2013 strengthening our position took that issue off of the table relative to customers. In addition to that, we are very competitive in terms of pricing and guidelines. And then the third element is quite frankly the best most trended organization in the business and they are outstanding in what we do and by alleviating the capital situation and making sure we are competitive with pricing and guidelines, but they are out there selling hard.

Chris Gamaitoni - Autonomous Research

Thank you so much.

Curt Culver

Okay.

Operator

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

Geoffrey Dunn - Dowling & Partners

Thanks. Good morning.

Curt Culver

Good morning.

Geoffrey Dunn - Dowling & Partners

I guess just first as a follow up to that last question, you are putting on share without being back in the B of A rotation if I read it still correct?

Curt Culver

That’s correct.

Geoffrey Dunn - Dowling & Partners

What do you need to do to get back into the B of A rotation, you need to settle the non-conventional aspect of that agreement, why aren’t you back in and what needs to change?

Pat Sinks

Well, this is Pat. I can’t comment on what they might decide, but I can tell you that the litigation that we are working on remains in it do have an impact on the relationship.

Curt Culver

So, we are working on those changes. I mean, B of A doesn’t have the influence, but it did at the time, that’s all kicked off way back when but still a good organization of one that needs to be an MGIC customer again. And so Geoff we are working harder down putting some of those things to bet and then we think we have a clear discussion with them relative to the value added by MGIC being a partner.

Geoffrey Dunn - Dowling & Partners

Okay. Looking at the top line your net premium earned rate came in about 54 basis points, do you have a specific gross earned premium rate this quarter before profit commission and fees and commissions or exceed the premium?

Tim Mattke

I don’t have it right in front of me, but my recollection is I think it’s probably two to three points higher than that before the premium fees.

Geoffrey Dunn - Dowling & Partners

Then the last thing, you mentioned severity in the expectation as you continue to improve as product and geography shift. I think last year we saw maybe a couple of thousand dollars of average severity improvement result in the third quarter reserve development, are we looking for the same kind of sensitivity such that if we see that come down to 44,000, 43,000, that’s the level where maybe we see another revision to your assumptions and further possible development, is that the type of sensitivity we should be thinking about?

Curt Culver

I think you have to see it sustained I mean we have always talked about that the severity is somewhat volatile. It can jump around from quarter-to-quarter. So if you look at the first quarter average pace compared to even the third quarter of last year, they are pretty similar, it’s down for the fourth quarter though. So we want to see that continue to come down over time, but if we do continue to see the average paid number come down that is probably better than what our expectations are currently.

Geoffrey Dunn - Dowling & Partners

Okay great. Thanks guys. Take care.

Curt Culver

Thank you.

Operator

Our next question comes from Christine Worley with JMP Securities.

Christine Worley - JMP Securities

Hi, most of my questions have been answered. Just a quick one, so assuming flat NIW with 2013, would that insume a consistent market share with what we saw in the first quarter, or what are your expectations around that?

Curt Culver

So my expectations to Pat is that we will continue to grow market share. So that will be part of the bonus conversation. So that will be part on the broadest conversation. So no, I mean our expectations are for higher market share. So I again back to my comments it was, I am so optimistic for exceeding last year’s volume number. So but it wouldn’t be a combination I guess of the continued increase in market share along with the industry market share pickup relative to FHA playing a role in the volume numbers we are looking at.

Christine Worley - JMP Securities

Okay, thank you.

Operator

Our next question comes from Amy DeBone with Compass Point Research.

Amy DeBone - Compass Point Research

Hi thank you for taking our questions. So can you give an update on just the pricing environment, you talked about market share gains and it looks like market share stabilized, pricing appears to be stabilized also, but can you just give an update on the competitive environment?

Curt Culver

Yes, I am not aware of any pricing changes path, so nothing has happened this quarter relative to pricing changes. So I guess in the mix of things that using near term it stabilized.

Amy DeBone - Compass Point Research

Okay and what are the increase in the investment yield this quarter?

Tim Mattke

We have a little bit longer duration in the portfolio at this point.

Amy DeBone - Compass Point Research

Is that adjustment expected to be larger term or?

Tim Mattke

Yes, I mean we are obviously latter to make sure we can meet our claim payment obligation as claims has slowed down a little bit. We are obviously working to see what our optimal duration is compared to where interest rates are and so we like the duration to take advantage of where the market is now.

Amy DeBone - Compass Point Research

And just lastly can you provide an updated view or were just remind us what’s need to occur for the DTA allowance to be reversed?

Curt Culver

The allowance to be reversed, I mean I guess that’s going to speak to more of a sustained – several quarter of sustained profitability. So it’s probably simply put in the guidance isn’t exactly clear on that to do what it can or can’t come in but you have to see several quarters of meaningful profitability and then forecast to be sustained before it be allowed back in on a GAAP basis. You wouldn’t expect it this year. Okay?

Operator

Our next question comes from Ron Bobman with Capital Returns.

Ron Bobman - Capital Returns

I think it was Mike Zimmerman, sort of through in the response, I think Mike you said it could happen as early as this quarter and I think you are referring to something relating to the FHA regs or guidelines or rules, but could you just be more specific as to what you exactly were referring to that could happen as early as this quarter? Thanks.

