NMI Holdings, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the corresponding 2020 periods unless otherwise noted. Amounts are in U.S. dollars.
Business context
NMI provides private mortgage insurance through its insurance subsidiaries and also offers outsourced loan-review services. At quarter-end, primary insurance-in-force was $143.6 billion and primary risk-in-force was $36.3 billion. The company reported 1,699 lender customers.
Financial performance and position
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net premiums earned | $113.6 million | $98.8 million | $330.4 million | $296.5 million |
| Total revenue | $124.0 million | $107.8 million | $360.0 million | $323.4 million |
| Net income | $60.2 million | $38.2 million | $170.6 million | $123.3 million |
| Diluted EPS | $0.69 | $0.45 | $1.96 | $1.55 |
| Combined ratio | 33.3% | 50.2% | 35.2% | 51.4% |
Q3 loss ratio was 2.8% versus 15.9%; expense ratio was 30.5% versus 34.4%. Adjusted net income, a non-GAAP measure, was $61.8 million for Q3 and $173.3 million for the nine months; adjusted diluted EPS was $0.71 and $2.00, respectively.
For the first nine months, operating cash flow was $281.4 million versus $215.0 million. Investing activities used $310.5 million; financing activities used $0.5 million. Cash and cash equivalents were $97.3 million at September 30, 2021, down from $126.9 million at December 31, 2020.
Total assets were $2.40 billion and shareholders’ equity was $1.52 billion at September 30, 2021. Debt had a carrying value of $394.3 million, against $400 million principal of senior secured notes bearing 7.375% interest and maturing in 2025. The $110 million revolving facility was undrawn, and the company reported compliance with its covenants.
Consolidated cash and investments totaled approximately $2.2 billion. The investment portfolio was investment grade, rated A+ on average, and had a 2.0% pre-tax book yield for the nine-month period. It had $13.3 million of gross unrealized losses, primarily attributed to interest-rate movements; the company recorded no investment credit-loss allowance. Nine-month other comprehensive loss was $34.5 million, largely reflecting unrealized investment losses.
Available PMIERs assets were $1.993 billion against $1.366 billion of required assets, a $627 million excess. Combined statutory capital was $1.881 billion and the reported risk-to-capital ratio was 12.5:1.
Material changes and operating trends
- Q3 net premiums earned increased 15%; nine-month net premiums earned increased 11%. Growth reflected a larger insured portfolio and more monthly-policy production, partly offset by increased reinsurance cessions.
- Primary new insurance written was $18.1 billion in Q3, down 2% year over year, but $67.2 billion for the nine months, up 57%. Management attributed the quarterly decline to a smaller overall mortgage-insurance market and nine-month growth to expansion of its customer franchise.
- Primary insurance-in-force rose 36% year over year to $143.6 billion. Annual persistency declined to 58% from 60%, reflecting refinancing activity.
- Insurance claims and claim expenses fell to $3.2 million in Q3 and $12.8 million year to date, from $15.7 million and $55.7 million, respectively. Management cited fewer new defaults, borrower cures and releases of some prior-year reserves.
- Primary defaults declined to 7,670, or 1.56% of policies in force, from 13,765, or 3.60%, a year earlier. However, the gross claims reserve increased to $104.6 million from $90.6 million at year-end 2020, partly because reserves per default rose as COVID-related defaults aged.
Outlook, risks and unusual items
Management said it expected new-business production to remain elevated, but provided no specific quantitative earnings or revenue guidance. It noted that higher interest rates and home prices could affect home purchases and mortgage-insurance production. COVID-19, future economic conditions, housing-market performance, borrower defaults and claims, GSE policies and PMIERs requirements remain material uncertainties. Management stated that forbearance and foreclosure programs were supporting borrower cures and expected near-term claim cash needs to remain limited, while acknowledging that delayed foreclosures may increase severity on loans that do not cure.
On September 9, 2021, the company announced that CFO Adam Pollitzer would become CEO effective January 1, 2022, succeeding Claudia Merkle. It recorded $1.3 million of transition-related expenses in Q3. Subsequent to quarter-end, the company entered into a $363.6 million excess-of-loss reinsurance transaction and announced quota-share treaties covering eligible policies written primarily in 2022 and 2023.
Other risks include counterparty performance under reinsurance agreements, competition from private and government mortgage insurers, interest-rate and credit-spread exposure in investments, and the transition away from LIBOR. The filing reported no material change to previously disclosed risk factors, no material legal accrual, and effective disclosure controls.
Important facts for investors to verify
- Whether default and forbearance declines continue, and how aging COVID-related defaults affect reserve adequacy and eventual claims severity.
- How persistency, refinancing and interest-rate changes affect premium income and the growth of insurance-in-force.
- The amount of usable PMIERs capital cushion as new business grows and reinsurance credit or GSE requirements change.
- Reinsurance transaction terms, collateralization, recoverability and any resulting limits or costs.
- The impact of investment-market movements, the LIBOR transition and the 7.375% notes on earnings, liquidity and capital.
- Reported GAAP results versus management’s non-GAAP adjusted measures, including the treatment of transaction and CEO-transition expenses.