Q2 2023 NMI Holdings Inc Earnings Call
Good afternoon, and welcome to the N M. I Holdings, Inc. Second quarter 2023 earnings conference call.
After today's presentation there'll be an opportunity to ask questions.
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I would now like to turn the conference over John Swenson Wealth management. Please go ahead.
Thank you Anthony and good afternoon, and welcome to the 2023 second quarter conference call for National in line.
John Swenson, Vice President of Investor Relations and Treasury.
Joining us on the call today are Brad Shuster Executive Chairman, Adam Pulitzer, President and Chief Executive Officer, Robin Lowe, Chief Financial Officer, and Nick Real Nieto, our controller.
Financial results for the quarter were released after the close today. The press release may be accessed Anatomize website, located in Nashville, and <unk> 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.
Yes, 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 will occur at any time other than the time of this call.
I'll stand up there on this call we may refer to certain non-GAAP measures.
Today's press release and on our website, we have provided a reconciliation of these measures to the most comparable measures under GAAP.
Now I'll turn the call over to Brad.
John and good afternoon, everyone.
As we talk today I'm greatly encouraged.
Both by the resiliency of the broader macro environment and housing market.
And by the significant and consistent success, we're achieving across our business.
In the second quarter National M. I again delivered standout operating performance.
Continued growth in our insured portfolio and record financial results.
Our lenders and their borrowers continued to turn to us for critical downpayment support.
And in the second quarter, we generated $11 5 billion and IW volume.
Ending the period with a record 191 3 billion of high quality high performing insurance in force.
In Washington, our conversations remain active and constructive.
Policymakers regulators, the FHFA and the Gse's.
Being highly focused on promoting broader access and affordability to the housing market for all borrowers.
And we believe there is broad recognition of the unique and valuable role that the private mortgage insurance industry plays in this regard.
At National MRI, we recognize the need to provide borrowers with a fair and equitable opportunity to access the housing market.
Establish a community identity and build long term wealth through homeownership.
Yeah.
We are actively engaged and committed to equally supporting borrowers from all communities.
And our and are proud to have helped over $1 6 million borrowers to date realized their homeownership goals.
Overall, we had a terrific second quarter and are well positioned to continue to lead with impact.
And drive value for our people our customers and their borrowers.
And our shareholders going forward.
With that let me turn it over to Adam Thank.
Thank you Brad and good afternoon, everyone.
National <unk> continued to outperform in the second quarter, delivering significant new business production strong growth in our insured portfolio and record financial results.
We generated $11 5 billion of N IW volume and ended the period with a record 191 3 billion of high quality high performing insurance in force.
Total revenue in the second quarter was a record $142 7 million and we delivered record GAAP net income of $80 3 million or <unk> 95 per diluted share and an 18, 6% return on equity.
Overall, we had an exceptionally strong quarter and are confident as we look ahead.
The macro environment and housing market in particular have proven to be resilient in the face of increased interest rates.
We see an attractive and sustained new business opportunity with our lender customers and their borrowers continuing to rely on us in size for critical downpayment support.
We have an exceptionally high quality and short portfolio and our credit performance continues to stand ahead.
Our persistency remains well above historical trend and when paired with our strong and IW volume has helped to drive continued growth and embedded value gains in our insured book.
We continue to manage our expenses and capital position with discipline and efficiency with today's incremental $200 million share repurchase authorization, serving as another important step in our effort to maintain funding balance and progressive capital distribution opportunities for our shareholders.
Notwithstanding these strong positives however, macro risks do you remain and we've maintained a proactive stance with respect to our pricing risk selection and reinsurance decisioning.
It continues to be the prudent and appropriate course, and we are encouraged by the continued discipline that we see across the broader private market.
Underwriting standards remain rigorous and the pricing environment remains balanced and constructive.
Overall, we had a terrific quarter delivering strong operating performance continued growth in our insured portfolio and record financial results.
