Q4 2020 MGIC Investment Corp Earnings Call
Ladies and gentlemen, thank you for standing by and welcome to MGIC Investment Corporation fourth quarter 'twenty 'twenty earnings Conference call. At this time, all participants are in a listen only mode. After the Speakers' remarks, there will be a question and answer session.
Ask a question during this session you will need to pass star one on your telephone if you wish to remove yourself from the queue. These plastic turnkey. If you require any further assistance. Please press star zero out. Thank you I would now like to hand, the conference over to your host Mr. Mike Zimmerman Senior Vice President Investor Relations.
Alright.
Thanks, Laura good morning, and thank you for joining US this morning, and your interest in MGIC Investment Corporation, joining me on the call today to discuss the results for the fourth quarter of 2020.
A little bit of outlook for 2021, our Chief Executive Officer, Tim Mattke, and Chief Financial Officer, Nathan Colson.
I want to remind all participants in our earnings release last evening, which may be accessed on our website, which is located at MTG MGIC com under newsroom includes additional information about the company's quarterly results that we will.
We will refer to during the call and includes a reconciliation of non-GAAP financial measures to the most comparable GAAP measures.
We have posted on our website a presentation that contains information pertaining to our primary risk in force.
New risks written reinsurance transactions and other information, which we think you'll find valuable.
I also want to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations for corrections to past presentations on our website and that investors and other interested parties may find valuable.
During the course of this call we may make comments about our expectations of the future actual results could differ materially from those contained in these forward looking statements.
Additional information about those factors, including COVID-19 that could cause actual results to differ materially from those discussed on the call or contained in the form 8-K and form 10-K that were filed last night.
If the company makes any forward looking statements we are not undertaking obligation to update those statements in the future in light of subsequent developments.
Further no interested parties should rely on the fact that such guidance or forward looking statements are current any time other than the time of this call or the issuance of the form 8-K per form 10-K.
I'd like to turn the call over to Tim. Thanks, Mike. Good morning, I am pleased to report that we finished 2020 with another quarter of very solid financial results.
I'll review the financial results at a high level Nathan provide more details on the results and our capital position and then before we open the line for questions I'll wrap up by discussing the current operating environment, including activities in Washington, D C and the potential for change.
Throughout our more than 60 years of providing support to first time homebuyers are people had been the cornerstone of the many accomplishments of MGIC. This is true again in 2020 day.
The efforts and character of our team throughout the unprecedented operating environment of 2020, despite our customers their local communities and fellow coworkers book.
Coping with their own unique circumstances brought about by the COVID-19 pandemic have been remarkable.
I'm humbled to lead an organization of such high dedication and integrity.
Yeah.
Our main business objective is to continuously align our resources to provide critical support to the housing market, especially first time in low and moderate wildfires.
Whether we operate remotely or in the office, we strive to achieve that objective by among other things offering competitive products and best in class service to mortgage originators and servicers and by maintaining a sharp focus on the sources and uses of our capital.
Moving to the financial results GAAP net income for the quarter was $151 million $16 million less in the fourth quarter of 2019, as a result of modestly higher credit losses for.
For the full year of 2020 net income was still a strong $446 million, but was down from $674 million from 2019.
The 2020 financial results were materially impacted by the level of losses incurred in 2020. The resulted from the economic impact of the COVID-19 pandemic, particularly in the second quarter.
So that is why I'm pleased to see that the main driver of losses incurred the number of new delinquency notices received has been trending lower for the last several months including through January.
Reflecting this favorable trend delinquency rate decreased to five 1% at the end of 2020. It is below 5% as of the end of January.
This rate is higher than December 2019, it is down from the six 4% at the end of June 2020 <unk>.
Approximately 62% of the yearend delinquency inventory has been reported to us as being in a forbearance plan.
Of course, we will continue to monitor the loans a forbearance as many will be reaching the end of the forbearance period in the coming quarters.
Throughout 2020, the demand for single family housing stayed strong.
Gains strong even if we are now moving through what is traditionally a slower time of year for purchase activity or new business writings continue to be weighted more heavily to purchase versus refinance transaction and purchase transactions accounted for 64% of our new insurance written or <unk> in the fourth quarter and the full year.
The low interest rate environment continues to make refinancing very attractive from any borrowers and our industry continues to enjoy a relatively larger market share on refinances its been in prior periods.
These strong housing and mortgage market conditions led to record volume for both purchase and refinance mortgage originations in 2020.
We were at a record volume of new business, finishing the year with $112 $1 billion of NSW, including $33 $2 billion of NSW in the fourth quarter.
This record amount of new business written more than offset the pressure of lower persistency on our existing books of business and as a result, our insurance in force increased nearly 11% year over year in <unk>.
Fact, 2020 was the only the sixth time in the last 30 years that insurance in force grew by more than 10% and we saw that growth continues through January.
We estimate that at the end of December our Pmiers available assets exceeded the pmiers minimum required assets by $1 8 billion. Despite an increase in the number of delinquent loans and a record amount of new business in 2020 and.
In addition, our policyholder position was $3 $2 billion more than the minimum state capital requirements.
As we look ahead to 2021, we have reasonable visibility into the insurance, we expect our rate over the next several months however, beyond that it becomes more difficult to reliably forecast, especially given the uncertain impact of COVID-19 could have book on national and regional economies as well as the impact of potentially higher interest rate and any change.
