NMI Holdings Inc (NMIH) Q4 2020 Earnings Call Transcript

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NMI Holdings Inc (NMIH -0.62%)
Q4 2020 Earnings Call
Feb 16, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, ladies and gentlemen, and welcome to the NMI Holdings, Inc. Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions]

I would now like to turn the conference over to your host, Mr. John Swenson of management. Please go ahead, sir.

John M. Swenson -- Vice President of Investor Relations and Treasury

Thank you, operator. Good afternoon and welcome to the 2020 fourth 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 refer to certain non-GAAP measures. In today's press release and on our website, we have provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.

Bradley M. Shuster -- Executive Chairman of the Board

Thank you, John and good afternoon, everyone. The fourth quarter capped a year of remarkable challenge, resiliency and reward for National MI. In 2020, we successfully navigated through the unprecedented stress of the COVID pandemic fully supporting our customers and their borrowers at a time when they and the overall housing market needed us most. During the year, we wrote a record $62.7 billion of NIW helping over 250,000 borrowers gain access to housing and establish a safe, secure environment in which to shelter through the pandemic.

We closed the year with a $111 billion of high quality, high performing primary insurance in force and our decision to prioritize risk responsibility from day one and establish a comprehensive credit risk management framework spanning individual risk underwriting, Rate GPS pricing and our innovative reinsurance program proved invaluable. Credit performance in our in-force portfolio continues to trend in an encouraging direction, and we are increasingly optimistic as we look forward, given the quality of our underlying book, potential for additional stimulus support for borrowers and sustained resiliency of the housing market.

We generated $171.6 million of full year GAAP net income in 2020 delivering strong profitability that was consistent with our results in 2019, despite absorbing the significant impact of the COVID pandemic through the year. Our adjusted net income was a $173.6 million and we exited the year with a 15.2% fourth quarter adjusted return on equity. Policy efforts played an important and stabilizing role during the year. Forbearance -- foreclosure moratorium and other assistance programs are helping to bridge borrowers pass this point of acute stress and ensure they are able to remain in their homes and resume their lives with limited interruption once the pandemic has passed. We applaud these efforts and note the recent extension of the forbearance and foreclosure timelines announced by the FHFA.

Homeownership is essential, more so today than ever before. People need to -- need shelter in order to shelter in place and allowing borrowers who through no fault to their own are facing real strain to stay in their homes and avoid foreclosure is the right social policy. It will also help speed the ultimate pace of economic recovery. We expect the housing market will be an area of focus for the Biden administration and new congressional leadership. It has been a bright spot in the wake of the pandemic and expanding access to all the benefits that homeownership provides a safe environment to shelter from the virus and 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 more important than ever before.

While it is difficult to predict the hierarchy of political priorities and specific changes that may come, we believe there will be continued recognition of the value that private mortgage insurance offers, providing borrowers with downpayment 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, I'm delighted with what we achieved last year and how effectively we were able to navigate through the COVID crisis. I'm optimistic about our opportunity to continue to build value for our employees who are borrowers for our customers and for our shareholders in 2021.

With that let me turn it over to Claudia.

Claudia J. Merkle -- Chief Executive Officer

Thank you, Brad. Remarkable is an apt description for 2020. It was a remarkably challenging and remarkably rewarding year. Our transition to a remote work environment was seamless. Our team connected and found innovative ways to advance our customer engagement. Our decision to prioritize discipline and responsible risk selection in every aspect of our business was validated by the strong credit performance of our in-force portfolio. We achieved standout execution in the capital reinsurance markets and our operating platform scaled effectively, readily supporting a massive increase in our new business volume.

The strong performance of our team and business for the duration of the COVID pandemic continued in the fourth quarter. GAAP net income was $48.3 million or $0.56 per diluted share, and adjusted net income was $50.8 million or $0.59 per diluted share. GAAP return on equity was 14.4% for the quarter and adjusted ROE was 15.2%. The new business environment remains exceptionally strong. COVID has driven a shift in behavior and fueled a record level of purchase demand shelter in place directives are reinforcing the importance of the home driving increased interest from both first-time buyers and existing homeowners looking to move up for more space. Record low mortgage rates have provided added fuel increasing affordability and drawing additional buyers to the market. Against this backdrop, we generated record NIW of $19.8 billion, up 7% from the third quarter and 66% compared to the fourth quarter of 2019.

We didn't see any of the seasonal slowdown that typically emerges in the fourth quarter. Volume was consistently strong for the period and the momentum in our production has carried into the beginning of 2021. Our volume is at record levels and the value of our new business production is equally strong our record NIW is matched by continued pricing discipline. Stringent underwriting standards and attractive risk-adjusted returns on new business flow. Overall, this continues to be a uniquely valuable new business environment, one where National MI is well situated to help lenders and deliver important solution for borrowers. In the fourth quarter, we activated 27 new lenders. For the full year 2020, we activated 101 lenders, including 8 from the top 200. We are now doing business with a broadly diverse group of nearly 200 high-quality originators. Our customers are evolving. And in many respects, the COVID pandemic has accelerated changes that we already that were already under way.

Lenders are prioritizing technology to drive improvements in the consumer experience and streamline their business processes. As they do, their expectations for their mortgage insurance partners are evolving. They expect us to offer technology enabled solutions to have embedded connectivity with third-party origination systems and point of sale platform and to support their drive for process efficiency. In this context, Rate GPS and the broader technology lead that we enjoy provide a key advantage. We are meeting our customers' needs remotely and our sales team is finding innovative ways to deepen our existing relationships and attract new customers every day.

