Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included below in Item 8 of this report and the Risk Factors included above in Item 1A of this report. In addition, investors should review the "Cautionary Note Regarding Forward Looking Statements" above.
Overview
We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators.
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-LTV (i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-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 homeowners.
NMIH, 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 December 31, 2020, we had master policies with 1,570 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As of December 31, 2020, we had $113.1 billion of total IIF, including primary IIF of $111.3 billion, and $28.3 billion of gross RIF, including primary RIF of $28.2 billion.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPS pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders.
Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claim payment practices, responsive customer service, financial strength and profitability.
Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located in Emeryville, California. As of December 31, 2020, we had 262 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 characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope that the recent development, distribution and administration of new vaccines may relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist. In response to the COVID-19 outbreak and continuing
uncertainties, we activated our disaster continuity program to ensure our employees are safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration for the increased level of macroeconomic volatility. While the U.S. housing market has demonstrated significant resiliency since the onset of the pandemic, with record levels of demand, mortgage origination activity and house price appreciation, much uncertainty remains. Given the uncertainty that prevails, we cannot fully assess or estimate the ultimate impact of COVID-19 on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results.
Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry
The U.S. housing market has demonstrated notable resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates are helping to support housing affordability, medical concerns and lifestyle preferences are driving people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives are reinforcing the value of homeownership – all of which are contributing to an influx of new home buyers, record levels of purchase demand, and generally stable to rising house prices nationally.
While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis will help to mitigate the risk of a severe pullback. We observe several favorable differences in the current environment compared to the period leading up to and through the 2008 Financial Crisis – the last period of significant economic volatility in the U.S. and one noted for its significant housing market dislocation. Such differences include:
(i) the generally higher quality borrower base (as measured by weighted average FICO scores and LTV ratios) and tighter underwriting standards (with, among other items, full-documentation required to verify borrower income and asset positions) that prevail in the current market;
(ii) the lower concentration of higher risk loan structures, such as negative amortizing, interest-only or short-termed option adjustable-rate mortgages being originated and outstanding in the current market;
(iii) the meaningfully higher proportion of loans used for lower risk purposes, such as the purchase of a primary residence or rate-term refinancing in the current market, as opposed to cash-out refinancings, investment properties or second home purchases, which prevailed to a far greater degree in the lead up to the 2008 Financial Crisis;
(iv) the availability and immediate application by the government, regulators, lenders, loan servicers and others of a broad toolkit of resources designed to aid distressed borrowers, including forbearance, foreclosure moratoriums and other assistance programs codified under the CARES Act, enacted on March 27, 2020; and
(v) the broader and equally immediate application of significant fiscal and monetary stimulus by the federal government under the CARES Act, and more recently under the Consolidated Appropriations Act, enacted on December 27, 2020, as well as across a range of other programs designed to assist unemployed individuals and distressed businesses, and support the smooth functioning of various capital and risk markets.
We also perceive the house price environment in the period leading up to the COVID-crisis to be anchored by more balanced market fundamentals than that in the period leading up to the 2008 Financial Crisis. We believe the 2008 Financial Crisis was directly precipitated by irresponsible behavior in the housing market that drove home prices to unsustainable heights (a so-called "bubble"). We see a causal link between the housing market and the 2008 Financial Crisis that we do not see in the COVID-19 outbreak, and we believe this will further contribute to housing market stability through the COVID-19 pandemic.
Purchase mortgage origination volume has increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume has also grown dramatically as declining mortgage rates have created refinancing opportunities for a large number of existing borrowers.
Growth in total mortgage origination volume increases the addressable market for the U.S. mortgage insurance industry, while accelerated refinancing activity increases prepayment speed on outstanding insured mortgages. In this context, total U.S. mortgage insurance industry NIW volume has increased to record levels, while the persistency of existing in-force insured risk across the industry has declined meaningfully.
While we currently observe broad resiliency in the housing and high-LTV mortgage markets and, for the reasons discussed above, expect this trend to continue in the near term, the ultimate impact of COVID-19 remains highly uncertain. See
Item 1A, "Risk Factors - The COVID-19 outbreak may continue to materially adversely affect our business, results of operations and financial condition."
Potential Impact on NMI's Business Performance and Financial Position
Operations
We had 262 employees at December 31, 2020, including 113 who typically work at our corporate headquarters in Emeryville, CA and 149 who typically work from home in locations across the country. In response to the COVID-19 outbreak, we activated our business continuity program and instituted additional work-from-home practices for our 113 Emeryville-based staff. We have transitioned our operations seamlessly and continue to positively engage with customers on a remote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment and internal controls over financial reporting are unchanged. We have achieved this transition without incurring additional capital expenditures or operating expenses and we believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course.
New Business Production
Our NIW volume increased significantly following the onset of the COVID-19 pandemic driven by the broad resiliency of the housing market, growth in total mortgage origination volume and increasing size of the U.S. mortgage insurance market, as well as the continued expansion of our customer franchise. We wrote $62.7 billion of NIW during the year ended December 31, 2020, up 39% compared to the year ended December 31, 2019 and 130% compared to the year ended December 31, 2018.
While we currently expect our new business production will remain elevated, the potential onset of a new viral wave and rising case counts, reintroduction of broad-based shelter in place directives, increased unemployment or other potential outcomes related to COVID-19 could drive a moderation or decline in our volume going forward.
We have broadly defined underwriting standards and loan-level eligibility criteria that are designed to limit our exposure to higher risk loans, and have used Rate GPS to actively shape the mix of our new business production and insured portfolio by, among other risk factors, borrower FICO score, DTI ratio and LTV ratio. In the weeks following the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that have further strengthened the credit risk profile of our NIW volume and IIF. At December 31, 2020, the weighted average FICO score of our RIF was 755 and we had a 3% mix of below 680 FICO score risk. Similarly, at December 31, 2020, the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 10% mix of 97% LTV risk.
We set our premium rates based on a broad range of individual and market variables, including property type, type of loan product, borrower credit characteristics, and lender profile. Given the significant economic dislocation caused thus far by the COVID-19 outbreak, the uncertain duration and ultimate global impact of this crisis, and the continued potential that it will have a deleterious effect on the residential housing market, we have taken action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules.
Delinquency Trends and Claims Expense
We had 12,209 defaulted loans in our primary insured portfolio at December 31, 2020, which represented a 3.06% default rate against our 399,429 total policies in-force. Our default population has increased significantly since the outbreak of the pandemic as borrowers have faced increasing challenges related to COVID-19 and chosen to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by the GSEs and private lenders.
At December 31, 2020, 19,464 or 4.9% of the loans we insured in our primary portfolio were enrolled in a forbearance program, including 11,232 of the loans in our default population, 1,108 loans that had missed at least one payment, but not progressed into default status and 7,124 additional loans that were fully performing without any missed payments.
As of January 31, 2021, our default population had decreased to 11,905, representing a 2.9% default rate and identified 17,820 loans in forbearance programs.
The table below highlights default and forbearance activity in our primary portfolio as of the dates indicated.
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Default and Forbearance Activity as of
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12/31/2019
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3/31/2020
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6/30/2020
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9/30/2020
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12/31/2020
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Number of loans in default
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1,448
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1,449
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10,816
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13,765
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12,209
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Default rate (1)
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0.40%
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0.38%
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2.90%
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3.60%
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3.06%
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Number of loans in forbearance
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436
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3,122
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28,555
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24,809
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19,464
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Forbearance rate (2)
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0.12%
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0.83%
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7.66%
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6.50%
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4.87%
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(1) Default rate is calculated as the number of loans in default divided by total polices in force
(2) Forbearance rate is calculated as the number of loans in forbearance divided by total polices in force.
While we are encouraged by the decline in our forbearance and default populations, and the rising level of cure activity amongst COVID impacted borrowers, the continued social and economic dislocation caused by the pandemic may contribute to an increase in our forbearance and default counts in future periods.
We establish reserves for claims and allocated claim expenses when we are notified that a borrower is in default. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve and claims expense) reflects our best estimate of the future claim payment to be made under each individual policy. Our future claims exposure is a function of the number of delinquent loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors.
We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options, which allow borrowers to amortize, or in certain instances fully defer the payments otherwise due during the forbearance period, over an extended length of time. In response to the onset of the COVID-19 outbreak, the GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back into performing status. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At December 31, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
Our Master Policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) interest (capped at three years) and (ii) certain advances, each as incurred through the date the claim is filed. Under our Master Policies, a national foreclosure moratorium of the type currently required will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amount. If the duration of the current foreclosure moratorium mandated by the GSEs is extended beyond March 31, 2021 by a significant period of time, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not yet gone through foreclosure, may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted.
Regulatory Capital Position
As an approved mortgage insurer and Wisconsin-domiciled carrier, we are required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI.
The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, we must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of $400 million. At December 31, 2020, we reported $1,751 million available assets against $984 million risk-based required assets for a $766 million "excess" funding position.
The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly
higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared by the Federal Emergency Management Agency (FEMA) to be a Major Disaster zone. In June 2020, the GSEs issued guidance (subsequently amended and restated in September 2020) on the risk-based treatment of loans affected by the COVID-19 crisis and the reporting of non-performing loans by aging category. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period.
Our PMIERs minimum risk-based required asset amount is also adjusted for our reinsurance transactions (as approved by the GSEs). Under our quota share reinsurance treaties, we receive credit for the PMIERs risk-based required asset amount on ceded RIF. As our gross PMIERs risk-based required asset amount on ceded RIF increases, our PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under our ILN transactions, we generally receive credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. We have structured our ILN transactions to be overcollateralized, such that there are more ILN notes outstanding and cash held in trust than we currently receive credit for under the PMIERs. To the extent our PMIERs risk-based required asset amount on RIF ceded under the ILN transactions grows, we receive increased PMIERs credit under the treaties. The increasing PMIERs credit we receive under the ILN treaties is further enhanced by their delinquency lockout triggers. In the event of certain credit enhancement or delinquency events, the ILN notes stop amortizing and the cash held in trust is secured for our benefit (a Lock-Out Event). As the underlying RIF continues to run-off, this has the effect of increasing the overcollateralization within, and excess PMIERs capacity provided by, each ILN structure.
Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period the overcollateralization within and PMIERs capacity provided by each ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account.
The following table provides detail on the level of overcollateralization of each of our ILN Transactions at December 31, 2020:
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($ values in thousands)
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2017 ILN Transaction
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2018 ILN Transaction
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2019 ILN Transaction
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2020-1 ILN Transaction
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2020-2 ILN Transaction
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Ceded RIF
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$
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1,920,096
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$
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2,238,154
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$
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2,764,120
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$
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5,175,978
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$
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5,820,747
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First Layer Retained Loss
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121,423
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123,234
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122,874
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169,514
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121,177
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Reinsurance Coverage
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40,226
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158,489
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231,877
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250,685
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242,351
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Eligible Coverage
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$
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161,649
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$
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281,723
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$
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354,751
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$
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420,199
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$
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363,528
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Subordinated Coverage (1)
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8.42%
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12.59%
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12.83%
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8.00%
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6.25%
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PMIERs Charge on Ceded RIF
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6.11%
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7.78%
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7.99%
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6.28%
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5.37%
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Overcollateralization (2)
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$
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40,226
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$
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107,612
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$
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133,941
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$
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94,929
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$
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50,852
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Delinquency Trigger (3)
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4.0%
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4.0%
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4.0%
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6.0%
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4.7%
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(1) For the 2020-1 ILN Transaction, absent a delinquency trigger, the subordinated coverage is capped at 8%.
(2) Overcollateralization of the 2017 ILN Transaction is equal to its current reinsurance coverage as the PMIERs required asset amount on RIF ceded under the transaction is currently below the remaining first layer retained loss.
(3) Delinquency triggers for 2017, 2018 and 2019 ILN Transactions are set at a fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for the 2020-1 and 2020-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average.
At December 31, 2020, we had an aggregate $428 million of overcollateralization available across our ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the Lock-Out Events remain in effect for each of the 2017, 2018 and 2019 ILN Transactions and our underlying RIF continues to run-off at the same rate as it did during the three months ended December 31, 2020, we estimate that our total overcollateralization would increase by up to approximately $45 million per quarter.
Our PMIERs funding requirement will go up in future periods based on the volume and risk profile of our new business production, and performance of our in-force insurance portfolio. We estimate, however, that we will remain in compliance with our PMIERs asset requirements even if the forbearance-driven default rate on our in-force portfolio materially exceeds its current level, given our $766 million excess available asset position at December 31, 2020, the nationwide applicability of the 70% haircut on delinquent policies affected by the COVID-19 crisis, the increasing PMIERs relief automatically provided under each of our quota share treaties and ILN Transactions.
NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as RTC) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are generally treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard, and we expect this to remain the case in the aftermath of the COVID-19 outbreak.
Liquidity
We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of December 31, 2020, we had $1.9 billion of consolidated cash and investments, including $72 million of cash and investments at NMIH.
On June 8, 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of approximately $220 million, net of underwriting discounts, commissions and other direct offering expenses. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15, Common Stock." On June 19, 2020, NMIH also completed the sale of $400 million aggregate principal amount of senior secured notes, raising net proceeds of $244 million after giving effect to offering expenses and the repayment of the principal amount outstanding under our existing $150 million term loan. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt." NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings.
NMIH also has access to $110 million of undrawn revolving credit capacity (the 2020 Revolving Credit Facility) and $1.6 million of ordinary course dividend capacity available from Re One without the prior approval of the Wisconsin OCI. Amounts drawn under the 2020 Revolving Credit Facility are available as directed for NMIH needs or may be down-streamed to support the requirements of our operating subsidiaries if we so decide. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt ."
NMIH's principal liquidity demands include funds for the payment of (i) certain corporate expenses, (ii) certain reimbursable expenses of our insurance subsidiaries, including NMIC, and (iii) principal and interest as due on our outstanding debt. NMIH generates cash interest income on its investment portfolio and benefits from tax, expense-sharing and debt service agreements with its subsidiaries. Such agreements have been approved by the Wisconsin OCI and provide for the reimbursement of substantially all of NMIH's annual cash expenditures. While such agreements are subject to revocation by the Wisconsin OCI, we do not expect such action to be taken at this time. The Wisconsin OCI has refreshed its approval of the debt service agreement providing for the additional reimbursement by NMIC of interest expense due on our newly issued Notes and 2020 Revolving Credit Facility.
NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At December 31, 2020, NMIC had $1.8 billion of cash and investments, including $104 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended December 31, 2020, NMIC generated $250 million of cash flow from operations and received an additional $406 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path (i.e., are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term.
Premiums paid to NMIC on monthly policies are generally collected and remitted by loan servicers. We have noted the broad discussion about the liquidity challenges loan servicers may themselves face in the event of widespread borrower utilization of forbearance programs. We do not currently believe that loan servicer liquidity issues will have a material impact on NMIC's premium receipts or liquidity profile. Loan servicers are contractually obligated to advance mortgage insurance premiums in a timely manner, even if the underlying borrowers fail to remit their monthly mortgage payments. In June 2020, the GSEs issued guidance to the PMIERs (subsequently amended and restated in September 2020) that, among other items, requires us to notify them of our intent to cancel coverage on policies for which servicers have failed to make timely premium payments so that the GSEs can pay the premiums directly to us and preserve the mortgage insurance coverage. Through December 31, 2020, we did not see any notable changes in servicer payment practices, with servicers generally continuing to remit monthly premium payments as scheduled, including those for policies covering loans that are in a forbearance program.
Investment portfolio
At December 31, 2020, we had $1.9 billion of cash and invested assets. Our investment strategy equally prioritizes capital preservation alongside income generation, and we have a long-established investment policy that sets conservative limits for asset types, industry sectors, single issuers and instrument credit ratings. At December 31, 2020, our investment portfolio was comprised of 100% fixed income assets with 100% of our holdings rated investment grade and our portfolio having an average rating of "A+." At December 31, 2020, our portfolio was in a $73 million aggregate unrealized gain position; it was highly liquid and highly diversified with no Level 3 asset positions and no single issuer concentration greater than 1.6%. We did not record any allowance for credit losses in the portfolio during the year ended December 31, 2020, as we expect to recover the amortized cost basis of all securities held.
The pre-tax book yield on our investment portfolio was 2.2% for the year ended December 31, 2020. At the onset of the COVID-19 crisis, we decided to prioritize liquidity and increased our cash and equivalent holdings as a percentage of our total portfolio. We believe such action was prudent in light of the heightened market volatility and general uncertainty developing in the early stages of the COVID-19 pandemic. We have since redeployed much of our excess liquidity position.
Taxes
The CARES Act and 2021 Appropriations Act, among other things, include provisions relating to refundable payroll tax credits, deferment of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, technical corrections to tax depreciation methods for qualified improvement property, and temporary 100% deduction for business meals. We continue to monitor the impact that the CARES Act and the 2021 Appropriations Act may have on our business, financial condition and results of operations.
Other Conditions and Trends Impacting Our Business
Customer Development
We have important relationships with customers across all categories and allocation profiles, including National Accounts and Regional Accounts, and centralized and decentralized lenders. Our sales and marketing efforts are broadly focused on expanding our presence with existing customers and activating new customer relationships. We consider an activation to be the point at which we have signed a Master Policy, established IT connectivity and generated a first application or first dollar of NIW from a customer. During the year ended December 31, 2020, we activated 101 lenders, compared to 94 and 121 for the years ended December 31, 2019 and December 31, 2018, respectively. We also continued to expand our business with existing customers, deepening our existing relationships and capturing what we believe to be an increasing portion of their annual MI volume. At December 31, 2020, we had 1,570 Master Policies and 1,195 active customer relationships, compared to 1,476 and 1,095, respectively, as of December 31, 2019 and 1,374 and 1,005, respectively, as of December 31, 2018.
New Insurance Written, Insurance-In-Force and Risk-In-Force
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 high-LTV mortgage originations. Our NIW is also affected by the percentage of such high-LTV originations covered by private versus government 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 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 before consideration of reinsurance. Net RIF is gross RIF net of ceded reinsurance.
Net Premiums Written and Net Premiums Earned
We 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. On 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 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 for the duration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance 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 as compared to interest rates on loans underpinning our in force policies), levels of claim 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 earned over the estimated life of the policy. Substantially all of our single premium policies in force as of December 31, 2020 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any twelve-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 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 revenue is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state 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 premiums written and earned and also reduces 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'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. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
Quota share reinsurance
NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, and the 2020 QSR Transaction, effective April 1, 2020. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. Each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by S&P, A.M. Best or both.
Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims.
Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in 2018 and 20% of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims.
Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to 21% of the risk on eligible policies written from April 1, 2020 through December 31, 2020, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 50% that varies directly and inversely with ceded claims.
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 has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies written during discrete periods through a series of mortgage insurance-linked note offerings by the Oaktown Re Vehicles. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances occurs. 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). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of December 31, 2020.
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|
|
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|
|
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|
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|
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|
|
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|
|
($ values in thousands)
|
Inception Date
|
|
Covered Production
|
|
Initial Reinsurance Coverage
|
|
Current Reinsurance Coverage
|
|
Initial First Layer Retained Loss
|
|
Current First Layer Retained Loss (1)
|
2017 ILN Transaction
|
May 2, 2017
|
|
1/1/2013 - 12/31/2016
|
|
$
|
211,320
|
|
|
$
|
40,226
|
|
|
$
|
126,793
|
|
|
$
|
121,423
|
|
2018 ILN Transaction
|
July 25, 2018
|
|
1/1/2017 - 5/31/2018
|
|
264,545
|
|
|
158,489
|
|
|
125,312
|
|
|
123,234
|
|
2019 ILN Transaction
|
July 30, 2019
|
|
6/1/2018 - 6/30/2019
|
|
326,905
|
|
|
231,877
|
|
|
123,424
|
|
|
122,874
|
|
2020-1 ILN Transaction
|
July 30, 2020
|
|
7/1/2019 - 3/31/2020
|
|
322,076
|
|
|
250,685
|
|
|
169,514
|
|
|
169,514
|
|
2020-2 ILN Transaction
|
October 29, 2020
|
|
4/1/2020 - 9/30/2020 (2)
|
|
242,351
|
|
|
242,351
|
|
|
121,777
|
|
|
121,177
|
|
(1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure, and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss.
(2) Less than 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, 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.
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|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
Primary and pool IIF and NIW
|
As of and for the years ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
IIF
|
|
NIW
|
|
IIF
|
|
NIW
|
|
IIF
|
|
NIW
|
|
|
|
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(In Millions)
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Monthly
|
$
|
95,336
|
|
|
$
|
56,651
|
|
|
$
|
77,097
|
|
|
$
|
41,357
|
|
|
$
|
51,655
|
|
|
$
|
24,122
|
|
|
|
|
|
Single
|
15,916
|
|
|
6,051
|
|
|
17,657
|
|
|
3,784
|
|
|
16,896
|
|
|
3,173
|
|
|
|
|
|
Primary
|
111,252
|
|
|
62,702
|
|
|
94,754
|
|
|
45,141
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|
|
68,551
|
|
|
27,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pool
|
1,855
|
|
|
—
|
|
|
2,570
|
|
|
—
|
|
|
2,901
|
|
|
—
|
|
|
|
|
|
Total
|
$
|
113,107
|
|
|
$
|
62,702
|
|
|
$
|
97,324
|
|
|
$
|
45,141
|
|
|
$
|
71,452
|
|
|
$
|
27,295
|
|
|
|
|
|
For the year ended December 31, 2020, primary NIW increased 39% compared to the year ended December 31, 2019, due to growth in our monthly and single premium policy production tied to growth in the size of the total mortgage insurance market, as well as the increased penetration of existing customer accounts and new customer account activations. For the year ended December 31, 2019, primary NIW increased 65% compared to the year ended December 31, 2018, due to growth in our monthly and single premium policy production.
