NMI Holdings' latest earnings call was a symphony of positive news. Record profits, growing book value, industry-leading credit performance, all set against a resilient housing market. It was a call designed to soothe investor anxieties and inspire confidence in the company's future. Yet, amidst the fanfare of success, one critical element was conspicuously absent: refinancing.

While Adam Pollitzer, NMI's President and CEO, confidently predicted a strong 2024 for the private MI market, mirroring the estimated $285 billion in new insurance written in 2023, his optimism was almost entirely predicated on purchase activity. The elephant in the room, the potential resurgence of refinancing, went virtually unmentioned.

This silence speaks volumes. It suggests that NMI, despite the recent dip in interest rates, is not banking on a refinancing wave to bolster its future growth. This seemingly conservative approach might puzzle some analysts, but a closer look at the company's strategy reveals a deeper, and potentially more lucrative, plan.

NMI is laser-focused on building a high-quality, high-performing insured portfolio. This focus is evident in their proactive risk management strategy, epitomized by their Rate GPS technology. Rate GPS allows NMI to meticulously control the flow of risk into their portfolio, adjusting their appetite for certain loan types based on real-time market dynamics.

This strategy was exemplified by their handling of the 97 LTV loans. As house prices dipped in late 2022 and early 2023, NMI judiciously curtailed the flow of these loans, concerned about the uncertain trajectory of the housing market.

As the market stabilized and prices began to climb, NMI gradually increased their exposure to 97 LTV loans, yet still maintained a lower concentration than the rest of the MI market (11% versus 15%). This measured approach speaks to their commitment to a high-quality insured book, prioritizing long-term stability over short-term volume gains.

This dedication to quality extends to their reinsurance strategy as well. While acknowledging the value of the ILN market, NMI has primarily favored traditional reinsurance agreements, particularly Excess of Loss (XOL) contracts. These XOL deals, as Adam Pollitzer noted, offer the advantage of securing forward flow coverage, ensuring comprehensive risk protection for their 2024 production.

This forward-looking approach, coupled with their consistently strong financial performance, has earned NMI significant upgrades from all three major rating agencies. This strengthened counterparty profile, in turn, allows them to negotiate even more favorable terms in the reinsurance market, creating a virtuous cycle of enhanced risk management and financial stability.

But the real brilliance of NMI's strategy lies in its subtle recognition of the potential pitfalls of a refinancing boom. While refinancing can generate significant volume in the short term, it often comes at the expense of portfolio quality.

Refinanced loans, particularly those driven by rate-chasing borrowers, tend to have a higher risk profile, as borrowers are often motivated by lower monthly payments rather than long-term financial stability. This dynamic can lead to a faster runoff of the insured portfolio, eroding the embedded value painstakingly built over time.

NMI's silence on refinancing, therefore, should not be interpreted as a lack of awareness or opportunity. Rather, it signifies a strategic decision to prioritize portfolio quality and long-term value creation.

Instead of relying on a potential refinancing surge, NMI is betting on the continued strength of the purchase market, driven by underlying demographic trends and a persistent supply-demand imbalance in the housing market. This strategy, while seemingly conservative, could ultimately prove to be the most profitable, allowing NMI to build a resilient, high-performing insured portfolio that will generate consistent returns for years to come.

This strategic foresight sets NMI apart. Their focus on quality, their proactive risk management, and their calculated silence on refinancing all point to a company that is not just reacting to market conditions, but actively shaping its future. This quiet confidence, rooted in a deep understanding of the mortgage insurance market, suggests that NMI is well-positioned to not just weather the coming storms, but to emerge stronger and more profitable than ever before.

Persistency Trends and 97 LTV Loan Concentration

The following chart illustrates NMI's persistency trends, which are expected to gradually decline from their peak, and their intentionally lower concentration of 97 LTV loans compared to the broader market, reflecting a focus on quality over volume.

Hypothesis and Numbers:

Persistency Trends: NMI expects persistency to remain above historical trends but anticipates a gradual decline from the current peak of 86.1% throughout 2024. This suggests that they are not relying on refinance activity to keep persistency artificially elevated.

97 LTV Concentration: NMI intentionally under-indexes the broader MI market in their concentration of 97 LTV loans, suggesting a preference for higher-quality loans with lower default risk.

Reinsurance Costs: Despite entering into new forward flow reinsurance agreements, NMI anticipates a relatively flat impact on reinsurance costs, suggesting that they are achieving favorable terms in the reinsurance market due to their strong credit profile and disciplined risk management.

Expense Ratio: NMI's target expense ratio remains in the low to mid-20% range, despite acknowledging the need to invest in people and systems. This suggests that they are confident in their ability to achieve significant operating leverage and maintain their industry-leading expense efficiency.

By focusing on these key metrics, we can see how NMI's subtle strategy, veiled beneath the positive headlines of their earnings call, sets them up for continued success in a potentially volatile mortgage market. Their focus on quality, not quantity, could prove to be the hidden gem that unlocks significant shareholder value in the years to come.

"Fun Fact: The mortgage insurance industry plays a crucial role in enabling homeownership for millions of Americans. By mitigating lender risk, MI allows borrowers to purchase homes with down payments as low as 3%, making the dream of owning a home a reality for many who wouldn't otherwise qualify."