Oct 16, 2013
Executives
Michael J. Zimmerman - Senior Vice President of Investor Relations Curt S.
Culver - Executive Chairman, Chief Executive Officer, Chairman of Executive Committee, Chairman of Mgic and Chief Executive Officer of Mgic J. Michael Lauer - Chief Financial Officer, Executive Vice President, Chief Financial Officer of Mortgage Guaranty Insurance Corporation and Executive Vice President of Mortgage Guaranty Insurance Corporation Patrick Sinks - President, Chief Operating Officer, President of Mortgage Guaranty Insurance Corporation and Chief Operating Officer of Mortgage Guaranty Insurance Corporation Lawrence J.
Pierzchalski - Executive Vice President of Risk Management - Mortgage Garuanty Insurance Corporation Timothy J. Mattke - Chief Accounting Officer, Senior Vice President and Controller
Analysts
Steve Stelmach - FBR Capital Markets & Co., Research Division Douglas Harter - Crédit Suisse AG, Research Division Geoffrey M. Dunn - Dowling & Partners Securities, LLC Bose T.
George - Keefe, Bruyette, & Woods, Inc., Research Division Mark C. DeVries - Barclays Capital, Research Division Jack Micenko - Susquehanna Financial Group, LLLP, Research Division Sean Dargan - Macquarie Research Seth Glasser Chris Gamaitoni Scott Frost - BofA Merrill Lynch, Research Division
Operator
Good day, ladies and gentlemen, and welcomed to MGIC Investment Corporation Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded.
I would now like to hand the conference over to Mr. Mike Zimmerman, Senior Vice President of Investor Relations.
Sir, you may begin.
Michael J. Zimmerman
Thank you. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation.
Joining me on the call today to discuss the results for the third quarter of 2013 our Chairman and CEO, Curt Culver; President and COO, Pat Sinks; Executive Vice President and CFO, Mike Lauer; Executive Vice President of Risk Management, Larry Pierzchalski; and Senior Vice President, Controller, Tim Mattke. I'll also remind all participants that our earnings release of this morning, which may be accessed on MGIC's website which is located at mtg.mgic.com under Investor Information, includes additional information about the company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures.
As we have indicated in this morning's press release, we have posted on our website supplemental information containing characteristics of our primary risk in-force, new insurance written, which we think you will find valuable. During the course of this call, we may make comments about our expectations of the future.
Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K that was filed earlier this morning.
If the company makes any forward-looking statements, we are not undertaking obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely our earnings 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.
With that, let me turn the call over to Curt.
Curt S. Culver
Thanks, Mike. Good morning.
After the last several years of reporting difficult financial results, I'm pleased to report that the third quarter was another profitable quarter for us, with net income of $12.1 million or $0.04 a share. The home price appreciation we have been experiencing over the last several quarters, as well as modest improvements in the employment picture, continued to positively impact our financial results during the third quarter.
And as we discussed last quarter, we have seen improvements in the cure rate of more recently received notices. This is to be expected as the country continues to recover from the effects of the recession and cure rates begin to return to their pre-recession norms.
The hard part, of course, is predicting the continuing pace of this recovery. I'm also encouraged by the progress we have made this year regarding new business growth.
While 30-year rates have come down from the highest we saw in June and July, they are still at a level that has material reduced refinance activity, which impacts total origination volume. The decline in our monthly new business writings during the quarter was almost entirely related to fewer refinanced transactions as the purchase market remained relatively strong.
The good news on fewer refinances means we have fewer cancellations of insurance. During the quarter, refinance volume fell as expected and totaled 18% of our new writings versus 30% in the second quarter and comprises approximately 15% of our current application pipeline.
Meanwhile, purchase application volume remains strong and is approximately 30% to 40% higher year-over-year. In the quarter, we wrote $8.6 billion of new business, up 7% from last quarter and 23% from the same period last year.
Year-to-date, our volume was $23.1 billion, up 35% from the first 9 months of 2012. New business writing is typically slow in the fourth quarter, and we expect them to happen again this year, but we view this as a seasonal fact versus a fundamental shift in demand for housing.
The in-force book increased in the quarter for the first time since 2008 as a result of fewer cancellations and strong new writings, yet another important milestone our company has reached this year. Even though the rapid rise in interest rates earlier this year has caused a shock to prospective homeowners.
The current interest rate environment has stabilized and is positive for us as purchase loans are still affordable. The rates are high enough to lower the refinance instead of recent vintages, which helps our in-force book grow.
Also keep in mind, the level of pent-up demand that has been created over the last several years. Also, formations are returning to their historical levels.
