NMI Holdings, Inc. — Q2 2019 Form 10-Q
Business context and reporting period. NMI provides private mortgage insurance, primarily through National Mortgage Insurance Corporation (NMIC), and also offers outsourced loan-review services. This filing covers the quarter and six months ended June 30, 2019; comparisons are with the corresponding 2018 periods unless noted. Amounts below are in U.S. dollars; financial-statement figures are generally in millions.
Financial performance and position
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Total revenue | $91.2 | $67.5 | $172.3 | $127.0 |
| Net premiums earned | $83.2 | $61.6 | $157.1 | $116.5 |
| Net investment income | $7.6 | $5.7 | $15.0 | $10.3 |
| Net income | $39.1 | $25.2 | $72.0 | $47.6 |
| Diluted EPS | $0.56 | $0.37 | $1.04 | $0.70 |
| Combined ratio | 42.6% | 48.1% | 44.0% | 51.2% |
- Revenue and growth: Net premiums earned grew 35% in Q2 and in the first half, reflecting growth in insurance-in-force (IIF), higher monthly policy production and earnings from single-premium policy cancellations, partly offset by reinsurance cessions. Q2 new insurance written (NIW) rose 87% to $12.2 billion; first-half NIW rose 47% to $19.1 billion. Primary IIF was $81.7 billion, up 41% year over year.
- Profit and margins: Net income increased 55% in Q2 and 51% in the first half. For the first half, the loss ratio was 3.6%, expense ratio 40.3% and combined ratio 44.0%. Claims expense increased as the insured book grew and aged, but remained modest relative to earned premiums.
- Cash flow: First-half operating cash flow was $87.3 million, versus $61.4 million. Investing activities used $75.0 million, mainly for purchases of investments; financing activities used $1.9 million. Cash, cash equivalents and restricted cash ended at $35.7 million, up from $25.3 million at year-end 2018.
- Assets and liquidity: Total assets were $1.22 billion at June 30, versus $1.09 billion at December 31, 2018; shareholders’ equity was $812.4 million, versus $701.5 million. Cash and investments totaled approximately $1.1 billion, including $44.8 million held at the holding company. The company also had an undrawn $85 million revolver.
- Debt: The term loan carrying value was $146.3 million; principal outstanding was $148.5 million and matures in May 2023. Its stated all-in interest rate was 6.95% at quarter-end. No revolver borrowings were outstanding. The company reported compliance with debt covenants.
- Insurance capital: NMIC’s PMIERs available assets were $878.6 million against required assets of $782.5 million. Combined statutory surplus for NMIC and Re One was $438.4 million, with a 15.8:1 risk-to-capital ratio. These are distinct regulatory measures.
Material changes versus the prior comparable period
- Growth in monthly premium business drove higher NIW and IIF. Monthly policies represented 91% of Q2 NIW and 78% of primary IIF, compared with 72% of IIF a year earlier.
- Underwriting and operating expenses rose 12% in Q2 and 10% in the first half, as policy volume, compensation and technology costs increased. The expense ratio nevertheless improved with premium growth.
- Claims and claim expenses increased to $2.9 million in Q2 from $0.6 million and to $5.7 million in the first half from $2.2 million. The quarter-end reserve was $18.4 million, versus $12.8 million at year-end 2018. Management cited portfolio growth and seasoning, partly offset by favorable prior-year reserve development.
- Interest expense declined to $3.1 million in Q2 from $5.6 million and to $6.1 million in the first half from $9.0 million. Prior-year periods included $2.2 million of debt-extinguishment and refinancing costs; the newer term loan also carried a lower spread.
- The fair-value loss on warrant liability was $1.7 million in Q2 and $7.2 million in the first half, versus gains in the 2018 periods. This non-cash valuation movement partly offset earnings growth. First-half other comprehensive income was $28.9 million, largely reflecting unrealized investment gains.
Outlook, commentary, risks and unusual items
- Outlook: The filing gives no numerical earnings or revenue guidance. Management said it expects to continue evaluating reinsurance opportunities and expects claims to rise as more of the portfolio reaches the historically higher-claim years. Results for interim periods may not indicate full-year results.
- Reinsurance: Effective April 1, NMIC terminated one reinsurer under the 2016 quota-share treaty on a cut-off basis and recaptured about $500 million of primary risk-in-force. The change reduced the premium cession rate on eligible policies from 25% to 20.5% and increased PMIERs required assets by approximately $27 million. On July 30, 2019, after quarter-end, NMIC entered a new excess-of-loss transaction covering up to $326.9 million of aggregate losses for a specified portfolio.
- Claims and portfolio risk: Only 0.3% of primary policies were in default at June 30, but management cautioned that claims are difficult to predict and could rise with portfolio seasoning, unemployment, lower home prices or other adverse economic conditions. Natural disasters, loan-level risk and geographic concentration are also relevant; California accounted for 12.3% of primary risk-in-force.
- Regulatory and market risks: The business depends on continued GSE approval and compliance with PMIERs, state licensing and capital rules. Competition includes other private insurers and government programs; changes in GSE practices, regulation, housing-market conditions or reinsurance availability could affect results and capital.
- Investments and interest rates: The $1.0 billion investment portfolio was entirely fixed maturity securities, with a 3.2% first-half pre-tax book yield. Management reported $1.0 million of gross unrealized losses and no securities considered other-than-temporarily impaired at quarter-end; a $0.4 million impairment loss was recognized in the first half for a security planned for sale. Variable-rate debt and reinsurance pricing also create interest-rate exposure.
- Other items: Adoption of the lease standard added right-of-use assets and lease liabilities; it did not affect earnings or cash flows. Ordinary-course legal matters were disclosed, with no material accrual recorded and no material liability then expected, though outcomes remain uncertain. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Key facts for investors to verify
- Whether strong premium growth and the shift toward monthly policies persist, and how cancellation and persistency trends affect earned premiums.
- Whether claims, default counts and reserve estimates rise as the insurance portfolio seasons; review favorable prior-year reserve development and assumptions for disaster-related defaults.
- Whether PMIERs capital headroom remains adequate after the reinsurer termination and under the revised requirements, and whether the new July 2019 reinsurance transaction receives and retains required approvals and capital credit.
- How much of reported earnings growth is attributable to recurring insurance operations versus warrant fair-value changes, investment marks and policy cancellations.
- Holding-company liquidity, subsidiary dividend restrictions, term-loan covenants and the ability to fund future growth and regulatory capital needs.