MGIC Investment's (MTG) CEO Pat Sinks on Q3 2016 Results - Earnings Call Transcript

| About: MGIC Investment (MTG)

MGIC Investment Corporation (NYSE:MTG)

Q3 2016 Earnings Conference Call

October 18, 2016, 10:00 AM ET

Executives

Mike Zimmerman - Senior Vice President, Investor Relations

Pat Sinks - Chief Executive Officer

Tim Mattke - Executive Vice President and Chief Financial Officer

Steve Mackey - Executive Vice President, Risk Management

Analysts

Mark DeVries - Barclays

Bose George - KBW

Jack Micenko - SIG

Doug Harter - Credit Suisse

Chris Gamaitoni - Autonomous

Eric Beardsley - Goldman Sachs

Geoffrey Dunn - Dowling & Partners

Mackenzie Aron - Zelman & Associates

Operator

Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation Third 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 be given at that time. [Operator Instructions] As a reminder, this conference call may be recorded.

I would now like to turn the conference over to Mike Zimmerman, Senior Vice President of Investor Relations. You may begin.

Mike Zimmerman

Thanks, Nicole. 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 third 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 our website, which is located at mtg.mgic.com under Newsroom – includes additional information about the company's quarterly results that we will refer to during the call, and includes certain non-GAAP financial measures. We've 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 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 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 Sinks.

Pat Sinks

Thanks, Mike, and good morning. I'm pleased to report that we had another strong quarter. Tim will cover the details of the financial results, but before he does that, I would like to spend a few minutes discussing the progress we have made on achieving our strategic objectives. As a reminder, among our strategic objectives are to prudently grow insurance in force, manage and deploy capital to optimize creation of shareholder value, and to preserve and expand the role of MGIC in private mortgage insurance and housing finance policy.

First, insurance in force, the primary driver of our future revenues, increased on a year-over-year basis ending at $180.1 billion. This growth reflects the expanding purchase mortgage market, our company's market share of approximately 17% to 18%, and the hard work and dedication of my fellow co-workers to deliver stellar customer service.

The 2009 and newer books now comprise 69% 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 substantial majority of our incurred losses. And while the rate of decline in new delinquent notices is 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 runoff of the older books, solid housing market fundamentals such as household formations and home sales, and our improved capital structure positions us well to provide credit enhancement and low down payment solutions to lenders, GSEs, and borrowers.

Given the continued low interest rate environment, we have seen a modest increase in refinance transactions, which accounted for 19% of our new insurance written in the quarter. The increased refinance activity has resulted in a slight decrease in our annual persistency rate. Most forecasts are calling for a continued increase in purchase mortgage 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 3 times to 4 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 $14.2 billion of new business. For the first nine months of 2016, we wrote $35.1 billion of new business, up approximately 6% from the first nine months of 2015. Based on actual results to date and forecasted strength in overall purchase activity for the full year of 2016, we now expect to write $46 billion of new insurance for the full-year compared to $43 billion in 2015. This should result in insurance in force increasing by approximately 4% to 5% in 2016.

In addition to deploying capital to write new business in the quarter, we took additional actions to advance our strategic objective of managing our capital to optimize creation of shareholder value. Year-to-date, we have reduced the number of potentially dilutive shares by nearly 66 million and improved our capital profile. Tim will cover these activities in detail in a few minutes.

We have also made progress toward the strategic objective of preserving and expanding the role of MGIC in private mortgage insurance and housing finance policy. In September, MGIC agreed to participate in a Freddie Mac pilot MI CRT transaction that will transfer risk to MI companies or their credit insurance affiliates.

While it is good to see the GSEs continue to explore ways to reduce the government's mortgage credit risk exposure, this new structure should not be confused with deep cover mortgage insurance, which is a front-end credit risk transfer proposal that we and others have been advocating for. The amount of capital we have allocated to this pilot program and the associated premiums are immaterial to our financial results in this or future periods. Future participation in credit risk transfers will need to be evaluated based upon the terms offered and expected returns.

