NMI Holdings, Inc. (NMIH) Q1 2015 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen and welcome to the NMI Holdings Inc. First Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, today's program is being recorded. I would now like to introduce your host for today’s program, Mr. John Swenson of National MI. Please go ahead.

Thank you, Jonathan. Good afternoon and welcome to the 2015 first quarter conference call for National MI. I am John Swenson, Vice President of Investor Relations and Treasury. Joining me on the call today are Brad Shuster, Chairman and CEO of National MI; Jay Sherwood, our President; and Glenn Farrell, our Chief Financial Officer. Financial results for the first 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 under the Investors tab 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 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. Brad will open with an update on the state of the business, Jay will provide comments on our progress with new and existing customers and then Glenn will discuss the financial results. We then 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 with some comments on the quarter, recent regulatory developments, and opportunities for product expansion. In the first quarter, we generated $1.2 billion of primary flow NIW, up 23% from the fourth quarter, reflecting strong growth from what is normally a seasonally weak first quarter for the industry. We have also made significant progress compared to where we were just one year ago. We have grown approved master policies by roughly 80%, our revenues have more than doubled, and our count of insurance policies in force is up tenfold. We are proud of what we achieved in a very competitive environment, and we are excited about the prospects of continuing our growth in 2015 and beyond. Now let me turn my comments to the final PMIERs and the new capital requirements for our industry. In general, the final PMIERs did not change significantly from the draft form we saw and commented on last summer. We are pleased to now have more certainty around the regulatory environment and the capital requirements upon which we can build our business. We also believe the new PMIERs reinforce the importance of a sound and financially stable private mortgage insurance industry, which is a critical component of a healthy residential mortgage market. Based on the new PMIERs, our risk-to-available assets ratio in the insurance companies as of the end of March was 5:1, which compares with the maximum under PMIERs of 18:1. We are substantially overcapitalized relative to our current risk in force, and we have the capacity to write approximately $20 billion of new insurance on that basis. Since our founding, we have anticipated the need to raise additional capital to support our growth, and the new PMIERs do not fundamentally change any of those assumptions. We also continue to believe that at the appropriate time, we will have a variety of capital opportunities to choose from including equity and equity linked instruments, debt and reinsurance transactions. Overall, we believe the PMIERs are a positive for the industry and for National MI and we are ready to move forward under the new framework. Now that the counterparty strength of the private MI industry has been mandated under the new PMIERs, we believe it is now time to encourage further transfer of housing market risk to the private sector through private mortgage insurance. We believe there are number of ways to accomplish this risk transfer. We expect that reductions in [agency, GPs,] and LLPAs would continue the shift of new insurance to conventional product versus the FHA. And with this in mind, we were pleased to see elimination of the adverse market fee concurrent with the release of PMIERs. Another option we’re excited about is deeper coverage on conforming loans. As a simple illustration, today’s private mortgage insurers provide 30% coverage on a 95% LTV loan, which means the MI coverage reaches down to about 67% loan-to-value. We and others in the industry are advocating for coverage down to 50% loan-to-value, which we believe could provide significant benefits to taxpayers and borrowers. The additional protection to the taxpayers can be provided through the existing mortgage finance system at no additional cost or even at savings to borrowers compared to the current mortgage finance convention. This form of deeper MI risk share has been championed by the mortgage bankers association. This deeper coverage carries higher premiums than today’s standard coverage because of the additional risk and capital requirements. However, the higher premium rate can be offset if Fannie and Freddie lower their guarantee fees and their loan level pricing adjustments, which they can do without incurring additional loss risk because of the deeper MI coverage. The MBA issued a research paper in late 2013 in support of the deep MI concept and continues to support this innovative risk share idea. This type of deeper MI risk share requires no new legislation. It requires nothing more than action by the FHFA along with Fannie and Freddie to reduce their fees to reflect the enhanced loss mitigation provided by the expanded mortgage insurance. This is an easy to execute plan that has the potential to incrementally reform our mortgage finance system by putting more private capital in front of public risk, a goal that is shared by all groups that are currently part of the discussion to reform the US mortgage finance system. Again, we are excited about this opportunity because it would expand the market for private mortgage insurance, while at the same time reducing taxpayer exposure to risk and potentially reducing cost to borrowers, a real win-win. Now that the private mortgage insured capital standards have been finalized, we trust that the FHFA and the GSEs will give this proposal a serious consideration in 2015. In summary, we are pleased with the strong first quarter growth in flow NIW and the overall progress for the business. We’re off to a great start in 2015 and are highly focused on delivering a year of growth in active customers and new insurance risk. With that, let me turn the call over to Jay Sherwood. Jay?

