Jan 23, 2014
Executives
Michael Zimmerman – IR Curt Culver – Chairman, CEO Mike Lauer – EVP, CFO Pat Sinks – President, COO Larry Pierzchalski – EVP, Risk Management
Analysts
Mark DeVries – Barclays Capital Eric Beardsley – Goldman Sachs Sean Dargan – Macquarie Research Jack Micenko – Susquehanna Financial Group/SIG Douglas Harter – Credit Suisse Jason Stewart – Compass Point Research & Trading Geoffrey Dunn – Dowling & Partners Securities Bose George – Keefe, Bruyette & Woods
Operator
Good day, ladies and gentlemen, and welcome to the MGIC Investment Corporation fourth-quarter earnings conference call. At this time, all participants are in a listen-only mode.
Later, we will conduct a question-and-answer session and instructions will follow at that time. (Operator Instructions).
As a reminder, today's conference is being recorded. I would now like to introduce your host for today's conference call, Mr.
Michael Zimmerman. You may begin sir.
Michael Zimmerman
Thanks, Kevin. 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 results for the fourth quarter and full year of 2013 are 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 and Controller, Tim Mattke. I want to remind all participants that our earnings release of this morning, which may be accessed on our website, is located at 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've indicated in this morning's press release, we had posted on our website supplemental information containing characteristics of our primary risk in force and new insurance written, which we think you'll 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 statement, we are not undertaking an obligation to update these statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or issuance of the Form 8-K.
With that, let me turn the call over to Curt.
Curt Culver
Thanks, Mike. Good morning.
In the fourth quarter, we recorded a modest net loss of $1.4 million. But perhaps more significantly, I am pleased to report that in 2013 the company made substantial progress on numerous issues that have been challenging us for the last few years.
Most importantly, we improved the capital position of the company through the capital raise as well as through the use of external reinsurance. And on an operating basis, new insurance written increased 24%, new delinquent notices declined 20%, the delinquent inventory declined 26%, and claim payments fell 29%.
I'll expand on each of these topics during my remarks. Let me first address our improved capital position.
In March of 2013, we raised $1.15 billion of new capital, of which $800 million was contributed to MGIC. In April, we closed a reinsurance transaction for new business written between the second quarter of 2013 and year-end 2015.
The transaction is a 30% quota share with a 20% ceding commission and a profit commission. In December, we amended that treaty to include business written in the first quarter of 2013 and prior that has never been delinquent, totaling approximately $55 billion of insurance in force and $13.7 billion of risk in force as of December 31, 2013.
This portion of the reinsured portfolio will have a 40% quota share, but all other terms remain the same. By implementing this amendment, MGIC's risk to capital ratio on a preliminary basis fell to 15.8 to 1 at the end of 2013.
Without the amendment, it would have been 19.2 to 1 at the end of 2013 compared to 20.1 last quarter and 44.7 to 1 one year ago. We view that any reinsurance with strong partners in a cost-effective manner provides us increased flexibility to deal with revisions to the capital standard and further positions us to take advantage of the significant growth opportunities, both in expanding the amount of business insured by our industry as well as growing our market share within that expanding market.
We believe that the net impact for the combined reinsurance transaction to our profitability equates to about 2 basis points of premium yield. Turning to the current operating environment, as the country continues to recover from the effects of the recession, we have seen home price appreciation as well as modest improvements in the employment picture.
Most observers expect these trends to continue through 2014. This is good news as HPA and employment have a huge impact on new business and credit performance.
I also remain optimistic that the demand for home purchases will continue to recover as household formations return to their historic levels. And as the economy continues to improve, consumers will have more confidence in their future employment and their desire to purchase a home will continue to increase.
And since the majority of purchasers that needs a mortgage do not have a 20% down payment, we have a wonderful opportunity in front of us. Regarding our current business writing in the quarter, we wrote $6.7 billion of new business, which was down approximately 4% when compared to the fourth quarter of 2012, with the decline due primarily to a decrease in refinance transactions.
New business writings typically slow in the fourth quarter, and that again was the case this year, but after considering the influence of refinance transactions on total volume, we view this slowdown as seasonal versus a fundamental shift in demand for housing. Year-to-date, our new insurance written was $29.8 billion, which was up 24% from last year.
