4. Term LoanDebt
|
| | | | |
| 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)
Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs. In connection with the Notes offering, we recorded capitalized debt issuance costs of $7.4 million. Such amounts will be amortized over the contractual life of the Notes using the effective interest method. At March 31, 2021, $6.4 million of unamortized debt issuance costs remained.
At March 31, 2021 and December 31, 2020, $9.8 million and $2.5 million, respectively, of accrued and unpaid interest on the Notes was included in "Accounts Payable and Accrued Expenses" on our condensed consolidated balance sheet.
2020 Revolving Credit Facility
On March 20, 2020, we amended our $85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility). Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate plus a margin of 1.375% to 2.875% per annum, based on the applicable corporate credit rating at the time.
On October 30, 2020, we entered into a Joinder Agreement to the Credit Agreement, increasing the aggregate principal amount of commitments under the 2020 Revolving Credit Facility from $100 million to $110 million. All other terms remained unchanged. As of March 31, 2021, 0 amounts were drawn 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 of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of March 31, 2021, the applicable commitment fee was 0.35%. For the three months ended March 31, 2021, we recorded $0.1 million of commitment fees in interest expense.
We incurred debt issuance costs of $0.8 million in connection with the 2020 Revolving Credit Facility and had $0.6 million of unamortized debt issuance costs associated with the 2018 Revolving Credit Facility remaining at the time of its amendment and replacement. Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2020 Revolving Credit Facility. At March 31, 2021, remaining unamortized deferred debt issuance costs were $0.9 million.
We are subject to certain covenants under the 2020 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs' financial requirements (subject to any GSE approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants at March 31, 2021.
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, (respectively, as defined therein), and support the growth of our business. The GSEs and the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) has approved bothand the GSEs have indicated their non-objection to all such transactions (subject to certain conditions and their periodicongoing review, of the transactions, including levels of approved capital credit).
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The effect of our reinsurance agreements on premiums written and earned is as follows:
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| (In Thousands) |
| Net premiums written | | | | | | | |
| Direct | $ | 136,232 | | | $ | 103,453 | | | | | |
Ceded (1) | (20,417) | | | (12,082) | | | | | |
| Net premiums written | $ | 115,815 | | | $ | 91,371 | | | | | |
| | | | | | | |
| Net premiums earned | | | | | | | |
| Direct | $ | 127,643 | | | $ | 113,187 | | | | | |
Ceded (1) | (21,764) | | | (14,470) | | | | | |
| Net premiums earned | $ | 105,879 | | | $ | 98,717 | | | | | |
|
| | | | | | | | | | | | | | |
| | 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 ais party to excess-of-loss reinsurance agreementagreements with Oaktown Re thatLtd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles). 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. The outstanding reinsurance coverage amount decreases from $211.3 million at inception over a ten-year period as the underlying covered mortgages amortize and was $185 million as of September 30, 2017. The outstanding reinsurance coverage amount will stop amortizing if certain credit enhancement or delinquency thresholds are triggered.amounts.
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., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd.). ForNMIC ceded aggregate premiums to the Oaktown Re Vehicles of $9.4 million and $3.9 million during the three and nine months ended September 30, 2017,March 31, 2021 and March 31, 2020, respectively. The increase in premiums ceded is due to the inception of the excess-of-loss reinsurance agreements that NMIC entered in with Oaktown Re IV Ltd. and Oaktown Re V Ltd.
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, 2021 and 2020, as the aggregate first layer risk retention for each applicable agreement was not exhausted 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 ten 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., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd., individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction and 2020-2 ILN Transaction, and collectively as the ILN Transactions.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
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. Current amounts are presented as of March 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | Inception Date | | | Covered Production | | Initial Reinsurance Coverage | | Current Reinsurance Coverage | | Initial First Layer Retained Loss | | Current First Layer Retained Loss (1) |
| 2017 ILN Transaction | May 2, 2017 | | | 1/1/2013 - 12/31/2016 | | $ | 211,320 | | | $ | 40,226 | | | $ | 126,793 | | | $ | 121,376 | |
| 2018 ILN Transaction | July 25, 2018 | | | 1/1/2017 - 5/31/2018 | | 264,545 | | | 158,489 | | | 125,312 | | | 123,051 | |
| 2019 ILN Transaction | July 30, 2019 | | | 6/1/2018 - 6/30/2019 | | 326,905 | | | 231,877 | | | 123,424 | | | 122,838 | |
| 2020-1 ILN Transaction | July 30, 2020 | | | 7/1/2019 - 3/31/2020 | | 322,076 | | | 174,314 | | | 169,514 | | | 169,514 | |
| 2020-2 ILN Transaction | October 29, 2020 | | | 4/1/2020 - 9/30/2020 (2) | | 242,351 | | | 218,741 | | | 121,777 | | | 121,177 | |
(1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss.
(2) Less than 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
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 time the 2017 ILN Transaction was entered into with Oaktown Re, we evaluated the applicabilityterms of the accounting guidance that addresses VIEs. As2018, 2019, 2020-1 and 2020-2 ILN Transactions, we are required to maintain a resultcertain 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 $4.9 million as of March 31, 2021. 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 decline over time as the outstanding principal balance of the evaluation of the 2017 ILN Transaction, we concluded that Oaktown Re is a VIE. However, given that NMIC does not have significant economic exposure in Oaktown Re, we do not consolidate Oaktown Re in our consolidated financial statements.respective insurance-linked notes are amortized.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quota share reinsurance
InNMIC is party to four outstanding quota share reinsurance treaties - the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, the 2020 QSR Transaction, effective April 1, 2020, and the 2021 QSR Transaction, effective January 1, 2021 - which we refer to collectively as the QSR Transactions. Under each of the QSR Transactions, NMIC entered intocedes a quota-share reinsurance transaction withproportional share of its risk on eligible policies written during a paneldiscrete period to panels of third-party reinsurers (2016 QSR Transaction).reinsurance providers. Each of the third-party reinsurersreinsurance providers has an insurer financial strength rating of A- or better by Standard and Poor’s& Poor's Rating ServicesService (S&P), A.M. Best Company, Inc. (A.M. Best) or both.
Under the terms of the 2016 QSR Transaction, effective September 1, 2016, NMIC cededcedes premiums written related to:
•to 25% of existingthe risk written on eligible primary policies as of Augustwritten for all periods through December 31, 2016;
2017 and 100% of existingthe risk under our pool agreement with Fannie Mae;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 termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk.
Under the terms of 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. 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 recapturing the related risk.
Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to 21% of the risk on eligible policies written from SeptemberApril 1, 2016 through2020 to December 31, 2017.2020. The 2020 QSR Transaction is scheduled to terminate on December 31, 2030. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2023, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk.
Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5% of the risk on eligible policies written in 2021. The 2021 QSR Transaction is scheduled to terminate on December 31, 2031. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2024, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk.
NMIC may terminate any or all 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.
The following table shows the amounts related to the 2016 QSR Transaction:Transactions:
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| (In Thousands) |
| Ceded risk-in-force | $ | 6,330,409 | | | $ | 4,843,715 | | | | | |
| | | | | | | |
| Ceded premiums earned | (25,747) | | | (23,011) | | | | | |
| Ceded claims and claim expenses | 1,180 | | | 1,532 | | | | | |
| | | | | | | |
| Ceding commission earned | 5,162 | | | 4,513 | | | | | |
| Profit commission | 13,380 | | | 12,413 | | | | | |
|
| | | | | | | | | | | | | |
| | For the three months ended | For the nine months ended |
| | September 30, 2017 | September 30, 2016 | September 30, 2017 | | September 30, 2016 |
| | (In Thousands) |
| Ceded risk-in-force | $ | 2,682,982 |
| $ | 1,778,235 |
| $ | 2,682,982 |
| | $ | 1,778,235 |
|
| Ceded premiums written | (14,389 | ) | (38,977 | ) | (36,715 | ) | | (38,977 | ) |
| Ceded premiums earned | (13,393 | ) | (2,885 | ) | (34,721 | ) | | (2,885 | ) |
| Ceded claims and claims expenses | 277 |
| 90 |
| 887 |
| | 90 |
|
| Ceding commission written | 2,878 |
| 7,795 |
| 7,343 |
| | 7,795 |
|
| Ceding commission earned | 2,581 |
| 551 |
| 6,921 |
| | 551 |
|
| Profit commission | 7,758 |
| 1,641 |
| 19,945 |
| | 1,641 |
|
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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, 2020 and 2021 QSR Transactions, 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, 2018 QSR Transaction, 2020 QSR Transaction and 2021 QSR Transaction, generally remainsremain below 60%, 61%, 50% and 57.5%, 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 ourthe 2016 QSR Transaction was $1.2$4.5 million as of September 30, 2017.March 31, 2021.
The agreementIn accordance with the terms of the 2018, 2020 and 2021 QSR Transactions, 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 recognized quarterly. NMIC's reinsurance recoverable balance is scheduledsupported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to terminatenon-affiliates. Reinsurance recoverables on Decemberloss reserves related to the 2018 QSR Transaction and 2020 QSR Transaction were $13.4 million and $0.8 million, respectively, as of March 31, 2027, except2021.
We remain directly liable for all claim payments if we are unable to collect reinsurance recoverables due from our reinsurers and, as such, we actively monitor and manage our counterparty credit exposure to our reinsurance providers. We establish an allowance for expected credit loss against our reinsurance recoverables if we do not expect to recover amounts due from one or more of our reinsurance counterparties, and report our reinsurance recoverables net of such allowance, if any. We actively monitor the counterparty credit profiles of our reinsurers and each is required to partially collateralize its obligations under the terms of our QSR Transactions. As of March 31, 2021, we did not recognize any allowance for credit loss 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 agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.our reinsurance recoverables.
6. Reserves for Insurance Claims and ClaimsClaim Expenses
We establishhold gross reserves in an amount equal to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Our method, consistent with industry practice,A loan is considered to be in "default" as of the payment date at which a borrower has missed the preceding two or more consecutive monthly payments. We establish reserves only for loans that have been reported to us as having been in default for at least 60 days. Ourby servicers, referred to as case reserves, also include amounts for estimated claims incurred onand additional loans that have beenwe estimate (based on actuarial review and other factors) to be 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 reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claim settlement process. As of September 30, 2017,March 31, 2021, we had 11,090 primary loans in default and held gross reserves for insurance claims and claimsclaim expenses of $6.1 million for 350 primary loans in default.$96.1 million. During the first ninethree months of 2017,ended March 31, 2021, we paid 16 claims totaling $731 thousand,$0.6 million, including two15 claims totaling $11 thousand covered under the 2016 QSR Transaction.Transactions representing $0.1 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, 46March 31, 2021, 198 loans in the pool were past due by 60 days or more.in default. These 46198 loans
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
represent represented approximately $3.0$16.3 million of risk-in-force (RIF).RIF. Due to the size of the remaining deductible, our expectation that a limited number of $10.0 million, the low level of notices of default (NODs) reported on loans in the pool through September 30, 2017default will progress to a claim and the expected severity on such claim submissions (all loans in the pool havehad loan-to-value (LTV) ratios (LTVs) under 80%) at origination), 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, 2021. In connection with the settlement of pool claims, we applied $368 thousand$1.0 million to the pool deductible through September 30, 2017.March 31, 2021. At March 31, 2021, the remaining pool deductible was $9.4 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.
We had 11,090loans in default in our primary insured portfolio as of March 31, 2021, which represented a 2.54% default rate against 436,652 total policies in-force. We had 1,449 loans in default in our primary insured portfolio as of March 31, 2020, which represented a 0.38% default rate against 376,852 total policies in-force. The increase in our default population is primarily due to challenges borrowers have faced related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or similar programs
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
made available by private lenders.
The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default. Our future claims exposure is a function of the number of defaulted 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. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, the Federal Housing Financing Agency (FHFA) and GSEs introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance programs and default status.
Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At March 31, 2021, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at March 31, 2021 compared to March 31, 2020, our total reserve position increased due to the growth in the size of our default population.
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claimsclaim expenses:
| | | | | | | | | | | |
| For the three months ended March 31, |
| 2021 | | 2020 |
| (In Thousands) |
| Beginning balance | $ | 90,567 | | | $ | 23,752 | |
Less reinsurance recoverables (1) | (17,608) | | | (4,939) | |
| Beginning balance, net of reinsurance recoverables | 72,959 | | | 18,813 | |
| | | |
| Add claims incurred: | | | |
| Claims and claim expenses incurred: | | | |
Current year (2) | 10,557 | | | 7,558 | |
Prior years (3) | (5,595) | | | (1,861) | |
| Total claims and claim expenses incurred | 4,962 | | | 5,697 | |
| | | |
| Less claims paid: | | | |
| Claims and claim expenses paid: | | | |
Current year (2) | 12 | | | 0 | |
Prior years (3) | 492 | | | 1,224 | |
| | | |
| Total claims and claim expenses paid | 504 | | | 1,224 | |
| | | |
| Reserve at end of period, net of reinsurance recoverables | 77,417 | | | 23,286 | |
Add reinsurance recoverables (1) | 18,686 | | | 6,193 | |
| Ending balance | $ | 96,103 | | | $ | 29,479 | |
|
| | | | | | | |
| | 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, included in "Other Assets" on the Condensed Consolidated Balance Sheets.Transactions. 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 and included $5.3 million attributed to net case reserves and $5.3 million attributed to net IBNR reserves for the three months ended March 31, 2021 and $6.0 million attributed to net case reserves and $1.6 million attributed to net IBNR reserves for the three months ended March 31, 2020.
(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 and included $0.6 million attributed to net case reserves and $5.0 million attributed to net IBNR reserves for the three months
ended March 31, 2021 and $0.6 million attributed to net case reserves and $1.3 million attributed to net IBNR reserves for the three months ended March 31, 2020.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs fordefaults occurring in current and prior years, including IBNR reserves. The amountreserves and is presented net of claims incurred relating to current year NODs represents the estimated amount to be ultimately paid on such loans in default. We recognized $581 thousand and $214 thousand of favorable prior year development during the nine months ended September 30, 2017 and 2016, respectively, due to NOD cures and ongoing analysis of recent loss development trends.reinsurance. We may increase or decrease our originalclaim estimates and reserves as we learn additional information about individual defaults and claimsdefaulted loans, and continue to observe and analyze loss development trends in our portfolio. ReservesGross reserves of $1.7$83.0 million related to prior year defaults remained as of September 30, 2017.March 31, 2021.
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.
| | | | | | | | | | | | | | | |
| For the three months ended March 31, | | |
| 2021 | | 2020 | | | | |
| (In Thousands, except for per share data) |
| Net income | $ | 52,891 | | | $ | 58,271 | | | | | |
| Basic weighted average shares outstanding | 85,317 | | | 68,563 | | | | | |
| Basic earnings per share | $ | 0.62 | | | $ | 0.85 | | | | | |
| | | | | | | |
| Net income | $ | 52,891 | | | $ | 58,271 | | | | | |
| Gain from change in fair value of warrant liability | 0 | | | (5,959) | | | | | |
| Diluted net income | $ | 52,891 | | | $ | 52,312 | | | | | |
| | | | | | | |
| Basic weighted average shares outstanding | 85,317 | | | 68,563 | | | | | |
| Dilutive effect of issuable shares | 1,170 | | | 1,838 | | | | | |
| Diluted weighted average shares outstanding | 86,487 | | | 70,401 | | | | | |
| | | | | | | |
| Diluted earnings per share | $ | 0.61 | | | $ | 0.74 | | | | | |
| | | | | | | |
| Anti-dilutive shares | 314 | | | 15 | | | | | |
8. Warrants
|
| | | | | | | | | | | | | | | |
| | For the three months ended September 30, | | For the nine months ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| (In Thousands, except for per share data) |
| Net income | $ | 12,312 |
| | $ | 6,175 |
| | $ | 23,816 |
| | $ | 4,279 |
|
| | | | | | | | |
| Basic earnings per share | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.40 |
| | $ | 0.07 |
|
| | | | | | | | |
| Basic weighted average shares outstanding | 59,883,629 |
| | 59,130,401 |
| | 59,680,166 |
| | 59,047,758 |
|
| 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 |
|
| | | | | | | | |
| Diluted earnings per share | $ | 0.20 |
|
| $ | 0.10 |
| | $ | 0.38 |
| | $ | 0.07 |
|
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,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 calculationApril 2012, 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.which 285 thousand remained outstanding available for exercise at March 31, 2021. 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.
During the three months ended March 31, 2021, 27 thousand warrants were exercised resulting in the issuance of 24 thousand shares of common stock. Upon exercise, we reclassified approximately $0.4 million of these warrants, the amounts will be treated aswarrant fair value from warrant liability to additional paid-in capital. NoDuring the three months ended March 31, 2020, 9000 warrants were exercised duringresulting in the nine months ended September 30, 2017 and 2016. We account for these warrantsissuance of 6000 shares of common stock. Upon exercise, we reclassified approximately $0.2 million of warrant fair value from warrant liability to purchase our common shares 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.additional paid-in capital.
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% for the three and nine months ended September 30, 2017, respectively, compared to 1.8% and 2.6% for the comparable 2016 periods. The increase in the effective tax expense for the three and nine months ended September 30, 2017, against the comparable 2016 periods is attributable to the elimination of tax benefits during the comparable 2016 periods due to the recognition of a full valuation allowance which had been recorded to reflect the amount of the deferred taxes that may not be realized. 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. See Note 1, "Organization and Basis of Presentation - Immaterial Correction of Prior Period Amounts" for further details.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
pre-tax income was 21.6% for the three months ended March 31, 2021, compared to 19.2% for the three months ended March 31, 2020. Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rate may fluctuate between interim periods due to the impact 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 discrete basis in the reporting period in which they occur.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent. As a result, our interim provision for income taxes for the three months ended March 31, 2021 represents a change in our net deferred tax liability. As of March 31, 2021 and December 31, 2020, we held $46.4 million of tax and loss bonds in "Other assets" on our condensed consolidated balance sheet.
10. Premium Receivable
Premiums receivable consists of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the associated receivable is written off against earned premium and the related insurance policy is canceled. We recognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the life of the receivable. Due to the nature of our insurance policies (a necessary precondition for access to mortgage credit for covered borrowers) and the short duration of the related receivables, we do not typically experience credit losses against our premium receivables and did not establish an allowance for credit loss at March 31, 2021.
Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan.
We establish a reserve for the write-off of premiums receivable based on historical experience. Our premium write-off reserve was not material at March 31, 2021 or December 31, 2020.
11. Regulatory Information
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.Commissioners (NAIC). 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.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NMIC and Re One's combined statutory net loss,income was $6.4 million and $7.7 million for the three months ended March 31, 2021 and 2020, respectively.
The Wisconsin OCI has imposed a prescribed accounting practice for the treatment of statutory contingency reserves that differs from the treatment promulgated by the NAIC. Under Wisconsin OCI's prescribed practice mortgage guaranty insurers are required to reflect changes in their contingency reserves through statutory income. Such approach contrasts with the NAIC's treatment, which records changes to contingency reserves directly to unassigned funds. As a Wisconsin-domiciled insurer, NMIC's statutory net income reflects an expense associated with the change in its contingency reserve. While such treatment impacts NMIC's statutory net income, it does not have an effect on NMIC's statutory capital position.
The following table presents NMIC and Re One's combined statutory surplus, contingency reserve, statutory capital and RTC ratios were as follows:risk-to-capital (RTC) ratio:
| | | | | | | | | | | | | | | |
| | | |
| March 31, 2021 | | December 31, 2020 | | | | |
| (In Thousands) |
| Statutory surplus | $ | 899,412 | | | $ | 894,331 | | | | | |
| Contingency reserve | 832,145 | | | 768,324 | | | | | |
Statutory capital (1) | $ | 1,731,557 | | | $ | 1,662,655 | | | | | |
| | | | | | | |
| Risk-to-capital | 13.2:1 | | 11.7:1 | | | | |
|
| | | | | | | |
| 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 the State of Delaware. Delaware such as NMIH. Delaware corporation 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 oncertain rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs that may restrict their ability to pay dividends to NMIH. Re One has the capacity to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. NMIC reported a statutory net loss for the year ended December 31, 2020 and does not have the capacity to pay dividends to NMIH during the twelve-month period ended December 31, 2021 without prior approval offrom the Wisconsin OCI. Certain other states in whichNeither Re One nor NMIC is licensed also have statutes or regulations that restrictever paid dividends to NMIH.
As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends. Since inception, NMIC has not paiddividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs prior to paying any dividends, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs. We cannot be certain that the GSEs will not amend the terms, or extend the duration, of this prior approval requirement beyond its current expiration of June 30, 2021.
12. Subsequent Event
On April 27, 2021, NMIC entered into a reinsurance agreement with Oaktown Re VI Ltd. (Oaktown Re VI), a Bermuda domiciled special purpose reinsurer, that provides for up to NMIH.
$367.2 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies primarily written between October 1, 2020 and March 31, 2021. For the reinsurance coverage period, NMIC will retain the first layer of $163.7 million of aggregate losses and Oaktown Re VI will then provide second layer coverage up to the outstanding reinsurance coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount.
Oaktown Re VI financed the coverage by issuing mortgage insurance-linked notes in an aggregate principal amount of $367.2 million to unaffiliated investors. The notes issued by Oaktown Re VI mature on October 25, 2033; all proceeds raised were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re VI to NMIC under the reinsurance agreement. Funds in the reinsurance trust account are required to be invested in high credit quality money market funds at all times. We refer to NMIC's reinsurance agreement with and the insurance-linked notes issued by Oaktown Re VI as the 2021-1 ILN Transaction. Under the terms of the 2021-1 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re VI for anticipated operating expenses (capped at $250,000 per year).
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 20162020 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 20162020 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, 2021, we had master policy relationshipspolicies with 1,2401,609 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, 2021, we had $46.6$125.4 billion of total insurance-in-force (IIF), including primary IIF of $43.3$123.8 billion, and $10.7$31.3 billion of gross RIF, including primary RIF of $10.6$31.2 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 GPS 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, and 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, California and ourCalifornia. As of March 31, 2021, we had 250 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 subsequently 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 severely curtailed day-to-day activity and local, state and federal regulators imposed a broad set
of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans were furloughed or laid-off in the ensuing downturn.
The global dislocation caused by COVID-19 was unprecedented. In response to the COVID-19 outbreak and uncertainty that it introduced, we activated our disaster continuity program to ensure our employees were safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration for the increased level of macroeconomic volatility.
The U.S. housing market demonstrated notable resiliency in the face of COVID stress, with significant purchase demand, record levels of mortgage origination activity and nationwide house price appreciation emerging shortly after the onset of the pandemic. More recently, the development of new vaccines and accelerating pace of the inoculation effort across the U.S. has allowed for the broad resumption of personal and business activity nationwide, and provided hope for a sharp economic rebound in 2021.
While there is increased optimism that the acute health risk posed by and economic impact of COVID-19 has begun to recede, the pandemic continues to affect communities across the U.S. and poses significant risk globally. The path and pace of global economic recovery will depend, in large part, on the course of the virus, which itself remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the ultimate impact COVID-19 will have on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results at this time.
Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry
The U.S. housing market has demonstrated significant resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates have helped to support housing affordability, medical concerns and lifestyle preferences have driven people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives have reinforced the value of homeownership – all of which contributed to an influx of new home buyers, record levels of purchase demand, and nationwide house price appreciation.
