Q1 2021 NMI Holdings Inc Earnings Call
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Good day, and welcome to that and Am I Holdings, Inc. First quarter 2021 and these costs.
Let's call.
At this time, all participants are on a listen only mode.
Later, we will conduct a question answer session and instructions will follow at that time, Inc.
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And I'd like to turn the conference over to your host Mr. John Schrenker. Please go ahead Sir.
Thank you Angela and good afternoon, and welcome to our 2021 first quarter conference call for National M. I.
And John Swenson, Vice President of Investor Relations and Treasury joining.
Joining us on the call today are Brad Shuster executive Chairman.
Claudia Merkle CEO, Adam Pullets are our chief financial Officer, and Julie Norberg our controller.
Financial results for the quarter were released after the close today for.
Yes release may be accessed on minimize website located at national and my Dot com under the investors tab.
During the course of this call we may make comments about our expectations for the future.
Actual results could differ materially from those contained and 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.
Yes, and to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements and the future and light of subsequent developments.
Further no one should rely on and the fact that the guidance of such statements is current at any time other than on the time on this call.
Also note that on this call we refer to certain non-GAAP measures.
And today's press release and on our website.
Provided a reconciliation of these measures to the most comparable measures under GAAP.
Now I'll turn the call over to Brad.
Thank you John and good afternoon, everyone.
I am pleased to report that and the first quarter.
National and <unk> delivered strong financial performance.
Record and IW volume and significant growth and our insured portfolio.
As we talk today I'm greatly encouraged.
The stress of the COVID-19 pandemic has begun to recede with the rollout of the nationwide vaccination effort.
The economic environment has stabilized.
With stimulus funding and the broad resumption of personal and business activity spurring job creation and growth.
And the housing market has continued to demonstrate remarkable resiliency and foundational strength.
Against this backdrop, we achieved a record $26 4 billion and I W.
And ended the quarter with $123 8 billion of high quality insurance and force.
We are helping more borrowers than ever before gain access to housing.
Credit performance and our in force portfolio continues to trend and a favorable direction.
And we are increasingly optimistic as we look forward given the quality of our underlying book.
Sustained resiliency of the housing market.
And strengthening macro environment.
Mortgage note rates have increased after touching an all time low in January.
And while the move higher has garnered significant attention and shifts the refinancing opportunity for certain homeowners.
Current rates are stable at approximately 3% nationally.
And remained highly constructive for our core purchase borrower.
The movement in rates also holds the prospect of slowing the pace of turbo and turnover and our existing portfolio.
Allowing us to retain the high quality business that we have worked hard to originate for a longer period of time.
Shifting to Washington matters.
We applaud the continued effort to assist those borrowers who are still impacted by the COVID-19 crisis.
The recent extension by the Gse's of their forbearance timeline and the changes proposed by the CFPB to the foreclosure process are important additional steps.
The recovery from the pandemic, well broadly accelerating will not be even.
And as the immediacy of the crisis receipts.
We'll still be many and need of support.
We believe policymakers regulators and others in Washington are committed to providing additional assistance to help as many borrowers as possible remain in their homes and resume their lives.
With limited interruption once the pandemic has passed.
More broadly.
And the administration and new congressional leadership.
We have signaled their focus on the housing market is and early priority.
Expanding access to homeownership and all the benefits it provides.
A safe environment and wish to shelter.
And ability to establish a community identity.
And and equitable opportunity for long term wealth creation.
And in a manner that appropriately guards against systemic risk is critically important.
And we believe there is continued recognition and Washington of the value that national MRI and.
And the broader private mortgage insurance industry bring to this effort.
Providing borrowers with down payments support and equal access to mortgage credit.
While also placing private capital and front of the taxpayer to absorb risk and loss and a downturn.
Overall, we had a terrific quarter and our.
And well positioned to continue helping borrowers and delivering on the goals that we set for our business.
With that let me turn it over to Claudia.
Thank you Brad.
The strong performance of our team and business continued in the first quarter.
We delivered record and IW volume achieved significant growth and our high quality insured portfolio and.
And reported strong bottom line profitability and returns.
GAAP net income was $52 9 million or 61 cents per diluted share.
And adjusted net income was $53 4 million or 62 cents per diluted share.
GAAP return on equity was 15, 4% for the quarter and adjusted ROE with debt.
<unk>, 5%.
The private mortgage insurance market remains highly constructive.
From a risk pricing and demand perspective and.
And we were able to help lenders and deliver valuable solutions for borrowers and a record pace and the first quarter.
We generated record and IW of $26 4 billion.
33% from the fourth quarter, and 134% compared to the first quarter of 2020.
Our <unk> growth and the quarter was all organic.
We remain focused on helping all lenders equally and supporting bars and <unk>.
And just in terms across the market.
In the first quarter, we activated 20 for new lenders.
We are now doing business with a broadly diverse group of more than 200 high quality Originators, Inc.
179 of the top 200 lenders nationwide.
We have been consistent and our approach to the market.
Leading with a consultative sales engagement and clear value proposition of certainty of coverage and differentiated service.
