NMI Holdings, Inc. (NMIH) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, ladies and gentlemen, and welcome to the NMI Holdings Inc. Third Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to turn the conference over to your host, Mr. John Swenson. Sir, you may begin.

Thank you, Christian. Good afternoon and welcome to the 2021 third quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman, Claudia Merkle, CEO, Adam Pollitzer, our Chief Financial Officer, and Julie Norberg, our Controller. Financial results for the quarter were released after the close today. The press release may be accessed on NMI’s website located at nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we'll refer to certain non-GAAP measures. In today’s press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP. Now, I’ll turn the call over to Brad.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter National MI delivered strong operating performance, significant growth in our insured portfolio and records and the actual results. We achieved record adjusted net income of $61.8 million or $0.71 per diluted share. And record GAAP net income of $60.2 million or $0.69 per diluted share. Adjusted return on equity for the quarter was 16.6% and GAAP ROE was 16.2%. We ended the third quarter with a record $144 billion of high quality primary insurance in-force, up 5% compared to the second quarter, and 37% compared to the third quarter of 2020. We are helping more borrowers than ever before gain access to housing, and the growth in our insured portfolio reflects this strength. Credit performance in our in-force portfolio also continues to trend in a favorable direction. And we are increasingly optimistic as we look forward, given the quality of our underlying book, sustained resiliency of the housing market and strength of the broader macro environment. Shifting to Washington matters. Policymakers, regulators, the FHFA and the GSEs are increasingly focused on promoting broader access and affordability to the housing market for all borrowers. Expanding access to homeownership and all the benefits it provides, in a manner that appropriately guards against systemic risk is critically important. At National MI, we recognize the need to provide all borrowers with an equitable opportunity to access the housing market establish a community identity and build long-term wealth through homeownership. And we are actively engaged and committed to equally supporting borrowers from all communities. We believe there is broad recognition in Washington of the value that the Private Mortgage Insurance industry brings to this effort, providing borrowers with down payment support and equal access to mortgage credit, while also placing private capital in front of the taxpayer to absorb risk and loss any downturn. In summary, we had a terrific quarter and are well position to continue helping borrowers and delivering on the goals that we set for our business. Before I turn it over to Claudia, I want to talk about the succession plan that we announced in September under which Claudia will be stepping down at the end of the year, and Adam will be taking over as President and CEO on January 1st. I want to express my gratitude and the gratitude of the rest of our Board to Claudia for her leadership, and dedication to National MI. For the team focus on building a talented and diverse team and for the strong foundation she has established to support National MI's continued growth and success. Over her nearly decade long tenure with National MI, Claudia has overseen the growth of our customer franchise, and led the development of our underwriting and operational capabilities. Since her promotion to CEO in 2019, National MI has more than doubled its insurance enforce, and was recognized on Fortune Magazine's 100 fastest growing companies list for our combined revenue, net income and stock price performance. I'm excited at the opportunity we have to build on this success under Adams leadership and to continue to grow and deliver as a company. Adam joined National MI as Chief Financial Officer nearly five years ago, and he has been instrumental in shaping our Corporate Strategy and Financial success since. He is a talented and seasoned executive, with deep knowledge of the mortgage insurance market. He experienced and proven success as a Senior Leader of National MI, and he demonstrated commitment to our company, our customers, our people and our shareholders. Claudia and I and the rest of our Board are confident that, he is the right leader to guide National MI going forward. With that, let me turn it over to Claudia.

