NMI Holdings, Inc. (NMIH) Q1 2022 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the NMI Holdings, Inc. First Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. [Operator Instructions]. I would like to hand the conference over to our speaker today, Mr. John Swenson with management.

Thanks, Andrea. Good afternoon and welcome to the 2022 first 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 Julie Norberg our Chief Accounting Officer. Financial results for the quarter were released after the close today, the press release maybe 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 refer to certain non-GAAP measures. In today's press release, and on our website, we've provided a reconciliation of these measures to the most comparable measures under GAAP. Now. I'll turn the call over to Brad.

Thank you, John. And good afternoon, everyone. I'm pleased to report that in the first quarter, National MI again, delivered strong operating performance, significant growth in our insured portfolio, and record financial results. We also reached an important milestone with April marking National MI's 10-year anniversary. We founded the company in 2012 with a goal to provide a differentiated commitment and standard of service and a clear vision as to how we should engage in the market to drive value for borrowers, our lender customers, our employees, our shareholders, and other important stakeholders. From the beginning, we focused on building National MI in a sustainable, risk responsible manner, positioning our business to support our customers and their borrowers, and deliver for shareholders across all market cycles. And we have had tremendous success over the past ten years. We have helped over 1.4 million borrowers gain access to mortgage credit and open the door to affordable and sustainable home ownership in communities across the country. We have established a national customer franchise, with a foundation of partnership, trust, and innovation. We have built a talented, dedicated team, and established a culture of collaboration, integrity and performance, where our employees feel energized and valued. Our success over the past ten years traces directly to their hard work and dedication. We have developed a comprehensive credit risk management framework spanning individual risk underwriting, granular risk selection and pricing through Rate GPS, and the comprehensive use of reinsurance to ensure our performance across all market cycles. We have built a large, high-quality and high-performing insured portfolio with significant embedded value, with our outperformance through the stress of the COVID pandemic, highlighting the unique strength and positioning of our book. And we have delivered consistently strong financial results for our shareholders, achieving a unique combination of both high-growth and high returns. Looking forward, I believe National MI is well positioned to continue to lead with impact, innovation, and success. We expect that we will continue to build franchise value by delivering important solutions for our customers and their borrowers. That will continue to build embedded value by growing our insured portfolio with discipline and a balanced focus on risk and return. And that will continue to build value for our shareholders, delivering strong growth, consistent returns through the cycle, and compound growth in book value per share. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the first quarter, delivering significant new business production, strong growth in our high-quality and short portfolio, record financial results, and continued success in the capital and reinsurance markets. We generated $14.2 billion of NIW volume and ended the quarter with a record $158.9 billion of high-quality, high-performing Insurance-in-force. We achieved record GAAP net income of $67.7 million or $0.77 per diluted share. And record adjusted net income of $67.5 million also $0.77 per diluted share. GAAP return on equity for the quarter was 17.5% and adjusted ROE was 17.4%. We began to repurchase common stock under the authorization program that we announced in February. Earlier this week, we completed an excess of loss reinsurance transaction, securing layered risk protection on our most recent NIW production. The transaction builds upon the broad success that we've achieved in the risk transfer markets to date and provides us with approximately 290 million of incremental team responding capacity at an attractive cost of capital. Overall, the mortgage insurance market environment remains constructive despite the emergence of an increased set of macros across turns. Pricing is stable and balanced, allowing us to fully and fairly support borrowers, while at the same time appropriately protecting risk-adjusted returns and our ability to deliver long-term value for shareholders. Credit performance continues to trend in a favorable direction, with underwriting discipline remaining paramount across the mortgage market, record house price appreciation providing a sizable equity buffer, and broad resiliency in the job market supporting the consumer. And lenders in their borrowers are still turning to the MI industry in size to provide critical down-payment support. While the sharp increase in interest rates since the beginning of the year has caused refinancing activity to slow considerably, purchase demand remains strong. On balance, we anticipate some degree of pullback in total industry NIW this year, following the record levels of production, the sector delivered in 2020 and 2021. However, we still expect the MI market will be large by historical standards and that secular trends, the demographic tailwinds of the millennial generation, an increasing number of first-time home buyers in the market, rising home prices, and an increased need for down payment support will drive a compelling long-term opportunity for the industry. Rising rates have had dramatic and favorable impact on the persistency of our in-force portfolio. Our 12-month persistency ratio improved to 71.5% at March 31st, from 63.8% at year-end. Increasing persistency is a significant positive serving to increase the expected lifetime premium revenue, earnings capacity, and embedded value of our in-force portfolio. The average 30-year fixed rate mortgage is now 5.4%, which is well above the weighted average note rate in our in-force portfolio. We expect our persistency will continue to improve meaningfully and drive further increase in our embedded portfolio value as we progress through the year. The broader macro environment is dynamic, highlighted by persistent inflation, anticipated Fed tightening, lingering risk from the pandemic, and geopolitical instability with the war in Ukraine. Despite these headwinds, the job market remains healthy, consumer balance sheets are strong, house prices continue to appreciate at an accelerated pace, and underwriting standards remain rigorous. We're confident that we've made the right investments from day one to position our business and secure our outperformance across all market cycles. We've attracted a talented and dedicated team to drive our success every day. We've had the trust and partnership of our customers with our focus on service, value-added engagement, and technology leadership. We prioritize discipline and risk responsibility as we've grown our in-force portfolio, building the highest quality insured book in the MI industry by a wide margin. We've led with innovation in the risk transfer markets, securing comprehensive reinsurance coverage on nearly all of the policies we've ever originated. And we've established a strong balance sheet with a robust funding position and sizable regulatory capital buffer. Going forward, we believe we are well-positioned to continue to serve our customers and their borrowers, invest in our employees and their success, and deliver consistent growth, returns and value for our shareholders. With that, I'll turn it over to Ravi.