I would expect the same or modestly higher volumes of new writings in 2014, even though total originations will be lower. During the quarter, refinance volumes declined further and totaled 13% of our new writings versus 18% in the third quarter and 30% in the second quarter, and comprises approximately 15% of our current application pipeline.
And while 30-year mortgage rates have risen to a level that has materially reduced refinance activity, they remain very affordable from a historical perspective. And as a result, the purchase market, while seasonally lower, remains relatively strong.
In fact, since December 1, our purchase application volume is approximately 15% to 20% higher than for the same period last year. The driving force behind the strength in the purchase volume is that our industry continues to regain share in a low down payment market from the FHA, reflecting the better value we offer borrowers.
While fourth-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 compared to 10% in the second quarter, and we expect that share will grow to 16% during 2014. Not all companies report their new insurance written for the quarter but we believe that, within our industry, MGIC's fourth-quarter market share has increased from the 16.5% to 17% range in the third quarter to a range of 17% to 18%.
Losses incurred in the fourth quarter were $196 million, down 72% from last year and up marginally from last quarter. There was no material change during the quarter to the frequency and severity assumptions on the existing delinquent inventory.
During the quarter, we saw 7% fewer new notices when compared to third-quarter levels, but as typical for this time of the year, they exceeded the number of cures reported. However, as I mentioned earlier during the year, we have continued to experience and benefit from positive housing and employment trends.
This environment, combined with the outstanding credit profile of the business written since 2009, has resulted in very few delinquencies from these books and has lowered the level of new defaults and increased the cure rate on new notices received from the 2008 and prior vintages. The delinquent inventory ended the quarter at 103,328 loans, which is down 26% year-over-year and down 7% sequentially.
After considering claims paid, we expect the inventory to continue to decline in 2014. Paid claims in the fourth quarter were $481 million, down 23% from the same period last year and up 16% from last quarter.
Included in the total claim payments for the quarter was $105 million that is associated with the implementation of the settlement agreement with Countrywide regarding rescission of coverage on GSE loans. These payments were in line with our previously established reserves.
For the full year, claim payments declined by 29%, totaling $1.8 million versus $2.5 billion in 2012. Given the current pattern of claim filings, we expect that paid claims will decrease further in 2014.
Claims received in the quarter which can serve as proxy for a foreclosure or a short-sale completion continued to decline, and were down 32% from the same period last year and down 13% quarter-to-quarter. In 2013, we received 29% fewer claims than in 2012.
At quarter end, cash and investments totaled $5.2 billion, including $560 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 of 2015.
Let me now take a couple of minutes to discuss the regulatory environment we are currently dealing with. First, the FHA and the GSEs continue to discuss and develop mortgage insurance eligibility standards, including new capital requirements.
These revised eligibility requirements and capital standards are now expected to be released sometime in the first half of 2014. Finally, the specifics of what is included and the timing of the release and implementation remain unknown at this time.
What we do know, based on conversations with the FHFA, is that the state regulators will receive the proposal first and will have up to six weeks to comment on it. After the FHFA has reviewed and incorporated any suggested changes, they will release the proposal for public comment.
So while we don't have any specifics to share, we remain confident that MGIC has a number of options available to comply once the proposal is 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 of which we are aware.
In August, the revised risk retention rule is released that generally defines a QRM mortgage, a QRM as a mortgage meeting the requirements of QM under what the regulators call the preferred approach. The comment period for this proposal expired at the end of October 2013, and we are not aware of the timing for a final rule.
As a reminder, the proposal contained no down payment requirement and the regulators also requested comments on an alternative QRMs definition, which utilizes certain QM criteria but also includes a maximum loan-to-value ratio of 70%. We think that the preferred approach of no down payment by the regulators is the more likely outcome, given the overall negative reaction to the original proposal, which required a 20% down payment.
This preferred approach of course will be good for MGIC and our industry. The debate over the role of FHA and the GSEs in the housing market continued during the quarter.
In addition, a new bill to reform FHA and the GSEs has recently been introduced by House Financial Service Democrats Delaney, Carney, and Himes. However, like previous bills introduced by Senators Corker and Warner and Representative Hensarling, with election looming this year, we do not expect any action in 2014, just rhetoric.
