Good day, ladies and gentlemen. And welcome to NMI Holdings Inc. Third Quarter 2018 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct the question-and-answer session and instructions will follow at that time [Operator Instructions]. I would now like to introduce your host for today's conference, Mr. John Swenson. You may begin.

Thank you. Good afternoon. And welcome to the 2018 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, Chairman and CEO; Claudia Merkle, President; Adam Pollitzer, our Chief Financial Officer; and Julie Norberg, our Controller. Financial results for the quarter were released after the close of the market today. The press release may be accessed on NMI's Web site 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 Web site 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 parties should rely on the fact that the guidance of such statements is current at anytime other than the time of this call. Also note that on this call, we'll refer to certain non GAAP measures and in today's press release and on our Web site, we have provided a reconciliation of these measures to the most comparable measures under GAAP. Now, to our conference call; Brad will open with an overview of the quarter; Claudia will provide an update on customer development and Rate GPS; and then Adam will discuss the financial results in detail. After some closing remarks from Brad, we will take your questions. With that, let me turn the call over to Brad Shuster.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the third quarter, National MI again delivered record financial performance and continued momentum in customer development and portfolio growth. We also achieved notable success with Rate GPS, both from customers and risk management standpoint. Adjusted net income for the quarter was a record $31.8 million or $0.46 per diluted share, and our GAAP net income was $24.8 million or $0.36 per share. Adjusted return on equity for the quarter was a record 19.7% and GAAP ROE was 15.4%. In the third quarter we wrote a record $7.4 billion of new high-quality mortgage insurance, including record monthly NIW of $6.7 billion. We achieved strong NIW growth while maintaining our risk management focus and remaining disciplined from a risk return perspective. Primary insurance in-force was a record $63.5 billion, up 47% compared to the third quarter of 2017, and 9% over the second quarter of 2018. We continued to deliver the fastest rate of growth of insurance in-force in the industry. We've been pleased with the early success of Rate GPS across the board. Customers are excited and adoption has been rapid and seamless. The granularity of the engine has quickly proven its impact as a risk management tool in the credit mix of our third quarter NIW. In addition, the expected returns on our rate GPS production are strong and in line with our long-term goals. Rate GPS is an important tool in our comprehensive and industry-leading risk management framework. Our approach to credit risk management has three foundational pillars; granular pricing through Rate GPS; individual risk underwriting of the policies we insure; and comprehensive reinsurance coverage of the in-force portfolio. Rate GPS allows us to dynamically consider a far more granular and expansive step of risk attributes…

Thank you, Brad for the introduction and kind words. I am looking forward to working with you, the rest of the management team and the board, to continue building on the strong foundation and success we’ve achieved at National MI. When I referenced our strong foundation, I am talking about our people, our customers, our portfolio and our financials. We have incredibly talented group and a winning culture built on integrity, accountability and mutual respect. We are a great place to work recognized nationally by Fortune magazine for three years running. And our people come in everyday energized and excited to help our customers and their borrowers. Lenders feel this and respond to it. They trust us and we have enable to grow our relationship day by day, quarter by quarter. We have consistently grown our wallet share with existing customers and attractive new lenders with our value proposition of certainty and service. We’re proud of what we’ve achieved to-date and there is still a substantial market opportunity in front of us. We believe that we can leverage the advantages of our certainty of coverage, sensible servicing approach and technology platform to continue building a durable and valuable customer franchise. At the same time, we will remain disciplined in our approach to credit risk management, policy pricing and overall expenses. We will prioritize high quality risk and aim to continue building our insurance portfolio in a responsible manner to see future financial results. With that, let me turn my comments to the third quarter. We generated record NIW of $7.4 billion in the third quarter, up 13% over the second quarter and 20% over the third quarter of 2017. Our monthly NIW of $6.7 billion was even stronger, up 17% over the second quarter and 38% compared to the third…

Thank you, Claudia and good afternoon everyone. We had another strong quarter and achieved record results across a number of key financial metrics. We generated record quarterly NIW of $7.4 billion, and continued the rapid growth of our high quality insured portfolio. This drove record net premiums earned of $65.4 million, record adjusted net income of $31.8 million or $0.46 per diluted share and record adjusted return on equity of 19.7%. These results reinforce our strong outlook for business and financial performance. Now, to the details, primary insurance enforced was $63.5 billion at quarter end, up 9% from 58.1 billion at the end of the second quarter and up 47% compared with the third quarter of 2017. At quarter end, monthly product represented 74% of our primary insurance enforced, up from 72% at the end of the second quarter and 66% at the end of the third quarter 2017. We expect that monthly products will continue to increase as a percentage of insurance enforced. 12 months persistency in the primary portfolio was 86.1%, up from 85.5% in the prior quarter. This is to be expected in a rising rate environment and is a positive for us given the pricing and credit profile of our in-force portfolio. Total NIW volume was $7.4 billion. Monthly product represented 91% of NIW compared to 88% in the second quarter and 79% in the third quarter of last year. Purchase originations represented 95% of our volume in the quarter. Net premiums earned for the quarter were $65.4 million, up 6% from the second quarter and up 47% compared to the third quarter of 2017. We earned $2.6 million from the cancellation of single premium policies in the quarter, down from $3.1 million in the second quarter. Reported yield for the quarter was 43 basis points…

