Q4 2020 NMI Holdings Inc Earnings Call
Good afternoon, ladies and gentlemen, and welcome to the end of My Holdings, Inc. Fourth quarter to end of 'twenty earnings Conference call. At this time, all participants are in a listen only mode.
Later, we'll conduct the question and answer session and instructions will follow at that time, Inc.
And once you do for assistance during the conference. Please press the Star then zero on the attached on the telephone.
I would now like to turn the conference over to your host Mr. Johnson of instrument. Please go ahead Sir.
Thank you operator, good afternoon, and welcome to the 2024th quarter Conference call for National M. I.
I'm, John Swenson, Vice President of Investor Relations and Treasury.
Joining us on the call today are Brad Shuster Executive Chairman, Claudia Merkle, CEO, Adam polyps, or our Chief financial Officer, and Julie Norberg our controller.
Financial results for the quarter were released after the close today.
The press release may be accessed on the enemies website located at the National M Dot com under the investors tab.
During the course of this call we may make comments about our expectations for the future.
Actual results could differ materially from those contained in these forward looking statements.
Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC.
Yeah from to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments.
Further no one should the line. The fact that the guidance of such statements is current at any time other than on the time of this call.
Also note that on this call we refer to certain non-GAAP measures in today's press release and on our website. We have provided a reconciliation of these measures to the most comparable measures under GAAP.
Now I will turn the call over to Brad.
Thank you John and good afternoon, everyone.
The fourth quarter capped the year of remarkable challenge resiliency and reward for national M. On.
In 2020.
We successfully navigated through the unprecedented stress of the Covid pandemic.
Well, we supporting our customers and their borrowers at a time when day and the overall housing market needed us most.
During the year, we wrote a record $62 7 billion of NII W.
Helping over 250000 borrowers gain access to housing and establish the safe secure environment in which to shelter through the pandemic.
We closed the year with 111 billion of high quality high performing primary insurance in force.
And our decision to prioritize risk responsibility from day one.
<unk> established a comprehensive credit risk management framework.
Spanning individual risk underwriting.
Reed G P S pricing.
And our innovative reinsurance program proved invaluable.
Credit performance in our in force portfolio continues to trend.
On the encouraging direction and.
And we are increasingly optimistic as we look forward.
Given the quality of on underlying book.
Potential for additional stimulus support for borrowers.
And sustained resiliency of the housing market.
We generated $171 6 million of full year GAAP net income in 2020.
Delivering strong profitability that was consistent with our result in 2019.
Despite absorbing the significant impact of the Covid pandemic through the year.
Our adjusted net income was the $173 6 million.
And we exited the year with a 15.2% fourth quarter adjusted return on equity.
Policy efforts played an important and stabilizing role during the year.
For Barents foreclosure.
Moratorium and other assistance programs are helping to bridge borrowers past this point of acute stress.
And ensure they are able to remain in their homes and resume their lives with limited interruption once the pandemic has passed.
We applaud these efforts and note the recent extension of the forbearance and foreclosure timelines announced by the FHFA.
Homeownership is essential.
More so today than ever before.
People need to show need shelter in order to shelter in place.
And allowing borrowers who through no fault of their own are facing real strain too.
Stay in their homes and avoid foreclosure is the right social policy.
It will also help speed the ultimate pace of economic recovery.
Yeah.
We expect the housing market will be an area of focus for the Biden administration and new congressional leadership.
It has been a bright spot in the wake of the pandemic and expanding access to all of the benefits that homeownership provides.
The safe environment to shelter from the virus.
And the ability to establish the community identity.
And an equitable opportunity for long term wealth creation.
In the manner that appropriately guards against the systemic risk is more important than ever before.
While it is difficult to predict the hierarchy of political priorities and specific changes that may come.
We believe there will be continued recognition of the value that private mortgage insurance offers.
Providing borrowers with downpayment support and equal access to mortgage credit.
While also placing private capital in front of the taxpayer to absorb risk and loss of any downturn.
Overall, I'm delighted with what we achieved last year.
And how effectively we were able to navigate through the Covid crisis.
I'm optimistic about our opportunity to continue to build value for our employees, where borrowers for our customers and for our shareholders in 2021.
With that let me turn it over to Claudia.
Thank you Brad.
Remarkable is an apt description for 2020.
It wasn't a remarkably challenging remarkably rewarding year.
Our transition to a remote work environment with seamless.
Our team connected and found innovative ways to advance our customer engagement.
Our decision to prioritize disciplined and responsible risk selection in every aspect of our business.
Was validated by the strong credit performance of our in force portfolio.
We achieved stand on execution in the capital reinsurance markets.
On our operating platform scale of effectively.
Readily supporting a massive increase in our new business volume.
The strong performance of our team and business is the duration of the Covid panic continued in the fourth quarter.
GAAP net income was $48 3 million for 56 cents per diluted share.
On adjusted net income was $50 8 million or <unk> 59 per diluted share.
GAAP return on equity was 14, 4% for the quarter and adjusted ROE was 15, 2%.
The new business environment remains exceptionally strong.
Covid has driven a shift in behavior and fuel the record level of purchase demand.
Shelter in place directives are reinforcing the importance of the home.
Driving increased interest from both the first time buyers of the existing homeowners looking to move up for more space.
