1. Organization, and Basis of Presentation and Summary of Accounting Principles
NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011, to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly ownedwholly-owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). In April 2012, we completed a private placement of our securities, through which we offered and sold an aggregate of 55,000,000 of our Class AOur common stock resulting in net proceeds of approximately $510 million (the Private Placement), and we completed the acquisition of our insurance subsidiaries for $8.5 million in cash, common stock and warrants, plus the assumption of $1.3 million in liabilities. In November 2013, we completed an initial public offering of 2.4 million shares of our common stock, and our common stock began tradingis listed on the NASDAQ exchange on November 8, 2013, under the ticker symbol "NMIH."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly ownedwholly-owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services on a limited basis to mortgage loan originators.
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly ownedwholly-owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2016,2019, included in our 20162019 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2017.2020.
Premium Deficiency Reserves10
We consider whether a premium deficiency exists at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds related unearned premiums and anticipated investment income. We have determined that no premium deficiency reserves were necessary for the three and nine months ended September 30, 2017 or 2016.
Reinsurance
We account for premiums, losses and loss expenses that are ceded to reinsurers on bases consistent with those we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums ceded or otherwise paid to reinsurers as reductions to premium revenue.
We earn profit and ceding commissions in connection with our 2016 QSR Transaction (see Note 5, "Reinsurance").Profit commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of losses we cede. We recognize any profit commissions we earn as increases to premium revenue. Ceding commissions are calculated as a percentage of ceded written premiums, which are intended to cover our costs to acquire and service the direct policies. We earn the
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ceding commissions in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We accounthave elected to present accrued interest receivable separately from available for ceding commissions as reductions to underwriting and operating expenses.
We cede a portion of loss reserves, paid losses and loss expenses to our reinsurers, which are accounted for as reinsurance recoverablessale securities on the consolidated balance sheetssheet in "Accrued Investment Income."Accrued interest receivable was $7.2 million as of March 31, 2020 relating almost entirely to available for sale debt securities. We have also elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. For all classes of available for sale securities, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due and as reductions to loss expense on the consolidated statementswrite-off of operations.accrued interest receivable is recognized by reversing interest income. We remain directly liable for all loss payments in the event we are unable to collect from any reinsurer.
Variable interest entity
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re Ltd. (Oaktown Re), a Bermuda-domiciled special purpose reinsurer. At inception of the reinsurance agreement, we determined that Oaktown Re was a variable interest entity (VIE), as defined under GAAP (ASC 810), because it did not have sufficient equity at risk to finance its activities. We evaluatedwrite off any accrued interest receivable during the VIE to determine whether NMIC was its primary beneficiary and, if so, whether we were required to consolidate the assets and liabilities of the VIE. The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its economic performance and (2) has significant economic exposure to the VIE; i.e., the obligation to absorb losses or receive benefits that could potentially be significant. The determination of whether an entity is the primary beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIE.
We concluded that we are not the primary beneficiary of Oaktown Re and that consolidation is not required, as we do not have significant economic exposure in the entity.
See Note 5, "Reinsurance" for further discussion of the reinsurance arrangement.three months ended March 31, 2020.
Premiums Receivable
Premiums receivable consistconsists of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled. We have determined thatrecognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the receivable write-offlife of the receivable. Due to the nature of our insurance policies and the short-term duration of the related receivables an allowance for credit loss was immaterialnot required at March 31, 2020.
Reinsurance
NMIC has entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction) and January 1, 2018 (the 2018 QSR Transaction), which we refer to collectively as the QSR Transactions. Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as reinsurance recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims expenses on the consolidated statements of operations. The company actively manages and monitors its credit risk associated with its reinsurance recoverables and recognizes an allowance for credit losses based on losses expected to arise over the life of the asset.
As it relates to its QSR transactions, each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (A.M.Best) or both. In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balances are further supported by trust accounts established and maintained by each reinsurer in accordance with the private mortgage insurer eligibility requirements (PMIERs) funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to our QSR Transactions was $6.2 million as of September 30, 2017.March 31, 2020 and an allowance for credit losses was not required.
Recent Accounting Pronouncements - Adopted
In May 2014,June 2016, the Financial Accounting StandardsStandard Board (the FASB)(FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (Topic 815), Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses shifts from Contracts with Customers (Topic 606). This update is intendedan incurred loss model, whereby losses are only recognized once probable and estimable, to provide a consistent approach in recognizing revenue. In accordancecurrent expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the new standard, recognitionamount of revenue occurs when a customer obtains controlthe allowance limited to the amount by which fair value is less than amortized cost. The length of promised goods or servicestime an available-for sale fixed maturity security has been held in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, ASU 2015-14 deferred the provisions of ASU 2014-09 to be effective for interim and annual periods beginning after December 15, 2017. In addition, this guidance amends the existing requirements for the recognition of a gain orunrealized loss position will no longer impact its credit loss determination. We adopted these updates on the transfer of non-financial assets that are not in a contract with a customer (ASU 2017-05). In September 2017, ASU 2017-13, added guidance from an SEC Staff Announcement, "Transition Related to Accounting Standards Updates No. 2014-09." The adoption of this update for our loan review services revenue, effective January 1, 2018, will2020. Adoption of the updated standards did not have an immateriala material impact on our consolidated financial statements, and will not affect the Company’s reporting of insurance premiums and investment income. We are still in the process of evaluating the adoption method and thehad no impact on presentationour accounting for insurance claims and disclosure.claim expenses as these items are not in scope of the guidance.
In February 2016,August 2018, the FASB issued ASU 2016-02, Leases2018-13, Fair Value Measurement (Topic 842)820). This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities onmodifies the balance sheet. The standard also requires additional disclosures regarding the amount, timing, and uncertaintyfair value measurement disclosure requirements of cash flows arising from leases. For public business entities,ASC 820. We adopted this update is effective for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted in any period. We expect to adopt this guidanceASU on January 1, 2019. In September 2017, ASU 2017-13, added guidance from an SEC Staff Announcement, "Transition Related to Accounting Standards Update No. 2016-02." We anticipate this standard will2020 and determined it did not have ana material impact on our consolidated financial position, primarily due to our office space operating lease, as we will be required to recognize lease assets and lease liabilities on our consolidated balance sheet. We will continue to assess the potential impacts of this standard, including the impact the adoption of this guidance will have on our results of operations or cash flows.statements.
In June 2016,August 2018, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326)2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update requiresapplies to cloud computing arrangements structured as service contracts, and provides companies to measure all expected credit losses for financial assets held at the reporting date. The accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration also is amended in the standard. The standard
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019, which amended the effective date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.2021. We are currently evaluating the impact the adoption of this ASU will have, if any, on theour consolidated financial statements.
In August 2016,November 2019, the FASB issued ASU 2016-15, Statement of Cash Flows2019-12, Income Taxes (Topic 230)740). This update is intendedeliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce diversitycomplexity in practice in how certain cash receiptsincome tax areas, including recognizing deferred taxes for tax goodwill and cash payments are presented and classified in the statementallocating taxes to members of cash flows.a consolidated group. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update, effective January 1, 2018, is not expected to have any impact on our statement of cash flows.
In August 2016, the FASB issued ASU 2016-16, Income Taxes- Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This update is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update, effective January 1, 2018, is not expected to have any impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update is intended to simplify the test for goodwill impairment. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have determined that the adoption of this ASU will have no impact on the consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). This update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The standard will take effect for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, and if an entity early adopts the guidance in an interim period, any adjustments are reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this update, effective January 1, 2018, is not expected to have any impact on our consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). This update is intended to simplify the accounting for certain financial instruments with down round features. This standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact the adoption of this ASU will have, if any, on theour consolidated financial statements.
Immaterial Correction of Prior Period Amounts
During the first quarter of 2017, after filing the 2016 10-K, including the audited financial statements included therein, we discovered that $1.8 million of deferred taxes on vested options associated with employees terminated in previous years had not been reversed. Because our deferred tax asset (DTA) was subject to a valuation allowance prior to December 31, 2016, no expense would have been recognized in periods prior to December 31, 2016. However, at December 31, 2016, when we released the valuation allowance against the DTA, the DTA was overstated by $1.8 million and resulted in a $1.8 million overstatement of our 2016 income tax benefit and net income.
In order to provide consistency in the consolidated statements and as permitted by Staff Accounting Bulletin (SAB) 108, revisions for these immaterial amounts to previously reported annual amounts are reflected in the Consolidated Balance Sheet financial information herein and will be reflected in the Consolidated Statement of Operations in future filings containing such financial information as permitted by SAB 108. A comparison of the affected amounts as previously reported and as adjusted are presented below.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
|
| | | | | | | |
| As of and for the full year ended December 31, 2016 | As previously reported | | As adjusted |
| | (In thousands) |
| Income Statement | | | |
| Net income | $ | 65,841 |
| | $ | 64,001 |
|
| Income tax (benefit) | (54,389 | ) | | (52,550 | ) |
| Basic EPS | 1.11 |
| | 1.08 |
|
| Diluted EPS | 1.08 |
| | 1.05 |
|
| | | | |
| Balance Sheet | | | |
| Deferred tax asset, net | $ | 53,274 |
| | $ | 51,434 |
|
| Total assets | 841,737 |
| | 839,897 |
|
| Accumulated deficit | (94,882 | ) | | (96,722 | ) |
| Total shareholders' equity | 477,349 |
| | 475,509 |
|
Change in Accounting Principle
In March 2016,2020, the FASB issued ASU 2016-09, Improvements2020-04, Reference Rate Reform (Topic 848). This update provides optional guidance to Employee Share-Based Payment Accounting (Topic 718), which intends to simplify various aspects ofease the potential burden in accounting for and reporting of share-based payments. The new accountingreference rate reform on financial reporting. Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate (LIBOR) in financial contracts, which is requiredexpected to be adopted using a modified retrospective approach, with a cumulative-effect adjustmentdiscontinued in 2021. The ASU includes optional expedients and exceptions for applying GAAP to opening retained earnings for any outstanding liability awards that qualify for equity classification under the new guidance.
As the guidancecontracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The standard is effective immediately through December 31, 2022 for annualall entities that have contracts, hedging relationships, and interim reporting periods beginning after December 15, 2016, we adoptedother transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the new guidance inimpact the first quarter of 2017. This required us to reflect any adjustments as of January 1, 2017, the beginning of the annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits in our provision for income taxes in the consolidated statements of operations. Additionally, our consolidated statements of cash flows now present excess tax benefits as an operating activity on a prospective basis. Finally, we have elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The net cumulative effect of this change was recognized as a $0.5 million reductionASU would have, if any, to our contract modifications that are affected by the accumulated deficit asdiscontinuation of January 1, 2017.LIBOR.
2. Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an accumulated basis in shareholders' equity. Net realized investment gains and losses are reported in incomeearnings based uponon specific identification of securities sold.sold or any impairment that has been recorded through the allowance for credit losses. If our intent is to sell a security and its fair value is below amortized cost, the security's amortized cost basis is written down to fair value and a loss is recognized in earnings.
Fair Values and Gross Unrealized Gains and Losses on Investments
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Gross Unrealized | | | | Fair
Value |
| | | Gains | | Losses | | |
| As of March 31, 2020 | (In Thousands) | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 48,207 | | | $ | 3,519 | | | $ | — | | | $ | 51,726 | |
| Municipal debt securities | 196,750 | | | 3,853 | | | (668) | | | 199,935 | |
| Corporate debt securities | 628,834 | | | 18,272 | | | (6,658) | | | 640,448 | |
| Asset-backed securities | 180,514 | | | 404 | | | (7,811) | | | 173,107 | |
| Total bonds | 1,054,305 | | | 26,048 | | | (15,137) | | | 1,065,216 | |
| | | | | | | |
| Short-term investments | 4,838 | | | 18 | | | — | | | 4,856 | |
| Total investments | $ | 1,059,143 | | | $ | 26,066 | | | $ | (15,137) | | | $ | 1,070,072 | |
|
| | | | | | | | | | | | | | | |
| | Amortized
Cost | | Gross Unrealized | | Fair
Value |
| | | Gains | | Losses | |
| As of September 30, 2017 | (In Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 65,669 |
| | $ | 21 |
| | $ | (636 | ) | | $ | 65,054 |
|
| Municipal debt securities | 90,155 |
| | 929 |
| | (348 | ) | | 90,736 |
|
| Corporate debt securities | 404,467 |
| | 5,619 |
| | (1,246 | ) | | 408,840 |
|
| Asset-backed securities | 96,279 |
| | 1,142 |
| | (101 | ) | | 97,320 |
|
| Total bonds | 656,570 |
| | 7,711 |
| | (2,331 | ) | | 661,950 |
|
| Short-term investments | 30,714 |
| | 65 |
| | — |
| | 30,779 |
|
| Total investments | $ | 687,284 |
| | $ | 7,776 |
| | $ | (2,331 | ) | | $ | 692,729 |
|
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | | | | | | | | | | | | | | | | | | | | |
| Amortized
Cost | | Gross Unrealized | | | | Fair
Value |
| | | Gains | | Losses | | |
| As of December 31, 2019 | (In Thousands) | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 48,203 | | | $ | 784 | | | $ | (58) | | | $ | 48,929 | |
| Municipal debt securities | 189,530 | | | 1,721 | | | (1,035) | | | 190,216 | |
| Corporate debt securities | 661,719 | | | 23,373 | | | (211) | | | 684,881 | |
| Asset-backed securities | 170,153 | | | 2,603 | | | (114) | | | 172,642 | |
| Total bonds | 1,069,605 | | | 28,481 | | | (1,418) | | | 1,096,668 | |
| | | | | | | |
| Short-term investments | 44,174 | | | 98 | | | — | | | 44,272 | |
| Total investments | $ | 1,113,779 | | | $ | 28,579 | | | $ | (1,418) | | | $ | 1,140,940 | |
We did not own any mortgage-backed securities in our asset-backed securities portfolio at March 31, 2020 or December 31, 2019. |
| | | | | | | | | | | | | | | |
| | Amortized
Cost | | Gross Unrealized | | Fair
Value |
| | | Gains | | Losses | |
| As of December 31, 2016 | (In Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 64,135 |
| | $ | 6 |
| | $ | (962 | ) | | $ | 63,179 |
|
| Municipal debt securities | 40,801 |
| | 131 |
| | (663 | ) | | 40,269 |
|
| Corporate debt securities | 349,712 |
| | 1,722 |
| | (2,356 | ) | | 349,078 |
|
| Asset-backed securities | 114,456 |
| | 765 |
| | (560 | ) | | 114,661 |
|
| Total bonds | 569,104 |
| | 2,624 |
| | (4,541 | ) | | 567,187 |
|
| Short-term investments | 61,584 |
| | 198 |
| | — |
| | 61,782 |
|
| Total investments | $ | 630,688 |
| | $ | 2,822 |
| | $ | (4,541 | ) | | $ | 628,969 |
|
AsThe following table presents a breakdown of September 30, 2017the fair value of our corporate debt securities by issuer industry group as of March 31, 2020 and December 31, 2016,2019:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| Financial | 40 | % | | 38 | % |
| Consumer | 23 | | | 26 | |
| Communications | 11 | | | 10 | |
| Utilities | 10 | | | 9 | |
| Industrial | 9 | | | 8 | |
| Technology | 7 | | | 7 | |
| Energy | — | | | 2 | |
| | | |
| Total | 100 | % | | 100 | % |
As of March 31, 2020 and December 31, 2019, approximately $7.0$5.7 million and $5.5 million, respectively, of our cash and investments were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
Scheduled Maturities
The amortized cost and fair values of available-for-sale securities as of September 30, 2017March 31, 2020 and December 31, 2016,2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
| | | | | | | | | | | |
| As of March 31, 2020 | Amortized
Cost | | Fair
Value |
| (In Thousands) | | |
| Due in one year or less | $ | 83,740 | | | $ | 83,736 | |
| Due after one through five years | 408,063 | | | 415,419 | |
| Due after five through ten years | 373,220 | | | 383,838 | |
| Due after ten years | 13,606 | | | 13,972 | |
| Asset-backed securities | 180,514 | | | 173,107 | |
| Total investments | $ | 1,059,143 | | | $ | 1,070,072 | |
|
| | | | | | | |
| As of September 30, 2017 | Amortized
Cost | | Fair
Value |
| | (In Thousands) |
| Due in one year or less | $ | 108,020 |
| | $ | 108,048 |
|
| Due after one through five years | 158,353 |
| | 159,502 |
|
| Due after five through ten years | 309,708 |
| | 312,697 |
|
| Due after ten years | 14,924 |
| | 15,162 |
|
| Asset-backed securities | 96,279 |
| | 97,320 |
|
| Total investments | $ | 687,284 |
| | $ | 692,729 |
|
13
NMI HOLDINGS, INC.
|
| | | | | | | |
| As of December 31, 2016 | Amortized
Cost | | Fair
Value |
| | (In Thousands) |
| Due in one year or less | $ | 94,382 |
| | $ | 94,584 |
|
| Due after one through five years | 173,296 |
| | 173,251 |
|
| Due after five through ten years | 242,005 |
| | 240,060 |
|
| Due after ten years | 6,549 |
| | 6,413 |
|
| Asset-backed securities | 114,456 |
| | 114,661 |
|
| Total investments | $ | 630,688 |
| | $ | 628,969 |
|
| | | | | | | | | | | |
| As of December 31, 2019 | Amortized
Cost | | Fair
Value |
| (In Thousands) | | |
| Due in one year or less | $ | 138,776 | | | $ | 139,113 | |
| Due after one through five years | 406,986 | | | 417,208 | |
| Due after five through ten years | 380,737 | | | 394,180 | |
| Due after ten years | 17,127 | | | 17,797 | |
| Asset-backed securities | 170,153 | | | 172,642 | |
| Total investments | $ | 1,113,779 | | | $ | 1,140,940 | |
Aging of Unrealized Losses
We evaluate our investments each quarter to determine whether declines in fair value are below amortized costs. As of September 30, 2017,March 31, 2020, the investment portfolio had gross unrealized losses of $2.3 million, $1.5$15.1 million, of which has$0.1 million had been in an unrealized loss position for a period of 12 months or greater. We did not consider these securities to be other-than-temporarilyFor any impaired as of September 30, 2017. We based our conclusion that these investments were not other-than-temporarily impaired as of September 30, 2017 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements since the purchase date; (ii)security we do notevaluate if we either intend to sell these investments; and (iii) we do not believe thatthe security or it is more likely than not that we will be required to sell these investmentsthe security before recovery of ourits amortized cost. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through earnings. For securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which mayfair value is less than amortized cost, any changes to the rating of the securities by a rating agency, and any adverse condition specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, and an allowance for credit losses is recorded. Any impairment that has not occur until maturity. For those securitiesbeen recorded through an allowance for credit loss is recognized in other comprehensive income. The following table summarizes the investment portfolio in an unrealized loss position thefor which an allowance is not recorded, aggregated by major security type and length of time the securities were in such a position is as follows:continuous unrealized loss position:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | | | 12 Months or Greater | | | | Total | | |
| # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses |
| As of March 31, 2020 | | (Dollars in Thousands) | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | | | — | | $ | — | | $ | — | |
| Municipal debt securities | 14 | | 46,936 | | (668) | | | — | | — | | — | | | 14 | | 46,936 | | (668) | |
| Corporate debt securities | 87 | | 178,776 | | (6,630) | | | 5 | | 3,294 | | (28) | | | 92 | | 182,070 | | (6,658) | |
| Asset-backed securities | 60 | | 133,997 | | (7,745) | | | 1 | | 2,934 | | (66) | | | 61 | | 136,931 | | (7,811) | |
| | | | | | | | | | | |
| Total | 161 | | $ | 359,709 | | $ | (15,043) | | | 6 | | $ | 6,228 | | $ | (94) | | | 167 | | $ | 365,937 | | $ | (15,137) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Less Than 12 Months | | | | 12 Months or Greater | | | | Total | | |
| # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses |
| As of December 31, 2019 | | (Dollars in Thousands) | | | | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | 4 | | $ | 12,001 | | $ | (58) | | | — | | $ | — | | $ | — | | | 4 | | $ | 12,001 | | $ | (58) | |
| Municipal debt securities | 26 | | 92,844 | | (1,034) | | | 1 | | 999 | | (1) | | | 27 | | 93,843 | | (1,035) | |
| Corporate debt securities | 10 | | 30,481 | | (140) | | | 14 | | 23,976 | | (71) | | | 24 | | 54,457 | | (211) | |
| Asset-backed securities | 9 | | 19,236 | | (102) | | | 1 | | 2,988 | | (12) | | | 10 | | 22,224 | | (114) | |
| Total | 49 | | $ | 154,562 | | $ | (1,334) | | | 16 | | $ | 27,963 | | $ | (84) | | | 65 | | $ | 182,525 | | $ | (1,418) | |
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Allowance of credit losses
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Greater | | Total |
| | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses |
| As of September 30, 2017 | | (Dollars in Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | 22 |
| $ | 38,425 |
| $ | (263 | ) | | 15 |
| $ | 19,621 |
| $ | (373 | ) | | 37 |
| $ | 58,046 |
| $ | (636 | ) |
| Municipal debt securities | 9 |
| 21,567 |
| (212 | ) | | 8 |
| 10,319 |
| (136 | ) | | 17 |
| 31,886 |
| (348 | ) |
| Corporate debt securities | 44 |
| 69,602 |
| (317 | ) | | 14 |
| 34,031 |
| (929 | ) | | 58 |
| 103,633 |
| (1,246 | ) |
| Asset-backed securities | 15 |
| 21,173 |
| (89 | ) | | 2 |
| 4,988 |
| (12 | ) | | 17 |
| 26,161 |
| (101 | ) |
| Total | 90 |
| $ | 150,767 |
| $ | (881 | ) | | 39 |
| $ | 68,959 |
| $ | (1,450 | ) | | 129 |
| $ | 219,726 |
| $ | (2,331 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Less Than 12 Months | | 12 Months or Greater | | Total |
| | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses | | # of Securities | Fair Value | Unrealized Losses |
| As of December 31, 2016 | | (Dollars in Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | 33 |
| $ | 51,093 |
| $ | (962 | ) | | — |
| $ | — |
| $ | — |
| | 33 |
| $ | 51,093 |
| $ | (962 | ) |
| Municipal debt securities | 14 |
| 28,659 |
| (617 | ) | | 1 |
| 1,704 |
| (46 | ) | | 15 |
| 30,363 |
| (663 | ) |
| Corporate debt securities | 77 |
| 135,115 |
| (1,955 | ) | | 8 |
| 13,873 |
| (401 | ) | | 85 |
| 148,988 |
| (2,356 | ) |
| Asset-backed securities | 30 |
| 38,702 |
| (510 | ) | | 6 |
| 2,472 |
| (50 | ) | | 36 |
| 41,174 |
| (560 | ) |
| Total | 154 |
| $ | 253,569 |
| $ | (4,044 | ) | | 15 |
| $ | 18,049 |
| $ | (497 | ) | | 169 |
| $ | 271,618 |
| $ | (4,541 | ) |
As of March 31, 2020, we did not recognize an allowance of credit losses on our investment portfolio. The following table presentsincrease in securities in an unrealized loss position as of March 31, 2020 can be attributed to a widening of credit spreads and surging demand for liquidity across the componentsbroader debt markets, partially offset by interest rate movements since the purchase date. We evaluated the securities in an unrealized loss position as of net investment income:
|
| | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In Thousands) |
| Investment income | $ | 4,363 |
| | $ | 3,727 |
| | $ | 12,455 |
| | $ | 10,672 |
|
| Investment expenses | (193 | ) | | (183 | ) | | (570 | ) | | (555 | ) |
| Net investment income | $ | 4,170 |
| | $ | 3,544 |
| | $ | 11,885 |
| | $ | 10,117 |
|
The following table presentsMarch 31, 2020 and assessed the componentscredit ratings and any ratings changes as well as any adverse conditions specifically related to the security. Based on our estimate of net realized investment gains (losses):
|
| | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| | (In Thousands) |
| Gross realized investment gains | $ | 69 |
| | $ | 66 |
| | $ | 536 |
| | $ | 683 |
|
| Gross realized investment losses | — |
| | — |
| | (338 | ) | | (1,441 | ) |
| Net realized investment gains (losses) | $ | 69 |
| | $ | 66 |
| | $ | 198 |
| | $ | (758 | ) |
Investment Securities - Other-than-Temporary Impairment (OTTI)the amount and timing of cash flows to be collected we expect to recover the amortized cost basis of these securities.
