Q1 2020 Earnings Call
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Ladies and gentlemen, thank you for send them by the competence scheduled to begin momentarily, where we are pausing for a moment and efforts to get other participants connected to the call. We thank you for your patience in line will again be placed on music cold.
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Ladies and gentlemen, thank you for standing by and welcome to the in M.I. Holdings incorporated first quarter 2020 earnings Conference call. At this time, all participants are not listen only mode. After the speaker's remarks, there will be a question and answer session. You asked a question.
And the session you want me to press Star one on your telephone.
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If you require further assistance. Please press star Zero I would now like to hand, the conference over to your speaker today, John Swenson. Thank you you may begin.
Thank you Dorothy [noise], good afternoon, and welcome to the Twentytwenty first quarter conference call for National online.
John Swenson, Vice President of Investor Relations and Treasury, joining us on the call today, our bread Schuster executive Chairman quality Merkel CEO, Adam Politzer, our Chief Financial Officer, and Julie Norberg our controller.
Financial results for the quarter were released after the close today. The press release may be accessed on minimize website located at www dot national in mind Dot com under the investors tab.
During the course of this call we may make comments about EUR 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 or trends to differ materially from those discussed on the call. It can be found on our web site or through our regulatory filings with the FCC.
Yes, and 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 developments.
Further no one should rely on the fact that the guidance of such statements was current at any time other than the time with 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 are the most comparable measures under GAAP.
Now I'll turn the call over to Brett.
Thank you John and good afternoon, everyone.
As I get started I went to recognize that this is an extremely challenging time.
And our thoughts at National Am I.
With all those who've been affected by this global pandemic.
Particularly those suffering from cobot 19.
And to healthcare workers in first responders, who are on the front lines of the crisis.
In addition to reviewing our first quarter results on todays call.
We will share with you how we're responding to this crisis and our current expectations for how cold It 19 will impact the housing market.
The mortgage insurance market.
And our business performance and financial position going forward.
Stepping back and looking at the bigger picture [laughter].
We built national am I to be a credible and sustainable counterparty across all market cycles.
From the start.
We have focused on building a dual durable franchise in a risk responsible manner.
We have worked hard to establish a comprehensive credit risk management framework.
And in doing so we have built the highest quality insured portfolio in the mortgage insurance industry.
Well before this crisis emerged.
We were actively targeting a higher quality mix of business through individual risk underwriting and granular reach U.P.S. pricing.
It had sourced and secured comprehensive reinsurance protection.
For nearly the entirety of our in force portfolio.
Our conservative stance heading into this period gives me confidence about the strength of our business today and our ability to continue supporting our lenders there borrowers.
And the overall housing market through this period of uncertainty.
And it's not just a function of our credit risk management framework.
It's the conservatism with which we've managed our investment portfolio.
The robust liquidity profile that we have built at both our holding company and operating company levels.
And the strength of our balance sheet and rig the regulatory funding position.
Together.
These elements are what position us to continue serving our customers.
And driving long term value for our stakeholders.
Well, we've taken steps all along the way to position National am I to perform through a severe stress cycle for an open ended period of time.
We are optimistic that the environment will begin to heal itself a shelter in place directives or list or lifted.
And medical advances give the population at large the confidence to resume day to day activity.
Importantly.
We do not believe that the housing market will experience a level of strain anywhere close to that seen during the 2008 financial crisis.
The housing market came into this downturn in a dramatically better position then it did in 2008.
Entering 2020.
The market had real pricing balance.
Driven by a sustainable so supply demand dynamic.
Lenders were disciplined and underwriting was responsible.
Paired with this is the immediate application of massive fiscal stimulus indirect borrower assistance programs.
We applaud the speed and magnitude of the government response to this crisis, notably the forbearance.
Foreclosure moratorium.
And other assistance programs codified under the cares app.
This broadly coordinated public policy effort.
Along with similar private initiatives implemented by lenders and Servicers.
We will help bridge borrowers passed the point of acute stress.
And Im sure they are able to remain in their homes and resume their lives with limited interruption once the crisis has passed.
Overall, while we may see some degree of housing price decline nationally.
We expect the market to be far more resilient that it was in the aftermath of the 2008 financial crisis.
With a far more muted level of price decline in a far quicker stabilization.
With that let me turn it over to Claudia.
Thank you Brad.
Response to the Togut 19 outbreak, we've taken steps to protect the health and safety of our employees.
And ensure our continued ability to seamlessly support our lenders and their bars.
In mid March we activated our business continuity program and instituted work from home practices are Emeryville staff.
We have transitioned our operations seamlessly.
Continue to positively engage with customers on a remote basis.
Our I T environment.
Underwriting capabilities.
Policies servicing platform.
And risk architecture have continue without interruption <unk>.