Record low mortgage rates have provided that in fuel.
Creasing affordability and drawing additional buyers to the market.
Against this backdrop we.
We generated record on IW of $19 8 billion up 7% from the third quarter and 66% compared to the fourth quarter of 2019.
We didn't see any of the seasonal slowdown it typically emerges in the fourth quarter.
Volume was consistently strong for the Purion and the momentum in our production has carried into the beginning of 2021.
Our volume is at record levels and the value of our new business production is equally strong.
On a record of nine W is matched by continued pricing discipline.
Oranges underwriting standards and attractive risk adjusted returns on new business flow.
Overall this continues to be of uniquely valuable new business environment.
One of our National Am I is well situated to help lenders and deliver important solution for borrowers.
In the fourth quarter, we activated 27, new lenders for the full year 2020 reactivated of 101 lenders, including eight from the top 200.
We are now doing business with the broadly diverse group of nearly 1200 high quality originators.
Are customers of our evolving and in many respects. The COVID-19 pandemic has accelerated changes that we already that were already underway.
Lenders are prioritizing technology to drive improvements in the consumer experience.
Green line their business processes.
As they do their expectations for their mortgage insurance partners are evolving.
I expect us to offer technology enabled solutions for having better connectivity with third party origination systems and point of sale platform.
And the support their drive for process efficiency.
In this context break EPS and the broader technology lead that we enjoy provide a key advantage.
We are meeting our customers' needs remotely and our sales team is finding innovative ways to deepen our existing relationships and attract new customers every day.
Our activation of pipeline is healthy and we expect to continue expanding our customer franchise in 2021.
We built our company to perform across all market cycles, and everything we have done to build of durable and profitable business recruiting of retaining great talent.
<unk> on the right culture.
Engaging with customers on a consultative way and managing risk expenses and capital positions us to lead through the Covid pandemic.
The strength of our position coming into the strength allowed us to remain fully customer focus throughout.
We have been consistent with our sales message our price delivery through rates EPS.
And our focus on risk management.
We achieved a tremendous amount in 2020 rote.
Growing our franchise or NID.
The volume our high quality insured portfolio and our balance sheet.
We absorbed the brunt of the Covid pandemic and delivered significant profitability and strong mid teen returns throughout.
As we look ahead in 2021, we expect the housing market will remain robust with sustained demand in house price appreciation.
We expect mortgage insurance market conditions will remain favorable with strong and IW volume and equally constructive pricing and risk dynamics.
And we see a clear path to continue doing what we do best.
The possibly deploying capital to support our customers and drive value.
With that I'll turn it over to Adam.
Thank you for you.
We delivered strong financial results in the fourth quarter against the backdrop of continued resiliency in the housing market.
We generated $19 8 billion of Ni W. In the fourth quarter and reported primary insurance in force of $111 3 billion at December 31.
Net premiums earned were $100 7 million adjusted net income was $50 8 million or <unk> 59 per diluted share and adjusted return on equity was 15, 2%.
Total <unk> of $19 8 billion included $17 8 billion of monthly production.
Purchase originations accounted for 66% of our volume in the quarter.
As part of you mentioned, the new business environment remains exceptionally strong.
We're achieving record volume strong risk adjusted returns on new production and because of the record low note rates on our current flow. We expect this business will be the most persistent we've ever originated.
Together, the volume value and stickiness of our new business production are driving growth in the embedded value of our insured portfolio and will serve to seed our future financial results.
Primary insurance in force was $111 3 billion compared to $104 5 billion at the end of the third quarter.
While record low interest rates have helps for exceptionally strong new business volume and contributed to the resiliency of the overall housing market. They have also continued to drive an elevated level of refinancing activity and portfolio turnover.
12 month persistency in our primary portfolio was 56% as of December 31.
We expect persistency will remain low in the near term given the outlook for interest rates of.
At the time, however, we expect portfolio turnover will slow and persistency will rebound as the business. We're writing in the current rate environment stays on our books for an extended period.
Yes.
Net premiums earned in the fourth quarter were $100 7 million, including $11 7 million from the cancellation of single premium policies.
Reported yield for the quarter was 37 three basis points compared to $38 nine basis points in the third quarter, primarily reflecting an increased ceded premium impact from our most recent islands.
Investment income was $8 4 million in the fourth quarter compared to $8 3 million in the third quarter.
Underwriting and operating expenses were $35 million compared to $34 million in the third quarter, reflecting in part the strong growth in our niwa volume period to period.
Expenses in the fourth quarter also included $1 7 million of cost incurred in connection with our fifth island offering in October.
Excluding Ireland related costs, adjusted underwriting and operating expenses were $33 3 million.
Our GAAP expense ratio was 34, 7% on our adjusted expense ratio was 33% for the fourth quarter.
We had 12209 defaults in our primary portfolio at December 31, compared to 13765 at September 30th.
On our default rate declined to three 1% from three 6% during the period.
Our default population has now declined every month since August and the number of loans on our portfolio that is missed at least one payment, but non progressed in the default status the.
The strongest leading indicator of our near term credit performance is at its lowest levels since April.
These favorable trends continued in January with our default population declining to 11905, and our default rate declining to two 9% at January 31.
