Q2 2020 NMI Holdings Inc Earnings Call
Ladies and gentlemen, today's conference is scheduled to begin momentarily until that time your lines will again be placed on music cold. Thank you for your patience.
[music].
[noise], ladies and gentlemen, thank you for standing by.
[laughter] and welcome to the end Am I Holdings, Inc. second quarter 2020 earnings Conference call.
At this time, all participants are in listen only mode.
After the speaker's remarks, there will be a question and answer session.
To ask a question. During this session you want me to press Star one on your telephone keypad I would now like turn the call over to Mr. John Swenson. Please go ahead Sir.
Thank you Corey good afternoon, and welcome to the 2022nd quarter Conference call for National Mike.
I'm, John Swenson, Vice President of Investor Relations and Treasury, joining us on the call today, our bread Schuster Executive Chairman Cody Merkel CEO.
Adam Pulitzer, 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 Nashville, My Dot com under the investors tab.
During the course of this call we may make comments about our expectations for the future actual results could differ materially from those contained in these forward looking statements additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our web site or through our regulatory filings with the.
C C.
Yes in to the extent the company makes forward looking statements. We does not undertake any obligation to update those statements in the future in light of subsequent development.
Further no one should rely on the fact that the guidance of such statements as current at any time other than the time of 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've provided a reconciliation of these measures to the most comparable measures under GAAP.
I'll turn the call over to bread.
Thank you John and good afternoon, everyone.
On today's call will review, our second quarter results.
Sure an update on how the code crisis is impacting our business performance and financial position.
As well as the broader housing and mortgage insurance markets.
We are now five months into this pandemic.
And while we had hoped to see a rapid containment of the virus and quick rebound in economic activity.
We plan from the start.
For a more protracted downturn and uncertain recovery.
We built national am I to be a credible and sustainable counterparty through all market cycle.
From day one.
We focused on building a 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 emerge.
We were using individual risk underwriting and granular rate GPS pricing to target a higher quality mix of business.
That's worse unsecured comprehensive reinsurance protection on our in force portfolio.
Alongside our credit risk management efforts, we've built a strong balance sheet Foundation.
We have been conservative in our investment portfolio and worked hard to establish a robust liquidity position.
We have flexible access across a broad range of capital and reinsurance markets and a significant regulatory funding cushion.
Over the last too much we have taken steps to further strengthen this foundation.
Raising their nearly a billion dollars of debt equity in Iowa and capital.
And securing additional reinsurance protection against adverse development in our insured portfolio.
Our ability to raise so much capital in such a short period of time across multiple markets.
The direct function of the strength and durability of the National Am I franchise.
Our broadly conservative stance heading into the crisis and the recent success. We've had we've achieved in the capital in reinsurance markets positions us to continue supporting our lenders there borrowers and the overall housing market through the covert crisis and can fully capital.
Wise on these significant new business opportunity that has now emerged.
Okay.
We are encouraged by the resiliency, we see in the housing market.
So Matt demand is robust.
It's prices continued to show strength nationally and record low interest rates are giving more Americans a chance to access homeownership.
At a time when its most critical.
Policy efforts are also playing an important and stabilizing role.
We fully endorse the various forbearance foreclosure moratorium and other assistance programs designed to help bridge borrowers pass this point of acute stress.
And ensure they are able to remain in their homes and resume their lives with limited interruption once the crisis has passed.
Homeownership is essential.
More so today than ever before.
People need shelter in order to shelter in place.
And allowing borrowers who through no fault of their own are facing real strain to stay in their homes and avoid foreclosure is the right social policy.
It will also help speed the ultimate pace of economic recovery.
We encourage policymakers to maintain their focus and offer continued support as needed to carry homeowners through this crisis.
In late June you update yesterday, and he sees updated P. Myers.
And clarified that loan subject to a cobot related forbearance program will benefit from a permanent risk based hair cut for the duration of the forbearance and subsequent repayment plan or trial modification periods.
We were pleased with the update.
And the update you say ngs sees recognition of the unique nature of this crisis.
This change enhances the mortgage insurance industries ability to support existing borrowers.
Through the duration of distress and to continue serving new borrowers at a point of increased need.
With that let me turn it over to Claudia.
Thank you Brad.
I continue to be pleased with the performance of our team and our business through the called the crisis.
From the start we've taken steps to protect the health and safety of our employees and ensure continued ability to seamlessly support our lenders and their bars.
We also took immediate action to increase our risk based pricing and enhance our underwriting guidelines in response to the heightened market uncertainty.
And bolstered our capital profile and reinsurance program to solidify our already strong funding and risk positions.
GAAP net income for the quarter was 26.8 million or 36 cents per diluted share.
And adjusted net income was 29.7 million or 40 cents per diluted share.
GAAP return on equity was 9.6% for the quarter and adjusted our OE was 10.7%.
We generated record second quarter, and I W. of 13.1 billion up 16% from the first quarter and 8% compared to the second quarter 2019.
We have started the third quarter even stronger.
Writing nearly 6 billion of and I W. volume in July.
The new business environment is exceptionally strong.
The koby crisis is driving a shift in behavior and fueling what we expect to be a sustained increase and purchase demand.