And once we get through the current political squabbles that are causing some short-term disruption, we would expect the economy to continue to improve, which in turn, provides consumers more confidence in their future employment, and importantly, their ability to purchase a home. As a result, I remain encouraged that the demand for home purchases will continue to recover.
And since the majority of purchases that need a mortgage do not have a 20% downpayment, we have a wonderful opportunity in front of us. In addition, our industry continues to regain share of the low downpayment market, reflecting the FHA's financial woes.
While the third quarter numbers are not yet available, we estimate that our industry's market share in the third quarter was approximately 13% of the overall market as compared to 10% in the second quarter. We believe that within our industry, MGIC's market share has stabilized in the 16.5% to 17% range.
Losses incurred in the third quarter were $180 million, down 63% from last year and down 8% from last quarter. During the quarter, we saw the typical seasonal pattern of new notices increasing from second quarter levels and exceeding the number of tiers cures reported.
However, as I mentioned earlier, we have continued to experience some benefit from positive housing trends. Specifically, the cure rate of recently reported notices continued to show improvement, and when combined with modest favorable development and severity this quarter, resulted in losses incurred being lower than we would have otherwise expected at this time in the year.
In October, we received consent from the GSEs regarding the previously-executed settlement agreement with Countrywide regarding rescission of coverage on GSE loans. As a result, during the fourth quarter, we will begin to implement the operational components of this agreement.
As a reminder, this means that we will process as claims the rescissions on GSE loans that we have been holding. This will impact our operating statistics we publish monthly, but will not impact our incurred losses as we have previously recorded the charge a year ago.
The activity associated with the agreement will be broken out when we release our operating statistics each month. Paid claims in the third quarter were $414 million, down 29% from last year and down 4% from last quarter.
Claims received, which can serve as proxy for foreclosure or short sale completions, continue to decline and were down 21% from the same period last year and down 7% quarter-to-quarter. The delinquent inventory ended the quarter at 111,587, which is down 25% year-over-year and down nearly 5% sequentially.
After considering claim fees, we expect the inventory to decline in the fourth quarter. At quarter end, cash and investments totaled $5.5 billion, including $594 million of cash and investments at the holding company.
Our annual interest expense is approximately $67 million and our next scheduled debt maturity is $83 million, due in November 2015. Let me now take a couple of minutes to discuss the regulatory environment we are currently dealing with.
First, earlier this year, the CFPB issued and then subsequently re-issued its final qualified mortgage or QM rule and appears to line up fairly well with the type lending that is taking place today in the marketplace. We estimate that 99% of our new risk written in the last several quarters would have met the QM definition, including a temporary category for mortgages satisfying the general product features of QM that meet the GSE's underwriting requirements.
In August, the long-awaited revised risk retention rule was released. Generally, it defines a QRM or Qualified Residential Mortgage as a mortgage meeting the requirements of a QM under which the regulators call a preferred approach.
Importantly, the preferred approach has no downpayment requirement. In addition, the regulators also request the comments on alternative QRM definition, which utilizes certain QM criteria, but also includes a maximum loan-to-value ratio of 70%.
The comment period for this proposal ends at the end of the month, and we will be commenting on this proposal. Since the original proposal from 2011 contained a 20% downpayment requirement, that was, for the most part, universally rejected as being too onerous.
We think that the preferred approach of no downpayment by the regulators is the more likely outcome. This, of course, will be good for MGIC and our industry.
Additionally, the FHFA and the GSEs continue to discuss and develop mortgage insurer eligibility standards, including new capital requirements. These revised eligibility requirements and capital standards are expected to be released sometime in 2013.
However, the specifics of what is included and the timing of their implementation remain unknown at this time. So while we do not have any specifics to share, we remain confident that MGIC has a number of options available to comply once they are published and effective.
The NAIC review of capital standards, which the Wisconsin insurance regulator is leading, also continues to move forward, and there is no timeframe for implementation that we are aware of. The debate over the role of FHA and the GSEs in the housing market continue during the quarter, with a number of congressional hearings taking place.
Given the current state of affairs in Washington and with elections looming in 2014, we do not expect any definitive action on either of these fronts this year or even next year. We continue to see and hear that in the various scenarios we are aware of, that there is a role for private mortgage insurance.
Exactly what their role is, however, has not been defined, but it seems positive for the industry. In closing, while it's a positive quarter for us financially, we also made good progress in 3 other areas: First, by increasing the amount of new business written while maintaining our industry-leading cost advantage; and second, by putting a significant rescission dispute behind us; and finally, by maintaining actions to be in compliance with the upcoming changes in the capital standards.
We will continue to focus on these objectives as we feel our company is in an excellent position to take advantage of the housing recovery, and we are committed to maximizing that opportunity. With that, operator, let's take questions.
