NMI Holdings Inc (NMIH) 2016 Q1 法說會逐字稿

Good day, ladies and gentlemen and welcome to the NMI Holdings, Inc. First Quarter 2016 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 follow at that time. (Operator Instructions)

I would now like to introduce your host for today's conference, Mr. John Swenson. Please go ahead, sir.

Thank you, Christi. Good afternoon and welcome to the 2016 First Quarter Conference Call for National MI. I am 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 first quarter were released after the close of the market today. We also published supplemental information highlighting certain current and historical performance metrics as well as an illustration of a loan level profitability model. The press release as well as the supplemental information 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 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, and then Glenn will discuss the financial results in detail. After some closing remarks from Brad, we will take your questions.

With that, let me turn it over to Brad Shuster. Brad?

Thank you, John and thank you all for joining us on the call today. National MI delivered excellent results in the first quarter. New insurance written of $4.3 billion with a record first quarter result and was up more than 150% over the same quarter last year. We grew our monthly borrower paid business by 23% over the prior quarter. This was on top of 28% growth in monthly product in the fourth quarter.

Just as we did in Q4, we achieved this in a market that we believe was down seasonally suggesting further market share gains for us in the monthly market segment. Although industry figures are not yet available, in the first quarter, we believe we maintained the overall market share of 9% achieved in our record fourth quarter last year, while significantly changing our product mix.

As we have discussed previously, effective January 1, we increased our rates for lender-paid singles product. We were the first to announce this higher pricing. As expected, the market has begun to adjust to these higher prices. This response combined with our strong performance in monthly product drove a meaningful shift in mix.

Consistent with the trends we described on our last call, monthly product represented 59% of NIW in the first quarter, up from 45% in the prior quarter. We have targeted a product mix that roughly mirrors the mix of the market and we are rapidly tracking towards that goal.

Since the PMIERs became effective January 1, we have seen the rest of the industry largely address premium rates to the PMIERs asset requirements. We like our rate structure and we do not anticipate making additional changes to our premium rates.

In the first quarter, we surpassed 1,000 approved master policies, ending the quarter with 1,023, an increase of 59 over the prior quarter. We generated NIW with 69 new customers in Q1, driving the number of customers generating NIW ever to date to 594. These are great accomplishments for our team and a big part of how we are continuing to grow in a competitive market.

We believe we have the opportunity to continue to add and activate new customers at a solid pace in 2016. We are seeing good gains from customers that have begun doing business with us for less than a year, many of whom just became active in the second half of 2015. In general, we expect to continue to see gains from many of these customers throughout 2016.

Because of the strong growth we are experiencing, we are implementing a reinsurance program as a key component of our capital planning. We have received proposals from multiple reinsurers. Based on the feedback we have received, we are confident that we will be able to execute a placement at reasonable terms. Importantly, reinsurance will allow us continue to grow internal capital and profitability while deferring indefinitely the need for an equity capital raise. Glenn will share more details on our planned program in his comments.

In summary, we had another excellent quarter of growth in NIW, insurance-in-force and premiums. We continue to anticipate a healthy market in 2016 and we believe National MI is on pace to have a very strong year as measured by every objective metric. I'll have some closing comments after Glenn provides more detail on the financial results. Glenn?

Thank you, Brad. And good afternoon everyone. I'm pleased to share with you a review of our first quarter results. As Brad mentioned, Primary NIW in the quarter was $4.3 billion, down slightly from $4.5 billion in the fourth quarter last year and up 153% over the first quarter of 2015. The small sequential decline was solely attributable to 30% decrease in our singles NIW as monthly product increased 23% quarter-on-quarter.

Looking at product mix, monthly premium product represent 59% of Q1 NIW, up from 45% in the fourth quarter. The mix of applications which are a precursor to NIW continues to shift toward monthly product reaching 69% month-to-date in April. We expect our NIW mix to continue to migrate toward the overall industry mix as we mature.

In terms of purchase refinance mix, for the quarter, purchase represented 69% of NIW with refinance 31%. This compares with a 72%-28% mix in the fourth quarter. Total policies in force as of the end of the quarter increased to 80,000, up 25% from 64,000 in the prior quarter.

Primary insurance-in-force at quarter-end was $18.6 billion, which compares with $14.8 billion at the end of the fourth quarter. Pool insurance-in-force as of the end of the first quarter was $4.1 billion, which compares with $4.2 billion as of the end of the fourth quarter. Weighted average FICO of risk in force as of the end of Q1 was 752, flat with the prior quarter. And overall persistency in the first quarter was 86%, up from 84% in Q4.