Thank you, Adam. We are excited about our record performance in third quarter and our continued momentum in terms of new customer activations, Rate GPS success and insured portfolio growth; private MI market conditions remain strong, both in terms of volume and credit performance; we have final clearing on PMIERs 2.0; we get a modest boost and expect to continue funding our growth capital needs efficiently; and we have a great team in place with Claudia taking to helm next year. I am optimistic about the opportunity ahead for National MI and our ability to continue to outperform. With that, I’ll ask our operator to come back on, so we can take your questions.

[Operator Instructions] Our first question comes from Mark Devries of Barclays. Please proceed.

Thanks. First off, let me just congratulate Claudia on the promotion. So first question, interested to get your thoughts on the size of the PMIERs cushion you’re going to want to hold here. And what your capital needs look like just given your expectations for growth in insurance in-force, your expected capital generation from earnings and future reinsurance and also what you currently hold in excess of what you think that buffer needs to be? Thanks.

Why don’t we talk about the long term cushion expectations and then bring it back to current. So it’s obviously as we’re in a growth mode we're holding significantly in excess of what we would view as an appropriate cushion over the long term when we’re self funding. And I think our goal at all time is just to manage our capital structure conservatively and make sure that we've got enough to satisfy our regulatory needs and most importantly, to honor the obligations that we’re making to our customers. Over the long-term, we think that translates to operating with roughly at 10% to 15% cushion above our minimum required amounts. But obviously as we've seen in the most recent period, when we’re executing transactions like the ILN, it bolsters our funding position in a meaningful way, and that puts us far above that 10% to 15% cushion target for a period of time. In terms of what that translates to for our capital expectations in the near-term, all the success that we’ve had in the markets, in the equity market, debt market, establishing our revolver, our quota share, the second ILN, it gives us a lot of runway. And importantly, when we posted 19.7% ROE, we were also organically generating capital at an accelerating clip every day. So that’s to a specific pipeline through the end of next year, call it; we’ve got an important decision to make on our quota share for 2019; we’ve the ability to flex the session rate between 20% to 30%; and so that’s an election we have to make by December 1st; it’s something that’s in focus for us now. Beyond that, we really need to see how our volume develops, how persistency develops, and what the opportunity is for us in the market. But our current thinking is that we don't have a specific need to be back in the market through 2019 as that growth capital matter. We may choose to do something in the ILN market as a risk management matter, but that’s likely a decision that would come at the back end of ’19 or perhaps early ’20.

And then next, could you just give us a sense of what types of customers are pushing back on Rate GPS and why they are?

Mark, most of the customers that are pushing back have a proprietary system and they just can’t operationalize it. With that said, they are working on it, many of them are looking to go on to Rate GPS. And we’re also helping them to get through the quotes that they need to achieve. So, that’s the key reason.

Thank you. And our next question comes from Chris Gamaitoni with Compass Point. Please proceed.

Could you give an updated amount for the ILN cost moving forward with the second deal, that’s $1.5 million in third quarter?

So, even though we executed a deal at the end of July, we picked up, I would say, greater the proportional amount of the cost in the third quarter, because there's an offset that comes through in the form of investment income of the assets that are held in trust. And so, those assets weren’t fully deployed in the earlier phase of closing that transaction. So, we'd expect something like 80% to 85% of the cost that we would expect to incur on a peak quarterly basis came through in the third quarter. So assume roughly $1.8 million coming through in the fourth quarter as a peak amount.

And with that disclosure, is that the entirety of the deduction to the premium revenue, or is that like a net number, excluding the impact from the investment carry?

It's all together. Our reinsurance premium is the net amount, so it's primarily going to be coming through.

And then moving to the investment portfolio construction, I was just wondering if you could update us on the duration of that portfolio and what type of new money yields you are putting on?

The duration on the investment portfolio was 3.53 years at quarter end. The pre tax book yield for the quarter was 2.9%. New money rates we're seeing north of 3.5%, about 3.6% at this time.

Thank you. And our next question comes from Jack Micenko with SIG. Please proceed.

