Q2 2020 MGIC Investment Corp Earnings Call
Ladies and gentlemen, good these contracts are scheduled to begin shortly discontinued standby pick your for patients.
I get to these contracts are scheduled to begin shortly be should contribute 10 by thank you for your patience.
[music].
Ladies and gentlemen, thank you for standing by and welcome to empty I see in Saflex Corporation's second quarter earnings call. At this time, all participants are in a listen El Nino offered to speakers presentation. There will be a question answer session to ask a question during this session.
You will need to press star one on your telephone.
I'd now like to how to conference over to your speaker today Mr., Mike Zimmerman.
Go ahead.
Thank you. Good morning, Thank you for joining us this morning and for your interest and I've got to see investment Corporation.
Joining me on the call today to discuss the results for the second quarter two <unk>.
2020.
Our Chief Executive Officer, Jim Mackey, Chief Financial Officer, Nathan goals.
To remind all participants.
Earnings release of this morning, which may be accessed on FDIC, what site, which is located at MTV.
<unk>.
Under new.
Additional information about the company's quarterly results.
We will refer to during the call.
Certain non-GAAP financial measures, we have posted on our website a presentation that contains information pertaining to our primary risk in force and new insurance written and other information, which we think you will find valuable.
I also want to remind listeners that from time to time, we make most information about our underwriting guidelines and other presentations are corrections the past presentations on our website that investors and other interested parties may find valuable as well.
During the course of this call we may make comments about our expectations on the future actual results could differ materially from those contained in these forward looking statements.
Additional information about those factors, including cobot 19 that could cause actual results to differ materially from those discussed on the call are contained in the form 8-K 10-Q that was filed last night.
The company makes any forward looking statements we are not undertaking an obligation to update those statements in the future in light of subsequent development.
Further no interested party should rely on the fact that such guidance are forward looking statements are occurring at a time other than the time of this call or the issuance of the 8-K or 10-Q.
I don't like to turn the call over to Tim.
Thanks, Mike and good morning, everyone.
Hope everyone. It was listening is safe and well I want to express my gratitude to an aberration for my fellow Angeliki coworkers and their families. The reference Dan a day out over the last summer months to support our customers their local communities and pellet coworkers coping with their own unique circumstances brought about by the cold in 19 pandemic had been remarkable.
So thank you.
The safety and health of our coworkers and their families as a responsibility I do not take lightly that's why we continue to operate in a remote work environment, while we provide critical support to the housing market, especially first time homebuyers.
As we navigate through this unusual period, we continue to execute on her business strategies with a goal to position our company to prosper over the long term.
We strive to achieve that goal by among other things working with the G fees and service or a loss avoidance programs operate competitive products and services to our customers maintaining a sharp focus on the sources and uses of our capital.
We think this is the best approach for all stakeholders.
Particularly relevant as we manage through the current environment.
I will kick off this call by spending a few minutes, providing a high level summary of our financial results for the second quarter their current financial position.
Nathan will cover some more details of the financial result.
Finally, I will wrap up by discussing the state of housing Finance reform endeavor to open it up for questions.
As far financial results GAAP net income for the quarter was $14 million.
The decrease in net income from prior quarters, primarily reflects the increase in loss reserves that we established to respond to the material increase and new delinquent loans that were reported to us in the second quarter.
Nathan will get into more details in a few minutes.
During the second quarter, the volume of both purchase and refinance mortgage originations was very robust.
Demand for single family housing, it's been very resilient and seems to actually increase despite the pandemic.
Of course, the low interest rate environment makes refinancing very attractive for many borrowers.
As a result, we wrote $20 billion, a new insurance and the corridor and despite lower persistency on our existing books of business or insurance in force increased by approximately 8% year over year.
Refinanced transactions at the present for monthly New business, writing peaked at approximately 44% in April I mean that was back down to 33% in July as demand for purchase mortgages increased and refinance transaction slowed a bit.
The combination of our application data lend to report and the MBK indices provide us with reasonable visibility into and I w. over the next several months.
While our current pipeline remains robust there was considerably less uncertainty about mortgage origination levels or credit performance beyond the near term given the uncertain impact cobot 19 will have on economic conditions.
