MGIC Investment Corporation

Ladies and gentlemen, thank you for standing by and welcome to the MGIC Investment Corporation second quarter earnings call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 1 on your telephone. I'd now like to hand the conference over to your speaker today, Mr. Mike Zimmerman. Please go ahead.

Thank you. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the second quarter of 2020, our Chief Executive Officer Tim Mattke and Chief Financial Officer Nathan Colson. I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website, which is located at mtg.mgic.com. Under Newsroom includes additional information about the company's quarterly results that we will refer to during the call and include certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk and force and new insurance written and other information which we think you will find valuable. I also want to remind listeners that from time to time we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website. that investors and other interested parties may find valuable as well. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors, including COVID-19, that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K and 10-Q that was filed last night. If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent development. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the 8K or 10Q. At this time, I'd like to turn the call over to Tim.

Thanks, Mike, and good morning, everyone. I hope everyone who is listening is safe and well. I want to express my gratitude to and admiration for my fellow MGIC coworkers and their families. Their efforts day in and day out over the last several months to support our customers, their local communities, and fellow coworkers while coping with their own unique circumstances brought about by the COVID-19 pandemic have been remarkable, so thank you. The safety and health of our coworkers and their families is a responsibility I do not take lightly. That is why we continue to operate in a remote work environment while we provide critical support to the housing market, especially first-time homebuyers. As we navigate through this unusual period, we continue to execute on our business strategies with a goal to position our company to prosper over the long term. We strive to achieve that goal by, among other things, working with the GSEs and servicers on loss avoidance programs, offering competitive products and services to our customers, and maintaining a sharp focus on the sources and uses of our capital. We think this is the best approach for all stakeholders and is particularly relevant as we manage through the current environment. I will kick off this call by spending a few minutes providing a high-level summary of our financial results for the second quarter and our current financial position. Then Nathan will cover some more details of the financial results. Finally, I will wrap up by discussing the State of Housing finance reform and then open it up for questions. As far as financial results, GAAP net income for the quarter was $14 million. The decrease in net income from prior quarters primarily reflects the increase in loss reserves that we established in response to the material increase in new delinquent loans that were reported to us in the second quarter. Nathan will get into more details in a few minutes. During the second quarter, the volume of both purchase and refinance mortgage originations was very robust. The demand for single-family housing has been very resilient and seems to have actually increased despite the pandemic. Of course, the low interest rate environment makes refinancing very attractive for many borrowers. As a result, we rolled $28 billion of new insurance in the quarter, and despite lower persistency on our existing books of business, our insurance in force increased by approximately 8% year over year. Refinance transactions as a percent for monthly new business writing peaked at approximately 44% in April and May. That was back down to 33% in July as demand for purchase mortgages increased and refinance transactions slowed a bit. The combination of our application data, lender reports, and the MBA indices provide us with reasonable visibility into NIW over the next several months. And while our current pipeline remains robust, there's considerably less certainty about mortgage origination levels or credit performance beyond the near term, given the uncertain impact COVID-19 will have on economic conditions. As a result of that uncertainty, as further discussed in our risk factors and in the 10Q, it is difficult to confidently forecast our future financial results and capital position. Therefore, we will not be providing any guidance about the potential paths or outcomes for insurance and force growth or credit performance, but will continue to provide the market with monthly credit metrics. We entered this period of uncertainty with a book of business that had strong credit characteristics. In addition, we are supported by a balance sheet that has a lowest debt-to-capital ratio 6.3 billion dollars in cash and investments, contractual premium flow, and a robust reinsurance program. Despite the increased number of loan delinquencies and the corresponding increase in minimum required assets required to be held under the private mortgage insurer eligibility requirements of the GSEs or PMIRs, we estimate that at the end of June, our available assets exceeded the minimum required assets by 1.1 billion dollars. In addition, Our policyholder position was $2.9 billion in excess of the minimum state capital requirements. While delinquency notices received in the second quarter were materially higher than the first quarter, there were 38% fewer notices in June than in May. Approximately 67% of our June 30th delinquency inventory and 80% of June new delinquency notices were reported to us as a COVID-19 related forbearance plan. The delinquency rate end of the quarter at 6.35%. Although there remains much uncertainty about the potential impacts to credit performance and our business caused by this national emergency, notably the potential for higher incurred and ultimately higher paid losses, we are encouraged by the July new notice and cure activity. With that, let me turn it over to Nathan.

