NMI Holdings, Inc.
2 0 1 7 A N N U A L R E P O R T
NMI Holdings, Inc. | 2100 Powell Street | 12TH Floor | Emeryville, CA 94608 | www.nationalmi.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 001-36174
NMI Holdings, Inc.
(Exact name of registrant as specified in its charter)
DELAWARE
45-4914248
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
2100 Powell Street, Emeryville, CA
(Address of principal executive offices)
94608
(Zip Code)
(855) 530-6642
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Class A Common Stock, $.01 par value per share
Name of each exchange on which registered
NASDAQ Stock Market LLC
Securities registered pursuant to Section 12(b) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES
NO
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. YES
NO
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES
NO
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). YES
NO
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form
10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting
company or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer" "smaller reporting company"
and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company
(Do not check if a smaller reporting company)
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES
NO
As of June 30, 2017, the last business day of the registrant's most recently completed second fiscal quarter, the calculated aggregate market value of common stock held
by non-affiliates was $671,117,064.
The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on February 13, 2018 was 60,610,731 shares.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for the 2018 Annual Meeting of Stockholders are incorporated herein by reference in Part III of this Annual Report on Form
10-K to the extent stated herein. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant's fiscal year ended
December 31, 2017.
TABLE OF CONTENTS
Cautionary Note Regarding Forward Looking Statements
PART I
Item 1.
Business
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Legal Proceedings
Item 4. Mine Safety Disclosures
PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Item 6.
Selected Financial Data
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Item 9.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14. Principal Accountant Fees and Services
PART IV
Item 15. Exhibits and Financial Statement Schedules
Signatures
Index to Financial Statement Schedules
Exhibit Index
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5
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24
46
46
46
46
47
47
49
51
75
76
110
110
110
111
111
111
111
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112
112
113
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CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and the U.S. Private Securities
Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions
or future events or performance are not historical facts and may be forward looking. These statements are often, but not always,
made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "potential," "should,"
"will," "estimate," "plan," "project," "continuing," "ongoing," "expect," "intend" or words of similar meaning and include, but are
not limited to, statements regarding the outlook for our future business and financial performance. All forward looking statements
are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore,
cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements
that are included elsewhere in this report. Further, any forward looking statement speaks only as of the date on which it is made and
we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after the date on
which the statement is made or to reflect the occurrence of unanticipated events. We have based these forward looking statements
on our current expectations and projections about future events and financial trends that we believe may affect our financial condition,
operating results, business strategy and financial needs. There are important factors that could cause our actual results, level of
activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed
or implied by the forward looking statements including, but not limited to:
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changes in the business practices of Fannie Mae and Freddie Mac (collectively, the GSEs), including decisions that
have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement;
our ability to remain an eligible mortgage insurer under the current or future versions of their private mortgage insurer
eligibility requirements (PMIERs) and other requirements imposed by the GSEs, which they may change at any time;
retention of our existing certificates of authority in each state and the District of Columbia (D.C.) and our ability to
remain a mortgage insurer in good standing in each state and D.C.;
our future profitability, liquidity and capital resources;
actions of existing competitors, including other private mortgage insurers and governmental mortgage insurers like the
Federal Housing Administration (FHA) and the Veterans Administration (VA) (collectively, public MIs), and potential
market entry by new competitors or consolidation of existing competitors;
developments in the world's financial, capital and reinsurance markets and our access to such markets;
adoption of new or changes to existing laws and regulations that impact our business or financial condition directly or
the mortgage insurance industry generally or their enforcement and implementation by regulators;
changes to the GSEs' role in the secondary mortgage market driven by legislative or regulatory action or other changes
that could affect the residential mortgage industry generally or mortgage insurance industry in particular;
potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries;
changes in general economic, market and political conditions and policies, interest rates, inflation or other conditions
that affect the housing market or the markets for home mortgages or mortgage insurance;
our ability to successfully execute and implement our capital plans, including our ability to access the reinsurance
market and to enter into, and receive approval for, reinsurance arrangements on terms and conditions that are acceptable
to us, the GSEs and our regulators;
our ability to implement our business strategy, including our ability to write mortgage insurance on low down payment
residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures,
and internal controls to support our business and regulatory and reporting requirements of the insurance industry;
our ability to attract and retain a diverse customer base, including the largest mortgage originators;
failure of our pricing, risk management or investment strategies;
emergence of unexpected claims and coverage issues, including claims exceeding our reserves or amounts we had
expected to experience;
potential adverse impacts arising from recent natural disasters, including, with respect to the affected areas, a decline
in new business, adverse effects on home prices, and an increase in notices of default on insured mortgages;
the inability of our counterparties, including third party reinsurers, to meet their obligations to us;
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our ability to utilize our net operating loss carryforwards, which could be limited or eliminated in various ways, including
if we experience an ownership change as defined in Section 382 of the Internal Revenue Code;
failure to maintain, improve and continue to develop necessary information technology (IT) systems or the failure of
our technology providers to perform as expected; and
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our ability to recruit, train and retain key personnel.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should
refer to the Risk Factors described in this report in Part I, Item 1A, "Risk Factors," Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and elsewhere in this report, including the exhibits hereto.
Unless expressly indicated or the context requires otherwise, the terms "we," "our," "us," "Company" and "NMI" in this
document refer to NMI Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries on a consolidated basis.
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Item 1. Business
General
PART I
We provide mortgage insurance (referred to as "mortgage insurance" or "MI") through our wholly owned insurance
subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). NMIC and
Re One are domiciled in Wisconsin and principally regulated by the Wisconsin Office of the Commissioner of Insurance (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 with coverage levels in excess of 25%, after giving
effect to third-party reinsurance. Our subsidiary, NMI Services, Inc. (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 loan-to-value (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.
NMI Holdings, Inc. (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, 2017, we had master
policies with 1,267 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, 2017, we had
$51.7 billion of total insurance-in-force (IIF), including primary IIF of $48.5 billion, and $11.9 billion of gross risk-in-force
(RIF), including primary RIF of $11.8 billion. For the year ended December 31, 2017, we generated new insurance written
(NIW) of $21.6 billion. As of December 31, 2017, we had 299 full-time employees.
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 the dream of homeownership,
ensure that we remain a strong and credible counterparty, 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, 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 claims payment practices, responsive customer service, financial strength and
profitability.
Our common stock trades on the NASDAQ under the symbol "NMIH."
Overview of Residential Mortgage Finance and the Role of the Private MI Industry in the Current Operating Environment
U.S. Residential Mortgage Market
According to statistics published by the U.S. Federal Reserve, the U.S. residential mortgage market is one of the largest
in the world, with more than $10 trillion of mortgage debt outstanding as of December 31, 2017, and includes both primary and
secondary components. The primary market consists of lenders originating home loans to borrowers and includes loans made in
connection with home purchases, which are referred to as purchase originations, and loans made to refinance existing mortgages,
which are referred to as refinancing originations. The secondary market includes institutions that buy and sell mortgages in the
form of whole loans or securitized assets, such as mortgage-backed securities.
The U.S. residential mortgage market attracts and involves participation from a range of private and public institutions.
Private industry participants include national and regional mortgage banks, money center banks, mortgage brokers, community
banks, builder-owned mortgage lenders, internet-sourced lenders, commercial, regional and investment banks, savings
institutions, credit unions, REITs and other financial institutions. Public participants include government agencies such as the
FHA, VA and Ginnie Mae, as well as government-sponsored enterprises, such as Fannie Mae and Freddie Mac.
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GSEs
The GSEs are the largest participants in the secondary mortgage market, buying residential mortgages from banks and other
primary lenders in connection with their federal mandate to provide liquidity and promote stability in the U.S. housing finance system.
The GSEs' charters prohibit them from purchasing or guaranteeing high-LTV loans unless such loans are covered by an authorized
form of credit enhancement, including insurance from a GSE-approved MI company, retention by the mortgage seller of at least a
10% participation in the loan or agreement by the seller to repurchase or replace the loan in the event of a default. As the largest
participants in the secondary mortgage market, the GSEs are the principal purchasers of mortgages insured by mortgage insurers,
including NMIC. As a result, the private MI industry in the U.S. is driven in large part by the GSEs' mortgage insurance requirements
and business practices. See "U.S. Mortgage Insurance Regulation - GSE Oversight," below.
Mortgage Insurance
MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered
mortgage and plays a central role in the U.S. housing market. MI is provided by both governmental agencies, including the FHA
and VA, and private companies, such as NMI, and is primarily geared toward high-LTV loans where borrowers make a down-payment
that is less than 20% of the value of a home. MI helps facilitate secondary market sales of such mortgages, primarily to the GSEs,
and provides lenders and investors a means to diversify and mitigate their exposure to mortgage credit risk. 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.
Competition
Our competition includes other private mortgage insurers, public MIs and other alternatives designed to eliminate the
need for MI, such as piggy-back loans or front-end risk sharing arrangements that do not require private MI on loans sold to the
GSEs.
The private MI industry is highly competitive and currently consists of six active participants, including us, Arch Capital
Group Ltd., Essent Group Ltd. (Essent), Genworth Financial, Inc., MGIC Investment Corporation (MGIC), and Radian Group
Inc. (Radian). Private mortgage insurers generally compete based on terms of coverage, underwriting guidelines, pricing,
customer service (including speed of MI underwriting and decisioning), availability of ancillary products and services (including
training and loan review services), financial strength, information security, customer relationships, name recognition and
reputation, the strength of management teams and sales organizations, the effective use of technology, and innovation in the
delivery and servicing of insurance products. We expect the MI market to remain competitive, with pressure for industry
participants to grow or maintain their market share.
We and other private mortgage insurers also compete directly with the public MI companies, i.e., federal governmental
agencies, that provide MI and who significantly increased their presence in the MI market following the financial crisis. Prior to
the 2008 financial crisis, private mortgage insurers accounted for the majority of the insured mortgage origination market.
Beginning in 2008, public MIs significantly expanded their role in the MI market as incumbent private mortgage insurers came
under significant financial stress. According to data reported by Inside Mortgage Finance, in 2007, public MIs accounted for 23%
of the total insured mortgage origination market. By 2009, public MI share had peaked at approximately 82% of the total insured
mortgage origination market. Public MI share has since declined and is estimated to have been 61% in 2017. Although there has
been broad policy consensus toward the need for private capital to play a larger role and government credit risk to be reduced in
the U.S. housing finance system, it remains difficult to predict whether the combined market share of public MIs will recede to
historical levels. A range of factors influence a lender's decision to choose private over public MI, including among others,
premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private
MI products compared to public MI alternatives.
Products and Services
Mortgage Insurance Products
We offer two principal types of MI coverage, primary and pool.
Primary Mortgage Insurance
Primary MI provides default protection on individual mortgage loans at specified coverage percentages. Primary MI is
typically written on a flow basis, whereby mortgages are insured on an individual, loan-by-loan basis at the time of origination.
Primary MI can also be written on an aggregated basis, whereby each mortgage in a given loan portfolio is individually insured in
a single transaction after the point of origination.
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All of our primary insurance is written on first-lien mortgage loans, with nearly all secured by owner occupied single-
family homes (defined as one-to-four family homes and condominiums). We also write a small amount of primary insurance on
first-lien mortgages secured by vacation properties, second homes and investment properties, although we have formal risk
policies in place to limit the amount of such business we underwrite.
Lenders select specific coverage levels for each loan insured on a primary basis. For loans sold to a GSE, the coverage
level must comply with the requirements established by that GSE. For other loans, lenders determine their desired coverage
levels.
IIF is the unpaid principal balance of all insured loans on a given date, and RIF is the product of the coverage
percentages multiplied by the IIF on such date. We expect our RIF across all policies written to approximate 25% of primary IIF;
however, coverage levels will vary on an individual loan basis between 6% and 35%. Higher coverage percentages generally
result in greater amounts paid per claim relative to policies with lower coverage percentages. In general, our premium rates
increase as coverage levels increase.
Our maximum obligation with respect to a claim is generally determined by multiplying the selected coverage
percentage by the loss amount on an insured loan. The loss amount is defined in our master mortgage insurance policy (together
with its related endorsements, the Master Policy) and includes unpaid loan principal, delinquent interest and certain expenses
associated with the default and subsequent foreclosure or sale of the property securing the insured loan. See "Business - Defaults
and Claims; Loss Mitigation - Defaults and Claims," below for a description of our claim settlement processes.
The terms of our primary mortgage insurance coverage are governed by our Master Policy, which we issue to each
approved lender with which we do business. The Master Policy sets forth the terms and conditions of our MI coverage, including,
among others, loan eligibility requirements, coverage terms, premium payment obligations, exclusions or reductions in coverage,
rescission and rescission relief provisions, policy administration requirements, conditions precedent to payment of a claim and
loss payment procedures. Our Master Policy is publicly available on our website. Upon receipt of an insurable loan, we issue a
certificate of insurance that extends coverage for such loan under our Master Policy. See "Business - Underwriting," below for a
description of our underwriting processes. Our MI coverage attaches at a loan level and remains in effect whether a mortgage is
retained by the originating lender or sold, assigned or otherwise transferred in the secondary market. We consider the original
lender or any subsequent owner of an insured loan to be our insured or, with respect to the GSEs, third-party beneficiaries under
our Master Policy.
Premium payments for primary MI are the contractual responsibility of our insureds; however, depending on how the
loan is structured, the premium payments may be paid by either the lender or the borrower, notwithstanding that the borrower is
not a beneficiary under the terms of the policy. Policies with premium payments made by the borrower are referred to as
borrower paid mortgage insurance (BPMI) and those with premium payments made by the lender are referred to as lender paid
mortgage insurance (LPMI). Lenders may structure loans to recover LPMI premiums from borrowers, including through
increases in mortgage note rates or higher origination fees.
Our premiums are based on statutory rating rules and rates that we file with various state insurance departments. We
establish our premium rates based on pricing models that assess risk across a spectrum of variables, including coverage
percentages, LTV ratios, loan and property attributes, and borrower risk characteristics. We have discretion under our rates and
rating rules to flex our premium rates to a limited degree, and we may choose to do so for lenders or programs that meet certain
criteria. We generally cannot change premium rates after coverage is established.
In general, premiums are calculated as a percentage of the original principal balance of an insured loan. We have four
premium plans:
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single — entire premium is paid upfront at the time coverage is placed;
annual — premiums are paid in advance for a subsequent 12 month period over the life of a policy;
• monthly — premiums are paid in advance on a monthly basis over the life of the policy; and
• Monthly Advantage® — premiums are billed and paid in arrears upon our receipt of notice of a mortgage close,
and on a monthly basis in arrears thereafter over the life of the policy.
In general, we may not terminate MI coverage except when an insured fails to pay premium as due or for certain material
violations of our Master Policy; although, as discussed below in "- Underwriting - Independent Validation and Rescission Relief,"
the terms of our Master Policy restrict our ability to rescind coverage when certain criteria are met. Insureds may cancel coverage
on a loan at any time at their option or upon mortgage repayment, which may be accelerated because a borrower refinances a
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mortgage or sells the underlying property. GSE guidelines generally provide that a borrower on a GSE-owned or guaranteed loan
meeting certain conditions may require their mortgage servicer to cancel BPMI upon the borrower's request when the principal
balance of the loan is 80% or less of the property's current assessed value. The federal Homeowners Protection Act of 1998
(HOPA) also requires the automatic termination of BPMI on most current loans when the LTV ratio (based on the original value
of the underlying property and original amortization schedule of the loan) is first scheduled to reach 78%. The HOPA also
provides for cancellation of BPMI upon a borrower's request when the LTV ratio (based on the original value of the underlying
property and original amortization schedule of the loan) is first scheduled to reach or, based on actual payments, reaches 80%,
upon satisfaction of the conditions set forth in the HOPA, including that the loan be current at the time. In addition, some states
impose their own MI notice and cancellation requirements on mortgage loan servicers.
Pool Insurance
Pool insurance is generally used to provide additional "credit enhancement" for certain secondary market mortgage
transactions. Pool insurance generally covers the excess of loss on a defaulted mortgage loan that exceeds the claim payment
under the primary MI coverage, if such loan has primary coverage, as well as the total loss on a defaulted mortgage loan that did
not have primary coverage. Pool insurance may have a stated aggregate loss limit for a pool of loans and may also have a
deductible under which no losses are paid by the mortgage insurer until the aggregate loss on the pool of loans exceeds the
deductible.
In 2013, NMIC entered into a pool agreement with Fannie Mae, pursuant to which NMIC initially insured 21,921 loans
with IIF of $5.2 billion (as of September 1, 2013). Fannie Mae pays monthly premiums for this transaction, which are recorded
as written and earned in the month received. The agreement has a term of 10 years from September 1, 2013, the coverage
effective date. The RIF to NMIC is $93.1 million, which represents the difference between a deductible payable by Fannie Mae
on initial losses and a stop loss above which losses are borne by Fannie Mae. NMIC provides this same level of risk coverage
over the term of the agreement. 100% of this pool risk is reinsured under the Company's September 2016 quota-share reinsurance
transaction (2016 QSR Transaction), discussed below at "Business - Reinsurance."
We did not write any pool insurance in 2017 and at present do not expect to write any meaningful amount of pool
insurance in the near future.
Loan Review Services
We offer outsourced loan review services to mortgage originators on a limited basis through NMIS. In connection with
these services, NMIS reviews loan data and documentation and assesses whether individual loan applications comply with the
originator's and/or GSE underwriting guidelines. We provide loan review services for mortgages that require MI and those that do
not. Under the terms of its loan review agreements, NMIS provides customers with limited indemnification against losses in the
event NMIS makes certain material loan review errors. The indemnification may be in the form of monetary or other remedies,
subject to per loan and annual limits. NMIS utilizes third party service providers to conduct individual loan reviews.
Customers
Since our inception, we have sought to establish customer relationships with a broad group of mortgage lenders. As of
December 31, 2017, we had Master Policies with 1,267 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.
We classify our customers into two primary categories, which we refer to as "National Accounts" and "Regional Accounts." We
consider National Accounts to be the most significant residential mortgage originators as determined by the combined volume of
their own "retail" originations and insured business they acquire from "correspondents," or other smaller mortgage originators.
National Account lenders primarily sell their loans to the GSEs or, less frequently, to private label secondary markets. National
Account lenders may also retain loans they originate or purchase in their portfolios. Regional Account lenders typically originate
loans on a local or regional level. Some Regional Account lenders have origination platforms that span multiple regions;
however, their primary lending focus is local. Regional Account lenders sell the majority of their origination volume to National
Accounts; however, they may also retain loans in their portfolios or sell portions of their production directly to the GSEs.
We further define customers as "centralized" or "decentralized" based on how they allocate their mortgage insurance
purchasing decisions across each of their MI providers. Centralized lenders make decisions about the placement and allocation of
private mortgage insurance at a centralized, corporate level. Decentralized lenders make decisions about the placement and
allocation of private mortgage insurance at a loan level by loan production personnel, such as loan officers. National Account
lenders primarily utilize the centralized allocation model and Regional Account lenders primarily utilize the decentralized
allocation model. There are, however, a number of National Account lenders who opt for a decentralized approach and a number
of Regional Account lenders who opt for a centralized approach.
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The GSEs, as major purchasers of conventional mortgage loans in the U.S., are the primary beneficiaries of our mortgage
insurance coverage. Revenues from our customers have been generated in the U.S. only.
Customers exceeding 10% of consolidated revenues
In 2017, the premiums earned by NMIC from Quicken Loans Inc. represented 11% of our consolidated revenues.
Sales and Marketing
Our sales and marketing efforts are designed to help us establish and maintain high-quality customer relationships. Our
sales force consists of qualified mortgage professionals that generally have well-established relationships with industry leading
lenders and significant experience in both MI and mortgage lending. We structure our sales force into National Accounts that
focus on relationships with national or large regional lenders, and Regional Accounts that focus on relationships with small or
regional lenders, such as community banks, credit unions, mortgage bankers and branches of National Accounts. We also
maintain a dedicated customer service team, which we refer to as the Solution Center and which offers support in loan submission
and underwriting service, risk management and technology to support our sales efforts.
We also have a product development and marketing department that has primary responsibility for the creation, launch
and management of our MI products and technological offerings and coordination of our marketing strategy. Our marketing
efforts seek to raise brand awareness through advertising and marketing campaigns, customer training programs, sponsorship of
industry and educational events, and our web-based presence and proprietary mobile technology.
Underwriting
We have established underwriting and risk management guidelines based on what we believe to be the major factors that
influence the performance of mortgage credit. Our underwriting guidelines incorporate credit eligibility requirements that, among
other things, restrict our coverage to mortgages that meet our thresholds with respect to borrower credit scores (FICO), maximum
debt-to-income (DTI) levels, maximum LTVs and documentation requirements. Our underwriting guidelines also limit the
coverage we provide for certain higher-risk mortgages, including those for cash-out refinancings, second homes or investment
properties.
We gather extensive data, perform detailed loan-level risk analysis and continuously monitor and assess trends in key
macroeconomic factors such as housing prices, interest rates and employment, to refine and adapt our underwriting guidelines and
pricing assumptions within the context of the current risk environment.
We evaluate loans and issue policies through two underwriting platforms:
• Non-Delegated: Customers submit loan information and documentation to us so that we may individually
underwrite each application to reach a decision as to whether we will insure a loan. On receipt of a non-delegated
submission, we review the information, documentation and data provided by the lender to underwrite the MI
application.
• Delegated: We provide eligible customers who we have vetted and approved with the ability to directly underwrite
our policies and bind our coverage based on pre-established eligibility rules, approved underwriting guidelines and
according to the terms of our Master Policy and Delegated Underwriting Endorsement. We offer delegated
underwriting to lenders that have a track record of originating quality mortgage loans and meet our delegated
authority approval requirements. To complete the underwriting process and bind coverage, delegated lenders are
required to provide us with certain loan characteristics to demonstrate such loans meet our threshold eligibility rules.
Our delegated eligibility rules are programmed into our insurance management system, which provides us the ability
to automatically reject policies that fail to meet threshold requirements.
Lenders elect whether to be non-delegated or delegated customers at the time they apply to become Master Policy
holders. Once a lender makes such an election, it delivers all MI applications to us under the selected platform. Our underwriting
guidelines and risk criteria are consistent across all policies whether originated on a non-delegated or delegated basis.
We employ a team of experienced underwriters who review and evaluate our non-delegated loan submissions. Our
underwriters are located remotely across the continental United States, facilitating our ability to service our customers nationwide
across the different time zones. We also engage third-party underwriting service providers (USPs) who provide us with
incremental underwriting capacity. Our USPs are trained and required under the terms of our outsourcing agreements to follow
the same processes and underwriting guidelines that our own employees follow when rendering insurance decisions.
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We have processes in place to manage the risk associated with outsourcing a component of our underwriting function. In
collaboration with our USPs' management teams, we monitor our USPs' day-to-day underwriting performance and MI
decisioning. We also review the qualifications of each individual underwriter assigned by our USPs to service our account and
provide them with NMI specific systems and guideline training to ensure they have the necessary training to render underwriting
decisions consistent with our underwriting guidelines and credit policies. Our outsourcing agreements require our USPs to
perform and provide us with the results of internal quality control reviews on a periodic basis. Individual underwriters with
unacceptable performance records are monitored and generally subject to replacement with 30 days' notice. We also perform
quarterly quality control reviews of a statistically relevant sample of our non-delegated underwriting decisions, including those
made by our USPs.
Our business has been subject to modest seasonality in NIW production. 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. Refinancing volume, however, does not follow a set seasonal trend
and instead is primarily influenced by mortgage rates. An increase in refinancing volume may limit the seasonal effect of home
purchase patterns on mortgage insurance NIW.
Independent Validation and Rescission Relief
We offer post-closing underwriting reviews, which we refer to as "independent validations," for both non-delegated and
delegated loans, as described below. Upon satisfactory completion of an independent validation, which involves reviewing certain
post-close documentation to confirm our original assessment of non-delegated loans and performing a comprehensive full-file
review for delegated loans, we agree on an accelerated basis that we will not rescind coverage under certain circumstances.
Our Master Policy generally provides us the ability to rescind coverage in the event of material misrepresentations and/or
fraud in the origination process. We believe our Master Policy sets forth clear and straightforward terms regarding our rescission
rights, including limitations on our right to rescind coverage when certain conditions are met, which we refer to as "rescission
relief." Subject to our independent validation of coverage eligibility of an insured loan, we stipulate in our Master Policy that we
will not rescind or cancel coverage of such loan for material borrower misrepresentations or underwriting defects provided the
borrower makes the first 12 monthly mortgage payments in a timely fashion. Lenders have the ability to select whether or not to
have insured loans subjected to our independent validation process. If a borrower does not make 12 timely payments or a lender
has elected not to pursue independent validation and accelerated rescission relief, the loan is still eligible for rescission relief if it
is current after 36 months and the borrower has had no more than two 30-day delinquencies and no 60-day or greater
delinquencies during such 36-month period. Our rescission relief provisions include additional limitations on our ability to
initiate an investigation of fraud or misrepresentation by a "First Party," defined in the Master Policy as our insured or any other
party involved in the origination of an insured loan (other than the borrower).
Non-delegated lenders who desire 12-month rescission relief are required to submit additional loan documentation post-
closing that allows us to independently validate such loans, including a loan's closing disclosures, note, executed mortgage and
title insurance commitment. Loans from non-delegated lenders who choose not to participate in the independent validation
process or who fail to submit the necessary documentation are eligible for 36-month rescission relief in accordance with the terms
of our Master Policy.
Delegated lenders who desire 12-month rescission relief are required to submit a full file (which contains all the
underwriting information and documentation otherwise required by us as part of a non-delegated review and the above-referenced
post-closing documentation) after a loan's coverage effective date. We refer to our independent validation of delegated loans as
our "Delegated Assurance Review" or "DAR" process. Through DAR, we assess and validate the MI underwriting process and
decisions made by our delegated customers on an individual loan level basis. Loans from delegated lenders who choose not to
participate in our DAR process are eligible for 36-month rescission relief in accordance with the terms of our Master Policy. All
delegated loans, whether included in the DAR process or not, are subject to review under our quality control process.
In December 2017, the GSEs issued an updated set of principles, the Amended and Restated GSE Rescission Relief
Principles (RRPs), which specify the rescission relief provisions that are required to, or may, be included in the master policies of
GSE-approved mortgage insurers. To comply, we will need to amend our existing Master Policy to conform to the terms of the
RRPs, with our new policy anticipated to take effect by January 2019. In accordance with the RRPs, our rescission rights under
the new master policy will be more limited than those under our existing Master Policy. Among other changes, we will be
required to grant immediate rescission relief following our satisfactory completion of an independent validation, rather than
waiting for the borrower to timely make the first 12 payments. In addition, we will be required to sunset our rescission rights at
the 60 month anniversary of the inception of our coverage, provided an insured loan is then current or subsequently cures. We
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will retain our rescission rights for certain fraud for the life of coverage of a loan; however, the limitations on our ability to pursue
this right will be more stringent than in the current Master Policy.
We engage USPs to perform the majority of our delegated and non-delegated independent validation work. As with our
non-delegated USPs, we review the qualifications of each individual underwriter engaged by our USPs to service our account and
provide them with NMI specific systems and guideline training to ensure they have the necessary training to render independent
validation decisions consistent with our underwriting guidelines and credit policies.
Policy Servicing
Our Policy Servicing Department is responsible for various servicing activities related to Master Policy administration,
premium billing and payment processing and certificate administration. With respect to servicing activities related to insured loans,
our Policy Servicing Department primarily interfaces with our insureds' mortgage loan servicers. Some insureds retain the servicing
rights and responsibilities for their own loan originations, while others transfer such rights and responsibilities to third party servicers.