And our internal control environment and internal controls over pronounced reporting are unchanged.
We have achieved this transition without incurring any additional cost.
We believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course.
To address the shifting credit environment.
We have adopted changes to our underwriting guidelines, including changes to our loan documentation requirements.
Our acid preserve requirements.
Our employment verification process.
And our income continuance determinations.
We expect these changes will further strengthen the credit profile of our new business productions.
We've also taken action to increase our pricing on all new business production and believe that others in the sector have generally pursued similar changes.
Overall, the new business environment is evolving in a positive way.
Policy pricing is up across the board.
Risk is improving as underwriting guidelines Titan.
And the capital demands of new business production are declining.
Now to our first quarter well, we delivered record result.
GAAP net income for the quarter with 58.3 million or 74 cents per diluted share.
And adjusted net income was 52.7 million or 75 cents per diluted share.
GAAP return on equity was 24.5% for the quarter and adjusted our we was 22.1%.
We generated record first quarter and my W. up 11.3 billion.
Down, 5% seasonally from the fourth quarter, but 63% compared to the first quarter of 29 team.
Primary insurance in force was 98.5 billion at quarter end up 4% compare to the fourth quarter and 34% compared to the first quarter of 29 team.
Operationally the first quarter was very much a tale of two cities.
With a strong business as usual environment in January and February disrupted by the pandemic in March.
On the business as usual side, we continue to expand our customer franchise activating 24, new lenders in the quarter.
We're now doing business with a broadly diverse group of over 1100 high quality originators supporting them at a time of uncertainty with our same focused on differentiated service and consultative engagement.
And we continue to emphasize rate G.P.S. as our platform per engagement.
More than 95% of our customers are currently using the platform and over 90% of our first quarter and I W. volume was delivered to the engine.
We have long noted the value that rate GPS provides as a risk management tool, allowing us to directly shaped the credit mix of our portfolio and the positive impact it has on our customer engagement.
In this environment the engine provides us with additional value.
The ability to implement pricing changes dynamically and make the adjustments that we believe are appropriate in real time as opposed to a long delayed lagging bases to re cars.
Going forward, we expect the cobot 19 outbreak will have a different effect on the U.S. housing market.
With existing home homeowners facing challenges related to the pandemic.
And the volume and timing a future purchase transactions negatively impacted as buyers reassess their ability and willingness to purchase homes and sellers reevaluate or postponed plan sales.
Balancing though are the early signs of stabilization that are emerging in the purchase market and our expectation for a significant increase and refinancing activity given the rate environment.
Against this backdrop, we expect total U.S. mortgage insurance origination volume will decline modestly in 2020 before stabilizing and we're covering a future periods.
Before turning it over to Adam I want to know how proud I am of the National My team.
Our people have maintained the same high level of focus in service as they always have for our customers.
Even as they were transitioning to a newly distributed work environment and adjusting to significant changes in their personal lives.
Our team is a huge part of our success.
And I'm deeply grateful for their resiliency and continued dedication.
As Brad said, our founding goal and are continuing mission is to be a credible and sustainable counterparty for our customers in policy holders across all market cycles.
Everything we have done to build a durable and profitable business recruiting and retaining great talent, establishing the right culture engaging with customers in a consultative way and managing risk expenses and capital has positioned us to continued to deliver for all of our stakeholders through this stretch.
Yeah.
With that I'll turn it over to Adam.
Thank you Claudia we achieved record results across a number of key metrics in the first quarter. Another maybe a temptation to look past. These results given the pandemic, but it's now emerged we take note of the strength of our performance going into this crisis, because one the strength of our historical performance in the capital position we have built.
Provides us with valuable resources to carry through the duration of distress and Q. It highlights the value of our strategy and the performance we can expect to deliver when the macro environment stabilizes in the future.
We generated 11.3 billion of and I w. in the quarter and grew our primary insurance in force to 98.5 billion at March 30 Onest.
Mr of 98.7 million of net premiums earned adjusted net income of 52.7 million or 75 cents per diluted share and adjusted return on equity of 22.1%.
Primary insurance in force of 98.5 billion was up 4% from 94.8 billion at the end of the fourth quarter and up 34% compared to the first quarter of 29 to 12 months persistency in the primary portfolio was 72% with the current interest rate environment continuing to spur refinancing Turner.
Over.
In this uncertain environment turnover helps to reduce the overall risk exposure embedded in our enforced portfolio.
Total and I W. was 11.3 billion with monthly products, contributing 10, and a half billion or 93% of our total volume.
Refinancing originations represented 29% of our volume in the quarter up from 24% in the fourth quarter.
This trend is continuing as refinancing activity accelerates refinancing volume accounted for over 40% of our and I W. production in April.
Net premiums earned in the first quarter were 98.7 million, including 8.6 million from the cancellation of single premium policies.