Premiums earned for the quarter were $19.8 million, up from $16.9 million in the prior quarter. The annualized premium yield for the quarter was 45 basis points, down from 49 bps in the fourth quarter. This range of premium yield is consistent with our expectations.

Because of the size and mix of our current book, we expect that premium yield will continue to be influenced by short-term factors such as the average quality of business we are writing, the mix of single versus monthly policies and cancellations. Over time, we expect premium yield will settle around 50 basis points. It is worth noting that just as our average premium rate is based on the high credit quality of our NIW, our weighted average PMIERs asset charge declined in the first quarter consistent with this high quality.

Investment income in the first quarter was $3.2 million, up from $2.1 million in the prior quarter. The increase reflects the investment of the proceeds of our term loan, as well as near full investment of assets in the insurance company, which is now generating positive cash flow.

Total revenues in the first quarter were $22.2 million, up from $18.9 million in the prior quarter. Underwriting and operating expenses in the first quarter were $22.7 million, including share-based compensation expense of $1.4 million. This compares with underwriting and operating expenses of $21.7 million, including $2.3 million of share-based comp in the prior quarter.

We had 55 notices of delinquency in the primary book as of the end of the first quarter, up from 36 at the end of the prior quarter. We recorded 458,000 for claims expense and there were no paid claims in the quarter. Our first quarter loss ratio defined as claims expense divided by premiums earned was 2%. As mentioned last quarter, we expect our loss ratios over the next several years to be in the low-to-mid single digits.

Now moving to the bottom line, net loss for the first quarter was $3.9 million or $0.07 per share, which compares with a net loss of $4.8 million or $0.08 per share in the prior quarter. We crossed the threshold of profitability before stock-based comp and interest expense during the first quarter. This is a significant milestone in our development and consistent with our guidance that $15 billion to $17 billion of insurance-in-force would provide profitability on this basis.

At quarter end, cash and investments were $630 million, which compares with $617 million in the prior quarter. As of quarter end, we had $84 million of cash and investments in the holding company. Book equity as of the end of the first quarter was $410 million, equal to $6.94 per share, which compares with $403 million or $6.85 per share at the end of the fourth quarter.

The increase in book value was primarily the result of unrealized gains in the investment portfolio. This book value excludes any benefit attributable to our deferred tax asset of approximately $66 million, equivalent to $1.12 per share as of December 31, 2015. As of quarter end, total available assets under PMIERs were $434 million and we required assets based on current risk-in-force were $303 million.

Now with some brief comments on our outlook. Based on the strong start to the year and the positive momentum we are seeing across our customer base, we currently expect to write in the range of $19 billion to $20 billion of new insurance in 2016. This would represent growth of more than 50% over the $12.4 billion we wrote in 2015.

As Brad mentioned, to support this growth, we're negotiating a reinsurance program under which we would cede 25% to 30% of our risk on a quota share basis. We are excited about this capital approach for three primary reasons. First, by helping to drive high levels of internal capital generation while simultaneously giving capital release, it can put off our need for equity capital indefinitely. In fact, we believe that over the next several years, we can continue to build insurance-in-force and reach solid mid-teens ROEs using only internally generated capital, reinsurance and debt.

Second, it will provide capital release to allow National MI to continue to grow market share and NIW in the primary markets. And third, reinsurance has a relatively low cost of capital, estimated to be in the mid-single digits and boosts our return on equity over the long-term.

As we mentioned on our last call, we estimate that $21 billion to $23 billion of insurance-in-force is the threshold for GAAP profitability including interest and stock compensation expense. We expect to cross this threshold by the end of the second quarter, which would position us for a profitable Q3 and possibly a profitable full year 2016. This is a stronger profit outlook than we described in our last call, and it takes into account both insurance and higher expenses related to our increased NIW volume. We now expect the expenses in 2016 will be approximately $96 million.

In summary, we had another excellent quarter and have started off the year in a good way. We are excited about the growth we are seeing, and the accretive capital opportunity we have in front of us.

With that, let me turn it back over to Brad for his closing remarks.

Thank you, Glenn. We have said previously that we believe we can drive a highly profitable and self-sustaining mortgage insurance business with market share in the high-single digit to low-double digit range. After two consecutive quarters of 9% market share, we believe we have demonstrated that the market wants and needs our unique value proposition and that we have achieved the level of market penetration necessary to ensure our continued success.

