NMI Holdings, Inc. (NASDAQ:NMIH) Q2 2023 Earnings Call Transcript

NMI Holdings, Inc. (NASDAQ:NMIH) Q2 2023 Earnings Call Transcript August 1, 2023

NMI Holdings, Inc. reports earnings inline with expectations. Reported EPS is $0.86 EPS, expectations were $0.86.

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

John Swenson: 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.

Bradley Shuster: 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.

Adam Pollitzer: 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.

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Ravi Mallela: 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.

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 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.

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Q&A Session

Operator: [Operator Instructions]. Our first question will come from Doug Harter with Crédit Suisse.

Douglas Harter: 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?

Ravi Mallela: Sure. I’ll take that. This is Ravi. Net yield in the quarter was 26.7 basis points versus 26.3 basis points in Q1, and both core and net were slightly up quarter-over-quarter. And I would say we benefited from the increase in persistency. But primarily, it came from the cumulative gains we incurred from new business pricing over the last year plus. And certainly, we benefit a little bit from the modest improvement in quota share cost, and that comes through from higher profit commission from ceded claims expense improvement that we saw in the quarter. But what I — what we talked about in the past is just a focus on core yield, which really excludes reinsurance and cancellation earnings. And we believe that will remain relatively stable given that we have strong persistency and the rate actions that we’ve taken so far have been positive.

But you have to really take into account the fact that, that’s balanced by the high-quality production which tends to come on with a different rate profile.

Adam Pollitzer: 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.

Operator: Our next question will come from Arren Cyganovich with Citi.

Arren Cyganovich: 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?

Adam Pollitzer: Yes. Look, I think we’re — Arren, it’s a good question. We’re encouraged, and I’d say incrementally more optimistic when we look at recent data and headlines. Certainly, I think we can all see that macro risks have been receding. And it’s been receding really since our last call in May, right? We’ve had a resolution of the debt ceiling deadline. We’ve had stronger-than-expected growth. Recent inflation data has shown signs of easing. We’ve seen stabilization of the regional banking sector through this quarter’s earnings announcements. And alongside that, we’ve got increasing consumer confidence. And so there’s reason to be optimistic in particular because of how resilient the housing market and house prices have been.

At the same time, we mentioned in our prepared remarks that risks remain. We didn’t elaborate but really, there are risks that remain broadly to the economy. It’s not a certainty that the Fed is going to be able to engineer a soft landing. And so when we look at it, right, the Fed just tightened again and still has a hawkish stance from our vantage point. The commercial real estate market is in focus. We’ve got the pending restart of student loan payments as something that may impact household finances. And regional banks are now facing increased capital requirements that over time, may curtail lending activity. And so when we look at it, what we’re concerned about is really what happens around us, those items that we can’t control. We can control how conservatively and appropriately we’re managing our business, how we’re managing our capital position, our risk mix, our pricing decisions.