At quarter end 19464, or four 9% of the loans on our primary portfolio or enrolled in of Forbearance program.
Share to 24809 loans or six 5% of our portfolio at September 30th.
Looking forward, while on acceleration in the path of the virus could exacerbate current issues and contribute to additional macro dislocation. We're optimistic that we will see continued improvement on our credit performance as impacted borrowers benefit from of rebounding economy.
And extended forbearance timeline additional stimulus support broad resiliency in the housing market and accelerating house price appreciation.
We're also hopeful that the broad distribution and administration of new vaccines will allow for a return to normalcy in the near term and further solidify our credit outlook.
Claims expense was $3 5 million in the fourth quarter down from $15 7 million in the third quarter.
We reevaluate the assumptions underpinning our reserve analysis every quarter.
Our reserve position at December 31 reflect our most current views and balances the beneficial impact forbearance programs and other forms of borrower assistance are expected to have on our ultimate claims experience with a conservative view of the path of the house price appreciation and other macroeconomic factors going forward.
We will continue to assess our underlying assumptions and reserve position as we progressed through 2021, considering among other factors the performance of our existing borrowers the.
The availability of additional stimulus support.
The underlying resiliency of the housing market and the path of house price appreciation to determine whether further changes to our reserving assumptions and reserve position are necessary during the year.
Interest expense in the quarter was $7 9 million and we reported of $1 4 million loss from the change in the fair value of our warrant liability during the period.
GAAP net income for the quarter was $48 3 million or <unk> 56 per diluted share <unk>.
Adjusted net income, which excludes periodic transaction costs warrant fair value changes and net realized investment gains and losses was $50 8 million or <unk> 59 per diluted share of 26% compared to $40 4 million or <unk> 47 per diluted share in the third quarter.
In January we announced that we entered into a new quota share reinsurance agreement covering 22, 5% of our new business production in 2021.
We estimate that the treaty carries of pre tax cost of capital of approximately 6% roughly equivalent to what we've been achieving prior to the onset of the Covid pandemic.
The new quota share agreement capped the year of standout success in the capital and reinsurance markets. We completed seven deals providing over $1 3 billion of growth capital.
Our success in the capital and reinsurance market highlights the confidence that investors have in our disciplined approach.
And the strength of our funding profile and comprehensive and uniquely expansive nature of our reinsurance program <unk>.
Provides us with an expanded ability to support our lenders and their borrowers going forward.
Total cash and investments were $1 9 billion at quarter end, including $72 million of cash and investments at the holding company.
Shareholders' equity at the end of the fourth quarter was $1 4 billion equal to $16 eight per share on <unk>.
18% from $13 61 per share at the end of 2019.
We of $400 million of outstanding senior notes, and our $110 million revolver remains undrawn and fully available.
At quarter end, we reported total available assets under P mirrors of $1 8 billion and risk based required assets of $984 million.
The excess available assets for $766 million.
Overall, we delivered strong results for the quarter with a record volume and value of new business production and the encouraging credit performance in our in force portfolio driving significant profitability and a strong mid teens return.
Looking forward, we are optimistic about the pace of economic recovery prospects for the normalization of day to day activity.
<unk> C of the housing market and semi sector of opportunity.
We believe that we are well positioned and expect that the growing size and attractive credit profile of our insured portfolio along with our broadly disciplined approach to risk management expenses and capital. We will continue to drive our performance with that let me turn it back to part of yet.
Thanks, Adam.
Covid has brought into sharp focus the important role that national of my and the broader private mortgage insurance industry play in supporting a healthy and functioning housing finance system.
For borrowers lenders and taxpayers across all market cycles.
Our performance in the fourth quarter with record on IW volume in primary insurance in force significant profitability and strong mid teens return cap the remarkable here.
We came into the pandemic in a position of strength.
The stirred by the conservatism with which we have managed our business and continue to provide support.
Lead with innovation and build value at all points to the year.
Looking ahead, we believe we are well positioned to continue to win with customers drive growth in our high quality insured portfolio maintain the right risk return balance and deliver strong results for our shareholders.
Thank you for joining us today on.
I'll now ask the operator to come back on so we can take your questions.
Thank you at this time I would like to inform everyone in order to ask the question. Please press the star one on your telephone keypad again debt. It is par wants to ask the question.
We have your first question from Mark Davies from Barclays. Your line is open.
Yeah. Thank you.
So you've obviously built a pretty large excess capital position.
And it's looking like the worst case scenario, we've been bracing for won't come to pass on as you've indicated you're pretty optimistic about the outlook for continued improvement in credit. So could you just talk about how you're thinking about deploying all of the excess capital here.
Sure Mark of our goal is to deploy the capital in support of growth in our business and that's our expectation as we look forward in the near term over the long term, we will have greater focus on opportunities for distribution and thinking about the right balance of capital.
The out over several years, but in the near term, it's really geared around deploying that capital in support of borrowers in this market. The <unk> opportunity as Claudio mentioned continues in a meaningful way as we started 2021 the return potential on new business production and the expectations around stickiness and performance given the profile of the borrowers who are coming through now.
Is quite significant and that's our primary focus is using that capital to support growth at this point.
Okay.
And just on the debt return potential of and I think.
The industry, obviously raise pricing.