A residential mortgage loan servicer handles the day-to-day tasks of managing a lender's loan portfolio, including processing
borrowers' loan payments, paying MI premiums to the mortgage insurer, responding to borrower inquiries, keeping track of principal
and interest payments, managing escrow accounts and initiating loss mitigation and foreclosure activities. Our servicing specialists
are assigned to our servicers to assist with day-to-day transactions and monitoring of their insured loans.
Over time a servicer may change on an insured loan if the related servicing rights are transferred to a different servicer
during the life of such loan. Servicing rights and responsibilities related to an insured loan may be sold, assigned or transferred,
subject to all of the terms and conditions of the Master Policy and to all defenses we may have had prior to any such sale, assignment
or transfer. Under the Master Policy, if the servicing rights for a loan are sold, assigned or transferred, coverage of the loan will
continue, provided that the loan is thereafter serviced by a servicer we approve. We retain the right under our Master Policy to revoke
approval of a servicer, thereby requiring a change of service providers if the insured wishes to continue coverage of insured loans
serviced by that servicer.
We have established policies and procedures that accommodate various methods for servicers to communicate loan and
certificate information to us. Our Master Policy requires our insureds, typically through their servicers, to regularly provide us with
reports regarding the statuses of their insured loans, including information on both current and delinquent loans. Generally, servicers
submit reports to us on a monthly basis. We are currently integrated with the two largest third-party mortgage servicing systems,
Black Knight Financial Services and FiServ. We are also integrated directly with certain lender customers who manage their own
servicing systems. These parties' servicing platforms are used by the majority of our larger servicing accounts to exchange billing,
payment and certificate level information on a daily or monthly basis. We also have our own external facing servicing website that
may be utilized by servicers to process their servicing transactions.
Defaults and Claims; Loss Mitigation
Defaults and Claims
The MI claim cycle begins with the receipt of a Notice of Default (NOD) for an insured loan from a loan servicer. Our
Master Policy requires our insureds to notify us within 45 days if a borrower defaults on one of the first 12 loan payments and no
later than 10 days after a borrower has defaulted on three payments after the first 12 months of a loan. A significant majority of
our insureds notify us when a loan is two payments in default. We establish claim reserves when a borrower has failed to make
two consecutive, regularly scheduled mortgage payments and is 60 days in default. The incidence of default is affected by a
variety of factors, many of which are unforeseen, including a borrowers' loss of income, unemployment, divorce, illness or death.
Defaults that are not cured result in a claim to us. A default may be cured by a borrower remitting all delinquent loan payments,
achieving a modification of loan terms, or refinancing the loan or selling the property and satisfying all amounts due under the
loan. While macroeconomic factors in any given period may influence default experience to a greater extent than does
seasonality, our industry has typically experienced a fourth quarter seasonal increase in the number of defaults and a first quarter
seasonal decline in the number of defaults and increase in the number of cures.
Claims result from foreclosures following uncured defaults, losses on approved pre-foreclosure short sales (short sales)
or borrowers surrendering their property deeds to their lenders in lieu of foreclosure (deeds-in-lieu). A range of factors impact the
frequency and severity of claims, including the macroeconomic environment, local housing prices, loan and borrower level risk
profiles, and the size and coverage level of a loan. If a default is not cured and we receive a claim, we refund any unearned
premium collected between the date of default and the date of the claim payment.
Under the terms of our Master Policy, our insureds are generally required to file claims within 60 days of acquiring title
to a property securing an insured loan (typically through foreclosure) or when there has been an approved short sale. In the years
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following the most recent financial crisis, foreclosure time-lines and the average time from initial default by a borrower to MI
claim submission have extended due to legislation and GSE programs requiring mortgage servicers to mitigate losses by offering
forbearance and loan modifications prior to pursuing foreclosure on delinquent loans.
Upon timely receipt of a covered claim we have the option to pay (i) the coverage percentage specified for a loan, with
the insured retaining title to the underlying property and receiving all proceeds from an eventual sale of the property (the
percentage option), (ii) the actual loss incurred by the insured upon sale of the property to a third party, if less than the percentage
option, or (iii) 100% of the insured's claim amount (as defined in the Master Policy) in exchange for the insured's conveyance of
good and marketable title to the property to us. In the event we elect to receive title to a property, we will market and sell the
acquired property and retain all proceeds. We have opted to settle the significant majority of our claims paid to date through the
percentage option.
Loss Mitigation
Before paying a claim, we review loan and servicing files to determine the appropriateness of the claim submission and
claim amount and to ensure we only pay for expenses covered under our Master Policy. Our Master Policy provides that we can
reduce or deny a claim if the servicer did not comply with its obligations required by our policy, including the requirement to
pursue reasonable loss mitigation efforts. Such efforts may include pursuing foreclosure or bankruptcy relief in a timely and
diligent manner. We deem a reduction in the claim amount to be a "curtailment." We may also receive claims submissions that
include costs and expenses not covered by our Master Policy, such as mortgage insurance premiums, hazard insurance premiums
for periods after the claim date and losses resulting from property damage that has not been repaired.
Under our Master Policy, insureds, typically through their servicers, must obtain prior approval from us before executing
a deed-in-lieu of foreclosure, short sale or loan modification. Our right to pre-approve these transactions provides us the ability to
mitigate actual or potential loss on an insured loan by ensuring that properties are being marketed and sold at reasonable values
and that, in appropriate cases, borrowers are offered modified loan terms that are structured to help them sustain their mortgage
payments. Proceeds from approved third-party sales occurring before we settle a claim are factored into the claim settlement and
can often mitigate the claim amount for which we are responsible to pay. In connection with our approval rights for short sales or
deed-in-lieu of foreclosure transactions, our Master Policy also provides us the right to obtain a contribution from borrowers with
appropriate financial capacity, either in the form of cash or promissory notes, to cover a portion of our claim payments. We have
entered into delegation agreements with the GSEs that provide them and their designated servicers the right to approve certain
transactions on our behalf including pre-foreclosure sales, deeds-in-lieu of foreclosure and loan modifications for most GSE-
owned loans that we insure.
Reinsurance
Internal Reinsurance
Ohio regulation limits the amount of risk a mortgage insurer may 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% must be reinsured.
Eight states previously had the same requirement; however, Ohio is the only state that currently continues to impose the limit. NMIC
uses reinsurance provided by Re One solely to comply with Ohio's coverage limit.
Third-Party Reinsurance
We utilize third-party reinsurance to actively manage our risk, ensure compliance with the GSEs Private Mortgage
Insurance Eligibility Requirements (PMIERs) and support the growth of our business. We currently have both quota share and
excess-of-loss reinsurance agreements in place.
Excess-of-loss reinsurance
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re Ltd. (Oaktown Re) that provides for up to
$211.3 million of aggregate excess-of-loss reinsurance coverage at inception for new defaults on an existing portfolio of our MI
policies written from 2013 through December 31, 2016. For the reinsurance coverage period, NMIC will retain the first layer of
$126.8 million of aggregate losses, and Oaktown Re will then provide second layer coverage up to the outstanding reinsurance
coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount. The outstanding
reinsurance coverage amount decreases from $211.3 million at inception over a ten-year period as the underlying covered
mortgages amortize and/or are repaid. The outstanding reinsurance coverage amount will stop amortizing if certain credit
enhancement or default thresholds are triggered.
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Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million
to unaffiliated investors (the Notes). The Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of
the Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re to NMIC under the
reinsurance agreement. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money
market funds. We refer collectively to NMIC's reinsurance agreement with Oaktown Re and the issuance of the Notes by
Oaktown Re as the 2017 ILN Transaction. Under the terms of the 2017 ILN Transaction, NMIC makes risk premium payments
for the applicable outstanding reinsurance coverage amount and pays Oaktown Re for its anticipated operating expenses (capped
at $300 thousand per year).
Under the reinsurance agreement, NMIC holds an optional termination right if certain events occur, including, among
others, 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 the agreement. In addition, there are certain events
that will result in mandatory termination of the agreement, including NMIC's failure to pay premiums or consent to reductions in
the trust account to make principal payments to noteholders, among others.
Quota share reinsurance
Under a quota share reinsurance agreement, the ceding insurer pays a premium in exchange for coverage on an agreed-
upon portion of incurred losses. Such quota share arrangements reduce net premiums written and earned and also reduce net RIF,
providing capital relief to the ceding insurer 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 underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss
performance and serve to reduce ceded premiums.
In September 2016, NMIC entered into a quota-share reinsurance transaction with a panel of third-party reinsurers (2016
QSR Transaction). Each of the third-party reinsurers has an insurer financial strength rating of A- or better by Standard and Poor's
Rating Services (S&P), A.M. Best or both. Under the 2016 QSR Transaction, NMIC (1) ceded 100% of the risk relating to our
pool agreement with Fannie Mae, (2) ceded 25% of existing risk written on eligible policies as of August 31, 2016 and (3) ceded
25% of the risk relating to eligible primary insurance policies written between September 1, 2016 and December 31, 2017, in
exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit
commission of up to 60% that varies directly and inversely with ceded claims. The 2016 QSR Transaction is scheduled to
terminate on December 31, 2027, except with respect to 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 at December 31,
2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the reinsured risk.
NMIC entered into a second quota share reinsurance treaty with a broad panel of highly rated reinsurers that took effect
on January 1, 2018 (2018 QSR Transaction). Under the 2018 QSR Transaction, NMIC agreed to cede 25% of its eligible policies
written in 2018 and 20% to 30% (such amount to be determined by NMIC at its sole election by December 1, 2018) of eligible
policies written in 2019, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding
commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims. 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 at December 31, 2022, or at the end of any calendar quarter thereafter, which would
result in NMIC reassuming the reinsured risk.
NMIC may terminate either or both of the 2016 and 2018 QSR Transactions if, due to a change in PMIERs requirements,
NMIC is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreement.
For further discussion of the effect of reinsurance on our business, see Part II, Item 7, "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Conditions and Trends Impacting our Business - Net Premiums
Written and Net Premiums Earned - Effect of reinsurance on our results."
Enterprise Risk Management
We have established enterprise wide policies, procedures and processes to allow us to identify, assess, monitor and
manage credit market and operational risks in our business. Management of these risks is an interdepartmental endeavor
including specific operational responsibilities and ongoing senior management and compliance personnel oversight. The Risk
Committee of our Board of Directors (Board) has responsibility for oversight and review of our enterprise risk management
approach and is supported by a management risk committee comprised of senior members of our management team. Our internal
audit function, which reports to the Audit Committee of our Board, provides independent ongoing assessments of our
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management of certain enterprise risks and reports its findings to our Board's Risk Committee. Our internal audit function also
periodically engages external resources to assist in the assessment of enterprise risks and our related control and monitoring
processes.
Credit Market Risk
To address the credit performance of our insured portfolio, we monitor and manage for borrower and loan-level risk
characteristics, as well as macroeconomic variables that influence the housing market. We measure the risk profile of our insured
portfolio individually by policy and in the aggregate across a range of metrics, including borrower credit score (e.g., FICO) and
DTI ratio, LTV, property type (e.g., single family home, condo or co-op), loan purpose (e.g., purchase or refinancing), occupancy
(e.g., owner-occupied) and other factors. We have established loan-level eligibility matrices which describe the maximum LTV,
minimum borrower credit score, maximum loan size, property type and occupancy status of loans that we will insure. Our loan
eligibility matrices are detailed in our Underwriting Guideline Manual, which is publicly available on our website. Our eligibility
criteria also contemplate "layered risk" embedded in a single insurance policy. Layered risk refers to the accumulation of
borrower, loan and property risks. For example, we have higher FICO score and lower maximum allowed LTV requirements for
investor-owned properties, as compared to owner-occupied homes.
We have also established concentration limits, which are designed to regulate the aggregation of loan-level risks in our
overall portfolio. We have observed that certain loans with certain characteristics relating to the individual loan or borrower
typically experience greater volatility and loss during periods of economic and housing market downturns and have established
targets and limits to manage our overall portfolio exposure to these risks, including higher LTV loans, investor loans, cash-out
refinances, certain state concentration levels and several other borrower or loan attributes, such as higher DTIs. We monitor these
parameters and underlying portfolio risks on an ongoing basis and, from time-to-time, may make adjustments to our guidelines
and credit policies after taking into consideration our then current portfolio attributes and other macroeconomic variables that
influence the housing market.
We have designed a quality control process to ensure ongoing adherence with our underwriting guidelines and eligibility
criteria. Our quality control group performs audits of insured loans identified on a random, high risk and targeted basis. These
reviews are designed to measure the quality of the underwriting decision and loan closing process, and specifically assess the
accuracy and adequacy of the information and documentation used to underwrite our MI. The findings from our quality control
processes inform and shape certain risk processes such as underwriter authority delegation, lender monitoring and guideline
management.
We also diligence our customers before formally engaging with them and subject them to ongoing review to ensure they
have appropriate financial resources, operational capabilities, management experience, and track record of origination quality.
Approved lenders are subject to well-defined parameters regarding underwriting delegation status, and credit guideline
requirements and, on a more limited basis, variances.
Our DAR process serves as an additional component of our risk management framework. Through DAR, we
individually review loans produced on a delegated basis and are able to monitor and assess trends in borrower and loan-level risk
characteristics, as well as grade the manufacturing and underwriting capabilities of each of our delegated lenders. We use this
information to both enhance our risk decisioning internally and to provide feedback to our DAR customers to help them enhance
their own production and control processes.
Operational Risk
Operational risks are inherent in our daily business activities, and include, among others, the risk of damage to physical assets,
reliance on outside vendors, continued access to qualified underwriting resources, cyber security threats, including breaches of our
system or other compromises resulting in unauthorized access to confidential, private and proprietary information, reliance on a
complex IT system and employee fraud or negligence. We seek to manage our operational exposures through a variety of standard
risk management practices and procedures, such as purchasing hazard insurance coverage, maintaining oversight of third-party
vendors, establishing IT system redundancy and security and disaster recovery practices, maintaining internal controls and ensuring
appropriate segregation of duties.
Information Technology Systems and Intellectual Property
We rely on information technology to directly engage with our lender customers, receive MI applications and supporting
documentation, stream-line our underwriting and validation processes, deliver binding policy certificates, and facilitate post-close
MI policy servicing. Our customers and regulators require us to provide and service our products in a secure manner, either
electronically via our internet website or through direct electronic data transmissions.
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We have invested in our infrastructure and technology through the design, development, integration and implementation
of what we believe is an efficient, secure, scalable platform that supports our current business activities and provides capacity for
significant future growth. We underwrite and service our MI portfolio within this proprietary insurance management platform,
which we refer to as AXIS.
Since the initial development of AXIS, we have continued to upgrade and enhance our systems and technical capabilities,
including:
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deploying technology that enables our customers to transact business faster and easier, whether via a secure internet
connection or through a secure system-to-system interface;
integrating our platform with third-party technology providers used by our customers in their loan origination process and
to order our MI and in their servicing processes for servicing and maintaining their MI policies;
implementing advanced document and business process management software that focuses on improving our underwriting
productivity and that may also be used to improve our quality assurance and loss management functions; and
launching our award-winning mobile applications, which enable customers to view and access information through mobile
devices, including our premium rate calculators, guideline updates and other resources and information notices.
We aim to utilize and develop technology that enhances our current operating capabilities and supports future growth,
while allowing us to realize current efficiencies. We engage contractors to assist with the development and maintenance of certain
areas of our IT architecture as a means to manage our technology costs and selectively draw in relevant expertise for particular
projects.
Investment Portfolio
Our primary objectives with respect to our investment portfolio are to preserve capital and generate investment income, while
maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification as to type, quality, maturity, industry
and issuer. At December 31, 2017, our investment portfolio was primarily comprised of fixed income securities including: U.S.
Treasury securities and obligations of U.S. government agencies, municipal debt securities, corporate debt securities, and asset-
backed securities. We also held other short-term investments (such as commercial paper).
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. Under our policy,
all securities in the portfolio are required to be U.S. dollar-denominated and have a National Association of Insurance Commissioners
(NAIC) '1' or '2' designation or investment grade rating by Moody's, S&P or Fitch at time of purchase. We review our investment
policies and strategies on a consistent basis, and they are subject to change depending upon regulatory, economic and market conditions
and our existing or anticipated financial condition and operating requirements, including our tax position.
We engage a third-party investment manager, Wells Capital Management, Inc., to assist with day-to-day management of our
portfolio and implementation of our investment policy.
Employees
As of December 31, 2017, we had 299 full-time employees. None of our employees are party to a collective bargaining
agreement. We utilize a third-party professional employer organization to manage our payroll administration and related compliance
requirements.
Available Information
Our principal office is located at 2100 Powell Street, 12th floor, Emeryville, CA 94608. Our main telephone number is
(855) 530 - NMIC (6642), and our website address is www.nationalmi.com. Copies of our Annual Reports on Form 10-K, Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports are available free of charge through our
website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange
Commission (SEC). In addition, a written copy of the Company's Business Conduct Policy, containing our code of ethics that is
applicable to all of our directors, officers and employees, is available on our website. Information contained or referenced on our
website is not incorporated by reference into, and does not form a part of, this report.
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U.S. MORTGAGE INSURANCE REGULATION
As discussed below, private mortgage insurers operating in the U.S. are subject to comprehensive state and federal regulation
and to significant oversight by the GSEs, the primary beneficiaries of our insurance coverage. NMIC and Re One are principally
regulated by our domiciliary and primary regulator, the Wisconsin OCI and by state insurance departments in each state in which
these companies are licensed. We are also significantly impacted and, in some cases, directly regulated by federal laws and regulations
affecting the housing finance system.
We believe that a strong, viable private MI market is a critical component of the U.S. housing finance system. We routinely
meet with regulatory agencies, including our state insurance regulators and the Federal Housing Finance Agency (FHFA), the GSEs,
our customers and other industry participants to promote the role and value of private mortgage insurance and exchange views on
the U.S. housing finance system. We believe we have an open dialogue with the Wisconsin OCI and often share our views on current
matters regarding the MI industry. We actively participate in industry discussions regarding potential changes to the laws impacting
private mortgage insurers and the regulatory environment. We intend to continue to promote legislative and regulatory policies that
support a viable and competitive private MI industry and a well-functioning U.S. housing finance system. We are a member of U.S.
Mortgage Insurers (USMI®), an organization formed to promote the use of private MI as a credit risk mitigant in the U.S. residential
mortgage market.
GSE Oversight
The GSEs are the principal purchasers of mortgages insured by private mortgage insurers. As a result, the nature of the
private MI industry in the U.S. is driven in large part by the requirements and practices of the GSEs, which include:
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the PMIERs, including operational, business and remedial requirements and minimum capital levels applicable to
GSE-qualified MI providers;
the underwriting standards that determine what loans are eligible for purchase by the GSEs, which affects the
quality of the risk insured by the mortgage insurer and the availability of mortgage loans;
the terms that the GSEs require to be included in MI policies for loans that they purchase, including terms governing
rescission relief;
the level of MI coverage, subject to the requirements of the GSEs' charters, as to when MI is used as the required
credit enhancement on high-LTV mortgages;
the amount of loan level delivery fees (which result in higher costs to borrowers) that the GSEs assess on loans
that require MI, which impacts private MI providers' ability to compete with FHA;
the terms on which the GSEs offer lenders relief on their representations and warranties made to a GSE at the time
of sale of a loan to a GSE, which creates pressure on private mortgage insurers to alter their rescission rights to
conform to the GSE relief;
loss mitigation programs established by the GSEs that impact insured mortgages and the circumstances under
which servicers must implement such programs;
the maximum loan limits of the GSEs in comparison to those of the FHA and other investors; and
the availability and scope of different loan purchase programs from the GSEs that allow different levels of MI
coverage.
In January 2013, the GSEs approved NMIC as a qualified mortgage insurer (as defined in the PMIERs, an Approved Insurer).
(Italicized terms have the same meaning that such terms have in the PMIERs.) As an Approved Insurer, NMIC is subject to ongoing
compliance with the PMIERs. The PMIERs establish operational, business, remedial and financial requirements applicable to
Approved Insurers. The GSEs have significant discretion under the PMIERs as well as a broad range of consent rights and notice
requirements with respect to various actions of an Approved Insurer. 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 risk
characteristics, such as FICO, vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV and
other risk features. An asset charge is calculated for each insured loan based on its risk profile. In general, higher quality loans carry
lower charges.
Under the PMIERs financial requirements, 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, calculated by applying on a loan-by-
loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF. The risk-based required asset amount
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for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount for
pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs
financial requirements also increase the amount of available assets that must be held by an Approved Insurer for loans originated
on or after January 1, 2016 that are insured under LPMI policies.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. As
of December 31, 2017, NMIC had sufficient assets to meet the PMIERs financial requirements, and we expect to certify to the GSEs
by April 15, 2018 that NMIC fully complied with the PMIERs as of December 31, 2017. NMIC also has an ongoing obligation to
immediately notify the GSEs in writing upon discovery of its failure to meet one or more of the PMIERs requirements. We continuously
monitor our compliance with the PMIERs.
On December 18, 2017, the GSEs provided us with a confidential summary of the proposed changes to the PMIERs financial,
business and other requirements that they are developing with the FHFA. We have engaged in conversations with the FHFA and the
GSEs about the proposed changes and expect to continue to provide feedback to them in the coming months. Once changes to the
PMIERs requirements are finalized, we expect the industry will be afforded a six month implementation period and currently anticipate
that updated PMIERs requirements, if any, will take effect no sooner than the fourth quarter of 2018.
State Mortgage Insurance Regulation
Certificates of Authority
NMIC holds a certificate of authority, or insurance license, in all 50 states and D.C. As a licensed insurer in these jurisdictions,
NMIC is subject to ongoing financial reporting and disclosure requirements relating to its business, operations, management or
affiliate arrangements.
State Insurance Laws
Our insurance subsidiaries are subject to comprehensive regulation by state insurance departments. As mandated by certain
state insurance laws, private MI companies are generally restricted to writing only MI business. We understand that the primary
purpose underlying this restriction, which is referred to in the industry as a "monoline" requirement, is to make it easier for regulators
to assess the overall risk in a mortgage insurer's insurance portfolio and to determine its capital adequacy under varying economic
scenarios. State insurance laws and regulations are principally designed for the protection of insured policyholders rather than for
the benefit of investors. Although their scope varies, state insurance laws generally grant broad supervisory powers to insurance
regulatory officials to examine insurance companies and interpret and/or enforce rules or exercise discretion affecting almost every
significant aspect of the insurance business.
In general, state insurance regulation of our business relates to:
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licenses to transact business;
policy forms;
premium rates;
insurable loans;
annual and quarterly financial reports prepared in accordance with statutory accounting principles;
determination of loss, unearned premium and contingency reserves;
• minimum capital levels and adequacy ratios;
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affiliate transactions;
reinsurance requirements;
limitations on the types of investment instruments which may be held in an investment portfolio;
the size of risks and limits on coverage of individual risks which may be insured;
special deposits of securities;
stockholder dividends;
insurance policy sales practices; and
claims handling.
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As an insurance holding company, NMIH is registered with the Wisconsin OCI, which is NMIC and Re One's primary
regulator, and must provide certain information to the Wisconsin OCI on an ongoing basis, including insurance holding company
annual audited consolidated financial statements. We, as an insurance holding company, and each of our affiliates, are prohibited
from engaging in certain transactions with our insurance subsidiaries without disclosure to, and in some instances, prior approval
by the Wisconsin OCI. Like other states, Wisconsin regulates transactions between domestic insurance companies and their controlling
stockholders or affiliates. Under Wisconsin law, all transactions involving us, or an affiliate, and an insurance subsidiary, must
conform to certain standards including that the transaction be "reasonable and fair" to the insurance subsidiary. Wisconsin law also
provides that disclosure of certain transactions must be filed with the Wisconsin OCI at least 30 days before the transaction is entered
into and that these transactions may be disapproved by the Wisconsin OCI within that period.
Under Wisconsin law, domestic insurers, such as NMIC, are required to submit and obtain prior Wisconsin OCI approval
on all reinsurance agreements with non-affiliate reinsurers. In addition, Wisconsin OCI requires that reinsurance agreements with
non-authorized and non-accredited reinsurers be collateralized through letters of credit and/or trust accounts in order for a domestic
insurer to take credit for reinsurance on its statutory balance sheet.
Wisconsin's insurance regulations generally provide that no person may merge with or acquire control (which is defined as
possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of a person, whether
through the ownership of voting securities, by contract, by common management or otherwise) of us or our insurance subsidiaries
unless the merger or transaction in which control is acquired has been approved by the Wisconsin OCI. Wisconsin law provides for
a rebuttable presumption of control when a person owns or has the right to vote, directly or indirectly, more than 10% of the voting
securities of a company. Pursuant to applicable Wisconsin regulations, voting securities include securities convertible into or
evidencing the right to acquire securities with the right to vote. For purposes of determining whether control exists, the Wisconsin
OCI may aggregate the direct or indirect ownership of us by entities under common control with one another. Notwithstanding the
presumption of control, any person or persons acting in concert or whose shares may be aggregated for purposes of determining
control, may file a disclaimer of affiliation with the Wisconsin OCI if such person or persons do not intend to control or direct or
influence the management of a domestic insurer. Such disclaimer will become effective unless it is expressly "disapproved" by the
OCI within 30 days. In addition, the insurance regulations of certain states require prior notification to the state's insurance department
before a person acquires control of an insurance company licensed in such state. An insurance company's licenses to conduct business
in those states could be affected by any such change in control. As of the date of this report, we are aware of one stockholder that
owns more than 10% of our shares of common stock. We understand that this stockholder has filed a disclaimer of control with the
Wisconsin OCI in connection therewith, which has not been disapproved.
Our insurance subsidiaries are subject to Wisconsin statutory requirements as to maintenance of minimum policyholders'
surplus and payment of dividends or distributions to stockholders. Under Wisconsin law, our insurance subsidiaries may pay "ordinary"
stockholder dividends with 30 days' prior notice to the Wisconsin OCI. Ordinary dividends are defined as payments or distributions
to stockholders in any 12-month period that do not exceed the lesser of (i) 10% of statutory policyholders' surplus as of the preceding
calendar year end or (ii) adjusted statutory net income. Adjusted statutory net income is defined for this purpose to be the greater
of the following:
a. The net income of the insurer for the calendar year preceding the date of the dividend or distribution, minus realized capital
gains for that calendar year; or
b. The aggregate of the net income of the insurer for the 3 calendar years preceding the date of the dividend or distribution,
minus realized capital gains for those calendar years and minus dividends paid or credited and distributions made within
the first 2 of the preceding 3 calendar years.
The Wisconsin OCI may prohibit the payment of ordinary dividends or other payments by our insurance subsidiaries to us if they
determine that such payments could be adverse to policyholders. In addition, our insurance subsidiaries may make or pay
"extraordinary" stockholder dividends (i.e., amounts in excess of ordinary dividends) only with the prior approval of the Wisconsin
OCI.
In addition to Wisconsin, other states may limit or restrict our insurance subsidiaries' ability to pay stockholder dividends.
For example, California and New York prohibit mortgage insurers licensed in such states from declaring dividends except from
undivided profits remaining above the aggregate of their paid-in capital, paid-in surplus and contingency reserves. In addition,
Florida requires mortgage insurers to hold capital and surplus not less than the lesser of (i) 10% of its total liabilities, or (ii) $100
million. It is possible that Wisconsin will adopt revised statutory provisions or interpretations of existing statutory provisions that
will be more or less restrictive than those described above or will otherwise take actions that may further restrict the ability of our
insurance subsidiaries to pay dividends or make distributions or returns of capital.