Our activation pipeline is healthy, and we expect to continue expanding our customer franchise in 2021. We've built our Company to perform across all market cycles. And everything we have done to build a durable and profitable business, recruiting and retaining great talent, establishing the right culture, engaging with customers in a consultative way and managing risk expenses and capital, positioned us to lead through the COVID pandemic. The strength of our position coming into this stress allowed us to remain fully customer focused throughout. We have been consistent with our sales message, our price delivery through Rate GPS and our focus on risk management. We achieved a tremendous amount in 2020 growing our franchise, our NIW volume, our high-quality insured portfolio and our balance sheet.

We absorbed the brunt of the COVID pandemic and delivered significant profitability and strong mid-teen returns throughout. As we look ahead in 2021, we expect the housing market will make remain robust with sustained demand in-house price appreciation. We expect mortgage insurance market conditions will remain favorable with strong NIW volume and equally constructive pricing and risk dynamics. And we see a clear path to continue doing what we do best responsibly deploying capital to support our customers and drive value.

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

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Thank you, Claudia. We delivered strong financial results in the fourth quarter against the backdrop of continued resiliency in the housing market. We generated $19.8 billion of NIW in the fourth quarter and reported primary insurance in force of $111.3 billion at December 31. Net premiums earned were $107 million. Adjusted net income was $50.8 million or $0.59 per diluted share, and adjusted return on equity was 15.2%. Total NIW was $19.8 billion, included $17.8 billion of monthly production. Purchase originations accounted for 66% of our volume in the quarter. As Claudio mentioned, the new business environment remains exceptionally strong. We're achieving record volume strong risk adjusted returns on new production and because of the record low note rates on our current flow, we expect this business will be the most persistent we've ever originated.

Taken together, the volume, value and stickiness of our new business production are driving growth in the embedded value of our insured portfolio and will serve to seed our future financial results. Primary insurance in force was $111.3 billion compared to $104.5 billion at the end of the third quarter, while record low interest rates have helped spur exceptionally strong new business volume and contributed to the resiliency of the overall housing market. They have also continue to drive an elevated level of refinancing activity and portfolio turnover.

12 month persistency in our primary portfolio was 56% as of December 31. We expect persistency will remain low in the near term, given the outlook for interest rates. Over time, however, we expect portfolio turnover will slow and persistency will rebound as the business we're writing in the current rate environment stays on our books for an extended period. Net premiums earned in the fourth quarter were $100.7 million including $11.7 million from the cancellation of single premium policies. Reported yield for the quarter was 37.3 basis points compared to 38.9 basis points in the third quarter, primarily reflecting an increased ceded premium impact from our most recent ILNs.

Investment income was $8.4 million in the fourth quarter compared to $8.3 million in the third quarter. Underwriting and operating expenses were $35 million compared to $34 million in the third quarter, reflecting in part the strong growth in our NIW volume period to period. Expenses in the fourth quarter also included $1.7 million of costs incurred in connection with our fifth ILN offering in October. Excluding ILN related costs, adjusted underwriting and operating expenses were $33.3 million. Our GAAP expense ratio was 34.7% and our adjusted expense ratio was 33% for the fourth quarter. We had 12,209 defaults in our primary portfolio at December 31 compared to 13,005 at September 30, and our default rate declined to 3.1% from 3.6% during the period.

Our default population has now declined every month since August and the number of loans in our portfolio that have missed at least one payment, but not progressed into default status. The strongest leading indicator of our near-term credit performance is at its lowest level since April. These favorable trends continued in January with our default population declining to 11,905 at our default rate declining to 2.9% at January 31. At quarter end 19,464 or 4.9% of the loans in our primary portfolio were enrolled in a forbearance program compared to 24,809 loans or 6.5% of our portfolio at September 30.

Looking forward while an acceleration in the path of the virus could exacerbate current issues and contribute to additional macro dislocation, we're optimistic that we will see continued improvement in our credit performance as impacted borrowers benefit from a rebounding economy, an extended forbearance timeline, additional stimulus support, broad resiliency in the housing market and accelerating house price appreciation. We're also hopeful that the broad distribution and administration of new vaccines will allow for a return to normalcy in the near term and further solidify our credit outlook.

Claims expense was $3.5 million in the fourth quarter, down from $15.7 million in the third quarter. We reevaluate the assumptions underpinning our reserve analysis every quarter. Our reserve position at December 31 reflects our most current views and balances the beneficial impact, forbearance programs and other forms of borrower assistance are expected to have on our ultimate claims experience with a conservative view of the path of house price appreciation and other macroeconomic factors going forward. We'll continue to assess our underlying assumptions and reserve position as we progress through 2021, considering among other factors, the performance of our existing borrowers, the availability of additional stimulus support, the underlying resiliency of the housing market and the path of house price appreciation to determine whether further changes to our reserving assumptions and reserve position are necessary during the year.