As a result of you know of the anticipated stress from from the pandemic, but it looks like credit holdings up much better as of yet it seems like pricing is kind of holding.
What should we expect for the returns on the business you guys of have written in 2020.
Yeah.
When we price range, we price obviously, not just for a base case outcome, but we price to account for the range of potential volatile past debt the market might taken net risk might take.
So the increase in pricing certainly reflected an increase in perceived macro risk and risk in a base case environment, but it was also to acknowledge that there was a much greater what I'll call dispersion of potential outcomes greater volatility in those outcomes that we might see ahead. It's still really early right now just on February 15th it's too early to be able to tell.
If the returns on the business that we've generated over the last year will meaningfully differ either positive or negative from the price expectation when we price our business. Our goal is to achieve a an appropriate risk adjusted return that generally centers around the strong mid teens a risk adjusted return that's still our expectation for the performance.
Of the business that we we generated last year.
Okay, but is it safe to say that at least based on what you're observing the.
On the.
The credit may be performing better than that maybe the returns could come in towards the higher end of of the range of potential outcomes.
Again, it's too early to tell I think youre spot on though is the credit ends up performing better than the price expectation the returns will be far better than.
What we had originally anticipated but.
We know pretty early on that the credit environment in terms of the profile of new borrowers that were coming through has shifted meaningfully stronger and so that also does factor into what our original loss expectations for right now we're still expecting that the performance will be in line with those price expectations.
Okay got it thank you.
Yeah.
We have your next question from Rick Shane from JP Morgan Your line is open.
Hey, guys. Thanks for taking my questions. This morning for this afternoon.
Look one of the things that we've heard related to our coverage of the mortgage rates is some conversation about early signs of burn out in terms of.
Refi activity. When you guys are looking at the range that reports are you seeing that in any way are there any leading indicators that suggest that.
Persistency may be reaching the inflection.
So it's a good question Rick.
We're not necessarily seeing that come through in the data that the.
And performance of the portfolio of day to day member of our persistency dynamic, though is a little bit different is not measuring the call. It the churn in the portfolio day in and day out the 12 month persistency stat that we provide the 56% that we reported for the fourth quarter is really a 12 month look back so for us that's what percentage of the business that was on our books as of.
2019 was there as of 12 31, 'twenty and so our persistency dynamic we expect will improve as we progress through this year, even if the pace of turnover in those what I'll call them earlier book years doesn't slow down simply because we will be bringing on amounts of production that we.
Generation in 2020 in the lower note rate environment into the calculus. So our dynamic will be a little bit different even if we don't see a slowdown in the rate of turnover in some pockets of the portfolio.
Got it.
And I understand that math and I appreciate.
Why you guys look at it that way, but when we look at it on the sort of a quarterly basis and obviously the.
16, and 17 in two of lesser occur in the 18 vintages are burning off relatively fast and that makes sense given where the coupons are are you on a.
Non fleet basis seen any inflection there.
No.
It will be when we've looked at it so when we modeled out where our persistency is going well.
Made the assumption of the same way we would do if we are trying to forecast value of our stock price debt yesterday's performance is the best indicator of Tomorrow's performance. We will we've assumed that persistency rates will continue on the <unk>.
Turnover rates on those chunks of the portfolio that are right for refinancing will continue at the exact same pace that we've seen in the most recent periods and the turnover in December was generally consistent with the turnover in November which was generally consistent with the turnover in October all at a very accelerated rate.
Got it Hey, Adam Thank you very much.
Yes.
We have your next question from Doug Harter from credit Credit Suisse. Your line is open.
Thanks can you guys just talk about how youre thinking about your capital level, you're you're P. Myers.
Excess is quite strong.
How much do you think you need to support.
To support growth.
On the coming year.
Versus you know do you think you might be in a position to think about capital return.
Yes, great question.
We certainly right now the capital that we have is there it gives us one an ability to obviously prosecute what's a tremendously attractive new business opportunity and really lean into support our lenders in there and Theyre borrowers, which is what we've been doing we do have expectations that we will be deploying the excess capital that we have now through.
The course of the year, obviously, we will continue to replenish excess capital as well.
For generating earnings and Appetizing, our balance sheet every day and we do have expectations on will continue to be active in the aisle and market through the course of the year.
For 2021, we don't have any plans to be of capital distributor I think over the long term, we will need to see one one of our profitability is until how much equity we're generating in excess capital for generating organically what the size of the new business opportunity is as we get further out.
Down the road and also how how credit is performing this is a tremendously strong and resilient environment from a housing market standpoint, but we'll want to see how all of those items develop.
Beyond this year to really calibrate our plans for capital management of potential capital distribution.
Great. Thank you Adam.
We have your next question from Randy Binner.
From B Riley your line is open hi.
Hi, good evening.
Could you address of spend if theres one topic I've spent the most time talking about with clients on <unk> is the.
Hypothetical concern around FHA mortgage insurance price cuts and so it's something we've talked about a lot over time, and it's probably a reasonable thing to think about with the new administration.
But now that we're kind of in a forum, where you can talk more broadly I'd just like to hear your perspective on on that issue.
Yeah sure Randy it's a good question and it's an important one.
Lee speaking.
We price to achieve what we believe are appropriate risk adjusted returns in our view on appropriate risk adjusted return isn't influenced by FHA pricing.
