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spk09: Good day and welcome to the NMI Holdings, Inc. second quarter 2022 earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Swenson. Please go ahead, sir.
spk07: Thank you, operator. Good afternoon and welcome to the 2022 second 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 Schuster, Executive Chairman, Adam Politzer, President and Chief Executive Officer, Ravi Malela, Chief Financial Officer, and Julie Norberg, our Chief Accounting Officer. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website, located at 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 FCC. 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 one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we refer to certain non-GAAP measures. In today's press release and on our website, we have provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.
spk15: Thank you, John, and good afternoon, everyone. We had a terrific second quarter with strong operating performance, significant growth in our insured portfolio, and record financial results. During today's call, as we always do, we'll share with you the details behind our numbers and the implications for the periods ahead. I'd like to focus, however, on the macroeconomic environment. I've been in this business for almost 30 years. I have seen a number of economic cycles over that time. And importantly, I've seen how the mortgage insurance industry overall, and National MI specifically, have learned from and been transformed by past experience. We do see an emerging set of macro headwinds. However, we do not expect the economy or the housing market to deteriorate as they did in the financial crisis. For more than a decade now, underwriting standards have been disciplined and responsible across the mortgage market. Regulatory guardrails have been enacted, and the toolkit to assist borrowers through stress has grown meaningfully. Our borrowers today have a strong credit profile, significant equity position in their homes given the recent run of house price appreciation, and benefit from record low 30-year fixed rate mortgages with manageable debt service obligations. From the start, we have focused on building national MI in a durable, risk-responsible manner. We've worked hard to establish a comprehensive credit risk management framework, and in doing so, we have built the highest quality insured portfolio in the MI industry and have secured comprehensive reinsurance protection for nearly the entirety of our book. I'm confident in our ability to perform across all market cycles. We will continue to invest in our employees, support our customers and their borrowers, and deliver for our shareholders, no matter how the economy develops. Shifting to Washington matters. In early June, the GSEs each released their equitable housing finance plans which are designed to promote equitable access to affordable and sustainable housing and address longstanding disparities in homeownership. We commend their efforts. At National MI, we believe that providing all borrowers with an equitable opportunity to access the housing market, establish a community identity, and build long-term wealth through homeownership in a manner that appropriately guards against systemic risk is critically important. National MI and the broader private mortgage insurance industry play a uniquely valuable role in the housing finance system, providing borrowers with down payment support and equal access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn. Since our formation, we've helped more than 1.4 million low down payment borrowers gain fair access to mortgage credit. And in doing so, have helped open the door to affordable and sustainable home ownership in communities across the country. We are committed to equally supporting borrowers from all communities and are actively engaged in discussions with policymakers, regulators, the GSEs, lenders, and consumer advocacy groups. We look forward to continuing to work with the GSEs as they put their equitable housing plans into action and develop specific initiatives to support increased access and affordability in a manner that appropriately guards against systemic risk. With that, let me turn it over to Adam.
spk04: Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the second quarter, delivering significant new business production, strong growth in our high-quality insured portfolio, continued success in the reinsurance market, and record results across every key financial metric. We generated $16.6 billion of NIW volume, and ended the quarter with a record $168.6 billion of high-quality, high-performing insurance in force. We achieved record GAAP net income of $75.4 million, or $0.86 per diluted share, and record adjusted net income of $74.3 million, also $0.86 per diluted share. GAAP return on equity for the quarter was 19.7%, and adjusted ROE was 19.4%. During the quarter, we also entered into a new quota share reinsurance agreement, securing incremental risk protection for a seasoned portion of our in-force portfolio. The transaction builds upon the broad success that we've had in the risk transfer markets to date and provides us with approximately $150 million of incremental PMIRs funding capacity at an attractive cost of capital. Overall, we had an exceptionally strong quarter. and are optimistic as we progress into the second half. Our lenders and their borrowers continue to rely on us for critical down payment support. Purchase demand remains strong, and we see a significant opportunity to continue writing high-quality, high-return, high-value new business. We expect our persistency will continue to improve meaningfully, driving sustained growth in our in-force book and a further increase in the embedded value of our insured portfolio. and our credit experience continues to trend in a favorable direction, with the performance data from our portfolio remaining resoundingly strong. Taken together, we see a clear opportunity for continued outperformance. We do, however, also see increased risk in the macro environment. Rising rates and the record run of house price appreciation have strained affordability for many new borrowers, and some prospective buyers are recalibrating due to the emerging economic uncertainty. We expect the pace of home price appreciation to moderate from record levels, and we may see a modest decline in certain local markets. Existing homeowners, however, are well positioned, with strong credit profiles, record levels of home equity, sustainable fixed payment obligations at record low mortgage rates, and a favorable job market, all providing foundational support. While we can't control how the economy or housing market develop, we can control how we're positioned to navigate through a period of stress. And we've taken action and made investments from day one to secure our performance across all cycles. We have a talented and dedicated team who drive our success every day. We've earned the trust and partnership of our customers with our focus on service, value-added engagement, and technology leadership. We've prioritized discipline and risk responsibility as we've grown our in-force portfolio, building the highest quality insured book in the MI industry. We've led with innovation in the risk transfer markets, securing comprehensive reinsurance coverage on nearly all of the policies we've ever originated. And we've established a strong balance sheet with a robust funding position and sizable regulatory capital buffer. In the second quarter and in the months since, we've taken further steps to bolster our business. We've selectively increased policy pricing to reflect the emerging risk environment. We've made targeted changes to manage our mix of new business by risk cohort and geography, and we secured additional reinsurance protection and strengthened our PMIRs position, among other actions. More broadly, we've been encouraged by the discipline that we've seen across the private MI market. Underwriting standards remain rigorous, and the pricing environment has generally hardened in response to emerging risks. Overall, we had a terrific quarter, delivering strong operating performance, significant growth in our insured portfolio, and record financial results, and are optimistic as we enter the second half of the year. We're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio, and deliver strong performance for our shareholders. Before turning it over to Ravi, I want to note how proud I am that for the seventh consecutive year, National MI has been recognized as a great place to work. Great Place to Work is a global authority on workplace culture, employee experience, and leadership, and partners with Fortune magazine to produce the annual Fortune 100 Best Companies to Work For list. We believe that the quality of our team and the culture that we've established are key competitive advantages, and it's gratifying to again be recognized for these strengths. With that, I'll turn it over to Ravi.
