NMI Holdings, Inc. Q1 FY2021 Earnings Call

Good day and welcome to the NMI Holdings, Inc. First Quarter 2021 Earnings Conference Call. I’d like to turn the conference over to your host, Mr. John Swenson. Please go ahead, sir.

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

Thank you, John. And good afternoon, everyone. I’m pleased to report that in the first quarter National MI delivered strong financial performance, record NIW volume, and significant growth in our insured portfolio. As we talk today, I’m greatly encouraged. The stress of the COVID pandemic has begun to recede with the rollout of the nationwide vaccination effort. The economic environment has stabilized with stimulus funding and the broad resumption of personal and business activity, spurring job creation and growth. And the housing market has continued to demonstrate remarkable resiliency and foundational strength. Against this backdrop, we achieved a record $26.4 billion of NIW and ended the quarter with $123.8 billion of high-quality insurance in force. We are helping more borrowers than ever before gain access to housing. Credit performance in our in-force portfolio continues to trend in a favorable direction. And we are increasingly optimistic as we look forward given the quality of our underlying book, sustained resiliency of the housing market, and strengthening macro environment. Mortgage note rates have increased after touching an all-time low in January. And while the move higher has garnered significant attention and shifts the refinancing opportunity for certain homeowners, current rates are stable at approximately 3% nationally and remain highly constructive for our core purchase borrower. The movement in rates also holds the prospect of slowing the pace of turnover in our existing portfolio, allowing us to retain the high-quality business that we have worked hard to originate for a longer period of time. Shifting to Washington matters. We applaud the continued effort to assist those borrowers who are still impacted by the COVID crisis. The recent extension by the GSEs of their forbearance timeline and the changes proposed by the CFPB to the foreclosure process are important additional steps. The recovery from the pandemic, while broadly accelerating, will not be even, and as the immediacy of the crisis recedes there will still be many in need of support. We believe policymakers, regulators, and others in Washington are committed to providing additional assistance to help as many borrowers as possible remain in their homes and resume their lives with limited interruption once the pandemic has passed. More broadly, the Biden administration and new congressional leadership have signaled their focus on the housing market as an early priority. Expanding access to home ownership and all the benefits it provides, a safe environment in which to shelter, an ability to establish a community identity, and an equitable opportunity for long-term wealth creation in a manner that appropriately guards against systemic risk, is critically important. And we believe there is continued recognition in Washington of the value that National MI and the broader private mortgage insurance industry bring to this effort, providing borrowers with down payment support and equal access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn. Overall, we had a terrific quarter and are well positioned to continue helping borrowers and delivering on the goals that we set for our business. With that, let me turn it over to Claudia.

Thank you, Brad. The strong performance of our team and business continued in the first quarter. We delivered record NIW volume, achieved significant growth in our high-quality insured portfolio, and reported strong bottom line profitability and returns. GAAP net income was $52.9 million or $0.61 per diluted share and adjusted net income was $53.4 million or $0.62 per diluted share. GAAP return on equity was 15.4% for the quarter and adjusted ROE was 15.5%. The private mortgage insurance market remains highly constructive from a risk, pricing, and demand perspective. And we were able to help lenders and deliver valuable solutions for borrowers at a record pace in the first quarter. We generated record NIW of $26.4 billion, up 33% from the fourth quarter and 134% compared to the first quarter of 2020. Our NIW growth in the quarter was all organic. We remain focused on helping all lenders equally and supporting borrowers on consistent terms across the market. In the first quarter, we activated 24 new lenders. We are now doing business with a broadly diverse group of more than 1,200 high-quality originators, including 179 of the top 200 lenders nationwide. We have been consistent in our approach to the market, leading with a consultative sales engagement and clear value proposition of certainty of coverage and differentiated service. We also found new and innovative ways to engage with lenders and to deepen our customer relationships as the COVID crisis developed. Our customer success, tallied over the last several years, helped fuel our record volume in the quarter and allowed us to achieve strong growth while maintaining our strict focus on credit discipline and risk-adjusted returns. Additionally, the broad push towards technology and digitization across the origination landscape has provided us with an accelerated ability to ramp our NIW volume once we have activated an account and quickly scale our new customer relationships. While we achieved record NIW volume in the first quarter and enjoy continued momentum through April, we have seen an early impact from rising interest rates in our flow of refinancing applications, which is a precursor to NIW volume. Notwithstanding the shift in refinancing activity, our outlook is positive. Long-term demographic trends support robust purchase demand. The experience of the pandemic has reinforced the value of home ownership, and credit discipline remains paramount throughout the mortgage market. Our team is engaged and working hard every day. Our lender activation pipeline is healthy. Our strategy to differentiate with customers while maintaining credit discipline and a balanced focus on risk-adjusted returns is working. And we expect to grow our insured portfolio, responsibly deploy capital, and drive value with consistency over time. With that, I’ll turn it over to Adam.