Operator
[Operator Instructions] And our first question comes from Steve Stelmach from FBR.
Steve Stelmach - FBR Capital Markets & Co., Research Division
Can you expand a little bit more on sort of the macro opportunity? There's an industry that I think had over $20 billion of capital per year pre-crisis now, depending on how you count it, call $6 billion, $7 billion, $8 billion today.
You have new entrants coming, raising capital. How much capital do you think this industry needs sort of ultimately to sort of satisfy demand over the cycle?
Are we still [indiscernible] in that process?
Curt S. Culver
It's too early in the process. I mean, we have to get through what capital standards may come out of this and then as well look at the opportunity that will be presented both by FHA being rehabilitated and the GSEs and whatever may happen there, Steve.
But I think the real positive thing is the new capital that has entered the business, both through the capital raises by the legacy companies, as well as the new entrants, the capital has been raised there and showing a wonderful sign to Washington that we can play this role, and we can play an important role in housing finance going forward. And if the opportunities presented there, the market will raise the capital necessary to meet that opportunity.
So the opportunity is very good relative to looking at just basic demographics, relative to, as I mentioned, household formations returning, should double from where they've been over the last 4 or 5 years annually. And as I mentioned, the opportunity presented by FHA's problems certainly is a wonderful opportunity.
So here in MGIC, and I'm sure throughout our industry, we're all excited about the future.
Steve Stelmach - FBR Capital Markets & Co., Research Division
And then sort of dovetailing into that, average premiums, how should we think about sort of average premium as LTVs at the GSEs will migrate higher, like it was a little bit lower. Are average premiums, do you suspect the buys sort of stable, improving, layered on with sort of additional competition?
How should we think about that trend?
J. Michael Lauer
Steve, this is Mike Lauer. So referring to the pricing, obviously, those cards are out there.
We have that public. But if you're talking about the effective yield for us, as the reinsurance transaction we have in the new business, you're going to see a modest drift lower over time.
But we're at 58 basis points this quarter. We should be in that range, again drifting down over time, but in that range.
So What pricing will be in the future, really, can be dictated by the credit quality and the opportunities in the products that are being originated and being insured.
Curt S. Culver
Yes, and as I've mentioned a number of times, I'm very excited relative to credit quality. Certainly going through all we've just gone through helps reinforce that.
But by the same token, one of the few good things done by Dodd-Frank was to legislate quality through the QM definition. And it's a role that I always felt the GSE should have played a bigger role in the marketplace on.
And for competitive reasons, I don't think they did as well there as they could have. But with the impact of QM, I really think you won't be competing on the loss line.
Steve Stelmach - FBR Capital Markets & Co., Research Division
Great. Just one more housekeeping.
Our 4Q numbers, it doesn't sound like the rescission settlement with Countrywide going to impact, sort of that 4Q results. Any other one-timers that we need to sort of think about that could cause some noise there?
Is the 90-day notice going to hit the P&L or any other sort of one-timer that's going to chock up as one-timers?
Curt S. Culver
Everything that we're aware about, we've disclosed it in the risk factors with it. So you're right, the Countrywide implementation won't affect our incurred losses in the quarter, won't affect operating statistics.
Other thing -- we're not aware of any other things that could happen in the quarter at this time. Obviously, we're beginning of the quarter.
Operator
Our next question comes from Douglas Harter from Crédit Suisse.
Douglas Harter - Crédit Suisse AG, Research Division
I was hoping you could give us a little clarity or outlook as to how you think kind of monthly volumes are shaping up for October, whether we think we've kind of stabilized at the level that we saw in September or you expect further declines?
Curt S. Culver
I'll let, Pat Sinks, who runs our business development group, answer that.
Patrick Sinks
What we've been seeing over the course of the third quarter into the fourth quarter is just a gradual decline. As Curt mentioned, we've seen refi activity drop quite dramatically, but that's kind of settled in that 15% range.
And so we've seen a slower decline in the purchase market side, but that's to be expected at this time of the year.
Douglas Harter - Crédit Suisse AG, Research Division
Got it. And then just your 12-plus payment defaults, that percentage declined nicely the quarter.
Do you have a view as to kind of how that rolls forward in the next 1, 2 quarters? How that outlook is shaping up?
Michael J. Zimmerman
This is Mike Zimmerman again. That's been, right, the mystery we've all been trying to solve for the last couple of years.
How long do these things take to get through the foreclosure pipeline. In Florida, claims coming to us are over almost 4 years delinquent.
On nationwide they're 2 years delinquent. Things seem to have been stabilized a little bit, I guess with the processing of those, but how long it takes to play out, how bankruptcies interact with all that, that's causing some of the uncertainty when we're looking at these things and the pace of this recovery.
