NMI Holdings, Inc. Q3 FY2025 Earnings Call

Good afternoon, and welcome to the NMI Holdings, Inc. Third Quarter 2025 Earnings Conference Call. Please note, this event is being recorded. I would now like to turn the conference over to John Swenson of management. Please go ahead.

Thank you, Gary. Good afternoon, and welcome to the 2025 Third 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; and Aurora Swithenbank, our Chief Financial Officer. 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 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 provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and strong financial results. Our lenders and their borrowers continued to turn to us for critical down payment support. And in the third quarter, we generated $13 billion of NIW volume, ending the period with a record $218.4 billion of high-quality, high-performing primary insurance-in-force. In Washington, our conversations remain active and constructive, and there continues to be broad recognition in D.C. of the unique and valuable role that the private mortgage insurance industry plays, offering borrowers low-cost down payment support and access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn and ultimately ensure the safety and soundness of the conventional mortgage market. National MI and the broader private mortgage insurance industry have never been stronger or better positioned to provide this critical down payment support than we are today. And we're excited to continue working with Director Pulte, other members of the administration and the leadership teams of Fannie and Freddie to advance their important goal of helping more Americans than ever unlock the dream of homeownership. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the third quarter, delivering significant new business production, consistent growth in our insured portfolio and strong financial results. We generated $13 billion of NIW volume and ended the period with a record $218.4 billion of high-quality, high-performing primary insurance-in-force. Total revenue in the third quarter was a record $178.7 million, and we delivered GAAP net income of $96 million or $1.22 per diluted share and a 15.6% return on equity. Overall, we had a terrific quarter and are confident as we look ahead. The macro environment and housing market have remained resilient through an extended period of headline volatility. Our lender customers and their borrowers continue to rely on us in size for critical down payment support, and we see an attractive and sustained new business opportunity fueled by long-term secular trends and furthered by the recent improvement in mortgage rates. We have an exceptionally high-quality insured portfolio covered by a comprehensive set of risk transfer solutions and our credit performance continues to stand ahead. We're delivering consistent growth in embedded value gains in our insured book, and we continue to manage our expenses and capital position with discipline and efficiency, building a robust balance sheet that's supported by the significant earnings power of our platform. Taken together, we see a clear opportunity for continued outperformance. 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's an approach that has served us well and continues to be the prudent and appropriate course. More broadly, we remain encouraged by the continued discipline that we see across the private MI market. Overall, we had a terrific quarter, delivering strong operating performance, consistent growth in our insured portfolio and strong financial results. We're in the market every day with a clear mandate and purpose offering a low-cost, high-value solution that helps borrowers bridge the down payment gap and meaningfully reduces the cash required at the closing table. In the process, we help to make homeownership more affordable and achievable for millions of Americans and communities across the country with coverage that works to insulate the GSEs and taxpayers from risk and loss in a downturn. Looking ahead, we're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value for our shareholders. With that, I'll turn it over to Aurora.

Thank you, Adam. We again delivered standout financial results in the third quarter. Total revenue was a record $178.7 million, GAAP net income was $96 million or $1.22 per diluted share and return on equity was 15.6%. We generated $13 billion of NIW and our primary insurance-in-force grew to $218.4 billion, up 2% from the end of the second quarter and 5% compared to the third quarter of 2024. 12-month persistency was 83.9% in the third quarter compared to 84.1% in the second quarter. Net premiums earned in the third quarter were a record $151.3 million, compared to $149.1 million in the second quarter and $143.3 million in the third quarter of 2024. Net yield for the quarter was 28 basis points, consistent with the second quarter. Core yields, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 34.2 basis points also unchanged from the second quarter. Investment income was $26.8 million in the third quarter compared to $24.9 million in the second quarter and $22.5 million in the third quarter of 2024. Total revenue was a record $178.7 million in the third quarter compared to $173.8 million in the second quarter and $166.1 million in the third quarter of 2024. Underwriting and operating expenses were $29.2 million in the third quarter compared to $29.5 million in the second quarter. Our expense ratio was a record low 19.3% in the quarter, highlighting the significant operating leverage embedded in our business and the success we have achieved in efficiently managing our cost base. We have a uniquely high-quality insured portfolio and our credit performance continues to stand out. We had 7,093 defaults at September 30 compared to 6,709 at June 30, and our default rate was 1.05% at quarter end. Claims expense in the third quarter was $18.6 million compared to $13.4 million in the second quarter, reflecting normal seasonal activity and the continued growth and seasoning of our portfolio. GAAP net income for the quarter was $96 million and diluted earnings per share was $1.22. Adjusted net income was $95.7 million, and adjusted diluted EPS was $1.21. Total cash and investments were $3.1 billion at quarter end, including $148 million of cash and investments at the holding company. Shareholders' equity at September 30 was $2.5 billion and book value per share was $32.62. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $33.32, up 4% compared to the second quarter and 16% compared to the third quarter of last year. In the third quarter, we repurchased $24.6 million of common stock, retiring 628,000 shares at an average price of $39.13, through quarter end, we've repurchased a total of $319 million of common stock, retiring 11.3 million shares at an average price of $28.25. We have $256 million of repurchase capacity remaining under our existing program. At quarter end, we reported $3.4 billion of total available assets under PMIERs and $2 billion of risk-based required assets. Excess available assets were $1.4 billion. Overall, we achieved standout financial results during the quarter, delivering consistent growth in our high-quality insured portfolio, record top line performance and expense efficiency and strong bottom line profitability and returns. With that, let me turn it back to Adam.

