Q2 2019 Earnings Call
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Good morning May have the conference I'd number please.
I'm, calling for the M.G. I see earnings call.
Oh, I see H.A.E.L. last name Mcelligott H.M.I.C.H.A.E.L.E.V.I.C.H.
Let me get a that'd be just double checking a true that's M for Mary I C H H.
Then Apple for Echo L E V for victory I see each.
Right.
You may also be spending of their company name. Please.
It's called Era A.I.E.R.A.
And your phone number beginning with the area code. Please.
71.
Nine to seven eight to nine five.
Thank you last your email address please.
It's Michael that's my first name at Era, the company name Dot Com.
Thank you so much for those information I'll join you now.
Sounds good thank you.
18.
We are maintaining our focus on the long term success of the company and we are in an excellent position to continue to serve our customers, while creating shareholder value.
In a few minutes, Tim will cover the details of the financial results, but before he does let me make a few comments.
The main driver of future shareholder value creation, our insurance in force grew by nearly 7% over the last 12 months ending the quarter at $213.9 billion, New insurance written was up approximately 13% in the second quarter compared to last year.
The size of the mortgage origination market generally has the largest impact on the volume of business, we will ensure.
I would characterize the overall mortgage origination market is healthy consumer confidence remains strong in mortgage rates remain attractive.
So while the supply of homes available for sale is still tight there is a strong demand for homes. As a result, we have seen a steady flow of purchase business during the quarter a good portion of our new insurance written was driven by an increase in refinances.
While refinances don't generally increase our insurance in force and they reduced the persistency rate the annual persistency on the existing book remained above 80% in the second quarter.
I remain optimistic about our ability to prudently grow the insurance in force because we have a compelling business proposition for our customers and consumers continue to feel confident about their future economic prospects I feel very confident about our ability to serve our customers given our capital strength position in the market.
The quarterly financial results reflect the very low credit losses are post 2008 businesses, producing and the favorable operating environment, we are experiencing especially as it relates to relates to employment wage growth and housing fundamentals.
Our inventory of delinquency notices continues to decline and is at the lowest levels. Our company has experienced in more than 20 years. 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.
Before I turn it over to Tim I want to remind you that our primary business objective is to be irrelevant business partner with our customers in order to prudently grow insurance in force generate long term premium flows and create book value growth for our shareholders. We are executing on that objective by offering competitive products and services, while maintaining a sharp focus on a risk adjusted returns on capital and expenses.
We recognize that our customers do not all operate in a similar manner and that they have individual needs. So we will continue to work with customers to deliver competitive options that meet our return thresholds in a manner that works best for all involved with that let me turn it over to Tim Thanks, Pat.
In the second quarter, we earned $167.8 million in net income or 46 cents per diluted share compared to $186.8 million or 49 cents per diluted share in the same period last year.
The primary driver of the difference in net income for the second quarter. This year compared to the same period last year was the level of positive primary loss reserve development.
This quarter, we recognized $30 million of positive development compared to $70 million in the second quarter of 2018.
For the quarter on an annualized basis, we generated a 17.5% return on beginning shareholders' equity.
Net premiums earned were essentially flat compared to the same period last year as higher ceded premiums and lower premium yield offset the increase in premiums from a higher average insurance in force.
Premiums ceded were higher primarily due to the $6.8 million nonrecurring termination fee to restructure our 2015 quota share reinsurance transaction.
Additionally, premiums due to modestly increase as a result of a higher percentage of the insurance in force being covered by our quota share treaty and insurance like no transactions, we executed in the capital markets, including in the quarter.
Net premiums earned also reflect a decrease in premium refund due to lower claim activity, an increase of $5 million and accelerated premiums per single policy cancellations compared to the same period last year and lower profit Commission due to higher ceded losses.
Beginning in the third quarter, our premiums will be modestly benefited because of the 2015 quota share transaction is now exceeding 15% versus 30% in prior period.
Losses incurred consist of reserves established on new delinquency notices plus changes to previously established loss reserves.
Total loss incurred were $21.8 million compared to a negative $13.4 million in the same period last year.
The increase in total losses incurred reflects the level of positive loss reserve development I just mentioned.
The positive development in the second quarter was the same amount we experienced in the first quarter of 2019.
