MGIC Investment Corporation

Ladies and gentlemen, thank you for standing by. Welcome to MGIC Investment Corporation's fourth quarter 2020 earnings conference call. At this time, all participants are in a listen-only mode. After the speaker's remarks, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telethon. If you wish to remove yourself from the queue, please press the count key. If you require any further assistance, please press star 0. Thank you. I would now like to hand the conference over to your host, Mr. Mike Zimmerman, Senior Vice President, Investment Relations. Sir, the floor is yours.

Thanks, Clara. Good morning, and thank you for joining us this morning to hear interest in MGIC Investment Corporation. Joining me on the call today is to discuss the results for the fourth quarter of 2020 and to provide a little bit of outlook for 2021, our Chief Executive Officer, Tim Mattke, and Chief Financial Officer, Nathan Colson. I want to remind all participants that our earnings release of last evening, which may be accessed on our website, which is located at mpg.mjc.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call, and includes the reconciliation of non-GAAP financial measures to the most comparable GAAP measures. We've posted on our website a presentation that contains information pertaining to our primary risk-enforced New Risk Written Reinsurance Transactions, and other information which we think you'll find valuable. I also want to remind listeners that from time to time we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website and that investors or other interested parties may find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors, including COVID-19, that could cause actual results to differ materially from those discussed on the call, are contained in the Form 8K and Form 10K that were 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 developments. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current, Any time other than the time of this call or the issuance of the Form 8-K or Form 10-K. With that, I'd like to turn the call over to Tim.

Thanks, Mike. Good morning. I'm pleased to report that we finished 2020 with another quarter of very solid financial results. I'll review the financial results at a high level. Nathan will provide more details on the results in our capital position. And then before we open the line for questions, I will wrap up by discussing the current operating environment, including activities in Washington, D.C., and the potential for change. Throughout our more than 60 years of providing support to first-time homebuyers, our people have been the cornerstone of many accomplishments of MGIC. This was true again in 2020. The efforts and character of our team throughout the unprecedented operating environment of 2020 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. I am humbled to lead an organization of such high dedication and integrity. Our main business objective is to continuously align our resources to provide critical support to the housing market, especially first-time and low and moderate wealth homebuyers. Whether we operate remotely or in the office, we strive to achieve that objective by, among other things, offering competitive products and best-in-class service to mortgage originators and servicers, and by maintaining a sharp focus on the sources and uses of our capital. Moving to the financial results, gap net income for the quarter was $151 million, $16 million less than the fourth quarter of 2019, as a result of modestly higher credit losses. For the full year of 2020, net income was still a strong $446 million, but was down from $674 million in 2019. The 2020 financial results were materially impacted by the level of losses incurred in 2020 that resulted from the economic impact of the COVID-19 pandemic. So that is why I am pleased to see that the main driver of losses incurred, the number of new delinquency notices received, has been trending lower for the last several months, including through January. Reflecting this favorable trend, delinquency rates decreased to 5.1% at the end of 2020 and as below 5% as at the end of January. This rate is higher than December 2019. It is down from the 6.4% at the end of June 2020. Approximately 62% of the year-end delinquency inventory has been reported to us as being in a forbearance plan. Of course, we will continue to monitor the loans of forbearance as many will be reaching the end of the forbearance period in the coming quarters. Throughout 2020, the demand for single-family housing stayed strong. and remain strong even as we are now moving through what is traditionally a slower time of year for purchase activity. Our new business writings continue to be weighted more heavily to purchase versus refinance transactions, and purchase transactions accounted for 64% of our new insurance written, or NIW, in the fourth quarter in the full year. The low interest rate environment continues to make refinancing very attractive for many borrowers, and our industry continues to enjoy a relatively larger market share on refinances than in prior periods. These strong housing and mortgage market conditions led to record volumes of both purchase and refinance mortgage originations in 2020. We wrote a record volume of new business, finishing the year with $112.1 billion of NAW, including $33.2 billion of NAW in the fourth quarter. This record amount of new business written more than offset the pressure of lower persistency on our existing books of business, and as a result, our insurance and force increased nearly 11% year over year. In fact, 2020 was the only six times in the last 30 years that insurance in force grew by more than 10%, and we saw that growth continue through January. We estimate that at the end of December, our PMIRES available assets exceeded the PMIRES minimum required assets by $1.8 billion, despite an increase in the number of delinquent loans and the record amount of new business in 2020. In addition, our policyholder position was $3.2 billion more than the minimum state capital requirements. As we look ahead to 2021, we have reasonable visibility into the insurance we expect to write over the next several months. However, beyond that, it becomes more difficult to reliably forecast, especially given the uncertain impact COVID-19 could have both on national and regional economies, as well as the impact of potentially higher interest rates and any changes in the relative pricing of the FHA and the GSEs, if those changes affect the consumer's monthly payments. Coming off what was the largest market opportunity the industry has seen, which resulted in the most NIWR company has ever written, we expect to write approximately 15% less new insurance in 2021, and their primary insurance in force will grow, but perhaps at a slightly slower rate than in 2020. This rate of growth assumes that annual persistency improves over the course of the year from its current level and reflects a smaller mortgage origination market due to fewer expected refinances. While we navigate the short term, we remain focused on long-term success of the company. As I mentioned, we do that by offering competitive products and best-in-class service to our customers, and by maintaining a sharp focus on sources and uses of capital. We think this is a winning strategy for all stakeholders. As we enter 2021, we have a book of business that has strong credit characteristics, perhaps the highest quality in our history. In addition, we have a strong balance sheet with modest leverage, $7 million in cash and investments, Contrastual Premium Flow, and a comprehensive reinsurance program. While we expect 2021 NIW to be robust and of high credit quality, there remains the potential for higher incurred losses than we experienced this quarter, given the uncertainty about the future economic impact of the COVID-19 pandemic. Further, we expect higher pay losses to begin to increase in 2021, assuming foreclosure moratoriums are not extended further. That said, we have seen an improvement in credit performance in the second half of 2020, even as the pandemic continued to impact the economy. We have a strong balance sheet, we are confident in our positioning in the market, and we like the risk-reward equation that the current conditions offer. With that, let me turn it over to Nathan.

