NMI Holdings, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports unaudited fourth-quarter results. NMI provides private mortgage insurance through NMIC and reinsurance through Re One, with outsourced loan-review services through NMIS.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Total revenue | $378.8 million | $275.0 million |
| Net premiums earned | $345.0 million | $251.2 million |
| Net investment income | $30.9 million | $23.5 million |
| Income before taxes | $216.7 million | $136.0 million |
| Net income | $172.0 million | $107.9 million |
| Diluted EPS | $2.47 | $1.60 |
| Operating cash flow | $208.2 million | $145.9 million |
| Cash and cash equivalents, year-end | $41.1 million | $25.3 million |
| Investments, year-end | $1.141 billion | $911.5 million |
| Term loan, year-end | $145.8 million | $146.8 million |
| Shareholders’ equity, year-end | $930.4 million | $701.5 million |
Full-year revenue rose about 38% and net income about 59%. The combined ratio improved to 40.3% from 48.8%; the expense ratio fell to 36.7% from 46.6%, while the loss ratio increased to 3.6% from 2.2%. Net income includes an $8.7 million loss from remeasurement of warrant liability. Adjusted net income, a non-GAAP measure, was $182.4 million, versus $113.3 million.
Fourth-quarter 2019 net income was $50.2 million, compared with $35.5 million in fourth-quarter 2018; diluted EPS was $0.71 versus $0.46.
Business growth, capital, and liquidity
- New primary insurance written increased 65% to $45.1 billion. Primary insurance-in-force reached $94.8 billion and primary risk-in-force $24.2 billion at year-end.
- Year-end persistency declined to 77% from 87%, which management attributed to refinancing activity amid lower mortgage rates. Monthly-premium policies were 92% of 2019 new business and 81% of primary insurance-in-force.
- Loans in default increased to 1,448 from 877; claims and claim expenses rose to $12.5 million from $5.5 million. The year-end claims reserve was $23.8 million. Management cited portfolio growth and seasoning, while favorable prior-year reserve development partly offset incurred claims.
- Operating cash flow increased to $208.2 million. Investing activities used $194.4 million, largely reflecting investment purchases; financing activities provided $2.0 million. Year-end cash and investments totaled about $1.182 billion, although much of the capital is held in regulated insurance subsidiaries.
- NMIC reported $1.016 billion of PMIERs available assets against $773.5 million of required assets and remained compliant. The reported combined risk-to-capital ratio was 15.8:1. NMIC’s own ratio was 16.3:1, below the commonly applicable 25:1 limit.
- The $150 million senior secured term loan matures in May 2023; its year-end carrying amount was $145.8 million and the stated all-in interest rate was 6.55%. The $85 million revolving facility, maturing in May 2021, was undrawn. The company reported compliance with debt covenants. Insurance subsidiaries had $16.1 million of aggregate ordinary dividend capacity for the following 12 months; they had not paid dividends to the parent.
Outlook, risks, and notable items
Management’s stated strategy is to grow its high-quality insured portfolio through customer relationships, disciplined underwriting and risk-based pricing. The filing gives no numerical earnings or revenue guidance. Management expects claims to rise as the portfolio seasons, with mortgage defaults and claim severity sensitive to employment, home prices, interest rates, and loan characteristics. Lower rates may increase refinancing and reduce persistency and future premium revenue.
- Key industry risks include competition from private and government mortgage insurers and alternative credit-risk transfers; changes to Fannie Mae and Freddie Mac requirements, PMIERs, or the structure of the housing-finance system; and possible regulatory changes affecting mortgage credit availability.
- Reinsurance supports capital and risk management, but counterparty performance and continued regulatory or GSE recognition of capital credit remain risks. In April 2019, NMIC terminated one reinsurer on a cut-off basis and recaptured about $500 million of previously ceded primary risk.
- The 2020 Master Policy was scheduled to apply to applications received from March 1, 2020, including revised rescission-relief terms. The company adopted CECL on January 1, 2020 and said adoption had no material financial-statement impact.
- The filing identifies LIBOR transition uncertainty, interest-rate and investment-market exposure, cybersecurity and operational risks, and potential effects of proposed GSE reform. It reports no material legal accrual and no current expectation of a reasonably possible material liability, while cautioning that outcomes are uncertain.
- No common dividends were paid, and the company did not expect to pay dividends in the near term. BDO issued unqualified opinions on the financial statements and internal control over financial reporting; the claims reserve was identified as a critical audit matter because of the judgment involved in estimating claim frequency and severity.
Important facts for investors to verify
- Whether strong growth in new insurance written and earnings continues while persistency remains lower and the insured portfolio seasons.
- Claims development, default counts, reserve adequacy, and the assumptions behind claim frequency and severity estimates.
- NMIC’s PMIERs available-asset cushion, statutory capital ratios, and the amount of capital restricted within insurance subsidiaries.
- Reinsurance recoverability and whether the agreements continue to receive expected capital credit from regulators and the GSEs.
- The effect of mortgage-rate changes, refinancing, competition, and housing-finance or regulatory reforms on premium revenue and new business.
- Holding-company liquidity, term-loan covenants and refinancing capacity, and the gap between consolidated cash and funds available to the parent.