For the quarterthree months ended September 30, 2017,March 31, 2019, we held no other-than-temporarilyrecognized a $0.4 million other than temporarily impaired securities.(OTTI) loss in earnings related to the planned sale of a security in a loss position in April 2019. There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss).
NMI HOLDINGS, INC. for the three months ended March 31, 2019.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Net Investment Income
The following table presents the components of net investment income:
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In Thousands) | | | | | | |
| Investment income | $ | 8,349 | | | $ | 7,496 | | | | | |
| Investment expenses | (245) | | | (113) | | | | | |
| Net investment income | $ | 8,104 | | | $ | 7,383 | | | | | |
The following table presents the components of net realized investment gains (losses):
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In Thousands) | | | | | | |
| Gross realized investment gains | $ | 540 | | | $ | 195 | | | | | |
| Gross realized investment losses | (612) | | | (382) | | | | | |
| Net realized investment (losses) | $ | (72) | | | $ | (187) | | | | | |
3. Fair Value of Financial Instruments
The following describes the valuation techniques used by us to determine the fair value of our financial instruments:
We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below:
Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
Assets classified as Level 1 and Level 2
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources. There were no transfers between Level 1 and Level 2 of the fair value hierarchy during the quarter ended September 30, 2017.
Liabilities classified as Level 3
We calculate the fair value of outstanding warrants utilizing levelLevel 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following tables present the level within the fair value hierarchy at which the Company’sour financial instruments were measured:
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | | | | | |
| Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value |
| As of March 31, 2020 | (In Thousands) | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 51,726 | | | $ | — | | | $ | — | | | $ | 51,726 | |
| Municipal debt securities | — | | | 199,935 | | | — | | | 199,935 | |
| Corporate debt securities | — | | | 640,448 | | | — | | | 640,448 | |
| Asset-backed securities | — | | | 173,107 | | | — | | | 173,107 | |
| | | | | | | |
| Cash, cash equivalents and short-term investments | 114,677 | | | — | | | — | | | 114,677 | |
| Total assets | $ | 166,403 | | | $ | 1,013,490 | | | $ | — | | | $ | 1,179,893 | |
| Warrant liability | — | | | — | | | 1,461 | | | 1,461 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 1,461 | | | $ | 1,461 | |
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | |
| | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value |
| As of September 30, 2017 | (In Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 60,214 |
| | $ | 4,840 |
| | $ | — |
| | $ | 65,054 |
|
| Municipal debt securities | — |
| | 90,736 |
| | — |
| | 90,736 |
|
| Corporate debt securities | — |
| | 408,840 |
| | — |
| | 408,840 |
|
| Asset-backed securities | — |
| | 97,320 |
| | — |
| | 97,320 |
|
| Cash, cash equivalents and short-term investments | 51,477 |
| | — |
| | — |
| | 51,477 |
|
| Total assets | $ | 111,691 |
| | $ | 601,736 |
| | $ | — |
| | $ | 713,427 |
|
| | | | | | | | |
| Warrant liability | — |
| | — |
| | 4,046 |
| | 4,046 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 4,046 |
| | $ | 4,046 |
|
16
NMI HOLDINGS, INC.
|
| | | | | | | | | | | | | | | |
| | Fair Value Measurements Using | | |
| | Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value |
| As of December 31, 2016 | (In Thousands) |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 50,719 |
| | $ | 12,460 |
| | $ | — |
| | $ | 63,179 |
|
| Municipal debt securities | — |
| | 40,269 |
| | — |
| | 40,269 |
|
| Corporate debt securities | — |
| | 349,078 |
| | — |
| | 349,078 |
|
| Asset-backed securities | — |
| | 114,661 |
| | — |
| | 114,661 |
|
| Cash, cash equivalents and short-term investments | 109,528 |
| | — |
| | — |
| | 109,528 |
|
| Total assets | $ | 160,247 |
| | $ | 516,468 |
| | $ | — |
| | $ | 676,715 |
|
| | | | | | | | |
| Warrant liability | — |
| | — |
| | 3,367 |
| | 3,367 |
|
| Total liabilities | $ | — |
| | $ | — |
| | $ | 3,367 |
| | $ | 3,367 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Measurements Using | | | | | | |
| Quoted Prices in
Active Markets for
Identical Assets
(Level 1) | | Significant Other
Observable Inputs
(Level 2) | | Significant
Unobservable
Inputs
(Level 3) | | Fair Value |
| As of December 31, 2019 | (In Thousands) | | | | | | |
| U.S. Treasury securities and obligations of U.S. government agencies | $ | 48,929 | | | $ | — | | | $ | — | | | $ | 48,929 | |
| Municipal debt securities | — | | | 190,216 | | | — | | | 190,216 | |
| Corporate debt securities | — | | | 684,881 | | | — | | | 684,881 | |
| Asset-backed securities | — | | | 172,642 | | | — | | | 172,642 | |
| | | | | | | |
| Cash, cash equivalents and short-term investments | 85,361 | | | — | | | — | | | 85,361 | |
| Total assets | $ | 134,290 | | | $ | 1,047,739 | | | $ | — | | | $ | 1,182,029 | |
| Warrant liability | — | | | — | | | 7,641 | | | 7,641 | |
| Total liabilities | $ | — | | | $ | — | | | $ | 7,641 | | | $ | 7,641 | |
There were no transfers between Level 12 and Level 23 of the fair value hierarchy during the ninethree months ended September 30, 2017 andMarch 31, 2020, or the year-endyear ended December 31, 2016.2019.
The following is a roll-forward of Level 3 liabilities measured at fair value:
| | | | | | | | | | | |
| For the three months ended March 31, | | |
| Warrant Liability | 2020 | | 2019 |
| (In Thousands) | | |
| Balance, January 1 | $ | 7,641 | | | $ | 7,296 | |
| Change in fair value of warrant liability included in earnings | (5,959) | | | 5,479 | |
| | | |
| Issuance of common stock on warrant exercise | (221) | | | (944) | |
| Balance, March 31 | $ | 1,461 | | | $ | 11,831 | |
|
| | | | | | | |
| | For the nine months ended September 30, |
| Warrant Liability | 2017 | | 2016 |
| | (In Thousands) |
| Balance, January 1 | $ | 3,367 |
| | $ | 1,467 |
|
| Change in fair value of warrant liability included in earnings | 679 |
| | 187 |
|
| Balance, September 30 | $ | 4,046 |
| | $ | 1,654 |
|
We revalue The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability quarterly using ain the Black-Scholes option-pricing model as of the dates indicated.
| | | | | | | | | | | |
| As of March 31, | | |
| 2020 | | 2019 |
| Common stock price | $ | 11.61 | | | $ | 25.87 | |
| Risk free interest rate | 0.23 | % | | 2.21 - 2.31% |
| Expected life | 2.06 years | | 1.67 - 3.06 years |
| Expected volatility | 61.4 | % | | 42.3 - 45.7% |
| Dividend yield | 0 | % | | 0 | % |
The changes in combination with a binomial model,fair value of the warrant liability for the three months ended March 31, 2020 and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. As of September 30, 2017, the assumptions used2019 are primarily attributable to changes in the option-pricing model were as follows: aprice of our common stock priceand exercises of outstanding warrants during the respective periods, with additional impact related to changes in other Black-Scholes model inputs.
4. Debt
On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $150 million five-year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) a $85 million three-year secured revolving credit facility (2018 Revolving Credit Facility) that, prior to amendment as of September 30, 2017 ofdiscussed below, would have matured on May 24, 2021. Proceeds from the 2018 Term Loan were used to repay in full the outstanding amount due under our $150 million amended term loan (2015 Term Loan) due on November 10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement. On March 20, 2020, we amended the 2018 Revolving Credit Facility (2020 Revolving Credit Facility), increasing the borrowing capacity under the facility to $100 million, extending the maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
under the facility.
$12.40, risk free interest rate of 1.66%, expected life of 3.25 years, expected volatility of 30.6% and a dividend yield of 0%. The change in fair value is primarily attributable to an increase in the price of our common stock from December 31, 2016 to September 30, 2017.
4. 2018 Term Loan
On November 10, 2015, we entered into a credit agreement (the Credit Agreement) to obtain a three-year senior secured term loan (the Term Loan) for $150 million. On February 10, 2017, we entered into an amendment to the Credit Agreement, to extend the maturity date of the Term Loan by one year and reduce the interest rate. Based on our analysis, we concluded the amendment to the Credit Agreement should be treated as a modification. As of September 30, 2017, theThe 2018 Term Loan bears interest at the Eurodollar Rate,LIBOR, as defined in the 2018 Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 6.75% (an4.75%, representing an all-in rate of 7.99%5.75% as of September 30, 2017),March 31, 2020, payable monthly or quarterly based on our current interest rateperiod election. Quarterly principal payments of $375 thousand$0.4 million are also required. TheAs of March 31, 2020, the outstanding principal balance of the 2018 Term Loan as of September 30, 2017 was $147$147.4 million.
DebtInterest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, totaling $4.8 million, including $370 thousandan original issue discount and capitalized modification costs related to the modification2015 Term Loan. For the three months ended March 31, 2020, we recorded $2.5 million of interest expense. Remaining unamortized issuance costs and a 1% original issue discount were $1.9 million as of March 31, 2020 and are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan.
We are subject to certain covenants under the 2018 Term Loan (as defined in the 2018 Credit Agreement), including (but not limited to) a maximum debt-to-total capitalization ratio (as defined in the 2018 Credit Agreement) of 35% under the 2018 Term Loan. Effective interest rate forWe were in compliance with all covenants as of March 31, 2020.
Future principal payments due under the 2018 Term Loan includesas of March 31, 2020 are as follows:
| | | | | | | | |
| As of March 31, 2020 | | Principal |
| | (In thousands) |
| | |
| 2020 | | 1,125 | |
| 2021 | | 1,500 | |
| 2022 | | 1,500 | |
| 2023 | | 143,250 | |
| Total | | $ | 147,375 | |
2020 Revolving Credit Facility
Borrowings under the 2020 Revolving Credit Facility accrue interest amortizationat a variable rate equal to, at our discretion, based on the applicable corporate credit rating at the time, (i) a base rate (as defined in the 2018 Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum, which is reduced from a margin of 1.00% to 2.50% prior to the amendment, or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 1.375% to 2.875% per annum, which is reduced from a margin of 2.00% to 3.50% prior to the amendment. As of March 31, 2020, 0 borrowings had been made under the 2020 Revolving Credit Facility.
Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount, which ranges from 0.175% to 0.525%, reduced from ranges of 0.30% to 0.60% prior to the amendment, based on the applicable corporate credit rating at the time. As of March 31, 2020, the applicable commitment fee was 0.35%. For the three months ended March 31, 2020, we recorded $0.1 million of commitment fees in interest expense.
We incurred issuance costs of $0.8 million in connection with the 2020 Revolving Credit Facility, which together with the remaining issuance cost andof $0.6 million prior to the discount.amendment, are amortized through interest expense over the extent contractual life of the 2020 Revolving Credit Facility, on a straight-line basis. For the ninethree months ended September 30, 2017,March 31, 2020, we recorded $10.1recognized $0.1 million of interest expense includingfrom the amortization of thedeferred issuance and modificationcosts. At March 31, 2020, remaining deferred issuance costs and original issue discount.were $1.4 million, net of accumulated amortization.
We are subject to certain quarterly covenants under the 2020 Revolving Credit Agreement. These covenants include, but areFacility, including (but not limited toto) the following: a maximum debt-to-total capitalization ratio (as defined therein) of 35%, maximum risk-to-capital (RTC) ratio of 22.0:1.0,a minimum liquidity (as defined therein),requirement, compliance with the PMIERs financial requirements (subject to any GSE-approvedFannie Mae and Freddie Mac (collectively, the GSEs) approved waivers), and minimum shareholders' equity requirements. This description is not intended to be complete in all respectsconsolidated net worth and is qualified in its entirety by the terms of the Credit Agreement, including its covenants and events of default.statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of September 30, 2017.March 31, 2020.
Future principal payments due under the Term Loan as of September 30, 2017 are as follows:
|
| | | | |
| As of September 30, 2017 | | Principal |
| | | (In thousands) |
| 2017 | | $ | 375 |
|
| 2018 | | 1,500 |
|
| 2019 | | 145,125 |
|
| Total | | $ | 147,000 |
|
| | | |
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
5. Reinsurance
We have enteredenter into two third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, compliancestate regulatory and other applicable capital requirements, and support the growth of our business. The GSEs and the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) have approved bothall such transactions (subject to certain conditions and their periodicongoing review, of the transactions, including levels of approved capital credit).
The effect of our reinsurance agreements on premiums written and earned is as follows:
| | | | | | | | | | | | | | | |
| For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Thousands) | | | | | | |
| Net premiums written | | | | | | | |
| Direct | $ | 103,453 | | | $ | 81,730 | | | | | |
Ceded (1) | (12,082) | | | (9,807) | | | | | |
| Net premiums written | $ | 91,371 | | | $ | 71,923 | | | | | |
| | | | | | | | | |
| Net premiums earned | | | | | | | | | |
| Direct | $ | 113,187 | | | $ | 86,298 | | | | | |
Ceded (1) | (14,470) | | | (12,430) | | | | | |
| Net premiums earned | $ | 98,717 | | | $ | 73,868 | | | | | |
|
| | | | | | | | | | | | | | |
| | For the three months ended | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | September 30, 2017 | | September 30, 2016 |
| | (In Thousands) |
| Net premiums written | | | | | | |
| Direct | $ | 56,217 |
| | $ | 46,535 |
| $ | 142,134 |
| | $ | 133,526 |
|
Ceded (1) | (8,501 | ) | | (37,336 | ) | (20,029 | ) | | (37,336 | ) |
| Net premiums written | $ | 47,716 |
| | $ | 9,199 |
| $ | 122,105 |
| | $ | 96,190 |
|
| | | | | | | |
| Net premiums earned | | | | | | |
| Direct | $ | 52,024 |
| | $ | 33,052 |
| $ | 133,696 |
| | $ | 78,900 |
|
Ceded (1) | (7,505 | ) | | (1,244 | ) | (18,035 | ) | | (1,244 | ) |
| Net premiums earned | $ | 44,519 |
| | $ | 31,808 |
| $ | 115,661 |
| | $ | 77,656 |
|
(1) Net of profit commissioncommission.
Excess-of-loss reinsurance
In May 2017, NMIC entered into aexcess-of-loss reinsurance agreementagreements with Oaktown Re thatLtd., Oaktown Re II Ltd. and Oaktown Re III Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018 and July 30, 2019, respectively. Each agreement provides for up to $211.3 million ofNMIC with aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existinga defined portfolio of mortgage insurance policies written from 2013 through December 31, 2016. For the coverage period,during a discrete period. Under each agreement, NMIC will retain theretains a first layer of $126.8 million of aggregate lossesloss exposure on covered policies and the respective Oaktown Re willVehicle then provideprovides second layer coverageloss protection up to the outstandinga defined reinsurance coverage amount. NMIC will then retainretains losses in excess of the outstandingrespective reinsurance coverage amount.amounts.
The outstandingrespective reinsurance coverage amount decreasesamounts provided by the Oaktown Re Vehicles decrease from $211.3 million atthe inception of each agreement over a ten-year10 year period as the underlying coveredinsured mortgages amortize and was $185 million as of September 30, 2017.are amortized or repaid, and/or the mortgage insurance coverage is canceled. The respective outstanding reinsurance coverage amount willamounts stop amortizing if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered.
Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million to unaffiliated investors (the Notes). The Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of the Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re to NMIC under the reinsurance agreement. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds. We refer collectively to NMIC’s reinsurance agreement with Oaktown Re and the issuance of the Notes by Oaktown Re as the 2017 ILN Transaction. Under the terms of the 2017 ILN Transaction, NMIC makes risk premium payments to the Oaktown Re Vehicles for the applicable outstanding reinsurance coverage amount and pays Oaktown Rean additional amount for anticipated operating expenses (capped at $300 thousand per year)year to Oaktown Re Ltd. and $250 thousand per year to Oaktown Re II, Ltd. and Oaktown Re III, Ltd.). ForNMIC ceded aggregate premiums to the Oaktown Re Vehicles of $3.9 million and $3.0 million during the three and nine months ended September 30, 2017,March 31, 2020 and three months ended March 31, 2019, respectively.
NMIC applies claims paid risk premiums of $1.9 million and $3.3 million, respectively.on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement. NMIC did not cede any incurred losses on covered policies to the Oaktown Re.Re Vehicles during the three months ended March 31, 2020 and 2019, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. Such trust funds are required to be invested in short-term U.S. Treasury money market funds at all times. Each Oaktown Re Vehicle financed its respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors. Such insurance-linked notes mature 10 years from the inception date of each reinsurance agreement. We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd. and
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Oaktown Re III, Ltd. individually as the 2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | Inception Date | | | Covered Production | | Initial Reinsurance Coverage | | Current Reinsurance Coverage | | Initial First Layer Retained Loss | | Current First Layer Retained Loss |
| 2017 ILN Transaction | May 2, 2017 | | | 1/1/2013 - 12/31/2016 | | $ | 211,320 | | | $ | 46,990 | | | $ | 126,793 | | | $ | 122,810 | |
| 2018 ILN Transaction | July 25, 2018 | | | 1/1/2017 - 5/31/2018 | | 264,545 | | | 174,340 | | | 125,312 | | | 124,311 | |
| 2019 ILN Transaction | July 30, 2019 | | | 6/1/2018 - 6/30/2019 | | 326,905 | | | 259,047 | | | 123,424 | | | 123,424 | |
NMIC holds an optional termination right if certain events occur,rights under each ILN Transaction, including, among others, an optional call feature which provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment adopted by NMIC.afforded to NMIC under a given agreement. In addition, there are certain events that will result intrigger mandatory termination of thean agreement, including NMIC’sNMIC's failure to pay premiums or consent to reductions in thea trust account to make principal payments to noteholders, among others.
AtUnder the timeterms of the 20172018 ILN Transaction was entered into with Oaktown Re, we evaluatedand the applicability of the accounting guidance that addresses VIEs. As a result of the evaluation of the 20172019 ILN Transaction, we concluded that Oaktown Reare required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full. "Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $2.5 million as of March 31, 2020. We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions will decrease over time as the outstanding principal balances of the respective insurance-linked notes decline.
Quota share reinsurance
Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. Each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by S&P, A.M.Best or both.
Under the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae. The 2016 QSR Transaction is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. NMIC has the option, based on certain conditions and subject to a VIE. However, given thattermination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC does not have significant economic exposurereassuming the related risk.
Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in Oaktown Re, we do not consolidate Oaktown Re2018 and 20% of the risk on eligible policies written in our consolidated financial statements.2019. The 2018 QSR Transaction is scheduled to terminate on December 31, 2029. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2022, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
NMIC may terminate either or both of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the risk-in-force (RIF) ceded under the respective agreements. Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums earned or written with respect to the recaptured risk. With the termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination has no effect on the cession of pool risk under the 2016 QSR Transaction.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quota share reinsurance
In September 2016, NMIC entered into a quota-share reinsurance transaction with a panel of third-party reinsurers (2016 QSR Transaction). Each of the third-party reinsurers has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services (S&P), A.M. Best or both.
Under the 2016 QSR Transaction, effective September 1, 2016, NMIC ceded premiums related to:
•25% of existing risk written on eligible policies as of August 31, 2016;
100% of existing risk under our pool agreement with Fannie Mae; and
25% of risk on eligible policies written from September 1, 2016 through December 31, 2017.
The following table shows the amounts related to the 2016 QSR Transaction:Transactions:
| | | | For the three months ended | For the nine months ended | | For the three months ended | |
| | September 30, 2017 | September 30, 2016 | September 30, 2017 | | September 30, 2016 | | March 31, 2020 | | March 31, 2019 | |
| | (In Thousands) | | (In Thousands) | |
| Ceded risk-in-force | $ | 2,682,982 |
| $ | 1,778,235 |
| $ | 2,682,982 |
| | $ | 1,778,235 |
| Ceded risk-in-force | $ | 4,843,715 | | | $ | 4,534,353 | | |
| Ceded premiums written | (14,389 | ) | (38,977 | ) | (36,715 | ) | | (38,977 | ) | |
| | Ceded premiums earned | (13,393 | ) | (2,885 | ) | (34,721 | ) | | (2,885 | ) | Ceded premiums earned | (23,011) | | | (21,468) | | |
| Ceded claims and claims expenses | 277 |
| 90 |
| 887 |
| | 90 |
| |
| Ceding commission written | 2,878 |
| 7,795 |
| 7,343 |
| | 7,795 |
| |
| Ceded claims and claim expenses | | Ceded claims and claim expenses | 1,532 | | | 899 | | |
| | Ceding commission earned | 2,581 |
| 551 |
| 6,921 |
| | 551 |
| Ceding commission earned | 4,513 | | | 4,206 | | |
| Profit commission | 7,758 |
| 1,641 |
| 19,945 |
| | 1,641 |
| Profit commission | 12,413 | | | 12,061 | | |
Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of incomerevenue on direct premiums. Under the 2018 QSR Transaction, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission for premiums ceded pursuant to this transaction.under the QSR Transactions. NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratioratios on the loans covered under the agreement2016 QSR Transaction and 2018 QSR Transaction generally remainsremain below 60% and 61%, respectively, as measured annually. Ceded claims and claimsclaim expenses under each of the QSR Transactions reduce NMIC'sthe respective profit commission received by NMIC on a dollar-for-dollar basis.