Thank you, Claudia. We delivered strong financial results in the first quarter, driven by our record NIW volume, strong growth in our insured portfolio, and continued resiliency in our credit performance. Net premiums earned were $105.9 million, adjusted net income was $53.4 million or $0.62 per diluted share, and adjusted return on equity was 15.5%. Total NIW of $26.4 billion included $23.8 billion of monthly production. Purchase originations accounted for 68% of our volume in the quarter. Primary insurance in force was $123.8 billion, up 11% from $111.3 billion at the end of the fourth quarter and up 26% compared to the first quarter of 2020. 12-month persistency in our primary portfolio was 52%, down from 56% in the fourth quarter, primarily reflecting refinancing activity from borrowers who locked prior to the recent increase in mortgage note rates. We expect persistency will begin to rebound in the second half as refinancing activity slows and the record volume of business that we’ve written at exceptionally low interest rates over the last 12 months stays on our books for an extended period. While refinancing volume, as Claudia noted, may be impacted in future periods due to rising rates, we expect improving persistency will provide a balance, helping to absorb the impact of any potential change in volume. Improving persistency is particularly valuable as a portion of our existing insured portfolio was originated in a higher premium rate environment. And the extension of our monthly policies provides us with a continued flow of premium revenue without the contribution of additional acquisition costs. In-force business will also, all else equal, generally perform better as a claims matter given the benefit of seasoning. Net premiums earned in the first quarter were $105.9 million, up 5% compared to $100.7 million in the fourth quarter. We earned $9.9 million from the cancellation of single-premium policies compared to $11.7 million in the fourth quarter. Reported yield for the quarter was 36 basis points compared to 37 basis points in the fourth quarter, primarily reflecting the decreased contribution from cancellation earnings during the period. Investment income was $8.8 million in the first quarter compared to $8.4 million in the fourth quarter. Underwriting and operating expenses were $34.1 million compared to $35 million in the fourth quarter. Expenses in the first quarter included $378,000 of costs incurred in connection with our most recent ILN offering in April. We expect an additional $1.8 million of ILN issuance costs to come through in the second quarter related to the transaction. Excluding ILN-related costs, adjusted underwriting and operating expenses were $33.7 million compared to $33.3 million in the fourth quarter. Our GAAP expense ratio was 32.2% compared to 34.7% in the fourth quarter. And our adjusted expense ratio was 31.8% compared to 33% last quarter. We had 11,090 defaults in our primary portfolio at March 31st compared to 12,209 at December 31st, and our default rate declined to 2.5% during the period. At quarter end, 14,805 or 3.4% of the loans we insured in our primary portfolio were enrolled in a forbearance program, including 9,988 of the loans in our default population. Our credit performance continues to trend in an encouraging direction with an increasing number of impacted borrowers curing their delinquencies and fewer new defaults emerging as the stress of the COVID crisis recedes. At April 30, our default population declined to 10,060 and our default rate fell to 2.2%. Of note, the number of loans in our portfolio that have missed at least one payment but not progressed into default status, an important leading indicator of our near-term credit performance, is at its lowest level since last March and nearly back to pre-pandemic levels. Looking forward, we’re optimistic that we will see continued improvement in our credit performance as the strength of the housing market carries forward, the broader economy recovers at an accelerating pace, and the nationwide vaccination effort allows for the broad resumption of personal and business activity. Claims expense was five million in the first quarter and our loss ratio, defined as claims expense divided by net premiums earned, was 4.7%. We re-evaluate the assumptions underpinning our reserve analysis every quarter and as we progress through the remainder of the year, we’ll consider, among other factors, the performance of our existing borrowers, the availability of additional support for those still in need at the end of their forbearance period. We have additional support for those still in need at the end of their forbearance period. And the underlying resiliency of the housing market and path of house price appreciation to determine whether further changes to our claims reserve are necessary. Interest expense in the quarter was $7.9 million. And we recorded a $205,000 loss from the change in the fair value of our warrant liability during the period. GAAP net income for the quarter was $52.9 million, or $0.61 per diluted share. Adjusted net income, which excludes periodic transaction costs, certain fair value changes, and net realized investment gains and losses, was $53.4 million, or $0.62 per diluted share. The ILN that we closed last week, our sixth offering, builds upon our previous success in the risk transfer markets and extends our comprehensive re-insurance coverage across our most recent production. The $367 million dollar deal is our largest to date and provides coverage on risk originated primarily between October 1 of 2020 and March 31 of this year from a 1.85% attachment point up to a 6.75% maximum detachment. The transaction carries an estimated 3% weighted average lifetime pre-tax cost of capital. The attachment point on the deal, akin to a deductible, is tied with the lowest we’ve ever achieved. And the estimated lifetime cost of the transaction is close to the tightest levels of any of our pre-COVID offerings. Total cash and investments were $1.9 billion at quarter end, including $78 million of cash and investments at the holding company. Shareholders’ equity at the end of the first quarter was $1.4 billion, equal to $16.13 per share, up 14% compared to the first quarter of 2020. We have $400 million of outstanding senior notes, and our $110 million dollar revolving credit facility remains undrawn and fully available. At quarter end, we reported total available assets under premiums of $1.8 billion, and risk-based required assets of $1.3 billion. Excess available assets were $549 million. The ILN issuance that we closed in April is not included in these figures as it was completed after quarter end; the $367 million offering will further bolster our excess position and provide even more funding runway for future periods. Overall, we delivered strong results for the quarter with record new business production, strong growth in our insured portfolio, and encouraging credit performance, driving significant profitability and a strong mid-teens return. With that, let me turn it back to Claudia.