People are moving out of more densely populated urban areas in favor of suburban communities, where social distancing is more easily achieved.
Shelter in place directives, our reinforcing the important to the home and driving increased interest from first time homebuyers.
Record low rates are out in fuel, increasing affordability and drawing additional buyers to the market.
This record demand is meaningfully outpacing supply and driving continued house price appreciation and broad resiliency in the housing market. Despite the overall macro dislocation caused by the Kobe crisis.
Our volume is at record levels.
And we have a robust forward pipeline.
We are seeing a tremendous upswing in new business to me and while pricing remains strong and the risk profile over new production into best we've ever seen.
Lenders are turning to us with increasing need.
And an increasing speed to help them support bars to the duration of distress and manage their record origination volume.
In the second quarter, we activated 25, new lenders.
We are now doing business with a broadly diverse group of over 1100 high quality originators.
Our sales team is signing up new accounts and deepening our penetration.
All while operating on a fully remote basis.
We see a real opportunity to help our lenders and their bars at a time when they need us most and in turn to increase our reach in the market.
We built our company to perform across all cycles and everything we have done to establish a durable and profitable franchise.
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 lead through this stress.
The strength of our position coming into this crisis has allowed us to remain fully customer focus throughout.
We have been consistent with our sales message our price delivery through rate GPS and our underwriting response times and operational ready readiness.
We are delivering in a business as usual way and this stands out as a notable positive to customers amidst the backdrop abroad uncertainty and a changing environment.
The breadth and scale of our recent capital reinsurance efforts reinforces this view.
Customers see the success, we have achieved as a strong indicator about our discipline consistency and future capabilities.
In the current environment. This success sends a powerful message and is helping us to accelerate the continued development of our customer franchise.
We have talked at length on our recent calls about the digital evolution of the mortgage landscape.
The advantages that our modern scalable IP platform provides.
At the end of March we entered into a long term I T services arrangement with Tata consultancy services.
Tcs is a leading global I T provider with deep experience in the mortgage market.
Under our agreement we are consolidating a range of like T functions that we had previously manage across our internal team and a number of third party vendors with a single partner.
We expect that our agreement with Tcs will further solidify our team lead Walt the same time allow us to achieve meaningful expense saving over the duration of the contract.
We estimate that we will save $100 million over the next seven years.
That will and that we will achieve these savings while delivering an even more enhanced I T experience for our internal and external users.
Before turning it over to Adam I want to know how proud I am not for the fifth consecutive year National mine has been recognized as a great place to work.
Great place to work as a global authority on workplace culture employee experience and leadership and partners with Fortune magazine to produce the annual Fortune 100 best companies to work for left.
We believe that the quality of our team and the culture that we have established our key competitive advantages and it is gratifying to again be recognized for these strengths.
That I'll turn it over to Adam.
Thank you thought here, we delivered strong financial results in the second quarter in the face of unprecedented macro dislocation. We generated 13.1 billion of then I w. in the quarter and reported primary insurance in force of 98.9 billion at June Thirtyth.
Net premiums earned for the quarter were 98.9 million adjusted net income was 29.7 million or 40 cents per diluted share and adjusted return on equity were 10.7%.
Total and I W. were 13.1 billion included 11.9 billion of monthly production.
Refinancing originations represented 41% of our volume in the quarter up from 29% in the first quarter.
Our mix of refinancing volume declined to 30% in July as purchase origination activity continued to accelerate.
It's Claudia mentioned, the new business environment is exceptionally strong our unit economics on new production are up and capital demands are down given how high quality risk is scored under the Pmiers framework.
Taken together expected risk adjusted returns on new business are trending above our mid teens long term target.
Equally as important we expect our recent production will be highly persistent given a record low interest rate environment, helping to build embedded value and feed our future financial results.
Primary insurance in force was 98.9 billion compared to 98.5 billion at the end of the first quarter.
Well record low interest rates have helped spur except exceptionally strong new business volume.
Similar to the resiliency of the overall housing market, they've also driven a significant increase in refinancing activity in portfolio turnover.
12 month persistency in the primary portfolio was 64% at June Thirtyth.
We expect persistency will remain low in the near term given the outlook for interest rates.
Overtime. However, we expect portfolio turnover will slow and persistency will rebound as the business. We're writing in the current rate environment stays on our books for an extended period.
Net premiums earned in the second quarter were 98.9 million, including 15.5 million from the cancellation a single premium policies.
Reported yield for the quarter was 40 basis points compared to 41 basis points in the first quarter.
Our premiums earned for the quarter reflect a decrease in the profit Commission received under our quota share reinsurance treaties.
Our profit Commission decline as we see that increased losses to our reinsurance partners. This is exactly how our reinsurance coverage is designed to work in a period of increased stress, we see an increasing amount of lost isn't required regulatory capital to our reinsurers.
Well this temporarily reduces our profit commission, you'll be directly offsetting benefit to our claims expense and additional benefits to our pmiers and state regulatory capital positions.
We also continue to receive our ceding commission in full without any reduction for loss experience.
Investment income was 7.1 million in the second quarter compared to 8.1 million in the first quarter.
Investment income declined modestly in the quarter as we prioritize liquidity and increased our cash equivalent position in late March early April at the onset of the co the crisis.
