Q3 2022 NMI Holdings Inc Earnings Call

November 1, 2022

Hello, and welcome to the and then My Holdings, Inc. Third quarter 2022 earnings Conference call.

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Please note this event is being recorded.

I would now like to turn the conference over to John Swenson. Please go ahead John .

Yeah.

Thank you good afternoon, and welcome to the 2022 third quarter conference call for NASA in my mind.

I'm, John Swenson, Vice President of Investor Relations and Treasury joining.

Joining us on the call today are Brad Shuster Executive Chairman, Adam Collins, our President and Chief Executive Officer, Rob <unk>, Chief Financial Officer, and Nick <unk> Our controller.

Financial results for the quarter were released after the close today. The press release may be accessed on <unk> website, located at National <unk> Dot com under the investors tab.

During the course of this call we may make comments about our expectations for the future.

Results could differ materially from those contained in these forward looking statements.

Additional information about the factors that could cause actual results or trends could differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC.

Yes, and to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements in the future and license in light of subsequent developments.

Further no one should rely on the fact that the guidance of such statements as 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.

We had a terrific third quarter.

Strong operating performance significant growth in our insured portfolio and record financial results.

Through the course of today's call, we will share with you the details behind our numbers and the implications for the periods ahead.

I'd like to focus however on the macroeconomic environment.

I've been in this business for almost 30 years.

I have seen a number of economic cycles over that time, and importantly, I've seen how the mortgage insurance industry overall and national MRI specifically.

I've learned from and been transformed by past experience.

We do see a growing set of macro headwinds. However, we do not expect the economy or housing markets to deteriorate as they did during the financial crisis.

For more than a decade now.

Underwriting standards have been disciplined and responsible across the mortgage market.

Regulatory guard rails have been enacted in the toolkit to assist borrowers through stress is growing meaningfully.

Our existing borrowers have strong credit profiles.

Significant embedded equity in their homes and benefit from having locked in record low 30 year fixed rate mortgages, which with manageable debt service obligations.

From the start we are focused on building national MRI, and a durable risk responsible manner.

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

And in doing so we have built an exceptionally high quality insured portfolio.

And have secured comprehensive reinsurance protection for nearly the entirety of our book.

I'm confident in our ability to perform across all market cycles.

And we expect to continue to invest in our employees.

Support our customers and their borrowers and deliver for our shareholders.

No matter, how the macroeconomic environment develops.

With that let me turn it over to Adam.

Thank you Brad and good afternoon, everyone.

National EMI continues to outperform in the third quarter delivering significant new business production strong growth in our high quality and short portfolio continued success in the reinsurance market and record financial results.

We generated $17 2 billion of Niwa volume and ended the quarter with a record $179 2 billion of high quality high performing insurance in force.

We achieved record net income of $76 8 million or <unk> 90 per diluted share and our return on equity was 21% in the quarter.

Overall, we had an exceptionally strong quarter and are optimistic as we progressed towards year end.

We do however continue to see developing risks in the macro environment and have already begun to see an impact in the U S housing market.

Mortgage rates are at a 20 year high.

Training affordability for many prospective buyers and driving existing homeowners to reevaluate plans moves.

We see new tension in the negotiation between buyers and sellers across many local markets and house prices have begun to trend down sequentially from their pandemic peaks.

And while the labor market currently stands as a bright spot and existing homeowners are well positioned with strong credit profiles.

Third levels of home equity and sustainable fixed payment obligations at record low mortgage rates.

We would expect unemployment to rise and an increasing number of households to face stress in the event of a recession.

While we can't control, how the economy or housing market develop we can control how we are positioned to navigate through a period of stress.

And we're confident as we've taken action and made investments from day, one to secure our performance across all cycles.

We've prioritized discipline and risk responsibility as we've grown our in force book building, an exceptionally high quality and short portfolio.

We've led with innovation and the risk transfer markets securing comprehensive reinsurance coverage on nearly all of the policies we have ever originated.

And we've established a strong balance sheet with a conservative investment portfolio robust liquidity profile and sizeable regulatory capital buffer all supported by the significant earnings power of our franchise.

We've been proactive, giving even more through the year as the risk environment has evolved and took further steps to bolster our business in the third quarter and month.

We continued to increase policy pricing to reflect the evolving risk environment. We've.

We've made additional changes to further manage our mix of new business by risk cohort and geography.

And we secured additional reinsurance protection and strengthened our <unk> position.

In August we announced that we'd entered into an excess of loss reinsurance agreement covering policies originated during the second quarter.

And this week, we entered into an additional X ol treaty securing layered risk protection on our third quarter, and IW production and incremental <unk> funding capacity.

With the completion of both deals approximately 97% of our insured portfolio is now covered by a comprehensive reinsurance solution.

More broadly we've been encouraged by the discipline that we've seen across the private market underwriting standards remain rigorous and pricing has hardened in response to emerging risks.

This is a time when rate GPS and the broader adoption of rate engines across the mortgage insurance industry proved even more valuable.

We have the ability to dynamically set our credit box and define our risk appetite.

And the flexibility to make the right adjustments that we believe are appropriate in real time.

Overall, we had a terrific quarter delivering strong operating performance significant growth in our insured portfolio and record financial results.

At the same time, we're taking appropriate steps to prepare for a potential downturn and are well positioned to continue to serve our customers and their borrowers.

Invest in our employees and their success and.

And deliver through the cycle performance for our shareholders.

With that I'll turn it over to Ravi.

Thank you Adam.

We delivered record financial results in the third quarter with strong new business volume significant growth in our insured portfolio continued resiliency and our credit performance and expense efficiency driving record profitability.

Net income was a record $76 8 million or <unk> 90 per diluted share and our return on equity was 21%.

We generated $17 2 billion of NSW in the third quarter.

And our primary insurance in force grew to $179 2 billion.

Up 6% from the end of the second quarter, and 25% compared to the third quarter of 2021.

