NMI Holdings, Inc. (NMIH) Q4 2014 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the NMI Holdings Inc. fourth quarter 2014 earnings conference call. At this time, all participant lines are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. [Operator Instructions]. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. John Swenson of National MI. Sir, you may begin.

Thank you, Candice. Good afternoon and welcome to the 2014 fourth quarter conference call for National MI. I am John Swenson, Vice President of Investor Relations and Treasury for National MI. Our financial results for the fourth quarter were released after the close of the market today. The release may be accessed on NMI's website located at www.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 in 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 events. Further, no interested party should rely on the fact that the guidance of forward-looking statements is current at any time other than the time of this call. Now to our conference call. Joining us today are Brad Shuster, Chairman and CEO of NMI, Jay Sherwood President of NMI and Glenn Farrell, our Chief Financial Officer. Brad will open with an update on the state of the business and then Jay will review the operating result in detail. Then we will take your questions. With that, let me turn the call over to Brad Shuster. Brad?

Thank you John and thank you all for joining us on the call today. Let me start by introducing two new members of the National MI team. Glenn Farrell joined us in January as our new Chief Financial Officer. Glenn was formerly the audit practice leader and partner-in-charge for KPMG's Northern California business unit. We are delighted to have attracted an executive with Glenn's leadership, experience and talent to take our finance function to the next level. I would also like introduce John Swenson. He joined us in January as Vice President of Investor Relations and Treasury. John has more than 20 years of experience in investor relations and finance and he will be the primary contact for all of our investor relations activities going forward. Finally, for anyone who missed our announcement in December, we also promoted Jay Sherwood from CFO to President, recognizing Jay's expanding role across the company. Now let me provide some comments on the quarter and an update on the progress of the business. Excluding aggregated single, in the fourth quarter we generated more than $900 million of flow NIW, up nearly 70% from what we did in the third quarter and equivalent to what we generated in the first nine months of 2014 combined. As of the end of the quarter, we had 735 customers with approved master policies, up from 664 at the end of the third quarter and up from 305 at the same time last year. 251 customers contributed to NIW during the quarter, up from 180 in the third quarter and for the year, we saw 277 customers contribute to NIW. It is also worth noting that fully 26% of our flow NIW in the fourth quarter was generated from customers who were not in the mix previously. These results reflect our rapid pace of new customer acquisition and the cultivation of these new customers into recurring generators of NIW. Our growth also reflects the positive response in the marketplace to our differentiated products, superior coverage terms and capital strength. We believe National MI's innovative leadership in the mortgage insurance industry is favorably changing the way customers manage their risk, a trend that we expect to continue in 2015. Now turning to the competitive environment. The most notable recent change is the 50 basis point premium rate reduction by the FHA. As many of you know, the FHA been raising mortgage insurance premiums over the past several years and we believe those increases have contributed to a share again for private mortgage insurers over that time frame. However we believe that many factors influence lenders and borrowers when it comes to the decision to go FHA or conventional, including the nonrefundable upfront mortgage insurance premium charged by the FHA, the ease and speed of underwriting and the preferences of market participants. Also although the price change mathematically reduces our price advantage on around 20% of our production, the monthly payment spread on an average loan is less than $20 for the majority of that production. Given this small spread on pricing and the other factors I previously mentioned, we believe that less than 10% of our production could be sensitive to the price change. Our experience has been that lenders are measured in their reactions to these price changes. In addition, the GSEs could reduce GSEs in low level pricing adjustments following the release of the final PMIERs by mid-year. This could potentially reduce the FHA pricing advantage in certain risk categories and lenders may wait to see how these events unfold. This leads us to believe that the FHA reduction will not have a significant impact on the 2015 production. As to longer-term impact to industry market share, we think that that will depend on what happens with the GSEs and LLPAs. From a market perspective, we believe the backdrop is good for growth in the purchase market and for greater participation by first-time homebuyers, which is good for the private mortgage insurance industry. In addition, with the 30-year fixed rate still below 4%, the possibility exists for increased refinance activity in the near-term, which would expand the market. Given our recent entry into the market, we are not exposed to the runoff of an in-force book that occurs during a refinance cycle, which we believe positions National MI to derive relatively more benefit from the incremental refinance volume that might occur. In summary, we are pleased with the strong fourth-quarter growth in NIW and with the overall progress of the business. We are off to a good start in 2015 and we expect that it will be another year of solid growth in master policies, active customers and NIW. With that, let me turn the call over to Jay Sherwood. Jay?

