NMI Holdings, Inc. — FY 2015 Form 10-K
Reporting period: Fiscal year ended December 31, 2015; the filing is an annual report, not a standalone fourth-quarter report. NMI provides private mortgage insurance through National Mortgage Insurance Corporation (NMIC), and began offering outsourced loan-review services in Q4 2015. Its insurance business began in April 2013.
Financial and operating performance
| Metric | FY 2015 / Dec. 31, 2015 | FY 2014 / Dec. 31, 2014 |
|---|---|---|
| Total revenue | $53.6 million | $19.2 million |
| Net premiums written | $114.2 million | $34.0 million |
| Net premiums earned | $45.5 million | $13.4 million |
| Net investment income | $7.2 million | $5.6 million |
| Insurance claims and claim expenses | $0.65 million | $0.08 million |
| Underwriting and operating expenses | $80.6 million | $73.4 million |
| Net loss | $27.8 million; $0.47 per share | $48.9 million; $0.84 per share |
| Operating cash flow | $41.5 million provided | $21.0 million used |
| Cash and investments | $616.6 million | $439.5 million |
| Total assets / shareholders’ equity | $662.5 million / $402.7 million | $463.3 million / $427.0 million |
| Term loan | $149.6 million outstanding; $143.9 million carrying value | None |
- Premium growth reflected more customers, increased allocations from existing customers and growth in primary insurance. Primary new insurance written rose 260% to $12.4 billion.
- Total insurance-in-force increased to $19.1 billion from $8.1 billion; risk-in-force rose to $3.7 billion from $894.7 million. Primary insurance-in-force was $14.8 billion, versus $3.4 billion.
- The expense ratio was 177%, loss ratio 1% and combined ratio 179%. The high expense ratio reflects the still-small earned-premium base relative to operating costs; management expects a 20%–25% expense ratio when the business matures.
- Net loss narrowed from the prior year as earned premiums increased, despite higher operating costs and claims. The company remained unprofitable.
- Operating cash flow turned positive, while investing activities used $230.2 million, primarily for securities purchases. Financing provided $143.0 million, primarily from the term loan.
Material changes and capital position
- NMIH borrowed $150 million in November 2015 under a senior secured term loan due November 10, 2018. The rate was 8.5% at year-end; quarterly principal payments are required, with most principal due at maturity.
- NMIH contributed $145.4 million of cash and securities to NMIC during Q4 to support risk growth and updated GSE capital requirements. At year-end, NMIC reported $431.4 million of PMIERs available assets against approximately $249.8 million of minimum required assets and had a statutory risk-to-capital ratio of 8.4:1. Management expected to certify PMIERs compliance by March 1, 2016.
- The loan agreement imposes financial tests, including a 35% maximum debt-to-capitalization ratio, a minimum liquidity test and a minimum equity requirement. The company reported covenant compliance at year-end.
- Persistency was 84.1%. Management noted elevated single-premium policy cancellations from refinancing. California represented 12.9% of primary risk-in-force and 27.7% of pool risk-in-force.
Outlook, commentary and risks
- Management expected near-term net losses to continue; it did not provide company-specific earnings guidance. For 2016, cited industry forecasts put total mortgage originations at $1.3–$1.4 trillion, with an estimated $500 billion insured market and roughly $200 billion potentially captured by private mortgage insurers.
- Management said updated PMIERs were met at year-end, but warned that required capital could grow faster than available assets as risk-in-force expands, potentially requiring new capital, reinsurance or slower growth.
- Key risks include dependence on Fannie Mae and Freddie Mac eligibility and practices; competition from FHA/VA and other insurers; housing-price, employment and interest-rate changes; uncertain claims and reserve estimates; customer concentration; and operational, technology and cybersecurity risks.
- Premiums earned from Quicken Loans exceeded 10% of consolidated revenue. The filing also identifies limited operating history and concentration in California as material exposures.
- The company reported no pending legal proceedings and no premium-deficiency reserve at year-end. It paid two claims totaling $54,000 in 2015; the year-end claim reserve was $679,000. Its reserve method does not accrue for potential future defaults on loans that are not yet in default.
- NMIH held $100.2 million of cash and liquid investments at year-end, but stated that this was not enough to repay the loan’s maturity balance. Dividends from the regulated insurance subsidiaries are constrained, so refinancing or raising capital may be necessary.
Important facts for investors to verify
- Whether NMIC completed its expected PMIERs certification and how future risk growth affects required capital and available assets.
- Loan maturity, amortization, interest costs, covenant headroom and NMIH’s ability to refinance or repay the 2018 term loan.
- Quarterly trends in new insurance written, premium yield, persistency and single-premium cancellations.
- Development of defaults, claims and reserves as the relatively young insurance portfolio seasons.
- Exposure to Quicken Loans, California and other concentrations, and any changes in GSE or government-insurer competition.