The relative pricing of the FHA and the <unk> as those changes affect to consumers monthly payment.
Coming off what was the largest market opportunity the industry has seen which resulted in the most niwa. Our company has ever written we expect to write approximately 15% less new insurance in 2021, and they're our primary insurance in force will grow, but perhaps at a slightly slower rate than in 2020.
This rate of growth assumes that annual persistency improves over the course of the year from its current level and reflects a smaller mortgage origination market due to fewer expected refinances.
While we navigate the short term we remain focused on long term success of the company.
As I mentioned, we do that by offering competitive products and best in class service to our customers.
By maintaining a sharp focus on sources and uses of capital. We think this is a winning strategy for all stakeholders.
As we enter 2021, we have a book of business that has strong credit characteristics, perhaps the highest quality in our history.
We had a strong balance sheet with modest leverage $7 billion in cash and investments contractual premium flow and a comprehensive reinsurance program.
While we expect 2021 niwa to be robust and a high credit quality there remains the potential for higher incurred losses that we experienced this quarter given the uncertainty about the future economic impact of the COVID-19 pandemic.
Further we expect higher paid losses to begin to increase from 2021, assuming foreclosure moratoriums are not extended further.
That said, we have seen an improvement in credit performance in the second half of 2020, even if the pandemic continues to impact the economy. We have a strong balance sheet. We are confident in our positioning in the market and we like the risk reward equation that the current conditions offer.
With that let me turn it over to Nathan.
Thanks, Tim and good morning.
I'll spend a few minutes talking about the financial performance of the company and then I'll discuss our capital and liquidity position.
In the fourth quarter, we earned $151 4 million of net income or <unk> 44 per diluted share and generated an annualized 13, 4% return on beginning shareholders' equity.
This compares to $177 1 million of net income or <unk> 49 per diluted share and an annualized 17% return on equity from the same period last year.
For the full year net income was $446 1 million or $1 29 per diluted share compared to $673 8 million or $1 85 per diluted share in 2019.
Reflecting the impact of higher incurred losses. The return on beginning shareholders' equity was still a solid 10, 4% in 2020 compared to 16, 9% in 2019.
On an adjusted net operating income basis in the fourth quarter. We earned <unk> 43 per diluted share versus <unk> 49 per diluted share in 2019 for.
For the full year, we earned $1 32 per diluted share versus $1 84 in 2019.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release and our 10-K.
There are a lot of moving parts, but as Tim mentioned, the primary difference in the quarterly and year over year comparative results as the higher losses incurred in 2020, primarily as a result of COVID-19, which I will cover in more detail in just a minute.
Total revenues were nearly flat year over year at approximately $1 2 billion during.
During the quarter total revenues were $302 3 million compared to $311 6 million last year due to lower net premiums earned and lower investment income.
Net premiums earned were lower due to lower net premium yield partially offset by higher average insurance in force.
<unk> income was lower primarily as the larger investment portfolio was more than offset by lower investment yields.
The net premium yield was 43, one basis points in the fourth quarter down about a half a basis point from the third quarter level.
The net premium yield declined sequentially, primarily because the premium yield on the in force portfolio, which is detailed in the press release has been declining as older policies with higher premium rates run off and are replaced by newer policies, which generally have lower premium rates.
The net premium yield declined five three basis points from the fourth quarter of 2019 to the fourth quarter of 2020 again, primarily as a result of a lower premium yield on the in force portfolio.
This decline also reflects a decrease in the profit commission on a quota share reinsurance transactions, resulting from an increase in ceded losses, which flows through the net premium earned line.
These effects were partially offset by an increase in accelerated earnings from the cancellation of single premium policies.
During the quarter accelerated premiums from single premium policy cancellations were $32 million, which was flat compared to the same quarter pardon.
Pardon me, which was flat compared to last quarter and up from $20 million in the fourth quarter of 2019.
I would expect the direct premium yield of the in force to decline throughout 2021 as the older books continue to run off however, due to the recognition of accelerated single premiums in the level of profit Commission.
The change in the net premium yield is more difficult to forecast reliably, but should also decline over time.
Despite the lower direct premium rates on the newer policies, we have been able to and expect to going forward earn attractive risk adjusted rates of return on P. Myers capital as a result of the strong credit profile of the new policies.
The use of more granular risk based pricing and the distribution of risk through a reinsurance program.
[laughter].
Shifting over to credit.
Net losses incurred in the fourth quarter were $45 8 million compared to $23 7 million from the same period last year.
In the fourth quarter, we received approximately 15000, new delinquency notices which was approximately 10% more than the fourth quarter of 2019, with 27% fewer than last quarter and 74% fewer than the second quarter of 2020.
The estimated claim rate on new notices received in the fourth quarter was approximately seven 5% compared to 8% in the fourth quarter of 2019.
While new delinquency notices were higher in the fourth quarter of 2020 compared to the same period in 2019. The primary driver of the increase in losses incurred was the minimal loss reserve development in the fourth quarter of 2020 compared to $24 million of favorable development in 2019.
We also decreased our incurred but not reported or I began our reserve in the fourth quarter of 2020 by $7 million to approximately $27 million compared to a decrease of $3 million in the fourth quarter of 2019.