More recently, on October 11, our Trade Association responded to the FHFA's request for input on Credit Risk Transfer or CRT. We believe that an expansion of front-end CRT, including through the use of deep cover MI, warrant serious consideration by the GSEs and the FHFA as a complement to existing backend CRT. Without a more robust program, including one that has an entity-based capital component such as deep cover MI, the enterprise's CRT strategy would not function adequately during all phases of the mortgage credit cycle particularly during times of financial stress, and therefore would not fully realize FHFA's principal objective of protecting US taxpayers.

Further, we strongly believe that deep cover MI will advance the four key objectives of a well-functioning housing finance system by ensuring that: One, substantial private capital loss protection is available in bad times as well as good; two, such private capital absorbs and deepens protection against first losses before the government and taxpayers; three, all sizes and types of financial institutions have equitable access to CRT; and four, CRT costs are transparent, thereby enhancing borrower access to affordable mortgage credit.

Discussions with the GSEs and the FHFA are ongoing. As we get closer to 2018, when the GSEs are forecasted to be depleted of capital, it is important to remember that a dollar of risk transferred to the private MIs is a dollar less of exposure to the taxpayer.

I would also note that there are still some market participants that are questioning the MIs as reliable counterparties. With strengthened risk-adjusted capital rules from both the GSEs and soon from the state regulators, and a clear understanding amongst all parties of the risk we insure, I believe that a mortgage insurance company is a solid counterparty for our customers.

I would remind everyone that, as an industry, we paid more than $50 billion since the Great Recession, and MGIC alone has paid 100% of valid claims totaling in excess of $15 billion. When the capital markets left the market, it was the private mortgage insurers who were there everyday underwriting loans and paying valid claims.

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

Tim Mattke

Thanks, Pat. In the quarter, we earned $56.6 million of net income versus $822.8 million for the same period last year. The primary driver of the decrease in the GAAP results were the fact that in the third quarter of 2015, we reversed the valuation allowance associated with our deferred tax assets relating to future periods. Additionally, in the third quarter of 2016, we recorded a loss on debt extinguishment when we repurchased $292.4 million of the 2020 senior convertible notes.

To make the year-over-year comparison of financial results more meaningful, we have begun to disclose a non-GAAP measure called Net Operating Income. Net Operating Income excludes certain items that we do not consider to be part of the operating results of our primary mortgage insurance business. A full definition of these items, as well as a reconciliation of Net Operating Income to GAAP net income, is included in the body of the press release.

With that said, our Net Operating Income for the quarter was $102.2 million or $0.25 per diluted share compared to $83.1 million or $0.20 per diluted share for the third quarter of 2015. The primary drivers of the improvement were lower losses incurred, lower operating expenses, and modestly less interest expense.

Lower incurred losses were – received 10% fewer new notices compared to the same period last year and reflecting the current economic environment, these new notices are estimated to have a claim rate of approximately 12% versus 13% in the third quarter last year. As we have previously discussed, we view a 10% claim rate as a long-term average. The pace of improvement in the claim rate continues to be difficult to project, given the unique performance of the pre-2009 loans.

During the quarter, we also updated our claim rate assumption for older delinquent notices, in particular, those aged more than 12 months, because the actual cure rate experience has outperformed our previous estimates. This resulted in a benefit of approximately $30 million to our primary loss reserves. Also in the quarter, there was an $8 million benefit primarily relating to IBNR. Keep in mind that because our older notices comprise approximately half of our total delinquent loans, even a small change in the cure rate assumptions can result in significant reserve developments.

The pre-2009 legacy books, especially chronic delinquencies, while continuing -- will decline -- will continue to dominate the notice activity for the foreseeable future. In the quarter, those books generated nearly 87% of the new delinquent notices received while comprising just over 31% of the risk in force. Additionally, nearly 84% of the notices received had been reported delinquent previously. We continue to expect that the 2009 and forward books will generate a low level of delinquencies and very low lifetime loss ratios.

Reflecting the declining delinquent inventories, network claims received in the quarter declined 19% for the same period last year. Net paid claims in the third quarter were $161 million. Primary paid claims were $147 million, down 23% from the same period last year. For the first nine months of 2016, the effect of average premium yield was 51.9 basis points, which compares to the first nine months of 2015 effective yield of 52.9 basis points.

