© 2017 Copyright. NMI Holdings Inc.
2020 Virtual Investor Day
- Welcome to NMI Holdings, Inc. - 2020 Virtual Investor Day
- Presentation materials will be displayed on screen alongside a video of management through each section of today's discussion
- Audience members have the opportunity to submit questions at any time through the course of the presentation in the dialogue box located on screen
- Submissions must include your name and organizational affiliation
- Questions will be aggregated and addressed during the Q&A session after formal presentations
- A replay of today's meeting will be available on our website athttps://ir.nationalmi.com/events-and-presentations
1
Our Use of Forward-Looking Statements and Non-GAAP Financial Measures
During the course of this 2020 Investor Day discussion, 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 today can be found on page 84 of this deck and on our website, or through our filings with the SEC, which are also on our website.
If, and to the extent, we make 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 is current at any time other than the time of this presentation.
Also note that we will refer to certain non-GAAP measures and provide a reconciliation in this presentation to the most comparable measures under GAAP on pages 82 and 83, and on the investor relations section of our website.
2
Agenda
Chairman's Message | Brad Shuster | Executive Chairman & |
Chairman of the Board | ||
Building on Our Success | Claudia Merkle | Chief Executive Officer |
Customer Development | Norm Fitzgerald | Senior VP & |
Chief Sales Officer | ||
Risk Management | Rob Smith | Executive VP & |
Chief Risk Officer | ||
Financial Review | Adam Pollitzer | Executive VP & |
Chief Financial Officer | ||
Questions & Answers |
3
Chairman's Message
Brad Shuster
Executive Chairman and Chairman of the Board
© 2017 Copyright. NMI Holdings Inc.
Themes for Today
- Significant success to date provides strong foundation
- Immediate and decisive action in face of COVID crisis
- Housing market resiliency presents enormous opportunity
- Well positioned to survive and thrive through COVID and beyond
5
Delivering significant value for shareholders and securing future outperformance across all market cycles
Founding Principles
- Help qualified borrowers achieve the
Dream of Home Ownership
- Be a Credible and Durable Counterparty
for our customers and policyholders
- Deliver a Great Customer Experience
through people and technology
- Manage Risk to ensure strong performance across all market cycles
- Create a Winning Culture that allows us to attract and retain the very best talent
- Generate sustainable Strong Mid-Teens Returns
for our shareholders
6
Executive Management
Highly experienced senior management team supported by a deep bench of talent
Bradley Shuster | Claudia Merkle |
Executive Chairman, | |
Chief Executive Officer | |
Chairman of the Board | |
William Leatherberry | Patrick Mathis |
General Counsel | Chief Operating Officer |
Adam Pollitzer | Robert Smith |
Chief Financial Officer | Chief Risk Officer |
Norm Fitzgerald
Chief Sales Officer
7
Significant Success to Date
- Performance Driven Culture
- Winning with Customers
- Building High-Quality Portfolio
- Strong Financial Results
Award
Winning
Culture
8
Significant Success to Date
- Performance Driven Culture
- Winning with Customers
- Building High-Quality Portfolio
- Strong Financial Results
Customer Value Proposition
Best-in-class | Consultative |
sales team | engagement |
Certainty of | Sensible |
Coverage | Servicing |
Active Customer Relationships
1,167
1,005
761
337
12/31/14 12/31/16 12/31/18 9/30/20
9
Significant Success to Date
- Performance Driven Culture
- Winning with Customers
- High-QualityPortfolio
- Strong Financial Results
Portfolio Characteristics
Prioritize higher | Rate GPS risk |
quality loans | selection |
Individual risk | Comprehensive |
underwriting | reinsurance |
Primary Insurance In-Force
$ billions
$104.5
$68.6
$32.2
$3.4
12/31/14 12/31/16 12/31/18 9/30/20
10
Significant Success to Date
- Performance Driven Culture
- Winning with Customers
- Building High-Quality Portfolio
- Strong Financial Results
Performance in COVID Stress | |||||||||
Balance sheet | Credit | ||||||||
strength | performance | ||||||||
Significant | Earnings | ||||||||
funding runway | resiliency | ||||||||
Adjusted Net Income & ROE* | |||||||||
$ millions | |||||||||
ROE | ROE | ||||||||
16.1% | |||||||||
21.1% | |||||||||
ROE | $175.5 | ||||||||
16.3% | $161.9 | ||||||||
ROE | |||||||||
6.3% | $95.2 | ||||||||
$29.5 | |||||||||
LTM Q3'17 LTM Q3'18 | LTM Q3'19 LTM Q3'20 |
* Adjusted net income and adjusted return on equity are non-GAAP measures. For a reconciliation to the most comparable GAAP measures, refer to the appendix or the company website at www.nationalmi.com.
11
Decisive Action at Outset of
COVID Pandemic
Discipline and strength prior to COVID outbreak provide strong foundation
Seamlessly transitioned to remote engagement
Leveraged digital tools to sustain and enhance customer engagement
Targeted guideline changes to increase underwriting rigor
Immediately increased Rate GPS pricing in recognition of COVID risk
Raised +$1.4 billion in capital and reinsurance markets
Rationalized expenses with launch of TCS partnership
Decisive action at earliest outset of pandemic sets up continued success
12
Housing Market Resiliency
Record purchase demand
Purchase mortgage application index | ||||
2017-2019 average | 2020 | |||
Average = +25.8% | ||||
1 | 4 | 7 | 10 13 16 19 22 25 28 31 34 37 40 43 | |
Calendar week |
Mortgage Bankers Association; Monthly, not seasonally adjusted
All-time low
mortgage rates
30-year fixed rate mortgage
4.5%
2.8%
8/30/18 3/19/19 10/6/19 4/24/20 11/12/20
St. Louis Federal Reserve Economic Data - 30-Year Fixed Rate Mortgage Average; weekly, not seasonally adjusted
Constrained housing supply
Monthly housing supply
Average = 5.5 mos
3.6 mos
7/1/15 | 10/15/16 | 1/30/18 | 5/17/19 | 9/1/20 |
St. Louis Federal Reserve Economic Data - monthly supply of houses, seasonally adjusted
National house | Encouraging credit | Mortgage origination | ||||||||
price appreciation | performance | volume | ||||||||
S&P / Case-Shiller U.S. National Home Price Index | % of GSE loans in forbearance | Purchase mortgage home originations volume | ||||||||
($ billions) | ||||||||||
+9.7% | $1,564 | |||||||||
$1,496 | ||||||||||
$1,326 | ||||||||||
+5.5% YTD | 3.4% | $1,234 | ||||||||
6/1/18 | 12/16/18 | 7/2/19 | 1/16/20 | 8/1/20 | 3/8/20 | 11/8/20 | 2018 | 2019 | 2020E | 2021E |
St. Louis Federal Reserve Economic Data - S&P / Case-Shiller U.S. National | Mortgage Bankers Association Forbearance and Call Volume Survey | Fannie Mae Housing Forecast - October 2020, 1-4 Unit Single Family | ||||||||
Home Price Index, monthly, not seasonally adjusted; indexed to 7/1/18 | Mortgage Originations |
13
Regulatory Environment
- Broad policy efforts aimed at assisting borrowers and keeping them in their homes
- CARES Act
- FHFA / GSE forbearance program and foreclosure moratorium
- Expansion of loan modification waterfall
- Frequent and constructive engagement with FHFA and GSEs through pandemic
- GSE amendments to PMIERs recognize unique nature of forbearance-related defaults
- FHFA directive to focus GSEs on their core mission and curtail "charter creep"
- General recognition of the central role MI plays in functioning of housing market
- FHFA released final Enterprise Regulatory Capital Framework for GSEs on November 18th
- Significant capital required for full privatization
- Risk transfer provided by private mortgage insurers even more valuable to privatization goals
- Uncertainties around timeline to implementation
14
Well-Positioned for the Future
Strong foundation
Customer engagement & pipeline
Comprehensive risk management framework
Highest quality insured portfolio
Resilient housing market fundamentals
Uniquely valuable new business opportunity
15
Built to perform
in all markets
Leading with
technology
Unique approach and credit outperformance
Industry-best portfolio
by any metric
Housing is the
"Bright Spot"
Volume and value of new
production
Building On Our Success
Claudia Merkle
Chief Executive Officer
© 2017 Copyright. NMI Holdings Inc.