To establish IV in the IV in our reserve.
We estimate the number of loans, whose borrowers had missed a payment but that had not yet been reported to us is delinquent.
Of the 57710 delinquent loans at year end 2020, approximately 62% or 36000 loans are reported to us to be in forbearance.
Based on the information reported to US we estimate that approximately 69% of the loans in forbearance at the end of December we reached the end of a 12 month forbearance term in the first half of 2021.
Recently, the FHFA announced an additional three month extension for loans in forbearance as of February 28, So that will alter the timing of when a resolution of the delinquency occurs.
Future economic conditions, including unemployment and home price appreciation will certainly impact the ultimate outcome of the remaining loans in forbearance.
That said I am pleased that the number of new notices we are receiving as a percentage of the number of loans insured has been steadily trending back towards pre COVID-19 levels when.
When we established reserves for a given population of delinquent loans, we expect a certain percentage of those loans will cure. So while we certainly expect the percentage of the COVID-19 related delinquencies secure including those in forbearance I think it is too soon to estimate more precisely the ultimate claims that will result from these delinquencies versus our initial estimates.
However, I am pleased that we have seen loans exited their forbearance plans without a claim payment is there was some concern early on that there would be very little resolution for 12 months.
Despite the uncertain resolution of the loans currently in forbearance. The fact that there has been a good deal of favorable resolutions are cures to date has reduced the downside scenario for losses incurred in excess of our estimates which is material from a risk managers point of view.
The number of claims received in the quarter remained very low due to the various foreclosure moratoriums.
Were down nearly 67% from the same period last year and primary paid claims declined to just $12 million down from $15 million last quarter and $42 million in the fourth quarter of 2019.
At some point the foreclosure moratoriums will expire however, we would expect claim payments to remain modest for several quarters. After the exploration is nationally on average it could take more than a year to complete a foreclosure should that become necessary.
Next I would like to talk for a couple of minutes about expenses.
One of the most efficient underwriters in the industry as a result of maintaining a keen eye on expenses, even while making investments in our infrastructure.
During the quarter operating expenses were in line with prior periods for the full year operating expenses were modestly lower than in 2019, primarily due to reduced performance based compensation, resulting from the effects of COVID-19 on our financial results.
And the lack of travel unrelated expenses.
These were offset somewhat by expenses associated with the continued reinvestment in our technology infrastructure and analytical capabilities and expenses associated with the record volume of new insurance, we wrote.
As we look to the future our expectation is that the mortgage finance business will become increasingly digitized as participants further integrate risk based analytics into their pricing capital allocation and operational frameworks.
We have not been standing still is this evolution occurs we have been making investments in our infrastructure to realize the value that comes with improved data analytics and operating improvements.
For example, we have already implemented a number of business transformation initiatives, such as our pricing engine IQ, which has allowed us to more efficiently and discretely price our business.
We've also developed a new risk evaluation platform called IQ plus that is now being rolled out and will eventually be the tool for all of our risk evaluation work and will allow us to retire the existing systems that serve those functions.
We have completed the transition for our general Ledger reinsurance accounting and administration payroll and human capital functions and are in the process of modernizing our policy servicing and claims administration systems. So that we can continue to offer the best in class experience to our customers.
In recent years, we've been able to find other savings to offset the investments we've been making which in turn has helped keep expenses relatively flat over the last few years.
By the end of 2020, we had laid the key groundwork to enable us to accelerate our investments in technology and analytical capabilities and process improvements beginning this year.
For the full year 2021, we expect underwriting and other expenses to be in the range of $220 million to $225 million.
The increase over 2020 is primarily due to the accelerated technology and business process investments I just mentioned, but also includes performance based compensation returning to target levels.
Over time, we expect the level of incremental spending to decline as some of these investments are completed over the next year or so and we realized improved operating efficiencies.
Interest expense was $18 million in the quarter compared to $13 million in the same period last year.
The increase resulted from the issuance in August of our senior notes due in 2028 and the repurchases of a portion of our senior notes due in 2023 and our convertible debentures due in 2063.
These capital actions increased our liquidity and improved our debt maturity profile.
Assuming no additional transactions the annual debt service costs will be approximately $72 million.
We had $846 million of cash and investments at the holding company at year end and our next debt maturity is $242 million due in 2023.
Last month, the holding company board approved a cash dividend of <unk> <unk> per share payable on March start.
Any future common stock dividends will also be determined in consultation with the board.
We continue to believe in a balanced approach to maintaining a strong balance sheet, including the use of forward commitment quota share treaties and by accessing the capital markets.
This approach provides flexibility for both the writing company and the holding company to maximize long term value whether by writing more primary mortgage insurance pursuing new business opportunities retiring debt paying dividends or repurchasing stock.
At the end at year end.
Our consolidated cash and investments totaled $7 billion, including the cash and investments at the holding company.
The consolidated investment portfolio had a mix of 83% taxable and 17% tax exempt securities a pretax yield of 255% and a duration of four three years.
Our investment portfolio had a net unrealized gain of $344 million at year end compared to $175 million at December 31, 2019.
Shifting to P Myers.
Mgic's available assets totaled approximately $5 3 billion, resulting in a $1 8 billion excess over the minimum required assets.
In the quarter, our available assets grew by approximately $300 million drip.
