Mgic Investment Corp Q2 FY2020 Earnings Call

Thank you for joining us for the MGIC Investment Corporation Second Quarter Earnings Call. I will now turn it over to Mr. Mike Zimmerman. Please proceed. Thank you. 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 second quarter of year-end 2020 are Chief Executive Officer, Tim Mattke; and Chief Financial Officer, Nathan Colson. I want to remind all participants that our earnings release of this morning, which may be accessed on MGIC's website 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 which we think you will find valuable. I also want to remind listeners that from time to time, we may post information about our underwriting guidelines and other presentations or corrections to past presentations on our website that investors and other interested parties may find valuable as well. During the course of this call, we may make comments about our expectations of the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about those factors, including COVID-19, that could cause actual results to differ materially from those discussed on the call are contained in the Form 8-K and 10-Q that was filed last night. If the company makes any forward-looking statements, we are not undertaking 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 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 hope everyone who is listening is safe and well. I want to express my gratitude to and admiration for my fellow MGIC coworkers and their families. Their efforts day in and day out over the last several months to support our customers through local communities and fellow coworkers, while coping with their own unique circumstances brought about by the COVID-19 pandemic have been remarkable. So thank you. The safety and health of our coworkers and their families is a responsibility I do not take lightly. That is why we continue to operate in a remote work environment, while we provide critical support to the housing market, especially first-time homebuyers. As we navigate through this unusual period, we continue to execute on our business strategies with a goal to position our company to prosper over the long term. We strive to achieve that goal by, among other things, working with the GSEs and servicers on loss avoidance programs, offering competitive products and services to our customers and maintaining a sharp focus on the sources and uses of our capital. We think this is the best approach for all stakeholders and is particularly relevant as we manage through the current environment. I will kick off this call by spending a few minutes providing a high-level summary of our financial results for the second quarter and our current financial position. Then Nathan will cover some more details of the financial results. Finally, I will wrap up by discussing the state of housing finance reform and then open it up for questions. As for our financial results, GAAP net income for the quarter was $14 million. The decrease in net income from prior quarters primarily reflects the increase in loss reserves that we established in response to the material increase in new delinquent loans that were reported to us in the second quarter. Nathan will get into more details in a few minutes. During the second quarter, the volume of both purchase and refinance mortgage originations was very robust. The demand for single-family housing has been very resilient and seems to have actually increased despite the pandemic. Of course, the low interest rate environment makes refinancing very attractive for many borrowers. As a result, we wrote $28 billion of new insurance in the quarter and despite lower persistency on our existing books of business, our insurance in force increased by approximately 8% year-over-year. Refinanced transactions as a percent for monthly new business writing peaked at approximately 44% in April and May. That was back down to 33% in July as demand for purchase mortgages increased and refinanced transactions slowed a bit. The combination of our application data, lender reports and the MBA indices provided us with reasonable visibility into NIW over the next several months. And while our current pipeline remains robust, there's considerably less certainty about mortgage origination levels or credit performance beyond the near term, given the uncertainty impact COVID-19 will have on economic conditions. As a result of that uncertainty, as further discussed in our risk factors and in the 10-Q, it is difficult to confidently forecast our future financial results and capital position. Therefore, we will not be providing any guidance about the potential path or outcomes for insurance in force growth or credit performance, but we'll continue to provide the market with monthly credit metrics. We entered this period of uncertainty with a book of business that had strong credit characteristics. In addition, we are supported by a balance sheet that has a low debt-to-capital ratio, $6.3 billion in cash and investments, contractual premium flow and a robust reinsurance program. Despite the increased number of loan delinquencies and the corresponding increase in minimum required assets required to be held under the private mortgage insurer eligibility requirements of the GSEs, or PMIERs, we estimate that at the end of June, our available assets exceeded the minimum required assets by $1.1 billion. In addition, our policyholder position was $2.9 billion in excess of the minimum state capital requirements. While delinquency notices received in the second quarter were materially higher than the first quarter, there were 38% fewer notices in June than in May. Approximately 67% of our June 30 delinquency inventory and 80% of June new delinquency notices were reported to us as COVID-19-related forbearance plans. The delinquency rate ended the quarter at 6.35%. Although there remains much uncertainty about the potential impacts to credit performance in our business caused by this international emergency, notably the potential for higher incurred and ultimately higher pay losses, we are encouraged by the July new notice and cure activity.