spk05: Thank you, Adam. We delivered record financial results in the second quarter with strong new business volume, significant growth in our insured portfolio, continued resiliency in our credit performance, and expense efficiency driving record profitability. Net premiums earned were a record $120.9 million. Adjusted net income was a record $74.3 million, or $0.86 for diluted share. And adjusted return on equity was 19.4%. We generated $16.6 billion of NIW in the second quarter, up 17% from the first quarter. Purchase NIW was $16.2 billion during the quarter. Primary insurance and force grew to $168.6 billion, up 6% from the end of the first quarter and up 23% compared to the second quarter of 2021. Twelve-month persistency in our primary portfolio improved again, reaching 76% compared to 71.5% in the first quarter. We expect persistency will continue to improve meaningfully as we progress through the year. a real positive that will help drive sustained portfolio growth and embedded value gains in the second half. Net premiums earned in the second quarter were $120.9 million compared to $116.5 million in the first quarter. We earned $2.2 million from the cancellation of single premium policies in the second quarter compared to $2.9 million in the first quarter. Reported yield for the second quarter was 30 basis points, unchanged from the first quarter. Investment income was 10.9 million in the second quarter, compared to 10.2 million in the first quarter. Underwriting and operating expenses were 30.7 million in the second quarter, compared to 32.9 million in the first quarter. Our expense ratio was a record low, 25.4% in the quarter. highlighting the significant operating leverage embedded in our business and the success we have achieved in efficiently managing our cost base as we have scaled our insured portfolio. We have long signaled our expectation to achieve and sustain a mid-20s expense ratio and are proud to be delivering on this guidance. Our credit performance continues to trend in a favorable direction. We had 4,271 defaults in our primary portfolio at June 30th, compared to 5,238 at March 31st, and our default rate declined to 77 basis points at quarter end. Peer activity during the quarter remained strong, and we again released a portion of the reserves we previously established for potential claims outcomes on our early COVID default population. recognizing a $3 million net claims benefit in the second quarter. At the same time, we adopted a more conservative posture for setting reserves across our remaining default population and increased our average carried reserve per default at June 30th in light of the evolving risk environment. Interest expense in the quarter was $8.1 million, and we recorded a $1 million gain on the change in the fair value of our warrant liability during the period. All remaining unexercised warrants expired during the second quarter. And as such, we will not see any warrant fair value changes in our financial results in future periods. GAAP net income was a record $75.4 million, or $0.86 per diluted share for the quarter. And adjusted net income was a record $74.3 million, also 86 cents per diluted share. Total cash and investments were 2.1 billion at quarter end, including 114 million of cash and investments at the holding company. We have 400 million of outstanding senior notes, and our $250 million resolving credit facility remains undrawn and fully available. In July, Moody's upgraded our financial strength and holding company debt ratings to BAA1 and BA1, respectively. We're pleased that they've recognized the strength of our credit profile, operating performance, financial results, and balance sheet position in their decision. Shareholders' equity as of June 30th was $1.5 billion, and book value per share was $18.01. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $19.91, up 5% compared to the first quarter and 19% compared to the second quarter of last year. In the second quarter, we repurchased $25 million of our common stock, retiring 1.4 million shares at an average price of $17.61, executing at a level below our book value per share. We have 95 million of repurchase capacity remaining under our existing authorization, and we intend to remain flexible and disciplined in our activity going forward, balancing the attractive opportunity we see to repurchase the shares at our current valuation against the evolving macroeconomic environment. During the quarter, we entered into a new quota share reinsurance agreement, primarily covering the portion of our in-force portfolio that was previously seated under our first and fourth ILNs. We exercised our ability to call these ILNs and reestablished risk protection on the pools with a new quota share treaty. The transaction effectively refreshes the coverage we previously had under the retired IONs on far more efficient terms, providing us with a lower risk attachment point, cheaper cost of capital, and increased PMIR's efficiency. The new quota share agreement is expected to provide an incremental $150 million of PMIR's credit at an estimated 3% weighted average lifetime pre-tax cost of capital. The treaty incepts on July 1st, and it's important to note that it will have a different impact on individual income statement line items than the ILN it replaces. The impact of the new treaty on pre-tax income, effectively it's all in cost, is expected to be approximately $1 million per quarter, compared to $1.6 million combined for our first and fourth ILNs in their last full quarter's outstanding. The new treaty will, however, have a more significant impact on our seeded premiums, which will be offset by a sizable seeding commission that appears as a benefit to our net operating expenses. Reinsurance remains a core pillar of our credit risk management strategies, providing us with meaningful protection against losses and stress scenarios and an efficient source of growth capital for our business. At quarter end, we reported total available assets under PMERS of $2.2 billion and risk-based required assets of $1.2 billion. Excess available assets were $929 million. Our new quota share reinsurance agreement is not included in these figures as it was completed after quarter end. The new treaty will further bolster our excess position and provide us with even more funding runway and enhance financial flexibility in future periods. In summary, we achieved record results in insurance and force, net premiums earned, total revenue, expense ratio, net income, and adjusted net income. Our credit performance continues to stand out in a favorable way. We continue to execute in the reinsurance market on favorable terms and have an exceptionally strong balance sheet. We believe we are well positioned to continue to perform across all market cycles. With that, let me turn it back to Adam.
spk04: Thank you, Robbie. Overall, we had a terrific quarter with significant new business production, increasing persistency, and growth in our high-quality insured portfolio driving record revenue, and favorable credit performance and expense discipline driving record profitability and strong returns. We're optimistic about the opportunity we have to continue to outperform in the second half. Stepping back, this is an interesting time, one where the strength of our current performance and near-term outlook stand in contrast to prevailing economic themes. It's important to focus on our current results as they highlight the value of our strategy and long-term potential, while at the same time, it's equally important to acknowledge and plan for potential macroeconomic outcomes. We've long been successful managing national MI with discipline and a focus on through-the-cycle performance and believe we're well-positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio, and deliver strong performance for our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
spk08: At this time, we will pause momentarily to assemble our roster. And the first question will come from Mark DeVries with Barclays.
spk09: Please go ahead.
spk17: Yeah, thanks. I wanted to drill down a little more on some of the different moving pieces you highlighted in some of the comments around the premium You know, it sounds like there has been some selective price increases, but also like at least the latest QSR is going to weigh on premiums in the near term. How should we think about kind of the net impact on the average premium over the next couple quarters?
spk05: Sure. Maybe I'll start, Mark, by just saying that, you know, our premium yield in Q2 was 30 basis points and it was flat. And just really thinking about the mechanics for Q2, You know, we had the impact of the new XOL, and we had a little bit of a decline in our cancellation earnings in the quarter, and that summed up to about a basis point impact on yield. And that was offset really by sort of the amortization of the cost of the QSRs that we have and the ILNs that we have in place. And so we ended up at 30 basis points sort of there. You know, just to touch on sort of on the moving parts with respect to you know, premium yield for Q3, you know, the impact of the seasoned QSR, you know, we've talked about it in our prescriptive remarks, it's more efficient and it's a fantastic deal for us, but it definitely impacts us in a different way than the ILMs. You know, with the seasoned QSR, 35% of our seeded premiums, you know, come back in the form of seeded commissions, and that impacts our expense line. And with ILMs, you know, all of the seeded premiums come back as net premiums earn. And so there's an impact on the premium yield. You know, the seasoned QSR, it's more efficient, and it certainly provides us benefits. And some of those benefits flow through experience and impact our premium yield. So in Q3, you know, we estimate the impact of the seasoned QSR as having about one and a half basis points on net yield. And maybe just to balance these comments, I would just say, You know, the hardening environment, you know, I think could provide us with some benefit. But that's really on new production. And, you know, that's going to really depend a lot on the risk myth, how NIW involves, kind of how cancellation earnings trend. I think we're seeing them trend down. We'll probably see them to continue to trend down. And, you know, I think also an offset to that would be the decline in the amortization of the costs of our ILN and XOLs. And those are sort of the moving parts with respect to how we think about Q3 and premium yield.
spk17: Okay, that's helpful. And then just turning to your operating expenses, is there anything to call out that really drove what looks like some pretty significant operating leverage in the quarter? And furthermore, I guess you guys are now kind of at your long-term guidance but still exhibiting pretty significant growth and operating leverage. Any color on kind of where we think that might trend?
