NMI - Earnings Call - Q1 2021

Transcript

Speaker 0

Good day, and welcome to the NMI Holdings, Inc. First Quarter twenty twenty one Earnings Conference Call. At this time, all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. I'd now like to turn the conference over to your host, Mr.

John Swenson. Please go ahead, sir.

Speaker 1

Thank you, Angela. Good afternoon, and welcome to our twenty twenty one first quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman Claudia Merkel, CEO Adam Politzer, 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 NMI's website located at nationalmi.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. If and 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 rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note

Speaker 2

that on this call, we

Speaker 1

refer to certain non GAAP measures. Measures. In today's press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.

Speaker 2

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the first quarter, National MI delivered strong financial performance, record NIW volume and significant growth in our insured portfolio. As we talk today, I'm greatly encouraged. The stress of the COVID 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 $26,400,000,000 of NIW and ended the quarter with $123,800,000,000 of high quality insurance in force. We are helping more borrowers than ever before gain access to housing. Credit performance in our in force portfolio continues to trend in a favorable direction. And we are increasingly optimistic as

Speaker 3

we look

Speaker 2

forward given the quality of 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 remain highly constructive for our core purchase borrower. The movement in rates also holds the prospect of slowing the pace of turnover in our existing portfolio, allowing 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 crisis. The recent extension by the GSEs of their forbearance timeline and the changes proposed by the CFPB to the foreclosure process are important additional steps. The recovery from the pandemic, while broadly accelerating, will not be even. And as the immediacy of the crisis recedes, there will still be many in 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, the Biden administration and new congressional leadership have signaled their focus on the housing market as an early priority. Expanding access to homeownership and all the benefits it provides, a safe environment in which to shelter, an ability to establish a community identity, and an equitable opportunity for long term wealth creation in a manner that appropriately guards against systemic risk is critically important. And we believe there is continued recognition in Washington of the value that National MI and the broader private mortgage insurance industry bring to this effort. Providing borrowers with down payment support and equal access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn. Overall, we had a terrific quarter and are 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.

Speaker 4

Thank you, Brad. The strong performance of our team and business continued in the first quarter. We delivered record NIW volume, achieved significant growth in our high quality insured portfolio and reported strong bottom line profitability and returns. GAAP net income was $52,900,000 or $0.61 per diluted share and adjusted net income was $53,400,000 or $0.62 per diluted share. GAAP return on equity was 15.4% for the quarter and adjusted ROE was 15.5%.

The private mortgage insurance market remains highly constructive from a risk, pricing and demand perspective, and we were able to help lenders and deliver valuable solutions for borrowers at a record pace in the first quarter. We generated record NIW of $26,400,000,000 up 33% from the fourth quarter and 134% compared to the first quarter of twenty twenty. Our NIW growth in the quarter was all organic. We remain focused on helping all lenders equally and supporting borrowers on consistent terms across the market. In the first quarter, we activated 24 new lenders.

We are now doing business with a broadly diverse group of more than 1,200 high quality originators, including 179 of the top 200 lenders nationwide. We have been consistent in 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 crisis developed. Our customer success tallied over the last several years helped fuel our record volume in 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 across the origination landscape has provided us with an accelerated ability to ramp our NIW volume once we have activated an account and quickly scale our new customer relationships.

While we achieved record NIW volume in the first quarter and enjoyed continued momentum through April, we have seen an early impact from rising interest rates in our flow of refinancing applications, which is a precursor to NIW volume. Notwithstanding the shift in refinancing activity, our outlook is positive. Long term demographic trends support robust purchase demand. The experience of the pandemic has reinforced the value of homeownership and credit discipline remains paramount throughout the mortgage market. Our team is engaged and working hard every day.

Our lender activation pipeline is healthy. Our strategy to differentiate with customers while maintaining credit discipline and a balanced focus on risk adjusted returns is working. And we expect to grow our insured portfolio, responsibly deploy capital and drive value with consistency over time. With that, I'll turn it over to Adam.

Speaker 5

Thank you, Claudia. We delivered strong financial results in the first quarter, driven by our record NIW volume, strong growth in our insured portfolio and continued resiliency in our credit performance. Net premiums earned were $105,900,000 adjusted net income was $53,400,000 or $0.62 per diluted share and adjusted return on equity was 15.5. Total NIW of $26,400,000,000 included $23,800,000,000 of monthly production. Purchase originations accounted for 68% of our volume in the quarter.

