NMI Holdings Inc (NMIH) 2017 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the NMI Holdings Inc. First Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, John Swenson. Please go ahead.

Thank you. Good afternoon, and welcome to the 2017 First 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 Accounting Officer; Adam Pollitzer our new CFO; and Rob Fore our Controller. Financial results for the first quarter were released after the close of the market today. The press release may be accessed on NMI's website which is 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 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. 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 good afternoon, everyone. We had another great quarter at National MI delivering record financial results and continuing to build our franchise with an expanding and more diverse customer base and a high quality and growing portfolio of insurance-in-force. Primary insurance-in-force of $35 billion was up 87% over the first quarter of last year. We are continuing to grow insurance-in-force at a faster rate than anyone in the industry.

Premiums earned for the quarter increased 68% over the first quarter last year to a record $33.2 million. We continued our strong momentum in expanding our business with existing customers and adding new customers. NIW of monthly product was up 16% year-over-year and represented more than 80% of our production in the quarter. We also signed up 46 new customers to master policies in the first quarter.

Over the past 2 months, we strengthened our capital position and continued to reduce our cost of capital. In February, we amended our term loan obtaining a lower interest rate and an additional year of maturity to November 2019. We were pleased that our lender group recognized our significant strives to date and the strength of our outlook. In March, Moody's upgraded our insurance company and the holding company citing our progression to profitability and capital flexibility as drivers of the upgrade.

In April, we completed the issuance of our first Insurance-Linked Notes or ILN. This innovative capital markets vehicle provides reinsurance against adverse loss development, significantly strengthening our financial profile. We also anticipate that it will provide approximately $200 million of capital relief, which we will use to write new business. This structure effectively caps our exposure to losses in an extreme adverse scenario such as the financial crisis.

Based on our internal modeling, in the unlikely event the Great Recession repeated itself tomorrow, our reinsurance coverage would cap the net loss ratio at 50% on all of our risk written through 2016. Because this type of risk is remote, we sought to cover it with a low-cost solution, bringing up significant capital to write new business. We estimate that the after-tax cost of capital for the ILN is approximately 3%. We believe the strong reception to this offering is a testament to the high credit quality of our originations and our superior underwriting model. Having initiated a quota-share reinsurance program with a panel of reinsurers in 2016, we now have 2 attractive low-cost channels for reinsuring our risk and supporting growth in insurance-in-force.

As we discussed on our February call, the origination market was impacted by the backup in interest rates post-election. In the first quarter, this drove a greater than seasonal market decline relative to the fourth quarter of 2016, especially in refinance originations. That said, our first quarter monthly product application volume for purchase mortgages was up 19% over the first quarter last year and the growth trend continued in April. With good job and wage growth, we believe the fundamentals are in place for a healthy purchase market in 2017. Also, as rates have moderated over the past months, we could see a rebound in refinance activity, although likely not to the levels we saw last year.

On the government and regulatory front, we welcome the discussion of corporate tax reform, which would help to level the playing field for domestic insurers, competing with offshore providers. We are also pleased to see the nomination of Pamela Hughes Patenaude as HUD Deputy Secretary. She has a strong background in housing policy and has demonstrated support for putting private capital in front of taxpayer risk. We are hopeful that, among other things, she will examine the role of the FHA and potentially refocus FHA on its primary mission of home affordability for lower income borrowers.

The overall pricing environment for mortgage insurance continues to be stable and constructive to mid-teens returns. Lender paid singles has always been the smallest but also the most price-competitive segment of the market. Over the past year, pricing in singles has generally trended up as market players have adjusted to PMIERs. We were the first mortgage insurer to introduce to -- true risk-based pricing early last year. And we believe we are a leader in bringing more transparency to the pricing discussion. In our experience, the vast majority of the market prefers the transparency and predictability of a rate card because it is consistent with their loan origination process. We continue to focus our sales efforts on growing with these customers, which we believe over the long-term yields more sustainable and durable customer relationships and market share. The success of our approach is validated by our demonstrated ability to continue to win new customers at a rapid pace and to grow our business with existing customers.

Our disciplined approach to customer development and product mix is fundamental to how we manage returns. The other components of return that we manage daily are risk and expenses. We have a superior approach to managing risk as we have underwritten or conducted a post-close review on approximately 85% of our portfolio. This is far more than any other mortgage insurer and it a was founding principle when we started the company.

As an insurance company, we believe it is critically important to underwrite the risk we are taking and to provide certainty of coverage to our policyholders. The breadth of our underwriting also gives us high confidence in our long-run loss assumptions and the single-digit loss ratios we expect over the next several years. To facilitate our underwriting mission, we have developed a state-of-the-art IT platform that we believe gives us the most efficient underwriting and archiving capability in the industry. We believe the investment we are making in risk management ultimately will lead to better loss performance and far better customer relations over a full credit cycle. We also received indications that our underwriting model contributed to the oversubscription and tight execution of our recent ILN transaction.