As a result of that uncertainty that's further discussed in our risk factors and the 10-Q, it's difficult to confidently forecast, our future financial results and capital position. Therefore, we will not be providing any guidance about the potential path or outcomes for insurance in force growth for credit performance they'll continue provide the market with monthly credit metrics.
We entered this period of uncertainty with a book of business that had strong credit characteristics.
In addition, we are supported by a balance sheets. It has a low debt to capital ratio $6.3 billion in cash and investments contractual premium flow and a robust reinsurance program.
Despite the increased number of loan delinquencies and a corresponding increase the minimum required assets acquired to be held under the private mortgage insurer eligibility requirements of the geographies or P. Myers.
We estimate that at the end of June are available assets exceeded the minimum required assets by $1.1 billion.
In addition, our policyholder position was $2.9 billion in excess of the minimum state capital requirements.
Well delinquency notices received in the second quarter were materially higher than the first quarter.
There were 38% fewer notices in June that in Maine, approximately 67% of our June Thirtyth delinquency inventory and 80% of June June at noon delinquency notices reported to us as a cobot 19 related forbearance plan.
The delinquency rate ended the quarter at 6.35%.
Although the remains much uncertainty about the potential impact to credit performance and our business caused by this national emergency, notably the potential for higher incurred and ultimately higher pay losses were encouraged by the July new notice and cure activity.
With that let me turn it over to Nathan.
Thanks, Tim.
I will spend a few minutes talking about the second quarter and then we'll turn to some of the uncertainties that Tim mentioned.
In the second quarter, we earned $14 million net income or four cents per diluted share, which compared to $168 million net income or 46 cents per diluted share from the same period last year.
The difference is almost entirely the result of higher losses incurred that are primarily covert 19 related.
Net premiums earned increased 1% and the net premium yield declined to 42.7 basis points from 46.5.
Compared to the second quarter of 2019.
Net premiums earned in the net premium yield of several components the largest component as what we call. The in force portfolio yield which reflects the premium rates in effect on our insurance in force.
Biggest driver of the lower net premiums earned and premium yields in the quarter was the decrease in the profit Commission on our quota share reinsurance transactions.
The increase in losses due to the increase in the new delinquencies in the second quarter.
Or losses were ceded to reinsurers, which lowers our profit Commission.
Well I'm on the topic of profit Commission I want to remind listeners that profit commission as calculated on an annual basis and there is no clawback a profit commission earned in prior years.
In the first quarter, we earned what I would call our normal level of profit Commission as losses were very low as they had been for the previous several years.
As a result of them they're material increase in ceded losses in the second quarter. Our year to date profit Commission as of June Thirtyth was lower than the year to date profit Commission as of March 30, Onest, which shows up in our financial results as a negative profit commission in the second quarter.
Of course, we did receive the benefit of reduce losses as well.
The amount of profit Commission, we earned in future periods will be primarily influenced by the amount of losses incurred that are ceded to reinsurers.
In addition to the profit Commission net premium earned the net premium yields were affected by lower average premium rates on our insurance in force.
Accelerated premiums from single premium policy cancellations had a favorable impact on net premium earned and then at premium yield an increase from $11 million in the second quarter of 2019 to 33 million in the second quarter of 2020, reflecting the strong refinance market.
Net losses incurred were 217 million compared to 22 million for the same period last year.
In the second quarter of 2020, we received approximately.
58000, new delinquency notices compared to 13000 and the same period last year.
The estimated claim rate on new notices received in the second quarter 2020 was approximately 7%.
This estimate was influenced in part or the actual performance of delinquent loans.
Expectations for home price appreciation and the expected performance of borrowers that suffered a financial hardship as a result of covert 19 and as loans have entered a forbearance plan.
Of course, there remains a great deal of uncertainty about the ultimate loss performance of these delinquent loans.
Yeah.
Tablets loss reserves, we monitor the level of new notices received the level of delinquencies cured.
The uptake of forbearance plans and the current and expected economic activity.
Then using that data, we established reserves that reflect our best estimate of the ultimate claim rate and claim amount or severity.
Both new and existing delinquencies.
The ultimate claim rate.
Represents.
The percentage of delinquent loans, we expect to result in mortgage insurance claims and our net of expected cures, including cures due to successful loan workouts. After forbearance period is over.
