10-Q: NMI Holdings Reports Strong Q2 Earnings Amid Rising Claims

NMI Holdings, Inc. announced increased net income and EPS for Q2 2025, driven by higher revenues and lower interest expenses, despite a significant rise in insurance claims and default rates.

Summary

• Net income for the three months ended June 30, 2025, increased by 4% to $96.15 million, up from $92.08 million in the prior year period.
• Diluted earnings per share (EPS) rose 7% to $1.21 for the three months ended June 30, 2025, compared to $1.13 in the same period last year.
• Total revenues for the quarter increased 7% to $173.78 million, primarily due to a 6% rise in net premiums earned to $149.07 million and a 21% increase in net investment income to $24.95 million.
• Insurance claims and claim expenses surged to $13.45 million for the quarter, a significant increase from $0.28 million in the prior year, resulting in a loss ratio of 9.0% compared to 0.2%.
• Interest expense decreased by 52% to $7.12 million for the quarter, largely due to the refinancing of senior notes in 2024.
• For the six months ended June 30, 2025, net income grew 10% to $198.71 million, with diluted EPS up 13% to $2.50.
• Primary insurance-in-force (IIF) increased 5% year-over-year to $214.65 billion as of June 30, 2025.
• The number of loans in default in the primary insured portfolio increased to 6,709 as of June 30, 2025, up from 4,904 a year prior, pushing the default rate to 1.00% from 0.76%.
• Claims paid increased to 188 for the six months ended June 30, 2025, compared to 101 in the same period last year, with average amount paid per claim rising to $57,000 from $30,000.
• Claims severity for the six months ended June 30, 2025, was 75%, up from 54% in the prior year, but remained below long-term industry norms.
• Available assets under PMIERs were $3.24 billion as of June 30, 2025, significantly exceeding net risk-based required assets of $1.93 billion.

Sentiment

Score: 7

Explanation: The company reported strong top-line financial growth with increased net income and EPS, driven by higher revenues and reduced interest expenses. It maintains a robust capital position and actively returns capital to shareholders through share repurchases. However, a significant increase in insurance claims, loss ratio, and default rates indicates emerging challenges in the core insurance business, which warrants close monitoring despite current profitability.

Positives

• Net income and diluted EPS increased by 4% and 7% respectively for the three months ended June 30, 2025, and by 10% and 13% for the six months ended June 30, 2025, demonstrating strong profitability growth.
• Total revenues grew by 7% for the quarter and 9% for the six-month period, driven by higher net premiums earned and robust net investment income.
• Net investment income increased by 21% for both the three and six months ended June 30, 2025, reflecting growth in the invested asset base and higher book yields.
• Interest expense significantly decreased by 52% for the quarter and 37% for the six-month period due to the successful refinancing of senior notes, reducing financing costs.
• Primary insurance-in-force (IIF) expanded by 5% year-over-year to $214.65 billion, indicating continued business growth.
• The company maintains a strong capital position, with PMIERs available assets of $3.24 billion significantly exceeding the $1.93 billion net risk-based required assets as of June 30, 2025.
• The persistency rate remained historically high at 84.1% as of June 30, 2025, contributing to stable premium earnings.
• Claims severity, while increasing, remained below long-term industry norms, suggesting effective risk management despite rising defaults.
• The company has substantial remaining share repurchase authority of $281.0 million as of June 30, 2025, indicating a commitment to returning capital to shareholders.

Negatives

• Insurance claims and claim expenses increased dramatically by 351% for the six months ended June 30, 2025, to $17.92 million, compared to $3.97 million in the prior year.
• The loss ratio significantly worsened to 9.0% for the three months ended June 30, 2025, from 0.2% in the prior year, and to 6.0% for the six months ended June 30, 2025, from 1.4%.
• The combined ratio increased to 28.8% for the three months ended June 30, 2025, from 20.3%, and to 26.0% for the six months ended June 30, 2025, from 22.4%.
• The number of loans in default increased by 37% year-over-year to 6,709 as of June 30, 2025, leading to an increase in the default rate to 1.00% from 0.76%.
• The average amount paid per claim increased to $57,000 for the six months ended June 30, 2025, from $30,000 in the prior year, indicating higher claim severity.
• Net realized investment losses of $400,000 were recorded for the three months ended June 30, 2025, compared to no losses in the prior year period.
• The company experienced a slight decrease in new insurance written (NIW) for the six months ended June 30, 2025, at $21.69 billion, compared to $21.90 billion in the prior year.

Risks

• Changes in general economic, market, and political conditions (including interest rates and inflation) and investment results could affect the U.S. housing and mortgage markets, impacting business operations.
• Decisions by Fannie Mae and Freddie Mac (GSEs) could decrease or discontinue the use of mortgage insurance as credit enhancement, or changes in FHFA housing policy objectives could affect the business.
• Ability to remain an eligible mortgage insurer under the PMIERs and other GSE requirements, which may change at any time, poses a continuous compliance risk.
• Actions of existing competitors, including other private and government mortgage insurers, and potential market entry by new competitors or consolidation could impact market share and profitability.
• Adoption of new or changes to existing laws, rules, and regulations, or their enforcement by regulators, could directly impact the business or the mortgage insurance industry.
• Potential legal and regulatory claims, investigations, actions, audits, or inquiries could result in adverse judgments, settlements, fines, or significant expenditures.
• Ability to successfully execute and implement capital plans, including accessing equity, credit, and reinsurance markets on acceptable terms, is crucial.
• Lenders, GSEs, or other market participants seeking alternatives to private mortgage insurance could reduce demand for services.
• Failure of risk management or pricing or investment strategies could lead to adverse financial outcomes.
• A decrease in the length of time insurance policies are in force (persistency) could negatively impact net premiums earned.
• Emergence of unexpected claim and coverage issues, including claims exceeding reserves, could impact financial results.
• Potential adverse impacts from natural disasters or public health emergencies, including a decline in new business, adverse effects on home prices, and an increase in notices of default.
• Climate risk and efforts to manage or regulate it by government agencies could affect business and operations.
• The inability of counterparties, including third-party reinsurers, to meet their obligations could result in unrecovered losses.
• Failure to maintain, improve, and develop necessary information technology (IT) systems or the failure of technology providers to perform could disrupt operations.
• Effectiveness and security of IT systems and digital products, including risks of failure or exposure to cybersecurity threats, could impact operations and confidential information.
• Ability to recruit, train, and retain key personnel is essential for business continuity and growth.

