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NMIH > SEC Filings for NMIH > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for NMI HOLDINGS, INC.

Form 10-Q for NMI HOLDINGS, INC.


8-Aug-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following analysis should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2013, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements" above and the "Risk Factors" detailed in Item 1A of Part I of our Annual Report on Form 10-K for the year ended December 31, 2013 and in Item 1A of Part II of our Quarterly Reports on Form 10-Q filed in 2014, including this Quarterly Report on Form 10-Q, for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period. Overview
NMI Holdings, Inc. ("NMIH" or the "Company") was formed in May 2011 and, through its subsidiaries, provides private mortgage guaranty insurance (which we refer to as "mortgage insurance" or "MI"). As used in this report, "we" and "our" refer to NMIH's consolidated operations. Our primary insurance subsidiary, National Mortgage Insurance Corporation ("NMIC"), is a qualified MI provider on loans purchased by Fannie Mae and Freddie Mac (collectively the "GSEs") and is currently licensed in all 50 states and D.C. to issue mortgage guaranty insurance. Our reinsurance subsidiary, National Mortgage Reinsurance Inc One ("Re One"), solely provides reinsurance to NMIC on certain loans insured by NMIC, as described in Note 12, Statutory Information, above. On November 8, 2013, we filed a final prospectus announcing the sale of approximately 2.1 million shares of common stock through our IPO. Following our IPO, and to meet our obligations under the Registration Rights Agreement, we filed a final prospectus on December 9, 2013 registering 51,101,434 Class A common shares that had previously been issued during our Private Placement.
MI protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers who generally make down payments of less than 20% of the home's purchase price. By protecting lenders and investors from credit losses, we help facilitate the availability of mortgages to prospective, primarily first-time, U.S. home buyers, thus promoting homeownership and helping to revitalize our residential communities. MI also facilitates the sale of these mortgage loans in the secondary mortgage market, most of which are sold to Fannie Mae and Freddie Mac. We are one of seven companies in the U.S. who offer MI. Our business strategy is to become a leading national MI company with our principal focus on writing insurance on high quality, low down payment residential mortgages in the United States. We believe the MI industry has significant barriers to entry due to the substantial capital necessary to fund operations and satisfy GSE requirements, the need for a customer-integrated operating platform capable of issuing and servicing mortgage insurance policies, the competitive positions and established customer relationships of existing mortgage insurance providers, and in order to conduct MI business nationwide, the need to obtain and maintain insurance licenses in all 50 states and D.C. Additionally, the resource commitment required by mortgage originators, and larger lenders in particular, to connect to a new mortgage insurance platform, such as ours, is significant, and absent a critical need, such as the capital constraints in the MI industry during the financial crisis, they have historically, in our view, been reluctant to make such an investment. We were formed at a time when the severe dislocation in the MI industry caused by the financial crisis created a need for newly capitalized mortgage insurers and this has facilitated our efforts to establish relationships with lenders. To date, we believe we have successfully navigated the Company through many of these barriers in order to start our insurance business.
Following our formation, we focused our efforts on organizational development, capital raising and other start-up related activities. Our efforts to build our MI business have included, among other things, securing GSE approval, obtaining insurance licenses in all 50 states and D.C., building an executive management team and hiring other key officers and directors and staff, building our operating processes, and designing and developing our business and technology applications and environment and infrastructure. In 2014, we continue to make progress achieving our goals, through the addition of new customers and the attainment of our goal of becoming licensed nationwide by obtaining a certificate of authority in Wyoming in April 2014. Since we began writing MI in April 2013, we have become a fully operational MI company, with $939.8 million of primary IIF and $4.9 billion of pool IIF as of June 30, 2014 compared to $161.7 million of primary IIF and $5.1 billion of pool IIF as of December 31, 2013. As of June 30, 2014, the Company had primary RIF of $220.9 million compared to primary RIF of $36.5 million as of December 31, 2013. Pool RIF as of June 30, 2014 and December 31, 2013 was $93.1 million.


