NMI Holdings, Inc. (NASDAQ:NMIH) Q1 2024 Earnings Call Transcript

NMI Holdings, Inc. (NASDAQ:NMIH) Q1 2024 Earnings Call Transcript April 30, 2024

NMI Holdings, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good afternoon and welcome to the NMI Holdings First Quarter 2024 Earnings Conference Call. All participants will be listen-only mode. [Operator Instructions] Please note, this event is being recorded. After today’s presentation there’ll be an opportunity to ask questions. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Mr. John Swenson. Please go ahead.

John Swenson: Thank you. Good afternoon and welcome to the 2024 first 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; Andrew Greenberg, our senior Vice President of Finance 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 provided a reconciliation of these measures to the most comparable measures under GAAP. Now, I’ll turn the call over to Brad.

Bradley Shuster: Thank you, John, and good afternoon, everyone. As we talk today, I’m greatly encouraged, both by the continued resilience that we see in the broader macro environment and housing market and by the significant and consistent success we’re achieving across our business. In the first quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio, and record financial results. Our lenders and their borrowers continue to turn to us for critical down payment support. And in the first quarter, we generated $9.4 billion of NIW volume, ending the period with a record $199.4 billion of high-quality, high-performing primary insurance in-force. In Washington, our conversations remain active and constructive.

Policymakers, regulators, the FHFA and the GSEs remain keenly 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 recognize 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 home ownership. We are actively engaged and committed to equally supporting borrowers from all communities, and are proud to have helped nearly 1.8 million borrowers to-date realize their home ownership goals. Overall, we had a terrific first quarter and are well-positioned to continue to lead with impact and drive value for our people, our customers and the borrowers, and our shareholders going forward.

With that, let me turn it over to Adam.

Adam Pollitzer: Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the first quarter, delivering significant new business production, consistent growth in our insured portfolio, and record financial results. We generated $9.4 billion of NIW volume and ended the period with a record $199.4 billion of high-quality, high-performing primary insurance in-force. Total revenue in the first quarter was a record $156.3 million, and we delivered record GAAP net income of $89 million. EPS was a record $1.08 per diluted share, up 8% compared to the fourth quarter, and 24% compared to the first quarter of 2023, and we generated an 18.2% 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 remained resilient in the face of elevated interest rates. Our lender customers and their borrowers continue to rely on us in size through critical down payment support, and we’ve seen attractive and sustained new business opportunity fueled by long-term secular trends. 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 current NIW volume, has helped to drive consistent growth and embedded value gains in our insured book. And we continue to manage our expenses in capital position with discipline and efficiency, building a robust balance sheet that is 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’ve been encouraged by the continued discipline that we’ve seen across the 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. We started the year with significant momentum, and looking ahead, 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.

With that, I’ll turn it over to Ravi.

Ravi Mallela: Thank you, Adam. We delivered records financial results in the first quarter with significant new business production, consistent growth in our high-quality insured portfolio, record top-line performance, favorable credit experience, continued expense efficiency, and record net income and earnings per share. Total revenue in the first quarter was a record $156.3 million. GAAP net income was a record $89 million. EPS was a record $1.08 per diluted share, and our return on equity was 18.2%. We generated 9.4 billion of NIW, and our primary insurance in-force grew to 199.4 billion, up 1.2% from the end of the fourth quarter, and 6.8% compared to the first quarter of 2023. 12-month persistency was 85.8% in the first quarter, compared to 86.1% in the fourth quarter.

Persistency remains well above historical trend and continues to serve as an important driver of the growth and embedded value of our insured portfolio. Net premiums earned in the first quarter were a record $136.7 million, compared to $132.9 million in the fourth quarter. We earned $586,000 from the cancellation of single premium policies in the first quarter, compared to $983,000 in the fourth quarter. Net yield for the quarter was 27.6 basis points, up from 27.1 basis points in the fourth quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings, was 34.1 basis points, up from 33.8 basis points in the fourth quarter. Investment income was $19.4 million in the first quarter, compared to $18.2 million in the fourth quarter.

We saw continued growth in investment income during the quarter, as we deployed new cash flows and reinvested rolling maturities at favorable new money rates. Total revenue was a record $156.3 million in the first quarter, up 3.2% compared to the fourth quarter, and 14.2% compared to the first quarter of 2023. Underwriting and operating expenses were $29.8 million in the first quarter, compared to $29.7 million in the fourth quarter. Our expense ratio was 21.8%, compared to 22.4% in the fourth quarter. We had 5,109 defaults at March 31st, compared to 5,099 at December 31st, and our default rate declined to 80 basis points at quarter end. Claims expense in the first quarter was $3.7 million, compared to $8.2 million in the fourth quarter. We have a uniquely high quality insured portfolio, and our claims experience continues to benefit from the discipline with which we’ve shaped our book, and the strong position of our existing borrowers, as well as the broad resiliency we’ve seen in the housing market.

