NMI Holdings, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are with Q1 2021 unless otherwise noted. NMI provides private mortgage insurance through National Mortgage Insurance Corporation (NMIC) and outsourced loan-review services through NMI Services.
Financial and operating performance
| Metric | Q1 2022 | Q1 2021 / comparison |
|---|---|---|
| Total revenue | $127.4 million | $115.2 million; up 11% |
| Net premiums earned | $116.5 million | $105.9 million; up 10% |
| Net investment income | $10.2 million | $8.8 million |
| Net income | $67.7 million | $52.9 million; up 28% |
| Diluted EPS | $0.77 | $0.61 |
| Operating cash flow | $80.3 million | $85.5 million |
| Loss / expense / combined ratios | (0.5)% / 28.3% / 27.7% | 4.7% / 32.2% / 36.9% |
Revenue and earnings growth primarily reflected growth in insurance-in-force and lower claims expense, including releases of prior-period reserves and cures. The Q1 2022 claims benefit was $0.6 million, compared with $5.0 million of claims expense in Q1 2021. Net premiums earned growth was partly offset by lower cancellation-related premium contribution and higher reinsurance cessions. Underwriting and operating expenses fell to $32.9 million from $34.1 million. The effective tax rate was 22.0%, versus 21.6%.
Balance sheet, capital and liquidity
- At March 31, 2022, total assets were $2.424 billion, total liabilities $888.9 million and shareholders’ equity $1.535 billion.
- Cash and cash equivalents were $130.9 million; available-for-sale fixed maturities were $1.994 billion. Cash and investments totaled approximately $2.1 billion, down from $2.2 billion at year-end 2021, mainly reflecting unrealized investment losses and share repurchases.
- Debt was $395.0 million carrying value, representing $400 million principal of 7.375% senior secured notes due June 2025. The $250 million revolving facility was undrawn; the company reported compliance with its covenants.
- NMIC reported $2.127 billion of PMIERs available assets against $1.341 billion of required assets, an excess of $786 million. Its statutory capital was $1.980 billion and risk-to-capital ratio 12.4:1. NMIC paid NMIH a $34.9 million ordinary dividend on April 1, 2022.
- Operating cash flow was positive; investing activities used $21.4 million and financing activities used $4.7 million, including $5.0 million of share repurchases. Cash and restricted cash increased $54.3 million during the quarter.
Material changes and portfolio trends
- Primary insurance-in-force rose 28% year over year to $158.9 billion, and primary risk-in-force rose to $40.5 billion. Policies in force reached 526,976.
- New insurance written fell to $14.2 billion from $26.4 billion, which management attributed principally to a smaller mortgage insurance market. Purchase NIW was $13.4 billion; refinance NIW was $0.8 billion.
- Annual persistency increased to 71.5% from 51.9%, as refinancing slowed with higher interest and mortgage rates. The portfolio default rate improved to 0.99% from 2.54%; 5,238 loans were in default, including 3,463 in COVID-related forbearance.
- Gross claims reserves were $102.4 million, including $20.1 million of reinsurance recoverables. The average reserve per default rose to $19,500 from $8,700, which management linked to aging defaults; the lower default count partly offset that increase.
- Fixed-maturity securities had $122.9 million of gross unrealized losses at quarter-end, versus $23.2 million at December 31, 2021. The company attributed the increase primarily to interest-rate movements, recorded no credit-loss allowance, and reported a $98.8 million after-tax other comprehensive loss. Comprehensive loss was $31.1 million despite positive net income.
- The board authorized a $125 million share repurchase program through December 31, 2023. NMI repurchased 235,344 shares for $5.0 million in Q1.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management described COVID-19’s acute economic effects as receding, but said the pandemic and its future effects remain uncertain. Interim results are not necessarily indicative of full-year performance.
- Key sensitivities include interest rates, inflation, housing prices, unemployment, mortgage origination and refinancing activity, policy persistency, claims frequency and severity, competition, GSE and PMIERs requirements, and reinsurer performance. Rising rates can reduce fixed-income fair values; the company reported portfolio duration of 4.72 years including cash, with an estimated 4.72% fair-value impact from an instantaneous 100-basis-point parallel rate shift.
- Three ILN transactions were in lock-out at March 31, 2022: the 2018 and 2019 transactions due to reference-pool defaults, and the 2021-2 transaction while building target credit enhancement. Amortization and collateral distributions were suspended for those transactions. NMI terminated the 2017 ILN transaction on March 25, 2022; it also terminated the 2020-1 transaction on April 25, 2022, after quarter-end.
- On May 2, 2022, NMIC entered into a new excess-of-loss reinsurance agreement providing $289.7 million of coverage at inception for new delinquencies on a specified existing portfolio; NMIC retains the first $133.4 million of aggregate losses.
- On April 24, 2022, 90,000 remaining warrants expired unexercised, resulting in an approximately $0.9 million gain. No material legal accrual was reported; management said it was not aware of material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether the sharp rise in unrealized investment losses reverses, persists, or creates any future realized losses or liquidity effects.
- How default aging, COVID-related forbearance exits, cures and reserve assumptions affect claims and reserve adequacy.
- The sustainability of premium growth as NIW declined and persistency rose, and the effects of higher rates on refinancing, new originations and policy cancellations.
- PMIERs capital headroom, state capital requirements and the continuing availability and terms of quota-share and excess-of-loss reinsurance.
- The impact of ILN lock-outs and post-quarter reinsurance transactions, including the new May 2022 coverage, on risk transfer and capital relief.
- Debt costs and covenants, holding-company liquidity and the pace of repurchases under the $125 million authorization.