NMI Holdings Inc

Good day and welcome to the NMI Holdings Inc. 4th Quarter 2024 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 a 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 John Swenson of Management. Please go ahead.

Thank you, Operator. Good afternoon and welcome to the 2024 4th Quarter Conference Call for National MI. I'm John Swenson, Vice President of Invest Relations and Treasury. Joining us on the call today are Brad Schuster, Executive Chairman, Adam Pollitzer, President and Chief Executive Officer, and Aurora Swithenbank, our Chief Financial 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 Investor Staff. 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 may refer to certain non-GAAP measures. In today's press release and on our website, we provided a reconciliation of these measures to the most comparable measures under GAAP. Now, I'll turn the call over to Brad.

Thank you, John, and good afternoon, everyone. I'm pleased to report that in the fourth quarter, National MI again delivered standout operating performance, continued growth in our insured portfolio, and strong financial results, capping a year of tremendous success. We closed 2024 with $46 billion of total NIW volume and a record $210.2 billion of high quality, high performing primary insurance and force. We delivered broad success in customer development, continued to innovate in the capital and insurance markets, and once again achieved industry-leading credit performance. In 2024, we generated record adjusted net income of $365.6 million, up 13% compared to 2023. Record adjusted EPS of $4.50, up 17% compared to 2023, and delivered a .6% adjusted return on equity. Looking ahead, I'm excited at the opportunity we have to continue to build on our success. As we plan for 2025, we'll continue to focus on our people. They are talented, innovative, and dedicated, and we'll continue to invest in our culture with a focus on collaboration, performance, and impact. We'll continue to differentiate with our customers. The mortgage market is connected and evolving, and we'll work to continue to stand out with our focus on customer service, value-added engagement, and technology leadership. We'll continue to prioritize discipline and risk responsibility as we grow our insured portfolio, working to write a large volume of high quality, high return business under the protective umbrella of our comprehensive credit risk management framework. And we'll continue to focus on building value for our shareholders, growing earnings, compounding book value, delivering strong mid-teens returns, and prudently distributing excess capital. Before turning it over to Adam, I'd also like to comment on the current policy environment. Our conversations in Washington since the election have been active and constructive. We have long noted that there is bipartisan recognition of the unique and valuable role that the private mortgage insurance industry plays, working to consistently expand access to home ownership and all the benefits it provides, while also placing private capital in front of the taxpayer to ensure the safety and soundness of the conventional mortgage market. National MI and the broader private MI industry have never been stronger or better positioned to provide support than we are today, and we're looking forward to working with the new administration to advance their important housing goals. With that, let me turn it over to Adam.

Thank you, Brad, and good afternoon, everyone. National MI continues to perform in the fourth quarter, delivering significant new business production, consistent growth in our insured portfolio, and strong financial results. We generated $11.9 billion of NIW volume and ended the period with a record $210.2 billion of high-quality, high-performing primary insurance enforce. Total revenue in the fourth quarter was a record $166.5 million, and we delivered a net income of $86.1 million, or $1.07 per diluted share, and a .6% adjusted return on equity. Overall, we had a terrific quarter and closed 2024 in a position of real strength. We generated $46 billion of NIW volume during the year and exited with $210.2 billion of primary insurance enforce. Our portfolio is the fastest-growing, highest-quality, and best-performing MI industry and has enormous embedded value. We now have nearly 660,000 policies outstanding, and have helped a record number of borrowers gain access to housing at a time when they needed us most. We enjoyed continued momentum and growth in our customer franchise, activating 118 new lenders in 2024 and ending the year with over 1,600 active accounts. We were once again recognized as a great place to work, our ninth consecutive award, which we view as a reflection of our unique corporate culture and a testament to the hard work and dedication of our talented team. We continue to innovate and find broad success and support in the reinsurance market, securing a series of new quota share and excess of loss treaties that extend our comprehensive credit risk management framework and are amongst the best we have ever achieved in terms of their cost, capacity, and duration. We completed a successful debt refinancing as an investment-grade issuer and continue to consistently return capital and drive value for shareholders under our repurchase program. And we achieved record full-year financial results, generating $651 million of total revenue, up 12% compared to 2023, $366 million of adjusted net income, up 13% compared to 2023, $4.50 of adjusted EPS, up 17% compared to 2023, and a .6% adjusted return on equity. As we begin 2025, we're encouraged by both the broad resiliency that we've seen in the macro environment and housing market and by the continued opportunity and discipline that we see across the private MI industry. Total MI industry NIW volume was an estimated $300 billion in 2024, with the market demonstrating real strength despite the continued headwind of elevated interest rates. Our lender customers and their borrowers continue to rely on us in size for critical down payment support, and we expect that the private MI market will remain just as strong in 2025, with long-term secular trends continuing to drive an attractive new business opportunity. The MI pricing environment remains balanced and constructive as well, allowing us to fully and fairly support our lenders and their borrowers while at the same time appropriately protect risk-adjusted returns and our ability to deliver long-term value for our shareholders. And credit continues to perform, with underwriting discipline across the mortgage market and existing borrowers well positioned against the backdrop of a broadly resilient U.S. economy. As we look ahead, we're confident. The macro outlook is encouraging, the private MI market opportunity is compelling, and we're well positioned to continue to deliver value for our people, our customers and their borrowers, and our shareholders. We have a strong customer franchise, a talented team driving us forward every day, an exceptionally high-quality book covered by a comprehensive set of risk transfer solutions, and a robust balance sheet supported by the significant earnings power of our platform. With that, I'll turn it over to Aurora.