Primary insurance in force was $123,800,000,000 up 11 from $111,300,000,000 at the end of the fourth quarter and up 26% compared to the first quarter of twenty twenty. Twelve month persistency in our primary portfolio was 52%, down from 56% in 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 in 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 twelve months stays on our books for an extended period. While refinancing volume, as Claudia noted, may be impacted in future periods due to rising rates, we expect improving persistency will provide a balance, helping to absorb the impact of any potential change in volume. Improving persistency is particularly valuable as a portion of our existing insured portfolio was originated in 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 in the first quarter were $105,900,000 up 5% compared to $100,700,000 in the fourth quarter. We earned $9,900,000 from the cancellation of single premium policies compared to $11,700,000 in the fourth quarter. Reported yield for the quarter was 36 basis points compared to 37 basis points in the fourth quarter, primarily reflecting the decreased contribution from cancellation earnings during the period.

Investment income was 8,800,000 in the first quarter compared to $8,400,000 in the fourth quarter. Underwriting and operating expenses were $34,100,000 compared to $35,000,000 in the fourth quarter. Expenses in the first quarter included $378,000 of costs incurred in connection with our most recent ILN offering in April. We expect an additional $1,800,000 of ILN issuance costs to come through in the second quarter related to the transaction. Excluding ILN related costs, adjusted underwriting and operating expenses were $33,700,000 compared to $33,300,000 in the fourth quarter.

Our GAAP expense ratio was 32.2% compared to 34.7% in the fourth quarter, and our adjusted expense ratio was 31.8% compared to 33% last quarter. We had 11,090 defaults in our primary portfolio at March 31 compared to 12,209 at December 31. And our default rate declined to 2.5% during the period. At quarter end, 15300 or 3.4% of the loans we insured in our primary portfolio were enrolled in a forbearance program, including 9,988 of the loans in our default population. Our credit performance continues to trend in an encouraging direction with an increasing number of impacted borrowers curing their delinquencies and fewer new defaults emerging as the stress of the COVID crisis recedes.

At April 30, our default population declined to 10,060, and our default rate fell to 2.2%. Of note, the number of loans in our portfolio that have missed at least one payment, but not progressed into default status, an 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, we're optimistic that we will see continued improvement in our credit performance as the strength of the housing market carries forward, the broader economy recovers at an accelerating pace, and the nationwide vaccination effort allows for the broad resumption of personal and business activity. Claims expense was $5,000,000 in the first quarter. And our loss ratio, defined as claims expense divided by net premiums earned, was 4.7%.

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 in the quarter was $7,900,000 and we recorded a $205,000 loss from the change in the fair value of our warrant liability during the period. GAAP net income for the quarter was $52,900,000 or $0.61 per diluted share. Adjusted net income, which excludes periodic transaction costs, warrant fair value changes and net realized investment gains and losses was $53,400,000 or $0.62 per diluted share.

The ILN that we closed last week, our sixth OCAM re offering, builds upon our previous success in the risk transfer markets and extends our comprehensive reinsurance coverage across our most recent production. The $367,000,000 deal is our largest to date and provides coverage on risk originated primarily between 10/01/2020 and March 31 from a 1.85 attachment point up to a 6.75% maximum detachment. The transaction carries an estimated 3% weighted average lifetime pretax 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 offerings. Total cash and investments were $1,900,000,000 at quarter end, including $78,000,000 of cash and investments at the holding company.

Shareholders' equity at the end of the first quarter was 1,400,000,000.0 equal to $16.13 per share, up 14% compared to the first quarter of twenty twenty. We have $400,000,000 of outstanding senior notes, and our $110,000,000 revolving credit facility remains undrawn and fully available. At quarter end, we reported total available assets under PMIERs of $1,800,000,000 and risk based required assets of $1,300,000,000 Excess available assets were $549,000,000 The ILN issuance that we closed in April is not included in these figures as it was completed after quarter end. The $367,000,000 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 in our insured portfolio and encouraging credit performance, driving significant profitability and a strong mid teens return.