As I discussed last quarter, there is going to be some volatility in this calculation each quarter for a variety of reasons, including the pace of prepayments on older books of business, which have higher premium rates in the business we are currently writing; the FICO LTV mix of new writings; premium refund assumptions that are influenced by expected claim rates; premium resets as older books pass their 10-year anniversary; and the level of the profit commission we earn on the reinsurance treaty, which is dependent on the level of losses incurred that are ceded.

We expect that, after considering the volatility I just described, the effective premium rate would trend lower in future quarters. However, the exact amount is difficult to predict. At quarter end, cash and investment totaled $5 billion, including $329 million of cash and investments at the holding company. The investment portfolio had a mix of 69% taxable and 31% tax-exempt securities, a pretax yield of 2.5% and a duration of 4.8 years.

Turning to our capital position under the GSE's Private Mortgage Insurer Eligibility Requirements or PMIERs, at the end of the third quarter, MGIC's available assets totaled approximately $4.7 billion, and its minimum required assets are $4.1 billion. MGIC's statutory capital is $1.4 billion in excess of the state requirement.

Reflecting the profitability of the new books of business, as well as the improved performance of the legacy books, the cushion above the minimum required assets was at the higher end of the 10% to 15% range we are currently targeting. We will try to manage the debt level by continually reviewing our use of reinsurance as well as continuing to seek and receive dividends from the writing company.

Regarding MGIC's ability to pay quarterly dividends, the Wisconsin insurance regulator approved another $16 million dividend paid to the holding company in the quarter, which brings the year-to-date total to $48 million. We expect to receive a small similar-sized dividend in the fourth quarter, and are optimistic that these quarterly dividends will grow in the future, especially if the difference between available assets and required assets under PMIERs grows as we expect. Each dividend would be considered extraordinary versus regular, and therefore requires OCI approval.

As we discussed last quarter, we believe it is important to manage the liquidity and capital position of the writing company to withstand a mild recession and to preserve the ability to continue to write new business without a remediation plan or the need to access the capital markets. It is also important to maintain a cushion for potentially higher volumes of primary business, new business opportunities, and potential changes to the PMIERs.

Now, let me address the holding company's capital position and the capital actions we took in the quarter. The primary goals of our capital management activities are to continue the positive ratings trajectory of the last several quarters to improve our capital structure, and eliminate potentially dilutive shares as a result of the capital raises during the Great Recession.

During the quarter, we issued $425 million of 5.75% senior notes. This is the first time we accessed the senior debt markets in quite a few years and marks another milestone for our company. We are very pleased with the investor reception to the offering as well as the terms we obtained. We used a portion of the net proceeds, as well as 18.3 million shares of our common stock, to purchase $292.4 million of the 2% 2020 senior convertible notes. This repurchase resulted in a pretax loss and debt extinguishment of $75.2 million.

During the quarter, we used a portion of the net proceeds to repurchase 13.5 million shares of our common stock that were used as partial consideration in the purchase of the senior convertible notes. Through the close of business on October 17, we repurchased an additional 3.5 million shares. We will use some of the remaining proceeds to repurchase the balance of shares that we issued in conjunction with the transaction. Any remaining proceeds from the debt issuance will be held at the holding company for general corporate purposes. This transaction, which only modestly increased our leverage ratio, eliminated 42.1 million potentially dilutive shares.

As a reminder, earlier this year, our writing company, MGIC, purchased $132.7 million of our holding company's 9% junior convertible debentures. These debentures are eliminated on our consolidated financial statements. We also repurchased $188.5 million of the 2017 convertible senior notes. Combined, these transactions eliminated 23.9 million potentially dilutive shares.

While credit ratings are not inhibiting our ability to write new primary business, we think that long-term ratings will become more relevant. Therefore, when analyzing various options to restructure our capital profile, as well as the ability to minimize potentially dilutive shares, we need to consider the resulting leverage ratio and interest expense of the holding company.

Of course, we also need to consider that capital is being created at the writing company, and its dividend-paying ability is subject to Insurance Department approval. We will continue to analyze the cost and benefits of implementing various transactions to achieve our capital management goals. And when we determine that there is an opportunity to create long-term value for shareholders, we will execute such transactions.

With that, let me turn it back to Pat.

