NMI Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. NMI provides private mortgage insurance through NMIC and outsourced loan-review services through NMIS. Financial statements are unaudited and consolidated.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Total revenue | $142.7 million | $132.2 million | $279.5 million | $259.7 million |
| Net premiums earned | $126.0 million | $120.9 million | $247.7 million | $237.4 million |
| Net investment income | $16.5 million | $10.9 million | $31.4 million | $21.1 million |
| Net income | $80.3 million | $75.4 million | $154.7 million | $143.1 million |
| Diluted EPS | $0.95 | $0.86 | $1.83 | $1.63 |
| Combined ratio | 24.1% | 22.9% | 25.4% | 25.3% |
Q2 revenue grew about 8% and net income about 6% year over year; for the first half, revenue rose about 8% and net income about 8%. Higher premiums earned and investment income, plus lower underwriting and operating expenses, supported earnings. The expense ratio fell to 21.8% in Q2 and 21.5% for the half, while the loss ratio rose to 2.3% and 3.9%, respectively. Prior-year reserve releases partly offset new claim reserves. Investment income increased with a larger invested asset base and higher reinvestment yields.
Q2 net premiums written declined 1% year over year to $117.1 million; first-half written premiums fell 2% to $230.1 million. New insurance written was $11.5 billion in Q2 and $20.2 billion in the first half, down from $16.6 billion and $30.8 billion, primarily because the overall mortgage-insurance market contracted. Primary insurance-in-force grew 13% year over year to $191.3 billion; annual persistency improved to 86% from 76%, reflecting slower refinancing.
Cash flow, balance sheet and capital
- First-half operating cash flow was $191.7 million, versus $173.8 million a year earlier. Investing activities used $119.5 million and financing activities used $43.4 million, principally reflecting investment purchases and share repurchases. Cash and restricted cash ended at $73.3 million.
- At June 30, total assets were $2.69 billion, shareholders’ equity was $1.75 billion and total liabilities were $940.9 million. Cash and investments were approximately $2.31 billion; NMIH, the holding company, held $138.9 million of cash and investments.
- Debt had a carrying value of $396.8 million against $400 million principal of senior secured notes, bearing 7.375% and maturing June 1, 2025. The $250 million revolving facility was undrawn; the company reported compliance with its covenants.
- NMIC reported $2.491 billion of PMIERs available assets against $1.318 billion required, an excess of approximately $1.173 billion. Its statutory capital was $2.341 billion and risk-to-capital ratio was 11.3:1.
- The investment portfolio had $234.6 million of gross unrealized losses, including $224.9 million on securities held in loss positions for at least 12 months. Management attributed the losses mainly to interest rates and credit spreads, reported no investment-security credit-loss allowance, and stated it did not expect to be required to sell impaired securities before recovery.
Changes, outlook and risks
- Insurance claims and claim expenses were $2.9 million in Q2, compared with a $3.0 million benefit in Q2 2022; first-half expense was $9.6 million, compared with a $3.7 million benefit. The June 30 gross claims reserve was $110.4 million, up from $99.8 million at year-end. Management cited new defaults and higher reserves on seasoned delinquencies, partly offset by favorable prior-year development of $35.3 million for the first half.
- There were 4,349 primary loans in default, a 0.71% default rate, compared with 4,271 and 0.77% a year earlier. Management cautioned that inflation, elevated interest and mortgage rates, weaker housing demand, home-price declines, or sustained unemployment could reduce new business and increase defaults and claims.
- The filing gives no numerical earnings or production guidance. Management described its strategy as disciplined underwriting and pricing, customer growth, and use of reinsurance; it cautioned that interim results may not indicate full-year performance.
- Reinsurance is material to risk management and regulatory capital. NMI remains directly liable for claims if reinsurers fail to pay; the filing reports no material allowance for reinsurance-recoverable credit losses. The 2018 insurance-linked note transaction was terminated after quarter-end, effective July 25, 2023. A new $95.8 million excess-of-loss arrangement began July 1, 2023.
- After quarter-end, the board authorized a new $200 million share-repurchase program and extended the existing $125 million program through December 31, 2025. During the first half, the company repurchased 1.7 million shares for $41.1 million including costs and taxes.
- A pending Homeowners Protection Act case concerns refunds of certain mortgage-insurance premiums; the company said it could not assess the outcome and had recorded no material accrual. The company also warned that a proposed SEC rule on conflicted transactions, if adopted as proposed, could affect or prohibit certain insurance-linked-note credit-risk-transfer transactions.
- Management said disclosure controls were effective as of June 30, 2023 and reported no material change in internal control over financial reporting. The LIBOR-to-SOFR transition was substantially complete and was not expected to have a material financial impact.
Key facts for investors to verify
- Whether weaker mortgage originations persist and how they affect new insurance written, premium growth and portfolio mix.
- Claims frequency, severity, cure rates and reserve development as the insured portfolio seasons and housing and employment conditions evolve.
- PMIERs excess assets, statutory capital and the continued availability, cost and capital credit of reinsurance.
- The duration and recovery implications of unrealized investment losses, and sensitivity of portfolio value and income to interest-rate changes.
- Debt refinancing or repayment plans ahead of the June 2025 note maturity, and the pace and execution of the expanded repurchase authorizations.
- Developments in the Homeowners Protection Act litigation and the SEC proposal’s potential effect on insurance-linked-note transactions.