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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by, and welcome to the MGIC Investment Corporation Third Quarter Earnings Call. At this time all participants are in listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] And please be advised that today's conference is being recorded. [Operator Instructions]
And now I would like to hand the conference over to your speaker today, Mr. Mike Zimmerman. Thank you. Please go ahead, sir.
Thank you, Cathleen. Good morning and thank you for joining us this morning and for your interest in MGIC Investment Corporation. Joining me on the call today to discuss the results for the third quarter of 2020 are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson.
I wanted to remind all participants that our earnings release that was issued last night and can be accessed on our website located at mtg.mgic.com under Newsroom, includes additional information about the company's quarterly results that we will refer to during the call, it includes certain non-GAAP financial measures. We have posted on our website a presentation that contains information pertaining to our primary risk in force, new insurance written and other information that we think you will find valuable.
I also wanted to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may find valuable. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors, including COVID-19, that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K and 10-Q that was filed last night.
If the company makes any forward-looking statements, we are not undertaking an obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that such guidance or forward-looking statements are current at any time other than the time of this call or the issuance of the Form 8-K or 10-Q.
At this time, I'd like to turn the call over to Tim.
Thanks, Mike, and good morning everyone. I'm pleased to report that we had a very solid third quarter nearly every respect, in a minute I will provide you with a high-level summary of our financial results. Then our CFO, Nathan Colson, will provide more detail about our financials and I'll wrap up by discussing the state of housing finance reform. First, I want to continue to express my gratitude to my fellow MDIC co-workers and their families, the efforts of our team day in and day out to support our customers, their local communities and fellow coworkers, while coping with their own unique circumstances brought about by COVID-19 pandemic has been remarkable.
People have made MGIC what it is for over 60 years and they continue to do so today. Our main business objective is to continue to align our resources to provide critical support to the housing market, especially first time in low and moderate wealth homebuyers. We strive to achieve that goal by among other things, working with the GSEs and investors, our loss mitigation programs that assist homeowners, offering competitive products and services to our customers and maintaining a sharp focus on sources and uses of our capital.
As we continue to execute on our business strategies for the health of our coworkers and their families, we're doing so in a remote work environment, we are working closely with our customers, many of whom are also working remotely to adapt the evolving way business gets done, especially during a national healthcare crisis. Based on the recent strong volume of purchase and refinance mortgage originations, the housing finance ecosystem appears to be functioning well and we are proud to be doing our part.
As far as our financial results, GAAP net income for the quarter was $131 million, up significantly from the second quarter. This reflects a materially lower level of incurred losses compared to the second quarter that's credit performance, especially new delinquent notices received was significantly better than last quarter. As I mentioned the volume of both purchase and refinance mortgage originations continue the strong levels. We wrote $32.8 billion of new insurance in the quarter. And despite the pressure of lower persistency on our existing books of business, our insurance in force increased by nearly 10% year-over-year. The demand for single family housing has stayed resilient even as we are moving into what is traditionally a slower time of year for purchase activity. Our new business writings continue to be heavily weighted to purchase transactions, which accounted for 60% to 65% of NIW for the quarter in our recent application.
Of course, the low interest rate environment continues to make refinancing very attractive for many borrowers. As a result, refinance transactions remain relatively steady and our industry continued to enjoy a relatively larger market share of refinances than in prior periods. Through a variety of sources, we can gain a reasonable visibility into the insurance we expect to write over the next several months. However, beyond that there's considerably less visibility, especially given the uncertainty impact COVID-19 could have on both national and regional economies.
We are hopeful that the housing market will continue to remain resilient, and we are confident in our positioning in this market. Today, we have a book of business that has strong credit characteristics. In addition, we are supported by a balance sheet that has modest leverage of $6.8 billion in cash and investments, contractual premium flow, and a robust reinsurance program bolstered by an additional insurance linked note transaction that covers risk between January through July 31st. While delinquency notices received in the third quarter for materially lower than in the second quarter, they were still elevated compared to the pre-COVID environment.
Approximately 67% of loans in our September 30 delinquency inventory were reported to be in forbearance plan. The delinquency rate ended the quarter at 5.8% and declined each month in the third quarter. While the COVID-19 pandemic has resulted in an increased number of loan delinquencies and a corresponding increase in PMIERs minimum required assets compared to the end of the first quarter, we estimate that as of the end of September, our PMIERs available assets exceeded the PMIERs minimum required assets by $1.4 billion. In addition, our policyholder position was $3.1 billion more than the minimum State Capital Requirements.
There remains much uncertainty about the potential impacts to credit performance in our business caused by the national emergency, notably the potential for higher losses incurred and ultimately higher paid losses. That said we are encouraged by the material improvement in the third quarter credit performance and the resilience of housing market and many homeowners as the pandemic continues to impact lives. During the quarter, we continue to focus on building on our strong capital position and financial flexibility with several external and internal transactions. Nathan will get into more detail on both our financial results and our capital management activities.
With that let me turn it over to Nathan.
Thanks, Tim, and good morning. I'll spend a few minutes talking about the third quarter financial results and the significant drivers that impact our results. Then I'll discuss the capital and intercompany transactions we recently completed. In the third quarter, we are under $131 million of net income, or $0.38 per diluted share compared to $177 million or $0.49 per diluted share from the same period last year. On an adjusted net operating income basis, we earned $0.43 per diluted share versus $0.49 per diluted share in the same period last year.
