NMI Holdings, Inc. Q2 FY2023 Earnings Call

Good afternoon, and welcome to the NMI Holdings, Inc. Second Quarter 2023 Earnings Conference Call. I would now like to turn the conference over to John Swenson of management. Please go ahead.

Thank you, Anthony. Good afternoon, and welcome to the 2023 Second Quarter Conference Call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; Ravi Mallela, Chief Financial Officer; and Nick Realmuto, 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 may 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.

Thank you, John, and good afternoon, everyone. As we talk today, I'm greatly encouraged both by the resiliency of the broader macro environment and housing market, and by the significant and consistent success we're achieving across our business. In the second quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and record financial results. Our lenders and their borrowers continued to turn to us for critical down payment support. And in the second quarter, we generated $11.5 billion of NIW volume ending the period with a record $191.3 billion of high-quality, high-performing insurance-in-force. In Washington, our conversations remain active and constructive. Policymakers, regulators, the FHFA and the GSEs remain highly focused on promoting broader access and affordability to the housing market for all borrowers. And we believe there is broad recognition of the unique and valuable role that the private mortgage insurance industry plays in this regard. At National MI, we recognized the need to provide borrowers with a fair and equitable opportunity to access the housing market, establish a community identity and build long-term wealth through homeownership. We are actively engaged and committed to equally supporting borrowers from all communities and are proud to have helped over 1.6 million borrowers to date realize their homeownership goals. Overall, we had a terrific second quarter and are well-positioned to continue to lead with impact and drive value for our people, our customers and their borrowers and our shareholders going forward. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the second quarter, delivering significant new business production, strong growth in our insured portfolio and record financial results. We generated $11.5 billion of NIW volume and ended the period with a record $191.3 billion of high-quality, high-performing insurance-in-force. Total revenue in the second quarter was a record $142.7 million, and we delivered record GAAP net income of $80.3 million or $0.95 per diluted share and an 18.6% return on equity. Overall, we had an exceptionally strong quarter and are confident as we look ahead. The macro environment and housing market in particular have proven to be resilient in the face of increased interest rates. We see an attractive and sustained new business opportunity with our lender customers and their borrowers continuing to rely on us in size for critical down payment support. We have an exceptionally high-quality insured portfolio and our credit performance continues to stand ahead. Our persistency remains well above historical trend and when paired with our strong NIW volume, has helped to drive continued growth and embedded value gains in our insured book. And we continue to manage our expenses and capital position with discipline and efficiency, with today's incremental $200 million share repurchase authorization serving as another important step in our effort to maintain funding balance and progress capital distribution opportunities for our shareholders. Notwithstanding these strong positives, however, macro risks do remain, and we've maintained a proactive stance with respect to our pricing, risk selection and reinsurance decisioning. It continues to be the prudent and appropriate course and we are encouraged by the continued discipline that we see across the broader private MI market. Underwriting standards remain rigorous, and the pricing environment remains balanced and constructive. Overall, we had a terrific quarter, delivering strong operating performance, continued growth in our insured portfolio and record financial results. I also want to note how proud I am that for the eighth 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've established are key competitive advantages and it is gratifying to again be recognized for these strengths. Looking ahead, we are well-positioned to continue to serve our customers and their borrowers, invest in our employees and their success, and deliver through the cycle growth, returns and value for our shareholders. With that, I'll turn it over to Ravi.