Driven by organic available asset generation from operations as the cash inflows from premiums and investment income significantly exceeded the cash outflows from operating expenses and paid losses.
The $1 8 billion excess does not consider the excess of loss reinsurance. We recently obtained through an insurance linked note or island transaction that closed on February 2nd.
The transaction covers virtually all of the policies written from August through December of 2023.
The reinsurance is supported by the proceeds of approximately $400 million of notes issued by a special purpose insurer.
We have summarized all of our island transactions in the quarterly supplement that is on our website.
In addition to this island transaction. We also came to terms with our reinsurance panel to increase the quota share on our 2021 and IW from 17, 5% to 30% and have secured a 15% quota share on our 2022 and IW.
Both the Io lending quota share transactions will provide us added capital flexibility.
We are required to hold more assets under P. Myers for delinquent loans in the amount of required assets increases as the number of missed payments increases.
However, we are allowed to reduce the amount of assets. We are required to hold by 70% for three months for delinquent loans, whose initial missed payment occurs prior to April one 2021 and under certain circumstances for loans in forbearance plans related to COVID-19.
This forbearance relief was an important temporary provision to have especially in the second quarter of 2020, when the economic fallout from the pandemic was most acute.
Uncertainty still remains about the outcome of these loans in forbearance, which is one of the reasons. We believe the gse's extended the relief on new notices through March 31.
That said the current need for this relief is lessening as our capital position has grown and fewer loans are delinquent.
At the end of the quarter the application of the 70% reduction in the minimum required assets on loans in forbearance provided approximately $700 million in P Myers relief.
And that is a significant amount if removed we would still have more than a $1 billion excess to the minimum required assets, even before considering the island transaction, we just completed.
Sure.
The bottom line is that as a result of our cash flow during the quarter and for that matter. The full year. The additional reinsurance we have procured the application of the 70% reduction in minimum required assets for certain COVID-19 related delinquencies among other things.
We have significantly increased our pmiers excess during 2020, while paying $390 million in dividends to the holding company, writing $112 1 billion of new insurance and growing our insurance in force nearly 11%.
That let me turn it back to Tim.
Nathan before moving to questions, let me address a few additional topics.
While 2020 was a year of unique challenges. There was also a year that saw the public policy debates about the future state of the residential housing to mortgage finance industry, including the appropriate roles for the GSE and FHA and private capital continue without a definitive resolution.
Not necessarily a bad thing as our company can operate very effectively and efficiently within the current framework and produced good results for shareholders.
Unfortunately, do not appear to be any short term answers on the horizon, we intend to continue to be actively engaged in these discussions about housing finance policy.
New administration will bring potentially new and different priorities. So it is difficult to gauge what specific actions may be taken by the FHA FHFA CFPB and the legislature.
Also difficult to gauge the timing of any such actions and their impact on our business.
We expect the new administration will focus on continued loss mitigation efforts for homeowners impacted by Covid.
And on affordable housing, both owner occupied and rental the details of these initiatives should become clearer as 2021 unfolds.
Meanwhile, we continue to advocate for the increased use of private capital, including private mortgage insurance and housing finance industry in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system.
Long term I remain encouraged about the future role that our company and industry can play in housing finance and believe that other regulators and policymakers share a similar view.
While other market options for credit enhancement can be scarce or unavailable at various points in the economic cycle. Our company in our industry continue to provide credit enhancement solutions to lenders borrowers and the GSE in all economic environments as demonstrated in the first half of 2020, when credit risk transfer transactions in the capital market slowed but the private margin.
Insurers record volumes of new insurance.
Private oriented <unk> offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership the down payment.
As I mentioned earlier, we are confident in our positioning in the market and we like the risk reward that the current conditions offer.
Currently the strong housing market is contributing to high levels of new insurance writings and the level of delinquencies close newly reported and those in inventory are declining we have a book of business that have strong underlying credit characteristics and is supported by a balance sheet that is low debt to capital ratio and investment portfolio of nearly $7 billion.
Contractual premium flow and a robust reinsurance program.
As I mentioned at the beginning in my remarks. In addition to the wellbeing of our fellow coworkers. We are focused on continuing to provide critical support to the current housing market, especially low and moderate income and first time homebuyers.
In closing I want to remind listeners that for more than 60 years, our permits from providing borrowers and lenders with affordable and prudent low down payment options on an uninterrupted basis, we have the right team in place to build off our solid foundation to continue that proud tradition and to deliver the quality products and service our customers have come to expect from MGIC.
With that operator, let's take questions.
Thank you Sir.
At this time I would like to remind everyone and I'll just ask a question. Please press Star then the number one our net telephone keypad.
And the number one on your telephone keypad, if you would like to withdraw your question Patrick.
Your first question will come from the line of wide Capex from Michael Sir Your line is now lines go ahead Paul.
Thank you.
Just had a question about prospects for capital returns just given these improving delinquency trends.
From reserves in the comprehensive reinsurance protection.
Do you think at this point that the Gse's would would entertain approving a dividend from MGIC before June 30, and if so.
With the OCI be likely to object if you saw the dividend.
And if you do get more cash up to the holding company can you just talk about appetite for buying back stock here.
Sure Mark it's Tim.
There's obviously a number of moving parts in there.
The Gse's did put in their provision related to the <unk> three multiplied that there is.