With that, let me turn it back to Claudia.

Speaker 4

Thanks, Adam. Our performance in the first quarter with record NIW volume and primary insurance in force, significant profitability and a strong mid teens return built upon the strength and resiliency we've demonstrated through the duration of the COVID crisis and stands out in a dramatic way. We're optimistic as we look forward with the stress of the COVID 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, 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.

I'll now ask the operator to come back on so we can take your questions.

Speaker 0

Your first question comes from the line of Mark Severe with Barclays. Please go ahead.

Speaker 3

Yes, thanks. Know, Adam, as you point out, your PMIERs excess continues to build and is probably well above any kind of cushion you feel like you need longer term. Can you just talk about updated thoughts on how that gets deployed over time, whether it's into the business or return to shareholders?

Speaker 5

Yes. Sure, Mark. I'm happy to. I think it's worth perhaps clarifying one piece. The dollar size of our PMIERs cushion is obviously quite significant at $549,000,000 at March 31.

But as a ratio, that's 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, we're continuing to consume the organic capital that we generate and then have additional needs. And so as we look forward, we would like to get to a point of increased efficiency from a PMIERs excess standpoint. But right now, the way we get there is by investing in our core business, writing business that's 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 MI market.

Speaker 3

Okay. Got it. And then any updates you can provide us on just kind of the latest pricing trends you're seeing across the industry?

Speaker 4

Yes, 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. So overall, we see a very constructive environment in the market.

Speaker 3

Okay. No additional pressure from competitors kind of looking at the loss expectations and realizing things, you know, aren't as bad as they might have thought, you know, in the summer?

Speaker 4

No. I mean, you always look, it's a competitive market. But nothing that, you know, nothing that is nothing that stands out. It remains constructive. It remains also I think all the MI companies we all find our place in the risk.

I mean, the risk isn't static. And we all have different lenders that we're working with. Overall, we feel it's a constructive environment.

Speaker 3

Okay. Got it. Thank you.

Speaker 0

Welcome Mark. Your next question is from the line of Doug Harter with Credit Suisse. Please go ahead.

Speaker 6

Hey, good afternoon. This is Josh Bolton on for Doug. First, any more color or thoughts can give us around the drivers of the premium yield decline during the quarter and where you expect that yield to trend, over the coming quarters? And then secondly, it looks like the company gained, from our math, gained a decent amount of market share in the quarter. Curious if you have any thoughts behind what drove that and how sustainable that is.

Sure.

Speaker 5

I'll take the premium yield question, and then Patia will give you a perspective the share piece and the volume in the quarter. Our net yield in the quarter was 36 basis points compared to 37 basis points in Q4. And the move largely traces to a decline in the contribution from our cancellation earnings, which were $9,900,000 in Q1 compared to $11,700,000 in Q4. That shift, paired with the growth in our insurance in force, right, because it's a ratio. So a decline in the contribution of cancellation earnings as a dollar amount plus the growth in the denominator in the form of insurance in force cost us one basis point of yield in the quarter.

In terms of guidance through the remainder of 2021, 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 ILN begin to come through in the second quarter.

Speaker 4

And Josh, regarding your question on the drivers, it was just a terrific quarter. We're really proud of the team and proud of what we achieved. We've been working on this for a long time, for close to ten years now, building our business and our lender base and putting ourselves in strong position to succeed. That hard work comes through in this quarter. In terms of specific drivers beyond the decade of heavy lifting to build the company, I'd highlight two things.

First, the digital evolution that we've seen and have seen accelerate as a result of COVID 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 MI comparison tools by the lenders is driving a shift, a shift towards ratable distribution in our industry. And when we pair that with all the hard work we've done to build our lender base, it's all clicking. And it's driving our record in NIW.

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 in NIW and still maintain the full integrity of our high quality portfolio. Overall, it was just a terrific quarter. And Josh as it relates to sustainability, you know, what we're most focused on is serving our customers and their VARs, deploying capital responsibly, and in a manner that allows us to generate strong risk adjusted returns.

You know, things will always shift quarter over quarter but we don't have any reason to anticipate significant fluctuations. I'd just note with that said, you know, the refi cycle is slowing. And there are even some headwinds in the purchase market because of housing availability.