But it is also important to recognize that the private on my market and the antibody in particular, we operate at a different point on the risk spectrum and where the FHA fits.
This bifurcation of the market, where certain borrowers are best served by the private market execution and the others by the public market that's growing even more since the since COVID-19 with the further shift in the quality. So if an FHA rate cut were to come through we expect debt. The significant majority of the borrowers we serve today will continue to for.
The best execution in the private market.
Thank you for that the follow up would be how is how is that you mentioned theres been a change since COVID-19, but even thinking back to maybe 2015, how much different is the overlap of the PMI versus the FHA market now versus then.
Yeah. The overlap you mean as far as the credit the credit scenario I would say there is less overlap today than in 2015, obviously with the credit chest I wouldn't I don't have any exact numbers there Randy but.
Certainly it is more for more and more into a.
Higher quality coming into the private sector.
Alright, I'll leave it there thank you.
Sure.
We have for your next question from Bose George from Cagny double of use your line is open.
Hey, good afternoon.
The first question, Brad referred to that the three months FHFA extension for borrowers who are in forbearance.
At the by February 28 could you clarify your understanding of the deadline for Nietzsche whiskey for differences.
And the last week did not seem to directly address them.
Yes, it's an interesting point both of what I'll call. It Theres, a theres a favorable dynamic there that's not.
Does not perfectly overlap with some of the other programs our understanding and read of last week's announcement is that any borrower who enters a GSE forbearance program by February 28, we will have up to 15 months to run under that program, obviously, depending on their hardship on the conversations they have with servicers, but that after February 20.
Eight borrowers can still access forbearance, if they have a GSE backed loan for an indeterminate amount of time. There is no end date on when they can access but if you access after February 28, instead of having 15 months to run you will have 12 months to run on that forbearance program.
Okay that makes sense, yeah that was the understanding as well so that's good to hear.
And then switching over to premiums you know in terms of premiums sort of way to think about how much downward pressure. There's left sits on the core margin, especially in light of the business that you're doing which is obviously extremely high quality.
Yeah, I would say debt.
I want to give you of general steer of steel steer excuse me.
End of fluctuate.
In every period, obviously based on the volume that we have the risk profile of that production importantly, the persistency.
Also our loss experience because it impacts our profit Commission.
When we price, but we're really pricing to achieve his bottom line results bottom line growth in that strong mid teens return.
Through the year to try to give you of general share without specific guidance, we do expect that our net yield will trend down from our Q4 level as we progress through 2021, given the continued pace of the.
The turnover on the in force portfolio and really the difference in the risk profile in rates on our current production versus that which is running off and we also expect to pick up some additional ceded premium costs through through the course of the year to the extent we're active in the ILS market. So we do expect to see some.
Some continued movement.
On the yield side through the year.
Okay, Great. That's helpful. Thanks, and then just a quick one on credit I didn't know if you gave the default to claim assumption. So if not we kept the and then actually just on the.
Okay.
The currency.
For closures are on hold just curious what the consumers.
Okay.
Both of them, sorry, I heard I heard the first part of the question is I'll answer it but then I'll ask you to repeat the second part I'm not sure of our line broke up of yours did but the the claim rate assumption on new notices in the fourth quarter was approximately 7%, which is consistent with the claim rate assumption that we've made on new notices in both the second and the third quarter would you mind repeating the <unk>.
Second part of your question, Yes, sure Yes, Yeah I was just curious what was the triggering paid claims currently it's obviously a small number but just given that theres the foreclosure moratoriums.
How long do you get sort of paid claims status.
Yes, so the overwhelming majority of.
Loans that are in default of progress the claim progressed through the foreclosure process, that's the process by which the servicer on lender. It takes title, but there are other mechanisms for the servicer to take title to the property it could be of short sale. It can be something called the deed in lieu of and we saw very very limited amounts of activity on those two pieces, which are really what I would say is those are the.
Those are not imposed on the borrower of those are done in coordination with the borrower as part of their own workout process and of thinking of what lies ahead after exiting from a home that may not be sustainable for them.
Okay, great. Thanks.
We have your next question is from Jack and the Genco from <unk>. Your line is open.
Hi, good afternoon everybody.
First question, we've talked about pricing and I know the industry raise prices pretty.
Prudently.
At the beginning of the onset of the pandemic and.
It sounds like it was maybe sort of of 10% sort of on average across the board certainly maybe higher.
Different buckets, but.
Whats your perspective on where pricing sits there where are we kind of flat of we held that level or is the industry.
Moving to come out of it on price from that initial move.
Three or four quarters ago.
Yes in terms of I'll call. It how much higher is pricing today, so to speak we've been protective of the rate increases that we had put in place. Following the onset of the Covid pandemic and are still achieving pricing that is higher today than it was prior to the onset to.
The outbreak of the virus.
We think that's appropriate right as I mentioned earlier pricing isn't just about pricing for the base case, but its pricing for the dispersion of potential outcomes that might develop.
Still early days for I think we're all hopeful we're all feeling better we're seeing vaccines rolling out we're seeing the resilience of the housing market the strength or at least the.
