NMI Holdings' CEO Discusses Q4 2013 Results - Earnings Call Transcript

Mar.10.14 | About: NMI Holdings, (NMIH)

NMI Holdings, Inc. (NASDAQ:NMIH)

Q4 2013 Results Earnings Conference Call

March 10, 2014 05:00 PM ET

Executives

Jay Sherwood - Chief Financial Officer

Brad Shuster - Chairman and CEO

Analysts

Steve Stelmach - FBR

Geoffrey Dunn - Dowling & Partners

Operator

Good day, ladies and gentlemen. And welcome to NMI Holdings Fourth Quarter and Full Year 2013 Earnings Results Conference Call. At this time, all participants are in listen-only mode. Later, we’ll conduct a question and answer session and instructions will be given at that time. (Operator Instructions). As a reminder, this conference call is being recorded.

I would now like to hand the conference over to Mr. Jay Sherwood. Chief Financial Officer, sir you may begin.

Jay Sherwood

Thank you, Saeed. 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 fourth quarter and full year 2013 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 that could cause actual results or trends to differ materially from those discussed on the call can be found on our website www.nationalmi.com under the Investor’s tab or through our regulatory filings with the SEC such as our recent Form 10-Q which is filed on December 17, 2013.

If and speaks tend to company makes any 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. The company reported a net loss for the quarter ended December 31, 2013 of $13.1 million or $0.23 per share and a net loss of $55.2 million or $0.99 per share for the year-end December 31, 2013.

In the fourth quarter of 2013, the company had primary new insurance written of $157.6 million compared to $3.6 million of primary new insurance written for the third quarter of 2013 and $162.2 million for the year. Pool new insurance written for 2013 was $5.2 billion and is all related to the Fannie Mae transaction previously disclosed in the third quarter of 2013.

For the year end December 31, 2013, the company had primary risk-in-force of $36.5 million compared to $1.2 million at September 30, 2013; pool risk-in-force at of the -- of 2013 was $93.1 million.

For the fourth quarter of 2013, the company had total revenues of $2.2 million, primarily comprised of $1.6 million in the premiums earned and $1.5 million of investment income offset by $0.9 million of loss from the change in the fair value of warrant liability. For the year ended December 31, 2013, the company had total revenues of $5.6 million, primarily comprised of $4.8 million of investment income and $2.1 million in premiums earned offset by $1.5 million of loss from the change in the fair value of the warrant liability. Total expenses for the quarter were $15.3 million and $60.7 million for the full year.

Turning to the balance sheet, at December 31, 2013, the company had approximately $465 million of cash and investments and book equity of $463.2 million or $7.98 in book value per share. This book value excludes any benefit attributable to the company’s net deferred tax asset. As of December 31, 2013, the company’s net deferred tax asset before valuation allowance was $35.6 million compared to $26.6 million at September 30, 2013.

And with that, I’ll turn it over to Brad.

Brad Shuster

Thank you, Jay. 2013 was a transformative year for NMI. During 2013, we obtained GSE approval, became licensed in 50 out of the 51 jurisdictions where we applied for a certificate of authority, wrote our first mortgage insurance policies, hired a nationwide sales force and completed our initial public offering.

In summary, during 2013, we successfully laid the foundation to address the majority of the mortgage insurance market. We made substantial progress on lender integration and expect to begin insuring loans in the correspondent channels of two very large national lenders this month representing a critical milestone for the company. The small and medium size lenders where the majority of mortgage insurance as originated regularly sell loans to these large national lenders making the approvals -- these approvals of critical importance to our ability to fully address the market.

We expect to be insuring loans in the retail channel of these two large national institutions at the same time or shortly after we are approved in their correspondent channels.

Our national sales force has made good progress opening other customer accounts. As of the end of February 2014, we had approximately 60 lenders sending the company mortgage insurance applications and 34 customers generating new insurance written. One important step in boarding a new customer as a signed master policy agreement; as of the end of February 2014, we have approximately 400 master policy agreements signed with lenders, including 12 of the top 25 sellers of GSE loans with private mortgage insurance, as defined by Inside Mortgage Finance. Most of these lenders have not been able to send us loans prior to the opening of the aforementioned correspondent’s channel; therefore we expect a substantial number of these lenders to convert to customers generating new insurance written in the coming quarters.