Thanks Adam. Our performance in the first quarter with record NIW volume and primary insurance in force, significant profitability and a strong mid-teens return builds upon the strength and resiliency we’ve demonstrated through the duration of the COVID crisis and stands out in a dramatic way. We’re optimistic as we look forward with the stress of the COVID pandemic beginning to recede, the outlook for the economy improving sharply, and the housing market continuing to strengthen. Against this broadly improving backdrop, we believe we are well positioned to continue to win with customers, drive growth in our high-quality insurance portfolio, maintain the right risk return balance, and deliver strong results for our shareholders. Thank you for joining us today. I’ll now ask the operator to come back on so we can take your questions.

Your first question comes from the line of Mark DeVries, Barclays.

Yes. Adam, as you point out, your premiums access continues to build in this probably well above any kind of cushion. Can you just talk about updated thoughts on how that gets deployed over time, whether it’s into the business or return to shareholders?

Yes, sure Mark I’m happy to. I think it’s worth perhaps clarifying one piece. The dollar size of our premium cushion is obviously quite significant at $549 million at March 31, but as a ratio, that’s approximately 44%. Our long-term goal is to operate with roughly a 35% cushion above our minimum required amount and when we’re writing as much business, as much high quality business as we did at record levels in the first quarter, we’re continuing to consume the organic capital that we generate and then have additional needs. And so as we look forward, we would like to get to a point of increased efficiency from a premium access standpoint. But right now, the way we get there is by investing in our core business, writing business that’s expected to generate a strong mid-teens return and really doing what we’ve proven to do best, which is deploying that capital responsibly in the MI market.