A detailed reconciliation of GAAP net income to adjusted net operating income can be found in the press release and in our 10-Q. While there are a lot of moving parts, the primary difference in year-over-year results is due to the higher losses incurred primarily as a result of COVID-19. Year-to-date total revenues were flat compared to the same period last year at approximately $900 million. During the quarter, total revenues were $296 million compared to $318 million last year, due to lower net premiums earned and lower investment income.
For the quarter net premiums earned decreased 4% and the net premium yield declined to 43.6 basis points from 49.6 basis points in the third quarter of 2019, but up from 42.7 basis points last quarter. While we provide a reconciliation of the effective premium yield in the press release, I'll highlight a couple points now. The net premium yield declined year-over-year, primarily because the premium rate on the in-force portfolio decline as older policies with higher premium rates ran off and were replaced by newer policies, which generally have lower premium rates. The lower premium rates on the newer policies reflect the strong credit profile of the new policies, the increased use of risk-based pricing, the lower cost of capital provided by the increased use of reinsurance as well as the competitive landscape.
The net premium yield also declined year-over-year as the profit commission on our quota share reinsurance transactions declined with higher ceded losses. These effects were partially offset by accelerated premiums from single premium policies that canceled before the end of their estimated lives as a result of refinancings.
While down compared to last year, the net premium yield was higher in the third quarter than in the second quarter as the decrease in the premium rate on the in-force portfolio was more than offset by a higher profit commission on our reinsurance transactions due to lower ceded losses in the quarter.
Accelerated premiums from single premium policy cancellations increased from $90 million in the third quarter of 2019 to $32 million in the third quarter of 2020, reflecting the continued strong refinance market and were relatively flat to the $33 million last quarter.
Net losses incurred were $40 million compared to $34 million for the same period last year. In the third quarter of 2020, we received approximately 21,000 new delinquency notices compared to 14,000 in the same period last year and 58,000 last quarter
The future state of unemployment and economic conditions will impact the size of the delinquency inventory and how long it will remain elevated when compared to pre-COVID levels. We remain encouraged by the decreased number of new notices received and the steady care activity that was reported to us for the month of October.
The estimated claim rate on new notices received in the third quarter was approximately 8%. This estimate was influenced in part by the actual performance of delinquent loans, expectations for home price appreciation, unemployment rates and the expected performance of borrowers that suffered a financial hardship as a result of COVID-19 and whose loans have entered a forbearance plan. This rate is modestly higher than the new notice claim rate used last quarter, influenced in part by the lower percentage of new notices in the third quarter that were reported in forbearance plans compared to the second quarter.
When we establish loss reserves, we monitor the level of new notices received, the level of delinquencies secured, the uptake of forbearance plans and the current and expected economic activity to estimate the ultimate claim rate and claim amount or severity on both new and existing delinquencies. The ultimate claim rate represents the percentage of delinquent loans we expect to result in mortgage insurance claims, and it reflects expected cures, including cures due to successful loan workouts after a forbearance period is over. Of course, there remains much uncertainty about the ultimate loss performance of these delinquent loans.
In the third quarter of 2020, our re-estimation of reserves associated with previous delinquencies resulted in effectively no loss reserve development compared to $274 million of favorable development in the same period last year and $10 million of adverse development last quarter.
We also decreased our incurred but not reported or IBNR reserve by $27 million. IBNR reflects the estimated losses from delinquencies occurring prior to the close of an accounting period on notices of delinquency not yet reported to us. To establish the IBNR reserve, we estimate the number of loans whose borrowers had missed a payment but that have not been reported to us as delinquent.
Reflecting the foreclosure moratoriums enacted by the GSEs and others, the number of claims received in the quarter declined by nearly 70% from the same period last year, and primary paid claims also declined by nearly 70% from the $47 million to $15 million. Most foreclosure moratoriums are currently set to expire December 31. However, we expect claim payments to remain modest for several quarters due to the effects of both the moratoriums and the forbearance plans that are in place.
We continue to diligently monitor net underwriting and other expenses. Before ceding commission, they totaled $59 million in the third quarter of 2020, which is flat to the same period last year.
While MGIC did not pay a cash dividend to the holding company in the third quarter, we did complete several significant transactions. First, following approvals from the GSEs and Wisconsin OCI, MGIC Reinsurance Corporation of Wisconsin, or MRCW, a subsidiary of MGIC was merged into MGIC. The merger resulted in the transfer of approximately $250 million of cash and invested assets to MGIC. Those assets when they were held by MRCW were not considered available assets for MGIC under PMIERs. MRCW previously held those assets to support an intercompany reinsurance agreement with MGIC that was terminated in 2019.
Second, following approvals from the GSEs and Wisconsin OCI, MGIC paid an in-kind dividend to our holding company of its ownership interest in $133 million principal amount of the holding company's 9% junior convertible debentures. These securities were then retired by our holding company. The debentures were not PMIERs-eligible assets, and as such, there was no impact to MGIC's PMIER position and importantly, the transfer eliminated $12 million of annual debt service from the holding company.