On expenses, we continue to manage in a way that supports our rapid growth and our near-term goal of achieving a 50% combined ratio. Adjusted for financing related costs in the first quarter, our operating expenses were up only 7% over last year, in line with our expectations despite our nearly doubling of policies in force over the same timeframe.

In summary, we are pleased with our performance in the first quarter both in the results we delivered and the foundation we laid to support future growth. I will be back with some closing remarks after Glenn provides more detail on the financial results. Glenn?

Thank you, Brad, and good afternoon, everyone. I'm pleased to share the financial results for the first quarter of 2017. Primary insurance-in-force at quarter-end grew to $34.8 billion, up nearly $2.6 billion or 8% from $32.2 billion at the end of the fourth quarter, and up 87% from the first quarter of 2016. Premiums earned for the quarter were $33.2 million, up from $32.8 million in the prior quarter. We earned $2.5 million from cancellation of single premium policies, down from $5.1 million in Q4 and consistent with the drop in refinance activity. Excluding the effect of cancellations, premium earned was up approximately 11% quarter-on-quarter. Before the effective reinsurance, premium yield in the first quarter was 44 basis points, down from 48 basis points in the prior quarter. The decline is attributable to the reduced cancellations in the quarter.

After reinsurance, reported net premium yield was 40 basis points, down from 44 basis points in the prior quarter. Excluding the effect of cancellations, we expect gross premium yield will rebound in the second quarter, driven primarily by higher yield on monthly premium policies and the amortization schedule of our singles book. We also have seen increased cancellation activity in April. If that trend continues, and recent interest rate suggests that it could, we expect gross premium yield will return to the high 40 basis points range in the second quarter.

After Reinsurance, including seated premium related to the Insurance-Linked Notes, we expect that net yield will be approximately 40 basis points. It is important to see premium yield in the context of targeted returns as it is highly correlated to credit quality, expected losses and the related capital charges. We have a high-quality book and it therefore has relatively lower premium rates but also low expected loss ratios and relatively low capital charges. With the added consideration that the book is reinsured, these yields are consistent with our expectations and our mid-teens return targets.

The weighted average rate on NIW across all products in the first quarter was 50 basis points, up from 46 basis points in Q4. And the weighted average rate on monthly product in Q1 was 54 basis points, up from 52 basis points in the fourth quarter.

In the first quarter, monthly product represented 81% of total NIW, up from 75% in Q4 2016, and up from 59% in the first quarter of 2016. This mirrors what we believe was the industry mix in Q1 and represents the achievement of our strategic goal with regard to product mix.

As Brad mentioned, in Q1 2017, monthly NIW volume was up 16% compared with the first quarter of 2016. And consistent with our strategic mix objectives, single premium NIW was down 50% versus the prior quarter and down 62% from the prior-year.

Primary insurance-in-force at quarter end was 62% monthly, a significant increase over the 50% mix of monthly as of the end of Q1 2016. In terms of purchase/refinance mix, in the first quarter, purchase represented 84% of NIW with refinance, 16%. This compares with a 72-28 mix in the fourth quarter of 2016.

Total policies in force as of the end of the quarter increased to 146,000, up 8% from 135,000 in the prior quarter. And the run-off rate for the quarter was approximately 3% with 12-month persistency in the primary book at 81.3%, roughly flat with 80.7% in Q4 2016. The weighted average FICO of primary risk-in-force as of the end of Q1 was 753, essentially flat with the prior quarter.

Investment income in the first quarter was $3.8 million, up from $3.6 million in the prior quarter. Total revenues in the first quarter were $37.1 million, up from $36.6 million in Q4. Underwriting and operating expenses in the first quarter were $26 million, which compares with $23.3 million in the prior quarter. In the first quarter, we recognized approximately $1.6 million of fees and expenses related to repricing of our term loan and the reinsurance -- and the Insurance-Linked Notes transaction. Excluding these expenses, we're up approximately 5% over the prior quarter and 7% over the first quarter last year. Note that in this coming second quarter, we expect to recognize an additional $3 million of upfront fees related to the closing of the ILN transaction. This is different from our quota-share reinsurance where these costs are amortized.

We had 207 notices of delinquency in the primary book as of the end of the first quarter, up from 179 at the end of the prior quarter. We had 4 paid claims in the quarter, which compares with 3 paid claims in Q4, bringing ever to date claims paid to 15.

