Q4 2019 Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to the in My Holdings incorporated fourth quarter 2019 earnings Conference call.
Hi, I'm all participants ones are in listen only mode. After the speakers presentations there will be a question and answer session. It's ask a question, especially agreed to press star one for telephone.
Pardon for three sisters, Please press Star zero.
Now I'd like to hand, the conference over to your Speaker today, John Swenson. Thank you. Please go ahead Sir.
Thank you good afternoon, and welcome TV 29 team fourth quarter conference call for National in line.
John Swenson, Vice President of Investor Relations and Treasury.
When you from a goal today, our bread Schuster executive Chairman audio Merkel, CEO and Pulitzer, Our Chief Financial Officer, and Julie Nordberg, our controller.
Financial results were released after the close of market today. The press release may be accessed to minimize website located at www dot nationally my dot com under the investors tab.
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 what color can be found on our website or through our regulatory filings with the RCC.
Yeah, but to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent development.
Further no one should rely on the fact that the guidance of such statements is currently at any time other than the times this call.
Also note that on this call we refer to certain non-GAAP measures.
Todays press release and on our website, we provided a reconciliation of these measures to the most comparable measures on yeah.
Now I'll turn the call over to Brett.
Thank you John and good afternoon, everyone.
In the fourth quarter National Lemar reported record results.
Wrapping a year ago stand out success.
In 29 team, we delivered exceptionally strong financial performance.
Rob success in customer development.
And best in class growth in any kind of you in insurance in force.
We continue to innovate in the reinsurance in capital markets and lead with discipline through rates, you P.S. and our individual risk underwriting approach.
We delivered 182.4 million of full year adjusted net income in 2019 of 61% compared to 2018.
And our exiting the year with a 23.3% fourth quarter adjusted return on equity.
We activated 94, new customers in the year and generated over 45 billion up and I W up 65% compared to 2018.
We closed 29 team with 95 billion of high quality and high returning primary insurance in force.
The investments we have made to develop and deploy a comprehensive credit risk management framework.
Banning rate GPS individual risk underwriting and our innovative reinsurance program continued to drive value.
In 2019, we delivered industry, leading credit performance with the full year loss ratio of 3.6%.
Shifting to Washington matters.
Last year, we welcome new leadership at the S HFSA, Fannie Mae and Freddie Mac.
Our conversations with each.
More broadly with other regulators and policymakers in Washington.
Constructive throughout the year.
We are encouraged by the progress that was made in 2019 towards ensuring the long term health of the mortgage market and expect these important efforts will continue in 2020.
The mortgage insurance industry and National M. wine play a central role in the housing finance system.
And we are pleased to see broad recognition in Washington, the value that M. wine provides to borrowers blenders tax payers and others.
Overall, I'm delighted with what we achieved last year and I'm excited about our opportunity in 2020.
With that let me turn it over to Claudia.
Thanks, Brad I'm pleased to report that in the fourth quarter. We once again achieved record performance expanding our customer franchise, driving strong and I w. volume and broken our 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 50.2 million or 71 cents per diluted share and adjusted net income was 52.6 million or 75 cents per diluted share.
GAAP return on equity when 22.3% for the quarter and adjusted or are we was 23.3%.
We generated record fourth quarter and I'd be over 11.9 billion down seasonally from the third quarter 2019, but up 72% compared to the fourth quarter of 2018.
Primary insurance in force was 94.8 billion at quarter end up 6% compared to the third quarter and 38% compared to the fourth quarter 2018.
In the fourth quarter, we activated 18, new lenders for the full year 2019, we activate 94 lenders, including six from the top 200.
We are now doing business with a broadly diverse group of nearly 1100 high quality originators.
Our activation pipeline is healthy and we expect to continue expanding our customer franchise in 2020.
Equally as important we're continuing to grow with our existing lenders.
Leveraging our value proposition of certain Tim service, and our consultative approach to customer engagement to further strengthen our relationship.
Great GPS continues to be a standout success with our customers.
More than 95% of our lenders are currently using the platform and more than 90% of our fourth quarter and and I w. volumes when delivered through the engine.
The mortgage market is that an exciting point of change.