That's what I say that's the difficult part of predicting it. So I know we're not answering it, but that's -- but we keep watching each quarter to see how those things -- each month and see how those things are developing and keep talking with our servicers to make sure that they're working through those processes as quickly, as efficiently as they can.
Operator
And our next question comes from Geoffrey Dunn from Dowling & Partners.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
A couple of questions on the incurred loss this quarter. First, can you break the incurred result down between the current period provision and prior year -- or prior period development?
J. Michael Lauer
I guess I would say -- this is Mike Lauer. The most significant adjustment during the quarter related to severity on the older buckets.
And I would say that was in the range of $40 million to $60 million in the quarter. So that was the benefit really more of a catch-up as we looked at trends over the last 3 quarters on average severity.
There were some modest changes in the cure rates, especially on current cures, but the significant adjustment related to severity on the older buckets.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Okay, and that actually leads into my second question. With respect to claim rate on the new notices, last quarter, you indicated the drop to 1 in 5 incident expectations.
Even if just fractional, did you reduce or improve that view again this quarter?
Curt S. Culver
Yes, we did.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Can you quantify that to me?
J. Michael Lauer
Jeff, this is Mike. I mean, so last quarter, what we said we owe is about 1 in 5.
So if you're thinking about it maybe from this perspective is that we are on the -- maybe on the higher end of 1 in 5. And now we're on the -- or the lower end of 1 of 5, and now on the higher end of that.
So if we were in the 20%, 21%, maybe now we're in the 18%, 20% range going forward. That changes, as you look, the inner quarter, cures were higher this quarter so that influenced it.
But there was a modest point or so improvement in the claim rate.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Okay. And in terms of severity, we see obviously just the overall average, I think the first second quarter on a row you're down on that 45,000, 46,000 range.
Is that the kind of level you expect to run at and the type of delta versus, say, 1Q at 48,000 that you've adjusted for?
Curt S. Culver
As of now, I would say yes. We obviously will look at again at year end.
I wouldn't anticipate much change. This was a significant adjustment, I think, in the quarter.
We'll look at again every quarter. But we tend to look at it more than 1 quarter adjustment so we'll look at some trends as we get to year end.
I wouldn't think of a major change going into the fourth quarter.
Michael J. Zimmerman
Jeff, the way I frame the 2 is, sometimes we see that jump around, so we like to see it trend downward and then stay down for more than just 1 quarter. So seeing it 2 quarters in a row stay in that 45,000 level obviously [indiscernible] to look at severity closer.
If it continues to stay down that range and they trend lower, we'll obviously take an even harder to look at it.
Operator
Our next question comes from Bose George from KBW.
Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division
The question was on the quota share. The 30% quota share, is that something that you guys could revisit just going forward?
Curt S. Culver
Well, in what sense?
Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division
Keeping more or seeding less of that?
Curt S. Culver
We have an agreement in place for 30% quota share and that has a term through 2018. But we do have early termination provision in '16 that would allow us to terminate early.
But we could end before that timeframe, change the 30% quota share to 20% or whatever.
Michael J. Zimmerman
Again, I think that's an important part as we look at new capital standards play an important role for us.
Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, great. And actually then, switching to the converts, the 2% converts, are they in the money now?
And is that going to show up in the fourth quarter share count?
Michael J. Zimmerman
I mean, yes. First, it has to be a years from the issuance of those.
So you have some technical accounting issues there. But really want to make sure they're antidilutive or not.
So when they look at all of the different structures that are in place, when you add back the interest, if it becomes a positive earnings for us, then it won't be included. So it has the antidilutive to be included.
Whether or not it's -- you make money and then you have to look and see if it's dilutive or antidilutive, and that will determine whether it's included or not.
Bose T. George - Keefe, Bruyette, & Woods, Inc., Research Division
Okay, great. And then just one last thing on pricing.
Have you guys seen any pickup in price competition in the industry?
Curt S. Culver
No change. From what we had seen prior single premiums still remain important.
But no changes relative to the other aspects of the business.
Operator
Our next question comes from Mark DeVries from Barclays.
Mark C. DeVries - Barclays Capital, Research Division
First question. Curt, I think you mentioned that you estimate private MI share of the market went to 13% from 10%.
Where do you think that could get? Is the FHA still capturing almost as much of the market as private MI.
If that goes higher, could you see the total market of private MI reach 20% or higher?
Curt S. Culver
I don't know how to characterize that. Let me put it in little different terms.
Historically, we've been 2/3 of the market. The end private mortgage insurance industry, FHA has been 1/3.