Thank you, Adam. We again delivered strong financial results in the fourth quarter. Total revenue was a record $166.5 million, adjusted net income was $86.1 million, or $1.07 per diluted share, and adjusted return on equity was 15.6%. We generated $11.9 billion of NIW, and our primary insurance in force grew to $210.2 billion, up 1% from the end of the third quarter and 7% compared to the fourth quarter of 2023. Twelve-month persistency was .6% in the fourth quarter, compared to .5% in the third quarter. Net premiums earned in the fourth quarter were a record $143.5 million, compared to $143.3 million in the third quarter, and $132.9 million in the fourth quarter of 2023. Net yield for the quarter was 27 basis points. Core yield, which excludes the cost of our reinsurance coverage and the contribution from cancellation earnings, was 34 basis points, unchanged from the third quarter. Investment income was $22.7 million in the fourth quarter, compared to $22.5 million in the third quarter, and $18.2 million in the fourth quarter of 2023. Total revenue was a record $166.5 million in the fourth quarter, compared to $166.1 million in the third quarter, and $151.4 million in the quarter, compared to $29.2 million in the third quarter, and our expense ratio was 21.7%. We had 6,642 defaults at December 31, including 471 new notices for loans in FEMA-declared disaster areas, primarily related to hurricanes Helene and Milton, and our default rate was 1% year-end. Claims expense in the fourth quarter was $17.3 million, compared to $10.3 million in the third quarter. We have a uniquely high-quality insured portfolio, and our credit experience continues to benefit from the discipline with which we have shaped our book, the strong position of our existing borrowers, and the broad resiliency we've seen in the housing market. Gap net income in the quarter was $86.2 million, and diluted earnings per share was $1.07. Total cash and investments were $2.8 billion at quarter end, including $132 million of cash and investments at the holding company. Shareholders' equity at December 31 was $2.2 billion, and book value per share was $28.21. Book value per share, excluding the impact of net unrealized gains and losses in the investment portfolio, was $29.80, up 4% compared to the third quarter and 17% compared to the fourth quarter of last year. In the fourth quarter, we repurchased $27.9 million of common stock, retiring 722,000 shares at an average price of $28.72. Through year end, we have repurchased a total of $245 million of common stock, retiring 9.3 million shares at an average price of $26.33. We have 80 million of repurchase capacity remaining under our existing program, and today's incremental $250 million authorization provides us with significant additional capacity to continue driving value and returning capital to our shareholders. At quarter end, we reported $3.1 billion of total available assets under PMIRs and $1.8 billion of risk-based required assets. Excess available assets were $1.3 billion. Overall, we achieved standout financial results during the quarter, delivering consistent growth in our high-quality insured portfolio, record top-line performance, continued expense efficiency, and strong bottom-line profitability and return. With that, let me turn it back to Adam.

Thank you, Aurora. Overall, we had a terrific quarter, capping a record year in which we delivered broad success in customer development, continued to innovate in the reinsurance and capital markets, once again achieved industry-leading credit performance, and generated exceptionally strong financial results with record profitability, significant growth in book value per share, and a .6% adjusted return on equity. Looking ahead, we're confident. 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 through the cycle growth, returns, and value 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.

We will now begin the question and answer session. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble

our roster. The first question today comes from Doug Harder with UBS. Please go ahead.

Re-purchase authorization. How

should we think about the pacing of capital return?

