NMI Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. NMI provides private mortgage insurance through National Mortgage Insurance Corporation (NMIC); its subsidiary NMIS also provides outsourced loan-review services.
Financial results and key metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Total revenue | $132.2 million | $120.8 million | $259.7 million | $236.0 million |
| Net premiums earned | $120.9 million | $110.9 million | $237.4 million | $216.8 million |
| Net investment income | $10.9 million | $9.4 million | $21.1 million | $18.2 million |
| Net income | $75.4 million | $57.5 million | $143.1 million | $110.4 million |
| Diluted EPS | $0.86 | $0.65 | $1.63 | $1.27 |
| Combined ratio | 22.9% | 35.5% | 25.3% | 36.2% |
- Revenue increased 9% in Q2 and 10% for the first half year over year; net income rose 31% and 30%, respectively. Growth reflected higher premiums earned and investment income, lower claims expense and lower operating expenses.
- Q2 claims expense was a $3.0 million benefit, versus $4.6 million expense a year earlier; first-half claims expense was a $3.7 million benefit, versus $9.6 million expense. The loss ratio was (2.5)% for Q2 and (1.5)% for the first half.
- Underwriting and operating expenses were $30.7 million in Q2 and $63.6 million for the first half, down from $34.7 million and $68.8 million. Management cited lower deferred acquisition cost amortization, reduced technology costs and lower capital-markets transaction costs, partly offset by higher travel and depreciation.
- First-half operating cash flow was $173.8 million, compared with $182.5 million. Investing activities used $147.8 million and financing activities used $30.3 million, including $30.4 million of share repurchases. Cash and cash equivalents were $72.4 million at quarter-end.
- Available-for-sale investments had a fair value of $2.019 billion at June 30, down from $2.086 billion at year-end. The portfolio recorded $199.4 million of gross unrealized losses, primarily attributed to interest-rate movements; no investment credit-loss allowance was recorded. First-half other comprehensive loss was $162.8 million.
- Debt was $395.3 million carrying value, representing $400 million principal of 7.375% senior secured notes due June 2025. The $250 million revolving facility was undrawn; the company reported covenant compliance.
Business trends and changes versus prior periods
- Q2 new insurance written (NIW) was $16.6 billion, down from $22.8 billion; first-half NIW was $30.8 billion, down from $49.1 billion. Management attributed the decline primarily to a smaller mortgage-insurance market, with lower single-premium production also weighing on net premiums written.
- Primary insurance-in-force grew 23% year over year to $168.6 billion; risk-in-force was $43.3 billion. Persistency rose to 76.0% from 53.9%, as higher mortgage rates slowed refinancing. Net premiums earned increased despite lower NIW, reflecting portfolio growth.
- Primary defaults declined to 4,271, or 0.77% of policies in force, from 8,764, or 1.86%, a year earlier. However, 2,400 defaults remained in COVID-related forbearance. The gross claims reserve was $98.5 million, down from $103.6 million at year-end.
- NMIC reported $2.169 billion in PMIERs available assets against $1.240 billion of required assets, a $929 million excess. Its statutory risk-to-capital ratio was 11.9:1, compared with 11.6:1 at year-end.
- The company repurchased 1.7 million shares for $30.4 million during the first half under a $125 million authorization; $94.6 million remained available at June 30.
Outlook, management commentary and risks
- The filing provides no specific numerical earnings or revenue guidance. Management said interim results may not indicate full-year results and highlighted persistent inflation, declining consumer confidence and rising jobless claims as potential pressures on housing and mortgage insurance markets.
- Management said the acute economic impact of COVID-19 had receded, while noting uncertainty about future effects. It also cautioned that the default population remained elevated versus historical experience and that reserve estimates may change as loans age and loss development becomes clearer.
- Three insurance-linked-note reinsurance transactions were in lock-out status at June 30: the 2018 and 2019 transactions due to reference-pool defaults, and 2021-2 while building its target credit enhancement. Amortization and collateral distributions were suspended for these transactions.
- NMIC terminated its 2017 and 2020-1 ILN transactions in March and April 2022. Effective July 1, 2022, it entered a quota-share treaty covering seasoned policies previously covered by those transactions.
- Interest-rate increases reduced the fair value of fixed-income investments; the company estimated that a parallel 100-basis-point yield-curve move would change portfolio fair value by approximately 4.30%, including cash. Other disclosed risks include housing-price declines, claims severity, reinsurance counterparty performance, PMIERs or GSE policy changes, competition, and market access.
- Moody’s upgraded NMIC’s financial-strength rating and NMIH’s notes rating on July 21, 2022; the company said the revolving-facility commitment fee would decline from 0.35% to 0.30%. The filing reported no material change in risk factors and no material legal accrual.
Important facts for investors to verify
- Whether lower NIW is offset by persistency and in-force growth as mortgage rates and the housing market change.
- How COVID-era defaults develop, including cures, claims, reserve adequacy and the effect of the 2,400 forborne loans.
- Whether investment unrealized losses remain non-credit-related and whether portfolio liquidity and capital withstand further rate or spread movements.
- How reinsurance lock-outs, the July 2022 quota-share treaty, PMIERs credit and reinsurer collateral affect risk transfer and capital requirements.
- Remaining repurchase authorization and holding-company liquidity, including dependence on subsidiary dividends and compliance with debt covenants.