NMI Holdings, Inc. Q3 FY2025 earnings call

Key Points

• Third quarter delivered standout operating performance, continued growth in insured portfolio and strong financial results.
• Generated $13 billion of NIW volume and ended with record $218.4 billion of primary insurance-in-force.
• Total revenue was record $178.7 million, GAAP net income $96 million, ROE 15.6%.
• Macro environment and housing market resilient; lender customers and borrowers rely on company for down payment support.
• High-quality insured portfolio covered by comprehensive risk transfer solutions; credit performance stands out.
• Managed expenses and capital position with discipline, building robust balance sheet.

In the third quarter, National MI generated $13 billion of NIW volume and ended the period with a record $218.4 billion of high-quality, high-performing primary insurance-in-force. Total revenue in the third quarter was a record $178.7 million, and GAAP net income was $96 million or $1.22 per diluted share with a 15.6% return on equity. Net premiums earned in the third quarter were a record $151.3 million. Investment income was $26.8 million in the third quarter. Underwriting and operating expenses were $29.2 million in the third quarter, and the expense ratio was a record low 19.3%, highlighting operating leverage and efficient cost management.

Forward-Looking

• Confident in continued outperformance looking ahead.
• Attractive and sustained new business opportunity fueled by long-term secular trends and recent mortgage rate improvement.
• Well positioned to serve customers, invest in employees, drive growth in insured portfolio and deliver through the cycle for shareholders.

Risks

• Macro risks remain, including signs of strain in labor market, consumer confidence down, and certain geographies facing housing market price pressure.
• Challenges for new entrants in private mortgage insurance market, including need for large capital to fund PMIERs compliance business and difficulties in building specific operating platform and earning trust.

Q: Just wanted to start off with credit. As I look at new defaults in the quarter, it was up only about 5% year-over-year, that's a noticeable step down from the pace of year-over-year increases that you've seen in the last kind of 10 quarters. So maybe just any color on kind of what happened in the quarter? And as we kind of look forward, how should we expect kind of new defaults kind of emerge like when we factor in kind of seasoning and everything?

A: Yes. Terry, good question. Look, I'd say broadly speaking, we're still greatly encouraged by the performance of our portfolio overall including the trends, obviously, in the default population. The impact of seasonality coming through this year was a bit more muted, which is encouraging. I think we trace that to a few things, right? We got broad resiliency that we've seen in the macro environment, and so that continues to set a favorable backdrop. We have an incredibly high-quality insured book and our existing borrowers, broadly speaking, remain well situated, and we're seeing that continue to translate through to our credit experience. The increase in our default experience that you noted some amount of that traces to seasonality, right? We tend to see seasonally a seasonal uptick in default experience as we roll through the second half of the year, and some portion of it traces to what we've talked about for a while now the seasoning, just the natural growth and seasoning of our book. As we look forward, we do expect that seasonality will continue to come through, and so we'll see an additional impact seasonally in Q4. And we do also expect that as we roll forward over the longer term, we'll continue to see that normalization in our credit experience but overall, we're delighted with how our portfolio is performing. It's exceptionally high quality, and we're encouraged by the trends that we saw in the third quarter and really year-to-date.

Q: Got it. That's helpful. And then maybe just any color on the competitive environment. There has been some rumblings about a potential new entrant, so any color on kind of how to think about how the dynamic may or may not change like if there was a new entrant into the MI market?

