Q3 2019 Earnings Call
Welcome to the I know my Holdings Inc. third quarter 2018 earnings conference call. At this time all participants are in listen only mode. Later, we will conduct a question and answer session and instructions will follow with tight I find it should require assistance during the conference. He says gardendale, especially on telephone I would now.
So turning the conference over to your house today Mr. Johnson Rice. Please go ahead.
Thank you operator, good afternoon, and welcome to the 2019 third quarter conference call for National where mine.
I'm, John Swenson, Vice President of Investor Relations and Treasury, joining us on the call today, our bread Schuster executive Chairman audio Merkel CEO .
Politzer, our chief financial Officer, and Julie Norberg, our controller.
Financial results for the quarter were released after the close or the market today. The press release may be accessed on minimize website located at www dot national remind dot com under the investor stuff.
During the course of this call we may make comments about our expectations for the future.
Actual results could differ materially from those contained in these forward looking statements.
Additional information about the factors that could cause actual results were trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the FCC.
Yes, and to the extent of the company makes forward looking statements. We does not undertake any obligation to update those statements in the future in light of subsequent developments.
Further no one should rely on the fact that the guidance included in such statements as current at any time on time on this call.
Also note that on this call we refer to certain non-GAAP measures in today's press release and on our website. We provided a reconciliation of these measures to the most comparable measures undergo now I'll turn the call over to Brad. Thank you John and good afternoon, everyone.
I'm pleased to report that in third quarter National Am I again delivered record financial performance.
And strong momentum and customer development and portfolio growth.
Well if market conditions remain constructive in the quarter in terms of origination volume and demand for our product.
As well as the strength of the underwriting environment.
The interest rate environment continued to spur increased purchased in refinancing volume.
Help drive incremental home price appreciation.
Yeah rates aren't particularly beneficial for first time homebuyers the key constituency.
We have seen an immediate improvement in affordability and access to the market.
Looking forward, we are optimistic about the macroeconomic environment and the outlook for the mortgage insurance market.
We see continued strength in our insured borrowers.
Given by record low unemployment strong wage growth and sustained home price appreciation.
In fact this is the first time in more than 50 years that both national unemployment and mortgage rates are below 4%.
You dynamic that sets up well for both new business, well and the credit performance of our enforced portfolio going forward.
Although our outlook is positive we continue to take a long term view of the credit cycle and have invested to develop the tools that we believe will allow us to outperform across all markets.
Our view has always been that we need to establish broad credit risk management strategies when times are good.
On a fully benefit when the market turns and this is exactly what we are doing.
We have developed and deployed the most comprehensive credit risk management framework in the industry.
Banning rate TPS individual risk underwriting and our innovative reinsurance program.
We believe that our ability to evaluate and price risk on a granular basis.
The unique insight we gave from individually underwriting the vast majority of the ones we ensure.
And our success in the island and reinsurance markets.
We will enhance our return profile mitigate the impact of credit volatility and drive shareholder value across all market cycles.
Shifting to Washington matters.
Understood on September says the department of Treasury and housing or urban development released proposals for the reform of the U.S. housing finance system.
Including broad recommendations regarding the geo seats.
The proposals were expensive and it will likely be sometime before we have clarity on which elements are ultimately adopted or in active.
That said, we view the release of the plans and the conversations they are now, prompting as an important step towards ensuring the long term health of the mortgage market.
We also believe the proposals as drafted are constructive for the mortgage insurance industry and national Lemar.
We were pleased to see explicit recognition of the value that institutional level capital brings to the market.
The mortgage insurance industry, which provides a dedicated source of permanent capital support across all market cycles.
And exists under the strict oversight of state regulatory and P. Myers standards.
Uniquely positioned to fill this institutional level wrong.
We believe the Treasury department's support for revisions to the ability to repay rule and their call for the CR P.B. NDS HF they to coordinate efforts to avoid any market disruption upon the planned expiration of UQM patch is a constructive approach.
We also believe that the treasury department's call to refocus the tier sees on their core function.
And establish a clear and transparent process to evaluate all new GRC products and programs will be valuable.
Helping to ensure a loving a level playing field for all market participants going forward.
And avoiding the type of charter grief that we saw with programs such as imagine and he PMI.
The proposal also encourage closer coordination between the Gses and FC Jay on housing policy matters.
