MGIC Investment Corporation (MTG) Q4 2020 Earnings Report, Transcript and Summary

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 listen-only mode. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the conference over to your host, Mr. Mike Zimmerman, Senior Vice President, Investor Relations. Sir, the floor is yours.

Thanks, Lara. Good morning, and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on this call today to discuss the results for the fourth quarter of 2020 and to provide a little bit of outlook for 2021 are 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 mtg.mgic.com under Newsroom, includes additional information about the Company's quarterly results that we will refer to during the call and includes a reconciliation of non-GAAP financial measures to the most comparable GAAP measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force 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 make 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 8-K and Form 10-K that were 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 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 and 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 in low and moderate wealth home buyers. 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. GAAP 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, particularly in the second quarter. So, that is why I'm 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 rate decreased to 5.1% at the end of 2020 and is below 5% as of 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 and is 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 remains 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 and 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 out of 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 NIW including $33.2 billion of NIW in the fourth quarter. This record amount of new business written more than offset the pressure of lower persistency in our existing books of business. And as a result, our insurance in force increased nearly 11% year-over-year. In fact, 2020 was the only the sixth time 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 PMIERs available assets exceeded the PMIERs 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, any changes to relative pricing of the FHA and the GSEs as those changes affect the consumer’s monthly payment. Coming off what was the largest market opportunity the industry has seen, which resulted in the most NIW our Company has ever written, we expect to write approximately 15% less new insurance in 2021, and that our 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, contractual 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 paid 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 if 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, Tim, 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 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 compared to $673.8 million or $1.85 per diluted share in 2019. Reflecting the impact of higher incurred losses, the return on beginning shareholders' equity was still a solid 10.4% in 2020 compared to 16.9% in 2019. On an adjusted net operating income basis, in the fourth quarter, we earned $0.43 per diluted share versus $0.49 per diluted share in 2019. 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 in 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 0.5 basis points from the third quarter level. The net premium yield declined sequentially, primarily because the premium yield on the in-force 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 in-force portfolio. This decline also reflects a decrease in the profit commission on our quota share reinsurance transactions, resulting from an increase in ceded losses, which flows to the net premium earned 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 same quarter -- pardon me, which was flat compared to 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 PMIERs 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% compared to 8% in the fourth quarter of 2019. While new delinquency notices were higher in the fourth quarter of 2020 compared to the same period in 2019, the primary driver of the increase in losses incurred was the minimal loss reserve development in the fourth quarter of 2020 compared to $24 million of favorable development in 2019. We also decreased our incurred but not reported, or IBNR reserve 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 IBNR reserve, we estimate the number of loans whose borrowers had missed a 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 in 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 the percentage of the COVID-19-related delinquencies to care, 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% from 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 of 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 discretely price our business. We have 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've been able to find other savings to offset the investments we've 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 million 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 realize 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 debentures due in 2063. These capital actions increased our liquidity and improved our debt maturity profile. Assuming no additional transactions, the annual debt service cost 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 the end -- 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 pretax 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 PMIERs. 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. 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 quota share transactions will provide us added capital flexibility. We are required to hold more assets under PMIERs for delinquent loans, and the amount of required assets increases as the number of missed payments 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 misspayment 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 and 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 that GSEs 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 in minimum required assets on loans and forbearance provided approximately $700 million in PMIERs 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 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 PMIERs 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 debate about the future state of the residential housing and mortgage finance industry including the appropriate roles for the GSEs and FHA and private capital continue without a definitive resolution. That's 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, it does not appear to be any short-term answer 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 and all the economic environments as demonstrated in the first half of 2020 when credit risk transfer transactions in the capital markets slowed, but the private mortgage insurers 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 homeownership, 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 writings 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 it 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 wellbeing 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.

[Operator Instructions] Your first question will come from the line of Mark DeVries from Barclays.

Thank you. I just had a question about prospect for capital returns, just given these improving delinquency trends, 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, could 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. The GSEs did put in their provision related to the 0.3 multiplier that there is -- with their approval, you could add 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 were overly prescriptive. We always keep good content, communication with our state regulator. So, feel good that as the environment hopefully continues to improve, we can have constructive dialogues there. So I think, obviously, over the next couple of quarters -- couple of months, couple of quarters, those are conversations that we'll 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 from 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. Pricing is just so dynamic and fluid with the introduction over the last couple of years of all the engine that it's hard -- 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. So, 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.

