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NMI Holdings Inc
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Good day, ladies and gentlemen, and welcome to the NMI Holdings, Incorporated Fourth Quarter 2018 Earnings Conference Call. [Operator Instructions]
I would now like to introduce your host for today's conference, Mr. John Swenson. Please go ahead sir.
Thank you, Chris. Good afternoon, and welcome to the 2018 fourth 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 Shuster, Executive Chairman; Claudia Merkle, CEO; Adam Pollitzer, our Chief Financial Officer; and Julie Norberg, our Controller.
Financial results for the quarter were released after the close of the market today. The press release may be accessed on NMI's website located at www.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 interested party should rely on the fact that the guidance of such statements as current at any time other than the time of this call.
Also note that on this call, we refer to certain non-GAAP measures, and in today's press release and on our website, we've provided a reconciliation of these measures to the most comparable measures under GAAP.
Now to our conference call. Brad will make some introductory remarks, Claudia will provide an update on the business and then Adam will discuss the financial results in detail. After some closing remarks from Brad, we'll take your questions.
With that, let me 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 record performance capping a year of stand-out success. We delivered a number of notable achievements in 2018, including exceptionally strong financial results, continued momentum in customer development, best-in-class growth in our insured portfolio, the introduction and rapid market adoption of Rate GPS and continued innovation in the reinsurance and capital markets.
Rate GPS, individual risk underwriting and our broad based reinsurance program provide us with what we believe is the most comprehensive risk management framework in the industry positioning National MI to deliver best-in-class credit performance. In 2018, we worked with the GSEs to finalize the updated PMIERs. We have significant excess capacity today, a range of efficient funding options available going forward and expect to be in full compliance when the new standards take effect on March 31.
Our broader conversations in Washington were also positive, signalling a constructive posture from regulators around the MI industry and continued recognition of the need for permanent, private, capital solutions in the housing finance market. And importantly, we managed a smooth transition with Claudia assuming the role of CEO on January 1. Overall, I am delighted about what we achieved last year and I'm optimistic about our outlook for 2019.
With that, I'll turn it over to Claudia.
Thank you, Brad. We delivered record performance across every key metric in the fourth quarter and are starting off 2019 with significant, positive momentum.
GAAP net income for the quarter was $35.5 million and adjusted net income was $32.1 million. Earnings per share for the quarter, was $0.46 on both a GAAP and adjusted basis. GAAP return on equity was 20.9% for the quarter and adjusted return on equity was 18.8%. We remain focused on delivering consistent, strong results across the cycle and expect to continue building significant shareholder value in 2019. We wrote record fourth quarter NIW of $7 billion, including monthly NIW of $6.3 billion.
Primary insurance-in-force was $68.6 billion, up 8% compared to the third quarter and 41% over the fourth quarter of last year. We continue to deliver the strongest insurance-in-force growth in the industry by a wide margin. Lenders continue to respond to our strong team and unique customer value proposition which prioritizes certainty of coverage and sensible servicing.
In the fourth quarter we activated 37 new customers. For the full year 2018 we activated 121 new accounts, including 16 lenders from the top 200 representing more than $11 billion of incremental NIW opportunity. We now have active relationships with over a 1,000 lenders. We are doing business with a large number of high quality originators who are delivering us a growing amount of high quality insured volume. Our activation pipeline is healthy and we expect to continue expanding our customer franchise in 2019.
Rate GPS continues to be a stand-out success. More than 95% of our customers are currently using the platform and approximately 90% of our fourth quarter NIW volume was deliberate through Rate GPS. At this point, all of our competitors have introduced their own risk-based pricing engines. We believe this is a positive for the long-term health of the MI industry and reinforces our decision to be a leader in the development of risk-based pricing technology.
The underwriting environment remains favorable and loss development on our portfolio continues to be better than expected. Nonetheless, we continue to prioritize our individual risk underwriting approach, which we believe provides us with enhanced knowledge of our customers, our portfolio and the emerging market trends and has been a key to our credit out performance thus far.
More broadly, private MI market conditions are healthy in terms of volume, industry competition and the regulatory environment. Against this backdrop, we are executing on our business plan and are well positioned to continue to win with customers, drive growth in our high-quality insured portfolio and deliver strong results for our shareholders.