Okay got it. And then any updates you can provide us on just the latest pricing trends we’re seeing across the industry?

Yes, sure Mark. I mean what we see is the pricing environment remains constructive and importantly, the unit economics and the expected returns on the new business continue to be very attractive. So overall we see a very constructive environment in the market.

Okay. No additional pressure from competitors looking at the loss expectations and realizing things aren’t as bad as they might have thought in the summer?

No I mean, look it’s a competitive market, but nothing that stands out. It remains constructive. It remains also, I think all the MI companies, we all find our place in the risk. I mean risk isn’t static and we all have different lenders that we’re working with, but overall we feel it’s a constructive environment.

Next question is from the line of Doug Harter with Credit Suisse.

Hey, good afternoon this is Josh Bolton on for Doug. First, any more color of thoughts you can give us around the drivers of the premium yield decline during the quarter, and where you expect that yield to trend over the coming quarters? And then secondly, it looks like the company gained from our math, gained a decent amount of market share in the quarter. Curious if you have any thoughts behind what drove that and how sustainable that is.

Sure I’ll take the premium yield question and then Claudia will give you a perspective on the share piece and the volume in the quarter. Our net yields in the quarter were 36 basis points compared to 37 basis points in Q4 and the move largely traces to a decline in the contribution from our cancellation earnings, which were $9.9 million in Q1 compared to $11.7 million in Q4. That shift paired with the growth in our insurance in force, right, because it’s a ratio, so a decline in the contribution of cancellation earnings as a dollar amount, plus the growth in the denominator in the form of insurance in force cost us one basis point of yield in the quarter. In terms of guidance through the remainder of ‘21, we’re not going to provide anything explicit, but the one item I would note is that we will see the cost of our most recent ILN begin to come through in the second quarter.

And Josh regarding a question on the drivers, it was just a terrific quarter. We’re really proud of the team and proud of what we achieved. We’ve been working on this for a long time, for close to 10 years now. Building our business and our lender base and putting ourselves in a strong position to succeed. That hard work comes through in this quarter. In terms of specific drivers beyond the decade of heavy lifting to build the company, I find two things. First, the digital evolution that we’ve seen and I’ve seen accelerate as a result of COVID has allowed us a significant boost. Digital engagement with lenders matters more than ever before. And while relationships are still highly critical, the adoption of MI comparison tools by the lenders is driving a shift, a shift towards ratable distribution in our industry. And when you pair that with all the hard work we’ve done to build our lender base it’s all clicking and it’s driving our record NIW. And I also note we chose to prudently layer a modest amount of incremental risk into the portfolio, our risk appetite isn’t static. And this is an environment where we felt we can layer on additional flow in NIW, and still maintain the full integrity of our high quality portfolio. But overall it was just a terrific quarter and Josh as it relates to sustainability, what we’re most focused on is serving our customers and their borrowers, deploying capital responsibly and in a manner that allows us to generate strong risk-adjusted returns. Things will always shift quarter over quarter, but we don’t have any reason to anticipate significant fluctuations. I just note with that said, the refi cycle is slowing, and there are even some headwinds in the purchase market because of housing availability.

Your next question is from the line of Bose George with KBW.

First I wanted to ask about expenses and what to expect there, with down this quarter, despite this strong NIW.

Yes, obviously we’re pleased right. Our focus has always been on efficiency and that remains the case today. So adjusted operating expenses of $33.7 million in the first quarter is a good result, particularly given the scale of our growth and performance on the bill side of the business. In terms of a progression through the year, we expect a modest increase from our Q1 operating expenses, as we do continue to invest in growth with some variability tied to the pace of reopening broadly and what that means for our TNE spend, certain performance-related costs, as well as the rate of turnover in our in force portfolio. I mentioned in the fourth quarter and it continues to come through, that with advancing turnover comes an impact on our DAC recognition. So all of those will be items that may cause some fluctuation, but net we expect a modest increase as we progress through the year from the Q1 level.