NMIC primarily differentiates itself from its competitors by underwriting all loans it insures either prior to or post close, which permits us to provide loan originators and aggregators with 12-month rescission relief protection, thereby giving our customers dependable service and consistent confidence of coverage. We have established risk management controls throughout our organization that we believe will support our continued financial strength. As a newly capitalized mortgage insurer, we have the ability to write new business without the burden of risky legacy exposures and believe our current capital supports our current business writing strategy, while staying within the regulatory guidelines imposed by state insurance departments and the GSEs.
On July 10, 2014, the FHFA released for public input the proposed PMIERs. The draft PMIERs represent the standards by which private mortgage insurers are eligible to provide mortgage insurance on loans owned or guaranteed by Fannie Mae and Freddie Mac. We believe that the proposed eligibility requirements for private mortgage insurers will help restore confidence in an industry affected by the recent housing crisis. We also believe a strong and financially sustainable private mortgage insurance industry is a key component of a healthy residential mortgage market and that NMIC is well positioned under the PMIERs to continue to serve the growing demand for private MI and to fully comply with the new financial requirements within the transition time period, which is described below.
Our headquarters are located in Emeryville, California and our website is www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report. Conditions and Trends Impacting Our Business We discuss below the following conditions and trends that have impacted or are expected to impact our business.
•Customer Development
•New Insurance Written, Insurance in Force and Risk in Force
•Consolidated Results of Operations
•Holding Company Liquidity and Capital Resources
•Capital Position of Our Insurance Subsidiaries
•Consolidated Investment Portfolio and Other Factors that Impact Our Consolidated Results
•Proposed PMIERs
•GSE Approval Conditions and GSE Reform
•Competition
•Other Items Customer Development We organize our sales and marketing efforts based on our national and regional customer segmentation. Our sales strategy is focused on attracting as customers mortgage originators in the United States that fall into two distinct categories, which we refer to as "National Accounts" and "Regional Accounts," discussed below. Since April 2013, we have increased our customer base to include some of the largest loan originators in the U.S. We expect to continue to add new lenders to our customer base throughout the remainder of 2014. In addition to adding new customers, we believe our existing customers will allocate more of their business to us for placement of our MI. We define National Accounts as the most significant residential mortgage originators as determined by volume of their own originations as well as volume of insured business they may acquire from other originators. These National Accounts generally originate loans through their retail channels as well as purchase loans originated by other entities, primarily mortgage originators who we would classify as Regional Accounts, as described below. National Accounts may sell their loans to the GSEs or private label secondary markets or securitize the loans themselves. We currently classify approximately 40 mortgage originators and/or aggregators as National Accounts. During the six months ended June 30, 2014, six of these National Accounts generated NIW, and as of June 30, 2014, we had approved master policies with 22 National Accounts. We continue to make progress with the remaining National Accounts. The Regional Accounts originate mortgage loans on a local or regional level throughout the country. Some of these Regional Accounts have origination platforms across multiple regions; however, their primary lending focus is local. They sell the majority of their originations to National Accounts, but Regional Accounts may also retain loans in their portfolios or sell portions of their production directly to the GSEs. During the six months ended June 30, 2014, 96 of these Regional Accounts generated NIW, and


as of June 30, 2014, we had approved master policies with 543 of these Regional Accounts. We believe we continue to make progress with the remaining Regional Accounts.
The tables below show the number of customers with approved master policies and the number of those customers generating NIW, by National and Regional Accounts, for the last five completed fiscal quarters.

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Additionally, we have made significant progress in our efforts to increase our correspondent approvals and our access to regional accounts.