Thank you, Adam. We delivered record financial results in the first quarter with significant growth in our insured portfolio and continued strength in our credit performance, driving record revenue and bottom-line profitability. Net premiums earned, were a record $116.5 million, adjusted net income was a record $67.5 million or $0.77 per diluted share, and adjusted return on equity was 17.4%. We generated $14.2 billion of NIW in the first quarter, including $13.4 billion of purchase volume. Primary Insurance-in-force grew to a $158.9 billion up 4% from the end of the fourth quarter, and up 28% compared to the first quarter of 2021. 12-month persistency in our primary portfolio improved significantly, reaching 71.5% compared to 63.8% in the fourth quarter. We expect persistency will continue to improve meaningfully as we progress through the year. A real positive for us, given the strong credit profile and embedded value of our in-force portfolio. Net premiums earned in the first quarter were a $116.5 million compared to a $113.9 million in the fourth quarter. Approximately 95% of our premium revenue in the period can be traced to policies that were in force at the beginning of the quarter. This is recurring revenue, and highlights the value of improving persistency. As our insured portfolio extends, we're able to harvest an increased revenue stream from our in-force book for an extended period. We earned $2.9 million from the cancellation of single premium policies in the first quarter, compared to $5.1 million in the fourth quarter. Reported yield for the quarter was 30 basis points compared to 31 basis points in the fourth quarter, primarily reflecting the decreased contribution from cancellation earnings. Investment income was $10.2 million in the first quarter compared to $10 million in the fourth quarter. Underwriting and operating expenses were $32.9 million in the first quarter, compared to $38.8 million in the fourth quarter. We incurred $260,000 of expenses in connection with capital markets activity during the period. Adjusted underwriting and operating expenses were $32.6 million compared to $34.8 million in the fourth quarter. Our GAAP expense ratio was a record low 28.3% in the quarter, and our adjusted expense ratio was a record low 28%. Highlighting the significant operating leverage embedded in our business and the success we've achieved in efficiently managing our cost base as we have scaled our insured portfolio. Our credit performance continues to trend in a favorable direction. We had 5,238 defaults in our primary portfolio at March 31st, compared to 6,227 December 31st, and our default rate declined to less than 1% at quarter-end. We released a portion of the reserves we previously established for potential claims outcomes on our early COVID default population in the first quarter. As a result, we recognized a claims benefit of $620,000 with the reserves we established on new defaults in the period fully offset by the release. Interest expense in the quarter was $8 million. And we recorded a $93,000 gain from the change in the fair value of our warrant liability during the period. GAAP net income was a record $67.7 million or $0.77 per diluted share for the quarter. And our adjusted net income was a record $67.5 million or $0.77 per diluted share. Total cash and investments were $2.1 billion at quarter end, including a $106 million of cash and investments for the holding company. Shareholders' equity as of March 31st, was $1.5 billion and book value per share was $17.84. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $18.97, up 4% compared to the fourth-quarter, and 18% compared to the first-quarter of last year. In the first-quarter, we repurchased $5 million of our common stock. We have a $120 million of repurchase capacity remaining under the program we announced in February. Earlier this week, we entered into a $290 million excess of loss reinsurance agreement with a broad panel of highly rated reinsurers. The excess of loss agreement is functionally the same as an ILN and provides us with coverage on policies originated primarily between October 1st of 2021 and March 31 of this year, from a 2% attachment point up to a 6.75% maximum detachment. The transaction carries an estimated or 4.5% weighted average lifetime pre -tax cost. We're pleased to have achieved such a favorable outcome in the excess of loss market, and to have extended our comprehensive risk transfer program into this valuable segment of the reinsurance market. Reinsurance remains a core pillar of our credit risk management strategy, providing us with meaningful protection against losses and stress scenarios and an efficient source of growth capital for our business. At quarter-end, we reported total available assets under PMIERs of $2.1 billion and risk-based required assets of $1.3 billion. Excess available assets were $786 million. Our new excess of loss agreement is not included in these figures as it was completed after quarter-end. The $290 million tree will further bolster our excess position and provide even more funding runway for future periods. In summary, we've achieved record results in Insurance-in-force, net premiums earned, total revenue, expense ratio, net income, and adjusted net income. Our credit performance continues to stand out in a favorable way. And as we look ahead, we believe we are well positioned to continue delivering strong mid-teens returns and compounded book value-per-share growth for shareholders. With that let me turn it back to Adam.