In the second quarter of 2020 are re estimation of reserves associated with previous delinquencies resulted in approximately $10 million of adverse loss reserve development, primarily primarily attributable to an increase in expected severity.
We also increased our incurred but not reported reserve or I'd be NR by 31 million.
In our reflects estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us.
To establish the Ivy in our reserve as of June Thirtyth, we estimated the number of loans, whose borrowers had missed their june 1st payment, but that has not been reported to us as delinquent.
Reflecting the low level of the delinquency inventory that existed in March and the forebear foreclosure moratoriums enacted by the Gses and others. The number of claims received in the quarter declined by nearly 60% from the same period last year.
Primary paid claims declined 44% from 52 million to 29 million.
Although most foreclosure moratoriums are set to expire August 31st we expect claim payments to remain modest over the next several quarters due to their effects and the effects of forbearance agreements that are in place.
In addition to the effects of foreclosure moratoriums and forbearance agreements, we expect the impact of unemployment and economic uncertainty caused the delinquency inventory to increase further although we are encouraged by the July new noticing cure activity.
We continue to diligently monitor net underwriting and other expenses before ceding commission they totaled $59 million in the second quarter 2020, which was flat to the same period last year, while writing substantially higher volumes of business.
We previously reported that EMS, you guys see the not request or pay a dividend to the holding company in the second quarter.
Future dividend payments from J.C., the holding company will be determined on a quarterly basis in consultation with the board and after considering any updated estimates about the length and severity of the economic impacts and cover that 19 on our business.
We also NSP, Wisconsin, OCI not to object before on Jesse pays dividends to the holding company.
And until March 30, Onest of 2021, we will also need to seek the gses approval before I'm JC pays any dividends to our holding company.
As previously disclosed the holding company board declared a cash dividend of six cents per share payable on August 28.
Any future dividends will be determined in consultation with the board.
As of June Thirtyth made approximately $530 million of cash and investments at the holding company or next debt maturity is an approximately three years and our interest expense is approximately $60 million per year of which $12 million is paid to EMG I see on the holding company debt that it owns.
At quarter end, our consolidated cash and investments totaled 6.3 billion, including the cash investments at the holding company.
Investment income was modestly lower year over year, primarily as the larger investment portfolio was offset by lower yields.
The consolidated investment portfolio had a mix of 81% taxable and 19% tax exempt securities a pre tax yield of 2.8% and a duration of four years.
Our investment portfolio and a net unrealized gain of 265 million.
Dollars at June Thirtyth 2020.
83 million at March 30, Onest, 2020, and 147 million a year ago.
At the end of the second quarter, our debt to total capital ratio was approximately 17% and mgcs available assets for Pmires purposes totaled approximately $4.5 billion, resulting in a $1.1 billion excess over the minimum required assets.
As many of you know the P. Myers generally require us to maintain significantly more minimum required assets for delinquent loans, then for performing loans.
The P. Myers required asset factors for delinquent loans are based on the number of missed payments and whether a claim has been received.
Pmires allows for these factors to be reduced by 70% under certain circumstances, including related to covert 19.
During the quarter, the gses clarified that for loans that become delinquent between March Onest on December 30, Onest 2020, 70% reduction as applicable for at least three months and longer if a forbearance plan has in place.
As a result of our strong positive cash flow during the quarter, which increased our available assets and the application of the 70% reduction in minimum required assets for covert 19 related delinquencies are pmires access increased by nearly a $100 million in the quarter.
With that let me turn it back to Tim.
Thanks, Jason.
Before moving to questions, let me address a few regulatory and political topics.
During the quarter the FHLB re propose the GSV capital rule with comments do at the end of August and have continued the workout preparing the GRC exit conservatorship at some point.
What if any impact these potential changes have any M&A industry is not clear at this point.
That said, we do believe that the FHLB I appreciate the benefits of insurance company structure to provide to the housing finance system relative to capital market and other less regulated solution.
The epic Epay is also continuing the review of all GRC activities in June the CFPB proposed changes to the definition of qualified mortgage and the so called GSP patch rubber.
The revised definition would replace the borrowers debt to income ratio in the definition, where the pricing threshold.