Speaker 1

Great. Appreciate the comments everyone.

Speaker 4

Thanks Josh.

Speaker 0

Your next question is from the line of Bose George with KBW. Please go ahead.

Speaker 7

Hey, good afternoon. Let's see. First, I wanted to ask about expenses. Can you give us an idea on what to expect there? It was down this quarter despite the strong NIW.

Speaker 5

Yes. Honestly, we're pleased, right? Our focus has always been on efficiency, and that remains the case today. So adjusted operating expenses of $33,700,000 in the first quarter is a good result, particularly given the scale of our growth and performance 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 in growth with some variability tied to the pace of reopening broadly and what that means for our T and E spend, certain performance related costs as well as the rate of turnover in our in force portfolio.

I mentioned in the fourth quarter, and it continues to come through, that with advancing turnover comes an impact on our DAC 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.

Speaker 7

Okay. Great. Thanks. And actually, just wanted to go back to the NIW discussion and the sustainability. I mean, just looking at the companies that have reported, it looks like your market share is kind of moved in line with peers.

And, I mean, do you feel like that's kind of a level, you know, where, you know, the the kind of the maintain sustainability of that, if you can just discuss that? Because it it looks like there was just a meaningful shift this quarter.

Speaker 4

Sure. Yes, we're not focused on market share, but we are proud of our ability to deliver such strong growth in our NIW volume in this insured portfolio. We'll obviously be able to measure market share after everyone reports, But we do expect that we've gained some ground in quarter. And like I mentioned before, this is years in the making, but we certainly did have what I would call, almost a force multiplier when you think about the digital side of the business. And we did layer in a slight amount of risk in the business.

But it's a lot of years of hard work. We feel really good about what we've achieved.

Speaker 7

Sense. Yep. Sorry. Go ahead, Em.

Speaker 5

So we we obviously are always building towards things in a sustainable way, which is why Claudia, in 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, the the success and the increase that we've achieved. But NIW 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 it, obviously, putting on high quality, high return or high expected return business is critically important. But most important over the long term is that we continue to build our insurance in force because it's our insurance in force that's driving both our current period and long term financial results, not just our NAW in any given period.

Speaker 7

Your

Speaker 0

next question is from the line of Aaron Cyganovich Please go ahead.

Speaker 8

Thanks. Claudia, 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? Or is this, you know, something you're saying is kind of been an ongoing process that you've been doing for several years?

Speaker 4

Yes. Sure, Erin. You know, 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 touches a huge number of different parts of the mortgage origination and closing process. In terms of what it means for our engagement with lenders and why it's such a strong catalyst for our growth, I'd note two things.

One is it amplifies our visibility in the It's now less about being directly in front of a loan officer, processor, an underwriter. That in the past gave us hundreds of touch points per day. It's now about being active with the lender, visible on their platform, and it immediately provides us with tens of thousands of touch points per day. So it's really substantial. The other thing is, you know, the digital market has it breaks down old habits for the lenders.

Where that loan officer process or underwriter may have been historically skewed towards their longer tenured MI relationship, that has really shifted, that dynamic. No longer does it you have a habit just to go to one of the longer term MI companies. So it's been a significant transformation for us and for the industry.

Speaker 8

That's very helpful. Thank you. And then just on the persistency, it was mentioned that it's going to improve in the second half of the year. Do you view this as being more of kind of a step function in the third quarter? Or is it will it be a little bit more gradual as we think about that?

Speaker 5

Yes, it's going to be a bit more gradual. We expect that it will begin to improve in the second half. And that's 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 progress, the more of the business that we wrote last year comes into the calculation because it's a twelve month persistency calculation. So it only includes business that was on our books twelve 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 end and into 2022 when the full effect of the record $62,700,000,000 of NIW that we wrote last year at exceptionally low note rates comes into the calculation for the first time.

Speaker 7

Got it. Thank you.

Speaker 0

Your next question is from the line of Rick Shane with JPMorgan.

Speaker 9

Thanks for taking my questions, this afternoon. First, 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. When we look at the delinquencies, on a dollar basis, they're down. The reserve is up slightly this quarter. And some of that makes sense given, the aging of the loans that are in default.

I'm curious how much sort of latitude you think those additional factors will give you as you move forward?