Thanks, Jim, and good morning. I'll spend a few minutes talking about the financial performance of the company, and then I'll discuss our capital and liquidity position. In the fourth quarter, we earned $151.4 million of net income or $0.44 per diluted share and generated an annualized 13.4% return on beginning shareholders' equity. This compares to $177.1 million of net income or $0.49 per diluted share and an annualized 17% return on equity from the same period last year. For the full year, net income was $446.1 million or $1.29 per diluted share Thank you for joining us today. For the full year, we earned $1.32 per diluted share versus $1.84 in 2019. A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release and our 10-K. There are a lot of moving parts, but as Tim mentioned, the primary difference in the quarterly and year-over-year comparative results is the higher losses incurred in 2020, primarily as a result of COVID-19, which I will cover in more detail in just a minute. Total revenues were nearly flat year over year at approximately $1.2 billion. During the quarter, total revenues were $302.3 million compared to $311.6 million last year due to lower net premiums earned and lower investment income. Net premiums earned were lower due to lower net premium yield partially offset by higher average insurance and force. Investment income was lower primarily as the larger investment portfolio was more than offset by lower investment yields. The net premium yield was 43.1 basis points in the fourth quarter, down about a half a basis point from the third quarter level. The net premium yield declined sequentially primarily because the premium yield on the InForce portfolio, which is detailed in the press release, has been declining as older policies with higher premium rates run off and are replaced by newer policies which generally have lower premium rates. The net premium yield declined 5.3 basis points from the fourth quarter of 2019 to the fourth quarter of 2020. Again, primarily as a result of a lower premium yield on the enforced portfolio. This decline also reflects a decrease in the profit commission on our quota share reinsurance transactions resulting from an increase in seeded losses which flows through the net premium earn line. These effects were partially offset by an increase in accelerated earnings from the cancellation of single premium policies. During the quarter, accelerated premiums from single premium policy cancellations were $32 million, which was flat compared to the last quarter and up from $20 million in the fourth quarter of 2019. I would expect the direct premium yield of the in-force to decline throughout 2021 as the older books continue to run off. However, due to the recognition of accelerated single premiums and the level of profit commission, The change in the net premium yield is more difficult to forecast reliably, but should also decline over time. Despite the lower direct premium rates on the newer policies, we have been able to, and expect to going forward, earn attractive risk-adjusted rates of return on P. Myers Capital as a result of the strong credit profile of the new policies, the use of more granular risk-based pricing, and the distribution of risk through our reinsurance program. Shifting over to credit. Net losses incurred in the fourth quarter were $45.8 million compared to $23.7 million for the same period last year. In the fourth quarter, we received approximately 15,000 new delinquency notices, which is approximately 10% more than the fourth quarter of 2019, but 27% fewer than last quarter and 74% fewer than the second quarter of 2020. The estimated claim rate on new notices received in the fourth quarter was approximately 7.5%, Thank you for joining us today. in the fourth quarter of 2020 by $7 million to approximately $27 million compared to a decrease of $3 million in the fourth quarter of 2019. To establish the IV&R Reserve, we estimate the number of loans whose borrowers had missed the payment but that had not yet been reported to us as delinquent. Of the 57,710 delinquent loans at year-end 2020, approximately 62% or 36,000 loans are reported to us to be in forbearance. Based on the information reported to us, we estimate that approximately 69% of the loans in forbearance at the end of December will reach the end of a 12-month forbearance term in the first half of 2021. Recently, the FHFA announced an additional three-month extension for loans in forbearance as of February 28th, so that will alter the timing of when a resolution of the delinquency occurs. Future economic conditions, including unemployment and home price appreciation, will certainly impact the ultimate outcome of the remaining loans and forbearance. That said, I am pleased that the number of new notices we are receiving as a percentage of the number of loans insured has been steadily trending back towards pre-COVID levels. When we establish reserves for a given population of delinquent loans, we expect a certain percentage of those loans will cure. So while we certainly expect a percentage of the COVID-19 related delinquencies to cure, including those in forbearance, I think it is too soon to estimate more precisely the ultimate claims that will result from these delinquencies versus our initial estimates. However, I am pleased that we have seen loans exit their forbearance plans without a claim payment as there was some concern early on that there would be very little resolution for 12 months. Despite the uncertain resolution of the loans currently in forbearance, the fact that there has been a good deal of favorable resolutions or cures to date has reduced the downside scenario for losses incurred in excess of our estimates, which is material from a risk manager's point of view. The number of claims received in the quarter remained very low due to the various foreclosure moratoriums. They were down nearly 67% in the same period last year, and primary paid claims declined to just $12 million, down from $15 million last quarter and $42 million in the fourth quarter of 2019. At some point, the foreclosure moratoriums will expire. However, we would expect claim payments to remain modest for several quarters after the expiration as nationally, on average, it could take more than a year to complete a foreclosure should that become necessary. Next, I would like to talk for a couple minutes about expenses. We are one of the most efficient underwriters in the industry as a result of maintaining a keen eye on expenses even while making investments in our infrastructure. During the quarter, operating expenses were in line with prior periods. For the full year, operating expenses were modestly lower than in 2019, primarily due to reduced performance-based compensation resulting from the effects of COVID-19 on our financial results and the lack of travel and related expenses. These were offset somewhat by expenses associated with the continued reinvestment in our technology infrastructure and analytical capabilities and expenses associated with the record volume of new insurance we wrote. As we look to the future, our expectation is that the mortgage finance business will become increasingly digitized as participants further integrate risk-based analytics into their pricing, capital allocation and operational frameworks. We have not been standing still as this evolution occurs. We have been making investments in our infrastructure to realize the value that comes with improved data, analytics and operating improvements. For example, we have already implemented a number of business transformation initiatives such as a pricing engine, MIQ, which has allowed us to more efficiently and discreetly price our business. We've also developed a new risk evaluation platform called IQ Plus that is now being rolled out and will eventually be the tool for all of our risk evaluation work and will allow us to retire the existing systems that serve those functions. We have completed the transition for our general ledger. Reinsurance Accounting and Administration, Payroll, and Human Capital functions and are in the process of modernizing our policy servicing and claims administration systems so that we can continue to offer the best-in-class experience to our customers. In recent years, we have been able to find other savings to offset the investments we have been making, which in turn has helped keep expenses relatively flat over the last few years. By the end of 2020, we have laid the key groundwork to enable us to accelerate our investments in technology, analytical capabilities and process improvements beginning this year. For the full year 2021, we expect underwriting and other expenses to be in the range of $220 to $225 million. The increase over 2020 is primarily due to the accelerated technology and business process investments I just mentioned, but also includes performance-based compensation returning to target levels. Over time, we expect the level of incremental spending to decline as some of these investments are completed over the next year or so and we realized improved operating efficiencies. Interest expense was $18 million in the quarter compared to $13 million in the same period last year. The increase resulted from the issuance in August of our senior notes due in 2028 and the repurchases of a portion of our senior notes due in 2023 and our convertible to ventures due in 2063. These capital actions increased our liquidity and improved our debt maturity profile. Assuming no additional transactions, the annual debt service costs will be approximately $72 million. We had $846 million of cash and investments at the holding company at year-end, and our next debt maturity is $242 million due in 2023. Last month, the holding company board approved a cash dividend of $0.06 per share, payable on March 3rd. Any future common stock dividends will also be determined in consultation with the Board. We continue to believe in a balanced approach to maintaining a strong balance sheet, including the use of forward commitment quota share treaties and by accessing the capital markets. This approach provides flexibility for both the writing company and the holding company to maximize long-term value, whether by writing more primary mortgage insurance, pursuing new business opportunities, retiring debt, paying dividends, or repurchasing stock. At year end, our consolidated cash and investments totaled $7 billion including the cash and investments at the holding company. The consolidated investment portfolio had a mix of 83% taxable and 17% tax exempt securities, a pre-tax yield of 2.55% and a duration of 4.3 years. Our investment portfolio had a net unrealized gain of $344 million at year-end compared to $175 million at December 31, 2019. Shifting to PMIRES, MGIC's available assets totaled approximately $5.3 billion, resulting in a $1.8 billion excess over the minimum required assets. In the quarter, our available assets grew by approximately $300 million, driven by organic available asset generation from operations, as the cash inflows from premium and investment income significantly exceeded the cash outflows from operating expenses and paid losses. The $1.8 billion excess does not consider the excess of loss reinsurance we recently obtained through an insurance-linked note or ILN transaction that closed on February 2nd. The transaction covers virtually all of the policies written from August through December of 2020. The reinsurance is supported by the proceeds of approximately $400 million of notes issued by a special purpose insurer. We have summarized all of our ILN transactions in the quarterly supplement that is on our website. In addition to this ILN transaction, we also came to terms with our reinsurance panel to increase the quota share on our 2021 NIW from 17.5% to 30% and have secured a 15% quota share on our 2022 NIW. Both the ILN and QuotaShare transactions will provide us added capital flexibility. We are required to hold more assets under PMIRES for delinquent loans, and the amount of required assets increases as the number of mispayments increases. However, we are allowed to reduce the amount of assets we are required to hold by 70% for three months for delinquent loans whose initial mispayment occurs prior to April 1, 2021, and under certain circumstances for loans and forbearance plans related to COVID-19. This forbearance relief was an important temporary provision to have, especially in the second quarter of 2020, when the economic fallout from the pandemic was most acute. Uncertainty still remains about the outcome of these loans and forbearance, which is one of the reasons we believe the GFC has extended the relief on new notices through March 31st. That said, the current need for this relief is lessening as our capital position has grown and fewer loans are delinquent. At the end of the quarter, the application of the 70% reduction to minimum required assets on loans and forbearance provided approximately $700 million in PMIR's relief. While that is a significant amount, if removed, we would still have more than a $1 billion access to the minimum required assets even before considering the ILN transaction we just completed. The bottom line is that as a result of our cash flow during the quarter, and for that matter the full year, the additional reinsurance we have procured The application of the 70% reduction in minimum required assets for certain COVID-19 related delinquencies, among other things. We have significantly increased our PMIRES access during 2020 while paying $390 million in dividends to the holding company, writing $112.1 billion of new insurance, and growing our insurance in force nearly 11%. With that, let me turn it back to Tim.

