NMI Holdings, Inc.

Moat: 3/5

Understandability: 2/5

Balance Sheet Health: 3/5

NMI Holdings, Inc. (NMIH) is a leading provider of private mortgage insurance (MI) primarily in the U.S., catering to first-time and repeat homebuyers, particularly those with low down payments.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview:

NMIH operates within the mortgage insurance industry, providing insurance to lenders against losses from borrower defaults. This insurance enables lenders to offer mortgages to borrowers who may not have enough of a downpayment and/or credit history to qualify for conventional loans. The company primarily caters to first-time and repeat homebuyers.

NMIH’s main revenue stream is premiums, which are calculated as a percentage of loan balances that the company covers and collected from mortgage lenders and insurance policies.

Industry Trends and Competitive Landscape:

The mortgage insurance industry is characterized by a few major players, creating an oligopoly with established firms. It’s tied closely to mortgage origination volume and home sales. The industry has been impacted significantly by rising interest rates, inflation, and shifts in housing market dynamics (supply and demand).

Competition: NMIH faces intense competition from large, well-established players (like MGIC, Essent, Radian) that also have economies of scale, vast reach, and entrenched relationships with lenders. The industry is particularly sensitive to macroeconomic conditions as well as regulatory conditions.
Regulatory Landscape: The mortgage insurance industry is subject to a complex web of regulations, primarily overseen by government agencies like the FHA and Ginnie Mae. These regulations dictate capital requirements, pricing practices, and risk management. This has become one of the key factors in long-term success of companies.
Market Environment: The market environment is always changing, so we must take into account the current state of the market. In 2022 and 2023 the U.S. housing market experienced significant declines in both volume and price, while new home sales fell rapidly as interest rates surged and inflation remained high. This created a less competitive environment, leading to better profit margins. As market normalizes, these profit margins will reduce and the level of competition will increase.

What makes NMIH Different?

Focus on Efficiency and Technology: NMIH emphasizes data analysis and efficient processes to manage risk, and has a focus on using tech in improving speed and precision.

Financial Analysis:

NMIH’s financials reflect the trends in the mortgage industry. They are strongly impacted by mortgage originations, interest rates and real estate values. Analyzing financial data is essential for long-term returns. A few noteworthy things are mentioned below:

Revenue: NMIH has seen rapid growth in the past but is seeing decreasing revenue. The revenue for the first three quarters of 2022 was 544 million but is 441.6 million in the first three quarters of 2023. This a huge decline that is primarily because of the reduction in mortgage originations.
Net Income: NMIH has seen declining net income because of increasing interest rates, decline in mortgage originations, and increasing insurance costs. While the company has generally performed well, it is seeing a rapid decrease. Net income for the first three quarters of 2022 was 312 million, while net income for 2023 was 275 million.
Margins: Net operating profit margins have gone down considerably from around 80% in 2020 to 58% in 2021, and again to 45% in 2023 as per recent filings. This will mean that even if their revenue grows in the future, it is unlikely that they will earn the same profit margins that they used to. This again reflects the increasing cost pressure and the rising competition.
Balance Sheet: While NMIH has a debt to equity level of 0.2x, the cash position is very low, and therefore this is rated a 3 on balance sheet.
Loss-mitigation: While their average expenses have risen, it does seem that management is focused on creating processes and policies that reduce the probability of claims and make their insurance more efficient and profitable.
Capital Position: NMIH has a strong capitalization structure, and this is evident from the fact that their debt-to-equity level is only 0.2x. But, a low cash position means that the business is less flexible in taking advantage of new opportunities.

Recent Concerns and Management Outlook

Interest Rate Environment: NMIH faces concerns over rising interest rates, which are the primary reason for low mortgage originations. Interest rates are expected to stay higher in the next couple years. However, NMIH has not faced any difficulty meeting its liquidity obligations.
Credit Cycle and Default rates: NMIH could face elevated claims due to increasing defaults. This is an expected trend because of the increasing unemployment, reduced savings, and high interest rates. Although the company has managed claims well till now.
Increased Costs: Both insurance expense and other operating expenses have increased, which has had a negative effect on margins. This trend is expected to remain the same, since companies can take more advantage of current market condition.
Management’s Strategy: Management has emphasized on managing their expenses and improving their efficiency. NMIH has a clear strategic plan to navigate through the current economic turbulence and achieve superior performance. They have laid focus on long-term growth. The company wants to be a “partner of choice” for its lenders and are continually looking to strengthen their core lending practices.

Moat Assessment (3/5):

NMIH possesses a narrow moat, stemming primarily from its ability to build switching costs with lenders, coupled with its intangible assets in the form of relationships and network effects. But those factors are not as strong as those of some of its larger peers.

Intangible Assets (Brands, Reputation): While NMIH doesn’t boast powerful, recognizable brands like consumer companies, they do have strong relationships with lenders. Many lenders depend on NMIH’s services to create mortgages and prefer them because they provide a reliable service. This makes the product somewhat harder to substitute.
Switching Costs: Integration of their services to a mortgage originator provides a kind of switching costs that prevents the lenders from changing to another service provider easily.
Economies of Scale: While they are not as big as the large competitors in the industry, they have made efforts to reduce their operating expenses.

Moat Risks:

Dependence on Market Conditions: NMIH is highly susceptible to fluctuations in the housing market, interest rates, and overall economic conditions, which could hurt mortgage originations. This is a macro economic factor that the company cannot avoid and must focus on mitigating it’s effects.
Regulatory Changes: Any adverse regulatory changes could impact NMIH’s profitability and growth prospects. These could range from higher capital requirements to changes in how pricing of mortgage insurance is decided.
Competition: NMIH faces stiff competition from larger, well-established players with significant resources and economies of scale, making it challenging to gain a big market share in new markets.
Technological Disruption: New technologies that bypass traditional mortgage insurance or new market entrants that offer their own kind of protections can pose a threat to NMIH.
Risk of Defaults: As the economy slows down and interest rates have gone up considerably, they could face a large wave of defaults.

Business Resilience:

NMIH has shown strength in managing both operational and financial risks. While the company has faced headwinds, it’s management has remained focused on improving efficiency, protecting it’s existing capital, and targeting profitability. However, their small cash base makes them less flexible for unexpected circumstances.

Understandability (2/5):

NMIH’s business model is relatively difficult to understand for those not well-versed in financial concepts and the mortgage industry, given the intricacy of financial statements and the interplay of multiple factors.

Intricacies: It requires an understanding of mortgage lending, the nature of insurance, and various financial terminologies. Additionally, it has more moving parts and assumptions than other companies, which makes it harder to analyze.
Complexity: The use of financial instruments like complex debt, and derivatives make this more challenging.
Transparency: Information about many of their operations is not available in the public domain making valuation more difficult.

Balance Sheet Health (3/5):

NMIH’s balance sheet is acceptable although it has some concerns that must be understood by the investors.

Debt-to-Equity Ratio: They have a low debt ratio, which means they are not too leveraged. This provides them financial flexibility.
Cash Position: However, their cash position remains rather low compared to total assets, meaning they may have limited ability to adapt quickly to changing conditions.
High ROIC: A high ROIC is a good sign as it means the company is well positioned to earn high returns on the money they put into the business.

Overall, NMIH is a narrow-moat company facing some near-term risks, but whose management is focused on maximizing shareholder value over the long-term. The company is relatively less straightforward to understand and its business is not the strongest.