NMI Holdings Inc (NMIH) 2021 Q2 法說會逐字稿

Good day, and thank you for standing by. Welcome to the NMI Holdings, Inc. Second Quarter 2021 Earnings Conference Call. (Operator Instuctions]

I would now like to turn the conference over to your speaker today, Mr. John Swenson. Please go ahead.

Thank you. Good afternoon, and welcome to the 2021 second 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 second quarter National MI delivered strong operating performance, significant growth in our insured portfolio, and record financial results.

As we talk today, I remain highly encouraged. The economic stress of the COVID pandemic continues to recede, and the housing market continues to lead with resiliency and foundational strength. Against this backdrop, we achieved a record adjusted net income of $58.1 million or $0.67 per diluted share and GAAP net income of $57.5 million or $0.65 per diluted share. Adjusted return on equity for the quarter was 16.4% and GAAP ROE was 16.2%. We ended the second quarter with a record $136.6 billion of high-quality primary insurance in force. We are helping more borrowers than ever before gain access to housing. And the growth in our insured portfolio reflects this strength, up 10% compared to the first quarter of this year and 38% compared to the second quarter of 2020.

Credit performance in our in-force portfolio also continues to trend in a favorable direction, and we are increasingly optimistic as we look forward, given the quality of our underlying book, sustained resiliency of the housing market, and strengthening macro environment. Shifting to Washington matters. We would like to congratulate Sandra Thompson on her appointment as acting Director of the FHFA. Director Thompson is a highly experienced regulator with deep knowledge and expertise. We expect she will further the Biden administration's efforts to expand access and equitable opportunities for homeownership to all communities while maintaining an overarching focus on preserving the safety and soundness of the housing finance system.

We believe there is broad recognition in Washington of the value of that National MI and the broader private mortgage insurance industry bring to these efforts, 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. And we look forward to engaging with Director Thompson and the broader FHFA leadership team in the months ahead. We also note and apply the continued effort by those in Washington to assist borrowers who are still impacted by the COVID crisis. The recent housing stability action plan outlined by the White House, foreclosure process changes adopted by the CFPB and the FHFA, an enhanced set of loan modification and payment reduction options introduced by HUD, the USDA, and VA, are important additional steps in this regard.

The recovery from the pandemic while broad-based will not be even. And as the immediacy of the crisis receives, there will still be many in need of support. We believe policymakers and regulators 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. 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. Our team and business continued to outperform in the second quarter. We delivered significant new business production, strong growth in our high-quality insured portfolio, and record financial results. We also enjoy continued momentum and growth in our customer franchise, activating 33 new lenders, the most we have added in a single quarter since 2018. We are now doing business with a broadly diverse group of more than 1,200 high-quality originators, including 185 of the top 200 lenders nationwide.

During the second quarter, we generated $22.8 billion of NIW, up 73% compared to the second quarter of 2020. Our volume included a record $18.9 billion of purchase NIW, up 6% from the first quarter and up 143% compared to the second quarter of 2020. The purchase market remains strong with the key themes that have driven housing -- the housing demand through the pandemic carrying forward and rising house prices in the recent movement in rates contributing to incremental origination volume and activity. First-time homebuyer demand is at a high and private mortgage insurance penetration of the purchase market is increasing as a growing numbers of borrowers turn to our industry for down payment support.

On our first quarter earnings call, we noted that then rising rates and the increasing equity position of many eligible homeowners were having an early impact on refinancing application volume, a precursor to NIW. This trend is reflected in our refinancing production, which slowed notably from a record $8.5 billion in the first quarter to $3.8 billion in the second quarter. The decline in quarterly refinancing volume was balanced by an increase in the persistency of our in-force portfolio. Our 12-month persistency ratio stabilized and trended up sequentially for the first time since the first quarter of 2019. Overall, the private mortgage insurance market is pacing towards another terrific year. We estimate that industry volume will reach $550 billion to $600 billion in 2021, and we continue to see a rational and constructive pricing environment with strong unit economics and attractive returns on our new business production.