Thank you, Ravi. Overall, we delivered strong results for the quarter, with significant new business production, an increasing persistency, driving growth in our high-quality insured portfolio, and favorable credit performance and expense discipline driving significant profitability and strong mid-teen returns. We've built National MI to outperform across all market cycles. Looking forward, we expect that rising interest rates and the accelerated pace of house price appreciation will remain dominant themes through the remainder of the year. Against this backdrop, we expect to continue building franchise value, leveraging our best-in-class team and technology leadership to further extend our customer reach. We expect to continue building embedded value, growing a high-quality, high-return insured portfolio with the benefit of both rapidly improving persistency and significant new business production. And we expect to continue building shareholder value, delivering strong growth, consistent returns, and compound growth in book value per share. Thank you for joining us today. I'll now ask the Operator to come back on so we can take your questions.

Thank you. [Operator Instructions] Our first question for today comes from Mark DeVries from Barclays.

Thanks. Adam, I think you indicated you see pricing is stable and balanced here, but just given some of the growing macro uncertainties in risk of recession, do you do you see that pricing is biased higher or do you think pricing already kind of adequately compensates you for these risks?

In us to question, maybe I'll talk about what we've done from a pricing standpoint most recently, and then trying to offer a view more broadly. As of now, we frequently fine-tune [Indiscernible] pricing as the risk environment and our risk appetite of all. We haven't made what I'll call broad changes to our pricing framework or rates at this stage, but we're always monitoring what's happening in the macro environment and also our own internal data to guide our decisioning. What we have done, I would say is some changes around the edges with a focus on higher-risk business and higher risk classes that we expect would be most directly impacted by inflation like downturn. Some of the focus on FICO and DTI markers. It's what we always do. We are obviously monitoring what's happening out there but right now, we still see balance. There's a number of macro headwinds that have emerged that we tallied inflation, interest rates, commodity prices, risk from the pandemic, supply chain disruptions. Balance that though -- by -- there's still a lot of really strong data that we're seeing, both from an internal stand point an externally, the job market remains healthy, consumer balance sheets are strong, and house prices are continuing to appreciate. So, we've made some changes on our end for certain risk buckets, I'd say on balance, we think we're more likely to see pricing move higher than it is to go down, but we've also always being on the leading-edge of increases in the face of stress, and perhaps generally more conservative in our posture there.