Lenders are prioritizing technology to drive improvements in the consumer experience and streamline their business processes.
As they do their expectations for their mortgage insurance partners are evolving.
They expect us to offer technology enabled solutions to have embedded connectivity with third party origination systems and point of sale platform and to meet their drive for process efficiency with accelerated response times.
In this context Richie P S and the broader technology lead that we enjoy provide a key advantage.
We are meeting our customers' needs for speed and efficiency and expect to continue doing so as the mortgage landscape evolves.
Our success with customers continues to drive strong growth in our insured portfolio.
And our commitment to a broad based risk management program spanning individual risk underwriting rate GPS and comprehensive reinsurance solutions continues to drive industry, leading loss performance.
More broadly private EMI market conditions remain healthy with low rates and the millennial demographic tailwind driving origination volume and consumer strength and rigorous underwriting standard driving favorable credit performance.
Against this backdrop, we're delivering on our business plan and are excited about our record performance in the fourth quarter.
We're focused on maintaining the right risk return balance and are confident and our ability to create significant shareholder value going forward.
With that let me turn it over to Adam.
Thank you Claudia and good afternoon, everyone. We had another strong quarter and achieved record results across a number of key financial metrics.
We generated record fourth quarter and I W. of 11.9 billion and continued the rapid growth of our high quality insured portfolio.
This drove record net premiums earned of 95.5 million record adjusted net income of 52.6 million were 75 cents per diluted share an adjusted return on equity of 23.3%.
Primary insurance in force was 94.8 billion at quarter end up 6% from 89.7 billion at the end of the third quarter and up 30% compared to the fourth quarter of 2018.
12 month persistency in the primary portfolio was 77% down from 82% in a third quarter the.
The current interest rate environment has helped drive incremental Eni w. into the on my market whatever it is all Pittsburgh increased turnover in the in force portfolio due to refinancing activity.
Assuming the current interest rate environment holds we expect persistency will continue to trend down through the second quarter, and then begin to rebound through the end of the year.
Notwithstanding the increased turnover, we expect to continue delivering strong growth in our insurance in force as we go forward given our view of future and I w. potential.
Total and I W. was 11.9 billion with monthly products, contributing 11.1 billion or 93% of our total volume.
Purchase originations represented 76% of our volume compared to 80% in the third quarter.
Net premiums earned in the fourth quarter were 95.5 million up 3% from the third quarter and 38% compared to the fourth quarter of 2018, we earned 8 million from the cancellation of single premium policies compared to 7.4 million in the third quarter.
Reported yield for the quarter was 41.4 basis points compared to 43.1 basis points in the third quarter.
We expect net yield to trend down to between 35 to 37 basis points by the end of 2020.
Reflecting the strong growth of our anti W. volume and focus on higher quality risk cohorts, which carry lower premium rates lower expected volatility and lower capital requirements, along with the run off of business that we originated in priced prior to the implementation of us tax reform in 2018.
Our yield guidance also reflects our expectations for reinsurance in Ireland activity and their related impact on net premiums during 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 and manage our concentration of business with layered risk characteristics in the fourth quarter, our mix of greater than 45, P.T.I. volume was 8.8% and our concentration of 97, LTV and below 680, FICO volume were five point.
Five in 2.1%, respectively, all well below the overall market.
Investment income was 8 million up from 7.9 million in the third quarter.
Underwriting and operating expenses were 31.3 million compared to 32.3 million in the third quarter.
In the fourth quarter Weve separately reported the third party expenses incurred by our service subsidiary and ammonia.
Which provides contract underwriting support on a fee for service basis to certain lenders.
These service expenses relate to Noninsurance activities, and our generally offset in the same period by fees paid to NMS, which we recognize his other revenue our service expenses and other revenue increased in 2019, along with the growth in our overall business and scaling of our customer relationships.
We're focused on driving organizational efficiency at all times and actively work to leverage technology in a way that allows us to quickly respond to the needs of our customers in a rapidly growing business, while maintaining the smallest possible expense footprint.
GAAP expense ratio was 32.8% compared to 35% in the third quarter and 42.4% in the fourth quarter of 2018.
