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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Thank you for standing by and welcome to the MGIC Investment Corporation Third Quarter Earnings Call. At this time all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session [Operator Instructions].
I would now like to hand the conference over to your speaker today, Mr. Mike Zimmerman, Senior Vice President of Investor Relations. Thank you, please go ahead.
Thanks, Lee [ph], 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 2019, our Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. Nathan, welcome to the call.
I want to remind all participants, that our earnings release of this morning which may be accessed on MGIC’s website, which is located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures.
We have posted on our website a presentation that contains information in pertaining to our primary risk in force and new insurance written and other information we think you'll find valuable. I also want to remind listeners that from time-to-time, we may post information about our underwriting guidelines and other presentations or corrections, the past presentations on our website that investors and other interested parties may find valuable as well.
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 party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call, or the issuance of the Form 8-K
At this time, I'd like to turn the call over to Tim.
Thanks, Mike. Good morning. I'm pleased to report we continued to succeed in executing on our business strategies and our third quarter financial results reflect that. In a few minutes, Nathan will cover the details of the financial results, but before he does, let me take a few preliminary comments.
As a result of strong credit characteristics on our insurance in force in the favorable housing and economic environments, we're generating meaningful earnings and GAAP return on equity. Our balance sheet continues to get stronger as evidenced by the increase in book value per share compared to the end of 2018.
Our insurance in force grew by 6% over the last 12 months ending the quarter at $218.1 billion. Reflecting the continued strength of our purchase mortgage origination market and increased refinance volume, new insurance written was up approximately 32% in the third quarter compared to last year.
The size of the total mortgage origination market has a meaningful impact on the volume of business we will insure. I would characterize the overall mortgage origination market is healthy, consumer confidence remains strong, and mortgage rates remain attractive.
So, while the supply of homes available for sale is still tight, there is strong demand for homes in refinances. The 6% growth rate insurance in force year-over-year reflects a modest slowdown in the growth rate of our insurance in force, in part due to the increased refinance activity.
However, let me explain why the slowdown is not as pronounced as it has been in other refinance cycles. The majority of policies that are most exposed to refinancing are written in 2018 and early 2019. Given the relatively short period these policies have been on the books, the underlying homes have likely experienced only a modest level of price appreciation. Therefore, many new loans being refinanced need mortgage insurance.
I remain optimistic about our ability to prudently grow our insurance in force because we have a compelling business proposition for our customers, and consumers continue to feel confident about the future economic prospects. I feel very confident about our ability to serve our customers given our capital strength and position in the market.
Turning to credit quality, our inventory of delinquency notices continues to be low, and the strong credit performance of the existing insurance in force continues to be a tailwind for our financial results. In addition, the new insurance we are writing has strong credit characteristics and is expected to generate meaningful returns for shareholders.
Now, I'll share some thoughts on our business objectives. We are focused on the long-term success of the company by offering competitive products and services while maintaining a sharp focus on risk-adjusted returns on capital and expenses. We recognize that our customers operate in a dynamic marketplace.
So, we will continue to work with our customers to deliver competitive options to meet our return thresholds in a manner that works best for all involved. Staying focused on these things will allow us to prudently grow insurance in force, generate long-term premium flows, and create value for our shareholders.
With that, let me turn it over to Nathan.
Thanks, Tim. Before turning to the financial results for the quarter, I wanted to take a minute to thank Tim and the Board for the opportunity to serve MGIC as its CFO. I'm really excited to lead such a talented finance team and be a bigger part of such a great management team.
Now onto the numbers. In the third quarter, we earned $176.9 million of net income or $0.49 per diluted share, which is the same diluted earnings per share as the third quarter of last year. This quarter we recognized $27 million of positive loss reserve development compared to $59 million in the third quarter of 2018. The accelerated premiums from single policy cancellations increased $12 million compared to the same period last year. For the quarter, on an annualized basis, we generated 17.5% return on beginning shareholders’ equity.
Net premiums earned increased 7% compared to the same period last year, primarily due to higher insurance in force and the increase in accelerated premiums from single premium policy cancellations, partially offset by lower premium rates on insurance in force.
Losses incurred consist of reserves established on new delinquency notices plus changes to previously established loss reserves. Net losses incurred were $34 million compared to a negative $1.5 million in the same period last year. The increase in net losses incurred primarily reflects the level of positive loss reserve development I just mentioned.
As we do each quarter, we reviewed the performance of the delinquency inventory to determine what if any changes should be made to the estimated claim rate and severity factors associated with previously received notices. The positive loss reserve development is primarily driven by higher than expected cure rates and delinquencies that were aged 18 months or greater. We attribute this primarily to the continuation of the favorable credit cycle we are experiencing.
During the quarter, we received approximately 3% more new delinquency notices than we did in the same period last year. In our view, this year-over-year increase is not an indication of deteriorating credit, rather it reflects that our larger, more recently written books of business were having very low levels of new delinquency notice activity are coming into their peak loss years. While continuing to diminish in number, we expect that the pre-2009 books will continue to be the majority of new notice activity in the coming quarters.
