NMI Holdings, Inc. — 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020; the filing also reports fourth-quarter results. NMI provides private mortgage insurance, principally on high loan-to-value residential mortgages, through its insurance subsidiaries. It reported 1,570 master-policy customers and $113.1 billion of insurance-in-force at year-end.
Financial and operating performance
| Metric | FY 2020 | FY 2019 | Change |
|---|---|---|---|
| Net premiums earned | $397.2 million | $345.0 million | +15% |
| Total revenue | $433.3 million | $378.8 million | +14% |
| Insurance claims and claim expenses | $59.2 million | $12.5 million | Nearly 5x |
| Net income | $171.6 million | $172.0 million | Essentially flat |
| Diluted EPS | $2.13 | $2.47 | Down 14% |
| Net cash from operating activities | $252.6 million | $208.2 million | +21% |
The annual loss ratio rose to 14.9% from 3.6%; the expense ratio improved to 33.1% from 36.7%, and the combined ratio increased to 48.1% from 40.3%. Fourth-quarter 2020 net income was $48.3 million, or $0.57 basic and $0.56 diluted EPS.
- Business growth: New insurance written increased 39% to $62.7 billion. Primary insurance-in-force rose 17% to $111.3 billion, while primary risk-in-force reached $28.2 billion.
- Portfolio and persistency: Annual persistency fell to 56% from 77%, reflecting accelerated refinancing amid low mortgage rates. Monthly-premium policies were 90% of 2020 new writings and 86% of year-end primary insurance-in-force.
- Claims and reserves: Year-end primary defaults rose to 12,209, or 3.06% of policies, from 1,448, or 0.40%. The claims reserve increased to $90.6 million from $23.8 million. Management recorded $7.7 million of favorable prior-year reserve development and used lower per-loan reserves for COVID-related defaults based on expected cures and borrower assistance.
- Assets, debt and capital: Total assets were $2.17 billion and shareholders’ equity was $1.37 billion. Debt was $393.3 million carrying value, representing $400 million principal of 7.375% senior secured notes due 2025. The company had a $110 million undrawn revolver and reported compliance with covenants.
- Liquidity and regulatory capital: Consolidated cash and investments totaled approximately $1.9 billion, including $72 million at the holding company. NMIC reported $1.75 billion of PMIERs available assets against $984 million required, a $766 million excess. NMIC generated $250 million of operating cash flow. Its risk-to-capital ratio was 12.0:1; the combined insurance-operations ratio was 11.7:1.
- Investments: The portfolio consisted of investment-grade fixed maturities; average rating was A+, pre-tax book yield was 2.2%, and unrealized gains were $73 million. No investment credit-loss allowance was recorded for 2020.
Material changes, outlook and risks
- Revenue growth was supported by higher insurance-in-force and new business, but claims expense rose sharply with pandemic-related defaults. Net income was flat, and diluted EPS declined partly because the June 2020 equity offering increased weighted-average shares.
- NMI raised approximately $220 million net through issuing 15.9 million shares and issued $400 million of notes; it contributed about $445 million to NMIC. Interest expense increased to $24.4 million from $12.1 million, including $2.6 million of debt-extinguishment costs.
- Management described housing and mortgage origination activity as resilient and said it expected new production to remain elevated near term, while warning that renewed pandemic disruption, unemployment, and other economic developments could moderate or reduce volumes. The filing provides no specific forward earnings or revenue guidance.
- COVID-related forbearance and foreclosure moratoria delayed claim resolution. At year-end, 19,464 insured loans were in forbearance; 10,803 of the 12,209 defaults were COVID-related. Management cautioned that defaults may rise and that prolonged moratoria could delay claims and increase eventual severity.
- Three older insurance-linked-note reinsurance transactions entered lock-out status in June 2020, suspending collateral and note amortization. Reinsurance supports capital and loss management, but counterparty performance and continued GSE/regulatory capital credit remain risks. A new 22.5% quota-share treaty covering eligible 2021 business was entered into after year-end.
- Other material risks include dependence on Fannie Mae and Freddie Mac eligibility and PMIERs, competition from government mortgage insurance and alternative credit-risk transfers, uncertain housing-finance and mortgage rules, interest-rate/refinancing effects on persistency, reserve-estimation uncertainty, and LIBOR transition exposure.
- The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. The reserve for claims was identified as a critical audit matter because frequency and severity estimates require significant judgment. No material legal accrual was recorded, though litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether COVID-related defaults cure or progress to paid claims, and whether the $90.6 million reserve adequately reflects eventual frequency and severity.
- How persistency and refinancing affect earned premiums, policy cancellations, and the profitability of monthly- versus single-premium business.
- Whether NMIC maintains PMIERs and state capital headroom as its insured portfolio grows and delinquencies develop.
- Whether reinsurance counterparties perform and the GSEs and regulators continue to recognize expected capital credit, including during ILN lock-outs.
- The holding company’s capacity to service debt given limits on insurance-subsidiary dividends; NMIC had no ordinary dividend capacity for 2021 without Wisconsin OCI approval.
- The effects of the $400 million notes, 7.375% coupon, revolving-credit covenants, and 2020 share issuance on financing costs and per-share results.