spk05: Yeah, I'll talk a little bit about just, you know, what happened in the quarter and give you a little bit about how we think about the trend. First, I'll just say, you know, we're very proud of achieving our, you know, our long-run goal of targeting low to mid-20s, you know, with our record low expense ratio, 25.4% in the quarter. And I just say in terms of the moving parts with respect to Q1, you know, our IT costs declined. We've talked in the past about our TCS relationship. We're in year two of that relationship, and frankly, our TCS costs declined. We had an annual step down in costs, and we picked up a big portion of that here in Q1, about $1 million. I think the rest of the difference between Q1 and Q2, we're really focused on the difference between Q1 and Q2 and Q3. Really, Q1 came in with typically higher payroll costs with respect to higher 401k costs and a FICA reset. And if you combine those two, the differences in payroll costs and the TCS benefit we picked up in Q2, that's really what drove the difference between Q1 and Q2. But when we look forward, I think we're always very focused on being efficient. We're 246 employees. We have the smallest footprint in the industry by far. And, you know, I would just say we probably expect some growth in our gross expenses. Look, we're going to continue to invest in our people, our systems, and in risk management. And I think the other part to really factor in is the impact of the seasoned QSR. And so that 35% seeding commission is going to be an offset to OPEX in the future. And I just say net-net with our investments and the impact of the season QSR, we're probably going to see a modest benefit going forward.
spk16: Okay. Very helpful. Thank you.
spk08: And the next question will be from Doug Harder from Credit Suisse.
spk09: Please go ahead.
spk11: Hi. This is John Kilachowski on for Doug. Just one question from me. Uh, what was the driver behind the positive reserve development this quarter and what's your outlook going forward for reserves and, uh, cares for the rest of 2022?
spk05: Yeah, I mean, um, you know, we reported a $3 million, uh, you know, net claims benefit in the quarter. You know, I just say that we're continuing to see, you know, progress with respect to our default population. Our default rate declined to 77 basis points in the quarter, down from 99 basis points in Q1. And just the total number of defaults have declined. We're down to 4,271 this quarter. And, you know, I'd just say the cure activity has been relatively strong. Our cure activity in Q2 was just slightly higher than what we saw in Q1. So that's about 2,000 cures. Look, I mean, it's pretty strong results with respect to how we've been performing. You know, I would just say that, you know, when we combine those pieces together and we think about, you know, the cure activity in the pre-COVID default population, the fact that defaults have declined quarter over quarter and cure rates have been relatively stable. You know, that's what drove our thought process with respect to Q2.
spk00: Great. Thank you.
spk09: And the next question will be from Rick Shang from J.P. Morgan. Please go ahead.
spk06: Hey, guys. Thanks for taking my questions this afternoon. Look, as we move through earnings season and we think about different things that we've heard within our broader coverage. Every once in a while, something idiosyncratic comes up in terms of either pockets of strength or weakness. And again, I realize that what's going on from a credit perspective, it's pretty difficult to extrapolate because the credit performance is so good. But is there anything that you're seeing that you would call out either on a positive or negative side that's a little bit surprising, a geo, where you're seeing some HPA, something interesting that you're seeing either positive or negative within the portfolio.
spk04: Yeah. Hey, Rick. It is an interesting time, right? You referenced idiosyncratic outcomes. And I would say there's so much of the current data that we look at both internally and externally is telling quite a positive story. But there are obviously emerging risks that we're all tuned to that we hear about every day that we see in other ways that are emerging and have clouded the go-forward view. When we look at it today, the job market is still healthy, consumer spending remains strong, household balance sheets are in better shape than they were before the pandemic, and most importantly, our credit performance continues to trend in a really favorable direction. We don't have a crystal ball, but when we think about what our data is telling us today versus what the emerging themes are, We do think that there's a higher likelihood that growth will slow rather than accelerate, that unemployment will increase from here as opposed to decreasing further, and that consumer fundamentals will soften as opposed to strengthening. And all of that will have some bearing on our business. It will have some bearing on where volume trends. It will have some bearing on house price performance, on credit performance for borrowers across the mortgage spectrum. But there's really nothing when we try to look. We look for, take out the magnifying glass and try to identify where might we be seeing the earliest signs of a shift. We look at the emerging population of borrowers who may have missed one payment but not missed enough payments or been in default status for long enough to progress into a technical default definition. We look at The rate of early payment defaults are borrowers who come into the market within the last 12 months facing an undue amount of stress. And there's nothing in even those areas where we would typically look for an early indication that signals a turn is on the horizon. Instead, what we're really keying off of there is just the general headline, the general macro sentiment that obviously has been emerging over the last several months.
spk06: Hey, Adam, I really appreciate the sincerity with which you approached that question. We're wrestling with the exact same stuff, so I appreciate the answer. Great. Thanks, Rick.
spk08: The next question will be from Bose George from KBW.
spk09: Please go ahead.
spk18: Yes, good afternoon. Actually, just one more follow-up on the expenses. Now that you're at the 25% that you kind of targeted, as you continue to grow, could we see that go closer to 20% that we see from some of the larger peers?
spk04: Well, look, we mentioned low to mid-20s as long-term goals. We certainly have a goal of continuing to manage our business with as much efficiency as possible. If we're successful in doing that, which we expect to be and we continue to grow our insurance in force, we will likely see some continued improvement in our expense ratio over the long term. Can't give you guidance, though, on the timeline over which that will emerge.
spk18: That's great. Thanks. Actually, I didn't know if you gave this, but what's the cash of the holding company?
spk05: Cash and investments at the holding company are $114 million.
spk18: Okay, great. Thanks. And then actually just one on the, what's the duration of your investment portfolio? Just when I think about the AOCI kind of rolling back in over time.
spk05: At Q2, it was 4.3. Okay, great.
spk18: Thanks.
spk08: The next question will be from Mark Hughes from Truist.
spk09: Please go ahead.
spk14: Yeah, thanks. Good afternoon. I wonder if you'd make a general comment with the interest rates up and presumably, you know, housing prices up, but still impact of the higher housing prices on the need for private mortgage insurance. Are you seeing that this is higher interest rates in their way, increasing demand for your product?
spk04: Yeah, it's a good question, Mark. What I would say is the need for our support is much more driven by down payment support than it is for what the monthly carrying cost of the home will be. And so movements in interest rates themselves don't necessarily impact the market opportunity or the penetration on the purchase side. Certainly they impact the refinancing opportunity because obviously borrowers may not find as much value in pursuing a refinancing transaction. It's the rise of house prices over the last several years that increased the need for our support, and we have been delighted to be able to really step in and provide borrowers with the support they need and help them gain access to housing. But it's not interest rates. It's house prices driving increased loan balances, obviously additional need for down payment dollars up front that really increases the opportunity for us.
spk14: Understood. Then thinking about the current macro environment, you laid out how the, when you look at some of these broader factors could have an impact on losses forward. How do the reinsurers look at it? Obviously your new transaction is a pretty attractive thing. Is that attractive pricing a function of the good position of your portfolio or Would you say the reinsurers at this point are not putting too much concern into these macro issues?
