NMI Holdings, Inc. — FY2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017. This is an annual report; fourth-quarter figures are included where relevant. NMI provides private mortgage insurance through NMIC and Re One, and loan-review services through NMIS.
Financial and operating performance
| Metric | FY2017 | FY2016 | Change or context |
|---|---|---|---|
| Total revenue | $182.7 million | $123.8 million | Up 48% |
| Net premiums earned | $165.7 million | $110.5 million | Up 50% |
| Net premiums written | $173.7 million | $134.7 million | Up 29% |
| Net investment income | $16.3 million | $13.8 million | Up with a larger portfolio and improved yields |
| Insurance claims and claim expenses | $5.3 million | $2.4 million | Up as defaults increased |
| Underwriting and operating expenses | $107.0 million | $93.2 million | Up 15% |
| Pre-tax income | $52.8 million | $11.5 million | Improved substantially |
| Net income | $22.1 million | $64.0 million | Down; prior year included a large tax benefit |
| Basic / diluted EPS | $0.37 / $0.35 | $1.08 / $1.05 | Lower largely due to the year-over-year tax effect |
| Operating cash flow | $67.8 million | $71.9 million | Down modestly |
FY2017 loss, expense and combined ratios were 3.2%, 64.5% and 67.7%, respectively, versus 2.2%, 84.4% and 86.6% in 2016. The expense ratio improved as earned premiums grew faster than expenses; the loss ratio increased with portfolio growth and emerging defaults.
Fourth quarter: Net premiums earned were $50.1 million, pre-tax income was $17.1 million and the company reported a net loss of $1.8 million, reflecting $18.8 million of income tax expense. FY2016 fourth-quarter net income of $59.7 million included a substantial tax benefit.
Portfolio, balance sheet and liquidity
- New primary insurance written was $21.6 billion, up 2%; primary insurance-in-force reached $48.5 billion, up 51%. Total insurance-in-force was $51.7 billion.
- At year-end, gross primary risk-in-force was $11.8 billion. Annual persistency was 86%, versus 81% in 2016; monthly-premium policies represented 81% of 2017 new insurance written and 69% of primary insurance-in-force.
- Total assets were $894.8 million; shareholders’ equity was $509.1 million. Cash and cash equivalents were $19.2 million and investments were $715.9 million. The company reported $735.1 million of cash and investments, including $51.0 million held at the parent company.
- The term loan had a $143.9 million carrying value; scheduled principal was $146.6 million and maturity was November 10, 2019. Its variable rate was Eurodollar Rate, subject to a 1% floor, plus 6.75%; the reported all-in rate at year-end was 8.23%.
- NMIC reported $527.9 million of PMIERs available assets against $446.2 million of net risk-based required assets, a difference of about $81.7 million. Combined insurance-subsidiary risk-to-capital was 13.2:1, compared with 11.6:1 in 2016. The company reported compliance with applicable requirements and loan covenants at year-end.
Material changes versus 2016
- Primary insurance-in-force grew 51%, while new primary insurance written rose only 2%; growth in monthly-policy production offset a decline in single-premium production.
- Net premiums earned increased 50% as the insured portfolio expanded. Ceded premiums and risk transfer under the 2016 quota-share and 2017 insurance-linked-note arrangements affected reported results.
- Loans in default increased to 928 from 179; the reported default rate rose to 0.5% from 0.1%. Claims paid were $1.3 million, versus $0.4 million.
- Cash and cash equivalents declined to $19.2 million from $47.7 million, while the investment portfolio increased to $715.9 million from $629.0 million. Operating cash flow remained positive.
- The 2017 statutory federal corporate tax rate fell from 35% to 21% for 2018 onward under the Tax Cuts and Jobs Act. NMI recorded a provisional, non-cash $13.6 million tax charge, primarily from remeasuring deferred tax balances. The 2016 comparison included a $52.5 million tax benefit, primarily from releasing a valuation allowance.
- The company revised 2016 financial amounts for an immaterial $1.8 million deferred-tax error, reducing previously reported 2016 net income from $65.8 million to $64.0 million.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management intends to continue growing its high-quality insured portfolio and customer base while emphasizing disciplined underwriting, pricing, capital strength and profitability. It expects claims to rise as the portfolio matures; management estimated lifetime loss ratios of 20%–25% for the existing primary portfolio.
- Management attributed the increase in defaults partly to hurricanes Harvey and Irma and California wildfires. Of 928 loans in default at year-end, 533 were in FEMA-declared disaster areas. The company used lower reserve assumptions for these loans based on an expectation of higher cures; actual cure and claims experience may differ.
- Proposed GSE eligibility-requirement changes could increase required capital or affect growth. NMI anticipated any updated PMIERs would take effect no earlier than the fourth quarter of 2018. GSE rescission-relief changes were expected to require amendments to the company’s master policy by January 2019.
- Quota-share reinsurance transfers risk but leaves NMIC directly liable to policyholders if reinsurers fail to pay. The 2017 excess-of-loss transaction was collateralized through a trust; the quota-share counterparties were not fully collateralized in the same manner. Loss of expected GSE or regulatory capital credit could affect capital needs and growth.
- Holding-company liquidity is constrained by insurance-subsidiary dividend restrictions. NMIC reported a statutory net loss for 2017 and could not pay dividends to NMIH through December 31, 2018 without Wisconsin OCI approval. NMIH stated it did not expect subsidiary dividends for several years, if at all, and would need to refinance or otherwise fund the term loan’s 2019 maturity.
- Other key risks include competition from public mortgage insurers and alternative credit enhancements, economic or housing-market deterioration, concentration in California (13.5% of primary risk-in-force), customer concentration (Quicken Loans generated 11% of consolidated revenue), changing regulation, cybersecurity and operational risks, and the short history of the company’s insurance portfolio.
- The company reported no material off-balance-sheet arrangements and no material accrued liability for its ordinary-course legal matters; it cautioned that legal outcomes remain uncertain. Management concluded disclosure controls and internal control over financial reporting were effective at December 31, 2017. A previously identified deferred-tax control weakness was reported as remediated. The auditor did not attest to internal control over financial reporting because NMI was an emerging growth company.
Important facts for investors to verify
- Whether the assumed higher cure rates for disaster-area defaults prove accurate, and how claims and reserves develop as the portfolio ages.
- How final PMIERs and rescission-relief requirements affect required capital, reinsurance credit, underwriting practices and growth capacity.
- NMIH’s plan and available resources to refinance or repay the 2019 term-loan maturity, given limits on upstream insurance-subsidiary dividends.
- Whether growth in monthly premiums and persistency can support earnings while expenses, claims and reinsurance costs evolve.
- The final tax effects of the Tax Cuts and Jobs Act, deferred-tax-asset realization and the use of federal and state net operating loss carryforwards.
- Customer concentration, geographic exposure, and the company’s compliance with regulatory, GSE and debt-covenant requirements.