We've since redeployed much of our excess liquidity position and expect net investment income to rebound in future periods.
Underwriting in operating expenses were 30.4 million compared to 32.3 million in the first quarter.
Expenses in the second quarter included 152000 of cost incurred in connection with our recently completed island offering.
We expect an additional 1.8 million of iowan related transaction costs to come through in the third quarter.
Excluding island related transaction costs adjusted underwriting in operating expenses were 30.2 million.
Our GAAP expense ratio was 30.7% and our adjusted expense ratio was 30.5% for the quarter down from 32.2% in the first quarter.
Our new long term Ickes services agreement with Tcs is expected to drive approximately 100 million of savings over the next seven years.
In connection with the agreement, we will be streamlining a consolidating a range of our third party vendor relationships under Tcs and have successfully transitioned 50 of our full time employees over the Tcs platform.
Our expected cash savings from the Tcs relationship will begin to emerge immediately.
However, GAAP accounting treatment for the contract will yield an increasing income statement benefit as we progressed through the seven year term.
Overall, we expect that arrangement with Tcs will allow us to maintain our technology, leading competitive advantage in an increasingly cost efficient manner.
We had 10816 defaults in our primary portfolio at the end of the second quarter compared to 1449 at the end of the first quarter.
The significant increase in our default population is directly attributable to the cobot outbreak as borrowers have faced increasing challenges and chosen to access the forbearance program for federally back loans certified under the cares Act and other similar assistance programs made available by private lenders.
At quarter end, 28555, or 7.7% of the loans, we insured in our primary portfolio were enrolled in a forbearance program, including 9502 of the loans in our default population.
6752 loans that had missed at least one payment, but not progressed into the bulk status.
And 12301 for 43% of all forbearance loans that were fully performing without any missed payments.
At the end of July we had 14175 defaults in our primary portfolio for default ratio were 3.8% and identified 28510 loans in forbearance programs.
We're generally encouraged by the slowing growth of our default population rising level of cure activity among cobot impacted borrowers.
And the general stability in our forbearance population.
Claims expense was 34.3 million in the quarter, reflecting the significant increase in our kobin related default population.
The reserve, we established for each defaulted loan and by extension. The claims expense, we incurred any given period reflects our best estimate of the future claim payments to be made for each individual alone in default.
Our planes exposure is triggered by a property foreclosure, we don't phone delinquencies and is ultimately a function of the number of defaulted loans the progressed to claim which we refer to as frequency.
And the amount we pay to settle such claims, which we refer to a severity.
Our estimates of claims frequency and severity or not formulaic rather they are broadly synthesize based on historical observed experience for similarly situated loans.
And assumptions about future macroeconomic factors.
We generally observe that forbearance programs or an effective tool to bridge dislocated borrowers from a point of acute stress to a future date when they can resume timely payment of their mortgage obligation.
The effectiveness of Forbearance program is greatly enhanced by the availability of various repayment and loan modification options, which allow borrowers to amortize or in certain instances outright deferred payments otherwise do during the forbearance period over an extended length of time.
In response to the cobot outbreak the FHLB say ngs fees have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back is performing status.
At June Thirtyth, we established lower case reserves for defaults that we consider to be connected to the cobot outbreak.
Given our expectation that forbearance repayment modification and other assistance programs will aid affected borrowers providing them a clear pathway to avoid foreclosure and keep their homes and ultimately tried higher cure rates on such defaults that we would otherwise experience.
Balancing this is the approach we took with our incurred but not reported or in our reserves.
We establish I'd be in our reserves for loans that we estimate to be in default that have not yet formally been reported to us as such fire servicing partners.
The second quarter, we doubled our I'd be in our reserving factor to account for the possibility of reporting delays tied to the co the crisis.
Interest expense in the quarter was 5.9 million and includes 2.6 million of extinguishment cost related to the repayment and retirement of our 150 million dollar term loan.
We reported a 1.2 million dollar loss from the change in the fair value of our warrant liability.
GAAP net income for the quarter was 26.8 million or 36 cents per diluted share.
Adjusted net income, which excludes periodic transaction costs worn fair value changes and net realized investment gains were 29.7 million or 40 cents per diluted share.
As Brian noted, we completed a comprehensive series of capital in reinsurance transactions over the last few months.
We raised 230 million of common equity 400 million, a senior debt 322 million on the island market and entered into a new quota share reinsurance agreement covering our new business production from April 1st through December 30, Onest of this year.
In total we raised nearly 1 billion of capital and secured additional risk protection against adverse development in onshore portfolio.
The success that we've just achieved in the markets paired with the risk disciplined capital strength and comprehensive reinsurance program that we carried into this crisis position national am I to perform well through the cobot 19 pandemic.
We've already downstream to significant majority of the net proceeds from our equity and debt offerings into Nm I see.
And if immediately began deploying this fresh capital in support of incremental high quality new business production.
We also capitalized on continued interest from the traditional reinsurance community and chose to upsize, our new quota share agreement from the tenant a half percent cession rate, we initially announced to 21%.
The island that we closed on July Thirtyth, our fourth Oaktown Reoffering builds upon the success, we've achieved in the risk transfer markets to date, and it's particularly valuable in light of the cobot outbreak.
