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, 2022 and December 31, 2021, approximately $5.0 million and $5.4 million, respectively, of unamortized debt issuance costs remained.
At March 31, 2022 and December 31, 2021, $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 the consolidated balance sheet.
2021 Revolving Credit Facility
On November 29, 2021, we amended our $110 million senior secured revolving credit facility (the 2020 Revolving Credit Facility and as amended, the 2021 Revolving Credit Facility), expanding the lender group, increasing the revolving capacity to $250 million, and extending the maturity from February 22, 2023 to the earlier of (x) November 29, 2025, or (y) if any existing senior secured notes remain outstanding on such date, February 28, 2025. Borrowings under the 2021 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 the 2021 Revolving Credit Facility) subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Adjusted Term SOFR Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375% to 2.875% per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. As of March 31, 2022, no amount was drawn under the 2021 Revolving Credit Facility.
Under the 2021 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, 2022, the applicable commitment fee was 0.35%. For the three months ended March 31, 2022, we recorded $0.2 million of commitment fees in interest expense.
We incurred debt issuance costs of $1.1 million in connection with the 2021 Revolving Credit Facility, and had $0.6 million of unamortized debt issuance costs associated with the 2020 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 2021 Revolving Credit Facility. At March 31, 2022, remaining unamortized deferred debt issuance costs were $1.5 million.
We are subject to certain covenants under the 2021 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35%, compliance with the private mortgage insurer eligibility requirements (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, 2022.
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, 2022 | | March 31, 2021 | | | | |
| (In Thousands) |
Net premiums written | | | | | | | |
Direct | $ | 138,872 | | | $ | 136,232 | | | | | |
Ceded (1) | (22,838) | | | (20,417) | | | | | |
Net premiums written | $ | 116,034 | | | $ | 115,815 | | | | | |
| | | | | | | |
Net premiums earned | | | | | | | |
Direct | $ | 139,716 | | | $ | 127,643 | | | | | |
Ceded (1) | (23,221) | | | (21,764) | | | | | |
Net premiums earned | $ | 116,495 | | | $ | 105,879 | | | | | |
|
| | | | | | | | | | | | | | |
| 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 intois a party to reinsurance agreementagreements with Oaktown Re thatLtd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd., Oaktown Re V Ltd., Oaktown Re VI Ltd., and Oaktown Re VII Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018, July 30, 2019, July 30, 2020, October 29, 2020, April 27, 2021, and October 26, 2021, respectively. Each agreement provides for up to $211.3 million ofNMIC with aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existinga defined portfolio of mortgage insurance policies written from 2013 through December 31, 2016. For the coverage period,policies. 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 $250 thousand per year, except with respect to Oaktown Re Ltd., for which the cap is $300 thousand per year). ForNMIC ceded aggregate premiums to the Oaktown Re Vehicles of $10.9 million and $9.4 million during the three and nine months ended September 30, 2017,March 31, 2022 and 2021, respectively. The increase in premiums ceded year-on-year is due to the inception of the excess-of-loss reinsurance agreements that NMIC entered in with Oaktown Re VI Ltd. and Oaktown VII 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, 2022 and 2021, 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 (except the notes issued by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which have a 12.5-year maturity). We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Vehicles individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction, 2020-2 ILN Transaction, 2021-1 ILN Transaction, and 2021-2 ILN Transaction, and collectively as the ILN Transactions.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled (except the coverage provided by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which decreases over a 12.5-year period). As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts 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 each agreement, are triggered (each, a Lock-Out Event). As of March 31, 2022, the 2018 and 2019 ILN Transactions were deemed to be in Lock Out
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
due to the default experience of the underlying reference pools for each respective transaction and the 2021-2 ILN Transaction was deemed to be in Lock Out in connection with the initial build of its target credit enhancement level.As such, 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 issued in connection with the 2018, 2019 and 2021-2 ILN Transactions will remain suspended for the duration of the Lock-Out Event for each respective 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.
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,note-holders, among others.
At the timeEffective March 25, 2022, NMIC exercised its optional clean-up call to terminate the 2017 ILN Transaction was entered intoTransaction. In connection with the termination of the transaction, NMIC’s excess of loss reinsurance agreement with Oaktown Re we evaluatedLtd. was commuted and the applicabilityinsurance-linked notes issued by Oaktown Re Ltd. were redeemed in full with a distribution of remaining collateral assets.
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 outstanding ILN Transaction. Current amounts are presented as of March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | Inception Date | | | Covered Production | | Initial Reinsurance Coverage | | Current Reinsurance Coverage | | Initial First Layer Retained Loss | | Current First Layer Retained Loss (1) | | | | |
| | | | | | | | | | | | | | | | |
2018 ILN Transaction | July 25, 2018 | | | 1/1/2017 - 5/31/2018 | | 264,545 | | 158,489 | | 125,312 | | 122,403 | | | | |
2019 ILN Transaction | July 30, 2019 | | | 6/1/2018 - 6/30/2019 | | 326,905 | | 231,877 | | 123,424 | | 122,524 | | | | |
2020-1 ILN Transaction (5) | July 30, 2020 | | | 7/1/2019 - 3/31/2020 | | 322,076 | | 35,409 | | 169,514 | | 169,463 | | | | |
2020-2 ILN Transaction | October 29, 2020 | | | 4/1/2020 - 9/30/2020 (2) | | 242,351 | | 140,063 | | 121,777 | | 121,177 | | | | |
2021-1 ILN Transaction | April 27, 2021 | | | 10/1/2020 - 3/31/2021 (3) | | 367,238 | | 359,787 | | 163,708 | | 163,708 | | | | |
2021-2 ILN Transaction (6) | October 26, 2021 | | | 4/1/2021 - 9/30/2021 (4) | | 363,596 | | 363,596 | | 146,229 | | 146,229 | | | | |
(1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claim expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claim expenses exceed its current first layer retained loss.
(2) Approximately 1% of the accounting guidance that addresses VIEs. As a resultproduction covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
(3) Approximately 1% of the evaluationproduction covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020.
(4) Approximately 2% of the 2017production covered by the 2021-2 ILN Transaction we concluded thathas coverage reporting dates between July 1, 2019 and March 31, 2021.
(5) Effective April 25, 2022, NMIC exercised its optional clean-up call to terminate the 2020-1 ILN Transaction. In connection with the termination of the transaction, NMIC’s excess of loss reinsurance agreement with Oaktown Re is a VIE. However, given that NMIC does not have significant economic exposure inIV Ltd. was commuted and the insurance-linked notes issued by Oaktown Re we do not consolidateIV Ltd. were redeemed in full with a distribution of remaining collateral assets.
(6) As of March 31, 2022, the current reinsurance coverage amount on the 2021-2 ILN Transactions is equal to the initial reinsurance coverage amount, as the reinsurance coverage provided by Oaktown Re VII Ltd. will not begin to amortize until a target credit enhancement level is reached.
Under the terms of our ILN Transactions, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full. "Cash and cash equivalents" on our consolidated financial statements.balance sheet includes restricted amounts of $3.1 million and $3.2 million as of March 31, 2022 and December 31, 2021, respectively. The restricted balances required under these transactions will decline over time as the outstanding principal balance of the respective insurance-linked notes are amortized.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Quota share reinsurance
InNMIC is a party to five active 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, the 2021 QSR Transaction, effective January 1, 2021, and the 2022 QSR Transaction, effective October 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 from January 1, 2021 to October 30, 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.
Under the terms of the 2022 QSR Transaction, NMIC cedes premiums earned related to 20% of the risk on eligible policies written primarily between October 30, 2021 and December 31, 2022. The 2022 QSR Transaction is scheduled to terminate on December 31, 2032. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2025 or semi-annually thereafter, which would result in NMIC recapturing the related risk.
In connection with the 2022 QSR Transaction, NMIC entered into an additional back-to-back quota share agreement that is scheduled to incept on January 1, 2023 (the 2023 QSR Transaction). Under the terms of the 2023 QSR Transactions, NMIC will cede premiums earned related to 20% of the risk on eligible policies written in 2023.
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.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table shows the amounts related to the 2016 QSR Transaction:Transactions:
| | | For the three months ended | For the nine months ended | | For the three months ended | |
| September 30, 2017 | September 30, 2016 | September 30, 2017 | | September 30, 2016 | | March 31, 2022 | | March 31, 2021 | |
| (In Thousands) | | (In Thousands) |
Ceded risk-in-force | $ | 2,682,982 |
| $ | 1,778,235 |
| $ | 2,682,982 |
| | $ | 1,778,235 |
| Ceded risk-in-force | $ | 8,504,853 | | | $ | 6,330,409 | | |
Ceded premiums written | (14,389 | ) | (38,977 | ) | (36,715 | ) | | (38,977 | ) | |
| Ceded premiums earned | (13,393 | ) | (2,885 | ) | (34,721 | ) | | (2,885 | ) | Ceded premiums earned | (29,005) | | | (25,747) | | |
Ceded claims and claims expenses | 277 |
| 90 |
| 887 |
| | 90 |
| |
Ceding commission written | 2,878 |
| 7,795 |
| 7,343 |
| | 7,795 |
| |
Ceded claims and claim expenses | | Ceded claims and claim expenses | (159) | | | 1,180 | | |
| Ceding commission earned | 2,581 |
| 551 |
| 6,921 |
| | 551 |
| Ceding commission earned | 5,886 | | | 5,162 | | |
Profit commission | 7,758 |
| 1,641 |
| 19,945 |
| | 1,641 |
| Profit commission | 16,723 | | | 13,380 | | |
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 all other 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, 2018, 2020, 2021 and 2022 QSR Transactions, generally remainsremain below 60%, 61%, 50% and 57.5% and 62%, 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$4.6 million as of September 30, 2017.March 31, 2022.
In accordance with the terms of the 2018, 2020, 2021 and 2022 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 supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The agreementaggregate reinsurance recoverable on loss reserves related to the 2018, 2020, 2021 and 2022 QSR Transactions was $15.5 million as of March 31, 2022.
We remain directly liable for all claim payments if we are unable to collect reinsurance recoverable 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 recoverable if we do not expect to recover amounts due from one or more of our reinsurance counterparties, and report our reinsurance recoverable net of such allowance, if any. We actively monitor the counterparty credit profiles of our reinsurers and each is scheduledrequired to terminatepartially collateralize its obligations under the terms of our QSR Transactions. The allowance for credit loss established on our reinsurance recoverable was deemed immaterial at March 31, 2022 and December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. However, NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.2021.