12 month persistency in our primary portfolio improved again.

Reaching 81% compared.

Compared to 76% in the second quarter.

We expect persistency will continue to trend higher through the end of the year.

Net premiums earned were $118 3 million in the third quarter.

Compared to a $129 million in the second quarter.

We earned $1 8 million from the cancellation of single premium policies in the third quarter.

Compared to $2 2 million in the second quarter.

Net premiums earned in the third quarter reflect a $5 5 million impact from the introduction of the season quota share agreement, we announced alongside our second quarter earnings release.

As we mentioned at the time, we recapture a significant majority of this top line cost through a ceding commission, which serves to offset our operating expenses.

Reported yield for the third quarter, which also reflects the introduction of the new season quota share was $27 two basis points compared.

Compared to 29 five basis points in the second quarter.

Our core yield which is calculated excluding the impact of our reinsurance treaties and cancellation earnings was 35 basis points unchanged from the second quarter.

Investment income was $11 9 million in the third quarter compared to $10 9 million in the second quarter.

We saw an acceleration in investment income during the quarter as.

As we deployed new cash flows and reinvested rolling maturities at significantly higher new money rates.

Underwriting and operating expenses were $27 1 million in the third quarter compared to $30 7 million in the second quarter.

And our expense ratio was a record low of 22, 9%.

Our credit performance continues to trend in a favorable direction.

We had 4096 defaults and our primary portfolio at September 30 <unk>.

Compared to 4271 at June 30.

And our default rate declined to 71 basis points at quarter end.

Cure 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 cohort default population.

Recognizing a three 4 million.

Dollar net claims benefits in the third quarter.

At the same time, we continue to take a conservative stance when setting reserves across our remaining default population.

In light of the evolving of the involving risk environment.

Interest expense in the quarter was $8 million.

Net income was a record $76 8 million or <unk> 90 per diluted share for the quarter.

Impaired to 86 per diluted share in the second quarter and 69 per diluted share in the third quarter of 2021.

Total cash and investments were $2 1 billion at quarter end.

Including $97 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 September 30 was $1 5 billion.

And book value per share was $18 21.

Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $20 85.

Up 5% compared to the second quarter, and 19% compared to the third quarter of last year.

In the third quarter, we repurchased $21 million of our common stock retiring 1 million shares at an average price of $20 94.

In August we announced that we had entered into an excess of loss reinsurance agreement.

Covering policies originated during the second quarter.

From a $2 two 5% attachment point up to a 665 maximum detachment point.

At an estimated five 4% weighted average lifetime pre tax cost.

This week, we entered into an additional XO treaty.

Securing protection on our third quarter Niwa production.

From a two 9% attachment point up to a six 9% maximum detachment.

This most recent transaction carries an estimated six 5% weighted average lifetime pre tax cost.

Our ability to compress the cycle time between transactions and secured coverage for our most recent quarterly production is particularly valuable as it serves to minimize our warehouse exposure.

And limit the credit risk retained on our high quality insured portfolio during a period of increased macro volatility.

At quarter end, we reported total available assets under <unk> of $2 3 billion.

And risk based required assets of $1 2 billion.

Excess available assets were $1 1 billion.

In summary, we achieved record financial results during the quarter.

Our credit performance continues to stand out in a positive way.

We continue to execute in the reinsurance market on constructive terms.

We have an exceptionally strong and well protected balance sheet.

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 and short portfolio and record financial results.

Looking forward, we do expect the macro environment will continue to evolve with potential implications for the housing market.

We are confident however that the disciplined approach we've taken to managing our business from day, one will carry our performance through a period of stress.

We have a strong customer franchise.

Talented team driving us forward everyday and.

And exceptionally high quality book covered by a comprehensive set of risk transfer solutions and a robust balance sheet and.

And we've been proactive.

Doing even more from a pricing risk selection and reinsurance standpoint, as the macro environment has evolved.

Thank you for joining us today I'll now ask the operator to come back on so we can take your questions.

Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys.

So at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Mark Devries with Barclays. Please go ahead.

Yes. Thanks.

Glad to hear that you've been taking up pricing in response to kind of the change.

Changing risks are you observing your competitors doing the same thing.

And also are you seeing kind of growing disparities in kind of pricing across different buckets is if so is there kind of layer in maybe different assumptions about.

The risks are changing.

Yeah markets. It's a good question, we absolutely are I'd say broadly speaking we have been encouraged by the discipline that we're seeing across the market and what we would characterize as a deliberate approach.

From the industry broadly.

Around price as the risk environment is is shifting rates that we observe have been hardening they've really been lateral hire we'll call. It as as macro volatility has increased and importantly within that context, we've been able to achieve incremental price, where we believe it is.

It's necessary and appropriate.

And to your second question, absolutely not all changes either that we make or that we observe more broadly across the industry have been have been uniform. We continue to make more significant changes for higher risk loans higher risk geographies that we expect would be more severely impacted by a downturn at the same time.

But I would say is.

The.

Uh huh.

Pricing changes that we're now seeing are more broad based in nature, and while they're not uniform, they're standing far more of the pricing spectrum than we saw in the second quarter.

Okay.

Really helpful and then.

Separate question have you had a chance yet to assess.

The potential impact of these recently announced targeted pricing changes to the enterprise.

Zinc frameworks and what that could mean for your business.

But we thought for a while now that the FHFA and Gse's should review and reformed their loan level pricing adjustments.

And we view the elimination of upfront fees for lower income borrowers that were announced as a constructive step.

Look it's still early but in terms of a market impact. Some of these are actually fairly significant moves for some borrowers that will amount to more than a three point upfront pricing change and we expect that that will tilt the line towards GSE execution for many high LTV borrowers.

Our our best sense at this point is that approximately 15% of current FHA VA volume could migrate to the conforming market following the <unk> change.

Okay, great. Thank you.

Okay.

Yeah.