Thanks, Nathan. Before moving to questions, let me address a few additional topics. While 2020 was a year of unique challenges, it was also a year that saw the public policy debates about the future state of the residential housing and mortgage finance industry, including the appropriate roles for the GFCs and FHA and private capital, continue without a definitive resolution. That is not necessarily a bad thing, as our company can operate very effectively and efficiently within the current framework and produce good results for shareholders. Unfortunately, there does not appear to be any short-term answers on the horizon. We intend to continue to be actively engaged in these discussions about housing finance policy. The new administration will bring potentially new and different priorities, so it is difficult to gauge what specific actions may be taken by the FHA, FHFA, CFPB, and the legislature. It is also difficult to gauge the timing of any such actions and their impact on our business. We expect the new administration will focus on continued loss mitigation efforts for homeowners impacted by COVID and on affordable housing. Both owner-occupied and rental. The details of these initiatives should become clear as 2021 unfolds. Meanwhile, we continue to advocate for the increased use of private capital, including private mortgage insurance and the housing finance industry, in order to reduce taxpayer exposure to housing while still maintaining a resilient housing finance system. Long-term, I remain encouraged about the future role that our company and industry can play in housing finance and believe that other regulators and policymakers share a similar view. While other market options for credit enhancement can be scarce or unavailable at various points in the economic cycle, our company and our industry continue to provide credit enhancement solutions to lenders, borrowers, and the GSEs in all economic environments, as demonstrated in the first half of 2020, when credit risk transfer transactions in the capital market slowed, but the private mortgage insurers wrote record volumes of new insurance. 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. As I mentioned earlier, we are confident in our positioning in the market and we like the risk-rewards that the current conditions offer. Currently, the strong housing market is contributing to high levels of new insurance writing and the level of delinquencies, both newly reported and those in inventory, are declining. We have a book of business that has strong underlying credit characteristics and that is supported by a balance sheet that has low debt-to-capital ratio, an investment portfolio of nearly $7 billion, contractual premium flow, and a robust reinsurance program. As I mentioned at the beginning of my remarks, in addition to the well-being of our fellow coworkers, we are focused on continuing to provide critical support to the current housing market, especially low- and moderate-income and first-time homebuyers. In closing, I want to remind listeners that for more than 60 years, our firm has been providing borrowers and lenders with affordable, and Prudent Low Down Payment Options on an uninterrupted basis. We have the right team in place to build off our solid foundation to continue that proud tradition and to deliver the quality products and service our customers have come to expect from MGIC. With that, operator, let's take questions.