Pricing has evolved, which is natural as risk and anticipated loss costs have stabilized through the pandemic. We believe, however, that the industry is at a point of balance, fully and fairly supporting lenders and their borrowers against the backdrop of a resilient housing market and broadly improving macro environment, while at the same time, appropriately protecting returns and our ability to deliver long-term value for shareholders. Looking forward, our outlook is positive. Industry volume is exceptionally strong with long-term demographic trends supporting robust purchase demand and the experience of the pandemic reinforcing the value of homeownership.

Credit performance is trending in a favorable direction. With underwriting discipline remaining paramount across the mortgage market, record house price appreciation providing a sizable equity buffer, and an expanded and broadly applied government toolkit now available to assist borrowers through times of stress. Against this backdrop, we are executing on our plans and believe we are well-positioned to drive growth, consistently compound book value, and deliver for shareholders going forward.

Before turning it over to Adam, I want to note how proud I am that for the sixth consecutive year National MI has been recognized as a great place to work. Great place to work is a global authority on workplace culture, employee experience, and leadership and partners with Fortune magazine to produce the annual Fortune 100 best companies to work for list. We believe that the quality of our team and the culture that we have established are key competitive advantages, and it is gratifying to again be recognized for these strengths.

With that, I'll turn it over to Adam.

Thank you, Claudia. We delivered record financial results in the second quarter with significant growth in our insured portfolio and continued strength in our credit performance, driving record revenue and bottom-line profitability. Net premiums earned were a record $110.9 million. Adjusted net income was a record $58.1 million or $0.67 per diluted share and adjusted return on equity was 16.4%.

Primary insurance in force grew to $136.6 billion, up 10% from the end of the first quarter and up 38% compared to the second quarter of 2020. 12-month persistency in our primary portfolio was 54%, up from 52% in the first quarter. This is the first time our persistency has trended up sequentially since the first quarter of 2019. We expect persistency will continue to improve through the remainder of the year, notwithstanding the recent movement in rates as the record NIW volume that we've written at exceptionally low-interest rates since the beginning of the pandemic fully comes into the persistency calculation.

Net premiums earned in the second quarter were $110.9 million, up 5% compared to $105.9 million in the first quarter. We earned $7 million from the cancellation of single premium policies compared to $9.9 million in the first quarter. Reported yield for the quarter was 34 basis points compared to 36 basis points in the first quarter, primarily reflecting the decreased contribution from cancellation earnings during the period and the introduction of ceded premium costs associated with our sixth ILN offering in April.

Investment income was $9.4 million in the second quarter compared to $8.8 million in the first quarter. Underwriting and operating expenses were $34.7 million compared to $34.1 million in the first quarter. Expenses in the second quarter included $1.6 million of costs incurred in connection with our most recent ILN offering. Excluding ILN related costs, adjusted underwriting and operating expenses were $33.1 million in the second quarter compared to $33.7 million in the first quarter. Our adjusted expense ratio was 29.9% compared to 31.8% last quarter. This is the first period our adjusted expense ratio has been below 30%, an important milestone that serves to highlight the significant operating leverage embedded in our financial model and the success we've achieved in efficiently managing our cost base as we have scaled our insured portfolio.

We had 8,764 defaults in our primary portfolio at June 30, compared to 11,090 at March 31. At quarter-end, approximately 90% of the loans in our default population were enrolled in a COVID-related forbearance program. Our credit performance continues to trend in a notably favorable direction with an increasing number of impacted borrowers curing their delinquencies and fewer new defaults emerging as the economic stress of the COVID crisis receives. Our default rate declined to 1.9% at June 30, less than half its peak from last summer, and the improvement continued in July with our default population declining to 8,277 at July 31, and our default rates falling to 1.7%. 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 the beginning of the pandemic.