Reported yields for the quarter was 41 basis points roughly flat with the fourth quarter.
Our first quarter yield is higher than we anticipated when we shared full year 2020 guidance on our last call. We are withdrawing our premium yield estimate for the remainder of the year due to the uncertainty surrounding the Kobin 19 outbreak.
We continue to benefit from the work we've done with rate TPS to actively shape the credit mix of our portfolio and manage our concentration of business with layered risk characteristics.
At quarter end, our concentration as a percentage of total primary risk in force of greater than 45, BTI business was 10% and our concentration of 97, LTV and below 680, FICO risk were 10% and 4% respectively.
Investment income was 8.1 million in the first quarter compared to 8 million in the fourth quarter.
Underwriting in operating expenses were 32.3 million compared to 31.3 million in the fourth quarter.
Census in the first quarter included 474000 of cost related to capital markets transaction activity that we were contemplating prior to the onset of the co the crisis and the dislocation it caused in the markets.
Excluding these costs adjusted underwriting and operating expenses were 31.8 million, our GAAP expense ratio was 32.7% and our adjusted expense ratio was 32.2% for the quarter.
We had 1449 notices of default in the primary portfolio at the end of the first quarter essentially flat from 1448 at the end of the fourth quarter.
Claims expense was 5.7 million in the quarter, reflecting a strengthening of the reserves held against our existing and new default populations as an insurance company, we do not established reserves against performing risk in the same way a lender does through its loan loss provision instead under GAAP, we wait to establish a reserve against an enforcement.
Let's see until the underlying insured mortgages delinquent at 60 days one more past due.
We expect that we will see a significant increase in our default population going forward as borrowers face challenges related to coven 19, and access the forbearance program for federally backed loans codified under the cares act or other programs made available by private lenders.
As of April Thirtyth, our default population had increased to 1610, which represented a 43 basis point delinquency rate.
Well, we're not yet able to forecast the ultimate level of forbearance driven delinquencies that.
Yeah, we will receive or the timing in which they will develop we know two important points.
First.
We're seeing a slowdown in the weekly progression of forbearance uptake rates in the external data. We've been monitoring survey data published by the mortgage bankers Association indicates that the number of new forbearance requests made to Servicers is declining and the share of GFC loans and forbearance programs is growing at a slowing pace.
Second.
We've observed a correlation between the risk profile, the underlying borrower and the incidence of forbearance and the data. We've received through April Thirtyth borrowers, who are self employed and those with higher debt to income ratios and lower FICO scores appear to be accessing forbearance programs with notably higher frequency.
This trend is further supported by the forbearance data being reported by Black Knight Moustache, which indicates that a meaningfully higher concentration of mortgage is covered by the FHLB and D.A. are in forbearance status compared to the loans purchased by the G.S. is if this pattern holds we expect it to dramatically higher credit quality of our insured.
Portfolio, where we have no legacy pre crisis exposures and a fraction of the concentration of higher risk loans will try favorable delinquency and loss experience on a comparative basis.
It's hard to fall population grows in future periods, we expect to establish increasing loss reserves and incur additional claims expense.
The level of reserves, we established for these delinquencies will as with all Anybodys reflect our best estimate of eventual claims exposure.
Our claims exposure is triggered by a property foreclosure, we don't phone delinquencies and is ultimately a function of the number of delinquent loans that progress to claim which we refer to as frequency and the amount. We go to settle such claims which we refer to a severity.
We generally observed that a significant majority of borrowers who access forbearance programs in the weight of specified disaster events or eventually able to resume timely payment of their mortgage obligations and remain in their homes and this is the overarching goal trading housing policy decisions today, a stated desire by politicians regular.
Leaders in lenders to help bridge borrowers task this point of acute stress and provide them with a pathway to avoid foreclosure and keep their homes.
Experience tells us that forbearance programs work and enhanced accommodation such as the FHLB phase recent announcement that borrowers would not owe a lump sum payment at the end of their forbearance period will further their effectiveness. This dynamic coupled with our view of general House price resiliency will inform our reserve setting.
As anybody's develop.
Interest expense was 2.7 million in the quarter and we recorded a 6 million dollar gain from the change in the fair value of her warrant liability.
Moving to the bottom line.
GAAP net income for the quarter was 58.3 million or 74 cents per diluted share. Adjusted net income was 52.7 million or 75 cents per diluted share compared to 52.6 million or 75 cents per diluted share in the fourth quarter, and 38.5 million or 56 cents per diluted share in the first.
Quarter of 2019.
Year on year, we grew adjusted net income by 37%.
Total cash and investments were 1.2 billion at quarter end, including 44 million of cash and investments at the holding company.