Thanks Brad. As Brad mentioned, our flow business was up 23% from the fourth quarter, which is the result of our ability to increase volume across our growing customer base. Aggregated single was down 29% versus the fourth quarter, leading to a flat total NIW comparison. We are pleased with our improving product mix. In the first quarter, monthly [Indiscernible] represented 54% of total NIW, up from 43% in the prior quarter. Flow single premium policies comprised 14% of total NIW in the first quarter, up from 12% in Q4. And finally, aggregated single premium LPMI represented 32% of total NIW, down from 45% in the fourth quarter. We also continued to add customers at a rapid pace. We ended the quarter with 777 approved master policies and 291 customers generating NIW during the period. This compares to 735 approved master policies and 251 customers generating NIW in the fourth quarter of 2014. Once we’re onboard with a customer, we often get the question of how we go about increasing our share. While the answer varies from customer to customer, we will point to three things. First, we are focused on providing exceptional customer service. We believe we have the most responsive underwriting and customer service teams in the industry. In our non-delegated business, our average turn time on new applications is between 6 to 8 hours, which compares with 24 to 48 hours for the majority of the industry. This is the result of how we designed our non-delegated underwriting operation, which allows us to operate at something close to full utilization, while at the same time providing best in class turnaround time. We received anecdotal praise from customers almost daily regarding the quality of our people and processes. These comments are gratifying confirming that we are achieving the industry leading level of customer service that we set out to provide. Second, we actively sell 12 month rescission relief. We are the first insurer to offer 12 month rescission relief and we believe our approach provides great certainty of coverage, enhancing our reliability as a counterparty. Finally, we have a highly motivated and properly incentivized sales team, unencumbered by legacy issues such as restrictions and denials, allowing them to more easily forge relationships with many customers. We believe these are meaningful differences that will allow us to continue to grow in a very competitive environment. For the balance of the year, we will maintain our dual focus on increasing share with our current customers and continuing to add new customers generating NIW. Now I will turn the call over to Glenn Farrell for more details on the financial results. Glenn?

Thank you Jay and good afternoon everyone. I am pleased to review with you our first quarter results. Total NIW for the first three months of the year was $1.7 billion, flat with the prior quarter, but we believe a great result in what is seasonally a down quarter. Primary flow NIW was $1.15 billion, up 23% from the prior quarter. Aggregated single premium NIW for the first quarter was $542 million, which compares with $757 million in the prior quarter and $278 million in the first quarter of 2014. As of March 31, 2015, primary insurance in-force was $4.8 billion, up approximately 40% from $3.4 billion in the prior quarter end. Pool insurance in-force as of the end of the first quarter was $4.6 billion compared with $4.7 billion at the prior quarter end and $5 billion as of March 31, 2014. Persistency as of the first quarter was 68%, reflecting significant cancellation activity primarily related to refinancing within the aggregated singles book. Excluding aggregated singles, persistency was 89%. Premiums written for the first quarter were $12.9 million, down from $14.1 million in the prior quarter as the result of higher mix of [BPMI] monthly product. Premiums earned for the quarter were $6.9 million, up from $5.5 million in the prior quarter. Note that premiums earned in the first quarter included approximately $1.4 million of benefit from accelerated recognition of premiums, primarily as a result of cancellation of aggregated single premium policies. In contrast, we saw approximately $1.1 million of additional earned premiums due to cancellations in the prior quarter. Excluding these effects, premiums earned in the quarter grew approximately 25% over the prior quarter. Investment income in the first quarter was $1.6 million, up from $1.3 million in the prior quarter. This primarily reflects more complete deployment of cash into investments. Total expenses in the first quarter were $18.5 million, including stock based compensation expense of approximately $2 million. This is up 5% from $17.7 million in the prior quarter and is consistent with our targeted increases in fixed and variable costs for the year. The net loss for the first quarter was $7.8 million, or $0.13 per share, which compares with a loss of $10 million or $0.17 per share in the prior quarter and a loss of $15.1 million or $0.26 per share in the first quarter of 2014. Turning to the balance sheet. As of March 31, 2015, cash and investments were $434 million, including $158 million held at the holding company. Book equity was $423 million, equal to $7.23 per share. This book value excludes any benefit attributable to the company's net deferred tax asset which at year-end was approximately $54 million. As Brad mentioned, excluding assets at the holding company, our risk-to-available assets ratio at quarter-end was 5:1, which compares with the maximum risk-to-available assets ratio under the final PMIERs of 18:1. In summary, we are pleased with the progress of the business and our solid growth in the first quarter. Now, I will turn it back to the operator, so we can take your questions.