Claims expense was $4.6 million in the second quarter compared to $5 million in the first quarter, and our loss ratio, defined as claims expense divided by net premiums earned, was 4.2% compared to 4.7% in the prior period. We reevaluate 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. The underlying resiliency of the housing market and path of house price appreciation and the overall macroeconomic outlook to determine whether further changes to our claims reserves are necessary.

Interest expense in the quarter was $7.9 million, and we recorded a $658,000 gain from the change in the fair value of our warrant liability during the period. GAAP net income for the quarter was $57.5 million or $0.65 per diluted share. Adjusted net income, which excludes periodic transaction costs, warrant fair value changes, and net realized investment gains and losses, was a record $58.1 million or $0.67 per diluted share. Total cash and investments were $2.1 billion at quarter-end, including $81 million of cash and investments at the holding company.

Shareholders' equity at the end of the second quarter was $1.5 billion, equal to $17.03 per share, up 6% compared to the first quarter and 15% compared to the second quarter of last year. We have $400 million of outstanding senior notes and our $110 million revolving credit facility remains undrawn and fully available. At quarter-end, we reported total available assets under premiers of $1.9 billion and risk-based required assets of $1.2 billion. Excess available assets were $716 million.

In summary, we achieved record results in insurance-in-force, net premiums earned, total revenue, expense ratio, and adjusted net income. Our credit performance continues to stand out in a dramatic way. And as we look forward, we believe that we are well-positioned to continue delivering strong mid-teen returns that are significantly in excess of our cost of capital. We expect that the growing size and attractive credit profile of our insured portfolio along with our broadly disciplined approach to managing risk, expenses and capital, will continue to drive our performance.

With that, let me turn it back to Claudia.

Thanks, Adam. We delivered strong performance in the second quarter, with continued momentum in our customer engagement, significant NIW volume, accelerated growth in our insured portfolio and encouraging credit trends driving record financial results. Our performance in the period built upon the strength and resiliency we've demonstrated through the duration of the pandemic, and we believe we're well-positioned to continue to win with customers, drive growth in our high-quality insured portfolio, maintain the right risk-return balance, and deliver strong results for our shareholders. Thank you for joining us today.

I'll now ask the operator to come back on so we can take your questions.

[Operator Instuctions] We do have a question from Doug Harter from Credit Suisse.

Adam, as you think about the premium yield for the rest of -- for the next couple of quarters, I guess, how do you think about single premium cancellation now that persistency has started to improve? And then just thinking about the underlying in-force premium yield, what are the expectations around that?

Yes. In terms of cancellations, we expect the dollar contribution of cancellations may decline through the remainder of the year, somewhat modestly quarter-to-quarter. And that's largely because the policies that are primed for refinancing from prior to COVID, a lot of the unearned premium revenue on those policies has already been recognized through with cancellations that have come through thus far. In terms of the impact of that and broader movements in yield and a steer through the remainder of the year, we won't provide anything explicit, but I'll note that we expect to pursue another ILN offering in Q4, which will bring with it additional cost towards the end of the year. And as we talked about, we'll likely see, what I'll call, continued fluctuation, but more likely some modest down pressure on the contribution from cancellation earnings over the next few quarters. And from a yield standpoint, the dollar impact of cancellations will then be paired against what we expect to be continued growth in our insurance in force. And so from a yield standpoint, it may have a little more of an impact than what we see as the decline is a dollar contribution.

And then can you just talk about just kind of what you saw competitively this quarter that looks like your market share kind of swung around a fair amount that the last 2 quarters net positive, but just the dynamics that lead to those types of swings in market share?

Sure. We're not focused on market share. It's just not something we manage towards. Our focus is serving our lenders and their bars, deploying our capital responsibly, and driving profitable growth in our insurance in force. That's the key for us, and we're doing exactly what we set out to do. We're stacking high-quality new production, driving this growth, which drives revenue and maintaining discipline around risk and expenses. We see just that in Q2, 10% growth in if compared to the first quarter and 38% year-over-year. Look, NIW and market share in this case, it will fluctuate from quarter to quarter. I will comment that over time, we expect the industry will settle into a roughly pro-rata distribution, plus or minus a few points, and those points are driven by risk appetite decisions around transactional bid volume and other value drivers.

