NMI Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023; comparative periods are the corresponding periods in 2022 unless otherwise noted. NMI provides private mortgage insurance through NMIC and outsourced loan-review services through NMIS.
Key financial metrics
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Total revenue | $148.2 million | $130.6 million | $427.6 million | $390.2 million |
| Net premiums earned | $130.1 million | $118.3 million | $377.8 million | $355.7 million |
| Net investment income | $17.9 million | $11.9 million | $49.3 million | $33.1 million |
| Net income | $84.0 million | $76.8 million | $238.7 million | $220.0 million |
| Diluted EPS | $1.00 | $0.90 | $2.83 | $2.53 |
| Combined ratio | 25.0% | 20.1% | 25.2% | 23.5% |
For the nine months, operating cash flow was $312.6 million, investing cash outflow was $117.9 million, and financing cash outflow was $62.6 million. Cash and cash equivalents were $176.5 million at September 30, 2023, versus $44.4 million at year-end 2022. Total assets were $2.76 billion; shareholders’ equity was $1.79 billion.
Debt was $397.2 million, consisting of $400 million principal of 7.375% senior secured notes due June 2025, net of issuance costs. The $250 million revolving facility was undrawn; NMI reported compliance with its covenants. NMIC had $2.60 billion in PMIERs available assets against $1.41 billion in required assets, a $1.19 billion excess. Its statutory risk-to-capital ratio was 11.4:1.
Material changes versus the prior comparable period
- Q3 revenue rose 13% and net income rose 9%; nine-month revenue rose 10% and net income rose 9%. Higher investment income and premium earnings drove growth; nine-month underwriting and operating expenses also declined.
- New insurance written fell to $11.3 billion in Q3 from $17.2 billion, and to $31.5 billion for nine months from $48.0 billion, primarily reflecting a smaller mortgage insurance market. Primary insurance-in-force increased 8% year over year to $194.8 billion.
- Persistency improved to 86.2% from 80.1%, as refinancing slowed. The primary default rate was 0.74%, compared with 0.71% a year earlier; defaults totaled 4,594 loans.
- Claims expense was $4.8 million in Q3, compared with a $3.4 million benefit in Q3 2022. Nine-month claims expense was $14.4 million, versus a $7.0 million benefit. Current-year default reserves increased, partly offset by favorable prior-year reserve development of $46.6 million for the nine months.
- The investment portfolio’s fair value was $2.20 billion, with $265.2 million of gross unrealized losses, mainly attributed by management to interest rates and, to a lesser extent, credit spreads. No investment credit-loss allowance was recorded. Accumulated other comprehensive loss was $213.6 million.
- NMI repurchased 2.4 million shares for $60.5 million, including costs and taxes, during the first nine months. The board extended the existing $125 million repurchase authorization and approved a new $200 million program; $208.5 million of aggregate authority remained at quarter-end.
Outlook, commentary, risks and unusual items
- The filing provides no specific earnings or production guidance. Management identifies persistent inflation, elevated interest rates, weaker housing demand, falling home prices, or sustained unemployment as potential pressures on new business and future defaults and claims.
- Management says higher investment yields contributed to investment-income growth. It also notes that rising rates can reduce fixed-income fair values and affect mortgage prepayments and claims. Portfolio pre-tax book yield was 2.6% for the nine months.
- Reinsurance remains central to capital and risk management. NMIC called and terminated the 2018 insurance-linked-note transaction in July 2023. Its Fannie Mae pool insurance agreement expired August 31, 2023, with no future exposure or related premiums under that agreement.
- A proposed SEC rule on conflicted transactions could, if adopted as proposed, affect or prohibit certain credit-risk-transfer transactions, including potentially insurance-linked-note transactions; the company was assessing the impact.
- A Homeowners Protection Act premium-refund lawsuit was dismissed in September 2023, but the plaintiff appealed in October. The company reported no material accrual and did not expect a reasonably possible material liability based on information then available, while noting litigation outcomes remain uncertain.
- The company cites risks from GSE policy changes, PMIERs and regulatory requirements, reinsurance counterparty performance, investment-market movements, and legal, cybersecurity and operational matters. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether falling mortgage originations continue to constrain new insurance written, and whether growth in insurance-in-force and persistency offsets that pressure.
- Default, cure and claim trends, including reserve adequacy and the extent to which favorable prior-year development continues.
- Investment portfolio performance, duration and unrealized losses, particularly if interest rates or credit spreads move further.
- PMIERs capital headroom, statutory capital and the availability and terms of reinsurance; verify any changes to GSE treatment or the proposed SEC rule’s status.
- Holding-company liquidity and capital allocation, including the 2025 note maturity, subsidiary dividend capacity and execution of repurchases.
- Developments in the pending appeal and any other material legal or regulatory matters.