So next, I just want to go back to the NIW discussion and the sustainability. I mean just looking at the companies that have reported, it looks like your market share moved in line with the industry, with the peers. And do you feel that’s a level where kind of maintain sustainability of that? If you could just discuss that because it looks like there was just a meaningful shift this quarter.

Sure, yes we’re not focused on market share, but we are proud of our ability to deliver such strong growth in our NIW volume and to this insured portfolio. We’ll obviously be able to measure market share after everyone reports, but we do expect that we’ve gained some ground in the quarter. And like I mentioned before, this is years in the making, but we certainly did have what I would call almost a force multiplier when you think about the digital side of the business. And we did layer in a slight amount of risk into the business, but it’s a lot of years of hard work. We feel really good about what we’ve achieved.

So we obviously are always building towards things in a sustainable way, which is why Claudia in her prepared remarks mentioned that this is all organic, because it was. And organic obviously provides us with greater conviction about our ability to maintain the success and the increase that we’ve achieved. But, and I tell you volume is going to fluctuate. It naturally does, it moves from period to period, besides the market itself is going to fluctuate. Our success with customers in any given period will naturally evolve. And our risk appetite is not going to be static. And as we think about it, obviously putting on high quality, high return, high expected return business is critically important, but most important over the long-term is that we continue to build our insurance in force because it’s our insurance in force that’s driving both our current period and long-term financial results, not just for NIW in any given period.

Okay next question is from the line of Arren Cyganovich with Citi.

Claudia, I was hoping you could maybe just expand a little bit about what you mean with digital engagement with the lenders. Are there specific actions that you’ve taken this past quarter, or is this something you’re saying has been an ongoing process you’ve been doing for several years?

Sure, Arren. The digitization of the mortgage market overall, and then the adoption of technology for our lenders. It’s been a focus that we’ve actually looked at for a long time now. And it touches a huge number of different parts of the mortgage origination and closing process. In terms of what it means for our engagement with lenders and why it’s such a strong catalyst for our growth, I note two things. One is it amplifies our visibility in the market. It’s now less about being directly in front of a loan officer, processor, or an underwriter, that in the gave us hundreds of touch points per day. It’s now about being active with the lender, visible on their platform. And it immediately provides us with tens of thousands of touch points per day. So it’s really substantial. The other thing is the digital market breaks down old habits for the lenders. For that loan officer, processor, underwriter may have been historically skewed towards their longer tenured MI relationship, that has really shifted that dynamic. No longer does it, you have a habit just to go to one of the longer-term at my company. So it’s been a significant transformation for us and for the industry.

That’s very helpful. And then just on the persistency, it was mentioned that it’s going to improve in the second half of the year. Do you view this as being more of a step function in the third quarter, or will it be a little bit more gradual as we think about that?

Yes it’s going to be a bit more gradual. We expect that it will begin to improve in the second half, and that’s going to be from both the benefit of the recent increase in rates and its impact on refinancing activity. But also importantly, because the farther into the year that we progress, the more of the business that we wrote last year comes into the calculation because it’s a 12-month persistency calculation. So it only includes business that was on our books 12 months ago when we report that number. That improvement that we expect to come through, we anticipate it will be modest at first before accelerating more fully as we actually roll past year end and into 2022 when the full effect of the record $62.7 billion of NIW that we wrote last year at exceptionally low note rates comes into the calculation for the first time.

Your next question is from the line of Rick Shane with JP Morgan.

First, I’d love to just talk a little bit, Adam, you mentioned some of the different factors that you’ll consider as you think about the reserve rate going forward. When we look at the delinquencies on a dollar basis, they’re down. The reserve is up slightly this quarter and some of that makes sense given the aging of the loans that are in default. I’m curious how much latitude do you think those additional factors will give you as you move forward?