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, 2022, we had 5,238 primary loans in default and held gross reserves for insurance claims and claimsclaim expenses of $6.1 million for 350 primary loans in default.$102.4 million. During the first ninethree months of 2017,ended March 31, 2022, we paid 1619 claims totaling $731 thousand, including two claims totaling $11 thousand$0.4 million, all of which were 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, 2022, 70 loans in the pool were past due by 60 days or more. These 46 loansin default.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
representThese 70 loans represented approximately $3.0$5.3 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, 2022. 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, 2022. At March 31, 2022, 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 5,238loans in default in our primary insured portfolio as of March 31, 2022, which represented a0.99% default rate against 526,976 total policies in-force. We had 11,090 loans 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. Although our default count declined from March 31, 2021 to March 31, 2022, the population remains elevated compared to our historical experience due to the continued challenges certain borrowers are facing related to the COVID-19 pandemic 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 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 pandemic, the 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, 2022 and 2021, we generally established lower reserves for defaults that we consider to be connected to the COVID-19 pandemic 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.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claimsclaim (benefits) expenses:
| | | | | | | | | | | |
| For the three months ended March 31, |
| 2022 | | 2021 |
| (In Thousands) |
Beginning balance | $ | 103,551 | | | $ | 90,567 | |
Less reinsurance recoverables (1) | (20,320) | | | (17,608) | |
Beginning balance, net of reinsurance recoverables | 83,231 | | | 72,959 | |
| | | |
Add claims incurred: | | | |
Claims and claim (benefits) expenses incurred: | | | |
Current year (2) | 10,080 | | | 10,557 | |
Prior years (3) | (10,699) | | | (5,595) | |
Total claims and claim (benefits) expenses incurred | (619) | | | 4,962 | |
| | | |
Less claims paid: | | | |
Claims and claim expenses paid: | | | |
Current year (2) | — | | | 12 | |
Prior years (3) | 320 | | | 492 | |
| | | |
Total claims and claim expenses paid | 320 | | | 504 | |
| | | |
Reserve at end of period, net of reinsurance recoverables | 82,292 | | | 77,417 | |
Add reinsurance recoverables (1) | 20,080 | | | 18,686 | |
Ending balance | $ | 102,372 | | | $ | 96,103 | |
|
| | | | | | | |
| 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 $5.2 million attributed to net case reserves and $4.7 million attributed to net IBNR reserves for the three months ended March 31, 2022 and $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.
(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 $5.8 million attributed to net case reserves and $4.7 million attributed to net IBNR reserves for the three months ended March 31, 2022 and $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.
The "claims incurred" section of the table above shows claims and claim (benefits) 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$89.7 million related to prior year defaults remained as of September 30, 2017.March 31, 2022.
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:
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
| | | For the three months ended September 30, | | For the nine months ended September 30, | | | For the three months ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | | | 2022 | | 2021 |
| (In Thousands, except for per share data) | | | (In Thousands, except for per share data) |
Net income | $ | 12,312 |
| | $ | 6,175 |
| | $ | 23,816 |
| | $ | 4,279 |
| Net income | | $ | 67,680 | | | $ | 52,891 | |
| | | | | | | | |
Basic weighted average shares outstanding | | Basic weighted average shares outstanding | | 85,953 | | | 85,317 | |
Basic earnings per share | $ | 0.21 |
| | $ | 0.10 |
| | $ | 0.40 |
| | $ | 0.07 |
| Basic earnings per share | | $ | 0.79 | | | $ | 0.62 | |
| | | | | | | | | | | | |
Net income | | Net income | | $ | 67,680 | | | $ | 52,891 | |
Gain from change in fair value of warrant liability | | Gain from change in fair value of warrant liability | | (93) | | | — | |
Diluted net income | | Diluted net income | | $ | 67,587 | | | $ | 52,891 | |
| Basic weighted average shares outstanding | 59,883,629 |
| | 59,130,401 |
| | 59,680,166 |
| | 59,047,758 |
| Basic weighted average shares outstanding | | 85,953 | | | 85,317 | |
Dilutive effect of non-vested shares and warrants | 3,205,329 |
| | 1,154,345 |
| | 3,093,167 |
| | 814,158 |
| |
Dilutive weighted average shares outstanding | 63,088,958 |
| | 60,284,746 |
| | 62,773,333 |
| | 59,861,916 |
| |
Dilutive effect of issuable shares | | Dilutive effect of issuable shares | | 1,357 | | | 1,170 | |
Diluted weighted average shares outstanding | | Diluted weighted average shares outstanding | | 87,310 | | | 86,487 | |
| | | | | | | | | | |
Diluted earnings per share | $ | 0.20 |
|
| $ | 0.10 |
| | $ | 0.38 |
| | $ | 0.07 |
| Diluted earnings per share | | $ | 0.77 | | | $ | 0.61 | |
| Anti-dilutive shares | | Anti-dilutive shares | | 8 | | | 314 | |
For the three and nine months ended September 30, 2017, 830,043 and 832,460, respectively, and for the three and nine months ended September 30, 2016, 4,012,046 and 4,326,168, respectively,8. Warrants
We issued 992 thousand warrants in connection with a private placement of our common stock equivalents issued under share-based compensation arrangements were not included in the 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 133 thousand remained outstanding available for exercise at March 31, 2022. 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, 2022, 66 thousand warrants were exercised resulting in the issuance of 51 thousand shares of common stock. Upon exercise, we reclassified approximately $0.9 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, 2021, 27 thousand warrants were exercised duringresulting in the nine months ended September 30, 2017 and 2016. We account for these warrantsissuance of 24 thousand shares of common stock. Upon exercise, we reclassified approximately $0.4 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%22.0% and 33.3%21.6% for the three and nine months ended September 30, 2017, respectively, compared to 1.8%March 31, 2022 and 2.6%2021, respectively. Our provision for the comparable 2016 periods. The increase in theincome taxes for interim reporting periods is established based on our estimated annual effective tax expenserate for the three and nine months ended September 30, 2017, against the comparable 2016 periods is attributable to the elimination ofa given year. Our effective tax benefits during the comparable 2016rate may fluctuate between interim periods due to the recognitionimpact of discrete items not included in our estimated annual effective tax rate, including the tax effects associated with the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability. Such items are treated on a full valuation allowancediscrete basis in the reporting period in which had been recordedthey occur.
As a mortgage guaranty insurance company, we are eligible to reflect the amount of the deferred taxes that may not be realized. We currently pay no regular federal incomeclaim a tax duededuction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the forecasted utilization of federal net operatingextent we acquire tax and loss carryforwards,bonds in an amount equal to the tax benefit derived from the claimed deduction, which were $122.9 million as of December 31, 2016. Theis our intent. As a result, our interim provision for income taxes include current year alternative minimumfor the three months ended March 31, 2022 represents a change in our net deferred tax liability. As of March 31, 2022 and December 31, 2021, we held $89.2 million of tax and changes to deferred tax assets. See Note 1, "Organization and Basis of Presentation - Immaterial Correction of Prior Period Amounts" for further details.loss bonds in "Other assets" on our consolidated balance sheet.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
10. Stockholders' Equity
10. On February 10, 2022, our Board of Directors approved a $125 million share repurchase program effective through December 31, 2023. The authorization provides us the flexibility to repurchase stock from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. During the three months ended March 31, 2022, we repurchased 235,344 shares pursuant to a trading plan under Rule 10b-18 of the Exchange Act at an average price of $21.23 per share, excluding associated costs.
11. Leases
We have 2 operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating right-of-use (ROU) assets and lease liabilities of $11.3 million and $12.2 million in "Other assets" and "Other liabilities," respectively, on our consolidated balance sheet as of March 31, 2022. As of December 31, 2021, we recognized operating ROU assets and lease liabilities of $2.6 million and $2.9 million, respectively. As of March 31, 2022 and December 31, 2021, we did not have any finance leases.
In January 2022, we modified the lease for our corporate headquarters, securing a reduction in pricing and incremental leasehold improvement concessions, reducing the square footage of leased space and extending the remaining term through March 2030. In February 2022, we renewed the lease of our data center facility, extending its term through January 2024. Upon the respective modification and extension, the ROU asset and liability associated with each lease was remeasured, using our current estimated incremental borrowing rate, resulting in an aggregate increase to ROU assets and lease liabilities of $9.7 million during the three months ended March 31, 2022.
The following table provides a summary of our ROU asset and lease liability assumptions as of March 31, 2022:
| | | | | | | | | | | | | | |
Weighted-average remaining lease term | 7.8 years |
Weighted-average discount rate | 6.50 | % |
Cash paid on our operating leases for the three months ended March 31, 2022 and 2021, was $29 thousand and $0.6 million, respectively. Lease expenses incurred for the three months ended March 31, 2022 and 2021, were $0.5 million and $0.6 million, respectively.
Future payments due under our existing operating leases as of March 31, 2022 are as follows:
| | | | | |
| ($ In Thousands)
|
| |
Remaining in 2022 | $ | 131 | |
2023 | 2,096 | |
2024 | 2,080 | |
2025 | 2,128 | |
2026 | 2,190 | |
2027 | 2,256 | |
2028 | 2,322 | |
2029 | 2,392 | |
2030 | 603 | |
Total undiscounted lease payments | 16,198 | |
Less effects of discounting | (3,977) | |
Present value of lease payments | $ | 12,221 | |
Lease expense is recorded in underwriting and operating expenses on the consolidated statements of operations and comprehensive income. Our existing leases have terms ranging from two to eight years. The lease for our corporate headquarters includes an option to renew for an additional five years at prevailing market rates at the time of renewal. This renewal option is not included in the calculation of future lease payments due under the existing lease as presented above as it is not reasonably certain to be exercised.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
12. 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 the allowance for credit loss established on premium receivable was deemed immaterial at March 31, 2022 and December 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 established a $1.8 million and $2.3 million reserve for premium write-offs at March 31, 2022 and December 31, 2021, respectively.
13. 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.
NMIC and Re One'sOne generated combined statutory net loss,income of $18.6 million and $6.4 million for the three months ended March 31, 2022 and 2021, 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's statutory surplus, contingency reserve, statutory capital and RTC ratios wererisk-to-capital (RTC) ratio as follows:of March 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | |
| | | |
| March 31, 2022 | | December 31, 2021 | | | | |
| (In Thousands) |
Statutory surplus | $ | 873,259 | | | $ | 893,848 | | | | | |
Contingency reserve | 1,106,497 | | | 1,036,639 | | | | | |
Statutory capital (1) | $ | 1,979,756 | | | $ | 1,930,487 | | | | | |
| | | | | | | |
Risk-to-capital | 12.4:1 | | 11.6:1 | | | | |
|
| | | | | | | |
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 |
|
(1) Represents the total of the statutory surplus and contingency reserve.