A: Yes. Yes. It's -- I'd say, look, it's not necessarily new. I think there's been periodic chatter about new market entrants over the years. and we're aware of the latest effort that's out there. But I'd say we, perhaps more than anybody else know the challenges and difficulties that come with building a private MI business, it is not easy at all, right? It's really hard to raise the capital. It's really hard to build an MI specific operating platform. It's really hard to hire the right team to sign up customers, earn their trust and also manage through an extended J curve to get to a point of profitability. And when we look at things, say, today versus when we got our start back in 2011, the market is at a very different point today. And so today, there is no clear need in the market, right? At this point, the 6 incumbent MI players are all serving the market incredibly well. We're showing up every day for lenders and their borrowers. We've got ample capacity to support their origination volume. We've got their trust we're offering, I think, broadly speaking, fair and valuable solutions for every borrower that comes through our market, and so it's difficult to know obviously exactly where things land. We don't know what will happen with the latest rumors. But say, it's a very high bar, right? It takes a lot of capital, a very large amount of capital to fund the PMIERs compliance business. And if we were controlling first strings and thinking about making an investment in a new entrant ourselves, I'd say we'd be highly skeptical that now is the right time to do that, given all the challenges that we would see for anybody who came into the market today. And that's not because the market itself is challenges because the market is doing so well in the 6 companies that are there today are performing so well. So we'll see, ultimately, if somebody new came in, everybody -- the market will adapt around it. But I think going from discussions to actually having a fully funded, capitalized approved entity, that's a pretty wide gulf.

Q: Can you give us an update on what you're seeing in terms of the strength of the consumer? Also just any housing markets that you're keeping an eye on where -- in terms of home prices or other signs of potential weakness.

A: Sure. Yes. Good question. Look, I'd say broadly speaking, I noted in our prepared remarks, but we've been encouraged by the broad resiliency that we're seeing in the economy and the housing market for a while now. Headline unemployment remains low, inflation is cooled, consumers broadly speaking, are still spending businesses or continuing to make significant investments. The equity market is continuing to set new highs. And so the overall picture today is an encouraging one. But for us, obviously, it's not just about today. It's also what comes tomorrow. And so we always think about risks that might be on the horizon. And so when we parse through the data, I think we can all see it on the macro side, there are signs in the labor market of some degree of strain emerging. We're not seeing unemployment increase, and we don't have government data for the last little while, but there are certain private data points that we can look at. So we don't see unemployment increasing, but certainly, the pace of new hiring activity has slowed. I think consumer confidence is down, particularly amongst certain borrower cohorts, and there's broad talks of -- I think we're terming it a K-shaped recovery. So we'll see what I'd say from our vantage point, it's still a really encouraging and resilient backdrop those macro and housing market but we're always focused on what might come. And then Bose, I think you asked a question about geos. And so yes, we've talked for a while now that there are certain geographies, Florida, Texas, the Sunbelt, Mountain West where we're seeing some -- either a declining pace of house price appreciation or a turn in prices with inventory building. And that's still the case. Those same markets, there's nothing new, the pressure isn't new, but we're still seeing, when we look at the world, those markets that have been soft for a little while now continue to show signs that they're soft, and we see continued strength, though, in the Northeast and the Midwest.

Q: Okay. Great. That's helpful. And then actually just in terms of the reinsurance markets, can you just talk about what you're seeing there? Also, just I guess you guys are more active on the XOL side, just in terms of execution, like why there versus more on the ILN side?

A: Sure. In terms of what we're seeing in the reinsurance market, reinsurance markets remain very robust, and we look at the pricing achieved by some of our competitors in the marketplace year-to-date, it's the best pricing that's ever been achieved. If we wind the clock back to 2024, we placed full XOL and quota share coverage for 2025, 2026 and a portion of the 2027 year with respect to the quota share. So we have a really nice runway in terms of our locked-in capacity in the traditional reinsurance market. So you may recall that in the third and fourth quarter of the year, the back part of the year, we typically engage with our reinsurance partners and talk about the opportunity to lock in further coverage for forward years or to optimize the coverage that we have in place. And so you may imagine, we're engaged in those discussions currently. And -- but again, it's a very strong reinsurance market backdrop leading into those conversations. And with regards to ILN versus XOL, we like both of those markets. Both of them have been very good sources of capital for us as a company. Recently, we have been more biased towards the traditional reinsurance market. In particular, because it offers that forward coverage, which isn't available in the debt capital markets. And so that's been our recent preference just from a cost flexibility and speed of execution perspective. But we like both of those markets. And I think you should expect us in the fullness of time to be active across all different markets.