Thank you, Brad, and Thank you for your kind words. I spent nearly 10 years at National MI, and have seen the company grow into a high performing, high impact organization. My time helping to build and lead National MI has been the most rewarding of my career. It has been a privilege to work with such a talented and dedicated group of people, and to be part of an organization that's doing so much to advance opportunities for homeownership, equally across all communities. Our goal has always been to support our customers and their bars with a differentiated commitment and standard of service, while also driving responsible growth and our high quality insured portfolio and strong risk adjusted returns for our shareholders. I am grateful to our customers for their steadfast partnership and support and proud of the success we have achieved together. And now is the right time for me and National MI to make this important transition. I've worked closely with Adam for nearly five years. He's a talented executive, who has made National MI a better company from the moment he joined. He has helped shape our strategy and was instrumental in helping us navigate through the unprecedented stress of the COVID pandemic. I have complete confidence in his leadership and also in our broader executive management team. I know I'm leaving the company in good hands. Now to discuss the third quarter. Our team and business continue to outperform, we've delivered significant new business production, strong growth and our high quality insured portfolio and record financial results. We also enjoyed continued momentum and growth in our customer franchise, activating 29 new lenders. We are now doing business with a broadly diverse group of nearly 1,300 high quality originators, including 187 of the top 200 lenders nationwide. During the third quarter, we generated $18.1 billion of NIW including $16.4 billion of purchase volume. The purchase market remains strong with the key themes that have driven housing demand through the pandemic carrying forward. Rates remain constructive, despite our recent doubts. Millennials are entering the market at an increasing pace, providing a demographic tailwind for demand. And the experience of the pandemic itself continues to drive an emotional and practical pull towards homeownership, the likes of, which we haven't seen in the US since the post-World War II period. First time homebuyer demand is at a high and private mortgage insurance penetration of the purchase market continues to increase as a growing number of bars turn to our industry for down payments support. Refinancing NIW volume declined to $1.7 billion in the quarter and accounted for 9% of our total production, compared to $3.8 billion or 17% of our volume in the second quarter, as rising rates impacted overall refinancing activity, and the increasing equity position of many eligible homeowners drove a normalization of private mortgage insurance penetration of the refi market. The decline in quarterly refinancing volume was balanced by continued improvement in the persistency of our enforced portfolio. Our 12 month persistency ratio increased again in the third quarter to 58.1%. Overall, the private mortgage insurance market is closing in on another terrific year. We estimate the total industry volume will reach $575 billion in 2021. The pricing environment is stable and balanced, allowing us to fully and fairly support lenders and their bars, while at the same time appropriately protecting risk adjusted returns and our ability to deliver long-term value for shareholders. And credit performance continues to trend in a favorable direction, with underwriting discipline remaining paramount across the mortgage market, record house price appreciation providing a sizable equity buffer and broad strength in the macro environment supporting the consumer and household balance sheets. Looking forward, our view is positive. We are executing on our plans against a broadly constructive back -- market backdrop and believe we are well positioned to continue to drive growth consistently compound book value and deliver for our shareholders. With that I'll turn it over to, Adam.