Assuming we execute the reinsurance program Glenn has outlined and that we maintain an expected level of NIW growth through 2017, we believe we are positioned to achieve approximately $1 of pre-tax income per share in 2017. This earnings power is being generated by operating leverage as we continue to scale into expenses and by the largely flat share count we would expect to maintain over that horizon. We expect to continue to expand profitability at a rapid pace in the ensuing years as we drive the operating leverage inherent in our business model.

Given the volatility of valuations in the equity market, we are pleased to be in a position to reach our financial targets and enhance shareholder value without the need for a new equity capital. Our customers give us praise every day for our great customer service and our people. They are rewarding us with an increasing share of their business. It is exciting that just as we are seeing our hard work acknowledged in the marketplace, we are also able to control our own destiny in the capital markets.

We are off to a great start in what we think will be another excellent year for National MI. We thank you for your interest and support, and now let me turn it back to the operator so we can take your questions.

(Operator Instructions) Patrick Kealey, FBR.

So, first off, just on the reinsurance and I appreciate the color around that, can you maybe give us a sense of when you're expecting on maybe timing to execute on the first of -- maybe a couple or one transaction, would that be something we can expect in 2Q, maybe second half of this year or I guess, just trying to get a sense as to when we should be thinking about that rolling in?

So, Patrick, we're not going to put a hard deadline out there today for having an agreement in place. We're in a negotiation, we don't want to put a deadline out there that could affect that, but we expect that we'll have this arrangement in place sometime in the second half of this year.

Okay, great. And then just switching over to your guidance of $19 billion, $20 billion in NIW this year, you had laid out the target of 75% monthly, 25% single. Given where you've started off the year, do you think you can hit that for this year or is it you are ramping into that 75%, 25% exiting 2016 and heading into 2017? I guess just trying to get a sense of mix within that number.

Well, Patrick, we didn't lay out a target of 75%, 25%. The target we laid out was our mix would approximate that of our industry as a whole, which is more like 70%, 30%. So we're virtually there and as we've said all along, that's what we expected as we mature as a company.

And I think, Patrick, I would add that the 70%, 30% is kind of a target for the end of the year. If you look at our full 2016 production, that will not probably have the 70%, 30% balance that we like to see because of the first quarter here as we said was 59%, 41%. So that will string out during the year and I think will then towards the end of the year, get to that balance that you're talking about.

Okay, thanks, that's helpful. And then if I can just sneak one last one, and I think in your supplement you have, in April, percent monthly jumps up to 68%, which is part of why I asked the last question. Anything in particular so far in April that's led to that jump or is it just essentially mix from your customers and nothing really worth reading into?

Yes, I think we had the pipeline effect from the latter part of 2015 of singles coming through in our NIW this quarter or the first quarter, Patrick. And so in April, as we saw in March and then we've seen thus far in April, that mix has continued to just reflect what we think is the right balance of business vis-a-vis the monthly and singles.

Bose George, KBW.

Just wanted to go back to the commentary on your earnings guidance for next year. Did I hear that right? So basically you expect $1 of pre-tax earnings for 2017?

Yes, Bose, as we stated with the assumption that we execute a reinsurance program along the parameters that Glenn outlined and that our NIW continues on the trajectory and the expectation that we have now, then that would produce approximately $1 per share pre-tax income next year.

Okay, great. And then the just in terms, when I think about that dollar presumably since you're just breaking even in the back half of this year, it will be at the lower end of that range earlier in the year and higher than that later in the year, is that a reasonable assumption?

Yes, we haven't really spread it in detail quarter-by-quarter, but I think the message here is that the trajectory of profitability going into next year and the years thereafter is going to be quite steep.

Okay, that's great. And actually just one on the reinsurance, is there a way to think about how much that is going to contribute to the ROE? Is that going to be a few points of the ROE as well?

I think over time, Bose, that could provide an additional one percentage point or two percentage points of ROE, I would think. We haven't specifically modeled it out and it's tough since we're in the middle of negotiations to really pin point it but yes, we do see it as definitely being accretive.

And then just actually one more quick one on the reinsurance, is that just new business that's going to be ceded? Is there anything existing that's going to be ceded?

Yes, we're looking at both our options there. I think it wouldn't be far out of line to suppose that we'd look at some of the back book as well as the forward book.