Re One had $5.6 million of statutory capital at March 31, 2022 and December 31, 2021. Effective October 1, 2021, the reinsurance agreement between NMIC and Re One was commuted and all ceded risk was transferred back to NMIC.Following the commutation, Re One has no risk in force or further obligation on future claims.
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware such as NMIH. Delaware 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.
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 without prior approvalto NMIH.NMIC has the capacity to pay $34.9 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2022 and on April 1, 2022, NMIC paid a $34.9 million ordinary course dividend to NMIH.
14. Subsequent Event
Excess-of-loss reinsurance (XOL) Agreement
On May 2, 2022, NMIC entered into a reinsurance agreement with a broad panel of highly rated reinsurers that provides for $289.7 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, 2021, and March 31, 2022 (2022-1 XOL Transaction). For the reinsurance coverage period, NMIC will retain the first layer of $133.4 million of aggregate losses and reinsurers then provide second layer coverage up to $289.7 million, subject to retained participation limits. NMIC will then retain losses in excess of the Wisconsin OCI. Certain other statesoutstanding reinsurance coverage amount.
Warrants
As of March 31, 2022, we had 133 thousand unexercised warrants. They were issued on April 24, 2012 with a contractual term of ten years expiring on April 24, 2022. On April 24, 2022, 90 thousand warrants expired unexercised, resulting in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends. Since inception, NMIC has not paid any dividends to NMIH.
a gain of approximately $0.9 million.
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 20162021 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 20162021 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 insurance subsidiaries. Our primary insurance subsidiary, NMIC. NMIC is a wholly-owned, domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC 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%. Our subsidiary, NMIS, provides outsourced loan review services on a limited basis to mortgage loan originators. Our stock trades onoriginators and our subsidiary, Re One, historically provided reinsurance coverage to NMIC in accordance with certain statutory risk retention requirements. Such requirements have been repealed and the NASDAQ under the symbol "NMIH."reinsurance coverage provided by Re One to NMIC has been commuted. Re One remains a wholly-owned, licensed insurance subsidiary; however, it does not currently have active insurance exposures.
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-loan-to-value (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, 2022, we had issued master policy relationshipspolicies with 1,2401,776 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, 2022, we had $46.6$158.9 billion of totalprimary insurance-in-force (IIF), including primary IIF of $43.3 billion, and $10.7$40.5 billion of gross RIF, including primary RIFrisk-in-force (RIF).
We believe that our success in acquiring a large and diverse group of $10.6 billion.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 high-quality 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, 2022, we had246 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 World Health Organization (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 spread of the virus, 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.
The global dislocation caused by COVID-19 was unprecedented and the pandemic had a direct impact on the U.S. housing market, private mortgage insurance industry, and our business and operating performance for an extended period. More recently, however, the acute economic impact of COVID-19 has begun to recede. While the pandemic continues to pose a global risk and affect communities across the U.S., it is no longer the single dominant driver of our performance that it had been in earlier periods. COVID-19 is now one of several mosaic factors, including a range of macroeconomic forces and public policy initiatives that are influencing our market and business.
Although we are optimistic that the nationwide COVID-19 vaccination effort and other medical advances will continue to support a normalization of personal and business activity, the path of the virus remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the impact the pandemic may have on the mortgage insurance market, our business performance or our financial position at this time, and it remains possible COVID-19 could again trigger more severe and adverse outcomes in future periods.
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, 2022 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.
Quota share reinsurance
NMIC entered intois a party to five active 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, the 2021 QSR Transaction, effective January 1, 2021, and the 2022 QSR Transaction, effective October 1, 2021 – which we refer to collectively as the QSR Transactions. 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 Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (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 MaeMae, in exchange for reimbursement of ceded claims and (2)claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded or will cedeclaims.
Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk relatingon 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 primary insurancepolicies 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 (subject to an aggregate risk written limit which was exhausted on October 30, 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.
Under the terms of the 2022 QSR Transaction, NMIC cedes premiums earned related to 20% of the risk on eligible policies written between September 1, 2016October 30, 2021 and December 31, 2017,2022, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60%62% that varies directly and inversely with ceded claims.
In May 2017,connection with the 2022 QSR Transaction, NMIC secured $211.3entered into an additional back-to-back quota share agreement that is scheduled to incept on January 1, 2023 (the 2023 QSR Transaction). Under the terms of the 2023 QSR Transactions, NMIC will cede premiums earned related to 20% of the risk on eligible policies written in 2023, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% 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 connection with the termination, NMIC recaptured 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 is party to reinsurance agreements with the Oaktown Re Vehicles that provide it with aggregate excess-of-loss reinsurance coverage at inception for an existing portfolioon defined portfolios of MImortgage insurance policies. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies written from 2013 through December 31, 2016, throughand the respective Oaktown Re Vehicle then provides second layer loss protection up to a mortgage insurance-linked notes offering by
Oaktown Re. Thedefined reinsurance coverage amount under the termsamount. NMIC then retains losses in excess of the 2017 ILN Transaction decreases from $211.3 million at inceptionrespective reinsurance coverage amounts.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease over a ten-year period as the underlying coveredinsured mortgages amortize and was $185 million as of September 30, 2017. Forare amortized or repaid, and/or the mortgage insurance coverage is canceled (except the coverage period, NMIC will retain the first layer of $126.8 million of aggregate lossesprovided by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which decreases over a 12.5-year period). As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts 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 each agreement, are triggered (each, a Lock-Out Event). As of March 31, 2022, the 2018 and 2019 ILN Transactions were deemed to be in Lock Out due to the default experience of the underlying reference pools for each respective transaction and the 2021-2 ILN Transaction was deemed to be in Lock Out in connection with the initial build of its target credit enhancement level.As such, 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 issued in connection with the 2018, 2019 and 2021-2 ILN Transactions will then provideremain suspended for the duration of the Lock-Out Event for each respective 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.
NMIC holds optional termination 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 second layer of coverage up toprescribed date, and a clean-up call if the outstanding reinsurance coverage amount.amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC retains lossesreasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement, including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to note-holders, among others.
Effective March 25, 2022, NMIC exercised its optional clean-up call to terminate the 2017 ILN Transaction.In connection with the termination of the transaction, NMIC’s excess of loss reinsurance agreement with Oaktown Re Ltd. was commuted and the outstandinginsurance-linked notes issued by Oaktown Re Ltd. were redeemed in full with a distribution of remaining collateral assets.
The following table presents the inception date, covered production period, current reinsurance coverage amount.amount, current first layer retained aggregate loss and detail on the level of overcollateralization under each outstanding ILN Transaction. Current amounts are presented as of March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | |
($ values in thousands) | | 2018 ILN Transaction | 2019 ILN Transaction | 2020-1 ILN Transaction(4) | 2020-2 ILN Transaction | 2021-1 ILN Transaction | 2021-2 ILN Transaction |
Inception date | | July 25, 2018 | July 30, 2019 | July 30, 2020 | October 29, 2020 | April 27, 2021 | October 26, 2021 |
Covered production | | 1/1/2017 - 5/31/2018 | 6/1/2018 - 6/30/2019 | 7/1/2019 - 3/31/2020 | 4/1/2020 - 9/30/2020 (1) | 10/1/2020 - 3/31/2021 (2) | 4/1/2021 - 9/30/2021 (3) |
| | | | | | | |
Current ceded RIF | | $ | 1,049,140 | | $ | 1,171,775 | | $ | 2,437,684 | | $ | 4,100,877 | | $ | 7,731,544 | | $ | 7,504,161 | |
| | | | | | | |
Current first layer retained loss | | 122,403 | | 122,524 | | 169,463 | | 121,177 | | 163,708 | | 146,229 | |
Current reinsurance coverage | | 158,489 | | 231,877 | | 35,409 | | 140,063 | | 359,787 | | 363,596 | |
Eligible coverage | | $ | 280,892 | | $ | 354,401 | | $ | 204,872 | | $ | 261,240 | | $ | 523,495 | | $ | 509,825 | |
Subordinated coverage (5) | | 26.77 | % | 30.24 | % | 8.00 | % | 6.25 | % | 6.75 | % | 6.79 | % |
| | | | | | | |
PMIERs charge on ceded RIF | | 8.22 | % | 7.99 | % | 5.95 | % | 5.54 | % | 6.06 | % | 6.53 | % |
Overcollateralization (6) (7) | | $ | 158,489 | | $ | 231,877 | | $ | 35,409 | | $ | 33,855 | | $ | 54,997 | | $ | 20,148 | |
| | | | | | | |
Delinquency Trigger (8) | | 4.0% | 4.0% | 6.0 | % | 4.7 | % | 5.1 | % | 5.1 | % |
(1) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
(2) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020.
(3) Approximately 2% of the production covered by the 2021-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2021.
(4) Effective April 25, 2022, NMIC exercised its optional clean-up call to terminate the 2020-1 ILN Transaction. In connection with the termination of the transaction, NMIC's excess of loss reinsurance agreement with Oaktown Re IV Ltd. was commuted and the insurance-linked notes issued by Oaktown Re IV Ltd. were redeemed in full with a distribution of remaining collateral assets.
(5) Absent a delinquency trigger, the subordinated coverage is capped at 8.00%, 6.25%, 6.75% and 7.45% for the 2020-1, 2020-2, 2021-1 and 2021-2 ILN Transactions, respectively.
(6) Overcollateralization for each of the 2018, 2019 and 2020-1 ILN Transactions is equal to their current reinsurance coverage as the PMIERs required asset amount on RIF ceded under each transaction is currently below its remaining first layer retained loss.
(7) May not be replicated based on the rounded figures presented in the table.
(8) Delinquency triggers for the 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, 2020-2, 2021-1 and 2021-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average.
See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements.
Portfolio Data
The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above.
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Primary and pool IIF and NIW | As of and for the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| IIF | | NIW | | IIF | | NIW | | |
| (In Millions) |
Monthly | $ | 139,156 | | | $ | 13,094 | | | $ | 106,920 | | | $ | 23,764 | | | | | |
Single | 19,721 | | | 1,071 | | | 16,857 | | | 2,633 | | | | | |
Primary | 158,877 | | | 14,165 | | | 123,777 | | | 26,397 | | | | | |
| | | | | | | | | | | |
Pool | 1,162 | | | — | | | 1,642 | | | — | | | | | |
Total | $ | 160,039 | | | $ | 14,165 | | | $ | 125,419 | | | $ | 26,397 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
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 |
|
ForNIW for the three months ended September 30, 2017, primary NIW increased 4%,March 31, 2022 was $14.2 billion compared to $26.4 billion for the same period in 2016, primarily because of the growth within and an expansion of our customer base. Primarythree months ended March 31, 2021. NIW decreased 8% for the nine months ended September 30, 2017, compared to the nine months ended September 30, 2016,year-on-year primarily due to a reductiondecline in our single policy production, driven primarily by actions we initiated to reduce the concentrationsize of single policies in our product mix, partially offset by growth in our monthly policy volume. For the three and nine months ended September 30, 2017, monthly premium NIWtotal mortgage insurance market.