Looking at the NIW trends over the last, let's call it, I guess, year-to-date. It seems like on the FICO side you're moving mid-band, let's call it, 7.20 to 7.59, at the same time, LTVs are coming down. And I'm curious if that's more with the markets given you or if that's the response to GPS and picking response from the market?

It's exactly that, Jack. We’re actively targeting the pockets of risk that we think yield the best risk-adjusted returns and that factors in our view of how loss variance will develop over time. And so we've made a conscious decision that we're able to express the Rate GPS in a very precise way to target certain bands business. And that's why you've seen our 97 LTV volume and our greater than 45 DTI come down in such a notable way, that’s an NMI directed outcome.

And then you’re big in California, California is obviously a big housing state anyway and its home also. But with top line sales slowing and price appreciation slowing, some headlines over the last several months. Any thoughts proactively about the risk mix as it relates to state exposure?

No, we’re broadly diversified nationally. In terms of our California concentration, California in any given period represents about 11% to 12% of the total U.S. housing market. I think for us, it’s about 13% of our portfolio. So we’re not outsized in our concentrations in California. We do actively consider MSA level risk trends. Through Rate GPS we have the ability to actively target certain bands, not just in terms of borrower profile, but also in terms of geo-location of properties. And so, we will consider that on a continued basis. But as to where we sit today, there’s nothing specific about California that we view as a whole different from our broader view.

Thank you. And our next question comes from Mackenzie Aron with Zelman and Associates. Please proceed.

First question on operating expenses. Adam, is there anything just I remember year-over-year, I think it was 4Q ’17 there was one-time expenses. Is there anything we need to be aware of it when thinking about the full year run rate for operating expenses?

No, there’s nothing of note that’s going to come through in the fourth quarter of ’18. Fourth quarter of ’17, we didn’t have any one off expenses per se. I think we just noted that there were some timing difference that shifted items between the third quarter and the fourth quarter. And there's always the potential for small amounts like that to come through. But the guidance that we provided at the outset of the year, which is take the second half ‘17 and annualize that by and grow that by about 10%, still holds for our expectation for the full year ’18.

And then just one more going back to the Rate GPS, just curious the industry is moving pretty quickly to follow along with the black box migration. Are you seeing any change in the appetite among some of the large lenders that historically have been more resistant to adopting more granularity across the different MI provider? Is that stand starting to shift at all among some of the customers?

We agree with you. You’re seeing an increase migration of our industry to providing fully integrated risk-based pricing. I think others are in various stages of development but we expect that evolution to occur. And we think that even the large -- some of the large lenders that may not have been able to implement initially, I think through our conversations with them, they understand the benefits of what something like Rate GPS can provide and how it could get the best rate for their borrower. So, I think they are working on ways to be able to utilize this and basically improve their business. So, we think that evolution is well underway and it won’t take long to get to where it’ll be that’s the norm.

Thank you. And our next question comes from Randy Binner with B. Riley FBR. Please proceed.

I have a couple of follow-ups there, I guess just to go back to expenses, because they’re progressing well. I am trying to understand I guess the cadence of how that might improve in 2019 off of that 43.6 number, the core number, Adam, that you mentioned…

It's on the expense ratio…

Yes on the expense ratio. So is that -- we start from there and we go down how much in 2019? I’m just trying to get a sense of how much that can improve moving ahead.

Randy, I don’t think we're at a point where we're going provide guidance, either on expense ratio or what we invasion for full year expenses in 2019. But suffice to say that discipline that we've demonstrated this year is something that we continue to be focused on. We would absolutely expect that the pace of our operating expense growth, dollars of growth will slow. As we go forward, we wouldn’t expect that will be delivering or incurring 10% growth in our operating expense base year-on-year. So the continued discipline in terms of the dollars that we're spending, coupled with the growth in our portfolio and the growth in our net premiums earned, we should see continued benefit through 2019 in our expense ratio. To the longest term, we expect that as you look out several years, we'll ultimately land with an expense ratio that's call it approximately 25% or so.

And then I also have a follow up on Rate GPS. So I appreciate all the proof points on the higher credit quality that you've been able to capture via this pricing tool. And I’m just trying to reconcile that -- so you've captured lower risk, ostensibly that means you collected a little bit less premium, I would think. I’m just trying to square that with the comment that most of the participants out there, the lenders who didn’t participated, is because of operational issues. So in other words, is it really operational issues or are you selecting out lenders that produce lower credit quality business?

The operational issues are real on their end, because they have proprietary loan originations systems. And it's just little bit harder to get into the queue and make some changes and connect with us. So, that’s the key reason why they're not moving over to our Rate GPS system. But many have indicated that they would like to. They recognize that as all the MI companies roll out their black box, everyone has a little bit of a different risk approach and that's good, especially good for the lenders that have a great manufacturing process. So, it's truly their own system operations.

