Nmi Holdings Inc Class A (NMIH) Q2 2021 Earnings Call Transcript

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Nmi Holdings Inc Class A (NMIH -1.25%)
Q2 2021 Earnings Call
Aug 3, 2021, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day and thank you for standing by and welcome to the NMI Holdings Incorporated Second Quarter 2021 Earnings Conference Call. at this time all participants are in listen-only mode. After the speaker's presentation, there will be a question-and--answer session. [Operator Instructions]

I'd now like to turn the conference over to your speaker today, Mr. John Swenson,

John Swenson -- Vice President of Investor Relations & Treasury

Thank you. Good afternoon and welcome to the 2021 second quarter conference call for National MI. I'm John Swinson, 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.

Brad Shuster -- Executive Chairman

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 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 home ownership 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 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 applaud 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 and 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 recedes, 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.

Claudia Merkle -- Chief Executive Officer

Thank you, Brad. Our team and business continue to outperform in the second quarter. We delivered significant new business production, strong growth in our high quality and shared 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 1200 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 the housing demand through the pandemic carrying forward and rising house prices and the recent movement in rates contributing to incremental origination volume and activity. First time home buyer demand is at a high and private mortgage insurance penetration of the purchase market is increasing as a growing numbers of bars 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 and 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 toward another terrific year. We estimate that industry volume will reach $550 billion to $600 billion in 2021 and we continue to 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 bars 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 home ownership. 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 bars to 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 know 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.

Adam Pollitzer -- Chief Financial Officer

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 enforced 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 months 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 and 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 are in $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 seated premium costs associated with our sixth Ireland offering an April. Investment income was $9.4 million in the second quarter, compared to $8.8 million in the first quarter. Underwriting 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 or 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 sharing their delinquencies and fewer new defaults emerging as the economic stress of the COVID crisis recedes.

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 rate 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 and important leading indicator of our near term credit performance is at its lowest levels 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 cents 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 $17.3 per share, 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 premieres 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 risks, expenses and capital will continue to drive our performance.

With that, let me turn it back to Claudia

Claudia Merkle -- Chief Executive Officer

Thanks, Brad. [Indecipherable] 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 insurance portfolio, maintain the right risk return balance and deliver strong results for our shareholders.

Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.

Questions and Answers:

Operator

[Operator Instructions] We do have a question from Doug Harter from Credit Suisse. You are not alive.

Doug Harter -- Credit Suisse -- Analyst

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 I'm just thinking about the underlying in-force premium yield. What are the expectations around that?

Adam Pollitzer -- Chief Financial Officer

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 unknown 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 costs toward the end of the year. And as we've talked about, we will 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 a as a decline, as a dollar contribution.

Doug Harter -- Credit Suisse -- Analyst

Okay, that makes sense. And then, can you just talk about kind of what you saw competitively this quarter that it looks like your market share, kind of swung around a fair amount the last two quarters net positive, but just the dynamics that lead to those types of swings and market share.

Claudia Merkle -- Chief Executive Officer

Sure. we're not focused on market share. It's just not something we manage toward. Our focus is serving our lenders and their bars, deploying our capital responsibly and driving profitable growth and 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 it's growth, which drives revenue and maintaining discipline around risk and expenses. We achieved just that in Q2, 10% growth and if compared to the first quarter and 38% year over year. Look NIW and market share in this case, it'll 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.

Operator

Next one on the queue is Bose George from KBW. You are now alive.

Bose George -- KBW -- Analyst

Hey everyone. Good afternoon. Wanted to follow up just on the industry competition question from Doug. In terms of, I know you guys, targeted a risk adjusted return but do you think lenders are getting more focused on price over time? Or do you think that is kind of remained pretty stable as well in terms of how they do their business?

Claudia Merkle -- Chief Executive Officer

Yes, 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 purpose is important, relationships. For us, the two 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 and 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.

Bose George -- KBW -- Analyst

And then, just on the expenses just curious how you should think about the expense ratio over time, clearly the growth -- underlying growth with your insurance in force remains strong is kind of a way for us to think about, where that expense ratio could go over time.

Adam Pollitzer -- Chief Financial Officer

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, I note the smallest absolute expense footprint in the industry by a fairly wide margin, small as 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-20's overtime. 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.

Operator

Next one on the queue is Rick Shane from JPMorgan. You are now live.

Rick Shane -- JPMorgan -- Analyst

Hey, everybody. And thanks for taking my questions. Look, 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 toward purchase activity. I am curious when you think about those three 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.

Adam Pollitzer -- Chief Financial Officer

Yes, Rick, it's a good question. What I would say maybe we'll tick 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 or 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 GSE has 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, drawing 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 toward home ownership. And that's contrasted against a severe supply side shortage in the US.

We've been significantly under-built 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, that's a terrific position for us to be in on the MI side.

Rick Shane -- JPMorgan -- Analyst

Great, Adam, thank you for all of that. And then the last part of that question, and I realize 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 are the same, have been in the home for a longer period of time? Is there anything we should think about there as well?