Thank you Brad and good afternoon everyone. Let me start with a review of the fourth quarter results. In the fourth quarter 2014, total NIW was $1.7 billion, which compares with $975 million of total NIW in the prior quarter. Although market share numbers for Q4 2014 are still preliminary, we estimate that our market share in the fourth quarter was approximately 4%. Flow NIW for the fourth quarter was $936 million, up 68% from the prior quarter level of $557 million. As Brad mentioned, 26% of our flow volume in Q4 came from customers who did not previously contribute to flow NIW. In the month of December, we reached an annualized run rate in the flow business of approximately $4 billion and we expect the run rate to continue to improve as we convert master policies into active customers. At year-end, the company had primary insurance in-force of $3.4 billion, which compares with $1.8 billion as of the end of September. Pool insurance in-force at the end of the quarter was $4.7 billion, which compares with the $4.8 billion at the end of the previous quarter. Primary risk-in-force at the end of December was $802 million, which compares with $436 million at the end of September. Pool risk-in-force was flat quarter-on-quarter at $93 million. For the fourth quarter, premiums written were $14.1 million, which compares with $9.7 million in Q3. Premiums earned for the quarter were $5.5 million, which compares with $3.9 million earned in the prior quarter. Investment income in the fourth quarter was $1.3 million, flat with the prior quarter. Total expenses in the fourth quarter were $17.5 million, which compares with $17.8 million in Q3. The decline was driven primarily by the retirement of our prior computer system and the elimination of the related depreciation. Turning to the balance sheet. At December 31, 2014, the company had approximately $440 million of cash and investments and book equity of $427 million or $7.31 in book value per share. This book value excludes any benefit attributable to the company's net deferred tax asset which was approximately $54 million at year-end. Now let me shift to our outlook for 2015. We currently expect to generate NIW in the range of $6 billion to $7 billion in 2015. For the year, we expect to drive significant growth in our flow business achieving primary flow NIW of approximately $5 billion in 2015. In aggregated single, we are currently assuming $1 billion to $2 billion in our plan for the year, which would essentially be flat with 2014. Although we are participating in this business in 2015, particularly as we excess capital, our long-term expectation is for aggregated single to represent a significantly lower percentage of our annual production and of our insurance in-force as compared to what we reported in 2014. Nevertheless, the mix of aggregated single in the market and in our production to-date is higher than originally anticipated, which will impact the level of insurance in-force necessary to reach operating profitability. Based on our current mix and spending assumptions, we estimate that the breakeven level for primary insurance in-force is now between $15 billion and $17 billion, excluding stock-based compensation expense. This is up from the previous range of $12 billion and $14 billion of insurance in-force. That said, we do expect to achieve positive cash flow from operations in the second half of 2015, which will mark another important milestone on our path to profitability. Excluding stock-based compensation expense, we expect to incur approximately $75 million of operating expense for the year, an increase of roughly 15%. By the end of 2015, we believe we will put in place the headcount and fixed cost base necessary to support our continued growth. In closing we are pleased with the progress of the business and our strong growth and customer development gains in Q4. We believe are in a great position, both competitively and operationally entering 2015 and we look forward to reporting to you our continued progress. With that, I will turn it back to Candice so we can take your questions.

[Operator Instructions]. Our first question comes from the line of Geoffrey Dunn of Dowling & Partners. Your line is now open.

Thank you. Good evening. Jay, what was the percent of NIW from all singles this quarter?

Geoff, let me get back to you on that number.

Okay and then I just wanted to clarify what you are just mentioned on expenses? Could you just reiterate again what you are expecting for 2015?

$75 million in total expenses, excluding stock-based compensation, which we are estimating at around $8 million for the year.

Okay and then my last question, do you have the capital ratio for the quarter and the actual capital number?

You mean the risk-to-capital ratio, Geoff?

Yes, please.

We will be putting out our 10-K tonight and that will be in there, Geoff.

Okay. Great. Thank you.

Thank you. Our next question comes from the line of Amy DeBone of Compass Point. Your line is now open.