We also found new and innovative ways to engage with lenders and to deepen our customer relationships as the COVID-19 crisis developed.
Our customer success.
Tallied over the last several years.
Helped fuel our record volume and the quarter and allowed us to achieve strong growth.
While maintaining our strict focus on credit discipline and risk adjusted returns.
Additionally.
The broad push towards technology, and Digitization and across the origination landscape has provided us with and accelerated the ability to ramp our niwa volume once we have activated and accounts and <unk>.
Quickly scale, our new customer relationship.
While we achieved record and IW volume and the first quarter and enjoyed continued momentum through April.
We have seen and early impact from rising interest rates in our flow of refinancing applications, which is a precursor to MSW volume.
Notwithstanding the shift and refinancing activity.
<unk> has positive.
Long term demographic trends support robust purchase demand.
Experience of the pandemic has reinforced the value of homeownership and.
Credit discipline remains paramount and throughout the mortgage market.
Our team is engaged and working hard every day.
Our lender activation and pipeline is healthy.
Our strategy to differentiate with customers, while maintaining credit discipline and a balance focus on risk adjusted returns is working.
And we expect to grow our insured portfolio.
Responsibly deploy capital.
And drives value with consistency over time.
With that I'll turn it over to Adam.
Thank you Claudia.
We delivered strong financial results in the first quarter, driven by our record and IW volume strong growth and our insured portfolio and continued resiliency and our credit performance.
Net premiums earned were $105 9 million adjusted net income was $53 4 million for 62 cents per diluted share.
And adjusted return on equity was 15, 5%.
Total and IW of $26 4 billion included $23 8 billion of monthly production.
Purchase originations accounted for 68% of our volume and the quarter.
Primary insurance in force was $123 8 billion up 11% for $111 3 billion at the end of the fourth quarter and up 26% compared to the first quarter of 2020.
12 month, persistency and our primary portfolio was 52% down from 56% and the fourth quarter.
Primarily reflecting refinancing activity from borrowers who locked prior to the recent increase in mortgage note rates.
We expect persistency will begin to rebound and the second half as refinancing activity slows and the record volume of business that we've written at exceptionally low interest rates over the last 12 months.
And on our books for an extended period.
While refinancing volume is quality and noted maybe impacted in future periods due to rising rates.
We expect improving persistency will provide a balanced helping to absorb the impact of any potential change in volume.
Improving persistency is particularly valuable as a portion of our existing and short portfolio was originated and a higher premium rate environment.
And the extension of our monthly policies provides us with a continued flow of premium revenue without the contribution of additional acquisition costs.
In force business will also all else equal generally perform better as the claims matter given the benefit of seasoning.
Net premiums earned and the first quarter or $105 9 million up 5% compared to $100 7 million in the fourth quarter.
We earned $9 9 million from the cancellation of single premium policies compared to $11 7 million in the fourth quarter.
Reported yield for the quarter was 36 basis points compared to 37 basis points and the fourth quarter, primarily reflecting the decreased contribution from cancellation earnings during the period.
Yeah.
Investment income was $8 8 million in the first quarter compared to $8 4 million in the fourth quarter.
Underwriting and operating expenses were $34 1 million compared to $35 million and the fourth quarter.
Expenses in the first quarter included 378000 of cost incurred in connection with our most recent island offering in April.
We expect an additional $1 8 million on island issuance costs to come through and the second quarter related to the transaction.
Excluding aisle and related costs adjusted underwriting and operating expenses were $33 7 million compared to $33 3 million in the fourth quarter.
Our GAAP expense ratio was 32, 2% compared to 34, 7% and the fourth quarter and our adjusted expense ratio was 31, 8% compared to 33% last quarter.
We had 11090 defaults and our primary portfolio at March 31.
Compared to 12209 at December 31, and.
And our default rate declined to two 5% during the period.
At quarter, and 14805 or three 4% of the loans, we insured and our primary portfolio were enrolled and a forbearance program, including 9988 of the loans and our default population.
Our credit performance continues to trend and and encouraging direction with an increasing number of impacted borrowers curing their delinquencies.
And fewer new defaults emerging as the stress of the COVID-19 crisis received.
On April 30th our default population declined to 10060, <unk> and our default rate fell to two 2%.
Of note the number of loans and our portfolio that have missed at least one payment, but non progressed into default status and important leading indicator of our near term credit performance is at its lowest level since last March and nearly back to pre pandemic levels.
Looking forward were optimistic and we will see continued improvement and our credit performance as the strength of the housing market carries forward.
The broader economy recovers and an accelerating pace.
And the nationwide vaccination effort allows for the broad resumption of personal and business activity.
Claims expense was $5 million in the first quarter and our loss ratio defined as claims expense divided by net premiums earned was four 7%.
We reevaluate the assumptions underpinning our reserve analysis every quarter and as we progress through the remainder of the year, we'll consider among other factors the performance of our existing borrowers.
The availability of additional support for those still in need at the end of their forbearance period.
And the underlying resiliency of the housing market and path of house price appreciation to determine whether further changes to our claims reserve are necessary.
Interest expense and the quarter was $7 9 million and we reported a $205000 loss from the change and the fair value of our warrant liability during the period.