Thanks, Tim. I will spend a few minutes talking about the second quarter, and then we'll turn to some of the uncertainties that Tim mentioned. In the second quarter, we earned $14 million in net income or $0.04 per diluted share, which compared to $168 million of net income or $0.46 per diluted share from the same period last year. The difference is almost entirely the result of higher losses incurred that are primarily COVID-19 related. Net premiums earned increased 1% and the net premium yield declined to 42.7 basis points from 46.5 compared to the second quarter of 2019. Net premiums earned and the net premium yield have several components. The largest component is what we call the in-force portfolio yield, which reflects the premium rates in effect on our insurance in force. The biggest driver of the lower net premiums earned and premium yield in the quarter was the decrease in the profit commission on our quarter share reinsurance transactions. With the increase in losses due to the increase in the new delinquencies in the second quarter, more losses were ceded to the reinsurers, which lowers our profit commission. While I'm on the topic of profit commission, I want to remind listeners that profit commission is calculated on an annual basis, and there is no clawback of profit commission earned in prior years. In the first quarter, we earned what I would call our normal level of profit commission, as losses were very low as they had been for the previous several years. As a result of the material increase in seeded losses in the second quarter, our year-to-date profit commission as of June 30th was lower than the year-to-date profit commission as of March 31st, which shows up in our financial results as a negative profit commission in the second quarter. Of course, we did receive the benefit of reduced losses as well. The amount of profit commission we earn in future periods will be primarily influenced by the amount of losses incurred that are ceded to the reinsurers. In addition to the profit commission, net premium earned and net premium yield were affected by the lower average premium rates on our insurance and force. Accelerated premiums from single premium policy cancellations had a favorable impact on net premium earned and the net premium yield, an increase from $11 million in the second quarter of 2019 to $33 million in the second quarter of 2020, reflecting the strong refinance market. Net losses incurred were $217 million compared to $22 million for the same period last year. In the second quarter of 2020, we received approximately 58,000 new delinquency notices compared to 13,000 in the same period last year. The estimated claim rate on new notices received in the second quarter of 2020 was approximately 7%. This estimate was influenced in part by the actual performance of delinquent loans, expectations for home price appreciation, and the expected performance of borrowers that suffered a financial hardship as a result of COVID-19 and whose loans have entered a forbearance plan. Of course, there remains a great deal of uncertainty about the ultimate loss performance of these delinquent loans. When we establish loss reserves, we monitor the level of new notices received, the level of delinquencies cured, the uptake of forbearance plans, and the current and expected economic activity. Using that data, we establish reserves that reflect our best estimate of the ultimate claim rate and claim amount or severity on both new and existing delinquencies. The ultimate claim rate represents the percentage of delinquent loans we expect to result in mortgage insurance claims and our net of expected cures, including cures due to successful loan workouts after a forbearance period is over. In the second quarter of 2020, our re-estimation of reserves associated with previous delinquencies resulted in approximately $10 million of adverse loss reserve development, primarily attributable to an increase in expected severity. We also increased our incurred but not reported reserve, or IBNR, by $31 million. IBNR reflects estimated losses from delinquencies occurring prior to the close of an accounting on notices of delinquency not yet reported to us. To establish the IV&R reserve as of June 30th, we estimated the number of loans whose borrowers had missed their June 1st payment but that had not been reported to us as delinquent. Reflecting the low level of the delinquency inventory that existed in March and the foreclosure moratoriums enacted by the GSEs and others, the number of claims received in the quarter declined by nearly 60% from the same period last year. Primary paid claims declined 44% from 52 million to 29 million. Although most foreclosure moratoriums are set to expire August 31st, we expect claim payments to remain modest over the next several quarters due to their effects and the effects of forbearance agreements that are in place. In addition to the effects of foreclosure moratoriums and forbearance agreements, we expect the impact of unemployment, An economic uncertainty will cause the delinquency inventory to increase further, although we are encouraged by the July new notice and cure activity. We continue to diligently monitor net underwriting and other expenses. Before ceding commission, they totaled $59 million in the second quarter of 2020, which is flat to the same period last year, while writing substantially higher volumes of business. We previously reported that MGIC did not request or pay a dividend to the holding company in the second quarter. Future dividend payments from MGIC to the holding company will be determined on a quarterly basis in consultation with the board and after considering any updated estimates about the length and severity of the economic impacts of COVID-19 on our business. We also asked the Wisconsin OCI not to object before MGIC pays dividends to the holding company. and until March 31st of 2021, we will also need to seek the GSE's approval before MGIC pays any dividends to our holding company. As previously disclosed, the holding company board declared a cash dividend of six cents per share payable on August 28th. Any future dividends will be determined in consultation with the board. As of June 30th, we had approximately 530 million of cash and investments at the holding company Our next debt maturity is in approximately three years, and our interest expense is approximately $60 million per year, of which $12 million is paid to MGIC on the holding company debt that it owns. At quarter end, our consolidated cash and investments totaled $6.3 billion, including the cash investments at the holding company. Investment income was modestly lower year over year, primarily as the larger investment portfolio was offset by lower yields. The consolidated investment portfolio had a mix of 81% taxable and 19% tax-exempt securities, a pre-tax yield of 2.8% and a duration of four years. Our investment portfolio had a net unrealized gain of $265 million at June 30, 2020, $83 million at March 31, 2020, and $147 million a year ago. At the end of the second quarter, our debt to total capital ratio was approximately 17% and MGIC's available assets for PMIRES purposes totaled approximately $4.5 billion, resulting in a $1.1 billion excess over the minimum required assets. As many of you know, the PMIRES generally require us to maintain significantly more minimum required assets for delinquent loans than for performing loans. The PMIRES required asset factors for delinquent loans are based on the number of missed payments and whether a claim has been received. PMIRES allows for these factors to be reduced by 70% under certain circumstances, including related to COVID-19. During the quarter, the GSEs clarified that for loans that become delinquent between March 1st and December 31st of 2020, the 70% reduction is applicable for at least three months and longer if a forbearance plan is in place. As a result of our strong positive cash flow during the quarter, which increased our available assets and the application of the 70% reduction in minimum required assets for COVID-19 related delinquencies, our PMIRES access increased by nearly $100 million in the quarter. With that, let me turn it back to Tim.

