NMI Holdings, Inc. — Q1 2019 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2019, NMI Holdings provided private mortgage insurance through its insurance subsidiaries and outsourced loan-review services. The company reported $76.1 billion of insurance-in-force (IIF), including $73.2 billion primary IIF, and $18.5 billion of gross risk-in-force (RIF). Its 10-Q compares results with Q1 2018; balance-sheet comparisons are with December 31, 2018.
Financial results and liquidity
| Metric | Q1 2019 | Q1 2018 or prior balance |
|---|---|---|
| Total revenue | $81.1 million | $59.6 million |
| Net premiums earned | $73.9 million | $54.9 million |
| Net investment income | $7.4 million | $4.6 million |
| Net income | $32.9 million | $22.4 million |
| Diluted EPS | $0.48 | $0.34 |
| Operating cash flow | $28.3 million | $21.1 million |
| Cash and investments at March 31 | $980.0 million | $936.8 million at December 31 |
| Total assets / shareholders’ equity | $1,147.5 million / $751.9 million | $1,092.0 million / $701.5 million at December 31 |
| Term loan carrying amount | $146.5 million | $146.8 million at December 31 |
Net premiums written were $71.9 million, up 22%. The loss ratio was 3.7% versus 2.9%; the expense ratio improved to 41.8% from 51.8%, and the combined ratio improved to 45.5% from 54.7%. Net cash used in investing activities was $12.0 million and net cash used in financing activities was $1.8 million. The 2018 comparison includes $79.2 million of net proceeds from a common-stock offering.
The term loan had $148.9 million principal outstanding, matures in May 2023, and carried a 7.25% all-in rate at quarter-end. The $85 million revolving facility was undrawn. The company reported compliance with debt covenants. NMIH held $43.7 million of cash and investments; it also had $85 million of undrawn revolving capacity. NMIC’s PMIERs available assets were $817.8 million against $607.3 million of risk-based required assets. The statutory risk-to-capital ratio for NMIC and Re One combined was 14:1.
Material changes and unusual items
- Revenue increased 36% and net income increased 47% year over year, mainly reflecting growth in the insured portfolio and investment income. Primary IIF grew 37% to $73.2 billion; Q1 new insurance written rose 7% to $6.9 billion, with monthly-premium policies representing 90% of new writings.
- Underwriting and operating expenses rose 8% to $30.8 million as the company expanded to support business growth. Claims expense rose to $2.7 million from $1.6 million, while the quarter included $1.2 million of favorable prior-year reserve development.
- A $5.5 million loss from the change in fair value of warrant liability weighed on results, compared with a $0.4 million gain in Q1 2018. The liability rose to $11.8 million, primarily reflecting the increase in NMIH’s share price.
- Available-for-sale investment fair value increased to $940.2 million from $911.5 million at year-end; accumulated other comprehensive income improved to $0.2 million from a $14.8 million loss. The company recorded a $0.4 million impairment loss related to a security it planned to sell in April.
- Effective April 1, 2019, NMIC terminated one reinsurer’s participation in the 2016 quota-share agreement on a cut-off basis, recapturing approximately $500 million of primary RIF. The filing estimated this would increase PMIERs required assets by approximately $27 million, based on March 31 amounts.
- Adoption of lease accounting increased recognized right-of-use assets and lease liabilities; reported March 31 balances were $7.7 million and $8.9 million, respectively. Adoption did not affect earnings or cash flows.
Outlook, management commentary, and risks
The filing gives no numerical earnings or revenue guidance. Management expects claims to rise as the insured portfolio matures; approximately 90% of primary IIF was written since March 31, 2016, and management notes that mortgage-insurance claims incidence is generally highest in years three through six after origination. Management also expects the share of monthly-premium policies in the portfolio to increase, given the composition of new business. Results for the quarter are not necessarily indicative of full-year results.
Key risks include changes in GSE practices or PMIERs requirements, maintaining regulatory and GSE eligibility, competition from private and government insurers, housing-market and economic conditions, interest-rate and investment risk, reinsurer counterparty performance, and the accuracy of claims reserves. The company reported no material change in risk factors from its 2018 Form 10-K and no material legal accrual; it cautioned that litigation outcomes remain uncertain. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Investor verification priorities
- Confirm the effect of the April 1 quota-share termination on PMIERs headroom, ceded premiums, and retained risk.
- Monitor claims, default inventory, reserve development, and portfolio seasoning against management’s expectation of rising claims.
- Assess earnings quality, including the warrant fair-value charge, favorable prior-year reserve releases, and investment impairment.
- Review liquidity and holding-company funding capacity, including restrictions on dividends from insurance subsidiaries and the undrawn revolver.
- Track premium growth, monthly-versus-single policy mix, persistency, and investment yield as drivers of future earnings.