Mike Zimmerman

Yes, what was mentioned earlier on the call was about the new eligibility requirement from the GSEs that we could see those public as early as this quarter. So then the eligibility criteria that includes the financials, risk capital, those types of measurements that we are all anxiously awaiting.

Ron Bobman - Capital Returns

In draft form, I am sorry to interrupt you.

Mike Zimmerman

Yes, that will be in draft form. So it will be published with what we said to be earlier this year and the expectations will be the same as that they would be made public by – and then there will be some public comment period so that we made public in draft form, we don’t know what the implementation date or the effective date would be, but that will be made public for all of us to be both you to review and us to review and we think that could happen as early as this quarter, but not effective this quarter, correct. We don’t know what the effective date is and we would expect still a transition period to go, but we don’t know the length of that transition period.

Ron Bobman - Capital Returns

Got it, thanks a lot. I appreciate it.

Mike Zimmerman

Sure.

Operator

The next question comes from Conor Ryan with (indiscernible).

Unidentified Analyst

Hey, guys. Thanks for your time. Just had a quick question on persistency, obviously we saw the trend in the quarter, any sort of view on where you could see that start to batch it up to over the coming quarters?

Curt Culver

Let’s see if we are consistent.

Pat Sinks

That’s kind of what we said earlier, it is now delayed or missed it, maybe pickup a few more tips along the way, but mid 80s on the overall portfolio kind of seem to be the long-term at the top end of that range.

Unidentified Analyst

Yes. And then just a follow-up to that obviously is assuming approximately flat NIW, I mean that should lead to some pretty decent insurance in force growth, correct?

Pat Sinks

We still believe to draw that review to be additive, but it should lead to growth in the portfolio, yes.

Unidentified Analyst

Okay, thank you.

Operator

Our next question comes from Douglas Harter with Credit Suisse.

Douglas Harter - Credit Suisse

Thanks. I was wondering has there been any movement in any of the defaults that have been there for two, three or more years, has there been any movement in that?

Curt Culver

I mean, we continue to see activity out there. I wouldn’t say there is anything out of the dorm as far as any significant changes. I mean our claims received coming in the door have continued the steady decrease and we see claims and we still see some cure activity out of those late stage notices, but I see no significant changes in the last quarter.

Douglas Harter - Credit Suisse

And I guess have you had more conversation with the servicers around the ultimate – their timing around bringing them to claim or whether they have the documentation to be able to bring them to claim?

Mike Zimmerman

This is Mike. I mean, we repeatedly have interactions with the servicers. We have a dedicated group in our claims area that is the servicing relationship team. So we are always engaged with them. We are obviously reviewing things going out. Last year we did several detailed deep dives to see if they are coming to fruition or not and we still expect them to at this point in time. Things have slowed down. There is new changes with process from CFPB as far as that they are delaying things, but it’s taking longer, that it’s causing things to age out more, but we haven’t seen anything yet on a meaningful manner. I mean, you are always going to see one or two, right, that we could have a little problem with, but as you can see from our rescissions of denials rate, which is very, very low, we are not seeing that as a cause.

Douglas Harter - Credit Suisse

Great, thank you.

Curt Culver

Thanks.

Operator

Our next question comes from Sean Dargan with Macquarie.

Sean Dargan - Macquarie

Thank you and good morning. I saw something in the press it was an interview with FHA Commissioner Galante and she seem to imply that they would be no more FHA premium rate increases is that kind of what your assuming in your base case of taking share from FHA?

Curt Culver

Yes, I think there has been more pressure to reduce it, so certainly not on the other side of increasing so our expectation that if they need to repair their balance sheet and they need these price increases as well as no cancellation they’ll do that and they will continue to do that and the out of Washington reinforcement so our assumption is that it continues as is.

Sean Dargan - Macquarie

Okay. And listening to some of the homebuilders, they seemed to imply that the mortgage eligibility is still too restrictive. Do you sense any movement to kind of make it easier to get a mortgage that would help you guys?

Curt Culver

Well, I mean again, I would expect the homebuilders and the realtors to always make the state. So the FICO scores I think are coming down somewhat, I think if you look at home buyer surveys, financing is becoming more readily available when there was a great deal of confusion for lenders relative to the QM and QRM regulations and how to deal with that, that's all being settled out now. So I think the combination of that settled out winter conditions being over and a glorious spring ahead of us that we will see the market return to more normal condition.

Sean Dargan - Macquarie

Okay. And one last question about the converts, as we go out further, the dilution from the 5% and 9% converts could represent real headwind to EPS growth, is there any ability and/or desire to retire those early?

Tim Mattke

Well, I guess what I’d say, it is because we know what the capital requirements are and that must be for those. It’s easier for us to figure out if there is something to do relate to anything at all happening at the holding company.

Sean Dargan - Macquarie

Okay, thank you.

Curt Culver

Thank you.

Operator

And I am not showing any further questions at this time.

Curt Culver - Chairman and Chief Executive Officer

Okay. With that, I wish you all a great day and thank you for your interest in our company.

Operator

Ladies and gentlemen, this does conclude today’s presentation. You may now disconnect and have a wonderful day.

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