Total IIF increased 16% and 14%, respectively,28% at March 31, 2022 compared to the same periods a year ago, drivenMarch 31, 2021, primarily bydue to the growth of our customer base.
For the nine months ended September 30, 2017, 80% of our NIW related to monthly premium policies. As of September 30, 2017, monthly premium policies accounted for 66% of our primary IIF, as compared to 60% at December 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 total IIF increased 45% as of September 30, 2017 compared to September 30, 2016, primarily because of our NIW generated between such measurement dates, partially offset by the run-off of in-force policies. Our persistency rate improved to 71.5% at March 31, 2022 from 51.9% at March 31, 2021, reflecting a slowdown in the pace of refinancing activity during the intervening twelve month period tied to an increase in interest and higher persistency of our policies in force.mortgage note rates.
The following table presents net premiums written and earned for the periods indicated.indicated:
| | | | | | | | | | | | | | | |
Primary and pool premiums written and earned | For the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| (In Thousands) |
Net premiums written | $ | 116,034 | | | $ | 115,815 | | | | | |
Net premiums earned | 116,495 | | | 105,879 | | | | | |
|
| | | | | | | | | | | | | |
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.
For the three and nine months ended September 30, 2017, net premiums written increased 419% and 27%, respectively, and net premiums earned increased 40% and 49%, respectively,10% during the three months ended March 31, 2022 compared to the same periods in 2016. The increases in net premiums written arethree months ended March 31, 2021, primarily due to the growth of our monthly policy production and IIF, and the initial cession of premiums written on IIF at the inception of the 2016 QSR Transaction, partially offset by thea decrease in the contribution from single premium NIW.policy cancellations and an increase in cessions under the ILN Transactions. The increasesaccelerated rate of growth in net premiums earned are primarilycompared to net premiums written is due to growtha decrease in our monthly policy productionthe volume and IIF, partially offset by cessions under the 2016 QSR Transaction and 2017 ILN Transaction and, compared to the same periods in 2016, reductions inmix of our single premium policy production and earningsfrom period to period.
from cancellations. Pool premiums written and earned for the three and nine months ended September 30, 2017March 31, 2022 and 2021, were $0.9$0.3 million and $2.9$0.5 million, respectively, before the effects ofgiving effect to the 2016 QSR Transaction.Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the datedates and for the periods indicated.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Primary portfolio trends | As of and for the three months ended |
| March 31, 2022 | | December 31, 2021 | | September 30, 2021 | | June 30, 2021 | | March 31, 2021 |
| ($ Values In Millions, except as noted below) |
New insurance written | $ | 14,165 | | | $ | 18,342 | | | $ | 18,084 | | | $ | 22,751 | | | $ | 26,397 | |
Percentage of monthly premium | 92 | % | | 93 | % | | 93 | % | | 85 | % | | 90 | % |
Percentage of single premium | 8 | % | | 7 | % | | 7 | % | | 15 | % | | 10 | % |
New risk written | $ | 3,721 | | | $ | 4,786 | | | $ | 4,640 | | | $ | 5,650 | | | $ | 6,531 | |
Insurance-in-force (1) | 158,877 | | | 152,343 | | | 143,618 | | | 136,598 | | | 123,777 | |
Percentage of monthly premium | 88 | % | | 87 | % | | 87 | % | | 86 | % | | 86 | % |
Percentage of single premium | 12 | % | | 13 | % | | 13 | % | | 14 | % | | 14 | % |
Risk-in-force (1) | $ | 40,522 | | | $ | 38,661 | | | $ | 36,253 | | | $ | 34,366 | | | $ | 31,206 | |
Policies in force (count) (1) | 526,976 | | | 512,316 | | | 490,714 | | | 471,794 | | | 436,652 | |
Average loan size ($ value in thousands) (1) | $ | 301 | | | $ | 297 | | | $ | 293 | | | $ | 290 | | | $ | 283 | |
Coverage percentage (2) | 25.5 | % | | 25.4 | % | | 25.2 | % | | 25.2 | % | | 25.2 | % |
Loans in default (count) (1) | 5,238 | | | 6,227 | | | 7,670 | | | 8,764 | | | 11,090 | |
Default rate (1) | 0.99 | % | | 1.22 | % | | 1.56 | % | | 1.86 | % | | 2.54 | % |
Risk-in-force on defaulted loans (1) | $ | 362 | | | $ | 435 | | | $ | 546 | | | $ | 625 | | | $ | 785 | |
Net premium yield (3) | 0.30 | % | | 0.31 | % | | 0.32 | % | | 0.34 | % | | 0.36 | % |
Earnings from cancellations | $ | 2.9 | | | $ | 5.1 | | | $ | 7.7 | | | $ | 7.0 | | | $ | 9.9 | |
Annual persistency (4) | 71.5 | % | | 63.8 | % | | 58.1 | % | | 53.9 | % | | 51.9 | % |
Quarterly run-off (5) | 5.0 | % | | 6.7 | % | | 8.1 | % | | 8.0 | % | | 12.5 | % |
|
| | | | | | | | | | | | | | | | | | | |
Primary portfolio trends | As of and for the three months ended |
| September 30, 2017 | | June 30, 2017 | | March 31, 2017 | | December 31, 2016 | | September 30, 2016 |
| ($ Values In Millions) |
New insurance written | $ | 6,115 |
| | $ | 5,037 |
| | $ | 3,559 |
| | $ | 5,240 |
| | $ | 5,857 |
|
New risk written | 1,496 |
| | 1,242 |
| | 868 |
| | 1,244 |
| | 1,415 |
|
Insurance in force (1) | 43,259 |
| | 38,629 |
| | 34,779 |
| | 32,168 |
| | 28,228 |
|
Risk in force (1) | 10,572 |
| | 9,417 |
| | 8,444 |
| | 7,790 |
| | 6,847 |
|
Policies in force (count) (1) | 180,089 |
| | 161,195 |
| | 145,632 |
| | 134,662 |
| | 119,002 |
|
Average loan size (1) | $ | 0.240 |
| | $ | 0.240 |
| | $ | 0.239 |
| | $ | 0.239 |
| | $ | 0.237 |
|
Weighted-average coverage (2) | 24.4 | % | | 24.4 | % | | 24.3 | % | | 24.2 | % | | 24.3 | % |
Loans in default (count) | 350 |
| | 249 |
| | 207 |
| | 179 |
| | 115 |
|
Percentage of loans in default | 0.2 | % | | 0.2 | % | | 0.1 | % | | 0.1 | % | | 0.1 | % |
Risk in force on defaulted loans | $ | 19 |
| | $ | 14 |
| | $ | 12 |
| | $ | 10 |
| | $ | 6 |
|
Average premium yield (3) | 0.43 | % | | 0.41 | % | | 0.40 | % | | 0.44 | % | | 0.48 | % |
Earnings from cancellations | $ | 4.3 |
| | $ | 3.8 |
| | $ | 2.5 |
| | $ | 5.1 |
| | $ | 5.8 |
|
Annual persistency | 85.1 | % | | 83.1 | % | | 81.3 | % | | 80.7 | % | | 81.8 | % |
Quarterly run-off (4) | 3.8 | % | | 3.4 | % | | 2.9 | % | | 4.6 | % | | 5.3 | % |
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
| |
(1)(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. | Reported as of the end of the period. |
| |
(2)
| Calculated as end of period RIF divided by IIF. |
| |
(3)
| Calculated as net primary and pool premiums earned, net of reinsurance, divided by average gross primary IIF for the period, annualized. |
| |
(4)
| Defined as the percentage of IIF that is no longer on our books after any three-month period. |
The table below presents a summary of the change in total primary IIF duringfor the dates and periods indicated.