Turning to our state licensing, the one remaining jurisdiction is Wyoming. We recently received a letter from the Wyoming Insurance Department notifying us that our application for certificate of authority in Wyoming has been recommended for approval. We understand that the certificate of authority will be issued once we establish a statutory deposit in the State of Wyoming which is customary for mortgage insurance companies. Once issued, this will fulfill our goal of being licensed nationwide.

Now, I will discuss some broader issues related to our company and the industry. Total mortgage originations declined during the second half of 2013 and the latest estimates from Fannie May indicate a decline in total mortgage origination from $1.8 trillion in 2013 to $1.3 trillion in 2014 due to a significant reduction in refinancing activity. Despite this decline, we expect the primary mortgage insurance market to remain strong and to be approximately $150 billion in 2014.

Purchase mortgages are forecasted to be up approximately 15% to nearly $800 billion in 2014. And you may recall that the penetration rate of private mortgage insurance is three to four times higher in the purchase mortgage market versus the refinanced market, significantly offsetting the decline in refinance activity.

From a regulatory standpoint, the GSEs have concluded a year long project to more closely align the provisions of each of the approved mortgage insurer’s master policy. The GSEs have done this through the development of common principles that establish standards that each approved mortgage insurer’s master policy must meet.

We have filed a new master policy with all the state insurance regulators that conforms to these common principles. One of these principles addresses rescission relief and requires an approved mortgage insurer’s master policy to offer rescission relief to vendors after 36 months provided the borrower has had no more than two late payments.

The GSE’s principles also permit and insure to offer rescission relief in less than 36 months provided the insurer underwrites the loan.

Because our business plan already calls for us to underwrite every loan whether it comes to us through the delegated or non-delegated channel, we will be able to offer rescission relief in 12 months on all of our policies. The fact that it’s resonated well with the large national accounts that bore the brunt of the mortgage insurance industry’s rescission practices that continue today.

The GSEs, the FHFA have been working for some time on developing new capital standards for the mortgage insurance industry. We expect the issuance of the new capital standards later this year. We believe that for the foreseeable future, the capital standards developed by the GSEs and the FHFA would be extremely important given the GSEs are the counter-parties to the majority of the mortgage insurance being written today.

And while we do not know for certain, we expect the capital standards to take into account the risk associated with the policies being written, allowing more leverage on less risky products. However, we believe there will likely be an overall cap on the company’s risk to capital ratio regardless the portfolio of composition of something lower than the current 25:1 maximum. We look forward to the new capital standards being implemented and we expect to be compliant.

We are excited about the company’s position as we begin to fully address the majority of the mortgage insurance market. As we have said before, we believe we are providing a differentiated product offering by underwriting every loan we insure allowing for superior terms of coverage all backed by unquestioned capital strength, an offering we believe will be most attractive to the largest lenders in the country.

We have been gratified by recent actions by some of our large international accounts to increase our share allocations as we prove our ability to deliver this differentiated value. And we look forward to the opportunity to make this type of customer recognition a frequent occurrence.

And with that I will open it up to your questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Steve Stelmach from FBR. Your line is open. Please go ahead.

Steve Stelmach - FBR

Hi. Good afternoon guys and congrats on the first quarter out of the box.

Brad Shuster

Thank you, Steve.

Steve Stelmach - FBR

Sure. In the past, you guys talked about those two correspondent, relationships to the top five correspondent lenders in the country. The ones that you mentioned today I assume that it’s the same that you’ve mentioned in the past, is that correct, or are these two more sort of correspondent relationships you’re sort of adding to the mix?

Brad Shuster

No these are the ones we’ve been talking about previously.

Steve Stelmach - FBR

Okay.

Jay Sherwood

Steve, this is Jay. We’ve never called them out by name, but yes, we’re being consistent in the discussion here.

