Earnings Call Transcript - NMIH Q2 2025

Operator, Operator

Good day, and welcome to the NMI Holdings, Inc. Second 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.

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

Thank you. Good afternoon, and welcome to the 2025 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; 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 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 provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.

Bradley Mize Shuster, Executive Chairman

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the second quarter National MI again delivered standout operating performance, continued growth in our insured portfolio and strong financial results. Our lenders and their borrowers continue to turn to us for critical down payment support and in the second quarter, we generated $12.5 billion of NIW volume ending the period with a record $214.7 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. about the value that the private mortgage insurance industry provides offering borrowers efficient 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. Before turning it to Adam and getting into the details of the quarter, I also want to share how proud I am that in June, National MI was again recognized as a Great Place To Work and earned an added Decade of Great distinction for garnering the honor for the tenth consecutive year. 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 firmly 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, let me turn it over to Adam.

Adam S. Pollitzer, President and Chief Executive Officer

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the second quarter, delivering significant new business production, consistent growth in our insured portfolio and strong financial results. We generated $12.5 billion of NIW volume and ended the period with a record $214.7 billion of high-quality, high-performing primary insurance in force. Total revenue in the second quarter was a record $173.8 million, and we delivered adjusted net income of $96.5 million or $1.22 per diluted share and a 16.3% adjusted return on equity. Overall, we had a terrific quarter and are confident as we look ahead. The macro environment has remained resilient in the face of elevated interest rates and increased 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. 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. Our persistency remains well above historical trends. And when paired with our strong NIW production, has helped to drive consistent growth and 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. 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, and we applaud the permanent renewal of the mortgage insurance premium tax deduction in the One Big Beautiful bill which is expected to deliver meaningful tax relief to deserving middle-class homeowners. Overall, we had a terrific quarter, delivering strong operating performance, continued 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 makes 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.

Aurora Jean Swithenbank, Chief Financial Officer

Thank you, Adam. We again delivered standout financial results in the second quarter. Total revenue was a record $173.8 million, adjusted net income was $96.5 million or $1.22 per diluted share and adjusted return on equity was 16.3%. We generated $12.5 billion of NIW and our primary insurance in force grew to $214.7 billion, up 2% from the end of the first quarter and 5% compared to the second quarter of 2024. 12-month persistency was 84.1% in the second quarter compared to 84.3% in the first quarter. Net premiums earned in the second quarter were $149.1 million compared to $149.4 million in the first quarter and $141.2 million in the second quarter of 2024. Net yield for the quarter was 28 basis points. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings, was 34.2 basis points up from 34.1 basis points in the first quarter. Investment income was $24.9 million in the second quarter compared to $23.7 million in the first quarter and $20.7 million in the second quarter of 2024. Total revenue was a record $173.8 million in the second quarter compared to $173.2 million in the first quarter and $162.1 million in the second quarter of 2024. Underwriting and operating expenses were $29.5 million in the second quarter compared to $30.2 million in the first quarter. Our expense ratio was a record low 19.8% 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 ahead. We had 6,709 defaults at June 30 compared to 6,859 at March 31, and our default rate declined to 1% at quarter end. Claims expense in the second quarter was $13.4 million. GAAP net income for the quarter was $96.2 million and diluted earnings per share was $1.21. Adjusted net income was $96.5 million and adjusted diluted EPS was $1.22. Total cash and investments were $3 billion at quarter end, including $169 million of cash and investments with the holding company. Shareholders' equity at June 30 was $2.4 billion and book value per share was $31.14. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $32.08, up 4% compared to the first quarter and 16% compared to the second quarter of last year. In the second quarter, we repurchased $23.2 million of common stock, retiring 628,000 shares at an average price of $36.90. Through quarter end, we've repurchased a total of $294 million of common stock, retiring 10.6 million shares at an average price of $27.61. We have $281 million of repurchase capacity remaining under our existing program. At quarter end, we reported $3.2 billion of total available assets under PMIERs and $1.9 billion of risk-based required assets. Excess available assets were $1.3 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 return. With that, let me turn it back to Adam.

Adam S. Pollitzer, President and Chief Executive Officer

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. Before closing, I also want to echo Brad's comments about our Great Place to Work and Decade of Great recognition. National MI leads the mortgage insurance market with discipline and distinction, and we are fortunate to have such a talented and dedicated team working hard every day to deliver innovative solutions for our customers and their borrowers. We have reputation, standing and success as a company because of our team, and I'm delighted to take a moment to celebrate their efforts. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.

Operator, Operator

The first question comes from Doug Harter from UBS.

Douglas Michael Harter, Analyst

I was hoping you could talk a little bit about the pacing of capital return. And given the sort of resiliency of the economy and the persistence of high rates, whether that would change the pacing of capital return?

Adam S. Pollitzer, President and Chief Executive Officer

Yes, Doug, that's a great question. Overall, we are satisfied with the execution of our program so far, including the $23 million we retired in Q2. Looking ahead, while we don't have a fixed schedule for our upcoming activities, we've maintained a consistent approach, averaging about $25 million in buybacks each quarter, which is a reasonable expectation moving forward. Our program operates in an open market, so you might see some natural fluctuations based on the risk environment, our operational performance, and valuation trends, as it's sensitive to value. We also have enough capacity to take advantage of opportunities if they arise, but we are disciplined enough to slow down if necessary. For now, it's safe to estimate that we'll continue at that rough pace of $25 million per quarter.

