NMI Holdings, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2020. Financial statements are unaudited. NMI provides private mortgage insurance, with an additional outsourced loan-review business.
Financial and operating performance
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Total revenue | $107.9m | $91.2m | $215.6m | $172.3m |
| Net premiums earned | $98.9m | $83.2m | $197.7m | $157.1m |
| Net income | $26.8m | $39.1m | $85.1m | $72.0m |
| Diluted EPS | $0.36 | $0.56 | $1.11 | $1.04 |
| Insurance claims and claim expenses | $34.3m | $2.9m | $40.0m | $5.7m |
| Loss / expense / combined ratio | 34.7% / 30.7% / 65.4% | 3.5% / 38.7% / 42.2% | 20.3% / 31.7% / 51.9% | 3.6% / 40.1% / 43.7% |
| Operating cash flow | Not separately stated for the quarter | $127.4m | $87.3m |
Q2 revenue rose 18%, mainly on a larger insured portfolio and higher earned premiums. Net income fell 31% as claims expense increased sharply with COVID-19-related defaults; higher revenue and lower underwriting and operating expenses partly offset the impact. For the first half, revenue increased 25% and net income increased 18% year over year. The reported six-month net income includes a $4.7m gain from the change in fair value of warrant liability; results also reflect capital-market transaction costs and realized investment gains.
At June 30, total assets were $2.05bn, including $1.34bn of fixed-maturity investments and $515.5m of cash and equivalents. Shareholders’ equity was $1.26bn. Debt was $392.8m carrying value, representing $400m principal of senior secured notes bearing 7.375% interest and maturing in 2025. The prior $150m term loan was repaid. The $100m revolving facility was undrawn; the company reported compliance with debt covenants.
Six-month investing cash outflow was $114.3m and financing cash inflow was $461.3m, largely reflecting the June equity and note offerings. Cash, cash equivalents and restricted cash increased by $474.4m to $515.5m. Management reported $1.9bn of consolidated cash and investments, including $75.6m at the holding company. NMIC had $1.7bn of cash and investments.
Business trends and changes from prior periods
- Primary new insurance written was $13.1bn in Q2, up 8% year over year and 16% from Q1. Total insurance-in-force was $101.2bn; primary risk-in-force was $25.2bn.
- Primary default inventory rose to 10,816 loans, or 2.90% of policies in force, from 1,028 loans and 0.32% a year earlier. Management attributed most of the increase to borrowers entering COVID-related forbearance. By July 31, defaults had risen to 14,175, or 3.8%.
- Gross claims reserves rose to $69.9m from $23.8m at year-end 2019. Management set lower reserves per COVID-related default, expecting assistance and modification programs to improve cure rates; average reserve per default was $6,500 versus $17,900 a year earlier. Actual defaults, cures and claim severity may differ materially from these assumptions.
- Annual persistency declined to 64.1% from 86.0% a year earlier, reflecting increased refinancing activity. Q2 cancellation earnings were $15.5m, versus $4.5m a year earlier.
- Statutory net income for NMIC and Re One was a loss of $24.7m in Q2 and a loss of $17.0m for the first half, versus gains in the comparable 2019 periods. Combined statutory surplus was $892.2m and risk-to-capital was 13.0:1 at June 30.
Outlook, capital, risks and unusual items
- Management said it now expects 2020 industry and company new insurance production to grow, potentially reaching record levels, amid resilient housing demand, low rates and refinancing activity. It increased rates on new business and tightened underwriting guidelines. The filing provides no numerical earnings or full-year financial guidance.
- PMIERs available assets were $1.656bn against $1.048bn required assets, an excess position of $609m. The equity and debt offerings funded an approximately $445m capital contribution to NMIC. Management expected the excess position to support compliance, while noting required assets could rise with defaults, new business and portfolio risk.
- COVID-19 remains the principal uncertainty: prolonged unemployment, higher defaults, home-price declines, extended forbearance or foreclosure moratoria, delayed claims and greater claim severity could adversely affect results, liquidity and capital. Management stated that the ultimate impact could not be reliably estimated.
- Lock-out events took effect June 25 for the 2017, 2018 and 2019 mortgage insurance-linked note transactions, suspending amortization and collateral distributions and preserving trust assets. A new transaction completed July 30 provides up to $322.1m of excess-of-loss coverage for specified existing policies; it is a subsequent event and was not included in June 30 PMIERs figures.
- The June offerings increased outstanding shares to 84.8m from 68.4m at year-end. The $400m notes carry a 35% maximum debt-to-total-capitalization covenant. The filing reports no material off-balance-sheet arrangements, no material litigation accrual, and effective disclosure controls.
- Other risks include changes in GSE practices or mortgage-insurance requirements, competition, reinsurance-counterparty performance, access to capital and reinsurance markets, investment and interest-rate risk, and the transition away from LIBOR.
Important facts for investors to verify
- Whether COVID-related defaults cure as assumed and how claims, severity and reserve estimates develop.
- Whether production growth and higher pricing offset falling persistency and refinancing-driven policy runoff.
- Ongoing PMIERs and statutory capital headroom, including the effect of default growth and GSE approval of reinsurance credit.
- Terms, effectiveness and collateral support of the July 2020 reinsurance transaction, and the duration and implications of ILN lock-out events.
- Debt-service capacity, covenant compliance and the impact of 7.375% notes and the enlarged share count on future earnings per share.