GAAP net income for the quarter was $52 9 million or <unk> 61 per diluted share.
Justin net income, which excludes periodic transaction costs for.
And fair value changes and net realized investment gains and losses was $53 4 million or <unk> 62 cents per diluted share.
The island that we closed last week, our sixth Okay reoffering builds upon our previous success and the risk transfer markets and extends our comprehensive reinsurance coverage across our most recent production.
The $367 million deal is our largest to date and provides coverage on risk originated primarily between October one 2020 and March 31 of this year.
From a 185% attachment point up to a 675% maximum detachment.
The transaction carries an estimated 3% weighted average lifetime pre tax cost of capital.
The attachment point on the deal akin to a deductible is tied with the lowest we've ever achieved and the estimated lifetime cost of the transaction is close to the tightest levels of any of our pre COVID-19 offerings.
Total cash and investments for $1 9 billion at quarter end.
Including $78 million of cash and investments at the holding company.
Shareholders' equity at the end of the first quarter was $1 4 billion equal to $16 13 per share up 14% compared to the first quarter of 2020.
We have 400 million and outstanding senior notes and our $110 million revolving credit facility remains undrawn and fully available.
At quarter, and we reported total available assets under P mirrors of $1 8 billion and risk based required assets of $1 3 billion.
Yes available assets were $549 million.
The island issuance that we closed in April is not included in these figures as it was completed after quarter end.
$367 million offering will further bolster our excess position and provide even more funding runway for future periods.
Overall, we delivered strong results for the quarter with record new business production strong growth and our insured portfolio and encourage and credit performance driving significant profitability and strong mid teens return.
With that let me turn it back to Claudia.
Thanks, Adam our.
And our performance and the first quarter with record and IW volume and primary insurance in force.
Significant profitability and a strong mid teens return builds upon the strength and resiliency, we've demonstrated through the duration of the COVID-19 crisis and stands out and a dramatic way.
We are optimistic as we look forward with the strength of the COVID-19 pandemic beginning to recede.
The outlook for the economy improving sharply.
And the housing market continuing to strengthen.
Against this broadly improving backdrop, we believe we are well positioned to continue to win with customers.
<unk> growth on our high quality insured portfolio maintain the right risk return balance and deliver strong results for our shareholders.
Thank you for joining us today I'll now ask the operator to come back on so we can take your questions.
Ladies and gentlemen, and you'll have a question at this time. Please press the star and the number one key on your Touchtone telephone.
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First question comes from the line of Mark COVID-19 right Chris.
Please go ahead.
Yes. Thanks.
Adam as you pointed out your premiums excess continues to build and it's probably well above any kind of cushion you feel like you need longer term can you just talk about your updated thoughts on on how that gets deployed over time on whether it's into the business or returned to shareholders. Yes.
Yes, sure Mark I'm happy to I think it's worth perhaps clarify on one piece the dollar size of our team and especially it is obviously quite significant and 549 million at March 31, but as a ratio thats approximately 44%. Our long term goal is to operate with roughly a 35% cushion above our minimum required amount.
And while we're writing as much business as much high quality business as we did at record levels in the first quarter, while continuing to consume the organic capital that we generate and then have additional needs and so as we look forward we.
We would like to get to a point of increased efficiency from our <unk> extra standpoint, but right now the way we get there is by investing and our core business, writing business Thats expected to generate a strong mid teens return and really doing what we've proven to do best which is deploying that capital responsibly in the semi market.
Okay got it and then and.
Any update you can provide us on just kind of the latest pricing trends youre seeing across the industry.
Yeah sure Mark I mean, what we see is the pricing environment remains constructive and importantly, the unit economics and the expected returns on the new business continue to be very attractive.
And so overall, we see a very constructive environment in the market.
Okay.
And no additional pressure from from <unk>.
Competitors kind of looking at the loss expectations and realize and things.
And as bad as they might have thought and.
On summer.
No I mean, youre always looking for its a competitive market, but not nothing that.
Nothing that is nothing.
Nothing that stands out it's it's it remains constructive and it remains also I think all the and my companies and all.
Find are are placed and the risk and risk isn't it isn't static and non.
And on a different lenders that were working with it.
But overall, where we feel it's a it's constructive environment.
Okay got it thank you.
Oh come on.
Your next question is from the line of GAAP Harter with Credit Suisse. Please go ahead.
Hey, good afternoon, and this is Josh Bolton on for Doug first any more color or thoughts you can give us around the drivers of the premium yield declined during the quarter and where you expect that yield to trend over the coming quarters and then secondly, it looks like you know the company gained from our math gained.
Decent amount of market share and the quarter curious if you have any thoughts behind what drove that and how sustainable that is.
Sure I'll take the premium your question on and audio will give you a perspective on.
On the share piece and the volume and the quarter on our net yield and the quarter was 36 basis points compared to 37 basis points and Q4 and the move largely traces to a defined and the contribution from our cancellation earnings which were $9 9 million and Q1 compared to $11 $7 million and Q4 that ship paired with the growth.