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Mortgage insurers licensed in Wisconsin are required to establish a contingency loss reserve for purposes of statutory
accounting, with annual contributions equal to the greater of (i) 50% of net earned premiums for such year or (ii) the minimum
policyholders' position (as described below) relating to NIW in the period, divided by 7. These additions to contingency reserves
cannot be withdrawn for a period of 10 years, except as permitted by insurance regulations. With prior approval from the Wisconsin
OCI, an MI company may make early withdrawals from the contingency reserve when incurred losses for a calendar quarter exceed
the greater of either (i) 35% of net premiums earned in a calendar year or (ii) 70% of the annual amount contributed to the contingency
loss reserve.
Under applicable Wisconsin law and the laws of 15 other states, a mortgage insurer must maintain a minimum amount of
statutory capital relative to its RIF in order for the mortgage insurer to continue to write new business. These are typically referred
to as "risk-to-capital requirements." While formulations of minimum capital may vary in certain jurisdictions, the most common
measure applied allows for a maximum permitted risk-to-capital (RTC) ratio of 25:1. Wisconsin has formula-based limits that
generally result in RTC limits slightly higher than the 25:1 ratio.
We compute RTC ratios for each of our insurance subsidiaries, as well as for our combined insurance operations. The RTC
ratio is our net RIF divided by our statutory capital. Our net RIF includes both direct and assumed primary and pool RIF, less risk
ceded and excluding risk on policies that are currently in default and for which loss reserves have been established. Wisconsin
requires a mortgage insurer to maintain a "minimum policyholders' position" as calculated in accordance with the applicable
regulations. Policyholders' position, which is also known as statutory capital, is generally the sum of statutory policyholders' surplus
(which increases as a result of statutory net income and contributions and decreases as a result of statutory net loss and dividends
paid), plus the statutory contingency reserve. Under statutory accounting rules, the contingency reserve is reported as a liability on
the statutory balance sheet; however, for purposes of statutory capital and RTC ratio calculations, it is included in capital.
State insurance regulators also have the authority to make changes to capital requirements. The NAIC has formed a working
group to develop and recommend more robust regulations governing mortgage insurance, including, among other things, strengthened
capital requirements, underwriting standards, claims practices and market conduct regulation. We, along with other mortgage insurers,
are working with the Mortgage Guaranty Insurance Working Group of the Financial Condition (E) Committee of the NAIC (the
Working Group). The Working Group will determine and make a recommendation to the Financial Condition (E) Committee of the
NAIC as to what changes the Working Group believes are necessary to the solvency and market practices regulation of mortgage
insurers, including changes to the Mortgage Guaranty Insurers Model Act (Model #630). The Working Group has proposed a draft
revised Model Act that contains risk-based capital requirements, which we and the MI industry are evaluating. We have provided
feedback to the Working Group since early 2013, including comments on the risk-based capital approach.
Most states, including Wisconsin, have enacted anti-inducement and anti-rebate laws applicable to mortgage insurers, which
prohibit mortgage insurers from inducing lenders to enter into insurance contracts by offering benefits not specified in the policy,
including rebates of insurance premiums. For example, Wisconsin prohibits mortgage insurers from allowing any commission, fee,
remuneration, or other compensation to be paid to, or received by, any insured lender, including any subsidiary or affiliate, officer,
director, or employee of any insured, any member of their immediate family, any corporation, partnership, trust, trade association in
which any insured is a member, or other entity in which any insured or any such officer, director, or employee or any member of
their immediate family has a financial interest.
MI premium rates are subject to prior approval in certain states, which requirement is designed to protect policyholders
against rates that are excessive, inadequate or unfairly discriminatory. In these states, any change in premium rates must be justified,
generally on the basis of the insurer's loss experience, expenses and future trend analysis. Trends in mortgage default rates are also
considered.
State insurance receivership law, not federal bankruptcy law, would govern any insolvency or financially hazardous condition
of our insurance subsidiaries. The Wisconsin OCI has substantial authority to issue orders or seek to control a state insurance
receivership proceeding to address the insolvency or financially hazardous condition of an insurance company that it regulates. Under
Wisconsin law, the Wisconsin OCI has substantial flexibility to restructure an insurance company in a receivership proceeding. The
Wisconsin OCI is obligated to maximize the value of an insolvent insurer's estate for the benefit of its policyholders. In all insurance
receiverships under state insurance law, policyholder claims are prioritized relative to the claims of stockholders.
Other U.S. Regulation
Federal laws and regulations applicable to participants in the housing finance industry, including mortgage originators and
servicers, purchasers of mortgage loans, such as the GSEs, and public MI companies such as the FHA and VA, directly and indirectly
impact private mortgage insurers. Changes in federal housing legislation may have significant effects on the demand for private MI
and, therefore, may materially affect our business.
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We are also impacted by federal regulation of residential mortgage transactions. Mortgage origination and servicing
transactions are subject to compliance with various federal and state consumer protection laws, including the Real Estate Settlement
Procedures Act of 1974 (RESPA), the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), the Fair Housing
Act, the HOPA, the Fair Credit Reporting Act of 1970 (FCRA), the Fair Debt Collection Practices Act, the Gramm-Leach-Bliley Act
of 1999 (GLBA) and others. Among other things, these laws and their implementing regulations prohibit payments for referrals of
real estate settlement service business, require fairness and non-discrimination in granting or facilitating the granting of credit and
insurance, govern the circumstances under which companies may obtain and use consumer credit information, establish standards
for cancellation of BPMI, define the manner in which companies may pursue collection activities, require disclosures of the cost of
credit and provide for other consumer protections.
Housing Finance Reform
The federal government currently plays a dominant role in the U.S. housing finance system through the GSEs and public
MIs (i.e., the FHA and VA) and Ginnie Mae. There is broad policy consensus toward the need for private capital to play a larger
role and government credit risk to be reduced. However, to date there has been a lack of consensus with regard to the specific changes
necessary to return to a larger role for private capital and what size the government's role should be. On September 6, 2008, the
FHFA used its authorities to place the GSEs into conservatorship. As the GSEs' conservator, the FHFA has the authority to control
and direct the GSEs' operations, and the FHFA's policy objectives can result in changes to the GSEs' requirements and practices.
With the GSEs in a prolonged conservatorship, there has been ongoing debate over the future role and purpose of the GSEs in the
U.S. housing market. Since 2011, there have been numerous legislative proposals intended to incrementally scale back or eliminate
the GSEs (such as a statutory mandate for the GSEs to transfer mortgage credit risk to the private sector) or to completely reform
the housing finance system. Congress, however, has not enacted any legislation to date. Passage and timing of comprehensive GSE
reform legislation or incremental change is uncertain, making the actual impact on us and our industry difficult to predict. With the
current administration and Republican majority in Congress (including the resulting control of key committees addressing GSE
reform), there is a possibility for greater consensus, although much uncertainty remains regarding the details of any reform as well
as when it would be enacted or implemented. Any such changes that come to pass could have a significant impact on our business.
FHA Reform
We compete with the single-family public MI programs of the FHA, which is part of the U.S. Department of Housing and
Urban Development (HUD). The FHA's role in the mortgage insurance industry is significantly dependent upon regulatory
developments. During the most recent housing downturn, the FHA began to capture an increasing share of the high-LTV market,
which share has not receded to the lower levels FHA transacted prior to the financial crisis. Since 2012, there have been several
legislative proposals intended to reform the FHA; however, no legislation has been enacted to date. In 2015, the FHA reduced some
of its annual mortgage insurance premiums by 50 basis points, which had the effect of maintaining the FHA's elevated market share
and continuing the increased role of government in the mortgage insurance market. The prospects for further unilateral FHA action
on premium or passage of FHA reform legislation in either the House or Senate, and how differences in proposed reforms between
the House and Senate might be resolved in any final legislation, remain uncertain.
The Dodd-Frank Act
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended certain
provisions of TILA, RESPA and other statutes that have had a significant impact on our business and the residential mortgage
market. The Consumer Financial Protection Bureau (CFPB), a federal agency created by the Dodd-Frank Act, is charged with
implementation and enforcement of these provisions. Leadership at the CFPB has recently changed, and it is difficult to predict
whether or how the CFPB might seek to implement these laws in the future.
Ability-to-Repay Rule
For instance, the CFPB implemented the Dodd-Frank Act Ability to Repay (ATR) mortgage provisions, which govern the
obligation of lenders to determine the borrower's ability to pay when originating a mortgage loan covered by the rule. The ATR rule
went into effect on January 10, 2014. A subset of mortgages within the ATR rule are known as "qualified mortgages" (QMs), which
generally are defined as loans without certain risky features, such as negative amortization, points and fees in excess of 3% of the
loan amount, and terms exceeding 30 years. QMs under the rule benefit from a statutory presumption of compliance with the ATR
rule, thus potentially mitigating the risk of the liability of the creditor and assignees of the loan under TILA. The rule also provides
a temporary category of QMs that have more flexible underwriting requirements so long as they satisfy the general product feature
requirements of QMs and so long as they meet the underwriting requirements of the GSEs. The temporary category of QMs that
meet the underwriting requirements of the GSEs is scheduled to phase out upon the earlier to occur of the end of conservatorship or
receivership of the GSEs or January 10, 2021. The expiration of this this temporary GSE QM status or any action by Congress or
the CFPB to modify it could affect the residential mortgage market and demand for private mortgage insurance.
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The Dodd-Frank Act also gave statutory authority to HUD, the VA, and the U.S. Department of Agriculture's Rural Housing
Service to develop their own definitions of "QM," which they have completed. To the extent lenders find that the HUD definition
of QM is more favorable to certain segments of their borrowers, they may choose FHA products over private MI products.
We, along with other industry participants, have observed that the significant majority of covered loans made after the
effective date of the CFPB's ATR rule have been QMs. We expect that most lenders will continue to be reluctant to make loans that
do not qualify as QMs (either under the rules' specific underwriting guidelines, GSE underwriting guidelines or the HUD definition
of a QM) because absent full compliance with the ATR rule, such loans will not be entitled to a "safe-harbor" presumption of
compliance with the ability-to-pay requirements.
The ATR rule may continue to impact the mortgage insurance industry in other ways, including because the ATR rule has
given rise to a subset of borrowers who cannot meet the regulatory QM standards, thus reducing the size of the mortgage market
tied to such borrowers. While Congress is considering certain reforms that may address this restrictiveness, there is no certainty
about whether that legislation will be enacted or be successful in increasing access to mortgage loans for those borrowers.
Basel III
The Basel Capital Accord, as updated, sets out international benchmarks for assessing banks' capital adequacy requirements,
which, among other factors, governs the capital treatment of MI purchased and held on balance sheet by domestic and international
banks in respect of their residential mortgage loan origination and securitization activities. In July 2013, U.S. banking regulators
promulgated regulations to implement significant elements of the Basel framework, which we refer to as Basel III. The effective
date for the U.S. Basel III regulations was January 1, 2014, although the majority of its provisions are subject to phase-in periods of
up to five years.
Under the "Standardized Approach" in the U.S. Basel III capital rules, loans secured by one-to-four-family residential
properties (residential mortgage exposures) receive a 50% or 100% risk weight. Generally, first lien residential mortgage exposures
that are prudently underwritten, including with respect to regulatory standards for LTV limits, and that are performing according to
their original terms receive a 50% risk weight, while all other residential mortgage exposures are assigned a 100% risk weight. The
banking regulators clarified in a set of frequently asked questions issued in March 2015 that LTV ratios can account for private MI
in determining whether a loan is made in accordance with prudent underwriting standards for purposes of receiving a 50% risk
weight. A mortgage exposure guaranteed by the federal government through the FHA or VA will have a risk weight of 20%.
In December 2014, the Basel Committee on Banking Supervision (Basel Committee) issued a proposal for further revisions
to Basel III's Standardized Approach for credit risk. The proposal sets forth proposed adjustments to the risk weights for residential
mortgage exposures that take into account LTV and the borrower's ability to service a mortgage as a proxy for a debt service coverage
ratio. The proposed LTV ratio did not take into consideration any credit enhancement, including private MI. Comments closed on
the 2014 proposal in March 2015, and in December 2015, the Basel Committee released a second proposal that retained the LTV
provisions of the initial draft, but not the debt servicing coverage ratios. In December 2017, the Basel Committee finalized its revisions
to the Standardized Approach for credit risk, including the adoption of risk weights for residential mortgage exposures that, like the
December 2015 proposal, take into account LTV but not debt servicing coverage ratios. The revisions to the international Basel III
framework would only take effect in the United States to the extent that they are adopted by the federal banking regulators and
incorporated into the U.S. Basel III rules.
We believe the existing U.S. implementation of the Basel III capital framework supports continued use of private MI by
portfolio lenders as a risk and capital management tool; however, with the ongoing implementation of Basel III and the continued
evolution of the Basel framework, it is difficult to predict the impact, if any, on the MI industry and the ultimate form of any potential
future modifications to the regulations by federal banking regulators.
Mortgage Servicing Rules
New residential mortgage servicing rules under RESPA and TILA, promulgated by the CFPB, went into effect in 2014.
These rules included new or enhanced servicer requirements for handling escrow accounts, responding to borrower assertions of
error and inquiries from borrowers, special handling of loans that are in default and loss mitigation when borrowers default, along
with other provisions. A provision of the required loss mitigation procedures prohibits the servicer from commencing foreclosure
until 120 days after a borrower defaults. Additional servicing regulations became effective in October 2017, providing some
borrowers with foreclosure protections more than once over the life of the loan, imposing specific timing requirements for loss
mitigation activities when servicing rights are transferred, and requiring that loss mitigation applications be properly dispositioned
before allowing pursuit of a foreclosure action, among other requirements. Violation of these loss mitigation rules, which mandate
special notices, handling and processing procedures (with deadlines) based on borrower submissions, may subject the servicer to
private rights of action under consumer protection laws. Such actions or threats of such actions could cause delays in and increase
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costs and expenses associated with default servicing, including foreclosure. As to servicing of delinquent mortgage loans covered
by our insurance policies, these rules could contribute to delays in and increased costs associated with foreclosure proceedings and
have a negative impact on the cost and resolution of claims.
Homeowners Protection Act of 1998
HOPA provides for the automatic termination, or cancellation upon a borrower's request, of BPMI, as defined in HOPA,
upon satisfaction of certain conditions. HOPA requires that lenders give borrowers certain notices with regard to the automatic
termination or cancellation of BPMI. These provisions apply to BPMI for purchase money, refinance and construction loans secured
by the borrower's principal dwelling. FHA and VA loans are not covered by HOPA. Under HOPA, automatic termination of BPMI
would generally occur when the mortgage is first scheduled to reach an LTV of 78% of the home's original value, assuming that the
borrower is current on the required mortgage payments. A borrower who has a "good payment history," as defined by HOPA, may
generally request cancellation of BPMI when the LTV is first scheduled to reach 80% of the home's original value or when actual
payments reduce the loan balance to 80% of the home's original value, whichever occurs earlier. If BPMI coverage is not canceled
at the borrower's request or by the automatic termination provision, the mortgage servicer must terminate such BPMI coverage by
the first day of the month following the date that is the midpoint of the loan's amortization, assuming the borrower is current on the
required mortgage payments.
Section 8 of RESPA
Section 8 of RESPA applies to most residential mortgages insured by us. Subject to limited exceptions, Section 8 of RESPA
prohibits persons from giving or accepting anything of value pursuant to an agreement or understanding to refer a "settlement service."
MI generally may be considered to be a "settlement service" for purposes of Section 8 of RESPA under applicable regulations.
Section 8 of RESPA affects how we structure ancillary services that we may provide to our customers, if any, including loan review
services, risk-share arrangements and customer training programs. RESPA authorizes the CFPB and other regulators to bring civil
enforcement actions and also provides for criminal penalties and private rights of action. The CFPB has brought a number of
enforcement actions under Section 8 of RESPA, including settlements with several mortgage insurers. The CFPB's interpretation
and enforcement of Section 8 of RESPA presents regulatory risk for many providers of "settlement services," including mortgage
insurers.
Mortgage Insurance Tax Deduction
In 2006, Congress enacted on a temporary basis the private mortgage insurance tax deduction, which expired at the end of
2011. Each year since the deduction initially expired in 2011, Congress has enacted legislation to temporarily extend the deduction,
with the most recent extension occurring in February 2018, to cover the 2017 tax year, from January 1, 2017 to December 31, 2017.
Elimination of the private mortgage insurance tax deduction could have the effect of reducing demand for private MI products.
Congress has periodically considered proposed legislation that would make the private mortgage insurance tax deduction permanent,
but to date has not enacted any such legislation.
SAFE Act
The federal Secure and Fair Enforcement for Mortgage Licensing Act (SAFE Act), enacted by Congress in 2008,
establishes minimum standards for the licensing and registration of state-licensed mortgage loan originators. The SAFE Act also
requires the establishment of a nationwide mortgage licensing system and registry for the residential mortgage industry and its
employees. As part of this licensing and registration process, loan originators who are employees of certain lending institutions
must generally be licensed under the SAFE Act guidelines enacted by each state in which they engage in loan originator activities
and registered with the registry. The CFPB administers and enforces the SAFE Act. Employees of NMIC are not required to be
licensed and/or registered under the SAFE Act as NMIC does not originate mortgage loans. NMIS currently provides loan review
services through third-party service providers, which have represented and warranted to NMIS that they comply with SAFE Act
requirements in all applicable jurisdictions.
Privacy and Information Security
We provide mortgage insurance products and services to financial institutions with which we have business relationships.
In the normal course of providing our products and services, we may receive non-public personal information regarding such financial
institutions' customers. The GLBA and related state and federal regulations implementing its privacy and safeguarding provisions
impose privacy and information security requirements on financial institutions, including obligations to protect and safeguard
consumers' non-public personal information. GLBA and its implementing regulations are enforced by state insurance regulators and
state attorneys general, and by the U.S. Federal Trade Commission (FTC) and the CFPB. In addition, many states have enacted
privacy and data security laws which impose compliance obligations beyond GLBA, including obligations to protect social security
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numbers, maintain comprehensive information security programs and provide notification if a security breach results in a reasonable
belief that unauthorized persons may have obtained access to consumer non-public personal information. We have adopted certain
risk management and security practices designed to facilitate our compliance with these federal and state privacy and information
security laws.
Fair Credit Reporting Act
FCRA imposes restrictions on the permissible use of credit report information. The CFPB and FTC each have authority to
enforce the FCRA. FCRA has been interpreted by some FTC staff and federal courts to require mortgage insurers to provide "adverse
action" notices to consumers if an application for mortgage insurance is declined or offered at higher than the best available rate for
the program applied for on the basis of a review of the consumer's credit. We provide such notices when required.
Anti-Discrimination Laws
ECOA requires creditors and insurers to handle applications for credit and for insurance in accordance with specified
requirements and prohibits discrimination in lending or insurance based on prohibited factors such as gender, race, ethnicity, age
and familial status. The Fair Housing Act prohibits discrimination on the basis of race, gender and other prohibited bases in connection
with housing-secured credit transactions.
Implications of and Elections Under the JOBS Act
As a company that had gross revenues of less than $1 billion during its last fiscal year, we are an "emerging growth company,"
as defined in the JOBS Act (an EGC). We will retain that status until December 31, 2018, the last day of the fiscal year following
the fifth anniversary of the date of the first sale of our common stock pursuant to an effective registration statement under the Securities
Act, which was November 7, 2013.
As an EGC:
• we are exempted from compliance with Section 404(b) of Sarbanes-Oxley, which requires our auditors to attest
to and report on our internal control over financial reporting;
• we are not required to comply with any new or revised financial accounting standard until such date as a private
company (i.e., a company that is not an "issuer" as defined by Section 2(a) of Sarbanes-Oxley) is required to
comply with such new or revised accounting standard. Although we are not required to comply with new or revised
financial accounting standards, we have opted out of using the extended transition period;
• we may elect to not comply with Item 402 of Regulation S-K, which requires extensive quantitative and qualitative
disclosure regarding executive compensation, but instead disclose the more limited information required of a
"smaller reporting company";
• we are exempted from the following additional compensation-related disclosure provisions that were imposed on
U.S. public companies pursuant to the Dodd-Frank Act: (i) the advisory vote on executive compensation required
by Section 14A(a) of the Exchange Act, (ii) the requirements of Section 14A(b) of the Exchange Act relating to
stockholder advisory votes on "golden parachute" compensation, (iii) the requirements of Section 14(i) of the
Exchange Act as to disclosure relating to the relationship between executive compensation and our financial
performance, and (iv) the requirement of Section 953(b)(1) of the Dodd-Frank Act, which requires disclosure as
to the relationship between the compensation of the Company's chief executive officer and median employee pay.
As long as we are an EGC, the JOBS Act has the effect of reducing the amount of information that we are required to
provide.
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Item 1A. Risk Factors
You should carefully consider the following risk factors, as well as all of the other information contained in this report,
including our consolidated financial statements and the related notes thereto, before deciding to invest in our common stock. The
occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition,
operating results and cash flow. In such case, the trading price of our common stock could decline and you could lose some or all
of your investment.
This report contains forward-looking statements that involve risks and uncertainties. See "Cautionary Note Regarding
Forward-Looking Statements" on page 3 of this report. Our actual results could differ materially and adversely from those
anticipated in these forward-looking statements, including any such statements made in Part II, Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Risk Factors Relating to Our Business Operations
We do not have a long operating history on which investors may rely for purposes of projecting our future operating results.
Prior to writing our first mortgage insurance policies in April 2013, we did not engage in any substantive operations and,
therefore, do not have a long operating history on which investors may rely for purposes of projecting future operating results.
Having a short operating history, we are subject to substantial business and financial risks and could suffer significant losses, all
of which are difficult to predict. We continue to develop business relationships, enhance our technology platform, gain
customers, establish operating procedures, hire staff and complete other tasks appropriate for the conduct of our intended business
activities. Our long-term success will also depend on our ability to continue to execute the operating procedures we have
established and internal controls we have developed to effectively support our business and our regulatory and reporting
requirements. Further, industry conditions may change in a manner that adversely affects the development or profitability of our
business, and there can be no assurance that we will be successful in our efforts to continue to develop our business.
We face intense competition for business in our industry from existing private MI providers and potentially from new entrants.
If we are unable to compete effectively, we may not be able to achieve our business goals, which would adversely affect our
business, financial condition and operating results.
The MI industry is highly competitive. With six private MI companies actively competing for business from the same
residential mortgage originators, it is important that we continue to differentiate ourselves from the other mortgage insurers, each
of which sells substantially similar products as ours. We compete with other private mortgage insurers based on our terms of
coverage, underwriting guidelines, pricing, customer service (including speed of MI underwriting and decisions), availability of
ancillary products and services (including training and loan review services), financial strength, information security, customer
relationships, name recognition and reputation, the strength of management teams and sales organizations, the effective use of
technology, and innovation in the delivery and servicing of insurance products.
One or more of our competitors may seek to capture increased market share from the public MIs, such as the FHA or VA,
or from other private mortgage insurers by reducing prices, offering alternative coverage and product options, including offerings
for loans not intended to be sold to the GSEs, loosening their underwriting guidelines or relaxing risk management policies, which
could, in turn, improve their competitive positions in the industry and negatively impact our ability to achieve our business goals.
Competition within the private mortgage insurance industry could result in our loss of customers, lower premiums, riskier credit
guidelines and other changes that could lower our revenues or increase our expenses. If our information technology systems are
inferior to our competitors', existing and potential customers may choose our competitors' products over ours. If we are unable to
compete effectively against our competitors and attract and retain our target customers, our revenue may be adversely impacted,
which could adversely impact our growth and profitability.
In addition, we and most of our competitors, either directly or indirectly, offer certain ancillary services to mortgage
lenders with which we also conduct MI business, including loan review, training and other services. For various reasons,
including those related to resources or compliance, we may choose not to offer these services at all or not to offer them in a form
or to the extent that is similar to the prevailing offerings of our competitors. If we choose not to offer these services, or if we were
to offer ancillary services that are not well-received by the market and fail to perform as anticipated, we could be at a competitive
disadvantage which could adversely impact our profitability.
Certain of our competitors are subsidiaries of larger corporations that may have access to greater amounts of capital and
financial resources than we do at a lower cost of capital and some have better financial strength ratings than we have. As a result,
they may be better positioned to compete in the traditional MI market, as well as outside of traditional MI, including when the
GSEs pursue alternative forms of credit enhancement other than traditional MI.
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Our financial strength ratings may remain important for our customers to maintain confidence in our products and our
competitive position. A downgrade in NMIC's ratings or ratings outlook could have an adverse effect on our financial condition
and operating results, including (i) increased scrutiny of our financial condition by our customers, resulting in potential reduction
in our NIW or (ii) negative impacts to our ability to conduct business in the non-GSE mortgage market, where financial strength
ratings may be more important for such lenders. In addition, although financial strength ratings are not a requirement to remain
an Approved Insurer under the current PMIERs framework, they may play a greater role to the extent GSEs use forms of credit
enhancement other than traditional MI, including use of deeper MI coverage or other forms of credit risk transfer.
The amount of insurance we may be able to write could be adversely affected if lenders and investors select alternatives to
private MI.
If lenders and investors select alternatives to private MI on high-LTV loans, our business could be adversely affected.
These alternatives to private MI include, but are not limited to:
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•
•
•
lenders using government mortgage insurance programs, including those of the FHA and the VA, and state-
supported mortgage insurance funds in several states, including Massachusetts and California;
lenders and other investors holding mortgages in portfolio and self-insuring;
investors (including the GSEs) using credit enhancements other than MI (including alternative forms of credit risk
transfer), using other credit enhancements in conjunction with reduced levels of MI coverage, or accepting credit
risk without credit enhancement;
lenders originating mortgages using "piggy-back" or other structures to avoid MI, such as a first mortgage with an
80% LTV and a second mortgage with a 10%, 15% or 20% LTV (referred to as 80-10-10, 80-15-5 or 80-20 loans,
respectively) rather than a first mortgage with an LTV above 80% that has MI; and
borrowers paying cash or making large down payments versus securing mortgage financing, which has occurred
with greater frequency in the years following the most recent financial crisis.
Any of these alternatives to private MI could reduce or eliminate the need for our products, could cause us to lose business and/or
could limit our ability to attract the business that we would prefer to insure.
Beginning in 2008, the public MIs, principally the FHA and VA, significantly expanded their role in the MI market as
incumbent private mortgage insurers came under significant financial stress. While declining from peak market share following
the most recent financial crisis, the market share of the public MIs remains substantially above their historically low market share
prior to 2008. Government mortgage insurance programs are not subject to the same capital requirements, costs of capital, risk
tolerance or business objectives that we and other private mortgage insurers are, and therefore, generally have greater financial
flexibility in setting their pricing, guidelines and capacity, which could put us at a competitive disadvantage. Although there has
been broad policy consensus toward the need for private capital to play a larger role and government credit risk to be reduced in
the U.S. housing finance system, it remains difficult to predict whether the combined market share of the public MIs will recede
to historical levels. These agencies may continue to maintain a strong combined market position and could increase their market
share in the future.
Factors that could cause government-supported mortgage insurance programs to remain significant include:
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•
•
•
•
•
•
•
federal housing policy, including future premium reductions or loosening of underwriting guidelines;
increases in premium rates or tightening of underwriting guidelines by private mortgage insurers;
capital constraints in the private MI industry;
increase in capital requirements imposed on private mortgage insurers by the GSEs or states;
continuation of increases to or imposition of new GSE loan delivery fees on loans that require MI, which may result
in higher borrower costs for MI loans compared to loans insured by public MIs;
loans insured under federal government-supported mortgage insurance programs are eligible for securitization in
Ginnie Mae securities, which may be viewed by investors as more desirable than GSE securities due to the explicit
backing of Ginnie Mae securities by the full faith and credit of the U.S. federal government;
difference in the spread between GSE mortgage-backed securities and Ginnie Mae mortgage-backed securities;
increase in public MIs' loan limits above GSE loan limits; and
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•
perceived operational ease of using insurance from public MIs compared to private MI.