For the year ended December 31, 2020, monthly premium polices accounted for 90% of our NIW, compared to 92% and 88% for the years ended December 31, 2019 and 2018, respectively. As of December 31, 2020, monthly premium policies accounted for 86% of our primary IIF, compared to 81% at December 31, 2019 and 75% at December 31, 2018.
Total IIF grew 16% at December 31, 2020 compared to December 31, 2019, which in turn grew 36% compared to December 31, 2018, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of our in-force policies. Our persistency rate decreased to 56% at December 31, 2020 from 77% at December 31, 2019 and 87% at December 31, 2018, reflecting the impact of increased refinancing activity during the year ended December 31, 2020 tied to record low interest rates.
The following table presents net premiums written and earned for the periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
Primary and pool premiums written and earned
|
For the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
(In Thousands)
|
Net premiums written
|
$
|
388,644
|
|
|
$
|
332,652
|
|
|
$
|
256,803
|
|
|
|
Net premiums earned
|
397,172
|
|
|
345,015
|
|
|
251,197
|
|
|
|
For the year ended December 31, 2020, net premiums written and earned grew 17% and 15%, respectively, compared to the year ended December 31, 2019. The growth in net premiums written and earned was primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR and ILN Transactions. Net premiums earned for the year ended December 31, 2020 were larger than net premiums written during the period primarily due to the cancellation of single premium policies and the accelerated recognition of associated unearned premium reserves.
For the year ended December 31, 2019, net premiums written and earned grew 30% and 37%, respectively, compared to the year ended December 31, 2018. The growth in net premiums written and earned was primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR Transactions and 2018 and 2019 ILN Transactions.
Pool premiums written and earned for the years ended December 31, 2020, 2019 and 2018, were $2.5 million, $3.0 million and $3.4 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary portfolio trends
|
As of and for the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ Values In Millions)
|
New insurance written
|
$
|
62,702
|
|
|
$
|
45,141
|
|
|
$
|
27,295
|
|
|
|
Percentage of monthly premium
|
90
|
%
|
|
92
|
%
|
|
88
|
%
|
|
|
Percentage of single premium
|
10
|
%
|
|
8
|
%
|
|
12
|
%
|
|
|
New risk written
|
$
|
15,602
|
|
|
$
|
11,715
|
|
|
$
|
6,909
|
|
|
|
Insurance-in-force (1)
|
111,252
|
|
|
94,754
|
|
|
68,551
|
|
|
|
Percentage of monthly premium
|
86
|
%
|
|
81
|
%
|
|
75
|
%
|
|
|
Percentage of single premium
|
14
|
%
|
|
19
|
%
|
|
25
|
%
|
|
|
Risk-in-force (1)
|
$
|
28,164
|
|
|
$
|
24,173
|
|
|
$
|
17,091
|
|
|
|
Policies in force (count) (1)
|
399,429
|
|
|
366,039
|
|
|
280,825
|
|
|
|
Average loan size ($ value in thousands) (1)
|
$
|
279
|
|
|
$
|
259
|
|
|
$
|
244
|
|
|
|
Coverage percentage (2)
|
25
|
%
|
|
26
|
%
|
|
25
|
%
|
|
|
Loans in default (count) (1)
|
12,209
|
|
|
1,448
|
|
|
877
|
|
|
|
Default rate (1)
|
3.06
|
%
|
|
0.40
|
%
|
|
0.31
|
%
|
|
|
Risk-in-force on defaulted loans (1)
|
$
|
874
|
|
|
$
|
84
|
|
|
$
|
48
|
|
|
|
Average premium yield (3)
|
0.39
|
%
|
|
0.42
|
%
|
|
0.43
|
%
|
|
|
Earnings from cancellations
|
$
|
48
|
|
|
$
|
22
|
|
|
$
|
11
|
|
|
|
Annual persistency (4)
|
56
|
%
|
|
77
|
%
|
|
87
|
%
|
|
|
Quarterly run-off (5)
|
12.5
|
%
|
|
7.7
|
%
|
|
3.1
|
%
|
|
|
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
(3) Calculated as net premiums earned divided by average primary IIF for the period.
(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. Figures shown represent fourth quarter values for the respective years.
The table below presents a summary of the change in total primary IIF for the dates and periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF
|
|
|
As of and for the year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(In Millions)
|
IIF, beginning of period
|
|
|
|
|
$
|
94,754
|
|
|
$
|
68,551
|
|
|
$
|
48,465
|
|
|
|
NIW
|
|
|
|
|
62,702
|
|
|
45,141
|
|
|
27,295
|
|
|
|
Cancellations, principal repayments and other reductions
|
|
|
|
|
(46,204)
|
|
|
(18,938)
|
|
|
(7,209)
|
|
|
|
IIF, end of period
|
|
|
|
|
$
|
111,252
|
|
|
$
|
94,754
|
|
|
$
|
68,551
|
|
|
|
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
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
IIF
|
|
RIF
|
|
IIF
|
|
RIF
|
|
IIF
|
|
RIF
|
|
|
|
|
|
(In Millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
58,232
|
|
|
14,510
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
2019
|
25,038
|
|
|
6,548
|
|
|
42,060
|
|
|
10,916
|
|
|
—
|
|
|
—
|
|
|
|
|
|
2018
|
9,788
|
|
|
2,494
|
|
|
19,579
|
|
|
4,977
|
|
|
26,310
|
|
|
6,664
|
|
|
|
|
|
2017
|
8,009
|
|
|
2,002
|
|
|
14,961
|
|
|
3,710
|
|
|
18,858
|
|
|
4,627
|
|
|
|
|
|
2016
|
6,756
|
|
|
1,732
|
|
|
11,944
|
|
|
2,995
|
|
|
15,400
|
|
|
3,795
|
|
|
|
|
|
2015 and before
|
3,429
|
|
|
878
|
|
|
6,210
|
|
|
1,575
|
|
|
7,983
|
|
|
2,005
|
|
|
|
|
|
Total
|
$
|
111,252
|
|
|
$
|
28,164
|
|
|
94,754
|
|
|
24,173
|
|
|
68,551
|
|
|
17,091
|
|
|
|
|
|
We utilize certain risk principles that form the basis of how we underwrite and originate NIW. We have established prudential underwriting standards and loan-level eligibility matrices which prescribe the maximum LTV, minimum borrower FICO score, maximum borrower DTI ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure and memorialized these standards and eligibility matrices in our Underwriting Guideline Manual that is publicly available on our website. Our underwriting standards and eligibility criteria are designed to limit the layering of risk 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.
In response to the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that have further strengthened the credit risk profile of our NIW volume and IIF.
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 year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(In Millions)
|
>= 760
|
|
|
|
|
$
|
37,437
|
|
|
$
|
21,931
|
|
|
$
|
11,741
|
|
|
|
740-759
|
|
|
|
|
9,443
|
|
|
7,541
|
|
|
4,629
|
|
|
|
720-739
|
|
|
|
|
7,820
|
|
|
6,643
|
|
|
4,006
|
|
|
|
700-719
|
|
|
|
|
4,644
|
|
|
4,783
|
|
|
3,232
|
|
|
|
680-699
|
|
|
|
|
2,692
|
|
|
3,021
|
|
|
2,227
|
|
|
|
<=679
|
|
|
|
|
666
|
|
|
1,222
|
|
|
1,460
|
|
|
|
Total
|
|
|
|
|
$
|
62,702
|
|
|
$
|
45,141
|
|
|
$
|
27,295
|
|
|
|
Weighted average FICO
|
|
|
|
|
761
|
|
|
753
|
|
|
747
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary NIW by LTV
|
|
|
For the year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(In Millions)
|
95.01% and above
|
|
|
|
|
$
|
3,732
|
|
|
$
|
3,192
|
|
|
$
|
3,226
|
|
|
|
90.01% to 95.00%
|
|
|
|
|
26,000
|
|
|
21,475
|
|
|
12,658
|
|
|
|
85.01% to 90.00%
|
|
|
|
|
22,356
|
|
|
15,555
|
|
|
8,240
|
|
|
|
85.00% and below
|
|
|
|
|
10,614
|
|
|
4,919
|
|
|
3,171
|
|
|
|
Total
|
|
|
|
|
$
|
62,702
|
|
|
$
|
45,141
|
|
|
$
|
27,295
|
|
|
|
Weighted average LTV
|
|
|
|
|
90.9
|
%
|
|
91.8
|
%
|
|
92.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary NIW by purchase/refinance mix
|
|
|
For the year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
(In Millions)
|
Purchase
|
|
|
|
|
$
|
41,616
|
|
|
$
|
37,405
|
|
|
$
|
25,210
|
|
|
|
Refinance
|
|
|
|
|
21,086
|
|
|
7,736
|
|
|
2,085
|
|
|
|
Total
|
|
|
|
|
$
|
62,702
|
|
|
$
|
45,141
|
|
|
$
|
27,295
|
|
|
|
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
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ Values In Millions)
|
>= 760
|
$
|
58,368
|
|
|
|
|
52
|
%
|
|
$
|
44,793
|
|
|
47
|
%
|
|
$
|
31,870
|
|
|
47
|
%
|
|
|
|
|
740-759
|
17,442
|
|
|
|
|
16
|
|
|
15,728
|
|
|
17
|
|
|
11,294
|
|
|
16
|
|
|
|
|
|
720-739
|
15,091
|
|
|
|
|
14
|
|
|
13,417
|
|
|
14
|
|
|
9,338
|
|
|
14
|
|
|
|
|
|
700-719
|
10,442
|
|
|
|
|
9
|
|
|
10,284
|
|
|
11
|
|
|
7,574
|
|
|
11
|
|
|
|
|
|
680-699
|
6,777
|
|
|
|
|
6
|
|
|
6,774
|
|
|
7
|
|
|
5,062
|
|
|
7
|
|
|
|
|
|
<=679
|
3,132
|
|
|
|
|
3
|
|
|
3,758
|
|
|
4
|
|
|
3,413
|
|
|
5
|
|
|
|
|
|
Total
|
$
|
111,252
|
|
|
|
|
100
|
%
|
|
$
|
94,754
|
|
|
100
|
%
|
|
$
|
68,551
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary RIF by FICO
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ Values In Millions)
|
>= 760
|
$
|
14,634
|
|
|
|
|
52
|
%
|
|
$
|
11,388
|
|
|
47
|
%
|
|
$
|
7,955
|
|
|
47
|
%
|
|
|
|
|
740-759
|
4,449
|
|
|
|
|
16
|
|
|
4,034
|
|
|
17
|
|
|
2,836
|
|
|
16
|
|
|
|
|
|
720-739
|
3,868
|
|
|
|
|
14
|
|
|
3,465
|
|
|
14
|
|
|
2,341
|
|
|
14
|
|
|
|
|
|
700-719
|
2,692
|
|
|
|
|
9
|
|
|
2,632
|
|
|
11
|
|
|
1,886
|
|
|
11
|
|
|
|
|
|
680-699
|
1,748
|
|
|
|
|
6
|
|
|
1,728
|
|
|
7
|
|
|
1,256
|
|
|
7
|
|
|
|
|
|
<=679
|
773
|
|
|
|
|
3
|
|
|
926
|
|
|
4
|
|
|
817
|
|
|
5
|
|
|
|
|
|
Total
|
$
|
28,164
|
|
|
|
|
100
|
%
|
|
$
|
24,173
|
|
|
100
|
%
|
|
$
|
17,091
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF by LTV
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ Values In Millions)
|
95.01% and above
|
$
|
9,129
|
|
|
|
|
8
|
%
|
|
$
|
8,640
|
|
|
9
|
%
|
|
$
|
6,774
|
|
|
10
|
%
|
|
|
|
|
90.01% to 95.00%
|
49,898
|
|
|
|
|
45
|
|
|
44,668
|
|
|
47
|
|
|
31,507
|
|
|
46
|
|
|
|
|
|
85.01% to 90.00%
|
36,972
|
|
|
|
|
33
|
|
|
30,163
|
|
|
32
|
|
|
20,668
|
|
|
30
|
|
|
|
|
|
85.00% and below
|
15,253
|
|
|
|
|
14
|
|
|
11,283
|
|
|
12
|
|
|
9,602
|
|
|
14
|
|
|
|
|
|
Total
|
$
|
111,252
|
|
|
|
|
100
|
%
|
|
$
|
94,754
|
|
|
100
|
%
|
|
$
|
68,551
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary RIF by LTV
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ Values In Millions)
|
95.01% and above
|
$
|
2,637
|
|
|
|
|
10
|
%
|
|
$
|
2,390
|
|
|
10
|
%
|
|
$
|
1,801
|
|
|
11
|
%
|
|
|
|
|
90.01% to 95.00%
|
14,673
|
|
|
|
|
52
|
|
|
13,086
|
|
|
54
|
|
|
9,185
|
|
|
54
|
|
|
|
|
|
85.01% to 90.00%
|
9,067
|
|
|
|
|
32
|
|
|
7,376
|
|
|
31
|
|
|
4,994
|
|
|
29
|
|
|
|
|
|
85.00% and below
|
1,787
|
|
|
|
|
6
|
|
|
1,321
|
|
|
5
|
|
|
1,111
|
|
|
6
|
|
|
|
|
|
Total
|
$
|
28,164
|
|
|
|
|
100
|
%
|
|
$
|
24,173
|
|
|
100
|
%
|
|
$
|
17,091
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary RIF by Loan Type
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
|
|
Fixed
|
99
|
%
|
|
98
|
%
|
|
98
|
%
|
|
|
Adjustable rate mortgages:
|
|
|
|
|
|
|
|
Less than five years
|
—
|
|
|
—
|
|
|
—
|
|
|
|
Five years and longer
|
1
|
|
|
2
|
|
|
2
|
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
|
100
|
%
|
|
|
The table below presents selected primary portfolio statistics, by book year, as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
|
|
Book year
|
Original Insurance Written
|
|
Remaining Insurance in Force
|
|
% Remaining of Original Insurance
|
|
Policies Ever in Force
|
|
Number of Policies in Force
|
|
Number of Loans in Default
|
|
# of Claims Paid
|
|
Incurred Loss Ratio (Inception to Date) (1)
|
|
Cumulative Default Rate (2)
|
|
Current Default Rate (3)
|
|
($ Values in Millions)
|
|
|
2013
|
$
|
162
|
|
|
$
|
12
|
|
|
7
|
%
|
|
655
|
|
|
74
|
|
|
1
|
|
|
1
|
|
|
0.2
|
%
|
|
0.3
|
%
|
|
1.4
|
%
|
2014
|
3,451
|
|
|
478
|
|
|
14
|
%
|
|
14,786
|
|
|
2,783
|
|
|
128
|
|
|
48
|
|
|
4.2
|
%
|
|
1.2
|
%
|
|
4.6
|
%
|
2015
|
12,422
|
|
|
2,939
|
|
|
24
|
%
|
|
52,548
|
|
|
15,201
|
|
|
597
|
|
|
111
|
|
|
3.2
|
%
|
|
1.3
|
%
|
|
3.9
|
%
|
2016
|
21,187
|
|
|
6,756
|
|
|
32
|
%
|
|
83,626
|
|
|
31,635
|
|
|
1,417
|
|
|
118
|
|
|
2.9
|
%
|
|
1.8
|
%
|
|
4.5
|
%
|
2017
|
21,582
|
|
|
8,009
|
|
|
37
|
%
|
|
85,897
|
|
|
37,919
|
|
|
2,219
|
|
|
82
|
|
|
4.6
|
%
|
|
2.7
|
%
|
|
5.9
|
%
|
2018
|
27,295
|
|
|
9,788
|
|
|
36
|
%
|
|
104,043
|
|
|
44,969
|
|
|
2,962
|
|
|
57
|
|
|
8.4
|
%
|
|
2.9
|
%
|
|
6.6
|
%
|
2019
|
45,141
|
|
|
25,038
|
|
|
55
|
%
|
|
148,423
|
|
|
91,657
|
|
|
3,724
|
|
|
8
|
|
|
14.7
|
%
|
|
2.5
|
%
|
|
4.1
|
%
|
2020
|
62,702
|
|
|
58,232
|
|
|
93
|
%
|
|
186,174
|
|
|
175,191
|
|
|
1,161
|
|
|
—
|
|
|
9.4
|
%
|
|
0.6
|
%
|
|
0.7
|
%
|
Total
|
$
|
193,942
|
|
|
$
|
111,252
|
|
|
|
|
676,152
|
|
|
399,429
|
|
|
12,209
|
|
|
425
|
|
|
|
|
|
|
|
(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.
Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of December 31, 2020 our RIF continues to be modestly more concentrated in California, primarily as a result of the size of the California mortgage market relative to the rest of the country and the location and timing of our acquisition of new customers. The distribution of our primary RIF as of December 31, 2020 is not necessarily representative of the geographic distribution we expect in the future.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Top 10 primary RIF by state as of December 31, 2020
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
California
|
11.2
|
%
|
|
11.8
|
%
|
|
13.0
|
%
|
Texas
|
8.8
|
|
|
8.2
|
|
|
8.2
|
|
Florida
|
7.3
|
|
|
5.7
|
|
|
5.0
|
|
Virginia
|
5.1
|
|
|
5.3
|
|
|
4.9
|
|
Colorado
|
4.1
|
|
|
3.4
|
|
|
3.5
|
|
Illinois
|
3.8
|
|
|
3.8
|
|
|
3.4
|
|
Maryland
|
3.7
|
|
|
3.4
|
|
|
3.2
|
|
Washington
|
3.5
|
|
|
3.3
|
|
|
2.9
|
|
Pennsylvania
|
3.4
|
|
|
3.6
|
|
|
3.6
|
|
Massachusetts
|
3.3
|
|
|
3.3
|
|
|
2.3
|
|
Total
|
54.2
|
%
|
|
51.8
|
%
|
|
50.0
|
%
|
Insurance Claims and Claim Expenses
Insurance claims and claim expenses incurred represent estimated future payments on newly defaulted insured loans and any change in our claim estimates for previously existing defaults. Claims incurred are generally affected by a variety of factors, including:
•future macroeconomic factors, including national and regional unemployment rates, which affect the likelihood that borrowers may default on their loans and probability of claims, and interest rates, which tend to drive increased persistency as they rise, thereby extending the average life of our insured portfolio and increasing expected future claims and decrease persistency as they fall, thereby shortening the average life of our insured portfolio and moderating future expected claims;
•changes in housing values, as such changes affect loss mitigation opportunities (available to us and a borrower) on loans in default, as well as borrowers' behaviors and willingness to default if the values of their homes are below or perceived to be below the balance of their mortgage;
•borrowers' FICO scores, with lower FICO scores tending to have a higher probability of claims;
•borrowers' DTI ratios, with higher DTI ratios tending to have a higher probability of claims;
•LTV ratios, with higher average LTV ratios tending to increase the probability of claims;
•the percentage of coverage on insured loans, with higher percentages of insurance coverage tending to result in higher incurred claim amounts than lower percentages of insurance coverage;
•the size of loans insured, with higher loan amounts tending to result in higher incurred claim amounts than smaller loan amounts;
•other borrower, property-type and loan level risk characteristics, such as cash-out refinancings, second homes or investment properties; and
•the level and amount of reinsurance coverage maintained with third parties.
Reserves for claims and claim expenses are established for mortgage loans that are in default. 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 for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as IBNR. We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees and other general expenses of administering the claim 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 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 the QSR Transactions and ILN Transactions, as applicable under each treaty. We have not yet ceded any reserves under the ILN Transactions as incurred claims and claims expenses on each respective reference pool remain within our retained coverage layer of each 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 claims or claim expense reserves for pool exposure to date.
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 macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters or global pandemics, and any 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 availability of various repayment and loan
modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time.
In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. At December 31, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
(In Thousands)
|
Beginning balance
|
$
|
23,752
|
|
|
$
|
12,811
|
|
|
$
|
8,761
|
|
|
|
Less reinsurance recoverables (1)
|
(4,939)
|
|
|
(3,001)
|
|
|
(1,902)
|
|
|
|
Beginning balance, net of reinsurance recoverables
|
18,813
|
|
|
9,810
|
|
|
6,859
|
|
|
|
|
|
|
|
|
|
|
|
Add claims incurred:
|
|
|
|
|
|
|
|
Claims and claim expenses incurred:
|
|
|
|
|
|
|
|
Current year (2)
|
66,943
|
|
|
14,737
|
|
|
7,860
|
|
|
|
Prior years (3)
|
(7,696)
|
|
|
(2,230)
|
|
|
(2,408)
|
|
|
|
Total claims and claim expenses incurred
|
59,247
|
|
|
12,507
|
|
|
5,452
|
|
|
|
|
|
|
|
|
|
|
|
Less claims paid:
|
|
|
|
|
|
|
|
Claims and claim expenses paid:
|
|
|
|
|
|
|
|
Current year (2)
|
586
|
|
|
204
|
|
|
130
|
|
|
|
Prior years (3)
|
4,515
|
|
|
3,849
|
|
|
2,371
|
|
|
|
Reinsurance terminations (4)
|
—
|
|
|
(549)
|
|
|
—
|
|
|
|
Total claims and claim expenses paid
|
5,101
|
|
|
3,504
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at end of period, net of reinsurance recoverables
|
72,959
|
|
|
18,813
|
|
|
9,810
|
|
|
|
Add reinsurance recoverables (1)
|
17,608
|
|
|
4,939
|
|
|
3,001
|
|
|
|
Ending balance
|
$
|
90,567
|
|
|
$
|
23,752
|
|
|
$
|
12,811
|
|
|
|
(1) Related to ceded losses recoverable under the QSR Transactions. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance," for additional information.