Interest expense in the quarter was $8 million. Net income was a record $89 million, up 6.8% compared to the fourth quarter, and 19.6% compared to the first quarter of 2023. Diluted EPS was a record $1.08 per share, up 7.5% compared to the fourth quarter, and 23.5% compared to the first quarter of 2023. Total cash and investments were $2.5 billion at quarter end, including $92 million of cash and investments at the holding company. Shareholder’s equity as of March 31st was $2 billion, and book value per share was $24.56. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $26.42. Up 3.4% compared to the fourth quarter, and 17.1% compared to the first quarter of last year. In the first quarter, we repurchased $25.2 million of common stock, retiring 840,000 shares at an average price of $29.98.

As of March 31st, we had 152 million of repurchase capacity remaining under our existing program. At quarter end, we reported total available assets under PMIERs of $2.8 billion, and risk-based required assets of $1.6 billion. Excess available assets were $1.3 billion. Overall, we delivered standout financial results during the quarter, with consistent 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.

Adam Pollitzer: 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 encouraged by the continued resiliency that we see in the macro environment and housing market, and we are well-positioned to continue delivering differentiated growth, returns, and value for our shareholders. We are leading the market with discipline and distinction. Sustainable secular trends are fueling a long-term private MI industry opportunity, and we are well-positioned with a strong customer franchise, a talented team that’s driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, a robust balance sheet, and the significant earnings power of our platform.

Taking together, we’re confident as we look forward. Before closing, I also want to take a moment to acknowledge Ravi, and thank him for the important contributions he’s made to National MI success over the past two and a half years. Ravi has brought a valuable strategic perspective to our management team, and he’s been an important business partner for me. Under his leadership as CFO, we’ve delivered standout operating performance and record financial results quarter after quarter. We’ve continued to lead with innovation in the risk transfer markets, has successfully introduced our share repurchase program, and has made the right investments to position National MI for continued long-term success. So thank you, Ravi. Our new CFO, Aurora Swithenbank, will be joining us in May, and we’re excited to welcome her at a time when we have such significant momentum across our business.

With that, I’ll ask the operator to come back on so we can take your questions.

Operator: Thank you. We will now begin the question and answer session. [Operator Instructions] Your first question comes from Bose George with KBW. Please go ahead.

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Q&A Session

Unidentified Analyst: Hey, good afternoon, everyone. This is actually Alex on for Bose. To start out, it looks like your 95% plus LTV bucket increased on a year-over-year basis to 11% of total NIW from 4% in last year’s first quarter. And it looks like that bucket has been in the low double digits over the last couple quarters as well. Could you talk through some of the drivers of that increase? Is that just a reflection of some of the affordability challenges we’re seeing in the market currently, or is there anything else you’d highlight there?

Adam Pollitzer: Yes, sure, Alex. I’d guide you to go back and look at some of our transcripts from earlier calls last year. We made a conscious decision in late 2022 and early 2023 as house prices were declining, and the outlook was a little bit less certain for the path going forward to curtail the flow of 97-LTV volume coming into the portfolio. It’s one of the benefits that we have with Rate GPS, where we can very actively and precisely manage the flow of risk coming into our portfolio at any point in time. Beginning on our first quarter call last year, we talked about, though, as things had stabilized as the market had really digested and recalibrated to elevated interest rates, and house prices again began to resume their climb toward record highs, that we were going to be comfortable accepting a modest amount of incremental 97-LTV volume into the portfolio.

And that’s really what you see. We’ve been at this. I think we’re 11% this quarter, roughly that level for the last several quarters. The other item that I would note, though, is that even though our volume has increased for that risk cohort year-on-year, very deliberately, we feel good about having curtailed it in late ’22 and early ’23, and we feel good about having taken an incremental amount of volume over the last several quarters. We still meaningfully under-index the broader MI market for 97-LTV concentrations. The rest of the market last quarter was at around 15% compared to our 11% this quarter.

Unidentified Analyst: Okay, great, thanks for that. That all makes sense. And then maybe just one more quick one. So you and your peers both, or all of the peers, have kind of meaningful level of PMIERs excess capital. Currently, I believe NMI is now around 80% of the minimum required level at, or 80% above the minimum required level at quarter end. When we think about excess capital moving forward, is PMIERs still the best metric to consider? Or do you think the industry will continue to run with meaningful access levels for the time being?

Adam Pollitzer: Yes, I think there’s yes to both of those, in fact. So I think PMIERs still sets the binding capital constraint for us and others in the industry to a significant extent, almost every policy that we ensure PMIERs sets the binding capital constraint. There may be a few policies where our internal view of economic capital, but in the main, it is PMIERs that drives our needs, and it’s PMIERs that we manage against. Broadly speaking, though, in terms of the excess that we’re carrying relative to the PMIERs minimum requirements, capital is key for us. And we’re obviously in a terrific position today. We’ve got a strong liquidity and funding position. We benefit from the broad protection of our comprehensive re-insurance program, which not only provides us with risk transfer benefits, but also with real capital efficiency and benefit.

