NMI Holdings, Inc. — FY 2014 Form 10-K
Reporting period: Fiscal year ended December 31, 2014; fourth-quarter figures are noted separately. NMI Holdings provides private mortgage guaranty insurance through its subsidiaries. It began writing insurance in April 2013, so results reflect an early-stage business scaling its customer base and operations.
Financial and operating performance
| Metric | FY 2014 | FY 2013 |
|---|---|---|
| Net premiums written | $34.0 million | $3.5 million |
| Net premiums earned | $13.4 million | $2.1 million |
| Total revenue | $22.2 million | $5.6 million |
| Net loss | $48.9 million | $55.2 million |
| Operating cash flow | $(21.0) million | $(36.3) million |
| Total assets | $463.3 million | $481.2 million |
| Shareholders' equity | $427.0 million | $463.2 million |
Fourth-quarter 2014 net premiums written were $14.1 million, premiums earned were $5.5 million, and net loss was $10.0 million. FY 2014 operating expenses were $73.0 million, up from $60.7 million, as the company expanded staff and outsourced services. The reported expense and combined ratios were both 545%, reflecting the low premium base relative to start-up costs; management targets a long-term expense ratio of 20%–25% as the business matures.
Net investment income was $5.6 million, compared with $4.8 million. A $2.9 million gain from remeasuring warrant liabilities helped results; this was a non-cash fair-value item. The company reported no debt. At year-end it held $103.0 million in cash and $336.5 million in investments. Cash and investments totaled approximately $440 million, including about $164 million at the holding company; insurance-subsidiary assets are subject to regulatory and GSE restrictions.
Business growth and changes versus prior year
- Primary new insurance written rose to $3.45 billion from $162.2 million. Unlike 2013, when new writings were dominated by a Fannie Mae pool transaction, 2014 new writings were primary insurance; no new pool insurance was written.
- Primary insurance in force reached $3.37 billion, versus $161.7 million a year earlier. Total insurance in force was $8.09 billion, including $4.72 billion of pool insurance, down from $5.25 billion total in 2013 as the pool book amortized.
- Total risk in force was $894.7 million, versus $129.6 million. The consolidated statutory risk-to-capital ratio was 3.6:1 at year-end.
- Master policyholders increased to 735 from 305; 37.7% were delivering business, versus 7.2% in 2013. Two customers each represented more than 10% of consolidated revenue, and California accounted for approximately 18% of total risk in force.
- Reported claims remained low: claims incurred were $83,000, and the year-end claim reserve was $83,000. The company had four primary loans in default at year-end. The Fannie Mae pool transaction had no claim reserve, in part because losses must exceed a $10.3 million deductible before NMI bears claims.
Liquidity, outlook, risks, and unusual items
- Management expected cash, investments, and projected operating cash flows to fund anticipated growth and expenses through 2015, after which it expected to consider capital options. Additional capital could involve debt or equity and could dilute common shareholders.
- The proposed GSE PMIERs were a key capital uncertainty. At year-end, draft-rule available assets were approximately $417 million on a consolidated basis, but only $253 million were at NMIC, including Re One. The draft requirements included a $400 million minimum; management said a transition plan and likely additional capital could be needed. Final requirements were anticipated in 2015.
- NMIC was restricted from paying dividends under GSE and state agreements through late 2015 or January 2016. The company also needed to obtain a financial strength rating by July 31, 2015 to maintain Freddie Mac approval.
- Key risks include the company's limited operating history and continuing losses; retaining major lender customers; competition from private insurers and government programs; changes to GSE eligibility or housing-finance policy; the FHA's January 2015 premium reduction; home-price, employment, interest-rate, and claim developments; and execution, technology, vendor, and cybersecurity risks.
- Investment portfolio fair value was below amortized cost by approximately $1.2 million at year-end. Management attributed unrealized losses primarily to interest-rate movements and did not consider the securities other-than-temporarily impaired. During 2014, the company broadened its investment guidelines to permit BBB securities; 9% of the portfolio was BBB-rated at year-end.
- The company reported no pending legal proceedings. Management cited a decline in legal expenses, net of settlement costs associated with litigation settled in the third quarter of 2014.
- Management expected relatively low claims in the first two to three operating years, but stated that ultimate claims depend on economic conditions and could differ materially from estimates. No numerical earnings guidance was provided.
Important facts for investors to verify
- Final PMIER terms, NMIC's compliance path, the timing and amount of any capital raise, and effects on growth or shareholder dilution.
- Whether the company obtains the required rating by the Freddie Mac deadline and maintains GSE eligibility and state licenses.
- Growth and quality of primary writings, customer retention and concentration, California exposure, and the mix of single-premium and recurring-premium business.
- Whether losses, claims, persistency, and investment returns develop as management assumes, and whether operating expenses decline relative to premiums as scale increases.
- Parent-company liquidity available for operations and subsidiary capital support, given restrictions on insurance-subsidiary dividends.