Pat Sinks

Thanks, Tim. Before moving to questions, let me give a quick update on the regulatory and political fronts. The review and updating of state capital standards by the NAIC, which Wisconsin insurance regulator is leading, continues to move forward. At this time, we 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 in-state for the GSEs that would be delivered to the new administration in early 2017, and we continue to be 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 in housing.

Simply put, another price reduction would likely shift the business away from private capital and expose taxpayers to increased 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 14% of our NAW in the quarter.

How much of this business would be at risk is difficult to say, as you would need to take into account lenders' concerns over the 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 in achieving our strategic objectives. We had net operating income of $102.2 million, wrote $14.2 billion of high-quality business, the enforced portfolio grew, the level of new delinquency notices and delinquent inventory continued to decline, we improved our capital profile, 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 through the debt repurchase, and continued paying dividends out of MGIC to the holding company. I see many opportunities 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 shareholders and we are committed to pursuing those opportunities.

With that, operator, let's take questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Mark DeVries of Barclays. Your line is now open.

Mark DeVries

Yeah, thank you. So it sounds like you still have some cash remaining, some net cash after your debt issuance and some of the other capital actions, by our estimate, somewhere in the $50 million range to buy back stock. Tim, does that sound like it's kind of in the ballpark?

Tim Mattke

Yes, it's probably in the ballpark after we get done repurchasing the 18.3 million that we used as consideration. That's probably the ballpark of what we have left from the offering.

Mark DeVries

Okay, great. And could you discuss appetite to do another senior debt issuance and try and take out the remaining 2020 converts?

Tim Mattke

I think it's something that, as we mentioned in the opening comments, we continue to look at. Obviously, if you look at the cost of that, and obviously you look at sort of the cost of issuing the debt in the market, so it is something that we continue to look at every quarter and discuss with our Board.

Mark DeVries

Okay, got it. And then, in terms of your 9% convert, is there much supply of that at this point? Do you have any willing sellers? Or were you able to buy most of the bonds out there that owners were willing to sell?

Pat Sinks

There is less of them out there now than obviously when we bought them back at the beginning of the year, but it obviously depends upon market conditions, but assumes depending upon the price, there would probably be some interested sellers.

Mark DeVries

Okay, got it. And then finally, a question for you, Pat. I think you and others in the industry have commented that you expect to get your fair share of the share that Arch has mentioned they expect to lose as a part of the acquisition. Have you seen any signs yet of lenders already starting to shift share around?

Pat Sinks

No, not yet. We are basing that assumption on statements that Arch has made. But, to this point, we haven't seen lenders take any action. So we are assuming that, when the transaction close, the opportunity will be presented to us.

Mark DeVries

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Phil Stefano [ph]. Your line is now open.

Unidentified Analyst

Just a follow-up on that last question a bit about the Arch transaction. How can we qualitatively think about what's the bigger opportunity for NIW growth? Would it be the fallout from that transaction or the outlook for purchase origination increasing?

Mike Zimmerman

Phil, this is Mike Zimmerman. I mean, obviously both would – I mean if you are talking about company specific, both obviously would contribute to that. I think the easier one to do certainly is the purchase market because those forecasts are widely available. The wild card really is market share within the industry, but that's – again company specific always the case.

Unidentified Analyst

Yes. And I guess – thinking about persistency, it feels like you've historically talked about this being in the low-to-mid 80s. I mean, obviously, refis have been a drag there and we'll probably see that maybe a little more in the fourth quarter. Does low-to-mid 80's still make sense in this low interest rate environment or does persistency come in a little bit lower than that as we think about this lower-for-longer environment?

Tim Mattke

Well, it's obviously -- this is Tim. Tt's obviously dripped a little bit lower again this quarter. I still think when we look at it long-term, we still think 80% is probably a good bogey to look at, but it could probably be a couple of points either side of it. Obviously, you can't predict exactly what's going to happen with interest rates, but we've had some little mini refi booms that have impacted persistency again over the last couple of quarters. So you could see a little bit of drip down on that, but I still think when you look at it long-term, 80% is a good sort of place to sort of ground, I guess, your assumptions.