(2) Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan defaulted in a prior year and subsequently cured and later re-defaulted in the current year, that default would be included in the current year. Amounts are presented net of reinsurance.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year. Amounts are presented net of reinsurance.
(4) Represents the settlement of reinsurance recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction on a cut-off basis. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance," for additional information.
The "claims incurred" section of the table above shows claims and claim expenses incurred on defaults occurring in current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred for current year defaults represents the estimated amount of claims and claim expenses to be ultimately be paid on such loans. The decreases during the periods presented in reserves held for prior year defaults represent favorable development and are generally the result of the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $8.3 million related to prior year defaults remained as of December 31, 2020.
The following table provides a reconciliation of the beginning and ending count of loans in default.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
Beginning default inventory
|
|
|
|
|
1,448
|
|
|
877
|
|
|
928
|
|
|
Plus: new defaults
|
|
|
|
|
19,459
|
|
|
2,429
|
|
|
1,559
|
|
|
Less: cures
|
|
|
|
|
(8,548)
|
|
|
(1,702)
|
|
|
(1,521)
|
|
|
Less: claims paid
|
|
|
|
|
(143)
|
|
|
(152)
|
|
|
(89)
|
|
|
Less: claims denied
|
|
|
|
|
(7)
|
|
|
(4)
|
|
|
—
|
|
|
Ending default inventory
|
|
|
|
|
12,209
|
|
|
1,448
|
|
|
877
|
|
|
The increase in the ending default inventory at December 31, 2020 compared to December 31, 2019, is primarily attributable to the COVID-19 outbreak as borrowers have faced increasing challenges and chosen to access the forbearance program for federally backed loans codified under the CARES Act and other similar assistance programs made available by private lenders. At December 31, 2020, 10,803 of our 12,209 ending default inventory were in a COVID-related forbearance program.
The increase in the ending default inventory at December 31, 2019 compared to December 31, 2018, primarily relates to an increase in new defaults tied to the growth in the number of policies in force and the aging of our earlier book years. The increase in new defaults was partially offset by cure activity on our beginning default population. The ratio of cures to new defaults decreased during the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the elevated level of defaults on insured loans in areas declared by FEMA to be individual disaster zones following Hurricanes Harvey and Irma, and the California wildfires in 2017, and the subsequent curing of the majority of such defaults in 2018. While we insure mortgages for homes in areas that are impacted by natural disasters, we do not provide coverage for property or casualty claims related to physical damage of a home underpinning an insured mortgage. As such, the cure rate on defaults that emerge following natural disasters tends to be meaningfully higher than the cure rate on similarly situated defaulted loans in unaffected areas.
The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
|
|
|
|
($ Values In Thousands)
|
|
|
Number of claims paid (1)
|
|
|
|
|
143
|
|
|
152
|
|
|
89
|
|
|
|
Total amount paid for claims
|
|
|
|
|
$
|
6,434
|
|
|
$
|
5,030
|
|
|
$
|
3,164
|
|
|
|
Average amount paid per claim
|
|
|
|
|
$
|
45
|
|
|
$
|
33
|
|
|
$
|
36
|
|
|
|
Severity(2)
|
|
|
|
|
80
|
%
|
|
74
|
%
|
|
72
|
%
|
|
|
(1) Count includes nine, 19 and eight claims settled without payment for the years ended December 31, 2020, 2019 and 2018, respectively.
(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, and is calculated including claims settled without payment.
The number of claims paid for the year ended December 31, 2020 decreased compared to the year ended December 31, 2019 despite the growth and seasoning of our insured portfolio, and significant increase in our default population, primarily as a result of the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID outbreak and codified under the CARES Act. Such forbearance and foreclosure programs have extended, and may ultimately interrupt, the timeline over which loans would otherwise progress through the default cycle to a paid claim.
Our claims severity for the year ended December 31, 2020 was 80% compared to 74% and 72% for the years ended December 31, 2019 and 2018, respectively. The increase in claims severity for the year ended December 31, 2020 relates to an increase in the portion of claims settled using the percent option instead of through third-party sales during the first half of the year as third-party marketing and sales activity was broadly constrained in the period immediately following the outbreak of the COVID-19 pandemic. Claims severity moderated in the second half of the year, benefiting from the resiliency of the housing market and broad national house price appreciation. An increase in the value of the homes collateralizing the mortgages we
insure provides additional equity support to our risk exposure and raises the prospect of a third-party sale of a foreclosed property, which can mitigate the severity of our settled claims.
The following table provides detail on our average reserve per default, before giving effect to reserves ceded under the QSR Transactions, as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average reserve per default:
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
(In Thousands)
|
Case (1)
|
$
|
6.8
|
|
|
$
|
15.0
|
|
|
$
|
13.5
|
|
|
IBNR (1)(2)
|
0.6
|
|
|
1.4
|
|
|
1.1
|
|
|
Total
|
$
|
7.4
|
|
|
$
|
16.4
|
|
|
$
|
14.6
|
|
|
(1) Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
The average reserve per default at December 31, 2020 decreased from December 31, 2019, primarily due to new COVID-19 related defaults. At December 31, 2020, we established lower reserves that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at December 31, 2020, our total reserve position and claims and claims expenses increased substantially as of and during the year ended December 31, 2020 due to the increase in the size of our default population.
The average reserve per default at December 31, 2019 increased from December 31, 2018, primarily due to the aging of our default population and to a lesser extent cure activity on defaults outstanding at December 31, 2018 for loans in areas impacted by natural disasters, which carried lower average reserves per defaulted loan.
Seasonality
Historically, our business has been subject to modest seasonality in both NIW production and default experience. Consistent with the seasonality of home sales, purchase origination volumes typically increase in late spring and peak during the summer months, leading to a rise in NIW volume during the second and third quarters of a given year.
The COVID pandemic interrupted this typical seasonal pattern. The COVID outbreak and resulting shelter-in-place directives spurred record purchase origination activity and mortgage insurance industry volume during the year ended December 31, 2020. Our purchase origination NIW increased consistently through the year and peaked in the fourth quarter, and our refinancing origination volume grew similarly through the year as mortgage rates declined precipitously in connection with COVID-related fiscal and monetary stimulus policies. Refinancing volume does not follow a set seasonal trend and is instead primarily influenced by available note rates. As rates declined consistently through the year, our refinancing origination volume accelerated.
GSE Oversight
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs (italicized terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business, remedial and financial requirements applicable to 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. In general, higher quality loans carry lower asset charges.
Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We certified to the GSEs by April 15, 2020 that NMIC was in full compliance with the PMIERs as of December 31, 2019. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC's compliance with the PMIERs.
The following table provides a comparison of the PMIERs available assets and risk-based required asset amount as reported by NMIC as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
($ values in thousands)
|
Available assets
|
$
|
1,750,668
|
|
|
$
|
1,016,387
|
|
|
$
|
733,762
|
|
|
|
Risk-based required asset amount
|
984,372
|
|
|
773,474
|
|
|
511,268
|
|
|
|
|
|
|
|
|
|
|
|
Available assets were $1.8 billion at December 31, 2020, compared to $1.0 billion at December 31, 2019 and $734 million at December 31, 2018. In June 2020, NMIH completed the sale of 15.9 million shares of common stock raising net proceeds of approximately $220 million and the sale of the $400 million aggregate principal amount of senior secured notes. NMIH contributed approximately $445 million of capital to NMIC following completion of the Notes and equity offerings. The $734 million increase in NMIC's available assets in 2020 was driven by the NMIH capital contribution and NMIC's positive cash flow from operations during the year.
The $283 million increase in NMIC's available assets in 2019, was primarily driven by NMIC's positive cash flow from operations during the year, with additional benefit realized on the adoption of revised PMIERs guidance effective March 31, 2019, which among other changes, allowed for the inclusion of premium receivables in available assets.
The increase in the risk-based required asset amount between the dates presented was primarily due to the growth of our gross RIF, partially offset by the increased cession of risk under our third-party reinsurance agreements. The risk-based required asset amount further increased in 2020 as a result of the growth in our our default population related to the onset of the COVID-19 pandemic. See "- COVID-19 Developments," above.
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as government MIs such as the FHA, USDA or VA. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price, credit risk tolerance and information technology capabilities. See Item 1, "Business - Overview of Residential Mortgage Finance and the Role of the Private MI Industry in the Current Operating Environment - Competition," above. We expect the private MI market to remain competitive, with pressure for industry participants to maintain or grow their market share.
The private MI industry overall competes more broadly with government MIs who significantly increased their share in the MI market following the 2008 Financial Crisis. Although there has been broad policy consensus toward the need for increasing private capital participation and decreasing government exposure to credit risk in the U.S. housing finance system, it remains difficult to predict whether the combined market share of government MIs will recede to pre-2008 levels. A range of factors influence a lender's and borrower's decision to choose private over 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 government MI alternatives.
Cybersecurity
We rely on technology to engage with customers, access borrower information and deliver our products and services. We have established and implemented security measures, controls and procedures to safeguard our IT systems, and prevent and detect unauthorized access to such systems or any data processed and/or stored therein. We periodically engage third parties to evaluate and test the adequacy of such security measures, controls and procedures. In addition, we have a business continuity plan that is designed to allow us to continue to operate in the midst of certain disruptive events, including disruptions to our IT systems, and we have an incident response plan that is designed to address information security incidents, including any breaches of our IT systems. Despite these safeguards, disruptions to and breaches of our IT systems are possible and may negatively impact our business.
We maintain a cybersecurity errors and omissions insurance policy to limit our exposure to loss in the event of an incident. This policy provides coverage for (i) claims related to, among other things, unauthorized network or computer access, unintentional disclosure or misuse of personally identifiable information in our possession, and unintentional failure to disclose a breach, and (ii) certain costs related to privacy notification, crisis management, cyber extortion, data recovery, business interruption and reputational harm.
Information Technology
Effective March 31, 2020, we entered into an IT services agreement with TCS. Under the agreement, TCS is providing IT services over a seven-year period across such functions as application development and support, infrastructure support, (service desk, end user computing and engineering services), and information security. We expect the engagement with TCS will further our ability to provide innovative IT solutions for our internal and external constituents, while realizing cost efficiencies by leveraging TCS's global platform. In connection with the agreement, a majority of our IT employees transitioned to TCS. We have the ability to terminate the agreement at any time with 120 days' prior notice, subject to the payment of a termination fee and other obligations as specified in the agreement.
LIBOR Transition
In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021, which is expected to render these widely used reference rates unavailable or unreliable. We have exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio, and our 2020 Revolving Credit Facility and ILN Transactions require LIBOR-based payments. We are in the process of reviewing our LIBOR-based contracts that extend beyond 2021 and transitioning to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we cannot currently estimate the impact such transition will have on our operations or financial results.
Consolidated Results of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated statements of operations
|
|
|
For the year ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
Revenues
|
|
|
|
|
($ in thousands, except for per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
|
|
$
|
397,172
|
|
|
$
|
345,015
|
|
|
$
|
251,197
|
|
|
|
Net investment income
|
|
|
|
|
31,897
|
|
|
30,856
|
|
|
23,538
|
|
|
|
Net realized investment gains
|
|
|
|
|
930
|
|
|
45
|
|
|
57
|
|
|
|
Other revenues
|
|
|
|
|
3,284
|
|
|
2,855
|
|
|
233
|
|
|
|
Total revenues
|
|
|
|
|
433,283
|
|
|
378,771
|
|
|
275,025
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claims and claim expenses
|
|
|
|
|
59,247
|
|
|
12,507
|
|
|
5,452
|
|
|
|
Underwriting and operating expenses
|
|
|
|
|
131,610
|
|
|
126,621
|
|
|
116,966
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service expenses
|
|
|
|
|
2,840
|
|
|
2,248
|
|
|
270
|
|
|
|
Interest expense
|
|
|
|
|
24,387
|
|
|
12,085
|
|
|
14,979
|
|
|
|
(Gain) loss from change in fair value of warrant liability
|
|
|
|
|
(2,907)
|
|
|
8,657
|
|
|
1,397
|
|
|
|
Total expenses
|
|
|
|
|
215,177
|
|
|
162,118
|
|
|
139,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
218,106
|
|
|
216,653
|
|
|
135,961
|
|
|
|
Income tax expense
|
|
|
|
|
46,540
|
|
|
44,696
|
|
|
28,034
|
|
|
|
Net income
|
|
|
|
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share - Basic
|
|
|
|
|
$
|
2.20
|
|
|
$
|
2.54
|
|
|
$
|
1.66
|
|
|
|
Earnings per share - Diluted
|
|
|
|
|
$
|
2.13
|
|
|
$
|
2.47
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio (1)
|
|
|
|
|
14.9
|
%
|
|
3.6
|
%
|
|
2.2
|
%
|
|
|
Expense ratio (2)
|
|
|
|
|
33.1
|
%
|
|
36.7
|
%
|
|
46.6
|
%
|
|
|
Combined ratio (3)
|
|
|
|
|
48.1
|
%
|
|
40.3
|
%
|
|
48.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP financial measures (4)
|
2020
|
|
2019
|
|
2018
|
Adjusted income before tax
|
$
|
221,506
|
|
|
$
|
227,618
|
|
|
$
|
142,195
|
|
Adjusted net income
|
173,642
|
|
|
182,437
|
|
|
113,256
|
|
Adjusted diluted EPS
|
2.19
|
|
|
2.62
|
|
|
1.67
|
|
(1) Loss ratio is calculated by dividing the insurance claims and claim expenses by net premiums earned.
(2) Expense ratio is calculated by dividing 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
Net premiums earned were $397.2 million, $345.0 million and $251.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. The sequential increase in net premiums earned during each successive year was primarily driven by the growth of our IIF, a rise in monthly policy production and higher single premium policy cancellations, partially offset by increased cessions under the relevant QSR and ILN Transactions.
Net investment income was $31.9 million, $30.9 million and $23.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. The increase in net investment income during the year ended December 31, 2020 was driven by an increase in the size of our total investment portfolio, partially offset by a decline in book yield tied to the prevailing interest rate and credit spread environment. The increase in net investment income for the year ended December 31, 2019 was driven by growth in the size of our investment portfolio and an improvement in book yield during the period.
Other revenues were $3.3 million, $2.9 million and $0.2 million for the years ended December 31, 2020, 2019 and 2018, respectively. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The sequential growth in other revenues in 2019 and 2020 relates to increases 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 claim 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 claim expenses were $59.2 million, $12.5 million and $5.5 million for the years ended December 31, 2020, 2019 and 2018, respectively. Insurance claims and claim expenses increased $46.7 million during the year ended December 31, 2020, primarily due to the outbreak of the COVID pandemic and resulting increase in our default population, partially offset by the release of certain prior period reserves upon the cure of their related defaults. Insurance claims and claim expenses increased $7.1 million during the year ended December 31, 2019, primarily due to an increase in our default population tied to the growth in the number of policies in force and aging of our earlier book years.
Underwriting and operating expenses were $131.6 million, $126.6 million and $117.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. The increase for the year ended December 31, 2020 primarily relates to the recognition of previously deferred policy acquisition costs (DAC) taken in connection with in-force portfolio run-off and an increase in issuance expenses incurred in connection with capital market reinsurance transaction activity, partially offset by reductions in travel and entertainment, and office administration expenses as a result of the COVID-19 outbreak. The increase for the year ended December 31, 2019 was primarily driven by increases in certain employee compensation and technology costs to support the growth of our business, and an increase in variable expenses, such as premium taxes, tied to the growth in our NIW and IIF, partially offset by increased ceding commissions under the 2016 and 2018 QSR Transactions. Issuance costs incurred in connection with our ILN Transactions are included in underwriting and operating expenses and were $4.6 million, $2.4 million and $2.7 million in 2020, 2019 and 2018, respectively.
Service expenses were $2.8 million, $2.2 million and $0.3 million for the years ended December 31, 2020, 2019 and 2018, respectively. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The sequential growth in service expenses in 2019 and 2020 relates to increases 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 $24.4 million, $12.1 million and $15.0 million for the years ended December 31, 2020, 2019 and 2018, respectively. Interest expense increased for the year ended December 31, 2020 in connection with the $400 million Notes issuance and retirement of the $150 million 2018 Term Loan completed in June 2020. Interest expense for the year ended December 31, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan. Interest expense for the year ended December 31, 2019 benefited from a lower interest rate environment on borrowings under the 2018 Term Loan. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt."
Income tax expense was $46.5 million, $44.7 million and $28.0 million for the years ended December 31, 2020, 2019 and 2018. Income tax expense increased sequentially in each period shown primarily due to the growth in our pre-tax income. As a U.S. taxpayer, we were subject to a U.S. federal corporate income tax rate of 21%. Our effective income tax rate on our pre-tax income was 21.3% for the year ended December 31, 2020 and 20.6% for each of the years ended December 31, 2019 and 2018. The increase in our effective tax rate for the year ended December 31, 2020 compared to the years ended December 31, 2019 and 2018 was primarily driven by the decrease in tax benefits from excess share-based compensation for vested restricted stock units (RSUs) and exercised stock options. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
Net Income
Net income was $171.6 million, $172.0 million and $107.9 million for the years ended December 31, 2020, 2019 and 2018, respectively. Adjusted net income was $173.6 million, $182.4 million and $113.3 million, for the same periods, respectively. Net income and adjusted net income in 2020 benefited from an increase in total revenues, which was largely offset by an increase in insurance claims and claim expenses due to significant COVID-related default experience, and further offset by
an increase in effective tax rate and income tax expense. Net income and adjusted net income grew in 2019 due to an increase in total revenue, partially offset by an increase in total expenses.
Diluted earnings per share (EPS) was $2.13, $2.47 and $1.60 for the years ended December 31, 2020, 2019 and 2018, respectively. Adjusted diluted EPS was $2.19, $2.62 and $1.67 for the same periods, respectively. Diluted and adjusted EPS decreased in 2020, primarily due to an increase in weighted average diluted shares outstanding in connection with the issuance of 15.9 million shares of common stock in June 2020, as well as a decrease in net income and adjusted net income during the year. Diluted and adjusted diluted EPS growth in 2019 was driven by growth in net income and adjusted net income, respectively, partially offset by an increase in weighted average diluted shares outstanding
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP Financial Measure Reconciliations
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
As reported
|
|
|
|
|
|
Income before income tax
|
$
|
218,106
|
|
|
$
|
216,653
|
|
|
$
|
135,961
|
|
Income tax expense
|
46,540
|
|
|
44,696
|
|
|
28,034
|
|
Net income
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
|
|
|
|
Adjustments
|
|
|
|
|
|
Net realized investment gains
|
(930)
|
|
|
(45)
|
|
|
(57)
|
|
(Gain) loss from change in fair value warrant liability
|
(2,907)
|
|
|
8,657
|
|
|
1,397
|
|
Capital market transaction costs
|
7,237
|
|
|
2,353
|
|
|
4,894
|
|
Adjusted income before tax
|
221,506
|
|
|
227,618
|
|
|
142,195
|
|
|
|
|
|
|
|
Income tax expense on adjustments
|
1,324
|
|
|
485
|
|
|
905
|
|
|
|
|
|
|
|
Adjusted net income
|
$
|
173,642
|
|
|
$
|
182,437
|
|
|
$
|
113,256
|
|
|
|
|
|
|
|
Weighted average diluted shares outstanding
|
79,263
|
|
|
69,721
|
|
|
67,652
|
|
Adjusted diluted effect of non-vested shares
|
—
|
|
|
—
|
|
|
—
|
|
Adjusted weighted average diluted shares outstanding
|
79,263
|
|
|
69,721
|
|
|
67,652
|
|
Adjusted diluted EPS
|
$
|
2.19
|
|
|
$
|
2.62
|
|
|
$
|
1.67
|
|
Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhances the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present.
Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred.
Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods.
Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding,
adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP.
Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below.
•Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability.
•Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles.
•Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results.
•Infrequent or unusual non-operating items. Items that are the result of unforeseen or uncommon events, which occur separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect our current period operating results.
