NMI Holdings, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. NMI provides private mortgage insurance through its insurance subsidiaries and outsourced loan-review services. Amounts below are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
Financial results
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Total revenue | $107.8 | $101.6 | $323.4 | $273.9 |
| Net premiums earned | $98.8 | $92.4 | $296.5 | $249.5 |
| Net income | $38.2 | $49.8 | $123.3 | $121.8 |
| Diluted EPS | $0.45 | $0.69 | $1.55 | $1.75 |
| Insurance claims and claim expenses | $15.7 | $2.6 | $55.7 | $8.2 |
| Loss / expense / combined ratios | 15.9% / 34.4% / 50.2% | 2.8% / 35.0% / 37.8% | 18.8% / 32.6% / 51.4% | 3.3% / 38.2% / 41.5% |
Q3 revenue rose 6% year over year, while net income fell 23%; nine-month revenue rose 18% and net income was slightly higher. Higher claims tied primarily to COVID-19-related defaults weighed on earnings. Diluted EPS also declined as the June equity offering increased weighted-average shares. Management-reported non-GAAP adjusted net income was $40.4 million for Q3 and $122.9 million for nine months; adjusted diluted EPS was $0.47 and $1.60, respectively.
- Cash flow: Nine-month operating cash flow was $215.0 million, versus $139.6 million. Investing activities used $520.9 million, compared with $117.3 million; financing provided $459.0 million, versus $1.7 million used in 2019.
- Financial position: At September 30, cash and cash equivalents were $194.2 million and available-for-sale investments were $1.690 billion. Total assets were $2.082 billion, total liabilities $774.3 million, and shareholders’ equity $1.308 billion.
- Debt and liquidity: The company issued $400 million of 7.375% senior secured notes due June 2025, repaid its $150 million term loan, and reported $393.0 million of notes carrying value net of issuance costs. The $100 million revolver was undrawn at quarter-end; its commitment increased to $110 million on October 30, 2020. The company reported $1.9 billion of consolidated cash and investments and compliance with debt covenants.
Business trends and changes versus prior periods
- Third-quarter new insurance written (NIW) was $18.5 billion, up 31% year over year; nine-month NIW was $42.9 billion, up 29%. Primary insurance-in-force was $104.5 billion, up from $89.7 billion a year earlier.
- Annual persistency fell to 60% from 82% a year earlier, reflecting elevated refinancing activity. Management said refinancing speeds reduce in-force exposure, while increased purchase demand supports new business.
- Primary defaults rose to 13,765, or 3.60% of policies in force, from 1,230, or 0.35%, at September 30, 2019. The gross claims reserve increased to $87.2 million from $23.8 million at year-end 2019.
- For COVID-related defaults, management used lower estimated reserves per loan based on expected cures and borrower assistance programs. Average gross reserve per default was $6,300, versus $16,700 a year earlier; the filing cautions that actual claims could materially exceed estimates.
- The June equity offering issued 15.9 million shares and raised $219.7 million net. Together with the notes offering, proceeds supported a roughly $445 million capital contribution to the primary insurer. Statutory capital increased to $1.591 billion from $981 million at year-end 2019; the reported statutory risk-to-capital ratio was 12.5:1.
Outlook, risks and unusual items
- Management expected NIW and industry production to remain elevated through the rest of 2020, with potential for record levels. It warned that renewed restrictions, unemployment, or other pandemic effects could moderate or reduce production. No numerical earnings or full-year financial guidance was provided.
- Management described housing demand and prices as resilient, citing low rates, stronger borrower profiles and assistance programs, but said the pandemic’s ultimate effects remained highly uncertain. Foreclosure moratoria and forbearance could delay claims and potentially increase claim severity; home-price declines, unemployment and servicer liquidity pressures could also adversely affect results.
- The 2017, 2018 and 2019 insurance-linked reinsurance transactions entered lock-out status in June 2020, suspending amortization of coverage and collateral distributions. Management said this preserves trust assets and supports capital capacity. The 2020-2 transaction, completed after quarter-end, added up to $242.4 million of excess-of-loss coverage, subject to applicable approvals and terms.
- At quarter-end, PMIERs available assets were $1.672 billion against $991 million of required assets, a reported $681 million excess. Management expected continued compliance, while noting required assets can rise with new production and portfolio defaults.
- Interest expense rose with the new notes and included $2.6 million of term-loan extinguishment and issuance costs for the nine months. The warrant-liability fair-value change produced a $4.3 million nine-month gain; such noncash valuation changes can make reported earnings volatile.
- The filing reported no material legal accrual and no material off-balance-sheet arrangements. Management stated disclosure controls were effective and no material change in internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- How COVID-related defaults cure or progress to paid claims, and whether reserves based on assumed assistance-program benefits prove adequate.
- Whether new insurance production and premium growth can offset lower persistency, refinancing runoff and higher claims.
- Ongoing PMIERs and statutory capital headroom, including the effects of reinsurance approvals, lock-out events and future default levels.
- Debt-service capacity under the 7.375% notes, revolving-facility terms and covenants, and the availability of holding-company liquidity versus insurer assets.
- The effects of the October 2020 reinsurance transaction and revolver increase, which occurred after the reporting date, and any subsequent changes in pandemic, housing or mortgage-market conditions.