NMI Holdings, Inc. (NMIH) Q4 2022 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the NMI Holdings, Inc. Fourth Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to John Swenson. Please go ahead, sir.

Thank you, operator. Good afternoon, and welcome to the 2022 fourth quarter conference call for National MI. I’m John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Executive Chairman; Adam Pollitzer, President and Chief Executive Officer; Ravi Mallela, Chief Financial Officer; and Nick Realmuto, our Controller. Financial results for the quarter were released after the close today. The press release may be accessed on NMI’s website located at nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC. If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that all on this call, we refer to certain non-GAAP measures. In today’s press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP. Now I’ll turn the call over to Brad.

Thank you, John, and good afternoon, everyone. I’m pleased to report that in the fourth quarter, National MI again delivered strong operating performance, significant growth in our insured portfolio and standout financial results, capping a year of tremendous success. We closed 2022 with $59 billion of total NIW volume and a record $184 billion of high quality, high performing primary insurance-in-force. We delivered broad success in customer development, continued to innovate in the reinsurance market and once again achieved industry-leading credit performance. We generated a record $292.9 million of GAAP net income in 2022, up 27% compared to 2021, and delivered an 18.4% return on equity for the year. 2022 marked National MI’s 10-year anniversary and our success during the year is particularly gratifying. 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 our 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 perform across all market cycles. This approach has served us well, and we closed 2022 in a position of tremendous growth. Looking ahead into 2023, we all recognize that there is risk in the economy broadly and the housing market specifically. However, we’re confident in our ability to deliver strong performance through the cycle. We have an exceptionally high quality insured portfolio. Our existing borrowers have strong credit profiles, significant embedded equity in their homes and most benefit from having locked in record low 30-year fixed rate mortgages with manageable debt service obligations. Our exposure sits under the protection of a broad risk transfer umbrella and is further supported by the strength of our balance sheet and significant earnings power of our franchise. Looking out over the longer term, I’m excited at the opportunity we have to deliver on our next 10 years of success. National MI is well positioned to continue to lead with impact and drive value for our people, our customers and their borrowers and our shareholders. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continues to outperform in the fourth quarter, delivering significant new business production, strong growth in our high quality insured portfolio and standout financial success. We generated $10.7 billion of NIW volume and ended the period with a record $184 billion of high quality, high performing insurance-in-force. Total revenue in the fourth quarter was a record $133.1 million, and we delivered GAAP net income of $72.9 million or $0.86 per diluted share and an 18.6% return on equity during the period. Overall, we had an exceptionally strong quarter and closed 2022 in a position of real strength. We generated $59 billion of NIW volume during the year and exited with $184 billion of insurance-in-force, a portfolio with significant and growing embedded value. We now have nearly 600,000 policies outstanding, and it helped a record number of borrowers gain access to housing at a time when they needed us most. We enjoyed continued momentum and growth in our customer franchise during the year, activating 120 new lenders and ending the year with over 1,400 active accounts. We continue to innovate and find success and broad support in the capital and reinsurance markets, executing five new reinsurance transactions during the year and successfully progressing along our capital road map with the introduction of our inaugural share repurchase program. We were once again recognized as a great place to work, our seventh consecutive award, a reflection of our unique corporate culture and a testament to the hard work and dedication of our talented team. And we achieved record full year financial results, generating $523 million of total revenue, up 8% compared to 2021. $293 million of GAAP net income, up 27% compared to 2021 and an 18.4% ROE. Looking out, however, risk remains in the economy and the housing market. Mortgage rates, despite a modest pullback to start the year, continued to strain affordability for many prospective borrowers and weigh on origination activity and house prices have begun to trend down across most local markets. As we plan for 2023, we expect that private MI industry NIW will scale to a level similar to the pre-pandemic purchase markets of 2018 and 2019. And that our claim costs will normalize after an extended period of record performance with the growth and natural seasoning of our portfolio and the potential for development in the macro environment. At the same time, we’re confident. We have a strong customer franchise, a talented team driving us forward every day, an exceptionally high quality book covered by a comprehensive set of risk transfer solutions, a robust balance sheet supported by the significant earnings power of our platform, and we have been proactive doing even more from a pricing, risk selection and reinsurance standpoint as the macro environment has evolved. More broadly, we remain encouraged by the discipline that we see across the private MI market. Underwriting standards remain rigorous and pricing continues to ladder higher in view of potential macro risks. This is a time when Rate GPS and the broader adoption of rate engines across the mortgage insurance industry proves even more valuable. We have the ability to dynamically set our credit box and define our risk appetite and the flexibility to make the rate adjustments that we believe are appropriate in real time. In the fourth quarter, we again increased policy pricing and made additional changes to further manage our mix of new business by risk cohort and geography. As we look out over the long-term, we see a tremendous opportunity to continue to lead in an attractive and growing private MI market. Over time, affordability will find a point of balance, core demographic trends will drive demand, origination volume will rebound, the housing market will grow and borrowers will need down payment support. National MI will be there, continuing to serve our customers and their borrowers, invest in our employees and their success and deliver on the significant opportunity we have to drive value for our shareholders. With that, I’ll turn it over to Ravi.