National MI:
Building on Our Success
Culture | Customers | Innovation | ||
Talented and | Building | Technology and |
Durable | ||
Committed People | Thought Leadership | |
Relationships | ||
Built for Sustained Outperformance Across All Market Cycles
Comprehensive | Highest Quality, | |||
Credit Risk | Strong Balance Sheet | |||
Best Performing | ||||
Management | and Resilient Earnings | |||
Insured Portfolio | ||||
Framework | ||||
Risk Management | Portfolio | Financials | ||
17
Performance Driven Culture
- Corporate culture - a key differentiator
- 261 engaged, motivated employees
- Team driven and collaborative
Award
Winning
Culture
People | Profit | Customer | Community |
Collaboration | Focused | Committed | Support |
Trust | Accountable | Responsive | Philanthropy |
Diversity | Deliver | Excellence | Homeownership |
Core values embedded in our decision making and business day-to-day | |||
18 |
Winning with Customers
The National MI Advantage
- Best-in-classsales force
- Unique customer value proposition - Certainty and Service
- Rate GPS leadership
- Differentiation through consultative selling
- Embracing technology at forefront of digital mortgage evolution
- Consistent engagement on distanced basis through COVID pandemic
Growing Our Customer Base
Active Customers
1,167
1,076
968
855
9/30/17 | 9/30/18 | 9/30/19 | 9/30/20 |
19
Highest-Quality, Best Performing Insured Portfolio
Credit Risk Standards &
Rigorous Underwriting Process
- Highest quality by FICO, LTV and DTI
- Minimal layered risk concentration
- Risk-basedpricing - Rate GPS
- >85% underwritten or validated
- Lender diversification
- Geographic diversification
- No aggressive product types
Highest Quality & Best Performing
In-Force Portfolio
Primary Insurance In-Force
$ billions, at quarter end | $104 |
$90
$64
$43
$28
$11
3Q'15 3Q'16 3Q'17 3Q'18 3Q'19 3Q'20
20
Comprehensive Credit Risk
Management Framework
National MI has an industry-leadingcredit risk management
approach, built on three-foundationalpillars…
Individual Risk | Granular | Comprehensive | |||||||
Pricing Engine | Reinsurance | ||||||||
Underwriting | |||||||||
Rate GPSSM | Program | ||||||||
…and has delivered best-in-classcredit performance
since its formation
21
Best-in-Class Credit Performance
Peak Reported COVID Default Rates1
NMI vs. Rest of Mortgage Insurance Industry
6.35% | 6.52% | ||||
Rest of industry: 6% | 5.98% | ||||
5.14% | 5.19% | ||||
3.78% | |||||
NMIH | ACGL | ESNT | GNW | MTG | RDN |
- Default rates as reported by each individual company in SEC filings, earnings releases, financial supplements or press releases. Periods may not align and underlying definitions and calculations of default rate may not be uniform across companies
22
Delivering Financial Success
Q1'20 LTM | Q3'20 | ||
✓ NIW | $49.5 billion | $18.5 billion | |
✓ IIF | $98.5 billion | $104.5 billion | |
✓ Revenue | $405.3 million | $107.8 million | |
✓ Adjusted net income* | $196.7 million | $40.4 million | |
✓ Adjusted return on equity* | 22.8% | 12.6% | |
✓ Book value | $1.0 billion | $1.3 billion | |
✓ Book value per share | $14.15 | $15.42 | |
✓ Loss ratio | 4.2% | 15.9% |
- Adjusted pre-taxincome and adjusted return on equity are non-GAAPmeasures. For a reconciliation to the most comparable GAAP measures, refer to the investor relations section of the company's website at www.nationalmi.com
23
Well-Positioned to Outperform
Through the COVID Pandemic
Our success to date provides the
foundation for our future performance
Performance- | Proven Credit Risk |
Driven Team | Management Framework |
Strong Customer | Strong Financial |
Engagement & Pipeline | Foundation |
Resilient Housing Market
Highest Quality
and Record Private
In-Force Portfolio
MI Opportunity
24
Record Private Mortgage
Insurance Market
✓ Skyrocketing demand for | ✓ |
homeownership | Record low interest rates |
✓ Greater need for down | ✓ Expanding private MI |
payment support | penetration rates |
Total Private Mortgage Insurance NIW
✓
Increasing mortgage origination volume
- Record private mortgage insurance NIW opportunity
~$575
$ billions
$131
$267 $269
$215
$176 $168
$384
$291
2012 2013 2014 2015 2016 2017 2018 2019 2020E
Source: Inside Mortgage Finance
25
Attractive Opportunity for
Responsible, Profitable Growth
Opportunity to Responsibly Scale NIW Volume and Build Embedded Value
Primary NIW volume | $54.9bn |
$ billions
$40.2bn
$27.2bn
$20.0bn
9/30/17 LTM | 9/30/18 LTM | 9/30/19 LTM | 9/30/20 LTM |
26
National MI:
Building on Our Success
Culture | Customers | Innovation | ||
Talented and | Building | Technology and |
Durable | ||
Committed People | Thought Leadership | |
Relationships | ||
Built for Sustained Outperformance Across All Market Cycles
Comprehensive | Highest Quality, | |||
Credit Risk | Strong Balance Sheet | |||
Best Performing | ||||
Management | and Resilient Earnings | |||
Insured Portfolio | ||||
Framework | ||||
Risk Management | Portfolio | Financials | ||
27
Sales and Customer Development
Norm Fitzgerald
Senior Vice President and Chief Sales Officer
© 2017 Copyright. NMI Holdings Inc.
Sales and Customer Development
- Significant success to date
- Digital transformation driving account engagement and salesforce efficiency
- Heightened engagement amidst COVID and record volume
- Strategy and tactics focused on a large opportunity
29
Significant Success to Date
Growing customer base | Driving significant | Industry leading growth in | ||||
and access to the market | NIW growth | high-quality insurance in-force | ||||
Active customers | New insurance written | Primary insurance in-force | ||||
1,167 | $ billions | $ billions | $104.5 | |||
$54.9 | ||||||
1,076 | $89.7 | |||||
968 | $40.2 | |||||
$68.6 | ||||||
855 | ||||||
$27.2 | $48.5 | |||||
$20.0 |
9/30/17 | 9/30/18 | 9/30/19 | 9/30/20 | 9/30/17 | 9/30/18 | 9/30/19 | 9/30/20 | 12/31/17 | 12/31/18 | 9/30/19 | 9/30/20 |
LTM | LTM | LTM | LTM |
30
Customer Development
Winning New Customers
Strong customer engagement
and activation pipeline
- Nearly 1,200 active customer relationships
- Current accounts represent ~80% of total mortgage insurance industry NIW
- 58 new account activations since COVID outbreak - 421 new account activations since 2017 - represents +$70bn of NIW opportunity
- Track record of growing wallet share within accounts steadily over time
- Large opportunity remains to both grow wallet share and activate new accounts
Active customer development
1,167
1,076
968
855
731
522
9/30/15 9/30/16 9/30/17 9/30/18 9/30/19 9/30/20
31
Why We Win
People and Value Proposition
Certainty of Coverage
- Standing behind our commitments
- "Iron Clad" rescission relief
Sensible Servicing
- Sensible Servicing® - customer-centric claims management process
Consultative Engagement
- Feedback loop - sharing best practices and insights from upfront underwrite
- Focus on digital mortgage roadmap and
Rate GPS
Value-added Programs
- Educational programs for lenders
- Webinars, roundtables and onsite events, access to industry experts
Customer Value Proposition
Best-in-Class | Consultative | |
Sales Team | Engagement | |
Certainty of | Sensible |
Coverage | Servicing |
32
Digital Mortgage Transformation
- Customers and borrowers becoming more digital
- Technology disrupts customer "habit" and legacy relationships - huge benefit to NMI as newest entrant
- Technology driving efficiency and flexibility for NMI and our customers
- Through technology leadership, NMI can target and serve a broader opportunity set (Top 600 Lenders)
Seamless
NMI
Integration
Electronic
Customer
Engagement
33
- Technology leadership shortens cycle from Master Policy to NIW
- Broad connectivity with third-party loan origination systems
- Leading with Rate GPS
- Virtual meetings, training, webinars
- Sophisticated communication tools and leveraging of social media
- Digital account and relationship management
Heightened Engagement Amidst COVID and Record Origination Volumes
- COVID has forced rapid transition to digital tools and virtual engagement
- NMI leveraging technology to expand customer outreach, stay current and connected in a "no-contact" way
- Being creative to enhance relevance and support customer productivity - critically important when customers are swamped by volume
- 58 new account activations since COVID speak to quality of our team and NMI engagement model
34
Strategy and Tactics
Focused on a Large Opportunity
- Top 600 lenders in the country represent ~92% of ~$575 market opportunity
- Significant penetration and active relationships with many leading lenders
- Also a sizeable opportunity remaining to continue adding new accounts and building wallet share with existing lenders
Top 600 Lenders ~$529 billion NIW opportunity
395 active relationships
(~$460bn NIW)
124
No master policy
81
Master policy
205 potential accounts
($69bn NIW opportunity)
35
Sustaining Our Positive Momentum
Top 600 Focus
New Account
Activation
NMI Technology
Leadership
Maintain Service
Excellence
- Know your customer - Win, Grow, Maintain
- Continue to leverage our success in client acquisition
- Lead with technology to drive salesforce efficiency and enhanced engagement
- Consultative engagement and value- added orientation
| 36
36
Risk Management
Rob Smith
Executive Vice President & Chief Risk Officer
© 2017 Copyright. NMI Holdings Inc.