Next one on the queue is Bose George from KBW.

Just wanted to follow-up just on the industry competition question from Don. In terms of -- I know you guys target a risk-adjusted return. But do you think lenders are getting more focused on price over time? Or do you think that has kind of remained pretty stable as well in terms of how they do their business?

Yes. I mean, it's a great question. I think that lenders have always looked at price as a key decision-maker, but there are several other factors of what they're doing to choose their MI companies. The idea -- the service is important, relationships. For us, the 2 important factors with relationships and with lenders are, we need to obtain a lot of knowledge for each of these lenders and navigate through this digital world, and most importantly, to continue activating new lenders. But I really believe that, as mentioned in my scripted remarks, we continue to see a rational constructive pricing environment. Pricing has evolved, which is natural and to be expected as risk and estimated losses have stabilized through the pandemic. What we've seen is a natural evolution of things given the improving macro environment where changes appear to have been made in connection with real underlying risk improvement as opposed to competitive pressures. So we're optimistic that we'll see this balance kind of carry forward because we certainly believe it should.

And actually -- and then just on the expenses, just curious how we should think about the expense ratio over time. Clearly, the growth -- underlying growth of your insurance for in force remains strong. So it's kind of a way for us to think about kind of where that expense ratio could go over time?

Yes, Bose. Broadly speaking, our goal is obviously to be as efficient as we possibly can. But we still expect to invest fully in our people, our systems, risk management strategies, our growth, all things that have driven value for us thus far, and we expect to continue to be core drivers going forward. We already have like now the smallest absolute expense footprint in the industry by a fairly wide margin, smallest headcount, and initiatives like the one that we announced earlier with TCS really help us find even greater savings. From an expense ratio standpoint going forward, we expect over the long-term that will migrate to the low to mid-20s over time. I'd caution that that won't happen overnight. And obviously, the rate of improvement that we deliver in the ratio itself will be a function of both the expense discipline that comes through as well as the growth in the insured portfolio and premium revenue, but things are moving in the right direction, and we're encouraged by that.

Next one on the queue is Rick Shane from JPMorgan.

Look, Bose and Doug touched upon really the first part of my question, but when we think about the factors in the industry, there's intense competition among the originators. We are in the midst of an extended and pretty significant period of home price appreciation, and there's also an ongoing shift that you guys pointed out towards purchase activity. I am curious when you think about those 3 factors, how you calibrate for credit and your credit underwriting decisions, because I think in some ways you've got a lot of different moving parts there?

Yes. Rick, it's a good question. What I would say, maybe we'll stick through them is that, first, notwithstanding what you've identified as competition on the lender side, we haven't seen a broad deterioration in underwriting standards. Remember, the market that we serve is the GSE market, nearly 98% plus of the loans that we insure are sold were guaranteed by the GSEs. And so it's really how the GSEs define their credit box and how lenders then define a box that's either as expansive or more restrictive than what the GSEs put out. We just haven't seen a deterioration of underwriting standards, either on the lender side or from the GSEs, and that's really encouraging at this point is one. You touched on the HPA environment and some of the decisioning that we're making there as well. Broadly speaking, we see real strength on a sustained basis to the HPA environment and the general housing environment. The housing market, it's a market like all others driven by supply-demand dynamics. And what we see today is real and sustainable demand that's driven by record-low rates, strong buyers in, largest generation in American history, is aging into the point where they're looking for starter homes. And the experience of the pandemic has really fueled an emotional and practical pull towards homeownership, and that's contrasted against a severe supply-side shortage in the U.S. We've been significantly underbuilt and underdeveloped for an extended period of time. And that can't be solved overnight. So overall, as we see the opportunity in the market, we see continued credit strength and rigor around underwriting guidelines. We're encouraged by the direction of the housing market overall, the need for support from the MI industry, and sustainability of perhaps not 15% per annum HPA, but general uptrend in HPA. And that's a terrific position for us to be in on the MI side.