While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis and demonstrated resiliency thus far through the pandemic will help to mitigate the risk of a severe pullback. We observe several favorable differences in the current environment compared to the period leading up to and through the 2008 Financial Crisis – the last period of significant economic volatility in the U.S. and one noted for its significant housing market dislocation. Such differences include:
(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 adjustable-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 the government, 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 significant fiscal and monetary stimulus by the federal government under the CARES Act, and subsequently under the Consolidated Appropriations Act enacted on December 27, 2020 (the CAA) and the American Rescue Plan Act enacted on March 11, 2021 (the American Rescue Plan), as well as across a range of other programs designed to assist unemployed individuals and distressed businesses, and support the smooth functioning of various capital and risk markets
We also perceive the house price environment in the period leading up to the 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 that drove home prices 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 contribute to housing market stability in the current period.
Purchase mortgage origination volume has increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume has also grown dramatically as historically low mortgage rates, though rising in recent months, have created refinancing opportunities for a large number of existing borrowers.
Growth in total mortgage origination volume increases the addressable market for the U.S. mortgage insurance industry, while accelerated refinancing activity increases prepayment speed on outstanding insured mortgages. In this context, total U.S. mortgage insurance industry new insurance written (NIW) volume increased to record levels following the onset of the COVID pandemic and the persistency of existing in-force insured risk across the industry declined meaningfully.
While we currently observe broad resiliency in the housing and high-LTV mortgage markets and, for the reasons discussed above, expect this trend to continue in the near term, the ultimate impact of COVID-19 remains highly uncertain. See Item 1A of our 2020 10K, "Risk Factors - The COVID-19 outbreak may continue to materially adversely affect our business, results of operations and financial condition."
Potential Impact on NMI's Business Performance and Financial Position
Operations
We had 250 employees at March 31, 2021, including 112 who typically work at our corporate headquarters in Emeryville, CA and 138 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 112 Emeryville-based staff. We transitioned our operations seamlessly and have continued 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 are unchanged. We 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.
While the broad COVID vaccination effort and relaxation of local restrictions on indoor business operation may allow for a general resumption of in-office activity for our headquarters-based employees, the success of our remote work experience through the pandemic may cause us to offer increased flexibility for employees who prefer a full-time or part-time distributed engagement in the future. If we offer such flexibility and a large enough number of employees elect such an approach, our office and real estate needs could evolve.
New Business Production
Our NIW volume increased significantly following the onset of the COVID-19 pandemic driven by the broad resiliency of the housing market, growth in total mortgage origination volume and increasing size of the U.S. mortgage insurance market, as well as the continued expansion of our customer franchise. We wrote $26.4 billion of NIW during the three months ended March 31, 2021, up 134% compared to the three months ended March 31, 2020.
While we currently expect our new business production will remain elevated, the potential onset of a new viral wave and rising case counts, reintroduction of broad-based shelter in place directives, increased unemployment or other potential outcomes related to COVID-19 could drive a moderation or decline in our volume going forward.
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.In the weeks following the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that further strengthened the credit risk profile of our NIW volume and IIF. At March 31, 2021, the weighted average FICO score of our RIF was 754 and we had a 3% mix of below 680 FICO score risk. Similarly, at March 31, 2021, the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 10% mix of 97% LTV risk.
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 by the COVID-19 outbreak, and the uncertain duration and ultimate global impact of this crisis, we took action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules, following the onset of the pandemic.
Delinquency Trends and Claims Expense
At March 31, 2021, we had 11,090 defaulted loans in our primary insured portfolio, which represented a 2.5% default rate against our 436,652 total policies in-force, and identified 14,805 loans that were enrolled in a forbearance program, including 9,988 of those in default status.
Our default population increased significantly following the outbreak of the pandemic as borrowers faced increased challenges related to COVID-19 and chose to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by private lenders. After this significant initial spike our default experience has steadily improved as an increasing number of impacted borrowers have cured their delinquencies, and fewer new defaults have emerged.
Our total population of defaulted loans peaked in August 2020 and has since declined every month with consistency. As of April 30, 2021, our default population was 10,060, representing a 2.24% default rate.
The table below highlights default and forbearance activity in our primary portfolio as of the dates indicated
| | | | | | | | | | | | | | | | | | | |
| Default and Forbearance Activity as of |
| 3/31/2020 | 6/30/2020 | 9/30/2020 | | | 12/31/2020 | 3/31/21 |
| Number of loans in default | 1,449 | 10,816 | 13,765 | | | 12,209 | 11,090 |
Default rate (1) | 0.38% | 2.90% | 3.60% | | | 3.06% | 2.54% |
| | | | | | | |
| Number of loans in forbearance | 3,122 | 28,555 | 24,809 | | | 19,464 | 14,805 |
Forbearance rate (2) | 0.83% | 7.66% | 6.50% | | | 4.87% | 3.39% |
| | | | | | | |
| | | | | | | |
| | | | | | | |
(1) Default rate is calculated as the number of loans in default divided by total polices in force
(2) Forbearance rate is calculated as the number of loans in forbearance divided by total polices in force.
While we are encouraged by the decline in our forbearance and default populations and optimistic that we will see continued improvement as the stress of the COVID crisis recedes, a future viral wave could cause further social and economic dislocation and contribute to an increase in our forbearance and default counts in future periods.
We establish reserves for claims and allocated claim expenses when we are notified that a borrower is in default. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve and claims expense) reflects 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. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options, which allow borrowers to amortize, or in certain instances fully defer the payments otherwise due during the forbearance period, over an extended length of time. In response to the onset of the COVID-19 outbreak, the GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back into performing status. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At March 31, 2021, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
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) up to three years of missed interest payments 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. In February, the GSEs extended their moratorium on the foreclosure of enterprise-backed single-family residential mortgages through June 30, 2021. If the duration of the current foreclosure moratorium mandated by the GSEs is further extended, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that 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.
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, 2021, we reported $1,810 million available assets against $1,261 million risk-based required assets. Our “excess” funding position was $549 million.
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. In June 2020, the GSEs issued guidance (subsequently amended and restated in each of September and December 2020) on the risk-based treatment of loans affected by the COVID-19 crisis and the reporting of non-performing loans by aging category. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period.
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 of certain credit enhancement or delinquency events, the ILN notes stop amortizing and the cash held in trust is secured for our benefit (a Lock-Out Event). 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.
Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period the overcollateralization within and potential PMIERs capacity provided by each ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account.
The following table provides detail on the level of overcollateralization of each of our ILN Transactions at March 31, 2021:
| | | | | | | | | | | | | | | | | |
| ($ values in thousands) | 2017 ILN Transaction | 2018 ILN Transaction | 2019 ILN Transaction | 2020-1 ILN Transaction | 2020-2 ILN Transaction |
| Ceded RIF | $ | 1,635,102 | | $ | 1,865,606 | | $ | 2,252,220 | | $ | 4,235,240 | | $ | 5,335,934 | |
| | | | | |
| First Layer Retained Loss | 121,376 | | 123,051 | | 122,838 | | 169,514 | | 121,177 | |
| Reinsurance Coverage | 40,226 | | 158,489 | | 231,877 | | 174,314 | | 218,741 | |
| Eligible Coverage | $ | 161,602 | | $ | 281,540 | | $ | 354,715 | | $ | 343,828 | | $ | 339,918 | |
Subordinated Coverage (1) | 9.88% | 15.09% | 15.75% | 8.00% | 6.25% |
| | | | | |
| PMIERs Charge on Ceded RIF | 6.23% | 7.92% | 8.10% | 6.40% | 5.44% |
Overcollateralization (2) (4) | $ | 40,226 | | $ | 133,753 | | $ | 172,206 | | $ | 72,839 | | $ | 49,601 | |
| | | | | |
Delinquency Trigger (3) | 4.0% | 4.0% | 4.0% | 6.0% | 4.7% |
(1) For the 2020-1 ILN Transaction, absent a delinquency trigger, the subordinated coverage is capped at 8%. For the 2020-2 ILN Transaction, absent a
delinquency, the subordinated coverage is capped at 6.25%.
(2) Overcollateralization of the 2017 ILN Transaction is equal to its current reinsurance coverage as the PMIERs required asset amount on RIF ceded under the transaction is currently below the remaining first layer retained loss.
(3) Delinquency triggers for 2017, 2018 and 2019 ILN Transactions are set at a fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for the 2020-1 and 2020-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average.
(4) May not be replicated based on the rounded figures presented in the table.
At March 31, 2021, we had an aggregate $469 million of overcollateralization available across our ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the Lock-Out Events remain in effect for each of the 2017, 2018 and 2019 ILN Transactions and our underlying RIF continues to run-off at the same rate as it did during the three months ended March 31, 2021, we estimate that our total overcollateralization would increase by up to approximately $33.7 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 the forbearance-driven default rate on our in-force portfolio materially exceeds its current level, given our $549 million excess available asset position at March 31, 2021, the nationwide applicability of the 70% haircut on delinquent policies subject to a forbearance program accessed in response to a financial hardship related to the COVID-19 crisis, the increasing PMIERs relief automatically provided under each of our quota share treaties and ILN Transactions.
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 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 generally 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 through the duration of and following the COVID-19 pandemic.
Liquidity
We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of March 31, 2021, we had $1.9 billion of consolidated cash and investments, including $78 million of cash and investments at NMIH.
On June 8, 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of approximately $220 million, net of underwriting discounts, commissions and other direct offering expenses. On June 19, 2020, NMIH also completed the sale of its $400 million aggregate principal amount of senior secured notes, raising net proceeds of $244 million after giving effect to offering expenses and the repayment of the $150 million principal amount outstanding under our 2018 Term Loan. NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings.
NMIH also has access to $110 million of undrawn revolving credit capacity (through the 2020 Revolving Credit Facility) and $1.6 million of ordinary course dividend capacity available from 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. Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt.
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 on our newly issued Notes and 2020 Revolving Credit Facility.
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, 2021, NMIC had $1.8 billion of cash and investments, including $86 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 (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. 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, 2021, NMIC generated $283 million of cash flow from operations and received an additional $327 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 use a meaningful amount of cash to settle claims in the near-term.
Premiums paid to NMIC on monthly policies are generally collected and remitted by loan servicers. There was broad discussion at the onset of the COVID pandemic and concerns about potential liquidity challenges that servicers might face in the event of widespread borrower utilization of forbearance programs. These concerns have not materialized thus far and we do not believe that loan servicer liquidity constraints, should they arise in the future, would 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. In June 2020, the GSEs issued guidance to the PMIERs (subsequently amended and restated in each of September and December 2020) that, among other items, requires us to notify them of our intent to cancel coverage on policies for which servicers have failed to make timely premium payments so that the GSEs can pay the premiums directly to us and preserve the mortgage insurance coverage. Through March 31, 2021, we did not see any notable changes in servicer payment practices, with servicers generally continuing to remit monthly premium payments as scheduled, including those for policies covering loans that are in a forbearance program.
Investment portfolio
At March 31, 2021, we had $1.9 billion of cash and invested assets. 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, 2021, 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, 2021, our portfolio was in a $16 million aggregate unrealized gain position; it was highly liquid and highly diversified with no Level 3 asset positions and no single issuer concentration greater than 1.5%. We did not record any allowance for credit losses in the portfolio during the three months ended March 31, 2021, as we expect to recover the amortized cost basis of all securities held.
The pre-tax book yield on our investment portfolio was 2.0% for the three months ended March 31, 2021. At the onset of the COVID-19 crisis, we decided to prioritize liquidity and increased our cash and equivalent holdings as a percentage of our total portfolio. We believe such action was prudent in light of the heightened market volatility and general uncertainty developing in the early stages of the COVID-19 pandemic. We have since redeployed much of our excess liquidity position.