Interest expense in the quarter was $7.9 million and we reported a $1.4 million loss from the change in the fair value of our warrant liability during the period. GAAP net income for the quarter was $48.3 million or $0.56 per diluted share. Adjusted net income, which excludes periodic transaction costs, warrant fair value changes and net realized investment gains and losses was $50.8 million or $0.59 per diluted share, up 26% compared to $40.4 million or $0.47 per diluted share in the third quarter. In January, we announced that we entered into a new quota share reinsurance agreement, covering 22.5% of our new business production in 2021. We estimate that the treaty carries a pre-tax cost of capital of approximately 6%, roughly equivalent to what we've been achieving prior to the onset of the COVID pandemic.

The new quota share agreement, capped the year of standout success in the capital and reinsurance markets. We completed seven deals providing over $1.3 billion of growth capital. Our success in the capital and reinsurance market highlights the confidence that investors have in our disciplined approach and the strength of our funding profile and comprehensive and uniquely expansive nature of our reinsurance program provides us with an expanded ability to support our lenders and their borrowers going forward. Total cash and investments were $1.9 billion at quarter end, including $72 million of cash and investments at the holding company. Shareholders' equity at the end of the fourth quarter was $1.4 billion equal to $16.08 per share, up 18% from $13.61 per share at the end of 2019. We have $400 million of outstanding senior notes and our $110 million revolver remains undrawn and fully available.

At quarter end, we reported total available assets under PMIERs of $1.8 billion and risk-based required assets of $984 million. Excess available assets were $766 million. Overall, we delivered strong results for the quarter with a record volume and value of new business production and encouraging credit performance in our in-force portfolio driving significant profitability and a strong mid-teens return. Looking forward, we're optimistic about the pace of economic recovery, prospect for the normalization of day-to-day activity, resiliency of the housing market and MI sector opportunity. We believe that we are well positioned and expect that the growing size and attractive credit profile of our insured portfolio along with our broadly disciplined approach to risk management expenses and capital will continue to drive our performance.

With that, let me turn it back to Claudia.

Claudia J. Merkle -- Chief Executive Officer

Thanks, Adam. COVID has brought into sharp focus, the important role that National MI and the broader private mortgage insurance industry play in supporting a healthy and functioning housing finance system that works for borrowers, lenders and taxpayers across all market cycles. Our performance in the fourth quarter with record NIW volume and primary insurance in force significant profitability and strong mid-teens return capped a remarkable year.

We came into the pandemic in a position of strength bolstered by the conservatism with which we have managed our business and continue to provide support lead with innovation and build value at all points through the year. Looking ahead, we believe we are well positioned to continue to win with customers drive growth in our high-quality insured portfolio, maintain the right risk return balance and deliver strong results for our shareholders. Thank you for joining us today.

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

Questions and Answers:

Operator

Thank you. [Operator Instructions] We have your first question from Mark DeVries from Barclays. Your line is open.

Mark DeVries -- Barclays -- Analyst

Yeah. Thank you. So you've obviously built a pretty large excess capital position and it's looking like the worst-case scenario. We've been bracing for -- won't come to pass and as you've indicated, you're pretty optimistic about the outlook for continued improvement in credit. So could you just talk about how you're thinking about deploying all the excess capital here?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Sure. Mark, our goal is to deploy the capital and support the growth in our business and that's our expectation, as we look forward in the near term. Over the long term, we'll have greater focus on opportunities for distribution and thinking about the right balance of capital out over several years. But in the near term, it's really geared around deploying that capital in support of borrowers in this market. The NIW opportunity as Claudia mentioned continues in a meaningful way. as we've started 2021. The return potential on new business production, the expectations around stickiness and performance given the profile of the borrowers who are coming through now is quite significant. That's our primary focus is using that capital to support growth at this point.

Mark DeVries -- Barclays -- Analyst

Okay. And just on that return potential, I mean I think in this -- the industry, obviously raise pricing as a result of the anticipated stress from the pandemic, but let's say credits holding up much better yet, it seems like pricing is kind of holding. What should we expect for the returns on the business, you guys have written in 2020?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. So I'd say when we price right, we price obviously not just for a base case outcome, but we price to account for the range of potential volatile past that the market might taking that risk might take. And so the increase in pricing certainly reflected an increase in perceived macro risks and risk in a base case environment, but it was also to acknowledge that there was a much greater, what I'll call dispersion of potential outcomes, greater volatility in those outcomes that we might see ahead, it's still really early. Right. We're now just February 15, it's too early to be able to tell if the returns on the business that we generated over the last year will meaningfully differ either positive or negative from the price expectation. When we price our business, our goal is to achieve an appropriate risk adjusted return that generally centers around a strong mid teens risk-adjusted returns. That still our expectation for the performance of the business that we -- we generated last year.

Mark DeVries -- Barclays -- Analyst

Okay. But is it safe to say that at least based on what you're observing, the credit may be performing better and maybe returns could come in toward the higher end of the range of potential outcomes?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Again, it's too early to tell. I think you're spot on though, if credit ends up performing better than the price expectations, the returns will be far better than what we had originally anticipated, but we know pretty early on that the credit environment in terms of the profile of new borrowers that were coming through has shifted meaningfully stronger. And so that also does factor into what our original loss expectations were. Right now, we're still expecting that the performance will be in line with those price expectations.

Mark DeVries -- Barclays -- Analyst

Okay, got it. Thank you.

Operator

We have your next question from Rick Shane from J.P. Morgan. Your line is open.