As we do each quarter, we review the performance of the delinquent inventory determine what if any changes should be made to the estimated claim rate and severity factors of previously received notices.
The positive development was driven by higher than expected cure rates in delinquencies that are aged two years or less.
We attribute this primarily to the continuation of the favorable credit cycle, we are experiencing.
During the quarter, we received 6% 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 reflects that our larger more recently written books of business, while having low levels of new delinquency notices.
We are coming into their peak loss years.
Further supporting our view regarding the credit quality is that in the second quarter, we received approximately 5% fewer new delinquency notices than we did in the first quarter of this year.
And the percentage of the insured loans that we were current at the beginning of the second quarter that was subsequently reported delinquent during the quarter continues to be at a very low 1.25%.
Additionally, the 2009 and forward books accounted for just 34% of the new delinquency notices but accounted for approximately 86% of the risk in force as of June 32019.
The claim rate on new notices received in the second quarter of 2019 was unchanged from the first quarter level of approximately 8%.
This estimate reflects the current economic environment than anticipated cures and was lower than the 9.5% claim rate in the second quarter of 2018.
While continuing to diminish the number we expect that the legacy books will continue to be the primary source of new notice activity in the coming quarters.
Net paid claims in the first quarter were $55 million, while the number of claims received in that quarter declined by 31% from the same period last year.
This activity reflects the continued decline of the delinquency inventory.
The effective average premium yield for the second quarter of 2019 was 46.5 basis points down from 47.4 in the first quarter.
As I mentioned previously this quarter, we paid a nonrecurring fee of $6.8 million associated with the restructuring of our 2015 quota share reinsurance transaction, which was recorded as additional premiums ceded and was the primary driver of the sequential change in the effective yield.
The effective yield also includes changes in the recognition of premiums on single premium policies.
Changes in premium refunds accruals and the levels of premiums ceded to the various reinsuring Trent transaction, we have in place and associated profit Commission.
While there could be some volatility we expected effective premium yield will trend lower in future periods. This decline as expected mainly because the older books of business written in higher premium rates continue to run off and are replaced the new books of business right and lower premium rates.
Of course. These newer books are also expected to generate low levels of losses, given the credit characteristics.
Net underwriting and other expenses were $45.7 million in the second quarter of 2019 compared to $44.7 million in the same period last year.
We continue to expect that for the full year 2019 expenses before reinsurance will be in line with last year.
During the quarter EMG fee paid a $70 million dividend to the holding company, we expect EMG to be able to continue to do so for the foreseeable future.
The dividend payments demonstrate the strong capital position is and as well as the level of capital, we anticipate being able to generate as a result of the high quality of our insurance in force.
As a reminder, any dividend payments are subject to approval of our board and we notified the USPI to ensure does not object to any dividend payment from EMG IC.
At quarter end, our consolidated cash and investments totaled $5.7 billion, including $333 million of cash and investments at the holding company.
Investment income increased year over year as a result of a larger investment portfolio and higher yields.
The consolidated investment portfolio had a mix of 80% taxable and 20% tax exempt securities pretax yield of 3.16% and has a duration of 4.0 years.
Our debt to total capital ratio was approximately 17% at the end of the second quarter of 2019.
At the end of the second quarter and Jay seed available assets totaled approximately $4.4 billion, resulting in a $1.1 billion excess over the required assets.
During the quarter, the pmires excess increase due to the recent insurance like no transaction. However that benefit was offset by the quota share restructure and transfer of risk from a reinsurance affiliate back to AMG.
The original reason that the business was reinsured by the affiliate was due to the fact that certain states limited the level of coverage that a primary writer could cover after working with various state regulators, we are able to have that requirement removed.
The transfer of risk was done to reduce administrative burden and really does not change the risk profile of our company.
Regarding the appropriate level of excess available assets under Pmiers is difficult actively manage to a specific target given the regulatory requirements for paying dividends.
Some level of excess provides a nice buffer against adverse economic scenarios as well as the potential for additional capital requirements from the Gses should they occur in the future.
In excess of available assets under Pmiers also positioned us to take advantage of new business opportunities as they occur and provide some support for our ability to pay dividends from MGC to the holding company.
Finally, I want to spend a few minutes discussing our capital position and how we are thinking about allocating capital.