Operator, Operator

The next question comes from Rick Shane from JPMorgan.

Richard Barry Shane, Analyst

Look, we're starting to, over the last couple of months hear more about rising supply of homes for sale, longer days on market. Some indications of home price depreciation in certain markets. If you can talk about how you're thinking about this tactically in terms of underwriting, but also in terms of risk transfer, when we look at year-to-date, you've done a QSR, you've done XOL. It looks like the strategy remains sort of balanced accessing different markets. But I'm curious if you're seeing anything in terms of pricing in those markets that either gives you pause or will lead you in one direction or the other?

Adam S. Pollitzer, President and Chief Executive Officer

Yes. Both Aurora and I will address this. I'll share my perspective on what we're observing in the market and how we're managing those observations, and then we'll discuss reinsurance, which is fully placed for several years. Overall, the market has encouraging signs. The economy is growing, the job market is strong, and the long-term drivers of demand are intact. It's not surprising that we're seeing general resilience in the market nationally. However, we do notice differences by geography. Areas like Florida, Texas, the Sunbelt, and Mountain West are under pressure, which isn’t new. These regions experienced significant price increases during the pandemic and are now undergoing a supply-demand adjustment. The housing market is moving toward equilibrium, and we anticipate that the rate of appreciation will normalize after an impressive period. Variations will continue to surface in different markets, impacting our risk, underwriting, and credit selection strategies. We're prepared for these changes as we've anticipated them for some time. Our proactive pricing approach with Rate GPS allows us to manage our mix across 950 MSAs effectively. We have no concerns regarding significant changes and aim to maintain balance. Protecting our balance sheet while delivering strong results for shareholders and supporting lenders and borrowers is essential. We're in an excellent position regarding our risk transfer program. I'll now hand it over to Aurora.

Aurora Jean Swithenbank, Chief Financial Officer

Yes, I'm happy to take that one. So as Adam articulated, we've already secured last fall both quota share and XOL coverage for all of our 2025 production and all of our 2026 production and a partial placement of our 2027 production year. So we're not looking to do anything specific or extra as a result of the current macro environment or housing market. But at the same time, our typical cadence is that we'll meet with our reinsurance partners in the back part of the year and place our forward flow deals. And so I think you'll see us doing that over the next couple of quarters. And I'd also say that alongside our sort of normal forward flow transactions, we always think about ways that we can optimize our coverage in terms of lowering cost getting additional coverage. So you may see us tweak certain contracts or exercise certain call rights with respect to transactions that are outstanding. But we don't really see any pressing need to do something different today.

Operator, Operator

The next question comes from Mark Hughes from Truist.

Mark Douglas Hughes, Analyst

Adam, any update on the competitive environment, how pricing relative to your peers? Any new developments there?

Adam S. Pollitzer, President and Chief Executive Officer

Yes. Generally speaking, the industry pricing appears balanced and favorable, and we remain optimistic about the unit economics we are achieving with new business. Currently at NMI, we are in a strong position, as I mentioned in my response to Rick. We are fully supporting our customers and their borrowers while also utilizing rates and other strategies to safeguard our balance sheet, manage risks, and ensure we can provide returns for shareholders. Overall, it's a positive environment as we look ahead.

Mark Douglas Hughes, Analyst

Yes. On the OpEx side, were there any kind of one-timers that helped out? Or is that just a function of leverage?

Aurora Jean Swithenbank, Chief Financial Officer

Yes. What I'd say on the expense side is that we typically do see a decline from Q1 to Q2 in terms of absolute dollars. And that's the typical annual reset of the FICA and the 401(k) bonus matching that occurs in the first quarter. So we do typically see a more heavy expense load in Q1 versus Q2. There were some other ins and outs, but there was no one-offs or anything particular that I'd point to.

Adam S. Pollitzer, President and Chief Executive Officer

Yes. Really just a strong quarter of discipline and efficiency that we always try to maintain.

Mark Douglas Hughes, Analyst

And then on investment income, likewise, any kind of nonrecurring items? Or is that just growth in the portfolio?

Aurora Jean Swithenbank, Chief Financial Officer

Yes. You could see that there were some small dispositions, which is the difference between GAAP net income and the adjusted net income, but truly de minimis in the context of a portfolio of this size. So the growth in the book yields that you've been seeing, not just this quarter but the past several quarters is just a result of the sort of normal investing activity at the current interest rate and spread environment reinvesting principal and interest as it comes due and then, of course, the free cash flow from the business.

Mark Douglas Hughes, Analyst

Anything on the default front, new notices around catastrophes. I don't know whether you had the recoveries coming off of maybe the wildfires, anything like that, that is worth calling out?