I think given the issues that FHA has to deal with and also I think even the Congressional mandate coming out of Washington, I think we'll exceed that 2/3 at some point in time in the future. So that will be above 2/3 of the industry in the Private Mortgage Insurance, the low downpayment loans.
So whether it translates to actual origination percentage, I don't know. But I think we'll exceed the historical norm over time given the pricing, the draw that they've had on treasury and just the mood in Washington relative to dealing with FHA and its problems.
But that all bodes very well for our industry.
Mark C. DeVries - Barclays Capital, Research Division
Okay. But is the combined credit enhance market share of private MI and FHA it's well over 20% right now, right, between the 2 of the total?
Michael J. Zimmerman
Sure. Yes.
I mean, and also, don't forget, VA has become mainly refinance the VA is about 20 -- if you look at the credit enhancement market, VA is about 20%, 22% of that share of the high LTV market, but that's dominated a lot by refis. So that plays a role into it too.
But, yes, I mean, between private MI and FHA, clearly it's over 20%.
Mark C. DeVries - Barclays Capital, Research Division
Okay. And could you talk about your expectations for the share of the market that singles capture as we move towards more of a purchase market?
And whether if those decline, what that might do for your market share of a private MI industry?
Patrick Sinks
This is Pat. Our estimate right now is that the single premium piece of the insured business is about 25% of the volume.
That is -- comprised of both an LPMI execution and BPMI. The distinction there is that we expect that QM, which will be effective in January, will have an impact on the borrower paid side, but it probably won't be material.
So we would expect, as we sit here today, that the market to continue to be in the 20%, 25% range. We heard some talk that higher interest rates will diminish the use of single premiums.
We've got to see that actually in the numbers.
Mark C. DeVries - Barclays Capital, Research Division
Okay, got it. And just last quick question.
Where does holding company cash stand right now?
Curt S. Culver
$594 million.
J. Michael Lauer
$594 million.
Operator
Our next question comes from Jack Micenko from SIG.
Jack Micenko - Susquehanna Financial Group, LLLP, Research Division
The first one, point of clarification. In talking about the severity assumption change in the quarter on the heels of last quarter, am I interpreting correctly to sort of say this is sort of a -- the adjustments made this quarter, it's unlikely to see another sort of third consecutive quarter of adjustments?
Sort of a true-up? Is that the right way to think about...
J. Michael Lauer
Yes. I think what I said is we've had some trends here over the last 2.5 quarters really at lower severity.
We've made some adjustment. Whether or not that continues in the fourth quarter, we'll have to look at again.
I wouldn't anticipate it, but we'll look at it, obviously, and adjustment if it's there. But I wouldn't anticipate it, I guess.
My first catch would be that it wouldn't change that much in 1 quarter and we generally would make that kind of adjustment a quarter unless some significant trends would continue.
Jack Micenko - Susquehanna Financial Group, LLLP, Research Division
Okay, that's exactly what I was looking for. And then looking at the '10, '11, I guess in the '10s, for sure, we're sort of getting to a season portfolio there, 50 to 100 bps of delinquencies.
I guess, A, is that kind of the right number that you see in the portfolio? And, B, would -- can you argue that maybe standards are a little too tight based on where underwriting is at now in terms of -- could that number come up and -- at the expense of maybe more top line business?
Michael J. Zimmerman
Just to make sure we talking about the delinquency rates on the 9 and 10 books of business?
Jack Micenko - Susquehanna Financial Group, LLLP, Research Division
Yes.
Curt S. Culver
Yes, I mean, I think the loss ratio on those books, are what, 13% on the 9s and about 6% on the 10s. That would reflect the fact that yes, there is more opportunity to do more business.
And I think as the FHA, as more of that business frees up to our sector, it's still great business obviously. But that will raise loss ratios on the newer books of business, but still well below probably historical numbers.
But we do have an opportunity to do more and that's reflective of what's going on in the FHA and also what the GSEs will accept. So I think the whole housing market will settle into more standardized numbers over the next couple of years as we figure out what's going to happen in Washington.
Jack Micenko - Susquehanna Financial Group, LLLP, Research Division
Okay. And then just real quick.
I'm not going to ask you about RTC numbers, and I'm not going to ask you about timing, because I know it would be a waste of your time. But when we talk about risk-weighting sort of becoming more of a discussion in the marketplace amongst investors, what do you think the right risk weighting is?
Is it just the top line number for pre-'09, post-'09? Is it a default-driven assumption?
I mean, how would you like to see the risk-weighting rules come out that would make the most sense?
Curt S. Culver
I think on a general basis, and I'll let Larry talk on it further, but just for my perspective, we'd like to see the risk rules come out that are reflective of the risk we ensure. And what I mean by that is that, if you will, loans that have 800 FICO should have less capital required against it versus 600.