The calculation of GAAP expense ratio in excludes any myos revenue in service expenses as they relate to noninsurance activities.
We had 1448 notices of defaults in the primary portfolio at the end of the fourth quarter compared to 1200 30 at the end of the third quarter claims expense was 4.3 million in the fourth quarter, our fourth quarter loss ratio defined as claims expense divided by net premiums earned was 4.5%.
Credit remains strong and our in force portfolio continues to perform better than initially expected and priced.
Overall, we expect to realize continued improvement in our combined ratio and underwriting margin expansion in 2020, as we further lever our fixed expense base and deliver strong credit performance in our insured portfolio.
Interest expense in the quarter was 3 million and we had a 2.6 million dollar loss from the change in the fair value of our warrant liability.
Moving to the bottom line GAAP net income for the quarter was $50.2 million were 71 cents per diluted share. Adjusted net income was 52.6 million or 75 cents per diluted share compared to $49.9 million were 71 cents per diluted share in the third quarter and $32.1 million were 46 cents per diluted.
Share in the fourth quarter of 2018.
Year on year, we grew adjusted net income by more than 60%.
We continue to organically grow and equity base in capital position at an accelerated pace shareholders' equity at the end of the fourth quarter was 930 million equal to $13.61 per share, which compares to $873 million were $12.86 per share at the end of the third quarter and $701 million were 10.
Dollar 58 cents per share at the end of the fourth quarter of 2018 year over year, we grew book value by more than 30%.
Total cash and investments were 1.2 billion at quarter end, including $55 million of cash and investments at the holding company.
In the fourth quarter, we received regulatory approval to allocate our holding company stock based compensation extends to our operating subsidiaries.
Beginning in 2020, we will also have ordinary course dividend capacity available from our primary operating subsidiary for the first time.
The ordinary course dividend capacity and allocation of stock based compensation expense meaningfully enhance liquidity profile at the holding company and provide us with incremental financial flexibility going forward.
At quarter end total available assets under Pmiers grew to over 1 billion, which compares to risk based required assets of 773 million.
Excess available assets were 243 million at quarter end.
In summary, we achieved record results in insurance in force net premiums earned expense ratio and adjusted net income and EPS.
Looking forward, we believed that we are 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 onshore 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 party for closing remarks. Thank you Adam our record fourth quarter capped a year of sustained outperformance.
Yes, our platform for the year, we delivered industry, leading growth and I W. volume and insurance in force best in class credit performance significant expansion in our underwriting margin and return on equity and continued innovation in the reinsurance in capital markets.
The broader economic environment remains strong and private mortgage insurance markets conditions are healthy.
In this setting we believe we are well positioned to continue to win with customers drive growth in our high quality insured portfolio maintain the right risk return balance and deliver strong results for our shareholders with that I'll ask the operator come back on so we can take your questions.
Thank you and as a reminder to ask a question you need to press or 100 telephone to withdraw your question. Please press the pound.
Please standby when compared to Q1 a roster.
And our first question comes from the line of Mark Devries with Barclays. Your line is now open.
Yes. Thanks.
No.
It's still a little early but it looks like you may have lost a little bit of Sharon and I W.
In the quarter relative to peers anything to call out there.
On the quarter.
Yeah, Mark no nothing nothing specific to know we continue to approach the business in the same way that's proven to be successful for us in the past.
So really good about our results.
We achieved 11.9 billion then I w. in Q4 and grew 72% year over year. So we're really proud of the team and we're also excited about opportunities in 2020, so nothing specific to note there.
Okay and I'm sure you saw the a the recommendation from the what else today around the 10 bips. Thank Bruce on the G fee.
Just curious on kind of what your expectations are around that whether there'd be.
So recommendation for a similar increase in pricing at the fed Jay and what the implications are longer term for the competitiveness of of just the allowance on private am I.
So mark this is Brad.
So that's just in the first a pass at the at the budget proposal.
And that's not the first time at that kind of an increase has been proposed two years ago. The very same.
Increase was was part of it and never was enacted.
So we that we think it's very early days.
And then not likely to ultimately be enacted as proposed there.