With the approval you could have dividend.
I think it remains to be seen whether they would allow that to happen or what the actual rules are to allow that to happen they were overly prescriptive.
Obviously always keep good contact and communication with our state regulator.
So feel good that as the environment hopefully continues to prove we can have constructive dialogues there.
So I think obviously over the next couple of quarters. A couple of months couple of quarters. Those are conversations that we will continue to be engaged in.
But obviously I think a lot of it has to do with the environment.
And our comfort level and those parties comfort levels with additional dividends out of MGIC and any capital return from the holding company.
Okay got it.
And then just one more question from me have you guys observed any kind of material changes to pricing in the market in recent months would be the improving delinquency trends that you've observed.
Hey, Mark got Mike here.
Pricing is just so dynamic and fluid with the introduction.
Over the last couple of years of all the engine that is hard it's not as easy as a comparable to say pricing is up where pricing is down like it used to be with the rate card or even.
Quite frankly last year was when there was a sudden shock.
All of <unk>.
Covid delinquencies.
So it's fluid dynamic changes.
Good day daily, but very frequently depending on conditions.
Views of those marketplaces so.
It's a competitive market and maintains to be competitive in.
But we feel it's a good risk reward opportunities Jim Simpson.
Understood. Okay. Thank you.
Sure.
Thank you. Your next question will come from the line of Doug Harter from Credit Suisse mainline is now like go ahead.
Thanks.
I'm just wondering hoping you could give us some outlook on persistency, you know kind of what types of trends youre seeing and any indication when you know at least from a quarterly basis.
Mike.
You know kind of level off or start to improve.
Yes, Nathan I'll take that one.
I think what we've seen in early 2021 is similar to what we saw in the second half relate 2020.
But rates are still pretty low for the loans that were being done at that time.
Clearly, we've seen some benchmark rates tick up the expectation kind of coming into the year was that rates would rise.
Maybe in the back half of the year and that that would help persistency for the full year.
That still remains to be seen but I think that's consistent with the market forecast of kind of lower refinance origination. So I think those things kind of play off each other a little bit.
Doug This is Mike.
Add to that what are we talking about rates I'm talking about what the rates lenders are offering to borrowers and clearly the tenure in fact, it's already.
But the spread between there and where rates are being offered.
That is zero so the offering to the consumer is effectively unchanged over it's still very very attractive.
Rates out there.
Yeah.
And then just given the strong home price appreciation.
We saw last year.
Can you talk about what youre seeing in terms of your penetration.
On on refinance volume or are you still kind of getting getting similar share or more people.
Appraising out of them I am not you know and therefore, not needing to kind of.
Basically we're up the policy.
Yes. This is Tim I think we're still seeing if you look at the start of the year on balance in particular that we are still seeing.
We're capturing more of that refi activity normally would just because again there I think there was somewhat recent vintages that were able to refinance with a lower rate, but they were not able to appraise out or not obviously at the 78%.
That sort of LTV so.
Whether that continues or not with a strong home price appreciation that remains to be seen but.
We are seeing higher levels than ordinary of sort of penetration into those refi markets again because of the books that we're refining even.
Even in spite of the high home price appreciation, just how sutent was that they were able to refi.
Great. Thank you guys.
Sure.
Thank you your net.
Next question will come from the line of Jack Nielsen Paul from.
Your line is now live go ahead. Please.
Hi, good morning.
Let me from your prepared comments, you talked a lot about investing in technology and in the engine.
How much of the business in the quarter.
Came through.
The engine versus the rate card and maybe what was that a year ago and how do you think.
Given the comments around investment further how much of your business can that look like.
Going forward.
Yes.
Jack I know you've tried to Nathan, but I mean, I think closer to the mix that's coming through the different engine right.
Quite frankly, as we've talked in the past that's all a delivery mechanism right. So absolutely got the published rate card Thats on the I'll call on the website.
That is still being used but that's a very very small segment of business, that's coming through that channel or that delivery mechanism. So whether it's our Q dynamic engine or whether it's a forward commitment negotiated card. It's all using the same technology and sales. So we don't really look at it is how much has been.
We're not dictating to customers how to do that.
So to us it's all the same.
The overwhelming majority is coming through the dynamic pricing approach that we're taking.
Okay and on share.
From last year.
Okay. Okay, and then part two to that would be you talked about the 220% from 25 run rate.
You did 190 last year.
Is it possible to sort of frame out.
You know the difference between the sort of 20 to 25 million what is that.
Let me go away, maybe 'twenty two and beyond.
Was there anything in the 190 run rate last year that.
It was may be overstated.
Because of some of the tech spend you talked about.
Yes, Jack it's Nathan I would say.
In terms of the increase the substantial majority of that I did mentioned kind of performance based comp back to target levels, but the substantial majority of that is kind of increase.
Technology and process investments that we're making I think the way that we think about that is we're going to make those.
Those likely will extend into 2022, and I think there'll be some level of reinvestment in the platform always but we do think that there is increased efficiencies to be gained by those investments that we're making those will start to be realized in some cases, probably beyond 2021 here so the actual.
Kind of long term run rate level.
Wouldn't necessarily bench market to where we are in 2021.
Okay.
Okay alright, thank you.
Thank you Sir your next question will come from the line of.
Yes.