The transaction provides us with excess of loss reinsurance protection on nearly all of the remaining uncovered pre cobot risk in our insured portfolio.
The deal is similar in structure to our first three transactions, providing us with real working layer risk protection and capital benefit.
It covers us for cumulative claims experience on risk originated between July 1st 2019, and March 31st 2020 from a 2.5% attachment point our deductible.
Up to an 8% maximizes attachment.
The transaction carries a weighted average lifetime pretax cost of approximately 6%.
The island further into waste, our balance sheet and pmiers position against the impact of forbearance activity in default experience and in doing so allows us to release the equity capital that we had previously allocated to support this pool and redeploy it in support of incremental high quality high return new business production.
Our ability to successfully execute a regular way island offering covering pre coven risk in the current environment broadly demonstrates the durability of the island market as a source of support for mortgage insurance risk and highlights the confidence that investors have in our individual risk underwriting approach and consistent use of rate GPS.
The target higher quality volume.
Total cash and investments were 1.9 billion at quarter end, including 76 million of cash and investments at the holding company at June Thirtyth, our investment portfolio had an aggregate unrealized gain a 53 million.
Shareholders' equity at the ended the second quarter was 1.3 billion equal to $14.82 per share. We have 400 million of outstanding senior notes and fully repaid and retired our previous 150 million dollar term loan.
Our 100 million dollar revolver remains undrawn and fully available.
At quarter end, we reported total available assets under Pmiers of 1.656 billion at risk base required assets of 1.048 billion excess available assets were 609 million.
The island issuance that we closed last week is not included in these figures as it was completed after quarter end to 322 million dollar offering will further bolster our excess position and provide even more funding runway for future periods.
The strength of our current funding profile and the comprehensive and uniquely expansive nature of our reinsurance program with this significant overcollateralization provide us with meaningful Pmiers and state regulatory capital runway.
We're in a position to be fully focused on new business opportunities and provide leadership support to our lenders and their borrowers.
Overall, the current environment is unlike any we've seen before while this introduces general uncertainty, we believe that the conservative nature with which we managed our business across the board and the proactive steps. We've recently taken in the capital and reinsurance markets will be valuable as we navigate through the stress with that let me turn it back to Claudia.
Thanks, Adam the covered 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 tax payers across all market cycles.
We came into this stress in a position of strength.
Bolstered by the conservatism with which we have managed our business and we are here to provide support through this challenging period.
Thank you for joining us today and I will now ask the operator come back on so we can take your questions.
Okay. At this time, if you would like to ask a question you may do show by pressing star Denim number one on your telephone keypad.
If your question has been answered and you wish to remove yourself from the Q you might do show by pressing the pound key on now pause for just a moment to compile the Q and I roster.
Your first question comes from the line of Douglas Harter.
From quiet credit Suisse.
Sorry your line is open.
Thanks.
I was hoping you could just help us think about kind of the the magnitude of capital you raised.
And what kind of size the opportunity that you see and so how much of this was four.
Being able to kind of grow the insurance in force and kind of grow into that capital versus kind of how much of this would be.
What kind of defensive or you know if and when kind of the 70% haircut goes away for your from now and when forbearance and.
Yes, Doug it's a it's a great question and certainly a fair question I'd say, we came into this stress in a really good position from an operational standpoint from the perspective of our you know the quality in our short portfolio, our liquidity position the investment portfolio and also our capital position, but.
Facing a stress of.
An unprecedented magnitude that is going to follow an unknown path because we've never seen something like it before it was the natural time for us to consider bolstering our resources, we didnt need to pursue a capital raise because of the risk in the in force portfolio. The strength of the capital position that we came into this crisis with and the unique workings.
Of our reinsurance program that provide us with accordion like capacity to absorb an increasing amount of pmiers train would have carried us through but having more capital in the face of an uncertain environment is an unequivocal positive, but what really drove our decision in around capital and focused our efforts was that.
New business environment, we knew pretty early on based on the changes that we had made that pricing would be up that the risk profile of production coming through in the post coded a environment would be down in that unit economics would would be there in a meaningful way, but by early June when we really launched a comprehensive series of quota share equity.
In debt. It was also clear that volume would be there in record size.
So the capital we raised is first and foremost about making sure that we have all of the funding needed to capitalize fully capitalize on that enormously attractive market opportunity and at some point, though capital is fungible and so having additional resources in the system provides additional value for the enforced portfolio.
What we've done now, though with our most recent island transaction Weve, So let's call. It good bank Bad bank, but we've essentially ring fenced the potential exposure that we have to premier strain on the enforce portfolio because nearly every risk that we originated prior to March 30, Onest of this year now sits under both.
They quota share agreement as well as an excess of loss agreement. So much much more focused and driven by the new business opportunity, but obviously in a period of uncertainty the additional capital in the Fungibility of capital provides us with added protection on the in force.
Got it any way to sort of size, how you're kind of seeing though the market opportunity.
And kind of the ability to kind of ramp back up after.
Yes.
Slower than than pure growth from a second quarter.
Yes, Doug I'll take that.
We don't typically guide and I W., although as I mentioned in my prepared remarks, we had a very very strong July and we're seeing a strong even a stronger August coming through the new business environment is just exceptionally strong both in terms of volume and pricing and risk adjusted returns.
