Q3 2020 MGIC Investment Corp Earnings Call
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Ladies and gentlemen, thank you for standing by and welcome to the M.G. IC Investment Corporation third quarter earnings call at.
At this time, all participants are in listen only mode.
After a guest speaker presentation, there will be a question and answer session. If you would like a question. During the session you will need to Freshen star one on your telephone keypad NPC advised that todays conference is being recorded.
You require any further chipsets, we express it starts to zero and now I would like to had to conference over to your speaker today Mr. Mike Zimmerman. Thank you. Please go ahead Sir.
Thank you Kathleen good morning, and thank you for joining us this morning and for your interest in FDIC Investment Corporation.
Joining me on the call today to discuss the results for the third quarter.
CFO Nathan Colson will provide more detail about our financials and I'll wrap up by discussing the state of housing Finance reform.
First I want to continue to express my gratitude to my fellow MGIC coworkers and their families.
The efforts of our team Diana day out to support our customers their local communities and fellow coworkers, while coping with their own unique circumstances brought about by COVID-19 pandemic has been remarkable.
That made MGIC, what it is for over 60 years and to continue to do so today.
Our main business objective is to continue to align our resources provide critical support to the housing market, especially first time and low and moderate wealth homebuyers.
We strive to achieve that goal by among other things working with a G. A season investors lost mitigation programs that assist homeowners offering competitive products and services to our customers and maintaining a sharp focus on sources and uses of our capital.
As we continue to execute on our business strategies for the health of our co workers and their families were you doing so in a remote work environment.
We are working closely with our customers many of whom are also working remotely to adapt to the evolving way business gets done, especially during a national healthcare crisis.
Based on the recent strong mine are purchasing refinance mortgage originations the housing finance ecosystem appears to be functioning well and we are proud to be doing our part.
As for our financial results GAAP net income for the quarter was $131 million up significantly from the second quarter. This reflects a materially lower level of incurred losses compared to the second quarter, that's credit performance, especially new delinquent notices received was significantly better in the last quarter.
Cause I mentioned, the volume of both purchase and refinance mortgage originations continued to strong levels.
We wrote $32.8 billion, a new insurance in the corner and despite the pressure of lower persistency on our existing books of business are insurance imports increased by nearly 10% year over year.
To demand for single family housing and stayed resilient, even as we are moving into what is traditionally a slower time of year for purchase activity or.
New business writings continue to be heavily weighted to purchase transactions, which accounted for 60% to 65% of NSW for the quarter and of recent applications.
Of course, low interest rate environment continues to make refinancing very attractive for many borrowers.
As a result refinance transactions remain relatively steady in our industry continue to enjoy a relatively larger market share Ah refinances that in prior periods.
Through a variety of sources, we can gain reasonable visibility into the insurance, we expect to right over the next several months.
However, beyond that there is considerably less visibility, especially given the uncertainty impact COVID-19 could have on both national and regional economies.
We are hopeful that the housing market will continue to remain resilient and we're confident in our positioning in this market.
Today, we have a book a business has strong credit characteristics. In addition, we are supported by balance sheet that has modest leverage $6.8 billion in cash and investments contractual premium flow and a robust reinsurance program bolster by an additional reinsurance linked no transaction that covers risk between January through July 31.
While delinquency notices received of the third quarter for materially lower than in the second quarter. They were still elevated compared to the pre covid environment.
Approximately 67% of loans in September 30th delinquent inventory reported to be in forbearance plan.
The delinquency rate end of the quarter at five 8% and declined each month in the third quarter.
While the COVID-19 pandemic has resulted in an increased number of loan delinquencies and a corresponding increase in pmiers minimum required assets compared to the end of the first quarter. We estimate that as of the end of September R. P. Myers available assets exceeded the <unk> minimum required assets by $1.4 billion.
In addition, our policyholder physician was $3.1 billion more than the minimum state capital requirements.
The remains much uncertainty about the potential impacts to credit performance and our business caused by the national emergency, notably the potential for higher losses incurred normally higher paid losses.
That said, we are encouraged by the material improvement in the third quarter credit performance and the resilience of housing market and many homeowners as the pandemic continues to impact lives.
During the quarter, we continued to focus on building on our strong capital position and financial flexibility with several external and internal transactions.
We'll get into more detail on both our financial results in our capital management activity with that let me turn it over to Nathan.
Thanks to them and good morning.
I'll spend a few minutes talking about the third quarter financial results in the significant drivers that impact our results then I'll discuss the capital and intercompany transactions, we recently completed.
The lower cost of capital provided by the increased use of reinsurance as well as the competitive landscape.
The net premium yield also declined year over year as the profit Commission on our quota share reinsurance transactions declined with higher ceded losses.
These effects were partially offset by accelerated premiums from single premium policies that cancelled before the end of their estimated lives as a result of refinancings.
While down compared to last year, the net premium yield was higher in the third quarter than in the second quarter as the decrease in the premium rate on the enforced portfolio was more than offset by higher profit Commission on our reinsurance transactions due to lower seeded losses in the quarter.