Hmm Bofa RBC. Your line is now like go ahead.
Hey, good morning, Thanks, I wanted to ask a question about some of the commentary you had about.
No.
The risk of her being conservative around the forbearance plans rolling off.
Yeah.
Clearly this is an area to focus on in general, but it's not a very big percentage of your book overall.
Low single digits I think so.
Can you kind of quantify more or maybe kind of give us some more color on why youre focusing on this is as much and kind of what it could mean for the income statement.
Relative to the positive credit trends, we're seeing overall.
Because it just it just seems to me it.
It's coming through is a pretty manageable risk it is going better than expected, but you're very conservative in the way you've discussed it. So I just wanted to dig into that a little bit more if we could.
Yes. This is Tim I think we talked about it in terms of obviously for the most part in terms of the reserves that we have and I think <unk>.
I tried to take talk about conservatively because.
I think as Nathan mentioned in prepared remarks, we've probably seen more loans actually resolving cure that maybe we even expected, but theres still a lot that have not resolved at all.
And we know that this could they can extend it for a period of time. So obviously the concern even though that we have less downside risk because we have had some curious come out of there. The downside risk is that more of these ultimately go.
<unk> come out of forbearance and actually go into foreclosure and it could go to claim to what our initial expectation was.
We really havent deviated much off of our initial expectations from when these loans initially went delinquent, but that's the concern I would say is that they that they will go at a higher rate to claim than we expected and just the fact that these can draw out longer I don't think thats a negative impact negative impacts I think if you think about home price continuing to appreciate that should be a day.
A positive fact pattern, but each each home is specific and youre talking about sort of a distribution around average prices that could happen in markets.
And so I think from our standpoint, we think it's prudent to sort of.
At least be cautious about how those could ultimately resolved.
Okay. That's helpful. And then just real quick on the refi yes.
Yes, I understand that general expectations for refi are lower and I think the MBA data plays a part of what you talk about when you're talking about market data, but I guess I'd ask.
How does refi trending so far this year versus your initial expectation, especially theres some origination platforms there.
Newly public and are interested in growth.
Rates are still relatively low so.
Understanding what the MBA scene.
Yeah.
As refi activity kind of more than you would've expected.
Based on what you've observed so far in 'twenty one.
Hey, Randy it's Mike.
As we all know.
Forecasting interest rates is a dangerous game.
Right. Its continued strong as I said in the guidance.
Interest rates the spread between the 10 year and 30 years compressed right. So it hasnt the consumer rates have not really increased that much and you're right. There are more.
Companies that are looking.
Looking to continue.
The franchise growth relative to originations so to answer your question. Its continued strong relative to refi mix that's coming in from applications.
Certainly and IW, which trails several weeks.
Applications, but even applications remain I would say, it's strong levels in the 40% range of refinance mix.
And how long it goes on is that right.
It's hard to tell.
Yeah.
Thanks for that I appreciate it.
Sure.
Thank you Sir your next question will come from the line of Bose George.
Choi from JD double your line is now live.
Hey, guys good morning.
I just wanted to follow up on the expenses.
So the 222 to $25 92.
Quite to the loss of an expense ratio of around.
22 as a percentage.
Yes.
Per cent range.
<unk> noted that this is a lot of this is a technology investment so non responsive.
The expense ratio is absolutely true.
We see trending back towards the 18% range.
Or is that or is there something book.
Bose, it's Nathan I think the expense ratio I think you're kind of thinking about it right for 2021 relative to the kind of incremental.
Impact for for what we've announced relative to increase kind of technology and process transformation spending.
Going forward it will be impacted not only by the level of <unk>.
Ongoing expenses, but also what our premium looks like and also the nature of our reinsurance programs just with the amount of ceded premium that we have in ceding commissions. So I think that's a little bit more I guess, a little bit more difficult to judge, but I think youre thinking about it right for 2021 certainly.
Okay.
From the dollar amount at this 20 to 25, I guess that number it was only supposed to book.
Just the cadence of the growth slows.
So 'twenty one is that right.
I think I think Bose. This is Tim I think the way, we think about it as investing in the platform.
And I think as Nathan said, we're trying to accelerate some based upon sort of one conviction at our ability to execute over the last 12 to 18 months on some of the technology initiatives and quite frankly, I think as you hear from a lot of other companies sort of getting a sense that others in the mortgage finance and broader are probably accelerating some of their tech.
Allergy investment and we want to make sure we keep pace I think it's safe to say that long term. The focus is to create efficiency out of that technology spend.
And that's part of it I'd say the other part of it has to be to be able to be smarter as how we.
Evaluate credit risk as well, but I think.
To not put it in the expense ratio terms, but to think about it as far as us trying to accelerate and how we think that sort of manifest in the business. I think it is right to think about it is that we should be more efficient because of it.
Okay, that's great. Thanks.
Switching to.
Different topic, just sounds absolutely true.
Just wanted to get your thoughts on a do you think.
There could be a cut there.
You can get some meaningful just given that silver lapses.
Yes.
It's tough to know for sure I mean, we've heard the rumours obviously for a while but not a lot of detail quite frankly and to certain extent I'm almost surprised that we haven't heard more recently or that's something happened. So I don't know if thats an indicator if it's just.
Sort of administration sort of trying to get things set up before they move on things that all being said.
