NMI Holdings Inc (NMIH) 2015 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NMI Holdings, Inc. first-quarter 2015 earnings conference call. At this time all participants are in a listen-only mode. Later we will conduct a question-and-answer session and instructions will be given at that time. (Operator Instructions). As a reminder, today's program is being recorded. I would now like to introduce your host for today's program, Mr. John Swenson, of National MI. Please go ahead.

Thank you Jonathan. Good afternoon and welcome to the 2015 first-quarter conference call for National MI. I'm John Swenson, Vice President of Investor Relations and Treasury. Joining me on the call today are Brad Shuster, Chairman and CEO of National MI; Jay Sherwood, our President; and Glenn Farrell, our Chief Financial Officer.

Financial results for the first quarter were released after the close of the market today. The release may be accessed on NMI's website located at www.NationalMI.com, under the investors tab. During the course of this call we may make comments about our expectations for the future. Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website under the investors tab or through our regulatory filings with the SEC.

If and to the extent the Company makes forward-looking statements we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no interested parties should rely on the fact that the guidance of forward-looking statements is current at any time other than the time of this call.

Now to our conference call. Brad will open with an update on the state of the business, Jay will provide comments on our progress with new and existing customers, and then Glenn will discuss the financial results. We then will take your questions. With that let me turn the call over to Brad Shuster. Brad?

Thank you, John, and thank you all for joining us on the call today. Let me start with some comments on the quarter, recent regulatory developments, and opportunities for product expansion. In the first quarter we generated $1.2 billion of primary flow NIW, up 23% from the fourth quarter, reflecting strong growth in what is normally a seasonally weak first quarter for the industry. We have also made significant progress compared to where we were just one year ago. We have grown approved master policies by roughly 80%, our revenues have more than doubled, and our count of insurance policies in force is up tenfold. We are proud of what we have achieved in a very competitive environment and we are excited about the prospects of continuing our growth in 2015 and beyond.

Now let me turn my comments to the final PMIERs and the new capital requirements for our industry. In general, the final PMIERs did not change significantly from the draft form we saw and commented on last summer. We are pleased to now have more certainty around the regulatory environment and the capital requirements upon which we can build our business. We also believe the new PMIERs reinforced the importance of a sound and financially stable private mortgage insurance industry, which is a critical component of a healthy residential mortgage market.

Based on the new PMIERs, our risk to available assets ratio in the insurance companies as of the end of March was 5 to 1, which compares with the maximum under PMIERs of 18 to 1. We are substantially over-capitalized relative to our current risk in force and we have the capacity to write approximately $20 billion of new insurance on that basis. Since our founding, we have anticipated the needs to raise additional capital to support our growth, and the new PMIERs do not fundamentally change any of those assumptions. We also continue to believe that, at the appropriate time, we will have a variety of capital opportunities to choose from, including equity and equity-linked instruments, debt and reinsurance transactions. Overall, we believe the PMIERs are a positive for the industry and for National MI, and we are ready to move forward under the new framework.

Now that the counterparty strength of the private MI industry has been mandated under the new PMIERs, we believe it is now time to encourage further transfer of housing market risk to the private sector through private mortgage insurance. We believe there are a number of ways to accomplish this risk transfer. We expect that reductions in agency GPs and LL PAs would continue the shift of new insurance to conventional product versus the FHA. And with this in mind, we were pleased to see elimination of the adverse market fee concurrent with the release of PMIERs.

Another option we are excited about is deeper coverage on conforming loans. As a simple illustration, today's private mortgage insurers provide 30% coverage on a 95% LTV loan, which means the MI coverage reaches down to about 67% loan-to-value. We and others in the industry are advocating for coverage down to 50% loan-to-value, which we believe could provide significant benefits to taxpayers and borrowers. The additional protection to the taxpayers can be provided through the existing mortgage finance system at no additional cost or even at savings to borrowers compared to the current mortgage finance convention.

This form of deeper MI risk share has been championed by the Mortgage Bankers Association. This deeper coverage carries higher premiums than today's standard coverage because of the additional risk and capital requirements. However, the higher premium rate can be offset if Fannie and Freddie lower their guarantees fees and their loan level pricing adjustments, which they can do without incurring additional loss risk because of the deeper MI coverage. The MBA issued a research paper in late 2013 in support of the deep MI concept and continues to support this innovative risk share idea. This type of deeper MI risk share requires no new legislation; it requires nothing more than action by the FHFA, along with Fannie and Freddie, to reduce their fees to reflect the enhanced loss mitigation provided by the expanded mortgage insurance.