Thank you, Aurora. We had a terrific quarter, once again delivering significant new business production, consistent growth in our high-quality insured portfolio and standout financial results. 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 are well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio and deliver through the cycle growth, returns and value 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 today is from Terry Ma with Barclays.

Just wanted to start off with credit. As I look at new defaults in the quarter, it was up only about 5% year-over-year, that's a noticeable step down from the pace of year-over-year increases that you've seen in the last kind of 10 quarters. So maybe just any color on kind of what happened in the quarter? And as we kind of look forward, how should we expect kind of new defaults kind of emerge like when we factor in kind of seasoning and everything?

Yes. Terry, good question. Look, I'd say broadly speaking, we're still greatly encouraged by the performance of our portfolio overall including the trends, obviously, in the default population. The impact of seasonality coming through this year was a bit more muted, which is encouraging. I think we trace that to a few things, right? We got broad resiliency that we've seen in the macro environment, and so that continues to set a favorable backdrop. We have an incredibly high-quality insured book and our existing borrowers, broadly speaking, remain well situated, and we're seeing that continue to translate through to our credit experience. The increase in our default experience that you noted some amount of that traces to seasonality, right? We tend to see seasonally a seasonal uptick in default experience as we roll through the second half of the year, and some portion of it traces to what we've talked about for a while now the seasoning, just the natural growth and seasoning of our book. As we look forward, we do expect that seasonality will continue to come through, and so we'll see an additional impact seasonally in Q4. And we do also expect that as we roll forward over the longer term, we'll continue to see that normalization in our credit experience but overall, we're delighted with how our portfolio is performing. It's exceptionally high quality, and we're encouraged by the trends that we saw in the third quarter and really year-to-date.

Got it. That's helpful. And then maybe just any color on the competitive environment. There has been some rumblings about a potential new entrant, so any color on kind of how to think about how the dynamic may or may not change like if there was a new entrant into the MI market.

Yes, it's not necessarily a new situation. There has been ongoing discussion about new competitors entering the market over the years, and we are aware of the latest initiatives. However, we understand better than anyone the challenges of establishing a private mortgage insurance business. It is quite difficult to raise the necessary capital, develop a specialized operating platform, recruit the right team, build trust with customers, and navigate the journey to profitability. When we compare the current market to when we started in 2011, it is in a vastly different place. Currently, there is no evident demand for new entrants, as the six existing mortgage insurance companies are meeting the market’s needs effectively. We are dedicated to supporting lenders and their borrowers, have the capacity to handle their origination volume, and are providing fair and valuable solutions. While we cannot predict how the situation will evolve with the recent rumors, the barriers to entry are significant. Establishing a compliant business requires substantial capital, and if we were to consider investing in a new entrant, we would be very doubtful that now is a suitable time, given the challenges any new company would face. This isn’t due to weaknesses in the market itself, as it is performing well with the six current companies. If a new competitor were to emerge, the market would adapt, but transitioning from discussions to a fully funded and approved operation is a major leap.

Can you give us an update on what you're seeing regarding consumer strength? Additionally, are there any housing markets you are monitoring for signs of potential weakness, such as home prices?

Sure. That's a good question. Generally, I mentioned in our prepared remarks that we are encouraged by the overall resilience we are observing in the economy and housing market. Unemployment remains low, inflation is decreasing, and consumers are still spending while businesses are making significant investments. The equity market continues to reach new highs. Today’s overall outlook is positive, but we also consider future risks. Analyzing the data, there are emerging signs of strain in the labor market. While unemployment isn't increasing, and recent government data is unavailable, certain private indicators suggest a slowdown in new hiring activity. Consumer confidence appears to be declining, particularly among some borrower groups, leading to discussions about a K-shaped recovery. From our perspective, the macro environment and housing market still present an encouraging and resilient backdrop, but we remain vigilant about potential changes. Regarding specific geographies, we have previously noted that places like Florida, Texas, and the Mountain West are experiencing either slower house price appreciation or price declines with increasing inventory. This trend continues, and those markets that have been weak for some time are still showing softness, while the Northeast and Midwest are demonstrating ongoing strength.