During the quarter, we utilize the remaining $25 million remaining under the 2018 share repurchase program and repurchased 1.8 million shares.
We have an additional $200 million authorization to repurchase shares through the end of 2020.
I would expect us to continue to be opportunistic and utilizing the additional authorization.
When deciding when to repurchase shares we consider a number of factors, including our internal intrinsic valuation using discounted cash flows as well as market based metrics like price to book and price earnings ratio.
But also recognize that historically our share price has been volatile.
When we evaluate strategy to allocate and utilize the capital that exists and is being created at the writing company. We first estimate how much capital is needed to support the new business that is being written this includes both the primary business as well as the GFC risk transfer transactions that require capital support.
We expect to remain active in the GFC risk transfer transactions provided the returns meet our thresholds.
We also have periodic options to just the level of quota share reinsurance we utilized like we did with the 2015 quota share transaction and we'll evaluate those options as they present themselves.
And of course, we're also sending dividends noted $280 million annual run rate to the holding company.
So we will continue to analyze and discuss for the board the best options to deploy capital. Our first priority is to use that to support new business, but if we are not able to find appropriate returns on this capital for shareholders than we'll examine other options that maximizes long term shareholder value.
With that let me turn it back to Ben.
Thanks, Tim before moving to questions. Let me give a quick update on the regulatory and political fronts.
Regarding housing finance reform, we remain optimistic about the future role that our company and industry can have but it continues to be very difficult to gauge what actions may be taken in the timing of any such actions. We continue to be actively engaged on this topic in Washington.
While no actions have been taken to date by the HFI director, we remain optimistic that what changes do occur will include the use of more private capital, including private Emily.
The U.S Treasury Department was directed to develop a plan as soon as practicable for administrative and legislative reforms for the housing finance system with such reforms aimed at reducing taxpayer risks expanding the private sectors roll modernizing the government housing programs and achieving sustainable homeownership.
The content of the plan and the timing of its release is unclear at this time.
Much like the expected F. HFI actions, we would expect it to include the use of more private capital.
Regarding the FHA, we continue to think it is unlikely that it will reduce its payment premiums and that the primary focus by the Fiji is on improving its operational policies and procedures.
Our company and our industry offer many solutions at 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 in the capital markets.
I will close my comments, where I started.
Our business is performing well, we are generating meaningful returns and our balance sheet is strong we grew our insurance in force investment income increased credit losses remain low expenses are being held in check and EMG continues to pay a quarterly dividend to our holding company. We are writing high quality new business in what is expected to be low loss environment that is being added to our existing book of business. It is performing exceptionally well and we are generating significant shareholder value.
Given the economic and labor market conditions, we anticipate that we will continue to be able to generate meaningful increases in shareholder value simply put the company is in great shape.
That is why I look ahead as I look ahead, I am very excited and confident about the future for EMG IC with that operator, let's take questions.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Geoffrey Dunn with Dowling and partners.
Thanks, Good morning.
Pat can you talk about the capital management strategy. You then return any capital in the first quarter.
Yes, the amount was negligible in the second quarter or at least well below the run rate of money that you're getting up from the opco.
And from from all appearances and stock what's attractive in the second quarter. So.
Can you just elaborate on how you're thinking about deploying capital why youve not deployed much in the first half of the year and and is there any consideration towards a common dividend that might be.
Limiting your appetite on the buyback.
I think sure.
I'd be happy to answer that first of all it is top of mind.
Given the capital position that we're in.
As Tim alluded to in his comments, we're trying to be opportunistic and very thoughtful. It is a consistent conversation that we have with our board on an ongoing conversation.
As we reported we bought back $25 million of shares.
During the second quarter.
And so it's really a case of trying to make sure. We're in the market when we feel its appropriate.
Relative to our discussions with our board again, it's a regular conversation.
As we alluded to here if we don't feel we can redeploy the business back in the business. We will look to return to shareholders and that would include share buybacks and dividends, obviously nothing new to report on that front today, but always part of the discussion.
At what point do you get concerned that.
The lack of buyback is sending the wrong message to the marketplace. When you talk about being opportunistic around intrinsic value.
That's always again top of mind, I mean, I don't know if I go so far as a state concern, but it is definitely something we think about.
Okay, and then as a follow up on the credit side.