Thank you, sir. At this time, I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad. Again, that's star then the number one on your telephone keypad. If you would like to withdraw your questions, you can press the pound key. Your first question will come from the line of Mark Devrex from Barclays. So your line is now live. Go ahead, please.

Thank you. Just had a question about prospect for capital returns just given, you know, these improving delinquency trends, you know, your strong reserves and the comprehensive reinsurance protection. Do you think at this point that the GSEs would entertain approving a dividend from MGIC before June 30th? And if so, would the OCI be likely to object if you saw the dividend? And if you do get more cash up to the holding company, you just talk about appetite for buying back stock here.

Sure, Mark. It's Tim. There's obviously a number of moving parts in there. You know, the GSE did put in their provision related to the 0.3 multiplier that there is, you know, with their approval you could have dividends. I think it remains to be seen whether they would allow that to happen or what the actual rules are to allow that to happen. They weren't overly prescriptive. We always keep good contact and communication with our state regulator. So feel good that as the environment hopefully continues to improve, we can have constructive dialogue there. So I think, you know, obviously over the next couple quarters, couple months, couple quarters, those are conversations that will continue to be engaged in. But obviously I think a lot of it has to do with the environment and our comfort level and those parties' comfort levels with additional dividends out of MGIC and any capital return from the holding company.