Steve Stelmach - FBR

Yes. Just making sure that these are the same guys that you’ve referred to in the past times. But okay, going forward, is that guidance still intact in terms of -- you’ve started the integration process and then writing business with those guys or at least the channel in which they opened up to you going forward or is that delayed at all or is it sort of on pace what you guys guided to?

Brad Shuster

No, it’s on pace. Steve, this is Brad. It’s on pace with what we talked about before. It’s relatively complicated process within a large institution to start doing business with the new mortgage insurer; it’s a fairly infrequent occurrence. So, we’ve been working through all that, we’re in daily if not hourly in some cases contact with the customers. And as we said in our remarks, we expect to start insuring loans here this month with both those institutions.

Jay Sherwood

Steve to remind you, on our last call we said that we expected to be doing that by the end of the first quarter. And as Brad just said, we’re saying exactly that again here.

Steve Stelmach - FBR

Got it. So, absolutely no change in guidance there, but maybe put some context around to sort of the customer adoption side beyond those two. You guys mentioned 34 customers generating NIW for you. I think one of your other MI competitors who is relatively new at the same sort of stage in their life cycle, they have disclosed [it faster], they are only doing about 13 customer relationships. So you are over two times that number, in a different part of the world, right, I think the MI number should be a little bit healthy than it was then and your adoption is running at two times their pace. What do you guys attribute that to? Is that execution, how should I think about that versus your comps?

Brad Shuster

Well Steve, this is Brad. We appreciate your pointing out that differential there, but in absolute term, the number is still relatively small. The exciting thing we look at is the number of master policies we have executed. And then when we open up these correspondent relationships, we can start making many of those go live as we continue to broaden our reach and execute more master policies. So, we think we’re still at the early stages, but the opportunity ahead of us is something that’s really what excites us.

Steve Stelmach - FBR

Okay. And then last question and maybe I’ll hop back in the queue. On the NIW side you have pretty big number relative to what I was expecting at least $158 million, yet the revenue came up a little bit later than I expected. What attributes that? Is it mostly the NIW [filings] towards the back half of the quarter, I mean you’ve eclipsed my number of $20 million of NIW versus [your 137] your revenue came a little late, how should I think about that?

Jay Sherwood

Steve that’s right, it’s more about a timing issue there, right?

Steve Stelmach - FBR

Okay. Yes, great. All right guys thanks.

Brad Shuster

Thank you.

Operator

Thank you. Our next question comes from Geoffrey Dunn from Dowling & Partners. Your line is open. Please go ahead.

Geoffrey Dunn - Dowling & Partners

Thanks. A couple of number questions first, Jay what was the holding company liquidity at the end of the quarter?

Jay Sherwood

So Geoff, are you asking what’s the cash at the holding company level?

Geoffrey Dunn - Dowling & Partners

Right.

Jay Sherwood

So let me pull up that number. So Geoff, why don’t you give me your next question, we’ll come back to that.

Geoffrey Dunn - Dowling & Partners

Okay. I was hoping that you could also maybe talk about your outlook for expenses, you’ve obviously been doubling out your sales force, but sequentially we saw the expenses come down a bit which I guess surprised me. How should we be thinking about the quarterly run rate as we go into ‘14?

Jay Sherwood

Yes. So Geoff, I think the easiest way to think about it is this, for the year we had and you saw --total expenses of $60 million. And about 50% of those expenses are payroll related and we’re going to increase our headcount from an average of 120 people in 2013 going about 180 people in 2014 so up about 50%. So you can -- this will get you, we haven’t guidance on the expense, but this will get you relatively close. If you increase that payroll number by the same amount by about 50% and keep all their other expenses relatively constant, I think you will get to a reasonable number for expenses in 2014.

Geoffrey Dunn - Dowling & Partners

Okay, great.

Jay Sherwood

So going back, you were asking about the cash at the holding company level, Geoff?

Geoffrey Dunn - Dowling & Partners

Yes.

Jay Sherwood

So we have about $265 million in cash at the holding company as of year-end.

Geoffrey Dunn - Dowling & Partners

And then just one technical question and then I have one last big picture. Your new business was not captured inside mortgage financer’s market share statistics, are you reporting to them or did they just miss it for some reason?