Thanks, Nathan. Before moving to questions, let me address a few regulatory and political topics. During the quarter, the FHFA re-proposed the GSE capital rule with comments due at the end of August and has continued the work of preparing the GSEs to exit conservatorship at some point. What, if any, impact these potential changes have on the MI industry is not clear at this point. That said, we do believe that the FHFA appreciates the benefits that an insurance company structure can provide to the housing finance system relative to capital markets and other less regulated solutions. The FHFA is also continuing the review of all GSE activities, and in June the CFPB proposed changes to the definition of qualified mortgage and the so-called GSE patch. The revised definition would replace the borrower's debt-to-income ratio in the definition with a pricing threshold. Based on work that our trade association, USMI, did, it is estimated that less than 10% of the private mortgage insurance market would be impacted by the proposed rule if enacted as is. The 60-day comment period for the proposal ends September 8, and the proposed changes have a targeted effective date of April 2021. While other market options for credit enhancement are scarce or unavailable, our industry and our company continue to provide credit enhancement solutions to lenders, borrowers, and the GSEs. While we are focused on prudent solutions and responses to the current environment, we continue to be actively engaged in discussions regarding housing finance policies. We continue to advocate for and remain optimistic that any changes will include the use of private capital, including private mortgage insurance. Long term, we remain encouraged about the future role that our company and industry can play in housing finance, but it continues to be difficult to gauge what actions may be taken and the timing of any such actions. Private mortgage insurance offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to home ownership, the down payment. We are navigating this period of uncertainty with a book of business that has strong underlying credit characteristics and is resupported by a balance sheet that has a low debt-to-capital ratio, an investment portfolio in excess of $6 billion, contractual premium flow, and a robust reinsurance program. In closing, as I mentioned at the beginning of my remarks, in addition to the well-being of our employees, we are focused on, one, continuing to provide critical support to the current housing market, and two, positioning our company to prosper over the long term. I want to remind listeners that our company was founded in 1957. We have successfully navigated many economic cycles and have continually provided borrowers and lenders with affordable and prudent low down payment options. I'm confident that we have the right team in place to navigate through this period of uncertainty and will continue to deliver the quality products and service our customers have come to expect from MGIC. With that operator, let's take questions.