Unidentified Analyst

Okay. One quick last one. On the share repurchases, it looks like – if I did the math right here – it was about 1 million, 1.5 million left of repurchases to take out the common stock using the recent debt deals. Does valuation matter or are you agnostic and just want to get that 18.3 million taken out as soon as possible?

Tim Mattke

Well, I think you are right as far as the numbers go. And I think when we launch the transaction, the plan is obviously to take the shares out and not add any additional dilution. So our plan is to buy those shares back from the market.

Unidentified Analyst

Great. Thanks.

Tim Mattke

You're welcome.

Operator

Thank you. Our next question comes from the line of Bose George of KBW. Your line is now open.

Bose George

Hey guys, good morning. Actually just a follow-up to some of the buybacks. Of the $50 million that's remaining, did you say that the plan is to allocate that to buybacks as well? Or is that undecided at the moment?

Tim Mattke

No, what we said is that's for general corporate purposes. At this point, we haven't announced any additional buybacks with that. We have to manage the debt service that we have at the holding company right now. We've got 2017 maturity coming up. So it has given us a little additional liquidity, but we have a little higher run rate on our annual interest expense too after the offering. So all those things sort of go into the mix.

Bose George

Okay. And then can you just remind me what's the plan for the 2017 converts?

Tim Mattke

2017 converts, we will pay off at maturity. I think there is $145 million of those left right now.

Bose George

Okay, great. And then just switching to the GSE risk-sharing comments that you made, just based on your discussions with the GSEs, does it look like the goal to pursue the deep end and sort of the front-end loan level of risk sharing, is still progressing?

Pat Sinks

This is Pat. We continue to be engaged, particularly with the FHFA both as a separate company as well as our Trade Association has made a lot of effort recently, both with our response to the request for input as well as face-to-face meetings. So they continue to progress.

Bose George

Okay, great. Thanks.

Pat Sinks

Thank you.

Operator

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

Soham Pandya

Hey good morning, guys. This is actually Soham on for Jack. My first question was just a follow-up to the last question. The assumptions on the deeper coverage study put out by Milliman last year was that there's going to be some reduction in GSEs to give MI's full credit for the coverage. I mean, how certain are we or the industry to reduce G fees? And if there was no G fee reduction, what sort of setup are we looking at in order to move from a pilot to something more systematic?

Pat Sinks

This is Pat. I think as the year has progressed and our thinking has evolved, our view is because whether or not there was a benefit to the borrower was a point of contention among some. We've taken the view that let's do the work, let's do the analysis. And if there should be a benefit to the borrower, then we can get into what happens to G fees. But rather than having that debate, we've got analysis that just says the concept works. The capital structure works. So let's not right now worry about the borrower. And if something shakes out, we will.

How do we move into this – our second question, how do we move it from pilot into something that's real? That's ways off in the future. I mean, the GSEs have been trying different pilots. I would expect it if we can get it done in the pilot phase first. So it's very difficult to predict as to when it would be an actual ongoing business opportunity such that we could factor it into our financial forecasts.

Soham Pandya

All right. Thank you. And then, Pat, you mentioned more recently that there was more stability in LPMI. But what's the risk that aggressive pricing returns, if rates do go up in December and we have something similar to this year, where the long end flattened? And then could you just remind us your target mix on the business now that we have had a couple of quarters of new pricing?

Pat Sinks

Well, the target mix is pretty much set by the market. I mean, right now it's about 75%/25%. It could hit as high as 80%, meaning borrower paid versus lender paid. So, we have seen some stability in the borrower-paid segment – that 75% as all the MI's pretty much lined up on rates over the course of the first and second quarter of this year. The LPMI rates continue to be aggressive. People play there selectively. So it kind of depends on the lender and the situation as to who's been trying to win those bids. But we are just watching it play out. It's difficult to predict if anything in the future is going to happen one way or the other. I'm just pleased that we have some stability in the market right now.

Soham Pandya

Okay, great. And then just the last one for Tim. Your investment yields look like they took a slight dip this quarter compared to the last three quarters. What's going on there? And how are you guys positioning the portfolio ahead of a potential rate hike in December?