In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to our 2016 QSR Transaction was $1.2$3.1 million as of September 30, 2017.March 31, 2020.
In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The agreement is scheduledreinsurance recoverable on loss reserves related to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. However, NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreementour 2018 QSR Transaction was $3.1 million as of DecemberMarch 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.2020.
6. Reserves for Insurance Claims and ClaimsClaim Expenses
We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Our method, consistentConsistent with industry practice, is towe establish reserves only for loans that have been reported to us by servicers as having been in default for at least 60 days. Ourdays, referred to as case reserves, also include amounts for estimated claims incurredand additional loans that we estimate (based on loans thatactuarial review) have been in default for at least 60 days that have not yet been reported to us by the servicers, often referred to as IBNR.incurred but not reported (IBNR) reserves. We also establish claim expense reserves, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process. As of September 30, 2017,March 31, 2020, we had reserves for insurance claims and claimsclaim expenses of $6.1$29.5 million for 3501,449 primary loans in default. During the first ninethree months of 2017,ended March 31, 2020, we paid 1634 claims totaling $731 thousand,$1.5 million of claims and claims expense, including two31 claims totaling $11 thousand covered under the 2016 QSR Transaction.Transactions representing $0.3 million of ceded claims and claim expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed the deductible under the pool agreement, which represents the amount of claims absorbed by Fannie Mae before we are obligated to pay any claims.this deductible. At September 30, 2017,March 31, 2020, 46 loans in the pool were past due by 60 days or more. These 46 loans
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
represent represented approximately $3.0 million of risk-in-force (RIF).RIF. Due to the size of the remaining deductible, of $10.0 million, the low level of notices of defaultdefaults (NODs) reported on loans in the pool through September 30, 2017March 31, 2020 and the expected severity (all loans in the pool have loan-to-value (LTV) ratios (LTVs) under 80%), we havedid not establishedestablish any poolcase or IBNR reserves for claims or IBNR for the three and nine months endedSeptember 30, 2017 and 2016.pool risk at March 31, 2020. In connection with the settlement of pool claims, we applied $368 thousand$0.9 million to the pool deductible through September 30, 2017.March 31, 2020. At March 31, 2020, the remaining pool deductible was $9.5 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claimsclaim expenses:
| | | | | | | | | | | |
| For the three months ended March 31, | | |
| 2020 | | 2019 |
| (In Thousands) | | |
| Beginning balance | $ | 23,752 | | | $ | 12,811 | |
Less reinsurance recoverables (1) | (4,939) | | | (3,001) | |
| Beginning balance, net of reinsurance recoverables | 18,813 | | | 9,810 | |
| | | |
| Add claims incurred: | | | |
| Claims and claim expenses incurred: | | | |
Current year (2) | 7,558 | | | 3,909 | |
Prior years (3) | (1,861) | | | (1,166) | |
| Total claims and claim expenses incurred | 5,697 | | | 2,743 | |
| | | |
| Less claims paid: | | | |
| Claims and claim expenses paid: | | | |
Current year (2) | — | | | — | |
Prior years (3) | 1,224 | | | 694 | |
| | | |
| Total claims and claim expenses paid | 1,224 | | | 694 | |
| | | |
| Reserve at end of period, net of reinsurance recoverables | 23,286 | | | 11,859 | |
Add reinsurance recoverables (1) | 6,193 | | | 3,678 | |
| Ending balance | $ | 29,479 | | | $ | 15,537 | |
|
| | | | | | | |
| | For the nine months ended September 30, |
| | 2017 | | 2016 |
| | (In Thousands) |
| Beginning balance | $ | 3,001 |
| | $ | 679 |
|
Less reinsurance recoverables (1) | (297 | ) | | — |
|
| Beginning balance, net of reinsurance recoverables | 2,704 |
| | 679 |
|
| | | | |
| Add claims incurred: | | | |
| Claims and claim expenses incurred: | | | |
Current year (2) | 3,546 |
| | 1,803 |
|
Prior years (3) | (581 | ) | | (214 | ) |
| Total claims and claims expenses incurred | 2,965 |
| | 1,589 |
|
| | | | |
| Less claims paid: | | | |
| Claims and claim expenses paid: | | | |
Current year (2) | — |
| | — |
|
Prior years (3) | 720 |
| | 225 |
|
| Total claims and claim expenses paid | 720 |
| | 225 |
|
| | | | |
| Reserve at end of period, net of reinsurance recoverables | 4,949 |
| | 2,043 |
|
Add reinsurance recoverables (1) | 1,174 |
| | 90 |
|
| Ending balance | $ | 6,123 |
| | $ | 2,133 |
|
(1) Related to ceded losses recoverable onunder the 2016 QSR Transaction,Transactions, included in "Other Assets"assets" on the Condensed Consolidated Balance Sheets. See Note 5, "Reinsurance"Reinsurance" for additional information.
(2)Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan had defaulted in a prior year and subsequently cured and later re-defaulted in the current year, thatthe default would be included in the current year. Amounts are presented net of reinsurance.
(3)Related to insured loans with defaults occurring in prior years, which have been continuously in default since that time.before the start of the current year. Amounts are presented net of reinsurance.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves.reserves and is presented net of reinsurance. The amount of claims incurred relating to current year NODs represents the estimated amount of claims and claim expenses to be ultimately paid on such loans in default. We recognized $581 thousand$1.9 million and $214 thousand$1.2 million of favorable prior year development during the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively, due to NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual defaults and claims and continue to observe and analyze loss development trends in our portfolio. ReservesGross reserves of $1.7$19.9 million related to prior year defaults remained as of September 30, 2017.March 31, 2020.
7. Earnings per Share
(EPS)
Basic earnings per shareEPS is based on the weighted average number of shares of common stock outstanding, while diluted earnings per shareoutstanding. Diluted EPS is based on the weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the vesting of service based and performance and service based restricted stock units (RSUs), and the exercise of vested and unvested stock options other share-based compensation arrangements, and the dilutive effect of
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
outstanding warrants. The number of shares issuable for RSUs subject to performance and service based vesting requirements are only included in diluted shares if the relevant performance measurement period has commenced and results during such period meet the necessary performance criteria. The following table reconciles the net income and the weighted average shares of common stock outstanding used in the computations of basic and diluted earnings per shareEPS of common stock:
stock.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | | For the three months ended September 30, | | For the nine months ended September 30, | | For the three months ended March 31, | |
| | 2017 | | 2016 | | 2017 | | 2016 | | 2020 | | 2019 | |
| (In Thousands, except for per share data) | | (In Thousands, except for per share data) | |
| Net income | $ | 12,312 |
| | $ | 6,175 |
| | $ | 23,816 |
| | $ | 4,279 |
| Net income | $ | 58,271 | | | $ | 32,899 | | |
| | | | | | | | | |
| Basic weighted average shares outstanding | | Basic weighted average shares outstanding | 68,563 | | | 66,692 | | |
| Basic earnings per share | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.40 |
| | $ | 0.07 |
| Basic earnings per share | $ | 0.85 | | | $ | 0.49 | | |
| | | | | | | | | | | | | |
| Net income | | Net income | $ | 58,271 | | | $ | 32,899 | | |
| Gain from change in fair value of warrant liability | | Gain from change in fair value of warrant liability | (5,959) | | | — | | |
| Diluted net income | | Diluted net income | $ | 52,312 | | | $ | 32,899 | | |
| | Basic weighted average shares outstanding | 59,883,629 |
| | 59,130,401 |
| | 59,680,166 |
| | 59,047,758 |
| Basic weighted average shares outstanding | 68,563 | | | 66,692 | | |
| Dilutive effect of non-vested shares and warrants | 3,205,329 |
| | 1,154,345 |
| | 3,093,167 |
| | 814,158 |
| |
| Dilutive weighted average shares outstanding | 63,088,958 |
| | 60,284,746 |
| | 62,773,333 |
| | 59,861,916 |
| |
| Dilutive effect of issuable shares | | Dilutive effect of issuable shares | 1,838 | | | 2,304 | | |
| Diluted weighted average shares outstanding | | Diluted weighted average shares outstanding | 70,401 | | | 68,996 | | |
| | | | | | | | | | |
| Diluted earnings per share | $ | 0.20 |
|
| $ | 0.10 |
| | $ | 0.38 |
| | $ | 0.07 |
| Diluted earnings per share | $ | 0.74 | | | $ | 0.48 | | |
| | Anti-dilutive shares | | Anti-dilutive shares | 15 | | | 754 | | |
For the three and nine months ended September 30, 2017, 830,043 and 832,460, respectively, and for the three and nine months ended September 30, 2016, 4,012,046 and 4,326,168, respectively,
8. Warrants
We issued 992 thousand warrants in connection with a private placement of our common stock equivalents issued under share-based compensation arrangements were not included in the calculation of diluted earnings per share because they were anti-dilutive. The warrants were not dilutive in 2016.
8. Warrants
We issued 992,000 warrants in connection with our Private Placement.April 2012. Each warrant gives the holder thereof the right to purchase one1 share of common stock at an exercise price equal to $10.00. The warrants were issued with an aggregate fair value of $5.1 million. Upon exercise of these warrants,
During the amounts will be treated as additional paid-in capital. Nothree months ended March 31, 2020, 9 thousand warrants were exercised resulting in the issuance of 6 thousand shares of common stock. Upon exercise, we reclassified approximately $0.2 million of warrant fair value from warrant liability to additional paid-in capital, of which $8 thousand related to changes in fair value during the ninethree months ended September 30, 2017 and 2016. We account for theseMarch 31, 2020.
During the three months ended March 31, 2019, 67 thousand warrants were exercised resulting in the issuance of 39 thousand shares of common stock. Upon exercise, we reclassified approximately $0.9 million of warrant fair value from warrant liability to purchase our common sharesadditional paid-in capital, of which $0.3 million related to changes in accordance with ASC 470-20, Debt with Conversion and Other Options and ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity.fair value during the three months ended March 31, 2019.
9. Income Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 35%21%. NMIH files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our provision for income taxes for the interim reporting periods are based on an estimated annual effective tax rate for the year ending December 31, 2017. Our effective tax rate on our pre-tax income was 36.9% and 33.3%19.2% for the three and nine months ended September 30, 2017, respectively,March 31, 2020 compared to 1.8% and 2.6% for the comparable 2016 periods. The increase in the effective tax expense15.6% for the three and nine months ended September 30, 2017, against the comparable 2016March 31, 2019. Our provision for income taxes for interim reporting periods is attributable to the elimination ofestablished based on our estimated annual effective tax benefits during the comparable 2016rate for a given year. Our effective tax rate may fluctuate between interim periods due to the recognitionimpact of discrete items not included in our estimated annual effective tax rate, including the tax effects associated with the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability. Such items are treated on a full valuation allowancediscrete basis in the reporting period in which had been recordedthey occur.
As a mortgage guaranty insurance company, we are eligible to reflect the amount of the deferred taxes that may not be realized. We currently pay no regular federal incomeclaim a tax duededuction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the forecasted utilization of federal net operatingextent we acquire tax and loss carryforwards,bonds in an amount equal to the tax benefit derived from the claimed deduction, which were $122.9 million as of December 31, 2016. Theis our intent. As a result, our interim provision for income taxes include current year alternative minimumfor the three months ended March 31, 2020 represents a change in our net deferred tax liability. As of March 31, 2020, we held $7.6 million of tax and changes to deferred tax assets. See Note 1, "Organization and Basis of Presentation - Immaterial Correction of Prior Period Amounts" for further details.loss bonds in "Other assets" in our condensed consolidated balance sheet.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Regulatory Information
10. Statutory InformationRequirements
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles (SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners. The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws.
NMIC and Re One's combined statutory net loss,income (loss) was as follows:
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| (In Thousands) | | | | | | |
| Statutory net gain (loss) | $ | 7,691 | | | $ | (927) | | | | | |
NMIC and Re One's combined statutory surplus, contingency reserve and RTC ratiosrisk-to-capital (RTC) ratio were as follows:
| | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
| (In Thousands) | | |
| | | |
| Statutory surplus | $ | 457,790 | | | $ | 449,602 | |
| Contingency reserve | 588,418 | | | 531,825 | |
| RTC ratio | 17.2:1 | | 15.8:1 |
|
| | | | | | | |
| As of and for the nine months and year ended | September 30, 2017 | | December 31, 2016 |
| | (In Thousands) |
| Statutory net loss | $ | (29,394 | ) | | $ | (26,653 | ) |
| Statutory surplus | 379,160 |
| | 413,809 |
|
| Contingency reserve | 157,326 |
| | 90,479 |
|
| Risk-to-Capital | 11.5:1 |
| | 11.6:1 |
|
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware such as NMIH. Delaware corporationcorporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits (subject to certain limitations).profits. NMIC and Re One are subject to restrictions on their ability to pay dividends without prior approval of the Wisconsin OCI. Certain other statescertain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. NMIC is licensed alsoand Re One have statutes or regulations that restrict its ability to pay dividends. Since inception, NMIC has notnever paid any dividends to NMIH.
NMIC and Re One have the capacity to pay aggregate ordinary dividends of $16.1 million to NMIH during the 12-month period ending December 31, 2020.
11. COVID-19 Developments and Coronavirus Aid, Relief, and Economic Security (CARES) Act
COVID-19 Developments
On January 30, 2020, the World Health Organization (WHO) declared the outbreak of a novel coronavirus strain (COVID-19) a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity. In the weeks following the outbreak, non-essential businesses across the U.S. have been shuttered and capital markets have experienced a significant spike in volatility and sell-off in valuations. A record number of Americans have been furloughed or laid-off, and unemployment claims have increased dramatically.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for a medical advance that relieves the crisis and provides for a quick return to normalized activity, it is not known how long the dislocation will persist. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees were safe and able to continue serving our customers and their borrowers without interruption. We expect the COVID-19 outbreak will have a direct effect on the U.S. housing market, with existing homeowners facing challenges related to COVID-19, and the volume and timing of future housing transactions negatively impacted as potential sellers re-evaluate or postpone planned sales (housing supply) and potential buyers reassess their ability and willingness to purchase homes (demand). We are currently assessing the potential impact the COVID-19 outbreak will have on the U.S economy and housing market, the mortgage insurance market, and our business performance and financial position, including our new business production, defaults and claims experience and investment portfolio returns, of which the ultimate outcome cannot be estimated at this time.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
CARES Act
On March 27, 2020, the President signed into law the CARES Act. The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We currently are eligible but have not taken advantage of the payroll protection program, emergency grants and business loans under the CARES Act. We will continue to monitor the impact that the CARES Act may have on our business, financial condition and results of operations.
12. Subsequent Event
On March 20, 2020, we amended the 2018 Revolving Credit Facility (2020 Revolving Credit Facility), increasing its size from $85 million to $100 million, expanding our lender group, extending its maturity to February 2023 and reducing its cost. Subsequent to the close of the quarter, we secured a further amendment to our 2020 Revolving Credit Facility to permit us to issue up to $400 million of senior debt alongside the facility, and we secured expanded approval from the Wisconsin OCI to allocate incremental holding company interest expenses to NMIC should we choose to pursue additional debt financing opportunities and downstream proceeds to support our operating businesses.
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 condensed 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 20162019 10-K, 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 Part II, Item 1A of this report and in Part I, Item 1A of our 20162019 10-K, as subsequently updated in other reports we file with the SEC, 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 a full fiscal year or for any other period.
Overview
We provide private MI through our wholly-owned insurance subsidiaries. Oursubsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary NMIC,and is approved as an MI provider by the GSEs and is licensed to write MI coverage in all 50 states and D.C. Both of our insurance subsidiaries, NMIC and Re One are domiciled in Wisconsin and directly regulated by our primary regulator, the Wisconsin OCI. Re One solely provides statutorily required reinsurance to NMIC on insured loans with coverage levels in excess of 25%.after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services on a limited basis to mortgage loan originators. Our stock trades on the NASDAQ under the symbol "NMIH."
MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high LTVhigh-LTV (i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing low down paymenthigh-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective primarily first-time, homeowners.
We were formedNMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of September 30, 2017,March 31, 2020, we had master policy relationshipspolicies with 1,2401,501 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and internet-sourcedother non-bank lenders. As of September 30, 2017,March 31, 2020, we had $46.6$101.0 billion of total insurance-in-force (IIF), including primary IIF of $43.3$98.5 billion, and $10.7 billion of gross RIF of $25.3 billion, including primary RIF of $10.6$25.2 billion.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPSSM pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders.
Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claimsclaim payment practices, responsive customer service, financial strength and profitability.
We discuss below our results of operations forOur common stock trades on the periods presented andNASDAQ under the conditions and trends that have impacted or are expected to impact our business.symbol "NMIH." Our headquarters areis located in Emeryville, CaliforniaCalifornia. As of March 31, 2020, we had 327 full- and ourpart-time employees. Our corporate website is located at www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report.
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including new insurance writings, the composition of our insurance portfolio and other factors that we expect to impact our results.
COVID-19 Developments
On January 30, 2020, the WHO declared the outbreak of COVID-19 a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the
population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity. In the weeks following the outbreak, non-essential businesses across the U.S. have been shuttered and capital markets have experienced a significant spike in volatility and sell-off in valuations. A record number of Americans have been furloughed or laid-off, and unemployment claims have increased dramatically.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for a medical advance that relieves the crisis and provides for a quick return to normalized activity, it is not known how long the dislocation will persist. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees were safe and able to continue serving our customers and their borrowers without interruption. We have also sought to broadly assess the potential impact the COVID-19 outbreak will have on the U.S. economy and housing market, and the implications for the mortgage insurance market, and our business performance and financial position.
Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry
We expect the COVID-19 outbreak will have a direct effect on the U.S. housing market, with existing homeowners facing challenges related to COVID-19, and the volume and timing of future housing transactions negatively impacted as potential sellers re-evaluate or postpone planned sales (housing supply) and potential buyers reassess their ability and willingness to purchase homes (demand). The market may be further constrained as transactions between committed buyers and sellers encounter operational challenges, such as delayed title searches due to the closure of local government offices.
As a market (like all others) where valuation is driven by supply/demand dynamics, this dislocation has the potential to impact housing prices. While it is too early for us to estimate the magnitude of any potential housing price decline (either nationally or in local markets), we have looked to the 2008 Financial Crisis as a point of comparison. In the wake of the 2008 Financial Crisis, national home price indices declined by approximately 30% from their pre-crisis peaks and remained severely dislocated for several years, causing significant stress for homeowners, lenders, mortgage insurers and the broader economy. We observe several differences in the current environment as compared to that in the period leading up to and through the 2008 Financial Crisis that we believe may lessen the relative housing price dislocation experienced in the aftermath of the COVID-19 outbreak, including:
(i) the generally higher quality borrower base (as measured by weighted average FICO scores and LTV ratios) and tighter underwriting standards (with, among other items, full-documentation required to verify borrower income and asset positions) that prevail in the current market;
(ii) the lower concentration of higher risk loan structures, such as negative amortizing, interest-only or short-termed option adjusted-rate mortgages being originated and outstanding in the current market;
(iii) the meaningfully higher proportion of loans used for lower risk purposes, such as the purchase of a primary residence or rate-term refinancing in the current market, as opposed to cash-out refinancings, investment properties or second home purchases, which prevailed to a far greater degree in the lead up to the 2008 Financial Crisis;
(iv) the availability and immediate application by politicians, regulators, lenders, loan servicers and others of a broad toolkit of resources designed to aid distressed borrowers, including forbearance, foreclosure moratoriums and other assistance programs codified under the CARES Act enacted on March 27, 2020; and
(v) the broader and equally immediate application of a massive amount of fiscal and monetary stimulus by the federal government under the CARES Act and across a range of other programs designed to assist unemployed individuals and distressed businesses, as well as support the smooth functioning of various capital and risk markets.
We also perceive the house price environment in the period leading up to the current COVID-crisis to be anchored by more balanced market fundamentals than that in the period leading up to the 2008 Financial Crisis. We believe the 2008 Financial Crisis was directly precipitated by irresponsible behavior in the housing market in which home prices were driven to unsustainable heights (a so called “bubble”). We see a causal link between the housing market and the 2008 Financial Crisis that we do not see in the COVID-19 outbreak, and we believe this will further lessen the relative housing price dislocation experienced going forward.
Notwithstanding the relative differences we observe in the current environment as compared to the 2008 Financial Crisis, we do expect that housing prices will be impacted by the COVID-19 outbreak. We also expect the mix of purchase and refinancing mortgage originations will shift in the near-term due to the current pandemic. We anticipate that purchase mortgage origination volume will be lower in the aftermath of the COVID-19 outbreak than it otherwise would have been as buyers and sellers postpone or more broadly reassess current and future transactions, while we expect refinancing origination volume will increase significantly as declining mortgage rates create refinancing opportunities for existing borrowers.
Historically, U.S. mortgage insurance industry penetration of the purchase origination market has been meaningfully higher than the refinancing origination market, as new home buyers have generally required a greater degree of down payment support, while refinancing borrowers have typically benefited from increasing equity in their existing homes. In recent periods, however, mortgage insurance industry penetration of the refinancing market has increased significantly and the composition of industry new insurance written (NIW) volume between purchase and refinancing loans has shifted. Refinancing originations accounted for approximately 30% of total mortgage insurance industry NIW volume for the quarter-ended December 31, 2019, compared to approximately 6% for the quarter-ended December 31, 2018. We expect this trend to continue in the near-term as purchase origination volume slows and refinancing origination volume increases, particularly as those borrowers who capitalize on the emerging refinancing opportunity may not have significant equity in their homes (either because they are refinancing so soon after closing on a new home purchase or because of a decline in the appraised value of their property) and may need to rely on mortgage insurance support to complete their transactions.
In this context, we expect to see a decline in total U.S. mortgage insurance industry NIW volume in the near-term, with the impact of declining purchase origination volume partially offset by a dramatic increase in, and increasing mortgage insurance penetration of, refinancing origination volume.
Potential Impact on NMI's Business Performance and Financial Position
Operations
We had 327 employees at March 31, 2020, including 173 who typically work at our corporate headquarters in Emeryville, CA and 154 who typically work from home in locations across the country. In response to the COVID-19 outbreak, we activated our business continuity program and instituted additional work-from-home practices for our 173 Emeryville-based staff. We have transitioned our operations seamlessly and continue to positively engage with customers on a remote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment and internal controls over financial reporting are unchanged. We have achieved this transition without incurring additional capital expenditures or operating expenses and we believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course.