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*Top Residential Correspondent Lenders in Q1 2014 as defined by National Mortgage News. As of March 31, 2014 there were 39 lenders on the list. New Insurance Written, Insurance in Force and Risk in Force NMIC began writing MI in April 2013. Primary insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which each loan in a portfolio of loans is individually insured in a single, bulk transaction. MI may also be written in a pool policy, where a group of loans (or pool) are insured under a single contract. Pool insurance may have a stated aggregate loss limit for a pool of loans and may also have a deductible under which no losses are paid by the insurer until losses on the pool of loans exceed the deductible.
During the quarter ended June 30, 2014, we had primary NIW of $429.9 million, compared to primary NIW of $354.3 million during the quarter ended March 31, 2014. We have not written any new pool insurance in 2014. Our total NIW of $5.3 billion for the year ended December 31, 2013 consisted almost entirely of pool insurance written under our Fannie Mae pool agreement, which comprised $5.2 billion of the total NIW.
As of June 30, 2014, NMIC had primary IIF of $939.8 million and pool IIF of $4.9 billion and total RIF of $314.0 million, consisting of $220.9 million of primary RIF, representing insurance on 3,865 loans, and pool RIF of $93.1 million, representing insurance on approximately 21,000 loans. As of December 31, 2013, NMIC had primary IIF of $161.7 million and pool IIF of $5.1 billion and total RIF of $129.6 million, consisting of primary RIF of $36.5 million and pool RIF of $93.1 million. We expect NMIC's primary IIF and RIF to significantly increase over the coming months as our operations continue to mature. Fannie Mae Pool Transaction
Effective September 1, 2013, NMIC entered into an agreement with Fannie Mae, pursuant to which NMIC initially insured approximately 22,000 loans with IIF of $5.2 billion (as of September 1, 2013). We receive monthly premiums from Fannie Mae for this transaction, which are recorded as written and earned in the month received. The agreement has a term of 10 years from September 1, 2013, the coverage effective date.


The RIF to NMIC is $93.1 million, which represents the difference between a deductible payable by Fannie Mae on initial losses and a stop loss, above which, losses are borne by Fannie Mae. NMIC provides this same level of risk coverage over the term of the agreement. We are bound to counter-party requirements contained in the agreement that specify the amount of capital NMIC will need to maintain to support the agreement until the new PMIERs are effective, which we discuss below in "Proposed PMIERs." The capital we are required to maintain under the pool agreement is specified as the greater of the following:
a. the amount of required capital specified in our January 2013 approval letter from Fannie Mae ($150 million); or

b. the sum of:

i. 5.6% of net primary RIF, plus;

ii. for pool insurance, the lesser of

1. 5.6% of the RIF under the pool transaction, based upon loan level coverage, before application of the aggregate stop loss and deductible, or;

2. the aggregate stop loss amount, net of any deductible, for the pool transaction.

Although the agreement currently requires that NMIC hold at least $150 million of capital in total to support both pool and primary risk, the capital we are required to maintain under this agreement just to support the pool risk (under
b.ii.) will decline over the 10-year term of the agreement as the loans in the pool amortize or as loans pay off. The amount calculated under ii.2. is equivalent to $93.1 million and remains the same over the term of the transaction. The current loan level RIF of the pool, as of June 30, 2014, is $1.69 billion, which, when multiplied by 5.6% per the calculation under b.ii.1, produces a capital requirement of $94.7 million. We expect that as the loans in the pool amortize or as loans payoff, the capital required in b.ii.1 will decline below the $93.1 million, which is constant and set at the effective date of the transaction, and as a result we will be required to hold a declining amount of capital against this transaction. If the draft PMIERs (discussed below) were put into place today, we expect that the amount of capital we would have to hold to support this particular pool transaction would be $44.1 million, a significant reduction from the current capital requirement under b.ii above.