And then the last part of that question, and I realized it was there were many parts. Is there anything in your underwriting or in your experience that on an apples-to-apples basis leads you to think credit is different between purchase and refi? Is there any sort of psychological advantage to having a borrower, even if the terms of the same have been in the home for a longer period of time? Is there anything we should think about there as well?

It's interesting. We've looked at it extensively. And what tends to emerge from the data is that there is a little bit of outperformance on the purchase side as opposed to the refi side, it's difficult for us to isolate why that's the case because all else equal, similar headline or even layered risk characteristics. We tend to see, in the aggregate, slightly better performance on the purchase side than the refi side. Perhaps there's something around the affirmative statement that a borrower is making at the time of purchase around their expectations for their future employment profile and the confidence that they have in their financial position. It's a significant, obviously, investment they're making and obligation they're taking on. And we find that most borrowers only take that on when they're at a high point from a confidence level. Once you're already into the loan, it may not be the same affirmative statement when you're pursuing a refinancing. That's just some ideas that we have kicking around. Difficult to isolate why, but we do see on the margin, not enough to drive, I'll call them significantly differentiated outcomes from a price return standpoint, but on the margin, better performance from the purchase borrower.

Next one on the queue is Cullen Johnson from B. Riley Securities.

So it looked like in the quarter, the PMIER's cushion, kind of in excess of requirements expanded a little bit in percentage terms. Would it be fair to interpret that maybe as an effort to kind of preempt this dynamic of delinquent loans or continue to age to carry with them a little bit higher capital requirements and also maybe seeing a little bit of a smaller capital benefit from that FEMA haircut as a smaller percentage of loans in the future are going to be in forbearance plans?

No, it's a good question, but the expansion of the PMIERs cushion really just reflects the execution of our sixth ILM in April. And so our March 31 numbers because the transaction was completed after quarter-end didn't reflect that transaction. When we do those deals, obviously, we take a lot of risk-off of the balance sheet and taking that risk off the balance sheet we get relief for the associated PMIERs required assets, and that causes an expansion of our cushion and our sufficiency ratio. We expect to be -- to continue deploying that excess position in support of new business. The nice thing for us in terms of how our capital position develops going forward depending on performance of the portfolio and new loans coming in or being subjected to the PMIERs haircut, if you will, is that, at this point, nearly the entirety of our insured portfolio sits under a comprehensive reinsurance program, pairing both our quota share coverage and our ILNs. And so to the extent we see the required asset charge on our in-force portfolio grow because future delinquencies don't necessarily get the same benefit of a haircut if they don't develop because of the COVID hear chip, the strain, the incremental strain of those defaults will just naturally be absorbed in an accordion-like way by the existing reinsurance structures.

And then kind of looking at with the FHFA kind of eliminating the adverse market refinance fee a few weeks ago. Would it be reasonable kind of you expect maybe a boost in refinance volume here and kind of see that associated impact on persistency going forward?

Yes. It's a good question. Look, I think the FHFA adverse market refinancing surcharge or fee that was put in place last December. We never really saw that actually be passed through to borrowers in most instances. The most vendors that we talk through just absorbed the cost, and those that did pass it along at most pass along as roughly a 1/8 of a point increase in the note rate. And so the elimination of that fee, we don't necessarily think that that's going to drive an expansion of the refinancing opportunity. Obviously, the movement in rates that we've seen itself may have a more pronounced impact. From a persistency standpoint, that our portfolio we talked about it last quarter is really split pretty meaningfully. The weighted average no rate underpinning our pre-COVID population. So all the business that we wrote from our inception through March 31 of last year, if we used March 31, April 1 of 2020 as a line of demarcation, have a 4.16% underlying weighted average note rate. And our post COVID, our April 1, 2020, through June 30 this year, production has a 3% weighted average underlying note rate. And so the movement in rates, it's been reasonably significant as a headline matter, right, 20 to 25 basis points in the 30-year fixed-rate national average. But going from a 320 down to a 3 doesn't fundamentally change the refinancing opportunity for that pre-COVID population. And so we don't necessarily expect that the movement in rates itself will spur a significant incremental amount of turnover in the pre-COVID population. And obviously, our post-COVID population with a 3% underlying weighted average note rate is still largely insulated from what we would -- from refinancing activity given where rates are today. So it's possible. We probably will see some marginal increase in refinancing activity, and it may have a degree of impact on persistency. But just given how the note rates stack for the portfolio, we don't expect something dramatic.