That's helpful. Next question, could you discuss COVID dynamic for the expense ratio and the operating leverage you discussed now that lapse rate is starting to moderate and you don't have to write as much new insurance to grow Insurance-in-force?

Sure. What I'd say is generally speaking, we've -- we've always aimed to manage our business with -- with significant discipline and we've -- we've had great success in leveraging into what is largely a fixed expense base as our portfolio grows. The marginal cost that it takes for us to write new business, whether it's volume in a record environment as we have for the last few years, or perhaps an environment that's a bit more moderated, doesn't change dramatically. If it was not really a, I'll call it a volume dynamic that's driving movement in expenses, it's really just a function of us being disciplined about where we deploy investments, where we choose to apply new expenses and see some real benefit as our portfolio continues to grow. From Q4 to Q1 -- the other item is that persistency factors in her helps to bolster portfolio growth. And because operating leverage is really about having a larger and larger portfolio with a larger and larger revenue base to absorb what is more of a fixed expense base. Obviously, persistency helps, but the other factor that comes into play, we mentioned it a few times on calls last year, is that when turnover in the portfolio was accelerated, it also causes us to recognize DAC amortization at a more accelerated rate. And in Q1 that dynamic normalized with interest rates moving higher, persistency, improving meaningfully. Part of the improvement that we saw from Q4 to Q1 is a normalization of our DAC amortization rate.

Got it. That's helpful. Thank you.

Thank you. Our next question comes from Rick Shane with JPMorgan.

Hi, guys. Thanks for taking my question. Look, I think Mark's touched on something important here, which is the plus and minus of the current environment in the challenges competitively in terms of what mortgage originators -- their incentives. Obviously, you have pricing power and underwriting power. But I'm curious if operationally, there are things that you do to manage risk during these periods of time.

It's a great question. [Indiscernible] a few things; one, in order for us to effectively manage risk in periods where there is more noise volatility and perhaps less certainty about the path ahead, we can't decide to action strategies today. We've always said from the start that in order to get the full benefit of all the risk management strategies that are available to us or that we've developed, we have to spend the time and make the decision to go live with them when the market is really strong. And so that's exactly what we've done, right? The benefit for us of having an individual risk underwriting approach where we can get our hands on loan files and evaluate the flow of risk in real-time coming through, to have Rate GPS and to source the overwhelming majority, north of 95% of our NIW volume through our pricing engine, where we can make real-time decisions about risk return, and mix that we want to see. And also, to have a comprehensive reinsurance program in place. All of those strategies that we've gone live with in prior periods are the ones that we see as being really valuable for us in a period where there's a little less certainty and a little bit more noise from a macro standpoint. And so, what we're doing today is not necessarily actioning new tools or strategies. It's utilizing all of that which we built in prior periods.

Okay. Very helpful answer, Adam. Thank you so much.

Our next question comes from Bose George with KBW.

Good afternoon. Can you talk about what you're seeing in the ILN market just in terms -- given some of the volatility there and in terms of the XOL transaction that you did? And as part of it, just to stay away from the ILN market until things come down a bit over there.

