NMI Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless otherwise stated. NMI provides private mortgage insurance through NMIC and outsourced loan-review services through NMIS. Financial amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $136.8 million | $127.4 million |
| Net premiums earned | $121.8 million | $116.5 million |
| Net investment income | $14.9 million | $10.2 million |
| Net income | $74.5 million | $67.7 million |
| Diluted EPS | $0.88 | $0.77 |
| Operating cash flow | $89.8 million | $80.3 million |
| Net cash used in investing activities | $33.8 million | $21.4 million |
| Net cash used in financing activities | $17.4 million | $4.7 million |
Net income growth reflected higher revenue and lower underwriting and operating expenses, partly offset by increased claims expense and income taxes. Net investment income rose as the portfolio grew and investments were reinvested at higher rates. Underwriting and operating expenses declined to $25.8 million from $32.9 million, partly reflecting higher reinsurance ceding commissions, lower technology costs and lower employee compensation costs.
The loss ratio was 5.5% versus negative 0.5%, the expense ratio was 21.2% versus 28.3%, and the combined ratio was 26.7% versus 27.7%. Net premiums written fell 3% to $113.0 million, while net premiums earned rose 5%. New insurance written declined to $8.7 billion from $14.2 billion, primarily reflecting a smaller mortgage insurance market. Primary insurance-in-force increased 17% year over year to $186.7 billion; annual persistency improved to 85.1% from 71.5%, as higher mortgage rates slowed refinancing.
Financial position, debt and capital
- Total assets were $2.634 billion at March 31, 2023, including $2.172 billion of investments at fair value and $83.1 million of cash and cash equivalents. Shareholders’ equity was $1.707 billion.
- Gross reserves for insurance claims and claim expenses were $108.2 million, up from $99.8 million at year-end 2022. Primary defaults numbered 4,475, a 0.75% default rate, compared with 4,449 and 0.75% at year-end.
- Senior notes had $400 million principal outstanding, carried at $396.4 million net of issuance costs, bear interest at 7.375%, and mature June 1, 2025. The $250 million revolving facility was undrawn; the company reported compliance with its covenants.
- NMIC reported $2.481 billion of PMIERs available assets against $1.232 billion of required assets, an excess of approximately $1.249 billion. Statutory capital was $2.339 billion and its risk-to-capital ratio was 10.8:1. NMIC had capacity for $98 million of ordinary dividends to the holding company during the twelve months ending December 31, 2023.
- The investment portfolio had $215.8 million of gross unrealized losses, including $209.2 million on securities in loss positions for at least twelve months. No investment credit-loss allowance was recorded; management attributed the losses primarily to interest rates and stated it did not consider them indicative of impaired collectability.
Material changes, outlook and risks
- Q1 share repurchases totaled approximately 666,000 shares for $14.9 million including costs and taxes; $53.7 million remained under the $125 million repurchase authorization, which expires December 31, 2023.
- Management identified persistent inflation, elevated interest rates, weaker consumer confidence and rising jobless claims as potential pressures on housing demand, new insurance production and future defaults and claims. A substantial or prolonged decline in home prices or sustained unemployment increase could worsen claims experience.
- Claims expense increased to $6.7 million from a $0.6 million benefit. New defaults and aging delinquencies increased reserves, partly offset by releases related to cures and updated loss analysis. Management noted that home-price appreciation and borrower assistance programs had supported cures and limited claims, but future claims may rise if housing equity erodes.
- Reinsurance premiums ceded increased. The 2021-2 insurance-linked-note transaction remained in lock-out while building to its target credit enhancement; a prior lock-out on the 2018 transaction cleared in February 2023. NMI remains directly liable for claims if reinsurers fail to pay recoverables.
- A proposed SEC rule on conflicted transactions could, if adopted as proposed, affect or restrict the company’s ability to use insurance-linked-note credit-risk-transfer transactions. The company was still assessing the potential impact.
- NMI disclosed litigation concerning refunds of certain mortgage insurance premiums under the Homeowners Protection Act. It could not assess the outcome; no material accrual was recorded, and the filing states the matter was not then expected to result in a material liability.
- The filing provides no specific financial guidance or quantified full-year outlook. Management cautions that interim results may not indicate full-year results.
Important facts for investors to verify
- Whether the mortgage market contraction continues to constrain new insurance written and how persistency and premium mix affect earned premiums.
- Changes in defaults, cures, reserve assumptions and claims severity, particularly under weaker home-price or employment conditions.
- PMIERs capital headroom, statutory capital and risk-to-capital levels, and continued access to reinsurance and GSE capital credit.
- Investment portfolio unrealized losses, interest-rate sensitivity and the effect of rates on investment income and insurance persistency.
- The status and terms of the SEC proposal and any effect on future insurance-linked-note transactions, as well as developments in the Homeowners Protection Act litigation.
- Debt refinancing or repayment plans ahead of the June 2025 notes maturity, and the pace of share repurchases relative to holding-company liquidity.