Our investment strategy has always prioritize capital preservation alongside income generation and our investment portfolio is well positioned to perform through a period of significant market volatility. Our portfolio is 100% fixed income, 100% investment grade and has a weighted average credit rating of a plus it's highly liquid and highly diversified.
With no level three assets positions and no single issuer concentration greater than 1.5%.
We have limited exposure to individual issuers sectors or asset classes across a broadly defined set of coated 19 risk categories.
At March 31st our portfolio had an aggregate unrealized gain of $11 million, which grew to approximately 29 million at April thirtyth.
Our liquidity position is equally strong at both the holding company and operating company level. During the 12 month period ended March 30, Onest and am I see our lead operating subsidiary generated 216 million of cash flow from operations and received an additional 252 million of cash flow from the maturity sale and redemption.
On a securities held in its investment portfolio.
Operating subsidiaries reimbursed, our holding company for substantially all of its cash expenses under long standing tax expense and debt service agreements that had been approved by our primary regulator in Wisconsin.
Given the strength of our overall profile, we did not believe that servicer liquidity issues, which had been discussed as a possible knock on consequence of coated related forbearance programs would have any notable impact on our business or financial position.
Shareholders' equity at the end of the first quarter was 975 million equal to $14.15 per share.
We have one under 47 million of outstanding debt under our term loan and our GAAP leverage was 13% at quarter end, providing us with significant incremental capacity to carry additional indebtedness.
On March 20, it we amended our revolving credit facility, increasing its size from 85 million to $100 million expanding our lender group extending its maturity to February 2023, and reducing its cost. The amendment provides us with more funding capacity at a lower cost with the longer maturity date no amounts are currently drawn under the facility.
And the full 100 million remains available to us.
In April we secure further consent from our revolving credit lenders to permit us to issue up to 400 million of senior debt alongside the facility and we secured expanded approval from our primary regulator in Wisconsin to allocate incremental holding company interest expense to our operating subsidiaries should we choose to pursue additional debt financing opportunities.
And downstream proceeds to support our operating business.
At quarter end, we reported total available assets under Pmiers of 1.070 billion and risk based required assets of 912 million excess available assets were 157 million.
Our pmiers risk based required asset amount is determined at an individual policy level based on the risk characteristics of each in short loan loans with higher risk factors, such as higher loan to values or lower borrower FICO scores are assessed the higher charge nonperforming loans that have missed two or more payments are generally assessed a significantly.
Higher charge and performing loans, regardless of the underlying borrower or loan risk profile. However, special consideration is given under pmiers to loans that are delinquent on homes located in an area declared by the federal Emergency management agency FEMA to be a major disaster zone.
The pmiers charge on nonperforming loans that enter delinquent status after a FEMA major disaster declarations benefits from a 70% haircut.
FEMA has made a major just Astra declaration in all 50 states in response to the Cobot 19 pandemic as such the Pmiers risk space required asset charge for all newly delinquent loans nationwide, including those that go delinquent under a federal or private forbearance programs will be reduced by 70%.
Our pmiers risk based required asset amount is also adjusted for approved reinsurance transactions.
Under our quota share reinsurance treaties, we receive credit for the Pmiers risk space required asset amount on ceded risk in force as our gross pmiers requirement on ceded with increases our pmiers credit automatically increases as well.
Under aisle in transactions, we generally receive credit for the Pmiers requirement unseeded referred to the extent such requirement is within the subordinated coverage layer or excess of loss detachment threshold as we tournament of the transaction.
We've structured our island transactions to be over collateralized, such that we have more island notes outstanding and cash equivalents held interest than we currently receive credit for under Pmiers to the extent our team. This requirement on ceded aylwin Rip grows we receive increased credit under the treaties.
The increasing pmiers credit we receive under the island treaties just further enhance by a structural feature which we refer to as their delinquency lockout traders.
In the event delinquencies exceed 4% of ceded risk the I wouldn't nodes stop amortizing and the cash equivalent assets held interest our secure for our benefit.
As the underlying ceded rep continues to run off this has the effect of increasing the overcollateralization within an excess pmiers capacity provided by each Ireland structure.
This is nuanced the critically important to understanding how our pmiers position will develop in the event of a rising level of kobin related delinquencies.
At March 31st we had 98 million of aggregate overcollateralization across our three island transactions. This is over and above the 157 million a pmiers excess assets, we reported and assuming the 4% delinquency lockout trigger is activated in each deal.
In our underlying ceded risks continues to run off at the same rate. It did during the month of March we estimate that our total overcollateralization will increase by up to $70 million per quarter.
Our pmiers funding requirement will go up in future periods based on the volume in risk profile of our new business production and the performance of our in force portfolio. However, we estimate that we will remain in compliance with our pmiers requirement, even if default rates in our in force portfolio materially exceed the current forbearance rates reported.