I also want to note how proud I am that for the eighth consecutive year National MRI has been recognized as a great place to work great.
Great place to work is a global authority on workplace culture employee experience and leadership and partners with Fortune magazine to produce the annual Fortune 100 best companies to work for list.
We believe that the quality of our team and the culture that we've established our key competitive advantages and it is gratifying to again be recognized for these strengths.
Looking ahead, we are well positioned to continue to serve our customers and their borrowers invest in our employees and their success and deliver through the cycle growth returns and value for our shareholders with that I'll turn it over to Ravi.
Thank you Adam.
We delivered record financial results in the second quarter with significant new business production strong growth in our high quality insured portfolio.
Record top line performance favorable credit experience continued expense efficiency and record bottom line profitability.
Total revenue in the second quarter was a record $142 7 million.
GAAP net income was a record $80 3 million or <unk> 95 per diluted share.
And our return on equity was 18, 6%.
We generated $11 5 billion, and then IW and our primary insurance in force grew to $191 3 billion up.
Up to 5% from the end of the first quarter and 13, 4% compared to the second quarter of 2022.
12 month persistency in our primary portfolio improved again, reaching 86%.
Impaired to 85, 1% in the first quarter.
Persistency continues to serve as an important driver of the growth in embedded value of our insured portfolio.
Net premiums earned in the second quarter were a record $126 million compared to $121 8 million in the first quarter.
We earned a $1 1 million from the cancellation of single premium policies in the second quarter compared to $1 4 million in the first quarter.
Net yield for the quarter was $26 seven basis points up from 26 three basis points in the first quarter.
Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings was $33 eight basis points up from 33 seven basis points in the first quarter.
Investment income was $16 5 million in the second quarter compared to $14 9 million in the first quarter.
Underwriting and operating expenses were $27 5 million in the second quarter compared to $25 8 million in the first quarter.
Our expense ratio was 21, 8% compared to 21, 2% in the first quarter.
We had 4349 defaults in our primary portfolio at June 30, compared to 4475 at March 31.
And our default rate declined to 71 basis points at quarter end.
Claims expense in the second quarter was $2 9 million compared to $6 7 million in the first quarter, reflecting the broad resiliency of the housing market the strong position and performance of our existing borrowers and continued cure activity within our previous default population.
Interest expense in the quarter was $8 million.
Net income was a record $80 3 million or <unk> 95 per diluted share compared to 88 per diluted share in the first quarter and <unk> 86 per diluted share in the second quarter of 2022.
Total cash and investments were $2 3 billion at quarter end, including $139 million of cash and investments at the holding company.
Shareholders' equity as of June 30 was $1 7 billion and book value per share was $21 25.
Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio was $23 53.
Up four 3% compared to the fourth quarter.
And 18, 2% compared to the second quarter of last year.
In the second quarter, we repurchased $26 million of common stock retiring slightly more than 1 million shares at an average price of $24 83.
Retiring $4 6 million shares at an average price of $20 99.
Today's new 200 million authorization provides us with significant incremental purchase capacity and will run through December 31 2025.
In July we entered into a new excess of loss reinsurance agreement that will provide forward flow risk protection for policies originated in the third and fourth quarters of this year.
The new deal further extends our comprehensive credit risk transfer program and carries an estimated $6 two 5% weighted average lifetime pre tax cost.
Our continued ability to compress the cycle time between transactions.
Execute on favorable terms and secure forward flow coverage for our future production is particularly valuable as it serves to minimize our warehouse exposure and limit the credit risk retained in our high quality insured portfolio.
At quarter end, we reported total available assets under <unk> of $2 5 billion and risk based required assets of $1 3 billion.
Excess available assets were $1 2 billion.
Overall, we delivered standout financial results during the second quarter with continued growth in our high quality insured portfolio and record top line performance favorable credit experience and continued expense efficiency driving record bottom line profitability and strong returns.
With that let me turn it back to Adam Thank.
