National MI beats expectations on 2Q earnings despite higher losses

NMI Holdings' second quarter earnings came in higher than analysts' expectations, but lower than prior periods given the impact of a massive growth in claims and claim expenses due to coronavirus-related defaults.

Net income for the second quarter was $26.8 million, compared to $58.3 million in the first quarter and $39.1 million in the second quarter of 2019.

NMI's adjusted operating earnings per share of $0.40 bested the B. Riley FBR estimate of $0.36 and the consensus estimate of $0.32. B. Riley FBR analyst Randy Binner credited the company exceeding their expectations to "somewhat better loss and expense metrics."

But insurance claims and claims expenses increased to $34.3 million, a gain of 503% compared with $5.7 million in the first quarter and 1,075% over $2.9 million recorded for the second quarter of 2019.

Its National MI subsidiary previously reported that its delinquent inventory stood at 10,816 loans on June 30, 88% of which were in forbearance program, versus 1,449 on March 31. Mortgage insurers only pay claims if or when loans in the inventory move into foreclosure.

"NMI's loss pick and [incurred but not reported] assumption reflect a still favorable credit profile for the housing market and relatively low forbearance trends in our view," said Binner.

NMI reported that it had 14,175 defaults and 28,510 loans in forbearance programs as of the end of July.

"They noted that they had seen an encouraging increase in cures among borrowers that had been impacted by the pandemic as well as slowing growth in its default population," Mark Palmer, an analyst with BTIG, said in his report.

National MI's Private Mortgage Insurer Eligibility Requirements' cushion was $700 million, with available assets of $1.7 billion and net risk-based required assets of $1.0 billion.

"NMI screened well in our recent analysis on capital adequacy and the company recently added another layer of reinsurance," Binner said.

Palmer noted the company's $1 billion capital raise since the pandemic started. "As it turned out, the company's efforts in running its mortgage insurance business have been similarly productive," he said.

National MI produced a record in new insurance written, at $13.1 billion, compared with $11.3 billion in the first quarter and $12.2 billion in the second quarter one year ago.

However, Binner had expected National MI to report $14.4 billion of NIW for the second quarter. "NMI was early to increase pricing in light of COVID pressure on the market and lost some market share on this," he wrote. He noted that July and August insurance-in-force growth trends are indicating that it has regained some of that lost share.

Its IIF of $98.9 billion on June 30 was approximately 16% lower than Binner's expectations of $118 billion.

But Palmer noted "that increase in IIF occurred despite 12-month persistency of 64% as of June 30 as refinancing activity accelerated during the quarter due to historically low interest rates.

"Management noted that the expected risk-adjusted returns of the new business that NMIH wrote during 2Q20 had been trending above its long-term target in the mid-teens,” Palmer wrote. “Given the exceptionally low interest rate environment in which that business was written, management expects it to be highly persistent and supportive of future value."