Prioritizing Risk Management
- Enterprise Risk Management Focus
-
"Three Pillars" of NMI's Credit Risk
Management Framework - Resiliency Through COVID Stress
38
Deploying a robust risk management program to secure performance across all market cycles
Enterprise Risk Management Framework
Strong Origination and Oversight Environment
Strong Borrower
Credit Profile
National MI has established the industry-
leading risk management framework
Board & management | Defined risk appetite & |
risk committees dictate | portfolio concentration |
policy | limits |
Regulatory Guardrails on
Formal underwriting
Real-time portfolio
Origination Quality
monitoring & stress
PMIERs Capital
Standards
guidelines
testing
Comprehensive privacy
Regulatory & Rating
Lender approval &
protection & data
Agency Oversight
monitoring
39
security program
Prioritizing Risk Management
- Enterprise Risk Management Focus
-
"Three Pillars" of NMI's Credit Risk
Management Framework - Resiliency Through COVID Stress
40
Deploying a robust risk management program to secure performance across all market cycles
Credit Risk Management Framework
- Three Foundational Pillars
National MI takes an "all seasons" approach to risk - developed and deploy our comprehensive credit risk management framework well before the onset of COVID
Individual risk | Rate GPS | Comprehensive | ||
underwriting | Granular Pricing System | reinsurance program | ||
✓ Losses occur at a loan level | ✓ All buyers, lenders and | ✓ Broad reinsurance | ||
- credit risk management | homes are different - | program spanning | ||
requires loan-level | these differences impact | traditional quota share | ||
knowledge | loan performance | and capital markets ILN | ||
issuance | ||||
✓ NMI individually | ✓ Rate GPS considers a | |||
underwrites or validates | broad range of risk | ✓ Enhances return profile | ||
>85% of loans we insure | variables- far beyond | and mitigates impact of | ||
FICO and LTV | credit volatilityunder | |||
✓ Rest of industry relies on | stress scenarios | |||
portfolio QC reviews | ✓ Prioritizes high-quality | |||
loansfrom high-quality | ||||
lenders | ||||
41
Underwriting Matters
Non-Delegated
Delegated Assurance Review
% YTD Q3'20 NIW
Non-Delegated
33% | ▪ NMI underwrites loan before close |
Delegated with Independent Validation
- NMI innovation
58% ▪
Underwriting is delegated to lender ▪ NMI performs post-close validation
Total Underwritten / Validated | 91% | |
Traditional Delegated Underwriting | ||
Traditional Delegated | 9% | ▪ Underwriting is delegated to lender |
▪ NMI performs post-close QC review |
42
Individual Risk Underwriting Advantage
- Capture and assess full loan file
- Increased knowledge of individual loan characteristics and emerging risk trends
- Opportunity for corrective action before underwriting defects become defaults
- Embeds positive selection bias in client selection and delegated flow
- Supports sensible servicing approach and customer feedback loop
Best-in-class credit performance
Improved data capture and cycle awareness
Superior customer engagement
Cost efficient structure
43
Rate GPS Is a Powerful Credit Risk Management Tool
- Considers broad range of variables with proven impact on credit performance
- Dynamically considers relationship between multiple risk variables
- Prioritizes and attracts higher quality loans from high quality lenders
-
Utilize to tactically shape insured portfolio
- with immediate impact - Allows for quick changes to address risks that may emerge in future
- Leverages NMI's individual risk underwriting approach
9M'20 NIW risk concentration
97% LTV | 11% | 12% Rest of MI | ||||||
8% | 9% | |||||||
9% | sector: | |||||||
4% | 10% | |||||||
NMIH ACGL MTG RDN ESNT GNW
<680 FICO | 6% | |||||
4% | 4% | 5% | Rest of MI | |||
3% | sector: | |||||
1% | 4% | |||||
NMIH RDN MTG | ACGL ESNT | GNW |
>45% DTI
11%
7%
Not disclosed
NMIH MTG ACGL RDN ESNT GNW
Source: Public company SEC filings, earnings releases and financial supplements
44
National MI has the Highest Quality Insured Portfolio in the MI Industry
Credit Risk Standards &
Rigorous Underwriting Process
Highest Quality
In-Force Portfolio - $26.6bn RIF
- No pre-financial crisis exposure
- High quality by FICO, LTV and DTI
- Minimal layered risk concentration
- 100% fully documented loan files
- No aggressive product types
- Geographic diversification
- ~85% underwritten or validated
- Risk-basedpricing - Rate GPS
1 Represents 95.01% and above, as reported by NMIH and peers
Note: Data as of 9/30/20 as disclosed in SEC filings and/or quarterly financial supplements
Primary RIF by FICO
Weighted average
FICO = 754
>760 51%
740-759 16%
720-739 14%
700-719 10%
680-699 6%
<6793%
Primary RIF by LTV
Weighted average
LTV = 93%
<85% 6%
85-90% 32%
90-95% 53%
>95% 9%
MI industry comparison: <680 FICO RIF concentration
10% 10%
8% 8%
6%8%
3%
NMIH ESNT ACGL RDN GNW MTG
MI industry comparison: 97% LTV1 RIF concentration
18%
15%
14%15%
13%
11%
9%
NMIH MTG ACGL RDN ESNT GNW
45
National MI - Comprehensive Reinsurance Program
Reinsurance "Tower" Illustration
Comprehensive reinsurance coverage
on nearly all risk ever written
NMI "back on risk" when losses exceed
2008 Financial Crisis-like levels
~20%
quota share
(proportional)
◼ National MI utilizes reinsurance as both: |
➢ Source of efficient funding for its PMIERs, |
Standard & Poor's and state regulatory |
capital needs; and |
➢ Risk management tool to limit the |
potential volatility of its credit portfolio |
across market cycles |
◼ National MI has secured reinsurance coverage |
from both traditional reinsurers and capital |
markets investors |
reinsurance
ILNs 1.0 - 5.0
➢ 2016, 2018 and 2020 QSRs |
"Excess-of-loss" reinsurance
NMI retains exposure up to attachment
point (deductible)1
➢ 2017, 2018, 2019 and 2020 ILNs |
◼ National MI intends to be active in both |
markets on a consistent basis going forward |
- we view the traditional and ILN markets as |
complimentary |
(1) Attachment points may vary for each ILN transaction and National MI's retained exposure for each transaction is considered individually
46
Reinsurance - Protects Against
Loss in Stress Scenarios
- Evaluated a number of scenarios to test ultimate claims exposure in a severe stress environment
- NMI's best-in-class reinsurance program provides significant loss mitigation, substantially reducing expected net claim rates
- Best-in-classcredit quality and comprehensive reinsurance position NMI to continue to thrive through COVID stress
Stress Scenario 1
COVID-19 | |
Related | |
Claims | 2.1% |
Rate | 1.7% |
Gross Claims Rate | Net Claims Rate |
Through 2023 | Through 2023 |
Stress Scenario 2
3.8% |
2.3% |
Gross Claims Rate | Net Claims Rate |
Through 2023 | Through 2023 |
Stress Scenario 3
6.7% |
2.5% |
Gross Claims Rate | Net Claims Rate |
Through 2023 | Through 2023 |
47
Reinsurance - Provides Regulatory Capital Buffer in Stress Scenarios
Quota share reinsurance
- Three treaties covering ~20% of our risk in-force
- Quota share coverage also known as
"proportional coverage" because the reinsurer assumes a proportional amount of loss exposure (on a first dollar basis)
Insurance-linked notes
- ILN coverage in place on nearly all risk ever written
- Structures are deliberately overcollateralized upfront and amount of excess funding grows upon a lock-out event
- Quota share treaties effectively "accordion" up to absorb any amount of increased regulatory capital need (regardless of delinquency level)
- $361 million aggregate overcollateralization across all five Oaktown Re
Insurance-Linked Notes - Coverage Details
As of September 30th | ILN 1 | ILN 2 | ILN 3 | ILN 4 | ILN 51 |
Covered RIF | $2.3 billion | $2.7 billion | $3.4 billion | $6.1 billion | $6.1 billion |
Eligible coverage2 | $161.8 million | $281.8 million | $354.9 million | $491.6 million | $363.5 million |