Mackenzie Kelley, Zelman & Associates.

Thanks and congrats on a solid quarter.

Thank you.

First, just in terms of the capital, I'll appreciate the color on the reinsurance and I know you mentioned debt as well in order to postpone any need for equity. Can you just give a little more color on, assuming that the reinsurance is executed in the second half, how soon would debt also be necessary and how should we be thinking about the right mix between reinsurance and debt going forward?

So, [Amy], what I think we discussed was that we see a scenario where we do not need to think about equity at all and can rely on reinsurance. As you know, end of 2018, our term loan would be due. So we would envision, end of 2018, either refinancing and upsizing that and then, if we had further growth needs, we could certainly look at increasing the seed on reinsurance as well. So, as we envisage it right now, equity isn't the necessary option in our capital plan.

Okay, and there wouldn't be any debt as well other than the existing term loan that you have really?

I think we'd be opportunistic with it, Mackenzie, in terms of if the debt markets open up to any extent it allows us to look at the possibility of refinancing and upsizing that, that's something we'd certainly look at, but I think what we're viewing now is that we're pretty well status quo with the debt.

Okay, makes sense. And now on pricing, can you just give a sense, now that the industry really has met your rate card, how is pricing trending? Does it seem to have stabilized and also, are you offering any variations in a rate card on customer-by-customer basis or has the new rate card really took hold?

We're seeing a good degree of stability in the pricing environment now that PMIERs has been in effect for some months, and the industry has coalesced around a rational pricing scheme and we are proud of our position within the industry as the leader of that movement. So we feel like the market is stable.

Okay. And then just lastly on the investment yield, it looks like it jumped up this quarter. Is that a better go forward run rate, in the 2% range, kind of high 2%s?

Yes, it's I think right around 2.5% or so, [Amy], and that's the right way to think about it, and in dollar terms, that's about the right way to think about it too, going forward.

Amy Debone, Compass Point.

I just have one follow-up on reinsurance. So, last year at the Investor Day, you guys guided to [$70 million] of capital translating to about $1 billion of NIW or around $250 million of new risk. How does that translate to reinsurance? Like, is there a way to think about how much risk needs to be ceded maybe from the back book in order to write $1 billion of NIW or new NIW or is it too early on to really pinpoint those metrics?

Amy, we can spend more time, but the piece that's missing from the simple math is the profitability you generate from the ceded business and how that contributes to capital and if you will, sort of creates additional leverage to write new insurance. So, we are happy to sort of walk through some of the math just based on terms you've seen for other providers. That would be a reasonable basis we think to start to model in.

Okay. And then in terms of, you have about $100 million PMIERs cushion around $100 million. How much NIW do current capital level allow you to write? Is it still around like $10 billion to $15 billion or closer to $10 billion at this point?

So with current capital, Amy, we could have insurance-in-force of probably say $27 billion to $28 billion, and that [takes over to $18 billion] now, right, and we'll have some run-off. So, you could probably write at least $10 billion to $12 billion.

Okay. And then, just in terms of the trajectory as of premium yield, so we -- you're currently at [45%, over time you said you'll settle in at 50%], but at what point or how should we think about when the yield contraction will start to reverse?

I think, Amy, the expectation for us going into this year was that the first couple of quarters would be a little bit lower, but I think, you're going to really start to see the ramp-up probably closer to the end of second quarter, early third quarter, but it's going to be a slow ramp-up to get there.

Okay. And then one last one, do you guys have any thoughts on originators potentially bidding out BPMI. Is that something that is --

We haven't seen any trend there at all. So, I don't really have any thoughts about it.

Christine Worley, JMP Securities.

Thank you. Most of my questions have been asked and answered, but I just had one follow-up on the reinsurance. In your negotiations, are you sort of looking at any ceding flexibility over time with the contract as you continue to generate more internal capital?

Yes, I would say, early on, we're in negotiations now and our goal will be to maximize flexibility so that we can adjust to, if, for example, our writings continue to outperform our expectations. We want to have the flexibility to take up the [slack].

Thank you. And I'm not showing any further questions on the phone lines at this time.

Well, with no further questions, we would like to thank you all for joining the call today. We look forward to reporting to you soon on our reinsurance program. We will be on the road, meeting with current and prospective investors on the East Coast and the Midwest in May, and we will be presenting at the KBW Conference on June 1.

Thank you again for joining us on the call today.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.