NMI Holdings Inc (NMIH) 2015 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the NMI Holding's third-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. If anyone should require assistance during this conference, please press star and then zero. As a reminder, this conference call is being recorded.

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

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

Financial results for the third quarter were released after the close of the market today. The release may be accessed on NMI's website 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 those 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, again www.nationalmi.com 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 party 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, and then Glenn will discuss the financial results in detail. 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.

In the third quarter, we generated $3.6 billion of total new insurance written, up 43% from the second quarter. Most of this growth came in our flow business, which was up 51%. Our growth in the quarter was driven by market share gains, reflecting continued growth from existing customers, as well as increasing contributions from new customers added this year.

Our results so far in October suggested our strong momentum is continuing in the fourth quarter. We have maintained a solid pace of new customer acquisition and activation ending the quarter with 906 master policies, up from 842 in the prior quarter and 391 customers generating NIW up from 340 in the second quarter.

Customers are responding favorably to our industry-leading response times, innovative terms of coverage and strong value proposition. We saw especially strong growth in our LPMI production in the quarter as we activated a number of new customers and increased share with existing customers in this competitive part of the market with targeted LPMI programs. As evidenced by our growth in the quarter, these programs have been very well received by customers.

The market for private mortgage insurance has been strong. We currently expect the market for new insurance written this year will be approximately $210 billion, up approximately 25% over last year. This would be a post-crisis high for private mortgage insurance, driven in part by a strong purchase origination market, which we also expect to be at a post-crisis high this year. The purchase market growth is significant because it has roughly 4 times the penetration rate from mortgage insurance versus refinancing.

Since the release of the PMIERs earlier this year, we have evaluated our price structure and product strategy consistent with our previously stated midteens target for return on equity. As a result, we have filed higher rates for our single premium policies that go into effect as of January 2016, the effective date of the additional PMIERs capital charges for this product.

We are also testing a new rate structure for borrower paid monthly policies that will provide a more consistent midteens return across the full credit spectrum. This new rate structure balances prices across FICO scores. We believe this simplified approach is highly transparent, which is a real asset in the post-TRID origination environment and is more responsive to borrowers because it eliminates some of the cross subsidization that existed under the standard rate card.

The response from lenders has been very positive. We expect that our new BPMI product offerings introduced in September will drive BPMI volume in future quarters, and we have already seen evidence of this in our application volume for September and October.

In summary, we are very excited about the growth we are achieving in new insurance written. Customers are embracing our innovative terms of coverage and our highly responsive customer service. We believe there is more growth ahead as we continue to gain traction in the marketplace.

And with that, let me turn the call over to Glenn Farrell. Glenn?

Thank you, Brad, and good afternoon, everyone. I'm pleased to review with you our third-quarter results.

43% of master policyholders generated new insurance written in the third quarter, up from 40% in the prior quarter. Our flow NIW is growing among a diversified customer base with roughly half coming from our 20 largest customers and the remaining coming from more than 370 other lenders. As Brad mentioned, primary new insurance written in the quarter was $3.6 billion, up 43% from second-quarter NIW of $2.5 billion. We believe much of our growth in the quarter came from market share gains.

There are two drivers to the market share gains. The first and most impactful is increasing volume with existing customers who we define as customers generating NIW for us as of the end of 2014. The second is contributions from new customers we've activated in 2015. Existing customers accounted for 71% of flow new insurance written in the third quarter and 82% of flow new insurance written for the year-to-date. In the third quarter, we increased volume with these existing customers by 22%. We believe this is a continued demonstration of our ability to increase volume with existing customers once we have them generating NIW.

Now to new customers, again defined as customers who generated their first NIW with us in 2015. Over the first three quarters of 2015, we have activated 197 new customers who contributed 18% of new insurance written for the year-to-date. We expect to see the number of new customers and the new insurance written associated with those customers continue to grow in the fourth quarter.

Looking at product mix, monthly BPMI represented 44% of Q3 NIW, down from 57% in the second quarter. As Brad mentioned, this is largely due to the strong customer response to our targeted LPMI programs. Flow singles comprised 37% of total new insurance written in the quarter, up from 19% in Q2.

Aggregated single represented 19% of total NIW in the quarter, down from 24% in the prior quarter. As aggregated single is expected to be less than 20% of our NIW going forward and with returns having improved to a level similar to our flow singles, we do not expect to report this product separately in the future.

Total policies in force as of the end of the quarter were approximately 46,000, up 46% from 32,000 in the prior quarter. Primary insurance in force at quarter end was $10.6 billion, which compares with $7.2 billion at the end of the second quarter. Pool insurance in force as of the end of the third quarter was $4.3 billion, which compares with $4.5 billion as of the end of the second quarter.

Looking at the mix of insurance in force by product, we ended the third quarter with monthly BPMI representing 48% of primary insurance in force, down from 50% in the second quarter; aggregated single was 28% of insurance in force in the third quarter, down from 34% in Q2; and flow singles were 24% of insurance in force in Q3, up from 16% in Q2.