And our insurance and force right because it's a ratio so a decline and the contribution of cancellation earnings as a dollar amount plus the growth and the denominator in the form of insurance and force cost US one basis point of yield in the quarter in terms of guidance through the remainder of 'twenty one.
We're not going to provide anything explicit but the one item I would note is that we will see the cost of our most recent io and begin to come through in in the second quarter.
Yeah.
And Josh regarding your question on <unk>.
We'll drivers.
And it was a it was just a terrific quarter and we're really proud of the team and proud of what we achieved we have been working on this for a long time for close to 10 years now built on our business and our lender base and and.
And putting ourselves in a and a strong position to succeed.
That hard work comes through and this quarter in terms of specific drivers beyond the decade of heavy lifting to build the company.
Two things first the digital evolution that we've seen and have seen accelerate as a result of COVID-19 has allowed us a significant boost.
Digital engagement with lenders matters more than ever before and while relationships are still highly critical the adoption of MRI comparison tools by the lenders is driving a shift a shift towards ratable distribution and our industry and we.
And we appear that with all the hard work, we've done to build our lender basis, it's all clicking and it's it's driving a record and IW. I'd also note we chose to prudently layer, a modest amount of incremental risk into the portfolio.
Our risk appetite isn't static and this is an environment, where we felt we can layer on additional flow and I W and still maintain the full integrity of our high quality portfolio.
Overall, it was just a terrific quarter and.
Josh as it as it relates to sustainability.
What we're most focused on serving our customers and their borrowers.
Point capital responsibly and in a manner that allows us to generate strong risk adjusted returns and things will always shift quarter over quarter, but we don't have any reason to anticipate significant fluctuations.
I just note that said.
And the refi cycle is slowing and they're ours and there are even some headwinds and the purchase market because of housing availability.
Great I appreciate the comments everyone.
Thanks, Josh.
Your next question is from the line of Bose George with Kb that for you. Please go ahead.
Hello, Good afternoon.
I wanted to ask about expenses can you give us on.
And what do you expect there.
This quarter, despite the strong and that W.
Yeah honestly, we're pleased right our focus.
<unk> has always been on efficiency and and that remains the case today. So adjusted operating expenses of $33 7 million and the first quarter is a good result, particularly given the scale of our growth and performance on.
On the build side of the business in terms of a progression through the year, we expect a modest increase from our Q1 operating expenses as we do continue to invest and growth with some variability tied to the pace of reopening broadly and what that means for our T&D spend certain performance related costs as well as <unk>.
The rate on turnover and our in force portfolio, I mentioned and the fourth quarter and it continues to come through debt with advancing.
Turnover comes and impact on our GAAP recognition. So all of those will be items that.
May cause some fluctuation, but net net we expect a modest increase as we progress through the year from the Q1 level.
Okay, great. Thanks, and thanks, I just wanted to go back to the and ITW.
Discussion and the sustainability.
Looking at the companies that have reported EBITDA. It looks like your market share is kind of moved in line with the interest with the peers.
And I mean do you feel like that's kind of a level where it is.
And it kind of maintain sustainability of debt. If you could just discuss that because it looks like there was just a meaningful shift this quarter.
Sure Yeah.
And I'm focused on market share, but we are proud of our ability to deliver such strong growth and our and like that'd be volume and and this is true portfolio will obviously be able to measure market share. After everyone reports that we do expect that we've gained some ground and in the quarter and like.
And I mentioned before this is this is yours and the making but we certainly did have inc.
And what I would call almost a force multiplier and we think about the digital side of the business and we did layer in.
Slight amount of risk and the business, but you know.
It's a it's a lot of years of hard work and we feel really good about what we've achieved.
Okay.
Sorry go ahead and.
We obviously are always building towards things and a sustainable way, which is why quality and her prepared remarks mentioned that this is all organic because it was and organic obviously provides us with greater conviction about our ability to maintain.
And the success and the increase that we've achieved but and.
W volume is going to fluctuate it naturally does it moves from period to period the size of the market itself is going to fluctuate.
Our success with customers in any given period will naturally evolve and our risk appetite is not going to be static.
And as we think about and obviously, putting on high quality high return on a high expected return business is critically important but most important over the long term is that we continue to build our insurance and force because it is our insurance and force that's driving both our current period and long term financial results not just our NSW and any given period.
So okay, the bricks and motor.
Thanks.
Your next question is from the line of Erin <unk> with Citi. Please go ahead.
Thanks Claudia.
And I was hoping you could maybe just expand a little bit about what you mean with digital engagement with the lenders.
Are there specific actions that you've taken this past quarter where is this.
Something you are saying, it's kind of been and ongoing.
Processing and doing for several years, yes sure Erinn.
And the Digitization of the mortgage market overall, and then the adoption of technology for our lenders it's been a focus that we've actually.
Looked at for a long time now and it.
And as excuse and number of different parts of the mortgage origination and closing process in terms of what was it what it means for our engagement with lenders and why it's such a strong catalyst for our growth.
I know two things one is it and amplifies our visibility and the market is now less about being directly in front of a loan officer processor and underwriter.