| | | | | | | | | | | | | | | |
Primary IIF | As of and for the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| (In Millions) |
IIF, beginning of period | $ | 152,343 | | | $ | 111,252 | | | | | |
NIW | 14,165 | | | 26,397 | | | | | |
Cancellations, principal repayments and other reductions | (7,631) | | | (13,872) | | | | | |
IIF, end of period | $ | 158,877 | | | $ | 123,777 | | | | | |
|
| | | | | | | | | | | | | | | |
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, 2022 | | As of March 31, 2021 |
| IIF | | RIF | | IIF | | RIF |
| (In Millions) |
March 31, 2022 | $ | 14,076 | | | $ | 3,699 | | | $ | — | | | $ | — | |
2021 | 78,955 | | | 20,058 | | | 26,296 | | | 6,508 | |
2020 | 41,311 | | | 10,431 | | | 53,650 | | | 13,397 | |
2019 | 11,102 | | | 2,910 | | | 20,402 | | | 5,342 | |
2018 | 4,411 | | | 1,127 | | | 8,074 | | | 2,057 | |
2017 and before | 9,022 | | | 2,297 | | | 15,355 | | | 3,902 | |
| | | | | | | |
Total | $ | 158,877 | | | $ | 40,522 | | | $ | 123,777 | | | $ | 31,206 | |
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, 2022 | | March 31, 2021 | | | | |
| (In Millions) |
>= 760 | $ | 6,372 | | | $ | 12,914 | | | | | |
740-759 | 2,388 | | | 5,312 | | | | | |
720-739 | 1,937 | | | 3,963 | | | | | |
700-719 | 1,639 | | | 2,358 | | | | | |
680-699 | 1,244 | | | 1,360 | | | | | |
<=679 | 585 | | | 490 | | | | | |
Total | $ | 14,165 | | | $ | 26,397 | | | | | |
Weighted average FICO | 748 | | | 755 | | | | | |
|
| | | | | | | | | | | | | | | |
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, 2022 | | March 31, 2021 | | | | |
| (In Millions) |
95.01% and above | $ | 1,366 | | | $ | 2,451 | | | | | |
90.01% to 95.00% | 7,055 | | | 11,051 | | | | | |
85.01% to 90.00% | 3,868 | | | 7,848 | | | | | |
85.00% and below | 1,876 | | | 5,047 | | | | | |
Total | $ | 14,165 | | | $ | 26,397 | | | | | |
Weighted average LTV | 92.1 | % | | 91.0 | % | | | | |
| | | | | | | | | | | | | | | |
Primary NIW by purchase/refinance mix | For the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| (In Millions) |
Purchase | $ | 13,398 | | | $ | 17,909 | | | | | |
Refinance | 767 | | | 8,488 | | | | | |
Total | $ | 14,165 | | | $ | 26,397 | | | | | |
|
| | | | | | | | | | | | | | |
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, 2022 | | March 31, 2021 |
| ($ Values In Millions) |
>= 760 | $ | 79,141 | | | 50 | % | | $ | 63,919 | | | 52 | % |
740-759 | 27,406 | | | 17 | | | 20,537 | | | 16 | |
720-739 | 22,176 | | | 14 | | | 17,167 | | | 14 | |
700-719 | 15,236 | | | 10 | | | 11,536 | | | 9 | |
680-699 | 10,347 | | | 6 | | | 7,329 | | | 6 | |
<=679 | 4,571 | | | 3 | | | 3,289 | | | 3 | |
Total | $ | 158,877 | | | 100 | % | | $ | 123,777 | | | 100 | % |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Primary RIF by FICO | As of |
| March 31, 2022 | | March 31, 2021 |
| ($ Values In Millions) |
>= 760 | $ | 19,883 | | | 49 | % | | $ | 15,920 | | | 51 | % |
740-759 | 7,054 | | | 17 | | | 5,214 | | | 17 | |
720-739 | 5,735 | | | 14 | | | 4,378 | | | 14 | |
700-719 | 4,010 | | | 10 | | | 2,981 | | | 9 | |
680-699 | 2,706 | | | 7 | | | 1,896 | | | 6 | |
<=679 | 1,134 | | | 3 | | | 817 | | | 3 | |
Total | $ | 40,522 | | | 100 | % | | $ | 31,206 | | | 100 | % |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Primary IIF by LTV | As of |
| March 31, 2022 | | March 31, 2021 |
| ($ Values In Millions) |
95.01% and above | $ | 14,918 | | | 9 | % | | $ | 10,616 | | | 9 | % |
90.01% to 95.00% | 72,381 | | | 46 | | | 54,832 | | | 44 | |
85.01% to 90.00% | 48,406 | | | 30 | | | 40,057 | | | 32 | |
85.00% and below | 23,172 | | | 15 | | | 18,272 | | | 15 | |
Total | $ | 158,877 | | | 100 | % | | $ | 123,777 | | | 100 | % |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
Primary RIF by LTV | As of |
| March 31, 2022 | | March 31, 2021 |
| ($ Values In Millions) |
95.01% and above | $ | 4,527 | | | 11 | % | | $ | 3,106 | | | 10 | % |
90.01% to 95.00% | 21,358 | | | 53 | | | 16,139 | | | 52 | |
85.01% to 90.00% | 11,895 | | | 29 | | | 9,818 | | | 31 | |
85.00% and below | 2,742 | | | 7 | | | 2,143 | | | 7 | |
Total | $ | 40,522 | | | 100 | % | | $ | 31,206 | | | 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 RIF by Loan Type | As of |
| March 31, 2022 | | March 31, 2021 |
| | | |
Fixed | 99 | % | | 99 | % |
Adjustable rate mortgages: | | | |
Less than five years | — | | | — | |
Five years and longer | 1 | | | 1 | |
Total | 100 | % | | 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 IIF by LTV | As of |
| September 30, 2017 | | September 30, 2016 |
| ($ Values In Millions) |
95.01% and above | $ | 3,038 |
| | 7 | % | | $ | 1,363 |
| | 5 | % |
90.01% to 95.00% | 19,562 |
| | 45 |
| | 12,644 |
| | 45 |
|
85.01% to 90.00% | 13,437 |
| | 31 |
| | 9,157 |
| | 32 |
|
85.00% and below | 7,222 |
| | 17 |
| | 5,064 |
| | 18 |
|
Total | $ | 43,259 |
| | 100 | % | | $ | 28,228 |
| | 100 | % |
|
| | | | | | | | | | | | | |
Primary RIF by LTV | As of |
| September 30, 2017 | | September 30, 2016 |
| ($ Values In Millions) |
95.01% and above | $ | 822 |
| | 8 | % | | $ | 380 |
| | 6 | % |
90.01% to 95.00% | 5,722 |
| | 54 |
| | 3,725 |
| | 54 |
|
85.01% to 90.00% | 3,205 |
| | 30 |
| | 2,174 |
| | 32 |
|
85.00% and below | 823 |
| | 8 |
| | 568 |
| | 8 |
|
Total | $ | 10,572 |
| | 100 | % | | $ | 6,847 |
| | 100 | % |
|
| | | | | |
Primary RIF by Loan Type | As of |
| September 30, 2017 | | September 30, 2016 |
| | | |
Fixed | 98 | % | | 98 | % |
Adjustable rate mortgages: | | | |
Less than five years | — |
| | — |
|
Five years and longer | 2 |
| | 2 |
|
Total | 100 | % | | 100 | % |
The table below showspresents selected primary portfolio statistics, by book year, as of September 30, 2017.March 31, 2022. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| As of March 31, 2022 | | |
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 | | | $ | 6 | | | 3 | % | | 655 | | | 40 | | | 1 | | | 1 | | | 0.5 | % | | 0.3 | % | | 2.5 | % |
2014 | 3,451 | | | 253 | | | 7 | % | | 14,786 | | | 1,568 | | | 39 | | | 49 | | | 4.2 | % | | 0.6 | % | | 2.5 | % |
2015 | 12,422 | | | 1,555 | | | 13 | % | | 52,548 | | | 8,564 | | | 218 | | | 119 | | | 3.3 | % | | 0.6 | % | | 2.5 | % |
2016 | 21,187 | | | 3,409 | | | 16 | % | | 83,626 | | | 17,318 | | | 487 | | | 134 | | | 3.0 | % | | 0.7 | % | | 2.8 | % |
2017 | 21,582 | | | 3,799 | | | 18 | % | | 85,897 | | | 19,700 | | | 783 | | | 106 | | | 4.3 | % | | 1.0 | % | | 4.0 | % |
2018 | 27,295 | | | 4,411 | | | 16 | % | | 104,043 | | | 22,121 | | | 1,032 | | | 93 | | | 7.6 | % | | 1.1 | % | | 4.7 | % |
2019 | 45,141 | | | 11,102 | | | 25 | % | | 148,423 | | | 45,603 | | | 1,118 | | | 23 | | | 10.1 | % | | 0.8 | % | | 2.5 | % |
2020 | 62,702 | | | 41,311 | | | 66 | % | | 186,174 | | | 131,277 | | | 902 | | | 1 | | | 5.1 | % | | 0.5 | % | | 0.7 | % |
2021 | 85,574 | | | 78,955 | | | 92 | % | | 257,972 | | | 242,014 | | | 658 | | | — | | | 2.8 | % | | 0.3 | % | | 0.3 | % |
2022 | 14,165 | | | 14,076 | | | 99 | % | | 38,974 | | | 38,771 | | | — | | | — | | | — | % | | — | % | | — | % |
Total | $ | 293,681 | | | $ | 158,877 | | | | | 973,098 | | | 526,976 | | | 5,238 | | | 526 | | | | | | | |
(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 periodsdates 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, 2022 is not necessarily representative of the geographic distribution we expect in the future.
| | | | | | | | | | | |
Top 10 primary RIF by state | As of |
| March 31, 2022 | | March 31, 2021 |
California | 10.8 | % | | 10.8 | % |
Texas | 9.5 | | | 9.5 | |
Florida | 8.4 | | | 7.9 | |
Virginia | 4.5 | | | 5.0 | |
Georgia | 3.9 | | | 3.3 | |
Illinois | 3.8 | | | 3.7 | |
Colorado | 3.7 | | | 4.1 | |
Washington | 3.7 | | | 3.5 | |
Maryland | 3.6 | | | 3.8 | |
Pennsylvania | 3.3 | | | 3.3 | |
| | | |
Total | 55.2 | % | | 54.9 | % |
|
| | | | | |
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 exceedTransactions as incurred claims and claim expenses on each respective reference pool remain within our retained coverage layer. Reserves are not established for future claims on insured loans which are not currently in default.
We expect our insurance claims and claims expenses to be relatively low in the near-term. Based on our experience and industry data, we believe that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. Aslayer 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 pandemic, 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 Coronavirus Aid, Relief, and Economic Security Act (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, 2022 and 2021, we generally 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 pandemic, 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 claims expenses.claim (benefits) expenses:
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| (In Thousands) |
Beginning balance | $ | 103,551 | | | $ | 90,567 | | | | | |
Less reinsurance recoverables (1) | (20,320) | | | (17,608) | | | | | |
Beginning balance, net of reinsurance recoverables | 83,231 | | | 72,959 | | | | | |
| | | | | | | |
Add claims incurred: | | | | | | | |
Claims and claim (benefits) expenses incurred: | | | | | | | |
Current year (2) | 10,080 | | | 10,557 | | | | | |
Prior years (3) | (10,699) | | | (5,595) | | | | | |
Total claims and claim (benefits) expenses incurred | (619) | | | 4,962 | | | | | |
| | | | | | | |
Less claims paid: | | | | | | | |
Claims and claim expenses paid: | | | | | | | |
Current year (2) | — | | | 12 | | | | | |
Prior years (3) | 320 | | | 492 | | | | | |
| | | | | | | |
Total claims and claim expenses paid | 320 | | | 504 | | | | | |
| | | | | | | |
Reserve at end of period, net of reinsurance recoverables | 82,292 | | | 77,417 | | | | | |
Add reinsurance recoverables (1) | 20,080 | | | 18,686 | | | | | |
Ending balance | $ | 102,372 | | | $ | 96,103 | | | | | |
|
| | | | | | | | | | | | | | | |
| 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 $5.2 million attributed to net case reserves and $4.7 million attributed to net IBNR reserves for the three months ended March 31, 2022 and $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.
(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 $5.8 million attributed to net case reserves and $4.7 million attributed to net IBNR reserves for the three months ended March 31, 2022 and $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.
The "claims incurred" section of the table above shows claims and claim (benefits) 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 $89.7 million related to prior year defaults remained as of March 31, 2022.