With that, let me turn it over to Adam.
Thank you, Claudia and good afternoon everyone. We had another strong quarter and achieved record results across a number of key financial metrics. We generated record fourth quarter NIW of $7 billion and continue the rapid growth of our high-quality insured portfolio. This drove record net premiums earned of $69.3 million, record adjusted net income of $32.1 million, or $0.46 per diluted share and adjusted return on equity of 18.8%. These results reinforce our strong outlook for our business and financial performance.
Now to the details, primary insurance-in-force was $68.6 billion at quarter end, up 8% from $63.5 billion at the end of the third quarter and up 41% compared to the fourth quarter of 2017. At quarter end monthly product represented 75% of our primary insurance-in-force, up from 74% at the end of the third quarter and 69% at the end of the fourth quarter in 2017. We expect that monthly product will continue to increase as a percentage of insurance-in-force.
12-month persistency in the primary portfolio was 87.1%, up from 86.1% in the prior quarter. This is a positive for us given the pricing and credit profile of our in-force portfolio.
Total NIW volume was seven billion. Monthly product represented 90% of NIW, compared to 91% in the third quarter and 83% in the fourth quarter of last year. Purchase originations represented 95% of our volume in the quarter.
Net premiums earned for the quarter were $69.3 million, up 6% from the third quarter and up 38% compared to the fourth quarter of 2017. We earned $2.1 million from the cancellation of single premium policies in the quarter, compared to $2.6 million in the third quarter. Reported deal for the quarter was 42 basis points, compared to 43 basis points in the third quarter reflecting a decrease in the contribution from cancellations. Net yield for the quarter came in at the upper end of the 41 to 42 basis point guidance we provided on our last call. We expect the net yields will trend between 40 to 41 basis points in 2019.
Weighted average rate on NIW in the fourth quarter was approximately 42 basis points, reflecting the high quality credit mix of our production in the period. Overall, we continue to capture business at rates that are supportive of our strong mid-teens return objective.
We continued to use Rate GPS to actively shape the credit mix of our new production. In the fourth quarter, our mix of greater than 45 GTI volume declined to 9% from 17% in the third quarter. Our mix of 97 LTV volume declined to 8% from 9% in the third quarter. And our mix of below 680 FICO volumes declined to less than 4% of total NIW.
Investment income was $7 million, up from $6.3 million in the third quarter. We expect investment income will continue to increase as our investment portfolio grows and we realize the benefit of higher new money rates.
Underwriting and operating expenses were $29.4 million in the fourth quarter, compared to $30.4 million in the third quarter. Our GAAP expense ratio was 42.4% in the fourth quarter, compared to 46.4% in the third quarter. Claims expense was $2.1 million in the quarter. The underwriting environment remains healthy and our in-force portfolio continues to perform better than initially expected and priced.
We had 877 notices of default in the primary book as of the end of the fourth quarter, up from 746 at the end of the third quarter. The increase in our default population reflects normal seasonality and delinquency patterns. Our fourth quarter loss ratio defined as claims expense divided by net premiums earned was 3.1%. We continue to expect that our loss ratio will be in the low to mid-single digits over the next few years.
Interest expense in the quarter was $3 million and we had a $3.5 million gain from the change in the fair value of our warrant liability.
Moving to the bottom line, net income for the fourth quarter was $35.5 million or $0.46 per diluted share. Adjusted net income, which excludes periodic transaction costs, warrant fair value changes and net realized investment gains or losses, was $32.1 million or $0.46 per diluted share, up from $31.8 million or $0.46 per diluted share in the third quarter. GAAP effective tax rate for the quarter was 21.5%. We expect our full year 2019 effective tax rate will be approximately 22%.
Similar to last year we anticipate that our first quarter effective rate will be modestly below our full year rate at approximately 18% with our second, third and fourth quarter rates coming in modestly above our full year effective rate.
Cash and investments were $937 million at quarter-end, up from $893 million at the end of the third quarter. As of December 31, we have $64 million of cash and investments at the holding company. At quarter-end, total available assets under PMIERs grew to $734 million, which compares to risk-based required assets of $511 million.