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated balance sheets
|
December 31, 2020
|
|
December 31, 2019
|
|
(In Thousands)
|
Total investment portfolio
|
$
|
1,804,286
|
|
|
$
|
1,140,940
|
|
Cash and cash equivalents
|
126,937
|
|
|
41,089
|
|
Premiums receivable
|
49,779
|
|
|
46,085
|
|
Deferred policy acquisition costs, net
|
62,225
|
|
|
59,972
|
|
Software and equipment, net
|
29,665
|
|
|
26,096
|
|
Prepaid reinsurance premiums
|
6,190
|
|
|
15,488
|
|
|
|
|
|
Reinsurance recoverable (1)
|
17,608
|
|
|
4,939
|
|
Other assets (1)
|
69,976
|
|
|
30,209
|
|
Total assets
|
$
|
2,166,666
|
|
|
$
|
1,364,818
|
|
Debt
|
$
|
393,301
|
|
|
$
|
145,764
|
|
Unearned premiums
|
118,817
|
|
|
136,642
|
|
Accounts payable and accrued expenses
|
61,716
|
|
|
39,904
|
|
Reserve for insurance claims and claim expenses
|
90,567
|
|
|
23,752
|
|
Reinsurance funds withheld
|
8,653
|
|
|
14,310
|
|
Warrant liability
|
4,409
|
|
|
7,641
|
|
|
|
|
|
Deferred tax liability, net
|
112,586
|
|
|
56,360
|
|
Other liabilities
|
7,026
|
|
|
10,025
|
|
Total liabilities
|
797,075
|
|
|
434,398
|
|
Total shareholders' equity
|
1,369,591
|
|
|
930,420
|
|
Total liabilities and shareholders' equity
|
$
|
2,166,666
|
|
|
$
|
1,364,818
|
|
(1) Reinsurance recoverable has been reclassified from "Other assets" in prior periods.
As of December 31, 2020, we had $1.9 billion in cash and investments, compared to $1.2 billion as of December 31, 2019. Cash and cash equivalents held by NMIH were $72.0 million at December 31, 2020. The increase in cash and investments related to net proceeds raised of approximately $220 million from the issuance of common stock and approximately $245 million from the issuance of the Notes, both of which were completed in June 2020, as well as cash generated from operations.
Net deferred policy acquisition costs (DAC) were $62.2 million as of December 31, 2020, compared to $60.0 million as of December 31, 2019. The increase was primarily driven by growth in the number of policies written during the year ended December 31, 2020 and the deferral of certain costs associated with the origination of those policies, partially offset by the amortization of previously deferred acquisition costs.
Prepaid reinsurance premiums were $6.2 million as of December 31, 2020, compared to $15.5 million as of December 31, 2019. 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 $17.6 million as of December 31, 2020, compared to $4.9 million as of December 31, 2019. The increase in reinsurance recoverable was primarily driven by an increase in ceded losses recoverable associated with our QSR transactions due to an increase in defaults and related reserves for insurance claims and claims expense resulting from the COVID-19 pandemic.
Other assets were $70.0 million as of December 31, 2020, compared to $30.2 million as of December 31, 2019. The increase was primarily driven by the purchase of additional tax and loss bonds during the year ended December 31, 2020. At December 31, 2020, we held $46.4 million of tax and loss bonds, compared to $7.6 million as of December 31, 2019. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
Debt was $393.3 million as of December 31, 2020, compared to $145.8 million as of December 31, 2019. Debt at December 31, 2019, represented the carrying value of the $150 million 2018 Term Loan, which was repaid in full during the second quarter of 2020. Debt at December 31, 2020, represented the carrying value of the Notes issued in June 2020.
Unearned premiums were $118.8 million as of December 31, 2020, compared to $136.6 million as of December 31, 2019. The decrease was primarily due to the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies and the cancellation of other single premium policies, partially offset by single premium policy originations during the year ended December 31, 2020.
Accounts payable and accrued expenses were $61.7 million as of December 31, 2020, compared to $39.9 million as of December 31, 2019. The increase primarily relates to an increase in reinsurance premiums payable, accrued interest due and payable semi-annually on the Notes, and unsettled payments due on the purchase of certain securities.
Reserve for insurance claims and claim expenses was $90.6 million as of December 31, 2020, compared to $23.8 million as of December 31, 2019. The increase was primarily due to an increase in defaults, driven by new defaults on insured loans impacted by the COVID-19 outbreak, and an increase in the overall number of policies in our portfolio and aging of earlier book years. This was partially offset by the release of prior year reserves primarily tied to default cures. See "Insurance Claims and Claim Expenses" above for further details.
Reinsurance funds withheld, which represents our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction, was $8.7 million as of December 31, 2020, compared to $14.3 million at December 31, 2019. The decrease relates to the continued decline in ceded premiums 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 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance."
Warrant liability was $4.4 million at December 31, 2020, compared to $7.6 million at December 31, 2019. The decrease was primarily due to a decline in our stock price 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 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4, Fair Value of Financial Instruments."
Net deferred tax liability was $112.6 million at December 31, 2020, compared to $56.4 million at December 31, 2019. The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve and the change in unrealized gains recorded in other comprehensive income. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated cash flows
|
For the years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Net cash provided by (used in):
|
(In Thousands)
|
Operating activities
|
$
|
252,598
|
|
|
$
|
208,150
|
|
|
$
|
145,861
|
|
|
|
Investing activities
|
(629,554)
|
|
|
(194,355)
|
|
|
(220,650)
|
|
|
|
Financing activities
|
462,804
|
|
|
2,000
|
|
|
80,887
|
|
|
|
Net increase in cash and cash equivalents
|
$
|
85,848
|
|
|
$
|
15,795
|
|
|
$
|
6,098
|
|
|
|
Net cash provided by operating activities was $252.6 million for the year ended December 31, 2020, compared to $208.2 million for the year ended December 31, 2019 and $145.9 million for the year ended December 31, 2018. The increase in cash generated by operating activities in each successive year was primarily driven by growth in premiums written, partially offset by an increase in claims paid and an increase in the purchase of tax and loss bonds during respective periods.
Cash used in investing activities for the years presented reflects the purchase of fixed and short-term maturities with cash provided by operating activities and, as available, financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash used in investing activities as of December 31, 2020, reflects, in part, the investment of net cash proceeds from the common stock and Notes offerings we completed in June 2020. Cash used in investing activities for the year ended December 31, 2018 reflects, in part, the investment of net cash proceeds raised in the common stock offering we completed in March 2018.
Cash provided by financing activities was $462.8 million for the year ended December 31, 2020, compared to $2.0 million for the year ended December 31, 2019 and $80.9 million for the year ended December 31, 2018. Cash provided by financing activities for the year ended December 31, 2020 primarily reflects $219.7 million of net cash proceeds raised in the
common stock offering and $244.4 million of net cash proceeds raised in the Notes offering we completed in June 2020. Cash provided by financing activities for the year ended December 31, 2019 primarily relates to proceeds from the issuance of common stock generated in connection with the exercise of employee stock options. Cash provided by financing activities for the year ended December 31, 2018 primarily reflects $79.2 million of net cash proceeds raised in the common stock offering we completed in March 2018.
Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2020 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations).
As of December 31, 2020, NMIH had $72.0 million of cash and investments. NMIH's principal source of net cash is investment income. NMIH also has access to $110 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt". Re One also has the capacity, under Wisconsin law, to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. In the future, NMIH may benefit from ordinary course dividend capacity available from NMIC as well.
In June 2020, NMIH completed the sale of (i) 15.9 million shares of common stock, including the exercise of a 15% overallotment option, raising proceeds of approximately $220 million, net of underwriting discounts, commissions and other direct offering expenses, and (ii) $400 million aggregate principal amount of senior secured notes, raising net proceeds of $244 million after giving effect to offering expenses and the repayment of the principal amount outstanding under our $150 million 2018 Term Loan. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15, Common Stock" and "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt ." Following completion of the deals, NMIH contributed approximately $445 million of the net proceeds raised in the common stock and Notes offerings as capital to NMIC.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, with such approvals subject to change or revocation at any time. Among such agreements, the Wisconsin OCI has approved the allocation of interest expense on the Notes and 2020 Revolving Credit Facility to NMIC to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
The Notes mature on June 19, 2025 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. The 2020 Revolving Credit Facility matures on February 22, 2023 and accrues interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 1.375% to 2.875% per annum, in each case based on the applicable corporate credit rating at the time. Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations.
Under the 2020 Revolving Credit Facility, NMIH is required to pay 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 December 31, 2020, the applicable commitment fee was 0.35%.
We are subject to certain covenants under the Notes and 2020 Revolving Credit Facility. Under the 2020 Revolving Credit Facility (and as defined in the Credit Agreement), NMIH may not permit (i) our debt to total capitalization ratio to exceed 35% as of the last day of any fiscal quarter, (ii) the aggregate amount of our unrestricted cash and cash equivalents to be less than $10 million at any time when NMIH does not have an investment-grade credit rating from both S&P and Moody's, (iii) the statutory capital of NMIC to be less than $414,424,624 as of the last day of any fiscal quarter, or (iv) our consolidated net worth to be, as of the last day of any fiscal quarter, less than the sum of (A) $461,607,905, plus (B) 50% of our cumulative consolidated net income for each fiscal quarter for which such consolidated net income is positive, plus (C) 50% of any increase in our consolidated net worth after March 31, 2018 resulting from certain issuances of equity by or capital contributions to NMIH or our subsidiaries. In addition, NMIC must remain at all times in compliance with all applicable "financial requirements" imposed
pursuant to the PMIERs, subject to any allowed transition period or forbearance thereunder. The Credit Agreement also prohibits, restricts or limits, among other things, NMIH's and its subsidiaries' ability to (i) incur additional indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, (v) make certain loans or investments, (vi) merge or consolidate and (vii) enter into transactions with affiliates, in each case subject to certain limitations, exceptions and qualifications as set forth in the Credit Agreement. We were in compliance with all covenants as of December 31, 2020.
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., "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 twelve months, exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the twelve-month period ending the preceding December 31. Re One has the capacity to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. NMIC reported a statutory net loss for the year ended December 31, 2020 and does not have the capacity to pay dividends to NMIH during the twelve-month period ended December 31, 2021 without prior approval from the Wisconsin OCI. Since inception, neither NMIC nor Re One have paid any dividends to NMIH.
As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs, prior to taking any of the following actions: (i) pay dividends, make payments of principal or increase payments of interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by the approved insurer, make any other payments, unless related to expenses incurred in the normal course of business or to commitments made prior to the guidance effective date, or pledge or transfer asset(s) to any affiliate or investor, or (ii) enter into any new arrangements or alter any existing arrangements under tax sharing and intercompany expense-sharing agreements other than renewals and extensions of agreements in effect prior to the guidance effective date.
NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements (respectively, as defined therein).
As an approved mortgage insurer and Wisconsin-domiciled carrier, NMIC is required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI. The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, NMIC must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of $400 million. At December 31, 2020, NMIC reported $1,751 million available assets against $984 million risk-based required assets for a $766 million "excess" funding position.
The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared by FEMA to be a Major Disaster zone. In June 2020, the GSEs issued guidance (subsequently amended and restated in September 2020) on the risk-based treatment of loans affected by the COVID-19 crisis. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent 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 the GSEs). Under NMIC's quota share reinsurance treaties, it receives credit for the PMIERs risk-based required asset 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 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 ratio of RIF to statutory capital (commonly
referred to as RTC) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are 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 December 31, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $19.4 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $1.6 billion (including contingency reserves) as of December 31, 2020, NMIC's RTC ratio was 12.0:1. Re One had total statutory capital of $37 million as of December 31, 2020 and a RTC ratio of 1.4:1.
NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At December 31, 2020, NMIC had $1.8 billion of cash and investments, including $104 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended December 31, 2020, NMIC generated $250 million of cash flow from operations and received an additional $406 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path (i.e., are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term.
Debt and Financial Strength Ratings
NMIC's financial strength is rated "Baa2" by Moody's and "BBB" by S&P. In June 2020, Moody's affirmed its financial strength rating of NMIC and its "Ba2" rating of NMIH's 2020 Revolving Credit Facility, and assigned a "Ba2" rating to the Notes. Moody's ratings outlook is stable. In March 2020, S&P updated its outlook from stable to negative for the mortgage insurance sector, including its financial strength rating of NMIC's and its “BB” rating of NMIH's long-term counter-party credit profile. In June 3, 2020, S&P assigned a "BB" rating to NMIH's senior secured Notes.
Consolidated Investment Portfolio
The primary objectives of our investment activity are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset types, industry sectors, single issuers and certain credit ratings; and benchmarks for asset duration.
Our investment portfolio is comprised entirely of fixed maturity instruments. As of December 31, 2020, the fair value of our investment portfolio was $1.8 billion and we held an additional $126.9 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the year ended December 31, 2020 was 2.2%. Book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. The yield on our investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our holdings and other factors.
The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type and credit rating:
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|
|
|
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|
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Percentage of portfolio's fair value
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December 31, 2020
|
|
December 31, 2019
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Corporate debt securities
|
63
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%
|
|
58
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%
|
Municipal debt securities
|
22
|
|
|
16
|
|
Asset-backed securities
|
7
|
|
|
15
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|
Cash, cash equivalents, and short-term investments
|
6
|
|
|
7
|
|
U.S. treasury securities and obligations of U.S. government agencies
|
2
|
|
|
4
|
|
Total
|
100
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%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment portfolio ratings at fair value (1)
|
December 31, 2020
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|
December 31, 2019
|
AAA
|
12
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%
|
|
20
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%
|
AA (2)
|
27
|
|
|
19
|
|
A (2)
|
43
|
|
|
47
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|
BBB (2)
|
18
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|
|
14
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|
|
|
|
|
|
|
|
|
|
|
|
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Total
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100
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%
|
|
100
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%
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(1) Excluding certain operating cash accounts.
(2) Includes +/– ratings.
All of our investments are rated by one or more 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
As of December 31, 2020, we did not recognize an allowance for credit loss for any security in our investment portfolio and we did not record any provision for credit loss for investment securities during the year ended December 31, 2020.
During the year ended December 31, 2019, we recognized a $0.4 million loss in earnings related to an other-than-temporarily impaired (OTTI) holding. We did not recognize any OTTI loss during the year ended December 31, 2018.
Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries.
Our effective income tax rate on pre-tax income was 21.3% for the year ended December 31, 2020 and 20.6% for each of the years ended December 31, 2019 and 2018. Our effective income tax rate may vary from the statutory tax rate in a given period due to the inclusions and exclusions of income and deductions for tax purposes. Inclusions of tax deductions may include tax benefits from excess share based compensation for vested RSUs and exercised stock options; and exclusions from income may include the fair value fluctuation of our warrant liability.
At December 31, 2020, we had federal net operating loss carryforwards of $2.1 million, which expire in varying amounts in 2030 and 2031, and state net operating loss carryforwards of $111.6 million, which expire in varying amounts from 2031 to 2041. Our ability to utilize our remaining federal net operating loss carryforwards is restricted by Section 382 of the Internal Revenue Code (IRC), which imposes annual limitations if there is an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $7.3 million of federal NOLs were subject to annual limitations of $0.8 million through 2016, and $0.3 million thereafter. Our remaining federal net operating loss carryforwards balance is a result of this limitation.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under Section 832(e) of the IRC, and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction. As of December 31, 2020, we held $46.4 million of tax and loss bonds, which are reported as prepaid federal income tax and grouped in "Other assets" in our consolidated balance sheet.
We record a valuation allowance against the state net operating losses generated by NMIH as NMIH operates at a loss, and we do not expect to utilize such net deferred tax assets in the future. We continue to evaluate the realizability of our state net
deferred tax asset position, and our examination of results through December 31, 2020 and review of future expectations support the continued application of a valuation allowance against such state net deferred tax assets.
NMIH and its subsidiaries entered into a tax sharing agreement effective August 23, 2012, which was subsequently amended on September 1, 2016. Under original and amended agreements, each of the parties agreed to file consolidated federal income tax returns for all tax years beginning in and subsequent to 2012, with NMIH as the direct tax filer. The tax liability of each subsidiary that is party to the agreement is limited to the amount of the liability it would incur if it filed separate returns.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with GAAP. In preparing our consolidated financial statements, management has made estimates and assumptions, and applied judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. As a result, actual results could differ materially from those estimates. A summary of the accounting policies that management believes are critical to the preparation of our consolidated financial statements is set forth below.
Insurance Premium Revenue Recognition
Premiums for primary mortgage insurance policies may be paid in a single, monthly or annual premium, with such election and payment type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums and amortized into earnings over the estimated policy life in accordance with the anticipated expiration of risk. Monthly premiums are recognized as revenue in the month billed and when coverage is effective. Annual premiums are initially deferred and earned on a straight-line basis over the year of coverage. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable deferred premium is returned to the policyholder and recorded as a reduction to written premium and unearned premium reserve in the period paid.
Premiums written on pool transactions are earned over the period that coverage is provided.
Reserve for Insurance Claims and Claim Expenses
We establish reserves for claims based on our best estimate of the ultimate claim costs for defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944). We consider a loan 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 for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as 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. Claim expense reserves are either allocated (i.e., associated with a specific claim) or unallocated (i.e., not associated with a specific claim).
The establishment of claims and claim expense reserves is subject to inherent uncertainty and requires significant judgment by management. 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 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, size of the loan and LTV ratios, and are strongly influenced by assumptions about the path of certain economic factors, such as house price appreciation, trends in unemployment and mortgage rates. We consider the appropriateness of such inputs at each fiscal quarter and conduct an actuarial review annually to evaluate and, if necessary, update these assumptions.
At December 31, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. It is possible that a relatively small change in our estimates for claim frequency or claim severity could have a material impact on our reserve position and our consolidated results of operations, even in a stable macroeconomic environment. At December 31, 2020, assuming all other estimates remain constant, a $1,000 increase/decrease in our average claim severity factor would cause approximately a +/- $1.1 million change in our reserve position, and a one percentage point increase/decrease in our average claim frequency factor cause approximately a +/- $2.5 million change in our reserve position.
Investments
We have designated our investment portfolio as available-for-sale and report our invested assets at fair value. Unrealized gains and losses in the portfolio, net of related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (AOCI) in shareholders' equity.
We measure fair value and classify invested assets in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). See Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4, Fair Value of Financial Instruments."
Purchases and sales of investments are recorded on a trade date basis. Net investment income is recognized when earned, and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method, and is net of investment management fees and other investment related expenses. For asset-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to changes in effective yields and prepayment assumptions are recognized on a prospective basis.
We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Realized Investment Loss."
For securities in an unrealized loss position where a sale is not intended or likely to be required, we further assess if the decline in fair value below amortized cost is driven by a credit related impairment, considering several items including, but not limited to:
•the severity of the decline in fair value;
•the financial condition of the issuer;
•the failure of the issuer to make scheduled interest or principal payments;
•recent rating downgrades of the applicable security or issuer by one or more nationally recognized statistical ratings organization; and
•other adverse conditions related to or impacting the security or issuer.
To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense, and presented as a "Realized Investment Loss." We recognize an allowance for credit losses for the difference between the amortized cost and present value of future expected cash flows, limited by the amount the fair value of the security is below its amortized cost. Subsequent changes (favorable and unfavorable) in credit losses are recognized through the statement of operations as a provision for or a reversal of credit loss expense, and presented as a "Realized Investment Gain or Loss." The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
Deferred Policy Acquisition Costs
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. DAC is reviewed periodically to determine that it does not exceed recoverable amounts. DAC is amortized to expense in proportion to estimated gross profits over the life of the associated policies. We revise the rate of amortization to reflect actual experience and changes to our persistency or loss development assumptions, and may accelerate or slow such rate in future periods as experience and future changes to estimates dictate. For the year ended December 31, 2020, we recognized an additional $8.6 million of DAC amortization due to the significant increase in mortgage refinancing activity and material decline in persistency on certain prior book years' insurance in-force experienced during the period.
Premium Deficiency Reserves
We consider whether a premium deficiency exists and premium deficiency reserve is required at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds future premiums, existing reserves and anticipated investment income. The premium deficiency
assessment requires the use of significant judgment and estimates to determine the present value of future premiums, and expected claim costs and expenses. The present value of future premiums relies on, among other things, assumptions about persistency and repayment patterns on the underlying insured loans. The present value of expected claim costs and expenses relies on assumptions about the severity of claims, claim rates on current defaults and expected defaults in future periods. Assumptions used in the premium deficiency calculation can be affected by changes in the macroeconomic environment, including the rate of house price appreciation and prevailing interest rates. Relatively small changes in estimated claim rates or estimated claim amounts could have a significant impact on our premium deficiency analysis. If we determine it is necessary and appropriate to establish a premium deficiency reserve, and actual premium patterns and claims experience differ from the assumptions used to establish the reserve, the difference between the actual results and our estimates would affect our consolidated results of operations in future periods.
Item 7A. 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'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., 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 December 31, 2020 and 2019 was $1.8 billion and $1.1 billion, respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support.
As of December 31, 2020, the duration of our fixed income portfolio, including cash and cash equivalents, was 4.83 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 4.83% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 4.98 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 4.98% in fair value of our fixed income portfolio.
We are also subject to market risk related to the ILN Transactions. The risk premium amounts under the ILN Transactions are calculated by multiplying the outstanding reinsurance coverage amount at the beginning of any payment period by a coupon rate, which is the sum of 1-month LIBOR and a risk margin, and then subtracting actual investment income earned on the trust balance during that payment period. An increase in 1-month LIBOR rates would generally increase the risk premium payments, while an increase to money market rates, which directly affect investment income earned on the trust balance, would generally decrease them. Although we expect the two rates to move in tandem, to the extent they do not, it could increase or decrease the risk premium payments that otherwise would be due.
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
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Consolidated Balance Sheets as of December 31, 2020 and 2019
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Consolidated Statements of Operations and Comprehensive Income for each of the years in the three-year period ended December 31, 2020
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Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2020
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Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2020
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Notes to Consolidated Financial Statements
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Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of NMI Holdings, Inc.