Yes, Rick, it’s a great question. And I would say it’s not so much about latitude, but candidly, this quarter more about a deliberate posture that we’ve taken. Our reserves do reflect, as they always do, our best estimate of ultimate claims exposure and in this instance, as of March 31. At this point, we spent a lot of time in the discussion earlier highlighting the broad optimism that we have about where the market, our business, and our credit performance are trending because in the macro, things are getting better, measurably better every day. Vaccines are paving the way for a broad reopening, the economy is rebounding sharply, and every day that goes by the housing market continues to be enormously resilient. Our default population is also declining at an accelerating pace. Our default inventory was down 9.2% from December 31 to March 31. And it just declined by 9.3% in the month of April alone. But as far as our reserving posture, we have decided to anchor more to our downside scenarios, not necessarily accounting for the prospect of additional assistance that may be offered to borrowers beyond forbearance at all, and embedding a more muted assumption for house price appreciation over the next several years, as we set those reserves. And we think that’s appropriate to be broadly optimistic in our outlook for the business overall and the decisions that we’re making, but still to anchor as a reserving matter more to the downside because of the way that we, as an MI company, establish our reserves. We’re not a bank. We don’t establish a bank-like Cecil reserve for the entirety of the loan portfolio. It’s only for the small subset of the loans that are in default in our portfolio that we’re establishing a reserve for. And so in a unique environment like we have now, like the pandemic presents, we’re comfortable, if you will, living with a little bit of that duality of broad optimism, but also anchored to a downside for purposes of reserves. We’re going to see where things develop through the course of the year to continue to assess that posture. We want to see what happens as we get out into the back end of the year after the current forbearance programs expire. And those will be items that we look for to consider whether or not that deliberately conservative posture should be moderated.

Got it. Look, I appreciate the answer and I think one of the things that is different to your point is that versus Cecil, there is less of an economic factor influence. It really is more specific to the loans that are in default and the aging of those loans, regardless of whether or not they are likely to cure becomes more dispositive in the short term.

That’s right.

Your next question is from the line of Mark Hughes with Truist.

I think you may have just addressed this in broad strokes, but looking at the current year claims number, but $10.6 million of meaningfully on a sequential basis, surely the portfolio is bigger and you’re being conservative, but that seems like a meaningful jump. I’m just curious on the drivers of that.

Yes. And Mark, it’s a great question. And in fact, we provided some additional footnoting this quarter to help highlight one interesting dynamic that really only emerges in the first quarter for us. And it emerges in a more significant way this year than in years past given the size of the default population. We established net case reserves of $5.3 million for the 1,767 new defaults that came through in Q1. We also established an additional $5.3 million of net IBNR reserves during the period, but the amount that shows in the current period row for our IBNR reserves isn’t calculated based solely on the Q1 defaults. It’s calculated based on the entirety of our default population and case reserve position, inclusive of prior period case reserves that are carried at March 31. And so that dynamic skews the optics of the reserve role table, but you can largely normalize for that if you simply subtract $5 million of that $5.3 million of IBNR reserve that was established in Q1 from the current period line. And if you add it back in to the prior period line, that will give you a more normalized view. And that normalized view yields about a five and a half million of current period reserves and about $500,000 of favorable development on prior period defaults. And that’s how you get to our $5 million of net claims expense incurred in Q1.

That’s very helpful. Brad, regarding your point about the government prioritizing private capital over taxpayer money to manage risk, do you see any significant regulatory changes emerging compared to what you discussed a few months ago?

Yes, Mark. There’s obviously a lot being talked about with the new administration a lot of discussion about tax reform, both personal and business taxes. A lot of positive movement on the forbearance side and the extensions that were recently announced there. But basically, I think the environment’s very constructive. I think housing has really been a bright spot throughout the pandemic. And I’m sure that the new administration appreciates that and won’t be hasty in terms of doing anything to affect that negatively. So we just feel that the overall regulatory environment is good and likely to stay that way even though we’re coming up to a period when there could be some changes that could come to pass. So it’s constructive but too early to draw any long-term conclusions.