Thank you, Claudia. I'm honored to be appointed National MI's next President and CEO and deeply appreciative of your leadership and support over the last several years. This is an exciting time and National MI, we're leading with impact and helping a record number of borrowers gain access to homeownership and we're here to do even more going forward. Our core mortgage insurance products are in greater demand than ever before and the increased digitization of the mortgage market has allowed us to expand our customer reach and accelerate our growth. We have a highly talented engaged team, a high quality and fast growing and short portfolio, a differentiated credit risk management strategy, and a robust balance sheet. Our commitment to our employees, to our customers and their borrowers, to our community, and to our shareholders remains the same and I'm looking forward to working with our talented Executive team, Brad and the rest of the Board of Directors to continue delivering strong results and value going forward. Now to the third quarter. We achieved record financial results in the period with significant growth in our insured portfolio and continued strength in our credit performance, driving record revenue and bottom-line profitability. Net premiums earned were record $113.6 million, adjusted net income was a record $61.8 million or $0.71 per diluted share, and adjusted return on equity was 16.6%. Primary insurance in force grew to $143.6 billion, up 5% from the end of the second quarter and up 37% compared to the third quarter of 2020. 12-month persistency in our primary portfolio was 58.1%, up from 53.9% in the second quarter. We expect persistency will continue to improve through the remainder of the year and into 2022 as refinancing activity slows and the record NIW volume that we've written at exceptionally low interest rates since the beginning of the pandemic, fully comes into the persistency calculation. Net premiums earned in the third quarter were $113.6 million compared to $110.9 million in the second quarter. We earned $7.7 million from the calculation of single premium policies compared to $7 million in the second quarter. Reported yield for the quarter was 32.4 basis points compared to 34.1 basis points in the second quarter, reflecting the strong growth in our insurance in force and the continued -- business that we originated in priced in earlier book years, as well as a reduced contribution from new single premium policies during the period. Investment income was $9.8 million in the third quarter compared to $9.4 million in the second quarter. Underwriting and operating expenses were $34.7 million, flat with the second quarter. Expenses in the third quarter included $1.3 million of costs associated with our upcoming CEO transition. We expect to incur an additional $2.5 million of transition related costs in the fourth quarter. Underwriting and operating expenses also included $481,000 of costs incurred in connection with our most recent Ireland offering in October. We expect an additional $1.6 million of Ireland issuance costs to come through in the fourth quarter related to the transaction. Excluding CEO transition and ILN related costs, adjusted underwriting and operating expenses were $32.9 million in the third quarter, compared to $33.1 million in the first quarter. Our GAAP expense ratio was a record low 30.5% in the quarter, and our adjusted expense ratio was a record low 29%, highlighting the significant operating leverage embedded in our financial model, and the success we've achieved and efficiently managing our cost base, as we've scaled our insured portfolio. We had 7,670 defaults in our primary portfolio on September 30, compared to 8,764 at June 30. Overall, our credit performance continues to trend in a favorable direction with an increasing number of impacted borrowers sharing their delinquencies and fewer new defaults emerging as the economic stress of the COVID crisis recedes. Our default rate declined to 1.6% at September 30, and the improvement continued in October, with default population declining to 6,988 and our default rate falling to 1.4%. Claims expense was $3.2 million in the third quarter compared to $4.6 million in the second quarter and our loss ratio defined as claims expense divided by net premiums earned was 2.8% compared to 4.2% in the prior period. We reevaluate the assumptions underpinning our reserve analysis every quarter. And as we progress through the remainder of the year, and into 2022, we'll consider among other factors, the performance of our existing borrowers, the underlying resiliency of the housing of the housing market and path of house price appreciation and the overall macro economic outlook to determine whether further changes to our claims reserves are necessary. Interest expense in the quarter was $7.9 million and we recorded no change in the fair value of our warrant liability during the period. GAAP net income was a record $60.2 million or $0.69 per diluted share for the quarter, and adjusted net income, which excludes periodic transaction costs, warrant fair value changes, net realized investment gains and losses and non-recurring cost associate with our upcoming CEO transition was a record $61.8 million or $0.71 per diluted share. The ILN that we closed last week, our seventh outcome reoffering builds upon our previous success in the risk transfer markets and extends our comprehensive reinsurance coverage across our most recent production. The $364 million deal is among our largest today, and provides us with coverage on risk originated primarily between April 1 and September 30 of this year, from a 1.85% attachment point up to a 7.45% maximum detachment. The transaction carries an estimated 3% weighted average lifetime pre tax cost. In October, we also completed the renewal of our quota-share reinsurance treaty with a broad panel of highly rated reinsurers. With the renewal, we have secured forward flow reinsurance protection for 20% of the new business that we generate in both 2022 and 2023. The new coverage carries better pricing, terms and conditions will be available for two years as opposed to a standard one year treaty and provides greater capacity than any other quota share agreement we've completed to date. We're pleased to have achieved such favorable outcomes in both the ILN and quota share market. Reinsurance for me is the core tiller of our credit risk management strategy, and an efficient source of growth capital for our business. Total cash and investments were $2.2 billion at quarter end including $79 million of cash and investments at the holding company. Shareholders equity at the end of the third quarter was $1.5 billion equal to $17.68 per share, a 4% compared to the second quarter and 15% compared to the third quarter of last year. We have $400 million of outstanding senior notes, and our $110 million revolving credit facility remains undrawn and fully available. At quarter end, we reported total available assets under premiers of $2 billion and risk base required assets of $1.4 billion. Excess available assets were 627 million, and our premier sufficiency ratio was 146%. In summary, we achieved record results in insurance in force, net premiums earned, total revenue, expense ratio, net income and adjusted net income. Our credit performance continues to stand out in a dramatic way. As we look ahead, we believe that we are well positioned to continue delivering strong mid-teen returns that are significantly in excess of our cost of capital. We expect that the growing size and attractive credit profile of our insured portfolio, and our broadly disciplined approach to managing risks, expenses and capital will continue to drive our performance. With that, let me turn it back to Claudia.

Thank you, Adam. We are excited about our record performance in the third quarter. Private MI market conditions remain strong. The housing market and macro backdrop present a compelling opportunity. And we believe that we are well positioned to continue to win with customers, drive growth in our high quality insured portfolio, maintain the right risk return balance and deliver strong results for our shareholders. We have a great team in place with Adam taking the helm next year, and a clear opportunity to continue to outperform going forward. Thank you for joining us today. I'll now ask the operator to come on. And we can take your questions.

[Operator Instructions] Your first question is from Mark Devries from Barclays. Your line is open.

Yes, thanks. Adam, I heard you call out kind of the, high level qualitative comments on what drove the Q-over-Q decline in the average premium. Can you able to quantify that for us in terms of how much each of those factors impacted it? And any comments on how those are trending for the fourth quarter?

