Q2 2014 Earnings Call Transcript

Published: 11 Aug 2014

[Operator:]

Good day, ladies and gentlemen. And welcome to the NMI Holdings Second Quarter 2014 Earnings Conference Call. At this time, all participants are in listen-only mode. Later, we will have a question-and-answer session, and instructions will follow at that time. (Operator Instructions) As a reminder, this conference call is being recorded. I would now like to turn the call over to Mr. Jay Sherwood, Chief Financial Officer. Sir, you may proceed.

[Jay Sherwood:]

Thank you, Nicolas. Good afternoon and thank you for joining us today and for your interest in NMI Holdings. I'm Jay Sherwood, the Chief Financial Officer of NMI. Joining me on the call today to discuss the results for the second quarter of 2014 is Brad Shuster, the company's Chairman and Chief Executive Officer. I want to remind all participants that today's earnings release which may be accessed on NMI's website located at www.nationalmi.com under the Investor's tab, includes additional information about the company's quarterly results, which we may refer to during the call. 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 those factors could cause actual results or trends to differ materially from those discussed on the call, and can be found on our website www.nationalmi.com under the Investor's tab or through our regulatory filings with the SEC. If, and to the extent, the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that the guidance of forward-looking statements is current at any time other than the time of this call. I'll now make some brief comments related to our financial information and then turn the call over to Brad. For the quarter ended June 30, 2014, the company reported a net loss of $12.9 million or $0.22 per share versus a net loss of $15.1 million or $0.26 per share for the quarter ended March 31, 2014. In the second quarter of 2014, the company had primary new insurance written of $429.9 million compared to $354.3 million of primary new insurance written from the first quarter of 2014. As of June 30, 2014, the company had primary insurance in-force of $939.8 million compared to $514.8 million at March 31, 2014; pool insurance in-force at June 30, 2014 was $4.9 billion compared to $5.0 billion as of March 31, 2014. As of June 30, 2014, the company had primary risk-in-force of $220.9 million compared to $115.5 million at March 31, 2014; pool risk-in-force at June 30, 2014, and at March 31, 2014, was $93.1 million. For the second quarter of 2014, the company had premiums written and premiums earned at $5.1 million and $2.1 million respectively, this compares to $5.2 million and $1.9 million from the prior quarter. Premiums written in the second quarter were down slightly from Q1 despite higher NIW in the quarter because of lower single premium business. As a reminder, our short-term mix of single versus monthly NIW will vary from our long-term expectations due to our relatively small customer base and quarterly NIW volume. In the first and second quarters of this year, investment income was the same at $1.5 million per quarter. For the second quarter of 2014, the company had total expenses of $18.7 million, compared to $19.3 million in the first quarter of 2014. Total net operating expenses for the quarter were down primarily due to lower litigation defense cost as a result of the settlement of the TMI litigation, and reimbursement in the quarter for our portion of the company's litigation defense cost incurred in prior quarters. We expect total expenses for each of the remaining quarters this year will be down slightly from the second quarter due to the elimination of litigation defense cost. Turning to the balance sheet at June 30, 2014, the company had approximately $448 million of cash and investments and book equity of $443.9 million or $7.61 in book value per share. This book value excludes any benefit attributable to the company's net deferred tax asset. With that, I'll turn it over to Brad.

[Brad Shuster:]