NMI Holdings, Inc.
Emeryville, CA
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NMI Holdings, Inc. (the "Company") and subsidiaries as of December 31, 2020 and 2019, the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedules included in the accompanying index (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company and subsidiaries at December 31, 2020 and 2019, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and our report dated February 24, 2021 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Reserve for Insurance Claims and Claims Expense
As described in Notes 2 and 7 to the consolidated financial statements, the Company recorded $90.6 million of reserve for insurance claims and claim expenses at December 31, 2020. The establishment of insurance claims and claim expenses reserve is subject to inherent uncertainty and requires significant judgment by management. The reserve is established by estimating: (i) claim severity which is the amount of the claim payment expected to be paid on each loan in default, and (ii) claim frequency which is the number of loans in default expected to result in a claim payment. The claim frequency is determined based on historical observed experience regarding certain loan factors. The claim severity and claim frequency estimates are also strongly influenced by current economic conditions.
We identified the Company's estimation of the reserve for insurance claims and claim expenses as a critical audit matter. The principal consideration for our determination is the high degree of subjectivity in estimating claim severity and claim frequency. Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•Testing the completeness and accuracy of the underlying loans and claims data used in management's reserve calculations which supported claim severity and claim frequency estimates.
•Utilizing personnel with specialized knowledge and skill in actuarial methods to assist in: (i) evaluating the appropriateness of the methodology and the assumptions used by management and management's specialist, including assessment of the reasonableness of changes in assumptions and inputs used in developing claim severity and claim frequency, which included comparing to third-party publications of current economic conditions and evaluating the current and historical loan factors, and (ii) performing a retrospective review of the prior year reserve estimate against historical figures and economic trends.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2011.
San Francisco, California
February 24, 2021
NMI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Assets
|
(In Thousands, except for share data)
|
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,730,835 and $1,113,779 as of December 31, 2020 and December 31, 2019, respectively)
|
$
|
1,804,286
|
|
|
$
|
1,140,940
|
|
Cash and cash equivalents (including restricted cash of $5,555 and $2,662 as of December 31, 2020 and December 31, 2019, respectively)
|
126,937
|
|
|
41,089
|
|
Premiums receivable
|
49,779
|
|
|
46,085
|
|
Accrued investment income
|
9,862
|
|
|
6,831
|
|
Prepaid expenses
|
3,292
|
|
|
3,512
|
|
Deferred policy acquisition costs, net
|
62,225
|
|
|
59,972
|
|
Software and equipment, net
|
29,665
|
|
|
26,096
|
|
Intangible assets and goodwill
|
3,634
|
|
|
3,634
|
|
Prepaid reinsurance premiums
|
6,190
|
|
|
15,488
|
|
|
|
|
|
Reinsurance recoverable (1)
|
17,608
|
|
|
4,939
|
|
Other assets (1)
|
53,188
|
|
|
16,232
|
|
Total assets
|
$
|
2,166,666
|
|
|
$
|
1,364,818
|
|
|
|
|
|
Liabilities
|
|
|
|
Debt
|
$
|
393,301
|
|
|
$
|
145,764
|
|
Unearned premiums
|
118,817
|
|
|
136,642
|
|
Accounts payable and accrued expenses
|
61,716
|
|
|
39,904
|
|
Reserve for insurance claims and claim expenses
|
90,567
|
|
|
23,752
|
|
Reinsurance funds withheld
|
8,653
|
|
|
14,310
|
|
|
|
|
|
Warrant liability, at fair value
|
4,409
|
|
|
7,641
|
|
|
|
|
|
Deferred tax liability, net
|
112,586
|
|
|
56,360
|
|
Other liabilities
|
7,026
|
|
|
10,025
|
|
Total liabilities
|
797,075
|
|
|
434,398
|
|
Commitments and contingencies (see Note 14)
|
|
|
|
|
|
|
|
Shareholders' equity
|
|
|
|
Common stock - class A shares, $0.01 par value; 85,163,039 and 68,358,074 shares issued and outstanding as of December 31, 2020 and December 31, 2019, respectively (250,000,000 shares authorized)
|
852
|
|
|
684
|
|
Additional paid-in capital
|
937,872
|
|
|
707,003
|
|
Accumulated other comprehensive income, net of tax
|
53,856
|
|
|
17,288
|
|
Retained earnings
|
377,011
|
|
|
205,445
|
|
Total shareholders' equity
|
1,369,591
|
|
|
930,420
|
|
Total liabilities and shareholders' equity
|
$
|
2,166,666
|
|
|
$
|
1,364,818
|
|
(1) Reinsurance recoverable has been reclassified from "Other assets" in the prior period.
See accompanying notes to consolidated financial statements.
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(In Thousands, except for per share data)
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
397,172
|
|
|
$
|
345,015
|
|
|
$
|
251,197
|
|
|
|
Net investment income
|
31,897
|
|
|
30,856
|
|
|
23,538
|
|
|
|
Net realized investment gains
|
930
|
|
|
45
|
|
|
57
|
|
|
|
Other revenues
|
3,284
|
|
|
2,855
|
|
|
233
|
|
|
|
Total revenues
|
433,283
|
|
|
378,771
|
|
|
275,025
|
|
|
|
Expenses
|
|
|
|
|
|
|
|
Insurance claims and claim expenses
|
59,247
|
|
|
12,507
|
|
|
5,452
|
|
|
|
Underwriting and operating expenses
|
131,610
|
|
|
126,621
|
|
|
116,966
|
|
|
|
Service expenses
|
2,840
|
|
|
2,248
|
|
|
270
|
|
|
|
Interest expense
|
24,387
|
|
|
12,085
|
|
|
14,979
|
|
|
|
(Gain) loss from change in fair value of warrant liability
|
(2,907)
|
|
|
8,657
|
|
|
1,397
|
|
|
|
Total expenses
|
215,177
|
|
|
162,118
|
|
|
139,064
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
218,106
|
|
|
216,653
|
|
|
135,961
|
|
|
|
Income tax expense
|
46,540
|
|
|
44,696
|
|
|
28,034
|
|
|
|
Net income
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
|
|
|
Basic
|
$
|
2.20
|
|
|
$
|
2.54
|
|
|
$
|
1.66
|
|
|
|
Diluted
|
$
|
2.13
|
|
|
$
|
2.47
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding
|
|
|
|
|
|
|
|
Basic
|
78,023
|
|
|
67,573
|
|
|
65,019
|
|
|
|
Diluted
|
79,263
|
|
|
69,721
|
|
|
67,652
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
|
Unrealized gains (losses) in accumulated other comprehensive income, net of tax expense (benefit) of $9,525, $8,548 and ($3,285) for each of the years in the three-year period ended December 31, 2020, respectively
|
35,829
|
|
|
32,155
|
|
|
(12,357)
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for realized losses (gains) included in net income, net of tax (benefit) expense of ($196), $9 and ($27) for each of the years in the three-years ended December 31, 2020, respectively
|
739
|
|
|
(35)
|
|
|
102
|
|
|
|
Other comprehensive income (loss), net of tax
|
36,568
|
|
|
32,120
|
|
|
(12,255)
|
|
|
|
Comprehensive income
|
$
|
208,134
|
|
|
$
|
204,077
|
|
|
$
|
95,672
|
|
|
|
See accompanying notes to consolidated financial statements.
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock - Class A
|
Additional
Paid-in Capital
|
Accumulated Other Comprehensive Income (Loss)
|
Retained Earnings (Accumulated Deficit)
|
Total
|
|
Shares
|
Amount
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2017
|
60,518
|
|
$
|
605
|
|
$
|
585,488
|
|
$
|
(2,859)
|
|
$
|
(74,157)
|
|
$
|
509,077
|
|
Cumulative effect of change in accounting principle
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
282
|
|
$
|
(282)
|
|
$
|
—
|
|
Common stock: class A shares issued related to public offering
|
4,255
|
|
43
|
|
79,122
|
|
—
|
|
—
|
|
79,165
|
|
Common stock: class A shares issued related to warrant exercises
|
91
|
|
1
|
|
1,893
|
|
—
|
|
—
|
|
1,894
|
|
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
|
1,455
|
|
14
|
|
3,121
|
|
—
|
|
—
|
|
3,135
|
|
Share-based compensation expense
|
—
|
|
—
|
|
12,557
|
|
—
|
|
—
|
|
12,557
|
|
Change in unrealized investment gains/losses, net of tax benefit of $3,258
|
—
|
|
—
|
|
—
|
|
(12,255)
|
|
—
|
|
(12,255)
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
107,927
|
|
107,927
|
|
Balances, December 31, 2018
|
66,319
|
|
$
|
663
|
|
$
|
682,181
|
|
$
|
(14,832)
|
|
$
|
33,488
|
|
$
|
701,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock: class A shares issued related to warrant exercises
|
289
|
|
3
|
|
8,309
|
|
—
|
|
—
|
|
8,312
|
|
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
|
1,750
|
|
18
|
|
3,482
|
|
—
|
|
—
|
|
3,500
|
|
Share-based compensation expense
|
—
|
|
—
|
|
13,031
|
|
—
|
|
—
|
|
13,031
|
|
Change in unrealized investment gains/losses, net of tax expense of $8,539
|
—
|
|
—
|
|
—
|
|
32,120
|
|
—
|
|
32,120
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
171,957
|
|
171,957
|
|
Balances, December 31, 2019
|
68,358
|
|
$
|
684
|
|
$
|
707,003
|
|
$
|
17,288
|
|
$
|
205,445
|
|
$
|
930,420
|
|
|
|
|
|
|
|
|
Common stock: class A shares issued related to public offering
|
15,870
|
|
159
|
|
219,528
|
|
—
|
|
—
|
|
219,687
|
|
Common stock: class A shares issued related to warrant exercises
|
11
|
|
*
|
325
|
|
—
|
|
—
|
|
325
|
|
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
|
924
|
|
9
|
|
(99)
|
|
—
|
|
—
|
|
(90)
|
|
Share-based compensation expense
|
—
|
|
—
|
|
11,115
|
|
—
|
|
—
|
|
11,115
|
|
Change in unrealized investment gains/losses, net of tax expense of $9,721
|
—
|
|
—
|
|
—
|
|
36,568
|
|
—
|
|
36,568
|
|
Net income
|
—
|
|
—
|
|
—
|
|
—
|
|
171,566
|
|
171,566
|
|
Balances, December 31, 2020
|
85,163
|
|
$
|
852
|
|
$
|
937,872
|
|
$
|
53,856
|
|
$
|
377,011
|
|
$
|
1,369,591
|
|
* During 2020, we issued 11,368 common shares with a par value of $0.01 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding.
See accompanying notes to consolidated financial statements.
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Cash flows from operating activities
|
(In Thousands)
|
Net income
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Net realized investment gains
|
(930)
|
|
|
(45)
|
|
|
(57)
|
|
|
|
(Gain) loss from change in fair value of warrant liability
|
(2,907)
|
|
|
8,657
|
|
|
1,397
|
|
|
|
Depreciation and amortization
|
9,930
|
|
|
9,299
|
|
|
7,811
|
|
|
|
Net amortization of premium on investment securities
|
3,668
|
|
|
1,252
|
|
|
1,519
|
|
|
|
Amortization of debt discount and debt issuance costs
|
4,036
|
|
|
1,011
|
|
|
3,390
|
|
|
|
Deferred income taxes
|
46,506
|
|
|
45,082
|
|
|
25,927
|
|
|
|
Share-based compensation expense
|
11,115
|
|
|
13,031
|
|
|
12,557
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Premiums receivable
|
(3,694)
|
|
|
(10,078)
|
|
|
(10,828)
|
|
|
|
Accrued investment income
|
(3,031)
|
|
|
(1,137)
|
|
|
(1,482)
|
|
|
|
Prepaid expenses
|
220
|
|
|
(472)
|
|
|
(1,090)
|
|
|
|
Deferred policy acquisition costs, net
|
(2,253)
|
|
|
(13,132)
|
|
|
(8,915)
|
|
|
|
Other assets
|
(38,804)
|
|
|
(8,831)
|
|
|
1,304
|
|
|
|
Unearned premiums
|
(17,825)
|
|
|
(22,251)
|
|
|
(4,273)
|
|
|
|
Reserve for insurance claims and claim expenses
|
66,815
|
|
|
10,941
|
|
|
4,050
|
|
|
|
Reinsurance recoverable (1)
|
(12,669)
|
|
|
(1,939)
|
|
|
(1,099)
|
|
|
|
Reinsurance balances, net (1)
|
2,783
|
|
|
917
|
|
|
1,659
|
|
|
|
Accounts payable and accrued expenses
|
18,072
|
|
|
3,888
|
|
|
6,064
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
252,598
|
|
|
208,150
|
|
|
145,861
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
Purchase of short-term investments
|
(42,241)
|
|
|
(230,362)
|
|
|
(257,916)
|
|
|
|
Purchase of fixed-maturity investments, available-for-sale
|
(1,065,916)
|
|
|
(290,533)
|
|
|
(356,337)
|
|
|
|
Proceeds from maturity of short-term investments
|
86,045
|
|
|
244,921
|
|
|
221,685
|
|
|
|
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
|
404,717
|
|
|
91,575
|
|
|
179,978
|
|
|
|
Software and equipment
|
(12,159)
|
|
|
(9,956)
|
|
|
(8,060)
|
|
|
|
Net cash (used in) investing activities
|
(629,554)
|
|
|
(194,355)
|
|
|
(220,650)
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
Proceeds from issuance of common stock related to public offering, net of issuance costs
|
219,687
|
|
|
—
|
|
|
79,165
|
|
|
|
Proceeds from issuance of common stock related to employee equity plans
|
8,871
|
|
|
21,748
|
|
|
12,857
|
|
|
|
Proceeds from issuance of common stock related to warrant exercises
|
—
|
|
|
—
|
|
|
321
|
|
|
|
Taxes paid related to net share settlement of equity awards
|
(8,961)
|
|
|
(18,248)
|
|
|
(9,722)
|
|
|
|
Proceeds from senior secured notes
|
400,000
|
|
|
—
|
|
|
149,250
|
|
|
|
Repayments of term loan
|
(147,750)
|
|
|
(1,500)
|
|
|
(147,375)
|
|
|
|
Payments of debt issuance costs
|
(9,043)
|
|
|
—
|
|
|
(3,609)
|
|
|
|
Net cash provided by financing activities
|
462,804
|
|
|
2,000
|
|
|
80,887
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash, cash equivalents and restricted cash
|
85,848
|
|
|
15,795
|
|
|
6,098
|
|
|
|
Cash, cash equivalents and restricted cash, beginning of period
|
41,089
|
|
|
25,294
|
|
|
19,196
|
|
|
|
Cash, cash equivalents and restricted cash, end of period
|
$
|
126,937
|
|
|
$
|
41,089
|
|
|
$
|
25,294
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest paid
|
$
|
17,561
|
|
|
$
|
10,691
|
|
|
$
|
12,093
|
|
|
|
Income taxes (refunded) paid
|
(70)
|
|
|
(64)
|
|
|
867
|
|
|
|
(1) Reinsurance recoverable has been reclassified from "Reinsurance balance, net" in prior periods.
See accompanying notes to consolidated financial statements.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
1. Organization and Basis of Presentation
NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011 to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly-owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). Our common stock is listed on the NASDAQ exchange under the ticker symbol "NMIH."
NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy in April 2013. NMIC is licensed to write mortgage insurance in all 50 states and the District of Columbia (D.C.). In August 2015, NMIH capitalized a wholly-owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Basis of Presentation
The accompanying consolidated financial statements include the results of NMIH and its wholly-owned subsidiaries. All inter-company transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and our accounts are maintained in US dollars. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to previously reported financial information have been made to conform to our current period presentation.
COVID-19 Developments
On January 30, 2020, the World Health Organization (WHO) declared the outbreak of coronavirus (COVID-19) a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope that the recent development, distribution and administration of new vaccines may relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist. In response to the COVID-19 outbreak and continuing uncertainties, we activated our disaster continuity program to ensure our employees are safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and provide an expanded ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration for the increased level macroeconomic volatility. While the U.S. housing market has demonstrated significant resiliency since the onset of the pandemic, with record levels of demand, mortgage origination activity and house price appreciation, much uncertainty remains. Given the uncertainty that prevails, we cannot fully assess or estimate the ultimate impact of COVID-19 on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results.
2. Summary of Accounting Principles
Use of Estimates
We use accounting principles and methods that conform to GAAP. 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.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Insurance Premium Revenue Recognition
Premiums for primary mortgage insurance policies may be paid in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium), with such election and payment type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums and amortized into earnings over the estimated policy life, in accordance with the anticipated expiration of risk. Monthly premiums are recognized as revenue in the month billed and when the coverage is effective. Annual premiums are initially deferred and earned on a straight-line basis over the year of coverage. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable deferred and unearned premium is returned to the policyholder and recorded as a reduction to written premium and unearned premium reserve in the period paid.
Premiums written on pool transactions are earned over the period that coverage is provided.
Concentrations
For the years ended December 31, 2020, December 31, 2019 and December 31, 2018 no customer accounted for more than 10% of our consolidated revenues. At December 31, 2020, December 31, 2019 and December 31, 2018 approximately 11%, 12% and 13% of our total risk-in-force (RIF) was concentrated in California.
Reserves for Insurance Claims and Claim Expenses
We establish reserves for claims based on our best estimate of the ultimate claim costs for defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944). 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 for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as 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. Claim expense reserves are either allocated (i.e., associated with a specific claim) or unallocated (i.e., not associated with a specific claim).
The establishment of claims and claim expense reserves is subject to inherent uncertainty and requires significant judgment by management. 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 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, size of the loan and loan-to-value (LTV) ratios, and are strongly influenced by assumptions about the path of certain economic factors, such as house price appreciation, trends in unemployment and mortgage rates. We consider the appropriateness of such inputs at each fiscal quarter and conduct an actuarial review annually to evaluate and, if necessary, update these assumptions.
Investments
We have designated our investment portfolio as available-for-sale and report our invested assets at fair value. Unrealized gains and losses in the portfolio, net of related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (AOCI) in shareholders' equity.
We measure fair value and classify invested assets in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). See Note 4, "Fair Value of Financial Instruments" for further discussion.
Purchases and sales of investments are recorded on a trade date basis. Net investment income is recognized when earned, and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method, and is net of investment management fees and other investment related expenses. For asset-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to changes in effective yields and prepayment assumptions are recognized on a prospective basis.
We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Realized Investment Loss."
For securities in an unrealized loss position where a sale is not intended or likely to be required, we further assess if the decline in fair value below amortized cost is driven by a credit related impairment, considering several items including, but not limited to:
•the severity of the decline in fair value;
•the financial condition of the issuer;
•the failure of the issuer to make scheduled interest or principal payments;
•recent rating downgrades of the applicable security or issuer by one or more nationally recognized statistical ratings organization; and
•other adverse conditions related to or impacting the security or issuer.
To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense, and presented as a "Realized Investment Loss." We recognize an allowance for credit losses for the difference between the amortized cost and present value of future expected cash flows, limited by the amount the fair value of the security is below its amortized cost. Subsequent changes (favorable and unfavorable) in credit losses are recognized through the statement of operations as a provision for or a reversal of credit loss expense, and presented as a "Realized Investment Gain or Loss." The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
We have elected to present accrued interest receivable separately from available for sale securities on our consolidated balance sheet. Accrued interest receivable was $9.9 million as of December 31, 2020 and is included in "Accrued Investment Income." We have elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. Accrued interest for available for sale securities is written off against interest income when the receivable has aged 90 days past due. We did not write off any accrued interest receivable during the twelve months ended December 31, 2020, 2019 or 2018.
We consider items such as commercial paper with original maturities of 90 days or less to be short-term investments.
Deferred Policy Acquisition Costs (DAC)
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. DAC is reviewed periodically to determine that it does not exceed recoverable amounts. DAC is amortized to expense in proportion to estimated gross profits over the life of the associated policies. We revise the rate of amortization to reflect actual experience and any changes to persistency or loss development. Total amortization of DAC for the years ended December 31, 2020, 2019 and 2018, net of a portion of the ceding commissions earned under our quota share reinsurance agreements (see "Reinsurance", below), was $19.1 million, $8.4 million and $8.1 million, respectively.
Premium Deficiency Reserves
We consider whether a premium deficiency exists and premium deficiency reserve is required at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds future premiums, existing reserves and anticipated investment income. We have determined that no premium deficiency reserves were necessary for any of the years in the three-year period ended December 31, 2020.
Reinsurance
We account for premiums, claims and claim expenses that are ceded to reinsurers on basis consistent with that which we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums ceded or otherwise paid to reinsurers as a reduction to premium revenue.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
NMIC entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction), January 1, 2018 (the 2018 QSR Transaction) and April 1, 2020 (the 2020 QSR Transaction), which we refer to collectively as the QSR Transactions. We earn profit and ceding commissions in connection with the QSR Transactions (see Note 6, "Reinsurance"). Profit commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of claims and claim expenses that we cede. We recognize any profit commissions we earn as an increase to premium revenue. Ceding commissions are calculated as a percentage of ceded written premiums under the 2016 QSR Transaction and as a percentage of ceded earned premiums under the 2018 and 2020 QSR Transactions, and are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions generated under the QSR Transactions in a manner consistent with our recognition of earnings on the underlying reinsured policies. We account for ceding commissions earned as a reduction to underwriting and operating expenses.