Rick Shane -- J.P. Morgan -- Analyst

Hey guys, thanks for taking my questions this morning or this afternoon. Look, one of the things that we've heard related to our coverage of the mortgage rates is some conversation about early signs of burn out in terms of refi activity. When you guys are looking at the recent reports, are you seeing that in any way, are there any leading indicators that suggest that persistency may be reaching the inflection?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

So it's a good question, Rick, we're not necessarily seeing that come through in the data that and performance of the portfolio day to day. Our persistency dynamic though is a little bit different. It's not measuring, call it the churn in the portfolio day in and day out, the 12 month persistency stat that we provide. The 56% that we reported for the fourth quarter is really a 12 month look back. So for us, that's what percentage of the business that was on our books as of 12/31/19 was there as of 12/31/20. And so our persistency dynamic, we expect will improve as we progress through this year. Even if the pace of turnover in those, what I'll call them earlier book years doesn't slow down, simply because we'll be bringing on amounts of production that we generated in 2020 in the lower note rate environment into the calculus. And so our dynamic will be a little bit different even if we don't see a slowdown in the rate of turnover in some pockets of the portfolio.

Rick Shane -- J.P. Morgan -- Analyst

Got it. But to, and I understand that math and I appreciate why you guys look at it that way. But when we look at it on a sort of a quarterly basis and obviously the '16 and '17 into a lesser care in the '18 vintages are burning off relatively fast and that makes sense given where the coupons are. Are you on a monthly basis seen any inflection there?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

No. And candidly, when we've looked at it, so when we've modeled out where our persistency is going, we've made the assumption -- the same way we would do if we're trying to forecast value where stock price, the yesterday's performance is the best indicator of tomorrow's performance. We have assumed that persistency rates will continue and the turnover rates on those chunks of the portfolio that are right for refinancing will continue at the exact same pace that we've seen in most recent periods. And the turnover in December was generally consistent with the turnover in November, which was generally consistent with the turnover in October all at a very accelerated rate.

Rick Shane -- J.P. Morgan -- Analyst

Got it. Hey, Adam. Thank you very much.

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Welcome.

Operator

We have your next question from Doug Harter from Credit Suisse. Your line is open.

Doug Harter -- Credit Suisse -- Analyst

Thanks. Can you guys just talk about how you're thinking about your capital level, your PMIERs excess is quite strong. How much do you think you need to support -- to support growth in the coming year versus, do you think you might be in a position to think about capital return?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yes. Great question. We certainly, right now, the capital that we have is there, it gives us one an ability to obviously prosecuted what's a -- a tremendously attractive new business opportunity and really lean into support our lenders in there and their borrowers, which is what we've been doing. We do have expectations that we will be deploying the excess capital that we have now through the course of the year. Obviously, we will continue to replenish excess capital, as we're generating earnings and equitizing our balance sheet every day, and we do have expectations and we'll continue to be active in the ILN market through the course of the year.

For 2021, we don't have any plans to be a capital distributor. I think over the long term, we'll need to see what our profitability is and so how much equity we're generating in excess capital, we're generating organically. What's the size of the new business opportunity is, as we get further out down the road and also how credit is performing. This is a tremendously, a strong and resilient environment from a housing market standpoint, but we want to see how all of those items develop beyond this year to really calibrate our plans for capital management and potential capital distribution.

Doug Harter -- Credit Suisse -- Analyst

Great, thank you, Adam.

Operator

We have your next question from Randy Binner from B. Riley. Your line is open.

Randy Binner -- B. Riley -- Analyst

Hi, good evening. Yeah, can you all address, I've spent, if there's one topic, I've spent the most time talking about with clients on MI is a hypothetical concern around FHA mortgage insurance, price cuts. And so it's something we've talked about a lot over time and it's probably a reasonable thing to think about with the new administration, but now that we're kind of in a forum where you can talk more broadly, I'd just like to hear your perspective on that issue?

Claudia J. Merkle -- Chief Executive Officer

Yeah, sure, Randy. It's a good question and it's an important one. Broadly speaking, we price to achieve what we believe are appropriate risk adjusted returns and our view on appropriate risk adjusted returns is influenced by FHA pricing, but it's also important to recognize that the private MI market and NMI in particular, we operate at a different point on the risk spectrum than where the FHA sits. This bifurcation of the market where certain borrowers are best served by the private market execution and others by the public market, that's growing even more since COVID with the further shift in the quality. So if an FHA recut were to come through, we expect that the significant majority of the borrowers we serve today will continue to find their best execution in the private market.

Randy Binner -- B. Riley -- Analyst

Can you -- thank you for that. The follow-up would be, how does that -- you mentioned, there has been a change since COVID, but even thinking back to maybe 2015, how much different is the overlap of the PMI versus the FHA market now versus then?

Claudia J. Merkle -- Chief Executive Officer

Yeah, the overlapping, as far as the credit scenario, I would say there is less overlap today than 2015, obviously with the credit shift. I wouldn't -- I don't have any exact numbers there, Randy, but certainly it is more, more and more to higher quality coming into the private sector.

Randy Binner -- B. Riley -- Analyst

All right. I'll leave it there. Thank you.

Claudia J. Merkle -- Chief Executive Officer

Sure.

Operator

We have your next question from Bose George from KBW. Your line is open.

Bose George -- KBW -- Analyst

Good afternoon. Actually, the first question, Brad referred to that, the three-month FHFA extension for borrowers who are and in forbearance, it's like February 28. Could you clarify your understanding of the deadline for new GST forbearances? The announcement last week did not seem to directly address that?