Pat Sinks

Yes, I think the way we look at it, for the most part, it stayed fairly flat. I mean, there is a little bit of volatility, but I think we think it's, for the most part, flat. We are trying to trend just a little bit more into the muni portfolio now that we show taxes on the income statement and, some point in the future, will be paying cash taxes. So I think you have to take that into consideration when you look at the yield. All things considered though from a duration, we've moved out a little bit farther, but don't see us going significantly up from where we are now.

Soham Pandya

Okay, thank you.

Operator

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

Doug Harter

Thanks. Where do you think you guys are in terms of expenses? As the portfolio grows, as you continue to write new business, do you need to add any expenses?

Tim Mattke

This is Tim. No, I think we are at a pretty good rate right now. I think one of the things we always say is this is a business that scales very well. And so if we have higher volumes of business, we think with our existing sales force, underwriting team, that we can handle additional volumes. Obviously when you talk about underwriting, there can be little incremental costs. But I think we feel like the work that we've done over the last few years to, again, keep the focus on expenses as we always have, keeps us in a pretty good spot even if volumes go up from here.

Doug Harter

And then can you just remind us of when your reinsurance deals are up for renegotiation or renewal, as capital is building at the insurance subsidiary?

Tim Mattke

Yes. This is Tim again. Our current reinsurance covers the NIW through the end of 2016. So, we'll be looking at putting reinsurance on for our 2017 books, and have had discussions with the reinsurers and think that that will look pretty similar to our existing treaty right now. But we have the ability for the existing treaty to early-terminate at the end of 2018, should we so choose. So that's the first contractual place where we have an ability to sort of look at resizing that reinsurance that's in place right now.

Doug Harter

Great. Thank you.

Tim Mattke

You're welcome.

Operator

Thank you. Our next question comes from the line of Chris Gamaitoni of Autonomous. Your line is now open.

Chris Gamaitoni

This is Chris Gamaitoni from Autonomous – I think it's me. I'm a little confused. Can you give us – do you have any sense of when the timing or what year you think you'd be able to get ordinary dividends out of the writing company, when you kind of lap the period for the contingency reserve release?

Tim Mattke

Chris, this is Tim. I think that's still years out. And I say that for a couple of reasons under the current rules. Because the contingency reserve build, that is a direct deduction for our statutory income, which is a key component of the calculation for us. So I think especially if you are going to think about anything meaningful, that's the way you have to think about it. Also when we are in the area where we are getting extraordinary dividends, that also bars you from getting ordinary – having them classified as ordinary. So I think that is – the best way to think about dividends right now is in the extraordinary methodology, and that, again, our goal is that those will continue to grow as our excess over PMIERs grows, and that the regulator gets more and more comfortable with our capital adequacy and ability to stream dividends up to the holding company.

Chris Gamaitoni

Okay. And how do you weigh reducing the usage of insurance versus capital return when you think about your capital planning actions?

Tim Mattke

Yes. I think it's a balance. I think we are very conscious of not getting overloaded from a reinsurance standpoint. But by the same token, we find it a very valuable tool. And I'd tell you that from a regulator's standpoint, I think they take a lot of comfort thus having reinsurance if there were to be any stress environment. And so I think we'll continue to look at those and see how it sort of plays out regarding dividend capacity. But the way we look at it right now, the more of an excess we can continue to grow and the lower risk to capital goes, I think the better case we have for additional dividend capacity.

Chris Gamaitoni

Okay. And switching gears, there's been some trade publications that have mentioned that state regulators are looking more closely at LPMI competition. Do you have any kind of views or commentary on that, whether that's occurring and what you think the impact might be in the future?

Mike Zimmerman

Yes, Chris, this is Mike. Actually last quarter, we talked about that, sort of where California had inquired about some pricing in the LPMI space. It's the best of our knowledge or at least from our Company perspective, we've resolved that issue with California and are moving forward with our pricing strategy as Pat has articulated in the past.

Chris Gamaitoni

Okay. So, no real change from where it is today, you don't think?

Tim Mattke

Not for MGIC, no.

Chris Gamaitoni

Yes. Okay. Thanks so much, guys.

Tim Mattke

Sure.