If it's a 25 basis point reduction.
I think that obviously can can make us a little bit less competitive around some of the the lower end of the credit spectrum for us as an industry, but.
But I would say, it's not a it's not a major confirmed concern from our standpoint, it's something that I think we've we've dealt with as a company over time and seen FHA make price changes in the past.
While I would say that it's something that we keep an eye on.
And Theres, a chance that there could be some amount of lost business from industry to a rate cut there if its 25 basis points.
It's something that that I would say, we don't we don't feel like there's significant risk to the volume we're going to be able to write this next year if that happens.
Okay great.
Thank you.
Our next question will come from the line of.
<unk> <unk> from Compass point your line is now live.
Good morning.
I, just kind of switching back to the credit topic.
Kind of capital and how you're thinking about capital return.
Is there any kind of are there any events on the calendar that would really help accelerate the pace of kind of getting more comfort.
I'm thinking about it.
The first few vintages of loans in forbearance expires with the 15 month deadline that puts them in June July and August.
Is that kind of the best time frame to think about in terms of gaining a lot more visibility around credit and how you might think about capital.
Yes, it's Nathan I'll take that one it's a good question and certainly one that we think a lot about.
I do think that certainly at the end of <unk>.
Forbearance terms for a lot of for a lot of borrowers that have been in forbearance that will be really useful information about the ultimate outcome, but I wouldn't characterize it that every month, we don't get new information as well we continue to see loans that have been in forbearance since the April.
And May and June Timeframes in 2020, as they continue to resolve every month so.
I do think that unimportant kind of resolution.
Will happen at the end of the forbearance period, but we are still getting I think news along the way.
As we've said in the prepared remarks and also in response to some of the questions I think that the news has generally been favorable theres been virtually no paid claims out of those cohorts and we continue to see care activity, although it's relatively modest but it is happening every month.
That makes a lot of sense.
But part of what I was doing it was obviously that's true.
The biggest indicator of whether or not your claim rate assumptions will be accurate because there's 95% cure at the end of the term.
Percent claim rate would be would be awesome.
Got it.
Kind of leading up to that is there any other information that you have or that you get from Servicers that gives you an indication of that.
Why loans are rolling or extending for another three months that can kind of.
Factor into your.
You kind of put your credit methodology.
Serving methodology or I should say.
Well.
The last part of this is Mike I mean sort of reserving methodologies, probably less sales right because thats, a pretty tried and true methodology in a pretty good in a very consistent approach, but we do get information, but we don't get complete information on our portfolio for reasons for exiting the forbearance. So we don't have real good visibility.
Into the reasons.
Look at our.
A portion of the portfolio, but not enough.
We'd be willing to make any statements about as far as per.
Preponderance of how much is prepay versus deferral and so on and all of that nature.
But we do that we look forward, we add part of it is certainly informs our thinking.
When it comes with but not necessarily the mechanics of reserving.
That makes a lot of sense.
I appreciate that and I'm going to jump back in the queue.
Thank you Sir.
Next question will come from the line of Botswana.
Yeah from Bank of America. Your line is now like go ahead. Please.
Hi, good morning, and thank you for taking my questions.
Maybe I'll just continue on that same topic, you know maybe on the mechanics of resuming can you just give us a sense of you know.
I think a lot of investors are beginning to think about.
And Sheila for reserve releases coming out so I understand that you probably don't want to size anything, but maybe just give us a sense on the mechanics of that process. What do you need to see is it.
You get to the 12 or 15 months now forbearance expiry. The loan then that's when you can release the results or is it more flow.
A little bit there's a little bit more judgment there along the way as you get more and more confidence in you know you see the trends month over month I'm sure. That's I think Mike was mentioning that some non scoring along the way to that 12 15 months.
Expiry Pizza does that can you get as you get confidence that in off of those loans are maturing will we start seeing reserve releases. So like what are the mechanics of book.
Can you help us with that thank you.
Sure Good question Nathan.
I think each period, we look at not only the expected ultimate losses on new delinquencies, which are the driver of our losses incurred but also reassess our previously established reserves.
<unk> looking at kind of cure and paid claim activity.
I think we were able to draw some confidence from from the history that we have there.
With foreclosure moratoriums really affecting paid claim activity in forbearance plans really extending the term on cure activity.
It has made I think it has made it more difficult to have a lot of conviction in.
Adjusting your ultimate losses and that these interim point, so I do think that the.
The resolution of forbearance items.
Like I said every month, we are seeing some level of resolution.
But if you think back to our initial estimates for let's say second quarter of 2020, new notices that largest cohort we were something around the six 5% new notice claim rates are so while we've seen a significant amount of resolution which has really.
As mitigated the potential downside scenario to our estimates.
It's still I think too early for us to think about reassessing those downward or frankly upward I think we still feel really comfortable with our initial estimates.
And that's really the process that we follow every quarter.
Right. So basically once we right now it feels like once you get through those 15 months expiring if that's where it stands you'll get a much better sense of what's happening and then you could have a little bit of a cliff day from whole bunch of them just go back to kill.
God stuff and it's like you know they started making their payments is that the right way of thinking about it.
I'd say certainly if if at the end of forbearance terms, we do see a significant amount of resolution either entering foreclosure or hearing that that will be kind of a useful information to reassess our estimates.
Okay.