spk04: Yeah, it's a good question. Look, what I would say is right now, overall, the reinsurance market and our ability to access attractive funding with the risk protection characteristics that we think are appropriate to help us manage our aggregation is there. The market is open. It's open to us in size. It's open on favorable terms. But our reinsurers are quite smart. They obviously monitor what's happening in the environment as well. We have long-term relationships with them. They understand how we manage our business. They understand that we're always on our front foot with respect to risk and managing our flows. And I think that's something that helps us achieve favorable outcomes in the reinsurance market. They're certainly focused on it, but in just the same way that we are still in the market providing support for our customers and their borrowers, We are their customers, and they are in the market continuing to provide support for us even as the macro environment evolves.
spk10: Thank you.
spk08: The next question will be from Ryan Gilbert from BTIG.
spk09: Please go ahead.
spk13: Hi, thanks. Good evening, everybody. I was hoping to get your updated thoughts on or quantification of where you think persistency can go and maybe quantify or expand on what a meaningful improvement in persistency means.
spk05: Well, good. I mean, Ryan, I think we mentioned on the call that as of Q2, our persistency was at 76%. It's up from 71.5% in Q1. And certainly, we think we're on a trend to 80%, given the current rate environment. And certainly, that provides a tremendous amount of value to us. It extends the life of many of our policies, which adds to the embedded value in our portfolio. And we see that as a real positive for us as an organization. Assuming that our strong credit performance continues to trend the way it has, It's going to build embedded value in our portfolio over time, and it's going to be real positive for us.
spk13: Okay. Second question on home price appreciation. I mean, we can look at the home price indices that are published for the LAG. I would love to get your updated thoughts or your view on how HPA trended throughout the quarter and maybe into July, if you have any visibility into where spot prices are.
spk04: Yeah, look, what I say is generally speaking, we do expect that the pace of house price appreciation, one, has slowed and that it will continue to slow and that we may begin to see some modest declines. We haven't seen that yet, but some modest declines across certain markets. We really do look at it, though, on a market-by-market basis. In rate GPS, we individually assess and price for 950 or so discrete MSAs. And so I can't give you a complete rundown because every market will have its own rhythm. It is an interesting one, though, where much of what we've experienced collectively over the last few years has been national in scope, right? We've had broad swings from and employment standpoint, right, with broad strength nationally. We've had broad house price appreciation nationally with obviously some differentiation market by market. What we think, though, what we think we'll see emerge going forward, though, is a much more differentiated outcome on a market by market basis. And so that's what we're monitoring. But we look at it across, you know, nearly 1,000 different MSAs nationally when we consider where credit is going and how we need to price for or manage the risk
spk13: Got it. And just to follow up on that, in the geographies where you expect home price appreciation to decline or there's an increased probability that it might, what do you see as the catalyst for home prices to move lower? I think we generally think of home prices as sticky downwards.
spk04: Yeah, look, it's a couple of things. When we look at individual markets, we're looking at, one, where was there the most significant house price appreciation over the last few years? Higher prices from a few years ago don't necessarily mean that things will fall in the future, but it's a place for us to start looking. But then we unpack that. The housing market is a market like all others that's driven by supply-demand dynamics. And so we look, what are those markets that have seen the most significant house price appreciation that have also seen the most significant supply build in recent periods? either because they are markets where there's a much larger concentration of new construction, where new home sales have accounted for a larger and larger percentage of overall home sales than the rest of the country, or where inventory of existing homes is building. And we pair that with some other data that we look at to try to get a sense for, and where on top of that do we see a greater disconnect from income levels, local economic opportunity, and affordability. And so it's a bit of a mosaic that we look at when trying to assess where we will see those modest declines. Again, we look at 950 or so MSAs, and we do this on a constant, continuous basis. There are some ones that are in the headlines, right? Boise is an area that's constantly referred to, and we do see some of these dynamics emerging there. But there are other areas in the Mountain West. There are areas through Texas where we look at these same dynamics as well.
spk13: Really helpful, thanks very much.
spk08: And again, if you'd like to ask a question, please press star and one. And the next question will come from Bill Deslam with Teton Capital.
spk09: Please go ahead.
spk02: Thank you. That's Ty, it's in capital. Adam, in your comments in the press release, you referenced a significant new business production. Would you dive into that in a bit more detail and discuss what that's referring to and maybe how that may or may not relate to things that Fritz mentioned in the analyst meeting a year ago?
spk04: Oh, sure. But simplistically, when we refer to significant new business production, what we're focusing on is the NIW that we generated in the period. So we wrote $16.6 billion of high quality, high return, high value new business in the quarter. And for us, that's up a little over 17% compared to what we achieved in the first quarter. So we feel terrific about what we were able to achieve from a customer support standpoint, where we were able to support borrowers and ultimately what it allowed us to drive from an NIW standpoint.
spk02: And to what degree do you see that 17% increase a function of new lenders that you were working with and your efforts on that front?
spk04: Yeah, it's a good question. We do talk about this a lot, but we didn't give the stat. I'll give it, though. We've given it in the past. We activated 35 new lender customers in the quarter, which is terrific. That's consistent with where we've been. There's still some white space for us for large needle-moving accounts, which were included in there. But in a particular quarter, the accounts that we activate, the new customers that we activate, have very, very little impact on the NIW that we generate. Rather, those new accounts that we bring on have the potential over time to help drive future NIW opportunity and NIW growth. Great. Thank you.
spk09: The next question will be from Jeffrey Dunn from Dowling and Partners. Please go ahead.
spk12: Thanks. Can you quantify the reserve strengthening action you took in the quarter? What portion of the $8.7 million current period provision related to that?
spk04: Jeff, if you look at it, there's a lot that goes into it. But ultimately, if you simply try to isolate what's the average reserve that we established for each new default, it was roughly double this quarter compared to what it was last quarter.
spk12: Okay, so this, I want to make sure I understand this, but this was on the entire non-COVID notice book, correct?
spk04: No, so the new defaults that emerged, the 1,069 new defaults that emerged in the second quarter, we established roughly a 2x reserve for each of those NODs as we had on the new defaults that emerged for the first time in the first quarter of 22.
spk12: Okay. And is that claim rate adjustment or severity adjustment or a combo thereof?
spk03: It's a combination of both.
spk12: Okay. And then I wanted to go back to the QSR and make sure I'm understanding this. I believe you called the 17 deal in the first quarter. Sounds like you called it 20-1 in the second quarter. So when you reference $1.6 million of that kind of cost going away, that was not the Q2 run rate, correct?
spk04: That's correct. So we called the 2017 deal on March 25th. We called the 2020 deal on April 25th. What we referenced was the last quarter in which those deals were outstanding for the full duration of the quarter, the combined cost was $1.6 million. So that would be the fourth quarter for ILN, the 2017 deal.
spk08: And it would be the first quarter for last quarter for the 2020 deal. And thank you very much.
spk09: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk04: Thank you again for joining us. We'll be attending the Barclays Financial Services Conference in New York on September 13th. and participating in the Zelman Virtual Housing Summit on September 21st. We look forward to speaking with you again soon.
spk08: And thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. Thank you. you Thank you. Thank you. Good day and welcome to the NMI Holdings, Inc.
spk09: Second Quarter 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your touchtone phone. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. John Swenson. Please go ahead, sir.