If the public MIs maintain or increase their share of the mortgage insurance market, our business and industry could be negatively
affected.
Further, at the direction of the FHFA, the GSEs have expanded their credit risk transfer programs. These programs have
included the use of structured finance vehicles, obtaining insurance from non-mortgage insurers, including off-shore reinsurance,
engaging in credit-linked note transactions in the capital markets, or using other forms of debt issuances or securitizations that
transfer credit risk directly to other investors. The growing success of these programs and the perception that some of these risk-
sharing structures have beneficial features in comparison to private MI (e.g., lower costs, reduced counter-party risk due to
collateral requirements or more diversified insurance exposures) may create increased competition for private MI on loans
traditionally sold to the GSEs with private MI.
The degree to which lenders or borrowers may select these alternatives now, or in the future, is difficult to predict. As
one or more of the alternatives described above, or new alternatives that enter the market, are chosen over MI, our revenues could
be adversely impacted. The loss of business in general or the specific loss of more profitable business could have a material
adverse effect on our financial position and operating results.
If we are unable to continue to attract and retain the most significant mortgage originators as customers, our ability to achieve
our business goals could be negatively impacted.
The success of our mortgage insurance business is highly dependent on our ability to attract and retain as customers the
most significant mortgage lenders in the U.S., as determined by the combined volume of their own retail originations and insured
business they may acquire from other originators through their correspondent channels. We believe these mortgage lenders are
critical to the achievement of our business goals because of their dominant market share. As a result of their size and market
share, these entities originate a significant majority of high-LTV mortgages in the U.S. and, therefore, influence the size of the MI
market. We are currently doing business with a majority of these lenders. However, there is no assurance we will receive
approvals from each of the remaining lenders to transact MI business with them. If we are unable to maintain our approved status
with one or more of these mortgage lenders, our business, financial condition and operating results could be adversely impacted.
Even if these lenders become our customers, we cannot be certain that any loss of business from one would be replaced
from other new or existing lender customers. Such lenders may decide to write business only with certain mortgage insurers
based on their views with respect to an insurer's pricing, service levels, underwriting guidelines, servicing and loss mitigation
practices, financial strength or other factors. Our customers may choose to diversify the mortgage insurers with which they do
business, which could negatively affect our level of NIW and our market share. In addition, our Master Policy does not, and by
law cannot, require our customers to do business with us. In 2017, premiums earned from one significant customer exceeded
10% of our consolidated revenues. Loss of business from significant customers, if not offset by additional business from other
customers, could have an adverse effect on the amount of new business we are able to write, and consequently, our financial
condition and operating results.
If the volume of high-LTV loan originations declines, the amount of insurance that we may be able to write could decline,
which would reduce our revenues.
Our revenues, in part, depend on the volume of high-LTV loan originations and may be negatively affected if the volume
declines. The factors that affect the volume of high-LTV loan originations include, among other things:
• restrictions on mortgage credit due to more stringent underwriting standards, more restrictive regulatory and capital
requirements and liquidity issues affecting lenders;
• the level of loan interest rates. Higher interest rates may increase the potential housing costs of consumers hoping to
purchase homes, which may have the effect of reducing the pool of potential borrowers available to purchase homes;
• deductibility of mortgage interest or other changes in tax policy, including the recently enacted Tax Cuts and Jobs
Act of 2017, that may have an effect on the residential housing market;
• the health of the real estate industry and the national economy as well as conditions in regional and local economies;
• housing affordability;
• population trends, including the rate of household formation, preferences of potential mortgage borrowers and
cultural shifts;
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• the rate of home price appreciation, which in times of heavy refinancing can affect whether refinance loans have
LTVs that require MI;
• U.S. government housing policy encouraging loans to first-time homebuyers; and
• the extent to which the GSEs' guaranty and other fees, credit underwriting guidelines and other business terms affect
lenders' willingness to extend credit for high-LTV mortgages.
A decline in the volume of high-LTV loan originations could decrease demand for MI, decrease our NIW and therefore
reduce our revenues and have an adverse effect on our operating results.
Our underwriting and risk management policies and practices may not anticipate all risks and/or the magnitude of potential
for loss as the result of unforeseen risks.
We have established underwriting, credit and risk management policies and practices that seek to mitigate our exposure
to borrower default risk in our insured loan portfolio by anticipating future risks and the magnitude of those risks. Our
underwriting and risk management guidelines are based on what we believe to be the major factors that influence the performance
of mortgage credit. Those factors include, among others, the borrower's credit strength, the loan product, origination practices of
lenders, the percentage coverage and size of insured loans and the condition of the economy. In addition, there are certain types
of loan characteristics relating to the individual loan or borrower that affect the risk potential for a loan, including its LTV,
purpose and terms and the credit profile of the borrower, including FICO and higher DTIs. The presence of multiple higher-risk
characteristics in a loan materially increases the likelihood of a default on such a loan unless, and to the extent, there are other
characteristics to mitigate the risk.
The frequency and severity of claims we incur is uncertain and depends largely on general economic conditions,
including unemployment and interest rates and trends in home prices. To the extent that a risk is unforeseen or is underestimated
in terms of frequency and/or severity of loss, our underwriting and risk management policies and practices may not completely
insulate us from the effects of those risks. If these policies and practices do not correctly anticipate risk or the potential for loss,
we may underwrite business for which we have not charged premium commensurate with the risk, which could result in material
adverse effects on our business, financial condition and operating results.
A downturn in the U.S. economy, rising interest rates or home price depreciation may result in increased, unexpected borrower
defaults, which could increase our losses.
Losses result from events that reduce a borrower's ability or willingness to continue to make mortgage payments, such as
unemployment, rising interest rates and whether a defaulting borrower can sell the home for an amount that will cover unpaid
principal and interest and the expenses of the sale. Deterioration in economic conditions, across the U.S. or in specific regional
economies, generally increases the likelihood that some borrowers will not have sufficient income to pay their mortgages. An
increase in interest rates typically leads to higher monthly payments for borrowers with existing ARMs. A decline in home values
typically makes it more difficult for borrowers to sell or refinance their homes, generally increasing the likelihood of a default
followed by a claim if borrowers experience job losses or other life events which reduce their incomes or increase their expenses.
In addition, adverse declines in home values may also decrease the willingness of borrowers with sufficient resources to make
mortgage payments when their mortgage balances exceed the values of their homes. Declines in home values typically increase
the severity of any claims we may pay. Home values may decline even absent deterioration in economic conditions due to
declines in demand for homes, which in turn may result from changes in buyers' perceptions of the potential for future
appreciation, rising interest rates or restrictions on mortgage credit due to more stringent underwriting standards, among other
factors.
Losses can increase when borrowers whose loans we insure experience reductions in income or increases in expenses.
Borrowers on high-LTV mortgages often have more difficulty weathering financial hardships caused by unemployment or income
reductions, or life events involving illness, death or divorce, because they may not have large amounts of personal savings or
available credit. Rising unemployment may increase the number of borrowers unable to remain current on their home mortgages
and may increase the number of new claims.
A significant downturn in economic conditions or an extended period of flat or declining housing values could result in
increased losses. Although the single-family housing market has shown improvement since the most recent financial crisis, the
future is not certain and may be affected by weakness or volatility in the U.S. economy, including any impacts arising out of
global market effects from international sources.
If our loss projections are inaccurate, our loss payments could materially exceed our recorded loss reserves resulting in
an adverse effect on our financial position and operating results. Also, if unemployment rates materially exceed and home price
27
trends materially differ from our forecasts, our underwriting standards and premium charges may prove inadequate to shield us
from materially increased losses.
Our IIF may be concentrated in specific geographic regions and could make our business highly susceptible to downturns in
local economies, which could be detrimental to our financial condition.
We seek to diversify our insured loan portfolio geographically; however, the availability of business might lead to
concentrations in specific regions in the U.S., which could make our business more susceptible to economic downturns in these
regions. Our IIF and RIF is currently more heavily concentrated in California than other states, 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.
Certain regions of the U.S. from time to time will experience weaker economic conditions, higher unemployment, lower property
values or weaker housing markets and, consequently, will experience higher rates of default, foreclosure and loss than on loans
nationally.
Any deterioration in housing prices in the regions in which there is a significant concentration of IIF and RIF and any
deterioration of economic conditions in such regions which adversely affects the ability of borrowers to make payments on their
insured loans may increase the likelihood and severity of our losses. In addition, other factors such as excessive building
resulting in an oversupply of housing in a particular area or a decrease in employment reducing the demand for housing in an area
may cause an oversupply of homes available for sale and result in unexpected losses. Any such deteriorations in local or national
economic conditions in the mortgage market and other economic conditions could have a material adverse effect on our operating
results and financial position.
The premiums we charge may not be sufficient to cover claim payments and our operating costs.
Our mortgage insurance premiums may not be adequate to cover future claim payments. We set premiums at the time a
policy is issued based on our expectations regarding likely performance over the term of the policy. Our premium rates are
developed based on expectations that may ultimately prove to be inaccurate. Our premiums are subject to approval by state
insurance regulators, which can delay or limit our ability to increase our premiums. Generally, we will not be able to cancel the
MI coverage or adjust renewal premiums during the life of an MI policy to mitigate adverse development. As a result, higher than
anticipated claims generally will not be able to be offset by premium increases on policies in force or mitigated by our non-
renewal or cancellation of insurance coverage. While we believe our initial capital, premiums and investment earnings will
provide a pool of resources sufficient to cover expected loss payments and have made estimates regarding loss payments and
potential claims, the ultimate number and magnitude of claims we experience cannot be predicted with certainty and the actual
premiums (along with investment earnings) may not be sufficient to cover losses and/or our operating costs. An increase in the
number or size of claims, compared to what we anticipate, could adversely affect our operating results or financial condition. We
may not be able to achieve the results that we expect, and there can be no assurance that losses will not exceed our total resources.
Changes in interest rates, house prices or mortgage insurance cancellation requirements may change the length of time that
our policies remain in force and impact future earnings.
The premium from a single premium policy is collected up front and generally earned over the estimated life of the
policy. In contrast, premiums from a monthly premium policy are received and earned each month over the life of the policy.
Each year, most of our premiums will be from insurance that has been written in prior years. As a result, the length of time
insurance remains in force, which is also generally referred to as persistency, is a significant determinant of our future revenues. A
lower level of persistency could reduce our future revenues from our monthly-paid premium products, which constituted about
69% of our primary IIF at year end 2017. In contrast, a higher than expected persistency rate will decrease the profitability from
single premium policies because they will remain in force longer than was estimated when the policies were written.
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The factors affecting persistency include:
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•
•
•
the level of current mortgage interest rates compared to the mortgage rates on the IIF, which affects the sensitivity of
the IIF to refinancings (i.e., lower current interest rates make it more attractive for borrowers to refinance and
receive a lower interest rate);
amount of equity in a home, as homeowners with more equity in their homes can more readily move to a new
residence or refinance their existing mortgage;
changes in rates of home price appreciation or depreciation;
economic conditions that affect a borrower's decision to pay-off a mortgage earlier than required;
lenders' credit policies, which may make it more difficult for borrowers to refinance their loans;
efforts of lenders to solicit borrower refinancing; and
cancellation of BPMI mandated by the HOPA, and mortgage insurance cancellation policies of mortgage investors,
along with the current value of the homes underlying the mortgages in the IIF.
Mortgage interest rates have remained historically low, but have been increasing and are likely to continue to rise as a
result of expected future changes in monetary policy by the Federal Reserve. Future premiums on our IIF represent a material
portion of our claims paying resources. We are unsure what the impact on our revenues will be as mortgages are refinanced,
because the number of policies we write for replacement mortgages may be more or less than the terminated policies associated
with the refinanced mortgages. Given this dynamic, our expected revenues from monthly premium policies in particular might be
negatively impacted if there is a higher than expected level of refinance activity in the future. In addition, if interest rates rise,
persistency is likely to increase, which may extend the average life of our insured portfolio and increase expected future claims,
particularly for LPMI policies that are non-cancellable.
We are outsourcing the underwriting of our mortgage insurance on certain loans to third-party underwriting service providers
(USPs). If these USPs fail to adequately perform their underwriting services or place our coverage on loans we would deem
ineligible, we could experience increased claims on loans underwritten by them and our customer relationships could be
negatively impacted.
If our USPs fail to adequately perform their underwriting services, such as mishandling of customer inquiries or an
inability to underwrite a sufficient volume of applications per day, we may lose opportunities to place mortgage insurance
coverage on particular loans, our reputation may suffer and customers may choose not to do business with us. In addition, if our
USPs place our MI coverage on loans that are ineligible for coverage under our underwriting guidelines, our risk of claims will be
increased on those loans or the premiums we charge will be inadequate given the risk presented. We do not have the right under
our Master Policy to cancel coverage of an ineligible loan as a result of a USP making an incorrect decision. Further, other than
being able to terminate our contracts with these USPs, we generally do not have express loan-level monetary contractual remedies
against these USPs if we are obligated to pay claims on ineligible loans that they improperly agreed to insure on our behalf. If
these USPs fail to adequately perform their underwriting services or consistently place coverage on ineligible loans, we could
experience increased claims on loans underwritten by them and our customer relationships could be negatively impacted, which
would have an adverse impact on our business, financial condition and operating results.
Our Master Policy contains restrictions on our ability to rescind coverage for certain material misrepresentations (including
fraud) and underwriting defects, and if we were to fail to timely discover any such misrepresentations or underwriting defects,
our rights of rescission would be significantly limited, and we could suffer increased losses as a result of paying claims on
loans with unacceptable risk characteristics.
Under our Master Policy's current rescission relief provisions, we agree that we will not rescind or cancel coverage of an
insured loan for material borrower misrepresentation (including fraud) or underwriting defects after a borrower timely makes a
certain number of payments (either 12 or 36, as applicable), as specified in our Master Policy. In addition, once the borrower has
made the requisite number of payments, we have agreed to limitations on our ability to initiate an investigation of fraud or
misrepresentation by our insureds or any First Party involved in the origination of an insured loan. Twelve-month rescission relief
on an insured loan is generally subject to our successful completion of an independent validation on such loan. If we are unable
to perform an independent validation on an insured loan, such loan may qualify for rescission relief after a borrower timely makes
36 consecutive monthly payments. The current processes we have in place to review insured loans may be ineffective in detecting
material misrepresentations and/or underwriting defects prior to a borrower making the requisite number of payments. After a
loan meets the conditions for rescission relief, we are contractually prohibited from exercising our rights of rescission for
borrower misrepresentation (including fraud) and certain First Party misrepresentations and our rights to investigate potential First
29
Party fraud or misrepresentation are significantly curtailed. In addition, after we amend our Master Policy to comply with the
new RRPs (discussed above in Item 1, "Business - Underwriting - Independent Validation and Rescission Relief"), our rescission
rights will be more limited than they are now. With these provisions in place, we may be obligated to pay claims on certain loans
with unacceptable risk characteristics or which failed to meet our underwriting guidelines at the time of origination. As a result,
we could suffer unexpected losses, which could adversely impact our business, financial condition and operating results.
The mix of business we write affects our revenue stream and the likelihood of losses occurring.
Even when housing values are stable or rising, mortgages with certain characteristics have higher probabilities of claims.
These characteristics include loans with LTVs over 95% (or in certain markets that have experienced declining housing values,
over 90%), lower credit scores, with lower scores tending to have higher probabilities of claims, or higher total DTI ratios (i.e.,
DTIs greater than 45%). Loans with high LTVs leave the borrower with little, no or negative-equity in the related property, which
may result in increased defaults by such borrowers. In addition, reductions in the values of such properties securing our insured
loans may increase the likelihood of default, and consequently the frequency or severity of losses. Loans with combinations of
these risk factors have a higher degree of layered risk. In general, we charge higher premiums for loans with higher risk
characteristics; however, our current pricing may not address certain risk characteristics. Even with the risk-based pricing
framework we have in place, there is no guarantee that our premiums will compensate us for the losses we incur on loans with
higher risk characteristics. From time to time, in response to market conditions, we may change the types of loans that we insure
and the guidelines under which we insure them, and in doing so, the concentration of insured loans with higher risk characteristics
in our portfolio may increase. In addition, we may make exceptions to our underwriting guidelines on a loan-by-loan basis and
for certain customer programs. Even though underwriting that falls outside of our guidelines would be on a case-by-case basis,
we could incur greater than expected claims and claim payments on this business, which could negatively impact our revenues
and operating results.
We expect our claims to increase as our portfolio grows and matures.
We believe, based on our experience and industry data, that claims incidence for mortgage insurance is generally highest
in the third through sixth years after loan origination. Historically, the first two to three years after loans are originated are a
period of relatively low claims, with claims increasing substantially for several years thereafter and then declining. Factors, such
as persistency of the book and the condition of the economy, including unemployment and housing prices can affect this pattern.
We began writing mortgage insurance coverage in 2013. Although our claims experience to date has been as expected, we
anticipate incurred losses and claims to increase as our earlier book years reach their anticipated period of highest claim frequency
and as we begin to layer on additional book years of coverage.
The actual default rate and the average loss per default that we experience as our portfolio matures is difficult to predict
and is dependent on the specific characteristics of our current in-force book, as well as the profile of business we write in the
future. Our default experience and claims incurred are generally affected by:
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future macroeconomic factors, including unemployment, which affects the likelihood that borrowers may default on
their loans, and rising interest rates, which tend to increase persistency, thereby extending the average life of our insured
portfolio and increasing expected future claims;
changes in housing values, as such changes may affect loss mitigation opportunities 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 their
mortgage balances;
•
borrowers' FICO scores, with lower FICO scores tending to have higher probabilities of claims;
• LTV ratios, with higher average LTV ratios tending to increase claims incurred;
• DTI ratios, with higher DTIs generally tending to increase claims incurred;
•
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•
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•
the size of loans insured, with higher average loan amounts tending to increase claims incurred;
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;
other borrower and loan level risk characteristics, such as cash-out refinancings, second homes or investment properties
the rate at which we rescind policies, which we expect to be lower for us than recent rescission rates experienced by
the private MI industry due to the terms of our Master Policy and generally tighter underwriting standard; and
the distribution of claims over the life of a book year, as described above.
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Incurred losses and claims may exceed our expectations in the event of general economic weakness or decreases in
housing values. An increase in the number or size of claims, compared to what we anticipate, could adversely affect our operating
results or financial condition.
If servicers fail to adhere to appropriate servicing standards or experience disruptions to their businesses, our claims could
unexpectedly increase.
We depend on reliable, consistent third-party servicing of the loans that we insure. Among other things, our Master
Policy requires our insureds and their servicers to timely submit premium and monthly IIF and default reports and use
commercially reasonable efforts to limit and mitigate loss when a loan is in default. If these servicers fail to adhere to such
servicing standards and fail to limit and mitigate loss when appropriate, our losses may unexpectedly increase. In addition, if one
or more servicers were to experience adverse effects to its business, such servicers could experience delays in their reporting and
premium payment requirements, which could result in our inability to correctly record new loans as they are underwritten, receive
and process premium payments on insured loans and/or properly recognize and establish loss reserves on loans when defaults
exist or occur but are not reported to us. Significant failures by large servicers or disruptions in the servicing of mortgage loans
we insure would adversely impact our business, financial condition and operating results.
Furthermore, we have delegated the authority to implement certain loss mitigation options on loans we insure (e.g.,
modifications, short sales and deeds-in-lieu) to the GSEs, who have in turn delegated such authority to most of their approved
servicers, pursuant to the delegation agreements. Servicers who service GSE-owned loans are required to operate under the
GSEs' required standards in accepting certain loss mitigation alternatives. We are dependent on these servicers to appropriately
make these decisions under their delegated authority to mitigate our exposure to loss. In some cases, loss mitigation decisions
favorable to the GSEs may not be favorable to us and may increase the incidence of paid claims. Inappropriate delegation
procedures or failure of servicers to adhere to required standards may increase the magnitude of our losses and have an adverse
effect on our business, financial condition and operating results. Our delegation of loss management decisions to the GSEs is
subject to cancellation; however, exercise of these rights may have an adverse effect on our relationship with the GSEs and
servicers.
We establish claims reserves when we are notified that an insured loan is in default for at least 60 days, based on
management's estimate of claim rates and claim sizes, which are subject to uncertainties and are based on assumptions about
certain estimation parameters that may be volatile. As a result, the actual claim payments we make may materially exceed the
amount of our corresponding claims reserves.
Our practice, consistent with generally accepted accounting principles in the U.S. (GAAP) for the MI industry, is to
establish loss reserves only for loans that servicers have reported to us as being at least 60 days in default. We also establish
IBNR reserves for estimated losses incurred on loans that have been in default for at least 60 days that have not yet been reported
to us by the servicers.
The establishment of loss and IBNR reserves is subject to inherent uncertainty and requires significant judgment by
management. We establish loss reserves using our best estimates of claim rates, i.e., the percent of loan defaults that ultimately
result in claim payments, and claim amounts, i.e., the dollar amounts required to settle claims, to estimate the ultimate losses on
loans reported to us as being at least 60 days in default as of the end of each reporting period. We estimate IBNR by analyzing
historical lags in default reporting to determine a specific number of IBNR claims in each reporting period. Our estimates of
claim rates and claim sizes are strongly influenced by prevailing economic conditions, including current rates or trends in
unemployment, housing price appreciation and/or interest rates, and our best judgments as to the future values or trends of these
macroeconomic factors. These factors are outside of our control and difficult to predict. Further, our expectations regarding
future claims may change significantly over time. If prevailing economic conditions deteriorate suddenly and/or unexpectedly,
our estimates of loss reserves could be materially understated, which may adversely impact our financial condition and operating
results. Due to the inherent uncertainty and significant judgment involved in the numerous assumptions required to estimate our
losses, our loss estimates may vary widely. Because loss and IBNR reserves are based on such estimates and judgments, there can
be no assurance that even in a stable economic environment, actual claims paid by us will not be substantially different than our
loss and IBNR reserves for such claims. Our business, operating results and financial condition will be adversely impacted if, and
to the extent, our actual losses are greater than our loss and IBNR reserves.
Further, consistent with industry practice, our reserving method does not take account of losses that could occur from
insured loans that are not in default. Thus, future potential losses that may develop from loans not currently in default are not
reflected in our financial statements, except in the case where we are required to establish a premium deficiency reserve. As a
result, future losses on loans that are not currently in default may have a material impact on future results if, and when, such
losses emerge.
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The occurrence of natural or man-made disasters or a pandemic could adversely affect our business, financial condition and
operating results.
We are exposed to various risks arising out of natural disasters, including earthquakes, wildfires, hurricanes, floods and
tornadoes and man-made disasters, including acts of terrorism, military actions and pandemics. For example, a natural or man-
made disaster or a pandemic could lead to unexpected changes in persistency rates as policyholders, contract-holders and
borrowers who are affected by the disaster may be unable to meet their contractual obligations, such as payment of premiums on
our insurance policies, interest payments due on our invested assets and mortgage payments on loans we insure. The continued
threat of terrorism may cause significant volatility in global financial markets, and a natural or man-made disaster or a pandemic
could trigger an economic downturn in the areas directly or indirectly affected by the disaster. These consequences could, among
other things, result in a decline in business and increased claims from those areas, as well as an adverse effect on home prices in
those areas, which could result in unexpected increased loss experience in our business. Disasters or a pandemic also could
disrupt public and private infrastructure, including communications and financial services, which could disrupt our normal
business operations. In addition, a disaster or a pandemic could adversely affect the value of the assets in our investment portfolio
if it affects companies' ability to pay us principal or interest on their securities.
We insure mortgages for homes in areas that have been impacted by recent natural disasters, including hurricanes Harvey
and Irma and the California wildfires. We have experienced an increase in NODs related to homes in areas declared by FEMA to
be disaster zones following the aforementioned natural disasters, which has negatively impacted our incurred losses. Our ultimate
claims exposure will depend on the number of NODs ultimately received, proximate cause of each default and cure rate of the
NOD population. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and other hazard
insurance carried on a related property, GSE-sponsored forbearance and other assistance programs, and a borrower's access to aid
from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected
areas. We anticipate that the population of loans in default in these FEMA disaster zones will cure at a higher rate than the
estimated rate we apply to non-disaster related loans in default, due to our master policy coverage terms, historical industry
experience, and current economic indicators and relief programs. As such, we have established lower reserves for these NODs
than we otherwise do for similarly situated NODs in non-disaster zones. Due to the inherent uncertainty and significant judgment
involved in our assumptions, our loss estimates may turn out to be materially inaccurate and we can provide no assurance that
actual claims paid by us, if any, on NODs in disaster zones will not be substantially different than the reserves we have
established for such claims.
We may be required to establish a premium deficiency reserve if the net present value of our premiums and reserves is less
than the net present value of our loss payments and expenses.
In addition to establishing loss reserves for loans in default, under GAAP, we are required to establish a premium
deficiency reserve for our mortgage insurance products 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 evaluate whether a premium deficiency exists at the end of each fiscal quarter.
Our evaluation of premium deficiency is based on our best estimates of the present value of future losses, expenses and
premiums. This evaluation depends upon many significant assumptions, including assumptions regarding future macroeconomic
conditions, and therefore, is inherently uncertain and may prove to be inaccurate. There can be no assurance that premium
deficiency reserves will not be required in future periods. In addition, even if we were required to establish a premium deficiency
reserve, there can be no assurance that it will be adequate.
We are exposed to certain risks associated with our third-party reinsurance transactions, including the possibility that our
reinsurers will fail to perform their obligations or that we will lose the capital credit we expected to receive when we entered
into the transactions as a result of future GSE or Wisconsin OCI action or if any of our reinsurers experiences a downgrade
or other adverse business event.
To actively manage our risk, ensure PMIERs compliance and support the growth of our business, we utilize third-party
reinsurance, including the 2016 QSR Transaction and the 2018 QSR Transaction (collectively, the QSR Transactions) and the
2017 ILN Transaction. There is a risk that these transactions will not continue to provide the benefits we expected when we
entered into them, including as a result of our counter-parties under the QSR Transactions (which are not fully collateralized like
the 2017 ILN Transaction) not performing their obligations, the GSEs or the Wisconsin OCI not continuing to give us full capital
credit as anticipated for the duration of the contracts, or if one or more reinsurers under the QSR Transactions experiences a
downgrade or other adverse business event. Any of these events could have negative impacts on the credit for the risk transferred
under the reinsurance agreements and, in turn, on our capital needs, PMIERs position and growth potential.
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Reinsurance does not relieve us of our direct liability to our insureds to pay claims, even when there are reinsurance
recoverables available to us under the QSR Transactions. Accordingly, we bear credit risk with respect to such reinsurers. To
mitigate this risk, there are certain contractual protections that establish sources from which we may directly obtain our
reinsurance recoverables under the QSR Transactions. The 2017 ILN Transaction is fully collateralized with funds deposited into
a trust account to secure the obligations of the reinsurer to NMIC under the reinsurance agreement. See Part II, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance," below. To the extent
the amounts in the QSR trust accounts are insufficient to cover loss recoveries and other amounts to which we are entitled under
the QSR Transactions, we would attempt to recover such amounts directly from the reinsurers. One or more reinsurers may be
unable or unwilling to pay reinsurance recoverables owed to us in the future, which could have an adverse effect on our financial
condition.
