MGIC Investment Corporation (MTG) Q1 2020 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation First Quarter Earnings Call. [Operator Instructions] Please be advised that today’s conference is being recorded. I would now like to hand the conference over to Mr. Mike Zimmerman. Please go ahead, sir.

Thank you, Sean. 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 first 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 includes certain non-GAAP financial measures. We’ve posted on our website a presentation that contains information pertaining to our primary risk in force, new insurance written and other information, 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 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 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 at any time other than the time of this call or the issuance of the Form 8-K or 10-Q. At this time, I will turn the call over to Tim Mattke, our CEO. Tim?

Thanks, Mike and good morning everyone. I want to start by saying that I hope everyone who is listening is safe and well. Next I want to express my gratitude and admiration to my fellow MGIC coworkers and their families. Your efforts day in and day out over the last several weeks to support our customers, your local communities and your fellow coworkers, while coping with your own personal circumstances this has always defined the culture of MGIC. So thank you. The safety and health of our coworkers and their families as a responsibility, I do not take lightly. On a Friday afternoon in mid-March, we made the decision to transition our operations to a remote work environment. Certain teams had operated remotely for some time, while this had done only occasionally and typically for weather related event. By the Monday following our decision nearly the entire organization logged on remotely and was standing by ready to serve our customers. I am proud to say that MGIC has continued to serve our customers every day since then as well. In perhaps a sign of our resiliency working remotely is solely becoming a matter of routine as we adapt the current environment. In addition to the health and safety of our employees as we navigate through the current environment we are focused on; one, continuing to provide critical support to the current housing market; and two, positioning our company prosper over the long-term. We strive to achieve those goals 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 managed through the current situation. More on the future in a minute, but first I want to spend a few minutes providing a high level summary of our financial results for the first quarter and our current financial position. Then Nathan will cover some more details of the financial results. During the first quarter, the favorable new business and credit trends we’ve experienced for the last few years continued. Our insurance in force increased approximately 6.7% year-over-year and number of loans delinquent declined. GAAP net income for the quarter was $149.8 million. Losses incurred is typically what creates the variability in our results in any given period. The favorable activity of new delinquency notice activity and cures of previously reported notices continued in the first quarter. However, to reflect the current environment, we did make some modest changes to our loss reserve estimates that Nathan will cover in more detail. From a new business perspective through April, our current pipeline of applications remain robust. The combination of our applications lender reports and the MBA indices provide us with reasonable visibility into NIW over the next couple of months. However, although our current pipeline remains robust, there’s considerably less visibility regarding the future business, especially in the current environment. Discussions with lenders as well as the most recent MBA application index data, despite the recent increases point to a meaningful contraction and purchase application, while refinanced transactions remain up more than 200% year-over-year. Given the high level of activity to-date and the uncertainty of when purchase activity will fully recover and the ultimate size of the refinance market, it is still too early to draw any meaningful conclusions about the full year impact on new insurance written, persistency and insurance in force growth. We expect that the increase in unemployment and economic uncertainty resulting from initiatives to reduce the transmission of COVID-19, putting shelter-in-place restrictions will negatively impact our business. In the current environment because of many uncertainties pertaining to COVID-19 as we discussed in our Risk Factors and in the 10-Q is very difficult to confidently forecast the impact of our financial results and capital position. However, as we enter this period of uncertainty with a book of business that is of high quality with low delinquencies and we’re supported by a balance sheet that has a lower debt to capital ratio and nearly $6 billion investment portfolio, contractual premium flow and a robust reinsurance program. We estimate at the end of March we had approximately $1 billion in excess of the minimum required assets that are required by the private mortgage insurance eligibility requirements or PMIERs of the GSEs Fannie Mae and Freddie Mac. We also had $2.8 billion in excess of the minimum state capital requirements. During the quarter, we repurchased 9.6 million shares of our common stock. While there’s $291 million remaining under the authorization that expires at the end of 2021 and approximately $563 million of cash and investments to holding company, due to the uncertainty surrounding COVID-19 we have temporarily suspended share repurchases. During the first quarter, we received fewer new notices in the same period last year, but reflecting the current environment we used a slightly higher claim rate on those notices. Not surprisingly, delinquency notices received in April increased from the number received in March and we anticipate that more significant increase will occur in May and June, especially in light of the reported forbearance rates on GSE loans over the past several weeks. As a result, we expect our losses incurred will increase as well our PMIERs minimum required assets. The magnitude of any increased loss incurred will be a function of the number of notices received that eventually results in a claim paid. Understandably, there are a lot of questions about the potential impacts to our business caused by the COVID-19, notably the potential for higher incurred and ultimately higher paid losses. Unfortunately today we do not have sufficient data available to address some of the level of confidence we would like. With that, let me turn it over to Nathan.