Thanks, Tim. I will spend a few minutes talking about the second quarter, and then we'll turn to some of the uncertainties that Tim mentioned. In the second quarter, we earned $14 million of net income or $0.04 per diluted share which compared to $168 million of net income or $0.46 per diluted share from the same period last year. The difference is almost entirely the result of higher losses incurred that are primarily COVID-19-related. Net premiums earned increased 1%, and the net premium yield declined to 42.7 basis points from 46.5 compared to the second quarter of 2019. Net premiums earned and the net premium yield have several components. The largest component is what we call the in-force portfolio yield, which reflects the premium rates in effect on our insurance in force. The biggest driver of the lower net premiums earned and premium yield in the quarter was the decrease in the profit commission on our quota share reinsurance transactions. With the increase in losses due to the new delinquencies in the second quarter, more losses were ceded to the reinsurers, which lowers our profit commission. While I'm on the topic of profit commission, I want to remind listeners that profit commission is calculated on an annual basis, and there is no clawback of profit commission earned in prior years. In the first quarter, we earned, what I would call, our normal level of profit commission as losses were very low as they had been for the previous several years. As a result of the material increase in ceded losses in the second quarter, our year-to-date profit commission as of June 30 was lower than the year-to-date profit commission as of March 31, which shows up in our financial results as a negative profit commission in the second quarter. Of course, we did receive the benefit of reduced losses as well. The amount of profit commission we earn in future periods will be primarily influenced by the amount of losses incurred that are ceded to the reinsurers. In addition to the profit commission, net premium earned and net premium yield were affected by the lower average premium rates on our insurance in force. Accelerated premiums from single premium policy cancellations had a favorable impact on net premium earned and the net premium yield, an increase from $11 million in the second quarter of 2019 to $33 million in the second quarter of 2020, reflecting the strong refinance market. Net losses incurred were $217 million compared to $22 million for the same period last year. In the second quarter of 2020, we received approximately 58,000 new delinquency notices compared to 13,000 in the same period last year. The estimated claim rate on new notices received in the second quarter of 2020 was approximately 7%. This estimate was influenced in part by the actual performance of delinquent loans, expectations for home price appreciation and the expected performance of borrowers that suffered a financial hardship as a result of COVID-19, and these loans have entered a forbearance plan. Of course, there remains a great deal of uncertainty about the ultimate loss performance of these delinquent loans. When we established loss reserves, we monitor the level of new notices received, the level of delinquencies carried, the uptake of forbearance plans and the current and expected economic activity. Then, using that data, we establish reserves that reflect our best estimate of 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 are net of expected cures, including cures due to successful loan workouts after a forbearance period is over. In the second quarter of 2020, our reestimation of reserves associated with previous delinquencies resulted in approximately $10 million of adverse loss reserve development, primarily attributable to an increase in expected severity. We also increased our incurred, but not reported reserve or IBNR by $31 million. IBNR reflects 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 as of June 30, we estimated the number of loans whose borrowers had missed their June 1 payment, but that had not been reported to us as delinquent. Reflecting the low level of the delinquency inventory that existed in March and the foreclosure moratoriums enacted by the GSEs and others, the number of claims received in the quarter declined by nearly 60% from the same period last year. Primary paid claims declined 44% from $52 million to $29 million. Although most foreclosure moratoriums are set to expire August 31, we expect claim payments to remain modest over the next several quarters due to their effects and the effects of forbearance agreement that are in place. In addition to the effects of foreclosure moratoriums and forbearance agreements, we expect the impact of unemployment and economic uncertainty will cause the delinquency inventory to increase further, although we are encouraged by the July new notice and cure activity. We continue to diligently monitor net underwriting and other expenses. Before ceding commission, they totaled $59 million in the second quarter of 2020, which is flat to the same period last year, while writing substantially higher volumes of business. We previously reported that MGIC did not request or pay a dividend to the holding company in the second quarter. Future dividend payments from MGIC to the holding company will be determined on a quarterly basis in consultation with the Board and after considering any updated estimates about the length and severity of the economic impacts of COVID-19 on our business. We also asked the Wisconsin OCI not to object before MGIC pays dividends to the holding company. And until March 31 of 2021, we will also need to seek the GSE's approval before MGIC pays any dividends to our holding company. As previously disclosed, the holding company Board declared a cash dividend of $0.06 per share payable on August 28. Any future dividends will be determined in consultation with the Board. As of June 30, we had approximately $530 million of cash and investments at the holding company. Our next debt maturity is in approximately 3 years, and our interest expense is approximately $60 million per year, of which $12 million is paid to MGIC on the holding company debt that it owns. At quarter-end, our consolidated cash and investments totaled $6.3 billion, including the cash and investments at the holding company. Investment income was modestly lower year-over-year primarily as the larger investment portfolio was offset by lower yields. The consolidated investment portfolio had a mix of 81% taxable and 19% tax-exempt securities, a pretax yield of 2.8% and a duration of 4 years. Our investment portfolio had a net unrealized gain of $265 million at June 30, 2020; $83 million at March 31, 2020; and $147 million a year ago. At the end of the second quarter, our debt-to-total capital ratio was approximately 17%, and MGIC's available assets for PMIERs purposes totaled approximately $4.5 billion resulting in a $1.1 billion excess over the minimum required assets. As many of you know, the PMIERs generally required us to maintain significantly more minimum required assets for delinquent loans than for performing loans. The PMIERs required asset factors for delinquent loans are based on the number of mispayments and whether a claim has been received. PMIERs allows for these factors to be reduced by 70% under certain circumstances, including related to COVID-19. During the quarter, the GSEs clarified that for loans that become delinquent between March 1 and December 31, 2020, the 70% reduction is applicable for at least 3 months and longer if a forbearance plan is in place. As a result of our strong positive cash flow during the quarter, which increased our available assets, and the application of the 70% reduction of minimum required assets for COVID-19-related delinquencies, our PMIERs excess increased by nearly $100 million in the quarter.