This is an easy to execute plan that has the potential to incrementally reform our mortgage finance system by putting more private capital in front of public risk, a goal that is shared with all groups that are currently part of the discussion to reform the US mortgage finance system. Again, we are excited about this opportunity because it would expand the market for private mortgage insurance while at the same time reducing taxpayer exposure to risk and potentially reducing cost to borrowers. A real win-win. Now that the private mortgage insured capital standards have been finalized, we trust that the FHFA and the GSEs will give this proposal serious consideration in 2015.

In summary, we are pleased with the strong first quarter growth in flow NIW and the overall progress of the business. We are off to a great start in 2015 and are highly focused on delivering a year of growth in active customers and new insurance risk. With that, let me turn the call over to Jay Sherwood. Jay?

Thanks, Brad. As Brad mentioned, our flow business was up 23% from the fourth quarter, which is a result of our ability to increase volume across our growing customer base. Aggregated single was down 29% versus the fourth quarter, leading to a flat total NIW comparison. We are pleased with our improving product mix. In the first quarter, monthly BPMI represented 54% of total NIW, up from 43% in the prior quarter. Flow of single premium policies comprised 14% of total NIW in the first quarter, up from 12% in Q4. And finally, aggregated single premium LPMI represented 32% of total NIW, down from 45% in the fourth quarter.

We also continue to add customers at a rapid pace. We ended the quarter with 777 approved master policies and 291 customers generating NIW during the period. This compares to 735 approved master policies and 251 customers generating NIW in the fourth quarter of 2014. Once we are on board with a customer, we often get the question of how we go about increasing our share. While the answer varies from customer to customer, we would point to three things. First, we are focused on providing exceptional customer service. We believe we have the most responsive underwriting and customer service teams in the industry.

In our non-delegated business, our average turn time on new applications is between 6 to 8 hours, which compares with 24 to 48 hours for the majority of the industry. This is a result of how we designed our non-delegated underwriting operation, which allows us to operate at something close to full utilization while at the same time providing best-in-class turnaround time. We receive anecdotal praise from customers almost daily touting the quality of our people and processes. These comments are gratifying, confirming that we are achieving the industry-leading level of customer service that we set out to provide.

Second, we actively sell twelve-month rescission relief. We are the first and sure to offer twelve-month rescission relief and we believe our approach provides greater certainty of coverage, enhancing our reliability as a counterparty. Finally, we have a highly motivated and properly incentivized sales team unencumbered by legacy issues such as rescissions and denials, allowing them to more easily forge relationships with many customers. We believe these are meaningful differences that will allow us to continue to grow in a very competitive environment. For the balance of the year we will maintain our dual focus on increasing share with our current customers and continuing to add new customers generating NIW.

Now I'll turn the call over to Glenn Farrell for more details on the financial results. Glenn?

Thank you, Jay, and good afternoon, everyone. I'm pleased to review with you our first quarter results. Total NIW for the first three months of the year was $1.7 billion, flat with the prior quarter, but we believe a great result in what is seasonally a down quarter. Primary flow NIW was $1.15 billion, up 23% from the prior quarter. Aggregated single premium NIW for the first quarter was $542 million, which compares with $757 million in the prior quarter and $270 million in the first quarter of 2014.

As of March 31, 2015, primary insurance in force was $4.8 billion, up approximately 40% from $3.4 billion at the prior quarter end. Pool insurance in force as of the end of the first quarter was $4.6 billion, compared with $4.7 billion at the prior quarter end and $5 billion as of March 31, 2014. Persistency as of the first quarter was 68%, reflecting significant cancellation activity, primarily related to the refinancing within the aggregated singles book. Excluding aggregated singles, persistency was 89%.

Premiums written for the first quarter were $12.9 million, down from $14.1 million in the prior quarter as a result of higher mix of BPMI monthly product. Premiums earned for the quarter were $6.9 million, up from $5.5 million in the prior quarter. Note that premiums earned in the first quarter included approximately $1.4 million of benefit from accelerated recognition of premiums primarily as a result of cancellation of aggregated single premium policies. In contrast we saw approximately $1.1 million of additional earned premiums due to cancellations in the prior quarter. Excluding these effects, premiums earned in the quarter grew approximately 25% over the prior quarter.