Thanks, Tim. I’ll spend a few minutes talking about the first quarter and then we’ll turn to some of the uncertainties that Tim mentioned. In the first quarter, we earned $149.8 million of net income or $0.42 per diluted share, which compares to $151.9 million of net income or $0.42 per diluted share from the same period last year. Net premiums earned increased 4% compared to the same period last year, which was primarily driven by two factors. First, insurance in force was higher, although this was partially offset by lower average premium rates on that insurance in force. Second, accelerated premiums from single premium policy cancellations increased $6 million, increased from $6 million in the first quarter of 2019 to $18 million in the first quarter of 2020, reflecting the strong refinance market. Net losses incurred were $61 million compared to $39 million in the same period last year. In the first quarter of 2020, we received approximately 9% fewer new delinquency notices than we did in the same period last year. The estimated claim rate on new notices received in the first quarter of 2020 was 9%, which is higher than the 8% rate that we used the last several quarters, reflecting some level of uncertainty given the current macroeconomic environment, especially for borrowers that were delinquent before the broadest impacts from the COVID-19 pandemic. Over the past several quarters, we had recorded favorable reserve development including $31 million favorable development in the first quarter of 2019. In the first quarter of 2020, our re-estimation of reserves on previous delinquencies resulted in $3 million of adverse loss reserve development. In the first quarter of 2020, we also increased our incurred but not reported, or IBNR, reserve from $22 million to $30 million. The number of loans in our delinquency inventory remains near 20-year lows and decreased in the quarter, reflecting the low level of the delinquency inventory and improved cure rates, the number of claims received in the quarter declined by 21% from the same period last year. Primary paid claims declined 19% from $57 million to $46 million. We would expect claim payments to slow over the next few months due to the foreclosure moratoriums that are in place. The net premium yield for the first quarter of 2020 was 46.6 basis points. Net premium yield has several components, the largest component is what we call the in force portfolio yield, which reflects the premium rates and effect on our insurance in force. The components of the net premium yield are detailed in today’s press release. We continue to diligently monitor net underwriting and other expenses, which before seeding commission totaled $56 million in the first quarter of 2020. A material portion of the year-over-year difference is related to certain expenses tied to our stock price. During the first quarter, MGIC paid a total of $390 million in dividends to the holding company. MGIC is not planning to request from its regulator, the Wisconsin OCI, a divided to be paid 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 the COVID-19 pandemic on our business. We also ask the Wisconsin OCI not to object before MGIC pays dividends to the holding company. As Tim mentioned, during the first quarter, we repurchased 9.6 million shares of our common stock for a total cost of $120 million. We have approximately $291 million authorization remaining under our $300 million share repurchase program, which runs through the end of 2021. However, due to the uncertainty surrounding the COVID-19 pandemic, we have temporarily suspended repurchases. As disclosed – as previously disclosed, the Board declared a cash dividend of $0.06 per share payable May 29. Any future dividends will be determined on a quarterly basis and approved by the Board. As of April 30, we have approximately $545 million of cash and investments at the holding company. Our next debt maturity is an approximately three years and our interest expense is approximately $60 million per year, of which $12 million gets paid to MGIC. At quarter end, our consolidated cash and investments totaled $5.9 billion, including the cash and investments at the holding company. Investment income increased year-over-year, primarily as a result of a larger investment portfolio. The consolidated investment portfolio had a mix of 80% taxable and 20% tax-exempt securities, a pretax yield of 3.1% and a duration of four years. The net unrealized gain of the portfolio was $175 million at December 31, 2019, $83 million at March 31, 2020 and $142 million at April 30, 2020. At the end of the first quarter, our debt-to-total-capital ratio was approximately 17%, and MGIC’s available assets for PMIERs purposes totaled $4.3 billion, resulting in a $1 billion excess over the minimum required assets. I realize many of you want to know primarily for thinking about future GAAP results, what delinquency rate we expect during the duration of this crisis and how we will establish the claim rate and severity factors that we use to reserve for expected claim payments. So I want to spend a couple minutes addressing those questions. Our process will be grounded in the same process we consistently use to establish loss reserves. Over the next several months, we will monitor the level of new notices received, the level of delinquency secured, the uptake of forbearance plans and current and expected economic activity. And using that data, we will establish reserves that reflect our best estimate of the ultimate loss on both new and existing delinquencies. Ultimate losses are those items that we expect results in MI claims and our net of expected cures, including cures due to successful loan workouts after a forbearance period is over. Increased delinquencies are expected to begin in the second quarter. Therefore, when we report our second quarter results, we will have the benefit of observing the actual loan activity for the next few months, the impact of the various forbearance programs as well as changes in employment and general economic activity. These observations will be very informative as we establish claim rate and severity factors over the next few months. Under the CARES Act and programs initiated by the GSEs, borrowers experiencing a hardship during the COVID-19 pandemic may obtain payment forbearance up to 360 days or current loans that initiate a COVID-19 related forbearance are not reported as delinquent for consumer credit reporting purposes. If the borrower does not make payments during the forbearance period, they will be treated as delinquent for the purposes of the PMIERs, so they are reported to us as such, from loan servicers. PMIERs generally require us to maintain significantly more minimum required assets for delinquent loans than for performing loans. The PMIERs required asset factors for delinquent loans are based on the number of mispayments and whether a claim has been received. The PMIERs provides for those factors to be reduced on loans that are reported delinquent that are in a FEMA declared major disaster area. Specifically, this reduces the minimum required asset charge by 70% for at least 120 days from the initial default date and longer if the loan is subject to a forbearance plan that is in a state where the FEMA major disaster declaration provides for individual assistance. Currently, we estimate that approximately 90% of our risk and floors is located in FEMA designated disaster areas with individual assistance. We expect that servicers will be reporting a delinquent loan that is in forbearance to us just as they are required to do for the GSEs. This results in a smaller incremental capital requirement for each new delinquency. However, because we cannot predict the number of delinquencies that will occur nor how long they will persist, we cannot currently estimate the increased amount of minimum required assets, who will be required to hold as a result of the COVID-19 pandemic. This estimation exercises further complicated for future periods. As assumptions need to be made about a number of items including the level of new business written and persistency. In the portfolio supplement posted to our website, we provided an illustrative example of the level of incremental delinquencies that our current excess of available assets over PMIERs Minimum Required Assets could have absorbed on a pro forma basis as of March 31. Making certain assumptions in order to simplify the analysis on a pro forma basis, it would have taken approximately 235,000 incremental delinquent loans to consume the $1 billion excess available assets that existed at March 31, after considering the quarter share reinsurance and assuming all incremental delinquent loans received the 70% reduction for FEMA declared major disasters. With that, let me turn it back to Tim.