Under the QSR Transactions, we cede a portion of claims and claim expenses and reserves to our reinsurers, and account for such ceded reserves as "Reinsurance Recoverables" on the consolidated balance sheets and such ceded expenses as reductions to claims and claim expenses on the consolidated statements of operations. As of December 31, 2020, we had $17.6 million of reinsurance recoverables under the QSR Transactions. We remain directly liable for all claim payments if we are unable to collect the recoverables due from our reinsurers and, as such, we actively monitor and manage our counterparty credit exposure to our reinsurance providers. We establish an allowance for expected credit loss against our reinsurance recoverables if we do not expect to recover amounts due from one or more of our reinsurance counterparties, and report our reinsurance recoverables net of such allowance, if any. We actively monitor the counterparty credit profiles of our reinsurers and each is required to partially collateralize its obligations under the terms of our QSR Transactions. As of December 31, 2020, we did not recognize any allowance for credit loss with respect to our reinsurance recoverables.
Income Taxes
We account for income taxes using the liability method in accordance with ASC Topic 740, Income Taxes. The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that would result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax expense in the consolidated statement of operations.
Warrants
We account for warrants 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. Our outstanding warrants may be settled through either (i) physical settlement method, or (ii) cashless exercise, where the number of shares issued upon exercise of the warrants is reduced to cover the cost of the exercise in lieu of the holder remitting a cash payment for the exercise price. The warrants expire and are not exercisable after the 10th anniversary of the date issued. The number of warrants and exercise price are subject to anti-dilution provisions whereby the number of warrants may be increased and their exercise price may be adjusted downward under certain circumstances. The anti-dilutive adjustments may be in excess of any dilution incurred by the warrant holders, and may be triggered by events that are not dilutive. As a result, the warrants are classified as a liability. We revalue the warrants at the end of each reporting period, and any change in fair value is reported in the statements of operations in the period in which the change occurred. We calculated the fair value of the warrants using a Black-Scholes option-pricing model in combination with a binomial model.
Share-Based Compensation
We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation, which addresses accounting for share-based awards and recognition of compensation expense, measured using grant date fair value, over the requisite service or performance period of the award. Share-based compensation includes restricted stock units (RSUs) and stock option grants under our Stock Plans. We calculate the fair value of stock option grants using a Black-Scholes option pricing model, which takes into account various subjective assumptions. Key assumptions used in the model include the expected volatility of our stock price, dividend yield and the risk-free interest rate, as well as the expected option term, giving consideration to the contractual terms of any award. RSU grants may contain a service condition, or performance and service conditions. RSU grants are valued at our stock price on the date of grant less the present value of anticipated dividends. We account for stock option and RSU forfeitures as they occur.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Earnings per Share (EPS)
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is based on the weighted-average number of common shares outstanding and common share equivalents that would be issuable upon the vesting of existing service based and certain performance and service based RSUs, and exercise of vested and unvested stock options and outstanding warrants.
Cash and Cash Equivalents
We consider items such as certificates of deposit and money market funds with original maturities of 90 days or less to be cash equivalents.
Software and Equipment
We capitalize certain costs associated with the development of internal-use software and equipment. Software and equipment are stated at cost, less accumulated amortization and depreciation. Amortization of software and depreciation of equipment commences at the beginning of the month following our placement of the assets into use. Amortization and depreciation are calculated on a straight-line basis over the estimated useful life of the respective assets, typically from three to five years, unless factors indicate a shorter useful life. For further detail, see Note 12, "Software and Equipment."
Leases
We recognize right-of-use (ROU) assets and corresponding lease liabilities for our lease arrangements. Lease liabilities are established based on the estimated present value of lease payments over the relevant lease term. We estimate a discount rate for each lease based on our estimated incremental borrowing rate at the commencement date of the relevant lease. Estimated lease terms includes optional renewal periods and early termination payments when it is reasonably certain we will exercise those rights. ROU assets are measured as the associated lease liability plus any direct costs incurred in connection with the initial establishment of the lease, less any lease incentives received.
Business Combinations, Goodwill and Intangible Assets
Goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired from a business combination. In accordance with ASC 350, Intangibles - Goodwill and Other, we test goodwill for impairment during the third quarter each year, or more frequently if we believe indicators of impairment exist. We have not identified any impairments of goodwill through December 31, 2020.
Our intangible assets consist of state licenses and Fannie Mae and Freddie Mac (collectively, the GSEs) applications which have indefinite lives. We test indefinite-lived intangible assets for impairment during the fourth quarter of each year or more frequently if we believe indicators of impairment exist. We have not identified any impairments of indefinite-lived intangible assets through December 31, 2020.
Premiums Receivable
Premiums receivable consists of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the associated receivable is written off against earned premium and the related insurance policy is canceled. We recognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the life of the receivable. Due to the nature of our insurance policies (a necessary precondition for access to mortgage credit for covered borrowers) and the short duration of the related receivables, we do not typically experience credit losses against our premium receivables and did not establish an allowance for credit loss at December 31, 2020.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
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 have established a reserve for premium write-offs based on historical experience; such reserve was deemed to be immaterial at December 31, 2020 and December 31, 2019.
Variable Interest Entities
NMIC is a party to reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018, July 30, 2019, July 30, 2020 and October 29, 2020, respectively. At inception of the respective reinsurance agreements, we determined that each of the Oaktown Re Vehicles were variable interest entities (VIEs), as defined under GAAP Accounting Standards Codification (ASC) 810, because they did not have sufficient equity at risk to finance their respective activities. We evaluated the VIEs at inception to determine whether NMIC was the primary beneficiary under each deal and, if so, whether we were required to consolidate the assets and liabilities of each VIE. The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its economic performance and (2) has significant economic exposure to the VIE, i.e., the obligation to absorb losses or receive benefits that could potentially be significant. The determination of whether an entity is the primary beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIE. We concluded that we are not the primary beneficiary of each VIE and as such, we do not consolidate them in our consolidated financial statements.
See Note 6, "Reinsurance" for further discussion of the reinsurance arrangements.
Other Revenues
Other revenues represent underwriting fee revenue from our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. NMIS fees are earned and recognized as services are provided.
Recent Accounting Pronouncements - Adopted
In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (Topic 815), Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses shifts from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. We adopted this ASU on January 1, 2020 and determined it did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
(Topic 944). This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019 and ASU 2020-11 in November 2020, which amended the effective date for this standard and provided transition relief to facilitate early application for long duration contracts. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2021 and and it did not have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This update with updates subsequently issued in January 2021 in ASU 2021-01. These updates provide optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate (LIBOR) in financial contracts, which is expected to be discontinued in 2021.The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. These standards are effective immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the impact the adoption of the ASUs would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.
In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments and contracts on an entity's own equity, including warrants, eliminating certain triggers for derivative accounting. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements, including our warrant liability.
3. Investments
We hold all investments on an available-for-sale basis and evaluate each position quarterly for impairment. We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense. The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Fair Values and Gross Unrealized Gains and Losses on Investments
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Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
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Gains
|
|
Losses
|
|
As of December 31, 2020
|
(In Thousands)
|
U.S. Treasury securities and obligations of U.S. government agencies
|
$
|
29,412
|
|
|
$
|
2,186
|
|
|
$
|
—
|
|
|
$
|
31,598
|
|
Municipal debt securities
|
407,323
|
|
|
14,027
|
|
|
(2)
|
|
|
421,348
|
|
Corporate debt securities
|
1,165,260
|
|
|
55,014
|
|
|
(483)
|
|
|
1,219,791
|
|
Asset-backed securities
|
128,471
|
|
|
2,736
|
|
|
(27)
|
|
|
131,180
|
|
Total bonds
|
1,730,466
|
|
|
73,963
|
|
|
(512)
|
|
|
1,803,917
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
369
|
|
|
—
|
|
|
—
|
|
|
369
|
|
Total investments
|
$
|
1,730,835
|
|
|
$
|
73,963
|
|
|
$
|
(512)
|
|
|
$
|
1,804,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortized
Cost
|
|
Gross Unrealized
|
|
Fair
Value
|
|
|
Gains
|
|
Losses
|
|
As of December 31, 2019
|
(In Thousands)
|
U.S. Treasury securities and obligations of U.S. government agencies
|
$
|
48,203
|
|
|
$
|
784
|
|
|
$
|
(58)
|
|
|
$
|
48,929
|
|
Municipal debt securities
|
189,530
|
|
|
1,721
|
|
|
(1,035)
|
|
|
190,216
|
|
Corporate debt securities
|
661,719
|
|
|
23,373
|
|
|
(211)
|
|
|
684,881
|
|
Asset-backed securities
|
170,153
|
|
|
2,603
|
|
|
(114)
|
|
|
172,642
|
|
Total bonds
|
1,069,605
|
|
|
28,481
|
|
|
(1,418)
|
|
|
1,096,668
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
44,174
|
|
|
98
|
|
|
—
|
|
|
44,272
|
|
Total investments
|
$
|
1,113,779
|
|
|
$
|
28,579
|
|
|
$
|
(1,418)
|
|
|
$
|
1,140,940
|
|
We did not own any mortgage-backed securities in our asset-backed securities portfolio at December 31, 2020 or 2019.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of December 31, 2020 and 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
Financial
|
37
|
%
|
|
38
|
%
|
Consumer
|
23
|
|
|
26
|
|
Communications
|
10
|
|
|
10
|
|
Utilities
|
11
|
|
|
9
|
|
Industrial
|
9
|
|
|
8
|
|
Technology
|
10
|
|
|
7
|
|
Energy
|
—
|
|
|
2
|
|
|
|
|
|
Total
|
100
|
%
|
|
100
|
%
|
As of December 31, 2020 and 2019, approximately $5.7 million and $5.5 million, respectively, of our cash and investments were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
Scheduled Maturities
The amortized cost and fair value of available-for-sale securities as of December 31, 2020 and 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2020
|
Amortized
Cost
|
|
Fair
Value
|
|
(In Thousands)
|
Due in one year or less
|
$
|
57,429
|
|
|
$
|
57,949
|
|
Due after one through five years
|
507,444
|
|
|
536,520
|
|
Due after five through ten years
|
1,016,230
|
|
|
1,056,098
|
|
Due after ten years
|
21,261
|
|
|
22,539
|
|
Asset-backed securities
|
128,471
|
|
|
131,180
|
|
Total investments
|
$
|
1,730,835
|
|
|
$
|
1,804,286
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2019
|
Amortized
Cost
|
|
Fair
Value
|
|
(In Thousands)
|
Due in one year or less
|
$
|
138,776
|
|
|
$
|
139,113
|
|
Due after one through five years
|
406,986
|
|
|
417,208
|
|
Due after five through ten years
|
380,737
|
|
|
394,180
|
|
Due after ten years
|
17,127
|
|
|
17,797
|
|
Asset-backed securities
|
170,153
|
|
|
172,642
|
|
Total investments
|
$
|
1,113,779
|
|
|
$
|
1,140,940
|
|
Aging of Unrealized Losses
As of December 31, 2020, the investment portfolio had gross unrealized losses of $0.5 million, of which $8 thousand had been in an unrealized loss position for a period of twelve months or longer. As of December 31, 2019, the investment portfolio had gross unrealized losses of $1.4 million, of which $84 thousand had been in an unrealized loss position for a period of twelve months or longer. For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
As of December 31, 2020
|
|
(Dollars in Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Municipal debt securities
|
4
|
|
3,548
|
|
(2)
|
|
|
—
|
|
—
|
|
—
|
|
|
4
|
|
3,548
|
|
(2)
|
|
Corporate debt securities
|
9
|
|
40,081
|
|
(483)
|
|
|
1
|
|
33
|
|
—
|
|
|
10
|
|
40,114
|
|
(483)
|
|
Asset-backed securities
|
2
|
|
5,191
|
|
(19)
|
|
|
1
|
|
2,495
|
|
(8)
|
|
|
3
|
|
7,686
|
|
(27)
|
|
Total
|
15
|
|
$
|
48,820
|
|
$
|
(504)
|
|
|
2
|
|
$
|
2,528
|
|
$
|
(8)
|
|
|
17
|
|
$
|
51,348
|
|
$
|
(512)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less Than Twelve Months
|
|
Twelve Months or Greater
|
|
Total
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
|
# of Securities
|
Fair Value
|
Unrealized Losses
|
As of December 31, 2019
|
|
(Dollars in Thousands)
|
U.S. Treasury securities and obligations of U.S. government agencies
|
4
|
|
$
|
12,001
|
|
$
|
(58)
|
|
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
4
|
|
$
|
12,001
|
|
$
|
(58)
|
|
Municipal debt securities
|
26
|
|
92,844
|
|
(1,034)
|
|
|
1
|
|
999
|
|
(1)
|
|
|
27
|
|
93,843
|
|
(1,035)
|
|
Corporate debt securities
|
10
|
|
30,481
|
|
(140)
|
|
|
14
|
|
23,976
|
|
(71)
|
|
|
24
|
|
54,457
|
|
(211)
|
|
Asset-backed securities
|
9
|
|
19,236
|
|
(102)
|
|
|
1
|
|
2,988
|
|
(12)
|
|
|
10
|
|
22,224
|
|
(114)
|
|
Total
|
49
|
|
$
|
154,562
|
|
$
|
(1,334)
|
|
|
16
|
|
$
|
27,963
|
|
$
|
(84)
|
|
|
65
|
|
$
|
182,525
|
|
$
|
(1,418)
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Allowance for credit losses
As of December 31, 2020, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did not record any provision for credit loss for investment securities during the year ended December 31, 2020. Based on current facts and circumstances, we believe the unrealized losses as of December 31, 2020 are not indicative of the ultimate collectability of the current amortized cost of the securities.
During the year ended December 31, 2019, we recognized $0.4 million other-than-temporarily impaired (OTTI) losses in earnings. For the year ended December 31, 2018, we did not recognize any OTTI losses.
Net Investment Income
The following table presents the components of net investment income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(In Thousands)
|
Investment income
|
$
|
33,140
|
|
|
$
|
31,332
|
|
|
$
|
24,342
|
|
|
|
Investment expenses
|
(1,243)
|
|
|
(476)
|
|
|
(804)
|
|
|
|
Net investment income
|
$
|
31,897
|
|
|
$
|
30,856
|
|
|
$
|
23,538
|
|
|
|
The following table presents the components of net realized investment gains:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(In Thousands)
|
Gross realized investment gains
|
|
|
|
|
$
|
5,572
|
|
|
$
|
561
|
|
|
$
|
525
|
|
|
|
Gross realized investment losses
|
|
|
|
|
(4,642)
|
|
|
(516)
|
|
|
(468)
|
|
|
|
Net realized investment gains
|
|
|
|
|
$
|
930
|
|
|
$
|
45
|
|
|
$
|
57
|
|
|
|
4. Fair Value of Financial Instruments
The following describes the valuation techniques used by us to determine the fair value of our financial instruments:
We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below:
Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Assets classified as Level 1 and Level 2
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources.
Liabilities classified as Level 3
We calculate the fair value of outstanding warrants utilizing Level 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.
The following tables present the level within the fair value hierarchy at which our financial instruments were measured:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value
|
As of December 31, 2020
|
(In Thousands)
|
U.S. Treasury securities and obligations of U.S. government agencies
|
$
|
31,598
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
31,598
|
|
Municipal debt securities
|
—
|
|
|
421,348
|
|
|
—
|
|
|
421,348
|
|
Corporate debt securities
|
—
|
|
|
1,219,791
|
|
|
—
|
|
|
1,219,791
|
|
Asset-backed securities
|
—
|
|
|
131,180
|
|
|
—
|
|
|
131,180
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
127,306
|
|
|
—
|
|
|
—
|
|
|
127,306
|
|
Total assets
|
$
|
158,904
|
|
|
$
|
1,772,319
|
|
|
$
|
—
|
|
|
$
|
1,931,223
|
|
Warrant liability
|
—
|
|
|
—
|
|
|
4,409
|
|
|
4,409
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,409
|
|
|
$
|
4,409
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
|
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
|
|
Significant Other
Observable Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Fair Value
|
As of December 31, 2019
|
(In Thousands)
|
U.S. Treasury securities and obligations of U.S. government agencies
|
$
|
48,929
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48,929
|
|
Municipal debt securities
|
—
|
|
|
190,216
|
|
|
—
|
|
|
190,216
|
|
Corporate debt securities
|
—
|
|
|
684,881
|
|
|
—
|
|
|
684,881
|
|
Asset-backed securities
|
—
|
|
|
172,642
|
|
|
—
|
|
|
172,642
|
|
|
|
|
|
|
|
|
|
Cash, cash equivalents and short-term investments
|
85,361
|
|
|
—
|
|
|
—
|
|
|
85,361
|
|
Total assets
|
$
|
134,290
|
|
|
$
|
1,047,739
|
|
|
$
|
—
|
|
|
$
|
1,182,029
|
|
Warrant liability
|
—
|
|
|
—
|
|
|
7,641
|
|
|
7,641
|
|
Total liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,641
|
|
|
$
|
7,641
|
|
There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the years ended December 31, 2020 or 2019.
The following is a roll-forward of Level 3 liabilities measured at fair value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
Warrant Liability
|
2020
|
|
2019
|
|
2018
|
|
|
|
(In Thousands)
|
Balance, January 1
|
$
|
7,641
|
|
|
$
|
7,296
|
|
|
$
|
7,472
|
|
|
|
Change in fair value of warrant liability included in earnings
|
(2,907)
|
|
|
8,657
|
|
|
1,397
|
|
|
|
Issuance of common stock on warrant exercise
|
(325)
|
|
|
(8,312)
|
|
|
(1,573)
|
|
|
|
Balance, December 31
|
$
|
4,409
|
|
|
$
|
7,641
|
|
|
$
|
7,296
|
|
|
|
The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Common stock price
|
$
|
22.65
|
|
|
$
|
33.18
|
|
|
$
|
17.85
|
|
|
|
Risk free interest rate
|
0.11
|
%
|
|
1.59
|
%
|
|
2.46 - 2.47%
|
|
|
Expected life
|
1.31 years
|
|
2.31 years
|
|
2.58 - 3.31 years
|
|
|
Expected volatility
|
83.7
|
%
|
|
41.4
|
%
|
|
41.1 - 42.5%
|
|
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
|
|
The changes in fair value of the warrant liability for the years ended December 31, 2020, 2019, and 2018 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in other Black-Scholes model inputs and the exercise of outstanding warrants.
Financial Instruments not Measured at Fair Value
On June 19, 2020, we issued $400 million aggregate principal amount of senior secured notes that mature on June 1, 2025 (the Notes) and used a portion of the proceeds from the Notes offering to repay the outstanding amount due under our $150 million term loan (2018 Term Loan). At December 31, 2020, the Notes were carried at a cost of $393.3 million, net of unamortized debt issuance costs of $6.7 million, and had a fair value of $447.1 million as assessed under our Level 2 hierarchy. At December 31, 2019, the 2018 Term Loan was carried at a cost of $145.8 million, net of unamortized debt issuance costs of $2.0 million, and had a fair value of $147.8 million.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
5. Debt
Senior Secured Notes
At December 31, 2020, we had $400 million aggregate principal amount of senior secured notes outstanding. The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. $244.4 million of proceeds from the Notes offering were contributed to our lead operating subsidiary, NMIC and remaining proceeds were used to repay the outstanding amount due under the 2018 Term Loan due on May 24, 2023 and to pay underwriting fees incurred connection with the offering.
The Notes mature on June 1, 2025. At any time, or from time to time, prior to March 1, 2025, we may elect to redeem the Notes in whole or in part at a price based on 100% of the aggregate principal amount of any Notes redeemed plus the "Applicable Premium," plus accrued and unpaid interest thereon. Applicable Premium is defined as the greater of (1) 1.0% of the principal amount of the Notes, or (2) the principal value of the Notes plus the present value of all future interest payments. At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon. From time to time prior to June 1, 2022, we may also elect to use proceeds raised from one or more equity offerings to redeem up to 40% of the aggregate principal amount of the Notes at a price equal to 107.375% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, subject to certain exceptions.
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 December 31, 2020, $6.7 million of unamortized debt issuance costs remained.
Interest expense for the year ended December 31, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan and issuance of the Notes.
At December 31, 2020, $2.5 million of accrued and unpaid interest on the Notes is included in "Accounts Payable and Accrued Expenses" on the Consolidated Balance Sheet.
2020 Revolving Credit Facility
On March 20, 2020, we amended our $85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility). Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate plus a margin of 1.375% to 2.875% per annum, based on the applicable corporate credit rating at the time.
On October 30, 2020, we entered into a Joinder Agreement to the Credit Agreement, increasing the aggregate principal amount of commitments under the 2020 Revolving Credit Facility from $100 million to $110 million. All other terms remained unchanged. As of December 31, 2020, no amounts were drawn under the 2020 Revolving Credit Facility.
Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of December 31, 2020, the applicable commitment fee was 0.35%. For the year ended December 31, 2020, we recorded $0.4 million of commitment fees in interest expense, respectively.
