NMI Holdings, Inc. (NASDAQ:NMIH) Q3 2023 Earnings Call Transcript

NMI Holdings, Inc. (NASDAQ:NMIH) Q3 2023 Earnings Call Transcript November 1, 2023

Operator: Good day, and welcome to the NMI Holdings Third Quarter 2023 Earnings Conference Call. 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, operator. Good afternoon, and welcome to the 2023 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; 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 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. I’m pleased to report that in the third 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 third quarter, we generated $11.3 billion of NIW volume, ending the period with a record $194.8 billion of high-quality, high-performing insurance-in-force. While the macro risk environment continues to evolve, we remain greatly encouraged by the resiliency of the housing market, the exceptional performance of our high-quality insured portfolio, and the broader success we’re achieving across our business.

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, 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 all borrowers with a fair and equitable opportunity to access the housing market, establish a community identity, and build long-term wealth through home ownership. Our products and the support we provide are more important today than ever before, and we see an increasing opportunity to support borrowers at a time when they need us most. Overall, we had a terrific third 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 third quarter, delivering significant new business production, strong growth in our insured portfolio, and record financial results. We generated $11.3 billion of NIW volume and ended the period with a record $194.8 billion of high-quality, high-performing insurance-in-force. Total revenue in the third quarter was a record $148.2 million and we delivered record GAAP net income of $84 million, or $1 per diluted share, and a 19% 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 increasing interest rates.

We see a 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 current NIW volume, has helped to drive continued growth and embedded value gains in our insured book. We’ve led with innovation in the risk transfer markets and have secured comprehensive reinsurance coverage on nearly all of the policies we’ve ever originated. And we continue to manage our expenses and 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 have 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 have 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. 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 Ravi.

Ravi Mallela: Thank you, Adam. We delivered record financial results in the third 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 $148.2 million. GAAP net income was a record $84 million or $1 per diluted share, and our return on equity was 19%. We generated $11.3 billion of NIW and our insurance-in-force grew to $194.8 billion, up 2% from the end of the second quarter and 9% compared to the second quarter of 2022. 12-month persistency was 86.2% in the third quarter compared to 86% in the second quarter.

Persistency continues to serve as an important driver of the growth and embedded value of our insured portfolio. Net premiums earned in the third quarter were a record $130.1 million, compared to $126 million in the second quarter. We earned $864,000 from the cancellation of single premium policies in the third quarter compared to $1.1 million in the second quarter. Net yield for the quarter was 27 basis points, up from 26.7 basis points in the second quarter. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 33.9 basis points, up from 33.8 basis points in the second quarter. Investment income was $17.9 million in the third quarter compared to $16.5 million in the second quarter.

Total revenue was a record $148.2 million in the third quarter, up 4% compared to the second quarter and 13% compared to the third quarter of 2022. Underwriting and operating expenses were $27.7 million in the third quarter, compared to $27.4 million in the second quarter. Our expense ratio was 21.3% compared to 21.8% in the second quarter. We had 4,594 defaults as of September 30 compared to 4,349 as of June 30, and our default rate was 74 basis points at quarter end. Claims expense in the third quarter was $4.8 million compared to $2.9 million in the second quarter. We have a uniquely high-quality insured portfolio and our claims experience continues to benefit from the discipline with which we have shaped our book and the strong position of our existing borrowers as well as the broad resiliency we’re seeing in the housing market.

Interest expense in the quarter was $8.1 million. Net income was a record $84 million or $1 per diluted share, up 5% compared to $0.95 per diluted share in the second quarter and 12% compared to $0.90 per diluted share in the third quarter of 2022. Total cash and investments were $2.4 billion at quarter end, including $134 million of cash and investments at the holding company. Shareholders’ equity as of September 30 was $1.8 billion, and book value per share was $21.94. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $24.56, up 4% compared to the second quarter and 18% compared to the third quarter of last year. In the third quarter, we repurchased $19.2 million of common stock, retiring 675,000 shares at an average price of $28.51.

