Q4 2022 NMI Holdings Inc Earnings Call
Good day, ladies and gentlemen, and welcome to the NII Holdings, Inc. Fourth quarter 2022 earnings Conference call. All participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on Touchtone phone.
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 Sir.
Thank you operator, good afternoon, and welcome to the 2022 fourth quarter conference call for National M. I.
I'm, John Swenson, Vice President of Investor Relations and Treasury.
Joining us on the call to Dr. Bradshaw, Mr Executive Chairman, Adam Palmer, President and Chief Executive Officer, Ravi Molecular 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 M Dot com under the investors tab.
During the course of this call we may make comments better 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.
Can be found on our website or through our regulatory filings with SEC.
If and to the extent the company makes forward looking statements. We do not undertake any obligation to update those statements in the future in light of subsequent developments.
Further no one should rely on the fact that the guidance of such statements is current at any time other than the time of this call.
Also note that on this call refer to certain non-GAAP measures.
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 will turn the call over to Brett.
Thank you John and good afternoon, everyone.
I am pleased to report that in the fourth quarter National MRI again delivered strong operating performance Cigna.
Significant growth in our insured portfolio and stand out financial results capping a year of tremendous success.
We closed 2022 with 59 billion of total <unk> volume and a record 184 billion of high quality high performing primary insurance in force.
Yeah.
We delivered broad success and customer development.
I need to innovate in the reinsurance market and.
We once again achieved industry, leading credit performance.
We generated a record $292 9 million of GAAP net income in 2022.
27% compared to 2021 and.
<unk> delivered an 18, 4% return on equity for the year.
2020 to Mark National <unk>, 10 year anniversary and our success during the year is particularly gratifying.
Yes.
We founded the company in 2012 with a goal to provide a differentiated commitment and standard for service.
Our 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 MRI, and a sustainable risk responsible manner.
Positioning our business to perform across all market cycles.
This approach has served us well and we closed 2022 and a position of tremendous growth.
Looking ahead into 2023.
We all recognize that there is risk in the economy broadly in 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 walked 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 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 and I continue to outperform in the fourth quarter delivering significant new business production.
Growth in our high quality insured portfolio and standout financial success.
We generated $10 7 billion and then IW 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 <unk> 86 per diluted share and an 18, 6% return on equity during the period.
Overall, we had an exceptionally strong quarter and closed 2022, and a position of real strength.
We generated $59 billion of N IW volume during the year and exited with $184 billion of insurance enforce our portfolio with significant and growing embedded value.
We now have nearly 600000 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 1400 active accounts we.
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 our longer capital roadmap with the introduction of our inaugural share repurchase program.
We were once again recognized as a great place to work our seventh consecutive award.
Flexion 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 pull back 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 industry and IW will scale to a level similar to the pre pandemic purchase markets of 2018 in 2019, and then our claim costs will normalize after an extended period of record performance with the growth in natural seasoning of our portfolio.
Leo 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 everyday and 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.
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 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 <unk>.
All 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 market.
Overtime 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 downpayment support Nash.
National <unk> 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 return.
Yes.
Total revenue in the fourth quarter was $133 1 million.
GAAP net income was $72 9 million or <unk> 86 per diluted share and our return on equity was 18, 6%.
We generated $10 7 billion of Ni W and our primary insurance in force grew to 184 billion up.
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 81% 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 22, 3%.
We had 4449 defaults and our primary portfolio at December 31.
Impaired to 4096 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.
Sure 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.
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 <unk> 86 per diluted share for the quarter compared to <unk> 90 per diluted share in the third quarter and 69 per diluted share in the fourth quarter of 2021.
Total cash and investments were $2 1 billion at year end <unk>.
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.
Tiring 255000 shares at an average price of $21 five.
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 <unk> 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 and short portfolio and standout financial performance capping a record year in which we delivered broad success in customer development continued 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 will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. If you are using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed then you would like to withdraw your question. Please press Star then two.
At this time, we will pause for Mr. Li from Allah roster.
Yes.
Yeah.
The first question comes from Mark Devries with Barclays. Please go ahead.