Thank you, Adam. We delivered standout financial results in the fourth quarter with significant new business production and growth in our high quality insured portfolio, strong top line performance, favorable credit experience, record expense efficiency and strong bottom line profitability and returns. Total revenue in the fourth quarter was $133.1 million. GAAP net income was $72.9 million or $0.86 per diluted share, and our return on equity was 18.6%. We generated $10.7 billion of NIW and our primary insurance-in-force grew to $184 billion, up 3% from the end of the third quarter and up 21%, compared to the fourth quarter of 2021. 12-month persistency in our primary portfolio improved again reaching 83.5%, compared to 80.1% in the third quarter. We expect portfolio persistency will remain strong through 2023. Net premiums earned in the fourth quarter were $119.6 million, compared to $118.3 million in the third quarter. We earned $1.5 million from the cancellation of single premium policies in the fourth quarter, compared to $1.8 million in the third quarter. Reported yield for the quarter was 26 basis points, compared to 27 basis points in the third quarter, reflecting the introduction of our new excess of loss reinsurance agreement during the period and a decreased contribution from cancellation earnings. Investment income was $13.3 million in the fourth quarter, compared to $11.9 million in the third quarter. We saw a continued acceleration in investment income during the quarter as we deployed new cash flows and reinvested rolling maturities at incrementally higher new money rates. Underwriting and operating expenses were $26.7 million in the fourth quarter, compared to $27.1 million in the third quarter, and our expense ratio was a record low of 22.3%. We had 4,449 defaults in our primary portfolio at December 31, compared to 4,096 at September 30, and our default rate increased modestly from 71 basis points in the third quarter to 75 basis points in the fourth quarter. Claims expense in the fourth quarter was $3.4 million, compared to a net claims benefit of $3.4 million in the third quarter. Pure activity during the quarter remained strong, and we again released a portion of the reserves we previously established for potential claims outcomes on our early COVID default population. At the same time, we continue to take a conservative stance when setting reserves across our remaining default population in light of the evolving risk environment. Interest expense in the quarter was $8 million. Net income was $72.9 million or $0.86 per diluted share for the quarter, compared to $0.90 per diluted share in the third quarter and $0.69 per diluted share in the fourth quarter of 2021. Total cash and investments were $2.1 billion at year-end, including $89 million of cash and investments at the holding company. We have $400 million of outstanding senior notes and our $250 million revolving credit facility remains undrawn and fully available. Shareholders’ equity as of December 31 was $1.6 billion and book value per share was $19.31. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $21.76, up 4% compared to the third quarter and 19% compared to the fourth quarter of last year. In the fourth quarter, we repurchased $5.4 million of common stock, retiring 255,000 shares at an average price of $21.05. For the full year, we repurchased a total of $57 million of stock, retiring 2.9 million shares at an average price of $19.34. We have $68 million of repurchase capacity remaining under our original $125 million authorization. At year-end, we reported total available assets under PMIERs of $2.4 billion and risk-based required assets of $1.2 billion. Excess available assets were $1.2 billion. In summary, we delivered standout financial results during the fourth quarter with significant growth in our high quality insured portfolio and strong top line performance, favorable credit experience and record expense efficiency, driving strong bottom line profitability and returns. With that, let me turn it back to Adam.

