NMI Holdings, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are to December 31, 2020. NMI provides private mortgage insurance through NMIC and Re One, and outsourced loan-review services through NMIS.
Financial and operating performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Total revenue | $115.2 million | $107.6 million | +7% |
| Net premiums earned | $105.9 million | $98.7 million | +7% |
| Net investment income | $8.8 million | $8.1 million | +9% |
| Insurance claims and claim expenses | $5.0 million | $5.7 million | −13% |
| Underwriting and operating expenses | $34.1 million | $32.3 million | +6% |
| Interest expense | $7.9 million | $2.7 million | Higher after 2020 debt issuance |
| Net income | $52.9 million | $58.3 million | −9% |
| Diluted EPS | $0.61 | $0.74 | −18% |
| Adjusted net income (non-GAAP) | $53.4 million | $52.7 million | +1% |
| Adjusted diluted EPS (non-GAAP) | $0.62 | $0.75 | −17% |
The loss ratio was 4.7% (5.8%); expense ratio 32.2% (32.7%); and combined ratio 36.9% (38.5%). Management attributed the GAAP net-income decline mainly to the change in warrant-liability valuation: a $0.2 million loss in Q1 2021 versus a $6.0 million gain in Q1 2020. Higher interest expense and a higher effective tax rate also weighed on results. Diluted EPS was additionally affected by the increased share count following the June 2020 equity offering. Adjusted results exclude specified items and are non-GAAP measures.
- Production and portfolio: New insurance written rose 134% to $26.4 billion. Primary insurance-in-force grew 26% year over year to $123.8 billion; total insurance-in-force was $125.4 billion. Net premiums written increased 27% to $115.8 million.
- Defaults and claims: Primary defaults were 11,090, or 2.54% of policies in force, versus 1,449, or 0.38%, a year earlier. Defaults peaked in August 2020 and declined each month thereafter. The company paid 16 claims totaling $0.6 million, versus 34 claims totaling $1.5 million. Claims expense benefited from reserve releases on some older defaults and lower estimated reserves per COVID-related default.
- Cash flow: Operating cash flow was $85.5 million, versus $47.9 million. Investing activities used $96.4 million, mainly reflecting purchases of fixed-maturity securities; financing activities used $0.4 million. Cash, cash equivalents and restricted cash ended at $115.5 million, down from $126.9 million at year-end.
- Balance sheet and liquidity: Total assets were $2.19 billion, total liabilities $807.5 million, and shareholders’ equity $1.38 billion. The investment portfolio was $1.83 billion; consolidated cash and investments were approximately $1.9 billion, including $78.2 million at the holding company. PMIERs available assets were $1.810 billion against $1.261 billion required, a $549 million excess.
- Debt: $400 million principal amount of senior secured notes remained outstanding, carried at $393.6 million net of issuance costs. The notes bear 7.375% interest and mature June 1, 2025. The $110 million revolving facility was undrawn; the company reported compliance with its covenants.
- Investment portfolio: All investments were fixed income and investment grade, with an average rating of A+. The pre-tax book yield was 2.0%. The portfolio had $25.5 million of gross unrealized losses, attributed primarily to interest-rate movements; no credit-loss allowance was recorded.
Material changes and management commentary
- Growth in premiums and investment income reflected a larger insured portfolio and increased production. Refinancing activity reduced annual persistency to 52% from 72%, and management noted that faster prepayments can reduce future premium revenue, particularly on monthly-premium policies.
- The default increase was largely linked to COVID-19-related forbearance. At March 31, 9,988 defaults were in a COVID-related forbearance program; total loans in forbearance were 14,805. Management expects assistance and repayment programs to support cures, but emphasized uncertainty around ultimate defaults and claims.
- At March 31, the gross reserve for insurance claims and claim expenses was $96.1 million, up from $90.6 million at year-end. Management used lower reserve estimates for COVID-related defaults based on expected higher cure rates; these assumptions may change as loan performance develops.
- Management described housing and mortgage origination markets as resilient, with strong purchase demand and home-price appreciation, while cautioning that the pandemic’s duration and economic effects remain uncertain. No specific full-year financial guidance was provided in the filing.
- Reinsurance remains a material capital and risk-management tool. Lock-out events continued to suspend amortization and collateral releases for the 2017, 2018 and 2019 insurance-linked-note transactions. On April 27, 2021, after quarter-end, NMIC entered a new transaction providing up to $367.2 million of excess-of-loss coverage, subject to a $163.7 million first-loss retention.
Risks, contingencies and unusual items
- Key uncertainties include COVID-19’s effects on borrowers, housing, defaults and claims; future home prices, unemployment and interest rates; GSE and PMIERs requirements; competition; reinsurance availability and counterparty performance; and investment-market movements.
- Foreclosure moratoria may delay claims and could increase claim severity if defaults persist. Reserves depend on estimates of cure rates, claim frequency and severity, and may be revised as new information emerges.
- The company reported no material legal accrual and no current expectation of a reasonably possible material litigation liability, while noting legal outcomes remain uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting.
- GSE prior approval requirements for certain insurer actions, including dividends, were then scheduled to expire June 30, 2021; the company could not rule out an extension. NMIC had no ordinary dividend capacity for the period without regulatory approval; Re One had $1.6 million of capacity.
- The LIBOR transition may affect certain investments, the revolving facility and reinsurance payments. Management was reviewing affected contracts and said the financial impact could not yet be estimated.
Important facts for investors to verify
- Whether COVID-related defaults continue to cure, and whether reserve assumptions prove adequate as forbearance and foreclosure programs change.
- Progress in defaults, claims paid, reserve development and claim severity, including the effects of home prices and foreclosure delays.
- Persistency, refinancing, new insurance written and premium trends, including the impact of ceded reinsurance and mix of monthly versus single premiums.
- Maintenance of PMIERs excess assets, statutory capital and lender/regulatory approvals, including any change to temporary GSE restrictions.
- Debt-service costs, covenant compliance, access to reinsurance and the terms and capital effect of the April 2021 transaction.
- Investment portfolio values and yields as interest rates move, and the company’s transition from LIBOR in affected contracts.