Sure, sure, happy to. So again, in terms of specifics for the quarter, our Q3 yield was 32.4 basis points compared to 34.1 in Q2, so a little over 1.6 basis point decline. I'd say, it's in line with our expectations, given how we shaped our portfolio as a risk matter. And what we've seen in terms of persistency and turnover. In terms of the component pieces, I highlighted that the move from Q2 to Q3 traces ones that have strong growth in our insurance in force and continue to run-off of business that we originated in priced in earlier book years. That takes us together, if you will, was about half of the movement in our yield. The other half of the movement related to our singles NIW volume in the period or singles NIW volume in Q3 was $1.2 billion compared to $3.3 billion in Q2. And as an accounting matter, the premium recognition pattern for singles policies is higher, highest, in fact, in the period in which the policies are written, so a decline in singles NIW volume from period to period also contributes to a decline in the singles yield contribution in that same period. So it's about a 50-50 split between the two different components.

Okay. Got it. And any comments on how that's shaping up for the fourth quarter?

In terms of guidance for Q4, we don't provide anything explicit, but I would note that we did just complete an ILN offering, right, and that will bring some additional seated premium costs into Q4. And while turnover, right, the run-off of business with higher embedded yield from earlier vintages made slow with increasing interest rates, it will still have an impact, it won't go to zero. So net-net in terms of a general steer, we'd expect that our net yield will trend down in Q4 from what we reported in Q3.

Okay. And that's helpful. And then just turning to the policy front, I think, we continue to get more appointments at senior policy positions around housing. And obviously, some priorities expressed through the -- this Reconciliation Act. Any updated thoughts for you on what you're seeing out of Washington and kind of what it could mean for the industry?

Yes, Mark. It’s Brad, I'll take that. So expanding opportunities for homeownership and providing increased access to housing is really central to who we are and what we do at National MI. And you're seeing increasing efforts by the administration and other -- others in Washington to also expand those opportunities. So that's at the forefront of housing policy discussions today in a variety of venues, we can't really speculate as to what additional policies, initiatives or programs may come. But we think that these -- it's great that these issues are in such focus today. And we expect that National MI and the broader private mortgage insurance industry will have an important role to play in shaping the discussions and delivering solutions in the future. So I'd also note that a variety of interest groups have offered up ideas for where the FHFA should focus its initial access and affordability efforts, which include changes in area median income, requirements embedded in the HomeReady and Home Possible programs to expand their reach further amendment to the PSPAs to eliminate the high risk loan limits that went into effect in January, and possibly reduction or complete elimination of LLPAs. So we think all those potential changes will be part of the discussion going forward.

Got it. Thank you.

Thank you. Operator: Your next question is from Doug Harter from Credit Suisse. Your line is open.

Thanks. Excuse me, Adam, hoping you could give a little more color about the sequential increase in NODs in the quarter kind of, was there anything kind of behind that? And kind of how do you expect that to trend?

Yes. It's a good question, Doug. We had just to touch over 1,600 new defaults in the third quarter compared to about 1,100 in the second quarter. I’d say default experience, when we're talking about numbers, generally this small can move a bit quarter-to-quarter, right. Ultimately, there's an individual borrower behind each loan who's facing stress. And that stress and their individual experience doesn't develop along the linear path for us. When we think about it, the most important piece is that one total new defaults remain exceedingly low overall, that roughly 1,600 new defaults that we experienced in the quarter equates to about a 30 basis point new notice rate compared to our total 490,000 policies at period end. And our total default population itself is continuing to decline as cures [ph] meaningfully exceed new notices, right. We have 7,670 default as of the end of Q3, which was down 13% compared to June. Also Claudia shared on the call where we were as of October, which was 6,988. So just in the month of October, we saw another 9% decline in our total default population. What we generally see in Q4, is that new notices pick up, right, there are some borrowers who do family goals and constraints around holiday season will divert certain payment streams towards the holidays and other matters. And so, we tend to see a little bit of a seasonal bounce in new notices in Q4. It's too early to tell if that will still come through. But overall, what we're seeing in terms of the total default population is most encouraging that the total number of defaults continues to decline.

And can you just talk about the level of expected claims out of this quarters defaults and some of the incurred losses you experience from them?