Third, we opportunistically accessed the capital markets and issued $650 million of 5.25% senior notes due in 2028 with a three-year call feature. We used a portion of the proceeds to repurchase $182.7 million par value of the senior notes due in 2023 with notes due in 2023 and $48.1 million on par value of the junior convertible debentures. The balance of the proceeds remain at the holding company. We incurred approximately $27 million pretax loss on the extinguishment of debt associated with this activity.
After considering these transactions, the annual debt service to the holding company is less than $70 million and the consolidated debt-to-capital ratio is approximately 22%. The repurchase of the debentures also eliminated approximately 3.6 million potentially dilutive shares. Our next debt maturity is $242 million due in August of 2023, and as of September 30, we had approximately $871 million of cash and investments at the holding company.
Last week, the holding company Board approved a cash dividend of $0.06 per share payable on November 25. Any future common stock dividends will also be determined in consultation with the Board.
At quarter end, our consolidated cash and investments totaled $6.8 billion, including cash and investments at the holding company. Investment income was lower year-over-year, primarily as the larger investment portfolio was partially offset by lower yields.
The consolidated investment portfolio had a mix of 83% taxable and 17% tax-exempt securities, a pretax yield of 2.6% and a duration of 4.1 years. Our investment portfolio had a net unrealized gain of $307 million at September 30, 2020 from $175 million at December 31, 2019 and $187 million at September 30, 2019.
Shifting to PMIERs, MGIC's available assets totaled approximately $5 billion, resulting in a $1.4 billion excess over the minimum required assets. In the quarter, our available assets grew by approximately $500 million, driven in part by the transfer of $250 million from MRCW to MGIC and in part by organic available asset generation from our positive cash flows from operations as the cash inflows from premium and investment income are meaningfully exceeding the cash outflows from operating expenses and paid losses.
Earlier, I mentioned that I was encouraged by the recent trends in new notice and cure activity. We have benefited from a modestly declining delinquent inventory since June, and nearly two thirds of the loans in the delinquent inventory are in a forbearance plan. This is a benefit because although we are required to hold more assets under PMIERs for delinquent loans and although the amount of required assets increases as the number of missed payments increases, we are allowed to reduce the amount of assets we are required to hold by 70% under certain circumstances, including for loans in a forbearance plan related to COVID-19.
The bottom line is that as a result of our strong positive cash flow during the quarter, the application of the 70% reduction of minimum required assets for certain COVID-19-related delinquencies and our intercompany transactions, we increased our PMIERs excess by nearly $300 million in the quarter.
Before I turn it back to Tim, let me make a few comments about the excess of loss reinsurance we recently obtained through an insurance-linked note or ILN transaction that closed in October. Transaction covers virtually all the risk in force related to our NIW from January through July 2020. The reinsurance is supported by the proceeds of approximately $413 million of notes issued by a special purpose insurer, and we expect to receive substantial PMIERs capital benefit for the transaction as we have with our other ILN transactions. We have summarized all of our ILN transactions in the quarterly supplement that is on our website.
In closing, I would like to mention that each of our sources of capital has its own strengths and weaknesses that must be considered. We believe that a balanced approach using our own balance sheet, using forward commitment quota share treaties and accessing the capital markets is important to maintaining a strong balance sheet and maximum flexibility for both the writing company and the holding company.
And with that, let me turn it back to Tim.
Thanks, Nathan. Before moving to questions, let me address a few additional topics. As I mentioned in prior quarters, the FHFA has re-proposed a rule setting forth the capital framework for the GSEs. The agency is currently reviewing public comments that are received on a re-proposed rule. The FHFA director has stated they would like it to be finalized yet this year. Since we don’t know how or if any of the comments will shape the final rule, it is hard to say at this point what impact the final rule will have on the MI industry.
That said, we do believe that the FHFA appreciates the benefits that an insurance company structure can provide to the housing finance system relative to capital markets and other less regulated solutions. The FHFA is also continuing the review of all GSE activities in our recently proposed revisions to a rule for the GSEs that has been in effect since 2009. The proposal would require the GSEs to provide advanced notice to FHFA of new activities to obtain prior approval before launching new products.
The proposed rule establishes revised criteria for determining whether new activity requires notice to FHFA and for determining if that activity is a new product that merits public notice and comment. This seems to be further evidence that the FHFA wants the role of the GSEs to be more clearly defined than it is today. Earlier this year, the CFPB proposed changes to the definition of qualified mortgage and the so-called GSE patch. The revised definition will replace the borrower’s debt-to-income ratio in the definition with a pricing threshold.
The comment period for the CFPB proposal ended September 8, and the proposed changes have a targeted publication date of April 2021 and they would be effective six months later. The CFPB recently said they would extend the GSE patch, which was set to expire in January of 2021 until the effective date of the new QM rule, perhaps Q4 2021 or Q1 2022 or when the GSEs exit conservatorship, whichever occurs first.
While other market options for credit enhancement can be scarce or unavailable at various points of the economic cycle, our company and our industry continues to provide credit enhancement solutions to lenders, borrowers and the GSEs in all economic environments. While we are focused on prudent responses to the current environment, we continue to be actively engaged in discussions regarding housing finance policies for the future. We continue to advocate for the increased use of private capital, including private mortgage insurance.