Yeah. Thanks.
Would you talk about how youre thinking about the use of reinsurance this year just given.
The macro uncertainties, you highlighted and the pricing available to you and reinsurance markets right now.
Certainly this is a this is ravi thanks for the question Mark.
I think we think about reinsurance as a very fundamental part of what we do everyday in 2023, we expect to be active in 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 2022, and we've been active in being getting so well coverage on our most recent production and when we look to 2023, we look to being programmatic.
New production getting covered under <unk> and also possibly if <unk> as the conditions improve.
Improve and XL wells are have been really great for us in 2022, because they allow us to quickly bring recent production under coverage.
We are compressing the cycle time between the between production and risk transfer and I would say just broadly on the market.
Pasty 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 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 in 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 that kind of drop in market share this quarter.
Yes, Mark I'm going to give you the comment of a frame, which is we do not manage the market share we never have and thats not our plan going forward instead, when we look at it we're delighted with the result 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 everyday and importantly, we drove.
Strong quarter on quarter growth in our insured portfolio, that's really the key for US right. It's stacking high quality new production driving 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 we can deliver an 18, 6% Roe.
It's really proves that the strategy we have in the market engagement.
We undertake is working well.
Okay fair enough. Thanks.
The next question comes from Bose, George with <unk>. Please go ahead.
Hey, everyone. Good afternoon wanted to.
Ask about you've provisioned 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 to claim assumption.
Yes, so close that'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 were.
Call. It risk continues to emerge there are reasons to be optimistic certainly but risk is also out there.
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 will 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 default 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 <unk>.
The average default to claim rate on new notices in the period happens to work out to something that 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.
All 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.
The guidance there for 'twenty, three and actually this quarter was there anything unusual I mean, usually we see a little bit of a bump up in the fourth quarter.
Bose. This is Ravi I'll take that question quarter over quarter in terms of the the decline I Wouldnt point to anything big in specific look we had lower ni W.
Generally leads to lower underwriting costs and were slightly 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 seven 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 expenses 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 that Opex will.
We'll have a modest growth, but we're constantly focused on managing our expenses in a thoughtful manner.
Okay, great. Thanks, a lot.
Yeah.
The next question comes from Rick Shane with JP Morgan. Please go ahead.
Thanks, guys for taking my question.
I just wanted to delve in a little bit more following up on those questions on credit.
Obviously, there is a lot going on.
In terms of.
In terms of cohort divergence.
Geographic diversion.
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.
Yeah look I'll I'll.
I'll, just I'll reiterate break and 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 where are we focused where might we see.
Where.
Where might we see greater.
Experience as a as we we roll through look naturally higher risk cohorts that we would define as being borrowers with lower FICO scores borrower 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 those are the pockets that were yes.
Yes, we were expecting and from a vintage standpoint, those borrowers who have had the least amount of time to build.
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 will 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 in 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 our 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 very helpful and again, given the context of the.
Very modest default rate.
It's hard to pick out any trends in there.
Pulling that Fred just a little bit more and <unk>.
Again understanding the 2020 and 21 vintages have.
Six engineering well when you think about the 'twenty two vintage is there anything is it is there enough information at this point to see any trends as it sort of a normal vintage is looking a little bit better a little bit worse than.
And then you would expect historically.
Okay.
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 noticed the borrowers who were supporting in our 2022 production simply have less embedded equity in there.
Their homes and the borrowers from earlier vintages.
Okay I appreciate it thanks Adam.
The next question comes from Mark Hughes with truly please go ahead.
Yes. Thank you good afternoon.
And when you think about yield a lot of moving parts, obviously your pricing going up.
It looks like you're a bit more disciplined on your underwriting.
Insurance costs are obviously.
I wonder if.
If you could give us some sense of how those different forces might impact the next 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.
We certainly understand the focus on yield the one thing that I would encourage you to do.
Remember that it's not a number that 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 in our high quality portfolio and also because of how our reinsurance treaties in particular, the quota shares are structured where we get a backend profit Commission.
Actually also.
Impacted by our loss experience in the reserving decisions that.
