NMI Holdings, Inc. — Q3 2018 Form 10-Q
Business and reporting period. NMI provides private mortgage guaranty insurance through its insurance subsidiaries and outsourced loan-review services. This summary covers the quarter and nine months ended September 30, 2018; comparisons are with the corresponding 2017 periods unless noted. Dollar amounts are in millions unless stated otherwise.
Financial and operating results
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Total revenue | $71.8 | $49.0 | $198.8 | $128.2 |
| Net premiums earned | $65.4 | $44.5 | $181.9 | $115.7 |
| Net investment income | $6.3 | $4.2 | $16.6 | $11.9 |
| Net income | $24.8 | $12.3 | $72.4 | $23.8 |
| Diluted EPS | $0.36 | $0.20 | $1.07 | $0.38 |
| Combined ratio | 48.1% | 57.5% | 50.1% | 70.6% |
- Revenue growth reflected expansion of the insured portfolio and increased monthly-policy production. Net premiums earned rose 47% in Q3 and 57% for the nine months.
- Q3 loss ratio was 1.7% and expense ratio 46.4%; for the nine months, they were 1.8% and 48.3%, respectively. Underwriting and operating expenses rose 23% in Q3 and 12% year to date, driven mainly by business growth; nine-month expenses included $2.6 million related to the 2018 insurance-linked note transaction.
- Q3 interest expense was $3.0 million. Nine-month interest expense was $12.0 million, including $2.2 million of costs associated with refinancing the prior term loan. A $5.5 million Q3 loss from the change in fair value of warrant liabilities was a significant non-operating item.
- Operating cash flow for the nine months was $99.3 million, compared with $41.8 million in 2017. Investing cash flow was negative $180.9 million and financing cash flow positive $80.6 million. Cash, cash equivalents and restricted cash ended at $18.2 million.
- Total assets were $1.052 billion and shareholders’ equity $660.5 million at September 30, 2018. The investment portfolio was $874.4 million at fair value; the company reported $892.6 million in cash and investments combined.
Material changes and capital position
- Primary insurance in force increased 47% year over year to $63.5 billion; total insurance in force was $66.5 billion. Q3 new insurance written was $7.36 billion, up 20%; monthly policies represented 91% of Q3 new writings. Management attributed growth to increased penetration of existing customers and new customer activations.
- In March, NMIH issued 4.3 million shares and received approximately $79.2 million net proceeds. In April, it contributed $70 million to its insurance subsidiary NMIC.
- In May, the company refinanced its prior debt with a $150 million five-year secured term loan, maturing in 2023, and established an $85 million revolving facility, maturing in 2021. The term loan’s stated all-in rate was 6.99% at quarter-end; no revolver borrowings were outstanding. Term-loan principal was $149.6 million, while its balance-sheet carrying value was $147.0 million. The company reported covenant compliance.
- Two insurance-linked note transactions provided excess-of-loss reinsurance coverage: the 2018 transaction added up to $264.5 million of coverage for specified vintages; the 2017 transaction had $144.1 million of coverage remaining. Quota-share reinsurance also ceded portions of eligible risk and premiums.
- NMIC reported $702.0 million of available assets against $399.0 million of PMIERs risk-based required assets at September 30. Combined statutory surplus and contingency reserve were $732.7 million; the reported combined risk-to-capital ratio was 13.3:1. NMIC’s separately reported risk-to-capital ratio, using its stated total statutory surplus including contingency reserves, was 13.9:1.
Outlook, commentary and risks
- No specific revenue or earnings guidance was provided. Management expected the full-year 2018 effective tax rate to approximate the 21% federal statutory rate and expected NMIC to remain compliant with revised PMIERs requirements taking effect March 31, 2019.
- Management said claims experience to date had been favorable and slower to develop than historical trends, but expected claims to increase as the portfolio seasons. It estimated lifetime losses on the existing primary portfolio at 20%–25% of earned premiums. The company noted that this estimate depends on underwriting, housing prices, employment, interest rates and other conditions.
- Defaults rose to 746 loans from 350 a year earlier; reserves for claims and claim expenses were $10.9 million. Management cited portfolio aging and disaster-affected loans, and reported favorable prior-year reserve development of $1.8 million for the nine months. It expected disaster-area defaults to cure at higher rates and therefore held lower reserves for those loans.
- Rate GPS, a proprietary risk-based pricing platform evaluating up to 30 risk variables, began operating in June 2018. Management said it expected the platform to improve risk selection and pricing.
- Principal risks include changes in GSE practices or PMIERs, competition from private and public mortgage insurers, housing and interest-rate conditions, future claims exceeding estimates, reinsurer counterparty performance, access to capital and reinsurance, and operational execution. The filing reported no material legal accrual and no known material change in previously disclosed risk factors, while noting litigation outcomes remain uncertain.
Important facts for investors to verify
- Whether premium growth and monthly-policy mix continue to support earnings as the portfolio seasons and claims emerge.
- Whether the $10.9 million claims reserve adequately reflects default trends, disaster-area cure assumptions and favorable prior-year development.
- NMIC’s continuing PMIERs and state-capital compliance, including after revised PMIERs take effect, and the amount of capital credit recognized for reinsurance.
- The cost, covenant headroom and refinancing exposure of the variable-rate term loan, plus the availability and terms of the undrawn revolver.
- The effect of investment-market movements on the portfolio: unrealized investment losses were $15.9 million at quarter-end, and the filing identified interest-rate and credit risks.