Long-term, we remain encouraged about the future role that our company and industry can play in housing finance, but it continues to be difficult to gauge what actions may be taken by the FHFA, CFPB and the legislature and the timing of any such actions. Private mortgage insurance offers many solutions and a great value proposition for lenders and consumers to overcome the number one barrier to homeownership, the down payment.
We are navigating this period of uncertainty with a book of business that has strong underlying credit characteristics, and we are supported by a balance sheet that has a low debt-to-capital ratio, an investment portfolio of nearly $7 billion, contractual premium flow and a robust reinsurance program.
As I mentioned at the beginning of my remarks, in addition to the well-being of our employees, we are focused on: one, continuing to provide critical support to the current housing market; and two, positioning our company to prosper over the long-term.
In closing, I want to remind listeners that since our founding in 1957, we have successfully navigated many economic cycles and have continually provided borrowers and lenders with affordable and prudent low down payment options. I am confident that we have the right team in place to continue to deliver the quality products and service our customers have come to expect from MGIC.
With that, operator, let’s take questions.
[Operator Instructions] And your first question comes from the line of Sam Choe from Credit Suisse. Your line is now open.
Hi, good morning, guys. I’m on for Doug today. Since we ended on some of the regulatory updates, this might be a little premature, given that we’re still getting some clarity on the political landscape. But do you anticipate, if there is a change in administration, that some of the regulatory trends that you’ve been seeing might be altered? How are you thinking about that?
Yes. This is Tim. And obviously, we’re all watching sort of the results of the election and I know it more will be coming out today. It’s really hard to say. I mean, a lot of it comes down to the individuals that are in places. And I would tell you that we focus on it and we talk about it but don’t spend too much time worrying about it. And we’ll wait and see what the election results finally are, how the cabinets get built out, whether it’s a Trump victory and him building out the cabinet that he has and making any changes, or if it’s a Biden victory. Then obviously, when you look down and look at the Senate and the House, it seems like there’s – it’s going to be more down the middle. And so I think in general, we feel really good about our ability to sort of navigate through that environment.
Got it, okay. That’s helpful. So I’m looking at your October numbers, and it seemed like insurance in-force growth was – I mean, it seems to be trending, on a year-over-year basis, similar to what we’ve been seeing in the third quarter. Is that a reasonable assumption for the remainder of the year? And how does that set up for maybe the early part of 2021?
This is Tim again. I think there’s been some pretty heavy refi activity out there still. And so their persistency has been challenged but obviously, some pretty strong volume out there to be done. And as I mentioned in my comments, the purchase volume has stayed strong even recently, which would seasonally be down. So it’s tough to say that, that trajectory is going to stay the same. Just as the in-force book grows, it becomes tougher to keep that same trajectory. But we feel really good about what’s happening in the housing market right now, our ability to deploy capital at good returns. And we think that’s going to continue for a good period of time here.
Got it. So are you guys able to kind of guess at what that year-end NIW production for the entire year might be or is that just hard to say at this point?
Hey Sam, it’s Mike Zimmerman here. So while we’re not going to go on a forecast because there’s such volatility with the numbers. I mean, obviously, we’ve already got one month in the bank, if you will and you can see that within the insurance in-force, the applications, it’s usually a 45, 60 days. So we do have some visibility there, at least probably through – certainly through November, but December still has to play out. So we’ll back off answering those specific to that.
Got it. All right. Thank you so much, guys.
Sure. Thank you.
And your next question comes from the line of Bose George of KBW. Your line is now open.
Hey, guys. Good morning. So I wanted to ask just about home prices have obviously been very strong. And I’m just curious from – just from a mechanic standpoint, how does that flow through to your loss provision? How does it impact your default to claim expectations? And what do you kind of assuming on the existing inventory in terms of home prices?
Yes, this is Nathan. I’ll take that one. I mean, certainly the home price appreciation that we’ve seen not just the last couple of months, but really over the last year has been continued to be really strong. It seems like in a lot of parts of the country, it’s accelerated. I think what we’ve observed over time though, is that we still get claims in markets where there is home price appreciation that there’s a distribution of that. And then I think that home price appreciation is also, certainly, more uncertain as you look out going forward with the macroeconomic uncertainty that exists.
So it’s a factor, it’s certainly a consideration, but I think it’s a positive influence, but there’s obviously a lot of moving parts right now, both favorable and unfavorable in terms of the macro things that we’re looking at, when we comes to setting the new notice claim rate and loss development assumptions that we have.
Okay. That makes sense? But presumably, if it remains very strong, given it would increase the ability to cure. So eventually it should reduce the default to claim rate, if that persists. Is that kind of a way to think about it?
Yes. I think that – this is Nathan, again. I think that is the right way to think about it.
Okay, great. Thanks. And then just on your singles, the production was 7%, it’s done quite a bit over the last quarter and quite a bit oral from last year’s levels. Is that something in the industry or is that a product position that you guys have been making?
Hey, Bose, this is Mike. Yes, I’d say, it’s really reflective of what the marketplace is out there. Given with the refinance transactions, right, usually, singles are less prevalent there. So you have that phenomenon, obviously, with interest rates, very low and risk based pricing, the LTV and the mix all comes into play. So I think it’s really more just of an industry thing versus any deliberate strategy, certainly on our part.