Yes, I think broadly speaking, maybe I'll touch on both sizing of the program and pacing expectations going forward to give you a little bit of perspective. The repurchase has obviously been a source of real value for us, allowing us in our minds to provide investors with the ability to directly participate in all of the value that we're generating day to day. The sizing of the strikes the right balance, allowing us to prudently manage our funding needs but also providing us with ample runway to continue repurchasing stock with consistency over the next several years. I'll anchor on that point of consistency. If you look back to date over the last three years that we've had our program in place, we've averaged about $25 million per quarter of repurchase. A little bit of movement up or down, obviously, depending on the market environment, our view of where we're trading, but roughly that $25 million. If you take the 250 million authorization today plus the 80 million remaining, that gives us about 330 million over the next 12 quarters. It works out to call it roughly that 25 million. Certainly, though, the incremental capacity also will allow us to be opportunistic if we see the opportunity to develop.

I guess just on that point, since you started the Buy Back program, your earnings power and the portfolio size have increased. At what point would you consider increasing the run rate of Buy Back?

Right now, I think the program gives us the flexibility to do both, to stick with the consistency that we've established but also to be opportunistic should the environment change, something in our outlook change. Right now, we expect it will

be operating at a roughly similar cadence. Thank you,

Adam. The next question comes from Terry Ma with Barclays. Please go

ahead.

Hey, thank you. Good afternoon. Maybe just to start off with credit, your reserve release this quarter for prior period defaults was one of the lower amounts over the last two years. Is there any color you can just provide on just the makeup of cures within the quarter?

Sure. In the table in the press release,

we split things out into prior years and current year. The reserve release associated with prior years is 4.4 million. What's in that number is, anything that went into default in 2023 or earlier and cured out in the fourth quarter of this past year. What is not in that and what is the majority of our cures in the quarter are loans that went into default in Q1, Q2, or Q3 of last year. Those cures are all embedded in the current year line. Again, the presentation in the table masks some of that since it's embedded in the current year. If we had bifurcated out those cures, the total cure population would have been 16.3 million. I'd say our cure rate quarter over quarter was broadly similar. In the third quarter, we had a cure rate of 31%. In the fourth quarter, we had a cure rate of 29%.

Got it. Okay. That's helpful. Then in terms of the claims activity in the quarter, that's ticked up a little bit. It looks like almost 30% of the claims activity this quarter came from the 2022 vintage, similar to last quarter. That's ticked up. Any color you can provide on the role to claim versus what you've assumed in your underwriting?

Yeah. If it's helpful, because obviously with the movement in claims expense in the quarter and the loss ratio, maybe I'll offer just a broader perspective on claims experience and I wouldn't say guidance, but at least a bit of perspective on how we see things developing going forward. In the quarter, we reported 17.3 million of claims expense in a 12% loss ratio. While our credit experience trended higher compared to Q3, it's in line with our expectations and we remain greatly encouraged by the credit performance of our book. We spent time last quarter on the call and really have long talked about the seasonality of credit performance accelerating from Q3 into Q4. We've also noted that we're seeing a natural normalization in our claims experience given the growth and seasoning of our book, as our more recent production years come into a period of typical loss incurrence, the 2022 book included. Aurora, in her remarks, also noted that we had a number of new notices that emerged in the fourth quarter related to storm activity. While we do adjust our reserving assumptions for those notices given the exceptionally high cure experience that we've seen on them, we did still see some amount of those NODs translated to claims expense. It was roughly one and a half million of our fourth quarter claims expense traces to those storm-related NODs. Overall, we have an exceptionally high quality book and we ended the quarter with a 1% default rate. That perspective though on the go forward, broadly speaking, our existing borrowers are well situated and continue to benefit from the resiliency that we've seen in the macro environment and the housing market, but we do expect that our default experience and our claim costs will continue to trend, particularly as our most recent production years continue to age to that point of normal loss incurrence. Again, 2022 book that you asked about included. I parsed though some of the underlying data from the quarter as you think about where things and as certainly when we look internally as to where things are going and some of this underlying data is actually encouraging, quite encouraging. So in the fourth quarter, if we adjust out the new storm-related defaults, our new notices actually declined compared to the quarter. They were down about 4% period to period and as a point of comparison, our new notices in Q4 of 2023 instead of declining as they did this year, they increased by 17%, which we'd expect with seasonality. The fact that we didn't see a similar trend this year is really encouraging and then the other element that I note is that the average age of our portfolio is extending with every passing month because of the strength of our persistency experience and at the age of our portfolio draws closer and closer to that three-year point of typical loss incurrence, we'd expect that we'll continue to see things normalize and so Net-Net as we look forward, whether it's the 2022 book year or the portfolio overall, we're incredibly happy with how we've built our book and how it's performing and we're

encouraged as we look ahead. Got it. Super helpful. Thank you.

The next question comes from Boz George with KBW.

Please go ahead.

