Q3 2020 NMI Holdings Inc Earnings Call

[music].

Good morning, ladies and gentlemen, and welcome to the end and I Holdings, Inc. Quite or 2028 East 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 follow at that time, if anyone should require assistance during the conference. Please.

<unk> five zero on you catch Dawn telephone I would know like to charity conference over to your host Mister Johnson said. Please go ahead to it.

Thank you <unk> <unk>, good afternoon, and welcome to the 2023rd quarter Conference call for National M. I.

John Swanson, Vice President of Investor Relations in Treasury.

Joining us on the call today are registered executive chairman podium Merkle C E O Adam Pulitzer, Our Chief Financial Officer, and Julie Norberg our controller.

Financial results for the quarter were released after the closed today. The press release may be accessed <unk> website located at national on my Dot Com under the investors staff.

During the course of this call we 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 the actual results or trends to differ materially from those discussed on the call can be found on our website or through a regulatory filings with the SEC.

The traced the success of our comprehensive credit risk management framework.

We built national M I to be a credible and sustainable counterparty through all market cycles.

From day, one we focused on building, a durable franchise and a risk responsible manner.

We have worked hard to establish a comprehensive credit risk management framework.

We see real strength in the housing market.

Demand is robust house prices continue to rise and record low interest rates are giving more Americans a chance to access homeownership.

Election in every aspect of our business.

Has been validated by the strong credit performance of our in force portfolio.

Our balance sheet strength and funding profile have proven to be durable.

With standout execution in the capital and reinsurance markets.

Broad resiliency in the housing market.

Our volume is at record levels and the value of our new business production is equally strong.

Our record Eni W is matched by continued pricing discipline stringent underwriting standards and attractive risk adjusted returns on new business flow.

This is a uniquely valuable new business environment.

In the third quarter, we activated 25, new lenders.

And reported primary insurance in force of 104.5 billion at September Thirtyth.

Net premiums earned were 98.8 million adjusted net income was $40.4 million or 47 cents per diluted share and adjusted return on equity was 12.6%.

Total Eni W. of 18.5 billion included $16.5 billion of monthly production.

Purchase originations accounted for 69% of our volume in the quarter up from 59% in the second quarter consistent with the accelerating pace of purchase activity, we've seen across the housing market.

As Claudia mentioned, the new business environment is exceptionally strong.

Investment income was $8.3 million in the third quarter compared to $7.1 million in the second quarter.

It used by the Gses to ease the transition out of forbearance and.

And broad resiliency in the housing market and accelerating home price appreciation.

Lifetime pretax cost and.

And is similar in structure to our first for transactions, providing us with real working layer risk production and capital benefit.

The transaction further insulates, our balance sheet and <unk> physician against the impact of future forbearance activity in default experience are.

The mortgage insurance risk.

And highlights the confidence that investors have in our individual risk underwriting approach and consistent use of right GPS to target higher quality volume.

Total cash and investments were 1.9 billion at quarter end, including $75 million of cash and investments at the holding company.

Shareholders equity at the end of the third quarter was 1.3 billion equal to $15 42 per share.

We have $400 million outstanding senior notes and Upsized are revolving credit facility to 110 million following the close of the quarter.

A revolver remains undrawn and fully available.

At quarter, and we reported total available assets under P mirrors of 1.7 billion and risk base required assets of $991 million.

Access available assets were 681 million.

The island issuance that we closed last week is not included in these figures as as as it was completed after quarter and the $242 million offering will further bolster our excess position and provide even more funding runway for future periods.

Overall, we delivered strong results for the quarter with a record volume and value of new business production and encouraging credit performance and are enforced portfolio driving resiliency in our earnings.

We continued to differentiate with our success in the island market.

And the strength of our current funding profile and comprehensive and uniquely expansive nature of our reinsurance program provide us with significant team years and state regulatory capital runway with that I'll turn it back to Claudia.

Thanks, Adam.

Clothing has brought into sharp focus the important role that national my and the broader private mortgage insurance industry play in supporting a healthy and punching housing finance system that works for bars lenders and taxpayers across all market cycles.

We came into the pandemic in a position of strength.

All stirred by the conservatism with which we have managed our business and.

And we have continued to provide support and build value through this period.

Prices will be down modestly over the next two years, we think it's an appropriate lead conservative stance, but as more data comes in that reinforces the view around the resiliency of the housing market in particular, the accelerating path of home price appreciation those will be items that we monitor going forward.

Okay helpful.

The expense ratio was down bus.

Even after adjusting for the capital markets transaction costs was there anything else.

Since we're calling out that loaded the operating wherever Jesus just a cloud ulcers.

Having to turn your book or with Lisa.

Then.

Putting the leverage.

So that would be hard volume slow.

Yeah in the quarter I would say the increase that we saw.