Yeah, absolutely. So obviously, we're setting our best estimate and establishing a loss pick for each of those defaults individually and so, it will vary. As to the moving pieces that went into our claims expense estimation for the quarter, the biggest driver of movement and what comes through as a lower apparent reserve per new default that we established versus where we were last quarter is the record case of HPA. But given what's happening in the housing market, three months matters meaningfully and that HPA along with you know, other ordinary course changes that we make drove our frequency and severity estimates and really drove the estimation that we made for ultimate clean experience on that population in Q3. Overall, we still see a significant majority of new defaults that are being recorded on loans that are also reported in a forbearance program. Right, the forbearance programs while individual borrowers may be nearing the end of their 18 month forbearance windows. The programs themselves are still available for borrowers facing new hardships related to COVID. And in the quarter, about 85% of the new notices that we received, also had an indication that they were the borrower was in a forbearance program, which we think is terrific, like those programs are designed to assist borrowers and really help bridge them from a point of acute stress today to a better environment tomorrow. We think they will work that they will continue to work, and that ultimately will see significant cheer activity on the new notices that came through, as well as the existing notices that carried forward in our in our portfolio.

So those new that 85% are they eligible for up to 18 months from whenever they entered in during the third quarter?

Yeah. So there's one tweak to that, they're eligible for -- I'll call it full runway under the forbearance programs, there's no timestamp other than there was a shift when the -- when we rolled through March. In March and earlier borrowers who access those forbearance programs were given 18 months of runway and borrowers who access those programs after March have 12 months of runway. So there's an extended period of time. It's not quite as long as the 18 months, which was an extension for those earliest COVID related borrowers. But there's a lengthy runway of 12 months that's available for borrowers who now accept the forbearance program.

Thank you, Adam.

Your next question is from Rick Shane from JPMorgan. Your line is open.

Thanks guys for taking my question. Look, we look at the trends in terms of persistency in NIW. It's simple math. It's triggered a huge rotation in the portfolio over the last 12 months. One risk that occurs when that happens is that basically there's adverse selection in the portfolio that the loans that are unable to refinance away are the more challenge. I'm curious if there was anything from either a geographic, vintage or even risk profile perspective that stands out to you right now that we should be thinking about as we move forward?

Yeah, Rick, it's a good question. And what I would say is, the reason that borrowers don't pursue a refinancing for those who have, I'll call it, who are right who stand to benefit meaningfully in terms of the monthly payment reduction, isn't just because of adverse selection. And more often than not it's just because of every market has inefficiencies across the entire spectrum of markets that we might look at, and the same exists for the housing market and for the mortgage market. And so we're not seeing a call it, a meaningful shift in risk on the in-force portfolio. Instead, what we're observing is exactly the opposite. And for a few reasons, the overall quality of our portfolio continues to improve. One, there's meaningful equitisation of that, those early advantages that are that's coming through, right with the record pace of house price appreciation, where borrowers are building equity in a meaningful way every month, every quarter, that goes by, and that has the effect of moving us further away from risk in a positive way. And for what it's worth, it has the effect of also providing real value for those borrowers right. And moving them away further away from adverse outcomes related to their homeownership. And so for the older vintage business that hasn't refinanced. We're seeing improvement every quarter that goes by, given that HPA, right? And that comes through to a degree as around our expectations for ultimate, ultimate lifetime loss continue to improve on those vintages, notwithstanding, maybe on the margin if you have some adverse dynamics that that come through. And then with the record levels of new business production that we've been putting on, the other dynamic that we're seeing and said our portfolio was getting younger, in a positive way. So typical peak loss in current period for a mortgage is between year three and year six, which is historically that's when borrowers to get in trouble are going to get into trouble in the most pronounced way, for a variety of reasons. And as we brought so much new business volume on that itself is such high and strong underlying credit characteristics. It has the effect of drag dragging the overall credit profile portfolio higher, but also dragging the age of the portfolio younger-and-younger, which moves us further away from that period of peak loss currents that we would expect when we model things out. So it's actually been quite a positive for us, both, what's happening with HPA and the equitisation of risk for those borrowers that remain robbing refinance, and then all of the positives that come from the record level of production that we've had most recently.

Got it. Okay, that's very helpful and I appreciate it. That's it for me.

Your next question is from Colin Johnson from B. Riley. Your line is open.

Hey, thanks for taking my questions on. I think the reason Adam puts your available assets to required assets ratio, at or above that of last quarter? And maybe the quota share deal pushes it higher still it would it be fair to think of that as the kind of run rate cushion on PMR's that you would target going forward, or maybe, would it be better to interpret it as kind of just taking advantage of the reinsurance markets while they're accommodative that you have some flexibility to reduce it as needed as you go forward?