Bradley M. Shuster -- Executive Chairman of the Board

Yeah, it's an interesting point, Bose. What -- I'll call it, there is a favorable dynamic there that's not perfectly overlapped with some of the other programs. Our understanding and read of last week's announcement is that any borrower who enters a GSE forbearance program by February 28 will have up to 15 months to run under that program obviously depending on their heard ship and the conversations they have with services, but that after February 28, borrowers can still access forbearance, if they have a GSE backed loan for an indeterminate amount of time. There is no on when they can access. But if you ask that after February 28, instead of having 15 months to run, you will have 12 months to run on that forbearance program.

Bose George -- KBW -- Analyst

Okay. That makes sense. Thank you. That was understandable as well. That's good to hear. And then switching over to premiums. In terms of premiums, is there a way to think about how much downward pressure is left just on the core margin, especially related to business that you're doing, which is obviously, extremely high quality.

Bradley M. Shuster -- Executive Chairman of the Board

Yeah. I would say that -- I want to give you a general steer, excuse me, it's going to fluctuate in every period obviously based on the volume that we have, the risk profile, that production. Importantly, the persistency and also our loss experience, because it impacts our profit commission, when we price, what we're really pricing to achieve is bottom line results, bottom line growth and that's strong the teens return -- through the year to try to give you a general steer without specific guidance, we do expect that our net yield will trend down from our Q4 level as we progress through 2021, given the continued pace of turnover and the in-force portfolio. And really the difference in the risk profile and rates on our current production versus that which is running off. And we also expect to pick up some additional ceded premium costs through the course of the year to the extent we're active in the ILN market. So we do expect to see some continued movement on the yield side, through the year.

Bose George -- KBW -- Analyst

So. Okay, great. That's helpful. Thanks. And then, actually just a quick one on credit, I think, if you gave the default to claim assumptions. So, if not we get that, and then actually, just on the [Technical Issues].

Bradley M. Shuster -- Executive Chairman of the Board

Bose, I'm sorry, I heard the first part of the question is, I'll answer it, but then I'll ask you to repeat the second part. I'm not sure our line broke up or yours did, but the claim rate assumption on new notices in the fourth quarter was approximately 7%, which is consistent with the claim rate assumption that we made on new notices in both the second and the third quarter. Would you mind repeating the second part of your question now?

Bose George -- KBW -- Analyst

Yeah, sure. Yes. Just curious what was triggering paid claims currently, it's obviously a small number, but is given that there is a foreclosure moratorium, I was just curious how a loan gets to a pay claim status.

Bradley M. Shuster -- Executive Chairman of the Board

Yeah, so the overwhelming majority of loans that are in default that progressed to claim, progressed through the foreclosure process, that's the process by which the servicer and lender takes title, but there are other mechanisms for the servicer to take title to the property. It could be a short sale, it could be something called the deed in lieu and we saw very, very limited amount of activity on those two pieces which are really what I would say is, those are -- those are not imposed on the borrower, those are done in coordination with the borrower as part of their own work out process and thinking of what lies ahead after exiting from a home that may not be sustainable for them.

Bose George -- KBW -- Analyst

Okay, great, thanks.

Operator

We have your next question from Jack Micenko from SIG. Your line is open.

Jack Micenko -- SIG -- Analyst

Hi, good afternoon, everybody. First question, we've talked about pricing and I know, the industry raise prices, pretty prudently at the beginning of the -- sort of the pandemic. And it sounds like it was maybe sort of a 10% sort of on average across the board. Certainly, maybe higher different buckets, but what's your perspective on where pricing, since there are we kind of flat, have we held that level or is the industry moved, come a bit on price from that initial move three, quarters ago?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah, Jack, in terms of, I'll call it, how much higher is pricing today, so to speak. We have been protective of the rate increases that we had put in place following the onset of the COVID pandemic. And are still achieving pricing that is higher today than it was prior to the onset of the outbreak of the virus. We think that's appropriate, right, as I mentioned earlier. Pricing isn't just about pricing for the base case, but it's pricing for the dispersion of potential outcomes that might develop. We're still early days, right I think we're all hopeful, we're all feeling better, we're seeing vaccines rolling out, we're seeing the resilience of the housing market. The strength, or at least the rebound in the macro environment, but there is still a lot of uncertainty that lies ahead. And so for us, we've been protective of those rate increases in a way that we think is both appropriate, but also highly supportive of borrowers. If you look at where mortgage note rates are today and where our pricing is, we don't believe that there is a single borrower out there who isn't it able to access credit, because of the cost of MI coverage. And so we've been really working to find that balance and that balance for us is really much the same as it was since the early onset of the COVID pandemic.

Jack Micenko -- SIG -- Analyst

Okay, got it. And then you think about your model, you tend to skew toward the higher end on FICO, and the lower end on LTV, looking at your NIW chart this quarter though. It does seem like you may be taken on a little bit more of a risk appetite and I'm just curious if that was more, if that was something where you saw the returns relatively attractive in the context of the prior question around pricing or if you've become quite pretty optimistic in your prepared comments on the outlook. Just thinking through with the thought process behind some of that shift, we saw in NIW this quarter.