Over the long term, we expect that this would reduce the risk of unnecessary competition between the Gses, Andy a paycheck and help protect the rigorous underwriting underwriting standards that have proven so valuable in the post crisis period.
Overall, we had another terrific quarter with record performance across every key financial and operational metric.
And we are well positioned to continue delivering on the goals we set for the business.
With that I'll turn it over to clients.
Thank you Brad in the third quarter, we delivered record performance once again, expanding our customer franchise, achieving strong growth in Eni W. in insurance in force and delivering record financial results.
All while maintaining our disciplined approach to managing risk and return.
GAAP net income for the quarter was 49.8 million or 69 cents per diluted share.
And adjusted net income was 49.9 million or 71 cents per diluted share.
57% from the third quarter of 2018.
GAAP return on equity was 23.6% for the quarter and adjusted or we was a record 23.7%.
Overall private mortgage insurance industry volume continued to benefit from increased origination activity tied to low rates and a strong national employment environment.
We generated record and I'd be a 14.1 billion in third quarter up 16% compared to the second quarter of 2019, 92% compared to the third quarter of 2018.
Nothing I W. was 13 billion.
17% from the second quarter, and 95% compared to third quarter of last year.
Primary insurance in force was 89.7 billion at quarter end up 10% compared to the second quarter and 41% compared to third quarter 2018.
We continue to achieve the fastest rate of growth in insurance in force in the industry.
In the third quarter, we activated 23, new lenders.
We are now doing business with a broadly diverse group of over a thousand high quality originators.
Equally as important we continue to grow with our existing lenders leveraging our value proposition of certainty and service and our consultative approach to customer engagement to further strengthen our relationships quarter over quarter.
Great GTF continues to be a standout success with our customers.
More than 95% of our lenders are using the platform and over 90% of our third quarter and I W. volume was delivered to the engine.
Our record performance in the third quarter reflects our hard work over the last seven years.
Building our business in a way that we believe will drive sustained outperformance across all market cycles.
It all starts with our people.
Hiring training and retaining the very best talent.
Giving them the tools they need to do their jobs effectively and creating a culture that encourages both individual achievement and teamwork.
Sustained outperformance also means engaging with lenders in the right way.
Building and direct relationships with customers of all types and sizes to our core value proposition of certainty and service.
It means focusing on organizational efficiencies.
Leveraging technology to quickly respond to the needs of our customers and our rapidly growing business, while maintaining the smallest possible expense footprint.
And that means being disciplined and focusing on risk management at every level.
Our trading higher risk through rate cheap yeah.
Individually underwriting the vast majority of the loans that we ensure.
In managing our aggregated portfolio exposure through our comprehensive reinsurance program.
This winning Formula has helped drive our success to date, including our record third quarter results and positions us to continue to perform as we go forward.
With that let me turn it over to Adam.
Thank you caught and good afternoon, everyone.
We had another strong quarter and achieved record results across a number of key financial metrics, we generated record and I W., a 14.1 billion and continue the rapid growth of our high quality in short portfolio.
This drove record net premiums earned of 92.4 million record adjusted net income of 49.9 billion or 71 cents per diluted share.
And record adjusted return on equity of 23.7% now to the details.
Primary insurance in force was 89.7 billion at quarter end up 10% from 81.7 billion at the end of the second quarter and up 41% compared to the third quarter of 2018 12 month persistency in the primary portfolio was 82.4% down from 86% in the second quarter.
Total and I W. was 14.1 billion with monthly products, contributing 13 billion or 92% of our total volume.
Purchase originations represented 80% of our volume compared to 88% in the second quarter.
We're seeing an increased flow of refinancing volume driven by overall rifai origination activity and an uptick in mortgage insurance penetration rates in the refinancing market.
Net premiums earned in the third quarter were 92.4 million up 11% from the second quarter and 41% compared to the third quarter of 2018.
We are a 7.4 million from the cancellation of single premium policies in the quarter.
Compared to 4.5 million in the second quarter.
Reported yield for the quarter was 43.1 basis points compared to 43 basis points in the second quarter.
Yield for the third quarter reflects an increase contribution from cancellations largely offset by an increased impact from reinsurance tied to our most recent island transaction.
We expect that net yield will trend between 41 to 42 basis points through the remainder of the year.
Overall, we continue to capture business at rates that are supportive of our strong mid teens return objective.
We continue to use rate GPS to actively shape the credit mix of our new production.