New Business Production
We expect that the volume, composition, credit profile and pricing of our new business production will change due to the COVID-19 crisis.
Our NIW has expanded significantly in past periods, driven by growth in the overall mortgage insurance market and the success we have had further developing our customer franchise. During the three-year period between January 1, 2017 and December 31, 2019, we activated 340 new lenders, growing our franchise by over 45%, and successfully deepened our engagement with many existing customers. In the same period, total U.S. mortgage insurance NIW volume increased by 19% annually - peaking at $384 billion for the year-ended December 31, 2019. Notwithstanding our recent gains and the customer success we have achieved, we expect that our new business volume will decline in the near-term along with the broader decline we anticipate in total U.S. mortgage insurance industry NIW volume.
We have broadly defined underwriting standards and loan-level eligibility criteria that are designed to limit our exposure to higher risk loans, and have used Rate GPS to actively shape the mix of our new business production and insured portfolio by, among other risk factors, borrower FICO score, debt-to-income (DTI) ratio and LTV ratio. At March 31, 2020, the weighted average FICO score of our IIF was 751 and we had a 4% mix of below 680 FICO score risk. Similarly, at March 31, 2020, the weighted average LTV ratio (at origination) of our insured portfolio was 91.9% and we had a 10% mix of 97% LTV risk. In the weeks since the outbreak of COVID-19, we have adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, our asset reserve requirements, our employment verification process and our income continuance determinations, that we expect will further strengthen the credit risk profile of our new business production.
We set our premium rates based on a broad range of individual and market variables, including property type, type of loan product, borrower credit characteristics, and lender profile. Given the significant economic dislocation caused thus far by the COVID-19 outbreak, and the uncertain duration and ultimate global impact of this crisis, we have taken action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules. We expect the pricing changes we have instituted will increase the rate received on NIW volume in future periods and further enhance the credit mix of our new business production.
Delinquency Trends and Claims Expense
We had 1,449 NODs in our primary insured portfolio as of March 31, 2020, which represented a 0.38% delinquency rate against our 376,852 total policies in-force. Given the recency of the COVID-19 outbreak, most borrowers (even those immediately impacted by the crisis) have not defaulted on their mortgages (i.e., missed two or more payments as due). We expect that we will see a significant increase in our default population going forward as borrowers face challenges related to COVID-19 and access the forbearance program for federally backed loans codified under the CARES Act or other programs made available by private lenders. As of April 30, 2020, our default population had increased to 1,610, which represented a 0.43% delinquency rate. We are not yet able to forecast the ultimate level of forbearance-driven delinquencies we will receive or the timing in which they will develop. While early, we have observed a correlation between the risk profile of the underlying borrowers and the incidence of forbearance in the data received through April 30, 2020. Borrowers with weaker credit profiles appear to be accessing forbearance programs with notably higher frequency. This trend is further supported by the forbearance data being reported by Black Knight McDash, which indicates that a meaningfully higher concentration of mortgages insured by the FHA and VA are in forbearance status compared to the loans purchased by the GSEs. Mortgages insured by the FHA and VA are generally of meaningfully lower credit quality than those purchased by the GSEs. We are monitoring this trend with particular focus given the high-quality credit profile of our insured portfolio.
We establish reserves for claims and allocated claim expenses when we are notified that a borrower is in default (i.e., has missed two or more mortgage payments). As our default population grows in future periods, we expect to establish increasing reserves and incur additional claims expense. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve and claims expense) will reflect our best estimate of the future claim payment to be made under each individual policy. Our future claims exposure is a function of the number of delinquent loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors. We generally observe that forbearance 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. Our reserve setting process in future periods will consider this dynamic along with our expectations for house prices (and current views of general resiliency), interest rates and unemployment rates.
Regulatory Capital Position
As an approved mortgage insurer and Wisconsin-domiciled carrier, we are required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI.
The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, we must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of $400 million. At March 31, 2020, we reported $1,070 million available assets against $912 million risk-based required assets for a $157 million of “excess” funding position.
The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared by the Federal Emergency Management Agency (FEMA) to be a Major Disaster zone. The PMIERs charge on non-performing loans that enter delinquent status up to 30 days prior and 90 days after a FEMA-declared Major Disaster is adjusted by a 30% multiplier (inversely, a 70% haircut). FEMA has made a Major Disaster Declaration in all 50 states in response to the COVID-19 pandemic. As such, the PMIERs risk-based required asset charge for all newly delinquent loans nationwide (including those that go delinquent under a federal or private forbearance program) will be reduced by 70%.
Our PMIERs minimum risk-based required asset amount is also adjusted for our reinsurance transactions (as approved by the GSEs). Under our quota share reinsurance treaties, we receive credit for the PMIERs risk-based required asset amount on
ceded RIF. As our gross PMIERs risk-based required asset amount on ceded RIF increases, our PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under our ILN transactions, we generally receive credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. We have structured our ILN transactions to be overcollateralized, such that there are more ILN notes outstanding and cash held in trust than we currently receive credit for under the PMIERs. To the extent our PMIERs risk-based required asset amount on RIF ceded under the ILN transactions grows, we receive increased PMIERs credit under the treaties. The increasing PMIERs credit we receive under the ILN treaties is further enhanced by their delinquency lockout triggers. In the event delinquencies exceed 4% of ceded RIF, the ILN notes stop amortizing and the cash held in trust is secured for our benefit. As the underlying RIF continues to run-off, this has the effect of increasing the overcollateralization within, and excess PMIERs capacity provided by, each ILN structure.
The following table provides detail on the level of overcollateralization of each of our ILN structures at March 31, 2020:
| | | | | | | | | | | |
| ($ values in thousands) | 2017 ILN Transaction | 2018 ILN Transaction | 2019 ILN Transaction |
| Ceded RIF | $ | 3,087,267 | | $ | 3,853,559 | | $ | 5,044,194 | |
| | | |
| Current First Layer Retained Loss | 122,810 | | 124,311 | | 123,424 | |
| Current Reinsurance Coverage | 46,990 | | 174,340 | | 259,047 | |
| Eligible Coverage | $ | 169,800 | | $ | 298,651 | | $ | 382,471 | |
| Subordinated Coverage | 5.50% | 7.75% | 7.50% |
| | | |
| PMIERs Charge on Ceded RIF | 5.20% | 6.63% | 6.89% |
| Overcollateralization | $ | 19,522 | | $ | 43,192 | | $ | 35,138 | |
| | | |
| Delinquency Trigger | 4.0% | 4.0% | 4.0% |
At March 31, 2020, we had an aggregate $98 million of overcollateralization available across our three ILN transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the 4% "delinquency lockout trigger" is activated in each deal and our underlying RIF continues to run-off at the same rate as it did during the month ended March 31, 2020, we estimate that our total overcollateralization would increase by up to $70 million per quarter.
Our PMIERs funding requirement will go up in future periods based on the volume and risk profile of our new business production, and performance of our in-force insurance portfolio. We estimate, however, that we will remain in compliance with our PMIERs asset requirements even if forbearance-driven default rates on our in-force portfolio materially exceed the current forbearance rates noted by Black Knight McDash for each of the GSEs and FHA/VA, given our $157 million excess available asset position at March 31, 2020, the nationwide applicability of the 70% FEMA-disaster haircut on newly delinquent policies, the increasing PMIERs relief automatically provided under each of our quota share and ILN treaties, and our expectation for declining new business funding requirements (with lower NIW volume coming through at incrementally higher credit quality).
NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as “risk-to-capital” or “RTC”) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard, and we expect this to remain the case in the aftermath of the COVID-19 outbreak.
Liquidity
We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of March 31, 2020, we had $1.2 billion of consolidated cash and investments, including $44 million of cash and investments at NMIH.
NMIH's principal liquidity demands include funds for the payment of (i) certain corporate expenses, (ii) certain reimbursable expenses of our insurance subsidiaries, including NMIC, and (iii) principal and interest as due on our outstanding debt. NMIH generates cash interest income on its investment portfolio and benefits from tax, expense-sharing and debt service agreements with its subsidiaries. Such agreements have been approved by the Wisconsin OCI and provide for the reimbursement of substantially all of NMIH's annual cash expenditures. While such agreements are subject to revocation by the Wisconsin OCI, we do not expect such action to be taken at this time. The Wisconsin OCI has refreshed its approval of the debt service agreement providing for the additional reimbursement by NMIC of interest expense due under our amended and upsized 2020 Revolving
Credit Facility. The Wisconsin OCI has also provided for the allocation of incremental holding company interest expenses to NMIC should we choose to pursue additional debt financing opportunities.
NMIH also has access to $100 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility and $16.1 million of aggregate ordinary course dividend capacity available from NMIC and Re One without the prior approval of the Wisconsin OCI. Amounts drawn under the 2020 Revolving Credit Facility are available as directed for NMIH needs or may be down-streamed to support the requirements of our operating subsidiaries if we so decide. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt."
NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At March 31, 2020, NMIC had $1.1 billion of cash and investments, including $76 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions, and (iii) claims payments. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended March 31, 2020, NMIC generated $216 million of cash flow from operations and received an additional $252 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path (i.e., are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to pay meaningful cash claims in the near-term.
Premiums paid to NMIC on monthly policies are generally collected and remitted by loan servicers. We have noted the broad discussion about the liquidity challenges loan servicers may themselves face in the event of widespread borrower utilization of forbearance programs. We do not currently believe that loan servicer liquidity issues will have a material impact on NMIC's premium receipts or liquidity profile. Loan servicers are contractually obligated to advance mortgage insurance premiums in a timely manner, even if the underlying borrowers fail to remit their monthly mortgage payments. We believe the GSEs are considering options to continue remitting premiums to us (and other mortgage insurers) on delinquent loans in the event a loan servicer fails to fulfill its obligation, including directly advancing such mortgage insurance premiums and/or moving the servicing obligation to a more adequately funded loan servicer with the capacity to continue making premium payments.
Investment portfolio
At March 31, 2020, we had $1.1 billion of invested assets and $110 million of cash and equivalents. Our investment strategy equally prioritizes capital preservation alongside income generation, and we have a long-established investment policy that sets conservative limits for asset types, industry sectors, single issuers and instrument credit ratings. At March 31, 2020, our investment portfolio was comprised of 100% fixed income assets with 100% of our holdings rated investment grade and our portfolio having an average rating of "A+." At March 31, 2020, our portfolio was highly liquid and highly diversified with no Level 3 asset positions and no single issuer concentration greater than 1.5%. Despite the severe sell-off generally seen across the capital markets, our investment portfolio was in a $11 million aggregate unrealized gain position at quarter end. We may experience future fluctuation in the value of our investment holdings, but did not record any allowance for credit losses in the portfolio in the quarter-ended March 31, 2020, as we expect to recover the amortized cost basis of all securities held.
The pre-tax book yield on our investment portfolio was 3.0% for the three months ended March 31, 2020. We calculate book yield as annualized net investment income divided by the average amortized cost of the investment portfolio. Given the current interest rate environment and our focus on high-grade assets, the yield we are capturing on new investments is below that of the total portfolio. We expect our total portfolio yield will migrate down over time if this dynamic holds.
Taxes
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We continue to monitor the impact that the CARES Act may have on our business, financial condition and results of operations.
New Insurance Written, Insurance In ForceInsurance-In-Force and Risk In ForceRisk-In-Force
New insurance written (NIW) NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our NIW is affected by the overall size of the mortgage origination market and the volume of low down paymenthigh-LTV mortgage originations,originations. Our NIW is also affected by the percentage of such low down paymenthigh-LTV originations covered by private versus publicgovernment MI or other alternative credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment, nonpayment of premiums, coverage rescission and claims payment)claim payments). RIF is related to IIF and represents the aggregate amount of coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans having a higher coverage percentage. Gross RIF represents RIF without anybefore consideration of the impact of reinsurance. Net RIF representsis gross RIF net of ceded risk and is therefore affected by our reinsurance agreements.reinsurance.
Net Premiums Written and Net Premiums Earned
Our objective is to achieve a mid-teens return on PMIERs required assets and weWe set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. See " - GSE Oversight," belowOn June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPS. Rate GPS considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While most of our new business is priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS provides us with a discussion of the PMIERs financial requirements.more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns.
Premiums are generally fixed overfor the estimated lifeduration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements.arrangements, less premium refunds and premium write-offs. As a result, net premiums written are generally influenced by:
•NIW;
•premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described below;
•cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings (which are affected by prevailing mortgage interest rates)rates as compared to interest rates on loans underpinning our in force policies), levels of claimsclaim payments and home prices; and
•cession of premiums under third-party reinsurance arrangements.
Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment at origination, which is initially recorded as unearned premium and earned over the estimated life of the policy. A majoritySubstantially all of our single premium policies in force as of September 30, 2017March 31, 2020 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and substantially all of our single premium policies are generally non-refundable on cancellation, assuming all other factors remain constant, if single premium loans are prepaidrepaid earlier than expected, our profitability
on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher, our profitabilityrevenue is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, compliancestate regulatory and other applicable capital requirements, and support the growth of our business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces net premiums written and earned and also reduces net RIF, providing capital relief to the ceding insurance companyus and reducing our incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota share transactions, which offset the ceding company’sour acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement, the ceding insurer is typically we are responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit. In general, there are no ceding commissions under excess-of-loss reinsurance agreements. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
InQuota share reinsurance
Effective September 1, 2016, NMIC entered into the 2016 QSR Transaction.Transaction with a syndicate of third-party reinsurers. Under the terms of the 2016 QSR Transaction, NMIC (1) cededcedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk relating tounder our pool agreement with Fannie Mae, and (2) ceded or will cede 25% of the risk relating to eligible primary insurance policies written between September 1, 2016 and December 31, 2017, in exchange for reimbursement of ceded claims and claimsclaim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims.
Effective January 1, 2018, NMIC entered into the 2018 QSR Transaction with a syndicate of third-party reinsurers. Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in 2018 and 20% of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims.
Under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In May 2017,connection with the termination, NMIC secured $211.3recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction.
Excess-of-loss reinsurance
NMIC has secured aggregate excess-of-loss reinsurance coverage at inception for an existing portfolioon defined portfolios of MImortgage insurance policies written from 2013 through December 31, 2016,during discrete periods through a series of mortgage insurance-linked notes offeringnote offerings by
the Oaktown Re. The reinsurance coverage amount under the terms of the 2017 ILN Transaction decreases from $211.3 million at inception overRe Vehicles. Under each agreement, NMIC retains a ten-year period as the underlying covered mortgages amortize and was $185 million as of September 30, 2017. For the coverage period, NMIC will retain the first layer of $126.8 million of aggregate lossesloss exposure on covered policies and the respective Oaktown Re willVehicle then provide aprovides second layer of coverageloss protection up to the outstandinga defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts.
NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles generally decrease from the inception of each agreement over a 10-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. The respective outstanding reinsurance coverage amount.amounts stop amortizing if certain credit enhancement or delinquency thresholds, as defined in each agreement are triggered, referred to as a lock-out feature. When
a lock-out trigger is breached, the respective ILN notes stop amortizing and the assets held in trust are frozen for our benefit while the underlying risk continues to run-off.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | Inception Date | | | Covered Production | | Initial Reinsurance Coverage | | Current Reinsurance Coverage | | Initial First Layer Retained Loss | | Current First Layer Retained Loss |
| 2017 ILN Transaction | May 2, 2017 | | | 1/1/2013 - 12/31/2016 | | $ | 211,320 | | | $ | 46,990 | | | $ | 126,793 | | | $ | 122,810 | |
| 2018 ILN Transaction | July 25, 2018 | | | 1/1/2017 - 5/31/2018 | | 264,545 | | | 174,340 | | | 125,312 | | | 124,311 | |
| 2019 ILN Transaction | July 30, 2019 | | | 6/1/2018 - 6/30/2019 | | 326,905 | | | 259,047 | | | 123,424 | | | 123,424 | |
See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements.
Portfolio Data
The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary and pool IIF and NIW | As of and for the three months ended | | | | | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | | | | | |
| IIF | | NIW | | IIF | | NIW | | | | |
| (In Millions) | | | | | | | | | | |
| Monthly | | $ | 81,347 | | | $ | 10,461 | | | $ | 55,995 | | | $ | 6,211 | | | | | |
| Single | | 17,147 | | | 836 | | | 17,239 | | | 702 | | | | | |
| Primary | | 98,494 | | | 11,297 | | | 73,234 | | | 6,913 | | | | | |
| | | | | | | | | | | |
| Pool | | 2,487 | | | — | | | 2,838 | | | — | | | | | |
| Total | | $ | 100,981 | | | $ | 11,297 | | | $ | 76,072 | | | $ | 6,913 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary and pool IIF and NIW | As of and for the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | IIF | | NIW | | IIF | | NIW | | NIW |
| | | | (In Millions) |
| Monthly | $ | 28,707 |
| | $ | 4,833 |
| | $ | 16,038 |
| | $ | 4,162 |
| | $ | 11,824 |
| | $ | 10,354 |
|
| Single | 14,552 |
| | 1,282 |
| | 12,190 |
| | 1,695 |
| | 2,887 |
| | 5,595 |
|
| Primary | 43,259 |
| | 6,115 |
| | 28,228 |
| | 5,857 |
| | 14,711 |
| | 15,949 |
|
| | | | | | | | | | | | |
| Pool | 3,330 |
| | — |
| | 3,826 |
| | $ | — |
| | — |
| | — |
|
| Total | $ | 46,589 |
| | $ | 6,115 |
| | $ | 32,054 |
| | $ | 5,857 |
| | $ | 14,711 |
| | $ | 15,949 |
|
For the three months ended September 30, 2017,March 31, 2020, primary NIW increased 4%,63% compared to the same period in 2016, primarily because of the growth within and an expansion of our customer base. Primary NIW decreased 8% for the ninethree months ended September 30, 2017, compared to the nine months ended September 30, 2016,March 31, 2019, primarily due to a reduction in our single policy production, driven primarily by actions we initiated to reduce the concentration of single policies in our product mix, partially offset by growth in our monthly policy volume.production tied to increased penetration of existing customer accounts, new customer account activations and a larger mortgage insurance market. The increase also contributed to the growth in single premium policy production. For the three and nine months ended September 30, 2017,March 31, 2020, monthly premiumprimary NIW increased 16% and 14%, respectively,68% compared to the same periods a year ago, driven primarily bythree months ended March 31, 2019.
For the growththree months ended March 31, 2020, monthly premium polices accounted for 93% of our customer base.
For the nine months ended September 30, 2017, 80% of our NIW related to monthly premium policies.NIW. As of September 30, 2017,March 31, 2020, monthly premium policies accounted for 66%83% of our primary IIF, as compared to 60%76% at DecemberMarch 31, 2016 and 57% at September 30, 2016.2019. We expect the break-down of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF towill continue to trend toward our current NIWan increased monthly mix over time. Our totaltime given the composition of our NIW.
Total IIF increased 45%33% as of September 30, 2017March 31, 2020 compared to September 30, 2016,March 31, 2019, primarily because of ourdue to the NIW generated between such measurement dates, and higher persistencypartially offset by the run-off of our policies in force.in-force policies. Our persistency rate decreased to 71.7% at March 31, 2020 from 87.2% at March 31, 2019, reflecting the impact of increased refinancing activity tied to record low interest rates.
The following table presents net premiums written and earned for the periods indicated.
| | | | | | | | | | | | | | | |
| Primary and pool premiums written and earned | | For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Thousands) | | | | | | |
| Net premiums written | | $ | 91,371 | | | $ | 71,923 | | | | | |
| Net premiums earned | | 98,717 | | | 73,868 | | | | | |
|
| | | | | | | | | | | | | |
| Primary and pool premiums written and earned | For the three months ended | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | September 30, 2017 | September 30, 2016 |
| | (In Thousands) |
Net premiums written (1) | $ | 47,716 |
| | $ | 9,199 |
| $ | 122,105 |
| $ | 96,190 |
|
Net premiums earned (1) | 44,519 |
| | 31,808 |
| 115,661 |
| 77,656 |
|
(1) Net For the three months ended March 31, 2020, net premiums written and earned are reported net of reinsurance.
For the threeincreased 27% and nine months ended September 30, 2017, net premiums written increased 419% and 27%, respectively, and net premiums earned increased 40% and 49%34%, respectively, compared to the same periods in 2016.three months ended March 31, 2019. The increases in net premiums written are due to growth of our monthly policy production and IIF and the initial cession of premiums written on IIF at the inception of the 2016 QSR Transaction, partially offset by the decrease in single premium NIW. The increases in net premiums earned are primarily due to the growth inof our IIF and increased monthly policy production, and IIF, partially offset by increased cessions under the 2016 QSR TransactionTransactions tied to the growth of our direct premium volume and 2017the inception of the 2019 ILN Transaction and,Transaction. Net premiums earned grew at an accelerated pace compared to net premiums written due to the same periods in 2016, reductions in ouramortization of unearned premiums and earnings on single premium policy production and earningscancellations, partially offset by new single premium policy originations.
from cancellations. Pool premiums written and earned for the three and nine months ended September 30, 2017March 31, 2020 and 2019, were $0.9$0.7 million and $2.9$0.8 million respectively, before giving effect to the effects2016 QSR Transaction, under which all of our written and earned pool premiums have been ceded. A portion of our ceded pool premiums earned are recouped through profit commission under the 2016 QSR Transaction.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the datedates and for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary portfolio trends | As of and for the three months ended | | | | | | | | |
| March 31, 2020 | | December 31, 2019 | | September 30, 2019 | | June 30, 2019 | | March 31, 2019 |
| ($ Values In Millions) | | | | | | | | |
| New insurance written | $ | 11,297 | | | $ | 11,949 | | | $ | 14,100 | | | $ | 12,179 | | | $ | 6,913 | |
| Percentage of monthly premium | 93 | % | | 93 | % | | 92 | % | | 91 | % | | 90 | % |
| Percentage of single premium | 7 | % | | 7 | % | | 8 | % | | 9 | % | | 10 | % |
| New risk written | $ | 2,897 | | | $ | 3,082 | | | $ | 3,651 | | | $ | 3,183 | | | $ | 1,799 | |
Insurance-in-force (1) | 98,494 | | | 94,754 | | | 89,713 | | | 81,708 | | | 73,234 | |
| Percentage of monthly premium | 83 | % | | 81 | % | | 80 | % | | 78 | % | | 76 | % |
| Percentage of single premium | 17 | % | | 19 | % | | 20 | % | | 22 | % | | 24 | % |
Risk-in-force (1) | $ | 25,192 | | | $ | 24,173 | | | $ | 22,810 | | | $ | 20,661 | | | $ | 18,373 | |
Policies in force (count) (1) | 376,852 | | | 366,039 | | | 350,395 | | | 324,876 | | | 297,232 | |
Average loan size (1) | $ | 0.261 | | | $ | 0.259 | | | $ | 0.256 | | | $ | 0.252 | | | $ | 0.246 | |
Coverage percentage (2) | 25.6 | % | | 25.5 | % | | 25.4 | % | | 25.3 | % | | 25.1 | % |
Loans in default (count) (1) | 1,449 | | | 1,448 | | | 1,230 | | | 1,028 | | | 940 | |
Percentage of loans in default (1) | 0.38 | % | | 0.40 | % | | 0.35 | % | | 0.32 | % | | 0.32 | % |
Risk-in-force on defaulted loans (1) | $ | 84 | | | $ | 84 | | | $ | 70 | | | $ | 58 | | | $ | 53 | |
Average premium yield (3) | 0.41 | % | | 0.41 | % | | 0.43 | % | | 0.43 | % | | 0.42 | % |
| Earnings from cancellations | $ | 8.6 | | | $ | 8.0 | | | $ | 7.4 | | | $ | 4.5 | | | $ | 2.3 | |
Annual persistency (4) | 71.7 | % | | 76.8 | % | | 82.4 | % | | 86.0 | % | | 87.2 | % |
Quarterly run-off (5) | 8.0 | % | | 7.7 | % | | 7.5 | % | | 5.1 | % | | 3.3 | % |
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
(3) Calculated as net premiums earned divided by average primary IIF for the period, annualized.