Next one on the queue is Mark Hughes from Truist.

And then looking at your underwriting, the FICO has average FICO scores come down just fractionally. The LTV is up a bit. Do you think you will make more progress in that direction, kind of opening up the credit box? Was that still going through 2Q, such that 3Q, we'll see a little bit more of that?

No. Mark, it's a good question. I'd say we've prided ourselves historically on being the most conservative MI provider in terms of the risk that we led into our portfolio. And that was certainly the case immediately after the onset of the pandemic, we took specific actions to really further curtail the flow of lower quality business into our book. We're now 16 months into the pandemic, and those initial concerns, while we think certainly appropriate the time no longer hold, we haven't fundamentally shifted our risk appetite. What we've done over the last few quarters, I would say, is simply eased some of those significant restrictions that we instituted early on. As to where we go in the third quarter, yes, there'll always be, I'll call it, movement -- small movements from periods to period just depending on which lenders we're getting our flow from and some other small dynamics. But I don't expect that there'll be a significant continued movement in the mix of our business in future quarters.

And then a question, if we do continue to get this strong on home price appreciation, what's the experience to homeowners often or ever take affirmative steps to try to cancel their mortgage insurance if their home price value -- home prices have gone up meaningfully since they bought them looks your experience on that?

Yes. It's -- so obviously, our policies are cancelable automatically when the loan itself is amortizing down below 78% LTV. And it's also cancelable if the borrower -- and not all policy, but monthly policies are cancelable. If the borrower secures an appraisal that shows that on an appraised basis, they're at or below an 8 LTV. We've just not had a lot of experience to show that that's a path that borrowers go down. As you noted, it's an affirmative step. The borrower has to be one focused on, I'll call it, their loan itself focused on the MI policy and the premium payment within that loan and then make the decision to go and spend the dollars on an appraisal outside of a refinancing or outside of some other need with an uncertain outcome because they're spending the dollars, it's a fixed cost and unless they appraise at the necessary level. They don't then get relief from their monthly premium. So we just don't see -- we don't see that activity. And to give you some context, obviously, I talked about the underlying weighted average note rate on our portfolio from the pre-COVID period being 4.16%. Nearly every one of those borrowers should be refinancing today because they have an opportunity for significant savings on a monthly basis. And we see enormous inefficiency in that arena, right, which is much more top of mind and in focus for borrowers to begin with. So we don't see -- we end up seeing, perhaps not inefficiency, but a similar lack of attention on the idea of securing an appraisal, specifically for the purpose of canceling MI.

Next one on the queue is Michael Calvi from Morgan Stanley.

First of all, big congratulations on yet another successful quarter. My question for you today is about the reliance of your future results on ongoing governmental support. Obviously, for Barents programs about a significant impact on performance thus far throughout the pandemic. So I was hoping you could add some additional color on how you're thinking about this all going forward and specifically managed risks involved in the transition away from the current 8 heavy environments?

This is Brad. Let me address that. So with respect to the GSE forbearance programs, we do -- really do apply the efforts of the FHFA and the GSEs and many others in Washington for how they have so quickly and consistently effectively supported homeowners through the COVID crisis. The forbearance programs have been enormously valuable, helping borrowers bridge from a point of acute stress to a much more stable position today. And the expanded set of modification and payment deferral options introduced early in the pandemic have helped borrowers successfully transition out of forbearance and default status. But as the programs wind down, there will undoubtedly be some who are still struggling. And forbearance will work for most, but not necessarily for all. And for this group, we expect there'll be another policy response because it doesn't make sense to leave these borrowers in for parents on a perpetual basis, but it also isn't fair and doesn't make sense to cut them loose without support at the end of the foreclosure process. So we think engineering a soft landing, preventing foreclosures, allowing borrowers to harvest the significant equity that it has recently built in their homes. Despite the miss payments under forbearance and helping them find new housing that is more sustainable in light of their new position will be critical, and we believe policymakers will follow that path.