In the third quarter, our concentration of greater than 45, Gitai volume was 8.6% and our mix of 97, LTV and below 680, FICO volume were 7%, 2.5%, respectively, all well below the overall market.
Most importantly, we continue to manage down our concentration of business with layered risk characteristics. We consider policies to have layered risk when the underlying in short loan carries more than one high risk factor.
Just a loan with both a below Sixeighty FICO score and a 97 LTV.
The expected credit performance of loans with layered risk characteristics is worse across all market cycles.
Then loans without such a layer profile.
Great GPS allows us to consider the individual risk factors and layered risk profile of each loan we ensure and provides us with a proven tool to manage the flow of risk into our portfolio.
We now have an enhanced ability to react if market conditions of all either positively or negatively.
I believe our focus at a higher quality risk will help drive differentiated loss performance and greater consistency in our results going forward.
Investment income was 7.9 million in the third quarter up from 7.6 million in the second quarter.
Underwriting in operating expenses were 33.2 million in the third quarter compared to 32, and a half million in the second quarter.
As indicated on our last call expenses in the third quarter included 1.7 million up costs related to our third I'll, let offering in July .
Excluding iowan related transaction costs, our adjusted underwriting and operating expenses were 31.6 million for the quarter.
Our GAAP expense ratio was 36% in the third quarter compared to 39.1% in the second quarter.
Adjusting for Iowa and related costs, our expense ratio was 34.2%. This represents a nearly five point improvement quarter over quarter.
And a nine point improvement compared to the third quarter of 2018, highlighting the significant operating leverage embedded in our financial model and the success, we've achieved and efficiently managing our cost base.
We had 1200 30 notices of defaults in the primary portfolio at the end of the third quarter up from 1028 at the end of the second quarter.
Claims expense was 2.6 million in the quarter, our third quarter loss ratio defined as claims expense divided by net premiums earned was 2.8%.
Credit remains strong and our in force portfolio continues to perform better than initially expected and priced.
Interest expense in the quarter was 3 million and we had a 1.1 million dollar gain from the change in the fair value of our warrant liability.
Moving to the bottom line GAAP net income for the third quarter was 49.8 million or 69 cents per diluted share.
Adjusted net income was 49.9 million were 71 cents per diluted share compared to 41.4 million or 59 cents per diluted share in the second quarter, and 31.8 million or 46 cents per diluted share in the third quarter of 2018.
Year on year, we grew adjusted net income by 57%.
The effective tax rate for the quarter was 22.2%.
We expect our effective tax rate will increase modestly to approximately 23% in the fourth quarter.
Shareholders' equity at the end of the third quarter was 873 million equal to $12.86 per share, which compares with 812 million or $11.99 per share at the end of the second quarter, and 660 million or $9.96 per share at the end of the third quarter 2018.
Year over year, our book value per share grew by nearly 30%.
GAAP return on equity was 23.6% in the third quarter and our adjusted return on equity was a record 23.7%.
We continue to organically grow our equity base in capital position at an accelerating pace in October Moodys upgraded our insurance financial strength and holding company debt ratings by one notch setting the continued growth of our business strength of our financial position high quality in short portfolio.
An innovative use of reinsurance, which insulates, our return profile and balance sheet for volatility during adverse economic cycles as drivers of the upgrade.
Total cash and investments were 1.1 billion at quarter end, including 43.3 million of cash and investments at the holding company.
Total available assets under Pmiers grew to 956 million at quarter end, which compares to risk based required assets of 638 million.
Access available assets were 318 million at the end of the quarter.
In summary, we achieved record results in insurance in force net premiums earned expense ratio adjusted net income EPS and return on equity.
As we look forward, we believe that we're well positioned to continue delivering strong mid teen returns that are significantly in excess of our cost of capital.
We expect that the growing size and attractive credit profile of our short portfolio, along with our broadly disciplined approach to risk management expenses and capital optimization will continue to drive our performance.
With that I'll turn it over to Claudia for her closing remarks.
Thank you Adam.
Our economic environment remains strong and private semi market conditions are healthy in terms of volume industry competition credit quality and the regulatory environment.
Against this backdrop, we're delivering record performance across our platform with continued momentum in terms of customer engagement and I w. volume insured portfolio growth and bottom line financial results.
We trace our strong performance in the quarter to the steady disciplined manner in which we built our business.