Okay. And actually just one more on that. I remember in the past, this was – it was kind of a lower return product just because of the increased competition in that market. Is that still the case or a returns are pretty similar to kind of the market.
Again, this is Mike. I think, if you go back several years that would probably be a fair and accurate statement for the last several years with all the risk adjusted pricing and the pricing engines, et cetera, that that came into play. I don’t think that is accurate of the statement as it would have been several years ago.
Okay, great. Thanks.
And your next question comes from the line of Randy Binner from B. Riley. Your line is now open.
Thank you. I just want to try one more kind of around macro commentary on the housing market. And clearly, there’s a lot of tailwinds from interest rates and demand and just COVID tailwind from people who want more space. But I think there’s a thought out there that as stimulus support wears off, there could be increased challenge. And do you have a view that specifically because that would seem to be kind of the unknown or potential headwind as opposed to all these tailwinds.
Randy, this is Mike. I’ll let Tim answer the question. But there was a little bit static with the connection. So just I want to make sure you heard the question, right. It’s really more of a macro view on housing, whether a second or third or whatever, additional wave through and any potential economic impact that that could have on the business, if it came through, right.
Correct.
Okay. I think that’s a good question, Randy. I think, obviously there was speculation that if there was more of a blue wave, that there might be stronger stimulus ultimately, we have some expectation that there will be some additional stimulus. Obviously, part of it has to do; I think what the path of the virus is, which is difficult to know. But I still think our view is that we would expect there’s going to be some amount of stimulus. Although, I think they’ll probably be a lot more discussion about it, again, where the election seems to be trending. But I guess, I’d say ultimately we think there will be some and in general, again, I view housing as being extremely resilient through all this. So while the size can matter, I think it probably matters a little bit less from a housing standpoint.
And hopefully, you can hear this question – detailed question on the model, just confirming that the debentures were paid down to zero with the refi.
This is Nathan. We’ve repurchased like approximately $48 million principal amount of the debentures. So those were retired. And then we also did the intercompany where we move the $133 million of the debentures that MGIC previously held, back to the holding company, and those are retired. But there are still a little over $200 million of the debenture still outstanding.
$200 million of the 9% or $200 million total?
Of the 9%. $209 million of the 9% or so.
Okay. I might follow-up on that. Thank you.
Sure. Thanks.
And your next question comes from the line of Jack Micenko from SIG. Your line is now open.
Good morning. I’m hoping to unpack the claim rate a little bit more for the quarter. I think you went from 7% last quarter to 8%. And Nathan, I think you said it was because you had a lower mix of new DQs that are in forbearance, 67. What was that number last quarter? Just trying to get sense of the magnitude that motivated the increase in claim rate.
Yes. This is Nathan I think the 67 is the amount in the delinquent inventory that is in forbearance. And that number actually hasn’t changed very much from the second quarter to the third quarter. What I was referring to previously was the amount of new notices that we received that were in forbearance. I know we put the statistics out monthly in the second quarter, I think it was something like 80% of the new notices that we receive were in forbearance plans. And that number was modestly lower in the third quarter, although, I don’t have the exact number, but we have put out the monthly statistics on new notices and amounts and forbearance plan. So it’s out there. I just don’t have it in front of me.
Okay. And there was no development change. So you’re not recasting an 8% back to last quarter, correct?
That’s correct. No, I think we still feel really comfortable with where we were positioned at the end of June for those delinquent items.
Okay. And then when we got the Trump tax cuts back in 2017, the MI industry and most industries passed some of that pricing on to benefit rather onto some pricing. Would you expect to, both MGIC and the industry to raise prices in the event that we don’t have a gridlocked Congress and something happens on the corporate tax side.
This is Tim. I guess I’m one hopeful that we don’t have a tax increase, but two, if there is, it’s hard to speculate exactly what the market response would be. I think it was a rational response, with the tax cut that we and others in the industry from a marketplace reacted. And it’s just tough to speculate that with the tax increase, would it be the same response or not, but again, I'm hopeful that we don't see a tax increase ultimately.
Okay. And if I could just ask one more on the 80% of book value here, you've got $1.4 billion excess going higher on the 3Q – 4Q because you completed the island after the quarter. What are you all looking for to restart the buyback, given the depressed value of the shares and your significant liquidity, and you've done a fair amount on the balance sheet in the last two quarters as well, is it just the end of the forbearance period and what that looks like? Is it moratoriums on foreclosures? Is it delinquency trends? Just – what are the two things that – okay, this is we're in the clear now let's take advantage of the valuation and deploy some excess capital? Or is it just the business is growing so much that you want to be able to meet the demand of kind of where NIW has been?
Well, Jack, it's Nathan, you did go through a lot of my lists there, but I'd probably point to maybe two main things. I think we want the business is growing certainly faster than we had previously with the volume of business and how we're positioned in the market. So I think we want to be able to have confidence that we can fund all of the growth that we're able to achieve and still maintain an appropriate access to PMIERs and can fund that with internally generated capital, which we've been able to do even through this increased growth period in the last two quarters.
