NMI Holdings, Inc. — Q3 2013 Form 10-Q
Business context and period. For the quarter and nine months ended September 30, 2013. NMI was a development-stage mortgage insurer that began writing policies in April 2013; results primarily reflect startup and business-building costs rather than a mature insurance operation.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $2.16 million for Q3; $3.38 million for nine months | $874 for Q3 2012; $874 for nine months 2012 |
| Net loss | $13.87 million for Q3; $42.10 million for nine months | $8.11 million for Q3 2012; $14.69 million for nine months 2012 |
| Loss per share | $0.25 for Q3; $0.76 for nine months | $0.15 for Q3 2012; $0.46 for nine months 2012 |
| Operating cash flow | $(29.28) million for nine months | $(8.86) million for nine months 2012 |
| Cash and investments | $446.1 million, including $34.1 million cash and $412.0 million investments | $490.7 million at December 31, 2012, including $485.9 million cash and $4.9 million investments |
| Total assets / equity | $461.7 million / $446.9 million | $542.8 million / $488.7 million at December 31, 2012 |
| Debt and liabilities | No borrowings reported; total liabilities $14.9 million, including $5.45 million warrant liability | Total liabilities $54.0 million at December 31, 2012 |
For nine months, premiums written and earned were $482,566; Q3 premiums were $481,529. Net investment income was $3.34 million for nine months. The investment portfolio had $7.27 million of unrealized losses at September 30, recorded in accumulated other comprehensive loss; management reported no other-than-temporary impairment. The company reported no loss reserves at quarter-end.
Operating expenses rose to $45.48 million for nine months from $14.70 million a year earlier, primarily reflecting increased staffing, share-based compensation, professional fees, and technology and licensing costs. Net loss margin is not a useful indicator at this early stage given minimal premium revenue. The company reported a statutory risk-to-capital ratio of 0.5:1, below its stated GSE and regulatory limits.
Material changes and business developments
- Premium activity began in April 2013. At September 30, primary insurance in force was $4.6 million across 22 loans; pool insurance in force was $5.17 billion across approximately 22,000 loans. Total risk in force was $94.3 million.
- A Fannie Mae pool agreement effective September 1 covers loans with approximately $5.2 billion unpaid principal balance. NMI’s initial risk in force was approximately $93.1 million; the agreement has an expected 10-year term.
- Cash and investments declined substantially as the company moved proceeds into fixed-income securities and funded operating costs. Investing cash outflow was $420.9 million for the nine months, principally reflecting purchases of securities.
- In November 2013, the company completed an IPO, including full exercise of the over-allotment option. It received approximately $29 million net proceeds on $31.4 million gross proceeds.
Outlook, commentary, and risks
- Management did not expect operating profitability through 2014. It targeted a long-term expense ratio of 20%–25% and average unlevered ROE in the mid-teens over time. These are targets, not near-term guidance.
- Management expected cash, investments and projected operating cash flows to fund growth through 2015, but said additional capital could be needed sooner if risk, expenses or capital requirements exceed expectations. It expected to need additional capital from 2015 onward.
- GSE approval conditions include minimum statutory capital of $150 million and a risk-to-capital limit of 15:1 through December 31, 2015; dividend and reinsurance restrictions also apply. State requirements and future GSE eligibility standards may change.
- Licensing remained incomplete in Wyoming; rate approval was pending in Washington and policy-form approvals in Florida, Alaska and Maryland. Customer uptake, lender integrations and completion of the new insurance system were important execution dependencies.
- The PMI receiver lawsuit seeks injunctive relief and unspecified damages. The company denied the allegations, but said it could not estimate potential losses; no litigation provision was recorded. An adverse result could also affect operations and certain officers’ eligibility.
- Management highlighted exposure to housing and economic conditions, mortgage-insurance competition, GSE and FHA policy changes, investment-market risks, claims/reserve estimation, and possible costs or delays in technology implementation. A proposed change to provide rescission relief after 12 timely payments remained subject to approvals.
Investor facts to verify
- Whether primary insurance production and lender adoption grow beyond the initial small book and single large pool transaction.
- Whether operating cash burn, hiring and technology costs remain consistent with the stated runway and capital plans.
- How loss reserves develop as the insured books season, given that no reserves were recorded at September 30.
- Whether NMI maintains required statutory capital and GSE/state risk-to-capital compliance as risk in force expands.
- Outcomes of the PMI litigation, outstanding state approvals, and implementation of the AXIS systems and policy changes.
- Whether the $7.27 million unrealized investment loss position changes materially, and the eventual cash proceeds and dilution implications of the IPO and outstanding warrants.