The percentage of the insured loans that were current at the beginning in the third quarter, but subsequently reported as delinquent during the quarter continues to remain below 1.5%, a level achieved in the first quarter of 2018. This further supports our view regarding credit quality.
The post-2008 book accounts for just 39% of the new delinquency notices and 27% of the delinquent inventory, but account for approximately 87% of the risk in force as of September 30, 2019. The estimated claim rate on new notices received in the third quarter of 2019 was 8%, which is consistent with the first and second quarters of 2019. This estimate reflects the current economic environment and anticipated cures and was lower than the 9% claim rate in the third quarter of 2018.
Net paid claims in the third quarter were $55 million, while the number of claims received in the quarter declined by 29% from the same period last year. This activity reflects the continued decline in the delinquency inventory.
The effective average premium yield for the third quarter of 2019 was 49.6 basis points, up from 46.5 basis points in the second quarter and 49.3 basis points in the third quarter of 2018. As a reminder, last quarter we incurred a non-recurring fee of $6.8 million associated with the restructuring of our 2015 quota share reinsurance transaction, which was recorded as additional premium ceded. The change in effective yield also reflects changes in premium rates, changes in accelerated premium from single premium policy cancellations, changes in premium refund accruals, and the level of premiums ceded to our various reinsurance transactions and the associated profit commission.
While there could be some volatility, we expect that the effective premium yield on the insurance in force will trend lower in future periods. This decline is expected mainly because the older books of business written at higher premium rates continue to run off and are replaced with new books of business written at lower premium rates. Of course, these newer books are also expected to generate low levels of losses and meaningful shareholder returns given their credit characteristics and the presence of the reinsurance coverage that has been placed on these books.
Net underwriting and other expenses were $48.3 million in the third quarter of 2019 compared to $46.8 million in the same period last year. The increase is primarily attributable to lower ceding commissions resulting from the restructuring of the 2015 quota share.
During the quarter MGIC paid a $70 million dividend to the holding company. We expect MGIC to be able to continue to pay dividends at an annual rate of at least $280 million for the foreseeable future. The dividend payments demonstrate strong capital position we are in, as well as the level of capital we anticipate being able to generate from our insurance in force. As a reminder any dividend payments are subject to approval of our Board, we notify the OCI to ensure it does not object to any dividend payments from MGIC.
Finally, I wanted to spend a few minutes discussing our capital position and our capital management activities. We continue to analyze and discuss with the Board, the best options for deploying capital. Our first priority is to use capital to support new business and prudently grow our insurance in force. But if we're not able to find appropriate opportunities then we will evaluate other options to maximize long-term shareholder value such as share repurchases and common stock dividends.
We have been participating in the GSE risk transfer transactions and expect to remain active provided the returns meet our thresholds. We also have periodic options to adjust the level of quota share reinsurance to utilize like we did with the 2015 quota share transaction and we will evaluate those options as they present themselves.
At quarter end our consolidated cash and investments totaled $5.8 billion, including $308 million of cash and investments at the holding company. Investment income increased year-over-year, primarily as a result of the larger investment portfolio. The consolidated investment portfolio had a mix of 81% taxable and 19% tax exempt securities and a pre-tax yield of 3.12% in a duration of four years.
At the end of the third quarter our debt to total capital ratio was approximately 17% and MGIC’s available assets for PMIERs purposes totaled approximately $4.5 billion, resulting in a $1.2 billion excess over the minimum required assets. As we have previously discussed on these calls, it is difficult to actively manage our excess available assets to a specific target given the regulatory requirements for paying dividends. Some level of excess provides a nice buffer against adverse economic scenarios, as well as the potential for increases in capital requirements from the GSC should they occur in the future.
And excess of available assets under PMIERs also positions us to take advantage of new business opportunities as they occur and provide some support for our ability to continue to pay dividends from MGIC to the holding company.
During the quarter, we utilized approximately $70 million under our 2019 share purchase program and repurchased 5.5 million shares, we have an additional $130 million authorization remaining under that program, which runs through the end of 2020. I would expect us to continue to be opportunistic in using the remaining authorization in deciding when to repurchase shares we consider a number of factors including our intrinsic valuation using discounted cash flows, as well as market based metrics like price to book and price to earnings ratios, but also recognize that historically, our share price has been volatile.
As we announced in July, we initiated a common stock dividend of $0.06 per share, after considering the payment of that dividend and our share purchases, the total amount of capital return to shareholders in the third quarter was approximately $91 million.
With let me turn it back to Joe.
Thanks, Nathan. Before moving to any questions, let me give a quick update on the regulatory and political fronts. Regarding housing finance reform, we remain encouraged about the future role that our company and industry can play. But it continues to be difficult to gauge what actions may be taken in the timing of any such actions.
As directed by President Trump, the U.S. Treasury Department issued a plan that outlines administrative and legislative reforms for the housing finance system. The reforms are aimed at reducing taxpayer risk, expanding the private sectors’ role in housing finance, modernizing the government housing programs, and achieving sustainable homeownership.