Thank you Ravi we had a terrific quarter once again delivering significant new business production continued growth in our insured portfolio and record financial performance.
Looking forward, we're confident the macro environment and housing market have proven to be resilient in the face of increased interest rates and 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 and a robust balance sheet.
Supported by the significant earnings power of our platform.
Taken together, we are well positioned to continue to serve our customers and their borrowers invest in our employees and their success drive growth in our high quality insured portfolio and deliver strong performance for our shareholders. Thank you for joining us today I'll now ask the operator to come back on so we can take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
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At this time, we will pause momentarily to assemble our roster.
Our first question will come from Doug Harter with credit Suisse.
Now go ahead.
Uh huh.
Can you just talk a little bit about.
The current environment for premium yields.
And your outlook. It you know it seems like it stabilized in the quarter.
Is that a trend we can expect going forward and kind of where are new.
It's being written relative to the enforce book.
Sure I'll take that this is Ravi.
Net yield in the quarter was $26 seven basis points versus 26, three basis points and in Q1 in both core and net or.
Slightly up quarter over quarter, and I would say we benefited from that.
Prudent that we saw in the quarter.
What I, what we talked about in the past is just a focus on core yield, which really excludes reinsurance and cancellation earnings and we believe that we will remain relatively stable given that we have strong persistency and the rate actions that we've taken so far have been positive, but you have to really take into account the fact that.
That's balanced by the high quality production, which tends to come on with a different rate profile.
Yeah, and then Doug in terms of how premium rate on new business written in Q2 stacks up against that we don't provide specifics about our premium rate.
But we do continue to see the benefit of those rate increases that Rami mentioned, we've really worked hard to achieve them over the past year and.
On the business that we wrote this quarter like $11 5 billion.
High quality high return volume is most importantly supportive of our strong mid teens return objectives.
Our next question will come from Oren <unk> with Citi. You May now go ahead.
Thanks.
This environment seems to be almost like a goldilocks for private mortgage insurance.
Home price appreciation and low claims experience.
It's still being able to you don't have a decent amount of new origination hyper assistance see what what what what are you. What are you worried about what what would be something that you would be concerned about for this environment to change.
Yeah look I think we're.
Good question, we're we're encouraged and I would say incrementally more optimistic when we look at.
At recent data and headlines certainly I think we can all see that macro risks have been receding and its been repeating really since our last call.
We've had a resolution of the debt ceiling deadline, we've had stronger than expected growth recent inflation data has shown signs of easing we've seen stabilization in the regional banking sector through this quarter's earnings announcements and alongside that we've got increase in consumer confidence and so there is reason to be optimistic.
In particular because of how resilient the housing market and house prices have been at the same time, we mentioned in our prepared remarks that risks remain we didn't elaborate but really there are risks that remain broadly to the economy. It's not a certainty that the fed is going to be able to engineer a soft landing and so when we look at it right the fed <unk>.
<unk> tightened again and still have the hawkish stance from our vantage point the commercial real estate markets in focus we've got the pending restart of student loan payments.
It's something that May impact household finances, and regional banks are now facing increased capital requirements that over time.
May curtail lending activity and so when we look at it what we're concerned about is really what happens around us those items that we can't control, we can control how conservatively and appropriately we're managing our business. How we are managing our capital position, our risk mix or pricing decisions, but what happens around us is a consequence and so when we look at those <unk>.
<unk> imbalance, we do still see the potential for volatility on the horizon from a macroeconomic standpoint, and that's what we're concerned about.
That's helpful. Thank you.
And then just secondarily, the persistency rate inched up a bit higher what do you think that in this kind of rate environment would be like the maximum as theyre getting kind of close to wherever that maximum we'd be on the persistency level.
And it's a good question I think I mentioned during the call that we reached 86% in Q2 up from 85, 1% in Q1 and look we expect it to remain well above historical trend through year end.