Investment income in the first quarter was $1.6 million, up from $1.3 million in the prior quarter. This primarily reflects more complete deployment of cash into investments. Total expenses in the first quarter were $18.5 million, including stock-based compensation expense of approximately $2 million. This is up 5% from $17.7 million in the prior quarter and is consistent with our targeted increases and fixed and variable costs for the year.

The net loss for the first quarter was $7.8 million, or $0.13 per share, which compares with a loss of $10 million or $0.17 per share in the prior quarter, and a loss of $15.1 million or $0.26 per share in the first quarter of 2014.

Turning to the balance sheet, as of March 31, 2015, cash and investments were $434 million including $158 million held at the holding company. Book equity was $423 million, equal to $7.23 per share. This book value excludes any benefit attributable to the Company's net deferred tax asset, which at year-end was approximately $54 million. As Brad mentioned, excluding assets at the holding company, our risk to available assets ratio at quarter end was 5 to 1, which compares to the maximum risk to available assets ratio under the final PMIERs of 18 to 1.

In summary, we are pleased with the progress of the business and our solid growth in the first quarter. Now I'll turn it back to the operator so we can take your questions.

(Operator Instructions). Bose George, KBW.

Good afternoon. The First is just the -- it was good to see the nice increase in the monthly NIW production. Just curious, was there anything unusual about the pace in 1Q? It was a lot stronger than 4Q, and can we think about growth levels that we saw in this quarter going forward?

No, there was nothing unusual or one-time event in the first quarter. So I don't think there's anything to add to that.

Okay, great. So this is a good baseline, and the growth levels we saw this quarter are reasonable in terms of extrapolating from that?

Well, Bose, if you recall in the last quarter we gave some guidance related to NIW. Just to remind you what that was, it was $6 billion to $7 billion of total NIW with $5 billion of that coming from flow. And at this point we are not going to be updating that guidance but we will look at that as the year progresses.

Great. And then just in terms of the single premiums, does it look like -- did your share decline this quarter or did you choose to back away a little bit from that product?

No, I think it's just again the changing products mix. As I mentioned in the prepared remarks we are definitely happy with the way the mix is shifting, but there was no conscious effort to shift away from that to a degree.

Okay, great. And then just actually one little question beyond the book value. It went down a little less than the GAAP losses there. Any other item that drives the book value number?

We are not aware of anything else that would be driving that. We will check into that, but get back to you.

It's a couple million dollars difference; it's probably somewhere in the equity portion (multiple speakers)

Small-cap, I was just curious.

We'll let you know, Bose.

Great, thanks.

Mackenzie Kelley, Zelman and Associates.

First on the NIW, do you have a sense of how much of the total flow volume was driven by refis versus purchase?

For total NIW, 60% of our volume was purchased, 40% was refi. In the flow business, so excluding aggregated singles, 75% was purchased, 25% was refi.

Okay. And do you know how that compares to last quarter, maybe?

Not significantly different. The aggregated single book, of course heavily weighted towards refi. So in our total mix you would see the change between flow and aggregated single. But within those products, not a significant change.

Okay, that's helpful. Secondly, the commentary around what customers are finding helpful with National MI was good perspective. As we think about the opportunity for National MI even over the next five years, what is a reasonable or realistic market share range that you guys are targeting that we should be thinking about?

We haven't given any sort of metrics around market share. As we've mentioned on previous calls, we've really been focused on the absolute level of insurance in force to breakeven. We did give some guidance around that last quarter, which was $15 billion to $17 million of insurance in force required to breakeven. And that's still a reasonable number for people to be looking at.

Great, thanks.

Jason Stewart, Compass Point.

I wanted to ask you about the impact prepayments have had. Or I guess I should say the heavy refinance environment has had on the FICO LTV distribution of NIW. Maybe what might be more typical over time. And if you care to take that to a premium level, it seems like it's a little higher FICO, higher LTV today than it might be, and maybe if you could give us some color as to where that could end up and what that means to revenue.

Actually, I don't know how much of a connection there would be between the heavy refinance activity and those metrics. I think what we have mentioned previously is the aggregated single tends to have a higher FICO score and lower LTV. And that is where a fair amount of the refi business comes from. Aggregated single in the last quarter, about 90% of that volume was refi, so heavily refi-oriented there. but I'm not sure if I see an explicit connection between what you are saying and the FICO LTV mix.