Adam Pollitzer -- Chief Financial Officer

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 competence 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 competence level. Once you're already into the loan, it may not be the same affirmative statement when you are 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.

Rick Shane -- JPMorgan -- Analyst

Thank you, guys.

Operator

Next one on the queue is Colin Johnson from B. Riley Securities. You're now live.

Colin Johnson -- B. Riley Securities -- Analyst

Hey, good afternoon. Thanks for taking the questions. So it looked like in the quarter, the PMR has cushion kind of an excess of requirements expanded a little bit in percentage terms. Would it be fair to interpret that maybe as an effort to kind of pre-empt this dynamic of delinquent own loans continue to age, they'll 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 is a smaller percentage of loans in the future are going to be in forbearance plans.

Adam Pollitzer -- Chief Financial Officer

No, it's a good question but the expansion of the PMR's cushion really just reflects the execution of our sixth ILN 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 PMR's required assets, and that causes an expansion of our cushion and our sufficiency ratio. We expect 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 are being subjected to the PMR's 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 hardship, the strain, the incremental strain of those defaults will just naturally be absorbed in an accordion like way by the existing reinsurance structures.

Colin Johnson -- B. Riley Securities -- Analyst

Got it, that's helpful. Thank you. 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 to expect maybe a boost in refinance volume here and kind of see that associated impact on persistency going forward?

Adam Pollitzer -- Chief Financial Officer

Yes, it's a good question. But I think the FHFA adverse market refinancing surcharge or fee that was put in place last December, we never really saw that actually be pass through to borrowers in most instances. In most lenders that we talked through just absorbed the cost and those that did pass it along at most pass along as roughly a one eighth 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, our portfolio we talked about as last quarter is really split pretty meaningfully. The weighted average, note rate underpinning our pre-COVID population. So all the businesses that we wrote from our inception through March 31 of last year, if we use March 31, April 1, 2020 is a line of demarcation, have a 4.16% underlying weighted average note rate and our post COVID our April 1, 2020 through June 30 of 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 a 30-year fixed rate national average, but going from a 320 down to a 3, it 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 rate stack for the portfolio, we don't expect something dramatic.

Colin Johnson -- B. Riley Securities -- Analyst

Right. Okay, that makes sense. Those are my questions. Thanks.

Operator

Next one. On a queue is Mark Hughes from Truist. You are now live.

Mark Hughes -- Truist -- Analyst

Yes. Thank you. Good afternoon. Looking at your underwriting, the FICO has -- average FICO score has 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, 3Q we'll see a little bit more of that.

Brad Shuster -- Executive Chairman

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 risks that we let 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 at 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 ease some of those significant restrictions that we instituted early on. As to where we go in the third quarter, there'll always be I'll call it movements, small movements from period 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.

Mark Hughes -- Truist -- Analyst

Question, if we do continue to get this strong 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've bought them. What's your experience on that?

Brad Shuster -- Executive Chairman

Yes, it's so obviously our policies are cancelable automatically when the loan itself is amortizing down below a 78% LTV. And it's also cancelable if the borrower and not all policies, but monthly policies are cancelable. If the borrower secures an appraisal that shows that on an appraised basis, they're at or below an 80% LTV [Phonetic]. 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 premiums.

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 press not inefficiency, but a similar lack of attention on the idea of securing an appraisal specifically for the purpose of cancelling MI.

Operator

Next one on the queue is from Michael Kolyr [Phonetic] from Morgan Stanley. You are not live.

Unidentified Participant

Hi everyone. First of all, big congratulations on yet another successful quarter. My question for you today is about your, the reliance of your future results on ongoing governmental support. Obviously for Forbearance programs that 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 managing risks involved in the transition away from the current aid heavy environment. Thank you.

Brad Shuster -- Executive Chairman

This is Brad. Let me address that. So with respect to the GSE Forbearance programs, we really do applaud the efforts of the FHFA 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 a borrower successfully transition out of forbearance and default status. But as the programs wind down there will doubtedly 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 forbearance on a perpetual basis, but it also isn't fair, and it 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 has recently built in their homes, despite the missed 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 policy makers will follow that path.

Adam Pollitzer -- Chief Financial Officer

And just to layer on to that 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 DC, even what we're seeing over the last few days in focus around an eviction moratorium, which is rental focus, but it shows the eagerness to provide support. For reserving purposes though importantly, we've chosen to anchor more to downside scenarios for reserves setting and we've not accounted for the prospect of additional assistance beyond the current forbearance programs and the assistance that they entailed as we set our reserves. And so, we're probably 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.

Unidentified Participant

Terrific. I appreciate the great responses. Thank you.

Operator

Next one on the queue is Ryan Gilbert from BTIG. You are not live.

Ryan Gilbert -- BTIG -- Analyst

Hi, thanks everyone. First question for me, just noting the nice improvement that we've seen in persistency and insurance enforce 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, 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.