Insurance Portfolio
We utilize certain risk principles that form the basis of how we originate primary NIW. First, we manage our portfolio credit risk by using several loan eligibility matrices which prescribe the maximum loan-to-value ("LTV") ratio, minimum borrower credit score, maximum loan size, property type and occupancy status of loans that we will insure. Our loan eligibility matrices, as well as all of our detailed underwriting guidelines, are contained in our Underwriting Guideline Manual that is publicly available on our website. Our eligibility criteria and underwriting guidelines are designed to mitigate the layered risk inherent in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan risk and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for riskier property types, such as investor properties, compared to owner-occupied properties. Another tool we use to manage our credit risk is to underwrite every loan we insure, including loans submitted through our delegated channel. We believe the prevailing standard of other companies in the MI industry has been to conduct partial quality assurance testing of delegated underwritten loans. We believe the industry's practice has exacerbated the negative impact of the recent mortgage crisis on legacy mortgage insurers because their partial quality control reviews did not adequately prevent the issuance of mortgage insurance through their delegated channels on ineligible, poor quality loans. Our pricing policies also help mitigate credit risk in the form of higher premium rates for loan features or borrower characteristics associated with historically higher default rates.
We monitor the concentrations of the various risk attributes in our insurance portfolio. Our NIW and risk written for the quarter ended June 30, 2014 was made up of approximately 67% and 66%, respectively, of credit scores at or above 740. Generally, insuring loans made to borrowers with higher credit scores tends to result in a lower frequency of claims. Additionally, as of June 30, 2014, we believe our insurance portfolio is comprised of loans that are full documentation loans, and less than 1% of our RIF is above 95% LTV. As we continue to increase our insurance writings, we expect to continue to seek out and insure high credit quality mortgages. Since we recently began writing MI in April 2013, our portfolio does not yet reflect our expected distribution of LTVs, borrower credit scores, loan sizes, property types and occupancy statuses of loans that we expect to insure, as well as the concentrations within states and metropolitan statistical areas ("MSAs"). We believe we will move toward our expected distribution of these risk attributes in our insurance portfolio as we continue to write more business.


Overview of NIW, IIF and RIF
A significant portion of our NIW in the first six months of 2014 was comprised of single premium policies. Our single premium polices are currently written in two ways: single premium policies written on a loan by loan basis ("Single") and single premium policies written on loans aggregated and delivered by the lender in a single transaction ("Aggregated Single"). Prior to writing Aggregated Single policies, the lender solicits single premium bids from us and other private MI companies. Because of the lower acquisition cost, the competitive bidding process and traditionally higher FICO scores associated with these policies, Aggregated Single policies have a lower premium than our Single premium policies.
While our single premium policies (including Single and Aggregated Single) currently represent the majority of our NIW and IIF, we expect the mix of our policy type to change meaningfully in future quarters with an increasing percentage of monthly premium policies. Our current long term expectation is for our total single premium polices (including Single and Aggregated Single) to collectively represent ten to twenty percent of our NIW and IIF as we expand our customer base and our business develops.
The tables on the following pages provide information on our current IIF by different metrics for the periods presented, including weighted average premiums (in basis points), FICO distributions, LTVs, premiums written and earned, average loan sizes and geographic distribution.
The table below shows NIW, IIF, RIF, policies in force, the weighted-average coverage, loans in default and the risk in force on that defaulted loan, by quarter, for the last four quarters, for our primary book.

Primary                                                              Quarter Ended
                                    June 30, 2014      March 31, 2014     December 31, 2013     September 30, 2013
                                                                (Dollars in Thousands)
New insurance written              $      429,944     $      354,313     $         157,568     $           3,560
Insurance in force (end of period) $      939,753     $      514,796     $         161,731     $           4,604
Risk in force (end of period)      $      220,949     $      115,467     $          36,516     $           1,196
Policies in force (end of period)           3,865              2,072                   653                    22
Weighted-average coverage (1)                23.5 %             22.4 %                22.6 %                26.0 %
Loans in default (count)                        1                  -                     -                     -
Risk in force on defaulted loans   $          100     $            -     $               -     $               -

(1) End of period RIF divided by IIF.


The table below shows primary and pool IIF, NIW and premiums written and earned by policy type.
Primary and Pool

                  As of and for the quarter ended June 30, 2014                As of and for the quarter ended March 31, 2014
                                             Premiums      Premiums                                        Premiums      Premiums
                   IIF             NIW        Written       Earned               IIF             NIW        Written       Earned
                                                                (In Thousands)
Monthly    $         277,490   $ 206,767   $       301   $       301     $          73,734   $  50,136   $        99   $        99
Single               125,056      97,037         2,086           224                28,020      26,518           535            56
Aggregated
Single               537,207     126,140         1,292           196               413,042     277,659         3,150           355
Total
Primary              939,753     429,944         3,679           721               514,796     354,313         3,784           510