Your next question comes from the line of Randy Binner with B. Riley.

Mostly asked and answered, but some persistency I’d just try a different way. Understanding that there’s an offset as persistency comes back and helps the model, there’s less volume. And so that would usually recover around now. It’s quite a bit lower than we thought in the quarter. And so the question is, is there maybe something different this time where you just have this really hot housing market, a function of a good economy or a dynamic in housing versus the economy we haven’t seen before where you just keep seeing more refi activity or more loan activity and persistency can stay low and volatile for a prolonged period of time? Is there a chance of that? Because if you try and draw the data points together, they’re still all over the place. So just wondering if there could be some different dynamic this time around.

Yes, it’s great. Randy, it’s a great question. We ask ourselves that as well, but I would call it, is there some type of a purgatory position where rates are high enough that it weighs on refinancing activity in a way that somehow doesn’t really slow the rate of turnover in the portfolio where we don’t get that balance to it. And the interesting piece for us is that while all of our business is incredibly high quality and it’s priced to achieve attractive risk adjusted returns, there’s somewhat of a bright line distinction between our pre-COVID and post-COVID business as a note rate and by extension as a refinancing matter. And that’s because the decline in interest rates and mortgage note rates at the onset of COVID was somewhat spectacular in its speed and its magnitude. Things pushed almost immediately. And that means that our pre-COVID book, which when we’re talking about it, we generally bucket that to include all business written on or before March 2020 and our post-COVID book, which would then be all the business that we’ve written on or after April 2020, have dramatically different underlying note rates. Our pre-COVID book carries a 4.17% weighted average note rate and our post-COVID book has a 2.97% underlying rate. And so in terms of the move that we’ve seen in the 30 year and its impact on refinancing activity, we expect that the recent increase in rates will have a profoundly positive impact on the persistency of our post-COVID production. It’s going to effectively lock in the significant majority of that book. And that’s critically important because that’s business that was originated in what we’ve consistently said is an environment where we had both record volume, but also record value of production. And whether the 30 year’s at 3%, 3.20%, 3.50% with an underlying 2.97% note rate supporting that book, that business is going to be locked in. On the flip side, our pre-COVID production at 4.17% isn’t dramatically, I’ll call it, more or less right for refinancing, whether you’re at 2.65%, 3%, 3.20%, 3.50%. And so we do expect that we will continue to see some amount of turnover in the portfolio. One, there’s natural life events that drive turnover, but two, because of that distinction in the different halves of the portfolio, for us at this point, though, a majority of our insurances force as of 3/31/21 was actually originated from April 1 of last year and forward. And so we will see still turnover in the portfolio unless we have a continued move higher in rates. That will still contribute some amount of cancellation earnings in a constructive way, but the most significant positive for us in the long-term is that the phenomenal business that we’ve originated over the last 12 months at record volume and record value is going to be locked in place. And that’s terrific for us.

All right, that’s helpful. And then the re-insurance, the last one, it was another ILN, that’s excess of loss. So that would not affect the dynamic on that more recent vintage of the post-COVID book? Wouldn’t be any smaller, all things being equal from the ILN unless there was a large loss then, correct?

That’s right. And again, the ILNs are really elegant also because they’re self-amortizing that generally speaking as the underlying risk is running off, they amortize down in size and so the cost is calibrated to the size of the underlying reference tools. In instances where the underlying risk runs off slower, the ILN stays outstanding longer, which is also positive because then we get the mass capital relief that they provide. There’s no public basis risk that develops down the road. If you have ILNs running off too quickly relative to the risk, which could expose you from a capital risk standpoint. That’s not how they’re built.

Your next question comes from the line of Ryan Gilbert with BTIG.