Accelerated premiums from single premium policy cancellations increased from $19 million in the third quarter of 2000 $19 million to $32 million in the third quarter of 2020, reflecting the continued strong refinance market and were relatively flat to the $33 million last quarter.
Net losses incurred were $41 million compared to $34 million.
For the same period last year in the third quarter of 2020, we received approximately 21000, new delinquency notices compared to 14000 in the same period last year and 58000 last quarter.
The future state of unemployment and economic conditions will impact the size of the delinquency inventory and how long it will remain elevated when compared to pre covered levels.
We remain encouraged by the decreased number of new notices received and the steady cure activity that was reported to us for the month of October.
The estimated claim rate on new notices received in the third quarter was approximately 8%. This.
This estimate was influenced in part by the actual performance of delinquent loans expectations for home price appreciation unemployment rates and the expected performance of borrowers that suffered a financial hardship as a result of COVID-19, and whose loans have entered a forbearance plan.
The straight as modestly higher than than new notice claim rate used last quarter influenced in part by the lower percentage of new notices in the third quarter that were reported in forbearance plans compared to the second quarter.
When we established loss reserves, we monitor the level of new notices received the level of delinquencies secured the uptake of forbearance plans in the current and expected economic activity to estimate the ultimate claim rate.
And claim amount or severity on both new and existing delinquencies.
The ultimate claim rate represents the percentage of delinquent loans, we expect to results in mortgage insurance claims and it reflects expected cares, including cures due to successful loan workouts. After a forbearance period is over.
Of course, there remains much uncertainty about the ultimate loss performance of these delinquent loans.
In the third quarter of 2020, our re estimation of reserves associated with previous delinquencies resulted in effectively no loss reserve development compared to $27 million of favorable development in the same period last year and $10 million of adverse development last quarter.
We also decreased our incurred but not reported or in our reserve by $27 million.
Ivy NR reflects the 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 and our reserve we estimate the number of loans, whose borrowers had missed a payment but that had not been reported to us as delinquent.
Reflecting the foreclosure moratoriums enacted by the Gses and others. The number of claims received in the quarter declined by nearly 70% in the same period last year and primary paid claims also declined by nearly 70% from $47 million to $15 million.
Most foreclosure moratoriums are currently set to expire December 30, Onest. However, we expect claim payments to remain modest for several quarters through the effects of both the moratoriums and the forbearance plans that are in place.
We continued to diligently monitor net underwriting and other expenses before ceding commission that totaled $59 million in the third quarter of 2020, which is flat to the same period last year.
While I'm Jessie did not pay a cash dividend to the holding company in the third quarter, we did complete several significant transactions.
First following approvals from the Gses in Wisconsin, OCI, EMG reinsurance Corporation of Wisconsin, or MRC W. A subsidiary of EMG was merged into M.J.C.
The merger resulted in the transfer of approximately $250 million of cash and invested assets to EMG those.
Those assets when they were held by MRC W are not considered available assets from Jesse under Pmiers and.
Marci W. previously held those assets to support an intercompany reinsurance agreement with them J C that was terminated in 2019.
Second.
Following approvals from the Gses in Wisconsin, OCI EMG paid in kind dividends to our holding company of its ownership interest in $133 million principal amount of the holding companies, 9% junior convertible debentures. These.
These securities were then retired by our holding company.
The debentures were not P. Myers eligible assets and as such there was no impact in Jesse's PMR position and importantly, the transfer eliminated $12 million of annual debt service from the holding company.
Third we opportunistically access the capital markets and issued $650 million of 5.25% senior notes due in 2028 with the three year call feature.
We used a portion of the proceeds to repurchase $182.7 million our value of the senior notes due in 2023, and 41 $48.1 million par value of the junior convertible debentures.
The balance of the proceeds remain at the holding company.
We incurred approximately $27 million pretax loss on the extinguishment of debt associated with this activity.
After considering these transactions the annual debt service, the holding company as less than $70 million and the consolidated debt to capital ratio was approximately 22%.
The repurchase of the debentures also eliminated approximately 3.6 million potentially dilutive shares.
Our next debt maturity is $242 million due in August of 2023 and as of September Thirtyth, we had approximately $871 million of cash and investments at the holding company.
Last week, the holding company board approved a cash dividend of six cents per share payable on November 20 Fiveth.
Any future common stock dividends will also be determined in consultation with the board.
At quarter end, our consolidated cash and investments totaled $6.8 billion, including cash and investments at the holding company invest.
Investment income was lower year over year, primarily as the larger investment portfolio, partially offset by lower yields.
The consolidated investment portfolio had a mix of 83% taxable and 17% tax exempt securities a pretax yield of 2.6% and a duration of 4.1 years.
Our investment portfolio had a net unrealized gain.
Of $307 million at September Thirtyth, 2020, $175 million at December 30, Onest 2019, and $187 million at September Thirtyth 2019.
Shifting the Pmires mgcs available assets totaled approximately $5 billion, resulting in a $1.4 billion access over the minimum required assets.
