Business Context and Reporting Period
NMI Holdings, Inc. (NMIH) filed this Form 8-K on August 5, 2020, to report financial results for the quarter ended June 30, 2020, and selected operating statistics for July 2020. The company operates as a private mortgage insurer. The filing details the impact of the COVID-19 pandemic on the U.S. housing market, borrower forbearance programs, and the company's capital and liquidity positions.
Key Financial Metrics and Operating Statistics
- New Insurance Written (NIW): $13.1 billion for the quarter ended June 30, 2020, representing a 16% increase compared to the quarter ended March 31, 2020.
- Default Statistics:
- As of June 30, 2020: 10,816 loans in default (2.90% default rate) against 372,934 policies in force.
- As of July 31, 2020: 14,175 loans in default (3.78% default rate).
- Forbearance: As of June 30, 2020, 28,555 loans (7.7% of the primary portfolio) were enrolled in forbearance programs.
- Portfolio Quality (June 30, 2020): Weighted average FICO score of 752; weighted average Loan-to-Value (LTV) ratio of 91.8%.
- Liquidity and Capital:
- Consolidated cash and investments: $1.9 billion (including $76 million at the holding company level).
- PMIERs (Private Mortgage Insurer Eligibility Requirements) Position: $1,656 million in available assets against $1,048 million in required assets, resulting in a $609 million excess funding position.
- Recent Capital Raises: $220 million from a common stock offering (June 8, 2020) and $244 million net proceeds from senior secured notes (June 19, 2020).
- Investment Portfolio: 100% fixed income, 100% investment grade (average rating "A+"), with a pre-tax book yield of 2.4% for the quarter. The portfolio held a $53 million aggregate unrealized gain.
Material Changes and Trends
The most significant change reported is the sharp increase in the default population, rising from 1,449 loans (0.38% rate) at March 31, 2020, to 14,175 loans (3.78% rate) by July 31, 2020. This increase is attributed to the economic dislocation caused by the COVID-19 pandemic and the utilization of forbearance programs under the CARES Act. Despite the rise in defaults, New Insurance Written volume grew significantly, driven by record levels of purchase demand and refinancing activity in the housing market. The company also noted a strategic shift to increase premium rates on new business to account for economic uncertainty.
Outlook, Risks, and Management Commentary
- Outlook: Management expects NIW volume to continue growing in 2020, potentially reaching record levels, while anticipating a precipitous decline in the persistency of existing in-force risk due to accelerated prepayments from refinancing.
- Capital Management: A "Lock-Out Event" was triggered for the 2017, 2018, and 2019 Insurance-Linked Note (ILN) transactions on June 25, 2020. This suspends the amortization of reinsurance coverage and preserves collateral, increasing overcollateralization by an estimated $80 million per quarter.
- Claims and Reserves: The company established lower reserves for defaults connected to COVID-19, expecting higher cure rates due to forbearance and modification programs. However, an extended foreclosure moratorium could delay claim receipts and increase claim severity.
- Risks: Key risks include the duration and severity of the COVID-19 pandemic, potential changes in GSE policies, the ability to maintain PMIERs compliance, and the potential for loan servicer liquidity issues to impact premium collections (though no material impact has been observed to date).
Investor Verification Checklist
- Verify the trajectory of the default rate beyond July 31, 2020, and the actual cure rates of loans currently in forbearance.
- Monitor the company's PMIERs excess funding position to ensure it remains above the $400 million minimum floor as defaults age.
- Confirm the impact of the Lock-Out Event on the 2017-2019 ILN transactions and the resulting growth in overcollateralization.
- Assess the sustainability of the 16% quarter-over-quarter growth in New Insurance Written volume amidst potential economic recovery or further downturns.
- Review future 10-Q filings for updates on claims frequency and severity, particularly regarding loans that exit forbearance without curing.