Importantly, we continue to see and hear that, in the various narrows we are aware of, there is a significant role for mortgage insurance. In closing, we made meaningful progress in 2013 regarding our capital position, increasing the volume and quality of new business writings and decreasing the level of delinquencies and claim payments, all while maintaining our industry-leading cost advantage.
And not to diminish these accomplishments, but we know that there's much more work to do. We are an established company with a national sales and underwriting organization in place that averages 18 years with our company, and a company that is always focused on delivering stellar customer service.
As a result, I feel our company is in an excellent position to take advantage of the housing recovery, and we are committed to maximizing that opportunity. That concludes my opening remarks.
But before we take questions, I would like to recognize Mike Lauer, who is participating in his last earnings call. As many of you are aware, Mike will be retiring at the end of February.
Mike joined MGIC 25 years ago, and like all of us long timers at MGIC has experienced the best of times and the worst of times. But through it all, he was a rock we could always count on.
His loyalty and dedication to our company set a standard that all of our younger coworkers admired and hopefully will emulate in their careers. His sense of humor sustained us through the difficult times, and when we were severely tested, Mike never lost faith.
On a personal note, Mike has been a mentor and trusted advisor and most importantly a true friend to me throughout the 25 years we have worked together. His salty, no-nonsense style has a way of getting to the bottom line quickly, something that is so appreciated.
But don't let that saltiness fool you. Mike has a heart as big as anyone I have ever met, and I saw him demonstrate that generosity over and over and over.
So, it is with mixed emotions that we say goodbye, but I assure you of one thing. We are all better for having worked with Mike and what a wonderful legacy that is.
Thank you, Mike.
Mike Lauer
Thank you.
Curt Culver
With that, Operator, we will take questions.
Operator
(Operator Instructions). Our first question comes from Mark DeVries with Barclays.
Mark DeVries – Barclays Capital
Yes, thanks. First question.
Curt, is the decision to reinsure so much risk at this point taking your risk to capital down a fair amount? Should we read into that any concern that when the eligibility requirements come out, it will be kind of the – the cap will be materially lower than the 18 to 1 that Radian initially cited, or is it more of a reflection that you are really optimistic about the amount of risk you will be writing over the next several years?
Curt Culver
This puts us in a position of maximum flexibility, and one that is nondilutive and another that we have the ability to do it on a short-term basis if we choose. So it's more about the flexibility it offers to the company and the opportunity that it offers the company Mark.
It is not reflective of what we think the capital standards are. It just puts us in a position that we think whatever comes out, we can maximize on what comes out.
Mark DeVries – Barclays Capital
Okay. And I imagine – I know that the cost to you of the last reinsurance deal was quite attractive.
Could you provide any color just on the difference in what you perceive the costs have been from this as opposed to another potential capital raise?
Unidentified Company Representative
Well, we'd say the cost of this is the exact same. This is [an addendum] [ph] to the original agreement, so the cost to us is effectively the same on this part of the reinsurance agreement as the first part.
Curt Culver
Right. Again, I don't know if you are talking about other capital raises that we have done, Mark, or just the first reinsurance transaction.
Mark DeVries – Barclays Capital
Yes. So the cost of this reinsurance versus if you were, you know – if you were to have to raise additional equity.
Unidentified Company Representative
It is significantly less than raising additional equity. I mean that's the key that we talked about.
Not only is it less expensive, but it's also there is a timing horizon here that goes away after a number of years, and it also has some cancelability features to it. So it's a much better feature than raising capital and dilutive for a long-term basis.
Curt Culver
I mean this is really a – but this is really a bridge that takes us through whatever the capital standards may come. At a point in time when they'd be implemented, it takes us through that period of time, and then after that, if it's not necessary, it's not necessary.
So again, it really grants us great flexibility on a nondilutive basis, and a very cost effective – when you figure in the profits, a very cost effective manner.
Mark DeVries – Barclays Capital
Understood. I just wanted to clarify one of your comments, Curt.
I think you said it equates to about 2 basis points of premium yield. Is that correct?
Curt Culver
That's correct.