Yeah, it's a good question. I would say that, first and foremost, for us reinsurance is about risk management, right. These are structures that absorb losses stress scenarios, we've seen their value, they absorb loss in stress scenarios as a default matter. And they also absorb what I call it capital stress, if we have a spike in team’s here associated with rising defaults. And so we saw exactly how valuable they are through the course of the last 18 months and in particular, last summer for us. They obviously also provide us with real meaningful capital benefit, because when we take risk out of our system, if you will, we also get the benefit of a reduced amount of risk based capital that we have to hold against the portfolio. We have always said, and we continue to, we remain committed to being a programmatic issuer across the reinsurance landscape, we will continue to execute islands, because they allow us to distribute risk and manage the aggregation of that risk on our balance sheet. And we'll continue to balance that with quota share reinsurance coverage. As we roll forward, I would say right now we're still in a high growth phase, right, we are still a consumer of growth capital, we're generating more and more capital organically every day. But we need to supplement that organic capital generation to support our new business production. And we do that by periodically, I'll call it refreshing. And there's elegance between what we achieve as a risk matter and also the refreshing of that excess capital position to fund our future NIW growth. Over the long-term, we don't envision carrying a plus 50% PMR's cushion. Over the long-term, we're going to look to operate at roughly a 35% cushion above/or minimum required amount. And that number will naturally shift, right, higher in periods of increased macro volatility or when we have an AI that we're going to have significant NIW growth. And so I wouldn't take where we are today as necessarily a reflection of where we want to be over the long-term. Simply take what we did today as part of our programmatic plans to remain active in the reinsurance markets for risk transfer purposes. And also the fact that it provides us with a benefit to fund our future growth capital needs is an important one.

Got it. That's really helpful. And then just, kind of, looking as we see the expiration of forbearance plans start to ramp up. Do you, from your perspective, have any visibility into maybe what proportion of those loans exiting forbearance, especially in the last couple of months have some loss mitigation or other plan in place to avoid foreclosure versus those that don't have that?

Yeah. So what we've seen, I would say that, in terms of the heaviest exits from forbearance, right, we've seen a shift, those who entered forbearance, but had the wherewithal to exit forbearance prior to the end of their forbearance period. And many meaningfully in advance at the end of their forbearance period, oftentimes would simply exit and make up all of their missed payments with a lump sum without any modification or payment deferral associated with their cure. What we're seeing more recently is that a significant percentage of borrowers who are exiting forbearance today are doing so with the benefit of a range of modification options that are available to them and that servicers are working through and that's a real positive right, the GSEs last May, meaningfully expanded the modification toolkit to include a new payment deferral option. And we see a lot of borrowers taking advantage of that. It's efficient, it's elegant, and it's something that many are utilizing. What we're seeing now is really just the first one wave of those borrowers who have been in forbearance for 18 months, right, who weren't able to exit earlier as they recover their household financial position. And the data that we're seeing about those, I call it those longest running borrowers who are both in default and have been in forbearance since the start of the pandemic is positive, right? It's showing that those long standing COVID defaulted borrowers are having success transitioning to a cure through modification options in many instances. But it's a small sample set. At this stage, it's something that we're going to monitor and that we'll have more data to reflect on as we get into the fourth quarter.

Got it. I appreciate it. Those are my questions.

Your next question is from Bose George from KBW. You line is open.

Hey, everyone. Good afternoon. In terms of the gross premium, is there a way to think about how much longer it will take for that premium to stabilize? And you guys have written a lot of business recently. So does that mean you're getting closer or just conceptually, is there a way to think about that?

Yeah. No, Bose, I understand that the desire for that. We really can't offer you anything specific about how our yieldable change, and where it may level off. It's going to -- it will just fluctuate in a given period based on a range of things right, our volume, our mix, the mix of our singles business, as I talked about, the risk profile of our new production persistency. And actually, loss experience also has an impact on our yield, because it impacts the profit condition embedded in our quota shares. And then obviously, our activity in the reinsurance market, how quickly we bring deals on, how quickly they roll off. And when we think about it, it models out right, we'll have a view. But ultimately, what we're really aiming to do and what we're succeeding in meaningfully, is writing a large volume of high quality NIW with attractive risk adjusted return characteristics. And if we do that, and we grow our insurance in force, that's what drives our bottom line growth and our strongest team returns.

Okay. That's fair. Thanks. And then, actually just on the incremental ILN expense this quarter. Is that work out to run 2.5-ish million that. And should we think of that kind of as a run rate, I guess, I mean, we always still get some run-off. But just the way to think about the ILN expense next quarter.

