NMI Holdings, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2016, compared with Q1 2015. NMI provides private mortgage insurance through its insurance subsidiaries and began offering outsourced loan-review services in late 2015. Its strategy is to grow market share while focusing on higher-quality, low-down-payment residential mortgages.
Key financial and operating metrics
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net premiums written | $38.1 million | $12.9 million in Q1 2015 |
| Net premiums earned | $19.8 million | $6.9 million in Q1 2015 |
| Total revenue | $22.2 million | $9.1 million in Q1 2015 |
| Net loss | $3.9 million; $0.07 per share | $7.8 million; $0.13 per share in Q1 2015 |
| Operating cash flow | $0.7 million provided | $7.5 million used in Q1 2015 |
| Cash and cash equivalents | $73.3 million | $57.3 million at December 31, 2015 |
| Investments at fair value | $556.7 million | $559.2 million at December 31, 2015 |
| Total assets / shareholders’ equity | $684.3 million / $410.1 million | $662.5 million / $402.7 million at December 31, 2015 |
| Term loan | $149.3 million outstanding principal; $144.0 million reported net of discount and issuance costs | Loan originated in November 2015 |
Underwriting and operating expenses were $22.7 million, and insurance claims and claim expenses were $0.5 million. Interest expense was $3.6 million. Net realized investment losses were $0.9 million, versus a $0.6 million gain in Q1 2015. The filing does not report a single headline operating margin. Total cash and investments were approximately $630 million, including approximately $84 million held at the holding company.
Mortgage-insurance scale expanded: primary new insurance written was $4.25 billion, up 151% year over year; total insurance-in-force was $22.7 billion, versus $19.1 billion at December 31, 2015; and total risk-in-force was $4.6 billion, versus $3.7 billion. The primary portfolio had 79,700 policies in force and 55 loans in default at quarter-end. Statutory combined risk-to-capital was reported as 10.8:1; management separately reported NMIC’s ratio as 10.5:1 using its stated statutory-surplus measure.
Material changes versus Q1 2015 and year-end 2015
- Revenue grew substantially with higher new business and a larger insurance portfolio. Management attributed the premium increase to customer growth, higher allocations from existing customers, and demand for monthly products.
- The net loss narrowed by $3.9 million year over year, despite higher operating expenses and the addition of $3.6 million in quarterly interest expense on the term loan. The company remained loss-making.
- Operating cash flow shifted from use to modest positive generation. Investing activities provided $15.8 million, principally reflecting investment maturities and sales exceeding purchases; cash increased $16.0 million during the quarter.
- Unearned premiums rose to $109.1 million from $90.8 million at year-end, while the claims reserve increased to $1.1 million from $0.7 million. The company recorded $95,000 of favorable prior-year claims development and paid no claims during the quarter.
- Available-for-sale investments had $2.2 million of gross unrealized losses; management said it did not consider the securities other-than-temporarily impaired and did not expect to be required to sell them before recovery.
Outlook, risks, contingencies, and unusual items
- Management expects growth in insurance-in-force and premiums, and expects operating expenses to rise as the business expands, but to grow more slowly than new insurance written over time. It noted that the expense ratio is expected to remain high while the business is young. No specific earnings or revenue guidance was provided.
- In January 2016, NMI changed lender-paid and borrower-paid rates in response to PMIERs capital charges, targeting a mid-teens return. Management expects the business mix to shift toward monthly-premium policies and expects the pricing changes to improve yields on lender-paid single-premium policies.
- Management expected to implement a reinsurance program in 2016 as a key part of its capital plan. NMIC reported PMIERs available assets of approximately $434.1 million against minimum required assets of approximately $302.9 million at March 31, 2016, and had certified compliance as of December 31, 2015.
- The term loan bears a variable rate; the first-quarter rate was 8.5%. It matures November 10, 2018. The company reported compliance with loan covenants at quarter-end, including a $36 million liquidity requirement. Variable rates expose the company to higher interest expense if rates rise.
- NMIC could not pay dividends to the holding company through December 31, 2016 without Wisconsin regulatory approval because of its 2015 statutory net loss. The holding company reported $84 million of cash and investments.
- Risks include GSE and PMIERs changes, regulatory capital needs, competition from private insurers and government programs, housing and interest-rate conditions, claims developing differently from estimates, access to reinsurance and capital, and reliance on continued customer and portfolio growth. Management said it was not aware of material changes to the risk factors in its 2015 Form 10-K.
- The company reported no off-balance-sheet arrangements, no material litigation accrual, and no material change in internal control over financial reporting. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rapid growth in new insurance written converts into sustainable earned premiums and reduced operating losses, particularly as acquisition and staffing costs rise.
- Whether the planned reinsurance program is completed on acceptable terms and how it affects PMIERs capacity, capital requirements, and returns.
- Whether claims, defaults, and loss reserves develop consistently with management’s assumptions as the relatively young insurance portfolio seasons.
- Whether premium-rate changes and a shift in product mix improve yields without impairing customer demand, persistency, or market share.
- Holding-company liquidity, term-loan interest costs and covenants, and the restrictions on dividends from NMIC.
- Investment portfolio sensitivity to interest rates and credit conditions, including the distinction between reported holding-company cash and cash and investments held across the group.