With that, let me turn it back to Nathan. Thanks, Nathan. Before moving to questions, let me address a few regulatory and political topics. During the quarter, the FHFA reproposed the GSE capital rule with comments due at the end of August and have continued the work of preparing the GSEs to exit the conservatorship at some point. What, if any, impact these potential changes have on the MI industry is not clear at this point. That said, we do believe that the FHFA appreciates the benefits of an insurance company structure to 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. And in June, the CFPB proposed changes to the definition of qualified mortgage and the so-called GSE Patch. The revised definition would replace the borrower's debt-to-income ratio in the definition with a pricing threshold. Based on the work that our trade association, USMI did, it is estimated that less than 10% of the private mortgage insurance market will be impacted by the proposed rule, if enacted as is. The 60-day comment period for the proposal ends September 8, and the proposed changes have a targeted effective date of April 2021. While other market options for credit enhancement are scarce or unavailable, our industry and our company continue to provide credit enhancement solutions to lenders, borrowers, and the GSEs. While we are focused on prudent solutions in response to the current environment, we continue to be actively engaged in discussions regarding housing finance policies. We continue to advocate for and remain optimistic that any changes will include the use of private capital, including private mortgage insurance. Long term, we remain encouraged about the future role that our company and the industry can play in housing finance. It continues to be difficult to gauge what actions may be taken 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 #1 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 to be supported by a balance sheet that has a low debt-to-capital ratio, an investment portfolio in excess of $6 billion, contractual premium flow, and a robust reinsurance program. In closing, 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. I want to remind listeners that our company was founded 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'm confident that we have the right team in place to navigate through this period of uncertainty, and we'll continue to deliver the quality products and service our customers that have come to expect from MGIC. With that, operator, let's take questions.

Your first question comes from the line of Jack Micenko.

I wanted to ask about the July cures, which show a very good trend with over 100% cure to the full. Do you have an understanding of what the total delinquency portfolio looks like from a forbearance perspective? Specifically, how many of those July cures or forbearance loans are transitioning out of forbearance or becoming delinquent, if you have any details on that?

Yes. Jack, it's Nathan. I'll take that one. We did put out the new notices in cures, but are still kind of working through our review process on the forbearance-related information that we have as of the end of July. So don't have an update relative to the composition of new notices in cures relative to the forbearance at this time.

Okay. And then you said 7% claim rate assumption on the book drove the loss incurred number for this quarter. I think you were at 9% last quarter. So curious what if the model really changed? Obviously, forbearance outcomes are probably going to be a lot different than true defaults. But just curious, was it the improvement that you saw sequentially through month-to-month of the quarter? Or was there something else to drive that change?