In the quarter, our available assets grew by approximately $500 million driven in part by the transfer of $250 million from our CW them J.C. and impart by organic available asset generation from our positive cash flows from operations as the cash inflows from premium and investment income are meaningfully exceeding the cash outflow.
As from operating expenses unpaid losses.
Earlier, I mentioned that I was encouraged by the recent trends and new notice and cure activity. We have benefited from modestly declining delinquent inventory since June and nearly two thirds of the loans in the delinquent inventory or in a forbearance plan.
This is a benefit because although we are required to hold more assets under pmiers for.
For delinquent loans and although the amount of required assets increases as the number of Miss payments increases we are allowed to reduce the amount of assets are required to hold by 70% under certain circumstances, including for loans in forbearance plan related to COVID-19.
The bottom line is that as a result of our strong positive cash flow during the quarter. The application of the 70% reduction in minimum required assets for certain covered.
19 related delinquencies and our intercompany transactions, we increased our p. Myers excess by nearly $300 million in the quarter.
Before I turn it back to Tim Let me make a few comments about the excess of loss reinsurance. We recently obtained through an insurance linked note or ill end transaction that closed in October.
The transaction covers virtually all the risk in force related to our NSW from January through July 2020.
The reinsurance is supported by the proceeds of approximately $413 million and notes issued by a special purpose ensure we expect to receive substantial pmiers capital benefit for the transaction as we have with our other island transactions. We have summarized all of our island transactions in the quarterly supplement that is on our website.
In closing I would like to mention that each of our sources of capital has its own strengths and weaknesses that must be considered we believe that a balanced approach using our own balance sheet using forward commitment quota share treaties and accessing the capital markets is important to maintaining a strong balance sheet and maximum flexibility for both the writing company.
And the holding company.
And with that let me turn it back to Tim.
Thanks Nathan.
Before moving to questions, let me address a few additional topics.
As I've mentioned in prior quarters. The FHLB has re proposed a rule setting forth the capital framework for the GSP.
The agency is currently reviewing public comments that have received on a re proposed rule.
The FHLB director has stated they would like it to be finalized yet this year since.
Since we don't know how or if any of the comments will shape. The final rule is hard to say at this point what impact. The final rule will have on the EMI industry that said, we do believe that the FHLB. They appreciate the benefits that an insurance company structure can provided the housing finance system relative to capital markets in other less regulated solutions.
The effective Fe is also continuing to review of all the activities in a recently proposed revisions tool rule for the Gses that had been in effect since 2009.
The proposal would require the GFT to provide advanced noticed FHLB wave of new activity to obtain prior approval before launching new products.
The proposed rule establishes revised criteria for determining whether new activity requires noticed FHLB and for determining if that activity is new product that merits public notice and comment.
This seems to be further evidence that the FHLB on the role of the GTS to be more clearly defined than it is today.
Earlier this year the CFPB proposed changes to the definition of qualified mortgage and the so-called GST patch through.
The revised definition will replace the borrowers debt to income ratio and the definition with the pricing threshold.
The common period for the CFPB proposal ended September eight and the proposed changes have a targeted publication date of April 2021, and they would be effective six months later.
The CFPB recently said they would extend the GFC patch was which was set to expire in January of 2021 until the effective date of the new QM rule grants Q4, 2021, or Q1 2022 or when the GFT ex the conservatorship whichever occurs onest.
While other market options for credit enhancement can be scarce or unavailable at various points in economic cycle. Our company in our industry continues to provide credit enhancement solutions to lenders borrowers in the GSP in all economic environments.
While we are focused on prudent responses to the current environment. We continue to be actively engaged in discussions regarding housing finance policies for the future. We continue to advocate for the increased use of private capital, including private mortgage insurance.
Long term, we remain encouraged about the future all that our company in industry complain housing finance.
But it continues to be difficult to gauge what actions may be taken by the FHLB CFPB and the legislature and the timing of any such action.
Private mortgage insurance offers many solution and a great value proposition for lenders and consumers to overcome the number one barrier homeownership the down payment.
We are navigating this period of uncertainty with the book of business that has strong underlying credit characteristics and we are supported by a balance sheet that has a low debt to capital ratio and investment portfolio of nearly $7 billion contractual premium flow in a robust reinsurance program.
As I mentioned at the beginning of my remarks. In addition to the well being of our employees. We are focused on one continuing to provide critical support to the current housing market and to positioning our company to prosper over the long term.
In closing I want to remind listeners that since our founding in 1957, we have successfully navigated many economic cycles and have continually provided borrowers and lenders with affordable and prudent low down payment options I'm.
Im confident that we have the right team in place to continue to deliver the quality products and service our customers have come to expect from energy IC with.
With that operator, let's take questions.
Thanks.
Again, if you would like to ask your question. Please press star one on your telephone keypad. If you would like to withdraw your question Greg Alky. Please standby, while we compile lucky with Avon story.
And your first question comes from the line of.
Todd from Credit Suisse. Your line is now open.
Hi, Good morning, guys I am on for Doug today since we ended on some of the regulatory updates.
This might be a little premature given that we're still getting some clarity on the political landscape bought do.
Do you anticipate it.
There is a change in that.