And just to layer on to that. So our broad view is that there will be additional support that's offered. It certainly aligns with all of the conversations that have happened thus far in D.C., even what we're seeing over the last few days in focus around the addiction moratorium, which is rental-focused, but it shows the eagerness to provide additional support. For reserving purposes, though, importantly, we've chosen to anchor more to downside scenarios for reserve setting. And we've not accounted for the prospect of additional assistance beyond the current forbearance programs and the assistance that they entail as we set our reserves. And so we're broadly optimistic in what we think will be done and what should be done. But as a financial matter, we've not baked that in to reserving or to other decisions that we're making around new business production.

Next one on the queue is Ryan Gilbert from BTIG.

First question for me, just noting the nice improvement that we've seen in persistency and insurance in force on a sequential basis. I'm wondering how you're thinking about balancing between -- or maybe it's not a balance, but just how you're thinking about NIW growth versus premium rate in the second half of the year, given that you're expecting persistency to continue to improve in the third and fourth quarter?

Brian, let me first comment around the premium rate. We don't provide specifics about our premium rate on NIW. But I can share that we're generally seeing rates that are in line with pre-COVID levels with similar and similarly strong risk-adjusted return opportunities broadly available in the market. And as far as I think you were also -- was your other part of the question, Ryan, around the 2022 market? I missed the second part of your question.

The question was really just the extent that you're balancing NIW growth in premium rate. And if you have any comments on 2022 on all years?

Yes. We really -- private MI is tracking towards just another terrific year in 2021. And it's still somewhat early, but looking out into 2022, we expect continued strength in the purchase market, mainly fueled by growth in the total purchase origination volume and increased MI penetration as more and more for same home buyers come into the market and meet our support. However, we also expect refinancing volume will continue to slow with a decrease in total refi origination activity. And then, thus a further decline in MI penetration of the resin market. Taken together, we expect that next year's 2022 market will be large by historical standards, but not necessarily approach the records that we've seen over the last 2 years.

And I guess just thinking about NIW in the second half of the year, and Adam your comment around the potential fourth quarter island. Is it correct to think that the PMIERs excess that you currently carry at the end of June should be mostly deployed by 4Q?

Yes, I'm going to hold that one in reserve just as obviously a signal is a forecast of NIW and we're guarded against that. Claudia mentioned in our prepared remarks and some of the follow-up here that we do see a tremendous opportunity still in the MI market broadly. And obviously, we're doing more with customers. We're having success and see a terrific opportunity to continue to put on high-value business at attractive risk-adjusted returns. And that will be our goal. We've got plenty of capital, obviously, between the excess position, all the capital at the Holdco, the untapped revolver, all the capital we need to prosecute the opportunity. As a risk management matter, we'll be pursuing the ILN, most likely, depending on market conditions, but most likely in the fourth quarter, and feel good about where that market is at this point. But as to the deployment of the current excess position and the rate of deployment, the decisions we make in the ILN market are equally driven by risk management as well as capital. And so, we'll likely still have an excess position when we're pursuing well. We will certainly have an excess position when we're pursuing the next ILN, it will just be the time for us as a programmatic issuer to be back in the market.

[Operator Instuctions] Next one on the queue is Geoffrey Dunn from Dowling.

I got a few questions. First, Adam, can you share the clean rate assumption on new notices this quarter? I think compares to 9% last quarter. And also if there were any IBNR adjustments, plus or minus?