Taxes
The CARES Act, CAA and American Rescue Plan include, among other items, provisions relating to refundable payroll tax credits, deferment of 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, technical corrections to tax depreciation methods for qualified improvement property, and temporary 100% deduction for business meals. We continue to monitor the impact that the CARES Act, CAA and American Rescue Plan 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, 2021 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-monthtwelve-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 prepaid 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 company and reducing 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’scompany's 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 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.
In September 2016, Quota share reinsurance
NMIC entered intois a party to four outstanding quota share reinsurance treaties – the 2016 QSR Transaction. Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, the 2020 QSR Transaction, effective April 1, 2020 and the 2021 QSR Transaction, effective January 1, 2021. 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 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,Mae, 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.
Under the terms of 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 2020 QSR Transaction, NMIC cedes premiums earned related to 21% of the risk on eligible policies written from April 1, 2020 through December 31, 2020, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 50% that varies directly and inversely with ceded claims.
Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5% of the risk on eligible policies written in 2021, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 57.5% that varies directly and inversely with ceded claims.
NMIC may elect to 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. TheRe Vehicles. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount under the termsamount. NMIC then retains losses in excess of the 2017 ILN Transaction decreasesrespective reinsurance coverage amounts.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from $211.3 million atthe inception of each agreement over a ten-year period as the underlying coveredinsured mortgages amortize and was $185 million asare amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of September 30, 2017. Forcollateral held in trust by the coverage period, NMIC will retain the first layer of $126.8 million of aggregate losses and Oaktown Re will then provide a second layerVehicles is distributed to ILN Transaction note-holders as amortization of coverage up to the outstanding insurance-linked note principal balances occurs. The outstanding reinsurance coverage amount. NMIC retains lossesamounts stop amortizing, and the collateral distribution to ILN Transaction note-holders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in excesseach agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the outstanding2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, amount.and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of March 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | Inception Date | | | Covered Production | | Initial Reinsurance Coverage | | Current Reinsurance Coverage | | Initial First Layer Retained Loss | | Current First Layer Retained Loss (1) |
| 2017 ILN Transaction | May 2, 2017 | | | 1/1/2013 - 12/31/2016 | | $ | 211,320 | | | $ | 40,226 | | | $ | 126,793 | | | $ | 121,376 | |
| 2018 ILN Transaction | July 25, 2018 | | | 1/1/2017 - 5/31/2018 | | 264,545 | | | 158,489 | | | 125,312 | | | 123,051 | |
| 2019 ILN Transaction | July 30, 2019 | | | 6/1/2018 - 6/30/2019 | | 326,905 | | | 231,877 | | | 123,424 | | | 122,838 | |
| 2020-1 ILN Transaction | July 30, 2020 | | | 7/1/2019 - 3/31/2020 | | 322,076 | | | 174,314 | | | 169,514 | | | 169,514 | |
| 2020-2 ILN Transaction | October 29, 2020 | | | 4/1/2020 - 9/30/2020 (2) | | 242,351 | | | 218,741 | | | 121,777 | | | 121,777 | |
(1) NMICapplies claims paid on covered policies against its first layer aggregate retained loss exposure, and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss.
(2) Less than1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements.
In April 27, 2021, NMIC secured $367.2 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies primarily written from October 1, 2020 to March 31, 2021, through a mortgage insurance-linked notes offering by Oaktown Re VI. The reinsurance coverage amount under the terms of the 2021-1 ILN Transaction decreases from $367.2 million at inception over a 12.5 year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained. For the reinsurance coverage period, NMIC retains the first layer of $163.7 million of aggregate losses and Oaktown Re VI then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount.
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, 2021 | | March 31, 2020 | | | | |
| IIF | | NIW | | IIF | | NIW | | |
| (In Millions) |
| Monthly | $ | 106,920 | | | $ | 23,764 | | | $ | 81,347 | | | $ | 10,461 | | | | | |
| Single | 16,857 | | | 2,633 | | | 17,147 | | | 836 | | | | | |
| Primary | 123,777 | | | 26,397 | | | 98,494 | | | 11,297 | | | | | |
| | | | | | | | | | | |
| Pool | 1,642 | | | — | | | 2,487 | | | — | | | | | |
| Total | $ | 125,419 | | | $ | 26,397 | | | $ | 100,981 | | | $ | 11,297 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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, primaryMarch 31, 2021, NIW increased 4%134%, 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, 2020, 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 and single premium policy volume. production tied to growth in the size of the total mortgage insurance market, as well as the increased penetration of existing customer accounts and new customer account activations.
For the three and nine months ended September 30, 2017,March 31, 2021, monthly premium NIW increased 16% and 14%, respectively, compared to the same periods a year ago, driven primarily by the growth of our customer base.
For the nine months ended September 30, 2017, 80%polices accounted for 90% of our NIW, relatedcompared to monthly premium policies.93% for the three months ended March 31, 2020. As of September 30, 2017,March 31, 2021, monthly premium policies accounted for 66%86% of our primary IIF, as compared to 60%83% at DecemberMarch 31, 2016 and 57% at September 30, 2016. We expect the break-down of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF to continue to trend toward our current NIW mix over time. Our total2020.
Total IIF increased 45% as of September 30, 201724% at March 31, 2021 compared to September 30, 2016,March 31, 2020, primarily because of ourdue to the NIW generated between such measurement dates, and higherpartially offset by the run-off of in-force policies. Our persistency rate decreased to 52% at March 31, 2021 from 72% at March 31, 2020, reflecting the impact of our policies in force.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 | 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 premiums written and earned are reported net of reinsurance. | | | | | | | | | | | | | | | |
| Primary and pool premiums written and earned | For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| (In Thousands) |
| Net premiums written | $ | 115,815 | | | $ | 91,371 | | | | | |
| Net premiums earned | 105,879 | | | 98,717 | | | | | |
For the three and nine months ended September 30, 2017,March 31, 2021, net premiums written increased 419% and 27%, respectively, and net premiums earned increased 40% and 49%7%, respectively, compared to the same periods in 2016.three months ended March 31, 2020. The increasesgrowth in net premiums written areand earned were primarily due to the growth of our IIF and increased 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 increased cessions under the decreaseQSR and ILN Transactions. The accelerated rate of growth in single premium NIW. The increasesnet premiums written over growth in net premiums earned are primarilyis due to growthincrease in our monthlysingle policy production and IIF, partially offset by cessions underincrease in earnings on cancellations during the 2016 QSR Transaction and 2017 ILN Transaction and, compared to the same periods in 2016, reductions in our single premium policy production and earningsthree months ended March 31, 2021.
from cancellations. Pool premiums written and earned for the three and nine months ended September 30, 2017March 31, 2021 and 2020, were $0.9$0.5 million and $2.9$0.7 million, respectively, before the effects ofgiving effect to the 2016 QSR Transaction.Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the datedates and for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary portfolio trends | As of and for the three months ended |
| March 31, 2021 | | December 31, 2020 | | September 30, 2020 | | June 30, 2020 | | March 31, 2020 |
| ($ Values In Millions, except as noted below) |
| New insurance written | $ | 26,397 | | | $ | 19,782 | | | $ | 18,499 | | | $ | 13,124 | | | $ | 11,297 | |
| Percentage of monthly premium | 90 | % | | 90 | % | | 89 | % | | 91 | % | | 93 | % |
| Percentage of single premium | 10 | % | | 10 | % | | 11 | % | | 9 | % | | 7 | % |
| New risk written | $ | 6,531 | | | $ | 4,868 | | | $ | 4,577 | | | $ | 3,260 | | | $ | 2,897 | |
Insurance-in-force (1) | 123,777 | | | 111,252 | | | 104,494 | | | 98,905 | | | 98,494 | |
| Percentage of monthly premium | 86 | % | | 86 | % | | 85 | % | | 84 | % | | 83 | % |
| Percentage of single premium | 14 | % | | 14 | % | | 15 | % | | 16 | % | | 17 | % |
Risk-in-force (1) | $ | 31,206 | | | $ | 28,164 | | | $ | 26,568 | | | $ | 25,238 | | | $ | 25,192 | |
Policies in force (count) (1) | 436,652 | | | 399,429 | | | 381,899 | | | 372,934 | | | 376,852 | |
Average loan size ($ value in thousands) (1) | $ | 283 | | | $ | 279 | | | $ | 274 | | | $ | 265 | | | $ | 261 | |
Coverage percentage (2) | 25.2 | % | | 25.3 | % | | 25.4 | % | | 25.5 | % | | 25.6 | % |
Loans in default (count) (1) | 11,090 | | | 12,209 | | | 13,765 | | | 10,816 | | | 1,449 | |
Default rate (1) | 2.54 | % | | 3.06 | % | | 3.60 | % | | 2.90 | % | | 0.38 | % |
Risk-in-force on defaulted loans (1) | $ | 785 | | | $ | 874 | | | $ | 1,008 | | | $ | 799 | | | $ | 84 | |
Net premium yield (3) | 0.36 | % | | 0.37 | % | | 0.39 | % | | 0.40 | % | | 0.41 | % |
| Earnings from cancellations | $ | 9.9 | | | $ | 11.7 | | | $ | 12.6 | | | $ | 15.5 | | | $ | 8.6 | |
Annual persistency (4) | 51.9 | % | | 55.9 | % | | 60.0 | % | | 64.1 | % | | 71.7 | % |
Quarterly run-off (5) | 12.5 | % | | 12.5 | % | | 13.1 | % | | 12.9 | % | | 8.0 | % |
|
| | | | | | | | | | | | | | | | | | | |
| 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 | % |
(2) Calculated as end of period RIF divided by end of period IIF.
| |
(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. |
(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 twelve-month period.