We incurred debt issuance costs of $0.8 million in connection with the 2020 Revolving Credit Facility and had $0.6 million of unamortized debt issuance costs associated with the 2018 Revolving Credit Facility remaining at the time of its amendment and replacement. Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2020 Revolving Credit Facility. At December 31, 2020, remaining unamortized deferred debt issuance costs were $1.1 million.
We are subject to certain covenants under the 2020 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the private mortgage insurer eligibility requirements (PMIERs) financial requirements (subject to any GSE approved waivers), and minimum
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants at December 31, 2020.
6. Reinsurance
We enter into third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, (respectively, as defined therein), and support the growth of our business. The Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) has approved and the GSEs have indicated their non-objection to all such transactions (subject to certain conditions and ongoing review, including levels of approved capital credit).
The effect of our reinsurance agreements on premiums written and earned is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
(In Thousands)
|
Net premiums written
|
|
|
|
|
|
|
Direct
|
$
|
455,172
|
|
|
$
|
376,052
|
|
|
$
|
287,791
|
|
|
Ceded (1)
|
(66,528)
|
|
|
(43,400)
|
|
|
(30,988)
|
|
|
Net premiums written
|
$
|
388,644
|
|
|
$
|
332,652
|
|
|
$
|
256,803
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
|
|
|
|
|
Direct
|
$
|
472,998
|
|
|
$
|
398,303
|
|
|
$
|
292,064
|
|
|
Ceded (1)
|
(75,826)
|
|
|
(53,288)
|
|
|
(40,867)
|
|
|
Net premiums earned
|
$
|
397,172
|
|
|
$
|
345,015
|
|
|
$
|
251,197
|
|
|
(1) Net of profit commission.
Excess-of-loss reinsurance
NMIC entered into excess-of-loss reinsurance agreements with the Oaktown Re Vehicles. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies written during a discrete period. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts.
NMIC makes risk premium payments to the Oaktown Re Vehicles for the applicable outstanding reinsurance coverage amount and pays an additional amount for anticipated operating expenses (capped at $300 thousand per year to Oaktown Re Ltd. and $250 thousand per year to Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd.). NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $22.8 million, $14.6 million and $9.6 million during the years ended December 31, 2020, 2019 and 2018, respectively.
NMIC applies claims paid 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 Vehicles during the years ended December 31, 2020, 2019 and 2018, respectively, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. Such trust funds are required to be invested in short-term U.S. Treasury money market funds at all times. Each Oaktown Re Vehicle financed its respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors. Such insurance-linked notes mature ten years from the inception date of each reinsurance agreement. We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd. and Oaktown Re V Ltd., individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction and 2020-2 ILN Transaction, and collectively as the ILN Transactions.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ values in thousands)
|
Inception Date
|
|
|
Covered Production
|
|
Initial Reinsurance Coverage
|
|
Current Reinsurance Coverage
|
|
Initial First Layer Retained Loss
|
|
Current First Layer Retained Loss (1)
|
2017 ILN Transaction
|
May 2, 2017
|
|
|
1/1/2013 - 12/31/2016
|
|
$
|
211,320
|
|
|
$
|
40,226
|
|
|
$
|
126,793
|
|
|
$
|
121,423
|
|
2018 ILN Transaction
|
July 25, 2018
|
|
|
1/1/2017 - 5/31/2018
|
|
264,545
|
|
|
158,489
|
|
|
125,312
|
|
|
123,234
|
|
2019 ILN Transaction
|
July 30, 2019
|
|
|
6/1/2018 - 6/30/2019
|
|
326,905
|
|
|
231,877
|
|
|
123,424
|
|
|
122,874
|
|
2020-1 ILN Transaction
|
July 30, 2020
|
|
|
7/1/2019 - 3/31/2020
|
|
322,076
|
|
|
250,685
|
|
|
169,514
|
|
|
169,514
|
|
2020-2 ILN Transaction
|
October 29, 2020
|
|
|
4/1/2020 - 9/30/2020 (2)
|
|
242,351
|
|
|
242,351
|
|
|
121,777
|
|
|
121,177
|
|
(1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss.
(2) Less than 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.
NMIC holds 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 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 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 noteholders, among others.
Under the terms of the 2018, 2019, 2020-1 and 2020-2 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 balance sheet includes restricted amounts of $5.6 million as of December 31, 2020. We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions will decline over time as the outstanding principal balance of the respective insurance-linked notes are amortized.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Quota share reinsurance
NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018 and the 2020 QSR Transaction, effective April 1, 2020. 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 cedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae. The 2016 QSR Transaction is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. NMIC has the option, based on certain conditions and subject to a 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 April 1, 2020 to December 31, 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.
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 RIF ceded under the respective agreements. Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums earned or written with respect to the recaptured risk. With the termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination has no effect on the cession of pool risk under the 2016 QSR Transaction.
The following table shows amounts related to the QSR Transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
(In Thousands)
|
Ceded risk-in-force
|
$
|
5,543,969
|
|
|
$
|
5,137,249
|
|
|
$
|
4,292,450
|
|
|
|
|
|
|
|
Ceded premiums earned
|
(94,899)
|
|
|
(89,211)
|
|
|
(74,068)
|
|
Ceded claims and claim expenses
|
14,002
|
|
|
3,465
|
|
|
1,763
|
|
|
|
|
|
|
|
Ceding commission earned
|
18,526
|
|
|
17,652
|
|
|
14,585
|
|
Profit commission
|
41,902
|
|
|
50,513
|
|
|
42,846
|
|
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 revenue on direct premiums. Under the 2018 QSR Transaction and 2020 QSR Transactions, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission for premiums ceded under the QSR Transactions. NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016 QSR
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Transaction, 2018 QSR Transaction and 2020 QSR Transaction, generally remain below 60%, 61% and 50%, respectively, as measured annually. Ceded claims and claim expenses under each of the QSR Transactions reduce the 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 the 2016 QSR Transaction was $4.5 million as of December 31, 2020.
In accordance with the terms of the 2018 and 2020 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 reinsurance recoverable on loss reserves related to the 2018 QSR Transaction was $12.6 million as of December 31, 2020. The reinsurance recoverable on loss reserves related to the 2020 QSR Transaction was $0.5 million as of December 31, 2020.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
7. Reserves for Insurance Claims and Claim Expenses
We hold gross reserves in an amount equal to the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. 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 for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as 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 December 31, 2020, we had 12,209 primary loans in default and held gross reserves for insurance claims and claim expenses of $90.6 million. During the year ended December 31, 2020, we paid 143 claims totaling $6.4 million, including 137 claims covered under the QSR Transactions representing $1.3 million of ceded claims and claim expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At December 31, 2020, 219 loans in the pool were in default. These 219 loans represented approximately $17.6 million of RIF. Due to the size of the remaining deductible, our expectation that a limited number of loans in default will progress to a claim and the expected severity on such claim submissions (all loans in the pool have LTV ratios under 80%), we did not establish any case or IBNR reserves for pool risk at December 31, 2020. In connection with the settlement of pool claims, we applied $1.0 million to the pool deductible through December 31, 2020. At December 31, 2020, 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 12,209 loans in default in our primary insured portfolio as of December 31, 2020 which represented a 3.06% default rate against 399,429 total policies in-force. We had 1,448 loans in default in our primary insured portfolio as of December 31, 2019, which represented a 0.40% default rate against 366,039 total policies in-force. The increase in our default population is primarily due to challenges borrowers are facing related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or similar programs made available by private lenders.
The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default. Our future claims exposure is a function of the number of defaulted loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, the Federal Housing Financing Agency (FHFA) and GSEs have 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 December 31, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at December 31, 2020, our total reserve position and claims and claim expenses increased as of and during the year ended December 31, 2020 due to the growth in the size of our default population.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended
|
|
December 31, 2020
|
|
December 31, 2019
|
|
December 31, 2018
|
|
|
|
(In Thousands)
|
Beginning balance
|
$
|
23,752
|
|
|
$
|
12,811
|
|
|
$
|
8,761
|
|
|
|
Less reinsurance recoverables (1)
|
(4,939)
|
|
|
(3,001)
|
|
|
(1,902)
|
|
|
|
Beginning balance, net of reinsurance recoverables
|
18,813
|
|
|
9,810
|
|
|
6,859
|
|
|
|
|
|
|
|
|
|
|
|
Add claims incurred:
|
|
|
|
|
|
|
|
Claims and claim expenses incurred:
|
|
|
|
|
|
|
|
Current year (2)
|
66,943
|
|
|
14,737
|
|
|
7,860
|
|
|
|
Prior years (3)
|
(7,696)
|
|
|
(2,230)
|
|
|
(2,408)
|
|
|
|
Total claims and claim expenses incurred
|
59,247
|
|
|
12,507
|
|
|
5,452
|
|
|
|
|
|
|
|
|
|
|
|
Less claims paid:
|
|
|
|
|
|
|
|
Claims and claim expenses paid:
|
|
|
|
|
|
|
|
Current year (2)
|
586
|
|
|
204
|
|
|
130
|
|
|
|
Prior years (3)
|
4,515
|
|
|
3,849
|
|
|
2,371
|
|
|
|
Reinsurance terminations (4)
|
—
|
|
|
(549)
|
|
|
—
|
|
|
|
Total claims and claim expenses paid
|
5,101
|
|
|
3,504
|
|
|
2,501
|
|
|
|
|
|
|
|
|
|
|
|
Reserve at end of period, net of reinsurance recoverables
|
72,959
|
|
|
18,813
|
|
|
9,810
|
|
|
|
Add reinsurance recoverables (1)
|
17,608
|
|
|
4,939
|
|
|
3,001
|
|
|
|
Ending balance
|
$
|
90,567
|
|
|
$
|
23,752
|
|
|
$
|
12,811
|
|
|
|
(1) Related to ceded losses recoverable under the QSR Transactions. See Note 6, "Reinsurance" for additional information.
(2) Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan defaulted in a prior year and subsequently cured and later re-defaulted in the current year, the default would be included in the current year. Amounts are presented net of reinsurance.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year. Amounts are presented net of reinsurance.
(4) Represents the settlement of reinsurance recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction on a cut-off basis. See Note 6, "Reinsurance" for additional information.
The "claims incurred" section of the table above shows claims and claim expenses incurred on defaults occurring in current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred relating to current year defaults represents the estimated amount of claims and claim expenses to ultimately be paid on such loans. We recognized $7.7 million, $2.2 million, and $2.4 million of favorable prior year development during the years ended December 31, 2020, 2019 and 2018, respectively, primarily due to the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $8.3 million related to prior year defaults remained as of December 31, 2020.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following tables provide claim development data by accident year and a reconciliation to the reserve for insurance claims and claim expenses.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of Reinsurance (1)
|
|
As of December 31, 2020
|
Accident Year
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
Total of IBNR
|
|
Defaults (2)
|
|
($ Values In Thousands)
|
2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
—
|
|
2014
|
|
|
83
|
|
|
34
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
—
|
|
—
|
2015
|
|
|
|
|
699
|
|
|
664
|
|
|
743
|
|
|
764
|
|
|
894
|
|
|
894
|
|
|
—
|
|
|
—
|
|
2016
|
|
|
|
|
|
|
2,394
|
|
|
1,568
|
|
|
1,790
|
|
|
1,934
|
|
|
1,936
|
|
|
8
|
|
|
5
|
|
2017
|
|
|
|
|
|
|
|
|
6,028
|
|
|
3,475
|
|
|
3,570
|
|
|
3,807
|
|
|
20
|
|
|
16
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
7,779
|
|
|
5,271
|
|
|
4,709
|
|
|
88
|
|
|
77
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
14,391
|
|
|
7,229
|
|
|
364
|
|
|
422
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,769
|
|
|
4,514
|
|
|
11,689
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
84,348
|
|
|
$
|
4,994
|
|
|
12,209
|
|
(1) Amounts include case and IBNR reserves.
(2) Number of defaults outstanding as of December 31, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance
|
Accident Year
|
2013
|
|
2014
|
|
2015
|
|
2016
|
|
2017
|
|
2018
|
|
2019
|
|
2020
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
2013
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
2014
|
|
|
—
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
|
4
|
|
2015
|
|
|
|
|
50
|
|
|
246
|
|
|
684
|
|
|
720
|
|
|
804
|
|
|
894
|
|
2016
|
|
|
|
|
|
|
171
|
|
|
890
|
|
|
1,596
|
|
|
1,826
|
|
|
1,827
|
|
2017
|
|
|
|
|
|
|
|
|
27
|
|
|
1,655
|
|
|
2,925
|
|
|
3,494
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
130
|
|
|
1,981
|
|
|
3,537
|
|
2019
|
|
|
|
|
|
|
|
|
|
|
|
|
69
|
|
|
2,368
|
|
2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
12,710
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses
|
(In Thousands)
|
|
|
As of December 31, 2020
|
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of Reinsurance
|
|
$
|
84,348
|
|
Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance
|
|
12,710
|
|
Liabilities for unpaid claims and allocated claims adjustment expenses, net of reinsurance
|
|
71,638
|
|
Reinsurance recoverable on unpaid claims
|
|
17,608
|
|
Unallocated claims adjustment expenses
|
|
1,321
|
|
Total gross liability for unpaid claims and claim adjustment expenses
|
|
$
|
90,567
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The following table shows the average percentage of claims and allocated claims adjustment expenses paid in the years following the incurrence of a claim.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average annual percentage payout of incurred claims and allocated claims adjustment expenses by age, net of reinsurance
|
|
Year 1
|
|
Year 2
|
|
Year 3
|
|
Year 4
|
|
Year 5
|
|
Year 6
|
|
Year 7
|
Claims duration disclosure
|
3%
|
|
37%
|
|
88%
|
|
95%
|
|
95%
|
|
100%
|
|
100%
|
8. Earnings per Share
Basic EPS is based on the weighted average number of shares of common stock outstanding. 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 RSUs, and the exercise of vested and unvested stock options and 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 EPS of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
|
|
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
(In Thousands, except for per share data)
|
Net income
|
|
|
|
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
Basic weighted average shares outstanding
|
|
|
|
|
78,023
|
|
|
67,573
|
|
|
65,019
|
|
|
|
Basic earnings per share
|
|
|
|
|
$
|
2.20
|
|
|
$
|
2.54
|
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
$
|
171,566
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
Gain from change in fair value of warrant liability
|
|
|
|
|
(2,907)
|
|
|
—
|
|
|
—
|
|
|
|
Diluted net income
|
|
|
|
|
$
|
168,659
|
|
|
$
|
171,957
|
|
|
$
|
107,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
|
|
78,023
|
|
|
67,573
|
|
|
65,019
|
|
|
|
Dilutive effect of issuable shares
|
|
|
|
|
1,240
|
|
|
2,148
|
|
|
2,633
|
|
|
|
Diluted weighted average shares outstanding
|
|
|
|
|
79,263
|
|
|
69,721
|
|
|
67,652
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share
|
|
|
|
|
$
|
2.13
|
|
|
$
|
2.47
|
|
|
$
|
1.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Anti-dilutive shares
|
|
|
|
|
58
|
|
|
565
|
|
|
843
|
|
|
|
9. Warrants
We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012, of which 312 thousand remained outstanding available for exercise at December 31, 2020. Each warrant gives the holder thereof the right to purchase one 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 year ended December 31, 2020, 18 thousand warrants were exercised resulting in the issuance of 11 thousand shares of common stock. Upon exercise, we reclassified approximately $0.3 million of warrant fair value from warrant liability to additional paid-in capital. During the year ended December 31, 2019, 448 thousand warrants were exercised resulting in the issuance of 289 thousand shares of common stock. Upon exercise, we reclassified approximately $8.3 million of warrant fair value from warrant liability to additional paid-in capital.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
Changes in fair value of $0.1 million, $4.1 million, and $0.4 million was recognized for warrants exercised during the years ended December 31, 2020, 2019 and 2018, respectively.
10. Share-Based Compensation
Share-based compensation includes stock options, service-based RSUs and performance and service based RSUs granted under our 2012 Stock Incentive Plan (2012 Plan) and our Amended and Restated 2014 Omnibus Incentive Plan (2014 Plan, and together with the 2012 Plan, the Stock Plans).
The 2012 Plan was approved by the Board on April 16, 2012 and authorized 5.5 million shares of common stock to be reserved for issuance, with limits of 3.85 million shares available for stock option issuance and 1.65 million shares available for RSU issuance. Options granted under the 2012 Plan are non-qualified stock options and may be granted to employees, directors and other key persons. The exercise price per share for options covered by the 2012 Plan is determined by the Board at the time of grant, but shall not be less than the fair market value of our common stock, defined as the closing price of our common stock, on the date of the grant. The term of the stock option grants is established by the Board, but no stock option shall be exercisable more than ten years after the date the stock option is granted. The vesting period of the stock option grants is also established by the Board at the time of grant and is generally a three-year period. Upon the exercise of stock options, we issue shares from the authorized, unissued share reserve.
The 2014 Plan was originally approved by our stockholders at our annual meeting on May 8, 2014 and authorized 4.0 million shares of common stock to be reserved for issuance. On May 11, 2017, our stockholders approved amendments to the 2014 Plan at our annual stockholder meeting, authorizing an additional 2.0 million shares of common stock for issuance, increasing the total shares of common stock reserved for issuance under the plan to 6.0 million. These shares may be either authorized but unissued shares or treasury shares.
For the years ended December 31, 2020, 2019 and 2018, we incurred $11.1 million, $13.0 million and $12.6 million, respectively, of expenses related to awards granted under our Stock Plans. We recognized related income tax benefits of $2.3 million, $2.7 million and $2.6 million for the years ended December 31, 2020, 2019 and 2018, respectively.
A summary of option activity during the years ended December 31, 2020, 2019 and 2018, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Weighted Average Exercise Price
|
|
(Shares in Thousands)
|
Options outstanding at December 31, 2019
|
1,928
|
|
|
$
|
4.84
|
|
|
$
|
13.04
|
|
Options granted
|
—
|
|
|
—
|
|
|
—
|
|
Options exercised
|
(435)
|
|
|
4.21
|
|
|
11.17
|
|
Options forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Options expired
|
—
|
|
|
—
|
|
|
—
|
|
Options outstanding at December 31, 2020
|
1,493
|
|
|
$
|
5.02
|
|
|
$
|
13.59
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Weighted Average Exercise Price
|
|
(Shares in Thousands)
|
Options outstanding at December 31, 2018
|
2,882
|
|
|
$
|
4.24
|
|
|
$
|
11.42
|
|
Options granted
|
163
|
|
|
8.85
|
|
|
22.19
|
|
Options exercised
|
(1,117)
|
|
|
3.88
|
|
|
10.19
|
|
Options forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Options expired
|
—
|
|
|
—
|
|
|
—
|
|
Options outstanding at December 31, 2019
|
1,928
|
|
|
$
|
4.84
|
|
|
$
|
13.04
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Weighted Average Exercise Price
|
|
(Shares in Thousands)
|
Options outstanding at December 31, 2017
|
3,311
|
|
|
$
|
3.95
|
|
|
$
|
10.41
|
|
Options granted
|
383
|
|
|
6.32
|
|
|
18.08
|
|
Options exercised
|
(803)
|
|
|
4.06
|
|
|
10.43
|
|
Options forfeited
|
—
|
|
|
—
|
|
|
—
|
|
Options expired
|
(9)
|
|
|
4.05
|
|
|
10.51
|
|
Options outstanding at December 31, 2018
|
2,882
|
|
|
$
|
4.24
|
|
|
$
|
11.42
|
|
As of December 31, 2020, there were approximately 1.3 million fully vested and exercisable options. There were 0.4 million exercises during the year with an aggregate intrinsic value of $6.0 million. The weighted average exercise price for the fully vested and exercisable options was $12.39. The remaining weighted average contractual life of fully vested and exercisable options as of December 31, 2020 was 4.85 years. The aggregate grant date intrinsic value of fully vested and exercisable options was $12.9 million as of December 31, 2020.
As of December 31, 2020, there was $0.2 million of total unrecognized compensation cost related to non-vested stock options. The weighted-average period over which total remaining compensation costs related to non-vested stock options will be recognized is 0.86 years.
No stock options were granted during the year ended December 31, 2020. The estimated grant date fair values of the stock options granted during the years ended December 31, 2019 and 2018 were calculated using the Black-Scholes valuation model based on the following assumptions.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ended December 31,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
Expected life
|
|
|
6 years
|
|
6 years
|
|
|
|
|
Risk free interest rate
|
|
|
2.57
|
%
|
|
2.66-2.89%
|
|
|
|
|
Dividend yield
|
|
|
—
|
%
|
|
—
|
%
|
|
|
|
|
Expected stock price volatility
|
|
|
36.8
|
%
|
|
30.1-30.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected life - is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. We use the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected life for options granted during the period as sufficient historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of 10 years.
Risk-free interest rate - is the U.S. Treasury rate on the date of the grant having a term approximating the expected life of the option.
Dividend yield - is calculated by dividing the expected annual dividend by our stock price at the valuation date.
Expected price volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate.