Speaker 5

Rick, it's a great question. I would say it's not so much about latitude, but candidly, this quarter more about a deliberate posture that we've taken. Our reserves do reflect, as they always do, our best estimate of ultimate claims exposure, and in this instance, as of March 31. At this point, we spent a lot of time in our in the discussion earlier, highlighting the broad optimism that we have about where the market, our business, and our credit performance are trending. Because in the macro, things are getting better measurably better every day.

Vaccines are paving the way for a broad reopening. The economy is rebounding sharply. And every day that goes by, the housing market continues to be enormously resilient. Our default population is also declining at an accelerating pace. Our default inventory was down 9.2% from December 31 to March 31, and it just declined by 9.3% in the month of April alone.

But as far as our reserving posture, 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 in 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 an MI company establish our reserves. We're not a bank. We don't establish a bank like CECL reserve for the entirety of a loan portfolio. It's only for the small subset of the loans that are in default in our portfolio that we're establishing a reserve for.

And so in a unique environment like we have now, like the pandemic presents, we're comfortable, if you will, 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 where things develop 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.

Speaker 9

Got it. Look, it's I appreciate the answer. And I think one of the things that is different, to your point, is that versus CECL, there is less of an economic factor influence. It really is more specific to the loans that are in default. And the season the aging of those loans, regardless of whether or not they are likely to cure, becomes more dispositive in the short term?

That's right. Okay. Thank you, guys.

Speaker 0

Your next question is from the line of Mark Hughes with Truist. Please go ahead.

Speaker 10

Yes, thank you. I think you may have just addressed this in broad strokes. But looking at the current year claims number, about $10,600,000 up meaningfully on a sequential basis, surely the portfolio is bigger and you're being conservative. But that seems like a meaningful jump. I'm just sort of curious on the drivers of that.

Speaker 5

Mark, 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 in the first quarter for us and emerges in a more significant way this year than in years past, given the size of the default population. We established net case reserves of $5,300,000 for the seventeen sixty seven new defaults that came through in Q1, we also established an additional $5,300,000 of net IBNR reserves during the period. But the amount that shows in the current period row for our IBNR reserves isn't calculated based solely on the Q1 defaults. 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 the reserve role table. But you can largely normalize for that if you simply subtract $5,000,000 of that $5,300,000 of IBNR reserve that was established in Q1 from the current period line. And if you add it back in to the prior period line, that will give you a more normalized view. And that normalized view yields about $5,500,000 of current period reserves and about $500,000 of favorable development on prior period defaults. And that's how you get to our $5,000,000 of net claims expense incurred in Q1.

Speaker 10

Thank you. That's very helpful. And then, Brad, your point about the government putting private capital in front of the taxpayer money in order to absorb risk. Any meaningful things afoot? Any regulatory changes that you see emerging compared to what you might have spoken about a few months ago?

Speaker 2

Yeah, Mark, there's obviously a lot being talked about with the new administration. A lot of discussion about tax reform, both personal and business taxes. A lot of positive movement on the forbearance side and the extensions that were recently announced there. But basically I think the environment's very constructive. I think housing has really been a bright spot throughout the pandemic.

And I'm sure that the new administration appreciates that and won't be hasty in terms of doing anything to affect that negatively. So we just feel that the overall regulatory environment is good and likely to stay that way even though we're coming up to a period when there could be some changes that come to pass. So it's constructive but too early to draw any long term conclusions.

Speaker 7

Thank you.

Speaker 0

Your next question comes from the line of Randy Binner with B. Riley. Please go ahead.

Speaker 11

Oh, hey, good evening. I mostly asked and answered, but just on persistency, I'd just try a different way, you know, understanding that there there's an offset, you know, as as persistency comes back and, you know, helps the model. There's less volume. And so that would usually recover around now. It's quite a bit lower than we thought in the quarter.

And so the question is, is there maybe something different this time where you just have this really hot housing market, a function of a good economy or a dynamic in housing versus the economy we haven't seen before where you just keep seeing more refi activity or more loan activity and persistency could stay low and volatile kind of for a prolonged period of time. Is there a chance of that? Because if you try and draw the data points together, they're still kind of all over the place. So just wondering if there could be some different dynamic this time around.