Thank you, Adam. We delivered record financial results in the second quarter with significant new business production, strong growth in our high-quality insured portfolio, record top line performance, favorable credit experience, continued expense efficiency, and record bottom-line profitability. Total revenue in the second quarter was a record $142.7 million, GAAP net income was a record $80.3 million or $0.95 per diluted share, and our return on equity was 18.6%. We generated $11.5 billion of NIW and our primary insurance-in-force grew to $191.3 billion, up 2.5% from the end of the first quarter and 13.4% compared to the second quarter of 2022. 12-month persistency in our primary portfolio improved again, reaching 86% compared to 85.1% in the first quarter. Persistency continues to serve as an important driver of the growth and embedded value of our insured portfolio. Net premiums earned in the second quarter were a record $126 million compared to $121.8 million in the first quarter. We earned $1.1 million from the cancellation of single premium policies in the second quarter compared to $1.4 million in the first quarter. Net yield for the quarter was 26.7 basis points, up from 26.3 basis points in the first quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 33.8 basis points, up from 33.7 basis points in the first quarter. Investment income was $16.5 million in the second quarter compared to $14.9 million in the first quarter. Underwriting and operating expenses were $27.5 million in the second quarter compared to $25.8 million in the first quarter. Our expense ratio was 21.8% compared to 21.2% in the first quarter. We had 4,349 defaults in our primary portfolio at June 30, compared to 4,475 at March 31, and our default rate declined to 71 basis points at quarter end. Claims expense in the second quarter was $2.9 million compared to $6.7 million in the first quarter, reflecting the broad resiliency of the housing market, the strong position and performance of our existing borrowers, and continued cure activity within our previous default population. Interest expense in the quarter was $8 million. Net income was a record $80.3 million or $0.95 per diluted share compared to $0.88 per diluted share in the first quarter and $0.86 per diluted share in the second quarter of 2022. Total cash and investments were $2.3 billion at quarter end, including $139 million of cash and investments at the holding company. Shareholders' equity as of June 30 was $1.7 billion, and book value per share was $21.25. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $23.53, up 4.3% compared to the first quarter and 18.2% compared to the second quarter of last year. In the second quarter, we repurchased $26 million of common stock retiring slightly more than 1 million shares at an average price of $24.83. To date, we have repurchased a total of $97 million of stock under the original $125 million authorization, retiring 4.6 million shares at an average price of $20.99. Today's new $200 million authorization provides us with significant incremental repurchase capacity and will run through December 31, 2025. In July, we entered into a new excess of loss reinsurance agreement that will provide forward flow risk protection for policies originated in the third and fourth quarters of this year. The new deal further extends our comprehensive credit risk transfer program and carries an estimated 6.25% weighted average lifetime pretax cost. Our continued ability to compress the cycle time between transactions, execute on favorable terms and secure forward flow coverage for our future production is particularly valuable as it serves to minimize our warehouse exposure and limit the credit risk retained in our high-quality insured portfolio. At quarter end, we reported total available assets under PMIERs of $2.5 billion and risk-based required assets of $1.3 billion. Excess available assets were $1.2 billion. Overall, we delivered standout financial results during the second quarter. With continued growth in our high-quality insured portfolio and record top-line performance, favorable credit experience and continued expense efficiency driving record bottom-line profitability and strong returns. With that, let me turn it back to Adam.

Thank you, Ravi. We had a terrific quarter, once again delivering significant new business production continued growth in our insured portfolio and record financial performance. Looking forward, we're confident the macro environment and housing market have proven to be resilient in the face of increased interest rates and we have a strong customer franchise, a talented team driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, and a robust balance sheet supported by the significant earnings power of our platform. Taken together, we're well-positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in a high-quality insured portfolio, and deliver strong performance 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.

Our first question will come from Doug Harter with Crédit Suisse.

Can you talk a little bit about the current environment for premium yields and your outlook? It seems like it's stabilized in the quarter. Is that a trend we can expect going forward and kind of where our new yields being written relative to the in-force book?

Sure. This is Ravi. The net yield for the quarter was 26.7 basis points compared to 26.3 basis points in the first quarter, with both core and net yields showing a slight increase quarter-over-quarter. We benefited from improved persistency, but the main driver was the cumulative gains from new business pricing over the past year. Additionally, we saw a slight improvement in quota share costs, which contributed to higher profit commissions from improvements in ceded claims expenses during the quarter. We've previously emphasized the importance of focusing on core yield, which excludes reinsurance and cancellation earnings. We believe this will remain relatively stable due to our strong persistency and the positive rate actions we've taken. However, it's important to consider that this stability is balanced by high-quality production, which typically carries a different rate profile.