Administration that some of the regulatory trends that you've been seeing might be altered how are you thinking about that.
Yes. This is Tim and obviously, we're all watching sort of the results of the election I know a lot more of the coming out today, it's really hard to say I mean, a lot of it comes down to the individuals that are in places and.
I would tell you that we focus on it and we talk about it but don't spend too much time worrying about it.
And we'll wait and see what the election results.
Finally, our how hollow cabinets get built out whether it's a.
That Trump victory and hand building out the cabinet that he has and making any changes or if it divide victory and then obviously when you look down and look at the sand in the house.
It seems like there is it's going to be more down the middle.
And so I think in general we feel really good about our ability to sort of navigate through that environment.
Got it okay thats helpful.
So I'm looking at your October numbers and it seem like insurance in force growth policy in force growth was.
I mean, it seems to be trending on a year over year basis similar to what we've been seeing in the third quarter.
At a reasonable assumption for the remainder of the year and how does that set up for maybe the early part of 2021.
And this is Tom again I think.
You know there is there's been some pretty heavy refi activity out there still and so theres persistency has been challenged but obviously some pretty strong volume out there to be done and and as I mentioned in my comments. The purchase volume has stayed strong.
Even recently, which would seasonally be dollars so.
So it's tough to say that that trajectory is going to stay the same.
Just as the in force book grows it becomes tougher to keep that same trajectory, but we feel really good about what's happening in the housing market right now our ability deploy capital at good returns.
We think thats going to continue for a good period of time here.
Got it so easy.
Are you guys able to kind of guess at what that.
Year end and I don't view production for the entire year might be or is that just hard to say at this point.
Hey, Tim It's Mike Zimmerman here so.
Well, one we're not going to guide or forecast because there's such volatility with the numbers I mean, obviously, we've already got one month and in the bank. If you will and you can see that within the insurance in force.
The applications.
45, 60 days, so we do have some visibility there at least probably through certainly through November.
But December still has to play out so.
Well, we'll back off answering those specific to that.
Got it all right. Thank you so much guys.
Thank you.
Thank you. Your next question comes from the line of Bose George 80 generally.
Your line is now open.
Hey, guys good morning.
I wanted to ask just about your home prices have obviously been very strong.
Yes, I'm just curious from a discipline mechanic standpoint, how does that flow through to your loss provision.
How does it impact your default to claim expectations and what do you kind of assuming on the existing inventory in terms of home prices.
Yes. This is Nathan ill take that one I mean, certainly the home price appreciation that we've seen not.
Not just last couple of months for really over the last year has been continue to be really strong seems like in a lot of parts of the country has accelerated I think what we've observed over time, though is that.
We still get claims and in markets, where there is home price appreciation that theres a distribution of that and then I think that home price appreciation has also certainly more uncertain as you look out going forward with the the macroeconomic uncertainty that exists. So it's a it's a factor it's certainly a consideration, but the but I.
It's a positive influence, but theres, obviously, a lot of moving parts right now both favorable and unfavorable in terms of the macro things that we're looking at when when we comes to setting the new notice claim rate and loss development assumptions that we have.
Okay that makes sense, but presumably if it remains very strong it will give us.
Increased the ability to cure so essentially it should reduce the default to claim rate.
If that persists is that can look way to think about it.
Yes, I think Thats. This data again I think that is the right way to think about it.
So.
Okay, great. Thanks, and then just on the on your singles that the production was 7% has done quite a bit over last quarter quite a bit or from last year's levels is that something in the industry or is that is that a product you mentioned that you guys have been making.
Hey, Bose, it's Mike, Yes, I'd say, it's really reflective of what the marketplace is out there given.
So.
With the refinancing transactions right, usually singles or less prevalent there. So you have that phenomenon.
Obviously with interest rates very low.
In risk based pricing the LTV in the mix all comes into play. So I think it's really more just from an industry leading versus any deliberate strategy.
On certainly on our part.
Okay, and actually just one more on that I remember the past. This was that it was kind of a lower return product just because of the comp increase competition in that market is that still the case or returns are pretty similar to to kind of the month.
Yes again. This is Mike goes I think if you go back several years that probably for an accurate statement for for the last several years that with all the risk adjusted pricing and the pricing engines et cetera that came into play I don't think thats accurate other statement as it would have been several years ago.
Okay, great. Thanks.
And your next question comes from the line of Randy.
From B. Riley your line is now open.
Thank you I just want to try one more kind of around macro commentary on the housing market.
Yes.
There's a lot of tailwinds from.
Find demand and it's called the tailwind so people want more space, but.
Thank you Dave.
Fall out there that as stimulus support resolved.
It could be increased challenge you do have a view on that specifically because.
I would still be kind of unknown a potential headwind.
As close all those tailwinds.
Randy This is Mike I'll, let Tim answer the question, but it was a little bit better and what that connection. So just want to make sure I heard the question right is really more of a macro view on housing, whether our second or third or whatever additional way through.
And any potential economic impact that could have.
That business is it.
Came through rate.
Okay, Yes, I think Thats a good question Randy Let me think.