Okay, got it. And then just one more question for me. Have you guys observed any kind of material changes to pricing in the market in recent months with the improving delinquency trends that you've observed?

Hey, Mark. Mike here. You know, pricing is just so dynamic and fluid with the introduction, you know, over the last couple years of all the engines. It's not as easy as a comparable to say pricing is up or pricing is down like it used to be with the rate card or even quite frankly last year when there was that sudden shock of COVID delinquencies. It's fluid, it's dynamic, it changes you could say daily but very frequently depending on conditions and views of those marketplaces. So It's a competitive market and maintains to be competitive, but we feel it's a good risk-reward opportunity, as Tim said.

Understood. Okay. Thank you.

Thank you. Your next question will come from the line of Doug Carter from Credit Speed. So your line is now live. Go ahead, please.

Thanks. I was hoping you could give us some outlook on persistency. What types of trends you're seeing and any indication when, at least from a quarterly basis, it might level off or start to improve?

Yes, Nathan, I'll take that one. I think what we've seen in early 2021 is similar to what we saw in the second half for late 2020, but rates were still pretty low for the loans that were being done at that time. Clearly, we've seen some benchmark rates tick up. The expectation coming into the year was that rates would rise maybe in the back half of the year and that that would help persistency for the full year. That still remains to be seen, but I think that's consistent with the market forecast of lower refinance origination. I think those things play off each other a little bit.

Just to add to that, when we're talking about rates, we're talking about what the rates lenders are offering to borrowers, and clearly the 10-year is already increased, but the spread between there and where rates are being offered, that is narrowed, so the offering to the consumer is effectively unchanged. It's still very attractive rates out there.

And then just given the strong home price appreciation we saw last year, you know, I guess can you talk about what you're seeing in terms of your penetration, you know, on refinance volume or are you still kind of getting similar share or more people kind of appraising out of MI and not, you know, and therefore, you know, not needing to kind of basically wrap the policy?

Yeah, this is Tim. I think, you know, we're still seeing, if you look at sort of the year on balance in particular, that we're still seeing, we're capturing more of that refi activity than we normally would, just because, again, I think there were some more recent vintages that were able to refinance with a lower rate, but they were not able to appraise out, or were not, obviously, at the 78% that are sort of LTV. So, whether that continues or not, with a strong home price appreciation, that remains to be seen, but You know, we were seeing higher levels than ordinary of sort of penetration into those refi markets, again, because of the books that we're refining, even in spite of the high home price appreciation, just how soon it was that they were able to refi.

Great. Thank you, guys.

Sure.

Thank you, sir. Your next question will come from the line of Jack Musenko from FIG. So your line is now live. Go ahead, please.

Hi. Good morning. Nathan, you prepared comments. You talked a lot about investing in technology and the engine. How much of the business in the quarter came through the engine versus the rate card? And maybe what was that a year ago? And how do you think, given the comments around investment further, how much of your business can that look like going forward?

Jack, I know you directed it at Nathan, but I think I'm closer to the mix that's coming through the different engines. And quite frankly, as we've talked in the past, it's all a delivery mechanism. So obviously we've got the published rate card that's on, I'll call it on the website, and that's still being used, but that's a very small segment of business that's coming through that channel or that delivery mechanism. So, whether it's our MIQ dynamic engine or whether it's a forward commitment, you know, negotiated card, it's all using the same technology and same. So, we don't really look at it as, you know, how much is, because we're not dictating to customers how to do that. So, to us, it's all the same. The overwhelming majority is coming through the dynamic pricing approach that we're taking.

Okay.

From last year.

Okay. Okay. And then part two to that would be You talked about the $220 to $225 run rate. You did $190 last year. Is it possible to sort of frame out the difference between the sort of $20 to $25 million? What of that's kept that could go away and maybe $22 or beyond? And was there anything in the $190 run rate last year that was maybe overstated because of some of the tech spend you talked about?

Yeah, Jack, it's Nathan. I would say, you know, in terms of the increase, the substantial majority of that, I did mention kind of performance-based compact at target levels, but the substantial majority of that is, you know, kind of increased technology and process investments that we're making. I think the way that we think about that is, you know, we're going to make those Those likely will extend into 2022. And I think there'll be some level of kind of reinvestment in the platform always. But we do think that there's increased efficiencies to be gained by those investments that we're making. Those will start to be realized in some cases, you know, probably beyond 2021 here. The actual, you know, the kind of long-term run rate level, I wouldn't necessarily benchmark it to where we are in 2021. Okay.

Okay. All right.

Thank you. Thank you, sir. Your next question will come from the line of Randy Benner from B. Riley. So your line is now live. Go ahead, please.