Your next question will come from the line of Doug Harter from Credit Suisse.

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

Yes. It's 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 or late 2020. But, rates are still pretty low for the loans that were being done at that time. Clearly, we've seen some benchmark rates pick up. The expectation kind of 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. So, that still remains to be seen. But, I think that's consistent with the market forecast of kind of lower refinance origination. So, I think those things kind of play off each other a little bit.

Yes. Doug, this is Mike. Just to add to that one, when we're talking about rates, we're talking about what the rates lenders are offering to borrowers. And clearly, the tenure is back, has already increased, but the spread between there and where rates are being offered, that is there. So, the offering to the consumer is effectively unchanged over -- it's still very good -- very attractive rates out there.

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

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

Your next question will come from the line of Jack Micenko from SIG.

Nathan, in your prepared comments, you talked a lot about investing in technology in 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 addressed it to Nathan, but I mean, I think I'm closer to the mix that comes through the different engines. I mean, it's quite frankly, as we've talked in the past, it's all a delivery mechanism. Right? So, obviously, we've got the published rate card that 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, negotiated card, it's all using the same technology and saying. So, we don't really look at it as 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 -- from last year.

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

Yes. Jack, it's Nathan. I would say, in terms of the increase, the substantial majority of that, I did mention kind of performance-based comp back to target levels. But, the substantial majority of that is kind of increased technology and process investments that we're making. I think, the way that we think about that is, 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 is increased efficiencies to be gained by those investments that we're making. Those will start to be realized, in some cases, probably beyond 2021 here. So, the actual -- the kind of long-term run rate level, I wouldn't necessarily benchmark it to where we are in 2021.

Your next question will come from the line of Randy Binner from B. Riley.

I wanted to ask a question about some of the commentary you had about the risk of being conservative around the forbearance plans rolling off. And clearly, this is an area to focus on, in general, but it's not a very big percent of your book overall, kind of low single digits, I think. And so, can you kind of quantify more or maybe kind of give us some 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'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.

Yes. This is Tim. I think, we talked about it in terms of, obviously, for the most part in terms of the reserves that we have. And I think you try to take -- talk about it conservatively because, I think, as Nathan mentioned in the prepared remarks, we've probably seen more loans actually resolve and cure that maybe we even expected, but there's still a lot that have not resolved at all. And we know that this going to extend it for a period of time. So, obviously, the concern even though that we have less downside risk because we have had some come cure out of there, the downside risk is that more of these ultimately go 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. Because I think if you think about home price continue to appreciate, 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 could happen in markets. And so, I think from our standpoint, we think it's prudent to sort of at least be cautious about how those could ultimately resolve.

That's helpful. And then just really quick on refi. I understand that general expectations for refi are lower, and I think MBA data plays a part of what you talk about when you’re talking about market data. But, I guess, I'd ask how is refi trending so far this year versus your initial expectation? And especially, there's some origination platforms that are newly public and are interested in growth, just rates are still relatively low. So understanding what the MBA is saying, is refi activity kind of more than you would have expected based on what you've observed so far in '21?

Hey Randy, it's Mike. Yes, 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 years compressed, right? So, it hasn't -- to 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 refi mix that's coming in from applications. And certainly, NIW, which trails several weeks, the application. But even applications remain I'd say at strong levels in the 40% range of refinance mix. And how long it goes on is right, it's hard to tell.

Your next question will come from the line of Bose George from KBW.

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

Bose, this is Nathan. I think, the expense ratio, I think, you're kind of thinking about it right for 2021 relative to the kind of incremental 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 ceded premium that we have and ceding commissions. 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 point, the $220 million to $225 million, I guess that number doesn't go down, just the cadence of the growth slows after '21, is that right?

Bose, it's Tim. 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 at 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's part of it. I'd say, the other part of it is to be able to be smarter as how we evaluate credit risk as well. But, I think 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 is that we should be more efficient because of it.