Based on worked their trade Association you estimated it is estimated nested made at less than 10% of the private mortgage insurance market will be impacted by the proposed rule if enacted as is.
The 60 day comment period for the proposal and September eight and the proposed changes have a targeted effective date of April 2021.
Well other market options for credit enhancement are scarce are unavailable our industry in our company continue to provide credit enhancement solutions to lenders borrowers and the GRC.
While we are focused on prudent solutions. The response to the current environment. We continue to be actively engaged in discussions regarding housing finance policies.
We continue to advocate for and remain optimistic that any changes will include these the private capital, including private mortgage insurance.
Long term, we remain encouraged about the future all that our company in industry can play in housing finance they continued to be difficult to gauge what actions may be taken in the timing of any such action.
Private mortgage insurance offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.
We're navigating this period of uncertainty with a book of business that has strong underlying credit characteristics.
Supported by a balance sheet that has a low debt to capital ratio investment portfolio in excess of $6 billion contractual premium flow and a robust reinsurance program.
In closing as I mentioned at the beginning in my remarks condition to the well being of our employees. We're focused on one continuing to provide critical supports the current housing market and to positioning our company to prosper over the long term.
I want to remind listeners that our company was founded in 1957, we have successfully navigated many economic cycles continually provided borrowers and lenders with affordable and prudent low down payment options.
Im confident that we have the right team in place to navigate through this period of uncertainty and we'll continue to deliver the quality products and service our customers have come to expect from energy I see.
With that operator, let's take questions.
As soon as a reminder, in order to ask a question. Please press star debt to number one on the telephone keypad again at the start one time. Thanks question.
Your first question comes from the line of.
Jack.
Sanco Your line is now open.
Hi, good morning, guys.
Wanted to ask about.
July.
So in terms, there I think over 100% here to the full.
You seem to have a sense of what the total delinquency portfolio looks like forbearance standpoint can you do you have a sense of how much.
Those July shores were.
Forbearance loans of either come out of forbearance or.
I guess.
And with the if you have that level detail.
Yeah, Jack as Nathan ill take that one we did put out the new notices and carriers.
At our still kind of working through our review process on the forbearance related information that we have as of the end of July So don't have an update relative to the composition of new notices and carriers relative to the forbearance at this time.
Okay and then.
Use at 7% climate assumption.
On the book drove losses for a number this quarter I think youre at 9% last quarter. So curious.
What.
Good.
Model will it change.
Obviously forbearance outcomes are probably going to be locked.
Sure defaults, but.
Just curious was at the improvement that you saw sequentially through month to month for the quarter or was there something.
Bigger there to drive that change.
Yes, I think if you recall back to the to the ended the first quarter still lot of uncertainty about.
Forbearance plans.
What the uptake would be what the rules would be I think a lot of that stuff has gotten more formalized.
Through the second quarter here.
So from I think from our perspective economic conditions I may have improved slightly but really it was the I think the uptake in forbearance and now the list of options that the borrowers in forbearance have including the 12 payment deferral for covered 19 that lease related forbearance.
We think that there are some benefit to that and ultimately a lower claim rate on those and given that.
67% of the inventory and 80% of the June new notices for in forbearance that that benefited the claim rate relative to last quarter.
We're going to sneak one more.
You are down about four basis points on on the in force yield.
The year.
How are you thinking that sort of.
Terminal velocity that weird when what level do we sort of.
The new money yields in the old money yields sort of becomes sort of that applebee's that low fortys is this sort of how do we think it.
Hey, Jack its Mike Zimmerman so.
It's going to be a funds right of that profit Commission and the ceded losses I mean at the big driver in the quarter. When you look at the sequential decrease.
In yield and we get a nice to put a reconciliation in into the press release on that.
See that the even though we had accelerated single premiums because the refinance that was more than offset by the increase ceded losses, which reduces our profit Commission.
So like a lot of other things.
When we're looking out as to what's the impact the yields going to be and as a bounce back or where is that go to your point, it's got to be a function of how these losses develop into going forward as far as new notices coming in cures that might happen on the existing notices all that's going to drive into it so.
Really not that great deal visibility.
I would take long term, it's kind of where we thought this will be heading over time clearly in the quarter was a big step down, but thats all a function of just of the accounting due to losses.