Maybe on a different topic, you mentioned that you all are seeing a little bit more refi.
The industry as a whole but.
Yeah, I'll, let just seeing a little bit more if the refi volumes than you typically see.
Two quick ones on that one is you know historically, we've talked about it being you know the three and a half to one maybe between refi and book the sensitivity would that is that a little differently now as we think about that so much or do you still feel good about that three and a half to one book she is refi.
Sensitivity, if you will and.
Yes.
Maybe I'll rephrase, it a little bit I mean long let's.
Let's say industry long term market share and Refis about 5% and 20 plus percent and purchase.
Isn't probably closer to eight to 10 in refi and in the mid to upper twenties.
Our focus now for the last measurable period anyway.
And then just in terms of the Refis themselves.
Mostly cash out refis or is it just really refinancing where they still need to have am I.
On the policy that Hasnt been.
And do you feel differently about those too.
But for US it's almost predominantly rate terms, because we don't do much in the cash out refi space.
Thank you.
Thank you Sir.
Our next question will come from the line of scale at the final from Deutsche Bank. Your line is online go ahead. Please.
Yeah. Thanks, Good morning on the expense guide up to 20 to 25 not to put a too fine a point on this but just to make sure.
Is the guide it's net of ceding commissions write a report.
That number is the right way to think about that.
That's right yes, okay.
Yeah, So switching gears I know there've been some questions about capital return.
I suspect in some respects, it's probably I'd say it feels like you're trying to flag a little too early to get into those conversations, but I guess I'm thinking about the past year year and a half maybe you can talk to us about.
How your your capital management strategy May have shifted with the uses of reinsurance the buffer that you might be contemplating to P. Myers.
It feels like.
Bearish on the <unk> want to always point out that the sector seems to be repurchasing shares at exactly the wrong time, So what do we learned over the past year year, and a half and how do we how do we apply that to capital strategy forward.
Hey, Phil it's Nathan I'll take that one relative to the kind of reinsurance strategy I would say really nothing has changed the strategy that we would've been talking about for some time now would be to be programmatic about issuing in the aisle and market and then forward commitment quota share treaties and.
While during the kind of peak dislocation due to Covid the island market wasn't accessible other than that we've executed two island transactions. The most recent one at very attractive terms.
Even the one in October I think it really attractive terms, but the spreads have come in quite a bit even since then.
<unk> executed again in the kind of quota share forward market.
So I'd say nothing different from that perspective relative.
Relative to kind of the excess levels and the overall sizing I think we were focused quite a bit on our excess notwithstanding the three factor.
And and that has grown very quickly.
A quarter or two ago, we wouldn't have had the level that we have today. So I think that's certainly something that we with the island that we did in February and also the.
The trends that we've seen.
I think positive for the direction for that going forward and then as Tim mentioned, our ability to size the amount of capital.
And the writing company at this point is partially dependent on approvals from the <unk> and the OCI and the GSE approval right now would expire at the end of June.
As we look out to the kind of near and intermediate term I think we do have.
Potentially some.
A good story to tell around having a really strong capital position at the writing company to support dividends to the holding company.
But.
With the with the approvals required right now don't think that that's necessarily a Q1 thing, but something that we're going to continue to talk about.
With both our regulators and the Gse's and then.
You also evaluate what the right sources and uses of capital at the holding company and clearly.
Our dividend has been a way that we've returned capital through this period and I think we've demonstrated that we can do meaningful shareholder returns via share buybacks as well, but I think key to key to having meaningful returns there as dividends from the operating company again.
Yeah, no understood understood.
And maybe to think about the reserving and the potential for development question.
In a different direction.
Do you have a view or can you at least give us a broad brush stroke I don't know how to think about the mark to market loan to value that you see in the book.
What percentage may be sub 90, or sub 85 at any comments you can give around.
The home price depreciation and kind of where it stands today in the book.
Yes, I think Mike Mike's got the numbers are given to you in a second but just I think that thats certainly a measure that we look at I think there is some used to it but I would just caution of maybe over overuse of that it's all about a distribution of that's an average we're talking about.
Loans that are that are delinquent.
We paid we paid claims and rising home price environments, all the time so.
Think it's good to see home price appreciation, we do think that that benefits severity ultimately.
Undoubtedly help certain certain borrowers avoid claim entirely but would just would just caution that just because the average loan is.
Kind of not underwater, let's say that that means that we could.
Potentially not have many many claims.
And well.
Through my papers here to try and find that don't have but I'd say that to underscore David's point.
I think all of our delinquent inventory.
Geordie a it has I think it's around 90.
It's certainly less than the 95% less than the 90, mark to market and probably 25% below book.
Flow, the 80% level, but again those are at CBS a levels.
So on sales.
Not dissimilar to other distributions you've seen publicized let's put it that way.
Okay, No that's fair.
Perfect and I appreciate the the word of caution on that thank you guys.
Yeah.
Thank you Sir and percentage.
That's helpful last question I'm going to go ahead and turn the call over to you for any closing remarks. Thank you.
Thanks for everyone for listening today I.
I hope everyone stays happy and healthy thanks for your interest in the company.
Thank you Sir Okay. Thank you so much presenters and thank you everyone for participating.
<unk> concludes today's conference you may now disconnect and have a lot of people.
Okay.
Good day.
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