As as Adam said, our rates are up risk profile strong capital requirements on new business production are down.
So we're very excited about our new business opportunities trajectory.
Great. Thank you.
Thanks, Doug.
Your next question comes from the line of Mark to freeze it from Barclays.
Sorry. Your line is open. Thank you have a follow up question.
On the last one it yeah.
It was interesting how it did look like your share kind of pulled back and the second quarter. It was probably the lowest growth quarter, you guys have hub stores I, a fun and it's clearly picking back up.
With the strong July can you talk about how pricing and kind of your risk parameters might have evolved.
Over that period, and whether that might have affected kind of the risk that you were saying it certainly looks like you did a lot more a higher percentage of high FICO lower percentage of high LTV is that also cover reflection of some of the adjustments you made around pricing or is it more reflection on just what kind of risk was being generated by.
Your clients.
Yeah. Thanks Mark.
It is a great question, let me first just talk about just some specifics about the quarter, then I'll I'll mention around the.
Around the quality piece.
In terms of specifics about the quarter. We know we were on the leading edge of raising prices as well as tightening our underwriting standards. We've been really disciplined both on risk in pricing and that was certainly the case at the outside of coated.
We have the flexibility of the ubiquity through rate GPS. So we were able and willing to take pricing up at the at the first signs of market distress.
Since then everyone is followed at this stage the other amyas are roughly on the same putting from a pricing standpoint, but it took many of our competitors month to make similar changes.
And as I mentioned, we had a terrific MW in July but with what's really important to focus on is that we're writing large volume was exceptionally high quality business high quality and high return.
As far as the quality. Yes. This is this is a period of unknowns. We we've never seen anything of the nature of magnitude I was like this before so it's entirely appropriate and consistent with everything we've done up to this point pressed to take a conservative stance from a new business risk point, it's just not the time to lean in and.
So our concentration of 97, LTV or below six maybe FICA or greater than 45% anti volume and particularly layered risk with those apps attributes.
This is the time for us to fully utilize the underwriting and pricing tools that we work so very hard to develop.
Got it Mark.
One for yet the the pickup in volume that we enjoyed in July that Claudia mentioned actually came if you look we've got operating statistics that are out embedded in the 8-K that we released with the earnings results today with a similarly strong if not stronger risk profile of new production from what we've been running in the last few months and so the volume is there.
Our our pricing is driving us towards higher quality, but also the market has shifted meaningfully in terms of the quality that's coming through.
Got it if that's helpful and Adam.
Can you I mean any help you can provide us on how the.
The cost saves from the Tcf contract will flow through the gap statements I think you indicated that.
Builds over time.
Yes, that's right they're going to build.
They're going to build overtime, the 100 million will come in over the next seven years.
It's going to come from a range of different different areas streamlining and consolidating our third party vendor relationships.
Transitioning 50 full time employees over to their platform.
Accounting for the contract requires us to match the expense alongside the services rendered and any time, we're transitioning into such a significant relationship of that nature. The services rendered will be heavier earlier wrong. So the expense savings won't start to I'll call. It fully emerge until a few years into into the contract.
Okay got it thank you.
Thanks Mark.
Your next question comes from the line of Bose George from KBW.
Sir your line is open.
Hello. Good good afternoon, obviously is this what we call up quickly on the expense contracts.
So I wouldn't think about sort of the benefit of that longer term to your expense ratio or is there yes.
A way for US again think about the benefit of that.
Roll over time.
Yes, but it's not necessarily do our expense ratio, but what else shares that Oh I see is for us as it is I think for most organizations our largest expense department historically, but it typically people our biggest cost and that is certainly the case throughout the organization, but IP has on top of our people cost I'll call them platform and project costs the benefit.
Of the Tcs engagement is first and foremost strategic in that it will provide us a partnership with a a global leading firms to drive continued innovation and success and leadership on the ITC side, but the contractual nature of the engagement also caps.
Where our expenses would otherwise grow in what is as otherwise been our largest department and so there are savings there dollars of savings that are going to come through but even more importantly, it in the largest expense department that we have set a ceiling on where expenses will grow overtime and so that will add significant.
Leveraged our expense ratio overtime.
Okay. Thanks sense. Thank you and then just switching to the to the premium.
Just just regarding the impact of so goals and classic commissions Dick average prices at the increase.
To the point, where you business is it supposed to get equal to the premiums on the stuff that's running off.
It is in failure.
Both the impact of the profit commission decline because of ceded losses and the increase in.
The increase in contribution cancellation earnings roughly cancel out in in the yield calculation the cost of the quota share went up by about 2.9 basis points and the contribution from cancellation earnings went up by about 2.7. So it's almost perfectly canceling out our yield overall, then was down by us.
About.
Eight tenths of a basis point from 40.9 in the first quarter of 40.1 in the second quarter, that's all core yield and so what's happening underpinning that core yield dynamic is still there is still some premium rich business from earlier years that we put prior to the implementation of tax reform that is running off and it's being replacement.
Meaningful way and even more so because of the growth in NIM by new business production, but there still is a little bit of drag coming into the yield calculation because of that dynamic. It is certainly slowing and slower than it otherwise would have been had we not push through the rate increases that we did in the immediate aftermath of co that.