Overall persistency as of the third quarter was 77%, up from 72% as of Q2. Excluding aggregated single, persistency was 90%, up from 89% as of Q2. Persistency in the aggregated single book was 64%.

Premiums written for the third quarter were $35.4 million, up 74% from the $20.3 million in the prior quarter. Premiums earned for the quarter were $12.8 million, an increase of 44% from $8.9 million in the prior quarter. Approximately $900,000 of premiums earned were attributable to cancellations in the quarter, which compares with $800,000 in the prior quarter. Annualized premium yield for the quarter was 52 basis points, up slightly from the 51 bips in the second quarter.

Investment income in the third quarter was $1.9 million, up from $1.7 million in the prior quarter. Total revenues in Q3 were $14.7 million, up from $10.9 million in the prior quarter.

Underwriting and operating expenses in the third quarter were $19.7 million, including share-based compensation expense of $1.8 million. This compares with underwriting and operating expenses of $20.9 million, including $2.1 million of share-based compensation in the prior quarter. The operating loss before share-based compensation expense was $3.3 million, which compares with a $7.9 million loss in the second quarter. As our insurance in force continues to grow, we expect to see declining losses going forward until we reach profitability.

At quarter end, cash and investments were $447 million, which compares with $434 million in the prior quarter. This includes $161 million in the holding company. In the quarter, we, again, generated positive cash flow from operations, and we are now cash flow positive for the year to date. We expected to maintain positive cash flow for the remainder of the year.

Book equity as at the end of the third quarter was $408 million, equal to $6.95 per share. This book value excludes any benefit attributable to our deferred tax asset of approximately $54 million as of December 31, 2014. As of quarter end, our risk to available assets ratio and the primary insurance company was approximately 11.6 to one.

Now some brief comments on our outlook. Based on current trends, we expect to meet or exceed the high end of our most recent full-year NIW guidance range of $10 billion to $11 billion. This leads us to expect primary insurance in force at year end of approximately $14 billion.

We also are on track with our spending plans as we exit 2015. We believe these metrics are trending favorably toward achieving operating profitability before stock-based compensation expenses sometime in the first half of 2016.

Now I'll turn it back to Brad for his concluding comments.

Thank you, Glenn. We are very pleased with our results in the third quarter and our current trajectory. In every metric that we look at as important for our Company, we had meaningful growth in the third quarter as compared with the second quarter. Whether it is total NIW, flow NIW, growth in number of new customers, NIW from new customers, NIW from existing customers, total policies in force, primary insurance in force, premiums written, premiums earned, new master policies, and total customers contributing to NIW, we saw meaningful growth. We expect to end the year in a solid competitive position and look forward to continued growth and profitability in 2016.

As a final note, we invite you all to attend our investor day, which is being held on November 19 in New York. We will introduce other members of our senior leadership team and trust you will end the session with a deeper understanding of how we are building National MI into a competitive and highly profitable participant in this growing industry.

Let me now turn it back to the operator so we can take your questions.

(Operator Instructions) Bose George, KBW.

Thanks. Good afternoon. First just wanted to ask one on pricing. You made a comment about pricing, the new pricing on the ROE. So just when you think about it, if the existing book is written under the new pricing -- under the new models, would the blended ROE end up being very similar?

Bose, this is Brad. I think if we were to sort of reprice everything on our new LPMI and BPMI pricing going forward under PMIERs, I think you'd have returns very similar to what we talked about historically. They would be in the midteens area.

Okay. Great. And then, based on the singles this quarter, if you would, what are the target ROEs? You noted that the returns on the aggregated and others have kind of converged. So where have you seen those returns?

So those returns, Bose, they are a little bit lower than the BPMI returns, but still sort of low to mid-double-digits depending on the program.

Okay. Great. And then one on capital, in terms of timelines for raising capital to comply with the $400 million PMIERs requirements, any updates there in terms of timeline and options you are considering?

Well, Bose, we are obviously highly aware of the PMIERs deadline coming up at the end of the year, so we are exploring options available in capital markets that would put us in compliance as of the reporting date at the end of the year.

We also are very cognizant of that because we are growing rapidly, and we will be looking for capital to support our growth. So we haven't made any decisions there, but I think we will be kind of wrapping up our exploratory discussions here shortly and so just watch for something in the fourth quarter.

And then, of course, to the extent that we don't find -- to the extent we don't find any attractive options available now, we certainly have a transition plan available to us if we decide that that's the best thing for our shareholders.

Okay. Great. Thank you.

Mackenzie Kelley, Zelman & Associates.

Thanks. Just a few -- first, on the targeted LPMI program that you mentioned, is that a new discounted product or what is that?