Okay. Thanks, guys. Good luck.
Thanks Jay.
Your next question comes from the line of Douglas Harter. Your line is now open.
Thanks.
Touching on Jacks last point can you talk about pricing during during the second quarter and kind of how that.
Trend.
Okay compared to the increase you guys saw and talked about on the last earnings call.
Yes, Tim I mean, I think from my perspective, we continue to be focused on making sure our premium rates.
The competitive but prudently growing the insurance in force and long term value and we wrote.
A lot of volume this quarter I think we felt really good about sort of the risk return dynamic on that but don't want to get into a lot of specifics related to competitive pricing.
Okay.
And.
Do you have a sense however on a reported yet.
Sensors to kind of where.
Youre W compared to the market do you think.
Thank you might have good share loss share.
I'd say, it's tough to know at this point again I think we feel really good about the book of business that we wrote in the quarter and the fact, we grew our in force portfolio.
But until all the others report I think it's difficult to know exactly where we landed other than we're really happy with the business that we wrote.
Great. Thanks.
Thanks.
Next question comes from drilling of Geoffrey Dunn. Your line is now open.
Thank you good morning.
And.
I wanted to break apart new notices a little bit with respect to reserving.
I think you said, 80%.
Notice and score.
Forbearance and obviously the remainder were not.
Seven accidents, and how does that break apart right now in your view of forbearance versus forbearance loans.
John It's Nathan I mean, we then set separate factors for forbearance versus non forbearance loans. So.
Yes, I think I.
I think.
We ended last quarter and 9% little less.
Fronts, there, obviously, lower but with a very high forbearance rate so.
Don't.
Just don't really thinking about it that way, it's more the forbearance becomes a qualitative.
Factor in the the decision making process ultimately around around setting.
Claim rates, although I think as everyone is aware and subject to a lot of uncertainty right now just given that that most of what we're experiencing is unprecedented.
Yes, what I'm trying to get to read on is when forbearance goes away your core facing kind of the current economic situation is that a 10% incidents environment for something that's 12, 13% banana kind of qualitative comment around that.
I think forbearance plans are.
Still uptake in plans, although it seems like from from some of the broader market data that Theres also a lot of people coming out of them or curing from forbearance, we should have kind of better visibility on some of those things over the next couple of months.
But I think part of what the claim rate would be in the future on non forbearance items will be largely dependent on the economic conditions at that point and what the prospects are kind of going forward from that points I think it's somewhat difficult to say think directionally absent forbearance plans I think our claim rate in the second quarter would have been higher.
But wouldn't want to guide to any specific number, especially not out into the future.
Okay. Thanks.
Next question comes from the line of Bose George Your line is now open.
Yes, good morning.
Noted that 70%, 70% discount thats in place for key miners.
Isn't lakes until the under the year.
Weapons after that or does that take place as long as corporate related dance is being offset by the key to insisted that visibility on that.
Yes sure this Nathan.
I think you think about it in two parts the way the kind of clarified rule will work relative to capital under Pmiers as for all delinquencies that are in.
The balance of the year here will be considered co vetted related lease for three months. So for the first three months of that delinquency, we will be able to to use the 70% haircut.
But for all items that are in a forbearance plan, we continue to get to the benefit of the 70% haircut, while that loans and a forbearance plan. Obviously loans that are are going into those kind of plans now, let's plans might extend out into 2021.
And they also clarify the G sees that as also clarified that.
During a I'd say, a post forbearance workout period like a repayment period on a repayment plan or a trial period on a modification plan, we would continue to get the 70% haircut during the post forbearance workout period as well.
Okay, Great. That's helpful. Thanks, and then just in terms of the islands, let's first you can see any value in some of the high attachment point, hi lens that we've seen from a couple of competitors look sort of like statutory capital Ireland structures.
Lots on low.
Yes, I guess regarding this data again regarding CIO end market I think it's really encouraging to see.
Multiple EMI companies be able to access that market.
I think the terms are not as attractive in terms of the attachment points and pricing levels as what we saw a pre covers I think that's to be expected.
We continue to evaluate that market and wood.
Seek to do things, if we thought it made sense.
But the very high attaching structures I think you can think about those as being.