If any reinsurer under the QSR Transactions experiences a ratings downgrade, the related reinsurance agreements
obligate any such reinsurer, consistent with PMIERs requirements, to increase collateral in the related trust account. If the
reinsurer breaches its collateral obligations, and fails to cure after notice, we may terminate the agreement with respect to such
reinsurer. The QSR Transactions also give us the right to terminate the agreements in certain other circumstances, including,
among other reasons, if a reinsurer becomes insolvent, has its license revoked or reinsures its entire liability under the relevant
QSR Transaction with another entity. If we experience an early termination, we would be required to re-assume the risk ceded to
the breaching reinsurer and the PMIERs and statutory capital credit we received when we entered into the agreement would be
reversed. Depending on the timing and severity, such an event could have a material adverse effect on our financial condition,
growth potential and future capital needs.
In addition, the GSEs and the Wisconsin OCI have the right periodically to review performance under our third party
reinsurance transactions, including the reinsurers' financial strength and other factors the GSEs and Wisconsin OCI may believe
are important to an evaluation of the transactions, which factors may be unknown to us. As a result of such reviews, the GSEs or
the Wisconsin OCI could withdraw their approvals or continue their approvals, but grant less than full capital credit. If we do not
continue to receive full capital credit in connection with these transactions, we would likely need to seek other sources of capital
or reductions in RIF sooner than we would have expected with full capital credit under PMIERs and state insurance laws. Future
sources of capital will depend on the cost, availability and terms and conditions that are acceptable to us, our regulators and the
GSEs. We cannot be sure that we will be able to secure other sources of capital or substitute reductions in RIF in the amounts we
require and on favorable terms, if at all.
If we are unsuccessful in our efforts to attract, train and retain qualified personnel, our business may be adversely affected.
We believe that our success depends in large part on the relationships, services and skills of our management team and
our ability to motivate, develop and retain these individuals and other key personnel, which includes members of our Finance,
Sales, Law, Risk, Insurance Operations and IT departments. We intend to pay competitive salaries, bonuses and equity-based
rewards to attract and retain such personnel, but there can be no assurance that we will be successful in such endeavors. The
unexpected loss of key personnel, or the inability to recruit, develop and retain qualified personnel in the future, could have an
adverse effect on our business, financial condition or operating results.
We face risks in connection with managing our growth, which will depend on maintaining and enhancing effective operating
procedures and internal controls.
As a recently formed mortgage insurance company, we have experienced significant growth since our formation. Our
future operating results depend to a large extent on our ability to successfully manage our growth. Our growth has placed, and it
may continue to place, significant demands on our operations and management. Our current plan depends on our ability to:
•
•
•
continue to implement and improve our operational, credit, financial, management and other disclosure and internal risk
controls and processes and our reporting systems and procedures to manage a growing number of client relationships;
scale our technology platform; and
attract and retain management talent.
We may not successfully implement improvements to, or integrate, our management information and control systems,
procedures and processes in an efficient or timely manner and may discover deficiencies in existing systems and controls. In
particular, our controls and procedures must be able to accommodate an increase in loan volume in various markets and the
infrastructure that comes with new customers. If we are unable to manage future expansion in our operations, we may experience
compliance and operational problems, be required to slow the pace of growth, or have to incur additional expenditures beyond
current projections to support such growth, any one of which could have an adverse effect on our business, financial condition or
operating results.
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Our management does not expect that our disclosure and internal risk controls and processes will prevent all potential
errors and fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. For example, in 2017, as a result of the existence of a material
weakness in the design and operating effectiveness of an internal control related to reconciliation support used to validate our
deferred tax inventory, we reported that our disclosure controls and procedures were not effective at that time. We enhanced
existing controls and designed and implemented new controls applicable to our deferred tax accounting, including those related to
stock compensation, to ensure that our DTA is accurately calculated and appropriately reflected in our financial statements and
reports we file with the SEC. The actions we took remediated the identified material weakness and strengthened our internal
control over financial reporting; however, there can be no guarantee that we will not experience flaws in our internal controls and
procedures in the future.
As a result of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within the company have been detected. The design of any system of controls also
is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future conditions. If our controls are not effective or not properly
implemented, we could suffer financial or other loss, disruption of our business, regulatory sanctions or damage to our reputation.
Losses resulting from these failures can vary significantly in size, scope and scale and may have a material adverse effect on our
business, financial condition and operating results.
We are exposed to operational risk from fraud, malfeasance or error by employees and third-party service providers, and any
such fraud, malfeasance or error could materially and adversely affect us.
We are exposed to many types of operational risk, including the risk of fraud or malfeasance by employees and outsiders,
including third-party service providers, clerical record-keeping errors and transactional errors. Our business depends on our
employees as well as third parties to process a large number of transactions. We could be materially and adversely affected if one
of our employees or one of our systems causes a significant operational breakdown or failure, either as a result of human error or
where an individual purposefully sabotages or fraudulently manipulates our operations or systems. Third parties with which we
do business also could be sources of operational risk to us, including breakdowns or failures of such parties' own systems or
employees. Any of these occurrences could result in a diminished ability to operate our business, potential liability to customers,
reputational damage and regulatory intervention, which could result in a material adverse effect on our financial position and
operating results.
If we do not maintain connectivity with or otherwise meet the technological demands of our customers or are unable to
develop, enhance and maintain our proprietary technology platform with respect to the products and services we offer, our
business and financial performance could be adversely affected.
We primarily rely on e-commerce and other technologies to provide and distribute our products and services. Customers
require us to provide and service our MI products in a secure manner, either electronically via our internet website or through
direct electronic data transmissions. Accordingly, we invest resources in establishing and maintaining electronic connectivity
with customers and, more generally, in e-commerce and technological advancements. Further, customers may choose to do
business only with mortgage insurers with which they are technologically compatible and may choose to retain existing MI
providers rather than invest the time and resources to integrate with a new provider. Our business, financial condition and
operating results may be adversely impacted if we do not successfully establish and maintain these arrangements or otherwise
keep pace with the technological demands of customers.
We have developed a proprietary enterprise technology platform designed to support our operations. The success of our
business depends on our ability to resolve any issues identified with our technology platform during operations and to make
timely improvements. Further, we will need to match or exceed the technological capabilities of our competitors over time.
There is no assurance that we will not experience significant difficulties with the operation of our technology platform. If our
technology platform fails to perform in the manner we expect, our business, financial condition and operating results will be
significantly harmed.
Further, our business would be negatively impacted if we are unable to timely and effectively enhance our platform when
necessary to support our primary business functions. We cannot predict with certainty the cost of such maintenance and
improvements, but failure to make such improvements and any significant shortfall in any technology enhancements or negative
variance in the time-line in which system enhancements are delivered could have an adverse effect on our business, financial
condition and operating results.
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We are dependent on our information technology and telecommunications systems and the third-parties who provide such
systems, and termination of our third-party contracts or systems failures and interruptions could have a material adverse effect
on us.
Our business is highly dependent on the successful and uninterrupted functioning of our information technology and
telecommunications systems and on adequate performance of our third-party service providers. We outsource many of our major
information technology functions, including for the development and operation of our enterprise technology platform, data center
hosting and management, email and collaboration and human resource systems. We also outsource certain of our underwriting
functions to third party service providers. The failure of any of these third parties to perform and/or deliver on a timely basis, or
the failure of these systems, either individually or collectively, or the termination of a third-party software license or service
agreement on which any of our systems is based, combined with our inability to find acceptable replacement arrangements, could
interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third
parties, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or
experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to
operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny
and possible financial liability, any of which could have an adverse effect on our business, financial condition and operating
results.
A failure in or breach of our operational or security systems or infrastructure, or those of third parties with which we do
business, including as a result of cyber-attacks, could disrupt our business, result in the disclosure or misuse of confidential or
proprietary information, damage our reputation, increase our costs and cause losses.
Our business is highly dependent upon the effective operation of our information technology systems, which process,
transmit, store and protect large amounts of personal information of the borrowers whose mortgages we insure, in addition to the
confidential, proprietary, financial and other information that are critical to our business. Furthermore, a significant portion of the
communications between our employees and our customers and service providers depends on information technology and
electronic information exchange. The security of our computer systems and networks, and those functions that we may outsource,
are vulnerable to unauthorized access, interruptions or failures due to events that may be beyond our control, including, but not
limited to, cyber-attacks, natural disasters, theft, terrorist attacks, computer viruses, and general technology failures. Additionally,
our employees and vendors may use portable computers or mobile devices which can be stolen, lost or damaged. We have
adopted information security procedures and controls to safeguard our systems and the information that we process, transmit and
store. Despite these efforts, we may not be able to anticipate or to implement effective preventive measures against all cyber
threats, or detect and contain a breach in a timely manner, including because employees may not follow the controls we have
implemented, the techniques used change frequently or are not recognized until launched, and because security attacks can
originate from a wide variety of sources. Our employees, customers or other users of our systems may also be subject to
fraudulent inducement to disclose sensitive information to parties attempting to gain access to our data or that of our customers.
There is no assurance that our information security policies and systems in place can prevent unauthorized use or disclosure of
confidential information, including nonpublic personal information. Any compromise of the security of our information
technology systems may result in loss of personally identifiable information, financial losses, loss of customers and the inability
to transact business; could be costly and time-consuming to address and resolve; could expose us to liability for damages, harm
our reputation, subject us to regulatory scrutiny and/or expose us to civil litigation. If any of these were to occur, our business,
financial condition and operating results could be adversely affected. Further, the technology errors and omissions insurance
coverage we maintain may be inadequate to cover claims and/or costs associated with incidents that may occur in the future.
Adverse investment performance may affect our financial results and ability to conduct business.
Our investment portfolio consists primarily of highly-rated debt obligations. Our investments are subject to market-wide
risks and fluctuations, as well as to risks inherent in particular securities. Changes in interest rates and other market conditions, as
well as credit events for particular issuers, could materially impact the future valuation of securities in our investment portfolio,
which may cause us to impair, in the future, some portion of those securities. These impairments could adversely impact our
liquidity, financial condition and operating results. In times of financial stress, the markets for some securities can become
illiquid, which would impair our ability to sell our securities for cash.
Income from our investment portfolio provides a source of revenue and cash flow to support our operations and claim
payments. If we improperly structure our investments to meet those future liabilities or have unexpected losses, including losses
resulting from the forced liquidation of investments before their maturity, we may be unable to meet those obligations. NMIC's
investments and investment policies are subject to state insurance laws, which results in our portfolio being predominantly limited
to highly rated fixed income securities. To date, our investment portfolio has been established at a time of historically low interest
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rates. If interest rates rise above the rates on our fixed income securities, the market value of our investment portfolio would
decrease. Any significant decrease in the value of our investment portfolio would adversely impact our financial condition.
We may be required or find it advisable to change our investments or investment policies depending upon regulatory,
economic and market conditions, or our existing or anticipated financial condition and operating requirements, including the tax
position, of our business. Our investment objectives may not be achieved. Although our portfolio consists mostly of highly-rated
investments and complies with applicable regulatory requirements, the success of our investment activity is affected by general
economic conditions, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent
and timing of investor participation in these markets, the level and volatility of interest rates and, consequently, the value of fixed
income securities.
We face risks associated with offering loan review services.
We provide loan review services for certain of our customers, including on loans for which we are not providing
mortgage insurance. Under the terms of our loan review agreements with customers and subject to contractual limitations on
liability, we provide these customers with limited indemnity rights if we make a material error in providing such services and the
error materially restricts or impairs the saleability of a loan, results in a material reduction in the value of a loan or results in the
customer being required to repurchase a loan. The indemnification may be in the form of monetary or other remedies, subject to
per loan and annual limitations. Accordingly, we have assumed some credit risk in connection with providing these services. We
also face regulatory and litigation risk in providing these services. See "The private MI industry is, and as a participant we will
be, subject to litigation and regulatory enforcement risk generally," below.
Risk Factors Relating to Regulation of the Mortgage Insurance Industry
There can be no assurance that the GSEs will continue to treat us as an Approved Insurer in the future, and our failure to
maintain compliance with the GSEs' PMIERs could adversely impact our business, financial condition and operating results.
NMIC is a GSE Approved Insurer, and the significant majority of insurance we write is on loans sold to the GSEs.
(Italicized terms have the same meaning that such terms have in the PMIERs, the GSE's eligibility requirements.) As a result, our
compliance with the PMIERs is necessary to maintain NMIC's status as an Approved Insurer. The PMIERs establish operational,
business, remedial and financial requirements applicable to Approved Insurers. By April 15th of each year, NMIC must certify it
met all PMIERs requirements as of December 31st of the prior year. NMIC also has an ongoing obligation to immediately notify
the GSEs in writing upon discovery of its failure to meet one or more of the PMIERs requirements. As of December 31, 2017,
NMIC had sufficient assets to meet the PMIERs financial requirements, and we expect to certify to the GSEs by April 15, 2018
that NMIC fully complied with the PMIERs as of December 31, 2017.
There can be no assurance, however, that NMIC will continue to comply with the PMIERs financial requirements. For
the reasons discussed in these Risk Factors and elsewhere in this report, NMIC's future results could be negatively impacted,
causing a reduction to revenues, an increase in losses, or requiring the use of assets, which could cause its available assets to fall
below the amount required under the PMIERs financial requirements. In addition, as NMIC continues to grow its business and
increase its net RIF, it is anticipated that NMIC's total risk-based required asset amount will increase more rapidly than its
available assets and that NMIC will need to raise additional capital or reduce its net RIF, including through the use of additional
reinsurance, to remain in compliance with the PMIERs financial requirements and to continue to support new business writings.
Any future growth capital may be in the form of debt, equity, or a combination of both. We can give no assurance that our efforts
to raise capital, obtain additional reinsurance or otherwise reduce our RIF would be successful. If we are unable to raise
additional capital, obtain additional reinsurance or enter into alternative arrangements to reduce our RIF, NMIC may not meet the
PMIERs financial requirements.
In addition, there is no assurance the GSEs will not make the PMIERs financial requirements more onerous in the future.
In particular, the PMIERs provide that the table of factors that determine minimum required assets will be updated every two
years or more frequently to reflect macroeconomic conditions, loan performance or to address other issues the GSEs deem
important. On December 18, 2017, the GSEs provided us with a confidential summary of the proposed changes to the PMIERs
financial, business and other requirements that they are developing with the FHFA. We have engaged in conversations with the
FHFA and the GSEs about the proposed changes and expect to continue to provide feedback to them in the coming months. Once
changes to the PMIERs requirements are finalized, we expect the industry will be afforded a six month implementation period and
currently anticipate that updated PMIERs requirements, if any, will take effect no sooner than the fourth quarter of 2018. If we
are required under the updated PMIERs to increase the amount of available assets to support our business writings, the amount of
capital NMIC is required to hold will increase, which may have a negative effect on our returns. Any such effect could have a
negative impact on our flexibility to meet our business plans and our future operating results. In addition, the GSEs may amend
or clarify the PMIERs at any time.
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Compliance with PMIERs requires us to seek the GSEs' prior approval before taking many actions, including
implementing new products or services or entering into reinsurance arrangements and inter-company agreements among others.
PMIERs' prior approval requirements could prohibit, materially modify or delay us in our intended course of action. Further, the
GSEs may modify or change their interpretation of terms they require us to include in our mortgage insurance policies for loans
purchased by them, requiring us to modify our terms of coverage or operational procedures to remain an Approved Insurer, and
such changes could have a material adverse impact on our financial position and operating results. Although not as likely, the
GSEs could, in their own discretion, require additional limitations and/or conditions on certain of our activities and practices that
are not currently in the PMIERs in order for us to remain an Approved Insurer. Additional requirements or conditions imposed by
the GSEs could limit our operating flexibility and the areas in which we may write new business.
If, in the future, NMIC fails to comply with the PMIERs, including the financial requirements, it may lose its Approved
Insurer status from one or both GSEs, or may have to enter into a remediation plan (with the approval of the GSEs), curtail its
business writings or cease transacting new business altogether. Any of these events would have a material adverse impact on our
financial condition and future business prospects.
Changes in the business practices of the GSEs, including a decision to decrease or discontinue the use of private MI, federal
legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.
The requirements and practices of the GSEs impact the operating results and financial performance of GSE-approved
private mortgage insurers. Changes in the charters or business practices of Freddie Mac or Fannie Mae could reduce the number
of mortgages they purchase that are insured by us and consequently diminish our franchise value. The GSEs could be directed to
make such changes by the FHFA, which was appointed as their conservator in September 2008 and has the authority to control
and direct the operations of the GSEs.
With the GSEs in a prolonged conservatorship, there has been ongoing debate over the future role and purpose of the
GSEs in the U.S. housing market. The U.S. Congress may legislate structural and other changes to the GSEs and the functioning
of the secondary mortgage market. Since 2011, there have been numerous legislative proposals intended to incrementally scale
back the GSEs (such as a statutory mandate for the GSEs to transfer mortgage credit risk to the private sector) or to completely
reform the housing finance system. Congress, however, has not enacted any legislation to date. The proposals vary greatly with
regard to the government's role in the housing market, and more specifically, with regard to the existence of an explicit or implicit
government guarantee. If any GSE reform legislation is enacted, it could impact the current role of private mortgage insurance as
credit enhancement, including its reduction or elimination, which would have an adverse effect on our revenue, operating results
or financial condition. As a result of these matters, it is uncertain what role private capital, including MI, will play in the domestic
residential housing finance system in the future or the impact of any such changes on our business. In addition, the timing of the
impact on our business is uncertain. Any changes to the charters or statutory authorities of the GSEs would require Congressional
action to implement. Passage and timing of any comprehensive GSE reform legislation or incremental change is uncertain and
could change through the legislative process, which could take time, making the actual impact on us and our industry difficult to
predict. With the current administration and Republican majority in Congress (including the resulting control of key committees
addressing GSE reform), there is a possibility for greater consensus, although much uncertainty remains regarding the details of
any reform as well as when it would be enacted or implemented. Any such changes that come to pass could have a significant
impact on our business.
In recent years, the FHFA has set goals for the GSEs to transfer significant portions of the GSEs' mortgage credit risk to
the private sector. To date, several credit risk transfer products have been created under the program. To the extent these credit
risk products evolve in a manner that displaces primary MI coverage, the amount of insurance we write may be reduced. It is
difficult to predict the impact of alternative credit risk transfer products, if any, that are developed to meet the goals established by
the FHFA.
NMIC is subject to state insurance department capital adequacy requirements, which if breached, could result in NMIC being
required to cease writing new business in such states.
NMIC's principal regulator is the Wisconsin OCI. Under applicable Wisconsin law, as well as that of 15 other states, a
mortgage insurer must maintain a minimum amount of statutory capital relative to its RIF in order for the mortgage insurer to
continue to write new business. While formulations of minimum capital may vary in each jurisdiction that has such a
requirement, the most common measure applied 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.
If our business grows faster (i.e., our RIF grows faster than expected) or is less profitable than expected (i.e., our revenues do not
generate the return we expect), our actual RTC ratios over the short to mid-term could exceed our expected RTC ratios and could
begin to approach the limits to which we are subject, which could require us to enter into alternative arrangements to reduce our
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RIF, including through additional reinsurance, or raise additional capital. We can give no assurance that our efforts to obtain
additional reinsurance or otherwise reduce our RIF, or to raise capital would be successful. If we are unable to obtain additional
reinsurance or enter into alternative arrangements to reduce our RIF or raise additional capital, we may exceed these state-
imposed capital requirements. Accordingly, if we fail to meet the capital adequacy requirements in one or more states, we could
be required to suspend writing business in some or all of the states in which we do business.
We are subject to regulation in various jurisdictions, and material changes in regulation or enforcement could adversely affect
us.
The U.S. MI industry and our insurance subsidiaries are subject to comprehensive federal and state regulation in each
jurisdiction in which they are licensed or authorized to do business. Federal or state regulatory scrutiny could lead to new legal
precedents, new regulations or new practices, or regulatory actions or investigations, which could adversely affect our financial
condition and operating results. Although their scope varies, state insurance laws generally grant broad supervisory powers to
state insurance regulatory authorities to examine insurance companies and enforce rules or exercise discretion affecting almost
every significant aspect of the insurance business, including premium rates, trade and claims practices, accounting methods,
marketing practices, policy forms and capital adequacy. These state insurance regulatory authorities could take actions that could
materially impact the types of products and services we and our industry are permitted to offer, including requiring us (and other
MI companies) to modify current pricing and business practices. Further, failure to comply with the various federal and state
regulations promulgated by federal consumer protection authorities and state insurance regulatory authorities could lead to
enforcement or disciplinary action, including the imposition of penalties and the revocation of our authorization to operate.
State insurance regulators also have the authority to make changes to capital requirements. The NAIC has formed a
working group to develop and recommend more robust regulations governing mortgage insurance, including, among other things,
strengthened capital requirements, underwriting standards, claims practices and market conduct. We, along with other mortgage
insurers, are working with the Mortgage Guaranty Insurance Working Group of the Financial Condition (E) Committee of the
NAIC (Working Group). The Working Group will determine and make a recommendation to the Financial Condition (E)
Committee of the NAIC as to what changes the Working Group believes are necessary to the solvency and market practices
regulation of mortgage insurers, including changes to the Mortgage Guaranty Insurers Model Act (Model #630). The Working
Group has proposed a draft revised Model Act that contains risk-based capital requirements, which we and the MI industry are
evaluating. We have provided feedback to the Working Group since early 2013, including comments on the risk-based capital
approach. The Working Group's discussions are ongoing and the ultimate outcome of these discussions and any potential actions
taken by the NAIC cannot be predicted at this time. If the Working Group's final proposal to the NAIC contains more stringent
capital requirements, this could ultimately lead to NMIC being obligated to hold more capital for its insured business than we are
required to hold under PMIERs, which would reduce our profitability compared to the profitability we expect under the existing
capital requirements.
The private MI industry is, and as a participant we will be, subject to litigation and regulatory enforcement risk generally.
We operate in highly regulated industries that inherently pose a heightened risk of litigation and regulatory proceedings.
As a result, the members of the MI industry, including NMIC, face litigation risk, including the risk of class action lawsuits, and
administrative enforcement by federal and state insurance agencies in the ordinary course of operations.
In the past, mortgage insurers (other than NMIC) have been involved in litigation and regulatory enforcement actions
alleging violations of Section 8 of RESPA. Among other things, Section 8 of RESPA generally precludes mortgage insurers from
paying referral fees to mortgage lenders for the referral of MI business. This limitation also can prohibit providing services or
products to mortgage lenders free of charge, charging fees for services that are lower than their reasonable or fair market value,
and paying fees for services that mortgage lenders provide that are higher than their reasonable or fair market value, in exchange
for the referral of MI business. Various regulators, including the CFPB, state insurance commissioners and state attorneys
general, may bring actions seeking various forms of relief in connection with alleged violations of the referral fee limitations of
RESPA, as can private litigants in class actions. In the years following the most recent financial crisis, the CFPB pursued a higher
volume of enforcement actions against mortgage industry participants, including mortgage insurers. In particular, the CFPB
focused on challenging mortgage insurers' captive reinsurance arrangements under Section 8 of RESPA. The insurance law
provisions of many states also prohibit paying for the referral of insurance business and provide various mechanisms to enforce
this prohibition. New leadership at the CFPB may also have an impact on future CFPB enforcement activity. The CFPB's
interpretation and enforcement of Section 8 of RESPA presents regulatory risk for many providers of "settlement services,"
including mortgage insurers.
We currently are not a party to any federal or state regulatory enforcement actions; however, such proceedings could
arise in the future. The cost to defend, and the ultimate resolution of, any such action or proceeding could have a material adverse
38
impact on our business, financial condition and operating results. Should we become a party to an action by any of these
regulators, the ultimate outcome is difficult to predict, and it is possible that any outcome could be negative to us specifically or
the industry in general and such a negative outcome could have an adverse effect on our business, financial position and operating
results.
We are involved in certain legal proceedings in the ordinary course of business. Based on information available to us
and our review of lawsuits and claims filed or pending against us to date, we have not recognized a material liability for these
matters, nor do we currently expect it is reasonably possible that these matters will result in a material liability to us. However,
the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such
matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, financial position and
operating results.
The implementation of Basel III may adversely affect the use of MI by certain banks.
In July 2013, U.S. federal banking regulators adopted regulations to implement Basel III. The phase in period for U.S.
banks to implement the capital rules is for a duration of five years, which started on January 2, 2014. With the ongoing
implementation of U.S. Basel III and the potential continued evolution of the international Basel capital framework, it is difficult
to predict the impact, if any, on the MI industry and the ultimate form of any potential future modifications to the regulations by
federal banking regulators. If federal regulators revise the U.S. Basel III rules to reduce or eliminate the capital benefit banks
receive from insuring high-LTV loans with private MI, or if our customers who are subject to Basel III believe that adverse
changes may occur at some time in the future, our current and future business may be adversely affected.
Our business prospects and operating results could be adversely impacted if, and to the extent that, the Consumer Financial
Protection Bureau's ATR Rules defining a QM further reduce the size of the origination market.
The Dodd-Frank Act authorized the Consumer Financial Protection Bureau (Bureau) to issue regulations requiring a loan
originator to determine whether, at the time a loan is originated, the consumer has a reasonable ability to repay the loan (ATR).
The Bureau's final ATR rule went into effect on January 10, 2014. A subset of mortgages within the ATR rule are known as
"qualified mortgages" or QMs, which generally are defined as loans without certain risky features, such as negative amortization,
points and fees in excess of 3% of the loan amount, and terms exceeding 30 years. QMs under the rule benefit from a statutory
presumption of compliance with the ATR rule, thus potentially mitigating the risk of the liability of the creditor and assignees of
the loan.
The rule also provides a temporary category of QMs that have more flexible underwriting requirements, so long as they
satisfy the general product feature requirements of QMs and so long as they meet the underwriting requirements of the GSEs.
The temporary category of QMs that meet the underwriting requirements of the GSEs is scheduled to phase out upon the earlier to
occur of the end of conservatorship or receivership of the GSEs or January 10, 2021. The expiration of this temporary GSE QM
status or any action by Congress or the Bureau to modify it could affect the residential mortgage market and demand for private
mortgage insurance.
The Dodd-Frank Act also gave statutory authority to the Department of Housing and Urban Development (HUD), the
Veterans Administration, and the U.S. Department of Agriculture's Rural Housing Service to develop their own definitions of
"QM," which those agencies have completed. To the extent lenders find that the HUD definition of QM is more favorable to
certain segments of their borrowers, they may choose FHA products over private MI products.
We, along with other industry participants, have observed that the significant majority of covered loans made after the
effective date of the ATR rule have been QMs. We expect that most lenders will continue to be reluctant to make loans that do not
qualify as QMs (either under the rule's specific underwriting guidelines, GSE underwriting guidelines or the HUD definition of a
QM) because absent full compliance with the ATR rule, such loans will not be entitled to a safe-harbor presumption of
compliance with the ability-to-pay requirements. As a result, we believe ATR regulations have given rise to a subset of borrowers
who cannot meet the regulatory QM standards, thus reducing the size of the residential mortgage market tied to such borrowers.
Our business prospects and operating results could be adversely impacted if, and to the extent that, the QM regulations have the
impact of further reducing the size of the origination market, including potentially when the temporary GSE QM status expires.
39
Risks Related to Our Holding Company
Our holding company structure and certain regulatory and other constraints could affect our ability to satisfy our obligations
and potentially require us to raise more capital.