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, 2022 | | March 31, 2021 | | | | |
Beginning default inventory | 6,227 | | | 12,209 | | | | | |
Plus: new defaults | 1,163 | | | 1,767 | | | | | |
Less: cures | (2,132) | | | (2,868) | | | | | |
Less: claims paid | (19) | | | (16) | | | | | |
Less: rescission and claims denied | (1) | | | (2) | | | | | |
| | | | | | | |
Ending default inventory | 5,238 | | | 11,090 | | | | | |
|
| | | | | | | | | | | |
| 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 endingEnding default inventory at September 30, 2017declined from March 31, 2021 to March 31, 2022 as an increased number of borrowers initially impacted by the COVID-19 pandemic cured their delinquencies, and fewer new defaults emerged as the acute economic stress of the pandemic crisis began to recede. While our default population declined from March 31, 2021 to March 31, 2022, our default inventory remains elevated compared to September 30, 2016 was primarilyhistorical experience due to an increase in the numbercontinued challenges certain borrowers are facing related to the COVID-19 pandemic and their decision to access the forbearance program for federally backed loans codified under the CARES Act or similar programs made available by private lenders. As of policies in force and expected loss developmentMarch 31, 2022, 3,463 of our portfolio. 5,238 defaulted loans 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 threeperiods indicated:
| | | | | | | | | | | | | | | |
| For the three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
| ($ In Thousands) |
Number of claims paid (1) | 19 | | | 16 | | | | | |
Total amount paid for claims | $ | 402 | | | $ | 606 | | | | | |
Average amount paid per claim | $ | 21 | | | $ | 38 | | | | | |
Severity (2) | 39 | % | | 61 | % | | | | |
(1) Count includes six and nineoneclaims settled without payment during the three months ended September 30, 2017March 31, 2022 and September 30, 2016.2021, respectively.
|
| | | | | | | | | | | | | | | |
| 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 inCompany paid 19 and 16 claims during the three months ended March 31, 2022 and 2021, respectively. The number of claims paid was modest relative to the size of our insured portfolio and number of defaulted loans we reported in each period, primarily due to the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID-19 pandemic 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 paid experience for the three and nine months ended September 30, 2017March 31, 2022 and 2021, further 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 defaulted borrowers with alternative paths and incentives to cure their loan prior to the development of a claim.
Our claims severity for the three months ended March 31, 2022 was 39% compared to 61% for three months ended March 31, 2021. Claims severity for the three months ended March 31, 2022 and 2021 benefited from the same periods ended September 30, 2016 is due to anresiliency of the housing market and broad national house price appreciation as our claims paid. An increase in our default inventory. We expect the severity of claims we receive to be between 85% and 95%value of the coverage amount. We believehomes 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, 2022 | | As of March 31, 2021 |
| (In Thousands) |
Case (1) | $ | 18.0 | | | $ | 7.9 | |
IBNR (1)(2) | 1.5 | | | 0.8 | |
Total | $ | 19.5 | | | $ | 8.7 | |
|
| | | | | | | |
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.
Average reserve per default increased from March 31, 2021 to March 31, 2022 primarily due to the “aging” of early COVID-related defaults. While we have generally established lower reserves for defaults that we consider to be connected to the COVID-19 pandemic 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, we have increased such reserves over time as individual defaults remain outstanding or “age.” The growth in our average reserve per default from March 31, 2021 to March 31, 2022, far exceeded the growth in our aggregate gross reserve position in the intervening period as the impact of the increase in our average reserve per default was largely offset by the decline in our total default inventory. 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, 20172022 that NMIC fully compliedwas in full compliance with the PMIERs as of December 31, 2016.2021. 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.indicated:
| | | | | | | | | | | |
| As of |
| March 31, 2022 | | March 31, 2021 |
| (In Thousands) |
Available assets | $ | 2,127,030 | | | $ | 1,809,589 | |
Risk-based required assets | 1,341,217 | | | 1,261,015 | |
|
| | | | | | | | | |
| 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 $2.1 billion at March 31, 2022, compared to $1.8 billion at March 31, 2021.The$317 million increase in available assets as of September 30, 2017 compared to September 30, 2016 is between the dates presented was primarily driven by theNMIC'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, partially offset by an increase in the cession of risk relating toceded under our third-party reinsurance agreements.
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, 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 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 do not expect the impact of such transition to be material to our operations or financial results.
Consolidated Results of Operations
| | | | | | | | | | | | | | | |
Consolidated statements of operations | Three months ended | | |
| March 31, 2022 | | March 31, 2021 | | | | |
Revenues | ($ in thousands, except for per share data) |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Net premiums earned | $ | 116,495 | | | $ | 105,879 | | | | | |
Net investment income | 10,199 | | | 8,814 | | | | | |
Net realized investment gains | 408 | | | — | | | | | |
Other revenues | 339 | | | 501 | | | | | |
Total revenues | 127,441 | | | 115,194 | | | | | |
Expenses | | | | | | | |
Insurance claims and claim (benefits) expenses | (619) | | | 4,962 | | | | | |
Underwriting and operating expenses | 32,935 | | | 34,065 | | | | | |
Service expenses | 430 | | | 591 | | | | | |
Interest expense | 8,041 | | | 7,915 | | | | | |
(Gain) loss from change in fair value of warrant liability | (93) | | | 205 | | | | | |
Total expenses | 40,694 | | | 47,738 | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income before income taxes | 86,747 | | | 67,456 | | | | | |
Income tax expense | 19,067 | | | 14,565 | | | | | |
Net income | $ | 67,680 | | | $ | 52,891 | | | | | |
| | | | | | | |
Earnings per share - Basic | $ | 0.79 | | | $ | 0.62 | | | | | |
Earnings per share - Diluted | $ | 0.77 | | | $ | 0.61 | | | | | |
| | | | | | | |
Loss ratio(1) | (0.5) | % | | 4.7 | % | | | | |
Expense ratio(2) | 28.3 | % | | 32.2 | % | | | | |
Combined ratio (3) | 27.7 | % | | 36.9 | % | | | | |
|
| | | | | | | | | | | | | | | |
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 (4) | March 31, 2022 | | March 31, 2021 | | | | |
| ($ in thousands, except for per share data) |
Adjusted income before tax | $ | 86,506 | | | $ | 68,039 | | | | | |
Adjusted net income | 67,470 | | | 53,395 | | | | | |
Adjusted diluted EPS | 0.77 | | 0.62 | | | | |
| | | | | | | |
| | | | | | | |
(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) Combined ratio may not foot due to rounding.
(4) See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.
Revenues
ForNet premiums earned were $116.5 million for the three and nine months ended September 30, 2017,March 31, 2022 compared to $105.9 million for the three months ended March 31, 2021. The increase in net premiums earned increased $12.7 million or 40% and $38.0 million or 49%, respectively, compared towas primarily driven by the corresponding three and nine months ended September 30, 2016. The increase in both periods is primarily due to the continued growth inof our monthly policy production and IIF, partially offset by a decline in the effects ofcontribution from single premium policy cancellations and an increase in cessions under the 2016 QSR Transaction and 2017 ILN Transaction and reductions in our single policy production and earnings from early policy cancellations.Transactions.
ForNet investment income was $10.2 million for the three and nine months ended September 30, 2017,March 31, 2022 compared to $8.8 million for the three months ended March 31, 2021. The increase in net investment income increased $0.6 million and $1.8 million, respectively, compared to the three and nine months ended September 30, 2016, due to an increasein each respective period was primarily driven by growth in the size of and improved yields on our total investment portfolio.
Other revenues were $339 thousand for the three months ended March 31, 2022 compared to $501 thousand for the three months ended March 31, 2021. 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 a benefit of $0.6 million for the three and nine months ended September 30, 2017, respectively,March 31, 2022 compared to insurance claims and claim expenses of $5.0 million for the three and nine months ended September 30, 2016, asMarch 31, 2021. Insurance claims and claim expenses during the three months ended March 31, 2022 benefited from cure activity and release of a resultportion of the reserves we established for anticipated claims payments in prior period, and a decrease in the number of new defaults emerging on loans impacted by the COVID-19 pandemic.
Underwriting and operating expenses were $32.9 million for the three months ended March 31, 2022 compared to $34.1 million for the three months ended March 31, 2021. The decrease in underwriting and operating expenses for the three months ended March 31, 2022 was primarily due to a decrease in the amortization of deferred policy acquisition costs (DAC) offset by an increase in our NODs,depreciation and amortization incurred in connection with the completion and implementation of certain software and equipment initiatives, as well as an increase in travel and entertainment expenses tied to the easing of COVID-19 related restrictions. Underwriting and operating expenses included capital market reinsurance transaction costs of $0.3 million and $0.4 million for the three months ended March 31, 2022 and 2021, respectively.
Service expenses were $430 thousand for the three months ended March 31, 2022 compared to $591 thousand for the three months ended March 31, 2021. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The year-on-year 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 $8.0 million for the three months ended March 31, 2022 compared to $7.9 million for the three months ended March 31, 2021. Interest expense primarily reflects the carrying costs on the $400 million Notes offering completed in June 2020. The increase in interest expense period-to-period was due to an increase in the number of policies in force year-over-year and expected loss development of our portfolio. The increase in claims and claims expenses for the three and nine months ended September 30, 2017 was offset by the partial release of reserves related to prior year defaults.
Underwriting and operating expenses increased $0.6 million or 3%, and $8.7 million or 12% for the three and nine months ended September 30, 2017, respectively, compared to the three and nine months ended September 30, 2016. Employee compensation accounts for the majority of our operating expenses. We increased 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. Underwriting and operating expenses for the nine months ended September 30, 2017 also reflect $4.8 million 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 million and $10.1 million for the three and nine months ended September 30, 2017, respectively, compared to interest expense of $3.7 million and $11.1 million for the three and nine months ended September 30, 2016, respectively. Interest expense declined in connectioncommitment fees associated with the amendment of our2021 Revolving Credit AgreementFacility which we completedhad extended its borrowing capacity from $110 million to $250 million in February 2017, which among other items, reduced the interest rate payable on the Term Loan.November 2021. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Term Loan.Debt."