Aurora Jean Swithenbank, Chief Financial Officer

Nothing that we call out in particular. We have a population of hurricane-related defaults largely related to Hurricanes Milton and Helene. That was 625 at the end of the first quarter, and now it is 421 as of the end of the second quarter. So those tend to cure at a higher-than-normal rate compared to other NODs and we're seeing exactly the behavior that we'd expect in that population. And you mentioned the wildfires just given the home price point in the geographic area affected by the wildfires in Southern California, we have a very limited number of NODs, single-digit number of NODs related to those regions.

Adam S. Pollitzer, President and Chief Executive Officer

Yes, maybe just a broader view on kind of how things trended. I'd say, overall, we continue to be encouraged by the credit performance of the portfolio, including trends in the default population. The broad resiliency that we've seen in the economy the labor market, house prices still sitting near or at record highs in most markets continues to set a favorable backdrop. Our existing borrowers remain incredibly well situated with strong credit profiles. And given the quality of our book, we're continuing to see that translate through to our default experience and overall credit performance.

Mark Douglas Hughes, Analyst

Yes. When you look at the recoveries in the quarter, is there anything you would identify as a significant driver of home price appreciation, or is there something else you would highlight beyond just the overall credit performance?

Adam S. Pollitzer, President and Chief Executive Officer

No, you're saying recoveries, I guess, we'll look at it and say it's cure activity, right? So those borrowers who have been in default who have been able to find their footing come out of default and resume payments on their mortgage in a timely fashion. What we are generally seeing is right, borrowers have the ability, a better ability to cure themselves out of a default position, one, if you are operating against the favorable macro backdrop of the strong labor market, so those borrowers who fell behind because they lost their job have the ability to find new employment quickly, and that still remains the case. And other borrowers benefit from significant amounts of embedded equity where even if they can't cure out of a default on their own, they could still sell their way out of a problem before they ultimately progress to a claimable outcome. Those trends are still there. We could talk about how they sit relative to where we were in prior periods. But that broad favorable backdrop continues to come through. The one other item that we've noted that does play through, and it's in the first half is the seasonal dynamic in our default population. Recall, we've talked about this in the past, those borrowers in the first half generally benefit from either the receipt of bonus income for some of them or, on a much broader sense, tax refunds, which come through, and the tax refund can be applied by borrowers who have fallen behind to help them catch up. That trend doesn't then follow in the third or fourth quarter because seasonally, they're not getting tax refunds in the third quarter and in the fourth quarter, there's a new outflow with many families choosing to prioritize spending for the holidays and other year-end expenses. And so that dynamic still came through. And so the pattern that you see in our default experience in our default population aligns with what we've seen in past years because of that seasonal dynamic as well.

Operator, Operator

The next question comes from Bose George from KBW.

Bose Thomas George, Analyst

On the regulatory front, FHFA put out this notice for comment on the equitable housing program. Does that potentially have an impact on the MI footprint? Or is there anything else that you see from the FHFA that could impact the MI footprint?

Adam S. Pollitzer, President and Chief Executive Officer

Yes, I'll discuss the equitable program. It’s currently a notice of proposed rulemaking, not a final decision. However, we believe that even if the plans are discontinued, the core principles of access and affordability will remain central to housing policy decisions in Washington, D.C. Policymakers and regulators from various administrations have consistently sought ways to support borrowers, increase supply, and expand access to homeownership. Therefore, formally ending the equitable housing finance plans will not significantly change this situation, and we do not anticipate any major impact on our business or market from this announcement at this time.

Bose Thomas George, Analyst

Okay. So you feel the change is more of a reduction in the regulatory side rather than in the actual loans that flow through these programs?

Adam S. Pollitzer, President and Chief Executive Officer

I don't want to speak for the FHFA regarding their ultimate intent. They announced that in the first quarter or early in the second quarter, they had issued an order to terminate all special purpose credit programs supported by the GSEs, which actually occurred late in March. We haven't seen any notable consequences from that, so we don't anticipate that the proposal to eliminate the equitable housing finance plans will have any impact either.

Bose Thomas George, Analyst

Okay. Great. I have one more regulatory question. You mentioned the MI tax deduction. Can you share what percentage of borrowers utilize that compared to those who just itemize or take the standard deduction?

Adam S. Pollitzer, President and Chief Executive Officer

Yes. Again, it's going to depend on the environment on the year. I think what we generally observed is that prior to the passage of the Tax Cut and Jobs Act, you had about 70% of filers who were taking a standard deduction. That number has increased to 90% with the passage of the Tax Cuts and Jobs Act and the increase in the standard deduction. And so we think that this is a common-sense provision, it will provide a benefit to many homeowners. It's really about providing borrowers benefit and relief. But it's because of those numbers, right, if you only have roughly 10% of filers who itemize it's not going to necessarily have a dramatic, dramatic impact on our borrower base, but there will certainly be borrowers who deserve the benefit and we'll be able to now to harvest it.

Operator, Operator

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

Adam S. Pollitzer, President and Chief Executive Officer

Thank you again for joining us. We'll be participating in the JPMorgan Future of Financials Forum virtually on August 12, the Barclays Financial Services Conference in New York on September 8, and the Zelman Housing Conference in Boston on September 12. We look forward to speaking with you again soon.

Operator, Operator

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