Obviously, there is speculation that if there was more of a little way if that there might be stronger stimulus ultimately.
Ultimately.
We have some expectation that there will be stimulate some additional stimulus obviously part of that had to do I think with what the path of the viruses, which is which is difficult to know but.
But I still think our view is that we would expect there's going to be some amount of stimulus. Although I think they'll probably be a lot more discussion about it again, where the where the election seems to be trending, but I guess I'd say ultimately we think there will be Dom.
And in General again, I view housing being extremely resilient through all that so.
So while the size can matter I think it probably matters those a little bit less from a housing standpoint.
All right and hopefully you can hear this question.
So a question on the model confirming that the debentures were paid down to zero.
With the rupiah.
Hi, This is Nathan we have repurchased approximately 48 million.
Principal amount of the debentures. So those were retired and then we also did the intercompany were removed 133 million of the debentures that EMG previously held back to the holding company and those are retired but there are still a little over $200 million of the debenture still outstanding.
$200 million of the 9% over 200 million total.
Of the 9% 200 209 million of the 9% Sir.
Okay.
And my follow up on that thank you.
Sure. Thanks.
And your next question comes from the line.
Jack Micenko.
From ISI.
Your line is now open.
Good morning.
Hoping to unpack the claim rate.
A little bit more for the quarter I think you went from seven last quarter to eight.
Nathan I think you said it was because you had a lower mix.
Mix of new D. cues that are in forbearance.
67, what was it what was that number last quarter, just trying to get some of the magnitude that.
Motivated the increase in claim rate.
Yes, Hi, this is Nathan I think the 67 is the amount in the delinquent inventory that is in forbearance and that that number actually hasn't changed very much from the second quarter to the third quarter. What I was referring to previously was the amount of new notices that we received that were in forbearance.
I know, we put the statistics out monthly in the second quarter I think it was something like 80%.
Of the new notices that we receive were in forbearance plans and and that number was modestly lower in the third quarter, Although I don't I don't have the exact number but we have put out the monthly statistics on new notices and amounts in forbearance plans. So it's out there I just don't don't have in front of me.
Okay, and there was no development change so you're not recasting.
At 8% back to last quarter correct.
That's correct no I think we still feel really comfortable with where we were positioned.
At the end of June four for those delinquent items okay.
Okay and then.
When we got the Trump tax cuts back in 2017.
Industry in most industries.
Pass some of that pricing.
On.
Well the benefit rather on to some pricing would you expect to.
Both am J.C. in the industry to raise prices.
In the event that we don't have a gridlocked Congress.
Something happens on the corporate tax side.
Yes. This is Tim I guess I'm I'm, one hopeful that we don't have a tax increase but to it. There is it's hard to speculate exactly what the market response would be I think it was a rational response with the tax cut.
That we and others in the industry from a marketplace reacted.
And I, it's just tough to speculate that with the tax increase.
Would that be the same response or not but again I'm hopeful that.
So we don't see a tax increase ultimately.
Okay, and if I could just ask one more on the.
80% of book value here, you've got.
Billion for access going higher.
On the Threeq to Fourq, because you'd be completed the island after the after the quarter like what do you what youre looking for.
Yes, it's a restart the buyback given given the depressed value of the shares and near significant liquidity anyway.
Got a fair amount on the balance sheet for the last two quarters as well is it is it just the end of the forbearance period and what that looks like is it is it moratoriums on foreclosures is it.
Delinquency trends just what's the what are the two or one or two things that okay. This is where are the clear now, let's let's let's take advantage of the valuation and deploy some excess capital or is it just the business is growing so much that you want to be able to meet the demand of kind of where that I W. Smith.
Well Jack its Nathan you did you did go through a lot of my list there but.
I would yes.
I'd, probably point to maybe two main things I think we want to the businesses growing certainly faster than we had previously with the volume of business and how we're positioned in the market. So I think we want to we want to be able to have confidence that we can fund all of the growth that we are able to achieve with and still maintain an appropriate.
At access to P. Myers, and can fund that with internally generated capital, which we've been able to do even through this increased growth period in the last two quarters. So I think what I want to see that especially if the purchase volume.
Parts to pick up as a percentage of the overall, we might see even more increased growth. Obviously, the refi activity I think our expectation is that it is going to remain strong so theres a little bit of uncertainty about about future growth rates and then the other big thing that that I think about is the post forbearance.
For for the large.
Set of delinquent loans that we received in May and June in particular.
We thought that some of those might be resolved in October as they got the six month their 180 days in forbearance, but in large part it seems like they've rolled.
Two to three months seven which is obviously allowed under under the cares Act. So it may be out into the first quarter of next year before we really see meaningful resolution on some of those items and while we continue to feel confident in our in our provisioning and our reserve positioning there is a lot of uncertainty.
About what the post forbearance path looks like I think to date, it's looks really positive but.
But thats, what we expected we expected that the early activity would generally be favorable and that things that that continued to remain.
That most of the ultimate claims are going to come out of that bucket anyway. So I don't know that we've gotten a lot of a lot of good evidence yet to have conviction that our initial.