The next question comes from Rick Shane with J P. Morgan. Please go ahead.

Hey, guys. Thanks for taking my question.

Little bit conceptual, but I'm curious when you think about.

Lifetime losses, and our originations are you able to through your underwriting.

Solved back to your target lifetime cumulative loss.

<unk> or do you have to adjust the price.

Yes, it's a good question.

It really has to be through through price, we use underwriting as a tool to.

Pressure test to ensure that the loans that are coming onto our books align with our expectations and our initial view of their risk profile, but the risk profile itself and the anticipated loss cost has to be covered through price.

Got it and so in an environment like we're in now.

You Ratchet you realized upfront if your assumptions are correct that you will incur higher cumulative losses and so the way you achieve your hurdle rate is by resetting price to get there.

Yes, that's right Luke.

For us it's really about when we're making price changes were not looking to take from the market by any stretch. In fact this is a time, where we want to make sure that we're doing everything we can to be balanced to continue to support our customers and importantly support borrowers who are facing higher costs day in and day out, but we're really focused on though is making sure that we maintain rate adequacy.

And rate adequacy for us in this environment and the need to capture incremental price is because our expectation of loss cost grows as the economy develops.

Adam.

Perfect and it actually segue into sort of more macro question, which is in an environment where.

Again, who knows what's going to happen, but we're all sitting here, saying, okay, well things are as good as they can get there are reasons to believe.

The macro environment will will deteriorate, we should to some extent look at the industry as utility that you were there and to some extent the PMI industry generally has a responsibility to be in the market and the way more broad.

<unk>. So I'm just trying to think about how the industry expands or contracts or how that would impact <unk>.

Originations if collectively the industry became uncomfortable with risks that they didn't feel they could cross.

Yes look I think it's an interesting perspective.

First and foremost what drives our volume as an industry is is is what's happening on the origination side right and in particular, where purchase origination activity goes and purchase activity is going to slow most likely right. We've had rates more than doubled through the course of this year and with prevailing 30 year note rates sitting north of 7%.

And it's strange affordability from any prospective buyers and it also causes existing homeowners, who had otherwise perhaps plan to move to to change course, and so those things will weigh on purchase activity at the same time there absolutely is a very large group of individuals who will still purchase a home who will still need support.

From offshore support from other pockets of the market.

At the same time, when we think about.

I'll call. It the utility aspects look we have a goal a goal of making sure that we can consistently support our customers and their borrowers through all market cycles. One of the ways that we achieve that is by applying price to ensure rate adequacy. It is also our balance sheet right. It is our shareholders balance sheet and we have a responsibility to them.

To manage it appropriately through periods of stress and so that's really what we tried to balance as we look at an environment like the one we're in today, where none of us knows exactly where things will land, but we do have an expectation that on balance things will probably get more challenging from a macro standpoint than better as we roll forward over the next 12 to 18 months.

Terrific Hey, Adam Thank you for taking the questions I really appreciate it.

Sure.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks can you talk about your.

Reserving expectations on.

Kind of do defaults today and how that.

<unk> to kind of the past several quarters.

Yes, I mean.

This is Ravi I'd, just say that with respect to credit and default trends, we're not really seeing anything of note at this point that's different look our cure rates are holding constant.

<unk> are trending down we saw our <unk> trend down from 4271.

A little bit less than 440 100 in the quarter, our default rate declined from 77 basis points to 71 basis points or <unk> <unk> have been flat quarter over quarter, and so as we parse things out and we'd look for look for reasons to to make major changes we've been we've been pretty steady and consistent.

Distant with respect to how credit trends have been evolving now look we continue to monitor and we look at today and we're constantly looking at the story going forward, but right now the story is really strong.

And in terms of the.

Some of the underlying macro assumptions and perspective in general conservatism that we embedded in Q3.

Do reassess our reserving assumptions each quarter.

And we had shifted in the second quarter to a meaningfully more conservative posture for reserve setting purposes than we had carried in Q1, we have maintained that conservative posture with some incremental adjustments there that that further bolster the reserve for carrying for remaining <unk> as of September 30.

Great and then just on the Covid then too.

And are these in the reserving and I guess, how much reserve is less.

<unk>.

To the extent that there is still favorable development or just how should we think about.

You are in that process.

Yes, a significant majority of our carried reserves today still relates to loans that went into default that we would identify as a COVID-19 related default and so we'll see how that population continues to develop.

As we roll forward.

And maybe just to add there.

Those those early Covid default populations carried out for the most part almost 90, 798% of those of those defaults have carried out over the course of the last two years.

Got it thank you.

The next question comes from Bose, George with <unk>. Please go ahead.

Hey, guys good afternoon.

Given your comments on price hardening.

Updated thoughts on the trend in the premium margin.

Okay.

Yes look.

In terms of.

Our view on premium yield.

We expect that our core yield is going to be generally stable.

With perhaps a modest decline through the end of the year.

We will get some support from improving persistency and some support from the pricing on new business.

We expect the trend in our net yields will be a bit more pronounced which is really due to the introduction of of the most recent <unk> transaction that we.

That we announced today.

And we will see where things develop.

As we roll into as we roll into next year loss performance does in fact impact our yield because of the profit commission dynamic under our quota share agreements.

And so we'll see where things developed through through next year, but through the end of this year, we expect core your core yield stability and.

Just some impact from the introduction of our most recent ex ol.

Okay, great. Thanks, and then actually just on persistency can you talk about where you think that could.

To get to.

The persistency in Q3 was just a hair over 80% and the trend has been above 80% and I think we are coming to our long term.

Levels, and we expect it to normalize by by year end and.

Persistency has just been a big positive to us.

We really work hard to generate that business underwrite it and then put it under our reinsurance and credit performance has been strong.

So lifetime premium revenue increases and frankly it at.

At the at the margin, we don't really see additional administrative cost to manage them going forward. So right now we see for.

