Business Context and Reporting Period
This Form 8-K filing by NMI Holdings, Inc. (NMIH) is dated May 6, 2020. The report details the entry into a material definitive agreement regarding the company's credit facilities and provides a comprehensive update on the impact of the COVID-19 pandemic on the U.S. housing market, the mortgage insurance industry, and NMIH's specific business operations and financial condition as of March 31, 2020.
Key Financial Metrics
- Liquidity and Cash: As of March 31, 2020, consolidated cash and investments totaled $1.2 billion. The primary operating subsidiary, NMIC, held $1.1 billion in cash and investments, including $76 million in cash equivalents.
- Regulatory Capital (PMIERs): NMIH reported $1,070 million in available assets against $912 million in risk-based required assets, resulting in a $157 million excess funding position.
- Debt and Credit Facilities: The company entered into Amendment No. 1 to its Credit Agreement, permitting the incurrence of up to $400 million in additional secured indebtedness. NMIH has $100 million of undrawn revolving credit capacity available.
- Investment Portfolio: The portfolio consists of $1.1 billion in invested assets, 100% fixed income, and 100% investment-grade rated (average rating "A+"). The portfolio held an aggregate unrealized gain of $11 million at quarter-end with a pre-tax book yield of 3.0%.
- Delinquency Rates: Notices of Default (NODs) were 1,449 as of March 31, 2020 (0.38% delinquency rate). By April 30, 2020, NODs increased to 1,610 (0.43% delinquency rate).
- Portfolio Quality: As of March 31, 2020, the weighted average FICO score of the insurance-in-force was 751, and the weighted average Loan-to-Value (LTV) ratio was 91.9%.
Material Changes and Operational Updates
- Credit Agreement Amendment: On May 6, 2020, NMIH amended its Credit Agreement to allow for up to $400 million in new senior secured notes or loans, subject to the repayment of existing Term Loans.
- Operational Continuity: In response to COVID-19, the company activated its business continuity program, transitioning 173 Emeryville-based employees to work-from-home status without incurring additional capital expenditures or operating expenses.
- Underwriting Adjustments: NMIH has increased premium rates on all new business production and tightened underwriting guidelines regarding loan documentation, asset reserves, and employment verification to strengthen the credit risk profile of new business.
- Reinsurance Overcollateralization: The company maintains $98 million in aggregate overcollateralization across three Insurance Linked Note (ILN) transactions to absorb increases in PMIERs risk-based required assets.
Outlook, Risks, and Management Commentary
- Market Outlook: Management expects a decline in total U.S. mortgage insurance New Insurance Written (NIW) volume in the near-term due to reduced purchase origination volume, partially offset by a significant increase in refinancing volume driven by declining mortgage rates.
- Delinquency and Claims: The company anticipates a significant increase in forbearance-driven delinquencies. While forbearance programs are viewed as effective bridges, the ultimate level of defaults and claims expense remains uncertain. Management expects to establish increasing reserves as the default population grows.
- Regulatory Capital Relief: Due to FEMA Major Disaster Declarations in all 50 states, the PMIERs risk-based required asset charge for newly delinquent loans is reduced by 70%. Management expects to remain in compliance with PMIERs asset requirements despite potential increases in forbearance-driven defaults.
- Key Risks:
- Potential material decline in home values increasing loss severity.
- Liquidity challenges for loan servicers potentially impacting premium remittances.
- Uncertainty regarding GSE treatment of forbearance loans for PMIERs capital calculations.
- Extended foreclosure moratoriums potentially delaying claim filings and increasing accrued interest claims.
Investor Verification Checklist
- Verify the specific terms and conditions of the $400 million secured indebtedness permitted under the Credit Agreement Amendment.
- Monitor the trajectory of forbearance rates and the conversion of forbearance cases to actual defaults (NODs) in upcoming quarterly reports.
- Review the impact of the 70% PMIERs disaster haircut on the company's capital requirements versus actual delinquency trends.
- Assess the stability of loan servicer liquidity and their ability to continue remitting premiums on delinquent loans.
- Track the shift in NIW composition between purchase and refinancing loans and the resulting impact on premium rates and revenue.