Income Tax
We aretax expense was $19.1 million for the three months ended March 31, 2022 compared to $14.6 million for the three months ended March 31, 2021. The year-on-year increase in income tax expense was primarily driven by growth in our pre-tax income. Our effective tax rate on pre-tax income was 22.0% for the three months ended March 31, 2022, compared to 21.6% for the three ended March 31, 2021. 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% for the three months ended September 30, 2017, compared to 1.8% for the comparable 2016 period. Our effective tax rate on our pre-tax income was 33.3% for the nine months ended September 30, 2017, compared to our effective tax rate on our pre-tax income of 2.6% for the comparable 2016 period. The difference between our statutory tax rate and our effective tax rates for the three and nine months ended September 30, 2017 is due to aMarch 31, 2022 and 2021 reflect the discrete tax benefit associated with excess tax benefits for restricted stock units that were recognized during the periods as a resulteffects of the adoptionvesting of ASU 2016-09RSUs and exercise of options, and the change in the prior quarter.fair value of our warrant liability in each period. See Item 1, "Financial Statements - Notes to Consolidated Financial Statements - Note 1, Organization and Basis of Presentation - Change in Accounting Principle." We expect our effective tax rate to return to approximately the statutory tax rate for the year ending December 31, 2017. From inception through September 30, 2016, we had evaluated the realizability of our net deferred tax assets on a quarterly basis and concluded that it was more-likely-than-not that our net deferred tax assets may not be realized and recognized a full valuation allowance against net deferred tax assets.
|
| | | | | | | |
Consolidated balance sheets | September 30, 2017 | | December 31, 2016 (1) |
| (In Thousands) |
Total investment portfolio | $ | 692,729 |
| | $ | 628,969 |
|
Cash and cash equivalents | 20,698 |
| | 47,746 |
|
Premiums receivable | 21,056 |
| | 13,728 |
|
Deferred policy acquisition costs, net | 36,101 |
| | 30,109 |
|
Software and equipment, net | 21,767 |
| | 20,402 |
|
Prepaid reinsurance premiums | 39,915 |
| | 37,921 |
|
Deferred tax asset, net | 38,490 |
| | 51,434 |
|
Other assets | 15,856 |
| | 9,588 |
|
Total assets | $ | 886,612 |
| | $ | 839,897 |
|
Term loan | $ | 143,969 |
| | $ | 144,353 |
|
Unearned premiums | 161,345 |
| | 152,906 |
|
Accounts payable and accrued expenses | 22,028 |
| | 25,297 |
|
Reserve for insurance claims and claims expenses | 6,123 |
| | 3,001 |
|
Reinsurance funds withheld | 33,105 |
| | 30,633 |
|
Deferred ceding commission | 4,971 |
| | 4,831 |
|
Warrant liability | 4,046 |
| | 3,367 |
|
Total liabilities | 375,587 |
| | 364,388 |
|
Total shareholders' equity | 511,025 |
| | 475,509 |
|
Total liabilities and shareholders' equity | $ | 886,612 |
| | $ | 839,897 |
|
(1) The 2016 prior period balance sheet has been revised. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1, Organization9, Income Taxes."
Net Income
Net income was $67.7 million for the three months ended March 31, 2022 compared to $52.9 million for the three months ended March 31, 2021. Adjusted net income was $67.5 million for the three months ended March 31, 2022 compared to $53.4 million for the three months ended March 31, 2021. The increases in net income and Basisadjusted net income were primarily driven by growth in our total revenues and decrease in insurance claims and claim expenses, partially offset by an increase in our income tax expense.
Diluted EPS was $0.77 for the three months ended March 31, 2022 compared to $0.61 for the three months ended March 31, 2021. Adjusted diluted EPS was $0.77 for the three months ended March 31, 2022 compared to $0.62 for the three
months ended March 31, 2021. Diluted and adjusted diluted EPS increased due to growth in net income and adjusted net income, partially offset by an increase in weighted average diluted shares outstanding.
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of Presentation. Immaterial Correctionfinancial results between periods.
| | | | | | | | | | | | | | | |
Non-GAAP Financial Measure Reconciliations | For the three months ended March 31, | | |
| 2022 | | 2021 | | | | |
As reported | ($ in thousands, except for per share data) |
Income before income taxes | $ | 86,747 | | | $ | 67,456 | | | | | |
Income tax expense | 19,067 | | | 14,565 | | | | | |
Net income | $ | 67,680 | | | $ | 52,891 | | | | | |
| | | | | | | |
Adjustments | | | | | | | |
Net realized investment gains | (408) | | | — | | | | | |
(Gain) loss from change in fair value warrant liability | (93) | | | 205 | | | | | |
Capital market transaction costs | 260 | | | 378 | | | | | |
Other infrequent, unusual or non-operating items | — | | | — | | | | | |
Adjusted income before tax | 86,506 | | | 68,039 | | | | | |
| | | | | | | |
Income tax (benefit) expense on adjustments | (31) | | | 79 | | | | | |
| | | | | | | |
Adjusted net income | $ | 67,470 | | | $ | 53,395 | | | | | |
| | | | | | | |
Weighted average diluted shares outstanding | 87,310 | | | 86,487 | | | | | |
| | | | | | | |
Adjusted diluted EPS | $ | 0.77 | | | $ | 0.62 | | | | | |
Explanation and Reconciliation of Prior Period Amounts" 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 other infrequent, unusual or 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 other infrequent, unusual or 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.
AsAdjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP.
Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below.
•Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability.
•Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles.
•Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results.
•Other infrequent, unusual or non-operating items. Items that are the result of unforeseen or uncommon events, and are not expected to recur with frequency 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 infrequent, unusual or non-operating adjustments related to severance, restricted stock modification and other expenses incurred in connection with the CEO transition announced in September 30, 2017, we had approximately $713.4 million2021 and 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 infrequent or non-recurring in nature, and are not indicative of the performance of, or ongoing trends in, our primary operating activities or business.
| | | | | | | | | | | |
Consolidated balance sheets | March 31, 2022 | | December 31, 2021 |
| (In Thousands) |
Total investment portfolio | $ | 1,993,972 | | | $ | 2,085,931 | |
Cash and cash equivalents | 130,906 | | | 76,646 | |
Premiums receivable | 60,526 | | | 60,358 | |
Deferred policy acquisition costs, net | 59,727 | | | 59,584 | |
Software and equipment, net | 32,386 | | | 32,047 | |
Prepaid reinsurance premiums | 2,011 | | | 2,393 | |
| | | |
Reinsurance recoverable | 20,080 | | | 20,320 | |
Other assets | 124,336 | | | 113,302 | |
Total assets | $ | 2,423,944 | | | $ | 2,450,581 | |
Debt | $ | 394,969 | | | $ | 394,623 | |
| | | |
Unearned premiums | 138,393 | | | 139,237 | |
Accounts payable and accrued expenses | 76,923 | | | 72,000 | |
Reserve for insurance claims and claim expenses | 102,372 | | | 103,551 | |
Reinsurance funds withheld | 5,343 | | | 5,601 | |
Warrant liability | 1,416 | | | 2,363 | |
Deferred tax liability, net | 156,966 | | | 164,175 | |
Other liabilities | 12,520 | | | 3,245 | |
Total liabilities | 888,902 | | | 884,795 | |
Total shareholders' equity | 1,535,042 | | | 1,565,786 | |
Total liabilities and shareholders' equity | $ | 2,423,944 | | | $ | 2,450,581 | |
Total cash and investments including $61.7were $2.1 billion as of March 31, 2022, compared to $2.2 billion as of December 31, 2021. Cash and investments at March 31, 2022 included $106.2 million held atby NMIH. The decrease in total cash and investments reflects an increase in the unrealized loss positions of our fixed income portfolio tied to the prevailing interest rate and credit spread environment and share repurchases during the three months ended March 31, 2022, partially offset by an increase in cash and investments from year-end 2016 primarily relates to cash generated from operations.
Premiums receivable was $60.5 million as of March 31, 2022, compared to $60.4 million as December 31, 2021. The increase was primarily driven by growth in our monthly premium policies in force, where premiums are generally paid one month in arrears.
Net deferred policy acquisition costs were $36.1$59.7 million as of September 30, 2017,March 31, 2022, compared to $30.1$59.6 million atas of December 31, 2016.2021. The increase was primarily driven by the defermentdeferral of certain costs associated with polices written during the nine months ended September 30, 2017, partiallyorigination of new policies between the respective balance sheet dates, largely offset by the recognition of previously deferred policy acquisition costs.
Prepaid reinsurance premiums were $2.0 million as of March 31, 2022, compared to $2.4 million as of December 31, 2021. Prepaid reinsurance premiums, which represent the unearned premiums on single premium policies ceded under the 2016 QSR Transaction, decreased due to the continued amortization of previously ceded unearned premiums.
Reinsurance recoverable was $20.1 million as of March 31, 2022, compared to $20.3 million as of December 31, 2021. The decrease was driven by a decrease in ceded losses recoverable associated with our QSR Transactions.
Other assets increased to $124.3 million as of March 31, 2022, compared to $113.3 million as of December 31, 2021. The increase was primarily driven by the recognition of incremental ROU assets in connection with the modification of the operating lease for our corporate headquarters in January 2022. Other assets included $89.2 million of tax and loss bonds held by the Company at both March 31, 2022 and December 31, 2021. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
Unearned premiums were $138.4 million as of March 31, 2022, compared to $139.2 million as of December 31, 2021. The decrease was driven by the amortization of previously deferred acquisition costs and the capitalization of ceding commissions associated with the 2016 QSR Transaction during the period.
Unearned premiums increased $8.4 million to $161.3 million as of September 30, 2017, primarily due to single premium policy origination during the period, offset by the amortization through earnings of existing unearned premiums through earnings in accordance with the expiration of risk on the related single premium policies and the cancellationcancellations 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 frompolicies, partially offset by single premium policy originations during 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.three months ended March 31, 2022.
Accounts payable and accrued expenses decreased to $22.0were $76.9 million as of September 30, 2017, from $25.3March 31, 2022, compared to $72.0 million atas of December 31, 2016.2021. The balance consistsincrease was primarily driven by accrued and unpaid interest on the Notes which is payable semi-annually in June and December and unsettled trades payable, partially offset by payments of payroll and bonuses, premium taxes and other contractual payables.
Reserve for insurance claims and claim expenses was $102.4 million as of March 31, 2022, compared to $103.6 million as of December 31, 2021. The decrease was primarily driven by a release of a portion of the reserves we established for anticipated claims payments in prior periods, cure activity, and a decline in the total size of our default population. The decrease was partially offset by the increase in the average reserve per default. 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-19 pandemic, we have increased the initial reserves held for such loans as they have aged in default status. See "- Insurance Claims and decreased as a result of lower operating accruals 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 $5.3 million as of $2.5March 31, 2022, compared to $5.6 million fromas of December 31, 2016, was a result of increased2021. 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 $1.4 million at March 31, 2022, compared to $2.4 million at December 31, 2021. The decrease was driven by the exercise of outstanding warrants, and changes in the price of our common stock and other Black-Scholes 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 $157.0 million at March 31, 2022, compared to $164.2 million at December 31, 2021. The decrease was primarily due to the increase in unrealized losses recorded in other comprehensive income, partially offset by an increase in the claimed deductibility of our statutory contingency reserve. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
Other liabilities increased to $12.5 million as of March 31, 2022, compared to $3.2 million as of December 31, 2021. The increase was primarily driven by the recognition of an incremental lease liability in connection with the modification of the operating lease for our corporate headquarters in January 2022.