Our first-quarter loss ratio, defined as claims expensed 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 income for the first quarter was $5.5 million or $0.09 per diluted share. This includes the impact of the $1.6 million of financing costs, as well as $0.2 million related to the change in the fair value of our warrant liability resulting from the increase in our stock price.

At quarter end, cash and investments were $671 million, down from $677 million in the prior quarter, attributable to payout of certain accrued expenses. As of quarter end, we had $59 million of cash and investments in the holding company. Book equity as of the end of the first quarter was $484 million, equal to $8.09 per share, up from $476 million or $8.04 per share at the end of 2016. As of quarter-end, total available assets under PMIERs grew to $467 million, which compares with risk-based required assets of $399 million.

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

Thank you, Glenn. We had a great first quarter and showed solid year-over-year increases in the key metrics that we manage. It is especially satisfying that we continue to grow in monthly product, which reflects our continued strategic focus on transitioning the mix of our insured portfolio.

We feel good about the market dynamic and our strong market position heading into the critical part of the calendar for purchase market demand. We also (technical difficulty) complete a capital markets transaction that will support our ability to meet that demand while protecting policyholders and shareholders from adverse loss development. We are well-positioned to execute on our vision for expanding margins and increasing returns throughout the year and are looking forward to reporting our progress toward those goals on our next call.

In closing, I want to again acknowledge the contributions of Glenn Farrell, as the first quarter was his last full quarter as CFO. We will have the benefit of his continued engagement as our Chief Accounting Officer through July. Earlier this week, Adam Pollitzer, officially joined as our new CFO and we look forward to his full participation on our second quarter call.

With that, let's bring back the operator so we can take your questions.

(Operator Instructions) And your first question comes from the line of Randy Binner with FBR.

I guess the first one is just picking up on that comment about the 17% increase in purchase and that continued to grow in April. Is that seasonally adjusted that 17% increase? You quoted because the book is so much bigger than it was last year. It's not clear to me if that's just kind of growth or if that's kind of a seasonally adjusted growth number?

Randy, it's John. One of the reasons we quoted the year-over-year, was to try to take the seasonality out of it a little bit, and it was 19% growth in dollar volume of purchased mortgages.

1-9 percent, okay, 19%.

Yes.

Okay, great. And then on the premium yield comments, I think you said that if cancellations increase, you could expect to see that back in the high 40 basis-point range in the second quarter. I just wanted to make sure that was correct and if there was anything else that might net it down to the low 40s?

No, Randy. This is Glenn. I think, yes. If cancellations do increase, certainly, the average yield will creep up. But I think we're also saying that we expect that it will creep up to the mid-40s gross for the next -- high 40s for the gross and in the next quarter, which when you adjust for the reinsurance transaction, it would bring you down to the mid-40s.

So Randy, it's John. Just to, yes, maybe clarify a little bit. So the -- we expect gross premium yield to be in the high 40s in Q2. Most of that is organic reasons, it's higher yield on monthlies, it's getting in a better part of the amortization schedule on singles. Only about a point or so as improvement is what we're thinking is coming out of cancellations. Most of that is just organic, if you will. And -- but then after the effective reinsurance, we're thinking a -- right around 40 will be the net that we show.

And then, just to -- then on the fees for the ILN's deal, so that's another $3 million. In that -- would that be the end of the upfront costs of the deal? And have you -- do you have any way to help us think about kind of the -- maybe offsetting economic benefit that comes from the ability to have $200 million of capital relief?

Yes, this is Brad, Randy. Yes, that will be -- the full recognition of the cost of the ILN will be in the quarter, and as Glenn mentioned, that differs from reinsurance accounting where you amortize those costs over the...

They are effectively amortized through the brokers fee, yes.

But the -- I mean, the economic benefit is that we have freed up substantial amount of capital under PMIERs that will go and write new business at and that's at -- as we said, a roughly 3% estimated cost of capital. So the economic advantages are pretty evident there.

And Randy, that -- maybe, just as -- what you were getting to. It's without the need either to add leverage or to issue equity.

Your next question comes from the line of Bose George from KBW.

I just wanted to go back again to the premium comment. The -- so if cancellations remain unchanged, say the -- or the premium from that $2.5 million, the net number you reported this quarter, the 40 basis points. So are you guys saying that the 40 goes to something like 45 next quarter?

The gross climbs up to that range but then when you back off the reinsurance cost, you're down to the 40. We have an incremental amount of premiums ceded due to the ILN transaction, Bose, and so that's causing an additional reduction in the net premium yield.

Okay, and what's the, sort of, the incremental impact of the ILN transaction on premiums?