spk07: Thank you, operator. Good afternoon, and welcome to the 2022 Second 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 Schuster, Executive Chairman, Adam Politzer, President and Chief Executive Officer, Ravi Malela, Chief Financial Officer, and Julie Norberg, our Chief Accounting Officer. Financial results for the quarter were released after the close today. The press release may be accessed on NMI's website, located at 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 one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. Also note that on this call, we refer to certain non-GAAP measures. In today's press release and on our website, we have provided a reconciliation of these measures to the most comparable measures under GAAP. Now I'll turn the call over to Brad.
spk15: Thank you, John, and good afternoon, everyone. We had a terrific second quarter with strong operating performance, significant growth in our insured portfolio, and record financial results. During today's call, as we always do, we'll share with you the details behind our numbers and the implications for the periods ahead. I'd like to focus, however, on the macroeconomic environment. I've been in this business for almost 30 years. I have seen a number of economic cycles over that time. And importantly, I've seen how the mortgage insurance industry overall, and National MI specifically, have learned from and been transformed by past experience. We do see an emerging set of macro headwinds. However, we do not expect the economy or the housing market to deteriorate as they did in the financial crisis. For more than a decade now, underwriting standards have been disciplined and responsible across the mortgage market. Regulatory guardrails have been enacted, and the toolkit to assist borrowers through stress has grown meaningfully. Our borrowers today have a strong credit profile, significant equity position in their homes given the recent run of house price appreciation, and benefit from record low 30-year fixed rate mortgages with manageable debt service obligations. From the start, we have focused on building national MI in a durable, risk-responsible manner. We've worked hard to establish a comprehensive credit risk management framework, and in doing so, we have built the highest quality insured portfolio in the MI industry and have secured comprehensive reinsurance protection for nearly the entirety of our book. I'm confident in our ability to perform across all market cycles. We will continue to invest in our employees, support our customers and their borrowers, and deliver for our shareholders, no matter how the economy develops. Shifting to Washington matters. In early June, the GSEs each released their equitable housing finance plans which are designed to promote equitable access to affordable and sustainable housing and address longstanding disparities in homeownership. We commend their efforts. At National MI, we believe that providing all borrowers with an equitable opportunity to access the housing market, establish a community identity, and build long-term wealth through homeownership in a manner that appropriately guards against systemic risk is critically important. National MI and the broader private mortgage insurance industry play a uniquely valuable role in the housing finance system, providing borrowers with down payment support and equal access to mortgage credit while also placing private capital in front of the taxpayer to absorb risk and loss in a downturn. Since our formation, we've helped more than 1.4 million low down payment borrowers gain fair access to mortgage credit. And in doing so, have helped open the door to affordable and sustainable home ownership in communities across the country. We are committed to equally supporting borrowers from all communities and are actively engaged in discussions with policymakers, regulators, the GSEs, lenders, and consumer advocacy groups. We look forward to continuing to work with the GSEs as they put their equitable housing plans into action and develop specific initiatives to support increased access and affordability in a manner that appropriately guards against systemic risk. With that, let me turn it over to Adam.
spk04: Thank you, Brad, and good afternoon, everyone. National MI continued to outperform in the second quarter, delivering significant new business production, strong growth in our high-quality insured portfolio, continued success in the reinsurance market, and record results across every key financial metric. We generated $16.6 billion of NIW volume, and ended the quarter with a record $168.6 billion of high-quality, high-performing insurance and force. We achieved record GAAP net income of $75.4 million, or $0.86 per diluted share, and record adjusted net income of $74.3 million, also $0.86 per diluted share. GAAP return on equity for the quarter was 19.7%, and adjusted ROE was 19.4%. During the quarter, we also entered into a new quota share reinsurance agreement, securing incremental risk protection for a seasoned portion of our in-force portfolio. The transaction builds upon the broad success that we've had in the risk transfer markets to date and provides us with approximately $150 million of incremental PMIRS funding capacity at an attractive cost of capital. Overall, we had an exceptionally strong quarter. and are optimistic as we progress into the second half. Our lenders and their borrowers continue to rely on us for critical down payment support. Purchase demand remains strong, and we see a significant opportunity to continue writing high-quality, high-return, high-value new business. We expect our persistency will continue to improve meaningfully, driving sustained growth in our in-force book and a further increase in the embedded value of our insured portfolio. and our credit experience continues to trend in a favorable direction, with the performance data from our portfolio remaining resoundingly strong. Taken together, we see a clear opportunity for continued outperformance. We do, however, also see increased risk in the macro environment. Rising rates and the record run of house price appreciation have strained affordability for many new borrowers, and some prospective buyers are recalibrating due to the emerging economic uncertainty. We expect the pace of home price appreciation to moderate from record levels, and we may see a modest decline in certain local markets. Existing homeowners, however, are well positioned, with strong credit profiles, record levels of home equity, sustainable fixed payment obligations at record low mortgage rates, and a favorable job market, all providing foundational support. While we can't control how the economy or housing market develop, we can control how we're positioned to navigate through a period of stress. And we've taken action and made investments from day one to secure our performance across all cycles. We have a talented and dedicated team who drive our success every day. We've earned the trust and partnership of our customers with our focus on service, value-added engagement, and technology leadership. We've prioritized discipline and risk responsibility as we've grown our in-force portfolio, building the highest quality insured book in the MI industry. We've led with innovation in the risk transfer markets, securing comprehensive reinsurance coverage on nearly all of the policies we've ever originated. And we've established a strong balance sheet with a robust funding position and sizable regulatory capital buffer. In the second quarter and in the months since, we've taken further steps to bolster our business. We've selectively increased policy pricing to reflect the emerging risk environment. We've made targeted changes to manage our mix of new business by risk cohort and geography, and we secured additional reinsurance protection and strengthened our PMIRs position, among other actions. More broadly, we've been encouraged by the discipline that we've seen across the private MI market. Underwriting standards remain rigorous, and the pricing environment has generally hardened in response to emerging risks. Overall, we had a terrific quarter, delivering strong operating performance, significant growth in our insured portfolio, and record financial results, and are optimistic as we enter the second half of the year. We're well positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio, and deliver strong performance for our shareholders. Before turning it over to Ravi, I want to note how proud I am that for the seventh consecutive year, National MI has been recognized as a great place to work. Great Place to Work is a global authority on workplace culture, employee experience, and leadership, and partners with Fortune magazine to produce the annual Fortune 100 Best Companies to Work For list. We believe that the quality of our team and the culture that we've established are key competitive advantages, and it's gratifying to again be recognized for these strengths. With that, I'll turn it over to Ravi.