And so let's just use that as an example. And the same on premium rates, that's reflective relative to the capital charges also.
So that you get a true risk-weighted capital ratio rather than just hard capital ratios. I mean, if you look at what we went through over the last cycle when we pretty much gained everything back, I mean we were running, what 6, 7, 8 to 1 on risk to capital ratio, and yet, you saw the results of that over the last number of years.
So that -- what truly has to happen is that the capital charges reflective of the risk that's insured and the current model, the hard risk to capital, that's 25:120, 18, 50 whatever it might be, is not reflective of that. Larry...
Lawrence J. Pierzchalski
I guess with regard to how much capital, it should be -- your starting capital plus your premium strength from the business ought to provide the funds to pay losses in a given stress scenario i.e. 30% price declines like we came down through from '06, '07.
So that's kind of the context. As Curt was saying, some of the higher FICO business, given the premium rate, would require risk of capitals of above -- less than 20:1, 25:1 for instance, whereas other segments would require something -- more than the 15 or 18:1 that's been thrown in the marketplace.
Our current mix, given the FICO distribution and whatnot, would suggest something of risk -- less capital required than what seems to be talked about 18:1 because the credit profile is so strong plus the premium stream, we wouldn't need much capital as to whether a 30% price decline.
Operator
Our next question comes from Sean Dargan from Macquarie.
Sean Dargan - Macquarie Research
Just -- when I think about this quarter’s results in the context of a normalized earnings going forward, I think it was said at the $40 million to $60 million of favorable development in the older bucket helped results. I know you don't want to talk about a per share number, but do you have a pretax earnings number in mind, which is possible when we think about normalized earnings?
Because presumably, you won't have the..
Curt S. Culver
We don't have it. We're not going there.
What's your next question?
Sean Dargan - Macquarie Research
Okay. But, I mean, the correct way to think about it is, that you wouldn't get this favorable -- this aid from...
Curt S. Culver
Sean, when you get to a steady state period of normalized performance and normalized delinquencies and writings coming in, clearly, you're going to have -- you won't have favorable or adverse development. You will just have it rolling along as it would be.
I think you can look back in history in our pre-2007 and see that. But yes, that's right.
But along the way, there's going to be adjustments that have to be made before you get back to that norm.
Sean Dargan - Macquarie Research
Got it. When we think about options you have available, when the FHFA does come out with the eligibility requirements, you mentioned the reinsurance.
And it seems that there's willing capacity in Bermuda given that the Bermuda reinsurers are getting squeezed in some other lines of business. Is there any appetite to reinsure legacy business?
Curt S. Culver
Yes, there is.
Sean Dargan - Macquarie Research
And would -- do you think that would be -- you'd be given credit for that under a likely scenario?
Michael J. Zimmerman
I think the only way we would do it is if you get credit, right -- I mean, you're not going to get credit from the capital standards, it wouldn't make sense to enter into a transaction.
Curt S. Culver
And we think it's likely that you would get credit for, so that is certainly one of the options we're pursuing as we look forward to our future.
Operator
Our next question comes from Seth Glasser from Millennium Partners.
Seth Glasser
I also won't ask you about timing of risk to capital, but I did have a couple of sort of philosophical questions for you. The first being, whatever the new standard is, assuming say it's 18x, how do you think about sort of where you would want to manage the level to?
I mean, at 18x, do you want to manage it to 15x or 16x or are you going to be comfortable sort of managing it much closer to that 18X type number?
J. Michael Lauer
I think the issue is going to be, as Curt talked about earlier, it probably won't be a hard number. There's going to be some other issues around it about how you measure it and when it's effective and probably maybe cuts on capital for different assets investments and everything.
So it's going to be more complex than just a pure number. That's why we kind of qualified it and said, we think we're comfortable where we're at with respect to alternatives we have just to meet the capital standards and then work around them as they change.
I think there's going to be some early calls on how the capital standards will be set up, but then they'll evolve over time to be, maybe, more specific as we talked about. They may be even tighter relative to, as Curt and Larry mentioned, that it may be more refined later on as we look at real products and risks associated with them in premiums, et cetera, on the life of the product.
So I think we'd encourage that. And I think the whole capital process is going to evolve over time.
And we think that we're in good position relative to cash on hand and at the holding company, as well as our existing capital position and alternatives relative to reinsurance going forward, to meeting the initial standards and then longer-term what it involves.
Curt S. Culver
But from a practical matter, you would not operate right at the 18:1 line. You'd have some distance because from a practical matter, any given quarter, you might get some gyration on the loss line or write more new business than you think, and then you're over the line, and that's not a good response.
So we'd probably operate somewhat below that line. How far I guess depends on how comfortable we are with the environment.