Yes. And then, Doug, in terms of how premium rate on new business written in Q2 stacks up against that, we don't provide specifics about our premium rate but we do continue to see the benefit of those rate increases that Ravi mentioned. We've really worked hard to achieve them over the past year. And in the business that we wrote this quarter, the $11.5 billion of high-quality, high-return volume is most importantly supportive of our strong mid-teen return objectives.

Our next question will come from Arren Cyganovich with Citi.

This environment seems to be almost like a Goldilocks for private mortgage insurance, home price appreciation, low claims experience, still being able to have a decent amount of new origination and high persistency. What are you worried about? What would be something that you would be concerned about for this environment to change?

Yes. I think it's a good question, Arren. We're feeling encouraged and a bit more optimistic when we examine recent data and news. Macro risks have been decreasing, especially since our last call in May. We've resolved the debt ceiling issue, experienced stronger-than-expected growth, and seen signs of easing in recent inflation data. The regional banking sector has stabilized through this quarter's earnings announcements, and consumer confidence is rising. There are reasons for optimism, particularly due to the resilience of the housing market and house prices. However, we did mention in our prepared remarks that risks still exist. It’s not certain that the Fed can achieve a soft landing. The Fed has tightened again and maintains a hawkish stance from our perspective. The commercial real estate market is under scrutiny, and the upcoming restart of student loan payments could impact household finances. Regional banks are also facing increased capital requirements, which might limit lending over time. Our main concern lies with external factors beyond our control. We can manage our business conservatively and effectively, oversee our capital position, risk mix, and pricing decisions, but external developments are significant. Considering these factors, we still foresee potential volatility ahead from a macroeconomic perspective, and that’s what we are worried about.

That's helpful. And then just secondarily, the persistency rate inched up a bit higher. What do you think that in this kind of rate environment would be like the maximum? Is it getting kind of close to wherever that maximum would be on the persistency level?

Arren, it's a good question. I think I mentioned during the call that we reached 86% in Q2, up from 85.1% in Q1. And look, we expect it to remain well above historical trend through year-end. And we might see some modest improvement going forward. But I think the way to think about it is that it's probably going to be naturally a little bit more muted over time. We've just seen it increase just so much, and there just is as we go through our portfolio, a minimum level of turnover that's going to occur. And we're going to start to see some of our portfolio, our most recent vintages hitting points of time and cancellation. And as a result, we're probably going to see some modest improvement going forward, but it's going to be muted over the course of the year. But it's still well above historical trends, and we're benefiting significantly from the high persistency.

Our next question will come from Rick Shane with JPMorgan.

I'd like to discuss the unusual environment we find ourselves in, particularly regarding MI penetration in the context of overall mortgage volume. On one side, we see that cash buyers have significant advantages in this market, which typically means they wouldn't pose competition for your customers. I'm interested to know if you're observing any shifts in that market. Conversely, the strong pricing for starter homes seems to be driving increased demand. I'm curious about how you manage that balance.

Yes, Rick, it's a great set of questions. And I may actually broaden it to just talk generally about where we see origination activity developing and the opportunities that we have, both in the near term and over the longer term to support borrowers and help them gain access to their homes. When we spoke last May, we shared our expectation that we would see a total purchase origination market of roughly $1.3 trillion for the year. And so I think the starting point, right, to preface your question is, we're actually still seeing notwithstanding the fact that there are headlines around affordability that rates remain elevated, we're seeing a really constructive purchase environment. And even though it sits behind the record levels that we saw what I'll call the pandemic years, by historical standards, it's a very large purchase market. And within that, we're seeing a tremendous opportunity to write new business. We've guided through the course of this year that we expect to see a total private MI market of, give or take, $300 billion. And that remains the case. The first half of the year has come in generally in line with our expectations. Our outlook remains the same today. And so, look, there are buyers out there who will transact. They need MI support and over the long term, not just through 2023, but over the long term, there are a number of fundamental drivers of both purchase volume as well as MI demand that we see sustaining our market opportunity. And so we haven't seen a shift because of maybe the rise and increasing advantage that cash buyers have or penetration rates, otherwise, it's a very large market that's coming in line with our expectations and it gives us increased confidence as we think about the long-term opportunity.