Our goal from the start has been to build a franchise that is both durable and successful.
We are executing on this vision and are well positioned to continue to win with customers drive growth in our high quality insured portfolio maintain the rate risk return balance.
Deliver strong results for our shareholders.
With that I'll ask the operator to joined so we can take your questions.
Hi.
Gentlemen, if you have a question at this time. Please press Star then the number one key questions.
If your question has been answered are you wish to remove yourself from the Q. Please press the pound.
First question comes from Rick Shane from JP Morgan Your line is open.
Hey, guys. Thanks for taking my question this afternoon.
Not surprisingly given the.
Passive rates over the last five years.
Persistency declined the most among the in the 2018 cohort.
Sure, Yes, if 2018 borrowers at this point have enough.
Home price appreciation that they're able to refinance without taking pmires one of the things that's actually driving the strength of the book rotation from 2018 loans to 2019 loans that are you basically recapturing existing paper.
Yes, Rick if it's Adam I think Thats exactly right. So we are observing an increased penetration of EMI into the refi market and we trace it too.
Largely to the 2018.
Book here.
What's unique this go around is that we've had rates fall so quickly and by so much without a corresponding macro credit event and so that means that those borrowers who took out loans really in the back end of 18 in a much higher no rate environment are now coming into the marketing can benefit from a refinancing opportunity, but they haven't yet benefited from.
Near as much H. PA or also as much time to amortize down there principle.
Balance through monthly payments and so we do see increased penetration and expect that to continue to hold.
Through at least the near term.
And do you find debt.
Because the originators have incentive to go back to those same borrowers and you have strong relationships with those originators that your recap that your recapture rate tends to be pretty high on those transactions.
Yes look it's difficult to trace it to a specific recapture eight one thing I would I would notice that broadly speaking the interest rate environment that we're seeing as Brad mentioned is really spring a significant increase in overall origination activity. So thats a ripe environment for EMI companies in general ourselves included to really capture.
Strong new business volume and Thats whats happening beyond that in terms of the business Thats actually in rotation, we already knew or company with a smaller enforce portfolio and if you look at it we have about a 7% share of total industry ETF and we have a much higher share of new business production and so simply the math.
With that when business comes into rotation Theres, a higher likelihood that we will beyond the ill call. It the winning into that equation that actually having lost business simply because we have less to lose and we're capturing a greater portion of of new business flow.
And Thats, a great way to describe it thank you very much.
Your next question comes from glide Chow from Credit Suisse. Your line is open.
Hi, guys I'm on for Doug today.
So just looking at the expense ratio I mean, you guys have been making good progress on that front.
And if ICSC exclude dial and Amit, it's even better so I'm just wondering how should we be viewing the progress on expenses going forward.
Yes, it's a great question and something we spent a lot of time, obviously focused on.
For us operating leverage is a is a significant driver of embedded earnings growth and and that's certainly still the case, we would expect as we go forward that we'll continue to scale into our fixed expense base and most importantly, right. It's not just about scaling into our fixed expense base, but balancing that with.
Discipline around new investments that we might look to making the platform and in our people.
And so what I would expect is that going forward. We will continue to see expense ratio improvement as to the taste and magnitude of expense ratio improvement in any given quarter.
Theres going to be a time, where we naturally slow simply because.
We're coming off of lower and lower numbers on the expense ratio side. So the pace of improvement may slow, but we would expect that we'll continue to see improvements at our overall expense profile at our expense ratio quarter on quarter.
Great another one firm.
There's revenue news line was up what cost.
Yes, so other revenues for US is it relates to our services subsidiary and Am I asked where we offer contract underwriting services for certain customers and so we saw an uptick in the third quarter, given really the broader growth an overall industry volume and by extension the volume that lenders, who engaged with us through that serve.
This is platform, we're looking for us to support them on so am I asked we perform loan underwriting services on behalf of customers and.
That business just increase what I would say if at that the the revenue that comes through I'd say no two items, one it's a fee stream revenue.
Which is a positive for us raised on underwriting income its fee revenue, but it's also generally offset by a corresponding expense thats embedded in our operating expense line item in the same period in which we recognize the revenue.
Got it thank you so much.
Your next question comes from Mckenzie from Zelman and Associates. Your line is open.
Thanks, Good afternoon, and congrats on another great quarter.