The plan did not contain any detailed directives so the impact of the plan on our company n industry is still uncertain. The plan did indicate that FHFA and Hutch [ph] to develop and implement a specific understanding as to the appropriate roles and overlap between the GSE and the FHA.
Additionally, the treasury plan calls for the FHFA and CFPB to continue to coordinate their efforts to avoid market disruptions. But also release its housing reform plan, which calls for the FHA to refocus on its mission of providing housing finance support that cannot be fulfilled through traditional underwriting. This reinforces our belief that the FHA is unlikely to expand its presence in the mortgage market.
While the FHFA has begun to review various pilots and programs, the GSEs are involved in and even eliminated some there have been no updates regarding the imagine EPMI programs. However, as we have previously reported, these programs have not gained significant traction with lenders to-date. The FHFA has also begun to turn their attention to the creation of a plan for the eventual end of the GSE conservatorship. This includes finalizing the capital model for the GSEs and allowing them to retain more capital. The FHFA has issued a request for proposal from financial advisors to assist in developing this plan. We believe this path would end conservatorship as complicated it will take time to develop and implement.
Finally, the CFPB has requested comments about the definition of Qualified Mortgage or QM. This request relates to their intent to let the so called GSE Patch expire in January 2021. The GSE Patch expands the definition of QM to include mortgages eligible to be purchased by the GSEs even if the mortgages do not meet the DTI ratio limit of 43%.
In the requests, they ask for comments about the Patch, and how best to judge the creditworthiness of borrowers, and how to draw upright line Safe Harbor for lenders. The commentary closed in September and the CFPB is reviewing these comments, including our own the comment of our trade group USMI.
Although the initial market reaction the CFPB has request for comments was negative for mortgage originators and insurers, considering the other initiatives to make homeownership affordable and available, we believe the intent of the CFPB is to eliminate temporary provisions, create a permanent definition of qualified mortgage and help increase the role of private capital in a mortgage market. We do not believe that the intent of the CFPB is to restrict access to credit for deserving homeowners or make homeownership more expensive or unattainable.
We continue to be actively engaged on this topic in Washington and remain opportunistic on what changes do occur will include the use of private capital, including private MI. Last week recognizing our industry's improved credit profile and evolving business model over the past several years, while pointing to stronger net income, improved capital adequacy, and the ease of excessive loss reinsurance through insurance link notes issued to investors, as well as traditional reinsurance coverage, Moody's upgraded our and other mono line mortgage insurers financial strength ratings. They mentioned that could lead to further upgrades we believe are all very achievable.
This supports our view is that as more private capital sought to transfer risk away from the taxpayers, that our company and the industry will be able to play a role. Our company and industry offer many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership, the down payment.
I believe that our company is well positioned to acquire, manage and distribute mortgage credit risk in a variety of forms supported by a robust capital structure that includes our strong balance sheet, and where appropriate reinsurance treaties and the capital markets. Our business is performing well, and we're generating meaningful returns.
In the quarter we grew our insurance in force and investment income, credit losses remained very low, expenses were held in check, and we returned $91 million to shareholders. We are writing high quality new business in what is expected to be a low loss environment that new business is being added to an existing book of business that is performing exceptionally well and we're generating significant shareholder value. Given the economic and labor market conditions, we expect that to continue. I am very excited and confident about the future of MGIC.
Before we open up the line to questions, I want to take a few minutes to say how honored and humbled I am to be CEO of a company with a reputation of MGIC. And one that has been serving the mortgage market since 1957 through many economic cycles.
I feel very fortunate to have a team of co-workers at MGIC that everyday demonstrates the commitment and dedication to our customers and company. I know that if it was not for these co-workers and the co-workers that preceded them over the past 60 plus years, our company will not be in a position that it is today.
I'm going to focus my energy not only maintaining that legacy of dedication and service to the housing market and home ownership, but I'm doing all that I can to ensure that co-workers that come after me could experience the same success that I've been able to enjoy.
Finally, I want to say a few words about Pat Sinks, who recently stepped down from his role as CEO. Pat is someone who I've looked as a great success story of this organization. He spent his entire career at MGIC after responding to an ad in the newspaper for a position of a staff accountant and worked his way up to lead this organization and did so while gaining the respect of his team and the industry.
While many thought the industry would not survive he and our entire company worked tirelessly to get the company through a difficult period of 2007 to 2014. With Pat assumed the role of CEO they even questioned the relevancy of our company and the industry. Pat spent much of his time as CEO in Washington with customers and co-workers having them understand and appreciate how the company and industry had learned from the financial crisis and emerged stronger and the critical role MI can continue to play in the mortgage finance industry.
He led the charge to restore the financial strength of our balance sheet and helps instill the discipline to maintain that in the future. He led MGIC as the industry of all from a buy and hold concept of managing risk to one that now acquires, manages and distributes risk. Pat led the team that has further advanced MGIC's ability to provide access to affordable and sustainable homeownership to consumers, create a rewarding environment for myself and my fellow co-workers, and position the company to provide meaningful returns to shareholders.