So I think, I want to see that especially if the purchase volume starts to pick up as a percent of the overall, we might see even more increased growth. Obviously the refi activity, I think our expectation is that it's going to remain strong. So there's a little bit of uncertainty about future growth rates. And then the other big thing that I think about is the post-forbearance path for the large set of delinquent loans that we received in May and June in particular. We thought that some of those might be resolved in October as they got the six months, they're 180 days in forbearance, but in large part it seems like they've rolled to month seven, which is obviously allowed under the CARES Act.
So it may be out into the first quarter of next year before we really see meaningful resolution on some of those items. And, while we continue to feel confident in our provisioning and our reserve positioning, there is a lot of uncertainty about what the post-forbearance path looks like. I think to-date it looked really positive, but that's what we expected. We expected that the early activity would generally be favorable and things that continue to remain, most of the ultimate claims are going to come out of that bucket anyway. So I don't know that we've gotten a lot of good evidence yet to have conviction that our initial views of post forbearance path is what actually happened.
So I think, want to see more on that and want to have confidence that we can fund our growth.
Alright, thank you.
Hey Jack, just to circle back on the percentage of new notices going in, as they said, in the second quarter, you were looking at around 80% the number I'd say on average for the third quarter, you're looking at close to 60%, kind of stepped down each month, 67%, 59%, 56%, so call it 60% of new notices.
Thanks Mike. Thanks.
Your next question comes from the line of Mark DeVries of Barclays. Your line is now open.
Thanks. There are obviously a lot of moving parts around the average premium, but Nathan, just wanted to get your thoughts on where you can see that bottoming, if you ignore kind of the noise around the impact of both the profit commission and just the accelerated amortization on unwritten premiums from singles.
Yes. Thanks for the question. It's a good question. It's a difficult question. The net premium yield is impacted by those things that we've – I think always found to be very hard to predict on the accelerated single earnings and really, you implicitly have a loss prediction in that relative to the profit commission on the quarter share deals. So I think when we've talked about this in the past, it was really focused on the in-force portfolio yield. And even that, as you think about where does that evolve to over the next 12 to 18 to 24 months, it's a largely a function of the new business that you write over that period and what the purchase and refinance mix looks there. So you end up needing to make a lot of assumptions there.
I think our general view has been that the trend is down. You can see that in the quarter-over-quarter trend that we have in the earnings release supplement. The pace of change in this quarter was slightly higher. I think that's owing to the volume of business that we wrote in this quarter and also the high-level of refinance activity, and in addition to the NIW that we wrote, there were also a lot of cancellations in this quarter. So that's resetting a lot of premium rates at lower levels, but it's also resetting a lot of capital levels at lower levels associated with the lower risk of the business that we're writing today.
So I don't have a specific number to guide you to or a pacing on that, because I think largely it's driven by some of the other assumptions you might make relative to the type and quantity of business that we write and the level of refinance volume.
Okay. Got it. And just wanted to clarify, is the profit commission is that calculated off of incurred losses as opposed to paid. And if you actually start to see favorable development, because you're seeing more favorable roll rates on some of these forbearance loans, would we expect that to come back through the premium line?
Yes. The profit commission is computed based on incurred losses. And if in the future, the actual ultimate losses are lower than the incurred losses that we're estimating today, that would have a positive impact on profit commission in the future, i.e., we would be able to “recapture that”. But I would just point out that, in either case we get the benefit of the re-insurance or either get it as a ceded loss benefit, including a ceded paid loss, or we get it as profit commission benefit. So it does impact the line items that things show up on, but on a net income or pre-tax income basis it doesn't have a bigger impact.
Okay. Got it. Thank you.
And your next question comes from the line of Mihir Bhatia from Bank of America.
Your line is now open.
Hi. And thank you for taking my questions. Good morning. Just wanted to – actually wanted to follow-up on the question on portfolio yield. Maybe focusing just a little bit on the in-force portfolio yield. So yes, given the higher quality of the business you've been writing in 2020 and the volume, does that argue for the pace of decline that you saw in this quarter to persist for a bit?
I can understand you got the capital benefit and the loss – lower losses in the future because it's higher quality business, but to the extent the housing market and NIW stays strong, the quarter-over-quarter piece, I think a couple of days, like you went from 0.48 to 0.46, maybe we should expect that to continue here in the near term for the next couple of quarters?
Hey Mihir, it’s Nathan. I think similar to what I mentioned previously, I think a lot of that comes down to your assumptions about the volume of business that we write in, say, the fourth quarter or the next six months. It also impacts – a big impact there is what are your expectations around cancellations of the existing in-force or persistency rate.
So I think if we experience the level of business writings that we did this quarter and also the level of cancellations that we did this quarter, then I think you could expect something on that order of magnitude. It also matters which loans are canceling. So there are lot of impacts that makes it I think, directionally, we've said over time, we do expect that trend to continue lower, but that the pace of the change is a function of a lot of other assumptions that you have to make. It makes it really hard to forecast even a one quarter change, but certainly over a longer period of time.
Okay, understood. That's helpful. Thank you. Let me switching gears a little bit to your – for your loans in forbearance. Can you share any statistics or any additional color on them? Just for example, what percent of them have under 10% equity? Does the forbearance pool look like the rest of your book, any differences in particular that are worth calling out among like the forbearance loans versus maybe regular delinquent. And also at this point, I think you may have a few loans that have cured out of the forbearance pool is the early, I guess, performance similar to what you're seeing, what you would have expected from your regular performance book, or is it a little bit weaker than the – like are there already loans that are re-delinquent or anything like that, you can share on that?
