NMI Holdings, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. This is an annual report, not a standalone fourth-quarter filing; quarterly figures below are unaudited.
Business context
NMI provides private mortgage insurance through National Mortgage Insurance Corporation and reinsurance subsidiary Re One, and offers loan-review services through NMI Services. At year-end, it had 1,374 master-policy customers, $71.5 billion of insurance-in-force (IIF), $17.2 billion of gross risk-in-force (RIF), and 304 employees. Its business depends substantially on mortgage originations and Fannie Mae and Freddie Mac requirements for mortgage insurance.
Financial and operating results
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $275.0 million | $182.7 million |
| Net premiums earned | $251.2 million | $165.7 million |
| Net investment income | $23.5 million | $16.3 million |
| Insurance claims and claim expenses | $5.5 million | $5.3 million |
| Underwriting and operating expenses | $117.2 million | $107.0 million |
| Net income | $107.9 million | $22.1 million |
| Diluted EPS | $1.60 | $0.35 |
| Operating cash flow | $145.9 million | $67.8 million |
- Revenue increased 51%; net premiums earned rose 52%, primarily reflecting a larger insured portfolio and greater monthly-premium production.
- Net income improved substantially, but comparisons include tax effects: 2017 included a $13.6 million noncash charge from the Tax Cuts and Jobs Act, while 2016 included a $58.5 million noncash tax benefit from releasing a valuation allowance. The 2018 effective tax rate was 20.6%.
- The 2018 loss ratio was 2.2%, expense ratio 46.7%, and combined ratio 48.9%, versus 3.2%, 64.5%, and 67.7%, respectively, in 2017.
- Primary new insurance written (NIW) rose 26% to $27.3 billion. Year-end primary IIF increased to $68.6 billion from $48.5 billion; annual persistency was 87% versus 86%.
- Monthly-premium policies were 88% of 2018 NIW and 75% of primary IIF at year-end. Weighted-average FICO on new business was 747 and weighted-average LTV was 92.2%.
- Fourth-quarter revenue was $76.3 million and net income was $35.5 million, compared with $54.7 million revenue and a $1.8 million net loss in fourth-quarter 2017. Fourth-quarter 2018 diluted EPS was $0.46. Quarterly earnings included a $3.5 million gain from the change in warrant-liability fair value.
Balance sheet, liquidity and capital
- At December 31, 2018, total assets were $1.092 billion, shareholders’ equity $701.5 million, and carrying-value term debt $146.8 million. Term-loan principal was $149.3 million; the $85 million revolving facility was undrawn.
- Cash and investments totaled $936.8 million, including $64.3 million held at the parent company. Cash and cash equivalents were $25.3 million. The fixed-income portfolio’s pretax book yield was 2.9%.
- Cash from operations was $145.9 million; investing activities used $220.7 million and financing activities provided $80.9 million. Financing included $79.2 million net proceeds from a March 2018 stock offering.
- NMIC reported $733.8 million of PMIERs available assets against $511.3 million of risk-based required assets. Combined risk-to-capital was 13.1:1; NMIC’s reported ratio was 13.7:1, below the commonly applicable 25:1 limit.
- The 2018 term loan matures in May 2023 and had a 7.27% all-in rate at year-end. The credit agreement limits debt-to-capitalization to 35% and includes liquidity, statutory-capital, net-worth and PMIERs covenants; the company reported compliance at year-end.
- NMIC reported a statutory net loss for 2018 and could not pay dividends to NMIH through December 31, 2019 without Wisconsin regulator approval. The company did not expect to pay common dividends in the near term.
Changes, outlook and material risks
- Management introduced Rate GPS in June 2018, a risk-based pricing platform intended to price policies more granularly and manage portfolio risk. The company also completed a $70 million capital contribution to NMIC.
- Two mortgage-insurance-linked-note transactions provided up to $211.3 million and $264.5 million of excess-of-loss coverage at inception. Quota-share reinsurance also reduces ceded risk and premiums. These arrangements support capital management but expose the company to counterparty and regulatory-credit risks; reinsurance does not remove NMIC’s direct obligations to policyholders.
- The GSEs’ revised PMIERs were scheduled to take effect March 31, 2019. Management expected NMIC to remain compliant. Revised GSE rescission-relief principles require a replacement master policy; management anticipated implementation no sooner than the second half of 2019, with more limited rescission rights.
- Management expects claims to rise as the relatively young insured portfolio seasons; claims frequency is generally highest in years three through six. It said claims experience to date had developed more slowly than historical trends, citing underwriting and favorable economic and housing conditions.
- Disaster-related defaults increased in affected areas, but cures were higher in those areas in 2018. Year-end primary loans in default fell to 877 from 928; the filing notes that reserve estimates for disaster-related defaults rely on assumptions about cure rates.
- Key risks include intense competition from private and government insurers and alternative GSE credit-risk programs; changes to GSE policy or housing-finance reform; mortgage-market, interest-rate and home-price shifts; underwriting and reserve-estimation uncertainty; reinsurance counterparty performance; and capital, regulatory, cyber and operational requirements. The company had no material off-balance-sheet arrangements and reported no material legal accrual or currently expected reasonably possible material liability.
- No numerical financial guidance was provided. The filing describes outlook expectations and risks but does not provide a clear earnings or revenue forecast.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal controls were effective at year-end; a material weakness disclosed for 2017 was reported as remediated.
Important facts for investors to verify
- Whether NMIC maintained compliance with revised PMIERs after their March 31, 2019 effective date, and the resulting effect on available capital and growth capacity.
- Actual claims, cure rates, reserve development and portfolio performance as the 2013–2018 books season, including disaster-related defaults.
- Reinsurance counterparties’ financial condition, collateral and continued GSE and regulatory capital credit.
- Effects of GSE credit-risk programs, competition and mortgage-market conditions on NIW, pricing and persistency.
- Parent-company liquidity and debt-covenant headroom, given restricted insurance-subsidiary dividends and variable-rate borrowing.
- Implementation and financial impact of the new master policy and revised rescission-relief terms.