Yes. If you remember at the end of the first quarter, there was still a lot of uncertainty regarding forbearance plans, including their uptake and the associated rules. However, much of that has become more defined throughout the second quarter. From our viewpoint, economic conditions may have improved slightly. The increase in forbearance uptake and the new options available to borrowers in forbearance, such as the 12-month payment deferral related to COVID-19, suggests there might be benefits, leading to a lower claim rate in that category. With 67% of the inventory and 80% of the new notices in June being in forbearance, this positively impacted the claim rate compared to last quarter.

Okay. If I could ask one more question. You're down about 4 basis points on the in-force yield year-over-year. How are you considering the concept of terminal velocity? At what level do we expect the new money yields and the old money to begin balancing out? Is that in the low 40s or mid-40s? How should we think about it?

Jack, it's Mike Zimmerman. The main factor this quarter is the profit commission and the ceded losses. When we look at the sequential decline in yield, we've included a reconciliation in the press release. Although we experienced an increase in single premiums due to the refinancing, this was more than negated by the rise in ceded losses, which has a negative impact on our profit commission. As we assess the yield's impact moving forward, it's crucial to understand its potential fluctuations and what levels we might see. This will depend heavily on how the losses evolve, the new notices we receive, and any potential cures from existing notices. Overall, while there was a substantial decrease this quarter, it's primarily due to accounting related to the losses, and I believe our long-term outlook remains aligned with our expectations.

I guess, touching on Jack's last point. Can you talk about pricing during the second quarter and kind of how that trended compared to the increase you guys saw and talked about in the last earnings call?

Yes, it's Tim. I mean, I think from my perspective, we continue to be focused on making sure that our premium rates are obviously competitive, but prudently growing the insurance in force and long-term value. And we wrote a lot of volume this quarter. I think we felt really good about sort of the risk return dynamic on that, but I don't want to get into a lot of specifics related to competitive pricing.

Okay. Do you have an idea of how your new insurance written might have compared to the market? Do you think you gained or lost market share?

I'd say, it's tough to know at this point. Again, I think we feel really good about the book of business that we wrote in the quarter. And the fact we grew our in-force portfolio. But until all the others report, I think it's difficult to know exactly where we landed other than we're really happy with the business that we wrote.

I wanted to break apart new notices a little bit with respect to reserving. I think you said 80% of notices were forbearance. And obviously, the remainder were not. 7% incidence, how does that break apart right now in your view of non-forbearance versus forbearance loans?

Jeff, it's Nathan. We did not differentiate between forbearance and non-forbearance loans when setting our factors. We ended the last quarter with a 9% overall rate, with some reduction in forbearance, but overall forbearance remains high. So it's best not to analyze it in that way. Forbearance plays a qualitative role in our decision-making regarding claim rates. However, it's important to note that there is significant uncertainty surrounding this, as we are dealing with unprecedented circumstances.

Yes, so what I'm trying to get a read on is when forbearance goes away, if we're facing kind of the current economic situation, is that a 10% incidence environment or something that's 12%, 13%? Any kind of qualitative comment around that?

Yes. I believe there is still interest in forbearance plans, although market data suggests that many individuals are exiting them or recovering from forbearance. We should gain clearer insights into this in the coming months. However, the future claim rate for non-forbearance items will largely depend on the economic situation at that time and the outlook from that point onward. Therefore, it's somewhat challenging to predict. I think that without forbearance plans, our claim rate for the second quarter would likely have been higher. However, I wouldn't want to commit to any specific number, especially regarding future projections.

You noted that the 70% discount that's in place for PMIERs is in place until the end of the year. What happens after that? Or does that stay in place as long as COVID-related forbearance is being offered by the GSEs? Or is there sort of visibility on that?

Yes. This is Nathan. I think you can consider it in two parts. The clarified rule regarding capital under PMIERs will address all delinquencies for the remainder of the year as COVID-related for at least the first three months. During this time, we can apply the 70% haircut. Additionally, for loans in a forbearance plan, we will continue to benefit from the 70% haircut while the loan remains in that plan. Loans entering forbearance may have plans extending into 2021. Furthermore, the GSEs have clarified that during a post-forbearance workout period, such as a repayment or trial modification plan, the 70% haircut will also apply during that time.