Thank you, Ravi. Overall, we had a terrific quarter. Once again delivering significant new business production, strong growth in our high quality insured portfolio and standout financial performance, capping a record year in which we delivered broad success in customer development, continue to innovate in the reinsurance market, once again achieved industry-leading credit performance and generated exceptionally strong financial results with record profitability, significant growth in book value per share and an 18.4% return on equity. As we look ahead, we’re confident in our ability to continue to lead with impact and deliver value for our people, our customers and their borrowers and our shareholders. Thank you for joining us today. I’ll now ask the operator to come back on so we can take your questions.

Thank you, sir. We’ll now begin the question-and-answer session. [Operator Instructions] The first question comes from Mark DeVries with Barclays. Please go ahead.

Yes. Thanks. Could you talk about how you’re thinking about the use of reinsurance this year just given the macro uncertainty you highlighted and the pricing available to you in reinsurance markets right now?

Certainly. This is Ravi. Thanks for the question, Mark. I think we think about reinsurance as a very fundamental part of what we do every day. In 2023, we expect to be active and programmatic as we always have been. It’s important to note that we have our existing quota share, which we renewed in 2023 on attractive terms. And we’ve been in 2022, we’ve been active in getting XOL coverage on our most recent production. And when we look to 2023, we look to being programmatic in new production, getting covered under XOL and also possibly if – on ILNs as the conditions improve. And XOLs are – have been really great for us in 2022 because they allow us to quickly bring recent production under coverage. It compresses the cycle time between production and risk transfer. And I would say just broadly on the market, capacity has been available on pretty constructive terms. And look, I mean, pricing and risk appetite among the markets have evolved as the macro environment has evolved. But we’ve been able to securely – secure coverage on a pretty large portion of what we produced in 2022. And I think overall, we feel that the durability of the market has been demonstrated by our ability to access the market on a pretty regular basis.

Okay. Got it. And then I know you don’t target market share, but it looks like you gave a fair amount back this quarter relative to last although back to kind of levels that have been more consistent with the last couple of years. Can you just talk about what might have driven that kind of drop in market share this quarter?

Yes. Mark, we’re going to give you the common refrain, which is we do not manage the market share. We never have and that’s not our plan going forward. Instead, when we look at it, we’re delighted with the results that we achieved in the quarter. We wrote $10.7 billion of high quality new business. We’re in the market working hard to support our customers and their borrowers every day. And importantly, we drove strong quarter-on-quarter growth in our insured portfolio. That’s really the key for us, right? Its stacking high quality new production, driving is growth. That’s what’s going to drive revenue expansion. We’re going to be disciplined around risk around expenses and capital alongside of that. And when we can deliver an 18.6% ROE, it’s really proof that the strategy we have and the market engagement that we undertake is working well.

Okay, fair enough. Thanks.

The next question comes from Bose George with KBW. Please go ahead.

Hey, everyone. Good afternoon. I wanted to ask about your provision for new notices. It looked like it was up a fair amount. Is that a good run rate to think about for 2023? And also, is there any change in the default declaim assumption?

