NMIH
#Thank you, Operator.
Good afternoon, and welcome to the 2016 fourth-quarter conference call for National MI.
I'm <UNK> <UNK>, Vice President of Investor Relations and Treasury.
Joining us on the call today are <UNK> <UNK>, Chairman and CEO; <UNK> <UNK>, our CFO; and Rob Fore, our Controller.
The financial results for the fourth quarter and year 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 investor's 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 development.
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.
Now to our conference call, <UNK> will open with an update on the state of the business and then <UNK> will discuss the financial results in detail.
After some closing remarks from <UNK>, we will take your questions.
With that, let me turn the call over to <UNK> Schuster.
Good afternoon, everyone.
I'm very pleased to report that in the fourth quarter of 2016, we once again delivered record performance in insurance in force, premiums earned, and pretax income.
We also continued to shift the mix of our NIW to align with the long-term industry averages, achieving a 75% mix of monthly product in the fourth quarter.
This fulfilled a key 2016 goal.
By these most important metrics, 2016 was a great year, and we believe we are set up for an even stronger 2017.
We want to thank our customers, employees, business partners, and shareholders for helping to make this happen.
As we have said previously, we are focused on achieving higher returns, which for us means three things.
First, we built high-quality relationships with customers where our customer service and reliability as a counterparty are valued.
We added 167 new customers in 2016, growing our customer base by 17%.
Second, we are committed to managing expenses in a way that supports our growth and our long-term vision for efficiency and returns.
In 2016, we more than doubled insurance in force, policies in force, and premiums earned while increasing operating expenses by only 16%.
And third, we believe we have a superior approach to managing risk, as we have underwritten or conducted a post-close review on roughly 85% of our portfolio.
We believe this is far more than any other mortgage insurer.
This practice was a fundamental principle when we started the Company.
It gives us a better understanding of the loans in our portfolio, enables us to offer 12 month rescission relief, and we believe ultimately will lead to better loss performance and far better customer relations over a full credit cycle.
Our strong execution is evident in our increasing margins and operating leverage.
When we compare our performance in the second half of 2016, with the first half of the year, 75% of our incremental revenues drop through to underwriting profits.
We expect this powerful operating leverage to drive lower combined ratios and higher returns over the next several years.
Assuming we continue to have a healthy origination market, we believe we can achieve our goal of mid-teens return on equity within two years.
We currently are targeting return on equity of approximately 10% by the end of 2017 and mid-teens return on equity by the end of 2018.
Now I have a few comments on the market.
The sharp backup in rates that occurred after the presidential election did slow down refinance activity.
This was evident in our mix of commitments, which declined to 17% refinance in January.
This is down from roughly 25% for most of 2016.
Although rates have leveled off recently, they are still the highest we have seen since mid-2015 and are likely to be a headwind for refinance activity this year.
Changes in refinance activity are less impactful to the size of the private mortgage insurance market.
Only about 5% of refinancing transactions carry mortgage insurance while the purchase market has roughly 20% penetration of mortgage insurance.
The purchase market is generally less sensitive to rates and is driven primarily by job growth and household formation.
We continue to believe that there is significant pent-up demand among millennials and other potential first-time home-buyers and that we will see a healthy purchase market in 2017 and beyond even at higher rates.
With the trends in refinance and purchase mortgage origination pushing the market in different directions, it's too early to forecast this year's private mortgage insurance market with any precision.
What we can say is that regardless of the market size, we are targeting industry-leading growth in insurance in force this year.
Regarding recent government developments we are pleased to see increased detention on the FHA and its role in the low down payment housing market.
We are hopeful that the new administration and Congress will refocus the FHA on its primary mission, which is subsidizing affordable housing for borrowers with lower credit scores and smaller loan balances.
We strongly believe the FHA should not be providing government subsidies to more credit worthy borrowers, especially those with higher loan balances which exceed $600,000 in some markets.
With the new administration, we are again hearing talk of potential GSE reform.
Although potential reforms would likely be decided and implemented over a period of multiple years, we are encouraged by the current dialogue in Washington.
Any serious reform proposal today has included a prominent role for private mortgage insurance to take a first loss position in front of taxpayer exposure.
We are confident that any new proposal will maintain private mortgage insurance as a critical pillar in housing finance reform, and we are well positioned to take a leadership role in any future structure.
The new administration and Congress have set a course to adjust the corporate tax structure.