And the past gave us hundreds of touch points per day is now it's now about being active with the lender visible on their platform and is immediately provides us with tens of thousands of touch points per day.
So it's it's really substantial.
The other thing is.
No.
The digital market has it breaks down old habits for the lenders for that loan officer processor underwriter and may have been historically skewed towards their longer tenured and my relationship that has really shifted on that dynamic I'm no longer does it you have a habit just to go to one of the longer term and my company. So.
It's been a significant transformation for us and for the industry.
That's very helpful. Thank you and then just on the persistency.
You know it was mentioned that it's going to improve and the second half of the years do you view this as being more of a kind of a step function in the third quarter or is it.
Will it be a little bit more gradual and suite as we think about that yes.
Yes, it's going to be a bit more gradual.
We expect that it will begin to improve and the second half and thats going to be from both the benefit of the recent increase in rates and its impact on refinancing activity, but also importantly, because the farther into the year that we progressed the more of the business that we wrote last year kind of into the calculation because it's a 12 months persist.
And calculation. So it only includes business that was on our books 12 months ago. When we report that number that improvement that we expect to come through we anticipate it will be modest at first before accelerating more fully as we actually roll past year and and into 2022.
And the full effect of the record $62 7 billion and Niwa debt. We wrote last year at exceptionally low no rates comes into the calculation for the for the first time.
Got it thank you.
Our next question is from the line of Rick Shane with J P. Morgan.
Thanks for taking my questions on this afternoon.
I'd love to just talk a little bit Adam you mentioned some of the different factors that you'll consider as you think about the reserve rate going forward.
And when we look at the delinquencies.
On a dollar basis Theyre down the reserve is up slightly this quarter and some of that makes sense given the aging of the loans that are on default.
Curious how much sort of latitude do you think there's additional factors will give you as you move forward.
Yeah, Rick it's a great question and I would say, it's not so much about latitude, but candidly this quarter more about a deliberate posture that we've taken and we.
Our reserves to reflect as they always do our best estimate of ultimate claims exposure and and this sort of stands as of March 31.
At this point, we spent a lot of time and our and.
And the discussion earlier, highlighting the broad optimism that we have about where the market our business and our credit performance are trending because and the macro things are getting better measure measurably better every day.
It seems are paving the way for a broad reopening the economy is rebounding sharply and everyday that goes by the housing market continues to be enormously resilient.
Default population is also declining at an accelerating pace our default inventory was down nine 2% from December 31 to March 31, and adjust declined by nine 3% and the month of April alone.
And as far as our reserving posture.
We have we have decided to.
Anchor more to our downside scenarios not necessarily accounting for the prospect of additional assistance that may be offered to borrowers beyond forbearance at all and embedding a muted a more muted assumption for house price appreciation over the next several years as we set those reserves and we think that's appropriate.
To be broadly optimistic and our outlook for the business overall and the decisions that we're making but still to anchor as a reserving matter more to the downside because of the way that we as in my company and establish our reserves were not a bank. We don't establish a bank like bank like seasonal reserve for the entirety of alone.
Folio is only for the small subset of the loans that are and default and our portfolio that were establishing a reserve for and so and a unique environment like we have now like the pandemic presents were comfortable if you were living with a little bit of that duality of broad optimism, but also anchored to a downside for purposes of reserves, we're going to see.
And where things developed through the course of the year to continue to assess that posture, we want to see what happens as we get out into the back end of the year. After the current forbearance programs expire.
And those will be items that we look for to consider whether or not that deliberately conservative posture should be moderated.
Got it look at it I appreciate that.
The answer and I think one of the things that is different to your point is that versus see so there is less of an economic factor influence. It really is more specific to the loans that are on default and the CS the aging.
Of those loans, regardless of whether or not they are likely to cure becomes more just positive and the short term.
That's right.
Okay. Thank you guys.
Your next question is from the line of Mark Hughes with Jewish Keith. Please go ahead.
Yes. Thank you I think you may have just addressed it.
And in broad strokes, but looking at the current year claims number.
And with $10 6 million up meaningfully on a sequential basis.
Surely the portfolios bigger and your.
And you're being conservative.
But that seems like a meaningful jump I'm, just sort of curious on the drivers of that yes.
Yes, Mark I think it's a great question and in fact, we provided some additional footnoting this quarter to help highlight one interesting dynamic that really only emerges and the first quarter for us and it emerges and a more significant way this year than in years past given the size of the default population, we established net case reserves.
$5 3 million and for the 1007 hundred 67, new defaults that came through in Q1. We also established an additional $5 3 million of net IV and our reserves during the period, but the amount that shows and the current period ROE for our IV and our reserves given calculated.
And just solely on the Q1 default it's calculated based on the entirety of our default population and case reserve position inclusive of prior period case reserves that are carried at March 31, and so that dynamic skews the optics of that.
And of that the reserve roll table, but you can largely normalize for that if you simply subtract $5 million of that $5 $3 million of IV and a reserve that was established in Q1 from the current period line and if you add it back in to the prior period line that'll give you a more normalized view and that normalized.
Few yields about <unk>.