We might see some modest improvement going forward, but I think the way to think about it is that it's probably going to be naturally a little bit more muted over time, we've just seen an increase just so much and there just is as we go through our portfolio a minimum level of turnover, that's going to occur and we're going to start to.
See.
Some of our portfolio, our most recent vintages hitting points.
Hitting points of time in cancellation and as a result, we're probably going to see some modest improvement going forward, but it's going to be muted over the course of the year, but it's still well above historical trends and were benefiting significantly from the high persistence.
Thank you.
Our next question will come from Rick Shane with J P. Morgan.
You May now go ahead.
Thanks for taking my questions. This afternoon, everybody, Hey, I'd like to talk a little bit about in the unusual environment that we're in the puts and takes for MA penetration.
In the context of overall mortgage volume.
On one hand, we're hearing that cash buyers have.
Huge advantages in this market.
But that's obviously not normally.
The.
They would not normally be competition for your customers I'm wondering if you've seen any substitution.
In that market and at the same time on.
On the other hand.
Robust pricing for starter homes, presumably is driving increased demand and I'm kind of curious how you balance that.
Yes.
It's a great set of questions and I may actually broaden it to just talk generally about where we see origination activity developing in the opportunities that we have both in the near term and over the longer term.
Port borrowers and help them gain access to their homes.
When we spoke last May we shared our expectation that we would see a total purchase origination market of roughly one three trillion for the year and so I think the starting point right to practice. Your question is we're actually still seeing notwithstanding the fact that there are headlines around affordability that rates remain elevated.
We're seeing a really constructive purchase environment and even though it sits behind the record levels that we saw at what I'll call. The pandemic years by historical standards, it's a very large purchase market and within that.
We're seeing a tremendous opportunity to write new business.
We've guided through the course of this year that we expect to see a total private market give or take 300 billion and that remains the case. The first half of the year has come in generally in line with.
With our expectations and our outlook remains the same today.
And so look there are there are buyers out there who will transact they need support and over the long term not just through 2023, but over the long term there are a number of.
Fundamental drivers of both purchase volume as well as <unk>.
Demand that we see sustaining our market opportunity and so we haven't seen a shift because of maybe the rise and increasing advantage that cash buyers have.
Or penetration rates otherwise, it's it's a very large market that's coming in in line with our expectations and it gives us increased confidence as we think about the long term opportunity.
Got it okay very helpful and thank you for refining my question I think that's a better way to explain it. Thank you.
Our next question will come from Mark Hughes with Truest you May now go ahead.
Yes. Thank you.
<unk> taken what was the share buyback a dollar amount in the second quarter and then any insight on your pacing on the buyback. If you think about the balance of the year into next year.
Sure.
Markets Ravi.
In Q2, we did about $26 million in share repurchases.
Slightly over $1 million of shares.
Certainly we're pleased with the execution.
With today's announcement, we have a little bit left in the $125 million share repurchase program and so when you combine that with the $200 million you get to $228 million capacity and we have through the end of 2025 to execute.
As you know we're not on a set schedule it really depends on.
Number of factors, including market dynamics.
How we feel about things in the market in particular, our stock price relative relative to the relative value in the shares and so we plan to execute opportunistically.
And we think about things going forward as the market progresses, we adjust accordingly.
Yes, Mark I think there was a as a rough guide.
<unk> got $228 million of capacity to be deployed over the next 10 quarters and you can think about things on a roughly ratable basis through the end of the authorization period in <unk>.
In December of 'twenty, five although I think Ravi is caveat that it's not going to be firmly regimented.
He is absolutely the case.
Right, So maybe similar to Q2.
And then on the expense ratio refresh me were there any capital market expenses in that number and then up a little bit sequentially.
Anything unusual in there and how do you think it should trend going forward.
Mark This is Ravi just to answer that there are two parts to your question there from the capital market side. The extra wells typically are structured in a way where we don't pay specific fees that are that we outlined like the way we do with islands. It's all rolled into the actual weighted average lifetime pre tax.
Cost that we quoted.