Hi. Thanks for taking my questions. Looks like the weighted average monthly premium increased again this quarter and so what did it increase to? And is there anything impacting this number aside from just the risk composition of new insurance written to greater or lower if that goes at higher LTVs?

Amy, this is Jay. Can you repeat the beginning part of your question?

Just trying to back into the change in the weighted average monthly premium?

So the premium yield? So yes, it was around 64 basis points, if you are doing the calculation the same way I do. So that number will be relatively volatile for us, given that's still a relatively small insurance in-force book and also the way single premiums are amortized will influence that number as well. And its also influenced by prepayments in the single policies as we pulled out earnings, that premiums written in earnings if we get prepayments there, which did occur in the fourth quarter. And so there is really nothing to point to other than the amortization schedule, the singles that may have caused that.

Okay.

But if you are heading towards pricing, if that's the nature of your questioning, pricing in the fourth quarter was relatively similar to what you saw in previous quarters. No material changes there in any of the products.

Okay. Great. And just to clarify, some of your statements surrounding insurance in-force -- so you expect to grow, you said $5 billion in 2015?

So the $5 billion number was the flow business only. Including aggregated single, we are expecting between $6 billion and $7 billion of NIW.

Okay and breakeven is now $15 billion to $17 billion and you are expecting to happen in 2016?

We didn't give any guidance on the timeline there.

Okay and what is your targeted longer-term mix for aggregated singles versus monthly premium business?

So we believe singles in total will be like the other participants in the industry. So it typically represents anywhere between 10% and 20% -- single tender represent 10% to 20% of summons total insurance in-force and we would expect this as we mature to be in a similar position.

Okay and then last just the DTA. It was $45 million last quarter. Has it increased?

Yes. We mentioned that number in the script too, I believe, we said $55 million.

Okay. Thank you.

Thank you. Our next question comes from the line of Christine Worley of JMP Securities. Your line is now open.

Hi. A quick question on the flow business. was the growth that you saw in this quarter driven more by national or regional accounts?

So this is Jay. So there was both. There was growth through both channels. I would say, if you had to pick one, the regional accounts grew more strongly there, but it came from both sides of the account.

Okay and do you expect to see similar growth projections for the national and regional accounts split in the $5 billion of flow that you forecasted in 2015 or weighted more heavily towards one or the other?

I would say, it's relatively even there.

Okay and then just I wanted to make sure I got this number correctly. You said 277 customers were contributing to NIW in the quarter?

That was for the year, Christine.

For the year. Okay and what was the number for the quarter? Did you give that?

251 customers contributed NIW during the quarter.

Okay. Thank you very much.

Just one quick correction on Amy's question. The DTA was $54 million, not $55 million. We are ready for the next question.

Thank you. Our next question comes from the line of Steve Stelmach of FBR. Your line is now open.

Hi, guys. It's Pat actually, on for Steve. First question, I was just, the break out of the new account on NIW was helpful. I was wondering if you can maybe discuss how much of the growth is also from better penetration from existing accounts?

Well, Pat, it is really some of both here. So we are really pleased with the way we have able to increase our master policies, executed with all of our customers. And then at the rate of which we were able to convert those master policies into NIW producing accounts. We were also very, very focused on increasing share with our existing customers and that's probably where we see the majority of our growth coming from this year. But we will continue to work hard at signing up new customers and be able to fully address all of the market. So we are interested in both.

Great and second question, I think, given what we have seen from others in the space, could you able to maybe touch on your appetite for non-QM product and maybe just how you see that playing out for the industry overall in 2015 and beyond?

Well, we haven't seen a tremendous amount of opportunity in that space yet. We still continue to see very, very high quality business coming into our portfolio and in fact we would have the appetite to expand our credit box somewhat. We think we could to do so very profitably and in very prudent fashion. But to the extent that the market expands and evolves to what's a normal credit profile including some of the products you mentioned, I think we are fully capable of underwriting and assessing and pricing that risk and being able to compete in that type of a marketplace to the extent that it evolves.

Great and then actually if I can sneak one more just on product as well. Have you seen any change in demand for lender paid MI from your customers or how maybe that's trended over the last few months or into 2015?

Well, are as Jay said earlier, the mix of lender paid mortgage insurance for 2014 was higher than we originally anticipated. And I think so far that is continuing to be the case as we enter 2015. But that product has been around for a long time and it's tended to ebb-and-flow in its predominance in the marketplace. So hard to predict, but we think we can effectively compete in both sides of the market.