Our next question will come from Mark Hughes with Truist.

Could you say again, what was the share buyback dollar amount in the second quarter? And then any insight on your pacing on the buyback if you think about the balance of the year and the next year?

Sure. Mark, it's Ravi. In Q2, we did about $26 million in share repurchases, slightly over 1 million of shares. Certainly, we're pleased with the execution. With today's announcement, we have a little bit left in the $125 million share repurchase program. And so when you combine that with the $200 million, you get to $228 million capacity. And we have through the end of 2025 to execute. As you know, we're not on a set schedule. It really depends on a number of factors, including market dynamics, how we feel about things in the market, in particular, our stock price relative to the relative value in the shares. And so we plan to execute opportunistically, and we think about things going forward. As the market progresses, we adjust accordingly.

Mark, I think that as a rough guide, we've got $228 million of capacity to be deployed over the next 10 quarters. And you could think about things on a roughly ratable basis through the end of the authorization period in December of '25, although I think Ravi's caveat that it's not going to be firmly regimented is absolutely the case.

Right. So maybe similar to Q2. And then on the expense ratio, refresh me, was there any capital market expenses in that number? And then up a little bit sequentially, anything unusual in there? And how do you think it should trend going forward?

Mark, this is Ravi. To address your question, there are two parts. Regarding the capital market side, the XOLs are structured in such a way that we do not pay specific fees, as outlined with ILNs. Instead, everything is included in the weighted average lifetime pretax cost that we shared. Now, looking at the second part of your question about quarter-over-quarter changes, we always aim to manage the business with discipline and efficiency. We are satisfied with the 21.8% expense ratio in Q2, focusing on the ratio rather than the dollar amounts. Our headcount remains the smallest in the industry. Specifically for this quarter, in March, we implemented salary increases, which could entail merit cost-of-living adjustments, promotions, and equity awards. The increase in compensation from Q1 to Q2 contributed to the quarter-over-quarter change, along with ordinary course projects that typically happen. We also observed a 31% increase in NIW volume quarter-over-quarter, which raised our variable costs and added to the increases. Overall, that is what led to the rise. As we’ve mentioned previously, we do not provide guidance for OpEx, but we anticipate that OpEx will increase in dollar terms as we continue to invest in our people, systems, and risk management strategies. Combining all these factors, we might see upticks in Q4 and Q3 regarding expense dollars.

Next question will come from Bose George with KBW.

Just wanted to go back to the discussion on macro, especially the improved expectations for home prices, I guess, over the course of this year. How does that sort of running through your thoughts on loss severities?

We are certainly encouraged by the broad resiliency we’ve observed in the macro environment and the housing market. For reserving purposes, we aim to take an appropriate but also conservative view. This means we typically focus more on downside scenarios when setting our position, and that was true in Q2 as well. However, we did take into account the resilience we have seen in the macro environment and housing market year-to-date. We balanced that with the necessity to maintain a conservative approach and consider some of the risks we still perceive on the horizon. As of June 30, this led us to moderate our expectations for economic strain and declines in house prices going forward in our reserving analysis, but we did not entirely eliminate what I would call a stress bias from our work.

Okay. That makes sense. And then just switching to the ILN market. It looks like one of your peers is in the market with the deal. Is that market starting to look better in terms of potentially reentering for you guys?

What I would say is that we're definitely encouraged by the rebound in the ILN market, especially with one of our colleagues participating in the market for the first time in September. This is very exciting for us, and we appreciate seeing some healing in the market. Regarding the state of the reinsurance markets, we're pleased with the most recent XOL as we believe there is ample capacity available. The terms have been constructive overall. Notably, our latest XOL involved new reinsurers. The pricing and risk appetite have been broader than in the past, though not all reinsurers have fully returned to the market. However, we were pleased to execute the deal, which is competitive and offered attractive terms, reflecting an efficient use of PMIERs capital.

Yes. These are all favorable developments, right? Our ability to continue executing on favorable terms in size and with speed in the traditional reinsurance markets. And we've noted a deal as well that you touched on, and that's a constructive one. To see a market that we have value and we've accessed meaningfully in the past rebound constructively, it gives us more optionality and gives us additional outlets, which is valuable as we go forward.