Seth Glasser
Right. Okay, that's fair.
I guess the other question with regards to this issue is, we've gotten confirmation, I guess, through a couple of different sources around the FHFA looking at haircutting capital credit that is received for subsidiaries. And there's been some question about whether that would include both MI and non-MI subsidiaries.
I mean, I know this is obviously a much bigger issue for your friends in Philadelphia, but just any thoughts or updates around what you're hearing with regard to subsidiary capital haircuts?
J. Michael Lauer
We haven't heard anything to that effect.
Michael J. Zimmerman
It's Mike Zimmerman. I mean, when our conversation was part of -- it's in the hands of the FHFA.
I mean, so we're waiting as you are and as they are as what those would be. So, we're on the same, I'd say, rumors that you are with it.
But exactly how they will be applied, to our knowledge, has not been determined.
Seth Glasser
Right. But I guess, has there been any color as to whether that is something that's still being considered?
Curt S. Culver
It hasn't been provided to us. So if it is, I mean, that's really their call, not ours.
Seth Glasser
Okay, understood. My final question is just with regard to the IRS issue that -- it seems like it's sort of sprung back on to the radar here a little bit.
So you will be actually receiving essentially a bill for the remaining IRS liability in the fourth quarter? And I know in the past, you've said that if necessary, you'd be likely to take this to full litigation if that had to be the path.
How are you thinking about that now? I mean, is it possible that you might need to make a pretty significant cash payment for this issue at some stage soon?
Curt S. Culver
No. All we're doing is updating you.
We think eventually, we thought we'd hear something sometime this year because year-end is coming up. We anticipate we'll hear something in the fourth quarter.
And if that's the case, than we would have a choice to make, either, A, to make the payment or, B, litigate and we litigate.
Michael J. Zimmerman
And if made a payment -- it's make the payment and then sue for a refund with it, in fact. So, we're just describing the update in risk factors was really just clarifying the choices that we would have to make once we receive the letter.
So that's what we're trying with those factors, is really, I would say in the update is to where we're headed, what our thoughts are around it.
Curt S. Culver
Yes, nothing new happened.
Operator
Our next question comes from Craig Rothman from Millennium Partners.
Chris Gamaitoni
This is Chris Gamaitoni for Craig. I just wanted your perspective on what you thought the future of the insurance in-force book would look like, kind of a mix between persistency and originations as we into the slower refi environment and whether we can see consistent growth in that book.
Curt S. Culver
Well, I think persistency on the newer books of business, as rates rise, will exceed 80% on those books of business. So they will be very profitable books of business, not only from a quality standpoint, but the fact that we'll have them for longer term than historic averages have been.
So I think there will be a return to old relative to persistency somewhere between 80% and 90%.
Michael J. Zimmerman
Now you won't see that show up in the reported number, that consolidated number on an annual basis for a few quarters yet as the refi activity of the prior year burns off with it. And the purchase volume we expect to be -- continue -- I mean, it's forecasted to be higher and better penetration rate as an industry with that, so that would bode positive for growth in the future.
Curt S. Culver
Yes, I think in the next couple of years, even though originations are looking at being down, it's all reflective of refinance volume. Purchase market, both '14 and '15, should be higher than the preceding year.
And as we've talked about with the pickup that we'll get as an industry from FHA business continuing to migrate to our industry, I mean, it should be a very healthy purchase money market for us moving forward.
Chris Gamaitoni
Do you have any sense of the -- how much kind of the IRR on capital deployed increases as those very clean recent originations extend? I assume -- I don't know what average life you were assuming when you price this relative the credit risk, but they extend longer as rates rise.
How much more of kind of IRR do you think do that increase?
Lawrence J. Pierzchalski
Well, corporately, we try to target a return overall around 15%. These newer books are doing better than that.
And even with some of the burn-off caused by the rate drop on '09 and '10, we lose some revenue, but the capital is released, so your IRR has benefited there. But we're probably well above 15% on these newer books.
Operator
Our next question comes from Scott Frost from Bank of America.
Scott Frost - BofA Merrill Lynch, Research Division
I know you've been over the -- that you're unclear on the timing of the new rules, but have you communicated to regulators what you think the length of the adjustment period would need to be once levels are determined? And I have a follow-up.
Curt S. Culver
No. We're basically waiting for this information.
We thought maybe by now, we would've heard it. So we're waiting for whatever they're going to come out with and then we'll have discussions with it.
They really haven't shared any information, whether it's with respect to their thought process about -- other than the they thought they will have something by fourth quarter this year, some new capital rates.
Michael J. Zimmerman
We have kind of expressed our desire to have an implementation period. An immediate -- to publish from day 1 and be effective day 2 is not an appropriate manner, but there's got to be some implementation period and timeline for them to become effective.