Hey, good morning. Thanks. I wanted to ask a question about some of the commentary you had about, you know, the risk of or being conservative around the forbearance plans rolling off. And, you know... clearly this is an area to focus on in general, but it's not a very big percent of your book overall, you know, kind of low single digits, I think. And so, you know, can you kind of quantify more or maybe kind of give us more color on why you're focusing on this as much and kind of what it could mean for the income statement relative to the positive credit trends we're seeing overall? Because it just seems to me it It's coming through as a pretty manageable risk. It's going better than expected, but you're very conservative in the way you've discussed it. So I just wanted to dig into that a little bit more if we could.

Yeah, this is Tim. I think we talk about it in terms of obviously, for the most part, in terms of the reserves that we have. And I think you try to talk about it conservatively because I think as Nathan mentioned the prepared remarks, we've probably seen more loans actually resolving cure than maybe we even expected, but there's still a lot that have not resolved at all. And we know this could extend it for a period of time. So obviously the concern, even though that we have less downside risk because we have had some cures come out of there, the downside risk is that more of these ultimately come out of forbearance and actually go into foreclosure and could go to claim to what our initial expectation was. We really haven't deviated much off of our initial expectation from when these loans initially went delinquent. But that's the concern, I would say, is that they will go at a higher rate to claim than we expected. And just the fact that these can draw out longer, I don't think that's a negative impact. I think if you think about home price continuing to depreciate, that should be a positive fact pattern. But each home is specific, and you're talking about sort of a distribution around average prices that can happen in markets. And so I think from our standpoint, we think it's prudent to sort of – you know at least be cautious about how those could ultimately resolve.

Okay that's helpful and then just real quick on refi you know understand that general expectations for refi are lower and I think you know MBA data plays a part of what you talk about when you talk about market data but I guess I'd ask you know how is refi trending so far this year versus your initial expectation and especially there's some you know origination platforms that are And Randy, it's Mike. As we all know, forecasting interest rates is a dangerous game.

and, right, it's continued strong. As I said in the current interest rates, the spread between the 10-year and 30-year is compressed, right? So it hasn't, the consumer rates have not really increased that much. And you're right, there are more companies that are looking to continue their franchise growth relative to originations. So to answer your question, it's continued strong. relative to, you know, refi mix, you know, that's coming in from applications. And certainly, you know, NIW, which trails, you know, several weeks, you know, the applications. But even applications remain at, say, a strong level, you know, in the 40%, you know, range of refinance mix. How long goes on is not right. It's hard to tell.

All right. Thanks for that. Appreciate it.

Thank you, sir. Your next question will come from the line of Bosay George from KDW. Your line is now live. Go ahead, please.

Hey, guys. Good morning. I just wanted to follow up on the expenses. So the $220 to $225 seems to equate to a loss expense ratio of around 22-ish percent. For many years, the expenses have been kind of in the 18% range. You know, you noted that this is, you know, a lot of this is a technology investment. So, you know, when we think of expense ratios after 22, you know, should we see it trending back towards that 80% range or is that, you know, is there something different here?

It poses, Nathan. I think, you know, the expense ratio, I think you're kind of thinking about it right for 2021 relative to the kind of incremental growth. impact for what we've announced relative to increased kind of technology and process transformation spending. Going forward, it will be impacted not only by the level of ongoing expenses, but also what our premium looks like and also the nature of our reinsurance programs, just with the amount of seeded premium that we have and seeded commission. So I think that's a little bit more I guess a little bit more difficult to judge, but I think you're thinking about it right for 2021, certainly.

Okay. And then just in terms of dollar amount at this time, the $2.20 to $2.25, I guess that number presumably doesn't go down, just the cadence of the growth slows, you know, after 21, is that right?

I think both. Sam, I think the way we think about it is investing in the platform. And I think, as Nathan said, we're trying to accelerate some based upon sort of one conviction and our ability to execute over the last 12 to 18 months on some of the technology initiatives. And quite frankly, I think, as you hear from a lot of other companies, sort of getting a sense that others in the mortgage finance and broader are probably accelerating some of their technology investment. And we want to make sure we keep pace I think it's safe to say that long-term, the focus is to create efficiency out of that technology spend. And that part of it, I'd say the other part of it is to be able to be smarter is how we evaluate credit risk as well. But I think, you know, to not put it in expense ratio terms, but to think about it as far as us trying to accelerate and how we think that sort of manifests in the business, I think it is right to think about it as that we should be more efficient because of it.

Okay, that's great, thanks. And then just switching to a different topic, just on the FHA, you know, just wanted to get your thoughts on, A, do you think there could be a cut there at 25 basis points, and B, do you think it's meaningful just given that the overlap is very big?

Yes, I mean, it's tough to know for sure. I mean, we've heard the rumors, obviously, for a while, but not a lot of detail, quite frankly. And to a certain extent, I'm almost surprised that we haven't heard more recently or that something's happened. So I don't know if that's an indicator or if it's just, you know, sort of the administration sort of trying to get things set up before they move on things. That all being said, you know, if it's a 25-day point reduction, I think that obviously can make us a little bit less competitive around some of the lower ends of the credit spectrum for us as an industry. But I would say it's not a major concern from our standpoint. It's something that I think we've dealt with as a company over time and seen FHA make price changes in the past. So I would say that it's something that we keep an eye on. and there's a chance that there could be some amount of lost business from an industry to a rate cut there if it's 25 basis points. It's something that I'd say we don't feel like there's significant risk to the volume we're going to be able to write this next year if that happens.