Subordinate coverage3 | 7.11% | 10.43% | 10.57% | 8.00% | 6.00% |
PMIERs charge on covered RIF | 5.93% | 7.48% | 7.79% | 6.13% | 5.33% |
"Overcollateralization" | $26.9 million | $79.6 million | $93.3 million | $120.4 million | $40.6 million |
Delinquency trigger | 4.0% | 4.0% | 4.0% | 6.0% | 4.5% |
- ILN 5 completed on 10/29/20
- Eligible coverage represents the current reinsurance coverage including current first layer retained loss
- Subordinate coverage is the ratio of eligible coverage to covered RIF
48
Prioritizing Risk Management
- Enterprise Risk Management Focus
-
"Three Pillars" of NMI's Credit Risk
Management Framework - Resiliency Through COVID Stress
49
Deploying a robust risk management program to secure performance across all market cycles
Comparison to 2008 Financial Crisis
Housing market is in a fundamentally better position at outset of the COVID-crisis than in the lead up to the financial crisis
- Balanced home prices driven by real market fundamentals - no risk of a deflating "bubble"
- High-qualityborrower base accessing plain vanilla loan products - drives sustainability of homeownership
- Tight underwriting standards - requiring fully-documented income and asset positions
- Well-developed(and expanding) toolkit to provide borrower relief - proven value of forbearance and other programs
- No moral hazard issues - paves way for immediate and widespread assistance for homeowners and others
- PMIERs fundamentally different framework - contemplates and requires funding of "perpetual" lifetime stress
50
Mortgage Insurance Market
Risk Profile
Pre-crisis | Current | |
% RIF | MI group1 | NMI |
>97% LTV2 | 27% | 9% |
<680 FICO3 | 39% | 4% |
<620 FICO4 | 10% | 0% |
Average FICO5 | 713 | 754 |
ARM & I/O6 | 22% | 2% |
Cash out refi7 | 17% | 0% |
- Average of MGIC and Radian as of 12/31/07 (include both bulk and flow RIF)
- 95.01%+ primary RIF distribution by LTV for Radian; 97-100% total original LTV for MGIC; 95.01% and above for NMI
- <=619 and 620-679 primary RIF distribution by FICO for Radian; <575, 575-619, and 620-679 original FICO for MGIC; <=679 primary RIF by FICO for NMI
- <=619 primary RIF distribution by FICO for Radian; <575 and 575-619 original FICO for MGIC
- Average current credit score for entire mortgage market entering 2007 per BlackKnight Financial COVID-19 Special Briefing
- ARM and Interest Only/Negative Amortization for Radian; Includes ARM, Option ARM, ARM I/O, and FRM I/O for MGIC; NMIH has essentially no interest only loans and all ARM have a reset period >5years
- Cashout loan purpose for Radian; Refi Equity loan purpose for MGIC
Source: Radian 2017 Investor Day (11/6/17) and MGIC Q4'07 Portfolio Supplement
Rapid Response - Underwriting & Pricing
Immediate and decisive action to protect credit
performance from the outset of the COVID pandemic
Underwriting Underwriting
GuidelinesProcess
Premium Rates
✓ | ✓ | ✓ |
Tightening of the credit | Increased rigor around | Immediate increase |
box to limit incremental | employment | to account for |
exposure to higher risk | verification and income | unprecedented macro |
loans | continuance | stress and reduce |
determination | exposure to certain risk | |
cohorts |
51
Rapid Response - Underwriting & Pricing
Immediate and decisive underwriting and pricing actions have had a dramatic and positive impact
NIW risk mix | NIW risk mix | |||||||||
PMIERs require asset charge | <680 FICO | |||||||||
5.8% | 1.9% | |||||||||
5.4% | 5.4% | 1.0% | 0.7% | |||||||
Q1'20 | Q2'20 | Q3'20 | Q1'20 | Q2'20 | Q3'20 | |||||
NIW risk mix
>45% DTI
10.3%
7.0%
4.9%
NIW risk mix
97% LTV
6.4%
4.2%
3.2%
Q1'20 | Q2'20 | Q3'20 | Q1'20 | Q2'20 | Q3'20 |
52
Rapid Response - Reinsurance Coverage
Immediate and decisive action to secure additional credit
protection and funding runway in the capital and reinsurance markets
2020 | ILN 4.0 | ILN 5.0 |
Quota Share | ||
Oaktown Re IV | Oaktown Re V | |
Treaty | ||
✓ | ✓ | ✓ |
21% proportional | $322mm excess-of-loss | $242mm excess-of-loss |
coverage for policies | coverage for policies | coverage for policies |
originated from | originated from | primarily originated from |
4/1/20-12/31/20 | 7/1/19-3/31/20 | 4/1/20-9/30/20 |
First quota share treaty | First "regular way" ILN | Most favorable terms and |
secured in the MI market | issuance in the MI market | risk protection of all ILNs |
post-COVID | post-COVID | issued post-COVID |
53 |
Rapid Response - Policy Stimulus
Immediate and overwhelming policy response to the COVID pandemic - driving social
and economic outcomes, and resiliency in the housing market
Federal Reserve
- Treasury Department
✓
Fed Funds rate - near zero
(for extended period)
Supporting functioning
financial markets
Encouraging free flow
of credit
Direct small business and
corporate support
Congress & the | FHFA & |
White House | GSEs |
✓ | ✓ |
$2.3 trillion CARES Act to | National forbearance |
provide aid, relief and | program and foreclosure |
economic security | moratorium |
Additional assistance | Modification waterfall - |
may still come | new payment deferral |
PMIERs bulletins | |
(recognizing unique needs) |
54
Forbearance Programs -
Significant Positive for the Market
◼ Housing security is more | Borrower reliance on GSE forbearance | ||||
important than ever | programs declining as recovery takes hold | ||||
◼ Providing borrowers (who are | MBA, weekly servicer forbearance and call volume summary, | ||||
facing challenges through no | % of GSE loans estimated to be in forbearance | ||||
fault of their own) an | |||||
opportunity to stay in their | |||||
homes is the right policy | Jun. 7th = 6.4% | ||||
Peak COVID utilization | |||||
◼ Forbearance and foreclosure | |||||
moratoriums offer a "bridge" to | |||||
a better environment in the | |||||
future | Nov. 8th = 3.4% | ||||
◼ Well-defined (and expanded) | Lowest since April 5th | ||||
set of modification alternatives | |||||
eases the transition back to | |||||
performing status | |||||
◼ All efforts to keep borrowers in | |||||
their homes are favorable for | 3/8/20 | 5/8/20 | 7/8/20 | 9/7/20 | 11/8/20 |
National MI credit performance | |||||
55 |
Forbearance Programs Significant
Positive for the Market
Fannie Mae Forbearance Outcomes
Entered forbearance since March and exited by July
Never Missed Payment | Missed Payments (62%) | |||
(38%) | ||||
Resolution method | Exit/cancel | Prepay | Prepay (PIF) | Reinstate | Payment | Payment | Flex Mod* | Liquidation | |||
(PIF) | Plan | Deferal | Options* | ||||||||
Temporary | Hardship | ||||||||||
Temporary | hardship | Borrower | |||||||||
Temporary | unresolved; | ||||||||||
hardship | resolved. | hardship is | |||||||||
Forbearance | hardship | new income | |||||||||
resolved. | Borrower | permanent. | |||||||||
was not | Could be | resolved. | is lower | ||||||||
Borrower | can | Liquidation | |||||||||
needed / | loan | Primarily | Borrower | than | |||||||
has | manage | options | |||||||||
Typical circumstances | temporary | refinance | property | can resume | previous | ||||||
adequate | slightly | include | |||||||||
hardship | or property | sale | prior | income. A | |||||||
reserves to | higher | Short-Sale, | |||||||||
shorter than | sale | payment, | lower | ||||||||
catch up | monthly | Deed-in Lieu | |||||||||
expected | but not | payment is | |||||||||
missed | payment | or | |||||||||
more. | deemed | ||||||||||
payments. | for a finite | Foreclosure | |||||||||
necessary | |||||||||||
period. | |||||||||||
To-date share of | |||||||||||
COVID forbearance | 30.5% | 7.1% | 8.5% | 30.9% | 1.7% | 20.5% | 0.6% | 0.3% | |||
exits | |||||||||||
Source: Fannie Mae Single-Family Credit Risk Transfer Update October 20,2020.
* Modifications and other liquidations may result in losses to CRT investors/reinsurers.