Yes. So the claim rate assumption, again, I'll give the one caveat, Jeff, that I think we've given consistently, which is we don't apply a blanket homogeneous default-to-claim rate assumption on new defaults. Every loan has its own characteristics and we individually evaluated all 8,764 defaults as of June 30, including the roughly 1,100 new defaults that came through. That said, I know it's something that's in focus. The average default-to-claim rate on those new notices, the 1,100 new notices roughly in the period was 13%. And as you noted, it stands in contrast to the 11% -- excuse me, the 9% assumption that came through in the first quarter.

And so -- that average change, was that any kind of mix issue or is that the company adopting any more conservatism? What drove such sort of material change?

Yes. It's really -- the underlying risk profile of the loans that came through as new defaults in the quarter is basically the same as what's coming -- what has come through in prior periods. We talked about on the call or on the prepared remarks that roughly 90% of the loans that are in default are also reported to us as being in forbearance. And there was no difference in the population in the second quarter. But we've decided to adopt a slightly more conservative posture for new defaults coming through now, really because we think there's the potential for different outcomes for borrowers who are facing stress today later in the closed cycle than borrowers who face stress early on when the enormous fiscal and monetary stimulus and other borrower systems programs were first introduced, that's really what's driving it.

And then looking to the premium rate, obviously, the net rate bounces around with reinsurance ILNs, etcetera. But the core premium yield, which strips out all that noise, it looks like it was down over 1 basis point this quarter, now below 39 basis points. Where do you see that stabilizing as we continue to shift to that '18 pricing?

Jeff, we're not going to give guidance on where premium yields, whether it's on a net basis or a core basis. We've got a little bit less than a basis point of movement on the core yield, about 0.95. So we could sink up. We could sink up later to just work through the numbers. The key for us really is that every piece of business that we're bringing on, I'll call it, stand-alone, stand on its own from a risk-adjusted return expectation standpoint and that absolutely remains the case today. Every piece of business that we're bringing on fully aligns with our expectations to deliver strong mid-teen returns over time. And the rate on business and the core yield that's obviously built up from all of the individual rate reflects that.

And then the last question, it's probably more a sensitive topic. But pretty great recession, the industry was really just a risk-taker. What the GSEs kind of said was okay, was kind of what the underwriting see to accept. Post-Great recession, we've seen the industry take a differentiated view on high DTIs for a little bit of years ago. What do you think is national and the broader industry's ability to continue to price risk the way you want to. If the FHFA directs a real broadening of the GSE credit box. Is that something where the new pricing engines will truly allow you to pick and choose the risk you want or don't want? Or is there maybe a political pressure that you have to directionally follow the GSEs?

I'll just -- I'll start there, and then Adam or Claudia can weigh in. But so we just -- we broadly support all actions that provide qualified borrowers with increased access to homeownership. That's our business. And we're confident that there's a way to help more individuals access homeownership with fairness, equity, and sustainability and also a way that provides appropriate safeguards against systemic risk and ensures the safety and soundness of the whole conan system. And we have our risk management program, which we've talked about many times, the 3 pillars of individual loan risk underwrite and rate GPS pricing, and comprehensive back-end reinsurance that allows us to proactively manage the risk outcome for our company. So incremental risk coming into the origination market doesn't automatically translate to incremental risk coming into our insured portfolio. And we have the risk and return standards that we manage towards and the tool to directly express our risk appetite in the market. So, we still feel very confident about conditions in the market and what is being originated for GSE purchase and guarantee.

And I probably could add on to that. When we think about the administration and FHFA and the possibility of broadening the credit markets. The key seems to be sustainability. And you don't -- the last thing I believe that the administration or FHFA wants to do is to set up a bar for the long mortgage, access to homeownership doesn't mean that you go down the credit curve necessarily. So I would find that hard to believe based on what we're sewing from both administrations FHFA.

There are no further questions on the queue. You may continue.

Thank you again for joining us. We will be participating virtually in the Barclays Financial Services conference on September 13 and the Zelman Housing Summit on September 21. We look forward to speaking with you soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.