NMI Holdings, Inc. — Q2 2021 Form 10-Q
Business context and reporting period. NMI Holdings provides private mortgage insurance through its insurance subsidiaries and outsourced loan-review services. This unaudited quarterly report covers the three and six months ended June 30, 2021; comparisons are to the same 2020 periods unless noted. Amounts below are in millions of dollars except per-share data and percentages.
Financial results and key metrics
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Total revenue | $120.8 | $107.9 | $236.0 | $215.6 |
| Net premiums earned | $110.9 | $98.9 | $216.8 | $197.7 |
| Net investment income | $9.4 | $7.1 | $18.2 | $15.2 |
| Net income | $57.5 | $26.8 | $110.4 | $85.1 |
| Diluted EPS | $0.65 | $0.36 | $1.27 | $1.11 |
| Loss ratio | 4.2% | 34.7% | 4.4% | 20.3% |
| Expense ratio | 31.3% | 30.7% | 31.7% | 31.7% |
| Combined ratio | 35.5% | 65.4% | 36.2% | 51.9% |
- Q2 revenue rose about 12% and net income more than doubled; six-month revenue increased about 9% and net income about 30%. Lower claims expense was the main earnings driver, alongside growth in premiums and investment income.
- Q2 new insurance written was $22.8 billion, up 73%; first-half volume was $49.1 billion, up 101%. Insurance-in-force reached $138.1 billion, up 36% year over year. Persistency declined to 54% from 64%, reflecting refinancing activity.
- Primary loans in default numbered 8,764, or 1.86% of policies in force, versus 10,816 and 2.90% a year earlier. Claims and claim expenses were $4.6 million in Q2 and $9.6 million for the half, versus $34.3 million and $40.0 million. The filing attributes the decline to fewer new defaults, cures and releases of certain prior reserves; claims timing was also affected by forbearance and foreclosure moratoriums.
- Operating cash flow was $182.5 million for the first half, versus $127.4 million. Investing activities used $240.7 million and financing activities used $0.7 million. Cash and cash equivalents declined to $68.1 million from $126.9 million at year-end 2020.
- Consolidated cash and investments totaled about $2.1 billion; shareholders’ equity was $1.46 billion. PMIERs available assets of $1.887 billion exceeded required assets of $1.171 billion by $716 million. Statutory capital was $1.806 billion and the risk-to-capital ratio was 11.8:1.
- Debt included $400 million principal of senior secured notes bearing 7.375% and due June 2025; carrying value, net of issuance costs, was $393.9 million. The $110 million revolving facility was undrawn, and the company reported compliance with its covenants.
Material changes versus the prior comparable period
- Premium growth reflected a larger insured portfolio and strong new business production; higher reinsurance cessions partly offset premium growth.
- Claims costs fell sharply as defaults declined and cures increased. However, the gross claims reserve rose to $101.2 million from $90.6 million at year-end 2020, partly because reserve estimates increased as some COVID-related defaults aged.
- Underwriting and operating expenses increased to $34.7 million in Q2 from $30.4 million, and to $68.8 million for the half from $62.6 million. Management cited recognition of previously deferred acquisition costs, partly offset by lower payroll, travel and office expenses.
- Interest expense increased to $7.9 million in Q2 and $15.8 million for the half, principally reflecting the higher cost and amount of debt after the 2020 notes issuance and term-loan repayment.
- Six-month comprehensive income was $84.1 million versus $105.5 million, despite higher net income, primarily reflecting a $26.4 million after-tax unrealized investment loss in 2021 versus a gain in 2020.
Outlook, risks and unusual items
- No quantified full-year earnings or production guidance is provided. Management expected new business production to remain elevated near term, while warning that the Delta variant or renewed economic disruption could moderate or reduce volumes.
- Management said the pandemic’s ultimate effect on production, defaults, claims and investments could not yet be estimated. At June 30, 7,822 of the 8,764 defaulted loans were in COVID-related forbearance. The company’s claim estimates assume assistance programs will support cures; prolonged foreclosure moratoriums could delay claims and increase eventual severity.
- Key risks include COVID-19 and housing-market developments, changes in GSE practices or PMIERs requirements, competition, reinsurance availability and counterparty performance, investment-market and interest-rate movements, and regulatory or legal developments. The company also disclosed exposure to LIBOR-based contracts and said it was assessing the transition to alternative rates.
- Six ILN reinsurance transactions were in place. Lock-Out Events suspended amortization for the 2017, 2018 and 2019 transactions and at inception for 2021-1; collateral remains in trust while those events continue. Reinsurance reduces risk and PMIERs requirements, but the company remains directly liable for claims if it cannot collect from reinsurers.
- Q2 results included a $0.7 million gain from the change in warrant-liability fair value. The company reported $1.6 million of capital-market reinsurance transaction costs in Q2 and $2.0 million for the half; its non-GAAP adjusted results exclude specified items. No material litigation accrual was recorded, and management did not expect currently pending or threatened matters to result in a material liability, while noting outcomes remain uncertain.
- Management reported effective disclosure controls as of June 30, 2021 and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether default and forbearance declines continue, and whether reserve assumptions and later claim severity remain appropriate as COVID-related loans age or exit assistance programs.
- Whether strong new insurance written offsets lower persistency and refinancing-driven policy runoff, and how the risk profile and pricing of new business evolve.
- Whether the $716 million PMIERs excess-asset cushion and reinsurance protections remain adequate under changes in portfolio risk, GSE rules or capital requirements.
- Reinsurer creditworthiness, ILN Lock-Out Event status and collateral coverage, including the impact if recoveries are delayed or unavailable.
- Investment portfolio sensitivity to interest rates and credit spreads, the LIBOR transition, and the company’s ability to meet debt service and liquidity needs.