Sure. So the way to think about it is roughly, it's a $364 million deal. I shared that it has a roughly 3% weighted average life-time cost associated with it. So… and it's -- it will be in the system in Q4 for roughly two months, because it was completed at the end of October. So I should have it at my fingertips as to what that works out to be. But in Q4, we'd expect 3% times $364 million, and then you have to shift that down, because it’s an annual works out to be about $1.08 million anticipated senior premium costs associated with the ILN note. Just to clarify that separate, right, that the senior premium coming through our net premium earned. Separately we have a remaining amount of transaction expenses that I mentioned on the call that will also carry for the deal that will come through operating expense, and that number is about $1.6 million of additional operating expense to come through related to the success and completion of the deal.

Okay, great. Thanks.

.:

Thanks. Just thinking about the rising home price appreciation, how did that in your mind create any challenges from affordability and first time homebuyers? And how much further do you think they can grow up before that becomes an issue?

Yes, it's a good question. We think about house prices a lot. Obviously, it's a critical driver of so much for us. It's a driver of our volume, right because it ties to purchase activity. Our ratable exposure is not the number of units sold, but it's the dollar volume of those origination activities. So, higher prices oftentimes has the effect of actually dragging growth into the overall MI NIW market by virtue of increasing the size of the mortgages that we cover, and increasing that ratable exposure and it also naturally has an impact on our credit performance. It'd say a few things one, as to where we think house prices will go, we are optimistic, right? We see the housing market as a market like all others that's driven by supply/demand dynamics, and we see real and sustainable demand that hasn't been unlikely most be matched by increased supply for an extended period. So, we're optimistic as to where house prices will go. In terms of what that means for individual borrowers affordability, it'd say even though interest rates have moved up, we're still near historic lows and I think the affordability dynamic is still a constructive one for many borrowers. It may mean that borrowers have a certain price point that they're looking at and they'll have to recalibrate expectations as to how much home they can get for that price point. But we see rising prices from where we're sitting today, as an overall net positive for industry volume. We saw -- we've got an expectation that conforming limits for GSE products will be increased meaningfully next year. That will have the effect of potentially dragging some volume from the jumbo market into the performing market and the private MI market by extension. We think there will still be enormous activity and demand on the purchase side and it obviously, others well for credit performance too.

That's helpful. And then just on the new insurance written for the quarter, it declined a little bit on the purchase side, was there anything in particular that was driving it?

Aaron, this is Claudia. Nothing particular, MIW will ebb and flow, but we wrote $18.1 billion of high quality new business in Q3 and we've written $67.2 billion of volume in the first nine months of the year, just an exceptional level of production. The record volume drove strong growth in our portfolio and that's what's key for us, stacking high quality, new business, driving if growth, which drives revenue and then maintaining our discipline around risk expenses and capital. Again, NIW ebb and flow, its natural origination volume fluctuates, interest rates move, the mix of purchase and refi production varies, house prices and loan sizes move. There's just a range of items that impact our NIW at any given time, especially quarterly.

Okay, Thank you.

Thanks Aaron.

Your next question is from Mark Hughes from Truist. Your line is open.

Thank you. Good afternoon. Looks like your credit appetite -- the credit box has been opening up a little bit the last couple of quarters, how much of that is the shift in the broader market Versus your appetite? And then is that continuing here into the fourth quarter?

Yes, it’s a good question. We certainly -- historically, we've been the most conservative MI provider in terms of the credit risk that we allow into our portfolio. And we talked about this, I think more specifically last quarter, but it's good to go over again. We did take very specific actions immediately after the onset of the pandemic to dramatically curtail the flow of lower quality business into our book. We just didn't know how things will develop. It's an unprecedented situation. But we're now 19 months in and those initial concerns, while we think they were fully appropriate and we're very happy to have made the moves we did at the time, they no longer hold. So we haven't fundamentally shifted our risk appetite at all. What all you're seeing is, is the easing of some of those significant restrictions that we instituted in the earliest days of the pandemic. And that hasn't fundamentally changed from where we were in Q2. Generally speaking, the risk mix of our production in Q3 was consistent with Q2 although there has been a little bit of movement. So where we go from here, it's a difficult one for us to forecast with precision, because we don't control the flow of risk coming into the market, we just control the flow of risk that we're comfortable taking on to our balance sheet. We'll still always look to maintain a high quality and short portfolio. It serves us well. It serves us well as a capital matter, as a last performance matter, as a comfort matter. It's one of our hallmarks. We didn't see a significant shift. Yeah, I'd say on the margin, we're seeing over the last, call it three plus months, a little bit of an increase in certain risk markers coming through the market. Market was probably running almost no layer of risk in terms of new origination volume coming through in the over 80 LTV space and layered risk, if you would recall is loans that have more than one high risk marker, so it could be a borrower with a below 680 FICO score and a greater than 45% debt to income ratio, for example. And that has shifted now we're seeing about I'll call it 3% of the market come through with layered risk characteristics. We continue to try to manage how much of that business comes to us, but 3% is a comfortable number given the scale of the market. It's something that the balance sheets can comfortably absorb, particularly when you have reinsurance coverage across the entirety of the portfolio.