On the rebound in the macro environment, but there's still a lot of uncertainty that lies ahead and so for US we've been protective of those rate increases in a way that we think is both appropriate but also highly supportive of borrowers. If you look at where mortgage note rates are today and where our pricing is we don't believe that there is a single borrower out there who is it.
<unk> able to access credit because of the cost of coverage and so we've been really working to find that balance and that balance for us is really much. The same as it was since the early onset of the Covid pandemic.
Okay got it and then.
Thinking about your your model you tend to skew towards you know the.
Higher end on on cycle on the lower end.
On the LTV looking at Youre on IW true this quarter, though it does seem like you have maybe taken on a little bit more of a risk appetite and I'm. Just curious if that was more of if that was something where you saw the returns relatively attractive in the context of the prior question around pricing or or.
It has become.
The quality and you both of them pretty optimistic on your prepared comments on the outlook just thinking through.
With the thought process behind some of that shift we saw on IW This quarter, yes.
Yes.
By design Jack its a good point to note the app.
For the the pandemic, we looked to broadly rain in what for US had already been really of low level of production in certain higher risk cohorts that below 680, FICO greater than 45, DTI and the 97 LTV volume through the course of the pandemic. What's become clear is that borrowers who are facing stress are dealing with income issues not equity issue.
And that comes through in a notable difference.
But we would've already expected based on historical data in loss expectations for high LTV borrowers versus high DTI and lower FICO borrowers and so as the macro environment has recovered as the housing market has demonstrated such significant resiliency, we've had an opportunity to up to by design.
On prudently layer in some.
Some additional risk into our production and our portfolio and in doing that the natural spot is with the modest amount of additional high LTV volume I would note that.
Overall, the risk profile on our new production is still dramatically lower today than it was pre COVID-19.
Our concentration of 97, LTV loans now looks to be roughly in line with the rest of the industry certainly not above it.
And most importantly, we remain just as focused on managing layered risk of which I think we had in the quarter something like 10 basis points of layered risk concentration in our production, which was the same as in the third quarter. So it was by design is based on some dynamics that we're observing as.
As the pandemic moves on and.
As we have greater clarity around its impact on the housing market, but it's an area, we're still going to be cautious we don't want to have an outsized concentration certainly.
Alright, great. Thanks.
Okay.
We have your next question from Guiliano Bologna from Compass point Your line is open.
Thanks for taking my questions I guess, continuing on a similar topic that's come up of a few times. So it was a little bit of a different angle when we think about it.
Of the overlap that you currently have with FHA one.
Of the things that has come up on a few different conversations that I've been having as the impact of the fifteens out potential of $15000 first time homebuyer credit and what I was trying to get a sense of was when we think about the overlap and where your business. There is overlap is it more so on the scale of lower FICO or is it more so on the scale of higher ltvs that push people out of your <unk>.
Because that could obviously have an LTV of benefit to a lot of people that are currently.
Please supposed to be on more of a an FHA bucket for the cost perspective, and push them towards the PMI in some cases and obviously the funnel moves both ways. So I'd be curious how the.
That overlap might impact the industry.
Yes.
That's one where I would say there is there is.
Not a lot of information around how it will work mechanically.
In the public domain and also how long that program, perhaps different from some others is.
Typically implemented for a specified window and so both how it's how it's actually structured mechanically how you get cash the borrowers upfront and how long. The program is in effect for will impact that I think your instinct, though is right, but it's not all just the negative broadly speaking there were some <unk>.
On his earlier about FHA possibility of FHA rate actions now about the $15000 tax credit. Our view is that all of these programs are really designed to increase access the housing for segments of the market that haven't yet been able to.
Take advantage of and.
The.
Access the benefits of housing thus far and so it's really designed to bring more buyers into the market with new demand of new origination dollars and some of that there may be a little bit of a reallocation of the pie for those borrowers who are already in the market between our market and perhaps not meeting my support broadly beta.
The FHA now looking at though they have a better profile with the lower LTV coming into our market, but the biggest piece for us as we think all of these programs and support that's offered for new buyers will really just expands the pie, it's not just going to be.
A.
A reallocation of the pie to give you a sense of our average loan size that we're ensuring at this point is roughly $300000 $15000 is 5% that 5% when our weighted average LTV at origination is 92 doesn't move that borrower out of.
On the private market what it might do is obviously change their risk profile and as you noted it could drag some buyers who would otherwise be shifted to the FHA with perhaps the higher LTV profile into a credit profile of where they can be best served by the private market.
That makes a lot of sense I really appreciate it and then ill jump back in the queue.
We have your next question from Brian Gilbertson from <unk>, Inc. Your line is open.
Alright, thanks, everyone.
First question just on <unk> I think you mentioned in the prepared remarks that you haven't seen a seasonal slowdown.
And demand and that's carried into January is it I guess is it fair to say that dollar volume of N IW and $1 20 one's tracking kind of consistent with the fourth quarter of 2020.
Yeah.
We've seen continue to see really strong application volume midway through the quarter, it's still a little early to tell how Q1 will unfold and how much of the seasonal slowdown ultimately comes through but you're right. We haven't seen so far.
Number two the bids.
Drivers of the demand that we've seen post COVID-19 are not seasonal in nature of the emotional drive towards homeownership.
On the increased affordability tied to low weight should persist regardless of the weather. So we'll see I mean, this is an unprecedented environment and it may yield of stronger origination both in Q1 and beyond and we would otherwise typically have.