NMIH serves as the holding company for our operating subsidiaries and does not have any significant operations of its
own. NMIH's principal source of operating cash is investment income, and could in the future include dividends from NMIC, if
available and permitted under law or by state insurance regulators. In addition, NMIH currently receives cash from our insurance
subsidiaries, consisting of payments made under our tax and expense-sharing arrangements. NMIH depends on these sources of
liquidity to make principal and interest payments under the Credit Agreement and to pay certain corporate expenses and income
taxes, among other things. If payments to NMIH were curtailed or limited, there is a risk that NMIH would be unable to satisfy
its financial obligations.
NMIC is a monoline insurance company restricted to writing residential MI business only, and Re One solely provides
reinsurance to NMIC to comply with Ohio's coverage limit. The expense-sharing arrangements between us and our subsidiaries,
as amended, have been approved by the Wisconsin OCI, but such approval may be revoked at any time.
Our dividend income is limited to upstream dividend payments from our subsidiaries, and such dividends are restricted
by Wisconsin law. In general, dividends in excess of prescribed limits are deemed "extraordinary" and require approval of the
Wisconsin OCI. Further, it is possible that Wisconsin will adopt revised statutory provisions or interpretations of existing
statutory provisions that could be more restrictive than those currently in effect or will otherwise take actions that may further
restrict the ability of our insurance subsidiaries to pay dividends or make distributions or returns of capital. NMIC reported a
statutory net loss for the twelve months ended December 31, 2017 and cannot pay any dividends to NMIH through December 31,
2018 without the prior approval of the Wisconsin OCI. As a result of these dividend limitations, we do not expect to receive
dividend income from our subsidiaries for several years, if at all.
In addition, to support NMIC's future growth, we could be required to provide additional capital support for NMIC and
Re One if additional capital is required by the GSEs or pursuant to insurance laws and regulations. If we were unable to meet our
obligations, our insurance subsidiaries could lose GSE approval and/or be required to cease writing business in one or more states,
which would adversely impact our business, financial condition and operating results.
To the extent that the funds generated from investment income or by our ongoing operations and capitalization are
insufficient to fund future operating requirements, we may need to raise additional funds through future financing activities,
reduce our RIF, including through additional reinsurance, or curtail our growth and reduce our expenses. NMIH's future capital
requirements depend on many factors, including NMIC's ability to successfully write new business, establish premium rates at
levels sufficient to cover claims and operating costs and meet minimum required asset thresholds under the PMIERs. We may
choose to generate additional liquidity through the issuance of additional debt, equity or a combination of both. We can give no
assurance that our efforts to raise capital, obtain additional reinsurance or otherwise reduce our RIF would be successful. If we
cannot obtain adequate capital, our business, financial condition and operating results could be adversely affected.
Our Credit Agreement contains various restrictive covenants and required financial ratios and tests that limit our operating
flexibility. The violation of one or more of these covenants, ratios or tests could have a material adverse effect on our
business, financial condition and operating results.
In 2015, NMIH entered into a credit agreement (together with its February and October 2017 amendments, the Credit
Agreement) providing for a term loan credit facility in the original principal amount of $150 million (the Term Loan), which
matures on November 10, 2019. The Credit Agreement contains various restrictive covenants and required financial ratios and
tests that we are required to meet or maintain and that limit our operating flexibility.
Among other requirements, 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 as of any date to be less than the
sum of all remaining scheduled principal amortization payments in respect of the Term Loan as of such date (excluding principal
scheduled to be paid on the maturity date) or (iii) our total shareholders' equity to be less than $307,788,750 as of the last day of
any fiscal quarter. In addition, NMIC must at all times comply with all applicable "financial requirements" imposed pursuant to
the PMIERs.
In addition, the Credit Agreement prohibits or restricts, among other things, NMIH's and its subsidiaries' ability to:
•
•
incur additional indebtedness;
incur liens on their property;
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•
•
pay dividends or make other distributions;
sell their assets;
• make certain loans or investments;
• merge or consolidate; and
•
enter into transactions with affiliates,
in each case subject to certain limitations, exceptions and qualifications as set forth in the Credit Agreement.
These covenants place significant restrictions on the manner in which we may operate our business, and our ability to
meet these covenants may be affected by events beyond our control. If we fail to meet any of these covenants, the lenders could
declare the outstanding principal amount of the Term Loan, accrued and unpaid interest and all other amounts owing and payable
thereunder to be immediately due and payable, which could have a material adverse effect on our business, financial condition
and operating results.
We are required to assess our ability to continue as a going concern as part of our preparation of financial statements at
each quarter-end. This assessment includes, among other things, our ability to comply with the covenants and requirements under
the Credit Agreement. If in future periods we are not able to demonstrate that we will be in compliance with the financial
covenant requirements in the Credit Agreement for at least 12 months following the date of the financial statements, management
could conclude there is substantial doubt about our ability to continue as a going concern, and the audit opinion that we would
receive from our independent registered public accounting firm would include an explanatory paragraph regarding our ability to
continue as a going concern. Such an opinion would cause us to be in breach of the covenants in the Credit Agreement.
NMIH's obligations under the Credit Agreement are guaranteed (Guarantee) by one of its subsidiaries, NMIS (the
Guarantor). NMIH's and the Guarantor's obligations under the Credit Agreement and the Guarantee, respectively, are secured by
first-priority liens on substantially all the assets of NMIH and the Guarantor, respectively, subject to certain exceptions. If we fail
to make the required payments, do not meet the financial covenants or otherwise default on the terms of the Credit Agreement, the
lenders under the Credit Agreement could declare all of the obligations under the Credit Agreement to be immediately due and
payable. We cannot assure you that our assets would be sufficient to repay such amounts in full, and the lenders could foreclose
on the collateral securing the Credit Agreement and the Guarantee, including, subject to regulatory approval, the stock of NMIC
and Re One. Any such actions could have a material adverse effect on our business, financial condition and operating results.
There is a risk NMIH will have insufficient liquidity to repay the Credit Agreement when it matures in 2019.
During the remaining term of the Credit Agreement, we are required to pay interest on the Term Loan of a Eurodollar
based rate (as defined in the Credit Agreement and subject to a 1% floor) plus an annual margin rate of 6.75%, on a monthly or
quarterly basis depending on our interest rate election. We also repay principal of 1% annually of the original loan amount in
quarterly installments at the end of each calendar quarter. NMIH's current holdings in cash and highly liquid investments are
sufficient to meet these principal and interest obligations during the term, but not to repay the outstanding principal of the Term
Loan at maturity. In addition, under an arrangement approved by NMIC's domestic regulator, the Wisconsin OCI, NMIH is
permitted to allocate all of the interest costs under the Term Loan to NMIC on a quarterly basis. The Credit Agreement is secured
by substantially all of the assets of NMIH, including the capital stock of NMIC and Re One. Due to restrictions on dividend
payments (and other intercompany transfers) under various state insurance laws, it is unlikely that NMIC will be able to make
stockholder dividends to NMIH during the term, and thus we do not expect NMIC's capital will be available to NMIH to repay the
outstanding principal of the Term Loan at maturity. See "Our holding company structure and certain regulatory and other
constraints could affect our ability to satisfy our obligations and potentially require us to raise more capital," above. If NMIH is
unable to extend or refinance the Term Loan and/or raise capital, it will not be able to repay the Term Loan at maturity, which
could have a material adverse impact on our business, financial condition and operating results.
Our existing, and any future, variable rate indebtedness subjects us to interest rate risk, which could cause our annual debt
service obligations to increase significantly.
Our indebtedness under the Credit Agreement is, and our future indebtedness may be, subject to variable rates of interest,
exposing us to interest rate risk. If interest rates increase, our debt service obligations on such variable rate indebtedness would
increase, resulting in a reduction of our net income that could be significant, even though the principal amount borrowed would
remain the same.
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Despite our substantial level of debt, we may incur more debt, which could exacerbate any or all of the risks described above.
We may incur substantial additional debt in the future. Although our Credit Agreement limits our ability and the ability
of certain of our subsidiaries to incur additional debt, these restrictions are subject to a number of qualifications and exceptions,
and, under certain circumstances, we may incur additional debt in compliance with these restrictions. In addition, the Credit
Agreement does not prevent us from incurring certain obligations that do not constitute "indebtedness" as defined therein. To the
extent that we incur additional debt or such other obligations, the risks associated with our Credit Agreement described above,
including our possible inability to service our debt or other obligations, would increase.
Our current credit ratings may adversely affect our ability to access capital and the cost of such capital, which could have a
material adverse effect on our business, financial condition and operating results.
Our current issuer credit and debt ratings are below investment grade. Our current credit ratings, or any future negative
actions the credit agencies may take, could affect our ability to access the reinsurance, credit and capital markets in the future and
could lead to worsened trade terms and adversely affect the cost, increasing our liquidity needs. An inability to access
reinsurance, capital and credit markets when needed to continue to grow our business, refinance our existing debt or raise new
debt or equity could have a material adverse effect on our business, financial condition, operating results and liquidity.
We do not anticipate paying any dividends on our common stock in the near future, and payment of any declared dividends
may be delayed.
Our insurance subsidiaries are required to obtain prior approval from our state of domicile regulator, the Wisconsin OCI
or any successor domestic regulator, for the payment of any extraordinary dividend. Without the payment of dividends from
NMIC to us, it may be difficult for us to pay dividends to stockholders.
We have not declared or paid dividends in the past, and we do not expect to pay dividends in the near future. We
currently intend to retain all of our earnings, if any, to fund our growth. As a result, only appreciation in the price of our common
stock, which may not occur, will provide a return to investors. Any future declaration and payment of dividends by our Board
will depend on many factors, including general economic and business conditions, our strategic plans, our financial results and
condition, legal requirements and other factors that our Board deems relevant. In addition, we may enter into additional credit
agreements or other debt arrangements in the future that will restrict our ability to declare or pay cash dividends on our common
stock.
The market price of our common stock may be volatile, which could cause the value of an investment in our common stock to
decline.
The market price of our common stock may fluctuate substantially and be highly volatile, which may make it difficult for
stockholders to sell their shares of our common stock at the volume, prices and times desired. There are many factors that impact
the market price of our common stock, including, without limitation:
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•
•
•
•
•
•
general market conditions, including price levels and volume and changes in interest rates;
national, regional and local economic or business conditions;
the effects of, and changes in, trade, tax, monetary and fiscal policies, including the interest rate policies of the
Federal Reserve;
changes in U.S. housing and housing finance policy, including changes to the GSEs;
our actual or projected financial condition, liquidity, operating results, cash flows and capital levels;
changes in, or failure to meet, our publicly disclosed expectations as to our future financial and operating
performance;
publication of research reports about us, our competitors or the financial services industry generally, or changes in,
or failure to meet, securities analysts' estimates of our financial and operating performance, or lack of research
reports by industry analysts or ceasing of coverage;
• market valuations, as well as the financial and operating performance and prospects, of similar companies;
•
future issuances or sales, or anticipated issuances or sales, of our common stock or other securities convertible into
or exchangeable or exercisable for our common stock;
•
additional indebtedness we may incur in the future;
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•
•
•
•
•
•
expenses incurred in connection with changes in our stock price, such as changes in the value of the liability
reflected on our financial statements associated with outstanding warrants;
the potential failure to establish and maintain effective internal controls over financial reporting;
additions or departures of key personnel;
our failure to satisfy the continued listing requirements of the NASDAQ;
our failure to comply with the Sarbanes-Oxley Act of 2002; and
our treatment as an EGC under the federal securities laws.
The stock markets in general have experienced substantial volatility that has often been unrelated to the operating
performance of particular companies. These types of broad market fluctuations may adversely affect the trading price of our
common stock. In the past, stockholders have sometimes instituted securities class action litigation against companies following
periods of volatility in the market price of their securities. Any similar litigation against us could result in substantial costs, divert
management's attention and resources and harm our business or operating results.
The market price of our common stock could decline due to the large number of outstanding shares of our common stock
eligible for future sale.
As of December 31, 2017, we had 60,517,512 shares of our common stock issued and outstanding. Of the outstanding
shares of our common stock, any shares held by a person (or persons whose shares are aggregated) who is not deemed to be an
affiliate of ours at any time during the three months preceding a sale and who has beneficially owned restricted securities within
the meaning of Rule 144 of the Securities Act are eligible for resale in the public market. Sales of substantial amounts of our
common stock in the public market in the future, or the perception that these sales could occur, could cause the market price of
our common stock to decline. These sales could also make it more difficult for us to sell equity or equity-related securities in the
future, at a time and place that we deem appropriate.
In addition, we have filed registration statements on Form S-8 under the Securities Act to register an aggregate of 5.5
million shares of our common stock for issuance under our 2012 Stock Incentive Plan (2012 Plan) and an aggregate of 6 million
shares of our common stock for issuance under our Amended and Restated 2014 Omnibus Incentive Plan (2014 Plan). Any shares
issued in connection with acquisitions, the exercise of stock options or otherwise would dilute the percentage ownership held by
investors who purchase our shares prior to such issuance.
Future issuances of shares of our common stock may depress our share price and might dilute the book value of our common
stock and reduce your influence over matters on which stockholders vote.
We have the authority, without action or vote of our stockholders except as required under Nasdaq rules, to issue all or
any part of our authorized but unissued shares of common stock, including shares that may be issued to satisfy our obligations
under our incentive plans, and securities and instruments that are convertible into shares of our common stock. Although we are
currently in compliance with state regulatory capital and PMIERs financial requirements, there can be no assurance we would not
seek to raise additional equity capital to manage our capital position under PMIERs or state insurance law, to grow our book of
business and for other purposes, including to pay off our Term Loan. Such stock issuances could be made at a price that reflects a
discount or a premium from the then-current trading price of our common stock and might dilute the book value of our common
stock or result in a decrease in the per share price of our common stock.
Our Class A common stock is subordinate to our existing and future indebtedness.
Shares of our common stock are equity interests and do not constitute indebtedness of NMIH. This means that shares of
the common stock rank junior to all our existing and future indebtedness and our other non-equity claims with respect to assets
available to satisfy claims against us, including claims in the event of our liquidation.
Future issuance of debt or preferred stock, which would rank senior to our common stock upon our liquidation, may adversely
affect the market value of our common stock.
In the future, we may attempt to increase our capital resources by issuing additional debt, including bank debt,
commercial paper, medium-term notes, senior or subordinated notes or classes of shares of preferred stock. Our preferred stock,
if issued, could have a preference on liquidating distributions or a preference on dividend payments that would limit amounts
available for distribution to holders of shares of our common stock. Accordingly, in the event of our liquidation, holders of our
debt securities and preferred stock and lenders with respect to our Credit Agreement or other future borrowings, if any, would
receive a distribution of our available assets prior to the holders of shares of our common stock. Any decision to issue debt or
43
preferred stock in the future will depend on market conditions and other factors, some of which will be beyond our control. We
cannot predict or estimate the amount, timing or nature of such future issuances. Holders of our common stock bear the risk of
such future issuances of debt or preferred stock reducing the market value of our common stock.
The benefit of our net operating loss carryforwards could be substantially limited if we experience an ownership change as
defined in Section 382 of the Internal Revenue Code, as amended (Section 382).
At December 31, 2017, we had approximately $93.4 million of federal net operating loss carryforwards (NOLs) that we
can use in certain circumstances to offset future taxable income and thus reduce our federal income tax liability. Our ability to
fully utilize our existing NOLs could be limited or eliminated in various ways, including (i) if we experience an "ownership
change" within the meaning of Section 382; (ii) due to changes in federal laws and regulations that could negatively impact our
ability to recognize benefits from our NOLs; or (iii) should we not attain sufficient profitability prior to the expiration of the
NOLs. There can be no assurance that we will have sufficient taxable income to be able to fully utilize our NOLs prior to their
expiration.
An "ownership change," under Section 382, is generally defined as greater than a 50% change in equity ownership by
value over a rolling three-year period. These rules generally operate by focusing on changes in the ownership among
stockholders owning, directly or indirectly, 5% or more of a company's common stock (including changes involving a stockholder
becoming a 5% stockholder) or any change in ownership arising from a new issuance of stock or share repurchases by the
company. We could experience an "ownership change" in the future as a result of changes in our common stock ownership that
may or may not be within our control. If an ownership change were to occur, Section 382 would impose an annual limit on the
amount of NOLs we could use to reduce our taxable income. The annual limit under Section 382 is primarily driven by the fair
market value of the company multiplied by the federal long-term tax exempt rate. A number of complex rules apply in calculating
this annual limit, which could be material and could significantly impair the value of our net deferred tax assets and, as a result,
have a material negative impact on our consolidated financial statements.
We will retain our status as an EGC until December 31, 2018, and the reduced disclosure requirements applicable to EGCs
may make our common stock less attractive to investors.
As an EGC, we are relieved from certain significant requirements, including, among other things, the requirement to
comply with certain provisions of Sarbanes-Oxley and the Dodd-Frank Act and certain provisions and reporting requirements of
or under the Securities Act and the Exchange Act, which has the effect of reducing the amount of information that we are
currently required to provide. For example, as an EGC, we are exempt from complying with Section 404(b) of Sarbanes-Oxley,
which otherwise would have required our auditors to attest to and report on our internal control over financial reporting. These
reduced disclosure requirements may make our common stock less attractive to investors. To the extent that other companies do
not, or cannot, take advantage of the benefits under the JOBS Act, this distinction may make our common stock less attractive to
investors.
Provisions contained in our organizational documents, as well as provisions of Delaware law and Wisconsin insurance law,
could delay or prevent a change of control of us, which could adversely affect the price of shares of our common stock.
Our certificate of incorporation and bylaws and Delaware law contain provisions that could have the effect of rendering
more difficult or discouraging an acquisition deemed undesirable by our Board. Our corporate governance documents include
provisions that:
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•
•
•
provide that special meetings of our stockholders generally can only be called by the chairman of the Board or the
president or by resolution of the Board;
provide our Board the ability to issue undesignated preferred stock, the terms of which may be established and the
shares of which may be issued without stockholder approval, and which may grant preferred holders voting, special
approval, dividend or other rights or preferences superior to the rights of the holder of common stock;
provide our Board the ability to issue common stock and warrants within the amount of authorized capital;
provide that, subject to the rights of the holders of any series of preferred stock with respect to such series of
preferred stock, any action required or permitted to be taken by our stockholders must be effected at a duly called
annual or special meeting of our stockholders and may not be effected by any consent in writing by such
stockholders; and
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•
provide that stockholders seeking to bring business before our annual meeting of stockholders, or to nominate
candidates for election as directors at our annual meeting of stockholders, generally must provide timely advance
notice of their intent in writing and certain other information not less than 90 days nor more than 120 days prior to
the meeting.
These provisions, alone or together, could delay hostile takeovers and changes of control of the Company or changes in our
management.
As a Delaware corporation, we are also subject to anti-takeover provisions of Delaware law. The Delaware General
Corporation Law (the DGCL) provides that stockholders are not entitled the right to cumulate votes in the election of directors
unless a corporation's certificate of incorporation provides otherwise. Our certificate of incorporation does not provide for
cumulative voting in the election of directors.
We are subject to Section 203 of the DGCL, which, subject to certain exceptions, prohibits a public Delaware
corporation from engaging in a business combination (as defined in such section) with an "interested stockholder" (defined
generally as any person who beneficially owns 15% or more of the outstanding voting stock of such corporation or any person
affiliated with such person) for a period of three years following the time that such stockholder became an interested stockholder,
unless (i) prior to such time, the board of directors of such corporation approved either the business combination or the transaction
that resulted in the stockholder becoming an interested stockholder; (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of such
corporation at the time the transaction commenced (excluding for purposes of determining the voting stock outstanding (but not
the outstanding voting stock owned by the interested stockholder) the voting stock owned by directors who are also officers or
held in employee benefit plans in which the employees do not have a confidential right to tender or vote stock held by the plan);
or (iii) on or subsequent to such time the business combination is approved by the board of directors of such corporation and
authorized at a meeting of stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock of such
corporation not owned by the interested stockholder.
In addition, Wisconsin's insurance laws and regulations generally provide that no person may acquire control of us unless
the transaction in which control is acquired has been approved by the Wisconsin OCI. The regulations provide for a rebuttable
presumption of control when a person owns or has the right to vote more than 10% of our voting securities. In addition, the
insurance laws and regulations of other states in which NMIC and/or Re One are licensed insurers require notification to the
state's insurance department a specified period before a person acquires control of us. If regulators in these states disapprove the
change of control, our licenses to conduct business in the disapproving states could be terminated.
Any provision of our certificate of incorporation or bylaws or Delaware law or under the Wisconsin insurance
regulations that has the effect of delaying or deterring a change in control could limit the opportunity for our stockholders to
receive a premium for their shares of common stock, and could also affect the price that some investors are willing to pay for
shares of our common stock.
45
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
We lease approximately 47,000 square feet of office space in Emeryville, California pursuant to an office facility lease that
we initially entered into in 2012 (as amended, the Lease). The term of the Lease extends through March 2023. We do not own or
lease any other facilities.
Item 3. Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business may be filed or pending against us or our affiliates
from time to time. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and expected
settlements when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When
a loss contingency is not both probable and reasonably estimable, we do not establish an accrual. Any such loss estimates are
inherently uncertain, based on currently available information and are subject to management's judgment and various assumptions.
Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may
not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such lawsuits and claims may have a material impact on our liquidity,
consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we
disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established
accrual. We also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where
reasonably practicable, we will provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss
contingencies that are deemed to be remote.
Based on information available to us and our review of lawsuits and claims filed or pending against us to date, we have
not recognized a material accrual liability for these matters, nor do we currently expect it is reasonably possible that these matters
will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is
inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an
unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as
a whole, in the future.
Item 4. Mine Safety Disclosures
Not applicable.
46
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Our common stock is listed on the NASDAQ under the symbol "NMIH." At February 13, 2018, there were 60,610,731
shares of our Class A common stock outstanding and approximately 21 holders of record. There are no shares of our Class B common
stock outstanding. The closing price of our common stock on NASDAQ on February 13, 2018 was $18.50.
The following table shows the high and low sales prices of our common stock on the NASDAQ for the financial quarters
indicated:
1st Quarter
2nd Quarter
3rd Quarter
4th Quarter
2017
2016
High
Low
High
Low
$
11.90
$
10.05
$
12.45
12.50
17.75
10.40
10.35
12.05
$
6.85
6.51
8.11
10.80
4.41
4.60
5.30
7.51
No dividends on our common stock have previously been declared or paid, and we do not expect to declare or pay dividends
in the near future. For information on our ability to pay dividends, see Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Holding Company Liquidity and Capital Resources" and Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note15, Regulatory Information - Dividend Restrictions."
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during 2017.
Common Stock Performance Graph
The following graph compares the cumulative total stockholder return on our Class A common stock from November 8,
2013 (the date our common shares commenced trading on the NASDAQ) until December 31, 2017, with the cumulative total
stockholder return on the Russell 2000 Index and a mortgage insurance company index (Peer Index). The Peer Index consists of
Essent, MGIC and Radian. The graph plots the changes in value of an initial $100 investment over the time periods indicated,
assuming all dividends are reinvested annually. The total stockholder's returns are not necessarily indicative of future returns.
Information contained or referenced in the stock performance graph below is being furnished with this report and will not be deemed
"filed" for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange
Act or the Securities Act.
47
11/8/2013
12/31/2013
12/30/2014
12/31/2015
12/31/2016
12/31/2017
NMI Holdings, Inc.
Russell 2000 Index
Peer Group Index (ESNT, MTG, RDN)
$
100 $
91 $
63
$
37
$
94
$
100
100
106
123
109
135
104
119
123
194
154
136
225
48
Item 6. Selected Financial Data
The information in the following table should be read in conjunction with the information included in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and the consolidated financial statements and notes
thereto included in Item 8, "Financial Statements and Supplementary Data."
For the years ended December 31,
2017
2016(1)
2015
2014
2013
Consolidated statements of operations
(In Thousands, except for ratios)
Net premiums earned
Net investment income
Net realized investment (losses) gains
Total revenues
Insurance claims & claims expenses
Underwriting and operating expenses
Net income (loss)
$
165,740
$
110,481
$
45,506
$
13,407
$
16,273
208
182,743
5,339
106,979
22,050
13,751
(693)
123,815
2,392
93,223
64,001
7,246
831
53,608
650
80,599
(27,793)
5,618
197
19,222
83
73,417
(48,906)
Basic income (loss) per share
$
0.37
$
1.08
$
(0.47) $
(0.84) $
2,095
4,808
186
7,089
—
60,774
(55,184)
(0.99)
Weighted average common shares
outstanding
59,816
59,071
58,683
58,281
56,005
Consolidated balance sheets
Total investments
Cash and cash equivalents
Total assets
Term loan
Unearned premiums
Reserve for insurance claims and claims
expenses
Shareholders' equity
Book value per share
Selected ratios
Loss ratio
Expense ratio
Combined ratio
Risk-to-capital ratio
Other data
2017
2016(1)
2015
2014
2013
(In Thousands, except for ratios)
$
715,875
$
628,969
$
559,235
$
336,501
$
409,088
19,196
894,848
143,882
163,166
8,761
509,077
47,746
839,897
144,353
152,906
3,001
475,509
57,317
662,451
143,939
90,733
679
402,731
103,021
463,265
—
22,069
55,929
481,219
—
1,446
83
—
426,958
463,217
$
8.41
$
8.04
$
6.85
$
7.31
$
7.98
3.2%
64.5%
67.7%
13.2:1
2.2%
84.4%
86.6%
11.6:1
1.4%
177.1%
178.5%
8.7:1
0.6%
544.8%
545.4%
3.6:1
—%
2,900.1%
2,900.1%
0.7:1
New primary insurance written
$ 21,586,880
$ 21,189,392
$ 12,424,156
$ 3,451,354
$
162,172
New primary risk written
New pool risk written
5,271,463
5,085,562
2,932,035
775,575
—
—
—
—
Direct primary insurance in force
48,465,157
32,167,539
14,823,926
3,369,664
Direct primary risk in force
11,843,047
7,790,060
3,586,462
Direct pool risk in force
Available Assets (2)
Net Risk-Based Required Assets (2)
93,090
527,897
446,226
93,090
453,523
366,584
93,090
431,411
249,805
801,561
93,090
—
—
36,516
93,090
161,731
36,516
93,090
—
—
49
(1) The 2016 prior period balance sheet and statements of operations have been revised. See Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts,"
for further details.
(2) PMIERs financial requirements as reported by NMIC took effect as of December 31, 2015.
50
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
Part I, 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 statutorily
required reinsurance to NMIC on insured loans with coverage levels in excess of 25% after giving effect to third-party
reinsurance. Our subsidiary, NMIS, provides outsourced loan review services 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, 2017, we had master policies with 1,267
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. We had total IIF of $51.7 billion and gross RIF of $11.9
billion as of December 31, 2017, compared to total IIF of $35.8 billion and gross RIF of $7.9 billion as of December 31, 2016,
and total IIF of $19.1 billion and gross RIF of $3.7 billion as of December 31, 2015. Included in our total IIF as of December 31,
2017, 2016, and 2015 was $48.5 billion, $32.2 billion and $14.8 billion of primary IIF, respectively. As of December 31, 2017,
our gross primary RIF was $11.8 billion, compared to $7.8 billion and $3.6 billion as of December 31, 2016 and 2015,
respectively. For the year ended December 31, 2017, we generated NIW of $21.6 billion, compared to $21.2 billion and $12.4
billion for the years ending December 31, 2016 and 2015, respectively. As of December 31, 2017, we had 299 full-time
employees.
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 the dream of homeownership,
ensure that we remain a strong and credible counterparty, 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, 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 claims payment practices, responsive customer service, financial strength and
profitability.
Our common stock trades on the NASDAQ under the symbol "NMIH."
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 customer development, new business writings, the composition of our insurance
portfolio and other factors that we expect to impact our results.
