NMI Holdings, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. NMI provides private mortgage insurance through its insurance subsidiaries, primarily covering residential loans with down payments generally below 20%.
Financial performance and position
| Metric | Q1 2017 | Q1 2016 or prior period |
|---|---|---|
| Net premiums earned | $33.2 million | $19.8 million |
| Total revenue | $37.1 million | $22.2 million |
| Net income (loss) | $5.5 million; $0.09 diluted EPS | $(3.9) million; $(0.07) diluted EPS |
| Loss / expense / combined ratios | 2% / 78% / 80% | 2% / 114% / 117% |
| Net cash from operations | $(2.1) million | $0.7 million provided |
| Cash and cash equivalents | $12.5 million | $47.7 million at Dec. 31, 2016 |
| Investment portfolio, fair value | $658.6 million | $629.0 million at Dec. 31, 2016 |
| Total assets / shareholders’ equity | $840.2 million / $483.9 million | $839.9 million / $475.5 million at Dec. 31, 2016 |
| Term loan | $147.8 million principal outstanding | Balance-sheet carrying amount: $144.0 million |
Net premiums earned rose 68%, reflecting growth in insurance in force and monthly-premium business. Total insurance in force reached $38.3 billion, up from $35.8 billion at year-end; risk in force was $8.5 billion, versus $7.9 billion. Primary new insurance written fell 16% year over year to $3.6 billion, mainly as the company reduced single-premium business; monthly-premium new writings increased 16%. Persistency was 81.3%.
Operating cash flow was negative despite quarterly earnings, with management citing lower single premiums written and reduced year-end accruals. Investing activities used $31.3 million, largely for investment purchases; financing activities used $1.9 million. Cash and investments totaled approximately $671.2 million, including $59 million held at the parent company. NMIC reported $467.0 million in PMIERs available assets against $398.9 million in net risk-based required assets.
Material changes and notable items
- Underwriting and operating expenses increased to $26.0 million from $22.7 million, reflecting business growth, hiring and operating costs. The quarter included $1.6 million related to the 2017 reinsurance transaction and loan amendment.
- The company amended its term loan in February: maturity extended to November 2019 and interest margin reduced. The loan’s all-in rate was 8.0% at quarter-end; management expects interest costs to decline by about $275,000 per quarter. The company reported compliance with loan covenants.
- Q1 included a $320,000 favorable development in prior-year claims. Claims reserves were $3.8 million for 207 primary loans in default, compared with $3.0 million for 179 loans at year-end 2016. The company paid four claims totaling $142,000.
- Management corrected an immaterial prior-period deferred-tax error: 2016 net income was revised from $65.8 million to $64.0 million, and the year-end deferred tax asset from $53.3 million to $51.4 million. Q1 adoption of share-based-payment guidance also reduced opening accumulated deficit by $514,000.
Outlook, risks and contingencies
- No specific full-year earnings or revenue guidance is provided. Management expects insurance in force and premium revenue to grow, operating expenses to grow more slowly than new writings over time, and the expense ratio to decline as the business matures. It expects reported loss ratios to remain below 10% while the portfolio is young; these are expectations, not guarantees.
- On May 2, 2017, after quarter-end, the company entered into $211.3 million of fully collateralized excess-of-loss reinsurance covering policies written from 2013 through 2016. The company said effects would begin in Q2 2017. It also reported an approximately $1.9 million pretax net cost from its existing quota-share reinsurance in Q1.
- Risks include housing and economic conditions, interest rates and investment values, claims and reserve estimation, competition (including FHA/VA), GSE and PMIERs requirements, regulatory approvals, reinsurer performance, and the company’s ability to maintain capital and liquidity. NMIC’s statutory surplus was $404.4 million and combined statutory risk-to-capital was 12.4:1; NMIC’s separate reported risk-to-capital ratio was 13.1:1.
- Disclosure controls were deemed ineffective at March 31 because of a material weakness in controls over reconciliation support for deferred taxes. Management is enhancing controls but stated remediation is not guaranteed. Management nevertheless concluded the Q1 financial statements fairly present results in all material respects.
- The company reported no material accrued liability for ordinary-course lawsuits and did not expect them to result in a material liability, while noting outcomes remain uncertain. NMIC cannot pay dividends to the parent through December 31, 2017 without Wisconsin regulator approval, following its 2016 statutory net loss.
Investor verification priorities
- Confirm the deferred-tax control weakness remediation and monitor any further tax-accounting adjustments.
- Review the effect, cost and capital credit of the May 2017 excess-of-loss reinsurance, alongside the existing quota-share arrangement.
- Track monthly versus single-premium mix, new writings, persistency and cancellations, which affect premium growth and cash generation.
- Assess claims development and reserve adequacy as the insurance portfolio matures.
- Verify available liquidity at the parent and insurance subsidiaries, PMIERs headroom, covenant compliance, and the distinction between the loan’s principal and carrying value.