My question is really around rate GPS and that the share of your customers that are utilizing it I think it's been relatively unchanged at 95% of customers and 90% of your volume. So I think this one is for you Claudia but are you expecting that 5%.
Ben holding out to eventually transition or are those customers comfortable with where they're out you're not really hoping that they'll switch over to the to the at Jed.
Yeah sure Mckenzie, so we'd love to see all of our lenders have on rate GPS.
The lenders that aren't there just have have usually a proprietary system that doesn't allow them to implement.
The GTS. So we do provide cards to those lenders, but eventually this has always been on all lenders getting the risk based pricing in the more granular approach. So we'd like to see haven't went on but sometimes thats just not feasible for some of these large lenders.
Got it and then maybe just an update on the competitive landscape I know there was a lot of talk last quarter about the rate cards. There that customize rate card has there been any shift over the last three months.
No I mean, what I'd say as far as the EMI sector as it relates to risk based pricing in general in there. There are six semi companies with six distinct management teams six different views on risk and that creates a very stable environment, what we see with the introduction frisbees pricing is a rational approach.
The market. So we're really thrilled with our results. We've had 14.1 billion then I W. And posted 20, 324% return. So we're really proud of the team, but I see the risk based pricing introduced by all the a mine has really created a really granular approach that's good for the sector.
Mackenzie as it relates to the rate cards and some of the discussions in the second quarter, we really haven't seen any shift to the same lenders continue to engage in the same way it doesn't seem to be expanding and nothing nothing of note thats new in the third quarter.
Great. Thanks, so much.
Okay. Okay.
Your next question comes from both stores from KBW. Your line is open.
Hey, guys. This is Tom you make join on for Bose I wanted to ask about the 41 to 42 basis points of average premium yield that you guided to for for the fourth quarter does that assume that the third quarter was the high point for earnings from cancellations.
Yeah, I think that the 41 to 42 reflects the possibility of a modest decrease in the contribution from cancellation earnings.
And also some what I call some movement in our core yield given sort of the run off of what I'll call higher risks, but also some higher yielding business in prior prior years as to whether or not the third quarter represents a high watermark in terms of dollars cancellations, it's a difficult one to predict but I'd say, it's even if we have.
Achieved the same dollars of cancellation earnings in the fourth quarter as we did in the third quarter because the way the yield is calculated which has its in reference to our average if during the period. If we're growing if but still seeing the same dollars of cancellation earnings you would see the yield come down and so it's not necessarily to serve as an indicator of whether or.
Not cancellation earnings have peaked or not it's a very difficult one.
To forecast it really depends on the interest rate environment, and borrower activity and behavior around refinancings, but given that dynamic of.
Even a constant dollar amount of cancellation earnings translates through to a lower yield that's how we get a 41 to 42 plus that in the core yield dynamic.
Okay that makes sense and.
No. If you guys get like October trends, but have you seen the kind of level of penetration on the refinance side.
My hold up in October of similar that wasn't another quarter.
Yes, I won't speak to our trends specifically, because we don't we don't share results. We obviously have the ability to look into the portfolio, which is not something we disclose what I would observe is that as a general matter. What we would typically see is as seasonality pattern to re fi volume, especially in the interest rate environment that we're in now.
First and second quarters lenders really have a significant volume of purchase origination activity that they have to work through and so their approach pricing and eagerness around refi volume is somewhat scaled in the third and fourth quarters, where there is not quite as much purchase origination activity coming through it really what's lenders focused on.
Refinancing activity, so as a general matter, what we would expect is for refinancing activity too.
Stay roughly the same if not actually accelerate through the end of the year given that seasonal dynamic.
Okay, Yeah that makes sense and then just last one from me all the growth that you've had would you attribute more of that to the new customers coming on board or ramping up wallet share with existing customers.
Yeah, you know our success really is driven by both.
We continue to.
Building customers and then also drive drive wallet share with each of those customers. So I see.
We also have a lot of opportunity, where we're bringing in larger and larger customers. As we go on overall I think Austin the introduction of risk based pricing is helping us get to the market even faster so.
I think though.
Interesting piece is a customer who we bring in today, how long do you want to define that as new customer versus growth within existing customer base in the last three years Weve activated over 300 custom new customer accounts, and we are still achieving wallet share growth, but some of those get many of those customers that we brought onto the platform an activated in 2017.