Thanks, Nathan. Before moving to questions, it is clear that the last couple of months have changed nearly everyone’s personal and professional agendas and objectives. That includes the regulatory and political topics we normally discuss. Nearly all the attention in Washington, D.C. that was centered on housing reform has been temporarily paused and the attention has turned to how to keep the housing finance market functioning in the current and post COVID-19 world. We expect that the GSE capital rule, the reproposed QM rule, including GSE Patch and other reviews by the FHFA of GSE activities will all be delayed for some period of time. Now the government reaction front significant numbers of actions have already taken to help the American consumer and economy weather their crisis. These actions include among other items, direct payments to consumers, the Paycheck Protection Program to enhance unemployment benefits. On the mortgage front, the GSEs and some lenders have taken a number of steps to ease certain origination guidelines, while appropriately tightening others. Nearly, all the changes that GSEs have put forth are either supportive of making a refinance easier to complete, which improves the borrower’s ability to pay, for supportive of ensuring that the borrower’s ability to pay on a purchase transaction is sustainable. On the servicing side, the GSEs and the CARES Act suspended for closures for at least 60 days to make available loan forbearance programs for borrowers experiencing financial hardships. These forbearance programs can last up to 12 months, and at that point, a loan workout or modification can be completed as appropriate, which will bring the loan current. We believe these programs, much like the GSE programs for hurricanes and other natural disasters are designed to help borrowers avoid adverse credit implications and foreclosure while they are temporarily unemployed as a result of the disaster. Historically with hurricanes or other natural disasters, these programs are very successful and most borrowers who entered forbearance plan were reported current several months later, as the temporary hardship ended. Of course, our nation has never seen a dramatic reduction to the economy in such a short period of time like it’s occurring now. As Nathan discussed, these programs have PMIERs implications and we and all the other mortgage insurers are engaged constructive discussions with the Federal Housing Finance Agency and the GSEs to gain more clarity about the application of PMIER on a longer term basis, including the requirements to continue to reduce the Minimum Required Assets for loans and forbearance by 70%, as well as the application of several other provisions of PMIERs in the current environment. While other market options for current enhancement are unavailable, our industry and our company continue to provide credit enhancement solutions to lenders, borrowers, and the GSEs. While our priority is working on prudent solutions and responses to the current environment, we continue to be actively engaged in housing discussions and policies and we continue to advocate for and remain optimistic that the changes do occur will include the use of private capital, including private MI. Long term, we still remain encouraged about the future role that our company and industry can plan in housing finance, so it continues to be difficult to engage what actions may be taken in the timing and the any such actions as a result of COVID-19. 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 entered this period of uncertainty with a book of business that is of high-quality with low delinquencies and we were supported by a balance sheet that has a low debt-to-capital ratio, nearly $6 billion investment portfolio, contractual premium flow and a robust reinsurance program. In closing, as I mentioned at the beginning of my remarks, in addition to the health and safety of our employees, we are focused on continuing to provide critical support to the current housing market and 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 it’s continually provided borrowers and lenders with affordable and prudent low down payment options. I am 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.