I appreciate the detail you've shared on the call so far. My first question is about the cures in the quarter. It appears there was a noticeable slowdown in both the absolute number of cures and the cure rate in the first quarter compared to the fourth quarter. Could you discuss what was occurring in the first quarter and how cures are trending so far in the second quarter, particularly in April?

Sure. I would say things are going to change from period to period. Borrowers are still experiencing stress, particularly those who are in default and have been in forbearance for an extended time. It's not unexpected for some of these older defaults to remain on our books longer than we would have anticipated outside of the pandemic. Overall, we are very encouraged. I mentioned earlier that we should look at the total default inventory instead of just focusing on new defaults alone. When we assess the level of cure activity, we see a decline in the default population of about 1,100 loans over the three months from December 31 to March 31, followed by a similar decrease of around 1,000 loans from March to April. This trend is really encouraging for us, and we hope it continues. We believe that most borrowers who defaulted due to COVID stress and utilized the forbearance programs and other assistance will ultimately recover and won't necessarily proceed to a claim against us.

Okay. And did the slowdown in cures influence your more conservative stance in the first quarter? I guess I’m asking because I agree with you that the macro trends are improving and it looks like the credit is getting better, but at the same time, your loss ratio is up over a hundred basis points, sequentially.

Yes. I would like to clarify and provide some context. Our loss ratio is 4.7%, which is an increase of 100 basis points. However, it remains 4.7% compared to 3.5% in Q4. The absolute level is just as important as the relative one. That said, this did not affect our decision to be more or less conservative. Generally, our goal was to maintain the same level of conservatism as we had in Q4. To illustrate, if your aim is to stay in the same place but conditions are improving, you need to adopt a more conservative approach regarding some of the assumptions related to frame rates and similar factors. This adjustment was made independently of any changes in cure activity or cure rates.

Your next question comes from the line of Mark Hughes with Truist.

I think you may have just addressed this in broad strokes, but looking at the current year claims number, but $10.6 million of meaningfully on a sequential basis, surely the portfolio is bigger and you’re being conservative, but that seems like a meaningful jump. I’m just curious on the drivers of that.

Yes. And Mark, it’s a great question. And in fact, we provided some additional footnoting this quarter to help highlight one interesting dynamic that really only emerges in the first quarter for us. And it emerges in a more significant way this year than in years past given the size of the default population. We established net case reserves of $5.3 million for the 1,767 new defaults that came through in Q1. We also established an additional $5.3 million of net IBNR reserves during the period, but the amount that shows in the current period row for our IBNR reserves isn’t calculated based solely on the Q1 defaults. It’s calculated based on the entirety of our default population and case reserve position, inclusive of prior period case reserves that are carried at March 31. And so that dynamic skews the optics of the reserve role table, but you can largely normalize for that if you simply subtract $5 million of that $5.3 million of IBNR reserve that was established in Q1 from the current period line. And if you add it back in to the prior period line, that will give you a more normalized view. And that normalized view yields about a five and a half million of current period reserves and about $500,000 of favorable development on prior period defaults. And that’s how you get to our $5 million of net claims expense incurred in Q1.

Your next question comes from the line of Ryan Gilbert with BTIG.

One more quick follow-up as it relates to your ILNs, would you say that you have adequate coverage throughout to mitigate risk during differing market environments?

That’s a great question Ryan. One of the key fundamentals that we ensure at all times is that our capacity remains robust, which is what drives our ability to fund future growth. As we continue to execute on the ILN strategy as a key tactical approach, we ensure that we have undrawn facilities and capital markets access at all times to allow us to efficiently deploy capital as required alongside the liability stream. We assess on an ongoing basis the appropriateness and robustness of our ILN coverage relative to our evolving book of business and systematic market events. Effectively, we strive to balance risk mitigation with growth opportunity, and that means we continuously ensure that our ILNs are working dynamically to support our overall balance sheet during favorable and unfavorable conditions.

Ladies and gentlemen, this concludes today’s conference call. Thank you for your participation and have a wonderful day. You may all disconnect.