spk05: Thank you, Adam. We delivered record financial results in the second quarter with strong new business volume, significant growth in our insured portfolio, continued resiliency in our credit performance, and expense efficiency driving record profitability. Net premiums earned were a record $120.9 million. Adjusted net income was a record $74.3 million, or $0.86 for diluted share. And adjusted return on equity was 19.4%. We generated $16.6 billion of NIW in the second quarter, up 17% from the first quarter. Purchase NIW was $16.2 billion during the quarter. Primary insurance and force grew to $168.6 billion, up 6% from the end of the first quarter and up 23% compared to the second quarter of 2021. Twelve-month persistency in our primary portfolio improved again, reaching 76% compared to 71.5% in the first quarter. We expect persistency will continue to improve meaningfully as we progress through the year. a real positive that will help drive sustained portfolio growth and embedded value gains in the second half. Net premiums earned in the second quarter were $120.9 million compared to $116.5 million in the first quarter. We earned $2.2 million from the cancellation of single premium policies in the second quarter compared to $2.9 million in the first quarter. Reported yield for the second quarter was 30 basis points, unchanged from the first quarter. Investment income was 10.9 million in the second quarter, compared to 10.2 million in the first quarter. Underwriting and operating expenses were 30.7 million in the second quarter, compared to 32.9 million in the first quarter. Our expense ratio was a record low, 25.4% in the quarter. highlighting the significant operating leverage embedded in our business and the success we have achieved in efficiently managing our cost base as we have scaled our insured portfolio. We have long signaled our expectation to achieve and sustain a mid-20s expense ratio and are proud to be delivering on this guidance. Our credit performance continues to trend in a favorable direction. We had 4,271 defaults in our primary portfolio at June 30th, compared to 5,238 at March 31st, and our default rate declined to 77 basis points at quarter ends. Peer activity during the quarter remained strong, and we again released a portion of the reserves we previously established for potential claims outcomes on our early COVID default populations. recognizing a $3 million net claims benefit in the second quarter. At the same time, we adopted a more conservative posture for setting reserves across our remaining default population and increased our average carried reserve per default at June 30th in light of the evolving risk environment. Interest expense in the quarter was $8.1 million, and we recorded a $1 million gain on the change in the fair value of our warrant liability during the period. All remaining unexercised warrants expired during the second quarter. And as such, we will not see any warrant fair value changes in our financial results in future periods. GAAP net income was a record $75.4 million, or $0.86 per diluted share for the quarter. And adjusted net income was a record $74.3 million, also $0.86 per diluted share. Total cash and investments were $2.1 billion at quarter end, including $114 million of cash and investments at the holding company. We have $400 million of outstanding senior notes, and our $250 million resolving credit facility remains undrawn and fully available. In July, Moody's upgraded our financial strength and holding company debt ratings to BAA1 and BA1, respectively. We're pleased that they've recognized the strength of our credit profile, operating performance, financial results, and balance sheet position in their decision. Shareholders' equity as of June 30th was $1.5 billion, and book value per share was $18.01. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $19.91, up 5% compared to the first quarter and 19% compared to the second quarter of last year. In the second quarter, we repurchased $25 million of our common stock, retiring 1.4 million shares at an average price of $17.61, executing at a level below our book value per share. We have 95 million of repurchase capacity remaining under our existing authorization, and we intend to remain flexible and disciplined in our activity going forward, balancing the attractive opportunity we see to repurchase the shares at our current valuation against the evolving macroeconomic environment. During the quarter, we entered into a new quota share reinsurance agreement, primarily covering the portion of our in-force portfolio that was previously seated under our first and fourth ILNs. We exercised our ability to call these ILNs and reestablished risk protection on the pools with a new quota share treaty. The transaction effectively refreshes the coverage we previously had under the retired IONs on far more efficient terms, providing us with a lower risk attachment point, cheaper cost of capital, and increased PMIR's efficiency. The new quota share agreement is expected to provide an incremental $150 million of PMIR's credit at an estimated 3% weighted average lifetime pre-tax cost of capital. The treaty incepts on July 1st, and it's important to note that it will have a different impact on individual income statement line items than the ILN it replaces. The impact of the new treaty on pre-tax income, effectively it's all in cost, is expected to be approximately $1 million per quarter, compared to 1.6 million combined for our first and fourth ILNs in their last full quarter's outstanding. The new treaty will, however, have a more significant impact on our seeded premiums, which will be offset by a sizable seeding commission that appears as a benefit to our net operating expenses. Reinsurance remains a core pillar of our credit risk management strategies, providing us with meaningful protection against losses and stress scenarios and an efficient source of growth capital for our business. At quarter end, we reported total available assets under PMERS of $2.2 billion and risk-based required assets of $1.2 billion. Excess available assets were $929 million. Our new quota share reinsurance agreement is not included in these figures as it was completed after quarter end. The new treaty will further bolster our excess position and provide us with even more funding runway and enhance financial flexibility in future periods. In summary, we achieved record results in insurance and force, net premiums earned, total revenue, expense ratio, net income, and adjusted net income. Our credit performance continues to stand out in a favorable way. We continue to execute in the reinsurance market on favorable terms and have an exceptionally strong balance sheet. We believe we are well positioned to continue to perform across all market cycles. With that, let me turn it back to Adam.
spk04: Thank you, Ravi. Overall, we had a terrific quarter with significant new business production, increasing persistency, and growth in our high-quality insured portfolio driving record revenue, and favorable credit performance and expense discipline driving record profitability and strong returns. We're optimistic about the opportunity we have to continue to outperform in the second half. Stepping back, this is an interesting time, one where the strength of our current performance and near-term outlook stand in contrast to prevailing economic themes. It's important to focus on our current results as they highlight the value of our strategy and long-term potential, while at the same time, it's equally important to acknowledge and plan for potential macroeconomic outcomes. We've long been successful managing national MI with discipline and a focus on through-the-cycle performance and believe we're well-positioned to continue to serve our customers and their borrowers, invest in our employees and their success, drive growth in our high-quality insured portfolio, and deliver strong performance for our shareholders. Thank you for joining us today. I'll now ask the operator to come back on so we can take your questions.
spk09: Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you were using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two.
spk08: At this time, we will pause momentarily to assemble our roster. And the first question will come from Mark DeVries with Barclays.
spk09: Please go ahead.
spk17: Yeah, thanks. I wanted to drill down a little more on some of the different moving pieces you highlighted in some of the comments around the premium. You know, it sounds like there has been some selective price increases, but also, like, at least the latest QSR is going to weigh on premiums in the near term. How should we think about kind of the net impact on the average premium over the next couple quarters?
spk05: Sure. Maybe I'll start, Mark, by just saying that, you know, our premium yield in Q2 was 30 basis points and it was flat. And just really thinking about the mechanics for Q2, You know, we had the impact of the new XOL, and we had a little bit of a decline in our cancellation earnings in the quarter, and that summed up to about a basis point impact on yield. And that was offset really by sort of the amortization of the cost of the QSRs that we have and the ILNs that we have in place. And so we ended up at 30 basis points sort of there. You know, just to touch on sort of on the moving parts with respect to you know, premium yield for Q3, you know, the impact of the seasoned QSR, you know, we've talked about it in our prescriptive remarks, it's more efficient and it's a fantastic deal for us, but it definitely impacts us in a different way than the ILNs. You know, with the seasoned QSR, 35% of our seeded premiums, you know, come back in the form of seeded commissions, and that impacts our expense line. And with ILNs, you know, all of the seeded premiums come back as net premiums earn. And so there's an impact on the premium yield. You know, the seasoned QSR, it's more efficient, and it certainly provides us benefits. And some of those benefits flow through experience and impact our premium yield. So in Q3, you know, we estimate the impact of the seasoned QSR as having about one and a half basis points on net yield. And maybe just to balance these comments, I would just say, You know, the hardening environment, you know, I think could provide us with some benefit. But that's really on new production. And, you know, that's going to really depend a lot on the risk myth, how NIW involves, kind of how cancellation earnings trend. I think we're seeing them trend down. We'll probably see them to continue to trend down. And, you know, I think also an offset to that would be the decline in the amortization of the costs of our ILN and XOLs. And those are sort of the moving parts with respect to how we think about Q3 and premium yield.