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah, it's by design, Jack. It's a good point to note. At the outset of the pandemic, we look to broadly reign in what for us, had already been really a low level of production in certain higher risk cohorts that below 680 FICO greater than 45 DTI and the 97 LTV volume. Through the course of the pandemic what's become clear is that borrowers who are facing stress are dealing with income issues not equity issues and that comes through in a notable difference beyond what we would have already expected based on historical data in loss expectations for high LTV borrowers versus high DTI and lower FICO borrowers. And so as the macro environment has recovered as the housing market has demonstrated such significant resiliency, we've had an opportunity to by design prudently layer in some additional risk into our production and our portfolio and in doing that, the natural spot is with a modest amount of additional high LTV volume. I would note that overall the risk profile on our new production is still dramatically lower today, than it was pre-COVID, our concentration of 97 LTV loans now looks to be roughly in line with the rest of the industry, certainly not about it. And most importantly, we remain just as focused on managing layered risk of which I think we had in the quarter, something like 10 basis points of layered risk concentration in our production, which was the same as in the third quarter. So it was by design, it's based on some dynamics that we're observing as the pandemic moves on. And as we have greater clarity around its impact on the housing market, but it's an area we're still going to be cautious. We don't want to have an outsize concentration certainly.

Jack Micenko -- SIG -- Analyst

All right, great, thanks.

Operator

We have your next question from Giuliano Bologna from Compass Point. Your line is open.

Giuliano Bologna -- Compass Point -- Analyst

Thanks for taking my questions. I guess, continue on a similar topic, that's some of the few times. That was a little bit of a different angle. When we think about the overlap that you currently have with FHA, one of the things that has come up in a few different conversations that have been having is the impact of a -- potential $15,000 first-time homebuyer credit, and what I was trying to get a sense of was, when we think about the overlap, and where your businesses overlapped, is it more so on the scale of lower FICO or is it more so on the scale of higher LTVs that push people out of your market? Because that could obviously have an LTV benefit to a lot of people that are currently pretty supposed to be in more of a -- an FHA bucket from a cost perspective and I push them toward PMI in some cases and obviously the final moves both ways. So I'd be curious how that overlap might impact the industry.

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. That's one where I would say there is not a lot of information around how it will work mechanically, in the public domain and also how long, did that program perhaps different from some others is typically implemented for a specified window. And so both how it's actually structured mechanically, how you get cash to borrowers upfront and how long the program is in effect for will impact that. I think your instinct though is right, that it's not all just a negative, broadly speaking, there were some questions earlier about FHA possibility of FHA rate actions now about the $15,000 tax credit. Our view is that all of these programs are really designed to increase access to housing for segments of the market that haven't yet been able to take advantage of and access the benefits of housing thus far. And so it's really designed to bring more buyers into the market with new demand and new origination dollars.

And some of that there may be a little bit of a reallocation of the pie for those borrowers who are already in the market between our market and perhaps not meeting MI support broadly between the FHA now looking until they have a better profile with a lower LTV coming into our market. But the biggest news for us is we think all of these programs and support that's offered for new buyers were really just expand the pie, it's not just going to be a reallocation of the pie. To give you a sense of our average loan size that we're ensuring at this point is roughly $300,000, $15,000 is 5%, that 5% when our weighted average LTV at origination is 92 doesn't move that borrower out of the private MI market. What it might do is obviously change their risk profile. And as you noted, some buyers who would otherwise be shifted to the FHA with perhaps higher LTV profile into a credit profile where they can be best served by the private market.

Giuliano Bologna -- Compass Point -- Analyst

That makes lot of sense. I really appreciate it. And I'll jump back in the queue.

Operator

We have your next question from Ryan Gilbert from BTIG. Your line is open.

Ryan Gilbert -- BTIG -- Analyst

Hi. Thanks everyone. First question just on NIW, I think you mentioned in the prepared remarks that you haven't seen a seasonal slowdown in demand and that's carried into January. I guess, is it fair to say that dollar volume of NIW in 1Q is tracking kind of consistent with the fourth quarter of 2020.

Claudia J. Merkle -- Chief Executive Officer

Yeah, we've seen -- continue to see really strong application volume midway through the quarter. It's still a little early to tell how Q1 will unfold and how much of that seasonal slowdown ultimately comes through. But you're right, we haven't seen so far. Remember too, the drivers of the demand that we've seen post COVID are not seasonal in nature. The emotional drive toward homeownership and the increased affordability tied to low rates should persist regardless of the weather. So we'll see. I mean, this is an unprecedented environment and it may yield a stronger origination both in Q1 and beyond than we would otherwise typically have. But we feel really strong about our momentum and positive about our future with our record volume that we delivered in the fourth quarter.

Ryan Gilbert -- BTIG -- Analyst

Okay, great. And then just thinking about, I guess the refi component of NIW, another really strong quarter in 4Q '20. Has there been any change in '21, in your ability to capture a stronger refi volume? Or is that been also pretty consistent with 2020?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

That one, I'm going to defer on, I don't have our breakdown. We were 66% purchase, so 34% refi in Q4. I don't have the breakdown on my fingertips, but broadly seeing, broadly speaking, we're having success in the market. Supporting our borrowers, we expect and suspect that our borrowers are equally busy from a refi standpoint as they are, from a purchase standpoint. And so we'll be -- we'll provide those splits, when we get to our first quarter call, but the momentum is there.

Ryan Gilbert -- BTIG -- Analyst

Okay, great. Thanks very much.

Claudia J. Merkle -- Chief Executive Officer

Welcome.