(5) Defined as the percentage of IIF that is no longer on our books after a given 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, 2021 | | March 31, 2020 | | | | |
| (In Millions) |
| IIF, beginning of period | $ | 111,252 | | | $ | 94,754 | | | | | |
| NIW | 26,397 | | | 11,297 | | | | | |
| Cancellations, principal repayments and other reductions | (13,872) | | | (7,557) | | | | | |
| IIF, end of period | $ | 123,777 | | | $ | 98,494 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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, 2021 | | As of March 31, 2020 |
| IIF | | RIF | | IIF | | RIF |
| (In Millions) |
| March 31, 2021 | $ | 26,296 | | | $ | 6,508 | | | $ | — | | | $ | — | |
| 2020 | 53,650 | | | 13,397 | | | 11,236 | | | 2,882 | |
| 2019 | 20,402 | | | 5,342 | | | 39,485 | | | 10,259 | |
| 2018 | 8,074 | | | 2,057 | | | 17,545 | | | 4,464 | |
| 2017 | 6,700 | | | 1,678 | | | 13,656 | | | 3,398 | |
| 2016 and before | 8,655 | | | 2,224 | | | 16,572 | | | 4,189 | |
| | | | | | | |
| Total | $ | 123,777 | | | $ | 31,206 | | | $ | 98,494 | | | $ | 25,192 | |
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-incomeDTI 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, 2021 | | March 31, 2020 | | | | |
| (In Millions) |
| >= 760 | $ | 12,914 | | | $ | 6,290 | | | | | |
| 740-759 | 5,312 | | | 1,615 | | | | | |
| 720-739 | 3,963 | | | 1,579 | | | | | |
| 700-719 | 2,358 | | | 1,038 | | | | | |
| 680-699 | 1,360 | | | 565 | | | | | |
| <=679 | 490 | | | 210 | | | | | |
| Total | $ | 26,397 | | | $ | 11,297 | | | | | |
| Weighted average FICO | 755 | | | 757 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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, 2021 | | March 31, 2020 | | | | |
| (In Millions) |
| 95.01% and above | $ | 2,451 | | | $ | 721 | | | | | |
| 90.01% to 95.00% | 11,051 | | | 5,009 | | | | | |
| 85.01% to 90.00% | 7,848 | | | 4,082 | | | | | |
| 85.00% and below | 5,047 | | | 1,485 | | | | | |
| Total | $ | 26,397 | | | $ | 11,297 | | | | | |
| Weighted average LTV | 91.0 | % | | 91.3 | % | | | | |
| | | | | | | | | | | | | | | |
| Primary NIW by purchase/refinance mix | For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| (In Millions) |
| Purchase | $ | 17,909 | | | $ | 7,991 | | | | | |
Refinance | 8,488 | | | 3,306 | | | | | |
| Total | $ | 26,397 | | | $ | 11,297 | | | | | |
|
| | | | | | | | | | | | | | |
| 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, 2021 | | March 31, 2020 |
| ($ Values In Millions) |
| >= 760 | $ | 63,919 | | | 52 | % | | $ | 47,340 | | | 48 | % |
| 740-759 | 20,537 | | | 16 | | | 16,060 | | | 16 | |
| 720-739 | 17,167 | | | 14 | | | 14,002 | | | 14 | |
| 700-719 | 11,536 | | | 9 | | | 10,518 | | | 11 | |
| 680-699 | 7,329 | | | 6 | | | 6,879 | | | 7 | |
| <=679 | 3,289 | | | 3 | | | 3,695 | | | 4 | |
| Total | $ | 123,777 | | | 100 | % | | $ | 98,494 | | | 100 | % |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Primary RIF by FICO | As of |
| March 31, 2021 | | March 31, 2020 |
| ($ Values In Millions) |
| >= 760 | $ | 15,920 | | | 51 | % | | $ | 12,076 | | | 48 | % |
| 740-759 | 5,214 | | | 17 | | | 4,121 | | | 16 | |
| 720-739 | 4,378 | | | 14 | | | 3,626 | | | 14 | |
| 700-719 | 2,981 | | | 9 | | | 2,696 | | | 11 | |
| 680-699 | 1,896 | | | 6 | | | 1,760 | | | 7 | |
| <=679 | 817 | | | 3 | | | 913 | | | 4 | |
| Total | $ | 31,206 | | | 100 | % | | $ | 25,192 | | | 100 | % |
| | | | | | | |
|
| | | | | | | | | | | | | |
| 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 IIF by LTV | As of |
| March 31, 2021 | | March 31, 2020 |
| ($ Values In Millions) |
| 95.01% and above | $ | 10,616 | | | 9 | % | | $ | 8,838 | | | 9 | % |
| 90.01% to 95.00% | 54,832 | | | 44 | | | 46,318 | | | 47 | |
| 85.01% to 90.00% | 40,057 | | | 32 | | | 31,729 | | | 32 | |
| 85.00% and below | 18,272 | | | 15 | | | 11,609 | | | 12 | |
| Total | $ | 123,777 | | | 100 | % | | $ | 98,494 | | | 100 | % |
| | | | | | | |
|
| | | | | | | | | | | | | |
| 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 LTV | As of |
| March 31, 2021 | | March 31, 2020 |
| ($ Values In Millions) |
| 95.01% and above | $ | 3,106 | | | 10 | % | | $ | 2,478 | | | 10 | % |
| 90.01% to 95.00% | 16,139 | | | 52 | | | 13,587 | | | 54 | |
| 85.01% to 90.00% | 9,818 | | | 31 | | | 7,767 | | | 31 | |
| 85.00% and below | 2,143 | | | 7 | | | 1,360 | | | 5 | |
| Total | $ | 31,206 | | | 100 | % | | $ | 25,192 | | | 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 | Primary RIF by Loan Type | As of |
| | September 30, 2017 | | September 30, 2016 | | March 31, 2021 | | March 31, 2020 |
| | | | | | | | |
| Fixed | 98 | % | | 98 | % | Fixed | 99 | % | | 98 | % |
| Adjustable rate mortgages: | | | | |
| Adjustable rate mortgages | | Adjustable rate mortgages | |
| Less than five years | — |
| | — |
| Less than five years | — | | | — | |
| Five years and longer | 2 |
| | 2 |
| Five years and longer | 1 | | | 2 | |
| Total | 100 | % | | 100 | % | Total | 100 | % | | 100 | % |
The table below showspresents selected primary portfolio statistics, by book year, as of September 30, 2017.March 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2021 | | |
| 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 | | | $ | 10 | | | 6 | % | | 655 | | | 66 | | | 2 | | | 1 | | | 0.4 | % | | 0.5 | % | | 3.0 | % |
| 2014 | 3,451 | | | 414 | | | 12 | % | | 14,786 | | | 2,452 | | | 114 | | | 48 | | | 4.2 | % | | 1.1 | % | | 4.6 | % |
| 2015 | 12,422 | | | 2,529 | | | 20 | % | | 52,548 | | | 13,334 | | | 541 | | | 113 | | | 3.2 | % | | 1.2 | % | | 4.1 | % |
| 2016 | 21,187 | | | 5,702 | | | 27 | % | | 83,626 | | | 27,332 | | | 1,256 | | | 122 | | | 2.8 | % | | 1.6 | % | | 4.6 | % |
| 2017 | 21,582 | | | 6,700 | | | 31 | % | | 85,897 | | | 32,499 | | | 1,972 | | | 84 | | | 4.4 | % | | 2.4 | % | | 6.1 | % |
| 2018 | 27,295 | | | 8,074 | | | 30 | % | | 104,043 | | | 38,090 | | | 2,679 | | | 64 | | | 8.5 | % | | 2.6 | % | | 7.0 | % |
| 2019 | 45,141 | | | 20,402 | | | 45 | % | | 148,423 | | | 77,278 | | | 3,276 | | | 9 | | | 14.1 | % | | 2.2 | % | | 4.2 | % |
| 2020 | 62,702 | | | 53,650 | | | 86 | % | | 186,174 | | | 163,626 | | | 1,247 | | | — | | | 8.3 | % | | 0.7 | % | | 0.8 | % |
| 2021 | 26,397 | | | 26,296 | | | 100 | % | | 82,232 | | | 81,975 | | | 3 | | | — | | | — | % | | — | % | | — | % |
| Total | $ | 220,339 | | | $ | 123,777 | | | | | 758,384 | | | 436,652 | | | 11,090 | | | 441 | | | | | | | |
(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, our RIF continues to be relatively more concentrated in California, primarily as a result of the location and timing of the acquisition of new customers. The distribution of riskour primary RIF as of September 30, 2017March 31, 2021 is not necessarily representative of the geographic distribution we expect in the future.
| | | | | | | | | | | |
| Top 10 primary RIF by state | As of |
| March 31, 2021 | | March 31, 2020 |
| California | 10.8 | % | | 11.5 | % |
| Texas | 9.5 | | | 8.2 | |
| Florida | 7.9 | | | 5.9 | |
| Virginia | 5.0 | | | 5.3 | |
| Colorado | 4.1 | | | 3.6 | |
| Maryland | 3.8 | | | 3.4 | |
| Illinois | 3.7 | | | 3.8 | |
| Washington | 3.5 | | | 3.3 | |
| Georgia | 3.3 | | | 2.7 | |
| Pennsylvania | 3.3 | | | 3.7 | |
| Total | 54.9 | % | | 51.4 | % |
|
| | | | | |
| 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 isare 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.loans, and the level of reinsurance coverage maintained against insured exposures.
Reserves for claims and allocated claimsclaim expenses are established for mortgage loans that are in default. A loan defaults,is considered to be in default as of the payment date at which we refera borrower has missed the preceding two or more consecutive monthly payments. We establish reserves for loans that have been reported to us in default by servicers, referred to as case reserves, whenand additional loans that 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 defaultsestimate (based on actuarial review and other factors) to be in default that have been incurred but have not yet been reported to us by loan servicers, based upon historical reporting trends, and establish IBNR reserves for those estimates.referred to as IBNR. We also establish reserves for unallocated claimsclaim expenses, not associated with a specific claim. The claims expenses consist ofwhich represent the estimated cost of the claim administration process, including legal and other fees as well asand other general expenses of administering the claimsclaim settlement process. Reserves are not established for future claims on insured loans which are not currently reported or which we estimate are not currently in default.
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 and ILN Transactions, as applicable under each treaty. We willhave not cedeyet ceded any reserves to the reinsurer under the 2017 ILN Transaction unless losses exceed our retained coverage layer. Reserves are not established for future claims on insured loans which are not currently in default.
We expect our insuranceTransactions as incurred claims and claims expenses to be relatively low in the near-term. Based on each respective reference pool remain within 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. Asretained coverage layer of September 30, 2017, over 95% of our primary IIF was related to business written since January 1, 2015. Additionally, oureach transaction. 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. Although the claims experience on new primary insurance written by us to date has been favorable, 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."
We insure mortgages for homes in areas that have been impacted by recent natural disasters including hurricanes Harveyor global pandemics, and Irmaany federal, state or local governmental response thereto.
Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. 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. The effectiveness of forbearance programs is enhanced by the firesavailability of various repayment and loan modification options which allow borrowers to amortize or, in Northern California. We do not provide coveragecertain instances, outright defer payments otherwise due during the forbearance period over an extended length of time.
In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. At March 31, 2021, we established lower reserves for property or casualty claims related to physical damage of a home underpinning an insured mortgage. We anticipatedefaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs 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 defaultaid affected borrowers and cure rate of the NOD population. In the event of natural disasters,drive higher cure rates are influenced by the adequacy of homeowners and flood insurance carried on a related property, and a borrower's accesssuch defaults than we would otherwise expect to aidexperience on similarly situated loans that did not benefit from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas.broad-based assistance programs.
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claimsclaim expenses.
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| (In Thousands) |
| Beginning balance | $ | 90,567 | | | $ | 23,752 | | | | | |
Less reinsurance recoverables (1) | (17,608) | | | (4,939) | | | | | |
| Beginning balance, net of reinsurance recoverables | 72,959 | | | 18,813 | | | | | |
| | | | | | | |
| Add claims incurred: | | | | | | | |
| Claims and claim expenses incurred: | | | | | | | |
Current year (2) | 10,557 | | | 7,558 | | | | | |
Prior years (3) | (5,595) | | | (1,861) | | | | | |
| Total claims and claim expenses incurred | 4,962 | | | 5,697 | | | | | |
| | | | | | | |
| Less claims paid: | | | | | | | |
| Claims and claim expenses paid: | | | | | | | |
Current year (2) | 12 | | | — | | | | | |
Prior years (3) | 492 | | | 1,224 | | | | | |
| | | | | | | |
| Total claims and claim expenses paid | 504 | | | 1,224 | | | | | |
| | | | | | | |
| Reserve at end of period, net of reinsurance recoverables | 77,417 | | | 23,286 | | | | | |
Add reinsurance recoverables (1) | 18,686 | | | 6,193 | | | | | |
| Ending balance | $ | 96,103 | | | $ | 29,479 | | | | | |
|
| | | | | | | | | | | | | | | |
| | 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, included in "Other Assets" on the Condensed Consolidated Balance Sheets.Transactions. 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 and included $5.3 million attributed to net case reserves and $5.3 million attributed to net IBNR reserves for the three months ended March 31, 2021 and $6.0 million attributed to net case reserves and $1.6 million attributed to net IBNR reserves for the three months ended March 31, 2020.
(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.and included $0.6 million attributed to net case reserves and $5.0 million attributed to net IBNR reserves for the three months ended March 31, 2021 and $0.6 million attributed to net case reserves and $1.3 million attributed to net IBNR reserves for the three months ended March 31, 2020
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs fordefaults occurring in current and prior years, including IBNR reserves. The amountreserves and is presented net of claims incurred relating to 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 ongoing analysis of recent loss development trends.reinsurance. We may increase or decrease our originalclaim estimates and reserves as we learn additional information about individual defaults and claimsdefaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $83.0 million related to prior year defaults remained as of March 31, 2021.