By each of the G fees and the FHLB given the significant 157 million dollar funding cushion we reported at March 30, Onest the nationwide applicability of the 70% FEMA disaster haircut on newly delinquent policies and the increasing pmiers relief automatically provided under each of our quota share an island treaties.
Add to this the excess funding we have at our holding company level and our 100 million of Undrawn revolving credit capacity and we have a great opportunity to continue supporting our customers and capitalize on the increasingly attractive new business environment.
Overall, the current environment is unlike any we've seen before well this introduces general uncertainty, we believe that the conservative nature with which we managed our business across the board will be valuable as we navigate through this stress with that let me turn it back to Claudia.
Thanks, Adam.
Toby crisis has brought into sharp focus the important roles at national online and the broader private mortgage insurance industry play in supporting a healthy and functioning housing finance system that works for bars lenders and taxpayers across all market cycles.
We came into this stress in a position of strength.
[noise] bolstered by the conservatism with which we have managed our business.
And we are here just to provide support through this challenging period.
Thank you for joining us today I will now ask the operator to come back on so we can take your questions.
As a reminder, if he would like to ask a question. Please press Star then the number one on what telephone keypad that a star one to ask a question we will pause for just a moment to compile the Q and a roster.
Well first question comes from a line of market Breeze with Barclays.
Yes.
Or her through all doing well Adam.
All the commentary or on the impact of reserves.
Hmm quarter live this crisis.
Clearly different in some ways I'm from the natural disaster in the natural.
Disasters kind of come and go quickly.
You know how would you thinking about what the ultimate frequency, which you might reserve for looks like when you compare it to like a garden variety defaults versus you know a more traditional national disaster.
Yeah, Mark it's a great question in certainly this is a different environment.
Then what we have in the wake of other natural disaster. It we're facing with mobile pandemic in a nationwide economic slowdown.
The reference I made to prior disasters isn't to draw a direct analogy to the level of ultimate cures or claims that will face rather its to highlight how significant public policy can be and driving positive outcomes for impacted borrowers and so the events. We're seeing now were markedly different than a typical natural disaster, but the level of support being offered up is.
It is different as well if scaled up dramatically given the significance of this crisis I think as we think about reserve setting one we have to see what is the level of defaults that come through we have to consider that.
Against one the overarching housing policy goal that we see today, which is to ease the disruption of the Kobin crisis for homeowners to give them a path to avoid foreclosures and stay in their homes, but it's a huge level of government assistance will be valuable I think overall.
We expect this to be more of a delinquency events than we do a claims event. We expect the roll rate of initial delinquencies progressing into foreclosure and claim will be much lower than we see in the ordinary course, not as a reference to disasters, but just in the ordinary course.
And we need to also layer onto that what Brad talked about is our view as a general resiliency in the housing market and the house price environment ultimately when we're making our loss picks.
Okay.
You know given this mills would result for river is different than.
Your normal natural gas or any concerns or risk.
You know the feature phone may or may not even though.
Recognize that even though team has made the proper the designation in give you that kind of 70% her kodama on both the impact to the required assets.
Yes, certainly it is a it's within the purview of the FHLB and the Gses to amend.
The Pmiers framework, but right now it is codify didn't pmiers, it's not a subjective thing.
Look it up exhibit a table eight footnote one if theme has made a major disaster Declaration then all loans that go delinquent in that area, including those that are in forbearance or otherwise benefit from a 70% hair cut.
So there is no judgment call or subjective approval that's needed again, it certainly is within their purview to to come out with an amendment that's not our expectation at this point in time, though.
Okay. That's helpful. Thank you.
Your next question comes from the line of Bose George with KBW.
Phil Good afternoon, but she just a follow up on that question on capital.
Do you have the view on how long that capital treatment last.
Is it just appeared and forbearance.
Total disaster. There continues after that that's clear when this is the capital treatment, so that that period and.
Yeah. Those another good question it depends on the nature of the event the duration of the FEMA designation and also a call it the umbrella under which a delinquency comes to US all delinquencies benefit from that that FEMA haircut as we'll call it up for up to 100.
20 days after their initial default date.
Loans that are delinquent under a forbearance program in a state that has been or an area that has been declared not just a major disaster area by FEMA, but it also benefits from individual assistance then those loans received the hair cut for the duration of that forbearance program our expectation here.
Is that almost all loans that coming to us.
In in delinquent status will be under a forbearance program either at the outset or.
Immediately thereafter, and so the duration, which we benefit from that haircut will be significant.
Okay, I know that makes sense and then just a follow up on the provision question as well. The do you have a default to claim expectation at the moment for the stuff that comes in or is that still kind of a work in progress.
