NMI Holdings, Inc. (NASDAQ:NMIH) Q4 2023 Earnings Call Transcript

NMI Holdings, Inc. (NASDAQ:NMIH) Q4 2023 Earnings Call Transcript February 14, 2024

NMI Holdings, Inc. beats earnings expectations. Reported EPS is $1.01, expectations were $0.95. 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 Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 Swenson: Thank you, Gary. Good afternoon and welcome to the 2023 fourth 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 fourth quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio and record financial results, capping a year of tremendous success. We closed 2023 with $40.5 billion of total NIW volume and a record $197 billion of high-quality, high-performing primary insurance in force. We delivered broad success in customer development, continue to innovate in the reinsurance market and once again achieved industry-leading credit performance. In 2023, we generated record GAAP net income of $322.1 million, up 10% compared to 2022. Record diluted earnings per share of $3.84, up 13% compared to 2022 and delivered an 18.2% return on equity.

Looking ahead, I’m excited that the opportunity we have to continue to build on our success. As we plan for 2024, we’ll continue to focus on our people. They are talented, innovative and dedicated and we’ll continue to invest in our culture with a focus on collaboration, performance and the impact. We’ll continue to differentiate with our customers. The mortgage market is connected and evolving and will continue — we’ll work to continue to stand out with our focus on customer service, value-added engagement and technology leadership. We’ll continue to prioritize discipline and risk responsibility as we grow our insured portfolio, working to write a large volume of high-quality, high-return business under the protective umbrella of our comprehensive credit risk management framework and we’ll continue to focus on building value for our shareholders.

Growing earnings, compounding book value, delivering strong mid-teens returns and prudently distributing excess capital. 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 fourth quarter, delivering significant new business production, consistent growth in our insured portfolio and record financial results. We generated $8.9 billion of NIW volume and ended the period with a record $197 billion of high-quality, high-performing primary insurance in force. Total revenue in the fourth quarter was a record $151.4 million and we delivered GAAP net income of $83.4 million and an 18% return on equity. Overall, we had an exceptionally strong quarter and closed 2023 in a position of real strength. We generated $40.5 billion of NIW volume during the year and exited with $197 billion of primary insurance in force.

Our portfolio is the fastest growing, highest quality and best performing in the MI industry and has enormous embedded value. We now have nearly 630,000 policies outstanding and it helped a record number of borrowers gain access to housing at a time when they needed us most. We enjoyed continued momentum and growth in our customer franchise, activating 70 new lenders in 2023 and ending the year with over 1,500 active accounts. We continue to innovate and find success and broad support in the capital and reinsurance markets. We completed 4 new reinsurance transactions during the year, further extending our comprehensive credit risk transfer program and we continue to efficiently return capital and drive value for shareholders with our upsized share repurchase program.

We were once again recognized as a Great Place to Work, our eighth consecutive award which we view as a reflection of our unique corporate culture and a testament to the hard work and dedication of our talented team and we achieved record full year financial results generating $579 million of total revenue, up 11% compared to 2022. $322 million of GAAP net income, up 10% compared to 2022, $3.84 of diluted earnings per share, up 13% compared to 2022 and an 18.2% ROE. As we begin 2024, we’re encouraged by both the broad resiliency that we’ve seen in the macro environment and housing market and by the continued opportunity and discipline that we see across the private MI industry. The housing market has been strong. House prices have reached new highs, declining rates have spurred incremental activity and underlying strength in the labor market and the recent rally in equity markets have worked to both bolster household balance sheet and drive increasing confidence for prospective buyers.

The mortgage insurance market environment remains constructive as well. Total MI industry NIW volume with an estimated $285 billion in 2023, with the market demonstrating real strength despite the headwind of rising rates through much of the year. Our lender customers and their borrowers continue to rely on us in size for critical down payment support and we expect that the private MI market will remain just as strong in 2024 with long-term secular trends continuing to drive an attractive new business opportunity. The MI pricing environment remains stable and balanced as well, allowing us to fully and fairly support lenders and their borrowers, while at the same time, appropriately protect risk-adjusted returns and our ability to deliver long-term value for our shareholders.

And credit performance continues to track, with underwriting discipline across the mortgage market and existing borrowers well situated with strong credit profiles, record levels of home equity and for most, fixed monthly payments at historically low note rates. As we look ahead, we’re confident the macro environment remains resilient, the private MI market opportunity is compelling and we are well positioned to continue to lead with impact and deliver value for our people, our customers and their borrowers and our shareholders. 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.