(4) Defined as the percentage of IIF that remains on our books after a given 12-month period.
(5) Defined as the percentage of IIF that is no longer on our books after a given three month period.
|
| | | | | | | | | | | | | | | | | | | |
| Primary portfolio trends | As of and for the three months ended |
| | September 30, 2017 | | June 30, 2017 | | March 31, 2017 | | December 31, 2016 | | September 30, 2016 |
| | ($ Values In Millions) |
| New insurance written | $ | 6,115 |
| | $ | 5,037 |
| | $ | 3,559 |
| | $ | 5,240 |
| | $ | 5,857 |
|
| New risk written | 1,496 |
| | 1,242 |
| | 868 |
| | 1,244 |
| | 1,415 |
|
Insurance in force (1) | 43,259 |
| | 38,629 |
| | 34,779 |
| | 32,168 |
| | 28,228 |
|
Risk in force (1) | 10,572 |
| | 9,417 |
| | 8,444 |
| | 7,790 |
| | 6,847 |
|
Policies in force (count) (1) | 180,089 |
| | 161,195 |
| | 145,632 |
| | 134,662 |
| | 119,002 |
|
Average loan size (1) | $ | 0.240 |
| | $ | 0.240 |
| | $ | 0.239 |
| | $ | 0.239 |
| | $ | 0.237 |
|
Weighted-average coverage (2) | 24.4 | % | | 24.4 | % | | 24.3 | % | | 24.2 | % | | 24.3 | % |
| Loans in default (count) | 350 |
| | 249 |
| | 207 |
| | 179 |
| | 115 |
|
| Percentage of loans in default | 0.2 | % | | 0.2 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % |
| Risk in force on defaulted loans | $ | 19 |
| | $ | 14 |
| | $ | 12 |
| | $ | 10 |
| | $ | 6 |
|
Average premium yield (3) | 0.43 | % | | 0.41 | % | | 0.40 | % | | 0.44 | % | | 0.48 | % |
| Earnings from cancellations | $ | 4.3 |
| | $ | 3.8 |
| | $ | 2.5 |
| | $ | 5.1 |
| | $ | 5.8 |
|
| Annual persistency | 85.1 | % | | 83.1 | % | | 81.3 | % | | 80.7 | % | | 81.8 | % |
Quarterly run-off (4) | 3.8 | % | | 3.4 | % | | 2.9 | % | | 4.6 | % | | 5.3 | % |
| |
(1)
| Reported as of the end of the period. |
| |
(2)
| Calculated as end of period RIF divided by IIF. |
| |
(3)
| Calculated as net primary and pool premiums earned, net of reinsurance, divided by average gross primary IIF for the period, annualized. |
| |
(4)
| Defined as the percentage of IIF that is no longer on our books after any three-month period. |
The table below presents a summary of the change in total primary IIF duringfor the dates and periods indicated.
| | | | | | | | | | | | | | | |
| Primary IIF | For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Millions) | | | | | | |
| IIF, beginning of period | $ | 94,754 | | | $ | 68,551 | | | | | |
| NIW | 11,297 | | | 6,913 | | | | | |
| Cancellations, principal repayments and other reductions | (7,557) | | | (2,230) | | | | | |
| IIF, end of period | $ | 98,494 | | | $ | 73,234 | | | | | |
|
| | | | | | | | | | | | | | | |
| Primary IIF | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | (In Millions) |
| IIF, beginning of period | $ | 38,629 |
| | $ | 23,624 |
| | $ | 32,168 |
| | $ | 14,824 |
|
| NIW | 6,115 |
| | 5,857 |
| | 14,711 |
| | 15,949 |
|
| Cancellations and other reductions | (1,485 | ) | | (1,253 | ) | | (3,620 | ) | | (2,545 | ) |
| IIF, end of period | $ | 43,259 |
| | $ | 28,228 |
| | $ | 43,259 |
| | $ | 28,228 |
|
We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.
The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated.
|
| | | | | | | | | | | | | | | |
| Primary IIF and RIF | As of September 30, 2017 | | As of September 30, 2016 |
| | IIF | | RIF | | IIF | | RIF |
| | (In Millions) |
| September 30, 2017 | $ | 14,315 |
| | $ | 3,508 |
| | $ | — |
| | $ | — |
|
| 2016 | 18,684 |
| | 4,520 |
| | 15,433 |
| | 3,719 |
|
| 2015 | 8,742 |
| | 2,167 |
| | 10,679 |
| | 2,610 |
|
| 2014 | 1,479 |
| | 368 |
| | 2,062 |
| | 505 |
|
| 2013 | 39 |
| | 9 |
| | 54 |
| | 13 |
|
| Total | $ | 43,259 |
| | $ | 10,572 |
| | $ | 28,228 |
| | $ | 6,847 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary IIF and RIF | As of March 31, 2020 | | | | As of March 31, 2019 | | |
| IIF | | RIF | | IIF | | RIF |
| (In Millions) | | | | | | |
| March 31, 2020 | $ | 11,236 | | | $ | 2,882 | | | $ | — | | | $ | — | |
| 2019 | 39,485 | | | 10,259 | | | 6,872 | | | 1,789 | |
| 2018 | 17,545 | | | 4,464 | | | 25,609 | | | 6,492 | |
| 2017 | 13,656 | | | 3,398 | | | 18,353 | | | 4,514 | |
| 2016 | 10,962 | | | 2,763 | | | 14,750 | | | 3,652 | |
| 2015 and before | 5,610 | | | 1,426 | | | 7,650 | | | 1,926 | |
| Total | | $ | 98,494 | | | $ | 25,192 | | | $ | 73,234 | | | $ | 18,373 | |
We utilize certain risk principles that form the basis of how we underwrite and originate primary NIW. We manage our portfolio credit risk by using several loanhave established prudential underwriting standards and loan-level eligibility matrices which prescribe the maximum LTV, minimum borrower creditFICO score, maximum borrower debt-to-income (DTI) ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure. Our loaninsure and memorialized these standards and 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 underwriting standards and eligibility criteria and underwriting guidelines are designed to mitigatelimit the layeredlayering of risk inherent in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts.
The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan.
| | | | | | | | | | | | | | | |
| Primary NIW by FICO | For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Millions) | | | | | | |
| >= 760 | $ | 6,290 | | | $ | 3,057 | | | | | |
| 740-759 | 1,615 | | | 1,224 | | | | | |
| 720-739 | 1,579 | | | 1,044 | | | | | |
| 700-719 | 1,038 | | | 792 | | | | | |
| 680-699 | 565 | | | 553 | | | | | |
| <=679 | 210 | | | 243 | | | | | |
| Total | $ | 11,297 | | | $ | 6,913 | | | | | |
| Weighted average FICO | 757 | | | 749 | | | | | |
|
| | | | | | | | | | | | | | | |
| Primary NIW by FICO | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | ($ In Millions) |
| >= 760 | $ | 2,806 |
| | $ | 2,975 |
| | $ | 6,865 |
| | $ | 8,418 |
|
| 740-759 | 934 |
| | 934 |
| | 2,277 |
| | 2,606 |
|
| 720-739 | 807 |
| | 725 |
| | 1,889 |
| | 1,870 |
|
| 700-719 | 697 |
| | 588 |
| | 1,662 |
| | 1,540 |
|
| 680-699 | 456 |
| | 387 |
| | 1,088 |
| | 940 |
|
| <=679 | 415 |
| | 248 |
| | 930 |
| | 575 |
|
| Total | $ | 6,115 |
| | $ | 5,857 |
| | $ | 14,711 |
| | $ | 15,949 |
|
| Weighted average FICO | 747 |
| | 753 |
| | 748 |
| | 754 |
|
| | | | | | | | | | | | | | | |
| Primary NIW by LTV | For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Millions) | | | | | | |
| 95.01% and above | $ | 721 | | | $ | 569 | | | | | |
| 90.01% to 95.00% | 5,009 | | | 3,424 | | | | | |
| 85.01% to 90.00% | 4,082 | | | 2,241 | | | | | |
| 85.00% and below | 1,485 | | | 679 | | | | | |
| Total | $ | 11,297 | | | $ | 6,913 | | | | | |
| Weighted average LTV | 91.3 | % | | 92.2 | % | | | | |
| | | | | | | | | | | | | | | |
| Primary NIW by purchase/refinance mix | For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Millions) | | | | | | |
| Purchase | $ | 7,991 | | | $ | 6,383 | | | | | |
Refinance (1) | 3,306 | | | 530 | | | | | |
| Total | $ | 11,297 | | | $ | 6,913 | | | | | |
(1) The amount of cash-out refinance loans insured in our portfolio was de minimis for the periods presented
|
| | | | | | | | | | | | | | |
| Primary NIW by LTV | For the three months ended | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | September 30, 2017 | | September 30, 2016 |
| | ($ In Millions) |
| 95.01% and above | $ | 722 |
| | $ | 347 |
| $ | 1,470 |
| | $ | 918 |
|
| 90.01% to 95.00% | 2,714 |
| | 2,557 |
| 6,623 |
| | 7,005 |
|
| 85.01% to 90.00% | 1,765 |
| | 1,844 |
| 4,372 |
| | 4,996 |
|
| 85.00% and below | 914 |
| | 1,109 |
| 2,246 |
| | 3,030 |
|
| Total | $ | 6,115 |
| | $ | 5,857 |
| $ | 14,711 |
| | $ | 15,949 |
|
| Weighted average LTV | 92.3 | % | | 91.7 | % | 92.2 | % | | 91.6 | % |
|
| | | | | | | | | | | | | | | |
| Primary NIW by purchase/refinance mix | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | (In Millions) |
| Purchase | $ | 5,387 |
| | $ | 4,400 |
| | $ | 12,889 |
| | $ | 11,518 |
|
| Refinance | 728 |
| | 1,457 |
| | 1,822 |
| | 4,431 |
|
| Total | $ | 6,115 |
| | $ | 5,857 |
| | $ | 14,711 |
| | $ | 15,949 |
|
The tables below present our total primary IIF and RIF by FICO and LTV and total primary RIF by loan type as of the dates indicated.
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary IIF by FICO | As of | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | |
| ($ Values In Millions) | | | | | | |
| >= 760 | $ | 47,340 | | | 48 | % | | $ | 33,902 | | | 46 | % |
| 740-759 | 16,060 | | | 16 | | | 12,160 | | | 17 | |
| 720-739 | 14,002 | | | 14 | | | 10,096 | | | 14 | |
| 700-719 | 10,518 | | | 11 | | | 8,122 | | | 11 | |
| 680-699 | 6,879 | | | 7 | | | 5,435 | | | 7 | |
| <=679 | 3,695 | | | 4 | | | 3,519 | | | 5 | |
| Total | $ | 98,494 | | | 100 | % | | $ | 73,234 | | | 100 | % |
| Weighted average FICO | 751 | | | | | 749 | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary RIF by FICO | As of | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | |
| ($ Values In Millions) | | | | | | |
| >= 760 | $ | 12,076 | | | 48 | % | | $ | 8,506 | | | 46 | % |
| 740-759 | 4,121 | | | 16 | | | 3,076 | | | 17 | |
| 720-739 | 3,626 | | | 14 | | | 2,550 | | | 14 | |
| 700-719 | 2,696 | | | 11 | | | 2,036 | | | 11 | |
| 680-699 | 1,760 | | | 7 | | | 1,357 | | | 7 | |
<=679 (1) | 913 | | | 4 | | | 848 | | | 5 | |
| Total | $ | 25,192 | | | 100 | % | | $ | 18,373 | | | 100 | % |
| Weighted average FICO | 751 | | | | | 749 | | | |
(1) There were no loans with a FICO <=620 insured in our portfolio for the periods presented.
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary IIF by LTV | As of | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | |
| ($ Values In Millions) | | | | | | |
| 95.01% and above | $ | 8,838 | | | 9 | % | | $ | 7,204 | | | 10 | % |
| 90.01% to 95.00% | 46,318 | | | 47 | | | 34,024 | | | 46 | |
| 85.01% to 90.00% | 31,729 | | | 32 | | | 22,208 | | | 30 | |
| 85.00% and below | 11,609 | | | 12 | | | 9,798 | | | 14 | |
| Total | $ | 98,494 | | | 100 | % | | $ | 73,234 | | | 100 | % |
| Weighted average LTV | 91.9 | % | | | | 91.9 | % | | |
|
| | | | | | | | | | | | | |
| Primary IIF by FICO | As of |
| | September 30, 2017 | | September 30, 2016 |
| | ($ Values In Millions) |
| >= 760 | $ | 21,329 |
| | 49 | % | | $ | 14,258 |
| | 50 | % |
| 740-759 | 6,983 |
| | 16 |
| | 4,612 |
| | 16 |
|
| 720-739 | 5,547 |
| | 13 |
| | 3,648 |
| | 13 |
|
| 700-719 | 4,505 |
| | 10 |
| | 2,813 |
| | 10 |
|
| 680-699 | 2,942 |
| | 7 |
| | 1,863 |
| | 7 |
|
| <=679 | 1,953 |
| | 5 |
| | 1,034 |
| | 4 |
|
| Total | $ | 43,259 |
| | 100 | % | | $ | 28,228 |
| | 100 | % |
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary RIF by LTV | As of | | | | | | |
| March 31, 2020 | | | | March 31, 2019 | | |
| ($ Values In Millions) | | | | | | |
| 95.01% and above | $ | 2,478 | | | 10 | % | | $ | 1,928 | | | 10 | % |
| 90.01% to 95.00% | 13,587 | | | 54 | | | 9,923 | | | 54 | |
| 85.01% to 90.00% | 7,767 | | | 31 | | | 5,384 | | | 30 | |
| 85.00% and below | 1,360 | | | 5 | | | 1,138 | | | 6 | |
| Total | $ | 25,192 | | | 100 | % | | $ | 18,373 | | | 100 | % |
| Weighted average LTV | 92.7 | % | | | | 92.7 | % | | |
|
| | | | | | | | | | | | | |
| Primary RIF by FICO | As of |
| | September 30, 2017 | | September 30, 2016 |
| | ($ Values In Millions) |
| >= 760 | $ | 5,251 |
| | 50 | % | | $ | 3,470 |
| | 51 | % |
| 740-759 | 1,713 |
| | 16 |
| | 1,130 |
| | 17 |
|
| 720-739 | 1,349 |
| | 13 |
| | 887 |
| | 13 |
|
| 700-719 | 1,092 |
| | 10 |
| | 680 |
| | 10 |
|
| 680-699 | 707 |
| | 7 |
| | 443 |
| | 6 |
|
| <=679 | 460 |
| | 4 |
| | 237 |
| | 3 |
|
| Total | $ | 10,572 |
| | 100 | % | | $ | 6,847 |
| | 100 | % |
| | | | | | | | | | | |
| Primary RIF by Loan Type | As of | | |
| March 31, 2020 | | March 31, 2019 |
| | | |
| Fixed | 98 | % | | 98 | % |
| Adjustable rate mortgages | | | |
| Less than five years | — | | | — | |
| Five years and longer | 2 | | | 2 | |
Total (1) | 100 | % | | 100 | % |
|
| | | | | | | | | | | | | |
| Primary IIF by LTV | As of |
| | September 30, 2017 | | September 30, 2016 |
| | ($ Values In Millions) |
| 95.01% and above | $ | 3,038 |
| | 7 | % | | $ | 1,363 |
| | 5 | % |
| 90.01% to 95.00% | 19,562 |
| | 45 |
| | 12,644 |
| | 45 |
|
| 85.01% to 90.00% | 13,437 |
| | 31 |
| | 9,157 |
| | 32 |
|
| 85.00% and below | 7,222 |
| | 17 |
| | 5,064 |
| | 18 |
|
| Total | $ | 43,259 |
| | 100 | % | | $ | 28,228 |
| | 100 | % |
|
| | | | | | | | | | | | | |
| Primary RIF by LTV | As of |
| | September 30, 2017 | | September 30, 2016 |
| | ($ Values In Millions) |
| 95.01% and above | $ | 822 |
| | 8 | % | | $ | 380 |
| | 6 | % |
| 90.01% to 95.00% | 5,722 |
| | 54 |
| | 3,725 |
| | 54 |
|
| 85.01% to 90.00% | 3,205 |
| | 30 |
| | 2,174 |
| | 32 |
|
| 85.00% and below | 823 |
| | 8 |
| | 568 |
| | 8 |
|
| Total | $ | 10,572 |
| | 100 | % | | $ | 6,847 |
| | 100 | % |
|
| | | | | |
| Primary RIF by Loan Type | As of |
| | September 30, 2017 | | September 30, 2016 |
| | | | |
| Fixed | 98 | % | | 98 | % |
| Adjustable rate mortgages: | | | |
| Less than five years | — |
| | — |
|
| Five years and longer | 2 |
| | 2 |
|
| Total | 100 | % | | 100 | % |
The table below showspresents selected primary portfolio statistics, by book year, as of September 30, 2017.March 31, 2020.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2020 | | | | | | | | | | | | | | | | | | |
| Book year | Original Insurance Written | | Remaining Insurance in Force | | % Remaining of Original Insurance | | Policies Ever in Force | | Number of Policies in Force | | Number of Loans in Default | | # of Claims Paid | | Incurred Loss Ratio (Inception to Date) (1) | | Cumulative Default Rate (2) | | Current Default Rate (3) |
| ($ Values in Millions) | | | | | | | | | | | | | | | | | | |
| 2013 | $ | 162 | | | $ | 20 | | | 12 | % | | 655 | | | 115 | | | — | | | 1 | | | 0.2 | % | | 0.2 | % | | — | % |
| 2014 | 3,451 | | | 747 | | | 22 | % | | 14,786 | | | 4,081 | | | 40 | | | 44 | | | 4.1 | % | | 0.6 | % | | 1.0 | % |
| 2015 | 12,422 | | | 4,843 | | | 39 | % | | 52,548 | | | 23,277 | | | 158 | | | 97 | | | 3.0 | % | | 0.5 | % | | 0.7 | % |
| 2016 | 21,187 | | | 10,962 | | | 52 | % | | 83,626 | | | 47,687 | | | 254 | | | 97 | | | 2.4 | % | | 0.4 | % | | 0.5 | % |
| 2017 | 21,582 | | | 13,656 | | | 63 | % | | 85,897 | | | 59,356 | | | 441 | | | 53 | | | 3.4 | % | | 0.6 | % | | 0.7 | % |
| 2018 | 27,295 | | | 17,545 | | | 64 | % | | 104,043 | | | 73,620 | | | 429 | | | 24 | | | 4.6 | % | | 0.4 | % | | 0.6 | % |
| 2019 | 45,141 | | | 39,485 | | | 87 | % | | 148,423 | | | 133,291 | | | 127 | | | — | | | 2.3 | % | | 0.1 | % | | 0.1 | % |
| 2020 | 11,297 | | | 11,236 | | | 99 | % | | 35,581 | | | 35,425 | | | — | | | — | | | — | % | | — | % | | — | % |
| Total | $ | 142,537 | | | $ | 98,494 | | | | | | 525,559 | | | 376,852 | | | 1,449 | | | 316 | | | | | | | | | |
(1) Calculated as total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance.
(2) Calculated as the sum of the number of claims paid ever to date and number of loans in default divided by policies ever in force.
(3) Calculated as the number of loans in default divided by number of policies in force.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of September 30, 2017 |
| Book year | Original Insurance Written | | Remaining Insurance in Force | | % Remaining of Original Insurance | | Policies Ever in Force | | Number of Policies in Force | | Number of Loans in Default | | # of Claims Paid | | Incurred Loss Ratio (Inception to Date) (1) | | Cumulative default rate (2) |
| | ($ Values in Millions) |
| 2013 | $ | 162 |
| | $ | 39 |
| | 24 | % | | 655 |
| | 201 |
| | — |
| | 1 |
| | 0.2 | % | | 0.2 | % |
| 2014 | 3,451 |
| | 1,479 |
| | 43 | % | | 14,786 |
| | 7,451 |
| | 54 |
| | 9 |
| | 3.8 | % | | 0.4 | % |
| 2015 | 12,422 |
| | 8,742 |
| | 70 | % | | 52,548 |
| | 39,727 |
| | 164 |
| | 14 |
| | 2.9 | % | | 0.3 | % |
| 2016 | 21,187 |
| | 18,684 |
| | 88 | % | | 83,626 |
| | 76,095 |
| | 119 |
| | 3 |
| | 1.6 | % | | 0.1 | % |
| 2017 | 14,711 |
| | 14,315 |
| | 97 | % | | 57,800 |
| | 56,615 |
| | 13 |
| | — |
| | 0.5 | % | | — |
|
| Total | $ | 51,933 |
| | $ | 43,259 |
| |
| | 209,415 |
| | 180,089 |
| | 350 |
| | 27 |
| |
| |
|
| |
(1)
| The ratio of total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance. |
| |
(2)
| The sum of the number of claims paid ever to date and number of loans in default as of the end of the period divided by policies ever in force. |
Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of September 30, 2017,March 31, 2020, our RIF continues, although declining, to be relatively more concentrated in California, primarily as a result of the size of the California mortgage market relative to the rest of the country and the location and timing of theour acquisition of new customers. The distribution of riskour primary RIF as of September 30, 2017March 31, 2020 is not necessarily representative of the geographic distribution we expect in the future.
| | | | | | | | | | | |
| Top 10 primary RIF by state | As of | | |
| March 31, 2020 | | March 31, 2019 |
| California | 11.5 | % | | 12.7 | % |
| Texas | 8.2 | | | 8.3 | |
| Florida | 5.9 | | | 5.2 | |
| Virginia | 5.3 | | | 5.0 | |
| Illinois | 3.8 | | | 3.4 | |
| Arizona | 3.7 | | | 4.8 | |
| Pennsylvania | 3.7 | | | 3.6 | |
| Colorado | 3.6 | | | 3.4 | |
| Michigan | 3.4 | | | 3.6 | |
| Maryland | 3.4 | | | 3.2 | |
| | | |
| Total | 52.5 | % | | 53.2 | % |
|
| | | | | |
| Top 10 primary RIF by state | As of |
| | September 30, 2017 | | September 30, 2016 |
| California | 13.6 | % | | 13.2 | % |
| Texas | 7.6 |
| | 6.8 |
|
| Virginia | 5.6 |
| | 6.6 |
|
| Arizona | 4.4 |
| | 3.8 |
|
| Florida | 4.3 |
| | 4.7 |
|
| Colorado | 3.8 |
| | 4.0 |
|
| Michigan | 3.7 |
| | 3.9 |
|
| Pennsylvania | 3.6 |
| | 3.6 |
|
| Utah | 3.6 |
| | 3.6 |
|
| Maryland | 3.6 |
| | 3.6 |
|
| Total | 53.8 | % | | 53.8 | % |
Insurance Claims and ClaimsClaim Expenses
Insurance claims and claimsclaim expenses incurred represent estimated future payments on newly defaulted insured loans and any change in our claim estimates for previously existing defaults. Claims incurred isand claim expenses are generally affected by a variety of factors, including the state of the economy,macroeconomic environment, national and regional unemployment trends, changes in housing values, loanborrower risk characteristics, LTV ratios and borrowerother loan level risk characteristics,attributes, the size and type of loans insured, and the percentage of coverage on insured loans.