Over the last two quarters, you've seen a deceleration in the pace of improvement on the legacy new notice development.
Is there anything you'd call out there and I guess, particularly with the four and five book showed year over year growth and new notices.
What's what's created that shift.
Jeff This is tammy.
It's tough to say, what's created that shift I would say you know overall, we did see is quite as strong as seasonal benefit on new notices Q2 of this year as we may be would see in other years I don't know if he has anything to do with sort of the tax changes and the lack of refunds maybe for some people.
But it's really hard to pin down what specific I can tell you from looking at it theres no sort of trends that we're concerned about now obviously from a reserve standpoint felt comfortable with releasing reserves again this quarter.
Okay. Thanks.
Sure.
Your next question comes from the line of Jack listen go with ESI G.
Hi, good.
Okay Jack.
Cardinal Jack.
How about now.
Thank you, Eric Yes, sorry about that guys.
I'm curious on a couple things Tim.
You have you done a sensitivity on the investment portfolio.
As to what 25 Bips.
You know would look like.
Number one and then number two.
Your singles mix has come down obviously, theres a capital incentive for that you've kind of settled in here and sort of the 15 16.
Kind of mix is that math I mean is that the right number to think about going forward, where do you think that you want to be in.
In the singles I know you sort of you have to at some level even for customer.
Requirements, but any thoughts on on where that single mix kind of goes to from here is it sort of come down kind of leveled off thanks.
Yes ill take that ill take the second question first Jack I mean, you know there is the singles mix as you said it can move over time in some time when you have re fi activity.
Neck and neck can change it as well I think with anti Q being out there and others, having comparable out there that could change sort of competitiveness of how you think about monthly and singles too, but when I think of singles.
It's it's going to change a little bit sometimes it's going to be closer to 10, sometimes closer to 20, we obviously tracking closer to 16 that seems to be where we've been pretty stable for a while now so I don't I don't read too much into it but when we project things going forward assume that's probably pretty close to where we are going to be unless something changes.
In sort of the environment sort of for your first question I guess as far as you know 25 basis point increase in interest rate on you know we have a duration of four on the portfolio and we've been pretty steady around there and so think about in terms of that obviously from a long term perspective with the amount of invested assets that we have interest rates going up can be beneficial to us.
We haven't really had a lot of risk to the portfolio that is really what would make the difference as far as investment income goals.
And so as with everybody, we've been sort of watching and waiting to see if interest rates go up over the last few years.
But that is not really come to fruition, but from a business standpoint, we look at the overall picture. It's a good environment for us to be operating in so you sort of look at it from that angle as well.
Okay. So the topic of fed cuts for example, later this month or through the balance of the year.
You think inflows in the four year duration.
Can can likely offset and you can maybe more maintained investment income its current levels, yeah, I would say more than offset.
Okay. Thank you.
Sure.
Your next question comes from the line of Bose George with KBW.
Hey, good morning.
Just going back to the capital question.
In terms of the dividend versus buyback is there a bias in one direction or another or is that still part of the work in progress.
This is Pat bullish no. There is no bias I mean, we're trying to be very thoughtful about how we do it.
Weighing all the options. So there is no one perfect particular.
Preferred method or the other if we were to declare a dividend obviously you want to be very confident in our future and what that means to us. So in that regard, we think about it differently than share repurchase, but I wouldn't say there is a bias one way or the other.
Okay. Thanks, and then actually just going back to the new notices discussion just going forward do you think the new notice this will continue.
To see modest increases year over year, just kind of curious about the trend that you expect there.
Yes, I mean, I think as we sort of talked about we're getting into sort of the peak loss years in some of the bigger books that are there from the newer vintages and so while theres not a lot of losses in relation to those vintages and theyre very good credit quality I think sometimes you just run of the dynamic of these are going to throw off losses at some point and with the size of those books you might see the slight uptick like we saw now and so.
I don't think it would surprise us, but I don't think we're worried about that either in both Mike and I think it's emerged to be maybe a better metric over the last several years both year over year comps I think we're a good sign good indicator watching credit quality in the bat, how it's been improving in the legacy Burton.
But if they going forward. These larger book I think the better metric going forward might be looking at the number of new notices as a percentage of the beginning number of loans that are current at the beginning of the quarter.