56
Strong Credit Performance
Through COVID Stress
◼ Strategic focus on high-quality | Peak Reported COVID Default Rates |
risk paying off in face of COVID | NMI vs. Rest of Mortgage Insurance Industry |
stress |
◼ Encouraging default experience | 6.35% | 6.52% | ||||
and forbearance utilization thus | ||||||
Rest of industry: 6% | 5.98% | |||||
far | ||||||
◼ Nearly all defaults relate to | 5.14% | 5.19% | ||||
COVID crisis: | ||||||
◼ Borrowers directly benefiting | ||||||
from forbearance and other | ||||||
assistance programs | 3.78% | |||||
◼ Paired with strong national | ||||||
house price appreciation | ||||||
◼ Currently expected to drive | ||||||
significant benefit in our | NMIH | ACGL | ESNT | GNW | MTG | RDN |
ultimate claim experience | ||||||
(1) Default rates as reported by each individual company in SEC filings, earnings releases, financial supplements or press releases. Periods may not align and underlying definitions and calculations of default rate may not be | ||||||
uniform across companies |
57
Encouraging Credit Trends
in In-Force Portfolio
◼ Encouraging credit trends | Credit strength through COVID-19 - | |||||
eight months into pandemic | National MI default activity by month | |||||
◼ Defaults peaked at low | Default population | Default rate | ||||
absolute level (particularly | ||||||
when considered against | 14,175 | 14,236 | ||||
magnitude of COVID stress) | 13,765 | |||||
13,108 | ||||||
◼ Forbearance program and | 3.8% | 3.8% | 3.6% | |||
10,816 | ||||||
expanded modification | ||||||
waterfall are working - easing | 2.9% | 3.4% | ||||
the transition for borrowers | ||||||
◼ Performance quickly improving | ||||||
with rising number of cures by | ||||||
COVID-impacted borrowers | ||||||
◼ Population of borrowers who | 1,610 | 2,265 | ||||
1,449 | ||||||
have missed one payment, but | 0.4% | 0.4% | 0.6% | |||
not progressed to default | ||||||
declining even more | 3/31/20 | 4/30/20 | 5/31/20 6/30/20 | 7/31/20 8/31/20 | 9/30/20 10/31/20 | |
dramatically | ||||||
58 |
Housing Market Resiliency - Nationwide House Price Appreciation
National Association of Realtors,
Quarterly Metropolitan Median Area Price Report - November 2020
-
Median single-family home prices grew year-over-year in all 181 metropolitan statistical
areas tracked by NAR - 65% of metros - 117 areas out of
181 - had double-digit price growth year-on-year - At end of the third quarter, housing inventory totals were equivalent to 2.7 months at the current sales pace
House price appreciation accelerating
nationwide in nearly every market
NAR, median sales price of existing single-family homes,
Q3'20 vs. Q3'19 price change by region
13.7% 13.3%
11.4% 11.1%
8.2%
West | Northeast | Southwest | Midwest | Las Vegas - |
Henderson | ||||
- Paradise
59
Home Prices are a Key Driver of Mortgage Credit Performance
House Prices Impact Both the Frequencyand Severityof
National MI's Ultimate Claim Experience
HPA: Frequency Impact
Probability of Default | ||||||||
-50% | -25% | 0% | 25% | 50% | 75% | 100% | 125% | 150% |
Home Equity
Foote, Christopher L., Kristopher Gerard, and Paul S. Willen, "Negative Equity and
Foreclosure: Theory and Evidence," Journal of Urban Economics 64, 2008, pp. 234-345
HPA: Severity Impact
Illustrative claims severity1
67.8%
38.2%
8.7% | ||||||||
-10% HPA | 0% HPA | +10% HPA | ||||||
Scenario 1 | Scenario 2 | Scenario 3 | ||||||
Original LTV | 95% | 95% | 95% | |||||
Original principal balance | 285,000 | 285,000 | 285,000 | |||||
Original property value | 300,000 | 300,000 | 300,000 | |||||
Loan balance at default | 265,982 | 265,982 | 254,601 | |||||
As of default date | ||||||||
Cumulative HPA | -10.0% | 0.0% | 10.0% | |||||
Current property value | 270,000 | 300,000 | 330,000 | |||||
Property sale net proceeds | 243,000 | 270,000 | 297,000 | |||||
Claim scenario | ||||||||
Delinquent interest & other | 39,011 | 39,011 | 39,011 | |||||
Total claim amount | 304,993 | 304,993 | 304,993 | |||||
Coverage | 30.0% | 30.0% | 30.0% | |||||
Claim amount1 | 61,993 | 34,993 | 7,993 | |||||
Claim severity1 | 67.75% | 38.24% | 8.74% |
1 Assumes settlement under the third-party sale option
60
Case Study: Early 2000s
(Dotcom Recession)
- National unemployment spiked by 66% (at peak) in the early 2000s following the burst of the late- 1990s tech bubble and emergence of accounting scandals at Enron, WorldCom and other large firms
- Despite the significant increase in unemployment and a broad national recession, housing demand grew and house prices continued to rise (substantially) from 2000-2003 - aided by a significant drop in mortgage rates (8% in 2000 to 5% in 2003)
- Mortgage credit performance was strong through the entirety of this period - actually improving through the recession
National unemployment rate
6.3% (Jun-03) | ||||
6.2% | ||||
+66% | ||||
4.3% | ||||
3.8% (Apr-00) | ||||
1/1/99 | 2/23/00 | 4/16/01 | 6/8/02 | 7/31/03 |
- St. Louis Federal Reserve Economic Data - unemployment rate, monthly data; seasonally adjusted
S&P/Case-Shiller National
House Price Index
143.7 (Jun-03) | 145 | |||
+30% | ||||
100 | 110.6 (Apr-00) | |||
1/1/99 | 2/23/00 | 4/16/01 | 6/8/02 | 7/31/03 |
- St. Louis Federal Reserve Economic Data - S&P / Case-Shiller U.S. National Home Price Index, monthly, not seasonally adjusted; indexed to 1/1/99
Single-family residential
mortgage delinquency rate
1.97% (Apr-00) | ||||
2.0% | ||||
-12% | ||||
1.7% | ||||
1.74% (Jul-03) | ||||
1/1/99 | 2/23/00 | 4/16/01 | 6/8/02 | 7/31/03 |
- St. Louis Federal Reserve Economic Data - delinquency rate on single family residential mortgages (all commercial banks); seasonally adjusted
61
Perspective on Ultimate COVID-Related Loss Exposure
Highest quality insured
portfolio
Nationwide house price appreciation provides equity buffer to potential losses
Forbearance programs and foreclosure moratoriums extending "cure runway"
Comprehensive reinsurance
program absorbs loss
- High-qualityportfolio and encouraging credit trends thus far - modest level of default experience and rising cure activity
- Forbearance, foreclosure and other assistance programs providing significant time for borrowers to find their footing and shallow runway for them to resume timely payment
- Resiliency of the housing market and accelerating house price appreciation nationwide provide a dramatic buffer from both frequency and severity of loss
-
Our ultimate loss exposure is driven by foreclosure activity
- claims are paid when title is taken, not upon a default - Altogether, we expect COVID to be far more of a default event than a claims event for National MI
62
Financial Review
Adam Pollitzer
Executive Vice President & Chief Financial Officer
© 2017 Copyright. NMI Holdings Inc.
Delivering Financial Success
Standout Success to Date
Balance Sheet Strength and Earnings Resiliency through COVID
Significant Long-term
Opportunity Remains Intact
64
Financial "Sweet Spot"
High-Growth,High-Returns,
Low Volatility
Navigating Through Stress
Delivering Resilient
Financial Performance
Long-Term Opportunity
Positioning to Achieve Strong
Mid-Teen Returns
Summary Financial Snapshot
Q1'20 LTM | Q3'20 | ||
✓ NIW | $49.5 billion | $18.5 billion | |
✓ IIF | $98.5 billion | $104.5 billion | |
✓ Revenue | $405.3 million | $107.8 million | |
✓ Adjusted net income* | $196.7 million | $40.4 million | |
✓ Adjusted return on equity* | 22.8% | 12.6% | |
✓ Book value | $1.0 billion | $1.3 billion | |
✓ Book value per share | $14.15 | $15.42 | |
✓ Loss ratio | 4.2% | 15.9% |
* Adjusted net income and adjusted return on equity are non-GAAP measures. For a reconciliation to the most comparable GAAP measures, refer to the appendix or the company website at www.nationalmi.com
65
COVID-19 Financial Impact
- COVID is impacting our financial performance - introducing certain direct and derivative "costs"
Impact clears | ||
Credit performance | post-COVID? | |
✓ | ||
◼ Driving increase in forbearance-related default experience | ||
◼ GAAP claims expense elevated compared what we otherwise would have incurred | ✓ | |
Record low interest rates / mortgage note rates |
- Persistency - acceleration in portfolio turnover impacts premium revenue
- Investment yield - declining new money rates average down portfolio yield
- Operating expenses - portfolio turnover drives accelerated DAC recognition
Capital needs / costs
- Capital needs increased immediately to support record NIW production
- Cost of capital (debt, ILN and quota share reinsurance) increased
- Leverage profile evolved with increased equity funding contribution
- ILN lockout introduces "negative carry" on higher trust balances
✓
✓
✓
✓
✓
✓
✓
- While some of these "costs" will stay with us going forward, many will begin to clear quickly and allow performance to more fully rebound
66
Continued Performance in the
Face of COVID Stress
Pre-COVID | COVID stress | Post-COVID | |||
Growth, Profitability | Capital Strength, | Positioning | |||
and Returns | Earnings Resiliency | for Success | |||
Strong | |||||
Returns | |||||
23.3% | 22.1% | ||||
23.7% | |||||
ROE | 21.2% | $53mm | $53mm | 12.6% | |
21.2% | $50mm | ||||
10.7% |
$39mm | $41mm | $40mm |
$30mm |
Q1'19 | Q2'19 | Q3'19 | Q4'19 | Q1'20 | Q2'20 | Q3'20 | Post-COVID |
Adjusted Net Income & ROE
Note: "Post-COVID" markers are not a forecast - for illustrative purposes only. Adjusted net income and adjusted return on equity are non-GAAP measures. For a reconciliation to the most comparable GAAP measures, refer to the appendix or the company website at www.nationalmi.com.