[Operator Instructions] And your first question comes from the line of Jack Micenko of SIG.

Good morning, everybody. Hope everybody is well. Nathan, going back to the illustrative example, you talked about 235,000 DQs, I guess that’s about a 22%, 23% DQ rate on where the portfolio stands today. When you talk about the available cushion, are you assuming that those 235,000 sort of matriculate through the 2% to 3% to 4% to 6% to 6-plus bucket over time? Or is that a point in time? And I’ll just stop there for my first question. Thanks.

Yes, thanks for the question. It is, and I think we did try to footnote on the assumptions, it does assume that all incremental delinquent loans are in the two to three mispayment bucket. It was really meant to be kind of at a point in time view as opposed to something more over time.

Got it. Okay. And then, I guess with the IBNR and the negative development, there’s kind of doing what you can ahead of time. I know you’re limited per accounting rules. What was in the 8% to 9% claim rate assumption? Can you remind us what that was around hurricanes? And then maybe lastly, what your claim rate assumption was or actual observed claim rates maybe were for 740-plus FICO business, in the sort of 2008, 2009 time frame?

Yes. I can certainly take the hurricane-related part of that question first here. We have used lower claim rates on hurricane-related notices in the past, claim rates in that 3% to 4% range. In terms of specific ultimate claim rates on delinquent items or cohorts from the crisis, I don’t have that directly in front of me, but I think we have – we did experience, on an overall basis, claim rates higher than the – certainly, the 8% or 9% that we’re using today. But I don’t have a precise number for you.

Okay. So then just one more for me. A big increase year-over-year in NIW. I think you had a little bit more refi as well. I think you were like 35% refi. Anything there? Or is that maybe against an easier comp one year ago? Or just kind of some color there because I think you’re year growth rate was pretty well in excess of the others that reported so far.

Yes. I mean, I don’t think anything – I mean, I think, obviously, a little bit from a comp standpoint, as we look to deploy our capital and win the business, where we think there’s a good risk return, that can move around quarter-to-quarter. And so I don’t know – I don’t think it’s any conscious trend, let’s say, to target specific segments there versus just as we look at sort of what the right risk return is. We’re very happy with what we were able to acquire from NIW in the quarter.

Thanks. Also I appreciate it. Good luck.

Your next question comes from the line of Bose George [Keefe, Bruyette & Woods].

Good morning. So just actually going back to that Slide 8, the – just when you look at your capacity, the 24.3% that you note there, I mean the capital at the holding company is incremental to that, right? So I mean, like a pro forma number, we could sort of assume that capital is there as well to beat any need to forbearance to do it both of that numbers. Is that right?

This is Nathan. Yes, that’s correct. That PMIERs excess represents the funds that are in MGIC today. So it doesn’t include any of the funds at the holding company. The other thing I would point out, we also have – MGIC has subsidiaries with approximately $300 million of capital that are not counted in that PMIERs excess as well, although it is included in our statutory capital. So from a levers to increase that, certainly have more than just the holding company.