So we have told them that. But to give them specifics, no.
But we've told them that clearly, you need to have been an implementation path in order to be logical about the whole process that's going on.
Scott Frost - BofA Merrill Lynch, Research Division
Have you given them an idea of what the -- how long that implementation path would need to be?
Michael J. Zimmerman
No. I mean -- up to us, we would say, extend it for 10 years.
But they're not going to go with that, right, because organic growth and so on with it. So it's really up to them.
Curt S. Culver
Yes. I mean, I think a more likely approach is that they will give a number of months of comment after they do release them to our industry.
And I would thank them for implementation in 2015. But that's practical thinking, so I'm not sure if it'll be taken.
Scott Frost - BofA Merrill Lynch, Research Division
A follow-up, for the -- you mentioned the reinsurance possibilities for legacy business. Is that -- would you say that, that -- the interest in reinsuring that is coming from third-party capital, more or less than traditional reinsurers with rated balance sheets?
How do you find the mix in terms of interest in reinsuring -- reinsuring legacy positions?
Curt S. Culver
Traditional reinsurers with strong balance sheets.
Operator
Our next question comes [indiscernible] from Hudson Capital.
Unknown Analyst
Quick question. Can you talk about the uses of holding company cash, please?
J. Michael Lauer
Well, as we have mentioned in the call, we're at about $594 million, and the principal use of that is interest payment. Annually, it's about $63 million, I think, and we've got an $84 million note due in November '15.
So that's the principal use. And then as we mentioned...
Unknown Analyst
I meant for the quarter itself.
Michael J. Zimmerman
None. We didn't have interest payments.
So during the quarter there wasn't much activity.
Unknown Analyst
So you guys end up...
Michael J. Zimmerman
It grew actually a couple of million dollars.
Unknown Analyst
So your ending balance as of second quarter was ...
J. Michael Lauer
It was $594 million. The beginning balance was $592 million, it's up a couple of million.
Timothy J. Mattke
Which includes any mark-to-market adjustment, investment income, all of that would be included in that delta. Are you with us?
Unknown Analyst
Yes. I'm still with you.
All right. Those are all my questions.
Operator
And our next question comes from Geoffrey Dunn from Dowling & Partners.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Just a couple of follow-ups. First, are you able to give any detail with respect to the profit commission on your quota deal and if that's benefiting your expenses at all yet?
Timothy J. Mattke
No detail on that. I guess just couple of things.
We have talked about ceding commission and that is 20% and that is benefiting our operating expenses. The profit commission will -- it runs through to the premium line.
So that will benefit the premium line coming back through there. So that's part of the blend of the premium deal that you see right now.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Okay, it isn't on a lag basis or anything like that? It builds with the cede?
Timothy J. Mattke
It builds with the cede, correct.
Curt S. Culver
And Geoff, as that becomes material in size, that will be broken out in the future. But at this point, they're not a material number to report.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Sure. And then with respect to the Countrywide, I think there's, what, 2,100 loans associated with that settlement?
Timothy J. Mattke
From the GSEs.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Yes, so is that something we should expect -- does your capacity allow for processing of all 2,100 in the fourth quarter, or is that something that's going to be bled in over 3, 4, 5 months?
Michael J. Zimmerman
The goal is to try and get them processed in the next -- in November starting in the fourth quarter. And on the loans effective -- the GSE loans process those our goal is to get them done this quarter.
Curt S. Culver
So the lion's share, not all, will be done in the fourth quarter, Geoff.
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
So the right way to think about the fourth quarter is kind of maybe a declining run rate off of this quarter's claimants, then it's plus 2,100 loans?
Michael J. Zimmerman
Geoff, are you talking about for the delinquent inventory or what?
Geoffrey M. Dunn - Dowling & Partners Securities, LLC
Yes, basically, I mean, you did about -- just under 8,700 claims this quarter. I'm wondering if we should be thinking that, that's going to spike up 9,500 or higher.
Curt S. Culver
Definitely the number of claims payable definitely spike up this quarter. And what we plan to do in our monthly statistics.
But I will -- we will give you that specific line item us what, if you will, extraordinary activity was during the month that was associated with the implementation of the agreement. But it absolutely will increase, materially increase during the quarter on a processing basis, paid basis.
Operator
Thank you. I am showing no further questions at this time.
I'd like to hand the conference back over for any closing remarks.
Michael J. Zimmerman
Thank you. I'd like to complement my management team and remind them it's bosses day.
Have a good day.
Operator
Ladies and gentlemen, thank you for participating in today's conference. This concludes our program.
You may all disconnect, and have a wonderful day.