Future Outlook

The company anticipates that macroeconomic factors, including persistent inflation, elevated interest rates, flagging consumer confidence, and increasing jobless claims, could impact the housing market, mortgage insurance industry, and future business. A significant decline in housing demand, a protracted decrease in home prices, or a sustained increase in unemployment could reduce new business activity and increase future default and claim experience. The company expects to continue evaluating reinsurance opportunities and notes that its IT service agreement with TCS has been extended through March 31, 2032.

Management Comments

• Our persistency rate remains historically high due to a continued slowdown in the pace of mortgage refinancing activity tied to the prevailing interest and mortgage rate environment.
• The increase in claims severity for the three and six months ended June 30, 2025, was primarily due to a greater proportion of claims related to loans originated in recent years, which generally have less accumulated equity than earlier vintages.
• Our claims severity for each period was below long-term industry norms.
• We generally observe that forbearance, repayment and modification, and other assistance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations, and note higher cure rates on defaults benefitting from broad-based assistance programs than would otherwise be expected on similarly situated loans that did not benefit from such programs.
• The increase in average reserve per default was due to changes in observed and forecasted housing market conditions and macroeconomic factors, and an increase in the proportion of defaults that trace to storm-related activity year-on-year, as storm-related defaults cure at higher rates.

Industry Context

The U.S. housing market and mortgage insurance industry are currently influenced by persistent inflation, elevated interest rates, and fluctuating consumer confidence. While the company's persistency rates remain high due to reduced refinancing activity, the increase in default rates and claims suggests a potential softening in credit performance across the broader mortgage landscape. The company's strategic use of reinsurance and its focus on disciplined risk selection and pricing, including its proprietary Rate GPS platform, aim to mitigate these industry-wide pressures and maintain a high-quality insured portfolio. The increase in storm-related defaults highlights the growing impact of natural disasters on the insurance sector.

Comparison to Industry Standards

• The company's claims severity of 75% for the six months ended June 30, 2025, while higher than the prior year, remained below long-term industry norms, indicating better-than-average claim management or a higher quality insured portfolio compared to the broader market.
• The company's PMIERs available assets of $3.24 billion significantly exceed its net risk-based required assets of $1.93 billion, demonstrating a robust capital position relative to regulatory standards for private mortgage insurers.
• The company's risk-to-capital (RTC) ratio of 13.1:1 as of June 30, 2025, is well below the common industry maximum ratio of 25:1, indicating strong statutory capitalization compared to state regulatory requirements.

Legal Proceedings

• A litigation proceeding pertaining to the refund of certain mortgage insurance premiums under the Homeowners Protection Act was dismissed in September 2023, and the dismissal was affirmed on appeal in June 2025. No material loss is currently expected.

Stakeholder Impact

• Shareholders: Positive impact from increased net income, EPS, and ongoing share repurchase programs, but potential concern from rising claims and default rates.
• Customers (mortgage originators): Continued access to mortgage insurance and outsourced loan review services, supported by the extended IT service agreement.
• Employees: Stable operations and continued investment in IT infrastructure, potentially indicating job security and growth opportunities.
• Creditors: Strong financial position and compliance with debt covenants, indicating low credit risk.
• Regulatory authorities: Continued compliance with PMIERs and state statutory capital requirements, maintaining good standing.

Next Steps

• Continue to monitor macroeconomic factors, including interest rates, inflation, and unemployment, for their impact on the housing and mortgage insurance markets.
• Manage risk and ensure compliance with PMIERs and state regulatory capital requirements.
• Evaluate and execute reinsurance opportunities to manage risk and support business growth.
• Continue to implement the share repurchase programs to return capital to shareholders.
• Monitor and analyze loss development trends in the insured portfolio, particularly given the increase in defaults and claims.

Key Dates

Recommendation

While NMI Holdings demonstrated strong financial performance with increased net income and EPS, driven by revenue growth and effective debt management, the significant rise in insurance claims, loss ratio, and default rates presents a notable concern. The company's robust capital position and active share repurchase program are positives, but the worsening underlying credit trends in the insured portfolio warrant caution. A 'hold' recommendation is appropriate to observe if these negative trends in claims and defaults stabilize or reverse, balancing current profitability against potential future headwinds in the core business.

Keywords

Mortgage Insurance, MI, SEC Filing, 10-Q, Financial Results, Earnings, Net Income, EPS, Insurance-in-Force, Risk-in-Force, PMIERs, Reinsurance, Claims, Defaults, Housing Market, Interest Rates, Capital Management, Share Repurchase, NMIH