Excess available assets at quarter-end were $223 million. Excess available assets would have been $244 million under the revised PMIERs framework if applied at the end of the fourth quarter.
In December, we disclosed that we elected a 20% rate for cessions under our Quota Share Reinsurance Treaty in 2019, compared to our 25% session rate in 2018. We negotiated for this flexibility when we originally structured the Quota Share Treaty and the decision to retain an increased amount of our net production reflects our confidence in the quality and return profile of the business we expect to write in 2019 and the strength of our PMIERs funding position.
Shareholders’ equity at the end of the fourth quarter was $701 million, equal to $10.58 per share, which compares to $660 million or $9.96 per share at the end of the third quarter.
Our GAAP return on equity was 20.9% in the fourth quarter. And our adjusted return on equity was 18.8%.
Looking forward, we believe that we are well positioned to continue delivering strong mid-teen returns that are significantly in excess of our cost of capital. We expect that the growing size, attractive credit profile and increasing persistency of our insured portfolio along with our broadly disciplined approach to risk management, expenses and capital optimization will continue to drive our performance.
With that, I'll turn it over to Brad for his closing remarks.
Thank you, Adam. We are excited about our record performance in the fourth quarter and our continued momentum heading into 2019. Our success with customers continues to drive industry-leading growth in our insured portfolio and our commitment to a broad-based risk management program spanning individual risk underwriting, Rate GPS and comprehensive reinsurance solutions continues to drive industry-leading credit performance. We are confident in our ability to deliver strong returns and create significant shareholder value going forward.
With that, I'll ask the operator to come back on so we can take your questions.
Thank you. [Operator Instructions] And our first question comes from Rick Shane with JP Morgan. Your line is now open.
Hey guys, thanks for taking my question. Just curious as you move to Rate GPS, obviously that gives you a greater ability to be granular, but are there going to be opportunities do you think in the near-term to increase pricing a little bit in selected goals?
Yes, Rick its Adam. So importantly, pricing for us really relates directly to the mix of the credit that we're insuring in any given period, while rate goes hand-in-hand with loss performance and capital to ultimately drive returns and so any increase in rates would be tied to a decision that we can increase rates in pockets of business where we see appropriate credit performance and capital performance.
So to the extent that our credit mix shifts as we go forward and we were comfortable, it will depend obviously on the environment that we're in the macro environment, the decisions we make on individual policy basis but also in the aggregate around reinsurance. There may be an opportunity to increase the weighted average rate that we're achieving in any given period, but it would go hand-in-hand with decisions around our credit mix.
Got it, okay. Thanks Adam. Second question, obviously one of the big issues politically right now with the distortion related to state taxes. I'm curious if you're seeing anything within the business to reflect that or strategically you have any plans to address potential migration in terms of targeting new partners?
Rick, I want to make sure I understand, in terms from a state tax perspective, obviously there's the deductibility of state taxes has consequence for home prices in certain areas. It tends not to affect our buyer, our borrower base or our buyer base given the average size of our loan at roughly $250,000 to $260,000. But I want to make sure when you're referring to partners, want to make sure that I have that correct?
I'm just saying are you contemplating, because if there's going to be some sort of migration related to this, which is something thematic we've heard in other areas of our coverage, does it make sense to target specific lenders who might have greater presence in the more desirable geographies?
No, from a relationship standpoint, look we're still at a point in our development. We have active relationships with over a thousand lenders. We obviously want to be supportive for all of those lenders in the business that they're generating, at this point there's still a significant opportunity and wide space for us to add new lenders. We're not at a point where I would say our capital is limited in any way so we need to prioritize one lender over the other.
So in terms of the customer opportunity for us in the lenders that we're looking to activate, it really still stands the spectrum and state taxes aren't having any impact on our strategy there.
Got it. Okay, thanks Adam.
Thank you. And our next question comes from Bose George with KBW. Your line is now open.
Hi everyone. Good afternoon. Actually I just want you to start with the question on market share. I know you don't really focus on market share directly but just with everyone reporting, it looks like your shares are up to 10% from 8.8% last quarter. I was wondering was there was any movement among larger lenders similar to what you guys pointed out a couple of quarters ago?
