NMI Holdings, Inc. — Q1 2018 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2018, NMI Holdings provided private mortgage insurance through its subsidiaries and outsourced loan-review services. The company reported 1,291 master-policy customer relationships and $56.6 billion of insurance in force (IIF), including $53.4 billion of primary IIF.
Financial and operating performance
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Total revenue | $59.6 million | $37.1 million |
| Net premiums earned | $54.9 million | $33.2 million |
| Net investment income | $4.6 million | $3.8 million |
| Insurance claims and claim expenses | $1.6 million | $0.6 million |
| Underwriting and operating expenses | $28.5 million | $26.0 million |
| Net income | $22.4 million | $5.5 million |
| Diluted earnings per share | $0.34 | $0.09 |
| Combined ratio | 54.7% | 80.1% |
Net premiums earned rose 65%, primarily reflecting growth in the insured portfolio, higher production and cancellation earnings, partly offset by reinsurance cessions. Primary new insurance written increased 82% to $6.46 billion; 84% was monthly-premium business. Total IIF grew 48% year over year. The loss ratio increased to 2.9% from 1.9%, while the expense ratio declined to 51.8% from 78.2%.
Operating cash flow was $21.1 million, versus cash used of $2.1 million a year earlier. Investing activities used $16.6 million; financing activities provided $78.1 million, mainly from a March stock offering that generated $79.2 million net proceeds. Cash and cash equivalents were $101.9 million at quarter-end, and cash and investments totaled approximately $825.7 million, including $123.0 million held at the holding company.
Total assets were $987.6 million and shareholders’ equity was $601.9 million at March 31, 2018. The term-loan carrying amount was $143.9 million; principal outstanding was $146.3 million, with a variable all-in rate of 8.54% and maturity in November 2019. The company reported compliance with loan covenants. The insurer subsidiaries reported a combined statutory net loss of $6.8 million for the quarter. NMIC reported $555.3 million of PMIERs available assets against $522.3 million of required assets. In April, the parent contributed $70 million to NMIC.
Changes, outlook, risks and unusual items
Effective January 1, 2018, NMIC began a new quota-share reinsurance transaction covering eligible 2018–2019 policies. The company also completed a 4.3-million-share public offering in March. The new reinsurance arrangement, together with existing quota-share and excess-of-loss agreements, reduces retained risk and affects premiums, claims, capital and liquidity.
Management expects claims to rise as the insured portfolio ages; it estimates lifetime loss ratios of 20%–25% for the existing primary portfolio. It said recent claims experience had developed more slowly than historical trends, but defaults increased, including in areas affected by hurricanes Harvey and Irma and California wildfires. Of 1,000 loans in default at quarter-end, 474 related to FEMA-declared disaster areas; reserve estimates assume these loans will cure at higher rates than comparable non-disaster defaults. Claims reserves were $10.4 million, and management noted estimates may change as loss experience develops.
The filing gives no specific earnings or revenue guidance. Management estimated the 2018 annual effective tax rate would approximate the 21% federal statutory rate. Key risks include changes to GSE practices or eligibility requirements, competition from public mortgage insurers and alternative credit-risk-transfer programs, housing-market and interest-rate shifts, reinsurance-counterparty performance, and the ability to maintain required capital. The portfolio’s fixed-income investments had $10.7 million of gross unrealized losses; management did not consider the securities other-than-temporarily impaired and said it did not expect to be forced to sell before recovery. No material off-balance-sheet arrangements or material legal accruals were reported.
Important facts for investors to verify
- Whether rapid growth in new insurance written and IIF converts to sustainable premium earnings and profitability as the portfolio seasons.
- How defaults and claims develop, especially disaster-area loans, and whether reserve assumptions and the estimated 20%–25% lifetime loss ratio remain appropriate.
- NMIC’s PMIERs cushion, statutory capital and risk-to-capital position after the April $70 million contribution, and the effect of any final PMIERs changes.
- The cost, coverage, counterparty exposure and capital benefits of the quota-share and excess-of-loss reinsurance arrangements.
- Holding-company liquidity and the refinancing or repayment plan for the variable-rate term loan due in 2019.