Thank you, Jay. Through the first six months of 2014, we have continued to make substantial progress in the execution of our business plan through the addition of important new customers that continued development of our critical information technology system, and the completion of our nation wide state licensing effort. In fact, as of June 30, we have insured loans in all 50 states plus the District of Columbia. With respect to customers, you will recall that we have two channels through which we originate business. Generally the fully largest mortgage originators are classified as national accounts, and all remaining lenders are classified as regional accounts. During the second quarter, six national accounts generated NIW up from five in the prior quarter, and 22 national accounts have approved master policies with us, up from 18 in the prior quarter. During the second quarter, 88 regional accounts generated NIW, up from 30 in the prior quarter; and 543 regional accounts have approved master policies, up from 460 at the end of the prior quarter. With respect to correspondent channel approvals, as of June 30, we were approved with 18 of the top 39 correspondent lenders, representing 45% of the correspondent market according to National Mortgage News. We expect to continue to significantly increase the number of approved master policies, the number of national and regional accounts generating NIW, and our correspondent approvals in the coming quarters. Also, as we have mentioned on our last call, from a regulatory standpoint, we have filed a new master policy with all of the state insurance regulators, consistent with the GSEs project to closely align the master policies of all GSE approved mortgage insurance providers. We expect the implementation date of our new master policy to be October 1 of this year. Turning to some broader issues related to our company and the industry. We continue to expect the private mortgage insurance market to be approximately $150 billion in 2014, despite the significant decline in total mortgage originations as the industry continues to increase its share of the insured mortgage market from the FHA. In addition, in July the FHFA released draft private mortgage insurer eligibility requirements, also known as PMIERs. The draft PMIERs are intended to mitigate future GSE losses, ensure that approved mortgage insurers maintain sufficient financial strength to withstand a stressed macro economic scenario, and create a common set of eligibility requirements for all approved mortgage insurers. We believe the draft PMIERs as written are a step in the right direction, and we welcome the level of playing created by the new eligibility requirements. In particular, while we will provide comments on the draft guidelines in the near future, we believe the strong transparent financial strength requirements will ensure the industry is well capitalized to take on an increasing role in providing credit enhancement to the housing finance industry, as the government seeks to reduce its footprint. If the draft guidelines were implemented today, we believe that based on the industry's mix of primary mortgage insurance written in the first half of 2014, and pricing from our current rate card, the industry would be able to operate an approximate 14

[Operator:]

(Operator Instructions) And our first question comes from the line of Geoffrey Dunn with Dowling & Partners. Your line is now open, please proceed with your question.

[Geoffrey Dunn:]

Thanks, good afternoon. First of all, thanks for all the additional disclosure on the VNIW. On that front, could you explain the difference in how the business is written or priced and composed for aggregate singles versus singles?

[Jay Sherwood:]

Geoff, this is Jay. I think we tried to describe that in earnings release and we have a similar description of the 10-Q which we're going to file up tonight. But I think I'll restate some of it here. So the way we've broken that out is single business is a business that comes in an approval basis, so it's insured on a loan-by-loan basis. And that product is priced off our rate card, as we mentioned, something called aggregate single, that's a pool of loans that get bit on by us and the rest of industry, and so it's more than one loan, those pool range in size, anywhere from $50 million to $200 million in size, and they are typically bided a discount to your rate card. And that discount on an average has been around a 30% discount to the rate card. The rate of return on that we estimated is around 10% that helps you.

[Geoffrey Dunn:]

Okay. And I saw, I think it was quicken – was recently advertised until they cut their single premium rate which I assume is a pass-through. So what is the interaction between how you approached the bid and the power that the non-bank originator has on the product?

[Jay Sherwood:]

Geoff, I'm not sure I totally understand the question but I think the pricing on that product is really a function of whether or not you want to bid or not and whether or not other competitors are bidding on that product. So I wouldn't say that it is a power between ourselves or any originator.

[Geoffrey Dunn:]

And then, with your commentary on the PMIERs, I appreciate all the details. With the returns that you were sighting at '14 and '12 [ph] was that unlevered or was there consideration for re-insurance of that leverage?

[Jay Sherwood:]

That's not an unleveraged return Geoff, that's a return on asset.

[Geoffrey Dunn:]

Okay, great. Thank you.

[Jay Sherwood:]

Thanks, Geoff.

[Operator:]

Thank you. Our next question comes from the line of Steve Stelmach with FBR. Your line is now open, please proceed with you are question.

[Unidentified Analyst:]

Hey guys, it's actually Pat Healy [ph] on for Steve. How are you?

[Brad Shuster:]

Hi, Pat.

[Unidentified Analyst:]

I guess the first question would be you guys touched on the FICO distribution, have you guys seen any signs of the credit box opening recently or do you have any color to provide that?

[Brad Shuster:]

No Pat, we have not seen anything recently that suggests that things are opening up. We continue to believe that overtime it will, but still a very sort of constrain credit blocks in current origination.

[Unidentified Analyst:]

Great. And my follow-up would just be, you guys talked about on prior calls kind of work you're doing on your platform, just love to get an update there and can I call you guys to provide [ph]?