Everyone, good afternoon. If you just wanted to follow up on Doug's questions about the capital return, can you just talk about dividends, when that might become part of the picture and then how you think about as that pull to par happens and the IIF quote slows, is that when the dividend might become part of how you return capital?

Yeah, I think look right now we're focused on our repurchase program and today's refresh really does provide us with significant incremental capacity. We do see a lot of value in the repurchase program, particularly given obviously where we sit relative to book value on a trading basis. The repurchase program allows us to maintain really that right funding balance optimized between equity, debt, reinsurance usage, and obviously it supports future EPS and ROE outcomes. I'd say we're really pleased with the execution that we've seen to date and now have over $300 million of runway between what we previously had and then the new authorization. I'd say in terms of a dividend over time, as we continue to perform and grow the dividend stream from our operating company up to the holding company, we may have an ability to introduce the common dividend, but for right now repurchase really is our primary focus.

Okay, makes sense, thanks. And then if you're switching over to credit, I think in the second quarter call there was some discussion about a couple of markets, I think Texas, Florida where they was built up with inventory and you were keeping an eye on. Can you just give us an update and then any other any markets now that you're focused on from that standpoint?

Yeah, I think we really haven't seen, and that continued also into Q3, we haven't seen the fundamental changes I'd say in terms of either new markets coming into a risk spotlight or others that are moving out. And so we continue to actively manage our mix of by both borrow or risk attributes, but also by geography through the use of rate GPS and haven't made any fundamental changes by risk cohort or geography. We still see inventory levels being a bit higher in those markets and the prospect for some pressure from an HPA standpoint.

Okay, great, thanks.

The next question comes from Rick Shane with JP Morgan. Please go ahead.

Hey guys, thanks for taking my questions. Most have been asked and answered, but I'm just curious from sort of a competitive landscape what you're seeing. I'm curious what you're hearing from mortgage originators in terms of, you know, their any pushback on pricing or any sort of to open the credit aperture just a little bit.

Yeah, you know, Rick, it's a good question. I'd say we really don't hear much direct feedback on our pricing from lenders. I think our customers, you know, rightly expect us to support them and their borrowers. And so we do that every day and we always aim to strike the right balance. And also importantly with, you know, the use of a trade engine, we never say no. We just say most often, right? We're always saying yes, but it's yes at a price that we believe is appropriate given the risk that we're being asked to take on. And at the end of the day, really, it is our balance sheet. We own the exposure and it's important that we're able to make the changes and decisions around pricing that we deem appropriate. But we really don't get much pushback on lenders. And I think though importantly, because when we look at it, not just our pricing, but broadly across the industry, we use the phrase balanced and constructive for a reason. And the balanced part of that is really to signal that we do have to find balance, right? It can't just be about, I would say, taking simply for value. We have to make sure that we are offering a low cost, consistent and valuable solution for our lenders and their borrowers. And that is our primary goal. Doing so in a way that allows us to obviously protect returns and shareholder value is critically important. But we think that the industry overall and certainly the way that

we engage really focuses on that point of balance. Got it. Okay. Thank you guys.

The next question comes from Mark Hughes with Truist. Please go ahead.

Yeah, thank you. Good afternoon. Any reason to think the premium yield will trend up or down from this quarter? I think the 34 bips before the reinsurance or seated premium and then the 27 bips afterwards, is that pretty stable here?

The core yield was flat quarter over quarter. And our net yield did pick down modestly. So the core yield, we feel good that that is going to demonstrate stability, especially with the persistency of the underlying book. Obviously, the net yield is going to vary in line with claims experience. And the primary reason it ticked down modestly through the quarter is the way that the reinsurance claims expense flows through those treaties and through the income statement.

If credit deteriorates a little bit, does that impact the yield? Does that net yield see a little bit of pressure? Is that your point?

That's correct. That's correct. So in a benign environment, we get a large profit commission in a as credit claims go up, we still get that money back from reinsurers, but it comes through at the claims reimbursement and that directly offsets the profit commission that we get. And so that interacts with the net yield calculation.

I think that last point that Aurora makes is really important. It's a geography issue, with claims increase. We still get the same net benefit from our reinsurance treaties, but instead of getting a profit commission back through premium revenue, we get a reimbursement of our claims experience, but all of it flows through in the same way to our bottom line performance.

Understood. And then from a regulatory perspective, sounds like the climate is probably improving. Are there any specific plans that any of the new folks in the administration have talked about in the past that would be beneficial for MI or is it more of just a broad productive view?