As of September 30, we had $208 million of repurchase capacity remaining under our existing program. At quarter end, we reported total available assets under PMIERs of $2.6 billion and risk-based required assets of $1.4 billion. Excess available assets were $1.2 billion. In summary, we delivered standout financial results during the third quarter with continued growth in our high-quality insured portfolio, 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. Overall, we had a terrific quarter, once again delivering significant new business production, continued growth in our high-quality insured portfolio, and record financial performance. Looking forward, while the macro environment continues to evolve, we are encouraged by the tremendous resiliency that we’ve seen in the economy and housing market thus far and are confident that the disciplined approach we’ve taken to managing our business from day one will continue to drive our performance. 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 delivering differentiated 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.

Operator: [Operator Instructions] Your first question comes from Rick Shane with JPMorgan. Please go ahead.

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Q&A Session

Rick Shane: Thanks, guys, for taking my question, and I hope everybody is well. Just wanted to talk a little bit about the expense ratio. Again, tick down and ’23 will be a step forward versus ’22. At what point do you sort of asymptotically approach the threshold where you don’t continue to build operating leverage? And what level would you see that sort of – you know, what ratio would you see [indiscernible]?

Adam Pollitzer: Yes. Rick, one, it’s nice to hear from you. I’ll start and then let Ravi answer with specifics about expense ratio in the quarter and where it might trend, but I want to offer a broader perspective on our operating expenses and how we think about it really as a strategic matter. Broadly speaking, we have always been focused on managing our business with discipline and efficiency. And candidly, we believe that we have a sustained expense advantage with the lowest absolute dollars of operating expense in the MI sector by a wide margin. In terms of the benefits that we always talk about that you’ll recognize, the financial impact is an obvious one, right? Lower expenses allow us to generate consistently stronger returns naturally.

But there’s also a real strategic aspect, real strategic value that’s often overlooked and it feeds directly into our risk management approach and the flexibility that we have to more actively shape the profile of our high-quality insured portfolio. As a financial matter, we write business and price our policies to generate an adequate return on capital, right? We need premium revenue coming in to absorb our operating expenses, our loss costs, our funding needs, and taxes. And with our expense advantage, we simply don’t need to have a higher concentration of higher risk, higher-yielding business coming in to cover our operating base. And so we can and have been achieving best-in-class returns while also taking the most proactive and disciplined approach to managing our mix of business and a large part of that flexibility and our ability to deliver consistently strong returns while being the most discerning from a risk standpoint, actually traces a lot to the discipline that we continue to carry on the operating expense side.

So I’ll let Ravi answer the specifics about operating expense, but we really think about expense advantage as a core strategic advantage for us, not just the numbers and a model expense ratio.

Ravi Mallela: And Adam, I would just add that, you know, where that strength comes from and that advantage comes from just us having the smallest headcount by a wide margin. And we also benefit from a de novo IT platform that’s scalable, efficient, and flexible. And a lot of that benefit, you know, came through again in Q3 with our 21.3% expense ratio. And really, you know, we’ve talked about this in the past, Rick. You know, we do expect our dollars of OpEx to grow because we continue to invest in people, technology, risk management, and in growth. But, you know, we’re really happy about the way our expense profile in particular has performed over time, and our expense ratio, you know, is really what we’re focused on. Now OpEx, you know, we think we’re going to continue to, you know, be in our long-term range of mid to low 20s, and we’re delighted to achieve that in Q3, and we’re certainly optimistic about managing in a disciplined manner and driving efficiency for the future.

Adam Pollitzer: Yes. Look, rate of improvement is obviously going to slow from such a low base. We’ve got the lowest expense ratio broadly, the lowest dollars of expense absolutely in the industry. So we’ll see where that trend is going forward. But right now, we’re in a really good position with the efficiency we carry.

Rick Shane: No. I appreciate the comments on the strategic benefit or advantage it creates as well. I mean, at the end of the day, I probably am a little more numbers in the model guy and focused on that, but it’s an important observation as well. Thank you.

Operator: Your next question comes from Bose George with KBW. Please go ahead.

Bose George: Yes, good afternoon. It looks like your provision for new notices has trended down, especially compared to 1Q where it was up pretty meaningfully. Is that accurate? And can you just discuss drivers for reserving for new notices and how that’s kind of changed over the past year?