Okay, great. Thanks.

Thank you. Your next question will come from the line of Aguiliano Bologna from Compass Point. So your line is now live. Go ahead, please.

Good morning. Switching back to the credit topic and capital and how you think about capital return, are there any events on the calendar that would really help accelerate the pace of gaining more comfort? And what I'm thinking about is, as you see the first few integers of loans and forbearance expire with the 15-month deadline, that puts them in June, July, and August. Is that kind of the best time frame to think about in terms of gaining a lot more visibility around credit and how you might think about capital?

Yeah, it's Nathan. I'll take that one. It's a good question. It's certainly one that we think a lot about. I mean, I do think that certainly at the end of forbearance terms for a lot of borrowers that have been in forbearance, that will be kind of really useful information about the ultimate outcome. But I wouldn't characterize it that every month we don't get new information as well. We continue to see loans that have been in forbearance since the April and May and June timeframes in 2020. They continue to resolve every month. So I do think that an important resolution will happen at the end of the forbearance period, but we are still getting, I think, news along the way. And as we've said, in kind of the prepared remarks and also in response to some of the questions. I think that the news has generally been favorable. There's been virtually no paid claims out of those cohorts, and we continue to see cure activity, although it's relatively modest, but it is happening every month.

That makes a lot of sense. And part of what I was getting at was, you know, obviously that's your biggest indicator of whether or not your claim rate assumptions will be accurate because it's 95%, you know, cure at the end of the term. A 7% claim rate would be off. But kind of leading up to that, is there any other information that you have or that you get from servicers that gives you an indication of why loans are rolling or extending for another three months that can kind of factor into your credit methodology or your reserving methodology, I should say?

Well, the last part, this is Mike. I mean, for the reserving methodology, less so, right, because that's a pretty tried-and-true methodology and a very consistent approach. But we do get information, but we don't get complete information on our portfolio for reasons for exiting, you know, the forbearance. So we don't have real good visibility into the reasons. You know, we can look on a portion of the portfolio, but not enough that You know, we'd be willing to make any statements about as far as, you know, preponderance of how much is prepaid versus deferral and so on of that nature. But we do, we look for it, we ask for it, and it certainly informs our thinking when it comes, but not necessarily the mechanics of reserving.

That makes a lot of sense. I appreciate that, and I'm going to jump back into the queue.

Thank you, sir. Your next question will come from the line of Mihir Bhatia from Bank of America. Your line is now live. Go ahead, please.

Hi. Good morning, and thank you for taking my questions. Maybe I'll just continue on that same topic, you know, maybe on the mechanics of reserving. Can you just give us a sense of, you know, I think a lot of investors are beginning to think about, you know, the potential for reserve releases coming out. So I understand that you probably don't want to size anything, but Maybe just give us a sense of the mechanics of that process. What do you need to see? Is it that you get to the 12 or 15-month now forbearance expiry, the loan cures, and that's when you can release the reserve? Or is it more of a little bit – there's a little bit more judgment there along the way as you get more and more confidence and you see the trends month over month? I'm sure there's – I think Mike was mentioning there's some loans curing along the way. to that 12, 15-month full expiry period. So does that, like, you know, can you get, as you get confidence that enough of those loans are maturing, will we start seeing reserve leases? So, like, what are the mechanics involved here? Maybe help us with that. Thank you.

Sure. Good question, Nathan. You know, I think each period we look at not only the expected ultimate losses on new delinquencies, which are the driver of our losses incurred, but also reassess our previously established Reserves. Previously, looking at kind of cure and paid claim activity, I think we were able to draw some confidence from the history that we have there with foreclosure moratoriums really affecting paid claim activity and forbearance plans really extending the term on cure activity. I think it's made it more difficult to have a lot of conviction in adjusting your ultimate Thank you very much. as mitigated the potential downside scenario to our estimates. It's still, I think, too early for us to think about, you know, reassessing those downward or, frankly, upward. I think we still feel really comfortable with our initial estimates. And that's really the process that we follow every quarter.

Right. So, basically, once we – right now, it feels like once you get to those 15-month expiries, if that's where it stays – You'll get a much better sense of what's happening, and then you could have a little bit of a cliff there if a whole bunch of them just go back to pure, cured status. Like, you know, they start making the payments. Is that the right way of thinking about it?

I'd say certainly if at the end of forbearance terms we do see a significant amount of resolution, either entering foreclosure or curing, that that will be kind of useful information to reassess our estimates on how the

Okay, maybe on a different topic, you know, you mentioned that y'all are seeing a little bit more refi of the MI industry as a whole, but y'all are just seeing a little bit more of the refi volumes than you typically see? Just two quick ones on that. One is, you know, historically we've talked about it being, you know, three and a half to one maybe between refi and purchase, the sensitivity. Is that a little different now as we think about the near term or do you still feel good about that three and a half to one purchase refi, you know, sensitivity, if you will?