We think it's more likely that.
Any kind of changes to the.
GP and LP, a framework will get.
Considered and.
You know incorporated in an overall.
GRC reform package, which which gets amount of conservatorship.
Okay fair enough. Thank you.
Yes.
Thank you and our next question comes from the line of two Stefano with Deutsche Bank. Your line is now open.
Yeah. Thanks.
I was hoping to talk about the adverse development in the quarter.
It's something that field out of trend with peers and I think you've been there was a comment in the prepared remarks that the business continues to perform better than expected.
So maybe you can comment on what drove the adverse development and any thoughts you can provide to help us get comfortable that this isn't something that we should be worried about persisting.
Yes, so I think it's a bit mechanical so it's important to note. We don't have a legacy set of loan exposures like many of our peers. Stephen So that means we don't have a population of borrowers that will.
Likelihood serially default cure and then default again ours is a much cleaner profile and it is a resoundingly high quality in short portfolio. The outcomes that we're achieving now in terms of default rate experience claims experience loss ratios are meaningfully better than the assumptions, we embedded in when we priced the business, but we will naturally have some amount of loss Thats why were and businesses to absorb these type.
So the event and as a general rule, we should see an amount of strengthening in our prior period reserves because we only book reserves. Once a borrower has defaulted, we're not allowed and don't book a loan loss provision.
For anticipated defaults like lenders do.
So we book a reserve once we have a reported delinquency and then we increased the reserve as the delinquency ages.
We're also loan that's 180 days past due will carry a higher reserve charge that alone. The 60 days past due and so in any given period, we will see a progression of some portion of our default population to older age status now sometimes that will be and there will be an increase in the reserve as a result of that there will be periods, where thats offset some fully.
By cure activity on other previously reported defaults were modest changes in our under underlying frequency and severity assumptions and another period Thats just not going to be the case. That's what came through in Q4 is there was a significant amount of cure activity, we generally feature activity seasonally dip.
In the fourth quarter as well, but it's just that natural dynamic of the aging of our portfolio and the aging of the default. So we have that our previously reported without that offsetting population of cereal redefine alters cures and then defaulting again.
Is the is the.
The seasonality of Q4, what would I guess I noticed last two quarters that there was adverse development was fourth quarter 15, and 16 I believe is the seasonality help explain or is there something different in the reserving process in Q4.
No. There was there was nothing different in the reserving process in Q4, if you rewind the tape and you look at 18 in 17, those numbers are going to be a bit distorted by the hurricane activity that was coming through but theres nothing unique about how we approach preserve setting in the fourth quarter of 19 or differences in the seasonal dynamic.
That we saw.
Okay.
And maybe switching gears and maybe this is a thinly veiled then I W. question I don't.
Has there been a change in the conversations.
As you do.
More business with current customers.
Sign up new customers or was there some kind of change in the the risk based pricing algorithm that that may have translated to an IDE w. differently than we were expecting.
No. So theres there hasn't been a change we always look at a better risk adjusted return on where pricing I I think as far as just the the momentum in the the changes in the drivers are really good here. We're doing the same things we've done in the past there's nothing that really has a different approach where we're still.
Looking at signing on new customers building wallet share ended the drivers for all of this in 2020 are good for US we've got a you've got a really strong response from a customer level, we've got focused strategy with Brean TPS.
A compelling value prop and the backdrop is healthy of mine markets that remains really healthy with low mortgage rates and combined with low unemployment. So nothing we're doing differently. We continue to do with what we've done in the past, which makes us they're very successful.
Got it thank you best of luck.
So thanks.
Thank you.
And our next question comes from the line of Rick Shane with JP Morgan. Your line is now open.
Hey, guys. Thanks for taking my question this afternoon.
When we look at the development of the balance sheet no matter, how you want to look at it lets focus on risk in force and we look at the formation of capital 2020 is likely to be an inflection point, where the formation of capital is growing at a faster rate than me.
Use of capital or we are approaching the point, where do you guys are considering returning capital and how would you consider that.
Yes, Rick it's a great question.
We're not approaching that point I think we've got a significant amount of capital runway in certainly have increased flexibility at the holding company given.