51
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 NIW from a customer. During
the year ended December 31, 2017, we activated 127 lenders, compared to 173 and 247 for the years ended December 31, 2016 and
December 31, 2015, 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, 2017, we had
1,267 Master Policies and 841 active customer relationships, compared to 1,131 and 715 as of December 31, 2016 and 964 and 524
as of December 31, 2015.
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, which
tend to be generated to a greater extent in purchase originations as compared to refinancings. Our NIW is also affected by the
percentage of such high-LTV originations covered by private versus public 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.
Premiums are generally fixed over the estimated life of the underlying loans. Net premiums written are equal to gross
premiums written minus ceded premiums written under our reinsurance arrangements and less premium refunds. 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 claims payments and home prices;
•
cession of premiums under third-party reinsurance arrangements.
Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium),
on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written
will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment
at origination, which is initially recorded as unearned premium and earned over the estimated life of the policy. A majority of our
single premium policies in force as of December 31, 2017 were non-refundable under most cancellation scenarios. If non-refundable
single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium
revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on
a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our
insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums
earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the
relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include
52
certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are
paid at origination on single premium policies and substantially all of our single premium policies are 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, our profitability is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure PMIERs compliance and support the growth of our
business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of
operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a
premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces net premiums
written and earned and also reduces net RIF, providing capital relief to the ceding insurance company and reducing incurred claims
in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota
share transactions, which offset the ceding company's acquisition and underwriting expenses. Certain quota share agreements include
profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement,
the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in
excess of such threshold up to a maximum agreed-upon limit. In general, there are no ceding commissions under excess-of-loss
reinsurance agreements. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
Quota share reinsurance
NMIC entered into the 2016 QSR Transaction in September 2016. Under the terms of the 2016 QSR Transaction, NMIC
(1) ceded 100% of the risk relating to our pool agreement with Fannie Mae, (2) ceded 25% of existing risk written on eligible policies
as of August 31, 2016 and (3) ceded 25% of the risk relating to eligible primary insurance policies written between September 1,
2016 and December 31, 2017, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding
commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims.
NMIC entered into the 2018 QSR Transaction, which took effect January 1, 2018. Under the 2018 QSR Transaction, NMIC
agrees to cede 25% of its eligible policies written in 2018 and 20% to 30% (such amount to be determined by NMIC at its sole
election by December 1, 2018) of eligible policies written in 2019, in exchange for reimbursement of ceded claims and claims
expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely
with ceded claims.
Excess-of-loss reinsurance
In May 2017, NMIC secured $211.3 million of aggregate excess-of-loss reinsurance coverage at inception for an existing
portfolio of MI policies written from 2013 through December 31, 2016, through a mortgage insurance-linked notes offering by
Oaktown Re. The reinsurance coverage amount under the terms of the 2017 ILN Transaction decreases from $211.3 million at
inception over a ten-year period as the underlying covered mortgages amortize and/or are repaid, and was $177 million as of
December 31, 2017. For the reinsurance coverage period, NMIC will retain the first layer of $126.8 million of aggregate losses and
Oaktown Re will then provide a second layer of coverage up to the outstanding reinsurance coverage amount. NMIC retains losses
in excess of the outstanding reinsurance coverage amount.
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.
53
Primary and pool IIF and NIW
As of and for the years ended
Monthly
Single
Primary
Pool
Total
December 31, 2017
December 31, 2016
December 31, 2015
IIF
NIW
IIF
NIW
IIF
NIW
(In Millions)
$
33,268
$
17,560
$
19,205
$
14,261
$
6,958
$
15,197
48,465
3,233
4,027
21,587
—
12,963
32,168
3,650
6,928
21,189
—
7,866
14,824
4,238
5,990
6,434
12,424
—
$
51,698
$
21,587
$
35,818
$
21,189
$
19,062
$
12,424
For the year ended December 31, 2017, primary NIW increased 2%, compared to the year ended December 31, 2016,
primarily because of the growth in our monthly policy volume tied to increased penetration of existing customer accounts and new
customer account activations, offset by a reduction in our single policy production tied to actions we initiated to reduce the
concentration of single policies in our product mix. Primary NIW increased 71% for the year ended December 31, 2016, compared
to the year ended December 31, 2015, primarily because of the growth within and an expansion of our customer base.
For the year ended December 31, 2017, 81% of our NIW related to monthly premium policies, as compared to 67% and
48% for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2017, monthly premium policies accounted
for 69% of our primary IIF, as compared to 60% at December 31, 2016 and 47% at December 31, 2015. We expect the break-down
of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF to continue to trend
toward our current NIW mix over time. Our total IIF at December 31, 2017 increased 44% compared to December 31, 2016, which
in turn increased 88% compared to December 31, 2015, primarily because of the NIW we generated between such measurement
dates and higher persistency of our policies in force.
The following table presents net premiums written and earned for the periods indicated.
Primary and pool premiums written and earned
For the year ended
Net premiums written (1)
Net premiums earned (1)
December 31, 2017
December 31, 2016
December 31, 2015
(In Thousands)
$
173,672
$
165,740
134,692
$
110,481
114,210
45,506
(1) Net premiums written and earned are reported net of reinsurance and premium refunds.
For the year ended December 31, 2017, net premiums written and earned increased 29% and 50%, respectively,
compared to the year ended December 31, 2016. The increase in net premiums written is due to the growth of our IIF and
increased monthly policy production, partially offset by a decrease in single premium NIW. The trend in net premiums written
was also impacted by the inception of the 2016 QSR Transaction in September 2016, which entailed an initial cession of $35
million of premiums written on all covered singles policies written prior to the transaction effective date and had the effect of
reducing net premiums written in 2016 by a like amount. The increase in net premiums earned is due to the growth of our IIF
and increased monthly policy production, partially offset by decreases in our single premium NIW and earnings from
cancellations, and the impact of cessions under the 2017 ILN transaction and 2016 QSR Transaction.
For the year ended December 31, 2016, net premiums written and earned increased 18% and 143%, respectively,
compared to the year ended December 31, 2015. The increases in net premiums written and earned are primarily due to the
growth of our IIF and increased NIW production, partially offset by ceded premiums related to the 2016 QSR Transaction,
which entailed an initial cession of premiums written on all covered singles policies written prior to the transaction effective date
and introduced partial cessions of premiums written and earned on covered policies thereafter.
Pool premiums written and earned for the years ended December 31, 2017, 2016 and 2015, were $3.8 million, $4.4
million and $4.9 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and
earned pool premiums have been ceded.
54
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party
reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the
periods indicated.
Primary portfolio trends
As of and for the year ended
New insurance written
Percentage of monthly premium
Percentage of single premium
New risk written
Insurance in force (IIF) (1)
Percentage of monthly premium
Percentage of single premium
Risk in force (1)
Policies in force (count) (1)
Average loan size (1)
Average coverage (2)
Loans in default (count)
Percentage of loans in default
Risk in force on defaulted loans
Earnings from cancellations
Annual persistency
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by IIF.
December 31, 2017
December 31, 2016
December 31, 2015
($ Values In Millions)
21,587
$
21,189
$
12,424
81%
19%
5,271
$
48,465
69%
31%
11,843
202,351
0.240
24%
928
0.5%
53
15
86%
$
$
$
$
67%
33%
5,086
$
32,168
60%
40%
7,790
134,662
0.239
24%
179
0.1%
10
17
81%
$
$
$
$
48%
52%
2,932
14,824
47%
53%
3,586
63,948
0.232
24%
36
0.1%
2
4
80%
$
$
$
$
$
$
The table below presents a summary of the change in total primary IIF for the dates and periods indicated.
Primary IIF
IIF, beginning of period
NIW
Cancellations and other reductions
IIF, end of period
As of and for the year ended
December 31, 2017
December 31, 2016
December 31, 2015
$
$
(In Millions)
32,168
$
14,824
$
21,587
(5,290)
48,465
$
21,189
(3,845)
32,168
$
3,370
12,424
(970)
14,824
55
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 reflects a summary of our primary IIF and RIF by book year as of the dates indicated.
Primary IIF and RIF
As of
2017
2016
2015
2014
2013
Total
December 31, 2017
December 31, 2016
December 31, 2015
IIF
RIF
IIF
RIF
IIF
RIF
$
20,739
$
5,059
$
18,066
8,256
1,368
36
48,465
$
4,383
2,051
341
9
11,843
$
$
(In Millions)
— $
— $
20,193
10,071
1,856
48
32,168
$
4,850
2,472
457
11
7,790
$
— $
—
12,110
2,644
70
14,824
$
—
—
2,932
638
16
3,586
We utilize certain risk principles that form the basis of how we underwrite and originate primary NIW. We manage our
portfolio credit risk by using several loan 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. Our loan eligibility matrices, as well as all of our detailed underwriting guidelines, are contained in our Underwriting
Guideline Manual that is publicly available on our website. Our eligibility criteria and underwriting guidelines are designed to
mitigate the layered risk inherent in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and
property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned
properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance
portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts.
The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We
calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing
the loan.
Primary NIW by FICO
For the year ended
December 31, 2017
December 31, 2016
December 31, 2015
>= 760
740-759
720-739
700-719
680-699
<=679
Total
Weighted average FICO
(In Millions)
$
$
10,985
3,452
2,517
2,099
1,315
821
9,711
3,332
2,833
2,539
1,699
1,473
21,587
$
746
21,189
754
$
$
6,111
1,955
1,726
1,254
889
489
12,424
752
$
$
56
Primary NIW by LTV
For the year ended
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
Total
Weighted average LTV
Primary NIW by purchase/refinance mix
Purchase
Refinance
Total
December 31, 2017
December 31, 2016
December 31, 2015
$
2,458
9,512
6,242
3,375
(In Millions)
$
1,273
9,229
6,576
4,111
492
5,452
4,236
2,244
21,587
$
21,189
$
12,424
92.2%
91.6%
91.6%
December 31, 2017
December 31, 2016
December 31, 2015
For the year ended
18,627
2,960
21,587
$
$
(In Millions)
15,293
5,896
21,189
$
$
8,161
4,263
12,424
$
$
$
$
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
>= 760
740-759
720-739
700-719
680-699
<=679
Total
December 31, 2017
December 31, 2016
December 31, 2015
As of
$
23,438
48% $
16,166
50% $
($ Values In Millions)
7,781
6,259
5,179
3,408
2,400
16
13
11
7
5
5,248
4,130
3,245
2,151
1,228
16
13
10
7
4
7,124
2,406
2,111
1,515
1,100
568
48%
16
14
10
8
4
$
48,465
100% $
32,168
100% $
14,824
100%
Primary RIF by FICO
As of
>= 760
740-759
720-739
700-719
680-699
<=679
Total
December 31, 2017
December 31, 2016
December 31, 2015
($ Values In Millions)
$
5,764
1,909
1,527
1,256
821
566
48% $
16
13
11
7
5
3,934
1,281
1,000
782
511
282
50% $
1,707
48%
16
13
10
7
4
590
519
369
267
134
16
14
10
8
4
$
11,843
100% $
7,790
100% $
3,586
100%
57
Primary IIF by LTV
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
December 31, 2017
As of
December 31, 2016
($ Values In Millions)
December 31, 2015
$
3,946
21,763
14,766
7,990
8% $
45
30
17
1,686
14,358
10,282
5,842
5% $
45
32
18
498
6,583
5,098
2,645
3%
45
34
18
Total
$
48,465
100% $
32,168
100% $
14,824
100%
Primary RIF by LTV
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
December 31, 2017
$
1,054
6,354
3,523
912
9% $
53
30
8
Total
$
11,843
100% $
Primary RIF by Loan Type
Fixed
Adjustable rate mortgages:
Less than five years
Five years and longer
Total
As of
December 31, 2016
($ Values In Millions)
467
4,226
2,439
658
7,790
6% $
55
31
8
100% $
As of
December 31, 2015
139
1,943
1,210
294
3,586
4%
54
34
8
100%
December 31, 2017
December 31, 2016
December 31, 2015
98%
—
2
100%
99%
—
1
100%
98%
—
2
100%
The table below shows selected primary portfolio statistics, by book year, as of December 31, 2017.
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)
Book year
As of December 31, 2017
2013
2014
2015
2016
2017
Total
(1)
(2)
$
162
$
3,451
12,422
21,187
21,587
36
1,368
8,256
18,066
20,739
$ 58,809
$ 48,465
($ Values in Millions)
22%
40%
66%
85%
96%
655
14,786
52,548
83,626
187
6,970
37,771
73,986
85,912
83,437
237,527
202,351
1
80
316
363
168
928
1
14
17
6
—
38
0.2%
4.0%
2.8%
2.3%
2.4%
0.3%
0.6%
0.6%
0.4%
0.2%
The ratio of total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance.
The sum of the number of claims paid ever to date and number of loans in default as of the end of the period divided by policies ever in force.
58
Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of December 31,
2017, our RIF continues to be relatively more concentrated in California, primarily as a result of the size of the California mortgage
market relative to the rest of the country and the location and timing of our acquisition of new customers.
Top 10 primary RIF by state as of December 31, 2017
As of
California
Texas
Virginia
Arizona
Florida
Michigan
Pennsylvania
Colorado
Maryland
Utah
Total
December 31, 2017
December 31, 2016
December 31, 2015
13.5%
13.6%
12.9%
7.8
5.3
4.6
4.5
3.7
3.6
3.6
3.5
3.5
7.0
6.5
3.9
4.5
3.7
3.6
3.9
3.7
3.7
6.8
5.2
3.7
5.3
4.4
3.7
4.2
2.8
3.0
53.6%
54.1%
52.0%
Insurance Claims and Claims Expenses
Insurance claims and claims expenses incurred represent estimated future payments on newly defaulted insured loans and
any change in our claim estimates for previously existing defaults. Claims incurred is generally affected by a variety of factors,
including:
•
•
future macroeconomic factors, including unemployment, which affects the likelihood that borrowers may default on
their loans, and rising interest rates, which tend to increase persistency, thereby extending the average life of our insured
portfolio and increasing expected future claims;
changes in housing values, as such changes may affect loss mitigation opportunities 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 their
mortgage balances;
•
borrowers' FICO scores, with lower FICO scores tending to have higher probabilities of claims;
• LTV ratios, with higher average LTV ratios tending to increase claims incurred;
• DTI ratios, with higher DTIs generally tending to increase claims incurred;
•
•
•
•
•
the size of loans insured, with higher average loan amounts tending to increase claims incurred;
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;
other borrower and loan level risk characteristics, such as cash-out refinancings, second homes or investment properties
the rate at which we rescind policies, which we expect to be lower for us than recent rescission rates experienced by
the private MI industry due to the terms of our Master Policy and generally tighter underwriting standards; and
the distribution of claims over the life of a book year.
Reserves for claims and allocated claims expenses are established for mortgage loan defaults, which we refer to as case
reserves, when we are notified that a borrower has missed two or more mortgage payments (i.e., an NOD). We also make estimates
of IBNR defaults, which are defaults that have been incurred but have not been reported by loan servicers, based on historical reporting
trends, and establish IBNR reserves for those estimates. We also establish reserves for unallocated claims expenses not associated
with a specific claim. The claims expenses consist of the estimated cost of the claim administration process, including legal and other
fees as well as other general expenses of administering the claims settlement process.
Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred
to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is referred to as
59
claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain
loan factors, such as age of the default, cure rates, size of the loan and estimated change in property valuation. 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 2016 QSR Transaction
and will be ceded under the 2018 QSR Transaction beginning in 2018. We will not cede reserves to the reinsurer under the 2017 ILN
Transaction unless losses exceed our retained coverage layer. Reserves are not established for future claims on insured loans which
are not currently in default.
Based on our experience and industry data, we believe that claims incidence for mortgage insurance is generally highest in
the third through sixth years after loan origination. As of December 31, 2017, over 95% of our primary IIF was related to business
written since January 1, 2015. Although the claims experience on new primary insurance written by us to date has been favorable,
we expect incurred claims to increase as a greater amount of our existing insured portfolio reaches its anticipated period of highest
claim frequency. We estimate that the loss ratio over the life of our existing primary insured portfolio will be between 20% and 25%
of earned premiums, and we price to that expectation. Additionally, 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 pool reserves for claims or IBNR 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 profile of new business we write in the future. In addition, claims experience will be affected by future
macroeconomic factors such as housing prices, interest rates and employment and other events, such as natural catastrophes. To date,
our claims experience is developing at a slower pace than historical trends indicate, as a result of high quality underwriting, a strong
macroeconomic environment and a favorable housing market. For additional discussion of our reserves, see Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 7, Reserves for Insurance Claims and
Claim Expenses."
We insure mortgages for homes in areas that have been impacted by recent natural disasters, including hurricanes Harvey
and Irma and the California wildfires. We do not provide coverage for property or casualty claims related to physical damage of a
home underpinning an insured mortgage. We have experienced an increase in NODs on insured loans in the impacted areas. Our
ultimate claims exposure will depend on the number of NODs received, proximate cause of each default and cure rate of the NOD
population. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and other hazard insurance
carried on a related property, GSE-sponsored forbearance and other assistance programs, and a borrower's access to aid from
government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas.
60
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims
and claims expenses.
December 31, 2017
December 31, 2016
December 31, 2015
For the year ended
Beginning balance
Less reinsurance recoverables (1)
Beginning balance, net of reinsurance recoverables
(In Thousands)
$
$
3,001
(297)
2,704
679
$
—
679
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
Prior years (3)
Total claims and claims expenses incurred
Less claims paid:
Claims and claim expenses paid:
Current year (2)
Prior years (3)
Total claims and claim expenses paid
Reserve at end of period, net of reinsurance recoverables
Add reinsurance recoverables (1)
Ending balance
6,140
(801)
5,339
27
1,157
1,184
6,859
1,902
2,457
(65)
2,392
171
196
367
2,704
297
$
8,761
$
3,001
$
83
—
83
699
(49)
650
50
4
54
679
—
679
(1) Related to ceded losses recoverable on the 2016 QSR Transaction, included in "Other Assets" on the Consolidated Balance Sheets. 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 had defaulted in a prior year and
subsequently cured and later re-defaulted in the current year, that default would be included in the current year.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default since that time.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior
years, including IBNR reserves. The amount of claims incurred for current year NODs represents the estimated amount to be ultimately
paid on such loans in default. The decreases during the periods presented in reserves held for prior year defaults represent favorable
development and are generally the result of NOD cures and ongoing analysis of recent loss development trends. We may increase
or decrease our original estimates as we learn additional information about individual defaults and claims, and continue to observe
and analyze loss development trends in our portfolio. Gross reserves of $1.0 million related to prior year defaults remained as of
December 31, 2017.
The following table provides a reconciliation of the beginning and ending count of loans in default.
Beginning default inventory
Plus: new defaults
Less: cures
Less: claims paid
Ending default inventory
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
179
1,262
(486)
(27)
928
36
284
(132)
(9)
179
4
51
(17)
(2)
36
61
The increase in the ending default inventory at December 31, 2017 compared to December 31, 2016, was primarily due to
new defaults on insured loans in areas impacted by hurricanes Harvey and Irma and the California wildfires, as well as the aging of
earlier book years and an increase in the overall number of policies in our portfolio. The increase in the ending default inventory at
December 31, 2016 compared to December 31, 2015 is tied to the growth in the number of policies in force and the expected loss
development of our portfolio.
The following table provides details of our claims paid, before giving effect to claims ceded under the 2016 QSR Transaction,
for the periods indicated.
Number of claims paid
Total amount paid for claims
Average amount paid per claim
Severity(1)
For the year ended
December 31,
2017
December 31,
2016
December 31,
2015
($ Values In Thousands)
27
1,266
47
86%
$
$
9
367
41
64%
$
$
$
$
2
54
27
44%
(1) Severity represents the total amount of claims paid divided by the related RIF on the loan at the time the claim is perfected.
The increase in the number of claims paid for the year ended December 31, 2017 compared to the years ended
December 31, 2016 and 2015, is due to an increase in our default inventory. We expect the severity of claims we receive to be
between 85% and 95% of the coverage amount for the near-term.
Average reserve per default:
As of
Case (1)
IBNR
Total
(1) Defined as the gross reserve per insured loan in default.
December 31, 2017
December 31, 2016
December 31, 2015
$
$
(In Thousands)
8
1
9
$
$
15 $
2
17 $
18
1
19
The average reserve per default at December 31, 2017 decreased from December 31, 2016 primarily due to new defaults
on insured loans in areas impacted by hurricanes Harvey and Irma and the California wildfires. As of December 31, 2017, 533 of
the 928 loans in default relate to homes in areas declared by FEMA to be disaster zones following the aforementioned natural
disasters. We anticipate that this population of loans in default will cure at a higher rate than the estimated rate we apply to non-
disaster related loans in default, due to our Master Policy coverage terms, historical industry experience, and current economic
indicators and relief programs. As such, we have established lower reserves for these NODs than we otherwise do for similarly
situated NODs in non-disaster zones. Over time, we anticipate that our average reserve per default will revert to our historical
averages as the NODs in these zones cure.
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. Refinancing volume,
however, does not follow a set seasonal trend and instead is primarily influenced by mortgage rates. An increase in refinancing
volume may limit the seasonal effect of home purchase patterns on mortgage insurance NIW. In addition, while macroeconomic
factors in any given period may influence default experience to a greater extent than does seasonality, our industry has typically
experienced a fourth quarter seasonal increase in the number of defaults and a first quarter seasonal decline in the number of
defaults and increase in the number of cures.
GSE Oversight
As an Approved Insurer, NMIC is subject to ongoing compliance with the PMIERs. (Italicized terms have the same meaning
that such terms have in the PMIERs, as described below.) The PMIERs establish operational, business, remedial and financial
62
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 risk characteristics, such as FICO,
vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV and other risk features. An asset
charge is calculated for each insured loan based on its risk profile. In general, higher quality loans carry lower charges.
Under the PMIERs financial requirements, Approved Insurers must maintain available assets that equal or exceed minimum
required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-
based required asset amount is a function of the risk profile of an Approved Insurer's net RIF, calculated by applying on a loan-by-
loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF, and other transactional adjustments
approved by the GSEs, such as with respect to our 2017 ILN Transaction and 2016 QSR Transaction. The risk-based required asset
amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount
for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs
financial requirements also increase the amount of available assets that must be held by an Approved Insurer for LPMI policies
originated on or after January 1, 2016.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. As
of December 31, 2017, NMIC had sufficient available assets to meet the PMIERs financial requirements, and we expect to certify
to the GSEs by April 15, 2018 that NMIC fully complied with the PMIERs as of December 31, 2017. NMIC also has an ongoing
obligation to immediately notify the GSEs in writing upon discovery of its failure to meet one or more of the PMIERs requirements.
We continuously monitor our compliance with the PMIERs.
The following table provides a comparison of the PMIERs financial requirements as reported by NMIC as of the dates
indicated.
Available Assets
Net Risk-Based Required Assets
As of
December 31,
2017
December 31,
2016
December 31,
2015
($ values in thousands)
$
527,897
$
453,523
$
431,411
446,226
366,584
249,805
Available assets were $528 million at December 31, 2017, compared to $454 million at December 31, 2016 and $431 million
at December 31, 2015. The increase in available assets of $74 million at December 31, 2017 and $23 million at December 31, 2016
was driven by positive cash flow from operations and the amortization of unearned premium reserves during each period. The increase
in the risk-based required asset amount at each measurement date is due to the growth of our gross RIF, partially offset by the cession
of risk relating to our third-party reinsurance agreements.
On December 18, 2017, the GSEs provided us with a confidential summary of the proposed changes to the PMIERs
financial, business and other requirements that they are developing with the FHFA. We have engaged in conversations with the
FHFA and the GSEs about the proposed changes and expect to continue to provide feedback to them in the coming months. Once
changes to the PMIERs requirements are finalized, we expect the industry will be afforded a six month implementation period and
currently anticipate that updated PMIERs requirements, if any, will take effect no sooner than the fourth quarter of 2018.
Cybersecurity
As a participant in the mortgage lending and MI industries, we rely on e-commerce and other technologies to provide and
expand our products and services. We have established and implemented security measures, controls and procedures to safeguard
our information technology systems and to prevent unauthorized access to such systems and any data processed and/or stored in
such systems. We periodically employ third parties to evaluate and test the adequacy of such systems, controls and procedures. In
addition, we have established a business continuity plan that is designed to allow our business to continue to operate in the midst of
certain disruptive events, including any disruptions to our information technology systems. We also have an incident response plan
that is designed to address information security incidents, including breaches of our information technology systems. Despite these
safeguards, disruptions to and breaches of our information technology systems are possible and may negatively impact our business.
We maintain cyber errors and omissions coverage to limit our exposure if an incident occurs. This insurance 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, unintentional failure to disclose a breach and (ii) certain costs related to
privacy notification, crisis management, cyber extortion, data recovery and business interruption.
63
Capital Position of Our Insurance Subsidiaries and Financial Strength Ratings
In addition to GSE-imposed asset requirements, NMIC is also subject to state regulatory minimum capital requirements
based on its RIF. While formulations of this minimum capital may vary by jurisdiction, the most common measure allows for a
maximum permitted RTC ratio of 25:1.
As of December 31, 2017, NMIC's performing primary RIF, net of reinsurance, was approximately $7.3 billion. NMIC
ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $524 million (including
contingency reserves) as of December 31, 2017, NMIC's RTC ratio was 14.0:1. Re One had total statutory capital of $34 million as
of December 31, 2017, with a RTC ratio of 0.8:1. We continuously monitor our compliance with state capital requirements.
In March 2017, Moody's Investors Service (Moody's) upgraded its financial strength rating from "Ba2" to "Ba1" for NMIC.
At that time, Moody's also upgraded its rating of NMIH's $150 million Term Loan from "B2" to "B1." In August 2017, Moody's re-
affirmed its "Ba1" financial strength rating for NMIC and its B1 rating of NMIH's $150 million Term Loan and upgraded the outlook
for both ratings from "stable" to "positive." In July 2017, S&P re-affirmed its "BBB-" financial strength and long-term counter-party
credit ratings on NMIC and its "BB-" long-term counter-party credit rating on NMIH and upgraded the outlook for both ratings to
"positive."
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as
public MIs like the FHA and the VA. Private MI companies compete based on service, customer relationships, underwriting and
other factors, including price. See Part I, 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 MI market to remain competitive, with
pressure for industry participants to grow or maintain their market share.
The private MI industry overall competes more broadly with public MIs who significantly increased their presence in the
MI market following the financial crisis. Although there has been broad policy consensus toward the need for private capital to play
a larger role and government credit risk to be reduced in the U.S. housing finance system, it remains difficult to predict whether the
combined market share of public MIs will recede to historical levels. A range of factors influence a lender's decision to choose private
over public MI, including among others, premium rates and other charges, loan eligibility requirements, cancelability, loan size limits
and the relative ease of use of private MI products compared to public MI alternatives.
64
Consolidated Results of Operations
Consolidated statements of operations
Revenues
Net premiums earned
Net investment income
Net realized investment gains (losses)
Other revenues
Total revenues
Expenses
Insurance claims and claims expenses
Underwriting and operating expenses
Total expenses
Other (expense) income
(Loss) gain from change in fair value of warrant liability
Interest expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Loss ratio(1)
Expense ratio(2)
Combined ratio
For the year ended December 31,
2016 (3)
2015
2017
(In Thousands, except for share data)
$
165,740
$
110,481
$
45,506
7,246
831
25
53,608
650
80,599
81,249
1,905
(2,057)
(27,793)
—
13,751
(693)
276
123,815
2,392
93,223
95,615
(1,900)
(14,848)
11,452
(52,549)
64,001
16,273
208
522
182,743
5,339
106,979
112,318
(4,105)
(13,528)
52,792
30,742
22,050
$
3.2%
64.5%
67.7%
$
$
(27,793)
2.2%
84.4%
86.6%
1.4%
177.1%
178.5%
(1) Loss ratio is calculated by dividing the provision for insurance claims and claims expenses by net premiums earned.