67
Effectively Navigating through COVID Stress
New Business | In-force Portfolio | |
Fully-deployed credit risk framework
Record volume and value
pre-COVID
Driving IIF growth despite heightened
Reinsurance largely ring-fences tail
refinancing activity
exposure
Positioning National MI for financial outperformance post-COVID
Capital and reinsurance activity | COVID driving lasting change in | |
provide funding and risk protection | operating needs and expense footprint | |
Conservative investment and | Continued focus on efficiency and long- | |
reserving posture | term value from TCS engagement | |
Balance Sheet | Expenses | |
68
Building Significant Incremental
Embedded Value
Responsibly Scaling New Business Production and Building Embedded Value
Primary NIW, $ billions
$54.9bnPricing
+10% nominal rate increase
$40.2bn | Credit quality | |
10bps layered risk concentration* | ||
$27.2bn | ||
$20.0bn | Capital | |
5.35% PMIERs charge* | ||
"Stickiness"
3.16% average note rate*
9/30/17 LTM | 9/30/18 LTM | 9/30/19 LTM | 9/30/20 LTM |
* NIW production from 4/1/20-10/31/20
69
Strong Balance Sheet
- Strong liquidity and capital position
-
Comprehensive reinsurance program
protects balance sheet - Conservative investment portfolio in
substantial gain position - Capital efforts provide significant
capacity to pursue new business growth
Capital Structure
$millions
$1,701 | |||
$393 | |||
$1,076 | |||
$849 | $146 | $1,308 | |
$147 | $930 | ||
$701 | |||
12/31/2018 | 12/31/2019 | 9/30/2020 | |
GAAP | Equity | Debt | |
17% | 14% | 23% | |
leverage |
$ millions | 12/31/18 | 12/31/19 | PF 9/30/201 |
Available assets | $734 | $1,016 | $1,672 |
Required assets | 511 | 773 | 791 |
PMIERs excess | $223 | $243 | $881 |
PMIERs sufficiency | 144% | 131% | 211% |
1 Pro Forma for ILN of $242 million aggregate principal amount of 10-year mortgage insurance-linked notes issued by Oaktown Re V Ltd. on October 29th providing an estimated $200mm of PMIERs credit.
70
Funding Capacity and Risk Protection - Capital and Reinsurance Activity
- Raised ~$1.4 billion across six capital markets and reinsurance transactions
- Secured reinsurance protection on nearly all risk ever written - ring-fencingpre-COVID exposure
- Dramatically expanded our funding runway - 211% PMIERs sufficiency at 9/30/201
- Proven durability of our preferred funding markets
- Seeing a rapid normalization of structures, terms and price in the capital and reinsurance markets
-
Meaningfully compressed our
ILN "cycle time"
2020 activity
Revolving credit facility - refinanced and upsized
$230 million common equity
$400 million high yield notes
$322 million ILN 4.0 (Oaktown Re IV)
$242 million ILN 5.0 (Oaktown Re V)
2020 quota share reinsurance (21% cession)
2021 expectations
Quota share renewal
ILNs 6.0 & 7.0
1 Pro Forma for ILN of $242 million aggregate principal amount of 10-year mortgage insurance-linked notes issued by Oaktown Re V Ltd. on October 29th providing an estimated $200mm of PMIERs credit.
71
High Quality Investment Portfolio
- Cash and invested assets = $1.9 billion at 9/30/20
- $1.7 billion actively managed fixed income portfolio and $194 million cash/equivalents
- $64.8 million aggregate unrealized gain
- Investment strategy prioritizes capital preservation alongside income generation
- 100% fixed income portfolio
- 100% investment grade holdings - average A+ across portfolio
-
Highly diversified by issuer, sector and asset type
- largest single issuer concentration = 1.6% - Highly liquid - all level 1 & 2 assets
- Weighted average duration = 4.53 years
- Limited exposure to individual issuers, sectors or asset classes in COVID-19 risk categories1
Portfolio by asset class
Cash & cash | U.S. treasury |
2% | |
equivalents | |
10% | |
ABS | |
7% | |
Municipal debt | |
17% |
Corporate debt
63%
Portfolio ratings at fair value
-
AAA
18%14%
AA
23%
A
44%
1 Potential COVID-19 risk categories include airline and aircraft ABS, retail and REIT, oil & energy, consumer credit ABS and rental car ABS; NMI has no gaming, lodging, auto & related, metals & mining, CLO, CMBS or RMBS holdings. Note: Amounts presented on charts may not foot due to rounding.
72
Loss Reserve Snapshot
- Carry reserves based on individual assessment of each defaulted loan
- Utilize econometric model that considers borrower and loan risk attributes, as well as key macro factors
- Aimed to establish conservative reserves given unprecedented nature of COVID stress
- Assume national decline in house prices through 2021
- Have not released reserves held on COVID-related cures (as yet)
- Have not accounted for positive impact of forbearance for pre- COVID defaults (~50% accessed)
COVID stress driving growth in default
population and increased reserving need
Gross claims and claims expense reserves
(for primary insurance)
$87.2 million
$69.9 million
$29.5 million
$23.8 million
12/31/19 3/31/20 6/30/20 9/30/20
73
Post-COVID Loss Perspective
Opportunity for continued credit strength over long-term
Highest quality new business
Highest quality
new business
Q1'20 NIW | Q3'20 NIW |
Nationwide HPA
equitizing risk
NAR, median price of existing single-family home
ever originated
10.3%
4.9%
6.4%
Q3'20 vs. Q3'19
14% 13% 11% 11%
Most rigorous underwriting environment ever seen
1.9% 0.7%
3.2%
Accelerating HPA quickly equitizing exposure on new policies
Turnover is reducing average age of in-force policies
New borrowers demonstrating performance through stress
<680 FICO > 45% DTI | 97% LTV |
Turnover reducing age
of in-force portfolio
Weighted average age of IIF, months
19.8 mos
18.9 mos | 18.9 mos |
12/31/18 12/31/19 9/30/20
74
West | Northeast Southwest Midwest |
Strong performance
on post-COVID policies
Forbearance utilization and default rate, NIW on or after 4/1/20
+108,000
276
New policies | Default count |
Focus on Efficiency and Expense Management
- Smallest headcount and expense base in industry (by wide margin)
- TCS (Tata Consultancy) IT partnership provides long-term expense benefits
- COVID changing the way we operate and positively impacting expense outlook
- Increased recognition of DAC expenses given portfolio turnover
Number of employees1 | 1,400 | ||||||||
980 | |||||||||
724 | |||||||||
383 | |||||||||
261 | NA | ||||||||
NMIH ESNT MTG ACGL | RDN GNW | ||||||||
NMI adjusted expense ratio3 |
73% |
32% |
LTM operating expenses2$300
($ millions)
$246
$216
$193
$159
$125
NMIH ESNT MTG GNW RDN ACGL
1 Employee count as of most recent available reporting period; NMIH as of 9/30/20; ESNT as of 9/30/20; MTG and RDN as of 12/31/19 (MTG excludes "on call" employees, RDN includes all employees - MI only employee base not disclosed); ACGL represents Mortgage Segment employees as of 2/21/18 per 2017 10K. 2 NMIH presented on adjusted basis; ESNT and MTG total company as reported; RDN MI segment as reported - including RDN's allocation of corporate items; ACGL and GNW MI segment as reported - excluding corporate allocation . 3 Presented on an adjusted basis which is a non-GAAP measure. For a reconciliation of non-GAAP measures to the most comparable GAAP measures are available in the addendix, and on the company's website at www.nationlmi.com.
75
Post-COVID Opportunity -
Rebounding Performance and Returns
"Decomposition" of Adjusted Return on Equity
2019 | 3Q'20 | Long-term outlook | |
Underwriting contribution | |||
Net premiums earned | $345.0mm | $98.8mm | |
Adjusted combined ratio | 39.6% | 48.0% | 40.0-50.0% |
Underwriting leverage (NPE / equity) | 0.42x | 0.31x | 0.35-0.40x |
Pre-tax underwriting RoE contribution | 25.5% | 16.0% | 17.5-25.0% |
Asset contribution | |||
Net investment income | $30.9mm | $8.3mm | |
Net investment yield | 3.0% | 2.2% | 1.5-2.0% |
Asset leverage (invested assets / equity) | 1.26x | 1.18x | 1.20-1.30x |
Pre-tax investment RoE contribution | 3.8% | 2.6% | 2.0-2.5% |
Financing cost | |||
Interest expense | $12.1mm | $7.8mm | |
Cost of debt (all in GAAP) | 8.1% | 7.8% | 7.8% |
Financial leverage (debt / equity) | 18.2% | 31.2% | 15.0-20.0% |
Pre-tax financing RoE impact | -1.5% | -2.4% | -1.0-1.5% |
Adjusted pre-tax return on equity | 27.9% | 16.2% | +20.0% |
Effective tax rate | 19.8% | 22.4% | 23.0% |
Adjusted return on equity | 22.4% | 12.6% | +15.0% |
Note: Long-term outlook for illustration purposes; does not represent a forecast. Adjusted combined ratio, pre-tax return on equity and return on equity are non-GAAP measures. For a reconciliation to the most comparable GAAP measures, refer to the appendix or the company website at www.nationalmi.com.