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, 2021 | | March 31, 2020 | | | | |
| Beginning default inventory | 12,209 | | | 1,448 | | | | | |
| Plus: new defaults | 1,767 | | | 512 | | | | | |
| Less: cures | (2,868) | | | (475) | | | | | |
| Less: claims paid | (16) | | | (34) | | | | | |
| Less: claims denied | (2) | | | (2) | | | | | |
| Ending default inventory | 11,090 | | | 1,449 | | | | | |
|
| | | | | | | | | | | |
| | 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, 2021 compared to September 30, 2016 wasMarch 31, 2020, is primarily dueattributable to an increase in the number of policies in forceCOVID-19 outbreak as borrowers have faced increasing challenges and expected loss developmentchosen to access the forbearance program for federally backed loans codified under the CARES Act and other similar assistance programs made available by private lenders. At March 31, 2021, 9,988 of our portfolio. 11,090 ending default inventory were in a COVID-19 related forbearance program.
The following table provides details of our claims paid, before giving effect to claims paidceded under the 2016 QSR Transaction,Transactions and ILN Transactions, for the periods indicated.
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| ($ In Thousands) |
Number of claims paid (1) | 16 | | | 34 | | | | | |
| Total amount paid for claims | $ | 606 | | | $ | 1,503 | | | | | |
Average amount paid per claim | $ | 38 | | | $ | 44 | | | | | |
Severity (2) | 61 | % | | 83 | % | | | | |
(1) Count includes one claim settled without payment in each of the three and nine months ended September 30, 2017March 31, 2021 and September 30, 2016.2020.
|
| | | | | | | | | | | | | | | |
| | 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, 2021 decreased compared to the same periodsthree months ended September 30, 2016 is due to anMarch 31, 2020, despite the growth and seasoning of our insured portfolio, and significant increase in our default inventory. We expect the severity of claims we receive to be between 85% and 95%population, primarily as a result of the coverage amount. We believeforbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID outbreak and codified under the CARES Act.Such forbearance and foreclosure programs have extended, and may ultimately interrupt, the timeline over which loans would otherwise progress through the default cycle to a paid claim.
Our claims severity for the three months ended March 31, 2021 was 61%, compared to 83% for the three months ended March 31, 2020. Claims severity for the three months ended March 31, 2021 benefited from the resiliency of the housing market and broad national house price appreciation. An increase in the value of the homes collateralizing the mortgages we insure provides additional equity support to our risk exposure and raises the prospect of a third-party sale of a foreclosed property, which can mitigate theseverity is below long-term expectations due of our settled claims.
The following table provides detail on our average reserve per default, before giving effect to home price appreciation in recent periods.reserves ceded under the QSR Transactions, as of the dates indicated.
| | | | | | | | | | | |
| Average reserve per default: | As of March 31, 2021 | | As of March 31, 2020 |
| (In Thousands) |
Case (1) | $ | 7.9 | | | $ | 18.6 | |
IBNR (1)(2) | 0.8 | | | 1.7 | |
| Total | $ | 8.7 | | | $ | 20.3 | |
|
| | | | | | | |
| 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, 2021 decreased from March 31, 2020, primarily due to new COVID-19 related defaults. At March 31, 2021, we established lower reserves that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at March 31, 2021, our total reserve position increased substantially due to the increase in the size of our default 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 adjustmentswhich 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, 20172021 that NMIC fully compliedwas in full compliance with the PMIERs as of December 31, 2016.2020. 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, 2021 | | March 31, 2020 |
| (In Thousands) |
| Available assets | $ | 1,809,589 | | | $ | 1,069,695 | |
| Risk-based required assets | 1,261,015 | | | 912,321 | |
|
| | | | | | | | | |
| | 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 $1.8 billion at March 31, 2021, compared to $1.1 billion at March 31, 2020. In June 2020, NMIH completed the sale of 15.9 million shares of common stock raising net proceeds of approximately $220 million and the sale of the $400 million aggregate principal amount of senior secured notes. NMIH contributed approximately $445 million of capital to NMIC following completion of the Notes and equity offerings. The $740 million increase in NMIC's available assets as of September 30, 2017 compared to September 30, 2016 is between the dates presented was driven by the NMIH capital contribution and NMIC's positive cash flow from operations and amortization of unearned premium reserves. during the intervening period.
The increase in therisk-based required asset amount is between the dates presented was primarily due to the growth of our gross RIF, and increase in our default inventory related to the onset of the COVID-19 pandemic, partially offset by the increased cession of risk relating tounder our third-party reinsurance agreements.See "- COVID-19 Developments," above.
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, NMIC's primary RIF, net of reinsurance, was approximately $6.2 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory surplus of $502.6 million (including contingency reserves) as of September 30, 2017, NMIC's RTC ratio was 12.3:1. Re One had total statutory capital of $33.9 million as of September 30, 2017, with a RTC ratio of 0.7:1. We continuously monitor our compliance with state capital requirements.
In August 2017, Moody's Investors Service (Moody's) re-affirmed its "Ba1" financial strength rating for NMIC and its B2 rating of NMIH's $150 million Term Loan. Moody's outlook for both ratings changed from " stable" to " positive." In July 2017, S&P re-affirmed its "BBB-" financial strength and long-term counter-party credit ratings on NMIC and its"BB-" long-term counter-party credit rating on NMIH. S&P's outlook for both companies is "positive."
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 IT 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 financial crisis.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, premium rates and other charges, loan eligibility requirements, the cancelability of private coverage, loan size limits and the relative ease of use of private MI products compared to governmentalgovernment MI alternatives.
LIBOR Transition
On March 5, 2021, ICE Benchmark Administration Limited (“IBA”), the administrator for LIBOR, confirmed it would permanently cease the publication of overnight, one-month, three-month, six-month and twelve-month USD LIBOR settings in their current form after June 30, 2023. The U.K. Financial Conduct Authority ("FCA"), the regulator of IBA, announced on the same day that it intends to stop requiring panel banks to continue to submit to LIBOR and all USD LIBOR settings in their current form will either cease to be provided by any administrator or no longer be representative after June 30, 2023. We have exposure to USD LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio, and our 2020 Revolving Credit Facility and certain ILN Transactions that require LIBOR-based payments. We are in the process of reviewing our LIBOR-based contracts and transitioning, as necessary and applicable, to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we cannot currently estimate the impact such transition will have on our operations or financial results.
Consolidated Results of Operations
| | | | | | | | | | | | | | | |
| Consolidated statements of operations | Three months ended | | |
| March 31, 2021 | | March 31, 2020 | | | | |
| Revenues | ($ in thousands, except for per share data) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Net premiums earned | $ | 105,879 | | | $ | 98,717 | | | | | |
| Net investment income | 8,814 | | | 8,104 | | | | | |
| Net realized investment losses | — | | | (72) | | | | | |
| Other revenues | 501 | | | 900 | | | | | |
| Total revenues | 115,194 | | | 107,649 | | | | | |
| Expenses | | | | | | | |
| Insurance claims and claim expenses | 4,962 | | | 5,697 | | | | | |
| Underwriting and operating expenses | 34,065 | | | 32,277 | | | | | |
| Service expenses | 591 | | | 734 | | | | | |
| Interest expense | 7,915 | | | 2,744 | | | | | |
| Loss (gain) from change in fair value of warrant liability | 205 | | | (5,959) | | | | | |
| Total expenses | 47,738 | | | 35,493 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Income before income taxes | 67,456 | | | 72,156 | | | | | |
| Income tax expense | 14,565 | | | 13,885 | | | | | |
| Net income | $ | 52,891 | | | $ | 58,271 | | | | | |
| | | | | | | |
| Earnings per share - Basic | $ | 0.62 | | | $ | 0.85 | | | | | |
| Earnings per share - Diluted | $ | 0.61 | | | $ | 0.74 | | | | | |
| | | | | | | |
Loss ratio(1) | 4.7 | % | | 5.8 | % | | | | |
Expense ratio(2) | 32.2 | % | | 32.7 | % | | | | |
| Combined ratio | 36.9 | % | | 38.5 | % | | | | |
|
| | | | | | | | | | | | | | | |
| 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 | % |
| | | | | | | | | | | | | | | |
| Three months ended | | |
Non-GAAP financial measures (3) | March 31, 2021 | | March 31, 2020 | | | | |
| ($ in thousands, except for per share data) |
| Adjusted income before tax | $ | 68,039 | | | $ | 66,743 | | | | | |
| Adjusted net income | 53,395 | | | 52,743 | | | | | |
| Adjusted diluted EPS | 0.62 | | 0.75 | | | | |
| | | | | | | |
| | | | | | | |
(1)Loss ratio is calculated by dividing the provision for insurance claims and claimsclaim expenses by net premiums earned.
(2)Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
(3) See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.
Revenues
ForNet premiums earned were $105.9 million for the three and nine months ended September 30, 2017, net premiums earned increased $12.7 million or 40% and $38.0 million or 49%, respectively,March 31, 2021 compared to $98.7 million for the corresponding three and nine months ended September 30, 2016.March 31, 2020. The increase in both periods isfrom period-to-period was 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 the effects of the 2016increased cessions under our QSR Transaction and 2017 ILN Transaction and reductions in our single policy production and earnings from early policy cancellations.Transactions.
ForNet investment income was $8.8 million for the three and nine months ended September 30, 2017, net investment income increased $0.6 million and $1.8 million, respectively,March 31, 2021 compared to $8.1 million for the three and nine months ended September 30, 2016, due to anMarch 31, 2020. The increase was driven by growth in the size of and improved yields on our total investment portfolio.portfolio, partially
offset by a decline in book yield tied to the prevailing interest rate and credit spread environment.
Other revenues were $0.5 million for the three months ended March 31, 2021, compared to $0.9 million for the three months ended March 31, 2020. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The decline in other revenues relates to a decrease 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 $1.4were $5.0 million for the three and nine months ended September 30, 2017, respectively,March 31, 2021, compared to $5.7 million for the three and nine months ended September 30, 2016, as a result of an increase in our NODs, primarily due toMarch 31, 2020. Insurance claims and claim expenses decreased period-to-period despite an increase in the number of policiesnew defaults reported during the three months ended March 31, 2021, primarily because we established lower reserves per default for loans that we consider to be impaired in force year-over-yearconnection with the COVID pandemic given our expectation that forbearance, repayment and expected loss development of our portfolio. The increase inmodification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. Insurance claims and claimsclaim expenses forduring the three and nine months ended September 30, 2017 was offset by the partialMarch 31, 2021 also benefited from cure activity and a release of reserves relatedpreviously held against certain loans that defaulted prior to prior year defaults.the onset of the COVID pandemic.
Underwriting and operating expenses increased $0.6were $34.1 million or 3%, and $8.7 million or 12% for the three and nine months ended September 30, 2017, respectively,March 31, 2021, compared to $32.3 million for the three and nine months ended September 30, 2016. Employee compensation accounts forMarch 31, 2020. The increase primarily relates to the majorityrecognition of our operating expenses. We increasedpreviously deferred policy acquisition costs taken in connection with in-force portfolio run-off, partially offset by reductions in payroll, travel and entertainment, and office administrative expenses as a result of the size of our workforce from 273 employees as of September 30, 2016 to 298 employees as of September 30, 2017 to support the growth of our business, particularly our sales and operating functions.COVID-19 outbreak. Underwriting and operating expenses for the nine months ended September 30, 2017 also reflect $4.8 millionincluded capital market reinsurance transaction costs of operating expenses related to the 2017 ILN Transaction and amendment of the Credit Agreement.
We incurred interest expense related to the Term Loan of $3.4$0.4 million and $10.1$0.5 million, for the three and nine months ended September 30, 2017, respectively, compared to interest expense of $3.7 millionMarch 31, 2021 and $11.12020, respectively.
Service expenses were $0.6 million for the three and nine months ended September 30, 2016, respectively. Interest expense declinedMarch 31, 2021, compared to $0.7 million for the three months ended March 31, 2020. Service expenses represent third-party costs incurred by NMIS in connection with the amendmentservices it provides. The decline in service expenses was driven by a decrease in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the same periods.
