NMI Holdings, Inc. — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual filing; it also reports unaudited fourth-quarter results. Amounts are in U.S. dollars unless noted.
Business context
NMI provides private mortgage insurance primarily through National Mortgage Insurance Corporation (NMIC), which is approved by Fannie Mae and Freddie Mac and licensed in all 50 states and Washington, D.C. Mortgage insurance covers part of lenders’ losses on qualifying high loan-to-value mortgages. At year-end, NMI reported $153.6 billion of total insurance-in-force (IIF), including $152.3 billion of primary IIF, and $38.8 billion of gross risk-in-force. It wrote $85.6 billion of new insurance in 2021.
Key financial results
| Metric | FY2021 | FY2020 |
|---|---|---|
| Total revenue | $485.1 million | $433.3 million |
| Net premiums earned | $444.3 million | $397.2 million |
| Net investment income | $38.1 million | $31.9 million |
| Insurance claims and claim expenses | $12.3 million | $59.2 million |
| Underwriting and operating expenses | $142.3 million | $131.6 million |
| Interest expense | $31.8 million | $24.4 million |
| Net income | $231.1 million | $171.6 million |
| Diluted EPS | $2.65 | $2.13 |
| Operating cash flow | $325.7 million | $252.6 million |
The FY2021 loss ratio was 2.8%, expense ratio 32.0%, and combined ratio 34.8%, compared with 14.9%, 33.1%, and 48.1%, respectively, in FY2020. Adjusted net income, a non-GAAP measure, was $236.8 million versus $173.6 million; adjusted diluted EPS was $2.73 versus $2.19.
For Q4 2021, revenue was approximately $125.1 million, net income was $60.5 million, and diluted EPS was $0.69. The filing’s quarterly table reports Q4 net premiums earned of $113.9 million.
Growth, balance sheet and liquidity
- New insurance written rose 36% to $85.6 billion from $62.7 billion in 2020. Primary IIF increased 37% to $152.3 billion from $111.3 billion. Annual persistency improved to 64% from 56%.
- At December 31, 2021, total assets were $2.45 billion, total liabilities $884.8 million, and shareholders’ equity $1.57 billion. Cash and investments totaled approximately $2.2 billion; $106 million was held at the holding company and NMIC held $2.1 billion of cash and investments.
- Debt was $394.6 million, principally $400 million of senior secured notes bearing 7.375% and maturing June 1, 2025, net of unamortized issuance costs. The $250 million revolving facility was undrawn at year-end. NMI reported compliance with its debt covenants.
- NMIC reported $2.041 billion of PMIERs available assets against $1.186 billion of required assets, an $855 million excess. Its statutory risk-to-capital ratio was 11.6:1, below the commonly applicable 25:1 limit.
- Investment income increased, while the available-for-sale portfolio’s net unrealized position moved sharply: shareholders’ accumulated other comprehensive income declined to $1.5 million from $53.9 million, primarily reflecting interest-rate and credit-spread movements. No investment credit-loss allowance was recorded.
Material changes, outlook and risks
- Profit increased substantially year over year, mainly as claims expense fell with fewer new defaults, borrower cures, and reserve releases; higher premiums from portfolio growth also contributed. Claims expense was elevated in 2020 following pandemic-related defaults.
- Defaults declined to 6,227 loans, or 1.22% of primary policies in force, from 12,209, or 3.06%, at year-end 2020. Of 7,019 loans in forbearance at year-end 2021, 4,751 were in default. Management said the default count had fallen monthly since its August 2020 peak, but remained above historical experience.
- Management described housing and mortgage-insurance production as resilient and expected new business production to remain elevated, while cautioning that outlook depends on the pandemic, interest rates, home prices, affordability, and mortgage originations. The filing provides no specific quantitative earnings or production guidance.
- COVID-related forbearance, repayment options, foreclosure delays, and assistance programs supported management’s expectation of higher cures and lower reserves on affected defaults. Management cautioned that prolonged defaults can age, increase claim severity, and make reserve estimates uncertain. The auditor identified claims reserves as a critical audit matter because of the judgment involved in estimating claim frequency, severity, and assistance-program effects.
- Reinsurance remains central to capital management. NMI added two insurance-linked-note transactions in 2021; several transactions were subject to lock-out events, although the 2017 transaction’s lock-out cleared in November. Reinsurance counterparties’ performance and continued GSE and regulator capital credit are risks.
- Other material exposures include competition from government mortgage insurers and alternative credit-risk structures, changes to GSE policies or PMIERs, regulatory and capital requirements, interest rates and inflation, servicing and cybersecurity risks, and LIBOR transition. Management said it did not expect the LIBOR transition to materially affect operations or results.
- Adam Pollitzer became CEO effective January 1, 2022, succeeding Claudia Merkle. NMI recorded $3.8 million of related transition expenses in 2021. In February 2022, the board authorized a share repurchase program of up to $125 million through December 31, 2023; no shares were repurchased during 2021.
- The company reported no material legal accrual and did not expect currently pending or threatened matters to result in a material liability, while noting litigation outcomes remain uncertain. BDO issued unqualified audit opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether default and forbearance declines continue, and whether aging pandemic-era defaults generate claims above current reserves.
- Reserve assumptions, particularly cure rates and claim severity; gross claims reserves were $103.6 million at year-end, and the auditor designated the estimate a critical audit matter.
- PMIERs capital headroom and the availability, cost, and effectiveness of quota-share and insurance-linked-note reinsurance as the portfolio grows.
- How interest-rate changes affect investment valuations, mortgage affordability, refinancing, persistency, and the company’s fixed-rate debt burden.
- Holding-company access to subsidiary cash: NMIC’s ordinary dividend capacity was $34.9 million for the following 12 months, subject to insurance and GSE restrictions. Common dividends had not been paid.
- Execution and funding of the $125 million repurchase authorization, alongside debt maturities and capital needs.