Pat, I am sure you're listening, and hopefully not in a caller queue, on behalf of myself and the rest of the company and our shareholders, thank you for the 41 years of service.
With that operator, let's take questions.
[Operator Instructions] Your first question comes from the line of Aron Mackenzie. Your line is open.
Thanks. Good morning and congrats on the strong quarter. First question just around pricing, the premium that we've seen on the new business has continued to come down clearly the risk of business has also shifted. Can you just talk about, was there anything specifically going on during the quarter, any adjustments within MiQ that were also driving that shift and when should we expect to see the average premiums starting to stabilize?
Mackenzie, this is Tim. I think as we look at the premium in the quarter, there is some from a mix shift, you can see less 97. We have the ability to make tweaks within MiQ on a regular basis, although try not to do too often. I think from our perspective, want to make sure that we're competitive in the marketplace. It’s really difficult to know when that might level off. Obviously, it's a competitive marketplace, but feel very good about sort of the risk return that we're getting on the new business at this point.
Great. And, Tim would you say that the competitive environment is stable right now or how would you characterize just any changes during the quarter to what you're seeing with MiQ and the other pricing engines being out in the market for another quarter now?
Yes, I guess, I would just -- it's always a competitive marketplace. And so I view it as that and from that standpoint, like I said I haven't noticed anything that was exceptional about the quarter from a competition standpoint, but it's a competitive marketplace with a lot of good quality business.
Great. And then just last one, can you quantify the amount of single premium cancellations during the quarter?
Yes, I think it was $18.5 million in the quarter. So, it is up $12 million from the prior quarter or the year ago quarter.
Great, thank you.
Thanks.
Your next question comes from the line of Douglas Harter with Credit Suisse. Your line is open.
Thanks. Just following up, Tim, you said that the returns are still very attractive on the business you're writing, if you could just quantify whether there was any kind of change in returns, if you were to kind of look at the business you wrote this quarter versus last quarter or kind of over the past year how that kind of expected return has changed given the credit quality mix and the pricing changes?
Yes, it’s Tim. I mean, I'd say it's been relatively consistent from a return standpoint, again, as we write a little bit of higher quality which we thought might happen as MiQ came on board, a little bit less capital held against it. And so, we view even as the premium comes down, we're getting very comparable returns to what we have been getting.
Great. And then if you could just talk about, kind of now that you've had MiQ for a while, kind of how you see the different pockets of opportunity within the market and kind of where you see the best risk adjusted returns kind of within the marketplace and now that you can more granularly price?
Yes, I mean, I guess from my perspective, I wouldn't say there's any one pocket that we are targeting. I think we're trying to get a good cross section of what's available out there. I think returns are pretty comparable across that spectrum still. So I would say that there's not one area that we're particularly targeting from that standpoint, but rather trying to get a good cross section of the market for good returns across that.
All right. Thank you, Tim.
Sure.
Your next question comes from the line of Randy Binner with B. Riley FBR. Your line is open.
Hey, good morning. Thanks. I wanted to ask if you could provide more color on the commentary that, refis are now less likely to have individuals moving out of mortgage insurance. Is there a regional aspect to that, is there a certain home value skewed to that dynamic. Just would be interested to hear more about that development. And I presume that was a -- that's an incremental driver to the NIW growth in the quarter?
Yes, Randy, this is Mike, you're right it was an incremental driver. Refis are up pretty substantially year-over-year and even sequentially. So clearly that's helped on the NIW front. So, from a 2018, early 2019 book, sort of the ones right there really prepaying the most given the coupons that they were originated at versus the prior years.
And so nationally, right, home prices have been relatively let's call 3%, 4%. There are certainly some markets that have accelerated more than that, and some that have been less than that. So -- but I wouldn't say there's any large geographic skew to that, a few minor average loans that we're ensuring, it's we call it a 90ish 93, 94 type LTV $240,000 to $250,000 of the loan amount. So, you're talking purchase prices under $300,000 nationally, clearly there's regions that are going to be higher than that.
So that's from a geographic [indiscernible] saying as I no, not a lot of skewing, but you can look into specific home markets, probably and see some markets that have gone up certainly more than the national average, but really speaking about that more generally across the board as to what's been the driver to it is that they haven't had the time as a whole to get that price appreciation to refi out mortgage insurance, which is if you go back the past refinance cycle, when you had coupons driving from 14 down to 10, or from eight down to five and four, you had a lot more build up, took longer time and then more buildup in the equity.
That's helpful. The follow-up, I guess is, do you give any sense of how much of those out of the cohorts you mentioned, how much has been refied? Is there any sense you have of kind of how developed that process is? I know that's a tough question.
Yes, that's right, completely, follow-up as far as the -- I mean, you're talking about like month-by-month or by coupon or by regions.
No, of that group who has been in there mortgage for a relatively short amount of time, so they didn't get the HPA but they are moving to refi. Do you have any sense of how much of those cohorts has moved to refi versus who may still?