And so thats separate and maybe just to take the second part of your question just on sort of quarter over quarter changes, we're always focused on managing the business with discipline and efficiency and we're pleased with the 21, 8% expense ratio in Q2.
We always try to focus on the ratio and not the dollars and where we're really operating with the same footprint. We have the smallest head count by far in the industry and what if you want to think about this quarter in particular just to give some color for that.
In March we award salary increases those could include merit cost or cost of living adjustments promotions and grant equity awards and the Q2 increases in comp versus Q1, we're one of the components that drove the quarter over quarter change and then another portion of that is just.
Ordinary course projects the pickup we saw from Q1 to Q2, we're just sort of ordinary course things that we do on a regular basis.
We also saw in IW pickup and IW volume increased 31% quarter over quarter and that increases our variable costs and that also contributed to to our quarter quarter increases. So take all of that together thats what drove the increase.
We've said this before in the past about about about our Opex, we don't provide guidance, but we do expect opex from a dollars perspective to grow because we're always investing in people and systems and risk management strategies, and we grow and so.
When you put all those together you could see some uptick in Q4 and Q3 in terms of dollars of expenses.
I appreciate that detail. Thank you.
Next question will come from Bose, George with <unk> you May now go ahead.
Hey, guys. Good afternoon, I just wanted to go back to the discussion on macro.
Especially.
Improved expectations for home prices.
Over the course of this year, how does that sort of running through your thoughts on on loss severities.
Well it's a.
I'd say, we're certainly encouraged by the broad resiliency that.
That we've seen in the in the macro environment and the housing market for our reserving purposes, though we've always aimed to take but we would say is an appropriate but also appropriately conservative view and so in practice. This means that we generally anchor more to downside scenarios when setting our position and that remain the case in Q2, we did in fact, though.
The factor for the resiliency that we've observed in the macro environment and housing market year to date, but we balance that.
By the need to still maintain a conservative stance and reflect some of those risks that I talked about that we still see on the horizon and so at June 30th what that meant is that we moderated our expectations for economic stream and house price declines going forward in our reserving analysis, but we didn't fully remove what I would call a stressed bias.
From our work.
Okay that makes sense. Thanks, and then just switching to the island market. It looks like one of your peers is in the market with the deal is is that the market is starting to look better in terms of potentially reentering for you guys.
What I would say is that it certainly.
We're encouraged by seeing the ILS market rebound.
And certainly having a.
One of our folks in the industry in the market.
The first since September that's very it's very exciting it's very exciting for us and certainly we feel that it's nice to see the market healing a little bit when we think about the state of the reinsurance markets.
We're happy to do the most recent ex ol.
We think capacity has been available broadly in the market, it's been constructive on constructive terms.
In particular, our XO well, we had new reinsurers come into this latest X ol and.
Pricing and risk appetite has been wider than in the past and not.
Not every reinsurers sort of back in the market but.
We're happy to execute the deal its a competitive deal on attractive terms and certainly reflects inefficient form of <unk> capital. Yes. So these are all favorable developments right our ability to continue executing on favorable terms.
In size and with speed in the traditional reinsurance market and we've noted the deal as well that you touched on and naphtha constructive want to see a market that we have we have valued and we've accessed meaningfully in the past rebound constructively.
It gives us more optionality and it gives us additional outlets, which is valuable as we go forward.
Okay, great. Thanks, a lot.
The next question will come from Geoffrey Dunn with Dowling you May now go ahead.
Thanks, Good afternoon.
First question was there a opco dividend up in the quarter.
Yes, there was we distributed $98 million of.
Ordinary course dividends from animal feed elite operating subsidiary up to the holding company during the quarter.
Okay, and then with respect to the assumptions in your loss provisioning.
Thank you, we're taking a very conservative stance on home prices.
What are you now thinking as you look forward in your assumptions.
Yes, so Jeff we've never specifically outlines the underlying assumption, but suffice it to say.