Speaker 5

Yes. Randy, it's a great question. We asked ourselves that as well. What I would call it is, is there some type of a purgatory position where rates are high enough that it weighs on refinancing activity in a way that somehow doesn't really slow the rate of turnover in the portfolio where we don't get that balance to it. And the interesting piece for us is that while all of our business is incredibly high quality and it's priced to achieve attractive risk adjusted returns, there's somewhat of a bright line distinction between our pre COVID and post COVID business as a note rate and by extension as a refinancing matter.

And that's because the decline in interest rates and mortgage note rates at the onset of COVID was somewhat spectacular in its speed and its magnitude, things plunged almost immediately. And that means that our pre COVID book, which when we're talking about it, we generally bucket that to include all business written on or before March 2020. And our post COVID book, which would then be all the business that we've written on or after April 2020, have dramatically different underlying note rates. So our pre COVID book carries a 4.17% weighted average note rate and our post COVID book has a 2.97% underlying rate. And so in terms of the move that we've seen in the thirty 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 production.

It's going to effectively lock in the significant majority of that book. And that's critically important because that's business that was originated in what we've consistently said is an environment where we had both record volume but also record value of production. And whether the thirty year is at three percent, three twenty, three fifty with an underlying 2.97% note rate supporting that book, that business is going to be locked in. On the flip side, our pre COVID production at 4.17% isn't dramatically, I'll call it, more or less right for refinancing, whether you're at two sixty five, 3%, 320%, 350%. And so we do expect that we will continue to see some amount of turnover in the portfolio.

One, there's natural life events drive turnover. But two, because of that distinction in the different halves of the portfolio. For us at this point, though, a majority of our insurance in force as of threethirty onetwenty one was actually originated from April 1 and forward. And so we will see still turnover in the portfolio unless we have a continued move higher in rates That will still contribute some amount of cancellation earnings in a constructive way. But the most significant positive for us in the long term is that the phenomenal business that we've originated over the last twelve months at record volume and record value is going to be locked in place.

And that's terrific for us.

Speaker 11

All right. That's helpful. And then the reinsurance, the last one, it was another ILN. So that's like excess of loss. So that would not affect the dynamic on that more recent vintage of the post COVID book wouldn't be any smaller, all things being equal, from the ILN unless there was a large loss there, correct?

Speaker 5

That's right. Again, the ILNs are really elegant also because I'll call them their self amortizing. They're generally speaking, as the underlying risk is running off, they amortize down in size. And so the cost is sort of calibrated to the size of the underlying reference tools. In instances where that the underlying risk runs off slower, the ILNs stay outstanding longer, which is also positive because then we get the matched capital relief that they provide.

There's no, I'll call it, basis risk that develops down the road if you have ILNs running off too quickly relative to the risk, which could expose you from a capital risk standpoint. That's not how they're built.

Speaker 1

Your

Speaker 0

next question comes from the line of Ryan Gilbert with BTIG.

Speaker 12

Detail that you provided on the call so far. My first question is on the I guess cures in the quarter. It seems like there was a pretty measurable slowdown in both cures on an absolute basis and then the cure rate as well in 1Q compared to the fourth quarter. And I'm wondering if you could, I guess, just explore what you think was what was happening in the first quarter? And then how cures are trending so far in the second quarter, specifically in April?

Speaker 5

Sure. Look, I would say things are going to move from period to period. Borrowers are still facing stress. Those who are still in default at this period in time, those who have been living, if you will, in forbearance for a longer period of time, it's not surprising for us to see some of those older age defaults perhaps live longer on our books in the default population than we would otherwise expect outside of the pandemic. But overall, we're enormously encouraged.

Again, I think I referenced it earlier on the call. We had roughly a we'll look at the total default inventory as opposed to just isolating cures and new defaults individually. When we look at the level of cure activity overall, the decline in the default population of roughly 1,100 over a three month period from December 31 through March 31 and then look at roughly the same decline of 1,000 loans from March to April, it's really encouraging for us. And we're hopeful that, that trend will continue. We do think that ultimately, as we've said for some time, the overwhelming majority of borrowers who went into default as a result of COVID stress and took advantage of the forbearance programs and other assistance that was offered, will ultimately cure out and not necessarily migrate through to a claim for us.