Randy, what we’re selecting with Rate GPS is the pockets of production from all of our lender customers that we think has better risk adjusted return characteristics that will better loss performance. So of course, as you do in the market, you see differences between different lenders in the overall production properties. But there's opportunities and we're able to support all of our lenders and we're able to select and target the pockets of business that we prioritize at this point.

Thank you. And our next question comes from Geoffrey Dunn with Dowling & Partners. Please proceed.

Claudia, I just want to follow up again on the Rate GPS. With respect to those proprietary systems, I would assume that the retail side of their business. Are there any broader issues related to the lenders that are pushing back on the wholesale channel?

The wholesale channels would have a very similar issue if they are using the same LOS, so if it's proprietary. So, there is not much of a difference between retail wholesale channel there Geoff. If they are out, they are trying to amend the entire system in order to be able to connect with the rate engines.

And then, Adam, a longer term question with respect to the ILNs. If ILN becomes a recurring credit risk management strategy, given what you know about the capital model for MI and the regulators. Will MIs be able to efficiently manage their capital base with their PMIERs cushions?

I think the ability for each MI, I call it, more efficiently or actively manage their capital positions will depend on each company, their position, their dividend capacity and their relationship with their regulators. We are certainly focused, over the long-term, it’s not going to be over the next years but over the long-term, in making sure that we can continue to execute what we view as valuable risk transfer transactions, especially when the market offers us what we believe are favorable terms to do that and balancing that with a need to efficiently manage the overall build of capital in the system. It’s something we’re focused on, it’s something that will be an area of priority over the next -- the first six years of our development we’re focusing on bringing in the business, establishing our footing in the market and figuring out where we were going to efficiently fund our growth. All of those things don't matter for the next six years, we’ll layer on how do we efficiently manage the capital position perhaps more actively.

Do you think regulators would ever allow companies to operate with negative surplus given what is now a third source of capital with ILNs?

We've not had that conversation, Geoff, so I wouldn’t want to venture I guess. I think the regulators will look at the overall capital profile and they'll do some modeling. But as you would expect, hard dollars of capital in the system are always going to be prioritized over the potential for capital support in a downturn. And so I think there’s a process to go through for those discussions.

Thank you. And our next question comes from Bose George with KBW. Please proceed.

Adam, I just wanted to go back to your comments on the premium. I don’t think you gave this. But can I get your premium margin on the NIW this quarter?

Yes. Our premium rate on NIW this quarter was 45 basis points, weighted-average rate on NIW was 45 basis points in the quarter. And in the market that compares to 51 basis points in the second quarter.

And then just a housekeeping question. When you calculate the $0.46 of adjusted EPS, the tax adjustment, it looks like that’s not using a 22% for that $365,000 I guess it is, so just curious about that.

It is but the treatment in application of taxes against our warrants is different. The changes in fair value of the warrant are not deductible. And so we carry that through when we’re calculating adjusted net income as well.

Thank you. And our next question comes from Phil Stefano with Deutsche Bank. Please proceed.

I guess, thinking back to second half ’17, we had some quarterly reporting issues, because of the three hurricanes that we got and now this year, we have Florence and Michael. I was hoping you could just give us an update on how the 2017 hurricanes are still showing in the financials. And should we expect anything from Florence and Michael this year that's coming in fourth quarter and maybe first quarter?

Sure. Why don’t we -- I'll touch on the most recent storms then we can talk about what’s still there from Harvey and Irma. In terms of Florence and Michael, it's really still just too early to see any impact in our financials. Recall that we define the defaults as a loan that SNFs at least two consecutive monthly payments, the Michael made landfall, I think it was on October 10th and Florence hit on September 14th, so there just hasn’t been enough time for defaults to develop and then be reported to us as defaults by servicers. Our initial view though on what this storm means for us is that we'll actually see the far less coming through related to the Florence and Michael than we did for Harvey and Irma. Our coverage density and the potential population of policies that could be effective, it's just much lower in those areas than it was, particularly in the Huston Metro area for Harvey. In terms of Harvey and Irma, at peak, we reported 533 NODs related to those storms. We didn’t break out the number this quarter because it's so small. They've all cleared out by enlarge. We have 91 related NODs left at September 30th for Harvey and Irma. So, we do still carry a modest reserve position against those NOV those are still on the books. We've seen the cure rate come through at the levels that we expected, if not better than we'd expected, when we set our reserves for those storms initially.

Thank you. At this time, I’m showing no questions in queue. And I'd like to turn the call back over to management for further remarks.

We’d like to thank you all for joining us on the call today. And we look forward to seeing you at our Investor Day in New York on November 15th. Thank you.

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program. You may now disconnect. Everyone, have a great day.