Our immersion opco dividend capacity in this SBC allocation the stock based comp allocation, but as we think about at our customer franchise, and then I w. or expanding every day and our in force portfolio is growing at a rapid pace. So our our capital needs are also growing as we roll forward.
Together, we think one that we will need the capital that we're not at a point of being capital self sufficient in that one immersion 2020, and two we think when we're delivering consistent plus 20% returns on equity that it's a valuable time to be continuing to invest in the business and so we don't have plans today to initiate a common dividend or repurchase program.
Certainly over the long term, we need to think about the best ways to either deploy capital invest in the business or distribute it.
Not going to be at 2020 focus item for us.
Great. Thank you for the clarity on that I appreciate it.
Thank you.
Our next question comes from the line of Bose George with KBW. Your line is now.
Hey, good afternoon.
Actually but wanted to ask about the guidance you gave on the premiums at 35 to 37 basis points.
Does that assume that the contribution from cancellations declines in the back half of the year as.
If I activity slows.
Yes, I suppose it does so it assumes a few things and I think it's worthwhile to go through we do assume that we're going to have some pressure on what we call our core yield given the combination of the significant Eni w. that we're generating today and its quality right with quality lower risk lower volatility lower capital. It brings a lower premium rate and also the run off of some.
Of those earlier vintages that had very high premium rates because they were price prior to the effectiveness of U.S. tax reform theres a bit of it that relates to our core yield we do have an expectation for a certain activity in both the island in the reinsurance market in 2020 and Thats included and then we do also anticipate that eight we'll see a reduction in the contribution.
From our cancellation earnings.
In terms of that dynamic, where we have a growing pool of insurance in force. Even if we had a static dollar contribution from cancellation earnings that would represent a smaller percentage yields component of the in short portfolio and if you look at how we're entering 2020, we exited 2019 with 137 million dollar.
All our unearned premium reserve balance, whereas we ended 2018 started 2019 with 159 million dollar unearned premium reserve balance that's the balance right. It's the acceleration of those deferred premiums that come through upon cancellation of a single premium policy. So we expect a lower contribution in terms of the yield component from cancellation.
We also actually are anticipating that we'll see a smaller dollar amounts of cancellation earnings coming through in 2020.
Okay, Great. That's helpful. Thanks, and then.
Just based on current pricing I mean is it can you tell in 2021 do you see further pressure on the premiums or is it just too early to tell on that.
Yeah. It's a great question I think we generally don't provide a longer term guidance and ultimately our long term yields going to depend on a whole bunch of things and I w. volume the risk profile of our new production.
And so by extension the rate on our new business and in the persistency of reinforced portfolio.
And also what we choose to do in the reinsurance market and so it's it's really just too too early for us to give you hear on on where yield is likely to head in 2021 or beyond.
Okay fair enough, thanks, and actually just one on the tax rate.
What drove the slightly lower tax rate and then can you just remind us the dealers sort of normalized tax rate next year.
Yes, it's a good question so starting point for US we've got a 21% statuary rate and when we establish our provision and also when we provide guidance, we sort of start with that 21% rate, we scaled down for sources of revenue that our excludable like investment income on our muni portfolio and we scale it up for certain expenses that arent deductible.
So on balance that will have us at around a 22% to 23% estimated effective rate our actual tax rate in any given quarter, though reflects the impact of certain what we call discreet items that occurred in a particular period. The two most notable items that we highlighted in the past our fluctuations in the fair value of our warrant line.
Ability and equity awards divesting of RF use an exercise of options, we have some equity activity come through as a discrete item in Q4, and so we saw in amounts of options being exercised that had a positive impact on our effective tax rate. You will you may recall that that's typically what we see come through in the first quarter.
Our of each year and so as we look into.
Into 2020, we would expect to see a full year effective tax rate of around 22%, but we expect our Q1 rate to be a bit lower than that at around 20% and we expect our Q2, three and four tax rates to be modestly above our full year guidance of 22%.
Okay, Great that's helpful. Thanks.
Thank you and our next question comes from the line of Douglas Harter with credit Suisse honest Alvin.
