NMI Holdings, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. NMI provides private mortgage insurance through its insurance subsidiaries and also offers outsourced loan-review services. Unless stated otherwise, financial amounts are in U.S. dollars.
Business context and operating trends
- At quarter-end, total insurance-in-force (IIF) was $92.4 billion, including $89.7 billion of primary IIF; gross risk-in-force (RIF) was $22.9 billion. The company had 1,450 lender customers.
- Third-quarter new insurance written (NIW) was $14.1 billion, up 92% year over year; nine-month NIW was $33.2 billion, up 63%. Growth was primarily attributed to monthly-premium production, customer penetration and new account activations.
- Monthly-premium policies represented 92% of Q3 NIW and 80% of primary IIF, versus 74% of primary IIF a year earlier. Annual persistency declined to 82.4% from 86.1%, with management citing refinancing activity amid low mortgage rates.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Total revenue | $101.6 million | $71.8 million | $273.9 million | $198.8 million |
| Net premiums earned | $92.4 million | $65.4 million | $249.5 million | $181.9 million |
| Net investment income | $7.9 million | $6.3 million | $22.9 million | $16.6 million |
| Net income | $49.8 million | $24.8 million | $121.8 million | $72.4 million |
| Diluted EPS | $0.69 | $0.36 | $1.75 | $1.07 |
| Combined ratio | 38.8% | 48.1% | 42.0% | 50.1% |
- Net premiums earned rose 41% in Q3 and 37% in the first nine months, reflecting portfolio growth, monthly-policy production and single-premium cancellations, partly offset by reinsurance cessions.
- Q3 loss ratio increased to 2.8% from 1.7%; the nine-month ratio rose to 3.3% from 1.8%. Expense ratio improved to 36.0% from 46.4% in Q3 and to 38.7% from 48.3% for nine months.
- Underwriting and operating expenses increased 9% in Q3 and 10% for nine months, mainly from higher policy volumes, employee and technology costs, and loan-review activity. Nine-month 2019 expenses included $2.4 million related to the July 2019 ILN transaction.
- Operating cash flow for the first nine months was $139.6 million, versus $99.3 million a year earlier. Investing activities used $117.3 million; financing activities used $1.7 million. Cash and restricted cash increased $20.6 million to $45.9 million.
Financial position, capital and debt
- Total assets were $1.30 billion at September 30, 2019, versus $1.09 billion at December 31, 2018; shareholders’ equity was $873.5 million, versus $701.5 million.
- Cash and investments totaled approximately $1.1 billion. The investment portfolio had a fair value of $1.07 billion and a nine-month pre-tax book yield of 3.1%.
- Term-loan carrying value was $146.0 million. The $148.1 million outstanding principal loan had an all-in interest rate of 6.95%; the $85 million revolving facility was undrawn. The company reported compliance with debt covenants.
- Insurance subsidiaries’ combined statutory surplus was $447.3 million, contingency reserve $476.8 million, and risk-to-capital ratio 14.3:1, compared with 13.1:1 at year-end 2018. NMIC reported PMIERs available assets of $955.6 million against required assets of $637.9 million.
Material changes, outlook and risks
- In July, NMIC entered a third excess-of-loss reinsurance transaction, with initial coverage of $326.9 million. In April, NMIC terminated one reinsurer under its 2016 quota-share arrangement, recapturing about $500 million of primary RIF; cessions on eligible policies under that transaction fell from 25% to 20.5%.
- Reserves for claims and claim expenses rose to $20.5 million from $12.8 million at year-end 2018. There were 1,230 primary loans in default, compared with 746 a year earlier. Management attributed the increase principally to portfolio growth and seasoning. Favorable prior-year reserve development was $2.7 million for the first nine months.
- Management said claims experience to date remained modest, but expects claims to rise as the portfolio seasons; it noted that roughly 82% of primary IIF was written since September 30, 2016. Claim experience remains exposed to housing prices, employment, interest rates, loan characteristics and natural disasters.
- No specific financial guidance or quantified forward outlook was provided. Management described continued portfolio growth and disciplined risk selection and pricing as strategic priorities. Moody’s upgraded NMIC and the credit facilities in October 2019; S&P had upgraded ratings in June.
- Q3 results included a $1.1 million gain from the change in warrant-liability fair value, compared with a $5.5 million loss in Q3 2018. For the first nine months, the warrant-liability fair-value change was a $6.0 million loss. These noncash valuation changes affected reported earnings.
- Other items include a $0.4 million investment impairment recognized in Q2 on a security sold in April, and a rise in net deferred tax liability to $43.8 million, primarily associated with the forecast tax deduction for statutory contingency reserves. Adoption of lease accounting added $7.6 million of assets and liabilities at adoption.
- Key risks include GSE policy or PMIERs changes, competition, mortgage-market and interest-rate shifts, refinancing-related persistency declines, higher-than-expected claims, reinsurer performance, and the company’s ability to maintain capital and regulatory eligibility. No material legal accrual was recorded; the filing cautions that legal outcomes remain uncertain.
Important facts for investors to verify
- Whether NIW and IIF growth can continue while refinancing-related cancellations and lower persistency weigh on the portfolio.
- How default counts, claim reserves and losses develop as recent policy vintages mature, including the effect of prior-year favorable reserve releases.
- The net capital and earnings effects of reinsurance cessions, the reinsurer termination and ongoing PMIERs requirements.
- Investment-portfolio exposure to interest-rate and credit-spread changes, and sensitivity of the floating-rate term loan and ILN costs.
- How much reported earnings growth reflects underlying insurance operations versus warrant fair-value movements and other period-specific items.