Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- NMI Holdings Inc (NMIH, Financial) achieved record financial results in the second quarter, with total revenue reaching $162.1 million.
- The company reported a record $203.5 billion of high-quality, high-performing primary insurance-in-force.
- GAAP net income was a record $92.1 million or $1.13 per diluted share, and adjusted net income was $97.6 million or $1.20 per diluted share.
- The company maintained a low expense ratio of 20.1%, highlighting significant operating leverage and cost efficiency.
- NMI Holdings Inc (NMIH) successfully refinanced its outstanding debt, lowering the cost of debt capital and saving approximately $3.5 million in annual interest expense.
Negative Points
- Despite strong performance, macroeconomic risks remain, necessitating a proactive stance on pricing, risk selection, and reinsurance decisioning.
- Interest expense increased to $14.7 million in the second quarter, partly due to $7 million of nonrecurring costs from debt refinancing.
- The company expects some growth in net operating expenses as it continues to invest in people, systems, and risk management strategies.
- Persistency slightly declined to 85.4% in the second quarter from 85.8% in the first quarter, although it remains above historical trends.
- The macro environment and housing market, while resilient, still pose uncertainties due to elevated interest rates and potential fluctuations in home prices.
Q & A Highlights
Q: You've now seen the core yield trend up for the past couple of quarters. Can you talk about your expectations for that going forward and how the new premiums you're writing compare to the in-force core yield?
A: Our premium yield has been trending higher due to the strength of our persistency experience and cumulative gains in new business pricing. Our net yield reflects this core strength and benefits from lower losses, driving an increase in our profit commission and a decline in reinsurance costs. Broadly speaking, new business is generally accretive to the overall yield profile of the portfolio.
Q: In terms of the cure activity, is there anything unusual to call out? How are you thinking about the trend in cure activity and the default rate?
A: We're encouraged by the credit performance and trends in our default population. Our new notice rate declined, and our cure rate improved to the highest level in the past two years. We expect some quarter-on-quarter improvement due to seasonal impacts, but overall, borrowers remain well situated with strong credit profiles. Looking ahead, we expect default counts to increase over time with the natural growth and seasoning of our portfolio.
Q: Your guidance was for a low to mid-20s expense ratio, but you're already at the bottom of that range. Why wouldn't it go below the range you've guided to?
A: Our goal over the long term is to deliver a low to mid-20s expense ratio, but this is not specific guidance. We expect to see some growth in net operating expenses as we continue to invest in our people, systems, risk management strategies, and overall growth throughout the year.
Q: About 29% of your portfolio is now '23, '24 vintage loans. Is there a bifurcation of this portfolio in terms of credit performance?
A: Our approach to underwriting and risk selection has been consistent across all vintages. The main difference is the note rate and the amount of embedded equity. We don't expect the note rate to be a core driver of differences in credit performance. The bigger driver will be the amount of embedded equity, with more recent borrowers having less equity compared to those from earlier vintages.
Q: Is there a normalized loss ratio that you're underwriting to for your current books of business?
A: There is no target loss ratio per se. Our goal is to price on a return-neutral basis across the risk spectrum, targeting a 15% unlevered return on PMIERs assets. Different risk cohorts have different loss expectations, but there's no normalized loss ratio we expect on a particular pool of business.
Q: Can you provide the math on the reserve for new notices in the quarter?
A: The reserve table includes releases on loans that first emerged in defaults in the first quarter and cured out. The number to focus on is $27 million established for new notices in the quarter.
Q: Any sense of what percent of NIW is first-time homebuyers and how that compares with the marketplace?
A: Our product is primarily geared towards first-time homebuyers. Of the $12.5 billion in NIW, 52% was volume in support of first-time homebuyers, which is well above the market average of around 30% to 40%.
Q: Is there going to be an impact in Q3 related to the termination and commute of the excess loss reinsurance agreement with Oaktown Re?
A: We expect to save about $700,000 per quarter in terms of expense associated with that deal, with no impact on our PMIERs available assets.
Q: What was the new money yield in the quarter?
A: Our current new money yield is between 4.75% and 5%. In the quarter, we put money to work at a little over 5%, which is still valuable as it provides a nice uplift to our overall book yield of 3%.
Q: What is driving the new pricing to be accretive to the yield even as your loss experience continues to be good?
A: The pricing environment is balanced and constructive, allowing us to support borrowers and customers while charging a price that protects our balance sheet and delivers returns for shareholders. We expect our core yield to remain generally stable, supported by strong persistency and the current pricing environment.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