Operator

We have your next question from Mark Hughes from Truist. Your line is open.

Mark Hughes -- Truist Securities -- Analyst

Yeah. Thank you. Good afternoon. Adam, another way to approach the capital situation, is there a way to say what sort of growth, you could support internally with internally generated capital with your quota share and ILN support? What kind of growth would you need in order to start to eat into that excess capital?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah, it's a good thought. As a theoretical matter, we could support 100% of our needs in that fashion, because that would be all of our excess today, plus an assumption that everything we're producing is going to go through a reinsurance transaction. And for us, obviously that's not necessarily 100% of our business goes through where we can make that assumption at all times. We have to obviously keep a prudential amount of excess. And we also have to be able to warehouse the production that we are generating until we get to that point of distribution with our next ILN. And that's a more difficult one to calibrate. I think it's fair to say that for us this year. we have every expectation that we'll be able to deploy our excess and support -- borrowers in support of our customers and really ultimately in a way that helps to seed our future financial results by generating significant additional growth in our insured portfolio. As we get out beyond 2021, some of those dynamics around distribution versus deployment versus organic generation and what we can harvest from the market may come into more acute focus, but that's not going to be our opportunity in '21.

Mark Hughes -- Truist Securities -- Analyst

And so your opportunity to deploy much or all of that excess, you think you can do that in 12 months?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Well, I'll give you a sense, so I don't have the numbers at my fingertips, but our PMIERs charge on our production in the fourth quarter was a little over 5.5%. We were $19.8 billion of NIW and we had at the time of a roughly a 20% quota share agreement in place, a 21% quota share agreement in place, I'd want to do the math, but you can, if you just took the fourth quarter and roll that forward as a constant amounts of production with a roughly equivalent PMIERs charge you could get to a timeline, I think that puts us on a pathway of consuming that amount of excess over something like a 10-month period or so, got a little bit of. We can -- we could do a bit more math on it a little bit more analysis and come back to you.

Mark Hughes -- Truist Securities -- Analyst

It's good. Very helpful. Thank you. And then you mentioned that your losses are predicated, you think on a conservative home price appreciation number. Can you share what that is?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

I won't share what the specific number is. It's not a constant for us, assumptions about house prices and the path they take because loss is developed even on the current default population developed over time. But suffice it to say, it's what I'll call it quite a muted number well below long-term historical averages in terms of what we tend to see on an annual basis for house price growth nationally.

Mark Hughes -- Truist Securities -- Analyst

Right. Which would be well below current home price appreciation, presumably?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yes. That's right.

Mark Hughes -- Truist Securities -- Analyst

Okay. Thank you very much.

Operator

We have your next question from Phil Stefano from Deutsche Bank. Your line is open.

Phil Stefano -- Deutsche Bank -- Analyst

Yeah. Thanks and good afternoon. So Adam, I think in your prepared remarks, you had talked about the percentage of your total inventory policies in-force that were in forbearance. I was hoping you could drill down to the extent that you could talk about the proportions of the default inventory that were in forbearance. And I think it's your November Investor Day, you had a slide in there that indicated only about 1% of the loans that were exiting forbearance were doing so in a stress scenario. I mean, if you have any updated thoughts on how that's kind of changed in the four or five months since that slide was presented, I appreciate it.

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Sure. So of the 12,209 defaults that we recorded, the default population at the end of December, I think around -- I got to get you the exact number. It was, I think, 11,200 roughly were in forbearance. There's another chunk of that remaining 1,000 or so that we suspect are in forbearance, but the way the reporting comes into us from servicers isn't quite as precise. And so out of an abundance of caution, we scoped that out.

But we're looking right now at something over 90% in terms of the population -- the default population that's in forbearance. And the largest chunk of those that are not in forbearance or what I'll call it, the pre-COVID defaults, those that were in the default tally from the end of last year, early this year, that having sort out, but having necessarily access forbearance to the same degree that post-COVID stress borrowers have. And then Phil, if you wouldn't mind just repeating the second part of the question.

Phil Stefano -- Deutsche Bank -- Analyst

Yeah. So at the Investor Day, there was the -- the 1% of people who were exiting forbearance in a stress scenario, does it feel like that number has shifted at all? Or is that generally, people when they exit forbearance, they're doing so not in a stressed environment?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. I want to be a bit careful. I want to go back and look at that slide. But the overwhelming majority of borrowers that are exiting forbearance continue to exit forbearance back into performing status and not progressing toward a claim at this point. The split in terms of how borrowers are exiting from forbearance. Many continue, actually the majority continue to simply make up for all of the missed payments thus far. And then another chunk, the next largest cohort would be those who are taking advantage of the payment deferral option that the GSE has introduced in May.

Phil Stefano -- Deutsche Bank -- Analyst

Got it. Okay. And the last one I have for you, I think it was Adam that had talked about. So the revised assumptions during the quarter when setting reserves, the 7% incidence rate assumption feels like it's relatively constant. And so I guess what you're trying to point to with these revised assumptions is the favorable development that we saw in the quarter. And I guess I was hoping you could just talk to me about -- look, is it as simple as home price appreciation and the expectation of vaccinations and economic development that we're going to slowly start to release some of this pool of reserves? Or is there anything else that maybe not as simplistic?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. So we didn't release reserves on any COVID-related defaults that we've identified in the portfolio. The prior year development that came through of roughly $2.2 million in the quarter relates entirely to the pre-COVID default population. And that population, we've continued to reserve all along exactly as we had done prior to the outset of the pandemic. And what I mean there is as those defaults age or cure, we're making corresponding adjustments to our carried reserves.