And that that actually ticked down a little bit again seasonally but were like 1.21, 0.3%.
And historically, that's a pretty good health as a very very healthy economy in that one 1.5% of the portfolio rolling delinquent each quarter.
And then obviously with the low claim rate that we're applying to those so.
Those comps might you get a little bit tougher, but I think thats, becoming less meaningful of an indicator given the low levels, but they are at.
Okay, Great Thats helpful. Thanks, and actually just in terms of the anti W. on the new business the new anti W. rate premium rate can you remind me does that incorporate any of the.
I'll answer it.
Quota share.
No well despite no thats the direct rate that were shown in the press release.
Okay, great. Thanks.
Your next question comes from the line of Chris Gamaitoni with Compass point.
Hi, good morning, everyone.
Morning cases.
I wanted to.
Did your expectations for future aisle and issuance.
You know thinking about the out years is this now a regular.
Programmatic exercise or was it all opportunistic with your recent issuance.
Hi, Chris It's Dan I mean, I think the way to think about as programmatic in nature.
For us where we also utilized the forward commitment nature of the quota share we have to build sort of meaningful size sort of for more recent vintages and so this last go around that men sort of 15 months of production.
So I think its right to think about it sort of on an annual basis for us in relation to sort of more recent vintages theres always the possibility can look at more season books as well I know some others in the industry have done that so thats always a consideration to depending upon sort of what the appetite for capital markets as of the time.
All right and when is your next to option for quota share adjustment that you mentioned.
The next option within the contract itself is at the end of 2021.
And that's the 2015.
That would be for the 2017 and I believe also the 2018.
Quota share, which are separate quota shares both have an option at the end of 2021.
Okay, perfect and I just wanted to follow up one more on the.
The decline in the new monthly and I W premium.
Is that I noticed that the book was less risky than last quarter's end, mostly mix related or was that something else.
This is Tim again, I mean, theres definitely some mix in there.
I think obviously with you know and Mike you being out there it's.
The pricing is in there as well, but there is definitely some mix associated with that as you mentioned the credit quality looks better this quarter.
And so a part of that decrease is related to the mix.
All right. Thank you so much.
Sure.
Your next question comes from the line of Randy Binner with B. Riley FBR.
Good morning, I had a question about.
Price competition.
It's.
Since two parts one.
There was a report.
I think last week that an originator of mortgages originator was offering discounted.
My rates. So I was wondering if if that's something that affected you or if that's a broader trend you're seeing and just in general how you characterize pricing competition, yes, I understand that.
Most of the market now is on some sort of black box model, but just generally in insurance when losses are low.
It can be tempting for.
Underwriters to to lower rates. So just wondering kind of how you would characterize pricing competition overall on your market.
Oh. This is Pat I would tell you first of all that we believe that all of the six private mortgage insurers now have their risk based pricing models into the market.
So it's a new way of doing business generally speaking for all of us anyway.
And I would tell you that the pricing is very competitive.
That's not to imply that there is any major issues just to add everybody is sharpening the pencil in and trying to stay competitive.
Relative to the report to last week I can't really comment on that I continue to believe that.
There are those who will continue to want to pick where they want to win in other words am I company may want to win a particular market or win with a particular customer.
Dependent on their assessment of the risk and they will sharpen the pencil.
But in a broad sense. So we're continuing to see what we've seen here in the last three six months.
Yeah Ray this is Mike I mean ages and Pat mentioned in his opening comments, but just the reiterated I mean, when we look at what we deliver to customers and returns we're looking at the returns and making sure we maintain our return for shareholders when establishing those prices. So they may ebb and flow back and forth depending on market conditions, and the second spots and things of that nature, but its always with a focus on.
Thanks Joel.
No that's helpful I think.
Yes, I think people are sensitive to.
Not so much the six companies, but kind of new entrants or new product types as we saw with.
The initial concerns around imagine EMI last year so.
And then just the follow up is on those two programs from the from Fannie and Freddie.
Does those pilot programs are still not at eight.
Okay game greater role in the market are they still very marginal.
Yes, Randy this is Mike, Yes, I mean.
Correct. They are still marginal we don't see much interest in those programs, but it's something obviously, we continue to to watch, but we haven't seen much uptake from customers at this stage of it anyway.
Okay, great. Thanks.