Yeah, I mean, I'll just like reframe it for a little bit. I mean, long term, I would say industry long-term market share and refi is about 5% and 20 plus percent in purchase and probably closer to 8 to 10 in refi and in the mid to upper 20s for purchase. For the last measurable period anyway.

Right. And then just in terms of the refis themselves, Are they mostly cash-out refis or is it just rate refinancing where they still need to have MI on the policy? And do you feel differently about those two?

Well, for us, it's almost predominantly rate term because we don't do much in the cash-out refi space.

Thank you.

Thank you, sir. Your next question will come from the line of Phil Stefano from Deutsche Bank. Your line is online. Go ahead, please.

Yeah, thanks. Good morning. On the expense guide of 220 to 225, not to put a too fine of a point on this, but just to make sure, is the guide, it's net of seating commissions, right, a reported number? Is the right way to think about that?

That's right, yes.

Okay. Okay. Yeah, so switching gears, and I know there have been some questions about capital return. I suspect in some respects it probably feels like you're trying to flag a little too early to get into those conversations, but I guess in thinking about the past year, year and a half, maybe you can talk to us about how your capital management strategy may have shifted with the uses of reinsurance, the buffer that you might be contemplating to P. Myers. It feels like People bearish on the MIs want to always point out that the sector seems to be repurchasing shares at exactly the wrong time. So what have we learned over the past year, year and a half, and how do we apply that to capital strategy forward?

Phil, it's Nathan. I'll take that one. Relative to the kind of reinsurance strategy, I would say really nothing has changed. The strategy that we would have been talking about for some time now would be to be Programmatic about issuing in the ILN market and then forward commitment quota share treaties. And while during the kind of peak dislocation due to COVID, the ILN market wasn't accessible. Other than that, we've executed two ILN transactions, the most recent one at very attractive terms. Even the one in October, I think, had really attractive terms, but spreads have come in quite a bit even since then. Have executed again in the kind of quota share forward market. So I'd say nothing different from that perspective. Relative to the excess levels and the overall sizing, I think we were focused quite a bit on our excess, notwithstanding the 0.3 factor. And that has grown very quickly. A quarter or two ago, we wouldn't have had the level that we have today. So I think that's certainly something that we, with the island that we did in February and also The trends that we've seen, I think positive for the direction for that going forward. And then, as Tim mentioned, our ability to size the amount of capital in the writing company at this point is partially dependent on approvals from the GSEs and the OCI. And the GSE approval right now would expire at the end of June. So I think as we look out to the near and intermediate term, I think we do have potentially some A good story to tell around having a really strong capital position at the writing company to support dividends to the holding company. But with the approvals required right now, I don't think that that's necessarily a Q1 thing, but something that we're going to continue to talk about with both our regulators and the GSEs. And then also evaluate what the right sources and uses of capital are at the holding company. And clearly, Our dividend has been a way that we've returned capital through this period. And, you know, I think we've demonstrated that we can do meaningful shareholder returns via share buybacks as well. But I think, you know, key to having meaningful returns there is dividends from the operating company again. Yep.

No, understood. Understood. And maybe to think about the reserving and the potential for development question in a different direction. Do you have a view or can you at least give us a broad brush stroke on how to think about the mark-to-market, loan-to-value that you see in the book and what percentage may be sub-90 or sub-85? Any comments you can give around the home price appreciation and kind of where it stands today in the book?

Yeah, I think Mike's got the numbers. I'll give them to you in a second. But I think that that's certainly a measure that we look at. I think there's some use to it, but I would just caution of maybe overuse of that. It's all about a distribution. That's an average. We're talking about loans that are delinquent. We pay claims in rising home price environments all the time. So I think it's good to see home price appreciation. We do think that that benefits severity ultimately. It undoubtedly helps certain borrowers avoid claim entirely, but would just caution that just because the average loan is kind of not underwater, let's say, that that means that we could potentially not have many claims.

And while I did say I'd run through my papers here to try and find it, I don't have, but I'd say to underscore Nathan's point, I mean, I think of our delinquent inventory, you know, the majority of it has, I think it's around a 90, you know, certainly less than a 95 and less than a 90 mark the market and probably 25%, you know, below the 80 level. But again, those are at CBSA levels and so on. So that's just similar to other distributions you've seen publicized. Let's put it that way.

Okay. Well, that's perfect. And I appreciate the word of caution on that. Thank you, guys.

Thank you, sir. And presenters, that's it for our last question. I'm going to go ahead and turn the call over to you for any closing remarks. Thank you.

Thanks for everyone for listening today. I hope everyone stays happy and healthy. Thanks for your interest in the company.

Thank you, sir. Again, thank you so much, presenters, and thank you, everyone, for participating. This concludes today's conference. You may not disconnect. Stay safe and have a lovely day.