[Operator Instructions] Our first question comes from the line of Bose George from KBW. Your question please.

Hi guys, good afternoon. the first is just on the – it was good to see the nice increase in the monthly NIW production, just curious was there anything unusual about the pace in 1Q, it was a lot stronger than 4Q, and can we think about the growth levels that we saw in this quarter going forward?

Bose, this is Jay. No, there was nothing unusual or one-time event in the first quarter. I don’t think there is anything to add to that.

Okay, great. So this is a good baseline and the growth levels we saw this quarter are reasonable in terms of sort of extrapolating from that?

Well, Bose, we – if you recall on the last quarter, we gave some guidance related to NIW. Just to remind you what that was, it was $6 billion to $7 billion of total NIW with $5 billion of that coming from flow, and at this point, we are not going to be updating that guidance, but we will look at that as the year progresses.

Okay, great. and then, just in terms of the single premium, does it look like that your share declined this quarter, did you kind of choose to back away a little bit from that product?

No, I think it is just again a changing products mix. As I mentioned in the prepared remarks, we are definitely happy with the way the mix is shifting. But there was no conscious effort to shift away from that to a degree.

Okay, great. And then just actually one little question on the book value, it went down a little less than the GAAP loss, is there any other item that drives the book value number?

Bose, this is Glenn. We are not aware of anything else that would be driving that. So we will check into that, but get back to you.

It is a couple of million dollars difference. It is probably somewhere in the equity portion…

It is a small number, just curious. So, thanks.

We will let you know Bose.

Okay, great. Thanks.

Thank you.

Thank you. Our next question comes from the line of Mackenzie Kelley from Zelman & Associates. Your question please.

Thanks. First on the NIW, do you have a sense to how much of the total flow volume was driven by refis versus purchased?

So, this is Jay. So, for total NIW, 60% of our volume was purchased, 40% was refi in the flow business. So excluding aggregated single, 75% was purchased, 25% was refi.

Okay and do you know how that compares to last quarter maybe?

Not significantly different. They aggregated single book, of course, heavily weighted towards refi. So, in our total mix you will see the change between flow and aggregated single, but within those products not a significant change.

Okay, that is helpful. Secondly, the commentary around what customers are finding helpful at the National MI was a good perspective, do you as we kind of think about the opportunities for National MI even over the next five years, what is a reasonable or realistic market share range that you guys are targeting or that we should be thinking about?

So this is Jay again. We haven’t given any sort of metrics around market share. As we have mentioned on previous calls, we have really been focused on the absolute level of insurance in force to breakeven. We did give some guidance around that last quarter, which was 15 billion to 17 billion of insurance in force required to breakeven. And that is still a reasonable number for people to be looking at.

Okay, great. Thanks.

Thank you. Our next question comes from the line of Jason Stewart from Compass Point. Your question please.

Hi, thank you. I wanted to ask you about the impact prepayments have had or I guess I should say the heavy refinance environment has had on the FICO LTV distribution of NIW, and maybe what might be more typical over time, and if you care to take that to a premium level, it seems like it is a little higher – FICO higher LTV today than it might be, and maybe if you could give us some color as to where that could end up and what that means to revenue?

Jason, this is Jay. Actually, I don’t know how much of a connection there would be between the heavy refinance activity and those metrics. I think what we have mentioned previously is the aggregated single tends to have a higher FICO score and lower LTV, and that is where a fair amount of the refi business comes from. Aggregated single in the last quarter, about 90% of that volume was refi. So heavily refi oriented there, but I’m not sure if I see any explicit connection between what you are saying and the FICO LTV mix.

Okay, so 740 FICO, low 90 LTV is pretty consistent with where you expect the monthly flow business to be over time?

That is right.

Okay, and the second part of that is really if you thought there was any impact different than your expectations on the FHA’s MIP reduction, I think maybe we got a little bit less of a change in LLPAs than some had thought, whether the market dynamics have played out as you thought or are there any changes to the way you see that?