Doug Mississippi, if your phone as I'm you. Please on mute sorry about that.
Talk a little bit a little bit more guidance around expenses, you know how to think about.
The overall dollars of expense growth.
As the insurance in force this is still growing at a healthy healthy clip.
Yes, Doug it's it's a great question, let me offer you a bit as a bit of us here for 2020. The overall great. It's incumbent upon us and we always look to balance investments and things like technology staff additions other items, where we think we need to grow balance those against really the need for us to maintain expense discipline and we think today that we are striking that.
Right balance were fully supporting our business needs investing in supporting the growth that we're seeing while at the same time levering into our operating.
Extend space at an accelerating pace and so we see that coming through right in the improvements in our expense ratio in 2020, we expect that dynamic to continue we expect to continue levering into our fixed expense base and driving expense ratio improvement I think overall, we anticipate that adjusted operating expenses and I'm using that term adjusted operating expense.
His pointedly will grow by 10% or less compared to 29 team in terms of how that plays out sequentially through the year quarter to quarter, we typically see modestly higher expenses in Q1 than we do through the remainder of the year, because we reset certain employee benefit items like our four one k. matching payroll taxes.
This is that tends to drive slightly higher expenses in Q1 than we then fee developing through the remainder of the year.
Thank you.
Thank you.
And our next question comes from the line up of Mark Hughes with Suntrust. Your line is now open.
Yes. Thank you very much on the persistency, how Ah how much.
Further down do you think it will go and what is what drives that how what are the timing impacts when you see a lot of refi activity a lot of turnover in the market.
Yes, let me I'll answer both of those in turn Mark So in terms of how low it will go we're not I'm going to be providing guidance is specific guidance. We do expect that our 12 month persistency will dip below the 77% that we reported in Q4, but then rebound in the second half of the year.
I'd say tied with that we do certainly expect to continue delivering.
Our industry, leading growth in our insurance in force given our expectations for future and I w. potential in terms of the dynamic that drives this.
It's really related to the persistency calculation itself. So our reported 12 month persistency looks at the total primary if that was on our books 12 months ago. So in this instance at December 30, Onest 2018, and looked at how much of that insurance in force remains in the portfolio 12 months later in this instance at December 31.
2019, and so the set we reported 77 persist 77% persistency.
That persistency ratio.
What percentage doesn't consider any of the business that we wrote in 2019 since that business wasn't in the portfolio 12 months ago and so our persistency is heavily influenced by a few things right. It's heavily influenced by the profile of the business that we wrote right. What's the underlying note rate, but also.
When we wrote it and so what we expect to see in 2020 is that more and more and more of the high quality, but we expect to be highly persistent business that we wrote in 2019 comes into that calculation right. So as of 331 20, our reported 12 month persistency will now include.
The first quarter 2019 production roll that forward to the second quarter will begin to include the second quarter 19 production and if you look at how note rates have developed through 2019, we expect the business that we originated really beginning in the second and then on in the third and fourth quarters because of the underlying note rates to be incredibly persisted as that starts to come into.
The calculation, we'll expect to see our persistency ratio rise.
Very helpful. Thank you.
Thank you.
And our next question comes from the line of Jack missing go.
As I just want is now.
Good afternoon.
Adam curious to understand how you think about the sensitivities on the premium yield.
On a 30 738 first like 30, 435, and I know you've got to 35 to 37.
Is that just island timing or are you thinking that competition, maybe gets a bit more pronounced in that and that sort of range given yourself.
No it so that.
Look we as a general matter, we see the broad rate environment as being generally stable today right. There's a few small pockets, where we can competition in the same ways that we've seen for sometime now, but we are still pricing all of our business to achieve the same risk adjusted returns of 15 plus percent risk adjusted return importantly for us on an unlevered hemostasis that we don't consider the source.
Our cost of the capital that supports that we really are pricing is there were fully loading with equity and we don't see that changing because we're not observing anything in the market today that causes us to think that dynamic is going to shift in terms of the outcomes that we'll see during the year, but they're always going to be uncertainty is right, where it is persistency trend exactly what happens to the in force portfolio.
So what happens really by extension with a broader interest rate environment, where does cancellation.
