NMI Holdings, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022; comparisons are to the corresponding 2021 periods unless noted. NMI provides private mortgage insurance through NMIC and outsourced loan-review services through NMIS.
Financial and operating performance
| Metric | Q3 2022 | First nine months 2022 |
|---|---|---|
| Total revenue | $130.6 million, up 5.3% | $390.2 million, up 8.4% |
| Net premiums earned | $118.3 million, up 4.2% | $355.7 million, up 7.7% |
| Net investment income | $11.9 million, up 21.5% | $33.1 million, up 18.0% |
| Net income | $76.8 million, up 27.7% | $220.0 million, up 28.9% |
| Diluted EPS | $0.90, versus $0.69 | $2.53, versus $1.96 |
| Combined ratio | 20.1%, versus 33.3% | 23.5%, versus 35.2% |
| Operating cash flow | $281.6 million for nine months, versus $281.4 million |
For the nine months, investing activities used $182.1 million and financing activities used $50.3 million, primarily reflecting investment purchases and $51.2 million of share repurchases. Cash and cash equivalents were $125.8 million at quarter-end. Total assets were $2.404 billion and shareholders’ equity was $1.526 billion.
Debt was $395.7 million, representing $400 million principal of 7.375% senior secured notes due June 2025, net of issuance costs. The $250 million revolving facility was undrawn; the company reported compliance with its covenants. NMIH had $97.4 million of cash and investments at the holding-company level. NMIC reported $2.275 billion of PMIERs available assets against $1.173 billion required, a $1.102 billion excess, and a 10.9:1 statutory risk-to-capital ratio.
Material changes and drivers
- Primary insurance-in-force increased 24% year over year to $179.2 billion; risk-in-force rose to $46.3 billion. Persistency improved to 80.1% from 58.1%, as higher mortgage rates slowed refinancing.
- New insurance written was $17.2 billion in Q3 and $48.0 billion year to date, down from $18.1 billion and $67.2 billion, respectively, as the mortgage insurance market contracted. Year-to-date net premiums written decreased 2% to $348.0 million.
- Default inventory fell to 4,096 loans (0.71% of policies in force) from 7,670 (1.56%). Claims expense was a benefit of $3.4 million in Q3 and $7.0 million for the nine months, mainly reflecting cures and reserve releases. The company said average reserves per default increased as COVID-era defaults aged and assumptions became more conservative.
- Underwriting and operating expenses declined to $27.1 million in Q3 and $90.8 million year to date. Management cited lower deferred acquisition-cost amortization, reduced technology and capital-markets costs, and higher reinsurance ceding commissions, partly offset by higher travel and depreciation costs.
- Higher interest rates and credit spreads drove substantial unrealized investment losses: gross unrealized losses were $275.2 million at September 30, versus $23.2 million at year-end 2021. This contributed to a $222.8 million nine-month other comprehensive loss and reduced investment fair value to $1.974 billion from $2.086 billion. No investment credit-loss allowance was recorded; management attributed the losses primarily to market-rate movements.
Outlook, risks, and unusual items
- The filing provides no specific earnings or operating guidance. Management said COVID-19’s acute impact had receded but remained uncertain; it also identified persistent inflation, rising interest rates, weaker consumer confidence, increasing jobless claims, and possible housing-market deterioration as risks.
- Reinsurance remains important to capital management. Two insurance-linked-note transactions were in lock-out at quarter-end: the 2018 transaction due to reference-pool defaults and the 2021-2 transaction while building target credit enhancement. The 2019 transaction cleared its lock-out in August. NMIC also terminated the 2017 and 2020-1 transactions and entered new excess-of-loss coverage; a further transaction providing $96.8 million of coverage was entered into on November 1, 2022.
- The $125 million share-repurchase authorization runs through December 31, 2023; $73.8 million remained at quarter-end. Warrants expired in April 2022, leaving no warrant liability at September 30.
- NMI is a third-party defendant in litigation concerning mortgage-insurance premium refunds under the Homeowners Protection Act. The company could not assess the outcome or potential impact and had recorded no material accrual. It cautioned that litigation outcomes remain uncertain.
- Other key exposures include mortgage-insurance competition, GSE and PMIERs requirements, reinsurance counterparty performance, investment interest-rate and credit-spread risk, and the ability to maintain regulatory capital and liquidity.
Important facts for investors to verify
- Whether the reduction in mortgage originations and new insurance written persists, and how portfolio growth and persistency affect earned premiums.
- Whether default cures continue and whether aging defaults, housing conditions, or borrower stress lead to higher claims or reserve revisions.
- Whether unrealized investment losses remain primarily rate-driven and are recoverable, and how further rate changes affect capital, liquidity, and investment income.
- Whether reinsurance coverage, lock-out status, and reinsurer creditworthiness continue to support PMIERs compliance and capital flexibility.
- Remaining repurchase authority, debt maturity and interest costs, and NMIC’s statutory and PMIERs capital buffers.
- Any material developments in the Homeowners Protection Act litigation or other legal contingencies.