Okay, great. That's helpful. And then just in terms of the ILNs, I was curious, do you guys see any value in some of the high attachment point ILNs that we've seen from a couple of competitors, so it looks sort of like statutory capital ILN structures? What are your thoughts on that?

Yes. This is Nathan again. Regarding the ILN market, it's encouraging to see multiple MI companies accessing that market. The terms currently aren't as favorable regarding attachment points and pricing levels compared to pre-COVID, but that's to be expected. We continue to assess that market and would consider actions if we believe it makes sense. However, the very high attaching structures may serve purposes beyond risk mitigation or PMIERs capital. While I see some value there, it hasn't been our primary strategy. It's worth noting that we have a substantial quota share program that differs from some competitors, who have utilized ILN structures in various ways.

Okay. Let me just sneak in one more. The 2007 and '08 books where you've seen obviously a pretty decent pickup in the delinquencies. So what are the mark-to-market LTVs on those books?

Bose, this is Mike. First off, the delinquencies did pick up but significantly less than we saw in the '09 and forward book. I don't have that right at my fingertips here, but maybe during the course of the call, we'll come back and give you that mark-to-market LTV for those books.

How should we think about the ILNs impacting incurred losses going forward? If you continue to have elevated new notices, is there a point at which kind of the incurred loss per new notice starts to go down as you start to breach some of the threshold delinquency levels that bring back your reinsurers on risk?

It's Nathan. No, that's exactly right. Right now, any losses incurred that we are experiencing on the loans that are covered by those ILN transactions are still within our retention players on those deals. So we are absorbing the losses on an accounting basis there. If it did get to the point where the cumulative losses incurred were above the attachment point, we would begin ceding those losses incurred to the ILNs.

Okay. And do you have a general sense of kind of what delinquency rate, we'd start to see that become a meaningful driver of the incurred number?

I don't have the exact details right now because those are closed pools that are depleting rapidly, particularly due to the low persistency we have experienced. I would need to verify the effective attachment point at this moment. However, looking ahead, I would estimate that it could be fairly high, possibly above 5% in terms of expected loss rates, especially as those deals continue to reduce leverage with loan prepayments.

Okay, got it. And then just on the profit commission, I think, Nathan, you indicated that those are done on an annualized basis, and there's no clawback. But is that determined on incurred losses or paid claims?

It's on an incurred basis. So it's really on a kind of an accident year basis. So we have all of the notices associated with a given accident year. The ultimate losses associated with those becomes the loss number in that calculation.

Okay. So if there are positive developments later on, and perhaps you overestimated the claims rate on these new notices, you don’t get that money back?

No, we would. Currently, we expect that very few, if any, of these have led to paid claims. This is mainly about setting up reserves at this stage. If it turns out that our reserves are too low and losses are ultimately higher, we would earn a smaller profit commission. Conversely, if our reserves are too high and actual losses are lower, we would get a larger profit commission. It balances out, but remains within the context of the accident year. So 2020 is treated as a separate year, but we will continue to adjust it based on any updated estimates of ultimate losses.

I want to revisit your question about the mark-to-market loan-to-value ratio. This is calculated at the CBSA level, which provides you with the comparison. For those two book years, you're seeing ratios below 70, and likely this applies to all book years from '08 and earlier. When considering the mark-to-market LTV at the CBSA level from the '18 book and earlier, it's probably at 80% or less for those much older books, and significantly lower.

Housing prices have been quite firm, I guess, because of demographics and low interest rates and tight supply. What are you assuming for the loss per loan? And what happens if the holder of the mortgage gets all their money back? Do you get a recovery on the loan part of the originals reserve?

Sure. It's Mike here. If there is no loss on the property, then the claim is unlikely to be submitted to us, or if it is submitted, it would be classified as a $0 paid claim. However, if the lender or the insured recovers the full amount owed through the sale of the property by the borrower, then there is no claim for the mortgage insurance.

But what if it's foreclosed and sold for more than the uninsured balance of the loan?

So there's a few states, and I'd have to get the list of them where there's ability to go after and to get the technical term or where you go to the borrower resources to see if there's any valid any assets that the borrower has. And there's only a few states that have that ability to kind of go back to the borrower. Quite frankly, what we've seen in our experience over the years of doing that, very little recovery comes from those borrowers because quite frankly, they don't have the asset levels.