Understood. One of the question -- I might -- you've talked a lot about moving parts on the credit front, I might have expected with the home price appreciation that perhaps you might keep up a pretty good pace of prior year reserve development. It was in the slightly positive territory this quarter, but maybe down a little bit sequentially. Was anything particularly restraining there, any reason why you wouldn't have had more favorable development? I'll ask it that way.

Yeah, so it's a good question. But I would say all of the developments that we saw in the portfolio, the modest release, the prior period reserves, all of that is from our pre-COVID population. Our pre-COVID default count, it's not too large, it's about just to touch under 10% of our overall default count. There was about a 15% cure rate on that business. And so, we did release the reserves that were associated with the pre-COVID defaults that had cure. We have not yet released any of the reserves that we established on our COVID defaults. We're just not there yet. We're broadly optimistic about where the market -- our business and our credit performance are trending. And obviously, every quarter that goes by, we continue to see improvement in our default population. But we do want -- we want more data, we want more time, importantly, to see how borrowers who enter forbearance programs and default status early in the pandemic. And in fact, remain delinquent today, how they'll ultimately perform. I share that some of the earliest data is really encouraging in that regard, but it's a really small sample set. So we'll continue to monitor that in Q4 and 2022. And we'll then make a decision and at the appropriate time as to what effect the rates of cure an HPA should have on the reserves that we established through the arc of the pandemic.

Appreciate it.

Your last question is from Ryan Gilbert from BTIG. Your line is open.

Hi. Thanks, everyone. I wanted to follow-up on Mark's question about NIWS characteristics. You know, you're moving down the spectrum on FICO and up on LTV. And I'm wondering if you could talk about the impact of that that might have on your premium yields. You know, if that could be a potential benefit to premium yield, or if ultimately, it gets washed out by the runoff of the older book years?

Yes, you know, take first off, most importantly, there's a benefit to borrowers, right. And when we're managing our business, we're really doing it with borrowers first, and helping borrowers gain access to housing is so critical at this time, and something we feel really proud of. I'd say by being balanced as to how we see risk developing and were we're comfortable putting our balance sheet behind borrowers. We can do that in a meaningful way. Obviously, we do price on a on a risk basis through a risk based pricing framework and so higher risk does oftentimes translate through incrementally higher premium rate on some of that production. And so, you know, difficult to say where it will balance. For us what we're really trying to do is to price each piece of risk individually, and make sure that we're generating an adequate risk adjusted return based on anticipated loss cost for that particular policy, but also doing something that is valuable and balanced for a borrower. You know what that means for our premium yield going forward? It's too early to tell. We just need to see how, you know, one distance develops in terms of the volume and profile of new production. And also what happens with persistency as rates kick higher.

Yes, absolutely. Thanks for that. Second question is on your singles business. It's been a little choppy as a percent of total NIW. And I'm wondering how you're thinking about single versus monthly is going forward?

Yes. So if they didn't move, right, it was 15% of our mix in Q2 and 7% in Q3. But I think it had been 8% or 9% in Q1. And so we -- we sort of talked about it in Q2 as well that really there's nothing specific to our mix to read into in the quarter, it just fluctuates a bit from period to period depending on the overall split in the market itself. And where we happen to see flow in a particular period from different customers. They over the long-term, we expect to be in that range of 5% to 15%. You know, we don't interest rate hedge our portfolio and monthly business is valuable when it extends and singles business is most valuable in prepayment scenarios and what we find is that maintaining the right balance in our insured portfolio gives us a natural embedded hedge around interest rate movement. And for us right now, you know, having a call it about a 15% mix overall in our insurance in force, and having, you know, somewhere between 5% to 15% or so, in our new business production is is the right balance for us.

Okay, great. Thanks very much.

And with that, I'm showing no further questions at this time. I would like to turn a call back to management for any additional or closing comments.

Thank you again for joining us. We are excited to be hosting our Annual Investor Day in person on December 2 in New York. And we will be participating in the Goldman Sachs Financial Services Conference on December 8. We look forward to speaking with you soon.

Ladies and gentlemen, this does conclude today's conference. Thank you for your participation and have a great day.