Mark DeVries – Barclays Capital
So, that's on all of your insurance in force. If I think about that, you're ceding about a third of your book in this case, right?
Is that the equivalent of basically paying up 6 basis points for the amount that you're ceding?
Michael Zimmerman
Well, Mark, this is Mike Zimmerman, because there's two different segments. You have the first part of the transaction which is on the new business [met and] [ph] 30%...
Mark DeVries – Barclays Capital
Yes.
Michael Zimmerman
…total this year, and this has about a 40% quota share on the legacy. So, on a weighted basis, we're trying to give you – there's some geography, because there's policy, the profit commission which runs through the premium line, the ceding commission that runs through the cost line with it, but on a bottom line basis, the equivalent is about 2 basis points annually.
So, the yield itself will be effected more than that, but bottom line it's about a 2 basis point annual impact.
Mark DeVries – Barclays Capital
Okay. Is that 55 – sorry, is that $55 billion number – is that the incremental from the latest addendum?
Or is that the total between the earlier deal and this addendum?
Curt Culver
That's the addendum. In the additional information in the press release, we give you the total amount of insurance in force.
It is around 55 – all told about 55% of the insurance in force is covered by risk sharing arrangement.
Mark DeVries – Barclays Capital
Okay.
Curt Culver
What we're talking about were just for this addendum.
Mark DeVries – Barclays Capital
Okay. So…
Michael Zimmerman
But the premium application of the quota share [inaudible] before the 40%.
Mark DeVries – Barclays Capital
Okay, but bottom line, I guess the amount you're seeing is a much lower percentage of the premium than the amount of risk that your ceding?
Michael Zimmerman
Well, right because of the – you’re right because of the profit commission and the way the deal is structured.
Mark DeVries – Barclays Capital
Yes, yes.
Michael Zimmerman
That's right.
Mark DeVries – Barclays Capital
Okay.
Unidentified Company Representative
And another way to think about it instead of basis points, the combined deals we think will probably cost us about $25 million to $30 million per year. And that’s…
Mark DeVries – Barclays Capital
Okay, okay. That's helpful.
Great. All right.
Let me be the first to, Mike, wish you the best on your future endeavors.
Mike Lauer
Thank you. Thanks.
Operator
Our next question comes from Eric Beardsley with Goldman Sachs.
Eric Beardsley – Goldman Sachs
Hi. Thanks.
Just to follow-up on the reinsurance. I guess – as you look at the timing – I know you're looking at flexibility, but with the landscape, that you might not have the FHFA eligibility requirements for another few months.
Why do you choose to pursue this now? Were there any concerns about competition in terms of reinsurance and others looking for deals?
Curt Culver
Clearly. Clearly.
Again, we – again, we have relationships with these, reinsurers, but we also are aware that others are in the market. And so it was a case of what we thought getting the preferred reinsurers that we have dealt with in the past and move forward with them at this point in time.
Eric Beardsley – Goldman Sachs
Great. And then just to follow-up.
Can you comment on any trends you're seeing in severities? It looks like, on our calculations that your average severity for primary claim is down roughly 3% year-over-year, which is a little bit less an improvement than we've seen in prior quarters.
Is there any change in terms of geography there, or any seasonality we should be aware of?
Michael Zimmerman
No. Nothing significant.
We see that bounce around a little bit quarter to quarter, so nothing unexpected with the movement in the quarter.
Eric Beardsley – Goldman Sachs
Okay. Great.
Thank you.
Operator
Our next question comes from Sean Dargan with Macquarie.
Sean Dargan – Macquarie Research
Thanks. And to start off by wishing Mike the best of luck in your retirement.
Just going back to Mark's question about the - I guess the cost of the reinsurance, did I hear that the cost for the business covered by the addendum is the same as the new business?
Michael Zimmerman
Effectively, it’s [inaudible] weighted in effectively, yes. I mean – I think the way you want to think about the reinsurance transaction though is in its entirety, you know relative to the treaty is one.
So that all the [inaudible] ratios, the ceding commission, the profit commission et cetera all work in combination, and that's [inaudible], Sean, that it's equivalent to about a 2 basis point bottom-line impact.
Sean Dargan – Macquarie Research
Okay, because I would just think that, because the risk characteristics are different, that the counterparty would want to charge more to assume that risk.