Yes. Hi Bose, this is Claudia. Yes, we don't manage our business to share, but we feel really good about our performance. We're executing on our goals and we're building on long-term durable MI company. At the end of the day we sell our differentiated terms of coverage, our service, we've got very strong sales relationships with our lenders. But our performance in the fourth quarter was all organic. It was not in activating with any other customers besides new customers and doing business with our existing customers to grow share.
No pivot back in [indiscernible].
Sure. That's helpful. Thanks. And then the – in terms of the average, can you just give me the average premium on the NIW for the quarter?
Yes. Bose, I mentioned it was 42 basis points, weighted average rate on NWI in the quarter.
Okay. Sorry, I missed that. And so that's net of all the reinsurance, et cetera?
No. So reinsurance and how that comes through is reflected in our net yield. So if you look at our net premiums earned divided by the average IIF that we have during the period separately, our weighted average rate on an NWI is the pricing that we're charging for each of the policies written on a weighted average basis through the quarter. They happen to both be 42 basis points this quarter. That won't always be the case.
Okay, great. Actually just one more for me, some couple of your peers have done, the XOL contracts now, you know, and I guess over the ILNs in the couple of cases just want to get your thoughts on that product.
Yes, it's a good question Bose and we took note obviously of what others have executed, I mean it's something that I’d say, we'll consider and so the ILN is an XOL treaty in and of itself. So we'll consider how a traditional XOL executed with a panel of reinsurers compares not just to the ILN but also to quarter share, we'll think about the coverage cost and kind of capital credit that we get relative to the other options that are available to us as we get through 2019.
Okay, great. Thanks.
Thank you. And our next question comes from Randy Binner with B. Riley, your line is open
Everyone, this is actually Ryan Aceto on for Randy this evening. Thanks for taking my question. First one was persistency it was a little bit higher than we were anticipating. Is there anything going on there or is that something we should expect going forward?
No. Yes, we'd expect over the next few years that our persistency will trend above, will observe as long-term historical averages for the MI sector, but we take that at something closer to 80% and obviously we're well in excess of that. The persistency that we saw in the fourth quarter, really relates to what happened in the rate environment more broadly.
So even though rates slides down but the 10 year treasury and 30 year note rates slides down again from earlier peaks in the year. We’re still well above the note rates at which most of our portfolio was originated as to where exactly that goes, difficult to put a pin in it, but we'd expect something that is closer to what we've achieved over the last few quarters than that longer-term rate for the industry historically.
Appreciate that and I just want to clarify, you said you're expecting premium yield between 40 basis points and 41 basis points in 2019?
That's correct.
Perfect. Thank you very much.
Thank you. And our next question comes from Jack Micenko with SIG. Your line is now open.
Hey, good afternoon. Adam wanted to talk first about expenses you guys had some pretty impressive operating leverage this year. Any update on sort of how we should think about dollar wise or expense ratio is kind of hard to model too, it's more of an output. But how do we think about expenses in 2019.
Well Let me give you a specific guidance as I can on that Jack, in 2019 I think we’d expect the rate of growth on our operating expenses to continue to moderate obviously and achieve incremental operating leverage that we've benefited from over the last several years, to put rough numbers on it we anticipate that our operating expenses will grow by up to 10% compared to our adjusted expenses in 2018.
And in terms of what's driving that growth, it’s mindful to think about three different areas. One, we are going to be making certain investments in our people and systems to support the continued development of our franchise, nothing significant, right? This is still largely a fixed cost business, but there's some growth that will incur from some of those investments.
Now we do also have certain variable costs that we incur our NIW and Insurance in Force will continue to grow and so variable expenses associated with those two items will grow by a modest amount. And then the other item to consider is that our decision to take the session rate down to 20% under our quarter share will have some impact because the ceding commission that we receive under that quarter share is recorded as an offset to operating expense.
So taking the session rate down by five points in 2019 reduces the ceding commission that we will receive on the 2019 origination volume. And we take all of those together we're looking at up to 10% on our adjusted expenses from 2018, adjusted expenses, as a reminder really being our operating expense excluding those transaction related costs that we highlight through the course of the year.
So on that one – we’ve got one $117 million reported, what is a couple million on the other items there?