Contribution come through and then also what our risk appetite is right our risk appetite and by extension our rate is not going to be static and so all of those things are the items that we expect will drive different outcomes in a in the reported yield and then as you noted for the exact timing and also the terms that we achieved on the.
Reinsurance transactions that we expect to pursue this year all of those will come through it doesn't contemplate changes in the broader pricing environment, because we're just not seeing that today.
All right thanks for that and then.
The 2018 loss incurred.
Vintage to date numbers.
You know are looking like they are trending higher than prior vintages for you. It also radian reported a similar trend I'm curious why you think that is that the teams are heading higher loss incurred.
Sooner.
The prior vintages.
Yeah.
I would say broadly speaking these are law of small numbers right and so.
We think that 2018 vintage is going to perform in an exceptionally strong way for us when we model out lifetime losses were into still anticipating meaningfully better credit performance than what our modeled and price assumptions were at the time, we originated that business.
Also for US we've got that book completely covered by reinsurance both quota share an island cover so really comfortable with what that means as we progress forward in terms of the specifics I think there's two items that flight.
One is if you look at the underlying profile of that business.
Thats really was really beginning in late 17, but and then more pronounced way in early 18 that we saw proliferation of some higher risk business coming through the market right. The increase in the concentration of high DPI borrowers coming through with some sub optimal layered risk characteristics that was the genesis of rate GPS and we rolled out rates GPS on June 420.
18, we don't actually started getting Eni w. through the engine, we get apps, we get commitments, but we don't get Eni w. until a few months later, so a large chunk of our 2018 production was originated on a rate card basis, and we recognize that the rate card wasn't the perfect tool at that time to address the risks that were in that market. I think you were seeing.
A validation of our decision to introduce rate GPS in how that book is performing relative to some others and also.
We saw when we had a rise in interest rates as we went through the back end of 18, we had a plateau in a little bit of a debt in the the the pace of home price appreciation and so now that as we accelerated so we'll expect things to broadly speaking get better. So when you have a temporary dip in HP, a particularly in the first year or two after you've.
Originated a book of business you do expect that to come through into performance certainly relative to the HP a tailwinds that the 2016 and 17 vintages had in there there early years.
Thank you.
Thank you and our next question comes from the line as Chris Gamaitoni with Compass point. Your line is now open.
Hi, everyone. Thanks for taking my call.
Most have been answered Adam what did you mean by adjusted operating expenses. When you kind of gave your outlook of 10% or less.
Sure. So I mean, two things one I want to make sure that you're hearing how we are reporting our operating expenses beginning in the fourth quarter, which excludes the third party service expenses from NMS and then also you'll recall when we report our earnings we one of the items that we adjust for that we disclosed is transaction related expenses and so in.
2019, we had about $2.4 million of transaction related expenses. So if you look at our total GAAP expense profile in your models may not be tuned yet to exclude service expenses. So we just look at the total GAAP expenses back out the service expenses back out the transaction costs. That's the point of reference that I'm talking about growing 10.
Percent or less we will then separately expect to have a transaction related expenses for the island activity that we may pursue in 2020, and we will also separately have NMS third party service expenses, but thats scaling I want to make sure you're looking at the right starting point.
Okay sure and does that adjusted number include the impact of the ceding Commission.
Pick up.
Okay.
And then I realize the capital consumptive nature of the business still I was just wondering if you had any color on.
What the type of dividend capacity is now is just so we think about flexibility potential in the future.
Yes, so I think about it in in concert with our stock based comp allocation. The reason that I highlight that we have a really really robust and rich expense sharing arrangement between a holding company operating company expenses at the holding company incurs for the benefit of the operating company we've got I.
Agreements in place that allow the allocation.
Stock based compensation, though is a noncash expense and so the ability to allocate a noncash expense from the holdco to the Opco and have that settled with a cash payments up from the opco increases the liquidity flow sort of the free cash available free cash flow I'll call. It from the operating company, the opco dividend capacity and the stock based comp allocation.
We'd expect in 2020 to yield about a 25 million dollar.