Yes. So Bose, it’s a good question. Look, for reserving purposes, we’ve always aimed to take an appropriate, obviously, but also what we would say is an appropriately conservative view. And in practice, that means we generally anchor more to our downside scenarios when setting our position. That’s always the case. It’s something we’ve talked about for a while now. But in an evolving market, like the one we see now where call it, risk continues to emerge. There are reasons to be optimistic, certainly, but risk is also out there. That proclivity to anchor more to the downside and be perhaps a bit more conservative becomes even more pronounced. And at December 31, that’s what we did. We continue to embed a conservative forward HPA assumption to reflect the likelihood that we’ll see further house price declines nationally, going forward. In terms of the specific underlying assumptions, recall, we don’t apply a blanket homogeneous default-to-claim rate assumption for our new defaults. Every loan in our portfolio, every loan in the default population, every one of the new defaults that came through in the quarter has its own risk characteristics and is individually evaluated and modeled. The average default-to-claim rate on new notices in the period happens to work out to something it worked out to be roughly 28%. That’s up a bit from where we were at the end of the third quarter. It reflects a bit of the profile of the newly defaulted loans as well as the development in the macro environment quarter-on-quarter. As for a forward steer, we don’t provide guidance. I’ll say that overall, we remain really encouraged by the credit performance of our portfolio, including the trends that we see in the default population.

Okay. Great. That’s very helpful. Thanks. And then just on the expense ratio, any guidance there for 2023? And actually this quarter, was there anything unusual? I mean, usually, we see a little bit of a bump up in the fourth quarter.

This is Ravi. I’ll take that question. Quarter-over-quarter in terms of the decline, I wouldn’t point to anything big in specific. Look, we had lower NIW that generally leads to lower underwriting costs. And we’re – we have a slightly lower head count. I think we finished the year with 242 people. And so really, those are the big drivers of the difference between what we saw in Q3, which was $27.1 million in expenses down to $26.7 million in Q4. Just with respect to 2023, look, we’re always focused on managing our business efficiently. Q4 was a record low efficient – expense ratio of 22.3%. And if we look out to 2023, we’re going to see modest growth just because we’re always investing in our people and in our systems and risk management strategies throughout the year. So we expect that OpEx will have a modest growth, but we’re constantly focused on managing our expenses in a thoughtful manner.

Okay, great. Thanks a lot.

The next question comes from Rick Shane with JPMorgan. Please go ahead.

Thanks guys for taking my question. I just wanted to delve in a little bit more following up on Bose’s questions on credit. Obviously, there’s a lot going on in terms of cohort divergence, geographic divergence, et cetera. I’m curious when you think about the portfolio, either from a vintage perspective, from a geographic perspective, from some sort of risk perspective, where do you see the greatest concern right now?

Yes. Look, I’ll just – I’ll reiterate, Rick, it’s a good question. Obviously, one that we’re focused on. We really are encouraged by the performance that we’re seeing in the portfolio overall. In terms of where are we focused? Where might we see greater experience as we roll through. Look, naturally, higher-risk cohorts that we would define as being borrowers with lower FICO scores, borrow with higher LTVs, borrowers with higher debt-to-income ratios. Those that have the presence of layered risk characteristics, more than one high-risk marker. We tend to see performance amongst those cohorts be worse at all times and particularly so in periods of stress. That’s something that we are – we’re monitoring. From a geographic standpoint, there are markets that we think will face a more severe pullback in house prices than others. And so those are the pockets that we’re expecting. And from a vintage standpoint, those borrowers who have the least amount of time to build their equity position. And so it’s nothing new, but those categories that we’ve always identified as higher risk categories and in particular, those who come through more recently are the ones that we’ll likely see more experience as we roll forward.

Adam, maybe just one thing to add on it is just as we start to see the seasoning of the 2020 and 2021 books, now they have a tremendous amount of embedded equity in those books. But we will see some normalized sort of loss experience that occurs as a result of seasoning of that book, nothing large that we expect or outsized in particular. But as they season, we will see defaults in that population as they get older and older and more and more mature.