In our overall expenses, which way to get on sort of how the development of the operating leverage unfolded part of it was related to just the growth in our portfolio and some of the variable costs, albeit not significant but there are variable costs associated with new business production. We also had a modest benefit in the second quarter that didn't continue to come through in the third quarter related to the <unk>.

Start of our partnership with Tcs, we signed the contract on March 31st with them, but expenses ramped through the quarter alongside the ramp of that engagement and our queue three expenses reflected a full quarters work.

Of that.

Of that relationship in terms of our operating leverage going forward. We fully expect that we will continue to see strong growth in our insured portfolio that over time that will drive strong growth in our premium revenue that far outpaces the necessary investments that we need to make or the growth in our operating expenses and that operating leverage will continue to carry forward.

Great. Thank you.

Your next question comes from <unk> from Jamie Your line is okay.

Hey, everybody. Thanks for taking my questions. This afternoon.

I'm curious Adam one of the things that you highlighted.

And your comments was the demand for housing driven by.

The urban Exodus.

I'm curious if you are seen any distortions in terms of either.

Home prices or.

Default rates related to urban environments versus.

Suburban or far suburb environments.

Environments.

Yeah.

We did highlight that and it is certainly something that's driving an increased amount of purchase activity I would say much more what we're seeing really driving the skyrocketing demand is well I'll call. It the emotional drive towards homeownership that in this environment. The houses everything Brad use the phrase that in order to shelter in place you need shelter and that's something we've come to talk about <unk>.

Eternally, that's really driving that emotional need right now the house is it's where you work.

Where your kids go to school, it's where you go on dates with your significant other and if that emotional aspect and layered on top of that augmenting. It a bit is that shifts from urban to suburban in terms of performance geographically, we're seeing pretty much across the board encouraging trends from a credit performance standpoint, even in those mark.

<unk> that we would identify as being the most exposed to the industries that are hardest hit by Covid, Las Vegas, and sort of the greater Henry Henderson area. For example, in Nevada that is perhaps the most exposed to travel and leisure gaming and entertainment house prices are up 75% on an annualized basis since the start of the Covid cry.

This and remember house prices really drives such a significant amount of credit performance, we're not seeing outside of perhaps small pockets of central business districts in some larger cities that are dealing with their own idiosyncratic issues like New York, maybe parts of Chicago or La we're really seeing broad based national spray.

From a house price standpoint from a demand standpoint, and by extension from a credit standpoint.

Got it okay. That's helpful. Because again anecdotally one of the things that we're hearing is that that urban exodus is more family driven so you're seeing the divergence for example in terms of.

Price appreciation of depreciation in urban environments for smaller places versus larger places his family's lead the cities but.

Young professionals don't have you seen that in the portfolio at all.

I'll end, but you guys did that coming and so like how should we think about fourth quarter I know, there's a lot of moving pieces to this but just your thoughts there.

Yeah, I think you hit the nail on the head there are a lot of moving pieces. It's a.

It's going to depend on where cancellation revenue comes in it's going to depend on what happens from a persistency standpoint and volumes.

Standpoint, but looking at it now you know not to give you anything explicit perhaps as a steer we do expect perhaps a modest decline in yield in the fourth quarter to reflect the addition of of that this island.

Yes.

Okay totally in color I would say to you know.

In the quarter, our fourth island.

It was it had it hit yield by about 1.2 basis points.

Our fifth island was smaller it was $242 million in size versus $322 million in size for the fourth Biogen and it was also more efficient from a pricing standpoint, we were able to achieve meaningfully better terms.

On that transaction so look at.

Look at that as a point of reference as well sorry.

So it should be slightly light, maybe slightly less than one basis point I guess Doug.

Yeah.

I actually don't have done a lot of risk yet okay.

Thank you.

Sure.

Your next question comes from call Me Mccoy from KBW. Your line is open.

Hey, guys. Good evening. Thanks for taking my question, there's been some chatter today about increased competition in the bullpen market. So so first off can you guys just give us kind of what your level of participation is in that channel and then just your broad views on the competitive landscape there.

Sure sure Hi, there so [laughter] speculate on the bulk did we do we don't participate in that our primary focus is risk based pricing and covenants really confirmed that strategy, where we can quickly and this to the market uncertainties, but that's in certain geographies or more broadly.

As far as pricing overall, the pricing environment remains constructive prices up risk is down capital required to support new business was down so unit economics are up.

We were early to raise rates, it's always been our posture to be more conservative and especially in the <unk> in the in the face of an unprecedented stresses event, but everyone else eventually followed suit.

Uh-huh.

We don't give a look forward, but certainly we're getting a benefit now around sort of the quantum of business coming on and the pricing at which were bringing that business on there are still large chunks of our portfolio, though that have some real premium rich business that was originated prior to tax reform and pricing changes that came into the industry in the mid.

Middle a 2018.

R.

I would say that are still right for refinancing. So if all else was equal and we were simply bringing on that new business. It might have a stabilizing effect, we need to see what happens.