Reserves for claims and allocated claimsclaim expenses are established for reported mortgage loan defaults, which we refer to as case reserves, when we are notified that a borrower has missed two or more mortgage payments (i.e., an NOD). We also make estimates of IBNR defaults, which are defaults that have been incurred but have not been reported by loan servicers, based uponon historical reporting trends, and establish IBNR reserves for those estimates.defaults. We also establish reserves for unallocated claimsclaim expenses not associated with a specific claim. The claimsClaim expenses consist of the estimated cost of the claim administration process, including legal and other fees as well as other general expenses of administering the claimsclaim settlement process.
Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is referred to as claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, cure rates, size of the loan and estimated change in property valuation.value. Reserves are released the month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under our 2016the QSR Transaction.Transactions. We will not cede reserves to the reinsurerclaims under the 2017 ILN TransactionTransactions unless losses exceed ourthe respective retained coverage layer.layers. Reserves are not established for future claims on insured loans which are not currently in default.
We expect our insurance claims and claims expenses to be relatively low in the near-term. Based on our experience and industry data, we believe that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of September 30, 2017, over 95% of our primary IIF was related to business written since January 1, 2015. Additionally, our Our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any poolclaims or claim expense reserves for claims or IBNRpool exposure to date.
Based on our experience and industry data, we believe that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of March 31, 2020, approximately 81% of our primary IIF related to business written since March 31, 2017. Although the claims experience on new primary insurance written by usour IIF to date has been favorable,modest, we expect incurred claims to increase as a greater amount of our existing insured portfolio reaches its anticipated period of highest claim frequency. We estimate that the loss ratio over the life of our existing insured portfolio will be between 20% and 25% of earned premiums, and we price to that expectation.
The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic
concentrations, among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by future macroeconomic factors such as housing prices, interest rates, unemployment rates and employment. To date, our claims experience is developing at a slower pace than historical trends indicate,other events, such as a result of high quality underwriting, a strong macroeconomic environment and a favorable housing market. For additional discussion of our reserves, see, Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 6, Reserves for Insurance Claims and Claims Expenses."natural disasters.
We insure mortgages for homes in areas that have been impacted by recent natural disasters, including hurricanes Harvey and Irma and the fires in Northern California. We do not provide coverage for property or casualty claims related to physical damage of a home underpinning an insured mortgage. We anticipate that we will experience an increase in NODs on insured loans in the
impacted areas. Our ultimate claims exposure will depend on the number of NODs received, proximate cause of each default and cure rate of the NOD population. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and flood insurance carried on a related property, and a borrower's access to aid from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas.
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claimsclaim expenses.
| | | | | | | | | | | | | | | |
| For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| (In Thousands) | | | | | | |
| Beginning balance | $ | 23,752 | | | $ | 12,811 | | | | | |
Less reinsurance recoverables (1) | (4,939) | | | (3,001) | | | | | |
| Beginning balance, net of reinsurance recoverables | 18,813 | | | 9,810 | | | | | |
| | | | | | | |
| Add claims incurred: | | | | | | | |
| Claims and claim expenses incurred: | | | | | | | |
Current year (2) | 7,558 | | | 3,909 | | | | | |
Prior years (3) | (1,861) | | | (1,166) | | | | | |
| Total claims and claim expenses incurred | 5,697 | | | 2,743 | | | | | |
| | | | | | | |
| Less claims paid: | | | | | | | |
| Claims and claim expenses paid: | | | | | | | |
Current year (2) | — | | | — | | | | | |
Prior years (3) | 1,224 | | | 694 | | | | | |
| | | | | | | |
| Total claims and claim expenses paid | 1,224 | | | 694 | | | | | |
| | | | | | | |
| Reserve at end of period, net of reinsurance recoverables | 23,286 | | | 11,859 | | | | | |
Add reinsurance recoverables (1) | 6,193 | | | 3,678 | | | | | |
| Ending balance | $ | 29,479 | | | $ | 15,537 | | | | | |
|
| | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | (In Thousands) |
| Beginning balance | $ | 5,048 |
| | $ | 1,475 |
| | $ | 3,001 |
| | $ | 679 |
|
Less reinsurance recoverables (1) | (899 | ) | | — |
| | (297 | ) | | — |
|
| Beginning balance, net of reinsurance recoverables | 4,149 |
| | 1,475 |
| | 2,704 |
| | 679 |
|
| | | | | | | | |
| Add claims incurred: | | | | | | | |
| Claims and claim expenses incurred: | | | | | | | |
Current year (2) | 1,215 |
| | 690 |
| | 3,546 |
| | 1,803 |
|
Prior years (3) | (258 | ) | | (29 | ) | | (581 | ) | | (214 | ) |
| Total claims and claims expenses incurred | 957 |
| | 661 |
| | 2,965 |
| | 1,589 |
|
| | | | | | | | |
| Less claims paid: | | | | | | | |
| Claims and claim expenses paid: | | | | | | | |
Current year (2) | — |
| | — |
| | — |
| | — |
|
Prior years (3) | 157 |
| | 93 |
| | 720 |
| | 225 |
|
| Total claims and claim expenses paid | 157 |
| | 93 |
| | 720 |
| | 225 |
|
| | | | | | | | |
| Reserve at end of period, net of reinsurance recoverables | 4,949 |
| | 2,043 |
| | 4,949 |
| | 2,043 |
|
Add reinsurance recoverables (1) | 1,174 |
| | 90 |
| | 1,174 |
| | 90 |
|
| Ending balance | $ | 6,123 |
| | $ | 2,133 |
| | $ | 6,123 |
| | $ | 2,133 |
|
(1)Related to ceded losses recoverable onunder the 2016 QSR Transaction,Transactions, included in "Other Assets"assets" on the Condensed Consolidated Balance Sheets.condensed consolidated balance sheets. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance"Reinsurance" for additional information.
(2)Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan had defaulted in a prior year and subsequently cured and later re-defaulted in the current year, that default would be included in the current year. Amounts are presented net of reinsurance.
(3)Related to insured loans with defaults occurring in prior years, which have been continuously in default since that time.before the start of the current year. Amounts are presented net of reinsurance.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves.reserves and is presented net of reinsurance. The amount of claims incurred relating tofor current year NODs represents the estimated amount to be ultimately paid on such loans in default. The decreases during the periods presented in reserves held for prior year defaults represent favorable development and are generally the result of NOD cures. We perform an ongoing analysis of recent loss development trends. Wetrends and may increase or decrease our original estimates as we learngather additional information about individual defaults and claims and continue to observe and analyze loss development trends in our portfolio.portfolio, including factors affected by the recent COVID-19 developments. Gross reserves of $19.9 million related to prior year defaults remained as of March 31, 2020.
The following table provides a reconciliation of the beginning and ending count of loans in default for the periods indicated.default.
| | | | | | | | | | | | | | | |
| For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| Beginning default inventory | 1,448 | | | 877 | | | | | |
| Plus: new defaults | 512 | | | 574 | | | | | |
| Less: cures | (475) | | | (474) | | | | | |
| Less: claims paid | (34) | | | (37) | | | | | |
| Less: claims denied | (2) | | | — | | | | | |
| Ending default inventory | 1,449 | | | 940 | | | | | |
|
| | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| Beginning default inventory | 249 |
| | 79 |
| | 179 |
| | 36 |
|
| Plus: new defaults | 208 |
| | 69 |
| | 479 |
| | 158 |
|
| Less: cures | (103 | ) | | (30 | ) | | (292 | ) | | (73 | ) |
| Less: claims paid | (4 | ) | | (3 | ) | | (16 | ) | | (6 | ) |
| Ending default inventory | 350 |
| | 115 |
| | 350 |
| | 115 |
|
The increase in the ending default inventory at September 30, 2017March 31, 2020 compared to September 30, 2016 wasMarch 31, 2019, primarily duerelates to an increase in new defaults tied to the growth in the number of policies in force and expected loss developmentthe aging of our portfolio. earlier book years. Our total policies in force were 376,852 and 297,232 for the three months ended March 31, 2020 and March 31, 2019, respectively. The increase in new defaults was partially offset by cure activity on our beginning NOD population.
The following table provides details of our claims paid, before giving effect to claims paidceded under the 2016 QSR Transaction,Transactions, for the periods indicated.
| | | | | | | | | | | | | | | |
| For the three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| ($ In Thousands) | | | | | | |
Number of claims paid (1) | 34 | | | 37 | | | | | |
| Total amount paid for claims | $ | 1,503 | | | $ | 926 | | | | | |
Average amount paid per claim | $ | 44 | | | $ | 25 | | | | | |
Severity (2) | 83 | % | | 64 | % | | | | |
(1) Count includes one claim settled without payment for the three and nine months ended September 30, 2017March 31, 2020, and September 30, 2016.three claims settled without payment for the three months ended March 31, 2019.
|
| | | | | | | | | | | | | | | |
| | For the three months ended | | For the nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| | ($ Values In Thousands) |
| Number of claims paid | 4 |
| | 3 |
| | 16 |
| | 6 |
|
| Total amount paid for claims | $ | 160 |
| | $ | 93 |
| | $ | 731 |
| | $ | 225 |
|
| Average amount paid per claim | $ | 40 |
| | $ | 31 |
| | $ | 46 |
| | $ | 32 |
|
Severity(1) | 73 | % | | 53 | % | | 83 | % | | 62 | % |
(1) (2)Severity represents the total amount of claims paid including claim expenses divided by the related RIF on the loan at the time the claim is perfected.perfected, and is calculated including claims settled without payment.
The increase in the number of claims paid for the three and nine months ended September 30, 2017March 31, 2020 decreased compared to the same periodsthree months ended September 30, 2016 isMarch 31, 2019, primarily due to anthe timing of when claims were received and paid in respect to respective period end. Our claims severity for the three months ended March 31, 2020 was 83%, compared to 64% for the three months ended March 31, 2019. The increase in claims severity for the three months ended March 31, 2020 can be attributed to fewer claims settled with zero payment compared to the three months ended March 31, 2019.
The following table provides detail on our average reserve per default, inventory. We expectbefore giving effect to reserves ceded under the severity of claims we receive to be between 85% and 95%QSR Transactions, as of the coverage amount. We believe our severity is below long-term expectations due to home price appreciation in recent periods.dates indicated.
| | | | | | | | | | | |
| Average reserve per default: | As of March 31, 2020 | | As of March 31, 2019 |
| (In Thousands) | | |
Case (1) | $ | 18 | | | $ | 15 | |
IBNR(2) | 2 | | | 2 | |
| Total | $ | 20 | | | $ | 17 | |
|
| | | | | | | |
| Average reserve per default: | As of September 30, 2017 | | As of September 30, 2016 |
| | (In Thousands) |
Case (1) | $ | 16 |
| | $ | 17 |
|
| IBNR | 1 |
| | 1 |
|
| Total | $ | 17 |
| | $ | 18 |
|
(1)Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
The average reserve per default at March 31, 2020 increased from March 31, 2019, primarily tied to an increase in claim rates resulting from updates to key assumptions as a result of COVID-19 and the aging our NOD population.
GSE Oversight
As anApproved Insurer approved insurer, NMIC is subject to ongoing compliance with the PMIERs.PMIERs established by each of the GSEs (Italicizeditalicized terms have the same meaning that such terms have in the PMIERs, as described below.)below). The PMIERs establish operational, business, remedial and financial requirements applicable toApproved Insurers approved insurers. The PMIERs financial requirements prescribe a risk-based methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV ratio and other risk features. An asset charge is calculated for each insured loan based on its risk profile. In general, higher quality loans carry lower asset charges.
Under the PMIERs, financial requirements, Approved Insurers approved insurers must maintainavailable assets that equal or exceedminimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. Therisk-based required asset amount is a function of the risk profile of anApproved Insurers net approved insurer's RIF, calculated by applyingassessed on a loan-
by-loanloan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs to the net RIF, and other transactional adjustments, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our 2017 ILN TransactionTransactions and 2016 QSR Transaction.Transactions. The aggregate gross risk-based required asset amountfor performing, primary insurance is subject to a floor of 5.6% of total, performing primary adjusted RIF, and the risk-based required asset amountfor pool insurance considers both the factors in the PMIERs tables and thenet remaining stop lossfor each pool insurance policy. The PMIERs financial requirements also increase the amount of available assets that must be held by an Approved Insurer for LPMI policies originated on or after January 1, 2016.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We certified to the GSEs by April 15, 20172020 that NMIC fully compliedwas in full compliance with the PMIERs as of December 31, 2016.2019. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of itsa failure to meet one or more of the PMIERs requirements. We continuously monitor ourNMIC's compliance with the PMIERs.
The following table provides a comparison of the PMIERs financial requirementsavailable assets and risk-based required asset amount as reported by NMIC as of the dates indicated.
| | | | | | | | | | | |
| As of | | |
| March 31, 2020 | | March 31, 2019 |
| (In Thousands) | | |
| Available assets | $ | 1,069,695 | | | $ | 817,758 | |
| Risk-based required assets | 912,321 | | | 607,325 | |
|
| | | | | | | | | |
| | As of | |
| | September 30, 2017 | | | September 30, 2016 | |
| | (In Thousands) | |
| Available assets | $ | 495,182 |
| | | $ | 488,635 |
| |
| Risk-based required assets | 356,207 |
| | | 320,609 |
| |
Available assets were $1,070 million at March 31, 2020, compared to $818 million at March 31, 2019. The increase in availableAvailable assets as of September 30, 2017 compared to September 30, 2016 is$252 million was primarily driven by theour positive cash flow from operations and amortization of unearned premium reserves. in the intervening periods.
The increase in therisk-based required asset amount is was due to the growth of our gross RIF, partially offset by the increased cession of risk relating tounder our third-party reinsurance agreements. The risk-based required asset amount further increased in 2020 as a result of the termination of our engagement with and the recapture of previously ceded primary RIF from one reinsurer under the 2016 QSR Transaction effective April 1, 2019.
LIBOR Transition
In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021, which is expected to render these widely used reference rates unavailable or unreliable.We have exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio. The 2018 Term Loan, 2020 Revolving Credit Facility, and premiums paid on our ILN Transactions are also LIBOR-based. We are in the process of reviewing our LIBOR-based contracts that extend beyond 2021 and transitioning to a set of alternative reference rates.We will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not know the impact it will have to our operations or financial results.
Capital Position of Our Insurance Subsidiaries and Financial Strength Ratings
In addition to GSE-imposed asset requirements, NMIC is also subject to state regulatory minimum capital requirements based on its RIF. While formulations of this minimum capital may vary by jurisdiction, the most common measure allows for a
maximum permitted RTC ratio of 25:1.
As of September 30, 2017,March 31, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $6.2$17.9 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory surpluscapital of $502.6 million$1.0 billion (including contingency reserves) as of September 30, 2017,March 31, 2020, NMIC's RTC ratio was 12.3:17.7:1. Re One had total statutory capital of $33.9$36 million as of September 30, 2017, withMarch 31, 2020, and a RTC ratio of 0.7:1.3:1. We continuously monitor our compliance with state capital requirements.
In August 2017,October 2019, Moody's Investors Service (Moody's) re-affirmedupgraded its "Ba1" financial strength rating forof NMIC from "Baa3" to "Baa2" and upgraded its B2 rating of NMIH's $150 million senior secured 2018 Term Loan. Moody'sLoan and 2018 Revolving Credit Facility from "Ba3" to "Ba2". The outlook for bothMoody's ratings changed from " stable" to " positive."is stable. In July 2017,June 2019, S&P re-affirmedupgraded its "BBB-" financial strength and long-term counter-party credit ratings onof NMIC from "BBB-" to "BBB" and its"BB-"upgraded its long-term counter-party credit rating onof NMIH from "BB-" to "BB". In March 2020, the S&P updated its outlook from stable to negative for the mortgage insurance sector, including NMIH. S&P's outlook
Information and Technology Support Function
Effective March 31, 2020, we entered into a services agreement to outsource our IT support and expertise functions to Tata Consultancy Services (TCS). The agreement provides for both companies is "positive."TCS to provide critical IT services over a seven-year period including such functions as application development and support, infrastructure support, information security, transition and transformation. We expect this engagement will allow us to continue our strategy to provide innovative development and IT optimization, as the business and industry continues to evolve, while realizing cost efficiencies by leveraging TCS's resources and operating model. As a result of this agreement, the majority of our IT employees will become employees of TCS during the second quarter of 2020, with guaranteed continued employment for a 12-month period effective from the date of transition. If we were to terminate the services agreement with TCS at any point before that 12-month period has expired, we would be obligated to rehire the affected employees for the remainder of their guaranteed employment period. In addition, the agreement provides that we may terminate it at any time with 120 days' notice, subject to our payment of a termination fee as specified in the agreement.
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as governmental agencies likegovernment MIs such as the FHA, and theUSDA or VA. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price.price, credit risk tolerance and information technology capabilities. We expect the private MI market to remain competitive, with pressure for industry participants to growmaintain or maintaingrow their market share.
The private MI industry overall competes more broadly with government entitiesMIs who significantly increased their presenceshare in the MI market following the 2008 financial crisis. Although there has been broad policy consensus toward the need for increasing private capital to play a larger roleparticipation and decreasing government exposure to credit risk to be reduced in the U.S. housing finance system, it remains difficult to predict whether the combined market share of governmental agencies such as the FHA and VAgovernment MIs will recede to historicalpre-2008 levels. A range of factors influence a lender's and borrower's decision to choose private MI over governmental insurance options,government MI, including among others, GSE demand, premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private MI products compared to governmentalgovernment MI alternatives.
Consolidated Results of Operations
| | | | | | | | | | | | | | | |
| Consolidated statements of operations | Three months ended | | | | | | |
| March 31, 2020 | | March 31, 2019 | | | | |
| Revenues | ($ in thousands, except for per share data) | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net premiums earned | $ | 98,717 | | | $ | 73,868 | | | | | |
| Net investment income | 8,104 | | | 7,383 | | | | | |
| Net realized investment losses | (72) | | | (187) | | | | | |
| Other revenues | 900 | | | 42 | | | | | |
| Total revenues | 107,649 | | | 81,106 | | | | | |
| Expenses | | | | | | | |
| Insurance claims and claim expenses | 5,697 | | | 2,743 | | | | | |
Underwriting and operating expenses(1) | 32,277 | | | 30,800 | | | | | |
Service expenses(1) | 734 | | | 49 | | | | | |
| Interest expense | 2,744 | | | 3,061 | | | | | |
| (Gain) loss from change in fair value of warrant liability | (5,959) | | | 5,479 | | | | | |
| Total expenses | 35,493 | | | 42,132 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Income before income taxes | 72,156 | | | 38,974 | | | | | |
| Income tax expense | 13,885 | | | 6,075 | | | | | |
| Net income | $ | 58,271 | | | $ | 32,899 | | | | | |
| | | | | | | |
| Earnings per share - Basic | $ | 0.85 | | | $ | 0.49 | | | | | |
| Earnings per share - Diluted | $ | 0.74 | | (2) | | $ | 0.48 | | | | | |
| | | | | | | |
Loss ratio(3) | 5.8 | % | | 3.7 | % | | | | |
Expense ratio(4) | 32.7 | % | | 41.7 | % | | | | |
| Combined ratio | 38.5 | % | | 45.4 | % | | | | |
|
| | | | | | | | | | | | | | | |
| Consolidated statements of operations | Three months ended | | Nine months ended |
| | September 30, 2017 | | September 30, 2016 | | September 30, 2017 | | September 30, 2016 |
| Revenues | (In Thousands) |
| Net premiums earned | $ | 44,519 |
| | $ | 31,808 |
| | $ | 115,661 |
| | $ | 77,656 |
|
| Net investment income | 4,170 |
| | 3,544 |
| | 11,885 |
| | 10,117 |
|
| Net realized investment gains (losses) | 69 |
| | 66 |
| | 198 |
| | (758 | ) |
| Other revenues | 195 |
| | 102 |
| | 461 |
| | 172 |
|
| Total revenues | 48,953 |
| | 35,520 |
| | 128,205 |
| | 87,187 |
|
| Expenses | | | | | | | |
| Insurance claims and claims expenses | 957 |
| | 664 |
| | 2,965 |
| | 1,592 |
|
| Underwriting and operating expenses | 24,645 |
| | 24,037 |
| | 78,682 |
| | 69,943 |
|
| Total expenses | 25,602 |
| | 24,701 |
| | 81,647 |
| | 71,535 |
|
| Other expense | | | | | | | |
| Loss from change in fair value of warrant liability | (502 | ) | | (797 | ) | | (679 | ) | | (187 | ) |
| Interest expense | (3,352 | ) | | (3,733 | ) | | (10,146 | ) | | (11,072 | ) |
| Income before income taxes | 19,497 |
| | 6,289 |
| | 35,733 |
| | 4,393 |
|
| Income tax expense | 7,185 |
| | 114 |
| | 11,917 |
| | 114 |
|
| Net income | $ | 12,312 |
| | $ | 6,175 |
| | $ | 23,816 |
| | $ | 4,279 |
|
| | | | | | | | |
Loss ratio(1) | 2.1 | % | | 2.1 | % | | 2.6 | % | | 2.1 | % |
Expense ratio(2) | 55.4 | % | | 75.6 | % | | 68.0 | % | | 90.1 | % |
| Combined ratio | 57.5 | % | | 77.7 | % | | 70.6 | % | | 92.2 | % |
| | | | | | | | | | | | | | | | | |
| The months ended | | | | | | |
Non-GAAP financial measures (5) | March 31, 2020 | | March 31, 2019 | | | | |
| Adjusted income before tax | $ | 66,743 | | | $ | 44,640 | | | | | |
| Adjusted net income | 52,743 | | | 38,526 | | | | | |
| Adjusted diluted EPS | 0.75 | | 0.56 | | | | |
| | | | | | | |
| | | | | | | |
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
(2) Diluted net income for the quarter ended March 31, 2020 excludes the impact of the warrant fair value change as it was anti-dilutive. For March 31, 2019, diluted net income equals reported net income as the impact of the warrant fair value change was dilutive.