Unidentified Company Representative
The terms are the same other than the quota share, so the ceding commission, profit commission, they are all the same.
Sean Dargan – Macquarie Research
Yes.
Unidentified Company Representative
So net-net, aside from the quota share, they get the same amount.
Sean Dargan – Macquarie Research
Okay. And then another way to ask a question about the timing of your transaction, it came in December, during which time we saw a change in leadership at the FHFA.
Now, I know you didn't get affirmative approval from either of the GSEs, but is this something that you cleared with – or discussed at least with the new leadership at the FHFA before you entered into the addendum?
Michael Zimmerman
We’ve been – they are aware. Freddie and Fannie are aware, as is the FHFA, and we expect them to approve it, which is why it was recorded.
Sean Dargan – Macquarie Research
Okay. Thank you very much.
Michael Zimmerman
And really, again, the timing – yes, I think, as Curt mentioned, one thing on the timing was the known parties, but also, like any other transaction, windows open and close and you want to make sure that you have the advantage of the counterparties when they're also in the market [inaudible].
Sean Dargan – Macquarie Research
Okay, thank you.
Operator
Our next question comes from Jack Micenko with SIG.
Jack Micenko – Susquehanna Financial Group/SIG
Thanks for taking the question., and Mike, wishing you warm weather and wide-open fairways. On the quota share, the new incremental – you said term is the same.
Does that mean you can reverse this at points in time if we get further clarity on risk to capital in the future?
Larry Pierzchalski
Well – this is Larry. Let me just check a couple of things.
Early some – earlier, somebody mentioned, “Geez. What if it – the 18 to 2, if it was 18 to 1 risk to capital, we would want to operate right at the line, so operating around 16 to 1 is probably where you want to be.
This transaction kind of takes us there.” And the provisions in the contract, one, if we don't get full credit from the state or the GSEs, we have the ability to terminate.
Aside from that, we have an early termination provision before the contract termination date of 2018. And so, as Curt said, others in the marketplace, terms are attractive.
The cost of capital on this transaction we believe is single digit. So the returns on the business are in the upper teens.
By having part of your capital supplied by reinsurance with a cost below, it enhances the returns of the shareholders.
Mike Lauer
This is Mike again. Another thing to think about is that in the sequence of running the business long-term, what we have added again that we used to have in part of the capital structure was some very good reinsurance relationships.
Going back 25 years ago, we had a significant amount of reinsurance that we used, and it proved to us to be very well. We moved out of that for a lot of different reasons during the 1990s, and we are now back looking at that again as another couple structure.
And as you will see longer-term, it's financially advantageous to have these relationships. It's less costly than the dilution in various other capital structures, and it will serve, I think, long-term to be another very good capital alternative vehicle for the company moving forward.
That's another way to think about this, as opposed to just this unique risk to capital issue that we are talking about.
Jack Micenko – Susquehanna Financial Group/SIG
Okay, great. And then late last summer competitor entered a deal with Freddie capping losses pretty close to reserve levels and I think, over the last several months, talking about that.
And I think there sounded to be an inclination to look at something similar on your part. Is that still something you're looking at where we could think about a potential announcement on a go-forward?
Michael Zimmerman
Yes. It’s Mike.
The reserve sometimes – I was like –we thought we had – I don't know how much room there is on the plates of Freddie and Fannie at the FHFA to undertake that, what the capital guidelines and other issues they have, but certainly that's something that we would entertain.
Jack Micenko – Susquehanna Financial Group/SIG
Okay, great. And then bigger picture, final question.
I guess 15 years until this summer, I guess mortgage rates have sort of come down somewhat consistently over time with volatility in between. With rates coming sort of off the bottom, I'm just curious as to what your thoughts are on persistency going forward.
Saw a nice pickup in 3Q to 4Q. Where do you sort of think that number can get to if rates sort of stay on the sort of glide path they are on now?
Curt Culver
But with the current books, you're going to be in the mid-80s% I think, and maybe a little higher. That's the run rate that you see 78% or whatever, they way that really works, but if you looked at the individual vintages, I think probably, in 2011, 2012 and this year, you're going to see very high persistency, almost a return to the days of old when I started in the business.