Yeah, I think the most important piece, as Brad mentioned, is that there really is bipartisan recognition of the value that we and the rest of the industry bring. We provide a low cost solution that helps to open the door to homeownership opportunities for millions of Americans. And we do that while placing private capital in a first lost position to absorb risk and loss, which ultimately protects taxpayers. And so I think it's really that. There is just broad recognition on both sides of the aisle of what we're doing and the consistency that we bring every day. I think we're excited to engage more and more with the new administration and understand even more about their priorities

and where we can be helpful. Thank

you.

As a reminder, if you would like to ask a question,

please press star then one to join the question queue. The next question comes from Mahir Bhatia with Bank of America. Please go ahead.

All right. Good afternoon. Thank you for taking my questions. First question I wanted to ask is just about the B-Miles excess. What do you think the right amount of B-Miles excess to operate with is? And I guess what would need to happen for that to change?

Yeah, you know, it's a good question. I'd say when we think about our excess capital position, I guess I use the phrase balance a lot, but we want to be balanced. On the one hand, there's value in conservatism and making sure we're prudently managing our balance sheet, our needs, building access across as many markets as possible, which is also why you see us accessing different flavors of reinsurance and capital markets. But obviously there's an impact to that, and we need to make sure we're also striking the right balance to minimize our cost of capital and ultimately our ability to deliver returns. I think most importantly, we have done exactly that. We've just delivered another record year with a .6% adjusted ROE. We've been returning a significant amount of capital to shareholders under our repurchase program. If we look at the total authorizations to date, I think this latest authorization brings us to 525 million of total authorization. And at the same time, we've been able to maintain obviously a significant P-Mirrors excess position, an extended amount of funding runway, and we think we're at a point where we have found that it doesn't mean that I'd say normal in perpetuity for us is carrying a 70% P-Mirrors excess position, but when we're able to carry that position, funded efficiently, still progress with our goals around capital distribution and value creation for shareholders, we think that's quite a comfortable position. We'll see where things trend relative to the risk environment going forward.

Let's just switch into expenses for a second. I know you don't manage to do an expense ratio, but it seems to settle down, you know, this 21-ish percent range. And my question there is, as your insurance and force continues to grow, shouldn't there be a natural tendency for the expense ratio to come down? Why is that not happening?

So we were first of all very focused on managing the

business with efficiency and discipline, and as you point out, there are benefits of scale. We have articulated a target, again, this isn't guidance or anything of that nature, but we have articulated a target of the low to 20s, and so our in-quarter expense ratio of 21.7 and the year-long expense ratio of 21% flat are both consistent with that. So we continue to look for ways to optimize those expenses going forward, but I think you should expect us to stay in that low 20s zone.

And you know, we hear the other one is, a couple of points I'd note. One, remember, we talked a bit about how the net yield and therefore our net premiums earned can be impacted by claims experience because of the workings of the profit commission on our quota share agreements. And so there's a little bit of an element of that, right? The expense ratio is a very specific measure of efficiency. It's obviously operating expense divided by net premium earned. When we think about efficiency, we do, you know, we care and focus on expense ratio in a classic sense, but we also think about it, I would say, as relative to what we're achieving in terms of our total revenue. And there we would expect that we'll continue to see efficiency gains. You know, it's an interesting one, right? The insurance industry is, when you think about expense efficiency, it's one of the only pockets that will pick out a single line item of revenue and say, what's our efficiency relative to this particular line of revenue, not the aggregate amount of revenue. And so when we look, though, as to where our revenue is going, the increase in contribution and benefit that we get from our investment yield and investment income, plus normalizing for the profit commission dynamic that flows through in any given quarter, we certainly do have a goal to continue to achieve efficiencies and, you know, we'll see where we land.

And then just my last question, what does it go like due to the hurricane defaults? I know you don't use like a claim rate across the defaults, but I guess when you model those or when you reserve for those, do you reserve at a lower rate for hurricane related defaults or is your process not ready for that?

No, absolutely we do. So, you know, the number I gave, we had about a million and a half of our claims expense in the fourth quarter related to storms, but because all of those storms, the defaults emerged in the fourth quarter, that's roughly the net reserve that we established against them. And that's a much lower reserve per default than if you look more broadly at, you know, at the rest of the defaults that emerged in the fourth quarter. So we absolutely do make an adjustment based on our historical experience because we expect them to cure at a dramatically higher rate. Thank you.

Thanks for taking my question.

This concludes our question and answer session. I would like to turn the conference back over to the company for any closing remarks.

Well, thank you all again for joining us. We'll be participating in the UBS Financial Services Conference on February 10th, the Bank of America Financial Services Conference on February 11th, and the RBC Financial Institutions Conference on March 4th. We look forward to speaking with you all again soon.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.