(3) Loss ratio is calculated by dividing the provision for insurance claims and claimsclaim expenses by net premiums earned.
(2) (4)Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
(5) See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.
Revenues
For Net premiums earned were $98.7 million and $73.9 million for the three and nine months ended September 30, 2017, netMarch 31, 2020 and March 31, 2019, respectively. Net premiums earned increased $12.7$24.8 million or 40% and $38.0 million or 49%, respectively, compared to the corresponding34% three and nine months ended September 30, 2016. The increase in both periods isMarch 31, 2020 primarily due to the continued growth of our IIF, a rise in our monthly policy production and IIF,higher single premium policy cancellations, partially offset by incremental cessions under the effectsQSR Transactions tied to the growth of our direct premium volume and the inception of the 2016 QSR Transaction2019 ILN Transaction.
Net investment income was $8.1 million and 2017 ILN Transaction and reductions in our single policy production and earnings from early policy cancellations.
For$7.4 million for the three and nine months ended September 30, 2017, net investment income increased $0.6 millionMarch 31, 2020 and $1.8 million, respectively, compared to the three and nine months ended September 30, 2016, due toMarch 31, 2019, respectively. The increase was driven by an increase in the size of and improved yields on our total investment portfolio.
Other revenues were $0.9 million and $42 thousand for the three months ended March 31, 2020 and March 31, 2019, respectively. Other revenues represent underwriting fee revenue from our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The growth in other revenues for the three months ended relates to an increase in NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods.
Expenses
We recognize insurance claims and claimsclaim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology, professional services and facilities expenses, in connection with the development and operation of our business.
We also incur service expenses in connection with NMIS' outsourced loan review activities.
Insurance claims and claimsclaim expenses increased $0.3 million and $1.4$3.0 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020, compared to the three and nine months ended September 30, 2016, as a result of an increase in our NODs,March 31, 2019 primarily due to an increase in new defaults tied to the growth in the number of policies in force year-over-year and expected loss developmentthe aging of our portfolio. Theearlier book years, and an increase in claimsour average reserve per default primarily due to an increase in claim rates resulting from updates to certain assumptions as a result of COVID-19 and claims expenses for the three and nine months ended September 30, 2017aging of our NOD population. This was partially offset by cure activity on the partial release of reserves related to prior year defaults.beginning NOD population.
Underwriting and operating expenses increased $0.6$1.5 million or 3%, and $8.7 million or 12%5% for the three and nine months ended September 30, 2017, respectively,March 31, 2020 compared to the three and nine months ended September 30, 2016. Employee compensation accounts forMarch 31, 2019. The increase relates to an increase in underwriting and operating expenses associated with the majority of our operating expenses. Wegrowth in policy volume, as well as increased the size of our workforce from 273 employees as of September 30, 2016 to 298 employees as of September 30, 2017headcount to support the growth of our business, particularly our sales and operating functions. Underwritingbusiness. We incurred $0.5 million of underwriting and operating expenses during the three months ended March 31, 2020 related to capital market transaction costs
Service expenses were $0.7 million and $49 thousand for the ninethree months ended September 30, 2017 also reflect $4.8 million of operatingMarch 31, 2020 and March 31, 2019, respectively. Service expenses relatedrepresent third-party costs incurred by NMIS in connection with the services it provides. The growth in service expenses for the quarter ended March 31, 2020 relates to an increase in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the 2017 ILN Transaction and amendment of the Credit Agreement.same periods.
We incurred interest Interest expense related to the Term Loan of $3.4 million and $10.1was $2.7 million for the three and nine months ended September 30, 2017, respectively,March 31, 2020 compared to interest expense of $3.7 million and $11.1$3.1 million for the three and nine months ended September 30, 2016, respectively.March 31, 2019. Interest expense declined in connection withfor the amendment of our Credit Agreement which we completed in February 2017, which among other items, reducedthree months ended March 31, 2020 benefited from a lower LIBOR indexed to the interest rate payable on2018 term loan compared to the Term Loan.three months ended March 31, 2019. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Term Loan.Debt."
Income Tax
tax expense was $13.9 million for the three months ended March 31, 2020 compared to $6.1 million for the three months ended March 31, 2019. Income tax expense increased due to the growth in our pre-tax income. We are a U.S. taxpayer and are subject to a 21% statutory U.S. federal corporate income tax rate of 35%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries.
Our provision for income taxes for the interim reporting periods are based on an estimated annual effective tax rate for the year ending December 31, 2017. We currently pay no regular federal income tax due to the forecasted utilization of federal net operating loss carryforwards, which were $122.9 million as of December 31, 2016. The interim provision for income taxes include current year alternative minimum tax and changes to deferred tax assets.rate. Our effective tax rate on our pre-tax income was 36.9%19.2% for the three months ended September 30, 2017,March 31, 2020 compared to 1.8%15.6% for the comparable 2016 period.three months ended March 31, 2019. Our provision for income taxes for interim periods is established based on our estimated annual effective tax rate on our pre-tax income was 33.3% for the nine months ended September 30, 2017, compared to our effective tax rate on our pre-tax income of 2.6% for the comparable 2016 period. The difference between our statutory tax rate and oura given year. Our effective tax rates for the three and nine months ended September 30, 2017 is due to aMarch 31, 2020 and 2019 reflect the discrete tax benefit associated with excess tax benefits for restricted stock units that were recognized during the periods as a resulteffects of the adoptionvesting of ASU 2016-09RSUs and exercise of options, and the change in the prior quarter.fair value of our warrant liability in each period. See Item 1, "Financial Statements - Notes to Consolidated Financial Statements - Note 1, Organization and Basis of Presentation - Change in Accounting Principle." We expect our effective tax rate to return to approximately the statutory tax rate for the year ending December 31, 2017. From inception through September 30, 2016, we had evaluated the realizability of our net deferred tax assets on a quarterly basis and concluded that it was more-likely-than-not that our net deferred tax assets may not be realized and recognized a full valuation allowance against net deferred tax assets.
|
| | | | | | | |
| Consolidated balance sheets | September 30, 2017 | | December 31, 2016 (1) |
| | (In Thousands) |
| Total investment portfolio | $ | 692,729 |
| | $ | 628,969 |
|
| Cash and cash equivalents | 20,698 |
| | 47,746 |
|
| Premiums receivable | 21,056 |
| | 13,728 |
|
| Deferred policy acquisition costs, net | 36,101 |
| | 30,109 |
|
| Software and equipment, net | 21,767 |
| | 20,402 |
|
| Prepaid reinsurance premiums | 39,915 |
| | 37,921 |
|
| Deferred tax asset, net | 38,490 |
| | 51,434 |
|
| Other assets | 15,856 |
| | 9,588 |
|
| Total assets | $ | 886,612 |
| | $ | 839,897 |
|
| Term loan | $ | 143,969 |
| | $ | 144,353 |
|
| Unearned premiums | 161,345 |
| | 152,906 |
|
| Accounts payable and accrued expenses | 22,028 |
| | 25,297 |
|
| Reserve for insurance claims and claims expenses | 6,123 |
| | 3,001 |
|
| Reinsurance funds withheld | 33,105 |
| | 30,633 |
|
| Deferred ceding commission | 4,971 |
| | 4,831 |
|
| Warrant liability | 4,046 |
| | 3,367 |
|
| Total liabilities | 375,587 |
| | 364,388 |
|
| Total shareholders' equity | 511,025 |
| | 475,509 |
|
| Total liabilities and shareholders' equity | $ | 886,612 |
| | $ | 839,897 |
|
(1) The 2016 prior period balance sheet has been revised. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1, Organization9, Income Taxes."
Net Income
Net income was $58.3 million for the three months ended March 31, 2020 compared to $32.9 million for the three months ended March 31, 2019. The increase in net income can be attributed by an increase in revenues and Basisgain from change in fair value of Presentation. Immaterial Correctionwarrant liability for the three months ended March 31, 2020, compared to a loss from change in fair value of Prior Period Amounts" warrant liability for further details.the three months ended March 31, 2019. This was partially offset by increased underwriting expenses and insurance claims and claim expenses. Adjusted net income was $52.7 million for the three months ended March 31, 2020, compared to $38.5 million for the three months ended March 31, 2019. The increase in adjusted net income for the three months ended March 31, 2020 was driven by growth in total revenues, partially offset by increased underwriting expenses and insurance claims and claim expenses. The gain/loss from change in fair value of warrant liability was excluded from adjusted net income in both periods presented.
Diluted EPS was $0.74 for the three months ended March 31, 2020 compared to $0.48 for the three months ended March 31, 2019. Adjusted diluted EPS was $0.75 for the three months ended March 31, 2020, compared to $0.56 for the three months ended March 31, 2019. The increases in diluted EPS and adjusted diluted EPS for the three months ended March 31, 2020, were driven by growth in net income and adjusted net income, partially offset by an increase in weighted average diluted shares outstanding.
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods.
| | | | | | | | | | | | | | | |
| Non-GAAP Financial Measure Reconciliations | For the three months ended March 31, | | | | | | |
| 2020 | | 2019 | | | | |
| As reported | ($ in thousands, except for per share data) | | | | | | |
| Income before income taxes | $ | 72,156 | | | | $ | 38,974 | | | | | |
| Income tax expense | 13,885 | | | | 6,075 | | | | | |
| Net income | $ | 58,271 | | | | $ | 32,899 | | | | | |
| | | | | | | | | | |
| Adjustments | | | | | | | | | | |
| Net realized investment losses | 72 | | | | 187 | | | | | |
| (Gain) loss from change in fair value warrant liability | (5,959) | | | | 5,479 | | | | | |
| Capital market transaction costs | 474 | | | | — | | | | | |
| Adjusted income before tax | 66,743 | | | | 44,640 | | | | | |
| | | | | | | | | | |
| Income tax expense on adjustments | 115 | | | | 39 | | | | | |
| | | | | | | |
| Adjusted net income | $ | 52,743 | | | | $ | 38,526 | | | | | |
| | | | | | | | | | |
| Weighted average diluted shares outstanding | 70,401 | | | | 68,996 | | | | | |
| | | | | | | |
| Adjusted diluted EPS | $ | 0.75 | | | $ | 0.56 | | | | | |
Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhance the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present.
Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred.
Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods.
Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP.
Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below.
•Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability.
•Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles.
•Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results.
•Infrequent or unusual non-operating items. Items that are the result of unforeseen or uncommon events, which occur separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect our current period operating results.
| | | | | | | | | | | |
| Consolidated balance sheets | March 31, 2020 | | December 31, 2019 |
| (In Thousands) | | |
| Total investment portfolio | $ | 1,070,072 | | | $ | 1,140,940 | |
| Cash and cash equivalents | 109,821 | | | 41,089 | |
| Premiums receivable | 46,872 | | | 46,085 | |
| Deferred policy acquisition costs, net | 62,634 | | | 59,972 | |
| Software and equipment, net | 25,667 | | | 26,096 | |
| Prepaid reinsurance premiums | 13,100 | | | 15,488 | |
| | | |
| Other assets | 59,661 | | | 35,148 | |
| Total assets | $ | 1,387,827 | | | $ | 1,364,818 | |
| Term loan | $ | 145,521 | | | $ | 145,764 | |
| Unearned premiums | 126,908 | | | 136,642 | |
| Accounts payable and accrued expenses | 20,745 | | | 39,904 | |
| Reserve for insurance claims and claim expenses | 29,479 | | | 23,752 | |
| Reinsurance funds withheld | 12,735 | | | 14,310 | |
| Warrant liability | 1,461 | | | 7,641 | |
| Deferred tax liability, net | 66,831 | | | 56,360 | |
| Other liabilities | 9,257 | | | 10,025 | |
| Total liabilities | 412,937 | | | 434,398 | |
| Total shareholders' equity | 974,890 | | | 930,420 | |
| Total liabilities and shareholders' equity | $ | 1,387,827 | | | $ | 1,364,818 | |
As of September 30, 2017,March 31, 2020, we had approximately $713.4 million$1.2 billion in cash and investments, including $61.7$43.7 million held atby NMIH. The decrease in investments from December 31, 2019 is attributed to increases in our unrealized loss positions caused by market-wide widening of credit spreads as a result of the COVID-19 pandemic and a temporary pause on reinvestment activities. The increase in cash and investments from year-end 2016 primarily relates toDecember 31, 2019 was due increased cash generated from operations.operations and a pause on reinvestment activities.
Net deferred policy acquisition costs were $36.1$62.6 million as of September 30, 2017,March 31, 2020, compared to $30.1$60.0 million atas of December 31, 2016.2019. The increase was primarily driven by growth in the defermentnumber of policies written during the period and the deferral of certain costs associated with polices written during the nine months ended September 30, 2017,origination of those policies, partially offset by the amortization of previously deferred acquisition costs andcosts.
Prepaid reinsurance premiums were $13.1 million as of March 31, 2020, compared to $15.5 million as of December 31, 2019. Prepaid reinsurance premiums, which represent the capitalization of ceding commissions associated withunearned premiums on single premium policies ceded under the 2016 QSR Transaction, duringdecreased due to the period.termination of our engagement with one reinsurer under the 2016 QSR Transaction and the continued amortization of previously ceded unearned premiums.
Unearned premiums Other assets increased $8.4 million to $161.3$59.7 million as of September 30, 2017,March 31, 2020 from $35.1 million as of December 31, 2019. Other assets as of March 31, 2020 includes unsettled trade receivables of $21.4 million from sales of certain investment securities, as well as the capitalization of $0.8 million of deferred debt issuance costs incurred in connection with the 2020 Revolving Credit Facility.
Unearned premiums decreased from $136.6 million as of December 31, 2019 to $126.9 million as of March 31, 2020, primarily due to single premium policy origination during the period, offset by the amortization through earnings of existing unearned premiums through earnings in accordance with the expiration of risk on the related single premium policies and the cancellation of other single premium policies. policies, partially offset by single premium policy originations during the three months ended March 31, 2020.
Other assets balance increased $6.3 million to $15.9 million as of September 30, 2017, primarily due to $3.3 million of pending proceeds from the sale of short-term investments in September and a $1.2 million increase in accrued investment income as a result of an increase in the size of our investment portfolio.
Accounts payable and accrued expenses decreased to $22.0from $39.9 million as of September 30, 2017, from $25.3 million at December 31, 2016. The balance consists2019 to $20.7 million as of March 31, 2020, primarily due to the payment of an unsettled trade payable related to the purchase of investment securities at year end 2019 and settlement of previously accrued compensation during the three months ended March 31, 2020.
Reserve for insurance claims and claim expenses increased from $23.8 million as of December 31, 2019 to be paid within$29.5 million as of March 31, 2020, primarily due to an increase in NODs tied to the next 12 monthsgrowth in the number of policies in force and decreasedthe aging of our earlier book years, and an increase in our average reserve per default tied to an increase an increase claim rates due
to updates to certain assumptions as a result of lower operating accrualsCOVID-19 and lower accrued interest duethe aging of our NOD population. This was partially offset by the release of prior year reserves primarily tied to a lower interest rate on the Term Loan.NOD cures. See "- Insurance Claims and Claim Expenses," abovefor further details.
Reinsurance funds withheld was $33.1$12.7 million as of September 30, 2017,March 31, 2020, representing the net of our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The increasedecrease in reinsurance funds withheld of $2.5$1.6 million from December 31, 2019, relates to the termination of our engagement with one reinsurer under the 2016 was a result of increasedQSR Transaction and the continued decline in ceded premiums written.written on single premium policies, due to the end of the reinsurance coverage period for new business under the 2016 QSR Transaction at December 31, 2017. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance."
Warrant liability decreased from $7.6 million at December 31, 2019 to $1.5 million at March 31, 2020, primarily due to a decrease in our stock price. For further information regarding the valuation of our warrant liability and its impact on our results of operations and financial position, see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 3, Fair Value of Financial Instruments."
Net deferred tax liability increased from $56.4 million as of December 31, 2019 to $66.8 million as of March 31, 2020, primarily due an increase in the claimed deductibility of our statutory contingency reserve. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
The following table summarizes our consolidated cash flows from operating, investing and financing activities:activities.
| | | Consolidated cash flows | For the nine months ended September 30, | Consolidated cash flows | For the three months ended March 31, | |
| | 2017 | | 2016 | | 2020 | | 2019 | |
| Net cash (used in) provided by: | (In Thousands) | |
| Net cash provided by (used in): | | Net cash provided by (used in): | (In Thousands) | |
| Operating activities | $ | 41,778 |
| | $ | 52,212 |
| Operating activities | $ | 47,852 | | | $ | 28,279 | | |
| Investing activities | (66,553 | ) | | (63,714 | ) | Investing activities | 25,783 | | | (11,977) | | |
| Financing activities | (2,273 | ) | | (1,293 | ) | Financing activities | (4,903) | | | (1,835) | | |
| Net decrease in cash and cash equivalents | $ | (27,048 | ) | | $ | (12,795 | ) | |
| Net increase in cash and cash equivalents | | Net increase in cash and cash equivalents | $ | 68,732 | | | $ | 14,467 | | |
Net cash provided by operating activities was $41.8$47.9 million for the ninethree months ended September 30, 2017,March 31, 2020, compared to $52.2$28.3 million infor the same period in 2016.three months ended March 31, 2019. The decreaseincreases in cash generated from operating activities for the three months ended March 31, 2020, was primarily causeddriven by growth in premiums written and investment income, partially offset by increased operating expenses in connection with employee compensation and benefits costs and highergrowth in claims paid duetied to an increase inthe growth and aging of our default inventory offset by growth in net premiums written.insured portfolio.
Cash used inprovided by investing activities for the periods presentedthree months ended March 31, 2020 represent the net cash proceeds from maturities of fixed maturities and the sales of short-term investments partially offset by purchases. As a result of the COVID-19 pandemic we paused reinvestment activities to bolster liquidity. Cash used in investment activities for the three months ended March 31, 2019 was driven by the purchase of fixed and short-term maturities during those periods.
Cash used in financing activities was $4.9 million for the three months ended March 31, 2020, compared to cash used in activities of $1.8 million for the three months ended March 31, 2019. The $1 million increasecash used in financing activities primarily relates to taxes paid on the net share settlement of equity awards for certain employees. The cash used in financing activities for the ninethree months ended September 30, 2017 compared toMarch 31, 2020 also includes cash paid for debt issuance costs in connection with the same period ended September 30, 2016, was primarily due to an increase in taxes paid related to the net share settlement of employee equity awards.2020 Revolving Credit Facility.
Holding Company Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of principal and interest related to the 2018 Term Loan;Loan and 2020 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations such as NMIH, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations).
As of September 30, 2017,March 31, 2020, NMIH had $61.7$43.7 million of cash and investments. NMIH's principal source of operatingnet cash is investment incomeincome. NMIH also has access to $100 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility. NMIC and inRe One have the future could includecapacity to pay aggregate ordinary dividends from NMIC, if available and permitted under law and byof $16.1 million to NMIH during the GSEs.12-month period ending December 31, 2020.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, but such approval may be changed or revoked at any time.OCI. With the Wisconsin OCI's approval, NMIH began allocating the interest expense on itsthe 2015 Term Loan to NMIC in the first quarter of 2017, consistent with the benefits NMIC received when NMIH down-streamedcontributed the loan proceeds to NMIC. NMIH received similar approval from the Wisconsin OCI to allocate interest expense to NMIC on the 2018 Term Loan and 2020 Revolving Credit Facility. Such approvals may be changed or revoked at any time.
NMIC's ability to pay dividends to NMIH isNMIC and Re One are subject to insurance department notice or approval.certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels (i.e.(i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer’sinsurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31. NMIC hasand Re One have never paid any dividends to NMIH. NMIC reported a statutory net loss forand Re One have the twelve months endedcapacity to pay aggregate ordinary dividends of $16.1 million to NMIH during the 12-month period ending December 31, 2016 and currently cannot pay any dividends2020.
As an approved insurer under PMIERs, NMIC would be subject to NMIH without the prior approval of the Wisconsin OCI. Certain other states in which NMIC is licensed also have statutes or regulations that restrictadditional restrictions on its ability to pay dividends.dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the PMIERs financial requirements are not permitted to pay dividends without prior approval from the GSEs.
NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements. NMIC's capital needs also depend on its decision to access the reinsurance markets. NMIH may require liquidity to fund the capital needs of its insurance subsidiaries.
In November 2015,May 2018, NMIH entered into the 2018 Credit Agreement forcovering the Term Loan. On February 10, 2017, NMIH amended the Credit Agreement, (Amendment No. 1) to reduce the interest rate and extend the maturity date of the2018 Term Loan from November 10,and 2018 to November 10, 2019.Revolving Credit Facility. The amended2018 Term Loan bears interest at the Eurodollar Rate, as defined in the 2018 Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 6.75%4.75%, payable monthly or quarterly based on our current interest period election.
On March 20, 2020, we amended the 2018 Revolving Credit Facility, increasing the borrowing capacity under the facility to $100 million, extending the maturity date to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility. Borrowings under the 2020 Revolving Credit Facility accrue interest at a variable rate election. Theequal to, at our discretion, based on the applicable corporate credit rating at the time, (i) a base rate (as defined in the 2018 Credit Agreement, contains various restrictivesubject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum, which is reduced from a margin of 1.00% to 2.50% prior to the amendment, or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 1.375% to 2.875% per annum, which is reduced from a margin of 2.00% to 3.50% prior to the amendment. As of March 31, 2020, no borrowings had been made under the 2020 Revolving Credit Facility. The 2020 Revolving Credit Facility also requires us to pay a quarterly commitment fee on the average daily undrawn amount, which ranges from 0.175% to 0.525%, reduced from ranges of 0.30% to 0.60% prior to the amendment, based on the applicable corporate credit rating at the time.