It's a nice reminder in order to ask a question. Please press start at the number one on your telephone keypad. Again, that is start one to ask a question. Your first question comes from the line of Jack Misenko. Your line is now open.

Hi, good morning, guys. I wanted to ask about the July cures. Very good trend there. I think over 100% cure to default. Do you seem to have a sense of what the total delinquency portfolio looks like from a forbearance standpoint? Do you have a sense of how much of those July cures were forbearance loans that either come out of forbearance or I guess if they come out of forbearance? I don't know if you have that in that one detail.

Jack, it's Nathan. I'll take that one. We did put out the new notices and cures but are still kind of working through a review process on the forbearance-related information that we have. as of the end of July, so don't have an update relative to the composition of new notices and cures relative to forbearance at this time.

Okay, and then you said 7% claim rate assumption on the book drove the loss incurred number this quarter. I think you were at 9% last quarter. So curious what in the model really changed Obviously, forbearance outcomes are probably going to be a lot different than true defaults, but just curious, was it the improvement that you saw sequentially through month to month to quarter, or was there something bigger there to drive that change?

Yeah, I think if you recall back to the end of the first quarter, still a lot of uncertainty about forbearance plans, what the uptake would be, what the rules would be. I think a lot of that stuff has gotten were formalized through the second quarter here. So from I think from our perspective, economic conditions may have improved slightly, but really it was the I think the uptake and forbearance and now the list of options that the borrowers in forbearance have, including the 12 payment deferral for COVID-19, at least related forbearance. that we think that there's some benefit to that and ultimately a lower claim rate on those. And given that, you know, 67% of the inventory and 80% of the June new notices were in forbearance, that benefited the claim rate relative to last quarter. Okay.

I can just think one more. You know, you're down about four basis points on the enforced yield year to year. How are you thinking about sort of You know, terminal velocity of that, like where, when, at what level do we sort of, the new money yields and the old money yields sort of begin to sort of net out? Is that a low 40? Is that a mid 40? Like, how do we think of that?

Hey Jack, it's Mike Zimmerman. So, it's going to be a fun to write of that profit commission and the seeded losses. I mean, that's a big driver in the quarter when you look at the sequential decrease in yield. And we get a nice bit of reconciliation into the press release on that. But you can see that even though we had accelerated single premiums because of refis, that was more than offset by the increased seeded losses, which reduces our profit commission. So like a lot of other things, when we're looking out as to what's the impact the yield is going to be and does it bounce back, where does it go to, to your point, it's going to be a function of how these losses develop as it's going forward as far as new notices coming in. Your next question comes from the line of Douglas Harter. Your line is now open.

Thanks. I guess touching on Jack's last point, can you talk about pricing during the second quarter and kind of how that trended compared to the increase you guys saw and talked about in the last earnings call?