With that, I’ll turn it over to Ravi.

Ravi Mallela: Thank you, Adam. We delivered record financial results in the fourth 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 EPS. Total revenue in the fourth quarter was a record $151.4 million. GAAP net income was $83.4 million or a record $1.01 per diluted share and our return on equity was 18%. We generated $8.9 billion of NIW and our primary insurance in force grew to $197 billion, up 1% from the end of the third quarter and 7% compared to the fourth quarter of 2022. 12-month persistency was 86.1% in the fourth quarter compared to 86.2% in the third quarter. Persistency remains well above historical trends and continues to serve as an important driver of the growth and embedded value of our insured portfolio.

Net premiums earned in the fourth quarter were a record $132.9 million compared to $130.1 million in the third quarter. We earned $983,000 from the cancellation of single premium policies in the fourth quarter compared to $864,000 in the third quarter. Net yield for the quarter was 27 basis points and core yield which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was 34 basis points both unchanged from the third quarter. Investment income was $18.2 million in the fourth quarter compared to $17.9 million in the third quarter. Total revenue was a record $151.4 million in the fourth quarter, up 2% compared to the third quarter and 14% compared to the fourth quarter of 2022. Underwriting and operating expenses were $29.7 million in the fourth quarter compared to $27.7 million in the third quarter.

Our expense ratio was 22.4% compared to 21.3% in the third quarter. We had 5,099 defaults as of December 31 compared to 4,594 as of September 30. And our default rate was 81 basis points at quarter end. Claims expense in the fourth quarter was $8.2 million compared to $4.8 million in the third quarter. Interest expense in the quarter was $8.1 million. Net income was $83.4 million or a record $1.01 per diluted share, up 1% compared to $1 per diluted share in the third quarter and 17% compared to $0.86 per diluted share in the fourth quarter of 2022. Total cash and investments were $2.5 billion at quarter end, including $114 million of cash and investments at the holding company. Shareholders’ equity as of December 31 was $1.9 billion and book value per share was $23.81.

Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $25.54, up 4% compared to the third quarter and 17% compared to the fourth quarter of last year. In the fourth quarter, we repurchased $31.5 million of common stock, retiring 1.1 million shares at an average price of $27.60. As of December 31, we had $177 million of repurchase capacity remaining under our existing program. At quarter end, we reported total available assets under PMIERs of $2.7 billion and risk-based required assets of $1.5 billion. Excess available assets were $1.2 billion. In January, we entered into a new quota share reinsurance treaty and a new excess of loss reinsurance agreement which together will provide forward flow coverage and comprehensive risk protection for our 2024 new business production at an estimated 5% pre-tax cost of capital.

Reinsurance remains a core pillar of our credit risk management strategy and an efficient source of growth capital for our business and we’re pleased to have achieved such favorable outcomes in both the quota share and XOL markets. In January, we also saw significant upward movement in our insurer financial strength and holding company credit ratings from all 3 major agencies, receiving upgrades from Moody’s and S&P and strong investment-grade debt [ph] ratings from Fitch. We’re pleased that each of the agencies has recognized the continued strength of our counterparty profile, uniquely high-quality insured portfolio, best-in-class credit performance, robust balance sheet and consistently strong financial results with their announcements. Overall, we had — we delivered standout financial results during the fourth quarter with consistent growth in our high-quality insured portfolio and record top line performance, favorable credit experience and continued expense efficiency, driving significant profitability, record EPS and strong returns.

With that, let me turn it back to Adam.

Adam Pollitzer: Thank you, Ravi. Overall, we had a terrific quarter. Capping a record year in which we delivered broad success in customer development, continue to innovate in the reinsurance market, once again achieved industry-leading credit performance and generated exceptionally strong financial results with record profitability, significant growth in book value per share and an 18.2% return on equity. Looking ahead, we’re confident in our ability to continue to lead with impact and deliver value for our people, our customers and their borrowers and 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] The first question is from Terry Ma with Barclays.

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Q&A Session

Terry Ma: So I’m just curious, as we look forward in more of the 2021 and 2020 — through 2023 vintages season and reached peak loss. Is there a way to think about the trajectory of the default rate or even a normalized loss ratio?