Okay. So when we think about the availability to – in a stress case, there’s the bit of a $360 million-odd at the holding company plus this $300 million at the subsidiaries?

Both. This is Mike. Yes. I mean, technically, yes, that’s right. I mean, I think you’ve got to be somewhat cautious when contributing holding company. Holding company has obligations, right? So you can’t assume that all capital is available. All the cash is available there. Certainly, there’s interest carry and so on. So – but on a technical basis, you are correct.

Okay. Great. And then actually, I just wanted to ask about pricing in the market. Peers have talked about price increases, what are you guys seeing? Do you have to raise prices? And if so, kind of what magnitude?

Yes. It’s Tim. I’ll take that. As we look at premium rates, as we always do, we consider the credit mix, what our loss expectations are and the capital charges we have to hold against that business we write. So accordingly, we did change, we react to the change conditions. And depending upon the risk characteristics of the loan, we did increase our premium, probably approximately somewhere 10% to 15% within our risk-based pricing engine MiQ, that approximated probably about 55%, 60% of our business as of 3/31.

So okay. Great. Thank you.

Our next question comes from the line of Chris Gamaitoni from Compass Point.

Nathan, of the $463 million of remaining ILN coverage, how much of that reduces the minimum required available assets under PMIERs?

Yes. I think maybe I’ll answer the question a little bit differently. I’d maybe just give you the number that is – I don’t have the number that I think you’re asking for there, but the number that – the difference between the amount of ILN outstanding and the credit that we get under PMIERs as of 3/31 was about $26 million.

Okay. That’s very helpful. And from an accounting standpoint, completely understand guessing the right default-to-claim for these forbearances will be really difficult. But as we progress, how do you evaluate whether or not you have to true-up that initial estimate? Meaning the programs give a borrower six months of forbearance and up to 12 months automatic extension, so it strikes me as the aging of those delinquencies is kind of irrelevant to that comp until the forbearance is over. So is it primarily just macroeconomic changes underlying the model? Or how does kind of the development factor you view versus your initial estimate?

Yes. It’s Nathan. I’ll take that one. I do think there’s a lot of uncertainty as to whether people that enter forbearance plans will kind of automatically not make six payments. I think we’ve seen some data points that indicate that even after people are entering forbearance, they are still making payments. So I guess that would be one thing that over time we’ll certainly have more information on what is the aging look like, and I think even my initial reaction was that people will automatically go for the full six months or full year. But I think the early data would indicate that, that may not be the case. I think the point about aging being not as relevant for forbearance loans than non is certainly a factor that over time, we will have to think about how to appropriately reflect that. But I do think that you’re correct that it’s certainly different. What that ultimately means for us in terms of development or claim rate picks out into the future, I think there’s just – there’s a lot of uncertainty.

Okay. And then on the amount of capital you have to handle – forbearance delinquency is very high, at least from what we know today, where forbearance rates are. Have you changed your NIW targeting in any way that focuses specifically on, call it, the new performing PMIERs load? Or is it still focusing – your targeted focus is just trying to do the most business where you think the best economic return is?

Chris, this is Tim. I think it’s the latter. We aren’t – what I read into your question, sort of the first part was, we somehow trying to, I guess, control the amount of NIW we write to conserve amount of the capital, I think that’s not the case. We are very focused on the risk return and deploying capital where we think we can get the appropriate returns, and that’s sort of our – that’s where we are currently. I have expectation that’s where we’re going to be, but feel that, that’s the equation that we’ve been dealing with for a while and expect that’s going to continue.

Perfect. Thank you so much. That’s all I had.

Our next caller is Mihir [Bank of America].

Thanks for taking my questions. And I hope everyone saying safe and healthy. I just wanted to start going back on forbearance and forbearance trends. I guess the first question I had was just wanted to get a better understanding of how much data do you actually get in terms of what is coming? So does the servicer tell you that, hey, these loans have gone into forbearance, even if they are not two payments delinquent? Or is it, this loan is now two payments delinquent, so you kind of just are reacting for how much like just additional advances noted?