Yeah, Tim, I mean, I think, you know, from my perspective, we continue to be focused on making sure our premium rates, you know, obviously competitive, but, you know, prudently growing the insurance in force. and long-term value. And, you know, we wrote a lot of volume this quarter. I think we felt really good about sort of the risk-return dynamic on that, but don't want to get into a lot of specifics related to competitive pricing.

Okay. And, you know, I guess do you have a sense, I know it's not everyone's reported yet, but, you know, a sense as to kind of where, you know, how your NIW might have compared to the market? Do you think that that you might have gained share or lost share?

I'd say it's tough to know at this point. Again, I think we feel really good about the book of business that we wrote in the quarter and the fact we grew our in-force portfolio. But until all the others report, I think it's difficult to know exactly where we landed and we're really happy with the business that we wrote.

Great, thanks.

Thanks.

Next question comes from the line of Jeffrey Dunn. Your line is now open.

Thank you. Good morning. I wanted to break apart new notices a little bit with respect to reserving. I think you said 80% of notices were forbearance and obviously the remainder were not. 7% incidents, how does that break apart right now in your view of non-forbearance versus forbearance loans?

Jeff, it's Nathan. We didn't set separate factors for forbearance versus non-forbearance loans. I think we ended last quarter at 9%, a little less forbearance there, obviously lower, but with a very high forbearance rate. Don't really think about it that way. It's more the forbearance becomes a qualitative factor. factor in the decision-making process ultimately around setting claim rates, although I think as everyone is aware, it's subject to a lot of uncertainty right now, just given that most of what we're experiencing is unprecedented.

Yes, what I'm trying to get a read on is when forbearance goes away, if we're facing kind of the current economic situation, is that a 10% incidence environment or something that's 12%, 13%? Any kind of qualitative comment around that?

I think forbearance plans are still uptake in plans, although it seems like from some of the broader market data that there's also a lot of people coming out of them or curing from forbearance. We should have better visibility on some of those things over the next couple months. But I think part of what the claim rate would be in the future on non-forbearance items will be largely dependent on the economic conditions at that point. and what the prospects are kind of going forward from that point. So I think it's somewhat difficult to say. I think, you know, directionally, absent forbearance plans, I think our claim rate in the second quarter would have been higher, but wouldn't want to guide to any specific number, especially, you know, not out into the future.

Okay, thanks.

Next question comes from the line of Bose. George, your line is now open.

Hey, guys, good morning. You noted that 70% discount that's in place for PMIRES is in place until the end of the year. What happens after that, or does that stay in place as long as COVID-related forbearance is being offered by the GSEs, or is there sort of visibility on that?

Yeah, sure. This is Nathan. I think you think about it in two parts. The way the kind of clarified rule will work relative to capital under PMIRES is for All delinquencies that are in really the balance of the year here will be considered kind of COVID related at least for three months. So for the first three months of that delinquency, we will be able to use the 70% haircut. But for all items that are in a forbearance plan, we continue to get to the benefit of the 70% haircut while that loan's in a forbearance plan. Obviously, loans that are are going into those kind of plans now. Those plans might extend out into 2021. And they also clarified, the GSEs, that is, also clarified that during, say, a post-forbearance workout period, like a repayment period on a repayment plan or a trial period on a modification plan, we would continue to get the 70% haircut during the post-forbearance workout period as well.

Okay, great. That's helpful. Thanks. And then just in terms of the ILNs, do you guys see any value in some of the high attachment point ILNs that we've seen from a couple of competitors that look sort of like statutory capital ILN structures? What are your thoughts on that?

Yeah, I guess regarding, this is Nathan again, regarding the ILN market, I think it's really encouraging to see multiple MI companies be able to access that market. I think it's The terms are not as attractive in terms of the attachment points and pricing levels as what we saw pre-COVID, but I think that's to be expected. We continue to evaluate that market and would seek to do things if we thought it made sense, but the very high attaching structures, I think you could think about those as being maybe for other purposes other than Risk Mitigation, or P. Myers Capital. So while I think there's some value there, that hasn't been our primary mode. And just remind that we do have a pretty large quota share program that is a little different than some of our competitors who have used the ILN structures a little more and in different ways than we have.