Interest expense was $7.9 million for the three months ended March 31, 2021 compared to $2.7 million for the three months ended March 31, 2020. Interest expense increased due to the increased amount and cost of our Credit Agreement which we completedoutstanding debt following the issuance of the $400 million Notes and retirement of the $150 million 2018 Term Loan in February 2017, which among other items, reduced the interest rate payable on the Term Loan.June 2020. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Term Loan.Debt."
Income Tax
We aretax expense was $14.6 million for the three months ended March 31, 2021 compared to $13.9 million for the three months ended March 31, 2020. The increase in income tax expense was primarily driven by an increase in our effective tax rate. As a U.S. taxpayer, andwe are subject to a statutory U.S. federal corporate income tax rate of 35%21%. 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 areis established based on anour estimated annual effective tax rate for a given year, and reflects the year ending December 31, 2017. We currently pay no regular federal incomeimpact of discrete tax due toeffects in the forecasted utilization of federal net operating loss carryforwards,period in 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.they occur. Our effective tax rate on our pre-tax income was 36.9%21.6% for the three months ended September 30, 2017,March 31, 2021, compared to 1.8%19.2% for the comparable 2016 period. Our effective tax rate on our pre-tax income was 33.3% for the ninethree months ended September 30, 2017, compared toMarch 31, 2020. The increase in our effective tax rate on our pre-tax income of 2.6% forperiod-to-period reflects a decrease in the comparable 2016 period. The difference between our statutorydiscrete tax rate and our effective tax rates forbenefits realized during the three and nine months ended September 30, 2017 is due to a discrete tax benefit associated with excess tax benefits for restricted stock units that were recognized duringMarch 31, 2021 from the periods as a result of the adoption of ASU 2016-09change in the prior quarter.fair value of our warrant liability, and excess share-based compensation realized upon the vesting of RSUs and exercise of stock options. 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 $52.9 million for the three months ended March 31, 2021 compared to $58.3 million for the three months ended March 31, 2020. Adjusted net income was $53.4 million for the three months ended March 31, 2021 compared to $52.7 million for the three months ended March 31, 2020. The decreases in net income from period-to-period was primarily driven by a shift in the impact of the change in the fair value of our warrant liability from a gain during the three months ended March 31, 2020 to a loss during the three months ended March 31, 2021. Our adjusted net income, which excludes the gain or
loss associated with the change in the fair value of the warrant liability, increased during the three months ended March 31, 2021, driven by an increase in total revenues and Basisdecline in insurance claim and claim expenses, partially offset by an increase in our interest expense and effective tax rate.
Diluted EPS was $0.61 for the three months ended March 31, 2021, compared to $0.74 for the three months ended March 31, 2020. Adjusted diluted EPS was $0.62 for the three months ended March 31, 2021, compared to $0.75 for the three months ended March 31, 2020. Diluted and adjusted diluted EPS decreased primarily due to an increase in weighted average diluted shares outstanding in connection with the issuance of Presentation. Immaterial Correction15.9 million shares of Prior Period Amounts" common stock we completed in June 2020.
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods.
| | | | | | | | | | | | | | | |
| Non-GAAP Financial Measure Reconciliations | For the three months ended March 31, | | |
| 2021 | | 2020 | | | | |
| As reported | ($ in thousands, except for per share data) |
| Income before income taxes | $ | 67,456 | | | $ | 72,156 | | | | | |
| Income tax expense | 14,565 | | | 13,885 | | | | | |
| Net income | $ | 52,891 | | | $ | 58,271 | | | | | |
| | | | | | | |
| Adjustments | | | | | | | |
| Net realized investment losses | — | | | 72 | | | | | |
| Loss (gain) from change in fair value warrant liability | 205 | | | (5,959) | | | | | |
| Capital market transaction costs | 378 | | | 474 | | | | | |
| Adjusted income before tax | 68,039 | | | 66,743 | | | | | |
| | | | | | | |
| Income tax expense on adjustments | 79 | | | 115 | | | | | |
| | | | | | | |
| Adjusted net income | $ | 53,395 | | | $ | 52,743 | | | | | |
| | | | | | | |
| Weighted average diluted shares outstanding | 86,487 | | | 70,401 | | | | | |
| | | | | | | |
| Adjusted diluted EPS | $ | 0.62 | | | $ | 0.75 | | | | | |
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 enhances 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 further details.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 September 30, 2017, wenon-vested shares that would otherwise have occurred had approximately $713.4 millionGAAP 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, 2021 | | December 31, 2020 |
| (In Thousands) |
| Total investment portfolio | $ | 1,831,511 | | | $ | 1,804,286 | |
| Cash and cash equivalents | 115,517 | | | 126,937 | |
| Premiums receivable | 52,206 | | | 49,779 | |
| Deferred policy acquisition costs, net | 62,294 | | | 62,225 | |
| Software and equipment, net | 31,298 | | | 29,665 | |
| Prepaid reinsurance premiums | 4,842 | | | 6,190 | |
| | | |
| Reinsurance recoverable | 18,686 | | | 17,608 | |
| Other assets | 71,477 | | | 69,976 | |
| Total assets | $ | 2,187,831 | | | $ | 2,166,666 | |
| Debt | $ | 393,622 | | | $ | 393,301 | |
| | | |
| Unearned premiums | 127,407 | | | 118,817 | |
| Accounts payable and accrued expenses | 57,139 | | | 61,716 | |
| Reserve for insurance claims and claim expenses | 96,103 | | | 90,567 | |
| Reinsurance funds withheld | 7,569 | | | 8,653 | |
| Warrant liability | 4,239 | | | 4,409 | |
| Deferred tax liability, net | 115,150 | | | 112,586 | |
| Other liabilities | 6,294 | | | 7,026 | |
| Total liabilities | 807,523 | | | 797,075 | |
| Total shareholders' equity | 1,380,308 | | | 1,369,591 | |
| Total liabilities and shareholders' equity | $ | 2,187,831 | | | $ | 2,166,666 | |
Total cash and investments including $61.7were $1.9 billion as of March 31, 2021 and December 31, 2020. Cash and investments at March 31, 2021 included $78.2 million held atby NMIH. The increase in total cash and investments from year-end 2016 primarily relates tobetween the respective measurement dates reflects cash generated from operations.operations, partially offset by a decrease in the unrealized gain position of our fixed income portfolio caused by a rise in interest rates.
Net deferred policy acquisition costs were $36.1$62.3 million as of September 30, 2017,March 31, 2021, compared to $30.1$62.2 million atas of December 31, 2016.2020. 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 $4.8 million as of March 31, 2021, compared to $6.2 million as of December 31, 2020. 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.continued amortization of previously ceded unearned premiums.
Reinsurance recoverable was $18.7 million as of March 31, 2021, compared to $17.6 million as of December 31, 2020. The increase was driven by an increase in ceded losses recoverable associated with our QSR Transactions.
Other assets increased to $71.5 million as of March 31, 2021, compared to $70.0 million as of December 31, 2020, primarily driven by a $1.6 million increase in software and equipment. Included in other assets are $46.4 million of tax and loss bonds held by the Company at both March 31, 2021 and December 31, 2020. see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
Unearned premiums increased $8.4 million to $161.3were $127.4 million as of September 30, 2017, primarily dueMarch 31, 2021, compared to $118.8 million as of December 31, 2020. The increase was driven by single premium policy originationoriginations during the period,three months ended March 31, 2021, partially offset by the cancellation of other single premium policies and the amortization through earnings of existing unearned premiums through earnings in accordance with the expiration of risk on the related policies and the cancellation of other single premium policies.
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 $22.0were $57.1 million as of September 30, 2017, from $25.3March 31, 2021, compared to $61.7 million atas of December 31, 2016.2020. The balance consistsdecrease was primarily driven by the payment of an unsettled trade payable related to the purchase of
investment securities at year-end 2020 and the settlement of previously accrued compensation during the three months ended March 31, 2021, partially offset by an increase in accrued and unpaid interest on the Notes.
Reserve for insurance claims and claim expenses was $96.1 million as of March 31, 2021, compared to $90.6 million as of December 31, 2020. Reserve for insurance claims and claim expenses increased at March 31, 2021 despite a decline in the total size of our default population because of an increase in the average case reserve held against previously defaulted loans and the establishment of initial reserves newly defaulted loans during the period. While we have generally established lower reserves per default for loans that we consider to be paid withinimpaired in connection with the next 12 monthsCOVID pandemic, we have increased the initial reserves held for such loans as they have aged in default status. The increase in the reserves for insurance claims and decreased as a resultclaim expenses at March 31, 2021 was partially offset by the release of lower operating accrualsprior year reserves tied to the curing of certain loans that had defaulted prior to the onset of the COVID pandemic. See "- Insurance Claims and lower accrued interest due to a lower interest rate on the Term Loan.Claim Expenses," abovefor further details.
Reinsurance funds withheld, was $33.1 million as of September 30, 2017, representing the net ofwhich represents our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The increase in reinsurance funds withheldTransaction was $7.6 million as of $2.5March 31, 2021, compared to $8.7 million fromas of December 31, 2016, was a result of increased2020. The decrease relates to 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 was $4.2 million at March 31, 2021, compared to $4.4 million at December 31, 2020. The decrease was primarily driven by the exercise of outstanding warrants during the three months ended March 31, 2021, partially offset by the change in Black-Scholes pricing model inputs between the respective measurement dates. 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 was $115.2 million at March 31, 2021 compared to $112.6 million at December 31, 2020. The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve, offset by the change in unrealized gains recorded in other comprehensive income. 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 three months ended March 31, |
| 2021 | | 2020 | | |
| Net cash provided by (used in): | (In Thousands) |
| Operating activities | $ | 85,464 | | | $ | 47,852 | | | |
| Investing activities | (96,447) | | | 25,783 | | | |
| Financing activities | (437) | | | (4,903) | | | |
| Net increase in cash and cash equivalents | $ | (11,420) | | | $ | 68,732 | | | |
|
| | | | | | | |
| Consolidated cash flows | For the nine months ended September 30, |
| | 2017 | | 2016 |
| Net cash (used in) provided by: | (In Thousands) |
| Operating activities | $ | 41,778 |
| | $ | 52,212 |
|
| Investing activities | (66,553 | ) | | (63,714 | ) |
| Financing activities | (2,273 | ) | | (1,293 | ) |
| Net decrease in cash and cash equivalents | $ | (27,048 | ) | | $ | (12,795 | ) |
Net cash provided by operating activities was $41.8$85.5 million for the ninethree months ended September 30, 2017,March 31, 2021, compared to $52.2$47.9 million infor the same period in 2016.three months ended March 31, 2020. The decreaseincrease in cash generated from operating activities was primarily caused by increased operating expenses in connection with employee compensation and benefits costs and higher claims paid due to an increase in our default inventory offsetdriven by growth in net premiums written.written, with further increase tied to a decline in claims and cash interest paid from period-to-period.
Cash used in investing activities for the periods presentedthree months ended March 31, 2021 was driven by the purchase of fixed and short-term maturities, during those periods.with cash provided by operating activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash provided by investing activities for the three months ended March 31, 2020 represent the net cash proceeds from maturities of fixed maturity investments and the sales of short-term investments, partially offset by purchases. We paused reinvestment activities at the onset of the COVID-19 pandemic in the first quarter of 2020 to bolster liquidity within our investment portfolio.