A $5 5 million of current period reserves and about 500000 of favorable development on prior period defaults defaults and Thats, how you get to our $5 million of net claims expense incurred in Q1.
Yes.
Thank you that's very helpful.
And then.
<unk>.
Your point about.
The government, putting private capital and front of the taxpayer money.
In order to absorb risk.
And any meaningful things that book.
And any regulatory changes are the.
That.
See emerging compared to what you might have spoken about a few months ago.
Yeah, Mark there's obviously.
A lot being talked about.
With the new administration.
Lot of discussion about.
Tax reform, both personal and business taxes.
You know a lot of.
Positive movement on the forbearance side and the extensions that were recently announced there.
But.
Basically the.
I think the environment is very constructive.
Think housing has really been a bright spot throughout the pandemic.
And I'm sure that the new administration appreciates that and it won't be.
Well it won't be hasty in terms of doing anything to affect that negatively.
So we just feel that the overall.
On a regulatory environment is good and.
Likely to stay that way even though.
Summing up to a period when and when there could be some see some changes that could come to past.
It's constructive, but but too early to draw any long term conclusions.
Thank you.
Your next question comes from the line of Randy Binner with B Riley. Please go ahead.
Oh, Hey, good evening, I, mostly asked and answered but.
Just some persistency.
And just try a different way.
Understanding that there is an offset you know as per.
Persistency.
Comes back and.
Helps the model there is less volume and so that would usually recover around now and there's quite a bit lower than we thought on the quarter and so the question is is there.
So maybe something different this time, where you just have this really hot housing market.
And you know a function of a good economy or a dynamic and housing versus the economy, we haven't seen before where.
You know you just keep seeing more refi activity or more loan activity and persistent and so you could stay low and volatile kind of it for a prolonged period of time and if there is there a chance of that because if you try and drive the data points together, there theres still kind of all over the place. So just just wondering if there could be some different dynamics.
And I'm around.
Yeah, Randy it's a great question, we asked ourselves that as well what I would call. It is there some type of a purgatory position where rates are high enough that it weighs on refinancing activity and a way that somehow it doesn't.
Really slow the rate of turnover and the portfolio, where we don't get that balance to it and the interesting piece for us is that wall.
All of our business is incredibly high quality and its price to achieve attractive risk. Adjusted returns. There is somewhat of a bright line distinction between our pre COVID-19 and post COVID-19 business as a note rate and by extension is a refinancing matter.
And thats because the decline in interest rates and mortgage note rates at the onset of COVID-19 with somebody on somewhat spectacular and its speed and its magnitude things pointing to almost immediately and.
And that means that our pre COVID-19 book, which when we're talking about and we generally bucket that will include all business written on or before March 2020.
And our post COVID-19 book, which would then be all of the business that we've written on or after April 2020 have dramatically different underlying note rates are pre COVID-19 book carries a four 1% to 7% weighted average note rate and our post COVID-19 book has a 297% underlying rate and so in terms of the move that we've seen.
<unk> in.
And the 30 year and its impact on refinancing activity. We expect that the recent increase in rates will have a profoundly positive impact on the persistency of our post COVID-19 production, it's going to effectively lock in the significant majority of that book and that's critically important because thats business that was originated and what we've consists.
And we said, it's an environment, where we had both record volume, but also record value of production and whether the 30 years at 3% $323 50, with and underlying 297% note rate supporting that book that business is going to be locked in on the flipside are pre COVID-19.
<unk> at $4 one 7%.
This dramatically I'll call it more or less right for refinancing whether youre at 265, three and $323 50.
And so we do expect that we will continue to see some amount of turnover and the portfolio. One there's natural life events that drive turnover, but two because of that that distinction in the different <unk> of the portfolio for us at this point, though.
Majority of our insurance and force as a $331 21 was actually originated from April one of last year and forward and so we will see still turnover and the portfolio unless we have a continued move higher and rates that will still contribute some amount of cancellation earnings and a constructive way, but the most.
Significant positive for us on a long term is that the phenomenal business that we've originated over the last 12 months at record volume and record value is going to be locked in place and that is terrific for us.
Alright, that's helpful and they've got reinsurance the last one there was another aisle and so that's like excess of loss so that that would not affect the dynamic on that.
More recent vintage of the post COVID-19 book wouldn't be any smaller all things being equal from the Isle and unless there was a large losses on correct.
That's right and again.
The islands are really elegant also because I'll call on their self amortizing that generally speaking as the underlying risk is running on the amortized down and size and so the cost to sort of calibrated to the size of the underlying reference tool and instances where that the underlying risk runs off slower the island's day outstanding longer which is also positive because then we get.
The matched capital relief that they provide theres no I'll call it basis risk that develops down the road. If you have <unk> running off to quickly relative to the risk, which could expose you from a capital risk standpoint, that's not how they are built.
Yes, okay understood. Thank you very much.
Your next question comes from the line of Ryan Gilbert and could be.
<unk>. Please go ahead.
Hi, Thanks, everyone I appreciate the detail that you've provided on the call so far.
My first question's on.
On that I guess cures and the quarter on.
It seems like there was a.
Pretty measurable slowdown.