Okay, great. Thanks, a lot.
Thanks, guys.
Your next question comes from the line of Jack I can't go from Fiveg Sorry. Your line is open.
Good afternoon.
Talk a little bit though.
The credit side I know.
For a lot of numbers.
Forbearance related defaults is maybe could you kind of run through that again for us I guess, what we just curious to hear is.
The new defaults, what percentage or forbearance. It sounded like you said you've got more.
Forbearance.
Loan.
We could see so is that there's not a positive as though.
May grow into it with delinquency has just I.
I guess those numbers.
Yes happy too so at the ended the quarter, we had 10816 defaults in our primary portfolio. We separately identified 28555 loans that were in forbearance programs.
And Theres Threed data points I gave for that 28555, there are the loans that are in default. So a portion of those 10816 are in forbearance and that number is 9500 too. So the overwhelming majority of loans that are in defaults are in a forbearance program.
Thats a real positive for us essentially everything that we identify that is kobin related in forbearance. There's a few hundred loans that based on the timing and the details around.
How they progressed into default status. We also would say are related to coded but nearly everything that is a kobin related default is in forbearance. That's a positive we want borrowers to be taking advantage of the programs that are that are offered to them to help themselves and ultimately put themselves on a pathway towards resuming timely payment principal and interest.
Then we have an additional amount of the loans in forbearance write another subset of the 28555 that have missed at least one payment, but had not progressed into default status. They may not ever progress into default status. Those borrowers make sure. They may continue to make payments are only have missed one or some of them may progress into default.
Status that number was 6752.
And then fully 43% or 12301 of those forbearance loans of that totaled 28555 are continuing to make every payment they've never missed a payment there and fully performing status, but I would say is overall, we are we're really encouraged by how.
Now the performance of the portfolio has been developing right things are going in a really positive manner. The forbearance population itself. So I shared with you 28555 loans and forbearance at the end of June that number came down a touch to 28510 at the end of July so the forbearance population is flat to try.
Turning down it actually peaked at the end of May and it's been declining modestly since then and also the rate of growth of our default population. We went from 1449 loans in default at the end of March to 10816 at the end of June, but we're only at 14175 App.
The end of July so the pace of growth has slowed and meaningfully and then another point I'll give you started for a lot of numbers that you Jack but it's useful here we have other data internally that I can give you some color on we look at what I'll call. Our total delinquent population, which is those loans that are in defaults.
As well as those loans that have missed at least one payment, but have not yet progressed into default status what others in the industry might refer to as their de 30, plus population that tally actually declined from the end of June to the end of July and that is an enormous positive it signals that our default population may be.
Seeking I'll put a heavy caveat around that and say obviously, so much depends on what's still happens in the macro environment, but the decline in what others term that de 30 population from June to July is a really meaningful positive about where credit performance is going to go.
That's Super Super Bowl.
The July numbers seem to show reflection.
There's a big percentage of TC choose that are forbearance room. So that's all that's a pretty constructive.
What is your claim rate assumption.
That you're running what's now.
As for banks.
Yes, so the I'd say look overall, we certainly expect that this is going to be much more of a default event that a claims event that that was the perspective, we had on our first quarter recall and it's certainly been reinforced by everything that's happened over the last several months.
At June Thirtyth, our reserve and by extension our claims expense assumes a roughly 7% default to claim rate on newly reported defaults in the quarter I'll note that thats lower than what we would typically assume for similarly, situated loans that weren't in forbearance and weren't otherwise benefiting from all of the massive assi.
Since that's.
Thats being offered in response to coated but it's also meaningfully meaningfully higher than what our experience in the aftermath of the 2017 in 2018 Hurricanes.
I would indicate should be applied.
Okay.
We're going on the expense line.
2 million.
On a on a dollar basis was any of that.
SAR contract.
Or something.
So we also plays sequentially shutdown.
Operating expenses.
Yes, I do it was not the the the Tcs relationship in fact, we may actually see some very modest growth over the next few quarters related to Tcs again because of the accounting dynamic.
The heavy lift associated with setting up that relationship transitioning accounts there is a little bit of overlap we can't just pull the plug on existing vendors and transition to Tcf Theres learning that has to happen. So we have to run law cost in parallel production that's all.
For the third and fourth quarter, but the step down from the stepped down from the first quarter to the second quarters, primarily because in the first quarter. When we it's when we pay bonuses and there are certain vesting events that happen, it's a heavier quarter for us from a FICA standpoint. So there are certain payroll costs that get introduced in the first quarter that then don't carry through the remainder of the.
Hi, Thank you appreciate it.
Your next question, it's from the line of Rick Shane from JP Morgan.
Our your line is open.
Follow up on Jack's question look the mix is shifting towards more rifai, a which is so somewhat of a historical anomaly for Tina by you guys historically have provided.
With a lot of different metrics and wait two ways to think about risk.
Is there any risk factor either positive or negative or that we should consider with Wi Fi in terms of the portfolio over the longer term.
Yes, Rick it's what I would say, though is risk is coming out of the system broadly in the changes we've made from a pricing and underwriting guidelines standpoint are driving a lot of that both across the purchase portfolio and the and the Rifai portfolio I mentioned that our purchase.