I guess that’s not with a great specificity into, I mean, you can look at the quarter-to-quarter decline of the insurance in force by the 2018 book year. So there's -- it was pretty rapid prepayments on those particular book years. But as far as how much is left to be refied, I think it's kind of difficult to get a real accurate sense of that.
Okay, fair enough. Thanks.
Your next question comes from the line of Mark DeVries with Barclays. Your line is open.
Yes. Thanks for all the comments on what you're seeing on Washington, but I was hoping to get a little bit more color on the QM Patch and kind of what you're hearing is the most likely outcome there?
Hey, Mark, it’s Tim. I guess it's tough to really put odds on what the most likely outcome is obviously there's a lot of discussion about A4's [ph] as well as compensating factors. I can tell you from the conversations I've been part of, I haven't heard one clear direction of where it's going to go. I can hear basically the positives and negatives associated with A4's as well as with compensating factors.
I think what I've heard from a lot of constituents is they want to be something that's durable, that doesn't change regularly. They can’t -- doesn't change necessarily just as administration changes. And so I think there's a good amount of work that probably still needs to be done to figure out how to sort of thread that needle. So I guess I -- it's tough candy camp exactly where it's going to fall out now, other than saying, I think we're pretty convinced that the goal isn’t to shrink and make housing less affordable. It's really to get rid of the temporary patch and make something that's more permanent and structure.
Okay, that’s helpful. And just to clarify it, A4's -- whether it's A4's one of the other solutions, your senses that it's not necessarily going to kick out any kind of meaningful push from the market it’s currently getting financed today it's just to create a more consistent definition of QM that applies to both conforming and non-conforming mortgages. Is that fair?
Yes, that's very fair.
Okay, great. And the next question, I know, it's not an easy question since you guys are the first time I to report but based on what you saw in terms of like customer activity during the quarter, do you have a sense for whether you may have regain some of the share that you lost over the last couple of quarters as you were rolling out MiQ?
Yes, Mark, it is tough to know until everybody reports, I mean, our sense is that we probably gained some share, but it's really tough to quantify how much.
Okay, fair enough. Thank you.
Your next question comes from the line of Bose George with KBW. Your line is open.
Hey guys, good morning. High DTI volume -- the percentage was down continues to decline. Do you think that’s something specific to you, do you think industry volume, there's also declining?
Yes, Bose, this is Mike. No, I think this industry never feel a quarter or two ago, the GSE -- we commented that the GSEs have made some changes to their engines relative to what they were accepting is that level will certainly will go up. So I think you're just seeing a more of a broad based approach, so I don’t think it’s necessarily anything specific to our organization.
Okay, thanks. And then actually just one on capital, just given the level of capital the $280 million you guys have coming back to the holding company. Is there a way to think about how much of that you're targeting to distribute to shareholders?
I would say, the way that we've talked about it in the past I think is still pretty consistent today, of that $280 million about $60 million of it is interest carry for the debt at the holding company. And then the remaining $220 million is kind of returnable to the extent that we don't have other options for that money. And to date, as we've evaluated other things have felt like dividends and share repurchases are the best use for those funds.
Implementing the common stock dividend does provide a use for about $85 million of that remaining $220 million. So, at the current $280 million dividend run rate, after paying interest and after paying the common stock dividend at the current level you left with something in the 140-ish range of kind of funds that are available to think about things like share repurchases and other.
Okay, great, that's helpful. Thanks. And then actually just one back to the premium, can you give me the number for the benefit to the profit commission from the positive reserve development?
I think it's -- this is Mike. I don't have that one right specific, but the premium refund accrual adjustment there is fairly, I think it's pretty consistent. Because we've had it small $30 million somewhat positive development last quarter. I don't have a specific number right in front of us here. And it's pretty materially I would say.
Yes, this is Nathan. I would say, one of the things when we restructured the 2015 quota share the absolute level of profit commission is lower than it has been in the past as well. And most of the loans that are in the delinquent inventory that have been there for a long time that were driving some of that reserve development just weren't included in some of those transactions. So, like Mike mentioned, I wouldn't look at the reserve development as being a big driver of the profit commission in the quarter.
Okay, great. Thanks.
Your next question comes from the line of Jack Micenko with SIG. Your line is open.
Hi, good morning. Tim, looking at the buyback, looking at the dividend up and thinking through, this being your first quarter as CEO. I mean, how much of all this is a coincidence and how much of this is maybe a change in mentality? I know, you bought small in 1Q and 2Q the environment is a lot different price valuation wise from where we were on your 4Q buyback. Just how do we sort of connect all the dots on that?
Yes, I guess, Jack, I probably if you're going to ask me between coincidence or a change in philosophy. I think it's more of a coincidence. If you look at where the stock was trading this quarter, we felt like we could be more active you look at the cash we have at the holding company that had built up felt those things all combined. As well as sort of having clarity as what we were going to do from ordinary dividend to shareholders sort of created a quarter where we thought it was a good opportunity to deploy what we did, as opposed to the change in sort of philosophy is what I would say.
Okay. And then following on Mark's question, and maybe suggestion that maybe you took a little bit of share back this quarter. How much of that was sort of planned? I mean, how important is market -- as we're gaining some market share to you in your new role?