Okay, thanks. Let me just sneak in one more. The 2007 and 2008 books where you've seen, obviously, a pretty decent pickup in delinquencies. What are the mark-to-market LTVs on those books?

This is Mike. First off, the delinquencies did pick up, but significantly less than we saw in the 09 and forward book. I don't have it right at my fingertips here, but maybe during the course of the call, we'll come back and give you that mark-to-market

Your next question comes from the line of Mark Debrief. Your line is now open.

Yeah, thanks. How should we think about the ILNs impacting incurred losses going forward? If you continue to have elevated new notices, is there a point at which kind of the The incurred loss per new notice starts to go down as you start to breach some of the threshold delinquency levels that bring your reinsurers on risk.

Nathan, that's exactly right. Right now, any losses incurred that we are experiencing on the loans that are covered by those ILN transactions are still within our retention layers on those deals. So we are absorbing the losses on an accounting basis there. If it did get to the point where the cumulative losses incurred were above the attachment point, we would begin seeding those losses incurred to the ILNs.

Okay. Do you have a general sense of kind of what delinquency rate we'd start to see that become a meaningful driver of the incurred number?

I don't have, I think because those are closed pools and they've been running off very quickly just given the relatively low persistency we've had, I'd have to kind of double check right now what the effective attachment point, but I think what you're looking at is at some point out in the future, I would say they'd be fairly high. I don't know, I don't have an exact number, but something Above, say, 5% in terms of expected loss rates, I would expect, just given that those deals continue to delever as the loans prepay.

Okay, got it. And then just on the profit commission, I think, Nathan, you indicated that those are done on an annualized basis and there's no clawback. But is that determined on incurred losses or paid claims?

It's on an incurred basis. So it's really on a kind of an accident year basis. So we have all of the notices associated with the given accident year. The ultimate losses associated with those becomes the loss number in that calculation.

Okay. And so to the extent to which there are favorable developments down the line, because maybe you assume too high of a claims rate on these new notices, there's no, you don't get that money back.

No, we would. Right now, we're assuming obviously very little, if any, of this has resulted in paid claims. So this is encouraged primarily just establishing reserves at this point. If those reserves turn out to be too low and losses are ultimately higher, then we would receive less profit commission if reserves are too high and ultimate losses are lower. We would receive more profit commission. So it trues up, but really within the accident year construct. So 2020 is kind of a standalone year, but we'll continue to true it up based on any revised estimates of ultimate losses.

Okay. Got it. That makes sense. All right. Thank you.

I just want to circle back to both to answer your question on the mark-to-market LTV. You're looking at below 70 on those two book years, and probably for all the 08 and prior, quite frankly, really as you look at that mark the market LTV at the CBS level, really from the 18 book back is probably at 80% or less, and those real old books significantly lower.

Your next question comes from the line of Adam Starr. Your line is now open.

Thank you. Housing prices have been quite firm, I guess because of demographics and low interest rates and tight supply. What are you assuming for the loss per loan? And what happens if the holder of the mortgage gets all their money back? Do you get a recovery on the loan?

Sure, Mike here from you. So if there's no loss on the property, then the claim most likely would not be submitted to us, or if it would be submitted to us, it would be what we would call a $0 paid claim. But if the lender or the insured gets full recovery of what owed them through the sale of the property by the borrower, then there's no claim for the mortgage insurer.

But what if it's foreclosed and sold for more than the amount, the uninsured balance of the loan?

So there's a few states, and I'd have to get the list of them, where there's ability to go after, get the technical term, where we can go to the borrower resources to see if there's any assets that the borrower has. And there's only a few states that have that ability to kind of go back to the borrower. Quite frankly, what we've seen in our experience over the years of doing that, very little recovery comes from those borrowers because, quite frankly, they don't have the asset level.