Yes. Sure. This is Mike. I followed it all right. It was a little choppy write-up, but as far as the reporting from servicers, you’re right. So let’s just start kind of just remind us kind of the flow on a monthly basis. So late in each month, we receive files from servicers. So for example, in the – in late April, we received files that revealed to us loans that were delinquent, missed their March 1 and April 1 payment, and then that’s what triggers the delinquency reporting to us, all right? That’s kind of standard. Fair. Included in the reporting that comes to us is that they – like they – like they do with the GSEs, they need to report loans that are either – what is the delinquency status? What’s the reason for the delinquency? Is it in forbearance? Is this not in forbearance? Is it in a repayment plan? It’s various coding. Now a lot of that, we do rely upon the servicers to get that in. So the reporting will come in, but it has to – we rely upon the servicers to do that information. So we will – we do expect to receive it coming in. Servicers, along with the MI industry, along with the GSEs, they have been working together to make sure that the coding gets recorded appropriately. And so we do expect to receive it coming in. We have not received much information to date, right, because these are going to be – we expect an increase of it going forward. We have received some very limited data through the month of April, that it’s consistent somewhat with the forbearance rates that we’ve seen been reported in the press by MBA surveys, Black Knight data. But I would caution to say that it’s what we know. We don’t know if that’s an all-inclusive number because we’re only getting reported loans that are delinquent. So for example, if a loan is current and enters into a forbearance period, it will never be reported to us if it continues to make those payments. Because it’s not past due and won’t beat the trigger for reporting purposes. So hopefully, that’s responsive to what your question was.

Yes. No. Actually, on that last one, if I could just clarify. So if – so just – sorry, if I make my – let’s say, a borrower makes that March payment, then COVID happens, they’re proactive, they call their servicer, they enter into a forbearance plan, and then they missed their April and May payment. Would that – that borrower would still be considered delinquent, right, in June?

The loan – we would expect that loan to be reported to us due for April 1. We would get that filed in June, and we would expect it to be reported delinquent to us, yes. What I was pointing out here was that they made their April 1 payment – or they made the March 1 payment, entered into forbearance and then made their April 1 payment, we would never see, but they’re in a forbearance, they’ve accepted it, that would not be reported delinquent to us.

Okay. No, understood. Thank you. That is actually helpful in clarifying. And then just one other question in terms of your reinsurance plans and what you’re seeing in terms of the ILN market or even QSR. I guess, you just entered one. But just want to make sure what you’re seeing in there, any comments you have? Thank you.

Yes, this is Nathan. Yes, you mentioned our quota share program, we did – we do have a 30% quota share covering the majority of our 2020 business. In terms of the ILN market, I think what we’ve always said is that we would like to be programmatic issuers in that market when it makes sense. Right now I think that market is really distressed still. Really, the ILN market has always been, I would view it as a subset of the GSE CRT market. So when the GSE CRT market opens back up for primary issuance, and I think that will be the first positive indicator for potentially future ILN issuance out of the MI space.

Understood. Thank you. Those are my questions. Thank you.

And caller, please introduce yourself.

It’s Adam Starr at Gulfside Asset Management. Are you still collecting premium on loans that are in forbearance, whether they’re delinquent or not?

Yes, Adam, it’s Mike. Good to hear from you. Yes, we do continue to receive premium, and we would expect to continue to receive premium from the – on all policies, whether they’re current or delinquent. Now – and just as a reminder, though, once the loan goes delinquent, our master policy does not – because it is a delinquent, the event occurred, the servicers are typically not obligated in our policy, but they are obligated under the GSEs to advance that premium to it. But as we do get paid premium on delinquent loans, we set up a reserve based on estimated claim rates for a refund of that premium back. So we don’t count delinquent premium that we expect to be associated with claims as revenue.

You get the cash, but you don’t accrue it in earnings. You offset it.

Correct.

Thank you very much and wishing you all the best and appreciate your doing the call.

Thanks.

Okay. Your next caller is A. Winston from Pilot Advisor.

Hi. Thank you. In following-up Adam’s question, I was curious if you could give us some sense of the cash collections of premium say for April compared to January or February and actually cash coming into MGIC from the premiums.

Yes. This is Nathan. We didn’t notice any really meaningful change month over month as we looked at January to February to March to April. And there’s a little variability with just single premium policies, because obviously that premium is all paid up front. But in terms of the renewal policies that I think are kind of the focus of the question. That’s something that we just haven’t seen really any, any change in.

So basically the mortgage services for the most part are reasonably healthy is what you’re saying?

this is Mike. I want to say, just reiterate what – I wouldn’t want to make any statement about others, but we’re receiving the cash, as Nathan described.