Your next question comes from Martin Jeffries with Barclays.
Yes. Thanks.
I wanted to just taking another crop crack at the question, Jeff asked earlier around capital.
Was it the rate at which you're growing earnings and capital. Even if you were to distribute all of the $70 million a quarter you'd still be growing capital in excess of the pace in which are growing risk and and so I guess the question is is there any reason we shouldn't expect.
Your capital returns to start to converge at least on the quarterly dividend.
Yeah.
Good because I imagine a scenario in which you just got this capital is building it was not being deployed.
Yeah markets as Tim I mean I think.
I think I know, what you're thinking about it the one thing I guess I'd say is when we look at the 70 million coming into Holdco. We also take into account sort of the interest carry we have there and so when I think about the 280 annually, we sort of back off the 60 that we have related to interest carry at that point, though becomes closer to 200, you know I think from the standpoint, when I look back and say the first 200 million authorization. We had it took US 15 months to complete that a little bit over a year, so a little bit slower than sort of how the capital is being brought up to the holding company, but that's really where our focus is on recognizing it's important to sort of match the outflows at the holdco with the inflows at the Holdco and when we think about sort of the writing company be able to play there that's really more of a discussion with our regulator as to why the amount of additional dividends, we can get up and if we can get up additional dividends that could impact obviously, how much we're able to give back to shareholders, but we also as mentioned sort of my comments have.
Of other levers if we can't get there from a dividend standpoint to the holdco with looking at the reinsurance and what we do and what levers we can pull there. So we really think about it in those two sort of level can we get the dividend out of energy I see to the Holdco and once we're at the Holdco, what's the run rate of inflows and outflows.
Okay, that's fair enough fair enough it sounds like.
There's still considerably more potential for outflows than what we've seen in the last couple of quarters and I think the point that Jeff was trying to make money, while I understand you're trying to be opportunistic and there are certainly volatility to your stock I can't actually think of a time.
And the last decade, where it's trading at or above what we think is intrinsic value. So I would just encourage you to be out there and buying as frequently as possible.
Just given where the stock is on the amount of capital you're generating.
Three state your thought duly noted.
Okay.
And then one other thing I think you said a lot around the average premium I just wanted to unpack it a little bit Tim it sounds like.
Like there was you had the one see associated.
With renegotiating the quota share, which was a big driver of the Q over Q decline, but he also said that you still expect the longer term trend to be down, but you also get a benefit.
From from from the renegotiation of the quarters or how should we think about the next few quarters kind of the average premium trend.
Yes, I mean definitely we still think the average premium trend is down and just to highlight again. This quarter. You know there is a couple of big thing is the one the the restructuring that was the 6.8 there was a negative to that and then but then we also had some benefit in the quarter from the accelerated singles, which probably gave us an extra oh, let's say four to 5 million this quarter than what we've been getting previously so those almost up that especially when you consider that we would have had a little bit of benefit from premium accrual on on refund.
And so then if you think about it going forward on the quota share we're down to 15% quota share with the restructuring were able to decrease the cost a little bit that's probably going to help us maybe somewhere around 4 million a quarter I would say and then that it's the overall dynamic that you've been seeing in the past as far as the new books come on with a little bit lower premium content, because they are higher quality credit quality, replacing some of the older books with higher premium so that trend still continues and then from the reinsurance standpoint, we get some of the benefit associated with the quota share restructure on a going forward basis.
Okay, but it sounds like if we think about just one quarter out.
Assuming rates remain low refinance activity is high you still get some kind of a benefit from.
From the singles and then the fee goes away and then you're also picking up some benefit so.
If we think about on a sequential basis should we expect average criminal to bounce back a little bit next quarter.
I think it depends you mentioned it depends on the refi activity. The refi activity is there and we have more single cancellation that would definitely be a benefit, especially when you put in together with sort of the restructure the 2015 quota share.
Okay, great. Thank you.
Sure.
Our next question comes from the line of Mackenzie Aron with.
Zelman and associates.
Thanks.
One follow up Mike for you one on the delinquency rates looking at the new defaults as a percent of the beginning current inventory what's been the historical run rate there or what would you say at a more normalized level.
Oh, a normalized I think whats representative of good economic cycles in that one 1.5%.
Rolling delinquent.