And.
Curious on an absolute basis, and then the cure rate as well and <unk>.
<unk> compared to the fourth quarter and I'm wondering if you could.
I guess just.
Explore what you think was what was happening and the first quarter and then how cures are trending so far and the second quarter specifically in April.
Sure.
I would say things are going to move from period to period.
Borrowers are still facing stress.
Those two are still in default at this period of time, those who have been living if you will and forbearance for a longer period of time, it's not surprising for us to see some of those older aged defaults, perhaps live longer on our books and then to fall.
Ill population and then we would otherwise expect outside of of the pandemic, but overall were enormously encouraged again I think I referenced that earlier on the call.
Roughly.
We'll look at the total default inventory as opposed to just isolating cures.
New defaults individually when we look at the level of cure activity overall, the decline and the default population of roughly 1100 over a three month period from December 31 through March 31, and then look at roughly the same decline.
Loans from March to April, it's really encouraging for us and we're hopeful that that trend will continue.
We do think Thats ultimately as we've said for some time the overwhelming majority of borrowers who went into default as a result of COVID-19 stress.
And took advantage of the forbearance programs and other assistance that was offered will ultimately cure out and not necessarily migrate through our claims.
And that's fine for us.
Okay.
Did that slow down and cures it.
Influence your.
More conservative stance, and the and the first quarter and I.
And I guess I'm, asking because I agree with you that the macro trends are improving and it looks like the credit.
Credit is getting better but at the same time your loss ratio is up over 100 basis points sequentially.
Yeah.
I would put that also I would calibrate that and put that in perspective.
And right our loss ratio of four 7% up 100 basis points, but it's still for 7% relative to three 5% and in Q4, and so I do think the absolute level theyre matters as much as as the relative what I would say no. It didn't influence our decision to be more or less conservative broadly speaking what I would say is <unk>.
Our goal was to maintain and equally conservative posture as we had in Q4 and to a degree I think about it. This way if your goal is to somewhat to run in place, but the wind at your back picks up speed you need to dig and your heels a little bit deeper in terms of the conservatism that we would embed in.
And some of those assumptions around claim rates and the like and so that's what came through it's really independent from.
Our movement and cure activity, our cure rate.
Okay got it and.
And second question is on and IW.
I'm wondering if you can quantify the impact of that opening 24, new lenders in the quarter had on your on your on your and IW growth and if you think going forward your ability to add new lenders to your business can offset some of that heads.
Headwinds from slow down and refinancing volume.
Sure.
Look we have been consistent and adding and activating new lenders quarter over quarter. It's been a focus for us as a matter of fact, one and things and that we can do is even go deeper beyond the top 200 and types of the strategy because we've got a.
We've got the technology and.
Back if you will but.
All of our Activations is what is really and quite frankly all of the.
And the diversification of all the lenders that we have today is really what's the basis of the success because in order to be able to use technology use the digital market and and gains and strong insurance and force is through the activated customers. So there. There are we are we constantly are driving down to what.
Unities, one M&A opportunities on the largest and opportunities for us.
And we see that continuing and there's still opportunity out there for us and it's just a matter of priority.
And and we continue to grow on that and I missed your other question about the refinance piece is that just just asking if it would balance out the refi volume.
My question was whether.
You think that opening at the new lenders, you've opened and the quarter and that you can like Mccain.
Assuming that you are planning on opening more lenders throughout the course of the year if that can help offset some of the headwinds that you're expecting from refinance volume.
For sure I mean things will shift quarter on quarter, but in general that's that's the goal.
The refi activity, we arent going to see quite of a slowdown there we've seen it and the applications due to the higher interest rates and also on the purchase side.
Have the availability issue, but all and all it was a.
We had and also strong April so we do see that we will have we will continue this.
Success, it's just a matter of to what degree because of the quarter over quarter dynamics and Refis will make a difference.
Okay got it thanks, so much I appreciate it.
Sure.
And your final question is from the line of sales Stephano with Deutsche Bank. Please go ahead.
Yeah, Thanks, and good afternoon I'm on it.
I'm going to ask a follow up on me and IW volume.
I guess and my mind as as we move to Digitization and comparative raters. This would translate to a best execution market, where price wins I guess it feels like a response to and an earlier question.
And that was it.
And theres been a ratable push for new business, what's I guess it was a bit surprising. So I was hoping you could you could comment on that and and I guess the second part of this question is look I mean, there's still feels like there was a pop and new business. This quarter is there anything you'd point to as it as an inflection or change and the.
The digitization that made it more apparent this quarter than we've seen over the past couple Phil Let me, let me clarify one item and your question and then Claudio will lay in the comments earlier about.
Ratable and drive towards ratable share is not a ratable push it's not a strategy move on our end and that's not what was said well just add is that the tools that lenders are using.
Patients a shift in industry share towards a ratable outcome. It is not necessarily a broad push and it's a dynamic that's happening by virtue of the tools that lenders have started to adopt.
Understood.
Yeah, and as far as debt.
And just the drivers.