Maybe for other purposes other than risk mitigation or P. Myers capital. So while I think there's some value there that hasn't been our our primary mode and just remind that we do have have a pretty large quota share program that is a little different than than some of some of our competitors.
Who have used the island structure is a little a little more in different ways than we have.
Okay. Thanks, Jim just sneak in one more the 2007 and eight books, whether you've seen obviously preseason pickup.
Delinquencies, so what does a mark to market Ltvs on those books.
Yes.
This is Mike.
The delinquencies did pick up but significantly less than we saw on the overnight and forward book.
I don't have right as I fingertips here, but made during the course of the call we'll come back and give you that mark to market.
TV for those books.
Okay. Thanks.
Your next question comes from the line of Mark You brief your line is now open.
Yes, Thanks, how should we think about the islands impacting incurred losses going forward. If you continue to have elevated new notice is there a point at which kind of the incurred loss per new notice starts to go down as you start to bridge.
Some of the.
Some of the threshold delinquency levels and that brings your reinsurers on risk.
Yes, it's Nathan now that's exactly right right now any losses incurred that we are experiencing on the loans that are covered by those island transactions are still within our retention layers on those deals. So we are absorbing the law.
Losses on an accounting basis, there if it did get to the point, where the cumulative losses incurred were above the attachment point, we would begin seating those losses incurred to the islands.
Okay do you have a general sense of kind of what delinquency rate, we'd start to see that become a meaningful him driver of incurred number.
I don't have I think because those are closed pools and they've been running off.
Very quickly just given the relatively low persistency, we've had I'd I'd have to have double check right now what the have effective attachment point, but I think what you're looking at as you know at some point out in the future I would say, it's the b.
Fairly high I don't know I don't have an exact number but something.
Above say, 5% in terms of expected loss rates I would expect just given that those.
Those deals continue to de lever as the as the loans prepay.
Okay got it and then I'm just on the profit Commission I think maybe can you indicated.
That those are done on annualized basis, and there is no clawback, but it's not determined on incurred losses or or paid claims.
It's on an incurred basis. So it's really on a kind of an accident year basis. So we have.
All of the notices associated with the given accident year, the ultimate losses associated with those becomes the loss number and that calculation.
Okay, and so to the extent of which there are favorable developments down the line.
Because maybe you assume to hybrid claims rate on these new notices there's no.
You don't get that money back.
No we would.
Right now, we're assuming obviously very little if any of this has resulted in paid claims. So this is encouraged of primarily just establishing reserves at this point.
If those reserves.
Turn out to be.
Two law and losses are ultimately higher than we would receive less profit Commission if loss reserves are too high and ultimate losses are lower we would receive more profit Commission.
Right, Okay, it's trues up but really within the accident year Con constructs. So 2020 is kind of a standalone year, but we'll continue to true it up based on any revised estimates of ultimate losses, Okay got it makes sense alright. Thank you.
Hey, just wanted to circle back to both to answer your question on the Mark to market.
TV.
So in done at the CBSA level right does that give you as a.
Like their near you're looking at below 70 on those two book years.
Probably for all the away in prior quite frankly for really as you look at that Mark to market LTV CBS really from them.
18 book.
Back is probably 80% or less.
Those real books significantly lower.
And your next question comes from the line of Adams Par. Your line is now open.
Thank you.
Yes.
Housing prices have been quite firm I guess because of demographics and low interest rates and tight supply.
What.
What are you assuming for the loss per loan.
And what happens if the holder of the mortgage.
Told their money back you get a recovery on the loan.
Adam.
Sure so I'd like to haircut from yet so.
If there is no loss on the property then the claim most likely will not be submitted to us are busy submitted to us it would be what we'd call is zero dollar.
Hey claim, but if the lender or the insured gets full recovery of what owed them through the sale of the property by the borrower than they are still claims for the mortgage insurance.
But what a bit for closed and sold for more than the amount of the uninsured balance.
So there's a few states and I'd have to get the list of them where their ability to go after that skippy technical term or we go to the borrower resources to see if theres any valent any any assets that the borrower has that theres only a few states that have that.
The ability to kind of go back to the borrower.
Quite frankly, what we've seen in our experience over the years of doing that very little recovery comes from those borrowers.