Q: Yes. the core yield, it's been holding pretty steady at 34 basis points. Is that a good run rate here? What moves that 1 way or the other in the kind of the near to medium term?

A: Sure. I'm happy to start out here. It has been very stable, and that's obviously been supported by the tremendous persistency that we've had in the book and continue to have in the third quarter. So again, we would -- we don't give forward guidance, but given the strength of the in-force book, we would expect that plus/minus that kind of number for the core yield will be good. Obviously, the net yield is influenced by claims expense in the quarter and how that runs through our reinsurance contracts.

Q: And then any thoughts about the impact on persistency if we do see interest rates drop, that would be great from a new business perspective, a lot of purchase activity would ramp up presumably, but you get a lot of refi. How would you see the puts and takes if kind of you get a refi-ed market? And then if you can get multiple rounds of it, given the -- where recent borrowers have been borrowing at.

A: Yes. So I think as you termed it, there's both puts and takes. Our persistency was 83.9% in the third quarter, and as we noted, again, helped to drive continued growth in embedded value gains in our insured portfolio. Overall, our portfolio is broadly well situated because we've got a 5.2% weighted average note rate underpinning our exposure at quarter end. But it's not even, obviously, across the entirety of our book. There are vintages parts of our in-force that have greater degrees of refi sensitivity, and where we will likely see an uptick in some prepayment speeds given the recent moves in rates, that's going to be natural, right? So that's the put. The take, as you noted, though, is, one, some portion of the borrowers in our portfolio who will benefit from a refinancing today or very likely to still need MI coverage because while HPA has generally trended higher, it's trended higher at a normal, not record pace. And so there's an opportunity to see penetration of refinancing origination activity grow if there were -- if we saw an uptick in overall refi activity. As you noted, look, if rates lag down, to the point where we see a more pronounced pressure on persistency, we'd also expect to see a benefit in new business activity, NIW volume, bringing prospective buyers purchase demand off the sidelines. And the 1 other 1 to note is there's a potential knock-on benefit from a credit experience standpoint, to a refinancing cycle, right? If we see refinancings accelerate, it's most likely just because of where the underlying note rates are that, that will come from our more recent vintages. And those are the vintages that we're looking at for that normalizing credit experience. If those vintages begin to turn over, it will take -- it will extend that normalization cycle from a credit performance standpoint.

Q: Appreciate that. And then were there any onetimers in the expense ratio is obviously, as you say, a record number. Anything nonrecurring there? Or is that a good run rate?

A: I'd say, with regard to the expense ratio, there was nothing in particular that I'd point out in the quarter. And if you look at the raw dollars, it's within a couple of hundred thousand dollars of what we spent last quarter. And so there are a few positives and negatives, but again, nothing of note. I would say if you're looking forward, typically, the second and third quarter are lightest in terms of expenses and the fourth, and then the first quarter tend to be heavier just in terms of both dollars of expense and also the ratio goes up during those quarters. And in the fourth quarter, that typically results from the accrual of some of our people-related expenses. So that's the only thing that I would note with regard to the fourth quarter.

Q: This is A.J. on for Rick. So if rates fall in refis do start to tick up, is there anything kind of proactive you can do to recapture MI on more of those loans? Could you maybe just walk through your playbook sharing your early experience you've had there?

A: Yes. So I'd say on the margin, there are things that you might try to do. But more broadly, the most important piece of the playbook is to be everywhere in the market and be offering valuable solutions for our customers to be plugged in with as many lenders as possible and so that we could serve their borrowers. We've noted for a while that 1 of the unique attributes that we have to our benefit is that our share of the new business environment is larger than our share of industry insurance-in-force. So to the extent that there is some amount of industry insurance-in-force that's in motion because it's refinancing, but still needs MI coverage. We have an opportunity, we think, to capture a little bit more of that than we will necessarily lose. And so that's not a strategy per se, it's just where the numbers are. But the real strategy behind it is make sure that we are connected to our customers that we're offering them valuable solutions that were present for their borrowers across all markets so that, that business that is potentially in motion is a business that we can capture