Origination volume in the second quarter.
Was actually meaningfully higher than what it was for for July and in July we still saw the credit metrics of new production strengthened.
But some of the benefits of refinancing volume coming through one generally speaking the borrowers have more equity where we're not we're not ensuring cash out revised and so the borrowers who are coming to us for rate term revised generally have built equity in their homes between the principal pay down that they had over the years as well as some amount of home price appreciation. So.
Lower LTV production and also because the mortgage payment itself carry so much weight in the FICO score on the margin you tend to see higher FICO scores amongst refinancing borrowers than you do amongst purchase borrowers, but overall I would say the the quality and the strengthening of.
Credit quality.
Turning on both the refi side and the purchase side.
Got it okay, that's very helpful.
And I think that the comment about not doing cash out revised significant.
I want to revisit the complicated topic that you guys just started explore with Jack.
I'm, particularly interested in loans that fall into the bucket of default and forbearance I'm, assuming that that was a loan that was in default and then the borrower soft forbearance is that the way to do is that how you wind up in that it's.
9000 plus loans.
So in all other periods that was the case in all other prior.
Environments borrowers had to file a demonstrate a hardship before they get access to forbearance program and the way that that that hardship was demonstrated as they would first be default they would miss the payments on their mortgage and then call up to access a forbearance program or other assistance in this environment. It is different borrowers have the ability.
Without proving the hardship simply claiming a hardship.
Were they are into fall before they've missed a payment to call their servicer and get access to a forbearance program. So they've done that and then.
A large number of those borrowers who are in forbearance continue to make payments they've never missed a payment rate 43% of the borrowers that we have that we in short order in forbearance continue to make all of the payments due but a subset of them have missed their payments right. The forebears program is doing what it is intended to do our instinct is ready.
Borrower, who is fearful of some type of a lay off fearful and it didn't unit diminishing of their income stream at the immediate outset, they're going to to call up in access of forbearance program and if that Dimunition and income actually plays through because they've been laid off or for some other reason.
Then they will pause the payment on their their mortgage and they will then progress while they're under the forbearance umbrella. So progressed into default status because they will have missed enough payments for a long enough period of time that a trips into the definition of default.
Got it okay, and I was under the and I misunderstood and I assume that once you were in forbearance Youre default status froze, where you were but that is an important segue into my next question, which is that when we look at shore reserve levels.
One of the factors that is extremely influential is number of payments that have been Midwest and because of the recency of that.
I'm wondering if you assume.
You know reasonable default rate her role rates and a reasonable cure rates. If that suggests that you will see additional reserve build as we move into Q or as we move through Q3 as those loans that are in default move from two payments missed two.
Five payments nest, yes.
It's a great question, Rick and candidly, it's something that we're focused on I would say in all other environments. The aging of that default the borrower missing more and more payments is telling about the likelihood that they're going to ultimately progressed to claim right and so we would typically carry a larger and larger reserve for.
Assuming higher reserve factor right higher frequency of ultimate claim and depending on the duration, perhaps some somewhat additional adjustment on severity.
As that defaults grows in its age, but we've never had a situation like this before were so many borrowers have gone into forbearance when they were otherwise current on their lungs, and it really raises an interesting question about whether a borrower who has told from the outset that they don't need to make a payment is there really something that is fundamentally different.
In the information between the borrower who has missed call it three or four payments in the borrower who has missed six or seven payments, we're going through that analysis now we have to see what the data tells US right. This is all happening in real time as we see the underlying risk profile of those borrowers who cure out forbearance and default status in the early.
The days versus those who remain in forbearance and continue to progress the age of their default, we'll be making that determination through the course of the third quarter into the fourth quarter I sense that we're going to carry a higher reserve factor for those borrowers who remain in a forbearance driven default.
Even though again theoretically the borrower who sold to Miss all of their payments, whether they mature mseven, it's not necessarily the the same information and same additional indication of higher risk, but there will likely be a higher reserve that we established for those borrowers to age through the forbearance program as well.
Okay. So there so there is in.
Some potential so historically I think that the reserve rate for alone that's two.
Payments Lee is in the high single digits, it moves to 25 or 30% a once in six months past due versus six months late you think we may wind up in a scenario, where it's not as severe as that.
I'd say, Rick I am not I. The great question again, I want I might be the rates that you just outlined aren't necessarily aligned with.
The broad rates that we've applied it very much depends on each individual loan its underlying risk profile the borrowers equity in the home and a whole variety of other items not it's something that we're focused on is what is the aging of a defaults mean under a forbearance program and as we get through the third quarter and yes.
Gather additional information about the macro environment the path of house prices.
The equity that our borrowers have as well as the cure activity for those who have remained in versus those who short out of forbearance defaults will make thats termination as we go through the third quarter.
Okay, well imagine we tried to oversimplify something thank you very much for your time.
Thanks, Rick.
Thanks.
Your next question comes from the line of Mark Hughes with Trust Securities or Trust Securities keeps me.
Thank you good afternoon.
The remark you touched on this and Hello.
In your last answer you talk to you mentioned home price appreciation how significant is that in this analysis that rates are down hosing housing prices continue to go up what does that mean for eventual.