Because quite frankly, there they don't have the asset levels kind of what did I was lender for closes and the lenders sells the property at Oh for more than the outstanding uninsured balance do you get back some the claim that you had paid.
Or do you not settle up the claim and Culverhouse's sold and.
So I'll make a part of the aggregate are about debt title title needs to transfer for us to pay the claim soap the lender foreclosed and took title Senate claim would have been submitted and we will evaluate whether or not there was a lot there or not.
If the bar if if the lender, though if at that time, if we assess whether because we have the right to acquire a property versus paying the claim. So we will be seeing the same thing that that lender would be seeing as they LNG is the property values are up they foreclosed the borrower didnt sell the property to avoid the foreclosure so.
We have the opportunity to acquire that whole and so that would that reduce our loss. If there if we didnt pay one so thats kind of the check and balance there we have the right to acquire the property if they if it can be sold for more and reduce that loss.
So, but when you set up your initial reserve on the default notice you assume a total loss on the insured balance.
Well, we split the severity so like this last quarter was right around 100%, though.
But yes, we would assess what our severity would be.
It's a it's like and some of those club loans in New York, New Jersey that were we paid claims that are delinquent seven or eight years, that's a very high severity now we're paying much more 120% or sell.
More recently coming into the price appreciation, we probably see less than 100% severity. So we make those adjustments when we established reserves.
Okay.
But rising house prices do give you a lot of protection than.
Ambela faulted loans.
Absolutely okay.
Okay. Thank you very much Mike I really appreciate your explanation.
Thanks, Adam.
Your next question comes from the line feels to follow your line is now open.
Yes, Thanks, and good morning, I wanted to get back to the 70% hair cut and the capital requirements and just understand I guess, one thing I'd been struggling with as the time in forbearance.
Gets longer.
Is there an increase in the capital requirement that you have on that mortgage and then the 70% haircut appliance or are we once into this.
Two to three months kind of aging capital requirement over the duration of the forbearance program.
Hi, its Nathan you had it right in saying that the 70% hair cut applies to the underlying.
Pmires factor that is based on time and delinquency. So 170% haircut continues to apply the factor.
Hi, which its hair cutting continues to increase as the loan ages and delinquencies. So the amount of capital required does go up as the item ages just by.
Not by the full amount of what would be indicated and p. myers by 70% less than that full amount.
Got it okay understood. It's Phil just as a quick reminder, right that first step up to 55% when it goes it at two to three category and then by type of gets out too before claim I think goes to 85%. So the incremental caveat there is incremental capital, but the big step up comes in that first that first.
Yes.
Pardon part of my fear was it in not understanding this could there be a double whammy next summer.
You get to step up in the aging and you also get bid.
Central falling off the hair cut but it doesn't seem like that that's the case or at least.
No wonder whats getting ahead of myself, but I think that makes sense. Thank you.
When you you had talked about gross expenses in the quarter.
59 million were flat year over year.
Is there any so you can point us to from a benefit people just being stuck at home.
Your salespeople pantheon and how on the road.
Doing what they do as a sales person.
Was there any expense benefit this the sheltering fleets.
That we live in.
This is Tim I would say for us it it's modest I mean, there there are some savings there obviously from a from a travel and.
Marketing expense.
But I would say for us our expectations that that.
Not significant.
Got it okay, and I don't do going back to one question that was earlier in the profit Commission I think.
It makes sense to me that don't any year to date basis, I think what part of that the question was trying to get that will if there's a huge favorable development number they could not asking for guidance. If there is a big favorable development number that comes next year owners for this year that Wouldnt impact in profit Commission either 20 Twond.
We're 2021 right.
So again the.
Thinking about the years as as accident business and think about the years is as accident years, so that to the new notices for the second quarter of 2020, those are going to be associated with the 2020 accident year and as we continue to update our estimates of ultimate losses that will flow through to see.
Updated estimates of ceded losses, which will impact the profit Commission.
So there's like a there is a true up but it's contained within the accident year. So.
Yes losses. It next year don't impact the profit Commission for 2020.
But any development on the the notices that we have received in 2024, we will continue to true up both ceded losses and the profit Commission.
Okay.