spk17: Okay, that's helpful. And then just turning to your operating expenses, is there anything to call out that really drove what looks like some pretty significant operating leverage in the quarter? And furthermore, I guess you guys are now kind of at your long-term guidance but still exhibiting pretty significant growth and operating leverage. Any color on kind of where we think that might trend?
spk05: Yeah, I'll talk a little bit about just, you know, what happened in the quarter and give you a little bit about how we think about the trend. First, I'll just say, you know, we're very proud of achieving our, you know, our long-run goal of targeting low to mid-20s, you know, with our record low expense ratio of 25.4% in the quarter. And I just say in terms of the moving parts with respect to Q1, you know, our IT costs declined. We've talked in the past about our TCS relationships. We're in year two of that relationship, and frankly, our TCS costs declined. We had a sort of an annual step down in costs, and we picked up sort of a big portion of that here in Q1, about $1 million. And I think the rest of the difference between Q1 and Q2, we're really focused on the difference between Q1 and Q2 and Q3. Really, Q1 came in with, you know, typically higher payroll costs with respect to higher 401K costs and a FICA reset. And if you combine those two, the differences in payroll costs and the TCS benefit we picked up in Q2, that's really what drove the difference between Q1 and Q2. But when we look forward, I think, you know, we're always very focused on being efficient. You know, we're 246 employees. We have the smallest footprint in the industry by far. And, you know, I would just say we probably expect some growth in our gross expenses. Look, we're going to continue to invest in our people, our systems, and in risk management. And I think the other part to really factor in is the impact of the season QSR. And so that 35% seeding commission is going to be an offset to OPEX in the future. And I just say net-net with our investments and the impact of the season QSR, we're probably going to see a modest benefit going forward.
spk16: Okay. Very helpful. Thank you.
spk08: And the next question will be from Doug Harder from Credit Suisse.
spk09: Please go ahead.
spk11: Hi. This is John Kilachowski. I'm for Doug. Just one question from me. What was the driver behind the positive reserve development this quarter? And what's your outlook going forward for reserves and CARES for the rest of 2022?
spk05: Yeah, I mean, you know, we reported a $3 million, you know, net claims benefit in the quarter. You know, I just say that we're continuing to see, you know, progress with respect to our default population. Our default rate declined to 77 basis points in the quarter, down from 99 basis points in Q1. And just the total number of defaults have declined. We're down to 4,271 this quarter. And I just say the cure activity has been relatively strong. Our cure activity in Q2 was just slightly higher than what we saw in Q1. So that's about 2,000 cures. Look, I mean, it's pretty strong results with respect to how we've been performing. You know, I would just say that, you know, when we combine those pieces together and we think about, you know, the cure activity in the pre-COVID default population, the fact that defaults have declined quarter over quarter and cure rates have been relatively stable. You know, that's what drove our thought process with respect to Q2.
spk00: Great. Thank you.
spk09: And the next question will be from Rick Shane from JP Morgan. Please go ahead.
spk06: Hey, guys. Thanks for taking my questions this afternoon. Look, as we move through earnings season and we think about different things that we've heard within our broader coverage. Every once in a while, something idiosyncratic comes up in terms of either pockets of strength or weakness. And again, I realize that what's going on from a credit perspective, it's pretty difficult to extrapolate because the credit performance is so good. But is there anything that you're seeing that you would call out either on a positive or negative side that's a little bit surprising, a geo, where you're seeing some HPA, something interesting that you're seeing either positive or negative within the portfolio.
spk04: Yeah. Hey, Rick. It is an interesting time, right? You referenced idiosyncratic outcomes. And I would say there's so much of the current data that we look at both internally and externally is telling quite a positive story. But there are obviously emerging risks that we're all tuned to, that we hear about every day, that we see in other ways. that are emerging and have clouded the go-forward view. When we look at it today, the job market is still healthy, consumer spending remains strong, household balance sheets are in better shape than they were before the pandemic, and most importantly, our credit performance continues to trend in a really favorable direction. We don't have a crystal ball, but when we think about what our data is telling us today versus what the emerging themes are, We do think that there's a higher likelihood that growth will slow rather than accelerate, that unemployment will increase from here as opposed to decreasing further, and that consumer fundamentals will soften as opposed to strengthening. And all of that will have some bearing on our business. It will have some bearing on where volume trends. It will have some bearing on house price performance, on credit performance for borrowers across the mortgage spectrum. But there's really nothing when we try to look. We look for, take out the magnifying glass and try to identify where might we be seeing the earliest signs of a shift. We look at the emerging population of borrowers who may have missed one payment but not missed enough payments or been in default status for long enough to progress into a technical default definition. We look at The rate of early payment defaults are borrowers who come into the market within the last 12 months facing an undue amount of stress. And there's nothing in even those areas where we would typically look for an early indication that signals a turn is on the horizon. Instead, what we're really keying off of there is just the general headline, the general macro sentiment that obviously has been emerging over the last several months.
spk06: Hey, Adam, I really appreciate the sincerity with which you approached that question. We're wrestling with the exact same stuff, so I appreciate the answer. Great. Thanks, Rick.
spk08: The next question will be from Bose George from KBW.
spk09: Please go ahead.
spk18: Yes, good afternoon. Actually, just one more follow-up on the expenses. Now that you're at the 25% that you've kind of targeted, as you continue to grow, could we see that go closer to 20% that we see from some of the larger peers?
spk04: Well, look, we mentioned low to mid-20s as long-term goals. We certainly have a goal of continuing to manage our business with as much efficiency as possible. If we're successful in doing that, which we expect to be and we continue to grow our insurance in force, we will likely see some continued improvement in our expense ratio over the long term. Can't give you guidance, though, on the timeline over which that will emerge.
spk18: That's great. Thanks. Actually, I didn't know if you gave this, but what's the cash of the holding company?
spk05: Cash and investments at the holding company are $114 million.
spk18: Okay, great. Thanks. And then actually just one on the, what's the duration of your investment portfolio? Just when I think about the AOCI kind of rolling back in over time.
spk05: At Q2, it was 4.3. Okay, great.
spk18: Thanks.
spk08: The next question will be from Mark Hughes from Truist.
spk09: Please go ahead.
spk14: Yeah, thanks. Good afternoon. I wonder if you'd make a general comment with the interest rates up and presumably, you know, housing prices up, but still impact of the higher housing prices on the need for private mortgage insurance. Are you seeing that this is higher interest rates in their way, increasing demand for your product?
spk04: Yeah, it's a good question, Mark. What I would say is the need for our support is much more driven by down payment support than it is for what the monthly carrying cost of the home will be. And so movements in interest rates themselves don't necessarily impact the market opportunity or the penetration on the purchase side. Certainly they impact the refinancing opportunity because obviously borrowers may not find as much value in pursuing a refinancing transaction. It's the rise of house prices over the last several years that increased the need for our support, and we have been delighted to be able to really step in and provide borrowers with the support they need and help them gain access to housing. But it's not interest rates. It's house prices rising, increased loan balances, obviously additional need for down payment dollars up front that really increases the opportunity for us.
spk14: Understood. Then thinking about the current macro environment, you laid out how the, when you look at some of these broader factors could have an impact on losses forward. How do the reinsurers look at it? Obviously your new transaction is a pretty attractive thing. Is that attractive pricing a function of the good position of your portfolio or Would you say the reinsurers at this point are not putting too much concern into these macro issues?
