NMI Holdings, Inc. — Q3 2017 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2017. NMI provides private mortgage insurance through its insurance subsidiaries and also offers limited outsourced loan-review services.
Financial performance
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Total revenue | $49.0 million | $35.5 million | $128.2 million | $87.2 million |
| Net premiums earned | $44.5 million | $31.8 million | $115.7 million | $77.7 million |
| Net income | $12.3 million | $6.2 million | $23.8 million | $4.3 million |
| Diluted EPS | $0.20 | $0.10 | $0.38 | $0.07 |
| Combined ratio | 57.5% | 77.7% | 70.6% | 92.2% |
- Q3 revenue rose 38% year over year, mainly reflecting growth in monthly-policy production and insurance in force. Nine-month revenue increased 47%.
- Q3 claims expense was $1.0 million; nine-month claims expense was $3.0 million. The reported loss ratio was 2.1% for Q3 and 2.6% year to date. Management cautioned that claims are expected to rise as the portfolio matures.
- Underwriting and operating expenses increased 3% in Q3 and 12% for the nine months year over year. Nine-month expenses included $4.8 million related to the 2017 insurance-linked-note transaction and credit-agreement amendment.
- Net cash from operations was $41.8 million for the first nine months, versus $52.2 million a year earlier. Investing used $66.6 million; financing used $2.3 million. Cash and cash equivalents fell to $20.7 million from $47.7 million at year-end 2016.
- At September 30, total assets were $886.6 million, shareholders’ equity $511.0 million, and the term-loan carrying amount $144.0 million. The loan’s principal balance was $147.0 million, with a 7.99% all-in interest rate at quarter-end and maturity extended to November 2019.
- Investments at fair value were $692.7 million. NMI reported $713.4 million in cash and investments, including $61.7 million held at the holding company. Nine-month pretax investment portfolio book yield was 2.3%.
Business trends and capital
- Total insurance in force reached $46.6 billion, up 45% from September 2016; primary insurance in force was $43.3 billion. Gross risk in force was $10.7 billion.
- Q3 primary new insurance written was $6.1 billion, up 4% year over year. Nine-month primary new insurance written declined 8%, primarily because the company reduced single-premium production; monthly-premium production grew 14% for the nine months.
- Monthly-premium policies represented 66% of primary insurance in force, compared with 57% a year earlier. Annual persistency was 85.1% versus 81.8% a year earlier.
- PMIERs available assets were $495.2 million against $356.2 million of risk-based required assets. NMIC’s statutory risk-to-capital ratio was 12.3:1; the combined insurers’ reported ratio was 11.5:1. The company said it complied with loan covenants at quarter-end.
- Reinsurance includes a 2016 quota-share arrangement and a 2017 excess-of-loss transaction providing up to $211.3 million of coverage at inception; the latter’s outstanding coverage was $185 million at September 30. Management said reinsurance supports risk management, PMIERs compliance, and growth.
Outlook, risks, and unusual items
- Management expects near-term claims to remain relatively low but anticipates claims to increase as insured books age. It estimates a 20%–25% lifetime loss ratio on the existing portfolio and claim severity of 85%–95% of coverage amounts; actual outcomes depend on portfolio and economic conditions.
- Hurricanes Harvey and Irma and Northern California fires could increase notices of default in affected areas. Ultimate exposure depends on defaults, causes, and cure rates.
- Key risks include GSE policy and PMIERs changes, competition (including FHA and VA), housing and employment conditions, interest rates, reinsurance counterparty performance, claims and reserve uncertainty, and access to capital. The filing provides no specific earnings or revenue guidance.
- Moody’s reaffirmed NMIC’s Ba1 financial strength rating and the term loan’s B2 rating, changing both outlooks to positive. S&P reaffirmed NMIC’s BBB- rating and NMIH’s BB- rating, both with positive outlooks.
- Disclosure controls were deemed ineffective because of a material weakness in controls over deferred-tax inventory reconciliation. Management reported enhanced and newly implemented controls, but said remediation could not be guaranteed. A $1.8 million deferred-tax asset overstatement also led to an immaterial correction of 2016 results; reported 2016 annual net income was adjusted to $64.0 million from $65.8 million.
- In October 2017, the company amended its loan agreement to remove a holding-company liquidity covenant tied to remaining interest payments while retaining a minimum-liquidity requirement tied to principal amortization.
Important facts for investors to verify
- Whether the deferred-tax control weakness has been fully remediated and whether the correction affects future reporting.
- Actual claims, cures, severity, and reserve development as newer insurance vintages age, including any disaster-related defaults.
- Ongoing PMIERs and state-capital headroom, and the terms, performance, and counterparty support of reinsurance arrangements.
- Cash generation and holding-company liquidity relative to loan payments and the restrictions on insurance-subsidiary dividends.
- Whether growth in monthly-premium business and insurance in force offsets lower single-premium production and rising operating costs.