I'd say, it's a it's a work in progress and it's not going to ever be ecstatic item right, we making we're making a best estimate at a point in time that we're establishing our reserves and setting or claims expense based on the information that's available to us at that point in time, the environment is not going to be static the information that we're looking to to triangulate.
Nation is not going to be static and so our assumptions broadly speaking will naturally evolve, but right now again, we expect us to be much more of a delinquency event and we do a claims to them.
Okay, and given that is that fair to say that the default to claim expectation is probably lower than what it was for the stuff that was coming in the fourth till March 15 to the typical delinquency.
Yes, absolutely we expect that the the role to claim will be meaningfully lower than what it would be for a typical defaults coming into us under normal circumstances.
So okay, great. Thank you.
Your next question comes from a line of the harder from credit Suisse.
Oh, just just hoping you could.
Ill touch on kind of the outlook for hours are those the environment for pricing you said that you've seen.
Increased pricing through through the rate engine.
Any sense, if you could quantify but the level of pricing increase.
That you've seen and expectations around them.
Absolutely does again.
Synthesis Claudia so yeah, we believe other mortgage insurers have made pricing changes broadly taking rate tough following the onset as a pandemic. So are we don't have perfect detail here much of what we hear is from our customers, but it does appear most everyone is responding logically with pricing changes.
For us one important to notice that the impact of pricing changes made through rate engines, it's not all equal just because all the advisor sourcing the same amount of business through their engine.
So it's nearly all of our new production for US continues to come to reach GPS, which means that any pricing change. We made today comes to nearly all of our new applications Tomorrow. So that's that's the competitor outlook and you want me to make a comment as well.
Yes, Doug.
Give you some specifics on what we've done.
So that sits in a certain light relative to what others have done our rates aren't uniforms to begin list that we haven't just supplied a blanket increase right at the same amount across the entirety of our risk in this environment risk still matters, and so risk selection and risk based pricing matter our prices are up anywhere from 10% to 70% depending on the borrower alone and.
Risk attributes.
Some of the risk at the upper end of that range right up 70%, we don't expect to get anymore. Other not part of the goal is we're using price in concert with some underwriting guideline changes to shape the mix of new business coming through now I'd say, that's a rough mile marker pricing on new business applications in the first week of ne is up about 20% compare.
So the first week of March and that's even before adjusting for the differences and the underlying risk profile right first week of May dramatically higher quality risk coming through the first week of March and we're just up 19% 20%.
Comparing one to the other so in this environment, we're getting higher price, taking less risk and because we're taking less risk we're required to hold a far lower level of capitalization against our new exposure and this is critical write new business environment unit economics of increased meaningfully as have the expected returns on new business production.
Great. Thank you for that.
Your next question comes from a line of Thanksgiving with Tony.
Compass point.
Thanks for taking my call.
Recognizing this is not a normal delinquency and I took all of your comments on preserving.
I was wondering if you give us any perspective of.
You know how you think about a cumulative loss rate in whatever scenario you lay out like Youre Moody's S three or.
Normally in a normal scenario, where unemployment goes the how it however, you want to frame. It. So there's some benchmark of with the expectation would be in a normal type recession acknowledging the stimulus is way different programs are different just the conceptualizing.
Yep.
Chris Happy to and what I would let me preface it by saying well, we do expect us to be more of a delinquency than a claim event. We are expecting claims to come through that are different from what we otherwise would have been facing in the normal course, we do expect the house house price environment to take a dip nationally for a period of time, we don't expect us to be anything close to what.
We saw during the 2008.
Financial crisis for a variety of reasons that Brad articulated I'm in terms of a you know a mile marker.
You know we.
We look at a whole variety of stress scenarios, we do run a repeat of the financial crisis in the portfolio. We run the C car adverse scenario as a estimation of a more normalized recessionary environment. We also then just come up with some additional stresses that we contemplate we don't necessarily believe that this is where things will go but I do think it's instructive to think of.
Not a scenario, where we have call it a down 10% National House price environment that takes hold immediately and stays at that level for 24 months with a very modest recovery thereafter that type of a stress for us largely doesnt Pierce the retained layers on our islands, maybe just a touch on our 2019 island.
Overall, that's less than a 3% cumulative claim rate outcome for us.
[noise] when you see cumulative claim rate were okay claim rate on risk in force just to be clear that's right.
That's right okay.
Thanks, so much I appreciate it.
[music].
Your next question comes from the line Jackman CECO from.
Yes I'd.
Hi, good afternoon, everybody have a local there but as well.
You know I believe talk about claim rate. That's certainly one thing that's going to be a 2021 or though.
At earliest but curious more.
Over the next couple of quarters, we think we'll talk about you know forbearance take rates and just curious.
How you're thinking about forbearance take rates you know I go some it will simply put the spread at 6% to 11% on what we've seen from some of the data you've referred to what's your internal sought on where that number ultimately ultimately goes as we go into Q3 Q.