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
| | Consolidated cash flows | For the nine months ended September 30, | Consolidated cash flows | For the three months ended March 31, |
| 2017 | | 2016 | | 2022 | | 2021 | |
Net cash (used in) provided by: | (In Thousands) | |
Net cash provided by (used in): | | Net cash provided by (used in): | (In Thousands) |
Operating activities | $ | 41,778 |
| | $ | 52,212 |
| Operating activities | $ | 80,310 | | | $ | 85,464 | | |
Investing activities | (66,553 | ) | | (63,714 | ) | Investing activities | (21,370) | | | (96,447) | | |
Financing activities | (2,273 | ) | | (1,293 | ) | Financing activities | (4,680) | | | (437) | | |
Net decrease in cash and cash equivalents | $ | (27,048 | ) | | $ | (12,795 | ) | |
Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | $ | 54,260 | | | $ | (11,420) | | |
Net cash provided by operating activities was $41.8$80.3 million for the ninethree months ended September 30, 2017,March 31, 2022, compared to $52.2$85.5 million infor the same period in 2016.three months ended March 31, 2021. The decrease in cash generated fromprovided by operating activities year-on-year was primarily causeddriven by increased operating expenses in connection withthe payment of certain employee compensation and benefits costs, and higher claims paid due to an increase in our default inventorypartially offset by growth in net premiums written.written and a decline in claims paid during the three months ended March 31, 2022.
Cash used in investing activities for the periods presented was driven bythree months ended March 31, 2022 and 2021 reflects 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.
The $1 million increase in cash
Cash used in financing activities was $4.7 million for the ninethree months ended September 30, 2017March 31, 2022, compared to $0.4 million for the same periodthree months ended September 30, 2016, wasMarch 31, 2021. Cash used in financing activities during the three months ended March 31, 2022 primarily due to an increase in taxes paid relatedrelates to the net share settlementrepurchase of employee equity awards.common stock.
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 2021 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; (vi) repurchase of its common stock; and (vi)(vii) 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, 2022, NMIH had $61.7$106.2 million of cash and investments. NMIH's principal sourcesources of operatingnet cash isare dividends from its subsidiaries and investment income andincome. NMIC has the capacity, under Wisconsin law, to pay $34.9 million of aggregate ordinary course dividends to NMIH during the twelve-month period ending December 31, 2022. NMIH also has access to $250 million of undrawn revolving credit capacity under the 2021 Revolving Credit Facility. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt.
On February 10, 2022, our Board of Directors approved a $125 million share repurchase program through December 31, 2023, that enables the company to repurchase its common stock. The authorization provides NMIH the flexibility to repurchase stock from time to time in the future could include dividends from NMIC, if availableopen market or in privately negotiated transactions, based on market and permittedbusiness conditions, stock price and other factors. During the three months ended March 31, 2022, NMIH repurchased 235,344 shares of common stock pursuant to a trading plan under law and byRule 10b-18 of the GSEs.Exchange Act, at a total cost of $5.0 million, including associated costs.
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 2021 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 1, 2025 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. The 2021 Revolving Credit Facility matures on the earlier of (x) November 29, 2025 or (y) if any existing senior secured notes remain outstanding on such date, February 28, 2025, and accrues interest at a variable rate equal to, at our discretion, (i) a Base Rate (as defined in the 2021 Revolving Credit Facility, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Adjusted Term SOFR Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375% to 2.875% per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. Borrowings under the 2021 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations.
Under the 2021 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, 2022, the applicable commitment fee was 0.35%.
We are subject to insurance department notice or approval.certain covenants under the 2021 Revolving Credit Facility, including: a maximum debt-to-total capitalization ratio of 35%, a requirement to maintain compliance with the private mortgage insurer eligibility requirements (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, 2022.
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 31.31. On April 1, 2022, NMIC has never paid any dividendsa $34.9 million ordinary course dividend to NMIH. NMIC reported a statutory net loss for
NMIH may require liquidity to fund the twelve months ended December 31, 2016 and currently cannot pay any dividends to NMIH without the prior approvalcapital needs of the Wisconsin OCI. Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.
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, 2022, NMIC reported $2,127 million available assets against $1,341 million risk-based required assets, for a $786 million "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 eligible for Individual Assistance. In June 2020, the GSEs issued guidance (which was subsequently amended and restated) on the risk-based treatment of loans affected by the COVID-19 pandemic. 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, 2022, NMIC's performing primary RIF, net of reinsurance, was approximately $24.5 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction.Based on NMIC's total statutory capital of $2.0 billion (including contingency reserves) as of March 31, 2022, NMIC's RTC ratio was 12.4:1. Re One has no risk in force remaining and no longer reports a RTC ratio.
NMIC's principal sources of 22.0:1.0, minimum 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, 2022, NMIC had $2.0 billion of $27.4cash and investments, including $92 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, 2022, NMIC generated $302 million of cash flow from operations and received an additional $137 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 removeborrowers, 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 2021 Revolving Credit Facility, and assigned a "Ba2" rating to the maturity date).Notes.
Moody's ratings outlook is stable. In June 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, 2022, the fair value of our investment portfolio was $692.7 million. We also had$2.0 billion and we held an additional $20.7$130.9 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, 2022 was 2.3%1.9%. 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, 2022 | | December 31, 2021 |
Corporate debt securities | 63 | % | | 64 | % |
Municipal debt securities | 26 | | | 26 | |
Cash, cash equivalents, and short-term investments | 6 | | | 4 | |
Asset-backed securities | 4 | | | 5 | |
| | | |
| | | |
U.S. treasury securities and obligations of U.S. government agencies | 1 | | | 1 | |
Total | 100 | % | | 100 | % |
The ratings | | | | | | | | | | | |
Investment portfolio ratings at fair value (1) | March 31, 2022 | | December 31, 2021 |
AAA | 11 | % | | 9 | % |
AA(2) | 28 | | | 28 | |
A(2) | 44 | | | 46 | |
BBB(2) | 17 | | | 17 | |
| | | |
| | | |
| | | |
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, 2022 or December 31, 2021, 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, 2022 or 2021.
As of March 31, 2022, the investment portfolio had gross unrealized losses of $122.9 million, of which $29.0 million 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, 2021, the investment portfolio had gross unrealized losses of $23.2 million, of which $6.5 million 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 specifiedaggregate size of the unrealized loss position as of March 31, 2022, was primarily driven by interest rate movements following the purchase date of certain securities. We evaluated the securities in an unrealized loss position as of March 31, 2022, assessing their credit ratings as well as any adverse conditions specifically related to the security. Based upon our 2016 10-K.estimate of the amount and timing of cash flows to be collected over the remaining life of each instrument, we believe the unrealized losses as of March 31, 2022 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 20162021 10-K.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large investment 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'sBoard'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, 2022 and December 31, 20162021 was $693 million$2.0 billion and $629 million,$2.1 billion, respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support.
As of September 30, 2017,March 31, 2022, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.954.72 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%4.72% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 4.134.81 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%4.81% 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-monthone-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-monthone-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, 2022, 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, 2022, 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 20162021 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 20162021 10-K. You should carefully consider the risks and uncertainties described herein and in our 20162021 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 20162021 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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| |
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NMI HOLDINGS, INC.
|
November 1, 2017 |
By: /s/ Adam Pollitzer
|
| Name: Adam Pollitzer
Title: Chief Financial Officer and Duly Authorized Signatory
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EXHIBIT INDEX
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| | |
Exhibit Number | | Description |
| | |
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 | | Warrant No. 1 to Purchase Common StockIndenture, dated as of June 19, 2020, among NMI Holdings, Inc. issued to FBR Capital Markets & Co., dated June 13, 2013NMI Services, Inc. as the Initial Guarantor, and the Bank of New York Mellon Trust Company, N.A. as Trustee and Notes Collateral Agent (incorporated(incorporated herein by reference to Exhibit 4.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013) |
4.6 | | |
10.1 ~ | | |
10.2 ~ | | |
10.3 ~ | | |
10.4 ~ | | |
10.5 ~ | | |
10.6 ~ | | |
10.7 ~ | | |
10.8 ~ | | |
10.9 ~ | | |
10.10 ~ | | |
|
| | |
10.11 ~ | | |
10.1210.1 ~ | | |
10.1310.2 ~ | | |
10.1410.3 ~ | | |
10.4 ~ | | |
10.1510.5 + | | |
10.1610.6 | | Credit Agreement, dated November 10, 2015,May 24, 2018, between NMI Holdings, Inc., the lenderslender 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 November 10, 2015)May 25, 2018) |
10.1710.7 | | Extension Amendment, No. 1, dated February 10, 2017,as of March 20, 2020, to the Company's Credit Agreement, dated November 10, 2015, between NMI Holdings, Inc.,as of May 24, 2018, by and among the Company, 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 March 20, 2020) |
10.8 | | 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) |
10.9 | | |
10.10 | | 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. (incorporated herein by reference to Exhibit 10.20 to our Form 10-Q filed on November 5, 2020). |
| | | | | | | | |
10.11 | | |
10.1810.12 ~ | | 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 ~ | | |
10.2010.13 ~
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10.2110.14 ~ | | |
10.2210.15 ~ | | |
10.2310.16 ~
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10.2410.17 ~ | | |
10.2510.18 ~
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10.2610.19 ~
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10.27 ~
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10.2810.20 ~ | | |
10.2910.21 ~ | | |
10.3010.22 ~ | | |
10.3110.23 ~
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21.110.24 ~
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10.25 ~
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10.26 ~
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10.27 ~ | | |
21.1 | | |
31.122.1 | | |
31.1 | | |
31.2 | | |
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32.1 # | | |
32.1 # | | |
101 * | | The following financial information from NMI Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended September 30, 2017March 31, 2022 formatted in XBRL (eXtensible Business Reporting Language):
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| | (i) Condensed Consolidated Balance Sheets as of September 30, 2017March 31, 2022 and December 31, 2016 2021; |
| | | | | | | | |
| | (ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2017March 31, 2022 and 20162021; |
| | (iii) Condensed Consolidated Statements of Changes in Shareholders' Equity for the ninethree months ended September 30, 2017March 31, 2022 and the year ended December 31, 2016 2021; |
| | (iv) Condensed Consolidated Statements of Cash Flows for the ninethree months ended September 30, 2017March 31, 2022 and 2016,2021; and
|
| | (v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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~ | Indicates a management contract or compensatory plan or contract. |
+ | Confidential treatment granted as to certain portions, which portions have been filed separately with the SEC. |
# | In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act except to the extent that the registrant specifically incorporates it by reference. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| NMI HOLDINGS, INC. |
Date: May 4, 2022 | |
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| By: /s/ Ravi Mallela |
* | 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: Ravi Mallela |
| Title: Chief Financial Officer and Duly Authorized Signatory |