And there was no kind of same store sales dynamic that we report it doesnt sound applicable for the M.I. sector, but so it really is both but it's also both because those accounts that we activate in earlier periods don't just bring us to a level and leave US there. We can continue to grow with those relationships over time as well.
I understand so after two to three years, there's you still see opportunity where do your wallet share is increasing.
Yes, absolutely we can see it and the numbers that we track that absolutely happens.
That's great all right. Thanks, guys.
Yes.
And you have mark.
From Barclays. Your line is open.
Thanks, Most of my question has been asked but Adam I've a question for you about execution around Iowa anthem included your last deal went quite well just wondering what risk if any you see the execution.
Ral Neo Morningstar his decision to kind of pull back from from from ratings are they still kind of on the sidelines and if so.
What do you think it applications on the cost of future Islands.
Yes, that's a great question is something that we've been monitoring and are focused on.
Difficult to say arch was out with a deal.
Since theres been some movement in the Morningstar Dvrs dynamic and they ultimately secure one down the path of securing a rating from a different agency, we have to see where Morningstar comes out right what their model looks like and what it means for ratings of new deals as well as all the deals that have been issued to date for us the Pos.
Positive is the timing we got our last deal in in July we're not expecting to come back to the market until sometime in the first half of 2020 and by that point, we think that whatever is the dynamic that will ultimately develop well had been established which is a positive for us to not need to be in the market at this time.
With respect to pricing you know the key piece is the investors that we engaged within the island market all of them every single investor that we engaged within the.
In the course of our last deal run their own credit models and arent really relying on.
Rating agency models as indicators of expected loss performance on the reference falls.
So really where the ratings become consequential is up the stack for those buyers has capital requirements that also whose ability to finance some of those tranches are influenced by the ratings at the end of the day the credit performance of the underlying portfolios is assessed by each individual investor and Thats what set.
The the pricing might pricing backup I'll call. It a touch because of the movement with the with with Morningstar DBRS, that's possible, but for us going from a deal where we all had an all in cost of capital on a pre tax basis at roughly 265, even if that backed up.
By 10%, we're still looking at a cost of capital that's well below 3%, that's something we're comfortable with but we're staying close to.
Okay. That's helpful. Thanks.
Okay.
We also have feels to final from Deutsche Bank. Your line is open.
Yes. Thanks, a question on underwriting and operating expenses and some of your peers have started to point of view towards looking at.
This metric on a gross of the ceding commission basis I guess it.
Does that make sense and as we think about growth should there be.
Materially different growth between the gross.
Fences and expenses.
Yes, So look I think ultimately the question is what's the volume that youre originating the topline business that youre. The topline revenue that you are producing and how does that look relative to your expense profile and so if you're looking at expenses gross of the ceding Commission you should probably but looking at gross premiums as well for from our vantage point what ultimate.
The matters is what's the mix of our underwriting margin what is our underwriting margin and what does that allow us to drive from an R&D standpoint, and so I don't think we would never look at our 23.7% are we in say that should be scaled up or down because of our insurance profile a reinsurance profile, it's simply as one of the items that.
Drives the outcome that ultimately.
Impacts the returns that were delivering for shareholders as to the trends in it.
I think the biggest question around the trend is will do you have consistency and what your reinsurance profile looks like so from we've got a reinsurance decision to make.
For our 2020 renewal and to the extent that we we shift to a non quota share structure that doesn't have a ceding commission that has a lesser ceding commission that may come into play, but that decision. If we go down that path would likely be accompanied with.
An acceleration in our net premium earned line because the contracts in the trees would have different different profiles. So I think at the end of the day. It's really a question for you in for investors from our vantage point, we care a great deal about ultimately what are a bottom line results and what's the are we that we're delivering all of that takes into account the cost that we pay for that coverage.
And the benefit that we received in our expense ratio.
Got it okay.
Second one ahead.
I I am making a mountain another molehill I understand that but there's a claims than ive line in the default inventory roll forward. It looks like it's the first time that it popped up I guess I was just surprised to see anything there.
Given the extent of loan profiles, the review uncertainty service et cetera.
Is there anything notable in that or is this just things that are going to pop up in the normal course of business.
Yes, nothing notable in that I mean, we certainly current due diligence process with clean diesel master policy requirements, and we could have something Thats Tonight, but nothing no nothing to them and fill the important pieces. So as it relates to our upfront underwrite. This is not a rescission. This is so rescission means we are saying that the policy wasn't underwritten.