Persistency normalizing by yearend and continuing to trend slightly up.

Okay, great. Thanks.

The next question comes from Mark Hughes with tourists.

Please go ahead.

Yes. Thank you good afternoon.

I'm not sure whether you.

Whether you give any detail on this but anything unusual in the expenses this quarter and how do we think about the expense ratio on a go forward basis.

Yes, I'll touch on that.

Certainly, it's nice to see a record low expense ratio of 22, 9% in.

In the quarter down from 25, 4% in Q2, the overwhelming majority of the quarter over quarter difference came from the ceding Commission that we had from our CS and <unk> about $3 8 million in the quarter and.

I would just say that overall, we're very happy where our expense ratio was right now.

From a long term perspective, we've been having setting a goal of being somewhere between low and mid <unk> and we're happy to deliver that on in Q3.

We're optimistic about looking for opportunities to manage expenses to driving efficiency.

And continuing to.

<unk>.

Expense ratio continue to trend down over time.

How much of the.

Correct me, if I'm not thinking about this the right way, but how much of the hardening.

From just the uptick in.

Broader interest rates more broadly.

It's obviously impacting the cost of your reinsurance and presumably the ex ol.

Versus.

Macro factors as concerns about the <unk>.

Consumer and what happens with the fall.

This aggregate them.

Yes, it's a pretty easy one 100% of it relates to our view of the go forward economic environment, none of it relates to what's happening on the reinsurance side in our reinsurance costs are migrating higher it's a market where risk takers needs to set their appetite and define their goals also from a risk adjusted return standpoint, just as we do on the primary side, but most importantly whenever.

We price our business, we price on a gross lines basis, which is to say we don't factor for.

Reinsurance costs reinsurance opportunities on the backend we want to make sure that the raise we're capturing for the risks we're taking in the front door is adequate if we have to maintain that risks and hold it on our balance sheet without the benefit of risk transfer. That's the approach we have always taken the approach we take today and so all of the rate changes that we're making across the risk spectrum are driven by our.

Our view of the macro not by what's evolving in the reinsurance market.

So I guess I'm thinking about.

<unk> cost for the.

Transactions, you mentioned, the five 4% to six 5% through the recent extra well.

How much of that is just influenced by broader interest rates and to get them.

Apologize if.

Good question.

No not a not a bad question at all.

I think the majority of that is driven by the same dynamic that's causing us to raise.

Premium rate on the primary side right our reinsurance partners are looking at.

The macro environment.

<unk> and the possibility for dislocation to develop in the housing market and they want incremental rate.

Account for.

Perhaps a wider view of potential loss outcomes, and that's coming through and the pricing at the same time right. We just achieved coverage at a six 5% pretax lifetime cost of capital.

It's not just the cost that grows right Theres also I would say the benefit growth as well right as the risk environment evolves the value of that protection the potential for it to absorb loss also increases and so when we look at it.

It doesn't influence how we price on the primary side, but we also arent changing course, and we still find value as both a risk transfer and a capital efficiency matter from continuing to execute in the reinsurance market.

And Adam I would just add that.

What we've seen at least since with respect to the reinsurance market is that capacity has evolved over the course of the year and so we've seen as the island market experienced some dislocation in the early part of the year.

Many reinsured, many many folks at pivoted to the <unk> market and.

A lot of capacity that was use up over the course of the year and that had an influence on where we're pricing and availability landed.

Interesting. Thank you very much.

The next question comes from Geoffrey Dunn with Dowling and partners. Please go ahead.

Thanks, Good afternoon.

Hum.

Adam I wanted to ask about capital strategy.

I believe LMI is still a capital consumer youre going into a hard market are harder market.

Yet riskier potential market.

And.

In a world where your capital you could have delays in the <unk> or anything like that.

You have a strategy for pulling back entering the market this quarter looks like you gained share.

In order to really capitalize on the opportunities that might be presented in the quarters ahead, and then also how do you balance that with.

Return on buying stock right now, which is probably approaching the returns on new business do you take any money out of the Opco over an 18 24 month outlook or do you take a more conservative approach and put that money to new business. So how do you think about the overall capital strategy heading into the environment, where it looks like we're going into yes, Jeff Thats a very good.

I will say, we think about all of those things.

Capital for Us.

Is is key and that's true candidly at all times today, certainly against an evolving macro backdrop, but equally so last year. For example, when the environment was much stronger our general philosophy about how we want to manage our balance sheet doesn't change we generally take a conservative stance, we want to make sure that we are.

Prudently managing our needs.

We're working hard to build access across as many markets as possible and we want to minimize our cost of capital wherever possible. We are in a terrific position today has a balance sheet and funding matter.

And we've been really pleased with the success of our repurchase activity since we launched the program earlier this year as we look forward now.

Now is the time I think it should be expected, where we would say an additional amount of excess capital carrying an additional amount of excess capital is valuable given the macro environment.

And so we're going to be balanced right and how we make all of those decisions. How we think about the return on potential capital deployment, either organically or through distributions.

Do we think about the <unk>.

Pacing of that activity as we roll forward a lot of it is going to depend on how everything develops from where we are today right. We know what our balance sheet looks like today, we know the size of our funding profile today, we can run calculations and stress test, but we're all going to have a lot more information that emerges over the next few quarters, we believe as to really where the market.

The macro and housing are going and that will influence our decisioning.

Okay, and then a follow up on credit.

It's a challenging environment because you're facing.

Seasoning pressure on your new notices whether or not we see any kind of recessionary pressure, but you also still have a lot of home price built into the existing book of business not necessarily the more recent stuff, but the passbook.

So how do you think about or how can you frame for us how to think about an economic impact on the existing book.

Do we worry about 6% unemployment with where the built up equity is in the portfolio.

Or are we in a scenario, where you need something much more severe too to really move the number on ultimate claim experience because of how the backlog looks.