Hey, Mihir, it's Mike. So give you several different some color if you will, on the forbearance inventory. So maybe starting on the cure activity or the composition, it’s – I'd say it's pretty representative when you look at by book years, LTVs et cetera. It's pretty representative of the recent writings and mix of business. Now the mark-to-market LTVs overall, you got to be careful right with mark-to-market LTVs as Nathan was responding to a question earlier about we get claims even in strong HBA market. But using, kind of CBSA type level and doing mark-to-market and LTVs, post it 80%, 85% of its below 90 and 60% below 80, on a mark-to-market basis.
Obviously, we don't know the presence of any seconds that may have been in place. So there and it's pretty similar, whether it's forbearance loans or not forbearance loans. And so when we're looking at kind of the 20 – that's kind of delinquent inventory not just forbearances. As far as cures, we look back at the inventory as of the end of June and then said how many of those cured as of the end of September. We're looking at about 40%. These are loans that went into – reported in forbearance as of the end of June, about 40% of those cured through – well, actually, 40% through the end of October, about 30% through the end of the quarter.
We are seeing loans that leave forbearance, a small percentage that leave forbearance and remains delinquent, but we're also then seeing a sizable portion of that small percentage that make a payment, so they're kind of staying in the one to three months. So we're seeing different levels of activity, but relative to the characteristics representative of the portfolio, I would say. The performance, hard to gauge. We haven't had this level of forbearance reporting. So we're really just building the database out forbearance loans behave, but just giving you some of those characteristics anyway.
No, that's helpful. Thank you. And my last question, just on your near-term capital strategy. So this quarter you got approval to dividends, a 9% junior notes to HoldCo. Should we take that as an indication that there is openness from the department to allow you to pivot in, to resume quarterly special dividends in the future? Or was it just because it was the junior notes that's materially different than how they would view a cash dividend, if you will. And then also just related to capital strategy and your 10-K it looks like you amended your language around repurchases and said you may resume them in the future this quarter. I don't think that was their last quarter. So should we read anything into that? So just, maybe also just talk about the right level of excess capital you're targeting in this environment. Thank you.
Well, I'll take the easy one. This is Mike, and I'll let Nathan talk to the capital. On the languages in the 10-Q, you did see the words that changed there, but really it's just – it's the same intent and same thing we've said before we temporarily suspended, temporarily suspended means that we could repurchase. So we just want it to, in the future. So we just wanted to clarify that statement that we've made previously, that the share repurchase has been temporarily suspended. But that we could restart it going forward. So don't read any more intent to that than just reiterating our intention. Nathan, I'll let you.
Yes. The question about the transactions in the third quarter, and maybe what that means for dividends from the writing company going forward. I would just say, I think we're really pleased that we were able to get the approvals that we needed for both the merger of MRCW and also the inner company in kind dividends of the junior debentures. Those required approval, not just from the Wisconsin OCI, but also the GSEs. So I think really happy with the relationship in all those places and our ability to, I think, execute thoughtful prudent transactions. What that means for dividends? I think, we don't expect to request a cash dividend in the fourth quarter. What that means for the first quarter? I think it's probably a little too early to say at this point. I would remind you that any dividends at this point through March 31 would also require approval of the GSEs.
And we also have $870 million in cash at the holding company. So we have enough flexibility there that dividends from the writing company. We have sufficient cash at the holding company to do any number of things without needing dividends from the writing company in order to affect that. So just maybe a couple of thoughts there. But just maybe a reminder that our transactions did require approval. I think that's a reflection of the fact that they made – that they made sense, and the fact that we've maintained good relationships both at the OCI and the GSEs. So I'm hopeful that if we have a thoughtful prudent request that we'll be able to get the approvals that we need in the future. It's really comes down to what does that request? And it's probably a little too early to say at this point.
Understood. Thank you. Thanks for taking my questions.
And your next question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is now open.
Thanks. Good morning. First question, can you share your thoughts about basically January and beyond, world where new notices don't have a forbearance option. Given the economic uncertainty, does it make sense that incidents would be higher than a normalized level, or can the economic environment be offset by how strong housing has been? How would you frame the prospect for instance once forbearance options go away?
Geoff, I will – I guess I'll start on it. It's tough to say. I mean, one thing I would say is, I wouldn't assume that there won't be forbearance options out there. And I think a lot of it quite frankly has to do with what the path that the virus takes. I guess my view is, if things are more strained and there's higher impact on the economy, I guess I would assume that there's going to be similar response to what we saw earlier this year. If the economy is sort of doing better, the virus is more controlled potentially, and sort of our delinquencies, ultimately that are maybe less muted or more muted that the sort of the having that sort of the forbearance is not as big of a deal.
So I think what we've tried to do from a planning standpoint, from a capital standpoint is be ready for all those situations. We feel like we have a strong capital position to handle whatever that could be. But I would think if there is a concern of a second or third wave and it was impacting sort of housing and delinquencies. I would expect you would see some response there and would say that end of December sort of what looks like a clip right now might not really be a clip on new delinquencies.