I guess from my perspective, I still don't feel market share as the end all metric by any means. It's really return on capital, and making sure that we're competitive in the marketplace. And I guess that's the one thing that we've talked about a lot here is making sure we're competitive in the marketplace.
And so, I think, generally feeling that as our shares slipped a little bit, maybe weren’t as competitive in the marketplace mainly from a pricing standpoint, we think we had great value across a number of our options and that all things being equal price we should do very well from a market share. But return on capital has to take sort of the main priority. But we want to make sure we're winning our fair share of the good quality business that’s out there.
All right, thank you.
Thanks.
Your next question comes from the line of Chris Gamaitoni with Compass Point Research. Your line is open.
Hi, good morning everyone. Most of my questions have been answered. Following on the market share question was there any types of clients that you saw increases in volume above what market expectations would have been?
I wouldn't say there's any type of clients. Again, we rolled out MiQ at the beginning of this year. So you think about the volume [indiscernible] now, us getting our feet under this a little bit more with how that sort of operating in the marketplace and how its competitive, obviously, plays into it a little bit. But I wouldn't say from any one type of customer really was I guess the focus or what needs made a difference if we did pick up anything from a market share standpoint.
All right. Can you give us any outlook for persistency maybe in the near-term as you look at the more details of your vintage data versus what we have?
This is Mike, Chris. I think given what was a 10 year at where mortgage rates are at and refi activity is still quite high. I think there is still going to be near-term still some headwinds to that that expect lower print on an annual basis going forward. The precise level don’t know obviously even though you have the rate environment you are getting into traditionally slower part of the year from activity perspective.
So -- but I wouldn’t expect that it continue to trend lower here in the near-term, but specific level don’t know, but I don’t think it's enough that we were getting overly concerned about a long-term drift down in persistency like we’ve seen in past refinance cycles.
Okay. And I was wondering if there is any additional commentary you have on thoughts of how you will approach your subsidiary excess capital toward conversations with regulators at the end of the year?
This is Nathan. I think the conversation is really -- starts with what do we think an appropriate level of capital is, how do we think we handle stress scenarios and what are the regulators views on that. And then one thing that we started talk a little bit more about is, if we feel like the absolute level of dividend should be higher than the $280 million the current annual run rate, what's the best strategy to achieve that and is in the form of annual type dividends or in the form of quarterly dividends, or a combination thereof.
So I think all of those options are on the table as we think about having that conversation, which I expect will happen sometime either in the fourth quarter or in early January of next year. But I think it starts with looking at our overall capital position, our position relative to PMIERs stress testing results and making sure that everyone's comfortable that we have enough capital in the business to handle wide range of potential future economic scenarios.
Thank you so much.
Your next question comes from the line of Mark Palmer with BTIG. Your line is now open.
Yes, thank you. A lot of my questions have been answered but very quickly I wanted to get your sense of what the timing may be in terms of additional ILN issuance and reinsurance transactions going forward?
This is Nathan, I will take the reassurance question first. We've done over the past several years we kind of programmatically issued one year forward commitment quota share agreements. We expect that we will have something similar forward commitment quota share agreement our plan has always been to be programmatic about that, we’ve been at the 30% quota share level for a while, we continue to evaluate whether that's the right level. So I think that's been working really well for us.
On the ILN side, for us it was really about -- we’ve covered up till the end of the first quarter of 2019 production, so through March by our 2019 one ILN. So then it was as a warehousing period for us, as we build enough risk to do another transaction. I can tell you, given the volumes that we've written in the second and third quarters relative to what we would've forecasts in the level refinance activity. We're getting there a little faster than we would have thought. So our intent was always to programmatically issue into the ILN markets as well. So when we have sufficient mass of risk enforced there, I would expect us to continue to execute on that strategy as well.
Thank you.
Your next question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open.
Thanks, good morning. I wanted to follow-up on Chris's question about talking to regulator about special dividend. And you say the conversation could start in Q4 2019 and it seems like the conversation should have started a while ago. The shift in the model, the treatment of risk, the distribution of risk, et cetera has been around for a while. Is this more the regulator taking time to get used to this change and understand it better or is it more that the company hasn't been in the position where it felt like we needed to more aggressively go after the excess capital at the subsidiary.
Hey, Geoff, this is Tim. I guess I would say the conversations will start in relation to sort of 2020 dividend level. And so I think that's sort of what Nathan was referring to. I think it's an evolution, I would tell you that from our standpoint, we have a very good relationship with the regulator and I think from our standpoint, we want to make sure they feel comfortable with specific level of targets, and those are things that they feel are sustainable overtime and that's really where we started with the quarterly dividend, making sure we cover the interest carry and stepping that up overtime.
As Nathan said, I think because we've had conversations with them even over the last year, we've talked to them about other forms other than quarterly dividends that make them more comfortable to have larger, potential specific targets of dividends that we would be able to get out and we've had those conversations but I think there'll be more meaningful conversations in the fourth quarter and first quarter here.