A little more, it was really for the ILN anything related to the term loan actually ran through interest expense, so in total we had about $2.7 million related to the ILN and it brings adjusted operating expense to about $114.6 million for the year.
Okay. Alright, that's helpful. And then you guys came out with Rate GPS pretty quickly. I think you had gone from 80% last quarters, 90% of business in this quarter. Now that everybody's out with a similar engine, are there any observations, anything that's going on in the market? It sounds – I mean it would seem like customer adoption is running ahead of expectations but any other observations as the industry sort of moves that way, maybe a bit quicker than we made or might have thought.
Yes, sure. For the broader market, we believe a fully integrated rate engine is the best way to engage with our customers and manage pricing and risk and return. Overall it's a positive for the MI market. It cements an important focus on risk adjusted returns. So the announcements from several of our competitors about their rate engines signals to us that they are prioritizing risks and returns above price and volume and this is a big positive for the sector.
Okay. Thank you, I will follow-up offline.
Thank you. And our next question comes from Chris Gamaitoni with Compass Point. Your line is now open.
Good afternoon everyone. First one housekeeping what was the ILN periodic cost in the quarter?
Bear with me for a moment, Chris.
So we had the two ILNs that ran through in the quarter. In total we ceded roughly $3.3 million of premiums under the combined ILN transactions.
Okay, perfect. And then maybe a broader one for Claudia, its market share growth is obviously been impressive and, still continuing to activate new accounts rapidly. What do you think the main differentiator is? Typically we hear lenders, if they have a full panel they necessarily need a new item to MI but you guys have done very well. So I'm just wondering what you think is differentiating your product versus others and leading to lenders bring onto their system?
Yes. I have first mentioned Chris just the response to Rate GPS has been strong, but primarily because the response to MI and our customer traction is still strong. I'd say the real reason that we're getting a tremendous amount of traction is our value proposition, our sales coverage, our focus on the highest priorities of NIW. So we're really doing, everyday blocking and tackling and we are very, very proud of the team, it's been a very successful approach.
Our activations are strong, quarterly, we're seeing activations that are really building that stacking effect matters. So all in all, the strategy is working significantly for us.
And Chris, there is a positive feedback loop dynamic that takes hold as well. There's positive momentum that comes as we do more and add more value to more customers, other lenders get excited about the prospect of engaging with us and so there's some positive momentum that builds. The more we continue to execute, some more we demonstrate how viable and successful we can be and valuable we can be as a long-term partner for the lender community. We just came to national traction.
All right. Thank you. That's all I have.
Thank you. And our next question comes from Phil Stefano with Deutsche Bank. Your line is now open.
Yes. Thanks. Just following up on that last question, Adam, you started to talk about the momentum that builds up there. Is Rate GPS helping in any way to pick up momentum or the conversations with prospective customers changed at all, now that Rate GPS is live?
You know Rate GPS, certainly our lenders are excited about it, but again, the traction is because we've had traction all along. I think the other piece for reaching yes and the traction is from a lender standpoint there wasn't a fundamental difference in how they engage and secure their rates from us.
So it was a very smooth process and I think that was another reason why we're seeing such adoption and continued success. But really at the core of it, this is activating new customers and building share within each of those customers, selling our value proposition and our service and our certainty of coverage it's resonating with our lenders.
And the certainty of coverage, can you remind us again, where is that happening? Is that in the U.S. or another location? And how should we think about the economies of scale there and the cost benefit of doing that, I guess is that something that customers are really getting excited about? Is it helping this momentum?
Yes, the certainty of coverage for us is we really value an underwritten loan and then we provide benefits around their servicing. So in other words, when we get a delinquency, we don't put a lender through a very lengthy repeatable process because we've already looked at the loan. So you know it’s good for us and good for the lenders all the way around and they like that approach.
Okay. That's it for me. Thank you.
Thank you. [Operator Instructions] And at this time I'm not showing any further questions on the phone line. I would now turn the call back to management for any further remarks.
Thank you for joining us on the call today. We will be presenting at the RBC Financials Conference in New York on March 12 and the BTIG Financials conference in New York on March 21. We look forward to seeing you at these events.
Ladies and gentlemen, thank you for participating in today's conference. This does conclude today's program. You may all disconnect. Everyone have a great day.