So, who knows what 2014 will hold, but I think the last three books of business still have significant increases in persistency.
Jack Micenko – Susquehanna Financial Group/SIG
All right. Thank you.
Operator
Our next question comes from Douglas Harter with Credit Suisse.
Douglas Harter – Credit Suisse
Thanks. Just talking about the capital structure and sort of cash usage, can you talk long-term what your plans would be for how much cash you feel that you need to hold at the parent company level?
Larry Pierzchalski
You know the only thing – right now, we are still waiting for capital rates to come up. We understand longer-term where we are.
Then, the only thing we've got to cover obviously is interest payments and debt issues. They – we don't have any other capital needs up at the holding company, and there aren't any other significant expenses out of the operating company.
So the idea would be that, longer-term, other sources of cash would come out of the rating company in this – as it gets profitable and there's a source of cash there. But I think the relative to our debt structure, we are in a good position right now for the next three years.
The first debt payment we've got coming up in 2015 is well covered interest payments were covered. We've got some conversion feature on the next debt coming up.
And I think we are structured right now at some higher interest rates. We could do something with some of the debt and restructure it, but before we do that, we need to know a little bit better about where the capital rates are going to be and what the interpretation of capital will be and if there's any longer-term capital structure coming up.
So I think, where we are today, we are well-positioned for the intermediate next two to three years, and the first call would be to understand what the capital requirements are going to be.
Douglas Harter – Credit Suisse
Okay. Yes.
I mean that would be my sense is that you have plenty of cash. I was just wondering why not use some of that cash as opposed to a reinsurance transaction as an even cheaper source of capital.
Larry Pierzchalski
Yes. I think part of that is the understanding of where the capital requirements are going to be and have a little bit of leverage, if you will.
Remember, we want to be – whatever comes out, we want to be significantly available not only to operate but also to capitalize on what we think will be increasing volumes.
Douglas Harter – Credit Suisse
Got it. Thank you.
Operator
Our next question comes from Jason Stewart with Compass Point.
Jason Stewart – Compass Point Research & Trading
Hi. Thanks.
Given the seasonally slow time of the year that we are in the fourth quarter and the first quarter, are you seeing any building price pressure in the market?
Curt Culver
No. You mean competitive pressure?
Jason Stewart – Compass Point Research & Trading
Yes.
Curt Culver
No. Not at all.
Jason Stewart – Compass Point Research & Trading
Okay. And then will you – just to follow-up on Jack's question.
When you were talking about persistency, you called out 2011 and beyond. And I know 2009 through 2011 perhaps saw higher-than-expected persistency.
Could you give us some color on how those vintages are trending in terms of persistency?
Curt Culver
I didn’t – I mean I think those are done at a lower rate. That is the only reason I don't think deficits should be as high as 2011 and after.
But…
Larry Pierzchalski
Yes. I mean, if you go back, if memory serves me right, a lot of those books were upper 4%, maybe around 5%.
The market is now around 4.5%. So the persistency on the 2009, 2010, 2011 books are improving because of the 100 basis point rise.
Maybe there's a little room for refinancing activity at a 4%.5 market if they are around 5%, but a lot of that has been – if they haven't acted already, the probability of them going forward and acting has probably diminished.
Jason Stewart – Compass Point Research & Trading
Okay. And one last question.
Have you seen any change in penetration of the use of mortgage insurance in the purchase market or has it been consistent from the third quarter to the fourth quarter?
Curt Culver
We target that back that the penetration in FHA, what, from 10% to 13%. So…
Mike Lauer
This is Mike. There is not a lot of visibility yet into the fourth quarter…
Curt Culver
Yes.
Mike Lauer
And now relative to the FHA. But – so the minimum is how it's almost relative to our share and I probably do expect it to be growing.
We expect growth from third quarter the fourth quarter, we just don't know to what level yet.
Curt Culver
You know the market – definitely yes.
Mike Lauer
The penetration of overall MI.
Jason Stewart – Compass Point Research & Trading
I guess I was thinking of it…
Mike Lauer
But then it didn’t turn out well, right?
Jason Stewart – Compass Point Research & Trading
Yes, it seems like the market, the purchase market, is deconsolidating a little bit. Have you noticed any subtle changes in your customer mix, whether it was more regional or community bank versus large national accounts?