Operator

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

Eric Beardsley

Hi, thank you. Just on the premium rate, I think you've mentioned that it's a little bit tough to predict here. I think you had previously said it would be down 2 to 3 basis points from, I think, the fourth quarter of 2015 levels as we got through year-end here. I guess just a couple of questions on that. One, just in the third quarter, I was wondering if you could help us quantify how much of a benefit you had from accelerated amortization on the single premium policies? And then, two, I guess, where should we ultimately see that premium rate settle out?

Tim Mattke

Yes, this is Tim. I think for the quarter, we saw about $3 million more in accelerated singles then we would saw in the second quarter. So if you are looking quarter over quarter, we probably had a $3 million additional benefit in Q3 of 2016. That today was up probably even – Q2 was probably even up a couple-million over Q1 of this year. So you should take that into account when you look at sort of the run rate.

As we said sort of in the opening comments, we still expect that it's going to trend down. And if you look sort of for the first nine months of this year versus first nine months of last year, we see a trend downward. It's tough to tell at what exact pace, but I don't think our view has changed significantly as far as that guidance that the average basis point, again, over the long-term, trends downward, even though there could be volatility on the quarters.

Eric Beardsley

Got it. So I guess, given the refi environment and whatever other trends are impacting it, could it be better than that initial guidance of down 2% to 3%?

Tim Mattke

It can be, depending upon the refi environment. And obviously, we talked about the level of losses under the Reinsurance Treaty as being something that impacts it. I would say that the headwinds are more going downward, but you can have, obviously, periods like this where you have some accelerated earnings on singles that will bring it up. And so that's why I think you have to look longer-term trends as opposed to quarter-to-quarter.

Eric Beardsley

Got it. And just back to the share count – because you had mentioned you had done 3.5 million shares since quarter-end and maybe there is another – I think you mentioned 1.5 million or so to do. So let's say you kept share count down 5 million versus the 3Q run rate. And then I guess from there, if we think about the 2017 converts getting paid off in cash next year, can you just help us with how much of the diluted share count would that be? Is that somewhere around 10 million, 11 million shares right now?

Mike Zimmerman

Eric, this is Mike. Yes, the 2017 is just about 10 million shares associated with those. So, right.

Eric Beardsley

Got it. So we are looking for the share count to come down another, call it, 15 million from the third quarter run rate, give or take?

Mike Zimmerman

Yes, but I would say that – right, the run rate, but the second – the 2017's, right, is maturing really, they are going to be there in the first quarter and they will be there partial time of the second quarter as well. But long-term, that would be correct.

Pat Sinks

Yes. And the other thing to think about is, obviously, the transaction that we did at the beginning of August, that full share count, from an EPS standpoint, coming out for the full quarter. So, obviously look at the shares that are remaining at the end of the quarter. And I think if you looked to adjust the additional shares that we have repurchased since the end of Q3, and along with the 2017's, that's the right way to start thinking about, I guess, if you are looking out to 2017.

Eric Beardsley

Okay, great. And then just lastly, I think you've been talking originally about a 32% tax rate. Is that still good to think about going forward? Or is it more close to the 34% adjusted rate we saw this quarter?

Pat Sinks

I think 32% is still the right way to sort of think about where we are trending to.

Eric Beardsley

Okay, great. Thank you.

Operator

Thank you. Our next question comes from the line of Amir Batten [ph] of Bank of America. Your line is now open.

Unidentified Analyst

My questions have been answered. Thanks.

Pat Sinks

Thanks, Amir.

Operator

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

Geoffrey Dunn

Thank you. Good morning. Tim, I think you indicated that you are expecting reinsurance on the 2017 to look similar to what you already have. As you think about your capital management and risk management planning, have you guys looked at or considered anything like these Bellamy deals that you just ceded, and looking more to the fixed income execution rather than the reinsurance market?

Pat Sinks

Yes, Geoff, it's something that we've looked at and we've paid close attention to. If you recall, we did some capital markets reinsurance deals back in the 2000's, so which we called Home Re. So we are familiar with the sort of the general structure of it. But obviously you've paid close attention to what's developed over the last couple of years. I would say that some of those transactions look appealing to a certain extent. I think you have to weigh what the PMIERs credit will be for it. And it's uncertain to us what credit you get, not just for, say, day one but, say, one or two years out from that. And that's one of the reasons why we like the quota share transactions that we've been doing with more traditional reinsurers. But it's something that we'll continue to explore and look to see if it makes sense for us to execute on.