We are subject to certain covenants under the 2018 Term Loan and required financial ratios and tests (which were not modified by Amendment No. 1) that2020 Revolving Credit Facility. Under the 2018 Term Loan (and as defined in the 2018 Credit Agreement), we are required to meet or maintain. These covenants include, but are not limited to the following:subject a maximum debt-to-total capitalization ratio (asof 35%. Under the 2020 Revolving Credit Facility (and as defined therein)in the 2018 Credit Agreement), we are subject to a maximum debt-to-total capitalization ratio of 35%, maximum RTC ratio of 22.0:1.0,a minimum liquidity (as defined therein) of $27.4 million as of September 30, 2017,requirement, compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum shareholders' equityconsolidated net worth and statutory capital requirements. In October 2017, NMIHWe were in compliance
with all covenants as of March 31, 2020. Subsequent to the close of the quarter, we secured a further amendedamendment to our 2020 Revolving Credit Facility to permit us to issue up to $400 million of senior debt alongside the Credit Agreementfacility, and we secured expanded approval from the Wisconsin OCI to remove a covenant that required NMIHallocate incremental holding company interest expenses to maintain liquidity (as defined therein) in an aggregate amount no less than all remaining interest payments dueNMIC should we choose to pursue additional debt financing opportunities and downstream proceeds to support our operating businesses. We periodically review incremental financing opportunities and we may choose to use the flexibility afforded under the Term Loan, while retaining the requirement to maintain minimum liquidity (as defined therein)amendment in an amount no less than all remaining principle amortization payments due under the Term Loan, estimated to be $3 million as of the date of this report (not including the amount due at the maturity date).future periods.
Consolidated Investment Portfolio
Our The primary objectives with respect toof our investment portfolioactivity are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification as toby type, quality, maturity, industry, and issuer that maximizes the after-tax return on investments.industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments,investments; concentration limits for asset types, industry sectors, single issuers, and certain credit ratings,ratings; and benchmarks for asset duration.
Substantially all of our Our investment portfolio is held inentirely comprised of fixed maturity instruments.investments. As of September 30, 2017,March 31, 2020, the fair value of our investment portfolio was $692.7 million.$1.1 billion. We also had an additional $20.7$109.8 million of cash and equivalents as of September 30, 2017.March 31, 2020. Pre-tax book yield on the investment portfolio for the ninethree months ended September 30, 2017March 31, 2020 was 2.3%3.0%. The book yield is calculated as period-to-date net investment income divided by average amortized cost of the investment portfolio. Yield on the investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our investment portfolio and other factors.
The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type and credit rating: |
| | | | | | |
| Percentage of portfolio's fair value | September 30, 2017 | | December 31, 2016 |
| 1. | Corporate debt securities | 57 | % | | 52 | % |
| 2. | U.S. treasury securities and obligations of U.S. government agencies | 9 |
| | 9 |
|
| 3. | Asset-backed securities | 14 |
| | 17 |
|
| 4. | Cash, cash equivalents, and short-term investments | 7 |
| | 16 |
|
| 5. | Municipal debt securities | 13 |
| | 6 |
|
| | Total | 100 | % | | 100 | % |
| | | | | | | | | | | |
| Percentage of portfolio's fair value | March 31, 2020 | | December 31, 2019 |
| Corporate debt securities | 54 | % | | 58 | % |
| Municipal debt securities | 17 | | | 16 | |
| Asset-backed securities | 15 | | | 15 | |
| | | |
| Cash, cash equivalents, and short-term investments | 10 | | | 7 | |
| U.S. treasury securities and obligations of U.S. government agencies | 4 | | | 4 | |
| Total | 100 | % | | 100 | % |
The ratings of our investment portfolio were:
| | | | | | | | | | | |
Investment portfolio ratings at fair value (1) | March 31, 2020 | | December 31, 2019 |
| AAA | 23 | % | | 20 | % |
AA(2) | 19 | | | 19 | |
A(2) | 46 | | | 47 | |
BBB(2) | 12 | | | 14 | |
| | | |
| | | |
| | | |
| Total | 100 | % | | 100 | % |
|
| | | | | |
| Investment portfolio ratings at fair value | September 30, 2017 | | December 31, 2016 |
| AAA | 19 | % | | 24 | % |
AA(1) | 21 |
| | 19 |
|
A(1) | 45 |
| | 44 |
|
BBB(1) | 15 |
| | 13 |
|
| Total | 100 | % | | 100 | % |
(1) Include Excluding certain operating cash accounts.
(2) Includes +/– ratings.
The ratings above
Our investments are providedrated by one or more of: Moody's, S&P and Fitch Ratings.nationally recognized statistical rating organizations. If threetwo or more ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
Investment Securities - Allowance for credit losses
As of March 31, 2020, we did not recognize an allowance of credit losses on our investment portfolio. The increase in securities in an unrealized loss position as of March 31, 2020 can be attributed to a wide widening of credit spreads and surging demand for liquidity across the broader markets, partially offset by interest rate movements since the purchase date. We expect to recover the amortized cost basis of these securities based on our estimate of the amount and timing of cash flows to be collected.
Other ItemsFor the three months ended March 31, 2019, we recognized a $0.4 million OTTI loss in earnings related to the planned sale of a security in a loss position in April 2019. There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss) for the three months ended March 31, 2019.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no material off-balance sheet arrangements as of September 30, 2017.March 31, 2020. In connection with the 2017 ILN Transaction,Transactions, we have certain future contractual commitments to the Oaktown Re a specialVehicles (special purpose VIEvariable interest entities that isare not consolidated in our financial results.results). See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1,1. Organization, and Basis of Presentation - Variable interest entity" and "Note 5, Reinsurance. Summary of Accounting Principles."
There are no material changes outside the ordinary course of business in the contractual obligations specified inWe entered into a services agreement to outsource our 2016 10-K.IT support and expertise functions to TCS, effective March 31, 2020. See "- Information and Technology Support Function," above for more information.
Critical Accounting Estimates
We use accounting principles and methods that conform to GAAP. Where GAAP specifically excludes mortgage insurance we follow general industry practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition, fair value measurements, our investment portfolio, deferred policy acquisition costs, premium deficiency reserves, income taxes,and reserves for insurance claims and claimsclaim expenses warrants and share-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting estimates. There have not been noany material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 20162019 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large portfolio of various holdings, types and maturities. NMIH's principal source of operating cash is investment income. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance.
We manage market risk via a defined investment policy implemented by our treasury function with oversight from our Board of Director's Risk Committee. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:
•Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates of our insurance portfolio, and as a result we may determine that our investment portfolio needs to be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse. Additionally, the changes in Eurodollar based interest rates affect the interest expense related to the Company's debt.
•Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.
•Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third party (e.g.(e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.
•Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.
•Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates fall below the interest rate of the debt.
The carrying value of our investment portfolio as of September 30, 2017March 31, 2020 and December 31, 20162019 was $693 million$1.1 billion and $629 million,$1.1 billion, respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support.
As of September 30, 2017,March 31, 2020, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.953.40 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 3.95%3.40% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 4.133.71 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 4.13%3.71% in fair value of our fixed income portfolio.
We are also subject to market risk related to our 2018 Term Loan and 2017the ILN Transaction.Transactions. As discussed in Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Term Loan,Debt" the 2018 Term Loan bears interest at a variable rate and, as a result, increases in market interest rates would generally result in increased interest expense on our outstanding principal.
The risk premium amounts under the 2017 ILN TransactionTransactions are calculated by multiplying the outstanding reinsurance coverage amount at the beginning of any payment period by a coupon rate, which is the sum of 1-month LIBOR and a risk margin, and then subtracting actual investment income earned on the trust balance during that payment period. An increase in 1-month LIBOR rates would generally increase the risk premium payments, while an increase to money market rates, which directly affect investment income earned on the trust balance, would generally decrease them. Although we expect the two rates to move in tandem, to the extent they do not, it could increase or decrease the risk premium payments that otherwise would be due.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our PrincipalChief Executive Officer and PrincipalChief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of September 30, 2017,March 31, 2020 pursuant to Rule 13a-15(e) under the Exchange Act. Management applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management's control objectives. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance and cannot guarantee that it will succeed in its stated objectives.
Based upon that evaluation, our PrincipalChief Executive Officer and PrincipalChief Financial Officer concluded that, as of September 30, 2017,March 31, 2020 our disclosure controls and procedures were not effective due to provide reasonable assurance that the existence of a material weaknessinformation required to be disclosed by us in the design and operating effectiveness of an internal control related to reconciliation support used to validate our deferred tax inventory. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected in a timely basis. As described in Item 1, "Financial Statements - Notes to Consolidated Financial Statements - Note 1, Organization and Basis of Presentation - Immaterial Correction of Prior Period Amounts," above, we detected a $1.8 million error in the deferred tax balance that was immaterial to the 2016 financial statements. Notwithstanding the material weakness identified, our management has concluded that the consolidated financial statements included in this Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows at and for the periods presented. In addition, there were no material errors in our financial results or balances identified as a result of this control deficiency, and accordingly, amendment of our 2016 Form 10-K is not required.
We enhanced existing controls and designed and implemented new controls applicable to our deferred tax accounting, including those related to stock compensation, to ensure that our DTA is accurately calculated and appropriately reflected in our financial statements and reports we file withor submit under the SEC. We believe these actions are sufficient to remediateExchange Act is recorded, processed, summarized, and reported within the identified material weaknesstime periods specified in the SEC's rules and strengthen our internal control over financial reporting; however, there can be no guarantee that such remediation will be sufficient. We will continue to monitor the effectiveness of our controls and will make any further changes management determines appropriate.forms.
Internal Control Over Financial Reporting
Other than noted above, there were There was no changeschange in our internal control over financial reporting that occurred during the period covered by this report that havehas materially affected, or areis reasonably likely to materially affect, our internal control over financial reporting.
PART II
Item 1. Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business may be filed or pending against us or our affiliates from time to time. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and expected settlements when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management’s judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such lawsuits and claims may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we will disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established accrual. We will also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where reasonably practicable, we will provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.
Based upon information available to us and our review of lawsuits and claims filed or pending against us to date, we have not recognized a material accrual liability for these matters, nor do we currently expect it is reasonably possible that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.
Item 1A. Risk Factors
Risk factors that affect our business and financial results are discussed in Part I, Item 1A of our 20162019 10-K. As of the date of this report, other than as included below, we are not aware of any material changes in our risk factors from the risk factors disclosed in our 20162019 10-K. You should carefully consider the risks and uncertainties described herein and in our 20162019 10-K, which have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. The risks described herein and in our 20162019 10-K are not the only risks we face, as there are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial which may in the future adversely affect our business, financial condition and/or operating results.
The recent COVID-19 outbreak could materially adversely affect our business, results of operations and financial condition.
Due to the unprecedented and rapidly changing social and economic impacts associated with the COVID-19 pandemic on the U.S. and global economies generally, and in particular on the U.S. housing, real estate, housing finance, and mortgage insurance markets, we are closely monitoring developments related to the COVID-19 pandemic to assess its impact on our business. Currently, COVID-19 is having a major impact on nearly every sector of the U.S. economy, including construction, public and private infrastructures, financial services, hospitality industries, manufacturing, travel, trade, tourism, the healthcare system, food supply, consumption and overall economic output, and on the financial, capital and credit markets.
As a result of the COVID-19 pandemic, the U.S. federal government and certain U.S. states have adopted various social distancing measures and have ordered businesses closed or have placed material restrictions on operations. This has resulted in widespread travel restrictions and many businesses are not currently operating or are operating at significantly reduced levels.
Due to the outbreak of the COVID-19 pandemic, there have been a number of governmental and GSE efforts to implement programs to assist individuals and businesses impacted by the virus. The GSEs, the primary purchasers of mortgages we insure, have adopted certain measures to assist borrowers impacted by COVID-19. On March 18, 2020, the GSEs announced suspension of foreclosures and evictions for at least 60 days. Similarly, earlier in March 2020, the GSEs announced that they would provide payment forbearance to borrowers impacted by COVID-19, allowing for mortgage payments to be suspended for up to 12 months due to hardship caused by COVID-19.
On March 27, 2020, the U.S. Congress enacted the CARES Act. Among many other things, the CARES Act suspends foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs. In addition, the CARES Act enacts into law a requirement to provide payment forbearance on such mortgages to borrowers experiencing a hardship during the COVID-19 emergency. Forbearance under the CARES Act allows for a mortgage payment to be suspended for up to 360 days due to hardship caused by COVID-19. The CARES Act also provides for enhanced
unemployment benefits, direct aid to individuals in the form of refundable tax credit rebates and increased flexibility under retirement plans.
Due to the evolving and highly uncertain nature of this crisis, it is too soon to fully assess or predict the ultimate impact COVID-19 will have on the markets in which we operate, but we believe it will be material and could adversely affect our business, operations and financial condition. We are currently unable to estimate precisely the magnitude of the impact that the pandemic will ultimately have on our business, operations and financial condition. We believe there are or will be a range of adverse effects on our markets, customers and new business, revenues, loss development and related impacts to our capital needs, employee health and productivity, investment portfolio performance, and ability to access capital and reinsurance markets if we need to. In turn, these impacts may cause changes, which also cannot be precisely determined at this time, to our estimates of future earnings and other guidance we have provided to the markets.
In particular, we believe we will experience the following impacts, among others:
•Efforts to mitigate the pandemic, including government-mandated business shutdowns, requests or orders for employees to work remotely, and other social distancing measures could adversely impact our ability to continue to conduct our business. Although we have been able to continue operations under our business continuity program, the spread of COVID-19 could negatively impact a significant number of our employees and the availability of key personnel necessary to conduct our business activities. Such a spread or outbreak could also negatively impact the business and operations of our customers and critical third-party service providers. Further, extreme market volatility may leave us unable to react to market events in a manner consistent with our historical practices in dealing with more orderly markets.
•We expect that the COVID-19 pandemic, including COVID-19-related illnesses and initiatives taken to reduce the transmission of COVID-19, will affect the number of new mortgages available for us to insure. Our NIW volume and future revenues are significantly dependent on the volume of high-LTV loan originations. If there is a significant decline in our NIW, our future revenue could be negatively impacted.
•Mortgage delinquencies are typically affected by a variety of factors, including illness, death, unemployment and other life events, among others. In the current environment, if borrowers take advantage of the wide-spread availability of forbearance programs, we are likely to experience a significant increase in forbearance-related delinquencies on our insured loans. While there are efforts underway to combat the spread and severity of COVID-19 and the related economic impacts, these measures may be ineffective in mitigating the spike in NODs we expect to receive as a direct result of illness or economic hardship that may arise from COVID-19.
•While the forbearance programs currently in place are designed to provide bridge assistance to borrowers experiencing hardship so that they may continue to pay their mortgages in the future, when we receive a NOD on an insured loan, including one arising from a COVID-19 forbearance, we would include such loan in our default population for the purposes of setting loss reserves. In addition, PMIERs generally require us to treat such loans as non-performing, which then increases the capital we are required to hold. Non-performing loans that have missed two or more payments are generally assessed a significantly higher capital charge than performing loans. Although loans under a COVID-19 forbearance may not be reported as delinquent for credit reporting purposes, it is unclear how the GSEs will treat such loans for purposes of satisfying PMIERs financial requirements. If the loans are considered delinquent for the purposes of PMIERs, it is unclear how the GSEs will calculate the additional minimum required assets associated with delinquent mortgages that are subject to COVID-19 forbearances. PMIERs currently provides for a discount factor based on FEMA declared disasters. The GSEs added these provisions in 2018 in response to hurricane disaster experiences; however, PMIERs does not limit its application to hurricane disasters. FEMA has made a Major Disaster Declaration in all 50 states in response to the COVID-19 pandemic. Our application of these PMIERs provisions to loans with COVID-19 forbearances are in part based on our subjective interpretations, which may be different than how the GSEs intend to address asset requirements for loans impacted by COVID-19-related defaults. There is a risk that the GSEs or FHFA may disagree with our interpretation or application of PMIERs financial requirements, which may require material changes to the assets we are required to hold. The impact to our capital needs and incurred losses could be material and adversely impact our NIW opportunity and our business, results of operations and financial condition.
Whether delinquencies ultimately result in claims will depend on a variety of factors, including the number of NODs received as a result of the COVID-19 pandemic, the length of the crisis and ultimate success of forbearance, government stimulus and other initiatives put in place to assist homeowners with curing their delinquencies. Due to the inherent uncertainty and significant judgment involved in our assumptions when we establish loss estimates, they may turn out to be materially inaccurate and we can provide no assurance that actual claims paid by us, if any, with respect to NODs arising from the pandemic will not be substantially more than the reserves we establish for such NODs.
•Our master policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) interest (capped at three years) and (ii) certain advances, each as incurred through the date the claim is filed. Under our master policies, a national foreclosure moratorium of the type currently required will not limit the amount of accrued interest (subject to the three year limit) or advances that may be included in the claim amount. If the duration of the current foreclosure delay mandated by the GSEs and CARES Act is extended beyond the current 60-day period (from March 18, 2020), loans that were in our default inventory with defaults unrelated to the COVID-19 crisis, which had not yet gone through foreclosure may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted.
•Home values could materially decline as a result of a persistent economic downturn arising the COVID-19 pandemic. Depreciation in the values of properties underpinning our insured loans may increase the likelihood of default and negatively impact borrowers’ abilities to sell their properties for amounts sufficient to cover their unpaid mortgages. In turn, the frequency or severity of losses we may incur would be negatively impacted.
•Our servicers could experience liquidity impacts, which could affect their willingness and/or ability to continue to pay premiums to us. Although our master policies do not require payment of premiums after a loan has gone into default, most servicers continue to remit premiums to us to avoid a lapse in coverage if the borrower cures the default; however, in the current environment, it is uncertain whether servicers will continue to do so. If this were to occur, we could experience adverse impacts to our revenues, which could be material.
•Our investment portfolio (and, specifically, the valuations of investment assets we hold) has been, and may continue to be, adversely affected as a result of market deterioration caused by the COVID-19 pandemic and uncertainty regarding its outcome.
•The COVID-19 pandemic has caused significant volatility and disruption to the financial, capital and reinsurance markets, making access to such markets increasingly difficult. To the extent that our current sources of income and capitalization are insufficient to meet GSE and state capital requirements or to fund our future operations, we would need to raise additional funds through future financing activities, including through the issuance of additional debt, equity, or a combination of both, reduce our RIF, including through additional reinsurance, or curtail our growth and reduce our expenses. We can give no assurance that any such efforts to raise capital, obtain additional reinsurance or otherwise reduce our RIF would be successful. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.
For the reasons described above, it is uncertain at this time what impact COVID-19 will have on our revenues, losses, expenses, required assets under PMIERs, statutory and GAAP capital, and liquidity, and that impact may be material and adverse. The ultimate significance of COVID-19 on our business will depend on, among other things: the extent and duration of, and severity of illness caused by, the pandemic; the effects on the economy and the time it takes to stabilize; the extent and duration of current and future social-distancing measures implemented by governmental authorities; current and future governmental assistance programs; and the long-term impact on the mortgage origination and mortgage insurance markets. While at this time we cannot estimate the short or long-term impacts of COVID-19 on our business, the above and other factors, including those set forth under the heading "Risk Factors" contained in our 2019 10-K could have a material adverse effect on our business, liquidity, results of operations and financial condition.
Item 6. Exhibits
An index to exhibits has been filed as part of this report and is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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NMI HOLDINGS, INC.
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November 1, 2017 |
By: /s/ Adam Pollitzer
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| Name: Adam Pollitzer
Title: Chief Financial Officer and Duly Authorized Signatory
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EXHIBIT INDEX
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| Exhibit Number | | Description |
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| 2.1 | | Stock Purchase Agreement, dated November 30, 2011, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013) |
| 2.2 | | |
| 3.1 | | |
| 3.2 | | |
| 4.1 | | |
| 4.2 | | |
| 4.3 | | |
| 4.4 | | Registration Rights Agreement between FBR & Co., FBR Capital Markets LT, Inc., FBR Capital Markets & Co., FBR Capital Markets PT, Inc. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013) |
| 4.5 | | |
| 4.6 | | |
| 10.1 ~ | | |
| 10.2 ~ | | |
10.3 ~ | | |
10.410.3 ~ | | |
10.5 ~ | | |
10.610.4 ~ | | |
10.710.5 ~ | | |
10.810.6 ~ | | |
10.910.7 ~ | | |
10.1010.8 ~ | | |
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10.11 ~ | | |
10.1210.9 ~ | | |
10.1310.10 ~ | | |
| | | | | | | | |
10.1410.11 ~ | | |
10.1510.12 + | | |
10.1610.13 | | |
10.1710.14 | | Amendment No. 1, dated February 10, 2017, to the Credit Agreement dated November 10, 2015, between NMI Holdings, Inc., the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on February 10, 2017) |
10.1810.15 | | Amendment No. 2, dated October 25, 2017, to the Credit Agreement dated November 10, 2015, between NMI Holdings, Inc., the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on October 26, 2017) |
| 10.16 | | Credit Agreement, dated May 24, 2018, between NMI Holdings, Inc., the lender party thereto, and JPMorgan Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 4.1 to our Form 8-K, filed on May 25, 2018) |
| 10.17 | |
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| 10.18 | | Joinder Agreement, dated as of March 20, 2020, to the Company’s Credit Agreement, dated as of May 24, 2018, by and among the Company, JPMorgan Chase Bank, N.A. as administrative agent, and Citibank, N.A. (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on March 20, 2020) |
| 10.19 ~ | | |
10.20 ~
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| 10.21 ~ | | |
| 10.22 ~ | | |
10.23 ~
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| 10.24 ~ | | |
10.25 ~
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10.26 ~
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10.27 ~
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10.2810.27 ~ | | |
10.2910.28 ~ | | |
10.3010.29 ~ | | |
10.3110.30 ~
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21.110.31 ~ | | |
| 10.32~ | | |
| | | | | | | | |
10.33~
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10.34~
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10.35~
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10.36~
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10.37~
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| 10.38~ | | |
| 21.1 | | |
| 31.1 | | |
| 31.2 | | |
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| 32.1 # | | |
32.1 # | | |
101 * | | The following financial information from NMI Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017March 31, 2020 formatted in XBRL (eXtensible Business Reporting Language):
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| | (i) Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2020 and December 31, 2016
2019; |
| | (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2017March 31, 2020 and 20162019; |
| | (iii) Condensed Consolidated Statements of Changes in Shareholders' Equity for the ninethree months ended September 30, 2017March 31, 2020 and the year ended December 31, 2016
2019; |
| | (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019; and
|
| | (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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| ~ | Indicates a management contract or compensatory plan or contract. |
| + | Confidential treatment granted as to certain portions, which portions have been filed separately with the SEC. |
| # | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act except to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| NMI HOLDINGS, INC. |
| Date: May 6, 2020 | |
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| By: /s/ Adam S. Pollitzer |
* | In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed "filed" for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.Name: Adam S. Pollitzer |
| Title: Chief Financial Officer and Duly Authorized Signatory |