Zumiez Inc

NASDAQ:ZUMZ

Good day, and welcome to the NMI Holdings, Inc. Fourth Quarter 2024 Earnings Conference Call. [Operator Instructions]

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 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; 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 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 one should rely on the fact that the guidance of such statements is current at any time other than the time of this call. I 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 in force. We delivered broad success in customer development, continue to innovate in the capital and reinsurance 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 17.6% 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 continued 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 in force. Total revenue in the fourth quarter was a record $166.5 million and we delivered adjusted net income of $86.1 million or $1.07 per diluted share and a 15.6% 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 in force.

Our portfolio is the fastest growing, highest quality and best performing in the 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 and $4.50 of adjusted EPS, up 17% compared to 2023 and a 17.6% 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 and 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 at 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. 12-month persistency was 84.6% in the fourth quarter compared to 85.5% 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 home 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 fourth quarter of 2023.

Underwriting and operating expenses were $31.1 million in the fourth 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% at 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. GAAP 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 $38.72. 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 PMIERs 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 returns. 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, continue 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 17.6% 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.

[Operator Instructions]

The first question today comes from Doug Harter with UBS.

Are repurchase authorization. How should we think about the pacing of capital return?

Yes, So, 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 program at $250 million we think, really 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. And so I'll anchor on that point of consistency. If you look back to date over the last 3 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 risk where we're trading, but roughly that $25 million.

And 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 -- 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 buyback program, your earnings power and the portfolio size have have increased. At what point would you consider kind of increasing the run rate of buybacks?

Yes. Right now, I think the program gives us the flexibility to do both, right, to stick with the consistency that we've established, but also to be opportunistic should the environment change if something in our outlook change. But right now, we expect that we'll be operating at a roughly similar cadence.

The next question comes from Terry Ma with Barclays.

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 2 years, is there any color you can just provide on just the makeup of peers within the quarter?

Sure. And in the table in the press release, we split things out into prior years and current year -- and so the reserve relief associated with prior years is $4.4 million. And so that -- what's in that number is effectively 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. And so 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. So I'd say our cure rate quarter-over-quarter was broadly similar. In the third quarter, we had a cure rate of 31% and in the fourth quarter, we had a cure rate of 29%.

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

Yes. And maybe I'll -- 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 take guidance but at least a bit of perspective, on how we see things developing going forward. And so in the quarter, we reported $17.3 million of claims expansion a 12% loss ratio and while our credit experience trended higher compared to Q3, so 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. And we've also noted that we're seeing a natural normalization in our claims experience given the growth and seasoning of our book, right, 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. And 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 translate through to claims expense. It was roughly $1.5 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, right, 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 at 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 parse some of the underlying data from the quarter as you think about where things and 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 third 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 -- that I'd 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 3-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.

The next question comes from Bose George with KBW.

I just wanted to follow up on Doug's questions about the capital return. But can you just talk about dividends, when that might become part of the picture? And then just how you think about the -- as the pull to par happens and IIF growth slows, mean is that when a dividend might become part of how you return capital?

Yes. I'd say, 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 optimize 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.

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. And then 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 there was a buildup of 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?

Yes. 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 business by both borrower risk attributes, but also by geography through the use of a 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.

The next question comes from Rick Shane with JPMorgan.

Most have been asked and answered. But just curious from sort of a competitive landscape what you're seeing. Curious what you're hearing from mortgage originators in terms of there any pushback on pricing or any sort of efforts to -- in a challenging environment, get PMIs to open the credit aperture just a little bit.

Yes. 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 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 the use of a rate 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, I'd say 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 the 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.

The next question comes from Mark Hughes with Truist.

Any reason to think the premium yield will trend up or down from this quarter, I think the 34 bps before the reinsurance or ceded premium and then the 27 bps afterwards, is that pretty stable here?

The core yield was flat quarter-over-quarter, and our net yield did tick down modestly. So the core yields, we feel good that, that is going to demonstrate stability, especially with the persistency of the underlying book. Obviously, the 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, is 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 emission in a -- as credit claims go up we still get that money back from reinsurers, but it comes through as the claims reimbursement, and that directly offsets the profit commission that we get -- and so that interacts with the net yield calculation.

Yes. I think that last point that or makes is really important, and 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, it 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?

Yes. I'd say the most important piece, as Brad mentioned, is that there really is broad bipartisan recognition of the value that we and the rest of the industry bring, right? 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 loss position to absorb risk and lost which ultimately protects taxpayers. And so I think it's really that. There is just broad recognition on both sides of the -- 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.

[Operator Instructions]

The next question comes from Mihir Bhatia with Bank of America.

First question I want to ask is just about the -- excess. Like what do you think the right amount of PMIERs excess to operate with is -- and like, I guess, what would be the open for that to change?

Yes. Look, here, it's a good question. I'd say -- when we think about our excess capital position, I guess I used the phrase panel, but we want to be balanced. On the one hand, right, there's value and conservatism and making sure that we are 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 that 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, right? We've just delivered another record year with a 17.6% adjusted ROE we've been returning a significant amount of capital to shareholders under our repurchase program.

If we look at the total authorization 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 PMIERs excess position, an extended amount of funding runway, and we think we think we're at a point where we have found that balance. It doesn't mean that, I'd say, normal in perpetuity for us is carrying a 70% PMIERs excess position. But when we're able to carry that position, fund it 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.

Got it. And then just switching to expenses for a second. I know you don't manage to an expense ratio, but it seems to have settled down this 21-ish percent range. And my question there is as your insurance in 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're, 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 mid-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 20 zone.

And 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 we care and focus on expense ratio in a classic sense, but we also think about it, I would say, is relative to what we're achieving in terms of our total revenue. And there, we would expect that we'll continue to see continue to see efficiency gains. It's an interesting one, right? The insurance industry is when you think about expense efficiency, it's 1 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 at 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 we'll see where we land.

Got it. And then just my last question. I wanted to like to the hurricane defaults. I know you don't use like a same rate across the defaults. But I guess when you model those or when you reserve for those, do you there at a lower rate for hurricane-related defaults -- or is your, I guess, profit not credit for that?

No, absolutely, we do. So the number I gave, we had about $1.5 million of our claims expense in the fourth quarter related to those storms. But because all of those storms, the default 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 then if you look more broadly 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 it to cure a dramatically higher rate.

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 10, the Bank of America Financial Services Conference on February 11 and the RBC Financial Institutions Conference on March 4. We look forward to speaking with you all again soon.

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