What happens if the lender forecloses and sells the property for more than the outstanding uninsured balance? Do you recover some of the claims that you previously paid, or do you only settle the claim after the house is sold, meaning you would only pay part of the insurance balance?

Yes, ownership must be transferred for us to settle the claim. If the lender has foreclosed and taken ownership, a claim would be submitted, and we would evaluate if there was a loss. If we determine that we have the option to acquire the property instead of paying the claim, we would assess the same factors as the lender. For example, if property values have increased, and the borrower did not sell to prevent foreclosure, we might choose to acquire and hold the property. This could mitigate any loss we might incur if we did make a payment. Essentially, we have the right to acquire the property if it can be sold for a higher price, which would help reduce our potential losses.

Got you. So when you set up your initial reserve on the default notice, do you assume a total loss on the insured balance?

In the last quarter, the severity was around 100%. We evaluate what the severity would be, especially for some loans in New York and New Jersey where we paid claims that were delinquent for 7 or 8 years, indicating a very high severity. Currently, we are paying more like 120%. As for more recent claims due to price appreciation, we are likely seeing less than 100% severity. We adjust accordingly when we set up the reserves.

Okay. But rising house prices do give you a lot of protection then on defaulted loans?

I wanted to go back to the 70% haircut in the capital requirements and just understand, I guess, one thing I've been struggling with. As the time in forbearance gets longer, is there an increase in the capital requirements that you have on that mortgage? And then the 70% haircut applies? Or are we locked into this 2- to 3-month kind of aging capital requirement over the duration of the forbearance program?

It's Nathan. You were correct in stating that the 70% reduction applies to the underlying PMIERs factor that is related to time and delinquency. Therefore, while the 70% reduction remains in effect, the factor by which it is reduced continues to rise as the loan ages in delinquency. This means that the required amount of capital increases as the item ages, although not by the full amount indicated in PMIERs, but rather by 70% less than that full amount.

And Phil, just a quick reminder that the first step-up moves to 55%. When it reaches the 2 to 3 categories, and by the time it gets to before claim, it goes to 85%. There is indeed incremental capital, but the significant increase happens with that first move.

Yes. Part of my fear was in not understanding this, could there be a double whammy next summer, as you get the step-up in the aging and you also get the potential falling off of the haircut, but it doesn't seem like that's the case. Or at least I don't want to risk getting ahead of myself, right? But no, I think that makes sense. When you had talked about gross expenses in the quarter of $59 million were flat year-over-year. Is there anything you can point us to from a benefit of people just being stuck at home and your salespeople can't be out on the road, doing what they do as a salesperson? Was there any expense benefit to this shelter-in-place world that we live in?

This is Tim. I would say, for us, it's modest. I mean, there are some savings there, obviously, from travel and marketing expense. But I would say, for us, our expectation is that that's not significant.

Got it. Okay. Regarding the earlier question about the profit commission, I understand that it's calculated on a year-to-date basis. What I was trying to clarify is whether a substantial favorable development number that may arise next year concerning this year's reserves would have any effect on the profit commission for either 2020 or 2021.

So again, think about the years as accident years. For instance, the new notices for the second quarter of 2020 will be linked to the 2020 accident year. As we continue to revise our estimates of ultimate losses, this will be reflected in the updated estimates of ceded losses, which will influence the profit commission. There is a true-up, but it remains within the accident year. So 2020 operates as a stand-alone year, but we will keep adjusting it based on any new estimates of ultimate losses.

Okay. Maybe to ask it differently, we've seen adverse development this year, which is potentially on the 2019 reserve losses. Did the 2019 profit commission change at all based on the adverse development that we saw this year?

I'd need to check, as I'm not certain what the adverse development is linked to in terms of book years, but there weren't many losses in 2019. However, if you were to assume that the adverse development was related to 2019 and that the loans in question were part of the reinsurance quota share deal, then yes, the profit commission would have decreased by the amount that ceded losses increased. Most of that adverse development was tied to older types of loans that are less likely to be included in our reinsurance deal or are covered at a lower percentage. So my reference to 2019 was merely illustrative, not suggesting we believe the development originated from that year.

No further questions from the phone line. Presenters, you may continue.

Okay. This is Tim, again, just want to thank everyone for their interest, and I hope everyone is able to stay healthy and safe out there. Thank you again. Have a great day.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.