Very good question, but we estimate today that the mark to market LTV on our insured portfolio as a touch under 75% and so the borrowers that we have ensured to date have generally speaking an exceptionally strong are an exceptionally strong position with a significant amount of equity buffer that sits in front of our exposure.

So a move in unemployment in isolation.

It's something we monitor right, we would expect that.

If the labor market were to deteriorate and increasing number of households would face stress the consequences of that stress, though for our credit performance our claims experience.

Also need to account for warehouse prices go.

And so with house prices.

And that equity position remains robust.

The impact may be we may see an increase in defaults experienced that doesn't necessarily translate through to ultimate claims outcomes. If house prices deteriorate alongside a rise in unemployment will see we would expect to see an increased impact from a claims standpoint.

But as the book stands now does 6% unemployment.

Where are you.

I mean, yes, we're at three 5% today, so it's nearly doubling of the unemployment rate nationally we run a lot of stress tests, though and does a 6% unemployment rate in isolation have a material impact on our expected performance and where we go.

Okay. Thanks.

Yeah.

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

Thank you again for joining us will be hosting our annual Investor day on Thursday November 17th in New York and will be participating in the Goldman Sachs Financial Services Conference on December seven we look forward to speaking with you again soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Okay.

[music].

Okay.

Thanks.

Yes.

Okay.

[music].

Hello, and welcome to the <unk> Holdings, Inc. Third quarter 2022 earnings Conference call.

All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.

After todays presentation, there will be an opportunity to ask questions.

To ask a question you May press Star then one on no touchtone phone to withdraw your question. Please press Star then two.

Please note this event is being recorded.

I would now like to turn the conference over to John Swenson. Please go ahead John .

Thank you good afternoon, and welcome to the 2022 third quarter conference call for National My mind.

I'm, John Swenson, Vice President of Investor Relations and Treasury joining.

Joining us on the call today are Brad Shuster Executive Chairman, Adam Palmer, President and Chief Executive Officer, Rob <unk>, Chief Financial Officer, and Nick <unk> Our controller.

Financial results for the quarter were released after the close today. The press release may be accessed on <unk> website, located at National <unk> Dot com under the investors tab.

During the course of this call we may make comments about our expectations for the future.

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.

Yes, and to the extent the company makes forward looking statements, we do not undertake any obligation to update those statements in the future and licensed in light of subsequent developments.

Further nordson rely on the fact that the guidance of such statements is current at any time other than the time of this call.

Now I'll turn the call over to Brad.

Thank you John and good afternoon, everyone.

We had a terrific third quarter with strong operating performance significant growth in our insured portfolio and record financial results.

Through the course of today's call, we will share with you the details behind our numbers and the implications for the periods ahead.

I'd like to focus however on the macroeconomic environment.

I've been in this business for almost 30 years.

I have seen a number of economic cycles over that time, and importantly, I've seen how the mortgage insurance industry overall and national <unk> specifically have.

Learn from and been transformed by past experience.

We do see a growing set of macro headwinds. However, we do not expect the economy or housing market to deteriorate as they did during the financial crisis.

For more than a decade now underwriting standards have been disciplined and responsible across the mortgage market.

Regulatory guard rails have been enacted in the toolkit to assist borrowers through stress has grown meaningfully.

Our existing borrowers have strong credit profiles.

Significant embedded equity in their homes.

And benefit from having locked in record low 30 year fixed rate mortgages, which with manageable debt service obligations.

From the start we are focused on building national MRI, and a durable risk responsible manner.

We've worked hard to establish a comprehensive credit risk management framework and in doing so we have built an exceptionally high quality insured portfolio and.

And have secured comprehensive reinsurance protection for nearly the entirety of our book.

I am confident in our ability to perform across all market cycles.

And we expect to continue to invest in our employees.

Support our customers and their borrowers and deliver for our shareholders.

No matter, how the macroeconomic environment develops.

With that let me turn it over to Adam.

Thank you Brad and good afternoon, everyone Nash.

We generated $17 2 billion of Niwa volume and ended the quarter with a record $179 2 billion of high quality high performing insurance in force.

We achieved record net income of $76 8 million or <unk> 90 per diluted share and our return on equity was 21% in the quarter.

Overall, we had an exceptionally strong quarter and are optimistic as we progress towards year end.

We do however continue to see developing risks in the macro environment and have already begun to see an impact in the U S housing market.

Mortgage rates are at a 20 year high straining affordability for many prospective buyers and driving existing homeowners to reevaluate planned moves.

We see new tension in the negotiation between buyers and sellers across many local markets and house prices have begun to trend down sequentially from their pandemic peaks.

And while the labor market currently stands as a bright spot and existing homeowners are well positioned with strong credit profiles record levels of home equity and sustainable fixed payment obligations at record low mortgage rates.

We would expect unemployment to rise and an increasing number of households to face stress in the event of a recession.

While we can't control, how the economy or housing market develop we can control how we are positioned to navigate through a period of stress.

And we're confident as we've taken action and made investments from day, one to secure our performance across all cycles.

We prioritized discipline and risk responsibility as we've grown our in force book building, an exceptionally high quality and short portfolio.

We've led with innovation and the risk transfer markets securing comprehensive reinsurance coverage on nearly all of the policies we have ever originated.

We've been proactive, giving even more through the year as the risk environment has evolved and took further steps to bolster our business in the third quarter and months.

We continued to increase policy pricing to reflect the evolving risk environment. We've.

We've made additional changes to further manage our mix of new business by risk cohort and geography.

And we secured additional reinsurance protection and strengthened our <unk> position.

In August we announced that we'd entered into an excess of loss reinsurance agreement covering policies originated during the second quarter.

And this week, we entered into an additional X ol treaty securing layered risk protection on our third quarter, and IW production and incremental <unk> funding capacity.

With the completion of both deals approximately 97% of our insured portfolio is now covered by our comprehensive reinsurance solution.

More broadly we've been encouraged by the discipline that we've seen across the private market.