Got it. It’s very helpful. And again, given the context of the very modest default rate, it’s hard to pick out any trends in there. Pulling the thread just a little bit more. And again, understanding the 2020 and 2021 vintages have seasoned very well. When you think about the 2022 vintage, is there anything – is there enough information at this point to see any trends? Is it sort of a normal vintage? Is it looking a little bit better, a little bit worse than you would expect historically?

Rick, we always focus on constructing a high-quality portfolio, and we consider our aggregations by individual risk markers FICO, LTV, DTI layered risk and that was the case when we built the 2022 portfolio. There’s nothing that stands out now. The one thing that we note is the borrowers who were supporting our 2022 production, simply have less embedded equity in their homes than the borrowers from earlier vintages.

Okay. Appreciate it. Thanks, Adam.

The next question comes from Mark Hughes with Truist. Please go ahead.

Yes, thank you. Good afternoon. Adam, when you think about yield, a lot of moving parts, obviously, your pricing going up, looks like you’re a bit more disciplined in your underwriting reinsurance costs are obviously up. I wonder if you could give us some sense of how those different forces might impact the next little bit here.

Mark, I’m going to give you a bit of a non-answer to start, but I’m going to acknowledge it and then I’ll give you something a little more specific. Look, I think we certainly understand the focus on yield. The one thing that I’d encourage you to do is to remember that it’s not a number that lives in isolation. As you noted, in a risk-based pricing environment, our yield is a function of the quality of the business that we choose to prioritize and it’s also going to naturally be influenced by things like persistency and the cancellation dynamics in our high-quality portfolio. And also because of how our reinsurance treaties, in particular the quota shares are structured, where we get a back-end profit commission. It’s actually also impacted by our loss experience and the reserving decisions that we make. And so when we think about yield and when we think about what it’s going to be going forward, we’re, in fact, most focused on making sure that we’re writing high-quality NIW volume with attractive risk-adjusted return characteristics that were driving the growth we need to see in our insured portfolio and that we’re obviously staying focused on risk management strategies. And when we do that and we succeed as we’ve been doing, we’ll see bottom line growth and strong returns for shareholders. In terms of how yield will roll going forward. Look, we talked about it on the call in our prepared remarks. We did ladder rates higher again in the fourth quarter where we believed it was necessary and appropriate. And in terms of the yield impact of those decisions, higher rates will support yield, and so we expect our core yield, which strips away a lot of the noise of our reinsurance program and cancellation earnings will be generally stable through the year. And our recent rate actions improving persistency will provide valuable support that’s going to be balanced a bit by the exceptionally high quality of our current production. And obviously in a risk-based pricing environment, high quality production naturally comes with a different rate profile. But overall we’re encouraged by what we’re achieving in the market today from a risk and from a rate pricing standpoint. And we’re optimistic as to the trend we’ll see in our core yield.

Okay. So maybe the core yield is steady, but with the quality of the underwriting, maybe that shaves it a little bit. Is that what I’m hearing you say?

Yes. So core yield is going to really – in terms of shaving it a little bit, the things that’ll move net yield around core yield are going to be the decisions we make on execution in the reinsurance market. Our loss experience and how that flows through in terms of the profit commission on our existing reinsurance structures and then cancellation earnings, which they’ll likely trend down because persistency continues to improve.

And then in investment income, I think you’d suggested it would continue to trend up through the quarter. Any kind of early thoughts on how that will play-out in the first quarter here on a go forward basis? I don’t know if there’s any specific you can provide, but just curious how much it might have improved with the new money yield?

Well, certainly we’ve benefited pretty significantly from the opportunity to capture yield relative to buying the same types of products that we’re buying, same bond types, ratings, certainly rolling into new money yields at the same duration. We’re seeing new money yields coming in at around 4.5% to 5%. And in 2022, we had about $400 million of cash flow from operations and maturities over the course of the year. And that just gave us a pretty sizable benefit. And we’ll probably see rateably that type of ability to roll into new money yields over the course of 2023.