In accordance with our underwriting guidelines and were terminating the coverage there were sending it we could be submitted we could receive a submission 40 claim payment for an item that isn't covered under the terms of our master policy and so while the treat while the contract itself and the insurance coverage is valid it's not a loss events that we are on the hook for and so.
Thats whats coming through its disconnected from the upfront underwrite that we do which really speaks to levels of precision activity, so something like a hurricane or tornado impacted house.
And one of those in fact that yep.
Got it okay understood.
Most peers disclose their decisions and denials and the same line so I'm pretty sure that's how I havent labeled but that's that's the confusion. Thank you.
Sure.
Your next question comes from Chris Gamaitoni from Compass point Your line is open.
Everyone. Most my questions have been <expletive> .
What's the fell in the outstanding balance of the island at the end of the quarter.
Okay.
Great question, Chris I don't have it off the top of my head, we could follow up and give it to you it will be in our in our Q when we file it.
And we could follow up offline and give it to you.
Okay appreciate that and.
And this is a very small item for you just wondering how we should think about that provision for new default moving forward as.
The book has shifted.
Loan balances are probably higher than they were just kind of trends of expectations there.
Yeah look it's obviously.
We don't generally provide explicit guidance on.
On losses.
I'd say that the overall quality of the portfolio continues to be exceedingly high and we do expect a lifetime losses on the on that portfolio will be will be modest I think the for the next few years, we'd continue to expect that the quality of the portfolio and the vintage stacking dynamic that we talked about in the past, we'll keep our loss ratio relatively low.
Theres also an interesting dynamic that's coming through because of the refinancing activity.
And the turnover in the in force replenished by such a significant amount of new production. The way that you can think about that as it somewhat I'll call. It resets the clock on our loss emergence patterns.
So as a general rule, we typically expect that loss incurrence on a book of business will peak between years, three and six after origination and now the fact that we're turning over older age books, and importantly, more than replacing them with newer production with.
Fairly pristine credit characteristics.
Is keeping our portfolio young.
If you will for a longer period of time and so that extends.
The the period over which we would expect to see a lower loss ratio because it basically is replenishing the portfolio in greater size with newer business.
Makes sense. Thank you so much.
Yeah.
We also have Mark Hughes from Suntrust. Your line is open.
Yes. Thank you I was just curious whether rate GPS is evolving much. If you think about how you're approaching the market an underwriting you're obviously getting a lot more experience here that changing the way you are approaching the market.
You seem to be doing obviously quite well with top line growth the quality of the portfolio.
It is improving.
Much of the of the system evolving to help you grow or the Joe.
The market is moving more and your direction.
Yeah, So Richie bass is never going to be static and how we think about credit risk is never going to be static I'd say from an evolution standpoint.
The same risk variables that we have always consider a range of risk variables around the borrower around the property the loan structure. The lender itself, where the home is located all of these things we still consider what will change around rate GBS. It hasn't yet in a meaningful way, but rate GPS and how we express our risk appetite through the engine will change based on the risk.
Environment that we see but we still see real strength in the risk environment.
And so our approach to the market through rate GPS is is really the same in the third quarter as it was in the first and second quarters nothing significant to note, but the nice thing is it gives us an ability to react very quickly.
If we see a need to because of risk developing in the market or alternatively to react not just react but to take action, if we see and emerging opportunity in the third quarter things were relatively stable and just to comment Mark It right re TPS is not an underwriting system and it certainly is certainly very gray.
Annular Ian.
And in timing, what kind of risk, we want but we would still be underwriting with our underwriters and with our automation.
Beyond that.
Understood. Thank you.
Thanks Mark.
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Your next question comes from Geoffrey Dunn from Dowling and partners. Your line is open.
Thanks, Sorry, just a couple first Adam did you disclose the premium rate on new business this quarter.
Yes, no Jeff we did in similar to the second quarter, when we didn't disclose it it's not something that.
We put out there at this point in the in a a post rate card rate engine environment, It's a bit more information from a competitive standpoint than we want being out in the in the public domain, but what I will share is that our pricing philosophy is the same as it's been all along with just a target and most importantly achieve rates on new business that are supportive of that strong.
On the teens return objectives.
Gotcha.
And then Claudia I was hoping you could talk a little bit about market share not what you did in the quarter, but.