Underwriting standards remain rigorous and pricing has hardened in response to emerging 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 right adjustments that we believe are appropriate in real time.

Overall, we had a terrific quarter delivering strong operating performance significant growth in our insured portfolio and record financial results.

At the same time, we're taking appropriate steps to prepare for a potential downturn and are well positioned to continue to serve our customers and their borrowers.

Invest in our employees and their success and.

And delivered through the cycle performance for our shareholders.

With that I'll turn it over to Ravi.

Thank you Adam.

Net income was a record $76 8 million or <unk> 90 per diluted share and our return on equity was 21%.

We generated $17 2 billion of <unk> in the third quarter.

And our primary insurance in force grew to $179 2 billion.

Up 6% from the end of the second quarter, and 25% compared to the third quarter of 2021.

12 month persistency in our primary portfolio improved again.

Reaching 81% compared.

Compared to 76% in the second quarter.

We expect persistency will continue to trend higher through the end of the year.

Net premiums earned were $118 3 million in the third quarter.

Compared to a $120 9 million in the second quarter.

We earned $1 8 million from the cancellation of single premium policies in the third quarter compared to $2 2 million in the second quarter.

Net premiums earned in the third quarter reflect a $5 5 million impact from the introduction of the season quota share agreement, we announced alongside our second quarter earnings release.

As we mentioned at the time, we recapture a significant majority of this top line cost through a ceding commission, which serves to offset our operating expenses.

Reported yield for the third quarter, which also reflects the introduction of the new season quota share was 27 two basis points.

Compared to 29 five basis points in the second quarter.

Our core yield which is calculated excluding the impact of our reinsurance treaties and cancellation earnings was 35 basis points unchanged from the second quarter.

Investment income was $11 9 million in the third quarter compared to $10 9 million in the second quarter.

We saw an acceleration in investment income during the quarter as.

As we deployed new cash flows and reinvested rolling maturities at significantly higher new money rates.

Underwriting and operating expenses were $27 1 million in the third quarter compared to $30 7 million in the second quarter.

And our expense ratio was a record low of 22, 9%.

Our credit performance continues to trend in a favorable direction we.

We had 4096 defaults and our primary portfolio at September 30.

Compared to 4271 at June 30.

And our default rate declined to 71 basis points at quarter end.

Cure 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 cohort default population.

Recognizing a three 4 million.

Net claims benefit in the third quarter.

At the same time, we continued to take a conservative stance when setting reserves across our remaining default population.

In light of the evolving of the evolving risk environment.

Interest expense in the quarter was $8 million.

Net income was a record $76 8 million or <unk> 90 per diluted share for the quarter.

Compared to 86 per diluted share in the second quarter and 69 per diluted share in the third quarter of 2021.

Total cash and investments were $2 1 billion at quarter end, including $97 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 September 30 was $1 5 billion.

And book value per share was $18 21.

Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $20 85.

Up 5% compared to the second quarter and.

And 19% compared to the third quarter of last year.

In the third quarter, we repurchased $21 million of our common stock retiring 1 million shares at an average price of $20 94.

In August we announced that we had entered into an excess of loss reinsurance agreement.

Covering policies originated during the second quarter.

From a $2 two 5% attachment point up to a 665 maximum detachment point.

At an estimated five 4% weighted average lifetime pre tax cost.

This week, we entered into an additional X ol treaty.

Securing protection on our third quarter Niwa production.

From a two 9% attachment point up to a six 9% maximum detachment.

This most recent transaction carries an estimated six 5% weighted average lifetime pre tax cost.

Our ability to compress the cycle time between transactions and secured coverage for our most recent quarterly production is particularly valuable as it serves to minimize our warehouse exposure.

And limit the credit risk retained on our high quality insured portfolio during a period of increased macro volatility.

At quarter end, we reported total available assets under <unk> of $2 3 billion.

And risk based required assets of $1 2 billion.

Excess available assets were $1 1 billion.

In summary, we achieved record financial results during the quarter.

Our credit performance continues to stand out in a positive way.

We continue to execute in the reinsurance market on constructive terms.

And we have an exceptionally strong and well protected balance sheet.

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 and short portfolio and record financial results.

Looking forward, we do expect the macro environment will continue to evolve with potential implications for the housing market.

We are confident however that the disciplined approach we've taken to managing our business from day, one we will carry our performance through a period of stress.

We have a strong customer franchise.

Talented team driving us forward everyday and exceptionally high quality book covered by a comprehensive set of risk transfer solutions and a robust balance sheet.

And we've been proactive.

And even more from a pricing risk selection and reinsurance standpoint, as the macro environment has evolved.

Thank you for joining us today I'll now ask the operator to come back on so we can take your questions.

Thank you.

We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys is that any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.

At this time, we will pause momentarily to assemble our roster.

Today's first question comes from Mark Devries with Barclays. Please go ahead.

Yes, Thanks was glad to hear that you've been taking up pricing in response to kind of the.

Changing risks are you observing your competitors doing the same thing.

And also are you seeing kind of growing disparities in kind of pricing across different buckets.

If so is there kind of layer in maybe different assumptions about how.

How the risks are changing.

Yes markets. It's a good question, we absolutely are I'd say broadly speaking we've been encouraged by the discipline that we're seeing across the market and what we would characterize as a deliberate approach.

From the industry broadly.

Around price as the risk environment is is shifting rates that we observed have been hardening, they've really been lateral hire we'll call. It as as macro volatility has increased and importantly within that context, we have been able to achieve incremental price, where we believe it.

It's necessary and appropriate.

But I would say is.

The.

Pricing changes that we're now seeing are more broad based in nature and while they are not uniform, they're standing far more of the pricing spectrum than we saw in the second quarter.

Okay.

That's really helpful and then on a separate question.

Have you had a chance yet to assess the potential impact of these recently announced targeted pricing changes to the enterprise.