Ravi Mallela: Look, I mean when we look at our claims expense in particular, we had a 2 — $8.2 million claims expense in Q4 and a 6.2% loss ratio. And we had an uptick in defaults 5,099. And our default rate went up a little bit to 81 basis points. And I think we see a little bit of an upward trend in the quarter but we’re really encouraged by the quality and credit performance in our portfolio. But maybe to look forward here, Terry, we’ve talked about it in a little while. The default population, we expected it to increase because, frankly, there’s just natural growth and seasoning of the portfolio, in particular, the books that you had mentioned, the 2020, 2021 and 2022 books which are coming into a period of normal loss occurrence but really the performance has been strong and we’re really encouraged by just looking ahead at what’s happening.

Terry Ma: Got it. Okay. And then just on the persistency ratio. It’s been flat for the past couple of quarters. Have we reached kind of like a natural plateau here? And is that sustainable going forward? Or is there something that may serve as a catalyst to bring that lower?

Adam Pollitzer: Yes. Maybe, Terry, I’ll start. So obviously, we were 86.1% in the quarter. And again, right, we’re well above historical norms and strong persistency is helping us to drive continued growth and embedded value in the insured portfolio. We expect that our persistency will remain well above historical trends as we progress through 2024. But as you said, we don’t expect that it will increase from here. and we’ll likely see some natural trending off of the current peak as we run through the year.

Operator: The next question is from Doug Harter with UBS.

Doug Harter: Can you talk about your outlook for capital return in 2024 kind of given the strong level of PMIERs and relatively consistent credit quality?

Adam Pollitzer: Sure. Look, we’re delighted with what we’ve achieved on our repurchase program thus far, retiring, I think, $148 million — or returning $148 million of capital. And if you look at it actually as to where we’ve executed the weighted average price to book for execution since we launched the program in February of ’22 is 1.01x. We’re really delighted with that execution. We’re focused. We have $177 million of runway remaining under our existing authorization that runs through year-end 2025. And we’re focused on prosecuting that opportunity. We expect that we’ll be in the market. We’ll always depend on where valuation is and what we see immediately in front of us but on a roughly ratable basis through the expiry of the program.

Doug Harter: And I guess how are you thinking about the dividend as one of the tools in returning capital?

Adam Pollitzer: Yes. Look, again, right now, we’re most focused on the repurchase program and deploying the remaining capacity. We really see repurchase as a way for shareholders to directly participate in the significant value that we’re creating. And importantly, right, by releasing capital, whether it’s in dividend or repurchase format, we’re trying to maintain the right funding balance, right, optimizing between equity, debt, reinsurance usage and importantly, supporting EPS and ROE outcomes. As I said, we’re really pleased with what we’ve achieved and the execution we have under the repurchase program. For now, that is our primary focus. We like the flexibility that our repurchase program affords us but as we continue to perform and grow the dividend stream that we can extract from our primary operating company, we may have an ability to introduce the common dividends over time.

But for right now, we’re focused on repurchase and the opportunity we have under the existing authorization.

Operator: The next question is from Arren Cyganovich with Citi.

Arren Cyganovich: Your core premium yield has been pretty stable here. What are your thoughts into 2024? Do you expect to see more stability on the premium side?

Ravi Mallela: Yes. Arren, we’ve been seeing our yields inflect higher over the last several quarters. And I think in this quarter, we’ve seen continued strength. In core yield, we expect it to remain generally stable and strong. Look, I mean, persistency has helped certainly and the rate actions we’ve taken over the last 1.5 years have also helped us with providing a stable sort of yield environment. But as always, when you want to think about it, where it’s always impacted by reinsurance execution, loss experience because profit commission moves with changes in ceded claims expenses. And we’ll just have to see from a loss perspective, how the macroeconomic environment evolves. But we generally think it will remain stable and strong.

Adam Pollitzer: Yes, that’s the key. Ravi said it. Core yield, we expect will be generally stable through the course of the year and that’s a real positive for us. We’ll see potentially some fluctuation in net yield, really based on reinsurance execution and then claims experience which is counterintuitive, how does claims experience impact net premium revenue and net yield but it’s because of the profit commission dynamic with our quota shares.

Arren Cyganovich: Got it. That’s helpful. And then to follow up, maybe on the point of reinsurance costs and ceded claims. Are those — how are those trending? Are you seeing any kind of increase in that? And then just quickly, did you say how much, if there was a reserve release in this quarter?