Thank you very much.

Okay. Your next question comes from the line of Sam Choe, Credit Suisse.

Hi guys. I’m on for Doug today. So I just wanted to ask one of the earlier questions in more of a broader sense. So when we’re thinking about like the 2017 hurricanes and other natural disasters how – like what are the key takeaways that we should be thinking about, whether it’s credit related and operationally?

I guess – it’s Tim. Just, I mean, the way I – we addressed a little bit in the opening comments. I think what we learned from that is that when there’s government intervention and allowed for forbearance that there’s going to be a pretty large uptick, and if those can sort of clear up in a few months as people get back their employment, I think what we tried to point out early on is, there’s some similarities here and that there’s a wide spread sort of impact and unemployment and widespread forbearance obviously being offered, and so we expect there to be a large uptick. I think a little bit of difference here is we don’t know how long the economic uncertainty will last. And so I think while we’re all hopeful that the economy gets back working and people get their jobs back very quickly and if that means that they’ll come out of forbearance within a few months and relatively quickly, like they do following a natural disaster, the reality is, we don’t know that. It’s not an exact comp. But especially with the uptick in the foreclosures or in the forbearance, we expect to see similar. So I think that’s why we use the natural disasters and the hurricanes as a starting for the comp.

Okay. Another question. Do you guys keep track of employment statistics for your customers? And if so, like, are you able to share that data?

Sam, it’s Mike. The information that we have is always at the point of origination whether that’s the FICO scores, et cetera. So the short answer, I guess, would be, no, we don’t have current employment information.

Got it. Okay. Thanks so much.

Thanks.

Okay. Mr. Dunn [Dowling & Partners], your line is open.

I’m not sure if that’s for me. Am I on?

Yes. Go ahead Geoff.

Sorry, I couldn’t hear the operator. I just want to have one clarification on the analysis you put out. In the footnote, it says ILNs are not considered. Is there an incremental adjustment we could also make to further refine the analysis? Or are ILNs effectively already in there because of the benefit they have on MRA and are reflected in the $1 billion excess to PMIERs.

Geoff, it’s Nathan. That’s a good point. I mean the insurance-linked notes are included in that $1 billion PMIERs excess. Certainly, I think when we said, not considered, it was more of the additional $26 million that Chris had asked about before, which is the amount of ILN capacity to absorb PMIERs that’s not currently taking as a benefit today.

So theoretically, it’s $1.26 billion if we wanted to adjust instead of $1 billion, round numbers.

Yes. The $23 million is not included in our PMIERs excess.

Got you. All right. Thanks.

Thanks, Geoff.

Your next question comes from the line of Phil Stefano, Deutsche Bank.

Yes. Thanks. I guess I am somewhat following up for Mihir’s questions earlier. When we look at the – some monthly defaults that you had reported, April had – it feels like a bit of a pop in it. And I guess in my mind, I partially suspect that maybe there’s some forbearances that you’re treating as defaults, even though it’s not technically a default? But it feels like that’s not necessarily the case. And is there anything in April that you’re aware of? Or why the reporting of new defaults may have ticked up than what we saw from Q1?

Phil, I think there are likely some forbearance within the April numbers, and I guess the way I sort of think about it is, there were likely people who had missed their March payment already before the COVID-19 sort of impact started to happen. And as they got to their April payments with the CARES Act and things that were in place, they sort of entered forbearance, and then that meant that they did not make their April payment and so saw that uptick. What I think what we’re expecting is to see more of an uptick in the May and the June and for people who would have been fully current prior to COVID-19, who then start to miss their payments. So I think what you’re seeing in April is people who would have missed a payment and a lot of times, those will never get to us, but with COVID-19 and sort of the forbearance in place, ended up missing the second payment, maybe otherwise would not have missed their second payment and then reported delinquent to us.

Sorry, Phil. I just want to add to that. Within that April delinquency number that we reported in the press release, we have gotten some reporting from some servicers, and so there’s approximately 2,500 forbearances of those delinquent loans have been reported to us, so that’s about 8%. But we don’t know if that’s the entirety of the population that’s in forbearance, so we haven’t gotten complete reporting from all services, but we have gotten some.

But I guess, is it the right way to think about that this cohort or this uptick is that people who are teetering on defaulting and then the world kind of fell apart around them and it just gave them a lifeline to go into forbearance?