Pricing framework and what that could mean for your business.

But we thought for a while now that the FHFA and <unk> should review and reform their loan level pricing adjustments.

And we view the elimination of upfront fees for lower income borrowers that were announced as a constructive step.

Our our best sense at this point is that approximately 15% of current FHA VA volume could migrate to the conforming market following the <unk> change.

Okay, great. Thank you.

The next question comes from Rick Shane with J P. Morgan. Please go ahead.

Hey, guys. Thanks for taking my question.

Little bit conceptual, but I'm curious when you think about.

Lifetime losses, and originations are you able to.

Through your underwriting.

Solve that two year target lifetime cumulative loss targets or do you have to adjust the price.

Yes, it's a good question.

It really has to be through through price, we use underwriting as a tool to.

Pressure tests to ensure that the loans that are coming onto our books align with our expectations and our initial view of their risk profile, but the risk profile itself and the anticipated loss costs have to be covered through price.

Got it and so in an environment like we're in now.

You Ratchet you realized upfront if your assumptions are correct that you will incur higher cumulative losses.

So the way you achieve your hurdle rate is by resetting price to get there.

Yes, that's right look is for.

And rate adequacy for us in this environment and the need to capture incremental price is because our expectation of loss cost growth as the economy develops.

Adam that's perfect and that actually segue into sort of more macro question, which is even in an environment where.

Again, who knows what's going to happen, but we're all sitting here, saying, okay, well things are as good as they can get there are reasons to believe.

The macro environment will will deteriorate, we should to some extent look at the industry as utility.

You were there and to some extent the PMI industry generally has a responsibility to be in the market.

The way more broadly because I'm just trying to think about how this industry expands or contracts and how that would impact.

Originations if collectively the industry became uncomfortable with risks that they didn't feel they could price.

Yes.

It's it's an interesting perspective.

First and foremost what drives our volume as an industry as is.

What's happening on the origination side right and in particular, where purchase origination activity goes and purchase activity is going to slow most likely right. We've had rates more than double through the course of this year and with prevailing 30 year note rates sitting north of 7%, it's strange affordability for many prospective buyers and it also causes existing homeowners who.

We had otherwise perhaps plan to move to to change course, and so those things will weigh on purchase activity at the same time there absolutely is a very large group of individuals who will still purchase a home who will still need support from offshore support from other pockets of the market.

At the same time, when we think about.

Then to manage it appropriately through periods of stress and so thats really what we try to balance as we look at an environment like the one we're in today, where none of us knows exactly where things will land, but we do have an expectation that on balance things will probably get more challenging from a macro standpoint than better as we roll forward over the next 12 to 18 months.

Terrific Hey, Adam Thank you for taking the questions I really appreciate it.

Thanks, Rick.

The next question comes from Doug Harter with Credit Suisse. Please go ahead.

Thanks can you talk about your.

Your reserving expectations on kind of new defaults today and how that.

Compared to the past several quarters.

Yes.

Yes, I mean.

This is Ravi I'd, just say that with respect to credit and default trends, we're not really seeing anything of note at this point that's different look our cure rates are holding constant.

<unk> are trending down we saw our <unk> trend down from 4271%.

A little bit less than 440 100 in the quarter, our default rate declined from 77 basis points to 71 basis points, our <unk> have been flat quarter over quarter, and so as we parse things out and we'd look for look for reasons to to make major changes we've been we've been pretty steady and consistent with.

With respect to how credit trends have been evolving now look we continue to monitor and we look at today and we're constantly looking at the story going forward, but right now the story is really strong.

And in terms of the some of the underlying macro assumptions and perspective in general conservatism that we embedded into Q3.

We do reassess our reserving assumptions each quarter.

And we had shifted in the second quarter to a meaningfully more conservative posture for reserve setting purposes than we had carried in Q1, we've maintained that conservative posture with some incremental adjustments there that that further bolster the reserves were carrying for remaining <unk> as of September 30.

Great and then just on the Covid.

And our views in the reserving I guess, how much reserve is less.

To the extent that there is still a favorable development or just how should we think about where you are in that process.

As we roll forward.

And maybe just to add there.

Those those early Covid default populations have figured out for the most part almost 90, 798% of those of those defaults have carried out over the course of the last two years.

Got it thank you.

The next question comes from Bose, George with <unk>. Please go ahead.

Good afternoon.

Just given your comments on price hardening.

Any updated thoughts on the trend in the premium margin.

Yes.

In terms of.

Our view on premium yield.

We expect that our core yields.

Is going to be generally stable.

With perhaps a modest decline through the end of the year.

We will get some support from improving persistency and some support from the pricing on new business.

We expect the trend in our net yields will be a bit more pronounced which is really due to the introduction of the most recent <unk> transaction that we that.

That we announced today.

And we will see where things develop.

As we roll into as we roll into next year loss performance does in fact impact our yield because of the profit commission dynamic under our quota share agreements.

And so we'll see where things developed through through next year, but through the end of this year, we expect core your core yield stability and.

Just some impact from the introduction of our most recent ex ol.

Great. Thanks, and then actually just on persistency can you talk about where you think that could get.

To get to.

Persistency in Q3 was just a hair over 80% and the trend has been above 80% and I think we are coming to our long term.

Levels, and we expect it to normalize by by year end.

And persistency has just been a big positive to us.

We really work hard to generate that business underwrite it and then put it under reinsurance and credit performance has been strong.

Lifetime premium revenue increases and frankly it.

At the margin, we don't really see additional administrative cost to manage them going forward. So right now we see persist.

Persistency normalizing by yearend and continuing to trend slightly up.

Okay, great. Thanks.

The next question comes from Mark Hughes with tourists.

Please go ahead.

Yes. Thank you good afternoon.

Oh sure whether you.

Whether you give any detail on this but anything unusual in the expenses this quarter and how do we think about the expense ratio on a go forward basis.

Yes, I'll touch on that.