Clearly a lower tax rate would benefit all American companies, and we believe it would be especially beneficial to companies with high pretax margins such as National MI.
Reform could also eliminate the current tax advantage for non-US insurers, potentially leveling the playing field for domestic insurers.
Finally, we are pleased to begin the year with one fewer competitor in the industry.
As customers begin to adjust the diversification of their counterparty risks, we are well-positioned to take on more of their business.
In summary, I am very proud of our performance in the fourth quarter and for the full year.
We are excited about our growing operating leverage and returns profile which is a realization of our founding vision.
With that, let me turn it over to <UNK> <UNK>.
Thank you, <UNK>.
And good afternoon, everyone.
I'm pleased to share with you our financial results for the fourth quarter and full year of 2016.
As <UNK> mentioned, we had a great fourth quarter and it allowed us to end the year with record numbers in our most important metrics of performance.
Primary insurance in force at quarter end grew to $32.2 billion, up nearly $4 billion or 14% from $28.2 billion at the end of the third quarter, and more than double where we were at the end of last year.
Premiums earned for the quarter were $32.8 million up from $31.8 million in the prior quarter.
Annualized premium yield for our primary book in the quarter was 44 basis points and includes the impact of a full quarter of reinsurance.
As a reminder, our reinsurance program commenced last September, and as a result we saw only one month of impact from reinsurance in the third-quarter results.
Excluding the impact of reinsurance, premium yield of 48 basis points was essentially flat quarter over quarter.
In the fourth quarter, we continued to shift our mix of NIW to monthly products.
Monthlies represented 75% of total NIW for the quarter up 71% in Q3 and 45% in the fourth quarter of 2015.
In Q4, monthly NIW volume was up 92% compared with the fourth quarter 2015.
Single premium NIW was down 21% versus the prior quarter and down 47% from the prior year.
This is consistent with our objective of shifting our NIW and insurance in force mix to mirror the long-term industry average.
And the primary insurance in force at year end was 60% monthly, a significant increase over the 47% mix of monthly we had as of the end of 2015.
In terms of purchase refinance mix in the fourth quarter purchase represented 72% of NIW with refinance 28%.
This compares with the 75%-25% mix in the third quarter.
As <UNK> mentioned, Q4 NIW was a little affected the increase in interest rates in November, but we are now seeing refinance mix come down in our commitments.
Total policies in force as of the end of the quarter increased to 135,000, up 13% from 119,000 in the prior quarter.
Weighted average Fico of primary risk in force as of the end of Q4 was 753, roughly flat with the prior quarter.
Overall persistency in the primary book was 81% also roughly flat with 82% in Q3.
Investment income in the fourth quarter was $3.6 million up from $3.5 million in the prior quarter.
And total revenues in the fourth quarter were $36.6 million, up 3% from $35.5 million in the prior quarter.
Underwriting and operating expenses in the fourth quarter were $23.3 million including share-based compensation expense of $1.8 million.
This compares with underwriting and operating expenses of $24 million including $1.8 million of share-based compensation in the prior quarter.
For the year, gross expenses of $95 million before the impact of the ceding commission, came in slightly better than our guidance of $96 million.
Net of the ceding commission expenses of $93 million were at the low end of the guidance range we provided last quarter.
We had 179 notices of delinquencies in the primary book as of the end of the fourth quarter, up from 115 at the end of the prior quarter.
We recorded $800,000 for claims expense and there were three paid claims in the quarter.
Our fourth-quarter loss ratio defined as claims expense divided by premiums earned was 2%.
As mentioned last quarter, we expect our loss ratios over the next several years to be in the low to mid single digits.
Now moving to the bottom line, net income for the fourth quarter was $61.6 million or $1.01 per diluted share.
This includes a $54.5 million tax benefit resulting from the reversal of the valuation allowance on our deferred tax asset, or DTA.
We expect to provide for taxes an annual rate of 35%.
However, we will be paying only minimal cash income tax for the next couple of years.
In the fourth quarter, we saw a full quarter's impact of reinsurance, which reduced pretax income by $2.2 million.
Results for the quarter also include a pretax non-cash charge of $1.7 million related to the change in the fair value of our warrant liability resulting from the increase in our stock price.
At quarter end, cash and investments were $677 million down from $686 million in the prior quarter.
The decline primarily relates to unrealized losses on the portfolio due to the November spike in interest rates and offset by cash generated from operations.