You know that our initial views of post forbearance path is is what actually happens. So we'll just I think want to see more on that and want to have confidence that we can fund our growth.
All right. Thank you.
Jack just to circle back on that percentage of new notices.
Going in as Dave said, the second quarter, you were looking at around 80%.
No I'd say on average for the third quarter looking at close to six feet cost step down each month. The Q 750, 956, so call it 60% of new notices.
Thanks, Mike Yes. Thanks.
Your next question comes from the line of Mike Jeffries, Thank Greg your.
Your line is now open.
Thanks.
There are obviously a lot of moving parts.
Parts around the average premium, but Nathan just wanted to get your thoughts on on where you can see that bottoming. If you ignore kind of the noise around the impact of both the profit Commission and just accelerated amortization on.
Earned premiums from single.
Yes.
Yes. Thanks for the question. It's a good question and it's a it's a difficult question. The net premium yield is impacted by those things that Weve I think always found to be very hard to predict on the accelerated single earnings.
And really your you implicitly of a lost prediction in there relative to the profit commission on the on the quota share deals. So I think when we when we've talked about this in the past we've really focused on the in force portfolio yield and even that as you think about where does that evolve to over the next 12 to 18 to 24 months.
It's a it's largely a function of the new business that you are right over that period, and what the purchase and refinance mix looks there. So you end up needing to make a lot of assumptions. There I think our general view has been that the trend is down you can see that in the quarter over quarter trend that we have in the earnings release supplement.
The pace of change this quarter was slightly higher I think thats, owing to the volume of business that we wrote this quarter and also the high level of refinance activity. In addition to.
To the anti W. that we wrote there were also a lot of cancellations. This quarter. So that's resetting a lot of premium rates at lower levels, but it's also resetting a lot of capital levels at lower levels associated with the lower risk of the business that we're writing today.
So I don't I don't have a specific number to guide you to or or a pacing on that because I think largely it's driven by some of the other assumptions you might make relative to the type and quantity of business that we write and the level of refinance volume.
Okay got it and just wanted to clarify or is the profit commission is that calculated off of incurred losses as opposed to pay them and if you actually start to see favorable development, because you're seeing more favorable rates on some of these.
Barents loans would we expect that to come back through through the premium line.
Yes. The profit Commission is computed based on incurred losses and if in the future. The actual ultimate losses are lower than the incurred losses that.
We're estimating today that would have a positive impact on profit commission in the future, we would be able to quote unquote recapture that.
But I would just point out that in.
In either case, we get the benefit of the reinsurance or either get it as a ceded loss benefit.
Including a seeded paid loss or we get it as profit Commission benefit. So it does impact the line items that thing show up on but on a on a net income or or pre tax income basis. It doesn't have it doesn't have as big an impact.
Okay got it thank you.
And your next question comes from the line of Michigan, but yes from back of Bank of America. Your line is now open.
Hi.
Thank you for taking my questions. Good morning, just wanted to actually what we wanted to follow up on the question on portfolio yield maybe focusing just a little bit on the in force portfolio and so I guess, given the higher quality of the business you've been writing in 2020 and the volume does that argue for the pace of decline that you saw this quarter to persist.
A little bit like I understand you've got the capital benefit and the loss lower losses in the future because its higher quality business, but the deal from the housing market and I W stay as strong.
Quarter over quarter pieces, I think a couple of days.
Like you went from <unk> 0.48, 0.46 liquidity should expect that to continue in the near term for the next couple of quarter.
I am here Nathan.
<unk>.
I think similar to to what I mentioned previously I think a lot of that comes down to your assumptions about the volume of business that we write in say the fourth quarter or the next six months and also impacts.
A big impact there as what are the expectations around cancellations of the existing in force or what persistency rate. So I think if if we experience.
If we experienced the level of new business writings that we did this quarter and also the level of cancellations that we did this quarter. Then I think you could expect something on that order of magnitude it.
It also matters, which loans are cancelling. So there are a lot of impact that makes it I think directionally. We've said overtime, we do expect that trend to continue lower but that the pace of the change is a function of a lot of other assumptions that you have to make it makes it really hard.
To to forecast, even a one quarter change, but certainly over a longer period of time.
Okay understood no that's helpful. Thank you.
Let me switching gears a little bit deal.
The loans in forbearance can you share any statistics or any additional color on them. You know just for example, what percent of them have on the 10% equity does the fall they're in school look like the rest of your book any differences in particular that are worth calling out among like you know the forbearance loan losses.
These regular delinquent and also at this point I think you may have a few loans that have gone out of the forbearance, who is the only I guess performance similar to what the other thing.
What you would have expected from your regular performance book or is it.
Little bit weaker than the rigs like are there already loans that are re delinquent or anything like that you can share on that.
Hey, Mike.
So give you several different.
Some color if you will on the forbearance inventory so starting on the care activity or the composition. It's I'd say, it's pretty representative when you look at buy book years.
LTV.
Et cetera, it's pretty representative of the recent right.
Writings and mix of business.
Now the mark to market Ltvs.
Overall.
The.
Got to be careful right with mark to market LTV that they base. It would respond to a question earlier about we get claims even in strong HP a markets.