I'm on it this is on an account basis versus dollar basis right. So now that range was also representative of.
When we go back over time, our average FICO scores 10, 15 20 years over 779 versus 57 60. So I mean I think we're we're in the mid point.
Of that range of historical I mean.
Anything in this range.
I think under one and a half.
Go lower than one.
Don't know right that will depend on the economic.
Forecast, but this is a good representative indicator of a good economic cycle in good borrower characteristics.
Okay helpful. And then just another on pricing, it's well I know.
You won't get the percent of the volume that's coming through am I Q, but can you just talk and give a little bit of commentary on if there is the utilization by your customers ramping higher and just kind of that the perception of black box another quarter into being out in the market.
Sure Mackenzie this pad a are they use of our risk based pricing model or am I Q is in fact growing.
The reason, we don't hand out a number is because as we said upfront you know we want to be responsive to our customers. So if that's the method. They want will use if it's your rate card we use that if it's a forward we'll use that so it continues to grow it grew again in the second quarter I would expect it to grow in the second half of the year and ultimately become the dominant.
I don't if we ever get 100% of the customers there because some of the national accounts prefer forward commitments, but it will become the dominant force of our mantra pricing.
Okay, great. Thank you.
Our next question comes from the line of Douglas Harter with Credit Suisse.
Oh, thanks, as you're thinking about the $70 million dividend.
Up to the holding company <unk> what are the the kind of the limiting factors that would.
Kind of a guide where how fast second bro.
So Tim I mean, it's a conversation that we have with our regulator on a pretty regular basis, probably more formally annually, but you know a lot of that conversation is around how do we look sort of in a stress how do we look as far as the earnings that we created this year, how do we look in relation to risk to capital and P. Myers et cetera. So all those things I think one of the conversation and you know it's growing pretty healthy over the last few years and so as we get to the $70 million per quarter standpoint feel good about that but definitely we'll have discussions about whether that can go higher you know I think it I would say I wouldn't expect it to be paying out dividends sort of on a quarterly basis, such that it matches, our full earnings by any mean, but it's something that we will continue to look at including potentially you know annual dividends on top of it its something we could talk about where the regulator, but that is something that would really come into the context of how do we look on P. Myers, how do we look on risk to capital and how it is.
The regulator feel about sort of the economic environment. We're in.
Got it and you know again some of some of your peers have taken kind of larger one time.
No dividends or you know kind of what are your thoughts on.
That as opposed to getting capital out faster versus the you know that the more steady dividend that you guys are been employing.
Yes, I am aware of those obviously those come up in conversation with our regulator a we've been definitely focused on the quarterly sort of recurring dividend, but as you know with the island transactions, having some large benefit sort of immediately it's part of the conversation, but I you know I wouldn't expect anything in the near future related to about doing a reinsurance transaction and automatically that turning into a dividend as an example.
Great. Thank you.
Sure.
Your next question comes from the line of Mihir Bhatia with Bank of America.
Good morning, Thank you for taking my questions.
I'd like to start with just going back to the monthly premium yield on and I W.
I think Jim you mentioned in your comments earlier, you mentioned, Mike Q is one of the factors that was maybe driving it Lou if I understood correctly and I was just curious as to why is that is that something you and Mike your pricing or is that just because it's being rolled out I guess, if you could just expand on that I just want to make sure I didn't misunderstand that.
Yeah, I mean, I think it just as you think about as we as we roll it out as well as sort of being able to price more discreetly for different type of risk that that gives the ability within that.
The pricing mechanism that you don't have an a standard rate card and so I think you know from our standpoint, it was not a surprise to see that be down in the in the quarter as Weve continued sort of more penetration with with Eni Q with our customers.
Got it so does that imply as they make you continues being.
For the adopted by your customers that that pressure will continue.
It is tough to know exactly obviously, what the competitive dynamics will be in the future and as Pat said, we've had success in rolling out at my queue right now and I don't think we'll ever get to a 100% I My Q and so I I think it's tough to read anything specific into where would be acquired for now because it's too much you know what the competitive dynamic is in the marketplace and what loans are being originated.
And here is my just add on that is that in his dimensional mix was a part of it you can't just solely.
Review.
Yeah, no the delivery method the mix of business.
Also influenced that I know right.