Ravi Mallela: Look, Arren, maybe just touching on reinsurance. Look, we’re really pleased that we just placed our forward flow quota share in excess of loss treaties that provides us with comprehensive risk protection for our 2024 NIW production. And so we really have no other immediate execution needs. And look, we’ll look for opportunities to further refine and enhance as we achieve and innovate when we see opportunities in the marketplace. But when you think about the new quota share and the XOLs, they’re going to come on with an incremental amount of cost but really, we think a lot of that will be offset by amortization of our existing reinsurance deals. So net-net, pretty flat in terms of the impact.

Adam Pollitzer: Yes. And in terms of the run-through for profit commission and reserve movement in the quarter, we had an $8.2 million claims expense in the quarter which is obviously up. And so as our claims expense is growing, on a net basis, what that means is in almost all scenarios. We’ve also increased the session through — under the reinsurance program. And so that will have weighed on profit commission in the quarter. In the quarter, we reported it’s in the press release, the exhibits. It included a $17.3 million provision for current year results offset by $9.8 million of release related to prior years.

Operator: The next question is from Bose George with KBW.

Bose George: I wanted to go back to credit. First, reasonably a large percentage of your claims are being settled without payment. Are those generally more seasoned loans with more equity or any other way to sort of categorize those?

Adam Pollitzer: No, that’s exactly it, right? Ultimately, we sit behind both the borrowers down payment and appreciated equity on a property and in the event that we have a claim that progresses or a default that progresses to claim where there’s significant embedded equity, we’re effectively able to harvest that to defuse our exposure and that’s what drives that. It’s really about the appreciated equity position of borrower to stay in default status and ultimately, progress through the plan [ph].

Bose George: Okay, great. And then, your incurred losses on the 2022 vintage, it’s 20.9%. I know your claim activity is very limited there. But do you have an early read for the actual claim rate versus the assumptions you’re making when you built — as you built that provision?

Adam Pollitzer: Yes. Let me touch on it. So one, obviously, the incurred loss ratio that’s reported in, it will be in our K, it’s in the release. It really relates to 2 items. The reason that it stands out relative to other vintages that we disclosed. One is the math behind the calculation itself. What that number represents, it’s a cumulative incurred loss ratio that we tally. And so it’s cumulative claims expense divided by cumulative net premiums earned because our 2022 book is newer, it has accumulated fewer years of premium revenue than earlier book years which it will over time but it can skew the presentation in, I’ll call it, the period immediately after or soon after that production period has ended. And second, it does relate, in fact, to some dynamics with that particular book year.

As we’re seeing defaults begin to emerge in that book year which is natural, it happens with all vintages as they season, they are coming through with less embedded equity than defaults from earlier book years for natural reasons, right? Borrowers to purchase their homes in 2022 didn’t benefit from the record COVID HPA rally that those from earlier book years did and that contributes to some increase in model loss expectations for that book relative to others and also to our loss picks as those defaults are coming through. Overall, though, what I would say is that our 2022 book year is exceptionally high quality if you look at the contours of the pool and we’re really encouraged by how it’s performing. While it’s performing worse than earlier vintages really because of the equity dynamic.

It’s performing exceptionally well against our original modeled expectations.

Bose George: Okay, that’s great. And if it continues to — if it performs better than expectations, I mean, eventually, that loss ratio declines, right? I guess you’ll release reserves to reflect that. Is that how that plays out over time?

Ravi Mallela: Yes, Bose. And obviously, we’ll have to see where that trends go over time.

Operator: The next question is from Mihir Bhatia with Bank of America.

Mihir Bhatia: I wanted to start with just — I think you mentioned you had 1,500 active accounts. How much of the market does that cover? And is there a segment of the market where you have an opportunity to grow where we are maybe underrepresented?

Adam Pollitzer: Yes, it’s a good question. So the roughly 1,500 active accounts that we have represent, they give us — we estimate access to about 95% or so of the addressable MI market which for all intents and purposes is the entire market. There’s always going to be a couple of accounts that are large in size that we try really hard and we’re not able to access in the near term and there’s going to be a bunch of smaller accounts that we also — but 95% access when we look at it, that’s really a fully representative access across the entirety of the market. There are some — there’s a very, very small number of larger accounts that have the potential to be needle movers and we’re trying. Our sales team is out there every day looking to continue to build relationships and help us gain access into those accounts and that could come on over time.

The other one, though, as we look at it from a growth standpoint, it’s not just white space, what are new accounts that we can access but it’s doing more with our existing customers. How do we bring them value, how do we bring them thought leadership, how do we prove ourselves as their best and most prioritized counterparty and how do we capture more and more of their wallet share every period that we roll forward and that’s a big focus for us.