Speaker 12

Okay. Did the slowdown in Cures influence your more conservative stance in the first quarter? I guess I'm asking because I agree with you that the macro trends are improving and it looks like the credit is getting better, but at the same time, your loss ratio is up over 100 basis points sequentially.

Speaker 5

Yes. I mean, would put that also I would calibrate that and put that in perspective. Our loss ratio of 4.7%, up, yes, 100 basis points, but it's still 4.7 relative to 3.5% in Q4. And so I do think the absolute level there matters as much as the relative. What I'd say is no, it didn't influence our decision to be more or less conservative.

Broadly speaking, what I would say is our goal was to maintain an equally conservative posture as we had in Q4. And to a degree, think about it this way, your goal is to somewhat to run-in place, but the wind at your back picks up speed, you need to dig in your heels a little bit deeper in terms of the conservatism that we would embed in some of those assumptions around claim rates and the like. And so that's what came through. It's really independent from a movement in cure activity or cure rate.

Speaker 12

Okay, got it. And second question is on NIW. I'm wondering if you can quantify the impact that opening 24 new lenders in the quarter had on your NIW growth. And you think, you know, going forward, your ability to add new lenders to your business can offset some of the headwinds from a slowdown in refinancing volume?

Speaker 4

Sure. Look, we we have been consistent in adding and activating new lenders quarter over quarter. It's been a focus for us. As a matter of fact, one of the things that is that we can do is even go deeper beyond a, you know, top 200 type of strategy because we've got the technology at our back, if you will. But all of our activations is what is really and quite frankly,

Speaker 7

all of

Speaker 4

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 gain the strong insurance in force is through the activated customers. So we constantly are driving though to what opportunities, what MI opportunities are the largest opportunities for us. And we see that continuing. There's still opportunity out there for us.

It's just a matter of priority. And we continue to grow on that. And I missed your other question about the refinance piece. Is it just asking if it would balance out the refi volume?

Speaker 12

My question was whether you think that opening that the new lenders you've opened in the quarter that you can likely can, you know, I'm assuming that you're 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 volume.

Speaker 4

Yes, sure. I mean, things will shift quarter on quarter. But in general, that's the goal. I think the refi activity, we are going to see quite a slowdown there. We've seen it in the applications due to the higher interest rates.

Also on the purchase side, you know, you have the availability issue. But all in all, it was, you know, we had also a strong April. So we do see that we will continue, the success. It's just a matter of to what degree because of the quarter over quarter dynamics, and refis will make a difference.

Speaker 12

Okay. Got it. Thanks so much. I appreciate it.

Speaker 0

Sure. And your final question is from the line of with Deutsche Bank. Please go ahead.

Speaker 13

Yes, thanks and good afternoon. I'm going to ask a follow-up on the NIW volume. I guess in my mind, as we move to digitization and comparative raters, this would translate to a best execution market where price wins. I guess it feels like in response to an earlier question, the comment that was there's been a ratable push for new business, which I guess is a bit surprising. So I was hoping you could comment on that.

And I guess the second part of this question is look I mean, it still feels like there was a pop in new business this quarter. Is there anything you'd point to as an inflection or a change in the digitization that made it more apparent this quarter than we've seen over the past couple?

Speaker 5

Phil, let me clarify one item in your question, and then Claudia will weigh in. The comment earlier about ratable drive towards ratable share is not a ratable push. It's not a strategy move on our end. That's not

Speaker 7

what was said. What was

Speaker 5

said is that the tools that lenders are using, hastens a shift in industry share towards a ratable outcome. It's not necessarily a broad push. It's a dynamic that's happening by virtue of the tools that lenders have started to adopt. Understood.

Speaker 4

Yeah. And as far as just the drivers, remember this digital evolution that came to fruition really was around COVID. And so you get that dynamic where if you're activated with a customer and you're now sitting at home and you don't have any of the outside forces of people coming in and out of your office, you're looking at a comparison tool, and that does shift. It gets us quickly on the map, if you will. So 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 1,200 active lenders, that broadly diverse customer base, is significant for us. It's what we've been hoping for. You know, the other piece is as I mentioned, the other driver when we think about volume is 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 integrity high integrity of our quality.