And then, just switching to a different topic. Just on the FHA, I just wanted to get your thoughts on, a, do you think there could be a cut there, 25 basis points, you think it's meaningful just given that the overlap is…

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 certain extent, I'm almost surprised that we haven't heard more recently or that something happened. So, I don't know if that's an indicator or if it's just sort of administration sort of trying to get things set up before they move on things. That all being said, if it's a 25 basis-point reduction, I think that obviously can make us a little bit less competitive around some of the lower end 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 change 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 loss business from an industry to a rate cut there, 25 basis points. It's something that I'd say, we don't feel like there is significant risk to the volume we're going to be able to write this next year, if that happens.

Your next question will come from the line of Giuliano Bologna from Compass Point.

Just kind of switching back to the credit topic and kind of capital and how you think about capital return, is there any kind of -- are there any events on the calendar that would really help accelerate the pace of kind of gaining more comfort? And what I'm thinking about is, as you see the first few vintages 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?

Yes, 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 time frames in 2020, they continue to resolve every month. So, I do think that an important kind of 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, the news has generally been favorable. There has been virtually no paid claims out of those cohorts, and we continue to see care 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, obviously that's your biggest indicator of whether or not your claim rate assumptions will be accurate because of 95% cured 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 kind of your credit methodology or your reserving methodology, I should say.

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

Your next question will come from the line of Mihir Bhatia from Bank of America.

Maybe I'll just continue on that same topic, maybe on the mechanics of reserving. Can you just give us a sense of, I think, a lot of investors are beginning to think about 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 on the mechanics of that process. What do you need to see? Is it that the -- 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 like -- 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, can you get -- as you get confidence that enough of those loans are maturing, will we start seeing reserve releases? So, like what are the mechanics involved here? Maybe help us with that. Thank you.

Sure. Good question. It's Nathan. 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, it has made -- I think it's made it more difficult to have a lot of conviction in adjusting your ultimate losses at these interim points. So, I do think that the resolution of forbearance items, like I said, every month, we are seeing some level of resolution. But, if you think back to our initial estimates for, let's say, second quarter of 2020, new notices, that largest cohort, we were something around 6.5% new notice claim rate there. So, while we've seen a significant amount of resolution, which has really -- has mitigated the potential downside scenario to our estimates, it's still, I think, too early for us to think about 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 get a much better sense of what's happening. And then, you could have a little bit of a cliff there from a whole bunch of them just go back to cure -- cure status, like they start making their 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.

Okay. Maybe on a different topic, you mentioned that you all are seeing a little bit more refi, the MI industry as a whole, but you all are just seeing a little bit more of the refi volumes than you typically see. So, just two quick ones on that. One is, historically, we've talked about it being 3.5 to 1 maybe between refi and purchase the sensitivity. Would that -- is that a little different now, as we think about the near term, or do you still feel good about that 3.5 to 1 purchase refi sensitivity, if you will?

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

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? There hasn't been -- is that -- 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.

Your next question will come from the line of Phil Stefano from Deutsche Bank.

On the expense guide of $220 million to $225 million, not to put a too fine of a point on this, but just to make sure, is the guide -- it's net of ceding commissions, right? A reported number? Is that the right way to think about that?

That's right. Yes.

Okay. Yes. So, switching gears, and I know there have been some questions about capital return, I suspect in some respects is probably -- it 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 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 PMIERs? It feels like people bearish on the MIs, want to always point out that the sector seems to be repurchasing shares is that exactly the wrong time. So, what have we learned over the past year, year and 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, at 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 kind of 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 ILN 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, it's 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 kind of 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 I think, we've demonstrated that we can do meaningful shareholder returns via share buybacks as well. But, I think, key to having meaningful returns there is dividends from the operating company again.

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?

Yes. I think, Mike's got the numbers, he'll give them to you in a second. But just -- 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 of -- 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, we'd just caution that just because the average loan is kind of not underwater, let's say, that means that we could potentially not have many claims.

Well, I’m going through my papers here to try and find it. I don't have, but I'll tell you to underscore Nathan's point, I mean, I think of our delinquent inventory, the majority of it has -- I think, it's around 90 -- certainly less than a 95 and less than a 90 mark-to-market and probably 25% below the 80 level. But again, those are at CBSA level and so on. So, not dissimilar to other distributions you've seen publicized…

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 now disconnect. Stay safe, and have a lovely day.