As of quarter end, we had $74 million of cash and investments in the holding company.
And in 2016, we generated $71.9 million of cash from operations which compares with $41.5 million in 2015.
Book equity as of the end of the fourth quarter was $477 million, equal to $8.07 per share, which compares with $430 million or $7.28 per share at the end of the third quarter.
The large increase in book value relates primarily to the reversal of the DTA.
As of quarter end, total available assets under PMIERs were $454 million.
Which compared with risk-based required assets of $367 million.
And with regard to consolidated capital planning, earlier this month we amended our term loan at the holding company which reduced the interest rate by 75 basis points from LIBOR plus 750 to LIBOR plus 675.
We also extended the maturities alone by one year to November of 2019.
With regard to funding growth in the primary insurance company, we continue to believe that reinsurance is our most attractive capital alternative to support growth and insurance in force.
With that, let me now turn it back over to <UNK> for his closing remarks.
Thank you, <UNK>.
It is clear that 2016 was a great year for National MI.
We achieved profitability, more than doubled insurance in force and premiums earned, negotiated a reinsurance treaty to support our growth, and solidified our position as a strong returns oriented mortgage insurance provider.
We are very pleased with these results.
Looking ahead, we believe 2017 will be an even better year as we continue to execute on the business model, layering on more high-quality insurance in force and driving strong revenue growth while by prudently managing expenses and risks.
With our largely fixed expense base we believe that the operating leverage we have already demonstrated is going to drive increasing profits and returns throughout the year.
We look forward to reporting those results to you as the year unfolds.
Finally, you all should have seen our recent announcement that <UNK> <UNK> will be retiring in July of this year.
I want to acknowledge <UNK> and what he has meant to the Company over the past two years.
<UNK> is a great personal friend.
He came out of retirement to join us at an important time in our journey as we were moving from a startup to a mature company.
He helped to bring world-class controls and professionalism into what was already a strong finance function.
He also brought a unique and valuable perspective to our management team based on his decades of business experience.
<UNK> will be in the CFO role until May, which is when we will welcome Adam Pollitzer as our new CFO.
<UNK>, you are a great leader and a valued friend and we are so grateful for your contributions to National MI.
You all will hear from <UNK> again on our next conference call.
Now a little about Adam Pollitzer, Adam comes to us from J.
P.
Morgan where he was a managing director on their insurance coverage team.
He knows the mortgage insurance sector very well and he comes to us with a deep understanding of the dynamics in our industry.
He is a smart and talented executive and we are excited to have him join our team.
I believe our ability to attract someone like Adam is a reflection of our opportunity to continue to grow and create value for all of our stakeholders.
With that, let's bring the operator back so we can take your questions.
(Operator Instructions) The first question comes from the line of <UNK> <UNK> with Zelman & Associates.
Yes, <UNK>, this is <UNK>.
I think we stated earlier that should be trending upwards towards the 50 basis points before reinsurance.
The reinsurance does take about 5 basis points off of the gross premium earned number so I would expect it to trend toward the 45 basis point level.
I don't think that we're going to be giving guidance per se, but I think we will expect to see some increases as we continue to grow and as you saw or you heard in the script we were up about 16% year over year, not anticipating that sort of growth but it is going to be moving upward.
Thank you.
Hey, <UNK>, it's <UNK>.
I think the expense ratio you saw come down significantly in 2016, we still will continue to see that driven down with the ROE targets that we've laid out for you.
I think that kind of drives based on where we are with the premiums earned versus what the overall combined ratio would be and then also with the low loss ratio, we do expect that expense ratio to be coming down significantly.
Yes, <UNK>, this is <UNK>.
We don't have any comment on their results that you are referring to.
I do think that the decision to act by the new administration was very sound and I'm very encouraged by the potential to again re-examine the mission of the FHA and to get it focused more squarely on lower-income buyers with lower-value mortgages, so we're very encouraged as things develop here but we will monitor it carefully.
Thanks.
<UNK>, it's <UNK>, so we're thinking something around 50% at that point for a combined ratio.
Sorry, one more time, <UNK>.
Yes, I think what we said was low to mid single digit, so yes that will be a small part of that 50%.
It was approximately $5 million both in Q3 as well as Q4, <UNK>.
Okay, we thank you for joining us on the call today, and we appreciate your support.
Thank you.