Pool               4,936,751           -         1,372         1,372             5,028,677           -         1,394         1,394
Total      $       5,876,504   $ 429,944   $     5,051   $     2,093     $       5,543,473   $ 354,313   $     5,178   $     1,904


             As of and for the quarter ended December 31, 2013               As of and for the quarter ended September 30, 2013
                                        Premiums      Premiums
                IIF           NIW        Written       Earned            IIF            NIW       Premiums Written     Premiums Earned
                                                                  (In Thousands)
Monthly    $     24,558   $  20,395   $        25   $        25     $      4,604   $     3,560   $               6   $               6
Single            1,790       1,790            47             7                -             -                   -                   -
Aggregated
Single          135,383     135,383         1,572           166                -             -                   -                   -
Total
Primary         161,731     157,568         1,644           198            4,604         3,560                   6                   6

Pool          5,089,517           -         1,414         1,414        5,171,664     5,171,664                 476                 476
Total      $  5,251,248   $ 157,568   $     3,058   $     1,612     $  5,176,268   $ 5,175,224   $             482   $             482

The tables below show the initial weighted average premium, in basis points, the weighted average FICO and the weighted average LTV, by policy type, for the quarter in which the policy was originated.

Weighted Average Premium
                                                                   December 31,
                               June 30, 2014     March 31, 2014        2013         September 30, 2013
                                                       (Shown in Basis Points)
Monthly                                  58                 56              64                     66
Single                                  215                205             251                      -
Aggregated Single                       102                113             116                      -


Weighted Average FICO
                                                                   December 31,
                               June 30, 2014     March 31, 2014        2013         September 30, 2013
Monthly                                 747                749             747                    762
Single                                  746                752             735                      -
Aggregated Single                       758                759             759                      -


Weighted Average LTV
                                June 30, 2014      March 31, 2014      December 31, 2013    September 30, 2013
Monthly                                93 %                92 %                 93 %                  92 %
Single                                 93                  92                   92                     -
Aggregated Single                      90                  90                   90                     -


The table below reflects our total NIW, IIF and RIF by FICO as of June 30, 2014.

Total Portfolio         NIW                    IIF                   RIF
                                     (Dollars in Thousands)
                                      As of June 30, 2014
>= 740          $ 4,828,040   78.9 %   $ 4,637,903   78.9 %   $ 221,984   70.7 %
680 - 739         1,118,164   18.3       1,076,146   18.3        84,266   26.8
620 - 679           171,889    2.8         162,455    2.8         7,789    2.5
<= 619                    -      -               -      -             -      -
Total           $ 6,118,093  100.0 %   $ 5,876,504  100.0 %   $ 314,039  100.0 %

The table below reflects our primary NIW, IIF and RIF by FICO for the 2014 and 2013 books as of June 30, 2014.

Primary - 2014 Book        NIW                  IIF                  RIF
                                       (Dollars in Thousands)
                                        As of June 30, 2014
>= 740              $ 527,289   67.2 %   $ 523,941   67.2 %   $ 121,540   65.7 %
680 - 739             238,307   30.4       237,685   30.5        58,656   31.7
620 - 679              18,661    2.4        18,492    2.3         4,796    2.6
<= 619                      -      -             -      -             -      -
Total               $ 784,257  100.0 %   $ 780,118  100.0 %   $ 184,992  100.0 %


Primary - 2013 Book       NIW *                 IIF                  RIF
                                      (Dollars in Thousands)
                                        As of June 30, 2014
>= 740              $ 113,907   70.2 %   $ 113,207   70.9 %   $ 25,168   70.0 %
680 - 739              47,102   29.0        45,420   28.5       10,516   29.2
620 - 679               1,163    0.8         1,008    0.6          273    0.8
<= 619                      -      -             -      -            -      -
Total               $ 162,172  100.0 %   $ 159,635  100.0 %   $ 35,957  100.0 %

The table below reflects our pool NIW, IIF and RIF by FICO for the 2013 book as of June 30, 2014. . . .

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