76
Delivering Financial Success
Standout Success to Date
Balance Sheet Strength and Earnings Resiliency through COVID
Significant Long-term
Opportunity Remains Intact
77
Financial "Sweet Spot"
High-Growth,High-Returns,
Low Volatility
Navigating Through Stress
Delivering Resilient
Financial Performance
Long-Term Opportunity
Positioning to Achieve Strong
Mid-Teen Returns
Concluding Remarks
Delivering significant value for shareholders and securing future
outperformance across all market cycles
✓ | ✓ | ✓ | ✓ |
Significant | Immediate | Housing | Well |
success to | and decisive | market | positioned to |
date provides | action in face | resiliency | survive and |
strong | of the COVID | presents | thrive through |
foundation | crisis | enormous | COVID and |
opportunity | beyond |
78
Questions & Answers
© 2017 Copyright. NMI Holdings Inc.
Appendix
© 2017 Copyright. NMI Holdings Inc.
Insured Portfolio Snapshot
$104.5 billion In-Force Portfolio
Current Portfolio Composition | Portfolio Metrics by Vintage as of 9/30/20 |
Weighted Average Composition | 9/30/20 IIF |
FICO | 754 |
LTV | 91.6% |
DTI | 34.9% |
Policies | Current | WA | WA | WA | ||||
ever in | policies in | FICO | original | current | # loans in | # claims | Delinquency | |
Vintage | force | force | score1 | LTV1 | LTV1 | default | paid | rate2 |
2013 | 655 | 82 | 752 | 91.3% | 59.3% | 4 | 1 | 4.88% |
2014 | 14,786 | 3,172 | 746 | 92.5% | 61.9% | 139 | 48 | 4.38% |
% of | |
In-Focus Risk Segments | 9/30/20 RIF |
95.01-97.0% LTV | 8.7% |
620-659 FICO | 1.1% |
>45% DTI | 8.9% |
ARMS with Reset < 5 years | 0.0% |
Cash-Out Refinance | 0.0% |
Second Home | 2.8% |
Investor-Owned Home | 0.2% |
2015 | 52,548 | 17,706 | 752 | 92.5% | 65.8% | 674 | 108 | 3.81% |
2016 | 83,626 | 36,731 | 756 | 92.6% | 69.8% | 1,609 | 116 | 4.38% |
2017 | 85,897 | 44,498 | 746 | 93.0% | 75.6% | 2,584 | 79 | 5.81% |
2018 | 104,043 | 52,967 | 742 | 93.2% | 81.1% | 3,246 | 49 | 6.13% |
2019 | 148,423 | 105,991 | 751 | 92.7% | 86.2% | 4,327 | 4 | 4.08% |
2020 | 125,639 | 120,752 | 761 | 91.8% | 89.8% | 1,182 | 0 | 0.98% |
Total | 615,617 | 381,899 | 754 | 92.4% | 83.9% | 13,765 | 405 | 3.60% |
- Weighted average shown on a RIF basis and Current LTV includes amortization and assumed home price appreciation per Corelogic
- Ratio of loans in default to current policies in force
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Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted operating expense, adjusted expense ratio, adjusted combined ratio, adjusted pre-tax income, adjusted net income, adjusted pre-taxreturn-on- equity, adjusted effective tax rate and adjusted return-on-equity enhances the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present.
Adjusted operating expense is defined as GAAP operating expense, excluding the periodic costs recorded to GAAP operating expense incurred in connection with capital markets transactions and discrete, non- recurring and non-operating items in the periods in which such items are incurred.
Adjusted operating expense ratio is defined as GAAP operating expense, excluding the periodic costs recorded to GAAP operating expense incurred in connection with capital markets transactions and discrete, non-recurring and non-operating items in the periods in which such items are incurred divided by net premiums earned during such periods.
Adjusted combined ratio is defined as the total of GAAP underwriting and operating expenses, excluding the pre-tax effects of periodic costs incurred in connection with capital markets transactions and insurance claims and claims expenses, divided by net premiums earned.
Adjusted pre-taxincome is defined as GAAP income before tax, excluding the effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred.
Adjusted net income is defined as GAAP net income excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods.
Adjusted pre-tax return-on-equity is calculated by dividing adjusted pre-tax income on an annualized basis by the average shareholders' equity for the period.
Adjusted return-on-equity is calculated by dividing adjusted net income on an annualized basis by the average shareholders' equity for the period.
Adjusted effective tax rate is calculated by diving GAAP income tax expense adjusted for the tax-effects of net realized gains or losses from our investment portfolio, periodic costs incurred in connection with capital market transaction and discrete, non-recurring and non-operating items in the periods in which such items are incurred, using the applicable federal statutory tax rate for the respective periods by adjusted pre-tax income for the period.
Although adjusted operating expense, adjusted expense ratio, adjusted combined ratio, adjusted pre-tax income, adjusted net income, adjusted pre-taxreturn-on-equity, adjusted effective tax rate and adjusted return-on-equity exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below.
- Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability.
- Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles.
- Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results.
- Infrequent or unusual non-operating items. Items that are the result of unforeseen or uncommon events, which occur separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect our current period operating results
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Financial Highlights and
Non-GAAP Reconciliation
Non-GAAP reconciliation | |||||||||||||||||||||||||
Second | Fourth | Second | Second | ||||||||||||||||||||||
First Quarter | Quarter | Third Quarter | Quarter | First Quarter | Quarter | Third Quarter | Fourth Quarter | First Quarter | Quarter | Third Quarter | |||||||||||||||
($ in thousands, except per share values) | 3/31/2018 | 6/30/2018 | 9/30/2018 | 12/31/2018 | 3/31/2019 | 6/30/2019 | 9/30/2019 | 12/31/2019 | 3/31/2020 | 6/30/2020 | 9/30/2020 | ||||||||||||||
As Reported: | |||||||||||||||||||||||||
Revenues | |||||||||||||||||||||||||
Net premiums earned | $ | 54,914 | $ | 61,615 | $ | 65,407 | $ | 69,261 | $ | 73,868 | $ | 83,249 | $ | 92,381 | $ | 95,517 | $ | 98,717 | $ | 98,944 | $ | 98,802 | |||
Net Investment Income | 4,574 | 5,735 | 6,277 | 6,952 | 7,383 | 7,629 | 7,882 | 7,962 | 8,104 | 7,070 | 8,337 | ||||||||||||||
Net realized investment gains (losses) | - | 59 | (8) | 6 | (187) | (113) | 81 | 264 | (72) | 711 | (4) | ||||||||||||||
Other revenues | 64 | 44 | 85 | 40 | 42 | 415 | 1,244 | 1,154 | 900 | 1,223 | 648 | ||||||||||||||
Total revenues | $ | 59,552 | $ | 67,453 | $ | 71,761 | $ | 76,259 | $ | 81,106 | $ | 91,180 | $ | 101,588 | $ | 104,897 | $ | 107,649 | $ | 107,948 | $ | 107,783 | |||
Expenses | |||||||||||||||||||||||||
Insurance claims and claims expenses | $ | 1,569 | $ | 643 | $ | 1,099 | $ | 2,141 | $ | 2,743 | $ | 2,923 | $ | 2,572 | $ | 4,269 | $ | 5,697 | $ | 34,334 | $ | 15,667 | |||
Underwriting and operating expenses | 28,346 | 28,958 | 30,323 | 29,339 | 30,800 | 32,190 | 32,335 | 31,296 | 32,277 | 30,370 | 33,969 | ||||||||||||||
Service expenses | 107 | 62 | 56 | 45 | 49 | 353 | 909 | 937 | 734 | 1,090 | 557 | ||||||||||||||
Interest expense | 3,419 | 5,560 | 2,972 | 3,028 | 3,061 | 3,071 | 2,979 | 2,974 | 2,744 | 5,941 | 7,796 | ||||||||||||||
Loss (Gain) from change in fair value of warrant liability | $ | (420) | $ | (109) | $ | 5,464 | $ | (3,538) | $ | 5,479 | $ | 1,685 | $ | (1,139) | $ | 2,632 | $ | (5,959) | $ | 1,236 | $ | 437 | |||
Total expenses | $ | 33,021 | $ | 35,114 | $ | 39,914 | $ | 31,015 | $ | 42,132 | $ | 40,222 | $ | 37,656 | $ | 42,108 | $ | 35,493 | $ | 72,971 | $ | 58,426 | |||
Income before income taxes | $ | 26,531 | $ | 32,339 | $ | 31,847 | $ | 45,244 | $ | 38,974 | $ | 50,958 | $ | 63,932 | $ | 62,789 | $ | 72,156 | $ | 34,977 | $ | 49,357 | |||
Income tax expense (benefit) | 4,176 | 7,098 | 7,036 | 9,724 | 6,075 | 11,858 | 14,169 | 12,594 | 13,885 | 8,129 | 11,178 | ||||||||||||||
Net income | $ | 22,355 | $ | 25,241 | $ | 24,811 | $ | 35,520 | $ | 32,899 | $ | 39,100 | $ | 49,763 | $ | 50,195 | $ | 58,271 | $ | 26,848 | $ | 38,179 | |||
Adjustments: | |||||||||||||||||||||||||
Loss (Gain) from change in fair value of warrant liability | $ | (420) | $ | (109) | $ | 5,464 | $ | (3,538) | $ | 5,479 | $ | 1,685 | $ | (1,139) | $ | 2,632 | $ | (5,959) | $ | 1,236 | $ | 437 | |||
Capital markets transaction costs | - | 2,921 | 1,871 | 102 | - | 664 | 1,689 | - | 474 | 2,790 | 2,254 | ||||||||||||||