From a refi cycle in a runoff standpoint as well.

Okay. Okay.

And your next question comes from Jack Meissen call from Us.

He's open.

Good afternoon everybody.

Adam a couple of four burns questions for you.

Mr. <unk> was a little quickly.

<unk> right on the total inventory.

Forbearance right on the new <unk>, Here's this quarter, if you have those two numbers.

Sure I don't have the forbearance right on the new default in the quarter, but it can give you a directional steer at quarter and we had 24809.

Loans that we insured that were enrolled in a forbearance program that the six 5% forbearance right.

That number is down I think we had about 28500 doing this from memory right about there at the end of June and I don't remember what that was as a Ah right 70 677 as of right. So we're seeing a decline that's generally consistent with sort of the quantum of movement, that's being reported about the GSC data.

Of the new defaults that came through in the quarter I don't have that right, but of our 13765 to false that we had at September 30th 12665 of those were in a forbearance program and I would say.

Nearly all of the Covid related defaults blows that.

Emerged following really March.

Nearly all of them are in a forbearance program. The bulk of those that are not in a forbearance program relate to our pre covid default population.

Got it that was my next question.

And then.

We've had a few of your periods reports today as well and the refi mix.

Of production has come down sequentially.

Is it is it too soon to claim victory as it relates to persistency going forward or as a move from say, 40% to 30% not enough for you to signal Hey, persistence is going to bounce off these low points here, a little sooner than expected.

I wouldn't I wouldn't declare victory per se I think what we're seeing in terms of the mix shift it's more reflection of the strength and the accelerating.

Past that purchase demand as taking and that we're seeing and purchase origination volume as opposed to something notable happening in terms of slowdown a refinancing volume. There is obviously a date out there that we need to monitor which is December 1st win.

Currently proposed GSC adverse market refi attar 50 basis points will go into effect. We obviously, we're monitoring that it's too early to know one if that's going to ultimately be imposed at that point extended as it had been originally and what effect it will have.

With.

Mortgage rates and the 3% zone, even for refinancing right now there's still a lot of business. That's that's right for refinancing.

Okay. Thank you.

Okay.

And once again, ladies and gentlemen, please price Clyde and the number one key touchtone telephone and if your question has been answered.

And you wish to a mortgage software. Thank you. Please press the pound key.

Next question comes from Jesse died from Bobby M like Mary.

He is open.

Thank you very much.

Couple number questions first Adam I missed the casual holdco could you repeat that please.

Sure, it's 75 million.

And was there any favorable Ivy in our development in the current year provision this quarter.

There was Jeff so in the quarter, we had doubled our Ivy in our factor in the second quarter to reflect the fact that when servicers were candidly drinking from a fire hose in dealing with the emergence of Covid and a massive influx of new reporting needs from both the forbearance standpoint in just a larger number of defaulted borrowers we were accounting for some did.

Some amount of service or lag.

We normalize that Ivy in our factor now that we are far enough into this and I'll call. It the quantum of new default a new information that services are having to deal with.

Has has diminished we're finding that the lag dynamic really isn't there in size. So we normalized the Ivy in our factor.

Are you able to quantify that I don't remember what it was last quarter.

I don't have it at my fingertips.

Okay, I don't even know my fingertips, but we can give us your offline.

Okay, and then lastly are more of a strategic question. The company has remained number weighs 90 590 solids for quite some time.

What does it take.

Or that market to become attractive to obviously, it's reflected in your delinquency rate it's reflected in your premium Marie.

Probably a in your ILM deals.

Is it the asset charges on that business as we grew risk adjusted return.

The price levels.

Or just a desire not to really be.

In that marketplace.

Let me just start with that.

Just from a from a overall basis.

We don't think we're being too conservative at this point at all.

We look at it that this is still a period of announcements we've never seen anything of this nature magnitude. So our focus is right now is not the time to lenient and Crow are concentration on 97, <unk> Green at 10 45 DTI.

This is the time for us to fully Utilise and fully flex if you will the underwriting pricing tools that we've worked so hard to develop.

So that's why we're overall thoughts on the 90 Sevens and.

That the conservative approach.

Yeah.

The other piece that we're finding.

As purchase volume picks up like 97 or not a refi product.

They're just not but by the time somebody is refinancing.

Especially in this environment with accelerating HDA, they've benefited from equity building their homes and they're getting effectively a mark on their house for purposes of the new.

The new down payment consideration and the new LTV.

Our 97 LTV volume due to increase in.

In October that we just reported I think we reported seven 7% versus four 6% in September and two 3% in August what's happening. There is our purchase volume is increasing the other piece, though that we are monitoring is it certainly appears that.

This stress events is an earnings event for borrowers and not an equity event for their ownership positions in their homes and so while we're very comfortable and things we have the appropriate mixed right now.

When we think about that if we were to look at what are the different risk buckets right are we looking at LTV high LTV low FICO height.