NMI Holdings, Inc. — Q3 2014 Form 10-Q
Business context and reporting period. The filing covers the quarter and nine months ended September 30, 2014. NMI is an early-stage private mortgage insurer; its primary insurer began writing policies in April 2013. At quarter-end, the company reported $1.8 billion of primary insurance in force (IIF), $4.8 billion of pool IIF, and $528.8 million of total risk in force (RIF).
Financial performance and position
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Total revenue | $6.6 million | $2.2 million | $15.4 million | $3.4 million |
| Net premiums written | $9.7 million | $0.5 million | $19.9 million | $0.5 million |
| Net premiums earned | $3.9 million | $0.5 million | $7.9 million | $0.5 million |
| Net investment income | $1.3 million | $1.5 million | $4.3 million | $3.3 million |
| Other underwriting and operating expenses | $17.8 million | $16.0 million | $55.7 million | $45.5 million |
| Net loss | $11.0 million | $13.9 million | $38.9 million | $42.1 million |
| Basic and diluted loss per share | $0.19 | $0.25 | $0.67 | $0.76 |
Revenue and premium growth reflected expansion of the insurance business, while lower losses year over year also benefited from a $3.0 million nine-month gain from revaluing warrants, primarily as the share price declined. The company remained loss-making; a conventional positive operating margin was not reported. Management targets a long-term expense ratio of 20%–25% of premiums written and mid-teens average unlevered return on equity, but expects the expense ratio to remain substantially higher while the business scales.
Cash flow and liquidity: Nine-month operating cash use was $19.6 million, versus $29.3 million in 2013. Investing activities provided $101.1 million, principally reflecting investment maturities, redemptions and sales; financing provided $0.01 million. Cash and cash equivalents rose to $137.5 million from $55.9 million at year-end 2013. Cash and investments totaled approximately $446 million, of which approximately $173 million was held at the parent company; about $254 million of consolidated net assets was restricted within insurance subsidiaries. Total assets were $465.6 million and shareholders’ equity was $434.4 million. No debt balance or off-balance-sheet arrangements were reported.
Insurance capital: Combined statutory surplus was $243.5 million, with a combined risk-to-capital ratio of 2.1:1 at September 30. NMIC’s ratio was 1.9:1, below the GSE’s 15:1 limit applicable during its first three years. NMIH contributed $70 million to NMIC in September and $20 million in March.
Material changes versus comparable periods
- Q3 primary new insurance written increased to $974.9 million from $429.9 million in Q2 2014; primary IIF rose to $1.8 billion from $939.8 million at June 30. Primary RIF increased to $435.7 million from $220.9 million.
- Nine-month net premiums written rose to $19.9 million from $0.5 million a year earlier. Net losses narrowed to $38.9 million from $42.1 million, despite operating expenses increasing by $10.2 million.
- Cash and investments were rebalanced during Q3, including approximately $100 million of investment sales; the company also began moving toward a planned 10%–15% allocation to BBB securities. Approximately 1% of the portfolio was BBB-rated at quarter-end.
- Shareholders’ equity declined to $434.4 million from $463.2 million at December 31, 2013, largely reflecting the nine-month net loss, partly offset by other comprehensive income.
Outlook, commentary, risks and unusual items
- Management said cash, investments and projected operating cash flows should fund anticipated growth and operating expenses through 2015, and expected to consider capital options thereafter. It may raise debt or equity, use reinsurance, or contribute additional capital to subsidiaries.
- Proposed FHFA private mortgage insurer eligibility requirements (PMIERs) could require materially more capital. At quarter-end, management estimated approximately $446 million of consolidated available assets under the draft rules, but only $273 million at NMIC and Re One, versus a proposed $400 million minimum. Management anticipated a transition plan and possible additional capital raising if the draft requirements were finalized.
- NMIC’s dividends to NMIH are restricted: GSE conditions generally prohibit dividends through December 31, 2015, and state regulatory agreements through January 2016. The company may need further capital contributions to meet GSE, state or rating-agency requirements.
- Key risks include changes to GSE requirements or mortgage-insurance usage, regulatory and capital-rule changes, competition, housing and interest-rate conditions, underwriting and claims experience, customer concentration, and the company’s limited operating history. Primary and pool RIF were concentrated in California, at approximately 18% and 28%, respectively.
- The PMI litigation was settled effective July 1, 2014; the company and its insurers made a settlement payment, and the complaint was dismissed with prejudice on July 28. The company’s portion was recorded in Q2; the filing text does not provide a clear amount.
- Q3 claims expense was a $26,000 benefit; the September 30 claims reserve was $2,000, consisting of a small IBNR reserve. The first reported primary-book default notice had cured during Q3.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Final PMIER requirements, transition timing, NMIC’s available capital under those rules, and the amount and timing of any capital raise or parent contribution.
- Whether rapid growth in primary IIF and RIF translates into earned premiums and eventual profitability while operating expenses continue to rise.
- Quality and concentration of new business, including credit scores, loan-to-value mix, California exposure, and the company’s ability to diversify its portfolio.
- Investment portfolio credit and interest-rate exposure, particularly as the company increases BBB allocations; reported fixed-income duration including cash was 2.28 years.
- Claims development, pool-loss exposure, GSE and state capital compliance, and restrictions on subsidiary dividends.