But using kind of at CBSA type level, and do a mark to market LTV.
You know close to 80, 85% of it below 90, and 60% below 80.
Summer basis.
Obviously, we don't know the presence of any second that may have been in place there.
And and it's pretty similar whether it's far Baird loans or non covered loans. When we're looking at kind of the plan can that kind of delinquent inventory matches and forbearances.
As far as carriers, we look back at the inventory as of the end of June.
And then what how many of those care as of the end of September morning at about 40%. These are loans that went into reported and forbearance as of the end of June about 40% of those care through.
Actually 40% through the end of October.
About 30% through the end of <unk>.
The.
The quarter.
We are seeing loans that leave forbearance, a small percentage of lease forbearance and remain delinquent, but we're also then seeing.
A sizable portion of that small percentage that make a payment so they're kind of thing in the one to three months. So.
We're seeing different levels of activity, but relative to the characteristics representative of the portfolio I would say.
Performance.
But again, we haven't had this level of forbearance reporting. So we're really just building the database now for Baird loans.
Hey.
Just giving some of those characteristics anyway.
No Thats helpful. Thank you and my last question just on your near term capital strategy. So this quarter you you got approval to dividends of 9% junior notes to Holdco.
Two we did sort of indication.
It is an openness from though the bachman do allow you to dividend to review quarterly special dividends in the future. So all was it just because it was you know the junior notes that that's materially different than how they would view a.
Cash dividend if you will.
And then also just related to the capital strategy in your 10-K. It looks like you amended your language around reporting and said you may resume them in the future. This quarter I don't think that was that last quarter. So should we read anything.
Into that so just you know maybe also just talk about the right level of excess capital you are targeting in this environment. Thank you.
Well I'll take the easy one for Mike and I'll, let David talk to the capital on the language in the 10-Q.
You did see the words that change there, but really it's just it's the same intense and say we said before we temporarily suspended.
Temporarily suspended means that we could repurchase that we just want them in the future. So we just want to clarify that statement that we've made previously that the share repurchase has been temporarily suspended but that we could.
We started going forward, so don't read any more intensive and just really reiterating our.
And I'll, let Jay.
Yes, the question about.
The transactions in the third quarter, and maybe what that means for dividends from the writing company going forward.
I would just said I think we're really pleased that we were able to get the approvals that we needed to for both the merger of them our CW and also the inner company.
In kind dividends of the of the junior debentures.
Those required approval not just from the Wisconsin OCI, but.
But also the Gses so I think.
I think really happy with the relationship and all those places and our ability to I think execute thoughtful prudent transactions.
What that means for dividends I think we we don't expect to request a cash dividend in the fourth quarter.
What that means for the first quarter I think it's probably a little too early to say at this point I would remind you that any dividends at this point through March 30, Onest would also require approval of the Gses and we also have $870 million in cash at the holding company. So we have enough flexibility there that.
That dividends from the writing company, we have we have sufficient cash at the holding company to do any number of things without needing dividends from the writing company in order to affect that so.
Just maybe a couple of thoughts there, but just maybe a reminder, that our transactions did require approval I think that's a reflection of the fact that they made that they made sense and the fact that weve maintained good relationships both at the OCI and the Gses. So.
I'm I'm hopeful that if we have a thoughtful prudent requests that we'll be able to get the approvals that we need in the future.
It's really comes down to.
What does that request and Thats, probably a little too early to say at this point.
Thank you thanks for taking my questions.
And your next question comes from the line of Geoffrey Dunn of Dowling and partners. Your line is now open.
Thanks, Good morning.
First question.
Can you share your thoughts about basically January and beyond a world, where new notices don't have a forbearance option.
Given the economic uncertainty does it make sense that incidence would be higher than a normalized level.
Sure.
Can the economic environment be offset by how strong housing is that how would you frame the prospect for instance, one forbearance options for what.
Jeff I'll I guess I'll start on it.
It's tough to say I mean at one thing I would say is I wouldn't assume that there won't be forbearance options out there.
And I think a lot of it quite frankly has to do with what what the path of of the virus takes I guess my view is if things there are more strained Anders there's higher impact on the economy I guess I would assume that there is going to be similar response to what we saw earlier this year and.
If it's if the economy is sort of doing better the virus is more controlled potentially in sort of our delinquencies ultimately that are maybe less muted or more muted that that sort of date, having that sort of the the forbearance is not as big of a deal. So I think what we've tried to do from.
From a planning standpoint from a capital standpoint is be ready for all those situations. We see feel like we have a strong capital position to handle whatever that could be but I would think if there is.
Sort of a second or third wave and it was impacting sort of a housing and delinquencies.
I would expect you would see some response, there and would say that that ended December of sort of what looks like a clip right now might not really be a clip on new delinquencies.
Okay.
Nathan can you talk to the investment portfolio. The environment, obviously continues to weigh on the yield.
So.
Given the duration, where we are into this cycle if rates and spreads remain consistent for the foreseeable future how much more pressure could we see on the young.
Thats a good question I, certainly our purchase yields in the third quarter.