In the first, we'll have about 7 months of that effect in this year, and it's approximately, I believe, about a $5 million after-tax cost, Bose, all in. And so on a premium basis, I don't think we've done that calculation, probably about 2 bps on the premium yield, 2 to 3 bps.

Okay. And then just in terms of the trajectory for the premium. So you guys reported a net 40 this quarter. You've said that in the past, and I guess I think you said earlier on the call as well that mid-40s is kind of the year-end target. Is that right?

That's correct.

So on a net basis, next quarter you'll be close enough to 40 but do you still get to sort of that 45 by year-end. The net basis on the premium?

No, [(inaudible) Glenn, so the 45 was where we were going to get to with just the quota-share deal in place. And now the we also have the ILN, it will be more like 40. Is where we're going to bounce to in Q2 and where we think we'll be throughout the year.

Okay, so the effective cost of the ILN is probably around 5 basis points?

Maybe 4.

Okay. And then, actually just on NIW. Year-over-year, it was down a reasonable amount and the peers who have reported seems to be kind of up -- flat to up a reasonable amount. Do you have any thoughts on that? Was there any -- do you think there was any share loss or any commentary there?

No. I think the -- the NIW was driven by the growth that we had in the monthly premium product offset by the decline in the single premium product, which is something we've been very upfront about and have indicated numerous times, it's been a strategic goal for us. So I think that's the story of the NIW. We feel very good about our market positioning and actually have a number of significant-sized new customers coming online this year.

Okay, great. That makes sense. And actually just one more. In the past, you'd guided basically to a 10% ROE -- exit ROE this year and 15% by the end of next year. Are those numbers still good?

Yes, Bose. That's still what we're trending towards and that's our goal to try and approach double-digits as we exit the year and then the sort of mid-teens next year.

Your next question comes from the line of Mackenzie Aron from Zelman & Associates.

I think just the main question I have is around with this new INL (sic) [ILN] and the reinsurance that was already in place. Can you just kind of walk through when will the company be self-funding in terms of new business. And how does this new INL (sic) ILN kind of bridge the gap relative to what was in place last quarter?

MacKenzie, this is Glenn. This is, I think, is another step in the process that we committed to last year and saying that we were going to be using reinsurance to affect our growth and funding the capital that we'd need as we grow. The actual self-funding is not probably on the near-term horizon and so this ILN transaction is one that I think we would have had to enter into some capital transaction sometime during 2017. This will provide us an additional amount of capital to probably sometime later in 2018. So there will be other needs for capital. But I think we would reiterate that we're very pleased with this -- the flexibility afforded by this transaction as well as the quota shares. So we do anticipate doing other types of these transactions down the road.

Okay. That makes sense. Just to clarify. Going forward on the P&L, it's only going to flow through with the 4 to 5 basis-point impact on the premium yield and then the additional $3 million of the cost next quarter, but otherwise, there won't be any other flow through. Is that right?

That's correct. Yes, MacKenzie. We do have -- we'll have continuing ceded premiums associated with that. And then also there will be certain amounts coming through that we would get back from losses as well.

Your next question comes from the line of Geoffrey Dunn from [NERF].

Obviously, there's a lot of focus on premiums and premium yields. So can you just give us specific details of your reinsurance impact this quarter, the ceding commission, profit commission, ceded earned and ceded written? And would you consider adding that to your press release from now on?

So Geoff, rather than having you wait on the call until we find it, we'll be happy to provide that after -- that's reported in the Q, correct?

Yes.

Which is out, Geoff. The Q is out so you should be able to find that. But we'll look at providing that detail in the press release going forward.

Great. And then I want to make sure I understand the economic impact of the ILNs. Obviously, there's a ceded premium impact on a go-forward basis. There's not typically any ceding commission or anything like that accompanying these types of deals, correct?

That's correct, Geoff. It's just a strict consideration as a ceded premium.

Okay. And then this $3 million cost in the second quarter, is that just banking fee type of stuff or is that something having to do with the economics of the transaction as well?

No. It's deal fees. All deal fees setting up the reinsurer, the underwriters, that sort of thing.

Okay. And then with respect to the drop in the singles mix, you have been moving that down a drop from 25 to 18. It's still a big drop. Did you back away from any particular client or the non-bank sector in general to cause that much of a shift in 1 quarter?

Yes, we've been pretty consistent at our approach to the singles market. So it has been an important initiative for us. So we're very happy that we've kind of got to that target where we're at a mix and we expect we'll be very close to the industry average.

(Operator Instructions) And we have no further questions at this time. I turn the call back over to the presenters.

So this is Brad. I want to thank you all for joining us on the call today. We will be presenting at the KBW Financial Conference in New York on June 1, and we hope to see you there. Thanks very much.

Thank you for your participation and have a wonderful day. You may now disconnect.