Hey, Bose, it's a good question. I'd say, like all public debt markets, the ILN market experienced some turbulence over the last few months. And I think we've always focused in all of our capital and reinsurance efforts on capping the most efficient sources of funding and attaining coverage that provides us with the most meaningful potential to absorb loss. At this point, and for this pool of policies, we found better execution in the XOL market than the ILN market. And we're really happy to have done the deal that we did. We've got great partners in the reinsurance market, we've been active there on the quota share side, for years, we've got a high-quality panel that supported this transaction at a really attractive cost of capital and it further diversifies our risk transfer program. But now we're not just quota share ILN, we're quota-share ILN and excess of loss. And we'll look to be programmatic, in how we layer on risk protection in the portfolio still going forward, but now we've got another outlet for us to consider and -- so we feel we got we found a better outlet in the excess of loss market, and that's something we'll consider each time we're looking to transact in future periods.

Okay great makes sense thanks. And then actually you noted that you started repurchases. Is it anything material? And just given your growth rates in terms of more material purchases, when could we expect that?

Sure. So, we announced a $125 million authorization in February. We did 5 million in call it the month-and-a-half, it was a mid-February announcement from that point through when we went into blackout. And we said at the time that the authorization runs through the end of next year that we'd expect to be roughly ratable through the course of the authorization period. And that's still our plan is to focus on executing the $120 million that remains on a roughly ratable timeline through the remaining life of the authorization period.

Okay. Great. Thanks.

Thank you. Our next question comes from Ryan Gilbert with BTIG.

Hi. Thanks. Good afternoon, guys. Adam was hoping you could just I guess, expand on your views on how you think, the -- the purchase origination market plays out over the rest of the year and I guess the extent to which you -- your company and MI generally you can gain market share given increased affordability challenges?

Yes. It's a good question. And I would say without our crystal ball is clearer than anybody else's. We've seen balance, right? We certainly have an environment where there's still a number of drivers pushing borrowers into the market from a purchase standpoint. I think there's still a fear that rates could move higher, that house prices will move higher, and so it's bringing buyers into the market to get ahead of that. There is a dynamic which we see, which is rent. Rent is increasing meaningfully and owning a home with a 30-year fixed rate mortgage becomes a form of rent control to a degree, right? You now have fixed payment with certainty and security. And beyond that, the demographic drivers, there's a large number of people who are reaching the age where we typically see them active as first-time home buyers. All of that still continues to come through. And it's balanced by the fact that affordability is a little more stretched with rates moving higher and price is continuing to increase. We think on balance that we'll probably see a purchase market that is larger overall than it was last year, but just modestly so, right? Where it's overall purchase origination volume, not NIW for purchase. And within that, I think the opportunity is still there for us inside as an industry and as a company, to really provide support as prices move higher, as rates move higher, there is an increasing need for down payment support. And so, we're really excited at the opportunity that we have through the course of the year to continue to support purchase borrowers.

Okay great thanks for that. Second question is on your reserve per default, looks like it was up pretty considerably on a year-over-year basis and quarter-over-quarter as well. Anything to call out there? And how would you expect, that to trend over the course of '22?

Sure, look our reserve -- just to make sure I understand on the reserve per default that we're carrying at the end of quarter?

Yeah, that's correct.

Sure.

Yeah

The reserve that we have for each default, obviously, it reflects the reserve on both our existing default population from earlier periods that remain delinquent at quarter-end, and also the reserving decisions that we've made on the new defaults that emerged in Q1. And even though we did release some of the reserves that we were carrying on early COVID defaults and have a really strong quarter from an overall credit performance standpoint and claims expense standpoint. We did continue to age all of the other delinquencies that remained in default status. And so, it's really that as the aging of the carryover defaults, if you will, that increases the reserve per default over time. So, at quarter-end, think we were carrying $19,500 per default compared to $16,600 at December 31st. And it's it's entirely the aging of the defaults that carried from last year into and through the first quarter balanced a bit by the reserve release that we had during the period.

Okay, great, thanks very much.

Thank you. [Operator instructions] Our next question comes from Doug Harter with Credit Suisse.

Thanks. You mentioned that lower DAC amortization kind of drove -- was a contributor to the lower operating expenses. I guess can you just quantify how much of that? And that is this level of operating expense the right run rate going forward?