Jason, this is Brad, what we have seen mostly in the marketplace is the result of the MIP reduction and the FHA is a – a lot of activity in refinancing in existing FHA loans in order to take advantage of that lower premium. So it hasn’t been a huge driver in terms of the market yet, although the actual shares between conventional and government execution aren’t really available yet on a current basis. So, while to your comment on, yes, I think some of the changes to LLPAs were a little bit less then we had hoped for. As you can tell from the comments earlier, we are hoping that that is not the end of the story there, and we think there is a lot of opportunity to do some very good things in the housing market by having those more reflect the strongly capitalized counterparties that the GSEs now have with the private mortgage insurers.

Got it. Okay that makes sense. Thanks and I will jump out. Thank you.

Thanks.

Thank you. Our next question comes from the line of Steve Stelmach from FBR. Your question please.

Hi guys. It is Pat Kealey actually on for Steve. Just wanted to dig in with kind of your NIW expectations and with the color you gave on account penetration and just overall growth in accounts, how should we expect your growth falling between those two avenues or is it more of a 50:50 split?

Patrick this is Jay. Just to make sure I understand, your question is do we see the growth coming from existing customers or new customers, is that…

Yes, just thinking along the lines of penetration versus account growth which you think in the more near-term is going to be kind of the engine between the two?

Yes, so I think we outlined this on the last call the 6 billion to 7 billion of total NIW is again 5 billion coming from flow is primarily based on our customer base as of the fourth quarter. So within that number it is primarily going to be coming from existing customers and expanding our share there.

Okay, great. That is helpful. And also with the regulatory clarity you guys have now, just kind of taking a look at the investment portfolio, is there maybe an additional lever for you guys to pull there and maybe kind of increase the yield there a little bit or just kind of any thoughts you might have going forward there?

Hi, this is John. So, we did see a bump in interest income, not really from a rate, but just from being more fully invested Q1 versus Q4, but that work is basically complete and we haven’t envisioned any adjustments in the mix of the portfolio. So, I think the Q1 level of yield and income you are seeing is what we expect for the rest of the year.

Great. Thank you guys.

Thank you.

Thank you. Our next question comes from the line of Geoffrey Dunn from Dowling Partners. Your question please.

Thank you. I have a few for you. First, in the first quarter did you see any change in the price competition, you are doing singles or aggregate singles?

Geoff, this is Jay. No, we didn’t see any material changes there.

Okay, and with the GSE [singles] coming out with some sort of higher capital charges there, how are you thinking about approaching the singles business for the next nine months ahead of getting those rules?

Yes, I think we will have to wait to see what those rules are Geoff before we discuss that.

Got it. On PMIERs, can you – what are your thoughts on the available asset level in the next 12 months relative to the 400 minimum and particularly as you are saying that, with all the NOIs now looking to be compliant by year-end, does that change any time – timetable for you to be compliant?

Look, Geoff this is Brad. As we said all along, we envision the need to raise capital to support the growth of our business, and the capital raise we laid out we said over the next two years we think we will have our capital fully deployed and we will be doing that. So, it is sort of coincidental that we have the PMIERs now to comply with, and so we think that that capital raise will fully satisfy that in addition to giving us the capital we need to grow the business further.

I guess what I’m asking is if you are short of 400 threshold this year, do you think you need to be compliant given that others are trying to be compliant at the effective date?

Geoff this is Jay. No, I don’t think that is a relevant factor. I think most lenders understand that the PMIERs evolved for the legacy companies and address their shortfalls as opposed to a new entrant at 5:1 risk to capital.

Okay, great. Thank you.

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

Hi, most of my questions have been asked and answered, but just I guess to go back to the aggregated singles once more, should we – how are you thinking about it for the remainder of the year, should we expect a commensurate step down each quarter similar to what we saw this quarter or was this a little bit more you were just sort of going with what the market was dictating?

So, Christine yes, we – it will depend on what the market has to offer and as we mentioned on the last quarter call we are guiding to around 1 billion to 2 billion of that product for the year. We did approximately 500 million in the first quarter. So at that pace we would be at the higher end of that range.

Okay. Thank you very much.

Thank you. [Operator instructions] And this does conclude the question and answer session of today’s program. I would like to hand the program back to management for any further remarks.

Okay. Thanks everyone for joining us. We will be presenting at the KBW Conference in New York on June 2, and happy Cinco de Mayo to everyone.

Thank you ladies and gentlemen for your participation in today’s conference. This does conclude the program.