Claim frequency or severity.
Yes, I see it actually it really is is perhaps the most it has the most significant impacts on both frequency and severity of any I'll call. It macro factor historically house prices in the past house prices nationally has been the best predictor of that my credit performance.
Right I mean at its core when borrowers have equity in their homes. They are far less likely to progress to claims data. So it impacts the frequency and from a suit and also tied to that is if the borrower.
Simply can't afford to make their payments and ultimately progress towards claims status. If they have sufficient what I'll call residual value. There is also the option for them to sell out of that default to secure out and we certainly see that happening at times. The other area from a severity standpoint is the more equity in the home if we take advantage of different claim settlement on.
Options, we have the potential to curtail our claims exposure and so it really is.
Has historically been the single biggest driver of EMI credit performance I think when we.
When we established our reserves for this quarter, we've assumed that house prices will decline modestly nationwide over the next two years in our reserving analysis. We also obviously recognize that the latest data coming in from the market shows a significant amount of can.
Renewed HP expansion, we think it appropriate right now given the broad level of uncertainty that remains to take a more conservative view for reserving and also candidly for pricing purposes, but it's something we're going to monitor it is critically important the path of house prices over the next two years, if they hold up.
Better than what we've assumed will be a meaningful positive in terms of where our ultimate claims experience settles.
No I wonder if any observations about the credit overlays on the part of the lend news how are.
Stiffer their standards, so you're doing your thing, but how how much are they.
Being strict in their underwriting and could that.
Diminish over time and.
Probably support home prices.
Yeah look certainly.
What do you want to ticket.
Yeah, well just mentioned Mark one of the things that we're seeing.
For what what your terming overlays, we're seeing that lenders are describing the loans I'm, especially as it relates to verify net income is close to closing as they can.
For the obvious reasons.
And you know and certainly making sure that they've got all of the particulars of alone intact before they close.
But.
Their due diligence, they're falling GSK guidelines, but they're very very particular, it gets very expensive for at for whatever reason they would deliver alone and then that when we go into forbearance. So there may have a stake in in this to make sure that all the overlays that they're putting in.
Make sense, especially about employment and continuance of other income.
Thank you very much.
Your next question comes from the line of Geoffrey Dunn from Dowling and partners. Sir Your line is open.
Thanks, Good evening.
Alan can you parse out the incurred losses this quarter between the case reserving in the PNR.
Hi, Jeff ought to come back here with the the detail. The Q will have an I think our earnings release has a table that provides a split between.
Case reserves and an idea in our her.
Per default.
It's about 5600.
Dollars in in reserve per.
Case reserve and about 900 per.
In our.
Thats on overall default. So that's that's off the new notices this quarter and incurred losses right.
That's correct.
Okay, Let me ask a follow up offline alright. Thank you.
Your next question comes from the line of filled Stefan I with Deutsche Bank. Sir Your line is open.
Yes, well most of it.
But I was just too quickly.
I think you had mentioned above the quota share percentage.
Went from 10.5% to 21% and was that effective April 1st.
Yes. So it's good question. So we took it from tenant after 21% based on the really candidly a broader interest that continue to emerge from the traditional reinsurance community Penn Treaty will be effective back to April onest for all risk in terms of what actually rolled through the quarter, though because of the how the timing of the additional.
Cash and came through it was a 12% session that impacted the quarter.
There'll be a little bit a catch up in terms of additional profit commission a little bit of ceded premium.
But our reinsurers are on risk for 21% of the production starting April 1st and there'll be a little bit of I'll call. It settlement on how that works through in the third quarter as well.
Okay, but it will be.
Okay won't be significant didn't make any underpinning probably finishing impact will be something we'll get re doing most of what weve, resulting in second quarter results.
Yes, that's right you will see so we'll end up happening in the third quarter as you'll see the full 21% impact of the the new quota share and they'll be I'll call. It a few hundred thousand dollars.
Sort of give and take that happens for the fact that the reinsurers are on risk effective April 1st and then needs to be a settlement premium paid to them as well as profit Commission and ceding Commission received by US. The other piece that I would note is that our pmiers physician will benefit effective April onest from the 21%, but again this dynamic.
The the 609 million of excess that we we tallied only reflects 12% seed as opposed to the 21% there will be a little bit of additional benefit also to the regulatory capital position that comes through in the third quarter.
Got it. Thank you guys look M&A continues to be well.
Thanks.
Phil.
Yeah.
From the.
You do have a follow up question from the line of Bose George.
Sorry.
Hi, Thanks for taking the follow up I know you referred to you is strong and our W. July a couple of times, but without the key or is that possible to get that number.
It's not an 8-K, you mentioned nearly 6 billion.
Then I W. system, Okay, great. Thank you.
Welcome.
And there are no further questions at this time I'd like to turn the call back to the presenters for any closing remarks.
Thank you again for joining us we will be participating in virtual investor conferences hosted by Barclays. The week of September 14th and Zelman Associates to weaken September 21st we look forward to speaking with you at one of these events and hope all of your stains safe and healthy through this crisis.
That does conclude todays conference call. Thank you for your participation you may now disconnect everyone have a wonderful afternoon.
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