In terms of how you're developing new business opportunities.
The incremental gain more on the small mid market, adding new customers.
Or I guess this is more about future opportunity or is it more building the penetration of the top 10 top 15 top 20, whatever you want to you want to think about I want to get an idea for for what's on the table, particularly for the large lenders and where you currently stand with them versus where you might be in the future.
Sure.
So Jeff well the way we've approach the market just when we think about we'll focus on shared when Weve focused on the market is is really always going after our top opportunities. So we're very focused on.
100 top 200, 300, and and that that's always benefits for us and then when we activate the customer the answers. The question answered the questions were always buildings here then within that customer so the growth comes from though.
In we've got although we have plenty of opportunity as well.
But I believe we're at this point that we need.
If we look at the top 200, there's another eight that we're working on with master policies.
So we'll continue to move down that path with our top opportunities.
The key is when you are doing business with them is that you're working on real consultative selling with than building relationships and then building in that wallet share.
I guess on on average is your market share of the top 10 or top 20 less than your market share of the top 50 top honor.
Yeah.
Customers ramp.
And so many different ways, we don't really disclose any particular share within the customers, but we can't tell you that we're doing we do very very well once we activate a customer and build wallet share.
Okay. Thanks.
Sure Jeff.
Your next question comes from sovereign bonds so from your.
Your line is open.
Hey, good evening everyone.
So so the pmiers excess of 300 million gives you significant runway going forward.
So how do you think about the uses of capital going forward to outside of just the core business and what does that mean for feature Ireland issuances.
Yes.
I'll take it.
Well I think what we like about I'll add as well as the traditional reinsurance market is both the capital efficiency, but also the risk protection that we get.
And by extension.
What it means from both the cost of funding standpoint, but also from a potential volatility of results standpoint, right Theres theres real benefits to both.
We do have a significant amount of capital runway with the excess position that we had we are yeah. We wrote 14.1 billion of Eni W., though in the third quarter and we see strengthen our I w. production as we go forward. So we're deploying that excess every day.
As we look forward, we do expect to be in.
Active in the I'll end market.
Really with consistency in the future as a risk management matter and also as a capital efficiency matter in the near term that's going to be from a capital standpoint will support necessary.
Capital to support growth and at points in the future it'll be about capital efficiency.
For right now we will be active notwithstanding the runway that we have you don't expect at some point in the first half of 2020.
We'll be looking to execute our next transaction got it Okay. And then just wanted to get your thoughts on you know some recent servicer reports that weve been reading, where they are flag.
Slight pickup in early stage delinquencies amongst first time home borrowers.
This is still a small fraction of what was before but one have you guys see any of that on the margins and if you have has there hasn't been prevalent in either the non banks are the bank side at all.
Yes, so we have not seen that no no change in apds in our portfolio. We just something we monitor closely right for us that is that's an important credit.
Patrick and performance Patrick we just haven't seen that come through I can't tell yet, but we just havent also been abreast of what others are seeing from a service or standpoint.
Because it's all coming through at our in our portfolio. It may be different risk cohorts different pockets of business that there that that helps me speaking to think a fair enough probably it probably both to our servicers are underwriting and making sure that we listen to layered risk.
As as we mentioned on scripted remarks, so some of that could be a factor as well.
On those person home buyers.
An important for us to make sure that we're sustain those bars with ability to repay so that could also be another another dynamic fair enough and then just one more on expenses for the fourth quarter Madam what should we sort of expect from here slight uptick from here or sort of flat.
Yes, I'd expect that we'll see expenses grow modestly from our GAAP base in Q3, and Thats just going to reflect certain variable expenses like we got pena taxes, and so as the portfolio grows.
Those that are teed off of the size of the in force portfolio and then we'll have a couple of other items around the timing a certain technology and and other projects. Some additions to our headcount we picked up for full time employees in the third quarter. So their full sort of I'll call it run rate.
Salary basis will come through in the fourth quarter. So we'll see a call at modest growth in in expenses in the fourth quarter got it. Thank you.
Okay.
I'm showing no further questions at this time.
Turning the conference back to the management for closing remarks.
I want to thank you for joining us call today awesome Snow, we will be hosting our annual Investor day on Thursday November 21st in New York, and we look forward to see there. Thank you.
Ladies and gentleman that concludes today's conference call.
You may now disconnect.