I would tell you that we always try to I guess toe the line of making sure that our regulator understands where we're coming from understands the demands of the marketplace, but making sure that we push them appropriately to where we feel comfortable, they feel comfortable with the size of dividend that we would be coming out.
Okay. On pricing has the impact of ILNs on the cost of capital affected your approach to what you consider acceptable return levels or are you seeing that maybe at competitors at all?
I think it's really tough to know how others are exactly viewing it. I can tell you that as things have become real programmatic, I guess we take a step back and look and say, we assume that others are pricing that in. From our standpoint, we've always thought that things along with reinsurance, whether it’s traditional reinsurance or ILNs that the pricing on that can change over time. And so have been very leery to put that into our pricing methodology.
But I would tell you that as you can see the programmatic nature of something's happening it wouldn't surprise me if others are viewing that as part of the capital structure and part of how they view sort of the pricing strategy, as it takes out some of the volatility of the risk, takes out some of the volatility of the earnings. So I think that's natural for others to potentially view it that way. And our view has always then let's look at things on a direct basis. Let's be aware of what they would be if we consider our traditional reinsurance that's on a forward commitment basis rewrite the business and also to consider what it looks like with the ILNs added on to really have a good appreciation for how the marketplace might look at it.
Okay. But to-date you haven't changed what you consider -- how you think about acceptable returns?
No, I think when we talk about pricing and when we actually go through our materials, we're focused on what the direct return is on it. I would tell you we're always cognizant of what the sort of the capital leverage that gets from reinsurance standpoint. But we haven't really changed the philosophy of how we’re pricing that.
Okay. And last question is what is -- when is your next option to consider a quota share reduction on one of your past deals?
At the end of 2021, we have options on both our 2017 and 2018 quota share agreements.
And have to go from 30 to 15?
That would to early terminate at that time.
Okay, all right. Thank you.
No, I was just going to say the 2015 the option at that point was to terminate. We use that as a launching point for a renegotiation discussion. So I would say contractually on the 2017 and 2018, we have the right to terminate at that time. But obviously, if a restructured agreement works for all parties, that's certainly an option too.
Okay, thanks.
Your next question comes from the line of Phil Stefano with Deutsche Bank. Your line is open.
Yes, thanks. I wanted to go back to Nathan walked us through kind of the cadence of the dividend up and then having $140 million for repurchases, another I think on the call it was mentioned earlier, you still want to be opportunistic. Has the definition of opportunistic changed over the past couple years or has ILNs or anything else kind of helped to change how you think about being opportunistic?
I would say that we've used a consistent methodology now for several years in terms of how we evaluate intrinsic value and what we think opportunistic means. But obviously the performance of the business the growth and book value, the earnings we've generated, the absolute level of what we feel is kind of an attractive price to transact that has evolved over time. I think you're seeing some of that this quarter as well that we felt like the price was very attractive in the third quarter and wanted to be a little more active than we had been in previous quarters.
I mean, as part of the question is has the ILNs have changed how you see intrinsic value because most of the tail has been severed off and maybe you feel comfortable buying, and either for example, instead of three years forward book value four years or something along those lines. I mean, has they -- has the calculus for intrinsic value been updated?
I would say the way that I would think about ILN, potentially impacting kind of intrinsic value in that way is maybe less about the tail scenarios or feeling like the that we need to hold extra for those tail scenarios.
And more about, what is the ability to potentially get money out of the writing company given that profile now at the writing company levels that doing these ILNs and mitigating that tail risk just means that we need less capital at the operating company level all else equal. And, does that ultimately help drive some of the discussions around increasing dividends to the holding company, which I think that would -- the way that we think about value in the way that we think about cash flow that would be -- those things are whereas I think the ILN could be a big benefit.
Got it. Okay. Everyone was pretty thorough. So that was it for my end. Thanks, guys.
Thanks.
Your last question comes from the line of Mihir Bhatia with Bank of America. Your line is open.
Hi, thanks for taking my questions. Firstly, let me congratulate Tim and Nathan on your new roles. And well, let me start with I had a question on just the claims and pre-crisis vintages. Those obviously continue to drive a significant portion of your new notices, but I was wondering, is there a -- couple of questions on that.
One is, is there a point at which they starts to fall off, we're getting 14 years I think from 2005 and then already passed the 10 year mark, I think on like the 2008 vintages. So just to understand with hop and some of that there has been some renewals, but will those start dropping off at some point where they get the 78%, or are those not subject to that 78% requirement? Or is it just going to be a gradual process for each of them just getting to it?
Yes, Mihir, this is Mike. It’s a question, we've been asking ourselves for a number of years.
Right.
When do those go away. So part of it, some of the legacy businesses that's left right was written without that cancellation through the bulk channel the stuff that and subject to Homeowners Protection Act. You mentioned some of the other things about HARP, and others. So -- and then also there's some credit performance that needs to take place for a lot of those [indiscernible] underneath to cope up.
So our expectation it’s going to continue to be a gradual process will be the short answer to your question. I’d say we -- it is pretty extended on a number of those book years. Obviously the 2007 book we’re talking 12 years out.