We’ve got a conservative investment portfolio, and we have ready access to capital across the funding spectrum. And when we look at it, today, even though the macro environment has proven to be remarkably resilient in the states of elevated interest rates, risks certainly remain. I think market volatility over the last few months serves to highlight that. And so as we think about our excess capital position, we want to make sure that we’re being balanced, right? We want to make sure that on the one hand, we recognize that there’s value in conservatism that we’re prudently managing our needs and building that access and that excess in an appropriate way. But there’s obviously a cost associated with that that we need to be mindful of, and carrying too much excess.

What we really think about is an excessive amount of capital at any given point in time can serve as a tax on our return potential. We think we’re really striking that right balance now. We’ve just delivered record financial results. We posted an 18.2% ROE, and we’ve also been able to return a significant amount of capital to shareholders under our repurchase program. As we look going forward, the sizing of that excess capital position, the line between a prudent amount of excess and something beyond that that we would think of as excessive, will naturally move depending on the risk environment that we’re in.

Unidentified Analyst: Great, that makes sense. Thanks for taking the questions, Adam.

Operator: Next question comes from Mark Hughes with Truist. Please go ahead.

Mark Hughes: Yes, thank you. Good afternoon. Adam, I wanted you to just expand a little bit on what you saw transpired during the quarter that gave you confidence to release those prior accident year reserves. You know, what in the housing market, the aging of the book, what were the key factors?

Adam Pollitzer: Sure, it’s a good question Mark. At the end of the day, it is really, it’s first and foremost about how the defaults that we had on the balance sheet were in our portfolio at the end of the prior quarter, how they performed. We actually saw our cure rates during the quarter move up to their highest levels in the last two years, not a dramatic degree, it wasn’t a seismic shift, but cure rates in the first quarter of ’24 are the highest level they’ve been in the last two years. So we came into the quarter with 5,099 defaults. We had over 35% of those defaults cured out and for borrowers to resume timely payment of principal interest on their loans. And so that allows us to obviously release the reserves that we held against that population of defaults.

We’ve also talked about in prior quarters that our general bias when we’re establishing our reserves is to anchor more towards downside scenarios. And so we continue to do that at each quarter end as you roll forward then with another quarter of actual macro development, actual development in the housing market. While we’re not necessarily changing that anchoring to downside scenarios, the actual experience over the last quarter ended up coming in better than what our embedded assumptions had been at the time we established reserves at year end. And it’s both of those items that drove the release. It’s the really strong cure activity that we saw within the default population and it’s continued strength and resiliency in the macro environment and housing market relative to the assumptions that we had embedded in our year end reserve position.

Mark Hughes: Could you talk in that context, severity was up a bit. I know you’ve spoken to the idea that you thought the claims that you did get to have more merit. But I wonder if you could just discuss the increase in scenario?

Adam Pollitzer: Yes. So I’d say it’s been really, really modest. A couple of items. One, when we establish our reserves, we’re going through and individually modeling, in this case, each of the 5,109 loans that are in default in the portfolio. And based on our view and set of assumptions around macro, but also the individual characteristics of the loan, the borrower, our estimation of current market-to-market equity position for the loan, we’re applying individual default acclaim rate assumptions and individual severity assumptions for each of those loans. We’re not applying a broad homogenous peanut butter spread assumption across the entire default population. So every loan has its own individual risk characteristics. Things didn’t actually move in a consequential way from year end through March 31st.

The weighted average severity assumption underpinning our reserves at the end of the first quarter was 65%, and that compares to 66% at year end. So it is evaluated on a real-time basis for the new population at any given point in time, but it actually didn’t move in a consequential way from year end.

Mark Hughes: Appreciate that. Thank you.

Operator: [Operator Instructions] The next question comes from Mihir Bhatia with Bank of America. Please go ahead.

Mihir Bhatia: Hi. Thanks for taking my question and good afternoon. I wanted to maybe start with just a little — go back to your comments on pricing. I think you described it as constructive in your prepared remarks. And I was curious about that. Is that meaning to suggest that you guys are still taking price and the industry is still taking price, or is it just more discipline and staying steady?

Adam Pollitzer: Yes, it’s much more stability. But the industry pricing, we’ve used the freeze through sort of the second half of 2022 and into the earlier part of 2023 on our calls that pricing was laddering higher in view of emerging risks in the market. And that was necessary at the time, and we were pleased to see that the industry was able to achieve that. For the last several quarters, though, we’ve noted that the industry pricing is at a point of balance and stability, and that’s what we see today. It’s stable, it’s rational. We continue to be encouraged by the broad discipline that we see across the sector. And I think most importantly, we’re where we should be, right? What a point of balance means is that we’re fully and fairly supporting our customers and their borrowers, but at the same time, we’re using rate among other tools to appropriately protect our balance sheet, our returns, and our ability to deliver long-term value for shareholders.