NMI Holdings, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. NMI provides private mortgage insurance, primarily for residential loans with down payments below 20%, through its insurance subsidiaries. Results are unaudited.
Financial results and position
| Metric | Q2 2016 | Q2 2015 | First half 2016 | First half 2015 |
|---|---|---|---|---|
| Total revenue | $29.5 million | $10.9 million | $51.7 million | $20.0 million |
| Net premiums earned | $26.0 million | $8.9 million | $45.8 million | $15.8 million |
| Net income (loss) | $2.0 million | $(10.4) million | $(1.9) million | $(18.2) million |
| Diluted EPS | $0.03 | $(0.18) | $(0.03) | $(0.31) |
| Operating cash flow | Not separately presented for the quarter | $27.6 million | $(1.4) million |
- Q2 expense ratio was 89% and combined ratio was 91%, versus 236% for both in Q2 2015. First-half expense and combined ratios were 100% and 102%, respectively, versus 249% for both in the prior-year period.
- At June 30, total assets were $716.4 million, including $607.3 million of investments and $46.8 million of cash. Total liabilities were $294.0 million and shareholders’ equity was $422.4 million. The term loan’s carrying amount was $144.1 million; outstanding principal was $148.9 million.
- Cash and investments totaled approximately $654.1 million, including $78.3 million held at the holding company. First-half investing cash outflow was $37.1 million, mainly reflecting investment purchases and portfolio rebalancing. Cash and cash equivalents declined $10.5 million during the half.
- Statutory surplus for the insurance subsidiaries was reported as $370.2 million combined; NMIC’s separately reported statutory surplus was $395.7 million. NMIC’s risk-to-capital ratio was 13.2:1, and Re One’s was 19:1.
Changes and operating trends
- NMI reported its first profitable quarter. Q2 net premiums written rose to $48.9 million from $20.3 million; primary new insurance written increased 129% year over year to $5.8 billion.
- Total insurance in force grew to $27.6 billion from $19.1 billion at year-end 2015; total risk in force rose to $5.8 billion from $3.7 billion. The company had 1,061 master policy holders, of whom 518 generated new business in Q2.
- Growth in premiums and investment income was partly offset by higher operating costs, claims expense, and $3.7 million of Q2 interest expense. First-half interest expense was $7.3 million, reflecting the term loan entered into in late 2015.
- First-half investment results included an $0.8 million realized loss, compared with a $1.0 million gain in the prior-year period. Net investment income increased to $6.6 million from $3.3 million.
Outlook, risks and contingencies
- No specific earnings or revenue guidance is provided. Management expects operating expenses to rise with business growth, but says fixed expenses should grow more slowly than new insurance written; it expects the expense ratio to decline as the business matures.
- Product mix shifted toward monthly-premium policies: 61% of first-half new insurance written was monthly. Management attributes lower single-premium lender-paid volume partly to revised rates and PMIERs capital charges. Persistency was 83.3% at June 30.
- A quota-share reinsurance agreement was scheduled to take effect September 1, 2016, covering specified existing, pool, and future policies. Wisconsin’s insurance regulator approved it, but GSE approval remained outstanding. Management expected full PMIERs capital credit and capacity to scale to approximately $50 billion of insurance in force; it cautioned that failure to receive full credit could require earlier alternative capital raising.
- The term loan carries an 8.5% all-in rate through June 30, 2016, is variable-rate, and matures November 10, 2018. NMI was in compliance with its covenants at quarter-end, including a $32 million liquidity requirement.
- NMIC could not pay dividends to the holding company through December 31, 2016 without regulatory approval, following its 2015 statutory net loss. The company reported a $139.4 million federal net operating loss carryforward at year-end 2015 and a full valuation allowance; any release could materially increase income in the period recognized.
- Key risks include PMIERs and GSE eligibility or capital-credit changes, reinsurance availability and cost, intense competition, interest-rate and housing-market changes, claim experience exceeding estimates, and access to capital. Management reported no material change in the risk factors from its 2015 Form 10-K. No material legal accrual was recorded, and management did not then expect a reasonably possible material liability, while noting litigation outcomes are uncertain.
Important facts for investors to verify
- Whether the GSEs approved the reinsurance agreement and granted the expected PMIERs capital credit.
- Whether premium growth and the Q2 return to profitability continue, particularly as the portfolio matures and operating expenses rise.
- Changes in defaults, claims reserves, persistency, and realized earnings from single-premium cancellations.
- Compliance with loan covenants, PMIERs, and state capital requirements, and the holding company’s liquidity given limits on subsidiary dividends.
- Progress toward sufficient evidence to release the deferred-tax valuation allowance, and the potential effect on reported earnings.