But we feel really strong of that our momentum and positive about our future with our record volume that we delivered in the fourth quarter.
Okay great.
And then just thinking about I.
I guess, the refi component of niwa of another really strong quarter in <unk> 'twenty.
Has there been any change in 'twenty, one and your ability to.
Capture stronger refi volume or has that been also pretty consistent with 2020.
That one I'm going to defer on I don't have a breakdown we were 66% purchase of 34% refi in Q4, I don't have the breakdown at my fingertips, but broadly seeing broadly speaking, we're having success in the market supporting our borrowers we expect.
I suspect that our borrowers are equally busy from a refi sampling as they are from the purchase standpoint.
And so it will be we'll provide those splits when we get to our first quarter call, but the momentum is there.
Okay, great. Thanks very much.
Welcome.
We have your next question from Mike Hughes from TUI since your line is open.
Yes. Thank you for good afternoon.
Adam are another way to approach the capital situation is here.
Way to say, what sort of growth you could support internally with the internally generated capital with your quota share and the Io and support.
What kind of growth would you need in order to start to eat into the excess capital.
Yes.
It's a good thought.
As.
Theoretical matter of we could support of 100% of our needs in that fashion, because that would be all of our excess today plus the assumption that everything we're producing is going to go through a reinsurance transaction and for us obviously that not necessarily 100% of our business goes through where we can't.
Make that assumption at all times, we have to obviously keep of our prudential amount of excess.
And we also have to be able to warehouse. The production that we are generating until we get to that point of distribution with our next island and that's the more difficult one to to calibrate I think it's fair to say that.
For us this year, we have every expectation that we'll be able to deploy our excess in support of borrowers in support of our customers and really ultimately in a way that helps to seed our future financial results by by generating significant additional growth in our insured portfolio as we get out beyond 2021 some of the.
The dynamics around distribution versus deployment versus organic generation and what we can harvest from the market may come into more acute focus, but that's not going to be our opportunity in 'twenty one.
And so your opportunity to deploy luxury of all of that excess if you think you can do that in 12 months.
Well I'll give you a sense. So I don't have the numbers at my fingertips, but our <unk> charge on our production in the fourth quarter was a little over five 5%. We were up $19 8 billion of in IW and we had at the time.
A.
Roughly a 20% quota share agreement in place of 21% quota share agreement in place I would want to do the math, but you can if you just took the fourth quarter and roll that forward as the constant amount of production with a roughly equivalent of <unk> charge, you could get to a timeline I think that puts us on a pathway of consuming that.
Mount of excess over something like a 10 month period, or so got a little bit of we could we could do a bit more math on it a little bit more analysis and come back yet.
Yeah.
Oh, it's good very helpful. Thank you and then you mentioned the your losses are predicated do you think all of the conservative of home price depreciation.
The number can you share what that is.
We will share what the specific number is it's not a constant for us.
Its about house prices in the past they take.
Because the losses develop even on the current default.
The population develop over time.
But suffice it to say when I'll call it quite a muted number well below long term historical averages in terms of what we tend to see on an annual basis for house price growth nationally.
Right, which would be well below curve.
Home price appreciation.
Presumably that's.
Okay.
Thank you very much.
We have your next question from Phil.
Stefano from Deutsche Bank. Your line is open.
Yeah, Thanks, and good afternoon, So Adam I think in your prepared remarks, you had talked about the percentage of your total inventory of policies enforced that weren't forbearance I was hoping you could you could drill down to the extent that you couldn't talk about the the proportions of the the default inventory that were in forbearance.
And I think it's your November Investor Day, you had a slide in there the indicated only about 1% of the loans that were exiting for Barents. We're doing so in the stress scenario I mean, if you have any updated thoughts on how that has kind of changed in the the four of five months since the since that slide was presented I appreciate it.
Sure.
Of the of the 12209% default.
That we recorded the deferred.
All of population at the end of December I think of ramp and kind of get you. The exact number it was I think of 11200 <unk>.
The fleet, we're in forbearance, there's another chunk of that remaining 1000 or so that we suspect are in forbearance, but the way the reporting comes into us from Servicers isn't.
Isn't quite as precise and so out of an abundance of caution out of an abundance of caution we scoped that out when we're looking right now at something over 90% in terms of the population of the default the default population that's in forbearance.
And the largest chunk of those that are not in forbearance are what I'll call. It of the pre COVID-19 defaults those that were in the default tally from.
On the end of last year early this year, the having short out.
But haven't necessarily access forbearance to the same degree that the post COVID-19.
Rest of borrowers have.
And then Phil if you wouldn't mind just repeating the second part of the question Yeah. So at the Investor Day. There was the the 1% of people who are exiting forbearance on the stress scenario and it does does it feel like that number has shifted at all or is that generally people when they exit forbearance theyre doing so.
Not in a stressed environment.
Yes, so I want to be a bit careful I want to go back and look at that slide but.
The overwhelming majority of borrowers that are exiting forbearance continued to exit forbearance back into performing status and non progressing towards.
A claim at this point the split in terms of how borrowers are exiting from forbearance. Many continue actually the majority of continue to simply make up for all of the missed payments thus far.