Yes, Doug, it's a good question. I'd say that most of the improvement we saw from Q4 to Q1 related to the DAC dynamics. There were their other items that came through, but largely that balanced each other out, some moving up, some moving down. Payroll costs in Q1 tend to be a bit higher than the are for the remainder of the year for us; there's that FICO reset. P&E and the timing of certain IT projects though, coming in a bit behind, and so all of those balanced out. In terms of what you should expect for the remainder of the year, we do expect to see some increase in overall expense level as we continue to invest in our growth and see a continued rebound in a portion, of our typical travel and entertainment spend and some other payroll costs, given the current environment. All that, we say, is going to be balanced by the general discipline we take to managing expenses and the benefits that we realize under our outsourcing arrangement on the IT side. Our goal is to be as efficient as possible and we may see -- we may see a modest increase quarter-to-quarter as we progress through the year.

Great. Thank you, Adam.

Our next question comes from Mark Hughes with Truist Securities.

Good afternoon. This is Michael Ramirez in for Mark, thanks for taking our questions today. Curious, I guess. You mentioned the mortgage interest rate, interest insurance market remains constructive in pricing is stable and balanced. Given the dramatic change in mortgage rates, you anticipate making any adjustments to pricing through the year to retain business and keep market share?

No. It's question. We don't price our policies based on the underlying note rate. We priced our policy is really based on our goals from risk-adjusted return standpoint. And the -- our policies are in yearly renewable policies like other pockets of the insurance market. So, when we put insurance in place on loan, generally speaking, the coverage remains outstanding for an extended period. It's cancelable under certain circumstances as as the loan ages and it cancels at the loan itself is retired because we are refinancing. But our policy pricing doesn't really impact whether or not the loan refinances and whether or not the policy cancels. So, we're much more focused, not on the interest rate environment itself in isolation, but instead on the macro backdrop in our expectations for credit performance reach [Indiscernible].

Okay. Thank you for that. Maybe one higher-level question with mortgage rates increasing, especially increasing through the year, especially that some funds might be -- they are expected to increase through the end of the year in '22, it seems refinance activity will slow from current low levels, for the overall mortgage market. Do you -- I'm just curious, do you benefit from a period of low refinance activity, whereas the current PMI mortgages, are unable to refinance and possibly get out from under PMI?

Yes. So, it's a great question and certainly one of the items that we've been highlighting, we would call that persistency. It's the stickiness of our policy. So, the slower the rate of turnover in the mortgages that we insure, the stickier our policies become. And that is critically important because the longer we hang onto policies, they continue to provide us with a premium revenue stream. And it really has the effect of increasing the lifetime earnings capacity of our portfolio and in increasing the embedded value, as we think about it, of our in-force book of business. And so generally speaking, increasing persistency is a real positive, particularly when the credit profile of the loans that we have in our portfolio, the borrower strength, the underlying equity position because of past HPA, all of it is so strong that the increased revenue stream that pumps from extension of those policies far, far outweighs any additional claims that might come through because policies have a longer life themselves.

Okay. Thank you for that. That's extremely helpful. Maybe just one more from us, hopefully you could share. What have you seen in terms of recent new business trends in the last few weeks this is mortgage rates have gone up? Any change in recent momentum?

No. I would say we're still seeing, I'll call it, seasonal movement come through. Repurchase activity has been low for some time and that hasn't changed. It can only go so low, and we're already at a major from a ReFi activity standpoint. Purchase volumes remain constructive, I'd say, but we're also at the same time seeing if you look back to where things were in 2020 and 2021, really 2021, it's obviously slower. But seasonality is still coming through with general strength in the spring season, purchase market remains strong and constructive, and ReFi is already down so low and it, it just remains there.

Okay. Great. Thanks for taking our questions.

I'm showing no further questions at this time. Now, I would like to turn the conference back to management.

Well, thank you again for joining us. We'll be participating in the BTIG Housing Conference on May 10th, and the Truist Securities Financial Services Conference on May 25, both in New York. As well as the KBW Real Estate Finance and Technology Conference virtually on May 26th. We look forward to speaking with you again soon.

This concludes today's conference call. Thank you for participating. You may now disconnect.