Maybe to ask it differently, we've seen adverse development this year, which is potentially on the 29 keen reserve losses did the 29 keen profit Commission change at all based on the adverse development that we saw this year.
I'd have to look at.
I don't know.
Exactly what that adverse development is attributable to in terms of book years, there weren't a lot of losses in 2019, but if you did assume that that adverse development was associated with.
2019, and that the loans that were it was associated with were part of the reinsurance the quota share deal then yes. The profit Commission would have gone down by the amount by which ceded losses went up.
Okay, Thats paying that most of that adverse development was on kind of more legacy type.
Loans that are less likely to be in our reinsurance deal or are covered at a lower percent. So by my 19 example, there was just illustrative not that we think the developments coming from 2019.
No no undecided Mccann, we wanted to make sure I understand it in that sense. Thank you guys you're welcome.
Yes.
Okay.
And your next question comes from the line. This pilot Clipper. Your line is now open.
Hi.
Can you give us any guidance on what your end of July delinquency rate was versus 6.35, I know things went down.
It looks like you came down meaningfully, but one of your competitors reports actual delinquency rates and so I'm just trying to triangulate what that number is.
Hi.
Mike Zimmerman here.
It probably tick down maybe a.
Few basis points.
Because the inventory declined made about 1000 or so unit.
The number of loans outstanding just one more month, so that went up so maybe we say we drop down a 10th or so.
But I'll, maybe as we'll try and get that into about around 6.2 and would be my gets into that number.
Got it.
Your next question comes from the line the from here Bob.
Align smelting.
Hi, good morning, and thank you for taking my questions.
Can you just want to start with the.
What would read that forbearances in delinquencies I appreciate that 67% of delinquent loans are related to corporate 19, forbearance, but is there a statistic you can share going the other way that is what percent of fuel forbearance loans are already reported.
Delinquent and so like what could potentially be coming it's going to miss and other expenses.
Yeah.
Yes, it's Nathan I I think weve.
Typically are reporting.
As more robust for delinquent loans than for performing loans and while we do get forbearance reporting.
From the G season from certain Servicers on performing loans, it's not as robust as the information we get for for nonperforming loans. So I think we're a little cautious to.
I think we would have a maybe a good number for one side of that statistic, but.
No not just not feel strongly about about the other number just given that our our reporting on performing loans typically isn't isn't at the same level as it is our nonperforming loans.
Understood No I appreciate that thanks.
So I guess.
I think you mentioned you expect delinquencies to increase as we go to do which ended the second office to Euro and I was just wondering if that's something you will see data that's telling you that or is it just mall, but given the economic involvement in the high unemployment rates et cetera.
Yeah, Yeah, Nathan I I do think you know the July results.
We're I think we're certainly encouraged by that but still feel like there is a lot of economic uncertainty at this point.
And that they're also seems to be.
Some some items that.
Entered forbearance.
That maybe.
Didn't either want to be in for grants at least anecdotally or are carrying to refinance these are things that we've heard so.
Obviously, the ultimate the peak, let's say of delinquent inventory.
As quite uncertain.
I think we were certainly thinking about it in July as being still.
Trending upward from where we were but seeing the results for July.
Yes, just feel like that certainly favorable to what we were thinking.
Understood. Thank you and just one final question I just want to make sure. We believe we get this right on the P. Myers and the 70% Dexcom.
You said loan is in scoop, it really didn't slow bear.
70% discount will apply to out the corporate related forbearance period is that correct I'm not talking of like that just for three months that you've got about achieving a little bit related forbearance plant you will get the discounts for the dial global equity and speech is that right.
That's correct for for that loan.
As long as it remained in a forbearance plan, we would continue to get to 70% haircut and if it were in a post forbearance workout such as a repayment plan or a trial period on a modification we would continue to get the 70% haircut during the post forbearance period as well.
Understood. Thank you that's all my questions appreciate it.
I think in order to actually question. Please press Star then to number one telephone keypad again does start one for questions.
No further questions from the full length percentish seem to continue.
Yes. This is Tim again, just want to thank everyone for their interest and ER hope everyone is able to stay healthy in tape out there. Thank you again have a great day.
Ladies and gentlemen, this concludes todays conference call. Thank you for participating you may now disconnect.
[music].