Remember this digital evolution that came to fruition really was around COVID-19 and so you get that dynamic where if you're activating with a customer and you're now sitting at home and you're not you don't have any of the outside forces and people coming in and out of your office Youre looking at.
And Youre looking at are at a comparison tool and that does shift and it gets us quickly on the map. If you will so that is that was a big driver, but really it's about the fact that we had to build the base I mean, the fact that we have 500 active lenders that broadly diverse customer base and is significant for us.
And it's what we've been hoping for you and the other pieces as I mentioned, the other driver and when we think about volume as we did choose to.
Prudently layer that modest amount of incremental risk into the portfolio. It was the right time and.
And still maintain our high Tegra day high integrity.
Of our quality so yeah I mean, it was it it's a combination of.
Building years, and they're making and having strong customer activation momentum.
The acceleration of the digital evolution really did help us it was a significant boost.
On some layering in of the.
Modest incremental and the risks and.
And this is this just came altogether very nicely.
So we were very proud of our success.
And I think that makes sense, if I understand and I'm going to ask a question on the Io and just switch gears.
If I understand the cadence of this correctly.
And the latest Ireland closed the business went through March 31, and it was end of April the transaction happens.
Actually it's a little bit earlier than that so we were in the market marketing that transaction as early as April eight nine timeframe, it's like a bond offering or other capital issuance, where you price. The deal is allocated and then it takes about two weeks to legally close so it's even a more compressed timeline, we closed the month and we're in the market.
And out of the market with the deal about 10 days later, so 10 to 12 days later, so it feels like that the timeline from the.
The month closing until you can be out marketing the deal has shortened it pretty significantly.
What is driving that because to me, it's fairly significant and that the warehousing risk that we've seen before with these islands is it feels like it's shrinking as well. So it's a great point feel it's something that we're really focused on that we've been focused on for quite some time I don't actually know that others follow the same path I don't believe that most other IL and issuers.
<unk> been able to sandwich I'll call. It the transaction ish issuance and execution directly against the month, if you will and with which portfolios have closed.
Not that there is an enormous amount of lag and I think others Theres actually.
Some degree of lag that doesn't exist for us not to say that others couldn't adopt our posture, but one of the reasons that we like it is exactly for the reason you highlighted we're able to get out and reduce really our exposure both for warehousing standpoint, and just generally speaking trauma market.
Execution standpoint, theres less time to develop and have lapsed for something to churn.
And so that's going to be arcade and Fabs candidly been our cadence for quite some time now our last deal that we completed in October of last year covered risk that we originated from April one of 2008 through September 30, and so it was the same exact rhythm, where we really sandwich the issuance right up against the close if you will of the reference for.
And it is five to six months.
A big enough of a reference pool to get you. The scale that you need for these these are the aisle on transactions to be attractive.
Yeah.
Did this deal was $367 million and size the transaction that we did before that was $242 million and size. So there is some latitude. There. There are also some other dynamics at play in terms of the diligence that the underwriters have to do they actually have to have loan files in hand on.
A large enough portion of the underlying reference pool and so.
There is probably the absolute shortest timeframe that you could see for issuances.
Five months May you know, probably now and so for us about a six month issuance cadence.
Makes sense, given given where our volume is and some of the other aspects of just what it takes to bring these deals to market.
Okay.
The last one and half for you is and thinking.
And thinking about a potential change and the U S corporate tax rate.
My assumption is that we'll just get a change and the the risk based pricing engine.
And the dialogues the pricing up to account for this and is it as simple as that or maybe you could talk to me about the dynamics around that.
Yeah.
Yes.
Look.
I think you hit the nail on the head debt.
Certainly with the prospect of tax reform.
Pricing comes to mind, because we price to achieve and after tax risk adjusted.
Return and with an increase in tax rate it would have an impact on our <unk>.
After tax return as to ultimately and we have the ability to do that on an overnight basis.
On an overnight basis.
Rate GPS, but as to what ultimately comes through.
And I'll say, it's just too early for us to solve.
And for any specifics, we would actually need to see what happens with any new tax legislation, including I think importantly, how reform does or does not level, the playing field between U S and offshore participants and then anything else that happens either embedded in that deal or more broadly from a risk and capital requirement standpoint, but the natural.
And we would think it's appropriate right were for pricing to an after tax level, we think it would be appropriate to drive a price increase through.
But there are some other factors that play that we would also need to see how are how they ultimately pan out.
One more quick follow up when you think about the mechanics of this I mean.
Do you drive through as much as you can do you dialed it up slowly to see how the competitive landscape unfolds or whats the strategy behind that change.
I mean, I would say right now tax reform, it's something Thats talked about but there is no legislation that's being considered actively things will continue to evolve we need to see what happens with the replacement.
Beat and if.
And what the contours of.
The shield provisions ultimately look look like so that's a strategy responds to legislation. It's just far too early for us to map something out alright.
Alright understood. Thank you for the thoughts.
And I will now turn the call back to management for closing remarks.
Thank you again for joining us we will be participating and virtual investor conferences hosted by truest on may 25th tier VW on may 27th and Deutsche Bank on June 2nd we look forward to seeing 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 and have a wonderful day you may all disconnect.
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