Okay. Nathan, can you talk to the investment portfolio? The environment obviously continues to weigh on the yield. So given the duration where we are into this cycle, if rates and spreads remain consistent for the foreseeable future, how much more pressure could we see on the yield?
That's a good question. Certainly, our purchase yields in the third quarter were quite a bit lower than the in-force portfolio yield so that does weigh on things. And then we affected a number of things this quarter that didn't help that yield number as well, generating the cash at the holding company with the debt issuance. And frankly, just holding a lot more cash at the holding company at this point, a lot more cash and investments, which has always been a lower yield, higher credit quality, shorter duration portfolio, just given the uses of cash at the holding company compared to the operating company. So I do expect that – the premise of your question was if rates and spreads stay where they are today, I think given what we invest in, you're looking at purchase yields that are below our in-force yield for awhile, and a decline in what that in-force yield looks like for the next several quarters.
Any way to frame how much additional pressure we can see?
Because of the operating company, holding company dynamics, I think it's a really good – a question, something that we could clarify a little bit better. I would be hesitant to provide an overall number because I think the dynamics of the different portfolios had a really big impact in the quarter. So that's something that we can take away and try to provide more information on in the future.
Okay. And then last question. Excluding ceding commissions, your gross expenses picked up pretty notably. It looks like double-digit year-over-year. Is that just largely incentive comp related to market conditions? And can we still expect a pretty benign growth rate on expenses generally going forward?
Geoff, I think you can expect a pretty benign from expense standpoint. You have to look back at the details a little bit; a lot of moving parts from incentive comp and sort of comp in general benefits. But I would say, we've tried to be vigilant in this time on expenses while still trying to maintain the focus on making sure we are ensuring sort of long-term, sort of not just viability, but being able to thrive in the long-term. But think it's been proven to make sure we focus on short-term. But I think the right way to think about is still sort of flat, definitely not higher than that as we move forward.
So you could – you envision relatively flat expenses for 2021 as well?
Geoff. It's Nathan. Just to clarify, you said up double-digits year-over-year. Just trying to maybe reconcile back to the numbers that you're – I had a set call $59 million in both periods, but it sounds like you're – you have different figures?
Yes. Maybe I'll follow up online. Maybe it's just how I'm backing out the ceding commission.
Okay.
Okay. Thank you.
Thanks, Geoff.
And your next question comes from the line of Phil Stefano from Deutsche Bank. Your line is now open.
Yes. Thanks and good morning. I think in the prepared remarks, there was a comment and probably once the Q&A as well that the refit activity continues to remain relatively steady. I was hoping you could just give us some commentary around – does persistency continue to be pressured or look similar to mid-2020 in the near term? And at what point do refits slow down even though rates are at these historic lows?
Well – so it's Mike and I'll start with reverse order, relative to market conditions. I mean, when you look at the spread, the margins over the tenure and look at where those spreads are at today versus historic averages, they're still quite a bit wider than normal. So even if rates stabilize or even go up a little bit, lenders have the ability to adjust that margin a little over the tenure note rate. So difficult to say, but I mean, I think that's why we suggested that we would think refinance, the transaction will continue to be pretty prominent in the marketplace.
For us, it's still the lesser amount of the business going forward. And it's been – it bounces around or in probably in – between 30% and 40% at any given month can be refinanced volume, really depending on the lenders, that do business with us in that particular period, the conversion rates et cetera. So I think in general, persistency staying pressured is the right way to think about it, given where rates are at. But I think you really got to follow that rates got lower, we could see persist go lower but that should create market opportunity on the other side from an NIW perspective.
And then as the persistency is pressured, is there any way you could help us think about the benefit from accelerated singles? I mean, presumably, that would remain elevated in this period as well?
Yes. Well, yes, I think so. Now the proportion of singles and a way that look at what's left of our singles population because as noted earlier, we've been writing less of that over recent periods, not just this quarter but over the last year or two. So all things equal? Yes. But the relative size of the singles population is also dwindling.
Got it. Got it. Okay. And looking at re-insurance, it seems like from what I saw in the queue that the quota share [indiscernible] percentage is down pretty meaningfully, something from 30% to the mid-teens for the 2021 treaty. Is that something that you were still contemplating adding people to the panel or is mid-teens the new way to think about the session percentage for the quarter shares moving forward?
So, it's Nathan. Just maybe a point of clarification the 17.5% for 2021 was actually a two year agreement that we entered into with a panel of reinsurers at the end of 2019. So we also had, an additional you know, set of one-year reinsurers that got our total quarter share for 2020, up to that 30% level. We are in kind of early stage discussions with reinsurers about their appetite and what the opportunity is to build on that 17.5% for 2021. So I don't have any update at this point. But I wouldn't – I wouldn't view that as necessarily the level for 2021. It's something that we'll talk about with reinsurers and see what the market is.
Got it. Okay. Understood. That makes sense. Thank you.
And there are no further questions at this time. Presenters you may continue.
Sure. Just want to thank everyone for their interest in MGIC, and I hope you and your loved ones that are happy and healthy. Thanks everyone.
Ladies and gentlemen, that does conclude our conference for today. Thank you for participating. You may all disconnect.