Claudia Merkle -- Chief Executive Officer

Yes. Well, Ryan let me first comment around the premium rate, we don't provide specifics about our premium rate on NRW, 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.

Ryan Gilbert -- BTIG -- Analyst

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

Claudia Merkle -- Chief Executive Officer

Yes. So we really private MI is tracking toward 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 first time home buyers come into the market and need our support. However, we also expect refinancing volume will continue to slow with a decrease in total refi origination activity. And then thus the further decline in MI penetration of the refi market. Taken together, we expect that next year 2022 market will be large by historical standards, but not necessarily approach the records that we've seen over the last two years.

Ryan Gilbert -- BTIG -- Analyst

Okay, got it. That's very helpful. Thank you. And I guess just thinking about NIW in the second half of the year and Adam, your comment around a potential fourth ILN, is it correct to think that the PMI is excess, that you currently carry at the end of June should be mostly deployed by 4Q?

Adam Pollitzer -- Chief Financial Officer

Yes. I'm going to hold that one in reserve just as obviously it signals a forecast event NIW and we're guarded against that. Claudia mentioned in her prepared remarks and some of the 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'll be our goal. We've got plenty of capital obviously between the access position, all the capital at the HoldCo, the uncapped 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 what we will certainly have an excess position when we're pursuing the next ILN, it'll just be the time for us as a programmatic issue or to be back in the market.

Operator

[Operator Instructions] Next one on the queue is Geoffrey Dunn from Dowling. You are not live.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Thank you. Good evening. I've got a few questions. First Adam, can you share the claim rate assumption on new notices this quarter? I think it compares to 9% last quarter and also if there were any IBNR adjustments plus, or minus.

Adam Pollitzer -- Chief Financial Officer

Yes. So the claim rate assumption again, I'll give the one caveat, Geoff, 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 1100 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 1100 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,

Geoffrey Dunn -- Dowling & Partners -- Analyst

What that average change? Was that any credit mix issue or is that the company adopting any more conservatism? What drove such a material change?

Adam Pollitzer -- Chief Financial Officer

Yes. it's really, there's the underlying risk profile of the loans that came through as new defaults in the quarter is basically the same as what's coming through -- what has come through in prior periods. We talked about on the call or on our 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 COVID cycle and borrowers who face stress early on when the enormous fiscal and monetary stimulus and other borrower assistance programs were first introduced, that's really what's driving it.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. 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 looks like it was down over a basis point this quarter now below 39 basis points. Where do you see that stabilizing as we continue to shift to that 18 pricing?

Adam Pollitzer -- Chief Financial Officer

Geoff, we're not going to give guidance on where premium yield whether it's on a net basis or a poor basis. We've got a little bit less than a basis point of movement on the core yield about 0.95. So we can sync up -- we could sync 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 stands 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 absolutely built up from all of the individual rate reflects that.

Geoffrey Dunn -- Dowling & Partners -- Analyst

Okay. And then last question, it's probably more of sensitive topic, but pre great recession, the industry was really just a risk taker. What the GSCs kind of said was, OK, what's kind of what the NRA seem to accept. Post great recession, we've seen the industry take a differentiated view on higher DTIs for a little bit a few years ago. What do you think is nationals in the broader industry's ability to continue to price with the way you want to, if the FHFA directs a real broadening of the GSC 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 may be a political pressure that you have to directionally fall the GSEs?

Brad Shuster -- Executive Chairman

Well, 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 bars with increased access to home ownership. That's our business and we're competent there's a way to help more individuals access home ownership with fairness, equity and sustainability, and also a way that provides appropriate safeguards against systemic risk and ensures the safety and soundness of how these denounced system. And we have our risk management program, which we talked about many times, the three pillars of individual loan, risk underwrite and rate GPS pricing and comprehensive backend reinsurance that's allows us to proactively manage the risks outcome for our company. So incremental risks coming into the origination market, it doesn't automatically translate to in them incremental risks coming into our insured portfolio and we have the risk and return standards that we managed toward 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 guaranteed.

Claudia Merkle -- Chief Executive Officer

I'd probably add onto that. When we think about the administration and FHFA, and the possibility of broadening a 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 wrong mortgage. Access to home ownership doesn't mean that you go down the credit curve necessarily. So, I would find that hard to believe based on what we're sharing from both administration FHFA.

Operator

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

Claudia Merkle -- Chief Executive Officer

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

Operator

[Operator Closing Remarks]

Duration: 53 minutes

Call participants:

John Swenson -- Vice President of Investor Relations & Treasury

Brad Shuster -- Executive Chairman

Claudia Merkle -- Chief Executive Officer

Adam Pollitzer -- Chief Financial Officer

Doug Harter -- Credit Suisse -- Analyst

Bose George -- KBW -- Analyst

Rick Shane -- JPMorgan -- Analyst

Colin Johnson -- B. Riley Securities -- Analyst

Mark Hughes -- Truist -- Analyst

Unidentified Participant

Ryan Gilbert -- BTIG -- Analyst

Geoffrey Dunn -- Dowling & Partners -- Analyst

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