What if the lender forecloses and the lender sells the property for more than the outstanding uninsured balance? Do you get back some of the claim that you had paid? or do you not settle up the claim until the house is sold and hence only pay part of your reserve out?

Title needs to transfer for us to pay the claim, so if the lender foreclosed and took title, then a claim would have been submitted and we would evaluate whether or not there was a loss there or not. If the lender, though, at that time, if we assess whether, because we have the right to acquire a property versus paying the claim, So we would be seeing the same things that that lender would be seeing that say, oh, geez, the property values are up. They foreclosed. The borrower didn't sell the property to avoid the foreclosure. So we have the opportunity to acquire that in whole. And so that would then reduce our loss if we did pay one. So that's kind of the check and balance there. We have the right to acquire the property if it can be sold for more and reduce that loss.

So, but when you set up your initial reserve on the default notice, you assume a total loss on the insured balance?

Well, we, with the severity, so like this last quarter was, you know, right around 100%, so, you know, but yes, we would assess what our severity would be, and, you know, if it's a, like in some of those loans in New York, New Jersey that were, we paid claims that are delinquent seven or eight years, that's, Thank you very much, Mike. I really appreciate your explanation. Thanks, Adam.

Your next question comes from the line of Phil Stefano. Your line is now open.

Yeah, thanks, and good morning. I wanted to go back to the 70% haircut and the capital requirements and just understand, I guess, one thing I've been struggling with. As the time in forbearance gets longer, is there an increase in the capital requirements that you have on that mortgage and then the 70% haircut applies? or are we locked into this two to three month kind of aging capital requirement over the duration of the forbearance program?

It's Nathan. You had it right in saying that the 70% haircut applies to the underlying PMIRES factor that is based on time and delinquency. So while the 70% haircut continues to apply, the factor by which its haircutting continues to increase as the loan ages in delinquency. So the amount of capital required does go up as the item ages, not by the full amount of what would be indicated in PMIRs, but by 70% less than that full amount.

Got it. Okay. Understood.

And Phil, just as a quick reminder, that first step up moves to 55% when it goes to that two to three category. and then by the time it gets out to the four claim, I think it goes to 85%. So the incremental cap, yes, there is incremental capital, but the big step up comes in that first move.

Yeah, part of my fear was in not understanding this, could there be a double whammy next summer as you get the step up in the aging and you also get the potential falling off of the haircut, but it doesn't feel like that's the case or at least

I don't want to risk getting ahead of myself, right? But no, I think that makes sense.

Thank you. You had talked about gross expenses in the quarter of $59 million were flat year over year. Is there anything you can point us to from a benefit of people just being stuck at home and your salespeople can't be out on the road doing what they do as a salesperson? Was there any expense benefit to this shelter-in-place world that we live in?

This is Tim. I would say for us it's modest. I mean, there are some savings there, obviously, from a travel and, you know, marketing expense. But I would say for us our expectations, that's, you know, not significant.

Got it. Okay. And going back to one question that was earlier on the profit commission, I think that It makes sense to me that it's done in a year-to-date basis. I think part of what the question was trying to get at was if there's a huge favorable development number that, you know, not asking for guidance, but if there is a big favorable development number that comes next year on reserves for this year, that wouldn't impact the profit commission in either 2020 or 2021, right? So, again, the

Think about the years as accident years. So the new notices for the second quarter of 2020, those are going to be associated with the 2020 accident year. And as we continue to update our estimates of ultimate losses, that will flow through to the updated estimates of seeded losses, which will impact the profit commission. There is a true-up, but it's contained within the accident year. Losses next year don't impact the profit commission for 2020, but any development on the notices that we have received in 2020, we will continue to true-up both seeded losses and the profit commission.