Were quite a bit lower than.
Then the in force portfolio yield so that does weigh on things and then we affected a number of things this quarter that that didnt help that yield number as while generating the cash at the holding company with the debt issuance and frankly, just holding a lot more cash at the holding company at this point a lot more.
Cash and investments, which has always been a lower yield higher credit quality shorter duration portfolio just given the uses of cash at the holding company compared to the operating company.
So I I do expect that.
Yes, the the premise of your question was if if rates and spreads stay where they are today I think given what we invest in you are looking at purchase yields that are below our enforce yield for a while on a decline in what that enforce yield looks like for the next several quarters.
Any any way to frame how much additional pressure we can say.
Right.
Because of the operating company holding company dynamics I think it's a it's a really good a.
Good question, something that we could clarify a little bit better I I would be hesitant to provide an overall number because I think the the dynamics of the different portfolios had a really big impact in the quarter. So that's.
That's a that's something that we can take away and and try to provide more information on in the future.
Okay, and then last question, excluding ceding commissions your gross expense.
Expenses picked up pretty notably it looks like double digit year over year is that just largely incentive comp related to market conditions and.
Can we still expect a pretty benign growth rate on expenses generally going forward.
Jeff I think you can expect a pretty benign.
From expense standpoint, you have to look back at the details a little bit you know lot of moving parts from incentive comp and.
Sort of comp in general and benefit.
But I would say we've tried to be vigilant in this time on expenses, while still trying to maintain a focus on making sure we are ensuring sort of long term.
Sort of not just viability for being able to thrive in the long term, but take it said prudent to make sure. We focus on short term, but I think the right way to think about is still sort of flat definitely not not higher than that as we move forward.
So you could you envision relatively flat expenses were 21 as well.
Yes, Jeff Nathan just just to clarify I know you said up double digits year over year, just trying to reconcile back to the numbers that you're I had a set.
About 59 million in both periods, but it sounds like you're right.
Your have different different figures.
Yes, maybe I'll follow up offline, maybe it's just coming.
Palin backing out the ceding Commission.
Okay all right. Thank you.
Thanks, Jeff.
And your next question comes from the line of sales to saddle from Deutsche Bank. Your line is now open.
Yes, Thanks, and good morning, I think in the prepared remarks, there was a comment and probably once a MCU and I as well.
The re Fi activity continues to remain relatively steady I was hoping you could just give us some commentary around it does persistency continued to be pressured or look similar to mid 2020 in the near term and at what point do refineries slow down even though rates are at these historic.
Lows.
Well.
So Mike start with the reverse order relative to market conditions I mean, when you look at the spread the margins over the tenure and look at where those spreads are at today versus historic averages, there's still quite a bit wider than normal.
So.
Even if rates stabilize or.
Or even go up a little bit lenders have the ability to adjust that margin over the tenure no no rate so difficult to say, but I I mean, I think thats why thats why we suggested that we would think refinanced transactions continue to be pretty pretty prominent.
In the marketplace.
For us, it's still the lesser amount of business going forward.
Hi, Dan.
It's it's been rounding it bounces around.
Or in that probably in that between 30 and 40% at any given month can be refinanced volume really depending on the lenders that do business with us and that particular period, the conversion rates et cetera. So I think in general persistency staying pressure.
Is the right way to think about it given.
You know the board where rates are at but I think you really got to fall embraced prep lower we could see persistency go lower but that should create market opportunity on the other side from an adobe.
And then yeah as the persistency is pressured he is there any way you could help us think about the benefit from accelerated singles I mean, presumably that will remain elevated in this period as well.
Yes, well, yes, I think so now.
The proportion of singles anyway, but look I know, what's left of our singles population because as noted earlier, we've been writing less of that over recent periods not just this quarter, but over the last year or two.
So.
All things equal, yes, but the relative size of the singles population is also dwindling.
Got it got it okay and looking at reinsurance <unk>. It it seems like from what I saw in the Q that the the quota share Cessna percentage is down pretty meaningfully something from 30% to the mid teens.
For the 2021 a treaty.
He is that something that you were still contemplating adding people to the panel or it is mid teens, the new way to think about the session percentage for the quarter shares moving forward.
Phil It's Nathan just maybe.
Maybe a point of clarification, the 17.5% for 2021 was actually a two year agreement that we entered into with a panel of reinsurers at at the end of 2019.
So we also had a an additional set of one year reinsurers that got our total quota share for 2020 up to that 30% level.
We are you know in kind of early stage discussions with with reinsurers about their appetite and what the opportunity is to build on that 17.5% for 2021. So I don't have any update at this point, but.
I wouldn't I wouldn't view that as necessarily the level for 2021, it's something that we'll talk about with reinsurers and see a see what the market is.
Got it okay understood that makes sense. Thank you.
[noise] [noise] and there are no further questions at this time, sometimes you may continue.
Sure just want to thank everyone for their interest in Mg I see and I Hope you and your loved ones, they're happy and healthy thanks, everyone.
Ladies and gentlemen that does conclude our conference for today. Thank you for participating you may all disconnect.
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