NMI Holdings, Inc. — Q3 2015 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and nine months ended September 30, 2015. NMI provides private mortgage insurance through its insurance subsidiaries and remains in an early growth phase, having begun writing policies in April 2013. At quarter-end, primary insurance in force (IIF) was $10.6 billion and pool IIF was $4.3 billion.
Financial results and position
Amounts below are in millions of dollars, except per-share data and percentages.
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net premiums written | $35.4 | $9.7 | $68.6 | $19.9 |
| Net premiums earned | $12.8 | $3.9 | $28.6 | $7.9 |
| Total revenue | $14.7 | $5.4 | $34.7 | $12.3 |
| Insurance claims and claim expenses | $0.2 | $(0.03) | $0.3 | $0.002 |
| Underwriting and operating expenses | $19.7 | $17.9 | $58.9 | $55.8 |
| Net loss | $(4.8) | $(11.0) | $(23.0) | $(38.9) |
| Basic and diluted loss per share | $(0.08) | $(0.19) | $(0.39) | $(0.67) |
- Cash flow: Nine-month operating cash flow was positive $16.2 million, versus negative $19.6 million a year earlier. Investing activities provided $14.3 million, compared with $101.1 million in 2014; financing activities used $0.7 million. Cash increased $29.8 million to $132.8 million.
- Balance sheet and liquidity: Total assets were $486.9 million and shareholders’ equity was $408.2 million at September 30, 2015. Cash and investments totaled approximately $447 million, including $161 million held at the holding company; approximately $239 million of consolidated net assets were held in insurance subsidiaries and restricted. Unearned premiums were $62.1 million and claim reserves were $0.36 million.
- Debt and investment risk: The filing reports no material debt balance. The $1.9 million warrant liability is not described as debt. The available-for-sale investment portfolio had a fair value of $314.5 million; its pre-tax book yield was 1.9%. Including cash, portfolio duration was 2.22 years; management estimated a 100-basis-point parallel rate shift would change fair value by 2.22%.
Material changes versus comparable periods
- Revenue and premiums increased substantially with business growth. Primary IIF rose to $10.6 billion from $1.8 billion a year earlier and from $3.4 billion at December 31, 2014; primary risk in force reached $2.6 billion.
- Primary new insurance written was $3.63 billion in Q3, up 43% from Q2 2015. Single-product new insurance written increased 88% quarter over quarter, attributed to greater lender demand.
- Net losses narrowed year over year as earned premiums grew. Underwriting and operating expenses nevertheless increased year over year; management attributed the increase primarily to employee and other growth-related costs. Headcount increased to 225 from 186 a year earlier.
- Operating cash flow improved year over year, primarily because of higher premiums written, partly offset by increased personnel costs. Cash and cash equivalents increased from $103.0 million at year-end 2014.
Outlook, commentary, risks, and unusual items
- Management expects operating expenses to grow more slowly than revenue over time and targets a mature expense ratio of 20%–25% of premiums written. It cautions that the ratio is expected to remain significantly higher while the business is still growing.
- The final GSE Private Mortgage Insurer Eligibility Requirements (PMIERs) take effect December 31, 2015. NMI expected to meet the financial requirements by the effective date or submit a transition plan; compliance may require additional debt, equity, or combined capital. At September 30, the company estimated PMIERs required assets of approximately $164 million for primary and $31 million for pool insurance.
- Insurance-subsidiary dividends were restricted: NMIC could not pay dividends through December 31, 2015 without Wisconsin OCI approval, and GSE and state-regulator arrangements restricted payments until at least the end of 2015 or January 2016.
- Management cited intense competition, lender pricing pressure, possible lower premium yields from single-premium business, and refinance-related single-premium cancellations. Persistency was 77.3%; management believed cancellations could decline if interest rates rise.
- Claims remain limited but are developing: 20 primary loans were in default, with $0.36 million reserved; the company settled its first primary claim in July 2015 for $4,000. No pool claim reserve was recorded, in part because the remaining pool deductible was $10.3 million. Management estimated lifetime loss ratios of 20%–25% of earned premiums, while expecting reported loss ratios to remain below 10% until the portfolio matures; these are estimates, not guarantees.
- Other risks include housing and economic conditions, interest-rate and investment-market movements, GSE eligibility and capital rules, regulatory changes, and customer concentration. A June 2015 Wisconsin OCI inquiry asked mortgage insurers, including NMIC, about customized terms or rates. The company reported no pending legal proceedings and no material change to previously disclosed risk factors.
- Unusual earnings items included gains from changes in warrant fair value of $0.3 million in Q3 and $1.5 million for the nine months; these gains were lower than in the comparable 2014 periods. No income-tax benefit was recognized in 2015 because of a valuation allowance against deferred tax assets.
Important facts for investors to verify
- NMIC’s actual PMIERs asset position, certification or transition-plan status, and any capital raise needed to support growth.
- Insurance-subsidiary statutory capital and risk-to-capital measures, and restrictions on transferring cash to the holding company. The filing reports differing entity-level and combined capital measures; confirm the applicable measure for each subsidiary.
- Whether rapid IIF growth translates into adequate earned premiums and eventual profitability, given elevated operating costs and pricing competition.
- Persistency, refinance-driven cancellations, single-premium mix, and the effect of any interest-rate changes on premiums and cash flows.
- Development of defaults and claims reserves as newer insurance books mature, including the assumptions underlying management’s expected lifetime loss ratios.
- Investment portfolio valuation and liquidity under interest-rate or credit-market stress, and the resolution or implications of the Wisconsin OCI inquiry.