Jay Sherwood

I think we will start to report to them going forward at some point this year.

Geoffrey Dunn - Dowling & Partners

Okay. And then my last question has to deal with how you are trying to compete in the marketplace. You are adding new lenders; I did see that you lowered some of your lender pays single premium business below peers. How are you approaching the market competitively with pricing, but also with an eye on remaining [years] on your returns?

Brad Shuster

Geoff, this is Brad. We have said all along we intend to be competitively priced relative to the competition and I think you will see us doing that going forward. So we will offer competitive pricing I think some of the other provisions that we are offering in terms of our underwriting every loan and insight that can help us provide the customers following up with the strong master policy terms and the strong capital creates a nice value proposition that we are having good uptake in the market.

And so customer response has been very favorable. There has been some lowering of premiums among the industry participants that has some effect on returns, but the returns are still very attractive and we think will continue to be so for some period of time. And particularly with the market gets back to sort of underwriting a whole gamut of insurable risk there can be some increased premium yields coming with that, so that will help writtens as well.

Jay Sherwood

Hey Geoff this is Jay here. Hey Geoff on the LPMI pricing your comment there?

Geoffrey Dunn - Dowling & Partners

Yes.

Jay Sherwood

You may want to double check that data point, there could be FICO bucket or two where we did that, but by and large it can be fair.

Geoffrey Dunn - Dowling & Partners

Probably 90 to 95.

Jay Sherwood

Yes. It’s going to be very consistent with everybody else. So I wouldn’t characterize this as [such].

Geoffrey Dunn - Dowling & Partners

That will call my attention as a new entrant, you cut your 90 to 95 LTV lender pay single, and obviously those are lot of backlash when the couple of companies where the FICO cut on monthly, just a couple of months to go. I guess I am just a little surprise to see the pricing adjusted below the peer level, even if it’s just at a sub segment?

Brad Shuster

Yes, I think that’s a very small segment of the market relative to a five basis point decrease across the board. So I wouldn’t read too much into that.

Geoffrey Dunn - Dowling & Partners

Okay. All right thank you.

Brad Shuster

Thank you.

Operator

Thank you. (Operator Instructions) And our next question comes from Jacqueline Ho from Compass Point. Your line is open. Please go ahead.

Unidentified Analyst

Guys thanks for taking my question. When you guys are officially on board or approved those two national lenders will you notify us like press release or 8-K?

Jay Sherwood

I don’t think so Jackie. They tend not to allow us to mention their name in the press.

Unidentified Analyst

Okay. So just assume this month it will happen and you will start writing with them?

Jay Sherwood

As Brad said, that’s what we are expecting, yes.

Unidentified Analyst

Okay. And then just one other quick one book value, what share count are you using? I am not --I’m a little off I am not sure if I am using wrong number?

Jay Sherwood

Hey Jackie, we’ll double check that before, it should be the $57 million or we could be using, $58 million, it could be the actual number. We’d double check that before we can get to you.

Unidentified Analyst

Okay. Thank you. That’s it, I appreciate it.

Brad Shuster

Sure.

Jay Sherwood

Thank you.

Operator

Thank you. We have a follow-up question from Steve Stelmach from FBR. Your line is open. Please go ahead.

Steve Stelmach - FBR

Yes. Just real quick needed a follow-up to Geoff’s line of questions. How should we think about sort of average premiums going forward even after all those adjustments that you (inaudible) and what your analysts really talked about recently or is there?

Brad Shuster

Yes, so as we’ve talked about from the start Steve it’s in 50 to 60 basis points is where we expect it to come in.

Steve Stelmach - FBR

Okay. So you made some tweaks, but no change in terms of average premiums?

Brad Shuster

Yes, that’s right.

Steve Stelmach - FBR

Got it. Thanks guys.

Brad Shuster

Thank you.

Operator

Thank you. And I’m showing no one in queue at this time.

Brad Shuster

Okay. All right. Well, we thank you all for your interest in the company and we’ll be talking to you soon. Thanks.

Operator

Ladies and gentlemen thank you for participating in today’s conference. This concludes our program. You may all disconnect and have a wonderful day.

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