That’s helpful. Thank you.

The next question comes from Arren Cyganovich with Citi. Please go ahead.

Thanks. Adam, I think you said in your prepared remarks that the expectation would be the industry that new insurance written would be more kind of in the 2018, 2019 levels. Is there obviously a more challenging rate environment for first time home buyers? But is there something else that’s kind of driving, I’d say more of that level of challenge for the first time home buyers besides just the rate in home prices?

Yes. I mean, right now it’s rate, it’s home prices, it’s affordability. At some point we’ll find equilibrium. That’s probably going to be through a combination of price, right? Obviously, we see prices developing potentially rate, we don’t know what certainty. And also over time, income will grow as well. And I just want to specify though, the steer that I gave on overall industry NIW wasn’t in line with 2018 and 2019. It was in line with the purchase markets from 2018 and 2019. So if you go back and you strip out refinancing activity and the volume that that refinancing activity drove for the industry in 2018 and 2019, you end up with purchase markets in 2018 that was $272 billion, and in 2019 that was $309 billion. And so we expect that we’ll see a private MI market this year of roughly equivalent size, call it, give or take around $300 billion. And just to give you some context, in 2018 and 2019 total loan origination purchased, origination was roughly $1.2 trillion to $1.3 trillion. And that’s our expectation for what we’ll see as a purchase market overall in 2023, which gets you to roughly equivalent size for the MI market as those years.

Got it. That’s helpful. Thank you.

[Operator Instructions] The next question comes from Geoffrey Dunn with Dowling & Partners. Please go ahead.

Thanks. Just firstly a clarification, Ravi, on the expense guidance for modest growth, is that net of seating commissions or is that on a gross basis?

On a gross basis and the impact of the – what you’re referring to, the season QSR, I believe.

Okay, so a reported basis. Great.

Yes.

And then Adam, I’m curious of your opinion on market pricing with respect to cumulative loss assumptions. Just average what you’re seeing across the industry. The norm years ago used to be maybe a 2% cumulative assumption, and the sense is it probably crept down to 1% over the last several years as performance was so good. Do you have an opinion on where we may be on average in the market now? Are we back into like a 1.5%, 2% range? Are we still below that? I’m trying to get an idea of how companies are reflecting their expectations for normal in the pricing you’re seeing day out – day in, day out now after two, three quarters of rate increases.

Yes. Geoff, I can’t give you a steer as to how and a perspective on how our competitors are thinking about pricing and how they’re modeling things out. Obviously, every company has its own perspective on risk on necessary return, right? On what an appropriate risk adjusted return is. And a lot of that’s going to be informed by differences in views on expected loss outcomes by each piece of business. Now the advent of rate engines, it’s even more difficult to talk in generalized terms because we’re pricing for over 1 million different individual loan per mutations. As a general matter though, what I would say is we’ve really been encouraged by what we would observe as discipline across the market. And what I would characterize as a fairly deliberate approach that the industry has taken in response to an evolving risk environment, rates have been hardening, they’ve been laddering higher as macro volatility and concerns about the go forward have grown. And importantly for us, we’ve been able to achieve incremental price where we believe it’s both necessary and appropriate. And so can’t give you a steer on what does this mean for long-term claims experience or how do you map pricing to a generalized claim rate assumption. But it’s moving in the right direction. There’s probably both a need and an opportunity in certain markets, in certain risk cohorts to capture incremental price. And we’ll have to see, obviously a lot of that will be driven by where we ultimately land from a macro standpoint and how default experience actually develops.

Okay. Thanks.

This concludes our question-and-answer session. I would like to turn the conference back over to the management for any closing remarks.

Well, thank you again for joining us. We’ll be participating in the RBC Global Financial Institutions Conference on March 8. We look forward to speaking with you again soon.

The conference has now concluded. Thank you for attending today’s presentation. You may all now disconnect.