Geoffrey Dunn

Okay, thanks.

Pat Sinks

You're welcome.

Operator

Thank you. And our next question comes from the line of Chris Gamaitoni of Autonomous. Your line is now open.

Chris Gamaitoni

Thanks for the follow-up. Do you have a sense of when – what the pace of decline of the 2006 and 2007 vintage will be? I'm really speaking about kind of the natural amortization to 78% and when we might see a cliff in the – of those being enforced, acknowledging some have been HARP, so maybe that's pushed out?

Mike Zimmerman

Chris, this is Mike. I mean, if you are on it just from a mathematical basis, both books had high percentages, 97's and 100 LTVs. And on a strict amortization basis, you are looking at 11, 12 years to get to the date where you hit a 78 LTV. So, 11, 12 years from those vintage years. Then there's – when you start factoring in the hope that you have the other considerations there, whether there is a presence of a second lien and other considerations of the loss and the cancellation perspective. But from a date perspective, you're looking at 11 to 12 years. So, 2018 and 2019, but keep in mind a lot of those books also have been HARP'ed, so that resets the clock.

Chris Gamaitoni

About 50-ish-percent rough have been HARP'ed, so I guess we could see maybe a decent step-down in, call it, 2018, 2019, and then kind of that half of the tail still being there from the HARP portfolio.

Mike Zimmerman

Have been – are currently delinquent and have been historically delinquent too, so that will weight into that.

Steve Mackey

Yes. This is Steve Mackey. I would not think of a kind of cliff affect at all or a significant step-down as we go from 2017 to 2018 to 2019. I kind of view the wind-down of that vintages – of those vintages as more of a slow grind-down over time.

Chris Gamaitoni

Okay. I just asked is kind of Old Republic, which is a pure runoff book, is kind of pinpointed 2022, is when they think most of it will be gone with a similar type of mix.

Steve Mackey

Well, okay. I mean, so we add five years – well, five years is, I guess, a pretty good long runway. So I mean I guess it's hard to argue whether it's that far out. So that's on a cliff.

Chris Gamaitoni

Okay. And on IBNR, do you have the gross dollar amount? You said an $8 million benefit. Is that the $91 million minus $8 million? Or is it a different number?

Steve Mackey

I think that we went from around $66 million at the end of Q2 down to the $8 million at the end of Q3.

Chris Gamaitoni

Okay, thank you.

Steve Mackey

You're welcome.

Operator

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

Mackenzie Aron

Thanks. Good morning. Just one follow-up on the loss reserves and kind of the assumptions that are baked in there. Can you talk a little bit about what you're seeing on the severity? I know in 2Q, you had noted that you had seen some improvement there, particularly in the judicial states, and felt like the reserve adjustments related to severity had caught you up. But can you just talk about what you saw the last – this last quarter, and whether there's trends there that you might still be watching that haven't yet been reflected in the adjustments?

Tim Mattke

Yes, Mackenzie, this is Tim. I think Q3 to me was very similar to what we saw in Q2. We definitely didn't see any deterioration, so I think our expectation based upon our estimates are that we have caught up at this point. That's not to say that things can't change in the future, but there's nothing in Q3 on the severity side that led us to believe that things were getting any worse; not really getting any significantly better either, though, I would say.

Mackenzie Aron

Okay, great. And then just on the claim rate as we think out to next year, can you give us any order of magnitude in terms of how much the claim rate on new notices could potentially decline next year?

Tim Mattke

No, I think it's too early to say. I think that's been a tough one to predict. I think we did see some year-over-year improvement of Q3 this year versus last year, but it gets tougher, I think, as we get to what we think is sort of a historical long run average of 10% to get that meaningful improvement. I think the big improvement we are going to get out of incurred's, quite frankly, is from the lower new notices that are coming in the door, is probably the best way to think about it.

Mackenzie Aron

Okay, great. Thanks.

Tim Mattke

Thanks.

Operator

Thank you. And I'm showing no further questions at this time.

Pat Sinks

Okay, this is Pat. Once again, we thank you for your interest in our Company and have a great day. Bye.

Operator

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

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