Net realized investment (gains) losses | - | (59) | 8 | (6) | 187 | 113 | (81) | (264) | 72 | (711) | 4 | ||||||||||||||
Adjusted Income before income taxes | $ | 26,111 | $ | 35,092 | $ | 39,190 | $ | 41,802 | $ | 44,640 | $ | 53,420 | $ | 64,401 | $ | 65,157 | $ | 66,743 | $ | 38,292 | $ | 52,052 | |||
Income tax expense (benefit) on adjustments | $ | (88) | $ | 578 | $ | 395 | $ | 20 | $ | 39 | $ | 163 | $ | 338 | $ | (55) | $ | 115 | $ | 437 | $ | 474 | |||
Deferred tax (expense) benefit adjustments | - | - | - | - | - | - | - | - | |||||||||||||||||
Adjusted Net income | $ | 22,023 | $ | 27,416 | $ | 31,759 | $ | 32,058 | $ | 38,526 | $ | 41,399 | $ | 49,894 | $ | 52,618 | $ | 52,743 | $ | 29,726 | $ | 40,400 | |||
Weighted average diluted shares outstanding | 65,697 | 68,616 | 68,844 | 69,013 | 68,996 | 69,590 | 70,137 | 70,276 | 70,401 | 74,174 | 85,599 | ||||||||||||||
Dilutive effect of non-vested shares and warrants | - | - | - | - | - | ||||||||||||||||||||
Weighted average diluted shares outstanding - Adjusted | 65,697 | 68,616 | 68,844 | 69,013 | 68,996 | 69,590 | 70,137 | 70,276 | 70,401 | 74,174 | 85,599 | ||||||||||||||
Diluted EPS - Reported | $ | 0.34 | $ | 0.37 | $ | 0.36 | $ | 0.46 | $ | 0.48 | $ | 0.56 | $ | 0.69 | $ | 0.71 | $ | 0.74 | $ | 0.36 | $ | 0.45 | |||
Diluted EPS - Adjusted | $ | 0.34 | $ | 0.40 | $ | 0.46 | $ | 0.46 | $ | 0.56 | $ | 0.59 | $ | 0.71 | $ | 0.75 | $ | 0.75 | $ | 0.40 | $ | 0.47 | |||
Shareholders' equity | $ | 601,944 | $ | 629,642 | $ | 660,493 | $ | 701,500 | $ | 751,881 | $ | 812,379 | $ | 873,487 | $ | 930,420 | $ | 974,890 | $ | 1,257,037 | $ | 1,307,556 | |||
Return on equity - Reported | 16.1% | 16.4% | 15.4% | 20.9% | 18.1% | 20.0% | 23.6% | 22.3% | 24.5% | 9.6% | 11.9% | ||||||||||||||
Return on equity - Adjusted | 15.9% | 17.8% | 19.7% | 18.8% | 21.2% | 21.2% | 23.7% | 23.3% | 22.1% | 10.7% | 12.6% | ||||||||||||||
Expense ratio - Reported | 51.6% | 47.0% | 46.4% | 42.4% | 41.7% | 38.7% | 35.0% | 32.8% | 32.7% | 30.7% | 34.4% | ||||||||||||||
Expense ratio - Adjusted | 51.6% | 45.9% | 43.5% | 42.2% | 41.7% | 37.9% | 33.2% | 32.8% | 32.2% | 30.5% | 32.1% | ||||||||||||||
Loss ratio - Reported and Adjusted | 2.9% | 1.0% | 1.7% | 3.1% | 3.7% | 3.5% | 2.8% | 4.5% | 5.8% | 34.7% | 15.9% | ||||||||||||||
Combined ratio - Reported | # | 54.5% | 48.0% | 48.0% | 45.5% | 45.4% | 42.2% | 37.8% | 37.2% | 38.5% | 65.4% | 50.2% | |||||||||||||
Combined ratio - Adjusted | # | 54.5% | 46.9% | 45.2% | 45.3% | 45.4% | 41.4% | 36.0% | 37.2% | 38.0% | 65.2% | 48.0% |
83
Cautionary Note Regarding
Forward-Looking Statements
Certain statements contained in this presentation or any other written or oral statements made by or on behalf of the Company in connection therewith may constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the U.S. Private Securities Litigation Reform Act of 1995 (the "PSLRA"). The PSLRA provides a "safe harbor" for any forward-looking statements. All statements other than statements of historical fact included in or incorporated by reference in this release are forward-looking statements, including any statements about our expectations, outlook, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "assume," "potential," "should," "will," "estimate," "plan," "project," "continuing," "ongoing," "expect," "intend" and similar words or phrases. All forward-looking statements are only predictions and involve estimates, known and unknown risks, assumptions and uncertainties that may turn out to be inaccurate and could cause actual results to differ materially from those expressed in them. Many risks and uncertainties are inherent in our industry and markets. Others are more specific to our business and operations. Important factors that could cause actual events or results to differ materially from those indicated in such statements include, but are not limited to: uncertainty relating to the coronavirus ("COVID-19") pandemic and the measures taken by governmental authorities and other third parties to combat it, including their impact on the global economy, the U.S. housing, real estate, housing finance and mortgage insurance markets, and the Company's business, operations and personnel, changes in the business practices of Fannie Mae and Freddie Mac (collectively, the "GSEs"), including decisions that have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement generally, or with first time homebuyers or on very high loan-to-value mortgages; our ability to remain an eligible mortgage insurer under the private mortgage insurer eligibility requirements ("PMIERs") and other requirements imposed by the GSEs, which they may change at any time; retention of our existing certificates of authority in each state and the District of Columbia ("D.C.") and our ability to remain a mortgage insurer in good standing in each state and D.C.; our future profitability, liquidity and capital resources; actions of existing competitors, including other private mortgage insurers and government mortgage insurers, such as the Federal Housing Administration, U.S. Department of Agriculture's Rural Housing Service and the U.S. Department of Veterans Affairs, and potential market entry by new competitors or consolidation of existing competitors; developments in the world's financial and capital markets and our access to such markets, including reinsurance; adoption of new or changes to existing laws and regulations that impact our business or financial condition directly or the mortgage insurance industry generally or their enforcement and implementation by regulators, including any action by the Consumer Financial Protection Bureau to address the planned expiration of the "QM Patch" under the Dodd-Frank Act Ability to Repay/Qualified Mortgage Rule; legislative or regulatory changes to the GSEs' role in the secondary mortgage market or other changes that could affect the residential mortgage industry generally or mortgage insurance industry in particular; potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries; changes in general economic, market and political conditions and policies, interest rates, inflation and investment results or other conditions that affect the housing market or the markets for home mortgages or mortgage insurance; our ability to successfully execute and implement our capital plans, including our ability to access the capital, credit and reinsurance markets and to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us, the GSEs and our regulators; our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low-down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry; our ability to attract and retain a diverse customer base, including the largest mortgage originators; failure of risk management or pricing or investment strategies; emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience; potential adverse impacts arising from natural disasters, including, with respect to affected areas, a decline in new business, adverse effects on home prices, and an increase in notices of default on insured mortgages; the inability of our counterparties, including third party reinsurers, to meet their obligations to us; failure to maintain, improve and continue to develop necessary information technology systems or the failure of technology providers to perform; and, our ability to recruit, train and retain key personnel. These risks and uncertainties also include, but are not limited to, those set forth under the heading "Risk Factors" detailed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2019 and in Part II, Item 1A of our Quarterly Reports on Form 10-Q for the quarters ended June 30, 2020 and September 30, 2020, as subsequently updated through other reports we file with the SEC. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by these cautionary statements. We caution you not to place undue reliance on any forward-looking statement, which speaks only as of the date on which it is made, and we undertake no obligation to publicly update or revise any forward-looking statement to reflect new information, future events or circumstances that occur after the date on which the statement is made or to reflect the occurrence of unanticipated events except as required by law.
84
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NMI Holdings Inc. published this content on 19 November 2020 and is solely responsible for the information contained therein. Distributed by Public, unedited and unaltered, on 19 November 2020 17:24:07 UTC