NMI Holdings, Inc. — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. NMI provides private mortgage insurance through its insurance subsidiaries. The company began writing policies in April 2013 and remained in its growth phase.
Key financial results
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net premiums written | $20.3 million | $5.1 million | $33.3 million | $10.2 million |
| Net premiums earned | $8.9 million | $2.1 million | $15.8 million | $4.0 million |
| Total revenue | $10.9 million | $3.6 million | $20.0 million | $7.0 million |
| Underwriting and operating expenses | $20.9 million | $18.6 million | $39.3 million | $37.9 million |
| Net loss | $10.4 million | $12.9 million | $18.2 million | $27.9 million |
| Basic and diluted loss per share | $0.18 | $0.22 | $0.31 | $0.48 |
Net investment income was $1.7 million for Q2 and $3.3 million for the first half. Realized investment gains were $0.4 million and $1.0 million, respectively. The Q2 insurance-claims line was a $6,000 benefit; first-half claims expense was $98,000. No conventional borrowings are reported on the balance sheet; the company had a $2.2 million warrant liability.
At June 30, total assets were $466.1 million, including $370.0 million of available-for-sale investments and $64.3 million of cash. Total liabilities were $54.4 million and shareholders’ equity was $411.7 million. Consolidated cash and investments totaled approximately $434 million, of which $163 million was held at the holding company; approximately $239 million of consolidated net assets were held in insurance subsidiaries and subject to restrictions.
For the first half, operating cash use was $1.4 million, investing cash use was $36.7 million and financing cash use was $0.7 million. Cash declined $38.7 million to $64.3 million, primarily as the company rebalanced and reinvested its portfolio. The portfolio’s pretax book yield was 1.2% at June 30.
Business growth and period-over-period changes
- Primary insurance in force (IIF) rose to $7.2 billion from $3.4 billion at December 31, 2014; primary risk in force (RIF) increased to $1.7 billion from $801.6 million. Q2 primary new insurance written was $2.55 billion, versus $430 million in Q2 2014.
- Master policy holders increased to 842 from 570 a year earlier; 340 were generating new business in Q2, compared with 94 a year earlier.
- Revenue growth reflected higher new business and IIF, customer additions and allocations from existing customers. Net losses narrowed year over year, but expenses rose, mainly because of higher payroll and related costs. Headcount increased to 209 from 174.
- Persistency was 71.7%. Management said cancellations of single-premium policies had contributed to lower-than-expected persistency; cancellations declined during Q2 as higher interest rates reduced refinance activity.
- Primary portfolio credit indicators included a 742 weighted-average FICO for Q2 monthly business and a 92% weighted-average LTV. Approximately 62% of primary IIF was on loans with borrower FICO scores of at least 740; about 2% of primary RIF was on loans above 95% LTV.
Outlook, capital, risks and unusual items
- Profitability: NMI expected continued near-term net losses and gave no specific earnings or revenue guidance. It targets a long-term expense ratio of 20%–25% of premiums written as the business matures; management cautioned that the ratio would remain higher during the growth phase.
- PMIERs and capital: Updated GSE Private Mortgage Insurer Eligibility Requirements were scheduled to take effect December 31, 2015. Management expected compliance to require additional capital or a transition plan; possible funding methods include debt, preferred equity or common equity. As of June 30, management reported a 7.7:1 NMIC risk-to-available-assets ratio versus an 18:1 maximum under the final PMIERs. It estimated then-current capital requirements of approximately $110 million for primary IIF and $30 million for pool IIF if the requirements had been effective on that date.
- Regulatory and rating developments: In June 2015, the Wisconsin Office of the Commissioner of Insurance requested information from mortgage insurers, including NMIC, about customized terms or rates. In July, S&P assigned NMIC a BBB- financial-strength and counterparty rating and NMIH a BB- counterparty rating, both with stable outlooks.
- Distribution and liquidity constraints: NMIC was restricted from paying dividends to NMIH through December 31, 2015 under GSE conditions and, under state regulatory agreements, until January 2016; other approvals or restrictions may also apply. NMIH may need to raise capital or limit growth if internal funding is insufficient.
- Insurance and market risks: Key risks include the company’s limited operating history, competition and pricing pressure, GSE eligibility and regulatory changes, housing and employment deterioration, interest-rate and investment-market risk, persistency and refinancing trends, underwriting and reserve uncertainty, and reliance on customers, technology and third-party providers. California accounted for 14.1% of primary IIF and 13.6% of primary RIF; pool exposure was more concentrated, with California representing 28.3% of pool IIF.
- Claims and unusual items: The company had nine primary loans in default and $181,000 of primary claim reserves at June 30; no pool reserves were recorded, reflecting the pool deductible and then-current expected losses. A $1.1 million first-half gain from the change in warrant fair value reduced reported losses; this noncash mark-to-market item is not operating revenue. No pending legal proceedings or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- How much capital NMIC ultimately needs to meet PMIERs, whether NMIH raises it, and any resulting cost or shareholder dilution.
- Whether primary IIF and premiums continue to grow while persistency, pricing and customer concentration remain sustainable.
- Whether the reported low claims and reserves remain adequate as the relatively young insurance books season.
- How the Wisconsin OCI inquiry, state regulation and GSE eligibility requirements develop, including any effect on capital or business practices.
- How much holding-company liquidity is available for corporate needs, given restrictions on insurance-subsidiary assets and dividends.