So, yeah, I mean, it's a combination of building years in the making and, having strong customer, activation momentum. The acceleration of the digital evolution really did help us. It was a significant boost. You know, some layering in of the modest incremental risk. And, you know, this just came all together very nicely.

So we're very proud of our success.

Speaker 7

All right. I think that

Speaker 13

makes sense. If I understand I'm going to ask a question about the ILN, just switching gears. If I understand the cadence of this correctly, the latest ILN that closed, the business went through March 31, and it was April the transaction happened.

Speaker 5

Yes. Actually, it's a little bit earlier than that. So we were in the market marketing that transaction as early as April time frame. It's like a bond offering or other capital issuance where you price the deal, it's allocated, and then it takes about two weeks to legally close. So it's even a more compressed time line.

We closed the month, and we're in the market, you know, and out of the market with a deal about ten days later, so ten, twelve days later.

Speaker 13

So it feels like that that the time line from the, the month closing until you can be out marketing the deal has shortened pretty significantly. What is driving that? Because that to me, it's fairly significant in that the warehousing risk that we've seen before with these ILNs is it feels like it's shrinking as well.

Speaker 5

Yes. So it's a great point, Phil. 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 ILN issuers have been able to sandwich, I'll call it, the transaction issuance and execution directly against the month, if you will, in which the portfolios have closed.

Not that there's an enormous amount of lag, but I think others, there's actually some degree of lag that doesn't exist for us. It's 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 from a warehousing standpoint and just generally speaking, a market execution standpoint. There's less time to develop and elapse for something to turn. And so that's going be our cadence. That's candidly been our cadence for quite some time now.

Our last deal that we completed in October covered risks that we originated from April 1 through September 30. So it was the same exact rhythm where we really sandwiched the issuance right up against the close, if you will, of the reference pool.

Speaker 13

And is five to six months big enough of a reference pool to get you the scale that you need for these ILN transactions to be attractive?

Speaker 5

Yes. We did our this deal was $367,000,000 in size. The transaction that we did before that was $242,000,000 in size. So there's 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's there's probably the absolute shortest time frame that you could see for issuance is five months. May, you know, probably now. And, you know, so for us, about a six month issuance cadence, makes sense, given where our volume is and some of the other aspects of just what it takes to bring these deals to market.

Speaker 13

Okay. The last one I have for you is I'm thinking about a potential change in The U. S. Corporate tax rate. My assumption is that we'll just get a change in the risk based pricing engines that dials the pricing up to account for this.

Is it as simple as that? Or maybe you could talk to me about the dynamics around that?

Speaker 5

Yes. It's look, I think you've hit the nail on the head that certainly, with the prospect of tax reform, pricing comes to mind because we price to achieve an after tax risk adjusted return. And with an increase in tax rate, it would have an impact on our expected after tax return. As to ultimately and we have the ability to do that in an overnight Rate GPS. But as to what ultimately comes through, I'll say it's just too early for us to offer any specifics.

We'd 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 bill or more broadly from a risk and capital requirement standpoint. But the natural and we would think it's appropriate, right?

We're pricing to an after tax level. We think it would be appropriate to drive a price increase through, but there are some other factors at play that we would also need to see how they ultimately pan out.

Speaker 13

And one more quick follow-up. When you think about the mechanics of this, I mean, you do you drive through as much as you can? Do you do you dial it up slowly to see how the competitive landscape unfolds? How you know, what's the strategy behind that change?

Speaker 5

I mean, I would say, now, tax reform, it's something that's talked about, but there's no legislation that's being considered actively. Things will continue to evolve. We need to see what happens with the replacement of BEAT and what the contours of the shield provisions ultimately look like. So that's a strategy response to legislation. It's just far too early for us to to have mapped something out.

Speaker 13

Alright. Understood. Thank you for the thoughts. Mhmm.

Speaker 0

And I will now turn the call back to management for closing remarks.

Speaker 4

Thank you again for joining us. We will be participating in virtual investor conferences hosted by Truist on May 25, KBW on May 27 and Deutsche Bank on June 2. We look forward to seeing you at one of these events and hope all of you are staying safe and healthy.

Speaker 0

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and have a wonderful day. You may all disconnect.