Let me clarify one item so the claim dynamic enroll to claim that it's a it's a 2020 item for US certainly we don't expect to be paying claims so ultimate claim payment and the cash impact associated with that for an extended period of time, given the duration of forbearance programs for closure moratoriums right. It's just a natural cycle of progressing towards a foreclosure.
So we incurred a loss and recognize that as a claims expense on a GAAP basis earlier on and so it just a point of clarification there in terms of forbearance.
Levels, well make a few alterations once the data isn't perfect. At this point I'd say generally speaking service or data that we get is consistent it's scrubbed, it's accurate for default reporting right. What is an actual default status, but the overwhelming majority of borrowers who are now in forbearance have not yet defaulted most of them made their last payment.
And then accessed a forbearance program and so the service are detailed on loans in workout status is less robust it comes to us.
In a bit of a haphazard way from a few different data sources and so we need to piece together sort of mosaic of those inputs.
What we're seeing right now is trending roughly in line with the data that's been publicly disclosed about the G fees and their level of forbearance broadly.
As to how high things will go but admittedly anything that that I share with you would just be speculative at this point, we don't know how long the stress is going to last we don't know what's on the horizon from a medical standpoint, we don't know how quickly things are going to normalize after the shelter in place directors are lifted and all of that will drive the macro impact in.
By extension the level of forbearance utilization, how long that persist how high. It goes so we have seen the data points that others have put out ranging anywhere from 10% to 20%.
And instead of speculating alongside of that what we've chosen to do is to stress test our portfolio like stress our claims paying resources, our liquidity profile, our regulatory capital position. So that we know what level of forbearance driven delinquencies we can withstand.
And our analysis indicates that we have the wherewithal to absorb in excess of 20% delinquency rates on our enforced portfolio I'm not putting that out there to say that we expect to 20% delinquency rate, but instead of speculating what we have found to be more useful as for us to stress the portfolio and understand the position that we're in and how high level, we can absorb.
That's helpful will make sense.
On the 70% haircut that was.
To your point pretty much automatic it was and it was in the documentation.
In your conversations in Washington is kind of a fluid situation I mean, if they just they put out this forbearance program.
You would wonder if there's something that they would think about incrementally to natural disaster are there any conversations in Washington, they're thinking about anything else that would apply to the p. Myers and the semi industry, maybe around kind of the seasoning weightings or or anything else that.
You are hearing we're thinking about that could partially offset.
More of that capital charges team or cycled industry.
Jeff It's Brett Levy, let me start mental I'll turn it over to close to add to it.
So we've had a series of ongoing conversations with.
The feature and the GRC.
Both directly as a company and in concert with the rest of the industry through us in line.
So we recognize in times like this it's critical for us to be connected with.
Our counterparties that are policymakers much the same way that we stay close with our.
President irregular in Wisconsin during times like these.
So we're not really in a position to speculate about possible amendment.
Mark but.
I think a couple observations.
First of all P. Myers never contemplated a situation like this complete.
Organic shutdown of all economic activity, what I would add is that was mandated by the government.
Alongside with a massive national Forbearance program designed to help homeowners and aboard foreclosures.
So really unprecedented situation.
Regulators and other financial service sub sectors have recognize how you'd be businesses and have made at least in some cases temporary in other cases other than temporary chooses to operational capital another standards and say.
To which they hold the people that they regularly.
So.
You know we pick the it's certainly of Baird consideration.
I guess, where I'd leave it with you we have every confidence that we can pay every claim will face coming out of this crisis with multiples of capital left over.
Thats, how we built the business and our credit risk management framework that were so proud of.
And you know as Adam just said, we've stressed ourselves too.
To the point, where we can absorb over a 20%.
You know pick up on on the forbearance programs and still have are few more sufficiency. So we feel really good.
Place from that standpoint, so that regulatory framework will evolve and.
We're just going out to see how things go but.
People are working on.
Okay. Thank you for that I know if there are some offline later thanks.
Thanks.
Your next question comes from a line of Rick Shane with JP Morgan.
Hey, guys. Thanks for taking my question and I hope everybody is doing well.
Look we're going to be in a really interesting environment.
Going forward.
Obviously, theres a little an enormous amount of uncertainty related to credit on I think you guys have done a good job articulating your views and providing a good capital outlook.
We're also going to be an environment, where rates are going to be persistently low there's going to likely be a at some point a pretty significant pickup in volume I'm curious are you guys have demonstrated and talked about the industry showing pricing power is you look forward to risk sharing going for.
Forward or do you think aisle and we'll continue to be in attractive way to share risk in a more uncertain environment.