Add to that.
Yeah, No no I appreciate that and actually on makes itself I think one of the.
I had a question just in terms of just you know youre.
Risking for one of the things that has been happening for the last few years is almost a little bit about.
I don't want to get a flu Bob but.
Seems at the below 85% LTV is making I think like five 6% of the.
Risk in force now and at the same bend. The 95 cents plus has obviously increased in the last couple of years and I was just curious whats driving the increase of the below 85, what drew.
Like you know the fight 6% from historically I think it was like below 1% before 2015. So I was just curious.
On that well part of it I mean is.
Is you know as the pricing through more discreet pricing.
Those have lower risk profile.
It lower risk content. So when you move away from average price in the more discreet pricing.
To make it more attractive certainly.
Utilize so and that athletes lender choice as far as when borrowers are putting down.
The amount of money that they put down do they instead, there's less incentive the talk of the putting in an additional 5% down.
To avoid mortgage insurance pricing is still has very attractive so theres not a number of things out there but.
But in those.
Drivers.
Got it and then just on.
On that same topic on the DP, Iowa, 45%.
This year, it's been a little bit lower is that partly because of the change in methodology or is that a decision that.
Either you bid from the markets, whether it's by a discrete pricing or just to pull back on a 45% I think it was down 3%.
Compared to last year.
This is Tim I mean, I think it it it's a little bit of of us being able to be more discrete there, but I think also it's a little bit to do with sort of the GFT, it and sort of what's actually flowing through there I think you've seen a drop in some of the above 45, DTA, Bob BTI volume flowing through the GFT and that sort of become sort of what's available to be alive and so I don't think we're necessarily an outlier in that regard I think like you help but I think it's also the overall sort of market that the analyzer, playing and based on what the Geo cities are bringing in the door.
And certainly the lower rate environment also it gives you some benefit to that as well.
Right.
Okay, No that makes sense and then just last question. The litigation I think last quarter. You article litigation charge has that actually settled or is that still just spending.
No it's still in process.
Okay. Thank you that does all my questions. Thank you.
Your next question comes from the line of Phil The final with Deutsche Bank.
Yeah. Thanks, good morning, so debt to capital ratio tick is something you mentioned that 70% now it's I think if I recall correctly around two years ago. It's felt like low to mid Twentys was what was how you guys were thinking about what was quote unquote right.
[laughter] thinking around that changed at all any <unk> any thoughts on what this looks like as we move forward.
Yeah, Phil I mean, I think from our standpoint, and there's been a lot of discussion about you know 20% in particular I think as much rating agency views on anything and what I'd tell you is.
My view is below 20 as positive from rating standpoint anything below that I don't think make as much of a difference I think for us it's really about sort of the what benefit leverage can add I think having some dry powder at the holding company is a good thing and so I don't think we want to be much about 20%. So it's something we look at and it's good to have capacity, there, but I wouldn't say that 20% is necessarily where we're targeting to be at but it is something that I think we're mindful of 20 as a as a ratio that the rating agencies would view and if you're above that for a period of time that they might look more negatively on.
Got it.
Can you just give US a reminder, on higher the latest thoughts around the 9% convertible junior subordinated debentures.
I mean, I know they'd be expensive to take out but as you know this part of the conversation can you remove some interesting dilution here you know by maybe doing issuing debt that's more standard and taking these guys out how you're thinking about that.
Yeah, I mean, it's something we look at it and quite frankly every quarter. We started refresh analysis on it as you mentioned they are expensive to take out you're effectively you know pre paying a lot of the interest on it and the way they trade quite frankly, and it's really a as the stock price goes up they become more closer to the money and they sort of stay at the same price or if they stock price trade down or the expectation that you're going to get the 9% coupon for longer keeps the price relatively stable until from we really looked at it from is a good economic opportunity to take them out and sort of better. The mindset that you really just prepaying a lot of that interest and and a lot of sort of the underlying share and really haven't that's why we haven't executed other than the one time, a few years ago, where the price declined fairly significantly a unrelated to us, but sort of more broader market concern and try to take advantage of it that way.
Alright understood. Thanks, guys.
Sure.
And there are no further questions at this time.
All right. This is Pat again, thank you everybody for your interest in our company and have a great day.
This concludes today's conference you may now disconnect.