As house prices develop, we're incorporating -- it's the latest actual appreciation that comes into our analysis. So that pre-COVID population declined from 883 defaults at September 30 to 795 at December 31. And the reason that we had that $2.2 million of favorable prior year development is because of the decline in the accounts alongside the strength of HPA not that we have are forecasting, but the strength in HPA that we've actually seen over the last several months has driven the release. We haven't released reserves even as cures have come through in a meaningful way for any of the COVID-related defaults that we've already reserved for, say, in the second and the third quarter.

Phil Stefano -- Deutsche Bank -- Analyst

Okay. Good. Thank you.

Operator

We have your next question from Geoffrey Dunn from Dowling & Partners. Your line is open.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Thanks. Good evening. Got a few questions for you. First, was there any IBNR development in the current period provision this quarter?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

No. Our IBNR factor was constant through the -- from the third quarter to the fourth quarter. So any movement in the case reserves would have prompted modest movements in the IBNR, but nothing like the changes that we noted from the second to the third quarter.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. So based on the average provision, it looks like your severity factor dropped significantly. I'm get backing into maybe about 35,000 relative to maybe north of 50 last quarter. Is that math correct? And can you explain the change?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. So it isn't -- we'll talk offline. But our average severity factor on new defaults in Q3 was about 77%, in Q4 it was about 74%. So there's some movement and that movement traces. One to just what was the LTV on the loans that happened to go into default during the course of the quarter, as well as the strength of the HPA environment, not -- again, that we're forecasting, but the HPA environment that we've actually seen develop over the last three months. Geoff, happy to work with you offline just to make sure that we're seeing the same analysis you are and helping you understand it. What I'd say is more broadly, when we look at severity factors, one of the things that we're most comforted by is obviously the level of equity that's embedded not just in the overall portfolio, but specifically in the default population.

At the end of the year, 94% of our default population had at least 10% equity on an estimated basis, right, our estimate of the current LTV and 75% had at least 15% equity underpinning their mortgage. That obviously goes a long way toward bolstering that borrower's performance. And in the event that they do progress to claim from providing us with some amounts and an ability to curtail our claims exposure as a severity matter.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. As you think about the incidence assumption, my assumption has been that the incidence rates would go up at all the MIs as the percent of new forbearance loans with the new delinquencies coming in and goes down. If that is the trend in the coming year, and there's no macro change on your part, is it fair that, that incident assumption go up? Or are there other things we need to consider as we look at that outlook?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Yeah. So this is one where -- I do want to highlight, we're very happy to talk about the claim rate assumption, we call a frequency factor internally in the aggregate, but it is -- that's not how we developed it. We don't just apply a blanket 7% assumption for all new notices that come in, in a particular quarter or whatever the claim rates we would be disclosing at that point. It's very much developed based on the individual profile of the loan, the borrower and expectations for performance on a model basis. So every single one of those -- the 2,589 new defaults that came through in the quarter went through our risk model, got its own frequency factor, and it just happens to be that the average continues to run at 7%. Where that number trends in the future will depend greatly on both the macro environments in which we're incurring new defaults, but also the underlying risk profile of those defaulted borrowers.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. And then last question, I think you mentioned the average PMIERs asset charge on NIW in Q4 is about 5.5%. Roughly speaking, what's the average charge on runoff or cancel business?

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Geoff, I don't have it at my fingertips. I'm happy to come back to you with it. The charge on our production prior to the onset of COVID in terms of a new -- from a new business standpoint in the fourth quarter of 2019 was running at about 6.1%, but the carry charge on that in-force portfolio, even though it was originated in a, I'll call it, with a higher risk characteristics, and so therefore, a higher risk charge will itself have benefited from seasoning credit. Sorry, I don't have it on my fingertips, but happy to come back to you with it.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. Great. Thank you.

Operator

I'm showing no further questions at this time. I would now like to turn the conference back to the management. Please continue.

Claudia J. Merkle -- Chief Executive Officer

Thank you again for joining us. We will be participating in virtual investor conferences hosted by Credit Suisse on February 25, EFA on March 1, and RBC on March 9. We will also be participating in J.P. Morgan Fixed Income Conference on March 2. We look forward to speaking with you at one of these events and hope all of you are staying safe and healthy.

Operator

[Operator Closing Remarks]

Duration: 62 minutes

Call participants:

John M. Swenson -- Vice President of Investor Relations and Treasury

Bradley M. Shuster -- Executive Chairman of the Board

Claudia J. Merkle -- Chief Executive Officer

Adam Pollitzer -- Executive Vice President and Chief Financial Officer

Mark DeVries -- Barclays -- Analyst

Rick Shane -- J.P. Morgan -- Analyst

Doug Harter -- Credit Suisse -- Analyst

Randy Binner -- B. Riley -- Analyst

Bose George -- KBW -- Analyst

Jack Micenko -- SIG -- Analyst

Giuliano Bologna -- Compass Point -- Analyst

Ryan Gilbert -- BTIG -- Analyst

Mark Hughes -- Truist Securities -- Analyst

Phil Stefano -- Deutsche Bank -- Analyst

Geoffrey Dunn -- Dowling & Partners -- Analyst

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