In the reinsurance market, we are observing a very strong environment, with competitors achieving the best pricing on record this year. Looking back to 2024, we secured full excess of loss (XOL) and quota share coverage for 2025, 2026, and part of 2027, which gives us solid capacity in the traditional reinsurance market. Typically, in the third and fourth quarters, we engage with our reinsurance partners to discuss the potential for further coverage or to optimize our existing arrangements. Currently, we are involved in those discussions, supported by a strong reinsurance market context. Regarding Insurance-Linked Notes (ILN) compared to XOL, we value both markets as they have provided us with significant capital. Recently, our focus has leaned more towards the traditional reinsurance market because it offers forward coverage that isn't available in the debt capital markets. This preference is based on cost flexibility and execution speed. However, we appreciate both markets and expect to be active across all of them over time.

Yes. the core yield, it's been holding pretty steady at 34 basis points. Is that a good run rate here? What moves that one way or the other in the kind of the near to medium term?

Sure. I'm happy to start out here. It has been very stable, and that's obviously been supported by the tremendous persistency that we've had in the book and continue to have in the third quarter. So again, we don't provide forward guidance, but given the strength of the in-force book, we would expect the core yield to remain around that level. The net yield is obviously influenced by claims expense for the quarter and how that interacts with our reinsurance contracts.

Any insights on how persistency might be affected if interest rates decrease would be appreciated. It seems likely that new business activity would increase significantly, leading to more refinancing. How do you view the pros and cons of a refinancing market? Additionally, if there are multiple rounds of refinancing, how would that impact the situation considering recent borrowing trends?

Yes, I believe there are both advantages and disadvantages to consider. Our persistency rate was 83.9% in the third quarter, which contributed to ongoing growth in embedded value gains within our insured portfolio. Overall, our portfolio is in a solid position, supported by a 5.2% weighted average note rate at the end of the quarter. However, this situation isn't uniform across our entire book. Certain segments of our in-force portfolio are more sensitive to refinancing, and we might observe an increase in prepayment speeds due to recent changes in interest rates, which is expected. That's the positive aspect. On the downside, some borrowers who could benefit from refinancing will still require mortgage insurance coverage. While home price appreciation has generally increased, it has done so at a normal rate, not at record levels. There is potential for greater refinancing activity if overall refinancing trends upward. If rates decrease significantly, leading to pressure on persistency, we anticipate an increase in new business activity and originations, encouraging more buyers to enter the market. Additionally, there could be benefits from a credit perspective during a refinancing cycle. If refinancing accelerates, it will likely reflect current underlying interest rates among our more recent vintages, which we view as normalizing in terms of credit experience. If those vintages start to change, it will prolong the credit performance normalization process.

I'd say, with regard to the expense ratio, there was nothing in particular that I'd point out in the quarter. And if you look at the raw dollars, it's within a couple of hundred thousand dollars of what we spent last quarter. And so there are a few positives and negatives, but again, nothing of note. I would say if you're looking forward, typically, the second and third quarter are lightest in terms of expenses and the fourth, and then the first quarter tend to be heavier just in terms of both dollars of expense and also the ratio goes up during those quarters. And in the fourth quarter, that typically results from the accrual of some of our people-related expenses. So that's the only thing that I would note with regard to the fourth quarter.

This is A.J. on for Rick. So if rates fall in refis do start to tick up, is there anything kind of proactive you can do to recapture MI on more of those loans? Could you maybe just walk through your playbook sharing your early experience you've had there?

Yes. So I'd say on the margin, there are things that you might try to do. But more broadly, the most important piece of the playbook is to be everywhere in the market and be offering valuable solutions for our customers to be plugged in with as many lenders as possible and so that we could serve their borrowers. We've noted for a while that 1 of the unique attributes that we have to our benefit is that our share of the new business environment is larger than our share of industry insurance-in-force. So to the extent that there is some amount of industry insurance-in-force that's in motion because it's refinancing, but still needs MI coverage. We have an opportunity, we think, to capture a little bit more of that than we will necessarily lose. And so that's not a strategy per se, it's just where the numbers are. But the real strategy behind it is make sure that we are connected to our customers that we're offering them valuable solutions that were present for their borrowers across all markets so that that business that is potentially in motion is a business that we can capture.

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

Thank you again for joining us. We look forward to speaking with you again soon.

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