Potential free cash flow, whether we will extract the component of that that relates to the stock based compensation Thats and expense item that we will along with all other expense items that we've been allocating we'll do the operating company dividend is about in total between and am I see and re one will be a little bit over $60 million, that's not something that we.
Will necessarily extract but it's available to the extent that we wanted to.
And just what are now that's the stock based comp as in cash flow and kind of what are the what are the cash expenses at the holdco rough numbers side.
The did you mean cash cash cash flow out Chris or Brazil.
Yes, any cash flow expenses that happened in paid out of the the parent holding company.
Yes, that's the that's essentially neutral now Chris.
Okay.
Alright, Thats all I have thank you.
Thank you and our next question comes from the line of Randy Binner with B. Riley FBR. Your line is now.
Yes, Thanks, I had a couple just the.
That service fee expense item that that was excluded is that.
Then item that kind of grows with the size of the company or is that pretty static at route is a million dollars a quarter set the right figure.
Yes, so it will grow dip it did not necessarily just with the size of our company, but it's going to grow depending on which customers we engaged with certain lenders.
Utilize contract underwriting services more than others and also it depends on the refi environment. It tends to be higher in Rifai heavy environment, that's when lenders new contract underwriting support from our forecasting standpoint, what it looks like going forward.
I would guide you I don't want to say it doesn't matter, it's a business that we invest in that we offer for our customers it drives value for us, but overall, we expect that any growth in enemies service expenses will be prepared and fully offset by growth in our other revenue contribution because we're getting fees were getting reimbursed for the incurrence of those expenses.
Got it and then just on.
Reinsurance.
The use of both quota share and on the island forms of of reinsurance. It. It is impacting that the printing me a little bit, but it's also incredibly efficient sources of capital support so.
How much.
How much of the business you can you see in the next you know.
One three even five years being kind of syndicated out to the reinsurance markets.
Yes, I am.
Well I see a significant majority of the business being syndicated out to the reinsurance markets probably over the next several years.
It's important for US we talk about as a strategy matter, having a comprehensive risk management program and a core pillar of that risk management program is the use of reinsurance structure is theres, obviously, a lot more that we do on the front end with individual underwriting and rate GPS.
But it's not just as a funding matter, but also as a risk matter, we see great value the reinsurance Ross in all of its forums gives us we think is better than debt like cost of funding right sub 5% in many instances far below 5% with equity like loss absorption characteristics and those loss absorption characteristics in particular art.
Expansive as we get out into sort of theoretical tail events and so we will want to have reinsurance structures in place now the exact contours of our reinsurance program may change over time.
We may not always have a quota share program, we may want to evaluate traditional excess of loss program and to the extent that we could do something that was both additive from a cost of capital standpoint, and actually enhance our risk protection, we'll look to do those things and so it's not just going to be a cut and paste uniform impact on our.
Yield sort of uniform cost that gets scaled up for the growth in our book, we are going to be nuance and how we utilize those markets, but I do see them as being.
Central to what we do going forward.
Well I appreciate that.
Agree it's a good use of.
Capital and could argue for higher multiple in stocks I'm just kind of how how are those negotiations are ongoing conversations going is that the reinsurance market still broadly available from a capacity perspective.
Yes. It is what we're working on some of the now in the traditional market, we're not at a point.
Where we're going to be disclosing anything, but we're having some some some good conversations we'll see where we land and then more broadly.
As we look out at the island market in particular, we would generally observe that.
The island market is offer really favorable terms to issuers with objective leave worse quality reference pools. So far this year and so we're optimistic that we'll be able to once again positively differentiate.
When we come to that market when we're ready to transact in 2020.
Alright, great. Thanks, a lot.
Thank you.
Last question comes from the line of Geoffrey Dunn with Dowling and partners. Your line is now open.
Thanks, My questions have been asked and answered.
Thank you and that does conclude today's question and answer session I would now like to turn the call back to management for closing remarks.
Thank you for the for joining us on the call today well be it the credit Suisse financial services for I'm on February 27, and RBC Global financial institutions Conference on March 10th we look forward to seeing you then.
Ladies and gentlemen, this concludes today's conference call. Thank you for participating you may now disconnect.
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