That was just some programs that we put into place sort of the mid-part of the year, sort of late second quarter, early third quarter that allowed us to open up some opportunities with some customers that we had not yet activated. So you know, as I said, those have been important in terms of generating NIW for us in the third quarter, but we are looking to raise our pricing in LPMI as we get into next year and the PMIERs go into effect.

Okay. Great. On the pace of improvement in the monthly NIW, it decelerated from what we've seen over the last few quarters. And obviously the share came down, and I know you mentioned part of that was lender specific. But if you look at the accounts that have been generating volume over the last few quarters that aren't still in such a ramp mode, are you seeing the benefit of them beginning to allocate more of the monthly BPMI business, or are they still --is there even an increase in the amount of LPMI volume that you are getting from those existing accounts?

So I think just because of our small, small size and our overall level of development, I think quarter to quarter fluctuations can be a little bit misleading. We did have some great growth in LPMI, as I said, but we still grew our BPMI. And we introduced these new BPMI pilots I've been talking about late in the third quarter, and we are seeing good traction in that. So we expect that our BPMI will ramp up nicely in the fourth quarter, and then over time as we mature I think you will see our mix move to approximately that of a private MI market as a whole.

Okay. And then just lastly, with those new BPMI rates, can you estimate about what percent of your customers are -- your master policy holders have agreed to adopt that and kind of what you expect the mix to be between the flatter BPMI versus the more national BPMI rate card?

I don't actually have that number. I do think that our new pilot rate card has been very effective in terms of activating customers we have not previously done business with, but I don't have the breakout between those customers using our national rate card and those using the new pilot rates.

Okay. Great. Thanks.

Christine Worley, JMP Securities.

I was wondering if you could give a little bit more detail on the 22% growth from the existing customers that you saw in the quarter? I mean is that more on the larger customer side or more of the smaller -- the 370 that you don't consider top 20?

Christine, I think it was pretty well distributed across the full gamut. We've seen some success at the small- to medium-sized customers, but also a lot of success with some of our larger accounts that I think you will continue to see results flowing through the fourth quarter.

Okay. And then on the lender paid business, I mean with the price increases that you are expecting to put in at January 1, do you think that we will see maybe a falloff in the volumes in that business that we saw -- that we are seeing towards the back half of this year, or how are you sort of thinking about that moving forward?

Yes, I guess it depends on the way the competition responds to the new capital rules and whether they kind of evaluate capital usage and returns in a similar way that we do. But we will just have to kind of wait and see how that plays out.

Okay. And then just lastly, on the expense sort of step-down that we saw in the quarter, do you think, I guess stripping out the stock-based compensation, do you think this is a good run rate going forward or we will still see some step-up as the book grows?

Christine, I think the step-down, as you phrased it, in Q3 was a little bit of a result of some what I'll call one-time effects in the second quarter that caused a little bit of bumpiness in Q2. I think our run rate coming out of Q3 is probably the appropriate one to reference, but maybe with a little bit of volume related growth in there as well.

Okay. Great. Thank you very much.

Amy DeBone, Compass Point Research.

Hi, guys. Thanks for taking my questions. I just have one follow-up on pricing and the pilot BPMI rate card. Is the minimum capital requirement under PMIERs taken into account when cross subsidization is eliminated across the rate cards? Meaning, that if the NIW mix shifts toward potentially higher credit quality loans, does the minimum capital requirement impact the average return?

Amy, actually the way we designed it, we've become sort of indifferent to mix because of the way we've adjusted the rates and eliminated that cross subsidy. So we're now indifferent to mix.

Okay. When will that pilot rate card be made public?

You know Amy -- this is Brad -- we just have to wait and see how the traction goes into the marketplace, and as I said earlier, it's the early returns are very encouraging, but it still is early. So we're just going to have to monitor the uptake and make a decision sometime this quarter or early next year.

Okay. And then one last one. The success of the targeted LPMI this quarter and it's happening prior to the new higher rates going into effect, does that impact the $15 billion to 16 billion insurance in force breakeven point at all?

No, we're not changing that. It was $15 billion to $17 billion breakeven point that I believe we've guided to previously.

Okay. Thanks.

That has not changed. Thank you.

(Operator Instructions) Joseph Boskovich, Old West Investments.

Hi. Good afternoon. Could you give us a little more color about the movement of Jay Sherwood?

Joseph, this is Brad Shuster. We filed an 8-K about that some time ago. There is really not a whole lot more color there, other than Jay was a Co-Founder of the Company with me. He did a lot of great things with us when we were a startup. But as happens in so many startup companies, sometimes the team that you have in place in the early years is not the same team when you mature as a company, and that's similar to what happened here.

Okay. So he is still on the Board?

He's not been on the Board of the holding company and is not on the Board, but he is still under contract with us.

Got it. Okay. Thanks.

Thank you.

I am showing no further questions at this time. I would now like to turn the call back over to management for any closing remarks.

So we thank you all for joining us on the call today. Thanks very much.

Hope to see you November 19.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Have a great day.