spk04: Yeah, it's a good question. Look, what I would say is right now overall the reinsurance market and our ability to access attractive funding with the risk protection characteristics that we think are appropriate to help us manage our aggregation is there. The market is open. It's open to us in size. It's open on favorable terms. But our reinsurers are quite smart. They obviously monitor what's happening in the environment as well. We have long-term relationships with them. They understand how we manage our business. They understand that we're always on our front foot with respect to risk and managing our flows. And I think that's something that helps us achieve favorable outcomes in the reinsurance market. They're certainly focused on it, but in just the same way that we are still in the market providing support for our customers and their borrowers, We are their customers, and they are in the market continuing to provide support for us, even as the macro environment evolves.
spk10: Thank you.
spk08: The next question will be from Ryan Gilbert from BTIG.
spk09: Please go ahead.
spk13: Hi, thanks. Good evening, everybody. I was hoping to get your updated thoughts on, you know, or quantification of where you think persistency can go and maybe, you know, quantify or expand on what a meaningful improvement in persistency means.
spk05: Well, good. I mean, Ryan, I think we mentioned on the call that our, you know, as of Q2, our persistency was at 76%. It's up from 71.5% in Q1. And certainly, we think we're on a trend to 80%, given the current rate environment. And certainly, that provides a tremendous amount of value to us. It extends the life of many of our policies, which adds to the embedded value in our portfolio. And we see that as a real positive for us as an organization. Assuming that our strong credit performance continues to trend the way it has, It's going to build embedded value in our portfolio over time, and it's going to be real positive for us.
spk13: Okay. Second question on home price appreciation. I mean, you know, we can look at the home price indices that are published for the lag. I would love to get your updated thoughts or your view on how HPA trended throughout the quarter and maybe into July, if you have any visibility into, like, where spot prices are.
spk04: Yeah, look, what I say is generally speaking, we do expect that the pace of house price appreciation, one, has slowed and that it will continue to slow and that we may begin to see some modest declines. We haven't seen that yet, but some modest declines across certain markets. We really do look at it, though, on a market-by-market basis. In rate GPS, we individually assess and price for 950 or so discrete MSAs. And so I can't give you a complete rundown because every market will have its own rhythm. It is an interesting one, though, where much of what we've experienced collectively over the last few years has been national in scope, right? We've had broad swings from and employment standpoint, right, with broad strength nationally. We've had broad house price appreciation nationally with obviously some differentiation market by market. What we think, though, what we think we'll see emerge going forward, though, is a much more differentiated outcome on a market by market basis. And so that's what we're monitoring. But we look at it across, you know, nearly 1,000 different MSAs nationally when we consider where credit is going and how we need to price for or manage the risk as a result.
spk13: Got it. And just to follow up on that, in the geographies where you expect home price appreciation to decline or there's an increased probability that it might, what do you see as the catalyst for home prices to move lower? I think we generally think of home prices as sticky downwards.
spk04: Yeah, look, it's a couple of things. When we look at individual markets, we're looking at, one, where was there the most significant house price appreciation over the last few years? Higher prices from a few years ago don't necessarily mean that things will fall in the future, but it's a place for us to start looking. But then we unpack that. The housing market is a market like all others that's driven by supply-demand dynamics. And so we look, what are those markets that have seen the most significant house price appreciation that have also seen the most significant supply build in recent period? either because they are markets where there's a much larger concentration of new construction, where new home sales have accounted for a larger and larger percentage of overall home sales than the rest of the country, or where inventory of existing homes is building. And we pair that with some other data that we look at to try to get a sense for, and where on top of that do we see a greater disconnect from income levels, local economic opportunity, and affordability. And so it's a bit of a mosaic that we look at when trying to assess where we will see those modest declines. Again, we look at 950 or so MSAs, and we do this on a constant, continuous basis. There are some ones that are in the headlines, right? Boise is an area that's constantly referred to, and we do see some of these dynamics emerging there. But there are other areas in the Mountain West. There are areas through Texas where we look at these same dynamics as well.
spk13: Really helpful, thanks very much.
spk08: And again, if you'd like to ask a question, please press star and one. And the next question will come from Bill Deslam with Teton Capital, please go ahead.
spk02: Thank you. That's Ty, it's in capital. Adam, in your comments in the press release, you referenced a significant new business production. Would you dive into that in a bit more detail and discuss what that's referring to and maybe how that may or may not relate to things that Fritz mentioned in the analyst meeting a year ago?
spk04: Oh, sure. But simplistically, when we refer to significant new business production, what we're focusing on is the NIW that we generated in the period. So we wrote $16.6 billion of high quality, high return, high value new business in the quarter. And for us, that's up a little over 17% compared to what we achieved in the first quarter. So we feel terrific about what we were able to achieve from a customer support standpoint, where we were able to support borrowers and ultimately what it allowed us to drive from an NIW standpoint.
spk02: And to what degree do you see that 17% increase a function of new lenders that you were working with and your efforts on that front?
spk04: Yeah, it's a good question. We do talk about this a lot, but we didn't give the stat. I'll give it, though. We've given it in the past. We activated 35 new lender customers in the quarter, which is terrific. That's consistent with where we've been. There's still some white space for us for large needle-moving accounts, which were included in there. But in a particular quarter, the accounts that we activate, the new customers that we activate, have very, very little impact on the NIW that we generate. Rather, those new accounts that we bring on have the potential over time to help drive future NIW opportunity and NIW growth. Great. Thank you.
spk09: The next question will be from Jeffrey Dunn from Dowling and Partners. Please go ahead.
spk12: Thanks. Can you quantify the reserve strengthening action you took in the quarter? What portion of the $8.7 million current period provision related to that?
spk04: Jeff, if you look at it, there's a lot that goes into it. but ultimately if you simply try to isolate what's the average reserve that we established for each new default, it was roughly double this quarter compared to what it was last quarter.
spk12: Okay. So this, um, so I want to make sure I understand this, but this was on the entire non COVID notice book, correct?
spk04: Uh, no. So the new defaults that emerged, the 1069 new defaults that emerged in the second quarter, we established roughly, a 2x reserve for each of those NODs as we had on the new defaults that emerged for the first time in the first quarter of 22.
spk12: Okay. And is that claim rate adjustment or severity adjustment or a combo thereof?
spk03: It's a combination of both.
spk12: Okay. And then I wanted to go back to the QSR and make sure I'm understanding this. I believe you called the 17 deal in the first quarter. Sounds like you called it 20-1 in the second quarter. So when you reference $1.6 million of that kind of cost going away, that was not the Q2 run rate, correct?
spk04: That's correct. So we called the 2017 deal on March 25th. We called the 2020 deal on April 25th. What we referenced was the last quarter in which those deals were outstanding for the full duration of the quarter, the combined cost was $1.6 million. So that would be the fourth quarter for the 2017 deal.
spk08: And it would be the first quarter for last quarter for the 2020 deal. And thank you very much.
spk09: Ladies and gentlemen, this concludes our question and answer session. I would like to turn the conference back over to management for any closing remarks.
spk04: Thank you again for joining us. We'll be attending the Barclays Financial Services Conference in New York on September 13th. and participating in the Zelman Virtual Housing Summit on September 21st. We look forward to speaking with you again soon.
spk08: And thank you very much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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