Okay. So 740 FICO, low 90 LTV is pretty consistent with where you'd expect the monthly flow business to be over time?

That's right.

Okay. The second part of that is really if you thought there was any impact different than your expectations on the FHA's MIP reduction. I think maybe we got a little bit less of a change in LLPAs than some had thought. Whether the market dynamics had played out as you thought, or are there any change to the way you see that?

What we've seen mostly in the marketplace as a result of the MIP reduction at the FHA is a lot of activity and refinancing existing FHA loans in order to take advantage of that lower premium. So it hasn't been a huge driver in terms of the market yet. Although the actual shares between conventional and government execution aren't really available yet on a current basis. So, while to your comment on yes, I think some of the changes to LLPAs were a little bit less than we had hoped for, as you can tell from the comments earlier, we are hoping that that's not the end of the story there. And we think there's a lot of opportunity to do some very good things in the housing market by having those more reflect the strongly capitalized counterparties that the GSEs now have with the private mortgage insurers.

Got it. That makes sense. Thanks and I'll jump out. Thank you.

Steve Stelmach, FBR.

It's Pat Kealey actually on for Steve. Just wanted to dig in with your NIW expectations, and with the color you gave on account penetration and just overall growth in accounts. How should we expect your growth flowing between those two avenues, or is it more of a 50-50 split?

Just to make sure I understand, your question is do we see the growth coming from existing customers or new customers?

Yes. Just thinking along the lines of penetration versus account growth, which you think in the more near-term is going to be the engine between the two?

I think we outlined this on the last call, the $6 billion to $7 billion of total NIW, with again $5 billion coming from flow, is primarily based on our customer base as of the fourth quarter. So, within that number it's primarily going to be coming from existing customers and expanding our share there.

Great, that's helpful. And then also with the regulatory clarity you guys have now, just taking a look at the investment portfolio, is there may be an additional lever for you guys to pull there and maybe increase the yield there a little bit? Or just kind of any thoughts you might have going forward there.

We did see a bump in interest income, not really from rate but just from being more fully invested, Q1 versus Q4. But that work's basically complete and we haven't envisioned any adjustments in the mix of the portfolio. So I think the Q1 level of yield and income you're seeing is what we expect for the rest of the year.

Great, thank you guys.

Geoffrey Dunn, Dowling and Partners.

Thank you. I have a few for you. First, in the first quarter did you see any change in the price competition either in singles or aggregate singles?

No, we didn't see any material changes there.

And with the GSEs set to review singles, assumingly coming out with some sort of higher capital charges there, how are you thinking about approaching the singles business for the next nine months ahead of getting those rules?

Yes, I think we will have to wait and see what those rules are before we discuss that.

All right. On PMIERs, what are your thoughts on the available asset level in the next 12 months relative to the 400 minimum? And particularly as you frame that, with all the MIs now looking to be compliant by year-end, does that change any kind of timetable for you to be compliant?

As we've said all along, we envision the need to raise capital to support the growth of our business. And the capital raise we laid out, we said over the next two years we think we will have our capital fully deployed and we will be doing that. So it's sort of coincidental that we have the PMIERs now to comply with. And so we think that that capital raise will fully satisfy that in addition to giving us the capital we need to grow the business further.

I guess what I'm asking is, if you are short of the 400 threshold this year, do you think you need to be compliant given that others are trying to be compliant at the effective date?

No, I don't think that's a relevant factor. I think most lenders understand that PMIERs developed for the legacy companies and to address their shortfalls as opposed to a new entrant, at 5 to 1 risk to capital.

Okay, great. Thank you.

Christine Worley, JMP Securities.

Most of my questions have been asked and answered, but just to go back to the aggregated singles once more. Should we -- how are you thinking about it for the remainder of the year? Should we expect a commensurate step-down each quarter similar to what we saw this quarter? Or was this a little bit more you were just going with the market was dictating?

Yes, it will depend on what the market has to offer. And as we mentioned on the last quarter call, we are guiding to around $1 billion to $2 billion of that product for the year. Did approximate $500 million in the first quarter, so at that pace we would be at the higher end of that range.

Okay. Thank you very much.

(Operator Instructions). This does conclude the question-and-answer session of today's program. I'd like to hand the program back to management for any further remarks.

Okay. Thanks, everyone, for joining us. We will be presenting at the KBW conference in New York on June 2, and happy Cinco de Mayo to everyone.

Thank you. Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.