Okay, maybe to ask it differently, we've seen adverse development this year, which is potentially on the 2019 reserve losses. Did the 2019 profit commission change at all based on the adverse development that we saw this year?

I'd have to look at, I don't know exactly what that adverse development is attributable to in terms of book years. There weren't a lot of losses in 2019, but If you did assume that that adverse development was associated with 2019 and that the loans that it was associated with were part of the reinsurance, the quarter share deal, then yes, the profit commission would have gone down by the amount by which seeded losses went up. Most of that adverse development was on more legacy type loans that are less likely to be in a reinsurance deal or covered at a lower percent. My 19 example there was just illustrative, not that we think that the development was coming from 2019.

No, no, I just mechanically want to make sure you understand it, and that's perfect. Thank you.

You're welcome.

And your next question comes from the line of Alex Clipper. Your line is now open.

Hi. Can you give us any guidance on what your end of July delinquency rate was versus the 6.35?

I know things went down, and it looks like it came down meaningfully, but one of your competitors reports actual delinquency rates, and so I'm just trying to triangulate what that number is.

Mike Zimmerman here. Can I take down maybe a few basis points? because the inventory just declined maybe about 1,000 or so units. The number of loans outstanding, you know, just one more month. So that went up. So maybe we dropped down a tenth or so. But maybe we'll try and get that answer, but around 6.2 would be my guess of that number.

Got it.

Your next question comes from the line of Mihir Bhattai. Your line is now open.

Hi, good morning and thank you for taking my questions. Firstly, I just want to start with the COVID-related forbearances and delinquencies. I appreciate that 67% of delinquent loans are related to a COVID-19 forbearance. But is there a statistic you can share going the other way? That is, what percent of your forbearance loans are already reported delinquent and, you know, so like What could potentially be coming if they miss another payment, et cetera?

Yeah, it's Nathan. I think typically our reporting is more robust for delinquent loans than for performing loans. And while we do get forbearance reporting from the GFCs and from certain servicers on performing loans, it's not as robust. as the information we get for non-performing loans. So I think we're a little cautious that I think we would have maybe a good number for one side of that statistic, but not feel as strongly about the other number just given that our reporting on performing loans typically isn't at the same level as it is on non-performing loans.

Understood. No, I appreciate that. Thanks. So I guess I think you mentioned you expect delinquencies to increase as we go into the second half of the year. And I was just wondering, is there something you're seeing in your data that's telling you that, or is it just more given the economic environment and the high unemployment rates, et cetera?

Yeah, it's Nathan. I do think the July results were, I think we're certainly encouraged by that, but still feel like there is a lot of economic uncertainty at this point. There also seems to be some items that entered forbearance that maybe didn't either want to be in forbearance, at least anecdotally, or are curing to refinance. These are things that we've heard. So obviously the ultimate, you know, the peak let's say of the delinquent inventory is quite uncertain. I think we were certainly thinking about it in July as being, you know, still trending upward from where we were. But, you know, seeing the results for July, I just feel like that's certainly favorable to what we were thinking.

Understood. Thank you. And just one final question. I just want to make sure we get this right on the P. Myers and the 70% discount. If a loan is in COVID-related forbearance, the 70% discount will apply throughout the COVID-related forbearance period? Is that correct? Correct? I'm not talking of just the first three months that you get. I'm talking of if it's actually in a COVID-related forbearance plan. You will get the discount for the entire COVID-related forbearance period. Is that right?

That's correct. For that loan, as long as it remained in a forbearance plan, we would continue to get the 70% haircut. And if it were in a post-forbearance workout, such as a repayment plan or a trial period on a modification, We would continue to get the 70% haircut during the post-forbearance period as well.

Understood. Thank you. That's all my questions. Appreciate it.

And again, in order to ask a question, please press star, then the number one on your telephone keypad. Again, that is star one for questions. No further questions from the phone line. Presenters, you may continue.

This is Tim again. Just want to thank everyone for their interest and hope everyone is able to stay healthy and safe out there. Thank you again. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.