And that we make and so when we think about yield and when we think about what it's going to be going forward.
In fact, most focused on making sure that we are writing high quality and IW 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 will see bottom line growth and strong returns for shareholders in terms of how how yields will roll going forward look we talked about it on the call in our prepared prepared remarks.
We did latter 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.
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 well.
We're encouraged by what were achieving in the market today from a risk and from a rate pricing standpoint.
And we're optimistic as to the trend we will see in our core yields.
Okay, well, maybe the core yields steady, but with the quality of the underwriting maybe.
She's got a little bit.
Is that what I'm hearing you say.
Yes, it's a core yield is going to really the in terms of shaving it a little bit the things that'll move net yield around core yields 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 of persistent.
She continues to improve.
And then.
Investment income I think you can.
Yesterday, the continued to trend up through the quarter.
Kind of early thoughts on how that.
We will will play out in the first quarter here on a go forward basis I don't know if theres any specifics you can provide.
Curious how much it might have improved the new money yield.
Well certainly we've benefited pretty.
Pretty significantly from the.
The opportunity to capture yield relative.
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 new money yields coming in at around four 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 ratably that type of.
Ability to roll into into.
Into new new money yields over the course of 2023.
That's helpful. Thank you.
The next question comes from Erin <unk> with Citi. Please go ahead.
Thanks, Adam I think you said.
In your prepared remarks that they.
Expectation would be the industry, new insurance written would be more kind of in the 2018 2019.
Levels.
Is there is there obviously a more challenging rate environment for first time, homebuyers, but or is there something else that's kind of driving.
More of that level of challenge for the for the first time homebuyers, Besides just the rates and home prices.
I mean right now it's right it's home prices, it's affordability at some point will find equilibrium, that's probably going to be through a combination of <unk>.
Price right, obviously, we see prices developing potentially right. We don't know with certainty and also over time income will grow as well.
I just wanted to.
Specify though.
The steer that I gave on overall industry and IW wasn't in line with 2018 in 2019. It was in line with the purchase markets from 2018 in 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 <unk>.
19, 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 market. This year of roughly equivalent size call it give or take around 300 billion and just to give you some <unk>.
Taxes in 2018 in 2019 total loan origination purchase origination was roughly one two to one three trillion.
That's our expectation for what we'll see is a purchase market overall in in 2023, which gets you to roughly equivalent size for the semi market is in those years.
Got it that's helpful. Thank you.
Yes.
As a reminder, if you have a question. Please press star then one to be joined the queue.
The next question comes from Geoffrey Dunn with Dowling <unk> partners. Please go ahead.
Thanks.
Firstly, a clarification Ravi on the expense guidance for modest growth is that net of ceding commissions or is that on a gross basis.
On a gross basis.
And and ceded and the impact of what you are referring to the.
Season in <unk> I believe.
Okay. So are our reported basis right, yes, yes, and then Adam I'm curious of your opinion on market pricing with respect to human.
Cumulative loss assumptions, just average what you're seeing across the industry.
The norm.
Years ago, we used to be maybe a 2% cumulative assumption.
And the sense is it probably crept down too.
Two 1% over the last several years as our 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 152% range or 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 or three quarters of rate increases, yes, Jeff Hi, I can't I.
Can't give you a steer as to how any perspective on how our competitors are thinking about pricing and how they're modeling things out. Obviously every company has its own perspective on.
Risks are necessary return rate on what an appropriate risk adjusted return is.
And a lot of that is going to be informed by differences in views on.
On an expected loss outcomes nice piece of business now with 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 term mutations as a general matter, though what I would say is we've really been encouraged by what we would observe is discipline across the market and what I would characterize as a fairly deliberate approach.
The industry has taken in response to an evolving risk environment rates have been hardening they've been lateral hire.
As macro volatility and concerns about the go forward has grown and importantly for US we have been able to achieve incremental price, where we believe it's both necessary and appropriate.
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.
Okay.
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 will be participating in the RBC Global financial institutions Conference on March eight we look forward to speaking with you again soon.
Okay.
The conference has now concluded. Thank you for attending today's presentation you may all now disconnect.