While we have moderated our expectations for what stream might look like we have steel.
Embedded or maintain.
We maintained our stressed biased.
The analysis.
Okay and last question I don't know the details on this for the Mac just announced the formation of our Bermuda subsidiary to help the CRP of illness is that something that management and the board I've ever discussed the strategy of international or something that you think could be kind of within a three year strategic plan for national.
We don't have anything immediately on the horizon will be curious to learn more about the enact announcement. It is a path that some others in our sector have pursued right now we find the best value of deploying our capital to be in support of our primary business. We continue to grow our customer franchise, we continue to grow the opportunity that.
We're able to.
To support and that remains our focus for now.
Okay. Thank you.
Our next question will come from Eric Hagen with <unk> you May now go ahead.
Hey, Thanks, How're you doing first question here I mean, how do you feel like homeowners are keeping up with inflation at this point, especially the borrowers with high Dci to begin with I realize the macro data suggest one thing but is there anything that maybe you're adjusting for at the portfolio level and how do you. How do you maybe adjust for the rest of that inflation stay.
It's higher for longer if you will.
Yeah, Eric It's a good question look I think first and foremost these are among other items ones that we account for from.
From the standpoint of both pricing as well as actively managing the flow of risk in the mix of that risk coming into our portfolio. One of the the risk markers that we consider both on a standalone basis, but also how it how it interacts with other risk markers is a borrower's debt to income ratio, which is essentially a household household coverage.
<unk> metric and we price for higher DTI borrowers in expectation that we will see higher claims activity for those borrowers because their household finances are a bit more stretch and.
And we also actively managed the concentration of risk coming through and so like all other risk markers like all other.
Risk factors that are out there we manage forward in a few ways, we try to price for it for the risks that we're comfortable taking we define what our risk appetite is and try to manage our mix such that we don't exceed that and then we also pursue reinsurance consistently to make sure. We don't have an outsized aggregation in the portfolio.
Yep.
Helpful.
What would you maybe identify at this point as a few of the stronger catalyst for first time home buyers at this point like I think you guys mentioned that the exploration of student loan forbearance or you're thinking that could have a bigger impact on the existing book or the forward opportunity is some borrowers might not be able to qualify or just how are you guys thinking about that thanks.
Look I'd say, it's obviously pretty new what.
What I'd say broadly as we're watching it right now, particularly.
Particularly because we've got an election cycle coming up I think by the administration has a clear vested interest in ensuring a smooth transition for borrowers and is taking steps to ensure that that transition is as seamless to them.
And we've seen.
Several important announcements both from the administration as well as from the Department of Education.
In the month or so since the Supreme Court ruling came out striking down the original student debt relief program.
And so we will see it is possible that the upcoming resumption of payments will have an impact on certain borrowers in our portfolio, who perhaps budgeted expecting more permanent relief from an overall credit standpoint, though we don't expect at this point that the the restart of student loan payments will have.
A material impact on the performance of our portfolio as for the potential impact on new business activity, but love to give you a specific answer but admittedly it's difficult to tell on the one hand, you could see an even greater need for private emigh support before with borrowers who now have to make additional monthly payments towards their student debt not able.
To save as much for a down payment as previously hoped.
But you can also see some pressure the other way with borrowers who were already stretched by higher rates and house prices now pushed to either look at less expensive homes and it's the loan size that drives then IW or perhaps being moved out of the buyer market entirely. So it's one it's one we really need to monitor at this point before.
Before we know which way it will come out overall, though we don't think it will have a consequential impact either on the credit performance of the portfolio or the new business opportunity.
I appreciate the good color. Thank you.
Okay.
This concludes our question and answer session I would like to turn the call back over to management for any closing remarks.
Well. Thank you all again for joining us will be participating in the Barclays Financial Services Conference on September 11th in New York and the Zelman Virtual housing summit on September 19th we look forward to speaking with you again soon.
Conference has now concluded. Thank you for attending today's presentation you may now disconnect.