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NMI Holdings Gains From Solid Premiums Amid Cost Concerns

NMI Holdings Inc. NMIH is well poised for growth, driven by new customer account activations, growth in premium policy production and solid capital position.

The stock carries a VGM Score of B. VGM Score helps to identify stocks with the most attractive value, best growth and the most promising momentum.

The stock has seen its estimates for 2020 and 2021 move up nearly 2.3% and 0.5%, respectively, in the past seven days that reflects investors, optimism.

The company has a decent earnings surprise history. It has a trailing four-quarter earnings surprise of 14.31%, on average.

Factors Driving NMI Holdings

This Zacks Rank #3 (Hold) mortgage insurer should continue to benefit from growth in monthly and single premium policy production tied to increased penetration of existing customer accounts, new customer account activation, as well as growth in the size of the total mortgage insurance market new insurance written (NIW) volume. These factors have been boosting NIW, the primary driver of insurance-in-force (IIF), to increase.

NMI Holdings is well-poised to gain from growth of IIF, increased monthly policy production and higher single premium policy cancellations that continue to contribute to net premiums earned. It is one of the important drivers of the company’s revenues.

Considering the increase in size and improvement of book yield on total investment portfolio, investment income is expected to improve amid the current low interest rate environment. The metric witnessed four-year CAGR (2015-2019) of 43.6%. Since the company has redeployed its excess liquidity position, net investment income is expected to rebound in the near term.

Such premium growth as well as improving investment income is driving the top line, which witnessed a five-year CAGR (2014-2019) of 63%. The Zacks Consensus Estimate for the company’s 2020 and 2021 revenues is pegged at $432.1 million and $465.3 million, indicating year-over-year increase of 14.1% and 7.6%, respectively.

In the third quarter of 2020, the company’s subsidiary National Mortgage Insurance Corporation (National MI) integrated with a cloud-based product, pricing and eligibility (PPE) engine provider Lender Price. The move was aimed toward standardizing, simplifying and automating the process of ordering private mortgage insurance, while limiting errors. The partnership is also expected to lower the time from application to closing for loan originators and consumers.

NMI Holdings boasts a strong balance sheet with significant financial flexibility. It exited the second quarter with total cash and cash equivalents of $515 million, which is sufficient to cover the company’s debt obligations of $393 million. Also, it has access to $100 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility, whose maturity date has been extended from May 24, 2021 to Feb 22, 2023. Further, the company has times interest earned of 16.9 compared with the industry’s measure of 8.4. This implies that its earnings are sufficient to cover interest obligations.

Furthermore, return on equity (ROE), reflecting the company’s efficient utilization of its shareholders’ funds to generate earnings, has been increasing in the past several years. Its trailing 12-month ROE of 18.3% is better than the industry average of 6.2%.

However, shares of this Zacks Rank #3 (Hold) property and casualty insurer have lost 15.5% in the past year compared with the industry’s decline of 2.1%.

Also, we remain concerned about the company’s high expenses incurred, which has been putting pressure on margins. In the second quarter, net margin contracted 490 basis points (bps) sequentially.

Nevertheless, the Zacks Consensus Estimate for 2021 earnings per share is pegged at $2.17, indicating year-over-year increase of nearly 21%.

Stocks to Consider

Some better-ranked stocks in the insurance space are Fidelity National Financial Inc. FNF, Manulife Financial Corp MFC and First American Financial Corporation FAF. While Fidelity National sports a Zacks Rank #1 (Strong Buy), Manulife Financial and First American Financial carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Fidelity National surpassed estimates in each of the last four quarters. The company has a trailing four-quarter earnings surprise of 32.13%, on average.

Manulife Financial surpassed estimates in two of the last four quarters. The company has a trailing four-quarter earnings surprise of 6.79%, on average.

First American Financial surpassed estimates in each of the last four quarters. It has a trailing four-quarter earnings surprise of 20.84%, on average.

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