Great. Thank you.

Thanks.

[indiscernible]. Our next question comes from the line of Geoffrey Dunn of Dowling & Partners Your line is now open.

Thanks. Just two number follow-ups. First, Jay, what was the holding company cash balance at your end, please?

Hi, Geoff. We will have that in the 10-K as well.

Okay and then can you quantify the impact of accelerated premiums on this quarter's premium result?

So Geoff, I don't have that number in front of me either. You are talking about the prepays of the singles?

Yes, with all the refinance activity going on, I figured we are going to get a benefit this quarter and next quarter.

Glenn, do you have that number? Accelerated single premiums?

I don't believe I have that right now.

Okay, Geoff. We will get back to you with that as well.

Okay. Thanks.

Thank you. Our next question comes from the line of Scott Cottrell [ph] of SJ Capital. Your line is now open. Mr. Cottrell, please check your mute button.

Real sorry about that. This is Scott. I was just wondering, on lender paid MI, is that something you see primarily coming from one customer or is it catching on? Is anybody else doing it?

So Scott, this is Jay. So I assume you are referring to the aggregated single as opposed to single in general?

Right. Yes.

So we are not seeing that expand in the marketplace. It's dominated by very few lenders, if not a single lender. So no, we are not seeing that expand in the marketplace.

Is there anything structurally out there that would prevent other lenders from doing that? Do they have any particular disincentives?

To do it right, you do need scale. So you have to be of a certain size and typically you have to warehouse loans for a period of time. And not everyone has the ability to warehouse loans, because those loans close. Then they pool those loans up and they put them out to bid after several weeks. So it's operationally more challenging than you might imagine to execute that product.

Okay and could you talk a little bit more about the process of signing up new accounts? Having the policies in place and then penetrating those accounts? Just what inning you are in, on a lot of them?

Well, we have a fully deployed national sales force. So we are able to touch on all the customers and potential customers around the country that are in a position to originate mortgage insurance. And within them, it's a process that varies fairly significantly across different customers, in regards to what they are really looking for in a mortgage insurance partner. But what we tend to emphasize is the fact that we are different because we underwrite every loan which enables us to offer superior terms of coverage relative to what others are offering in the marketplace. So we think that by doing the work upfront and giving greater certainty through our master policy that that's going to resonate with a number of customers. Others will look at our capital position and it's relatively undeployed at this point and wanting to do business with us from a capital strength standpoint. And then there is other customers that value the relationships that they developed over the years with our people, which is many times a multiyear or multidecade, even relationship that they have enjoyed doing business with our people. And so it is a variety of things. We try and pull those all together and make the sale. And as you can see from the numbers, we did a good job of that in the fourth quarter.

Absolutely. okay. Thank you. Those were my questions.

Thanks.

Thank you. Our next question comes from the line of Christine Worley of JMP securities. Your line is now open.

Hi. Just a quick follow-up. The $6 billion to $7 billion of NIW projection that you gave in 2015, is that assuming no movement in PMIERs, LLPAs or GSEs?

That's correct, Christine. We are not expecting much of a movement from those.

Okay. Is that --

Let me just clarify. I mean, movement in PMIERs, I guess we do expect them to be issued, but we are not building any expectations about major changes to what's already been exposed to the market.

Okay. I guess what I am trying to get at on this, say for example LLPAs, were to come down, there would potentially be some upside to the $6 billion to $7 billion NIW number.

Yes. I suppose that's possible.

Okay.

We don't have a lot of clarity about the probability of LLPAs and GSEs coming down. We think they should. We think they are higher than where they should be, given the characteristics of the risk in the marketplace. And I think, at a minimum, it would serve to minimize any impact from the FHA's price movement recently and as you say, it could potentially, depending on the extent to which they come down, it could be expensive thing for the overall market.

Okay. Great. Thank you.

Thank you. I am showing no further questions at this time. I would like to turn the conference back over to management for and further remarks.

Okay. Candice, thanks very much for your help today. Thank you all for joining us. This is John Swenson again. We invite you to visit us. We will be at the Sanford Bernstein Conference in Boston on March 12. Thanks a lot.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Have a great day, everyone.