Phil, every family makes their own decisions, and we don’t have visibility in, so it’s hard to draw those generalities or we’re reluctant to draw those generalities. I’m not saying what your hypothesis could be is incorrect. But I wouldn’t want to, I guess, reinforce that because we don’t have good visibility into that.

Fair enough. So my second question is – and it’s likely premature, but I wanted to talk about the contingency reserve. And to the extent that the loss ratios for the year got above 35%, what’s involved in the consideration of trying to access that reserve? Or why would you? Why wouldn’t you? How should I think about that?

Yes. It’s Nathan. I mean, you’re correct that the way the rules work on contingency reserves is, if the loss ratio for the year is above 35%, then we can release that contingency reserve. The release is done on a first-in, first-out basis. So you’d really be releasing from contingency reserves that we added in maybe the 2013, 2014 time period. I think – I view that as almost formulaic as opposed to a judgment that we would make to release it or not. It’s really just kind of set aside capital. So moving it from contingency reserve. Really, it just moves into surplus at that point. I think that’s something that we’ve consistently done when we have had loss ratios that allowed us to release contingency reserves. So I wouldn’t view it as something that really there’s a lot of decisioning on, just something that would naturally happen if we were in that circumstance.

Okay. Got. I guess, this is more – there is a bit of discussion to it. Got it. Thank you so much.

Okay. Next caller, please introduce yourself. Your line is open.

Sounds like breakfast.

Hello?

Hello? Yes.

Sorry, it’s Mark DeVries [Barclays].

Hey, Mark.

Sorry for the confusion. So a question I have is, are there any assets available to the holding company outside of the cash there that could be used to support the writing company? Anything like committed undrawn lines of credit?

Mark, this is Nathan. No, we don’t have a credit facility at the holding company at this time.

Mark, this is Mike, I just want to make sure you heard the earlier comments Nathan made about other subsidiaries that are not that we have. I think he mentioned $300 million that’s on other subsidiaries that’s not in the MGIC available in that excess, reflected in that cushion.

What I – I didn’t hear the response. I don’t know if you gave this outside of the commitments of the holding company, how much you view is available to push down, if necessary?

Well, I think – I mean, this is Nathan. At this time, we’re certainly evaluating how new notices come in, but feel like with the things that – not only the PMIERs access that we currently have and its currently have and its ability to withstand large increases in delinquent loans, but also some of the other levers that Mike mentioned with capital at other subsidiaries of MGIC that would really just be upstreaming capital back to their parent company. That gives us even more flexibility. And then this obviously will take place over some period of time, and we’re still generating strong cash from operations even in this environment, which will organically generate capital. So I think we feel like we have a lot of levers that would be pulled before we go to the holding company and think about funds there.

Okay. Got it. And then in the scenario you laid out where you could absorb up to – you could see delinquencies up to 24% and have that all absorbed by your existing excess. How do you think about whether FHFA would want to see you with delinquencies really high and rising have some level of cushion over and above kind of your required assets?

Mark, it’s Tim. I think it’s something that we think of, and I think it’s a good question to ask. I don’t know what the exact answer is. My view is we’re an insurance company. PMIERs are put in place to make sure that us, as MIs compare claims. Obviously, the FHFA and GSEs as they look and they can change PMIERs whenever they want to. What they want to do is make sure they get paid their claims. And so I think I feel comfortable with sort of the thought process we went through; obviously, feel good about the relationship with them and that they’re being thoughtful about this. It’s really tough though to know if they would say we need to have some excess of where we are, but we’ve always operated under the assumption that they could change PMIERs if they want to, if they felt like they needed to. I haven’t received any indication that will lead me to believe that’s the case at all. The only dialogue we’ve had, quite frankly, as an industry has been around some of the nuances of how to apply PMIERs to the current forbearance situation, knowing it’s not exactly on point with the hurricanes as long as – as far as how this long could be a duration for.

Okay. Got it. Thank you.

Sure.

And there are no final questions. I will now turn it back over to management.

Thanks, Sean. As we close, I just wanted to take a moment to appreciate all the first responders who are on the front lines of this pandemic. The courage is inspiring. For everyone else listening to the call, I just want to say I hope you and your families are safe and healthy. And finally, as we head into this weekend, I want to take an early moment to wish a happy Mother’s Day to all the mothers out there. So thank you for your interest in MGIC.

And this concludes today’s conference. You may now disconnect.