Right.
But it is a small population, but it's still the lion share of the delinquencies that have been generated.
And what about -- sorry, what about on severity? Are those like less severe just given the time or no not really?
Yes, well, there's good and relative improvement on the severity, because they've had some HBA recovery. But there's still markets that are still underwater from the 2007 alone, take it out and some Central Florida markets as just as an example is still have quite a bit of negative equity on those. So -- but it's gotten relatively better. But it's still -- they're still -- we're still pretty much paying out full plays on the majority of that business.
Got it. And then just a question, I guess on just capital structure, really, I guess small host stay away from, I think we've talked about buybacks and the cadence a bit on this call. So maybe just talking generally, in terms of your managing your capital structure, a few years ago, and this was I think, a little bit more -- it was more in focus, as we used to talk about a 20%-ish, debt to capital ratio. Given the changes in the business model with the risk being laid off and taking out some of the tail risk, if you will. Are there any -- is that still the target you all are thinking, or I guess, the region you're thinking of maybe not target is not the right word. But is that still the 20% or any thoughts to changing that maybe business can support more debt?
This is Tim. I guess, I would say from a 20% I think, we always do that as a key mark, for at least one of the rating agencies to be under that. Otherwise getting the double average ratio issues, I'd say from a target, we want to make sure you're under it. Obviously, as we continue to have earnings, we continue to fall under it. I think we like the ability to have some dry powder if we thought we needed any additional leverage in the capital stack, but I would tell you with where we sit right now, I don't think we look to lever back up to 20%, just to lever back up, I think we get a lot of good leverage from a return standpoint with a reinsurance, which is in the insurance company.
And don’t lead to sort of get that same type of leverage from it, the holding company, especially with our methodology of holding back 2 to 3 times interest, even the interest rates where they are right now, we get some leverage from an ROE standpoint, but it's not a significant amount even by having at a 20% for example.
And so I like being below it right now. And if we have something we need it for, we can use it at that point and hopefully not get penalized by the rating agencies too much. But I guess I'd say in short, I wouldn't expect this to lever back up to 20% as a target, as more of it was to make sure we got below 20% to make sure it wasn't an issue from the rating agency standpoint.
Got it, thank you.
Just one thing I would add to what Tim said. So Moody's put out their revised press release on ratings upgrade late last week and in the factors that could lead to an upgrade, they introduced another leverage target at 15% that's the total cap as a threshold that might be considered for -- maybe necessary for an upgrade. So we haven't had extended discussions on whether that's a bright line or we're very close to that at 17% currently.
If we feel like the rating is important from the business perspective, and 15% of the line with Moody's, it may have -- now the rating agencies may have created a new threshold, whereas we thought what might be 15% in the future.
Got it. No, appreciate that. Thanks. And then just from a business perspective, can you help us, what are the business imperatives if you will in the current environment to have higher Moody's or S&P’s ratings?
I think from a current business standpoint, as far as the flow business that we write every day, it's not meaningful, I would tell you that when you start to talk about us being involved in the GSE is laying off risk on CRT, the ratings can matter, and I think in the broader dialogue about housing finance reform, DMIs being higher rated, can be beneficial as well. Our view has always been that it's something that if the rating agencies make it available, then it's really want to be in a position and we can take advantage of if we think it's meaningful from the business model.
And so again, from a flow business standpoint right now, I'd say it's not a differentiator when you start talking about being able to be active in GSE CRT, and we talk about how people looking it for mortgage [Technical Difficulty]. I think it's something we have to take into consideration.
Got it. And then just my last question, just as we get to the end of the year, and we get the FHA MMI report, there has been some talk this year in terms of just moving whether moving to risk based pricing or FHA adjusting prices, I think Congress, there was a bushel a couple of months ago the FHA Loan Affordability Act, just what are you hearing from regulators or from the FHA on just that FHA mortgage insurance piece, any concerns that they -- what would be like the implications of moving to risk based pricing and any concerns that they would lower prices this year? Because I think last year was telegraphed pretty early on that they weren't going to do, so I was just curious about this year's any thoughts this year?
So Mihir, this is Mike, something you are asking more about the GSEs capital model and the implications that they would have internally and that's something that is really underway right now, we don't have great inside as to where they're going to land. They certainly had some comments out there the question that I think is waiting to be answered is will they -- the FHFA take the comments that have been already set in and then issue a final rule or will they re-propose something that's more in line with what Director, Calabria is thinking about the long-term solution for capital and risk based capital.
I mean, I think it's a safe bet to say that they will move to some type of risk based capital within their structure. But how that rolls into MI given the presence of PMIERs that already exists that’s risk based, it's the -- we have little inside there. They've been really accepting that at FHFA level, so we'll have to wait and see how they come out, when they do their -- reveal, if you will, whether it's a re-proposal or issuance of a final rule, which we think will be yet this year, but that's something that we'll wait and see. So the implications can't tell you because we don't know what direction that would take.
Okay, thank you.
Well, I appreciate everybody's interest in the company and have a good day.
This concludes today's conference call. You may now disconnect.