And then another chunk of the next largest cohort would be those who are taking advantage of the payment deferral option that the gse's introduced in may.
Got it okay and the last one of half for you.
I think it was Adam the had talked about so the revised assumptions during the quarter when setting.
Reserves the.
The 7% incidence rate assumption it feels like it's relatively constant and so I guess, what you are trying to point to with with these revised assumptions as the favorable development that we saw on the quarter.
I guess I was hoping you could just talk to me about the look it is as simple as home price appreciation and the expectation of vaccinations in economic development that we're going to slowly start to release. Some of this you know this pool of of reserves or is there anything else that the you know maybe.
Maybe not as the simplistic yes.
Yes, so we did not release reserves on any COVID-19 related defaults that we've identified in the in the portfolio of the prior year development that came through of roughly $2 2 million in the quarter relates entirely to the pre COVID-19 default population and that population. We've continued to reserve all along exactly as we had done prior to the outset of.
Of the pandemic and what I mean, there is as those defaults.
Age or cure, we're making corresponding adjustments to our carried reserves and house prices develop we're incorporating the it's.
The latest actual appreciation that comes into our analysis. So that pre COVID-19 population declined from 883 defaults at September 36 of 795 at December 31, and the reason that we had that $2 2 million of favorable prior year development of because of the decline in the accounts.
Alongside the strength of HPA not that we have our forecasting but the strength in HVA that we've actually seen over the last several months has driven the release, we haven't released reserves even at the tours have come through on a meaningful way for any of the.
Any of the the the Covid related defaults that we've already reserved for say in the second and the third quarter.
Okay. Thank you.
We have your next question from Geoffrey Dunn from Dowling and partners. Your line is open.
Thanks, Good evening.
On a few questions for you first was there any IV in our development in the current period provision this quarter.
No our IV inaccurate, our IV on our factor was was constant through the.
From the third quarter for the fourth quarter. So any movement in the case reserves would have prompted a modest movements in the <unk>, but nothing nothing like the changes that we noted from the second of the third quarter.
Okay. So based on the average provision.
It looks like your severity factor dropped significantly get backing into maybe about 35000.
Relative to maybe north of 50 last quarter, what is that math correct and can you explain the change.
Yes.
We'll talk off line, but our average severity factor on new defaults in.
Q3 was about 77% in Q4 it was about 74%. So there is some movement on that movement traces wanted to just what was the LTV on the the loan to happen to go into default during the course of the quarter as well as the strength of the HPA environment, not again that we're forecasting but the HVA environment that we have.
<unk> seen develop over the last.
On the last three months, Jeff happy to work with you offline just to make sure that.
We're seeing the same analysis you are in helping you.
The thing you understand it so what I say is more broadly when we look at.
Severity factors one of the things that we're most comforted by is obviously the level of equity that's embedded not just in the overall portfolio, but specifically in the default population at the end of the year, 94% of our default population had at least 10% equity.
On an estimated basis right on our estimate of the current LTV and 75% had at least 15% equity underpinning their mortgage that obviously goes a long way towards bolstering that borrowers performance and in the event that they do progress the claim from providing us with.
Some some amount.
And an ability to curtail our claims exposure as the severity of matter.
Okay. As you think about the in terms of assumption.
Assumption has been that the incidence rates would go up but all of the <unk> as the percent of <unk>.
New forbearance loans with the new delinquencies coming in goes down.
If that is the trend in the coming year and Theres no macro change on your part.
Is it fair that that incidence assumptions go up or the other things we need to consider as we look at that outlook.
Yeah. So this is one where.
I do want to highlight we're very happy to talk about the claim rate assumption.
What we call of frequency factor internally.
In the aggregate, but it is that's not how we develop the we don't just apply a blanket 7% assumption for all new notices that come in and of particular quarter or whatever the the claim rate we would be disclosing at that point, it's very much developed based on the individual profile of the loan the borrower and expectations for performance on a model basis. So.
The single one of those the 2589, new defaults that came through in the quarter went through our risk model got its own frequency factor and it just happens to be that the average continues to run at 7% where that number of trends in the future will depend greatly on both the macro environment in which we are incurring new defaults, but.
Also the underlying risk profile of those defaulted borrowers.
Okay.
Then the last question I think you mentioned the average premier's actual charge offs on IW in Q4 was about five of them.
Roughly speaking, what's the average charge on on runoff, we're canceling business.
Jeff I don't have it on my fingertips.
Happy to come back to you with it the.
The charge on.
Our production prior to the onset of Covid in terms of the new from the new business standpoint.
In the fourth quarter of 2019 was running at about six 1%, but the carry charge on that in force portfolio, even though it was originated in a I'll call it with a higher risk characteristics and so therefore, a higher risk charge.
<unk> benefited from seasoning credit so I don't have it on my fingertips, but happy to come back to you with it.
Okay, great. Thank you.
I'm showing no further questions at this time I would now like to turn the conference back to the management. Please continue.
Thank you again for joining us will.
We will be participating in virtual investor conferences hosted by credit Suisse on February 25th FIFA on March 1st and RBC on March nine.
We will also be participating in the Jpmorgan fixed income conference on March 2nd.
We look forward to speaking with you at one of these events and hope all of you are staying safe and healthy.
Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.
On the.
The general.
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