Next question will come from Geoffrey Dunn with Dowling.

First question, was there an opco dividend up in the quarter?

Yes, there was. We distributed $98 million of ordinary course dividends from NMIC, the lead operating subsidiary up to the holding company during the quarter.

Okay. And then with respect to the assumptions in your loss provisioning, I think you were taking a very conservative stance on home prices. What are you now thinking as you look forward in your assumptions?

Yes. So Geoff, we haven't specifically stated the underlying assumption. However, while we have tempered our expectations for what strain might look like, we have still included our stress bias in the analysis.

Okay. And then last question, I don't know the details on this, but Enact just announced the formation of a Bermuda subsidiary to help the CRT business. Is that something that management and the Board have ever discussed the strategy for National or something that you think could be kind of within a 3-year strategic plan for National?

We don't have anything immediately on the horizon. We'll be curious to learn more about the Enact announcement. It is a path that some others in our sector have pursued. Right now, we find the best value of deploying our capital to be in support of our primary business. We continue to grow our customer franchise. We continue to grow the opportunity that we're able to support and that remains our focus for now.

Next question will come from Eric Hagen with BTIG.

First question here. I mean, how do you feel like homeowners are keeping up with inflation at this point, especially the borrowers with high DTI to begin with? I realize the macro data suggest one thing, but is there anything that maybe you're adjusting for at the portfolio level? And how do you maybe adjust for the risk that inflation stays higher for longer, if you will?

Yes, Eric, that’s an important question. First, we account for various factors related to pricing and actively managing the flow and types of risk in our portfolio. One of the key indicators we look at is a borrower’s debt-to-income ratio, which serves as a measure of a household's financial capacity. We adjust pricing for borrowers with higher DTI, anticipating that they may present higher claims because their financial situations may be tighter. Additionally, we manage the concentration of risk that we accept. Like all risk indicators, we address this in several ways. We set our risk appetite and ensure that our risk mix remains within that limit. We also consistently seek reinsurance to prevent excessive risk accumulation in our portfolio.

Yes. That's helpful. What would you maybe identify at this point as a few of the stronger catalyst for first-time homebuyers at this point? I think you guys mentioned the expiration of student loan forbearance. Are you thinking that could have a bigger impact on the existing book or the forward opportunity as some borrowers might not be able to qualify or just how are you guys thinking about that?

Yes. Look, I'd say it's obviously pretty new. What I'd say broadly is we're watching it right now, particularly because we've got an election cycle coming up. I think the Biden administration has a clear vested interest in ensuring a smooth transition for borrowers and is taking steps to ensure that, that transition is seamless. To that end, we've seen several important announcements, both from the administration as well as from the Department of Education in the month or so since the Supreme Court ruling came out, striking down the original student debt relief program. And so we'll see. It is possible that the upcoming resumption of payments will have an impact on certain borrowers in our portfolio who perhaps budgeted expecting more permanent relief. From an overall credit standpoint, though, we don't expect at this point that the restart of student loan payments will have a material impact on the performance of our portfolio. As for the potential impact on new business activity, I'd love to give you a specific answer, but admittedly, it's difficult to tell. On the one hand, you could see an even greater need for private MI support before with borrowers who now have to make additional monthly payments towards their student debt, not able to save as much for a down payment as previously hoped. But you could also see some pressure the other way with borrowers who were already stretched by higher rates and house prices now pushed to either look at less-expensive homes and it's the loan size that drives NIW or perhaps being moved out of the buyer market entirely. So it's one we really need to monitor at this point before we know which way it will come out. Overall, though, we don't think it will have a consequential impact either on the credit performance of the portfolio or the new business opportunity.

This concludes your question-and-answer session. I would like to turn the conference back over to management for any closing remarks.

Well, thank you all again for joining us. We'll be participating in the Barclays Financial Services Conference on September 11 in New York and the Zelman Virtual Housing Summit on September 19. We look forward to speaking with you again soon.

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.