NMI Holdings, Inc. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. NMI provides private mortgage insurance through its insurance subsidiaries. It began writing policies in April 2013 and reported results on a consolidated basis.
Financial and operating performance
| Metric | Q1 2015 | Q1 2014 |
|---|---|---|
| Net premiums written | $12.9 million | $5.2 million |
| Net premiums earned | $6.9 million | $1.9 million |
| Net investment income | $1.6 million | $1.5 million |
| Total revenue | $10.4 million | $4.2 million |
| Insurance claims and claim expenses | $0.1 million | None reported |
| Underwriting and operating expenses | $18.4 million | $19.3 million |
| Net loss | $7.8 million | $15.1 million |
| Basic and diluted loss per share | $0.13 | $0.26 |
The year-over-year reduction in net loss reflected higher earned premiums and investment income, a warrant-liability fair-value gain, and lower technology, depreciation and certain other expenses. The $1.2 million warrant-liability gain was noncash and primarily reflected a lower share price. No debt balance is reported in the balance sheet.
At March 31, total assets were $461.7 million, liabilities $38.5 million and shareholders’ equity $423.2 million. Cash and cash equivalents were $66.4 million; available-for-sale investments were $367.9 million. Cash and investments totaled approximately $434 million, including $158 million held at the holding company. Approximately $248 million of consolidated net assets were held by insurance subsidiaries and restricted. Unearned premiums were $28.1 million and the claims reserve was $0.2 million.
Operating cash use was $7.5 million, investing cash use $29.1 million and financing cash use less than $0.1 million. Cash declined $36.6 million during the quarter to $66.4 million, principally as cash was redeployed into investments. Management said cash, investments and projected operating cash flows should fund anticipated growth and expenses through at least 2015.
Business trends and changes versus comparable periods
- Primary insurance in force rose to $4.8 billion from $3.4 billion at December 31, 2014; primary risk in force increased to $1.1 billion from $801.6 million. Pool insurance in force was $4.6 billion and pool risk in force $93.1 million.
- First-quarter primary new insurance written was $1.70 billion, nearly flat with Q4 2014 and substantially above Q1 2014’s $354.3 million. Monthly and flow-single new business grew sequentially, while aggregated-single new business declined 28% from Q4 and represented 32% of Q1 total, versus 45% in Q4.
- The company had 777 master policyholders, of whom 291 generated new insurance written in Q1 2015, compared with 436 and 35, respectively, in Q1 2014.
- Premiums earned rose partly because of portfolio growth and $1.4 million earned from cancellations of single-premium policies, which management linked to refinancing activity amid low interest rates. Net premiums written declined from Q4 2014’s $14.1 million as aggregated-single business fell.
- Primary risk in force was concentrated in higher FICO categories: 63.6% was associated with borrowers scoring at least 740. About 1% of primary risk in force was on loans above 95% loan-to-value. California represented 14.7% of primary risk in force; pool risk was more concentrated in California at 28.0%.
Outlook, risks and unusual items
- Management targets a mature expense ratio of 20%–25% of premiums written, but said the ratio is expected to remain significantly higher while premiums are low relative to largely fixed operating costs. No specific near-term earnings or revenue guidance was provided.
- The FHFA published updated GSE Private Mortgage Insurer Eligibility Requirements on April 17, 2015, after quarter-end; they are scheduled to take effect December 31, 2015. The requirements include available assets of at least the greater of $400 million or a risk-based amount. NMI expected either to meet the financial requirements by the effective date or submit a transition plan, potentially involving additional capital.
- At March 31, NMIC’s risk-to-capital ratio was 5:1 and Re One’s was 8.2:1, below applicable state and GSE limits. The company nevertheless expects to provide further capital support as needed, including for new GSE requirements and business growth.
- NMIC could not pay dividends to NMIH through December 31, 2015 without regulatory approval; GSE and state restrictions also barred dividends until at least December 31, 2015 and January 2016, respectively. This limits parent-company access to insurance-subsidiary capital.
- The company had not paid claims to date. Its $187,000 claims reserve covered six primary loans in default; there were 35 pool loans at least 60 days past due, but the company recorded no pool reserve because of the contractual deductible and its loss expectations. Management’s estimated lifetime loss ratio was 20%–25% of earned premiums, based on assumptions that actual experience could differ from.
- Key risks include the company’s limited operating history, competition and pricing pressure, dependence on GSE eligibility and customer relationships, housing and interest-rate conditions, capital requirements, reserve estimation, and the possibility of needing additional financing. FHA reduced some single-family premiums in January 2015, creating competitive uncertainty.
- The investment portfolio had a 0.6% pretax book yield. Management described it as investment grade and primarily fixed income; interest-rate, credit, prepayment and concentration risks could affect value and liquidity. No material pending legal proceedings or off-balance-sheet arrangements were reported.
Most important facts for investors to verify
- How NMI will satisfy the updated PMIERs, including the resulting required assets, any transition plan and potential capital raising.
- Whether primary new business, premium growth and customer activity continue while aggregated-single production declines and competition affects pricing.
- Whether the holding company’s available liquidity remains adequate given restricted insurance-subsidiary assets and dividend limitations.
- How defaults, claims, loss reserves and pool exposure develop as the relatively young insured books season.
- Whether expenses scale down as a percentage of premiums toward management’s 20%–25% mature target, and whether cash use remains consistent with management’s stated liquidity outlook.