Cash used in financing activities was $0.4 million for the three months ended March 31, 2021, compared to cash used in financing activities of $4.9 million for the three months ended March 31, 2020. 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:for (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of principal andthe interest related to the Term Loan;Notes 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, 2021, NMIH had $61.7$78.2 million of cash and investments. NMIH's principal source of operatingnet cash is investment income and inincome. NMIH also has access to $110 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. Re One also has the capacity, under Wisconsin law, to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. In the future, could include dividendsNMIH may benefit from ordinary course dividend capacity available from NMIC if available and permitted under law and by the GSEs.as well.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, butwith such approval may be changedapprovals subject to change or revokedrevocation at any time. WithAmong such agreements, the Wisconsin OCI's approval, NMIH began allocatingOCI has approved the allocation of interest expense on its Term Loanthe Notes and the 2020 Revolving Credit Facility to NMIC into the first quarter of 2017, consistent with the benefitsextent proceeds from such offering and facility are distributed to NMIC received when NMIH down-streamed the loan proceedsor used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
NMIC's abilityThe Notes mature on June 19, 2025 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. The 2020 Revolving Credit Facility matures on February 22, 2023 and accrues interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum 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, in each case based on the applicable corporate credit rating at the time. Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations.
Under the 2020 Revolving Credit Facility, NMIH is required to pay dividendsa quarterly commitment fee on the average daily undrawn amount of 0.175% to NMIH is0.525%, based on the applicable corporate credit rating at the time. As of March 31, 2021, the applicable commitment fee was 0.35%.
We are subject to insurance department notice or approval.certain covenants under the Notes and the 2020 Revolving Credit Facility (as defined in the Credit Agreement). Under the Notes (as defined in the Indenture), we are subject to a maximum debt-to-total capitalization ratio of 35%. Under the 2020 Revolving Credit Facility (as defined in the Credit Agreement), we are subject to a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, a requirement to maintain compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of March 31, 2021.
NMIC and Re One are subject to 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 12twelve 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-monthtwelve-month period ending the preceding December 31. NMICRe One has never paid anythe capacity to pay $1.6 million of aggregate ordinary dividends to NMIH.NMIH during the twelve-month period ending December 31, 2021. NMIC reported a statutory net loss for the twelve monthsyear ended December 31, 20162020 and currently cannotdoes not have the capacity to pay dividends to NMIH during the twelve-month period ended December 31, 2021 without prior approval from the Wisconsin OCI.Since inception, neither NMIC nor Re One have paid any dividends to NMIH without theNMIH.
As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of the Wisconsin OCI. Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs, prior to taking any of the following actions: (i) pay dividends, make payments of principal or increase payments of
interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by the approved insurer, make any other payments, unless related to expenses incurred in the normal course of business or to commitments made prior to the guidance effective date, or pledge or transfer asset(s) to any affiliate or investor, or (ii) enter into any new arrangements or alter any existing arrangements under tax sharing and intercompany expense-sharing agreements other than renewals and extensions of agreements in effect prior to the guidance effective date. We cannot be certain that the GSEs will not amend the terms, or extend the duration, of this prior approval requirement beyond its current expiration of June 30, 2021.
NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. 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 decisionrequirements (respectively, as defined therein).
As an approved mortgage insurer and Wisconsin-domiciled carrier, NMIC is required to access the reinsurance markets. NMIH may require liquidity to fund the capital needs of its insurance subsidiaries.
In November 2015, NMIH entered into the Credit Agreement for the Term Loan. On February 10, 2017, NMIH amended the Credit Agreement, (Amendment No. 1) to reduce the interest rate and extend the maturity datesatisfy financial and/or capitalization requirements stipulated by each of the Term Loan from November 10, 2018 to November 10, 2019.GSEs and the Wisconsin OCI. The amended Term Loan bears interest atfinancial requirements stipulated by the Eurodollar Rate, as definedGSEs are outlined in the Credit Agreement andPMIERs. Under the PMIERs, NMIC must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a 1.00%minimum floor plusof $400 million. At March 31, 2021, we reported $1,810 million available assets against $1,261 million risk-based required assets for a $549 million of "excess" funding position
The risk-based required asset amount under PMIERs is determined at an annual margin rate of 6.75%, payable monthly or quarterlyindividual policy-level based on our interest rate election. The Credit Agreement contains various restrictive covenantsthe 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 FEMA to be a Major Disaster zone. In June 2020, the GSEs issued guidance restated in each of September and December 2020) on the risk-based treatment of loans affected by the COVID-19 crisis. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required financial ratiosasset haircut for the duration of the forbearance period and tests (which were not modifiedsubsequent repayment plan or trial modification period.
NMIC's PMIERs minimum risk-based required asset amount is also adjusted for its reinsurance transactions (as approved by Amendment No. 1) that we arethe GSEs). Under NMIC's quota share reinsurance treaties, it receives credit for the PMIERs risk-based required to meet or maintain. These covenants include, but are not limitedasset amount on ceded RIF. As its gross PMIERs risk-based required asset amount on ceded RIF increases, the PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under NMIC's ILN transactions, it generally receives credit for the PMIERs risk-based required asset amount on ceded RIF to the following:extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction.
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 debt-to-total capitalization ratio (as defined therein) of 35%, maximumRIF to statutory capital (commonly referred to as 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.
As of March 31, 2021, NMIC's performing primary RIF, net of reinsurance, was approximately $22.8 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction.Based on NMIC's total statutory capital of $1.7 billion (including contingency reserves) as of March 31, 2021, NMIC's RTC ratio was 13.4:1 Re One had total statutory capital of $37.3 million as of March 31, 2021 and a RTC ratio of 22.0:1.0, minimum1.8:1
NMIC's principal sources of liquidity (as defined therein)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, 2021, NMIC had $1.8 billion of $27.4cash and investments, including $86 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 (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of September 30, 2017, compliance withtax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the PMIERs financial requirements (subjecttwelve-month period ended March 31, 2021, NMIC generated $283million of cash flow from operations and received an additional $327 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any GSE-approved waivers)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 minimum shareholders' equity requirements. In October 2017, NMIH further amendeddue at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the Credit Agreementbreadth and duration of forbearance programs available to remove
borrowers, separate foreclosure moratoriums that have been enacted at a covenant that required NMIH to maintain liquidity (as defined therein) in an aggregate amount no less than all remaining interest payments due underlocal, state and federal level, and the Term Loan, while retaining the requirement to maintain minimum liquidity (as defined therein) in an amount no less than all remaining principle amortization payments due under the Term Loan, estimated to be $3 million asgeneral duration of the datedefault to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of this report (not includingcash to settle claims in the amount due atnear-term.
Debt and Financial Strength Ratings
NMIC's financial strength is rated "Baa2" by Moody's and "BBB" by S&P.In June 2020, Moody's affirmed its financial strength rating of NMIC and its "Ba2" rating of NMIH's 2020 Revolving Credit Facility, and assigned a "Ba2" rating to the maturity date).Notes. Moody's ratings outlook is stable.In June 3, 2020, S&P assigned a "BB" rating to NMIH's senior secured Notes. In April 2021, S&P upgraded its outlook from negative to positive for the financial strength rating of NMIC's and NMIH's long-term counter-party credit profile.
Consolidated Investment Portfolio
OurThe 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 ourOur investment portfolio is held incomprised entirely of fixed maturity instruments. As of September 30, 2017,March 31, 2021, the fair value of our investment portfolio was $692.7 million. We also had$1.8 billion and we held an additional $20.7$115.5 million of cash and equivalents as of September 30, 2017.equivalents. Pre-tax book yield on the investment portfolio for the ninethree months ended September 30, 2017March 31, 2021 was 2.3%2.0%. The bookBook yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. YieldThe yield on theour investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our investment portfolioholdings 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, 2021 | | December 31, 2020 |
| Corporate debt securities | 61 | % | | 63 | % |
| Municipal debt securities | 24 | | | 22 | |
| Asset-backed securities | 7 | | | 7 | |
| Cash, cash equivalents, and short-term investments | 6 | | | 6 | |
| | | |
| | | |
| U.S. treasury securities and obligations of U.S. government agencies | 2 | | | 2 | |
| Total | 100 | % | | 100 | % |
The ratings
| | | | | | | | | | | |
Investment portfolio ratings at fair value (1) | March 31, 2021 | | December 31, 2020 |
| AAA | 11 | % | | 12 | % |
AA(2) | 28 | | | 27 | |
A(2) | 42 | | | 43 | |
BBB(2) | 19 | | | 18 | |
| | | |
| | | |
| | | |
| Total | 100 | % | | 100 | % |
(1) Excluding certain operating cash accounts.
(2) Includes +/– ratings.
All of our investment portfolio were:
|
| | | | | |
| 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 +/– ratings.
The ratings aboveinvestments are providedrated by one or more of: Moody's, S&P and Fitch Ratings.nationally recognized statistical rating organizations. If three 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
Other Items
Off-Balance Sheet Arrangements and Contractual Obligations
We had no material off-balance sheet arrangementsdid not recognize an allowance for credit loss for any security in the investment portfolio as of September 30, 2017. In connection withMarch 31, 2021 or December 31, 2020, and we did not record any provision for credit loss for investment securities during the 2017 ILN Transaction, we have certain future contractual commitments to Oaktown Re,three months ended March 31, 2021, and March 31, 2020.
As of March 31, 2021, the investment portfolio had gross unrealized losses of $25.5 million, none of which had been in an unrealized loss position for a special purpose VIE that is not consolidatedperiod of twelve months or longer. As of December 31, 2020, the investment portfolio had gross unrealized losses of $0.5 million, of which $8 thousand had been in our financial results. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1, Organization and Basisan unrealized loss position for a period of Presentation - Variable interest entity" and "Note 5, Reinsurance."
There are no material changes outside the ordinary course of businesstwelve months or longer. The increase in the contractual obligations specifiednumber of securities in our 2016 10-K.and the aggregate size of the unrealized loss position as of March 31, 2021, was primarily driven by interest rate movements following the purchase date of certain securities. Based on current facts and circumstances, we believe the unrealized losses as of March 31, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities.
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 20162020 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, 2021 and December 31, 20162020 was $693 million and $629 million, respectively,$1.8 billion, 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, 2021, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.954.84 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%4.84% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 4.134.97 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%4.97% in fair value of our fixed income portfolio.
We are also subject to market risk related to our Term Loanthe Notes and 2017the ILN Transaction.Transactions. As discussed in Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Term Loan,Debt" the Term Loan bearsNotes bear 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, 2021 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, 2021 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 wereThere 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’smanagement'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 20162020 10-K. As of the date of this report, we are not aware of any material changes in our risk factors from the risk factors disclosed in our 20162020 10-K. You should carefully consider the risks and uncertainties described herein and in our 20162020 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 20162020 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.
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 | | |
| 4.7 | | Indenture, dated as of June 19, 2020, among NMI Holdings, Inc., NMI Services, Inc. as the Initial Guarantor, and the Bank of New York Mellon Trust Company, N.A. as Trustee and Notes Collateral Agent (incorporated herein by reference to Exhibit 4.1 to our Form 8-K, filed on June 19, 2020) |
| 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 ~ | | |
| | | | | | | | |
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) |
10.19 ~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 | | |
| 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 | | Joinder Agreement, dated as of October 29, 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. |
| 10.21 ~ | | |
10.2010.22 ~
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10.2110.23 ~ | | |
10.2210.24 ~ | | |
10.2310.25 ~
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10.2410.26 ~ | | |
10.2510.27 ~
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10.2610.28 ~
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10.27 ~
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10.2810.29 ~ | | |
10.2910.30 ~ | | |
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10.3010.31 ~ | | |
10.3110.32 ~
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21.110.33 ~ | | |
| 10.34 ~ | | |
10.35 ~
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10.36 ~
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10.37 ~
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10.38 ~
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10.39 ~
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| 10.40 ~ | | |
| 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, 20172020 formatted in XBRL (eXtensible Business Reporting Language):
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| | (i) Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2021 and December 31, 2016
2020; |
| | (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2017March 31, 2021 and 20162020; |
| | (iii) Condensed Consolidated Statements of Changes in Shareholders' Equity for the ninethree months ended September 30, 2017March 31, 2021 and the year ended December 31, 2016
2020; |
| | (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2021 and 2016,2020; and
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| | (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 4, 2021 | |
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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 |