Yes, Rick a very good question when I would say rest assured we've been having active conversations with our reinsurance not just islands right also but reinsurance traditional reinsurance into the mix that we've been having active discussions with our reinsurance partners Island investors bankers insurance brokers to gauge this exact issue.
We believe that the reinsurance market the traditional reinsurance market is available today for EMI risk and at the island market is on a path to near term recovery.
I think what we need to see obviously structure is deal sizes and limits pricing and attachment points will likely change, which is all natural into the extra expected in much the same way to our primary risk appetite in pricing use of shifted that's going to be the same that happens in secondary markets, but we have every reason to be confident that those mark.
It will bring remain available a broadly but in particular to national Eni and I think our experienced here helps right. Our counterparties on the reinsurance side, our partners know, how we manage our business with conservatism all along and.
That becomes a real positive point of differentiated differentiation for us now in stress. So we do expect that those markets will be there again the profile of each deal is likely to shift, but we do expect them to be available.
Okay that that's helpful. One of one of my favorite questions right. Now is just to ask how people are spending their time because that gives you a little bit of insight into how people are looking at their businesses and the fact that you guys are doing that means you're looking pretty far down the road in terms of.
Seen originations come back.
Yes.
Thank you guys.
Great. Thanks, Rick.
Your next question comes from the line fill stephano with Deutsche Bank.
Yeah. Thanks, Adam in your prepared remarks, you had mentioned that there was a reserve strengthening in the quarter.
I'm not sure that I can fully followed that I was hoping you could talk me through it.
Is that a more conservative.
Reserving position on new defaults that came through in first quarter 20, or they didn't come through as adverse development, but how should I be thinking about when exactly that strengthening work.
Yes, I think just simplistically, Phil it's a good question. So our our energy count was essentially flat quarter to quarter right 1449 at March 30, Onest compared to 1448 at December 30, Onest not all the same population, but just think about it it's essentially a flat energy count roughly the same of the same age right.
Finally, and our gross reserves increased by 24% from what we carried at December 31st through March 30, Onest and so we did take our best estimate for eventual claims exposure up because of our view of the future macro environment changing.
I would say.
This isn't though a one Q event for us right and our approach to establishing a best estimate view in the second quarter and going forward will naturally continue to evolve is more information does come in but my reference there. It was posting a higher case reserve per energy for each new defaults and taking up those.
That we carried from prior periods as well.
Got it okay.
In my mind and embedded in that is a.
It is adverse development that maybe that's as more of a appease the mentality to thinking about this includes the and my accounting Oh.
I'll take that offline.
In looking at the islands. It administrative we do good work when it feels like the the pace of new defaults is going to pick up do they have to be put on notice at some point that theres potential claims coming or how are their triggers within there that you have to communicate to them Oh.
About the changing in the economic environment.
Yeah, I would say that there are no.
There are no disclosure requirements or items that need to be share that are different than in the normal course, there is a heavy amounts of disclosure on the underlying pools of risk that we share and provide updates on on a monthly basis and so I'm looking at what's the population of loans that still remain so they understand what's the run off of the risk in force embedded in each of those transactions at.
Loan level basis, so theres a loan tape that passed along but thats, probably nothing is different in a period of higher stress higher delinquency that is otherwise the case in normal course.
Perfect. Thank you.
Last question comes from the line of Mark Hughes Suntrust.
Yes. Thank you good afternoon.
Adam or Youre hesitancy around the premium yield guidance.
So a lot of moving parts.
I Wonder if you could give some thoughts on the puts and takes you sit here today, you're obviously getting better pricing.
But there is lot of turnover in the portfolio, it's probably putting pressure on on the yield.
How do we think about how that might progress through the year.
Yeah officially just the Hugh Hewitt contours.
So I'll give you confidence on the qualitative basis and nothing that there's towards a number.
You know just as it's there's so much uncertainty right now I think you're touching on a lot of points that are that are there right we need to understand what it means for new business volume, how our new business pricing continues to emerge what's the rate of portfolio turnover that portfolio turnover isn't just a negative in fact, we got a significant contribution from cancellation.
Earnings for it we had $8.6 million cancellation earnings in the first quarter, which is far higher than what we otherwise had anticipated and remember our reinsurance costs running through there. So the answer that I gave on the availability of reinsurance as an important one in an attractive one for us as we think about our funding profile going forward and our risk management program for new business, but also.
Where the cost and the structure of those transactions land will impact what our reported net yield this.
Thank you very much.
And there are no further questions at this time I'll turn it back over to our speakers for closing remarks.
Thank you again for joining us we will be participating in virtual investor conferences hosted by Suntrust time may 19th.
It should bank on May 27th and KBW on May 28, we look forward to speaking with you at one of these virtual events, thank you and be safe.
Thank you, ladies and gentlemen that does conclude today's conference call. We thank you for your participation of assets you. Please disconnect your lines.
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