A summary of RSU activity during the years ended December 31, 2020, 2019 and 2018 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2020
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
(Shares in Thousands)
|
Non-vested restricted stock units at December 31, 2019
|
1,202
|
|
|
$
|
18.67
|
|
Restricted stock units granted
|
646
|
|
|
22.67
|
|
Restricted stock units vested
|
(664)
|
|
|
17.68
|
|
Restricted stock units forfeited
|
(122)
|
|
|
19.55
|
|
Non-vested restricted stock units at December 31, 2020
|
1,062
|
|
|
$
|
21.61
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2019
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
(Shares in Thousands)
|
Non-vested restricted stock units at December 31, 2018
|
1,753
|
|
|
$
|
12.06
|
|
Restricted stock units granted
|
470
|
|
|
24.42
|
|
Restricted stock units vested
|
(970)
|
|
|
9.71
|
|
Restricted stock units forfeited
|
(51)
|
|
|
15.06
|
|
Non-vested restricted stock units at December 31, 2019
|
1,202
|
|
|
$
|
18.67
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Year Ended December 31, 2018
|
Shares
|
|
Weighted Average Grant Date Fair Value per Share
|
|
(Shares in Thousands)
|
Non-vested restricted stock units at December 31, 2017
|
2,065
|
|
|
$
|
8.15
|
|
Restricted stock units granted
|
701
|
|
|
17.22
|
|
Restricted stock units vested
|
(913)
|
|
|
7.42
|
|
Restricted stock units forfeited
|
(100)
|
|
|
9.89
|
|
Non-vested restricted stock units at December 31, 2018
|
1,753
|
|
|
$
|
12.06
|
|
At December 31, 2020, we had 1.1 million granted and non-vested RSUs, consisting of 1.0 million RSUs that are subject to service condition vesting requirements and 0.1 million RSUs that are subject to performance and service condition vesting requirements. The total fair value of RSUs vested during the year ended December 31, 2020 was $11.7 million. The remaining weighted average contractual life of non-vested RSUs was 1.44 years. As of December 31, 2020, there was $8.8 million of total unrecognized compensation costs related to non-vested RSUs, compared to $7.2 million as of December 31, 2019. The weighted-average period over which total remaining compensation costs related to non-vested RSUs will be recognized is 1.49 years.
Non-vested RSUs subject to service condition vesting requirements vest over a period ranging from one to five years. Non-vested RSUs subject to performance and service condition vesting requirements vest over a three year period, with the number of shares issued upon vesting based on a compound annual book value per share growth target. The fair value of non-vested RSUs is measured as the closing price of our common stock on the date of grant less the present value of anticipated dividends to be paid during the vesting period.
401(k) Savings Plan
We offer our employees a 401(k) Savings Plan (401(k) Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (IRC). Under the 401(k) Plan, we match up to 100% of eligible employees' pre-tax contributions up to 5% of eligible compensation. During the years ended December 31, 2020, 2019 and 2018, we incurred approximately $2.2 million, $2.5 million and $1.6 million of expense related to our matching 401(k) Plan contributions, respectively.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
11. Income Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. NMIH files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries.
Total income tax expense consists of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(In Thousands)
|
Current
|
$
|
34
|
|
|
$
|
(386)
|
|
|
$
|
1,677
|
|
|
|
Deferred
|
46,506
|
|
|
45,082
|
|
|
26,357
|
|
|
|
Total income tax expense
|
$
|
46,540
|
|
|
$
|
44,696
|
|
|
$
|
28,034
|
|
|
|
For the years ended December 31, 2020, 2019 and 2018, we had income tax expenses of $46.5 million, $44.7 million, and $28.0 million, respectively, including amounts related to current state income taxes and changes to our federal and state net deferred tax liability.
The following table presents a reconciliation between the federal statutory income tax rate and our effective income tax rate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
Federal statutory income tax rate
|
21.0
|
%
|
|
21.0
|
%
|
|
21.0
|
%
|
|
|
State provision
|
0.5
|
|
|
0.5
|
|
|
0.7
|
|
|
|
Share-based and other compensation
|
0.1
|
|
|
(1.7)
|
|
|
(1.4)
|
|
|
|
Warrant gain/loss
|
(0.3)
|
|
|
0.9
|
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
—
|
|
|
(0.1)
|
|
|
0.1
|
|
|
|
Effective income tax rate
|
21.3
|
%
|
|
20.6
|
%
|
|
20.6
|
%
|
|
|
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The components of our net deferred tax asset are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2020
|
|
2019
|
Deferred tax asset
|
(In Thousands)
|
Net operating loss carry forwards
|
$
|
7,938
|
|
|
$
|
9,244
|
|
Share-based compensation
|
5,067
|
|
|
5,959
|
|
Unearned premium reserve
|
4,844
|
|
|
5,213
|
|
Accrued expenses
|
3,198
|
|
|
4,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other (1)
|
1,592
|
|
|
1,972
|
|
Total gross deferred tax asset
|
22,639
|
|
|
26,927
|
|
Less: valuation allowance
|
(7,610)
|
|
|
(7,857)
|
|
Total deferred tax asset
|
15,029
|
|
|
19,070
|
|
Deferred tax liability
|
|
|
|
Contingency reserve
|
(91,429)
|
|
|
(47,730)
|
|
Deferred acquisition costs
|
(13,381)
|
|
|
(12,902)
|
|
Unrealized gain on investments
|
(15,432)
|
|
|
(7,634)
|
|
Capitalized software
|
(5,569)
|
|
|
(5,107)
|
|
|
|
|
|
Other (1)
|
(1,804)
|
|
|
(2,057)
|
|
Total deferred tax liability
|
(127,615)
|
|
|
(75,430)
|
|
Net deferred income tax (liability)
|
$
|
(112,586)
|
|
|
$
|
(56,360)
|
|
(1) Prior periods have been reclassified for consistency and presentation purposes.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent.
During the years ended December 31, 2020 and 2019, we purchased $38.8 million and $7.6 million of tax and loss bonds, respectively. As a result, we had no current federal income tax provision for the years ended December 31, 2020 and 2019. As of December 31, 2020 and 2019, we held $46.4 million and $7.6 million of tax and loss bonds, respectively, in "Other assets" in our consolidated balance sheet.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220). This update permits the reclassification of the disproportionate income tax effects, commonly referred to as "stranded tax," that result from the TCJA on items within AOCI to retained earnings. We adopted this update effective January 1, 2018, resulting in a $0.3 million reduction to retained earnings as of January 1, 2018. The remaining $4.2 million of stranded tax that remains in AOCI relates to our available-for-sale fixed income holdings.
At December 31, 2020, we had a federal net operating loss carryforward of $2.1 million which expires in varying amounts in 2030 and 2031, and state net operating loss carryforward of $111.6 million which expire in varying amounts from 2031 to 2041. Section 382 of the IRC imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $7.3 million of federal net operating losses were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2028. Our federal net operating loss carryforward arises from this limitation and the constraint on our ability to utilize the net operating loss carryforward in full during the current period.
At December 31, 2020 and 2019, we recorded valuation allowances of $7.6 million and $7.9 million, respectively against state net deferred tax assets that may not be realized in future periods. The valuation allowances for both years primarily relate to state net operating losses generated by NMIH, as NMIH operates at a loss and currently only generates revenue from its investment portfolio.
As of December 31, 2020 and 2019, we had no reserves for unrecognized tax benefits as we have taken no material uncertain tax positions that would have required a reserve to be measured and recognized.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
We file income tax returns with the U.S. federal government and various state jurisdictions that are subject to potential examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax returns for 2017 and subsequent years, and state income tax returns for 2016 and subsequent years, remain open by statute.
12. Software and Equipment
Software and equipment consist largely of capitalized software developed to support our mortgage insurance operations. Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2020 and 2019, consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2020
|
|
December 31, 2019
|
|
|
|
(In Thousands)
|
Software
|
$
|
59,678
|
|
|
$
|
46,522
|
|
|
|
Equipment
|
9,123
|
|
|
8,992
|
|
|
|
Leasehold improvements
|
3,402
|
|
|
3,442
|
|
|
|
Subtotal
|
72,203
|
|
|
58,956
|
|
|
|
Accumulated amortization and depreciation
|
(42,538)
|
|
|
(32,860)
|
|
|
|
Software and equipment, net
|
$
|
29,665
|
|
|
$
|
26,096
|
|
|
|
Capitalized costs for software, equipment, and leasehold improvements during the years ended December 31, 2020, 2019 and 2018, were $14.5 million, $10.6 million, and $9.8 million, respectively. Amortization and depreciation expense for software, equipment, and leasehold improvements for the years ended December 31, 2020, 2019, and 2018 were $9.9 million, $9.3 million, and $7.8 million, respectively.
13. Intangible Assets and Goodwill
Intangible assets and goodwill consist of identifiable intangible assets and goodwill purchased in connection with the acquisition of our insurance subsidiaries. Intangible assets and goodwill as of both December 31, 2020 and 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(In Thousands)
|
|
Expected Lives
|
Goodwill
|
$
|
3,244
|
|
|
Indefinite
|
State licenses
|
260
|
|
|
Indefinite
|
GSE applications
|
130
|
|
|
Indefinite
|
Total intangible assets and goodwill
|
$
|
3,634
|
|
|
|
We test goodwill and intangible assets for impairment in the third and fourth quarter, respectively, of every year, or more frequently if we believe indicators of impairment exist. No impairments of indefinite-lived intangibles or goodwill were identified during the years ended December 31, 2020, 2019 and 2018.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
14. Commitments and Contingencies
PMIERs
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs (italicized terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business, remedial and financial requirements applicable to 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 and other risk features. In general, higher quality loans carry lower charges.
Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an approved insurer's net RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing, primary adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy.
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, 2020, that NMIC was in full compliance with the PMIERs as of December 31, 2019. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC's compliance with the PMIERs.
Leases
We have two operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating ROU assets and lease liabilities of $4.6 million and $5.3 million in "Other assets" and "Other liabilities," respectively, on our consolidated balance sheet as of December 31, 2020. As of December 31, 2019, we recognized operating ROU assets and lease liabilities of $6.4 million and $7.4 million, respectively. As of December 31, 2020 and 2019, we did not have any finance leases.
We did not enter any new operating leases or recognize any new ROU assets or lease liabilities during the year ended December 31, 2020. ROU assets exchanged for new operating lease liabilities for the year ended December 31, 2019 were $8.1 million, primarily in connection with our initial adoption of ASU 2016-02, Leases (Topic 842).
The following table provides a summary of our ROU asset and lease liability assumptions as of December 31, 2020:
|
|
|
|
|
|
Weighted-average remaining lease term
|
2.2 years
|
Weighted-average discount rate
|
6.21
|
%
|
Cash paid on our operating leases for the years ended December 31, 2020, 2019 and 2018 was $2.5 million, $2.5 million and $2.3 million and lease expense incurred was $2.3 million, $2.2 million and $2.1 million during each respective period, reflecting the net benefit of incentives received at inception of the lease.
Future payments due under our existing operating leases as of December 31, 2020 are as follows:
|
|
|
|
|
|
Years ending December 31,
|
(In Thousands)
|
2021
|
$
|
2,609
|
|
2022
|
2,574
|
|
2023
|
462
|
|
|
|
Total undiscounted lease payments
|
5,645
|
|
Less effects of discounting
|
(391)
|
|
Present value of lease payments
|
$
|
5,254
|
|
Lease expense is recorded in underwriting and operating expenses on our consolidated statements of operations. Our existing operating leases have original terms that range from three to five years. The lease for our corporate headquarters includes
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
an option to renew for an additional five years at prevailing market rates at time of renewal. We have not included this renewal option in our calculation of minimum lease payments as it is not reasonably certain to be exercised.
15. Common Stock
As of December 31, 2020, we had 85.2 million outstanding shares of Class A common stock. Holders of our common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. Each holder of our common stock is entitled to one vote per share on all matters to be voted upon by stockholders, and there are no cumulative voting rights. Holders of common stock are entitled to receive dividends ratably if any are declared.
On June 8, 2020, we completed the sale of 13.8 million shares of common stock and granted the underwriters on the transaction a 15% overallotment option to purchase additional shares. The overallotment option was exercised in full, resulting in a total of 15.9 million shares of common stock issued. The common stock offering generated proceeds of $219.7 million, net of underwriting discounts, commissions and other direct offering expenses.
16. Regulatory Information
Statutory Requirements
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 (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.
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 the company's statutory capital position.
NMIC and Re One's combined statutory net income (loss), statutory surplus, contingency reserve, statutory capital and risk-to-capital (RTC) ratios as of and for the years ended December 31, 2020, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of and for the year ended December 31,
|
|
2020
|
|
2019
|
|
2018
|
|
|
|
(In Thousands)
|
Statutory net (loss) gain
|
$
|
(20,136)
|
|
|
$
|
15,233
|
|
|
$
|
(19,784)
|
|
|
|
|
|
|
|
|
|
|
|
Statutory surplus
|
894,331
|
|
|
449,602
|
|
|
430,785
|
|
|
|
Contingency reserve
|
768,324
|
|
|
531,825
|
|
|
332,702
|
|
|
|
Statutory capital (1)
|
1,662,655
|
|
|
981,427
|
|
|
763,487
|
|
|
|
|
|
|
|
|
|
|
|
Risk-to-capital
|
11.7:1
|
|
15.8:1
|
|
13.1:1
|
|
|
(1) Represents the total of the statutory surplus and contingency reserve.
In June 2020, NMIH contributed approximately $445 million of capital to NMIC following completion of its common stock and senior notes offerings.
Under applicable law in Wisconsin and 15 other states, mortgage insurers must maintain minimum amounts of statutory capital relative to RIF to continue writing new business. While formulations of minimum statutory capital may vary in each state, the most common measure allows for a maximum permitted RTC ratio of 25:1. Wisconsin and certain other states, including California and Illinois, apply a substantially similar requirement referred to as minimum policyholders' position.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
The NAIC formed a Mortgage Guaranty Insurance Working Group (the Working Group) in 2012 to discuss, develop and recommend changes to the regulatory oversight and solvency standards of the mortgage insurance industry, including changes to the Mortgage Guaranty Insurance Model Act (Model Act). The Working Group has proposed amendments to the Model Act that include, among other changes, adoption of a risk-based capital model. If adopted by the NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and potentially others that do not, are expected to enact a portion or all of the revised Model Act, including the loan-level capital model.
As of December 31, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $19.4 billion and its RTC ratio was 12.0:1, significantly below applicable limits. As of December 31, 2019, NMIC's performing primary RIF, net of reinsurance, was approximately $15.4 billion and its RTC ratio was 16.3:1.
Reinsurance
Prior to January 10, 2019, Ohio regulation limited the amount of risk a mortgage insurer was permitted to retain on a single loan to 25% of the borrower's indebtedness (after giving effect to third-party reinsurance) and, as a result, the portion of such insurance in excess of 25% was required to be reinsured. Ohio repealed this requirement for future periods beginning January 10, 2019. Several other states previously imposed similar coverage restrictions and repealed these measures prior to 2018. To comply with these previous state coverage limits, NMIC and Re One have reinsurance agreements in place under which Re One provides reinsurance to NMIC on certain insured loans with coverage levels in excess of 25%, after giving effect to third-party reinsurance.
Dividend Restrictions
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 corporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits.
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 that may restrict their ability to pay dividends to NMIH. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts (i.e.,"extraordinary" dividends), are subject to the Wisconsin OCI's prior approval. Under Wisconsin law, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding twelve months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the twelve-month period ending the preceding December 31. NMIC and Re One have never paid dividends to NMIH. Re One has the capacity to pay aggregate ordinary dividends of $1.6 million to NMIH during the twelve-month period ending December 31, 2021. NMIC reported a statutory net loss for the year ended December 31, 2020 and does not have the capacity to pay dividends to NMIH during the twelve-month period ended December 31, 2021 without prior approval from the Wisconsin OCI.
The Wisconsin OCI has approved the allocation of interest expense on the $400 million Notes and $110 million 2020 Revolving Credit Facility to NMIC, to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs prior to paying any dividends, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
17. Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020 Quarters
|
|
2020
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
|
(In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
98,717
|
|
|
$
|
98,944
|
|
|
$
|
98,802
|
|
|
$
|
100,709
|
|
|
$
|
397,172
|
|
Net investment income
|
8,104
|
|
|
7,070
|
|
|
8,337
|
|
|
8,386
|
|
|
31,897
|
|
Net realized investment (losses) gains
|
(72)
|
|
|
711
|
|
|
(4)
|
|
|
295
|
|
|
930
|
|
Other revenues
|
900
|
|
|
1,223
|
|
|
648
|
|
|
513
|
|
|
3,284
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claims and claim expenses
|
5,697
|
|
|
34,334
|
|
|
15,667
|
|
|
3,549
|
|
|
59,247
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting and operating expenses
|
32,277
|
|
|
30,370
|
|
|
33,969
|
|
|
34,994
|
|
|
131,610
|
|
Service expenses
|
734
|
|
|
1,090
|
|
|
557
|
|
|
459
|
|
|
2,840
|
|
Interest expense
|
2,744
|
|
|
5,941
|
|
|
7,796
|
|
|
7,906
|
|
|
24,387
|
|
(Gain) loss from change in fair value of warrant liability
|
(5,959)
|
|
|
1,236
|
|
|
437
|
|
|
1,379
|
|
|
(2,907)
|
|
Pre-tax income
|
72,156
|
|
|
34,977
|
|
|
49,357
|
|
|
61,616
|
|
|
218,106
|
|
Income tax expense
|
13,885
|
|
|
8,129
|
|
|
11,178
|
|
|
13,348
|
|
|
46,540
|
|
Net income
|
$
|
58,271
|
|
|
$
|
26,848
|
|
|
$
|
38,179
|
|
|
$
|
48,268
|
|
|
$
|
171,566
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (1)
|
$
|
0.85
|
|
|
$
|
0.36
|
|
|
$
|
0.45
|
|
|
$
|
0.57
|
|
|
$
|
2.20
|
|
Diluted earnings per share (1)
|
$
|
0.74
|
|
|
$
|
0.36
|
|
|
$
|
0.45
|
|
|
$
|
0.56
|
|
|
$
|
2.13
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
68,563
|
|
|
73,617
|
|
|
84,805
|
|
|
84,956
|
|
|
78,023
|
|
Weighted average common shares outstanding - diluted
|
70,401
|
|
|
74,174
|
|
|
85,599
|
|
|
86,250
|
|
|
79,263
|
|
(1) Due to the use of weighted average shares outstanding when calculating EPS, the sum of quarterly per share data may not equal the per share data for the year.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019 Quarters
|
|
2019
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
|
Year
|
|
(In Thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
$
|
73,868
|
|
|
$
|
83,249
|
|
|
$
|
92,381
|
|
|
$
|
95,517
|
|
|
$
|
345,015
|
|
Net investment income
|
7,383
|
|
|
7,629
|
|
|
7,882
|
|
|
7,962
|
|
|
$
|
30,856
|
|
Net realized investment (losses) gains
|
(187)
|
|
|
(113)
|
|
|
81
|
|
|
264
|
|
|
$
|
45
|
|
Other revenues
|
42
|
|
|
415
|
|
|
1,244
|
|
|
1,154
|
|
|
$
|
2,855
|
|
|
|
|
|
|
|
|
|
|
|
Insurance claims and claim expenses
|
2,743
|
|
|
2,923
|
|
|
2,572
|
|
|
4,269
|
|
|
$
|
12,507
|
|
Underwriting and operating expenses
|
30,800
|
|
|
32,190
|
|
|
32,335
|
|
|
31,296
|
|
|
$
|
126,621
|
|
Service expenses
|
49
|
|
|
353
|
|
|
909
|
|
|
937
|
|
|
$
|
2,248
|
|
Interest expense
|
3,061
|
|
|
3,071
|
|
|
2,979
|
|
|
2,974
|
|
|
$
|
12,085
|
|
Loss (gain) from change in fair value of warrant liability
|
5,479
|
|
|
1,685
|
|
|
(1,139)
|
|
|
2,632
|
|
|
$
|
8,657
|
|
Pre-tax income
|
38,974
|
|
|
50,958
|
|
|
63,932
|
|
|
62,789
|
|
|
$
|
216,653
|
|
Income tax expense
|
6,075
|
|
|
11,858
|
|
|
14,169
|
|
|
12,594
|
|
|
$
|
44,696
|
|
Net income
|
$
|
32,899
|
|
|
$
|
39,100
|
|
|
$
|
49,763
|
|
|
$
|
50,195
|
|
|
$
|
171,957
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share (1)
|
$
|
0.49
|
|
|
$
|
0.58
|
|
|
$
|
0.73
|
|
|
$
|
0.74
|
|
|
$
|
2.54
|
|
Diluted earnings per share (1)
|
$
|
0.48
|
|
|
$
|
0.56
|
|
|
$
|
0.69
|
|
|
$
|
0.71
|
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
66,692
|
|
|
67,590
|
|
|
67,849
|
|
|
68,140
|
|
|
67,573
|
|
Weighted average common shares outstanding - diluted
|
68,996
|
|
|
69,590
|
|
|
70,137
|
|
|
70,276
|
|
|
69,721
|
|
(1) Due to the use of weighted average shares outstanding when calculating EPS, the sum of quarterly per share data may not equal the per share data for the year.
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2020
18. Subsequent Event
Quota share reinsurance
Effective January 1, 2021, NMIC entered into its fourth quota share reinsurance treaty with a broad panel of highly rated reinsurers (2021 QSR Transaction). Under the 2021 QSR Transaction, NMIC will cede premiums earned related to 22.5% of the risk on eligible policies written from January 1, 2021 through December 31, 2021, in exchange for reimbursement of ceded claims and claims 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. 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 at December 31, 2026, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the reinsured risk.