Business context and reporting period
NMI Holdings, Inc. filed this unaudited Form 10-Q for the quarter ended March 31, 2020. The company provides private mortgage insurance through its insurance subsidiaries and outsourced loan-review services through NMIS. Unless noted, financial amounts below are in millions of dollars; operating results compare Q1 2020 with Q1 2019.
Financial and operating performance
| Metric | Q1 2020 / March 31, 2020 | Prior comparable period / change |
|---|---|---|
| Total revenue | $107.6 | $81.1; up 33% |
| Net premiums earned | $98.7 | $73.9; up 34% |
| Net investment income | $8.1 | $7.4 |
| Net income | $58.3 | $32.9 |
| EPS | Basic $0.85; diluted $0.74 | Basic $0.49; diluted $0.48 |
| Adjusted net income and adjusted diluted EPS (non-GAAP) | $52.7; $0.75 | $38.5; $0.56 |
| Loss / expense / combined ratio | 5.8% / 32.7% / 38.5% | 3.7% / 41.7% / 45.4% |
| Operating cash flow | $47.9 | $28.3 |
| Cash, cash equivalents and restricted cash | $109.8 | $41.1 at December 31, 2019 |
| Total assets / shareholders’ equity | $1,387.8 / $974.9 | $1,364.8 / $930.4 at December 31, 2019 |
| Term loan | $145.5 carrying value; $147.4 principal outstanding | No revolver borrowings at quarter-end |
Growth in premiums reflected a larger insured portfolio, higher monthly-policy production and single-premium policy cancellations; investment income rose with portfolio size. Net income also benefited from a $6.0 million gain from remeasuring the warrant liability, versus a $5.5 million loss in Q1 2019. This volatile, noncash item materially affects the GAAP comparison; adjusted results exclude it and other specified items. Claims expense increased to $5.7 million from $2.7 million.
Mortgage insurance portfolio and capital
- Primary insurance-in-force was $98.5 billion, up 34% year over year; total IIF, including pool insurance, was $101.0 billion. Primary risk-in-force was $25.2 billion.
- Q1 primary new insurance written was $11.3 billion, up 63%; 93% was monthly-premium business. Annual persistency fell to 71.7% from 87.2%, reflecting refinancing activity.
- At March 31, 2020, there were 1,449 primary loans in default, a 0.38% rate; the company reported 1,610 defaults and a 0.43% rate as of April 30. Claims reserves were $29.5 million, versus $23.8 million at year-end.
- PMIERs available assets were $1.070 billion against $912 million of required assets, leaving $157 million of excess. Combined statutory surplus was $457.8 million; statutory contingency reserves were $588.4 million and the reported statutory risk-to-capital ratio was 17.2:1.
Material changes, liquidity and debt
Consolidated operating cash flow increased year over year. Investing activities provided $25.8 million, compared with $12.0 million used in Q1 2019, as the company paused reinvestment and emphasized liquidity amid market volatility. Cash increased by $68.7 million during the quarter. The investment portfolio had a fair value of $1.070 billion, was entirely fixed-income, and management reported it as investment grade with an average rating of A+; the company recorded no credit-loss allowance. Unrealized losses rose sharply during the market disruption, while management reported an aggregate $11 million unrealized gain position at quarter-end.
On March 20, the company amended its revolver, increasing capacity from $85 million to $100 million, extending maturity to February 2023 and reducing borrowing and commitment costs. All reported debt covenants were met at quarter-end. Subsequent to quarter-end, the company obtained permission to issue up to $400 million of senior debt alongside the revolver and expanded regulatory approval to allocate incremental holding-company interest expense to NMIC if it pursues additional debt.
Outlook, risks and unusual items
- COVID-19: Management could not estimate the pandemic’s ultimate effect. It expected weaker purchase originations and lower near-term industry insurance-writing volume, partly offset by refinancing activity. The company raised rates on new business and tightened underwriting and documentation requirements. It anticipated more delinquencies, reserves and claims as economic hardship and forbearance develop.
- Capital and delinquency uncertainty: Management estimated it could remain PMIERs-compliant under materially higher defaults, citing excess assets, reinsurance and a 70% disaster-related charge reduction on newly delinquent loans. The filing cautions that GSE interpretation of the treatment of COVID-related forbearances was uncertain and could increase required assets.
- Claims and housing exposure: Outcomes depend on unemployment, home prices, delinquency cures, claim frequency and severity, and the duration of foreclosure moratoria. Management noted that extended delays could defer claims and increase severity. April default data showed an increase from quarter-end.
- Markets and funding: Credit-spread widening and liquidity demand affected investment valuations. The company warned of possible further investment losses, lower returns on new investments, and potential difficulty accessing debt or reinsurance markets. Its term loan and certain reinsurance costs are LIBOR-linked; the effect of the benchmark transition was not yet known.
- Other items: A seven-year IT services agreement with Tata Consultancy Services became effective March 31; most IT employees were expected to transfer in Q2. The company reported no material off-balance-sheet arrangements and no material legal accrual or currently expected reasonably possible material legal liability. It provided no quantified earnings or full-year financial guidance; it said COVID-19 effects could not yet be estimated.
Important facts for investors to verify
- How COVID-related forbearance translates into reported defaults, claims, reserves and PMIERs asset requirements, including subsequent delinquency and claims data.
- Whether the $157 million PMIERs excess remains adequate as risk-based requirements change and whether GSEs agree with the company’s disaster-related treatment.
- Whether premium growth, refinancing-related cancellations and persistency changes support future earned premiums and profitability.
- Investment portfolio credit quality, fair-value movements, realized or credit losses, and returns as new assets are invested at lower yields.
- Any use of the amended revolver or authorization for up to $400 million of senior debt, including resulting leverage, interest expense and covenant headroom.
- The effect of the IT outsourcing transition and the warrant-liability remeasurement on reported versus adjusted results.