Certainly, it's nice to see a record low expense ratio of 22, 9% in.

In the quarter down from 25, 4% in Q2, the overwhelming majority of the quarter over quarter difference came from the ceding Commission that we had from our season <unk> about $3 8 million in the quarter and.

I would just say that overall, we're very happy where our expense ratio is right now.

From a long term perspective, we've been having setting a goal of being somewhere between low and mid <unk> and we're happy to deliver that on in Q3 and were optimistic about looking for opportunities to manage expenses to driving efficiency.

And continuing to.

<unk>.

Expense ratio continue to trend down over time.

How much of the.

Correct me, if I'm not thinking about this the right way, but how much of the hardening.

From just the uptick in.

Broader interest rates more broadly.

Which is obviously impacting the cost of your reinsurance and presumably the ex ol.

Versus.

Macro factors as concerns about the <unk>.

Consumer and what happened with <unk>.

<unk>.

This aggregate them.

Yes, it's a pretty easy one 100% of it relates to our view of the go forward economic environment, none of it relates to what's happening on the reinsurance side and the reinsurance costs are migrating higher it's a market where risk takers need to set their appetite and define their goals, but also from a risk adjusted return standpoint, just as we do on the primary side, but most importantly whenever.

We price our business, we price on a gross lines basis, which is to say we don't factor for.

Reinsurance costs reinsurance opportunities on the backend we want to make sure that the raise we're capturing for the risks we're taking in the front door is adequate if we have to maintain that risks and hold it on our balance sheet without the benefit of risk transfer. That's the approach we have always taken the approach we take today until all of the rate changes that we're making across the risk spectrum are driven by.

Our view of the macro not by what's evolving in the reinsurance market.

So I guess I'm thinking about.

Your costs for the.

Transactions, you mentioned, the five 4% to six 5%.

Recent ex ol.

How much of that is to influence by broader interest rates and to get them.

Apologizes.

Good question.

Not a bad question at all.

I think the majority of that is driven by the same dynamic that's causing us to raise.

Right on the primary side right our reinsurance partners are looking at.

The macro environment and the possibility for dislocation to develop in the housing market and they want incremental rate to account for.

Perhaps a wider view of potential loss outcomes, and that's coming through and the pricing at the same time, we just achieved coverage at a six 5% pre tax lifetime cost of capital.

It's not just the cost that grows right. There is also I would say the benefit growth as well as the risk environment evolves the value of that protection the potential for it to absorb loss also increases and so when we look at it.

And Adam I would just add that.

What we've seen at least with respect to the reinsurance market is that capacity has evolved over the course of the year and so we've seen as the island market experienced some dislocation in the early part of the year.

Many reinsurers many many folks.

Pivoted to the <unk> market and <unk>.

A lot of capacity because use up over the course of the year and that had an influence on on where we're pricing and availability landed.

Interesting. Thank you very much.

The next question comes from Geoffrey Dunn with Dowling and partners. Please go ahead.

Thanks, Good afternoon.

Adam I wanted to ask about capital strategy.

I believe <unk> is still a capital consumer.

Going into a hard market are harder market.

Yet riskier potential market.

And.

In a world where your capital you could have delays in the <unk> or anything like that.

You have a strategy for pulling back entering the market this quarter looks like you gained share.

In order to really capitalize on the opportunities that might be presented in the quarters ahead, and then also how do you balance that with.

I will say, we think of that all of those things right.

Capital for Us.

Prudently managing our needs.

And we've been really pleased with the success of our repurchase activity since we launched the program earlier this year as we look forward now.

Now was the time I think it should be expected, where we would say an additional amount of excess capital carrying an additional amount of excess capital is valuable given the macro environment.

And so we're going to be balanced right and how we make all of those decisions. How we think about the return on potential capital deployment, either organically or through distributions and.

And how do we think about the.

The pacing of that activity as we roll forward a lot of it is going to depend on how everything develops from where we are today right. We know what our balance sheet looks like today, we know the size of our funding profile today, we can run calculations and stress test, but we're all going to have a lot more information that emerges over the next few quarters, we believe as to really where the market.

The macro and housing are going and that will influence our decisioning.

Okay.

And then a follow up on credit.

It's a challenging environment because you're facing.

So.

How do you think about or how can you frame for us how to think about an economic impact on the existing book.

Do we worry about 6% unemployment with where the built up equity is in the portfolio.

Or are we in a scenario, where you need something much more severe to really move the number on ultimate claim experience because of how the back book looks.

A very good question, but we estimate today that the mark to market LTV on our insured portfolio as a touch under 75% into the borrowers that we've ensured to date have generally speaking an exceptionally strong are an exceptionally strong position with a significant amount of equity buffer that fits as part of our exposure and so.

A move at unemployment in isolation.

Something we monitor right, we would expect that.

If the labor market were to deteriorate and increasing number of households, with face stress the consequences of that stress, though for our credit performance. Our claims experience also need to account for warehouse prices go.

So with house prices.

And that equity position remains.

Robust then the impact may be we may see an increase in defaults experienced that doesn't necessarily translate through to ultimate claims outcomes. If house prices deteriorate alongside a rise in unemployment, we will see we would expect to see an increased impact from a claims standpoint.

But as the book stands now does 6% unemployment.

Where are you.

I mean, yes, we're at three 5% today, so it's nearly doubling of the unemployment rate nationally we run a lot of stress test, though when does a 6% unemployment rate in isolation.

A material impact on our expected performance and where we go.

Thanks.

This concludes our question and answer session.

I would like to turn the conference back over to management for any closing remarks.

Thank you again for joining us we will be hosting our annual Investor day on Thursday November 17th in New York and will be participating in the Goldman Sachs Financial Services Conference on December seven we look forward to speaking with you again soon.

The conference has now concluded. Thank you for attending today's presentation you may now disconnect.

Q3 2022 NMI Holdings Inc Earnings Call

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