Curt Culver
No. Not today.
But I would echo Mike's. I think we've seen both an increase relative to penetration in FHA as an industry in our own company, as I mentioned earlier, and increased market share within the fourth quarter.
So those trends are very positive.
Jason Stewart – Compass Point Research & Trading
Okay. Appreciate it.
Thanks.
Operator
Our next question comes from Geoffrey Dunn with Dowling and Partners.
Geoffrey Dunn – Dowling & Partners Securities
Thanks, good morning.
Michael Zimmerman
Hi.
Geoffrey Dunn – Dowling & Partners Securities
First, could you comment on development on the incident side for new notices versus third quarter?
Michael Zimmerman
Well, from a development standpoint, I guess the new notices coming in the fourth quarter we're looking at them very similar to when we looked at them in the third quarter, which I think we said was just slightly better than a one-in-five ultimate claim rate on those items, and really no change in severity as I mentioned earlier. And then development of the already existing notices based upon incurreds, no significant changes on those, maybe a little bit of positive development but very subtle.
Geoffrey Dunn – Dowling & Partners Securities
Okay. And then I'm not sure if I missed this, but did you disclose specifically the termination duration on the new reinsurance?
Michael Zimmerman
We have early termination at our option at the end of 2016, and the contract terminates at the end of 2018.
Geoffrey Dunn – Dowling & Partners Securities
And that's the same as the…
Michael Zimmerman
You know as the…
Geoffrey Dunn – Dowling & Partners Securities
Right?
Michael Zimmerman
Right. That's in addition to the – if we don't get full capital treatment, we have a right to terminate as well.
Geoffrey Dunn – Dowling & Partners Securities
Right.
Michael Zimmerman
Those are pretty different, if you will, triggers, one at the end of 2016, one if we don't get the full capital treatment and then the opposite at the end of the contract as well.
Geoffrey Dunn – Dowling & Partners Securities
Okay. And then I'm trying to get a little bit better idea on the profit commission.
If I assume about 58 BPS on the ceded risk, it looks like it's about $125 million annual of gross premium cede. And I think, Mike, you indicated this might be a 25%, 30% net cost.
So, is there a tax factor when you get to that 25%, 30%, or should we be basically looking at that starting premium less ceding commission and the delta is the profit commission?
Michael Zimmerman
And the other component I guess would be the ceded losses that we have in there, but effectively that would be the way I'd look at it, is what you think ceded premium is, plus the ceded commission of 20% plus your loss assumption, and then the delta would get you back to that $25 million, $30 million that we say the bottom line impact us.
Geoffrey Dunn – Dowling & Partners Securities
Okay. So it is – it’s fair to say, at the end of the day, that your net cede is less than 50% totally?
Michael Zimmerman
Yes.
Geoffrey Dunn – Dowling & Partners Securities
Great, thank you.
Mike Lauer
Thank you.
Operator
Our next question comes from Bose George with KBW.
Bose George – Keefe, Bruyette, & Woods
Hey there. Good morning.
On the losses incurred number for the quarter, was that entirely driven by new notices, or were there any adjustments for existing delinquent inventory?
Michael Zimmerman
Primarily driven by new notices. There was probably some slight favorable development on existing delinquencies, but nothing material.
Bose George – Keefe, Bruyette, & Woods
Great. And just in terms of the default decline rate that you're assuming, what was that for the quarter and could you see that trending down in 2014?
Michael Zimmerman
As I said, I think was slightly better than one in five ultimate claim rates. As far as trending down, we whole sell in good time.
It is probably closer to one in ten that ultimately goes to claim. How quickly we get back to that point I guess depends upon the economy and how that recovers.
Bose George – Keefe, Bruyette, & Woods
Okay, great. Thanks a lot.
Operator
I'm not showing any further questions at this time.
Curt Culver
Okay. If not, then it concludes our call.
And again, thank you for your interest. And again, thanks to Mike for all he did for our company.
Mike Lauer
Thank you.
Curt Culver
Have a good day.
Operator
Ladies and gentlemen, this does conclude today's presentation. You may now disconnect and have a wonderful day.