[Jay Sherwood:]

Pat, this is Jay. So we've described that previously as three modules, it's the – potentially the underwriting modules, the delinquency and claims module, and the servicing and billing module. So the delinquency and claims, and the servicing and billing modules have been complete for sometime and fully deployed the underwriting module at near completion will be rolled out to our customers in the fourth quarter.

[Unidentified Analyst:]

Great, thank you, guys.

[Jay Sherwood:]

Thanks, Pat.

[Operator:]

Thank you. Our next question comes from the line of Amy [ph] with Compass Capital. Your line is now open, please proceed with your question.

[Unidentified Analyst:]

Hi, thank you for taking my question. Has there been any change in the level of insurance enforced to breakeven in the quarter?

[Jay Sherwood:]

Amy, this is Jay, no. We're still estimating it will be between $12 billion and $14 billion of insurance enforced to breakeven, and we've talked about average premium required for that and this will be premium yield, 50 to 60 basis points.

[Unidentified Analyst:]

What is your three or more or less, like five year expectations for the loss ratio and some of your peers have been revising those are let down. So I'm glad if you can state –

[Jay Sherwood:]

We haven't given any sort of formal guidance on that Amy but mathematically it would be very difficult to get above a loss ratio of 10%, simply because you would expect us to continue to grow our book year-over-year, and yet not reach the peak of a claims curve until years three or four of a vintage. So, larger vintages will mask any losses that are coming through the peak of the claim curve in our earlier vintages. So very difficult mathematically to get above our 10% loss ratio on the next three to five years.

[Unidentified Analyst:]

And then in terms of GSE eligibility requirements, I know you mentioned that – comments regarding clarity surrounding the FICO buckets and different elements of the proposed Board. But is there any specific area that the proposal that would impact how your pricing is today?

[Brad Shuster:]

No, Amy. This is Brad, I think – I don't think we see any need to change pricing, as we mentioned we are priced higher than the rest of the industry in a number of the lower FICO buckets. And as a result, we don't anticipate any need if the draft requirements are issued as they stand today.

[Operator:]

Thank you. Our next question comes from the line of Andy Riesman [ph] with Marathon Asset Management. Your line is now open, please proceed with your question.

[Unidentified Analyst:]

Hey guys, how you're doing? I just been strong enough to think through your market share, I mean it would appear that based on the color you just gave on the number of national accounts that you're writing for, that moved from Q1 to Q2, and the number of regional's and correspondents, and then also the shifts in where you've been approved, that market should be going up, but how can we – is that something you guys track and something you could put some more granularity around for us?

[Jay Sherwood:]

This is Jay. So, honestly we haven't focused on the market share at this point, it could be relatively small given the early stages of that company and it's development. We're far more focused on getting to the required insurance enforced to breakeven, and how long that may take us do. So we just haven't focused on the market share we are, and so many other factors playing in that, the total origination market, the shift from FHA to private MI, and how big the MI market is. What we're really focused on Andy is growing those numbers of master policies that we have executed with both, regional and national accounts which enables us to do business with them. And then, activating those accounts and getting them to generate NIW for us, that's what we're really very focused on.

[Unidentified Analyst:]

I imagine at some point, right at these, I mean like when you go from five to six national accounts in Q2, you probably don't get the full benefit of that in Q2, right, I mean imagine there is some time period of ramp. So, at some point we should see the NIW – I really retch it up I think would think, right?

[Jay Sherwood:]

Yes, you're correct that it does take time for those accounts as they activate to really make an impact on the NIW. So it's just a matter of sticking to our basics and continuing to grow our customer base, expand the number of customers sending us NIW and hopefully, we'll have great results in that regard to report in the future.

[Unidentified Analyst:]

Okay, thank you.

[Jay Sherwood:]

Thank you.

[Operator:]

(Operator Instructions) Thank you. And with no further questions in the queue, I would like to turn the call back to speakers for any closing remarks.

[Brad Shuster:]

This is Brad. I just like to thank everyone on the call for joining us today, and for your interest in the company. Thanks very much.

[Operator:]

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may all disconnect. Have a good day everyone.