(2) Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
(3) The 2016 prior period consolidated statements of operations has been revised. See Item 8, "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for
further details.
Revenues
For the year ended December 31, 2017, net premiums earned totaled $165.7 million compared to $110.5 million for the
year ended December 31, 2016 and $45.5 million for the year ended December 31, 2015. The increase of net premiums earned of
$55.2 million in 2017 was primarily due to the growth of our IIF and increased monthly policy production, partially offset by the
decreases in single premium NIW and earnings from cancellations, and the impact of cessions under the 2017 ILN transaction and
2016 QSR Transaction. The $65.0 million increase in net premiums earned in 2016 was primarily due to the growth of our IIF,
increased single premium NIW production and higher earnings from cancellations, partially offset by the effect of the 2016 QSR
Transaction.
For the year ended December 31, 2017, net investment income was $16.3 million compared to $13.8 million for the year
ended December 31, 2016 and $7.2 million for the year ended December 31, 2015. The increase in both periods was due to an increase
in the size of and improved yields on our total investment portfolio.
65
Expenses
We recognize insurance claims and claims 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.
For the year ended December 31, 2017, insurance claims and claims expenses were $5.3 million compared to $2.4 million
for the year ended December 31, 2016 and $0.7 million for the year ended December 31, 2015. Insurance claims and claims expenses
increased $2.9 million in 2017, as a result of new defaults on insured loans in areas impacted by hurricanes Harvey and Irma and
the California wildfires, as well as an increase in the overall number of policies in our portfolio and aging of earlier book years,
offset by the partial release of reserves related to prior year defaults. Insurance claims and claims expenses increased $1.7 million
in 2016 compared to 2015 primarily due to an increase in the overall number of policies in our portfolio and aging of earlier book
years.
Underwriting and operating expenses were $107.0 million for the year ended December 31, 2017, compared to $93.2 million
and $80.6 million for the years ended December 31, 2016 and 2015, respectively. Employee compensation accounts for the majority
of our operating expenses. We increased the size of our workforce from 243 employees at December 31, 2015 to 276 employees at
December 31, 2016 and to 299 employees at December 31, 2017 to support the growth of our business, particularly our sales and
operating functions. Underwriting and operating expenses for the year ended December 31, 2017 also reflect $4.9 million of operating
expenses related to the 2017 ILN Transaction and amendment of our Credit Agreement.
Interest expense was $13.5 million, $14.8 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015,
respectively. Interest expense declined in 2017 compared to 2016 in connection with the amendment of our Credit Agreement
completed in February 2017, which among other items, reduced the interest spread payable on the Term Loan. The interest expense
reduction was partially offset by a rise in the underlying LIBOR rate during 2017. See Item 8, "Financial Statements and Supplementary
Data - Notes to Consolidated Financial Statements - Note 5, Term Loan." Interest expense increased in 2016 compared to 2015,
reflecting a full year of interest expense for the Term Loan, which we established in the fourth quarter of 2015.
Income tax expense was $30.7 million for the year ended December 31, 2017 compared to income tax benefit of $52.5
million for the year ended December 31, 2016 and no income tax provision for the year ended December 31, 2015. The fluctuation
of our income taxes is the result of significant events during each of periods presented. During the year ended December 31, 2017,
we recorded a one-time non-cash charge of $13.6 million primarily due to the re-measurement of net deferred tax assets in connection
with the enactment of the Tax Cuts and Jobs Act. During the year ended December 31, 2016, we recorded a one-time non-cash
benefit of $58.8 million related to the release of the valuation allowance recorded against our federal and certain state net deferred
tax assets. During the year ended December 31, 2015, we did not record an income tax expense due to the recognition of a valuation
allowance against our federal and state net deferred tax assets. 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."
66
Consolidated balance sheets
Total investment portfolio
Cash and cash equivalents
Premiums receivable
Deferred policy acquisition costs, net
Software and equipment, net
Prepaid reinsurance premiums
Deferred tax asset, net
Other assets
Total assets
Term loan
Unearned premiums
Accounts payable and accrued expenses
Reserve for insurance claims and claims expenses
Reinsurance funds withheld
Deferred ceding commission
Warrant liability
Total liabilities
Total shareholders' equity
December 31, 2017
December 31, 2016 (1)
(In Thousands)
$
715,875
$
628,969
19,196
25,179
37,925
22,802
40,250
19,929
13,692
$
$
$
$
894,848
143,882
163,166
23,364
8,761
34,102
5,024
7,472
385,771
509,077
47,746
13,728
30,109
20,402
37,921
51,434
9,588
839,897
144,353
152,906
25,297
3,001
30,633
4,831
3,367
364,388
475,509
839,897
Total liabilities and shareholders' equity
$
894,848
$
(1) The 2016 prior period balance sheet has been revised. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for further details.
As of December 31, 2017, we had approximately $735.1 million in cash and investments, including $51.0 million held at
NMIH. The increase in cash and investments from year-end 2016 primarily relates to cash generated from operations.
Net deferred policy acquisition costs (DAC) were $37.9 million as of December 31, 2017, compared to $30.1 million as of
December 31, 2016. The increase was driven by growth in the number of policies written during the year ended December 31, 2017
and the deferment of certain costs associated with the origination of those policies, partially offset by the amortization of previously
deferred acquisition costs and the capitalization of ceding commissions associated with the 2016 QSR Transaction during the period.
Premiums receivable increased to $25.2 million as of December 31, 2017, compared to $13.7 million as of December 31,
2016 due to growth in the number of monthly policies in force.
Deferred tax asset, net decreased to $19.9 million as of December 31, 2017, from $51.4 million at December 31, 2016 due
to the re-measurement of our deferred tax balances at the reduced statutory U.S. federal corporate income tax rate of 21% and the
utilization of net operating loss carryforwards during the period. 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."
Unearned premiums increased $10.3 million to $163.2 million as of December 31, 2017, primarily due to single premium
policy origination during the period, offset by the amortization through earnings of existing unearned premiums in accordance with
the expiration of risk on the related policies and the cancellation of other single premium policies.
Reserve for insurance claims and claims expenses increased $5.8 million to $8.8 million at December 31, 2017, due to an
increase in our default inventory at December 31, 2017. See "- Insurance Claims and Claims Expenses," above for further details.
Warrant liability increased to $7.5 million at December 31, 2017, compared to $3.4 million at December 31, 2016 primarily
due to an increase in our stock price during the year.
Reinsurance funds withheld was $34.1 million as of December 31, 2017, representing the net of our ceded reinsurance
premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The increase in reinsurance
67
funds withheld of $3.5 million from December 31, 2016, was a result of increased ceded premiums written. See, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance."
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Consolidated cash flows
Net cash (used in) provided by:
Operating activities
Investing activities
Financing activities
Net decrease in cash and cash equivalents
For the years ended December 31,
2017
2016
(In Thousands)
2015
$
$
67,763
$
(93,072)
(3,241)
(28,550) $
71,944
$
(79,792)
(1,723)
(9,571) $
41,463
(230,165)
142,998
(45,704)
Net cash provided by operating activities was $67.8 million for the year ended December 31, 2017, compared to $71.9
million for the year ended December 31, 2016, and $41.5 million for the year ended December 31, 2015. The decrease in cash
generated from operating activities in 2017 compared to 2016 was primarily caused by increased operating expenses in connection
with employee compensation and benefits costs and higher claims paid due to an increase in our default inventory offset by growth
in direct premiums written. The increase in cash generated from operating activities in 2016 compared to 2015 was primarily due to
the higher premiums written offset by increased operating expenses associated with the hiring of management and staff personnel
and costs for contract and professional services.
Cash used in investing activities for the periods presented was driven by the purchase of fixed and short-term maturities
during those periods.
Cash used in financing activities was $3.2 million and $1.7 million for the year ended December 31, 2017, and 2016, and
primarily relates to taxes paid on the net share settlement of equity awards for certain employees. Cash provided by financing activities
was $143.0 million for the year ended December 31, 2015, and primarily relates to proceeds from the Term Loan which we established
in the fourth quarter of 2015.
Holding Company Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its
own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain
reimbursable expenses of its insurance subsidiaries; (iii) payment of principal and interest related to the Term Loan; (iv) tax payments
to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock.
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as
NMIH, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's
surplus or recent net profits (subject to certain limitations).
As of December 31, 2017, NMIH had $51.0 million of cash and investments. NMIH's principal source of net cash is
investment income and in the future could include dividends from NMIC, if available and permitted under law and by the GSEs.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin
OCI, but such approval may be changed or revoked at any time. With the Wisconsin OCI's approval, NMIH began allocating the
interest expense on its Term Loan to NMIC in the first quarter of 2017, consistent with the benefits NMIC received when NMIH
down-streamed the loan proceeds to NMIC.
NMIC's ability to pay dividends to NMIH is subject to insurance department notice or approval. Under Wisconsin law,
NMIC 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 12 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 12-month period ending the preceding December 31. NMIC has never paid any
dividends to NMIH. NMIC reported a statutory net loss for the twelve months ended December 31, 2017 and currently cannot pay
any dividends to NMIH through December 31, 2018 without the prior approval of the Wisconsin OCI. Certain other states in which
NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.
68
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 and meet minimum required asset thresholds under the PMIERs and
state capital requirements. NMIC's capital needs also depend on its decision to access the reinsurance markets. NMIH may require
liquidity to fund the capital needs of its insurance subsidiaries.
In November 2015, NMIH entered into the Credit Agreement for the Term Loan. On February 10, 2017, NMIH amended
the Credit Agreement (Amendment No. 1) to reduce the interest rate and extend the maturity date of the Term Loan from November
10, 2018 to November 10, 2019. The amended Term Loan bears interest at the Eurodollar Rate, as defined in the Credit Agreement
and subject to a 1.00% floor, plus an annual margin rate of 6.75%, payable monthly or quarterly based on our interest rate election.
On October 25, 2017, NMIH further amended the Credit Agreement (Amendment No. 2) to remove a covenant that required NMIH
to maintain liquidity (as defined therein) in an aggregate amount no less than all remaining interest payments due under the Term
Loan. As modified by Amendment No. 2, the Credit Agreement retains the requirement that NMIH maintain liquidity in an aggregate
amount no less than the sum of all remaining principal amortization payments due under the Term Loan, excluding principal scheduled
to be paid on its maturity date, determined to be $2.6 million as of December 31, 2017. The Credit Agreement contains other
restrictive covenants and required financial ratios and tests (which were not modified by Amendments No.1 or No.2) that we are
required to meet or maintain. The current covenants include, but are not limited to the following: a maximum debt-to-total capitalization
ratio (as defined therein) of 35%, maximum RTC ratio of 22.0:1.0, minimum liquidity (as modified by Amendment No. 2 and defined
therein), compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum shareholders'
equity requirements.
Consolidated Investment Portfolio
Our primary objectives with respect to our investment portfolio 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.
Substantially all of our investment portfolio is held in fixed maturity instruments. As of December 31, 2017, the fair value
of our investment portfolio was $715.9 million. We also had an additional $19.2 million of cash and equivalents as of December 31,
2017. Pre-tax book yield on the portfolio for the year ended December 31, 2017 was 2.3%. The book yield is calculated as period-
to-date net investment income divided by average amortized cost of the investment portfolio. Yield on the investment portfolio is
likely to change over time based on movements in interest rates, the duration or mix of our investment portfolio and other factors.
The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type
and credit rating:
Percentage of portfolio's fair value
Corporate debt securities
U.S. treasury securities and obligations of U.S. government agencies
Asset-backed securities
Cash, cash equivalents, and short-term investments
Municipal debt securities
Total
The ratings of our investment portfolio were:
December 31, 2017
December 31, 2016
59%
9
14
6
12
100%
52%
9
17
16
6
100%
Investment portfolio ratings at fair value
December 31, 2017
December 31, 2016
AAA
AA(1)
A(1)
BBB(1)
Total
(1) Include +/– ratings.
21%
19
46
14
100%
24%
19
44
13
100%
The ratings above are provided by one or more of: Moody's, S&P and Fitch Ratings. If three ratings are available, we assign
69
the middle rating for classification purposes, otherwise we assign the lowest rating.
Other-than-Temporary Impairment (OTTI)
As of December 31, 2017 and 2016, we held no other-than-temporarily impaired (OTTI) securities, and as of December
31, 2015, we held one OTTI security. For the year ended December 31, 2017, we recognized OTTI losses in earnings of $144 thousand
on a single security with an unfavorable recovery forecast. The impaired security was liquidated during the year. There were no
credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income
(loss).
For the year ended December 31, 2015, we recognized an OTTI loss in earnings of $89 thousand on a single security where
we expected a planned sale would result in a loss. The impaired security was liquidated in 2016.
Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 35% for for all prior years
through December 31, 2017. We will be subject to a statutory U.S. federal corporate income tax rate of 21% for the years ending
December 31, 2018 and all future periods. Our holding company files a consolidated U.S. federal and various state income tax
returns on behalf of itself and its subsidiaries.
Provisional amounts
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the statutory U.S. federal corporate
income tax rate from 35% to 21%. We have not completed our full assessment of the tax effects of the enactment of the Act on our
December 31, 2017 balances; however, in certain cases, as described below, we have made reasonable estimates of the effects on
our deferred tax balances. We recognized a $13.6 million income tax expense in the year ended December 31, 2017 for the items
we could reasonably estimate primarily related to the re-measurement of deferred tax assets and liabilities. We are still analyzing
the Act and refining our calculation on deferred our tax asset related to share-based compensation, which could affect the measurement
of these balances or give rise to further increases or decreases to our deferred tax amounts. For tax years beginning after December
31, 2017, the Act expanded the number of individuals whose compensation is subject to a $1 million cap on tax deductibility and
includes performance-based compensation in the calculation. As a result, the Company recorded a provisional amount to reduce the
future tax benefit related to share-based compensation. We will continue to make and refine our calculations as additional analysis
is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.
The Securities and Exchange Commission issued Staff Accounting Bulletin No. 118 (SAB 118) on December 23, 2017.
SAB 118 provides a one-year measurement period from a registrant's reporting period that includes the Act's enactment date to allow
the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under Accounting
Standards Codification (ASC) 740.
The ultimate impact of the Act on our reported results in fiscal 2017 and beyond may differ from the estimates provided
herein, possibly materially, due to, among other things, changes in interpretations and assumptions we have made, guidance that
may be issued, and other actions we may take as a result of the Act differently from that presently contemplated.
Our effective income tax rate on our pre-tax income was 58.2% for the year ended December 31, 2017. Our effective
income tax rate on our pre-tax loss was (459.0)% and 0.0% for the years ended December 31, 2016 and 2015, respectively. The
difference between our statutory tax rate and our effective tax rate for the year ended December 31, 2017 is primarily due to tax
expense of $13.6 million associated with the enactment of the Act, partially offset by a tax benefit of $3.3 million from excess share-
based compensation for vested restricted stock units (RSUs) and exercised stock options. The difference between our statutory tax
rate and our effective tax rate for the year ended December 31, 2016 is due to the release of the valuation allowance in 2016. Starting
in 2018, we expect that our consolidated effective tax rate will approximate the statutory corporate tax rates.
Since inception and prior to December 31, 2016, we recorded a valuation allowance against deferred tax assets, and, as
such, we generally did not record a benefit associated with the losses incurred in prior periods or other income tax benefits. At
December 31, 2016, after weighing applicable evidence, we concluded that it was more-likely-than-not that our deferred tax asset
would be realized. As a result, as of December 31, 2016, we released the valuation allowance on federal and certain state deferred
tax assets. We continued to record a valuation allowance against net state deferred tax assets, primarily related to state net operating
losses generated by NMIH that we do not expect to be utilized. NMIH operates at a loss and continues to only generate revenue
from its investment portfolio.
70
As of December 31, 2016, the positive evidence that weighed in favor of releasing the valuation allowance and ultimately
outweighed the negative evidence against releasing the allowance included:
•
•
•
•
•
•
•
our net operating loss carryforwards were expected to be fully utilized by 2018;
our other deferred tax assets were based on known recognition schedules and our expectation was that the majority
would either reverse in the next three years or were related to deferred tax liabilities;
our significant unearned premium balance which represents future revenue to be earned over the policies' lives;
the substantial growth in our IIF driving the increase in net premiums;
our positive earnings trends from quarterly and annual increases in revenue;
our taxable income in 2016 and our expected taxable income in future years; and
our expectation that we will be in a cumulative profit in a three-year period in 2017.
The primary negative evidence that was considered was our cumulative losses in recent years. Although ASC 740 does not
define the term or the length of time to consider when calculating the cumulative loss, practice and interpretations suggest that the
guideline, not a "bright line", is to aggregate the pretax results as adjusted for permanent items for three years (i.e., the current and
the two preceding years).
At December 31, 2016, we concluded that positive evidence of sufficient quantity and quality outweighed negative evidence
and supported our conclusion that it is more-likely-than-not that we will realize our federal and certain state deferred tax assets. The
reversal of our beginning-of-the-year valuation allowance against such deferred tax assets (resulting from a change in judgment
about the realizability of the related deferred tax assets in future years) is consistent with the requirements of ASC 740-10-45-20.
At December 31, 2016, we released the valuation allowance on federal and certain state deferred tax assets. A valuation allowance
continued to be recorded against net state deferred tax assets, primarily related to state net operating losses by NMIH that we do not
expect to be utilized. NMIH operates at a loss and currently only generates revenue from its investment portfolio.
We have examined the results through December 31, 2017, and performed a review of future expectations, which continue
to support the conclusion that it is more-likely-than-not that we will realize our federal and certain state deferred tax assets. We also
concluded to continue to apply a valuation allowance to the net state deferred tax assets, primarily related to state net operating losses
by NMIH that we do not expect to be utilized.
At December 31, 2017, we had a federal net operating loss carryforward of $93.3 million which expires from 2030 to 2037,
and state net operating loss carryforwards of $89.1 million, which expire in varying amounts during the years 2031 to 2037. Section
382 of the Internal Revenue Code 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 NOLs
were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2029.
There is a tax sharing agreement between NMIH and its subsidiaries, dated August 23, 2012 and amended on September
1, 2016. Under this agreement, each of the parties mutually agreed to file a consolidated federal income tax return for 2012 and
subsequent tax years, 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.
71
Off-Balance Sheet Arrangements and Contractual Obligations
We had no material off-balance sheet arrangements at December 31, 2017. In connection with the 2017 ILN Transaction,
we have certain future contractual commitments to Oaktown Re, a special purpose VIE that is not consolidated in our financial
results. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary
of Accounting Principles - Variable interest entity" and "Note 6, Reinsurance."
Contractual obligations at December 31, 2017 are summarized in the table that follows.
Contractual obligations
Long-term debt obligations (1)
Capital lease obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities reflected on the
registrant's balance sheet under GAAP
Total
$
$
Less than 1 year
1-3 years
3-5 years
More than 5 years
— $
(In Thousands)
— $
— $
1,507
—
1,711
3,155
—
145,130
—
7,252
175
—
—
—
3,221
—
—
6,373
$
152,557
$
3,221
$
—
—
—
—
—
—
—
(1) Long-term debt relates to our $150 million Credit Agreement and includes future interest payments using the minimum interest rate in effect
at December 31, 2017 of 7.75%.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operation are based on our consolidated financial
statements, which have been prepared in conformity with U.S. GAAP. In preparing our consolidated financial statements, management
has made estimates, assumptions and 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. Because the use of estimates is inherent
in GAAP, 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 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 premium
reserve 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 as coverage is effective. Annual premiums are initially deferred and earned
on a straight-line basis over the year of coverage. Premiums written on pool transactions are earned over the period that coverage
is provided. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned,
and any refundable premium is returned to the policyholder. Premiums returned to the policyholder are recorded as a reduction of
written and earned premiums in the paid period.
Reserve for Claims and Claims Expenses
Consistent with industry practice, we establish reserves for claims based on our best estimate of ultimate claim costs for
defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944). We establish reserves
for loans that have been in default for at least 60 days. Reserves for claims and allocated claims expenses, referred to as case reserves,
are established when we are notified of defaults by loan servicers. Additional claims reserves, referred to as IBNR reserves, are
established for loans that we estimate (based on actuarial review) have been in default for at least 60 days, but have not yet been
reported to us as such by servicers. We also establish reserves for unallocated claims expenses not associated with specific claims.
Claims expenses represent the estimated cost of the claim administration process, including legal and other fees, as well as other
general expenses of administering the claims settlement process.
The establishment of claims and claims 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 the claim payment expected to be paid on each such loan in default, which is
72
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 prevailing economic
conditions, such as mortgage rates, trends in unemployment and house price appreciation. We conduct an annual actuarial review
to evaluate, and, if necessary, update these assumptions.
Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains
and losses, after considering the related tax expense or benefit, are recognized as a component of accumulated other comprehensive
income (loss) in shareholders' equity. Net realized investment gains and losses are reported in income based on specific identification
of securities sold, and are reclassified out of accumulated other comprehensive income (loss).
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."
Each fiscal quarter, we evaluate our investments to determine whether declines in fair value below amortized cost were
considered other-than-temporary in accordance with applicable guidance. Under current guidance, a debt security impairment is
deemed other-than-temporary if (i) we either intend to sell the security or it is more likely than not that we will be required to sell
the security before recovery or (ii) we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security.
In evaluating whether a decline in fair value is other-than-temporary, we consider several factors including, but not limited to:
•
•
•
•
•
•
our intent to sell the security or whether it is more likely than not that we will be required to sell the security before
recovery;
severity and duration 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 credit downgrades of the applicable security or the issuer below investment grade; and
adverse conditions specifically related to the security, an industry or a geographic area.
Premium Deficiency Reserve
We perform a premium deficiency calculation 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 calculation of premium deficiency reserves requires the use of significant judgment and
estimates to determine the present value of future premiums and present value of expected claims and expenses on our business.
The present value of future premiums relies on, among other things, assumptions about persistency and repayment patterns on
underlying loans. The present value of expected claims and expenses depends on assumptions relating to severity of claims, claim
rates on current defaults and expected defaults in future periods. These assumptions may also include an estimate of expected
rescission activity. Assumptions used in calculating premium deficiency reserves can be affected by volatility in the current housing
and mortgage lending industries. To the extent premium patterns and actual claim experience differ from the assumptions used in
calculating a premium deficiency reserve, the differences between the actual results and our estimate will affect future period earnings.
In considering the potential sensitivity of the factors underlying our best estimate of premium deficiency reserves, it is possible that
even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have
a significant impact on establishing a premium deficiency reserve, should one be needed, and, correspondingly, on our operating
results.
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 and is adjusted as appropriate for policy cancellations to be consistent with
our revenue recognition policy. We estimate the rate of amortization to reflect actual experience and any changes to persistency or
loss development. For each book year of business, these costs are amortized to expense in proportion to estimated gross profits over
the estimated life of the policies.
73
Income Taxes
We account for income taxes using the liability method in accordance with ASC 740, Income Taxes. Under this method, we
determine deferred tax assets and liabilities based on the expected future tax effects of temporary differences at the enacted tax rates
applicable for the period in which the deferred tax assets or liabilities are 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 as compared to amounts already recognized as tax expense
in the consolidated statement of operations. Changes in tax laws, rates, regulations and policies, or the final determination of tax
audits or examinations, could materially affect our tax estimates.
We are required to establish a valuation allowance against our deferred tax assets when it is more likely than not that all or
a portion of our deferred tax assets will not be realized. We assess our need for a valuation allowance on a quarterly basis. In the
course of our review, we assess all available evidence, both positive and negative, including future sources of income, tax planning
strategies, future contractual cash flows and reversing temporary differences, and are required to exercise judgment and make
assumptions in this regard.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the
full year. When estimating our full year effective tax rate, we adjust our forecasted pre-tax income for gains and losses on our
investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and
other adjustments. The impact of these items is accounted for discretely at the applicable federal tax rate.
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 by
us using either (i) a physical settlement method or (ii) cashless exercise, where shares that are issued upon exercise of the warrants
are reduced to cover the cost of the exercise, in lieu of the holder remitting a cash payment of the exercise price. The warrants expire,
and are not exercisable after the 10th anniversary of the date they were issued. The exercise price and the number of warrants are
subject to anti-dilution provisions whereby the existing exercise price is adjusted downward, and the number of warrants increased,
for events that may not be dilutive. The adjustment may be in excess of any dilution suffered. 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 calculate the fair value of the warrants using a Black-Scholes option-
pricing model in combination with a binomial model. We use a Monte Carlo simulation model to value the pricing protection features
within the warrants. Variables in the model include the fair value of the stock, risk-free rate of return, dividend yield, expected life
and expected volatility of the Company's stock price.
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 RSUs and stock option grants under the NMI
Holdings, Inc. 2012 Stock Incentive Plan (2012 Plan) and the NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive
Plan (Amended 2014 Plan), which amended and restated the NMI Holdings, Inc. 2014 Omnibus Incentive Plan (2014 Plan). 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, our expected dividend yield and
the risk-free interest rate, as well as the expected option term, giving consideration to the contractual terms of any award and the
effects of expected exercise and post-vesting termination behavior. RSU grants to employees may contain a service condition, market
and service condition or performance and service condition. RSU grants to employees with a service or a performance condition and
RSU grants to non-employee directors are valued at our stock price on the date of grant less the present value of anticipated dividends.
The fair value of RSU grants to employees with a market condition are determined based on a Monte Carlo simulation model at the
date of grant.
74
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large portfolio of various holdings, types and maturities. NMIH's principal source of operating cash
is investment income. The assets within the investment portfolio are exposed to the same factors that affect overall financial market
performance.
We manage market risk via a defined investment policy implemented by our treasury function with oversight from our
Board'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, 2017 and 2016 was $716 million and $629 million,
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, 2017 the duration of our fixed income portfolio, including cash and cash equivalents, was 3.67 years,
which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a
change of 3.67% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 3.72 years,
which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a
change of 3.72% in fair value of our fixed income portfolio.
We are also subject to market risk related to our Term Loan and 2017 ILN Transaction. As discussed in Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Term Loan," the Term Loan bears interest
at a variable rate and, as a result, increases in market interest rates would generally result in increased interest expense on our
outstanding principal.
The risk premium amounts under the 2017 ILN Transaction 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.
75
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm - BDO USA LLP
Consolidated Balance Sheets as of December 31, 2017 and 2016
Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the years in the three-year period
ended December 31, 2017
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended
December 31, 2017
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2017
Notes to Consolidated Financial Statements
77
78
79
80
81
82
76
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") as of December 31, 2017
and 2016, 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, 2017, 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 at December 31, 2017
and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017,
in conformity with accounting principles generally accepted in the United States of America.
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 Public Company Accounting Oversight Board (United States) ("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. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but
not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
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.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2011.
San Francisco, CA
February 16, 2018
77
NMI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
Assets
December 31, 2017
December 31, 2016
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $713,859 and
$630,688 as of December 31, 2017 and December 31, 2016, respectively)
$
715,875
$
628,969
Cash and cash equivalents
Premiums receivable
Accrued investment income
Prepaid expenses
Deferred policy acquisition costs, net
Software and equipment, net
Intangible assets and goodwill
Prepaid reinsurance premiums
Deferred tax asset, net
Other assets
Total assets
Liabilities
Term loan
Unearned premiums
Accounts payable and accrued expenses
Reserve for insurance claims and claim expenses
Reinsurance funds withheld
Deferred ceding commission
Warrant liability, at fair value
Total liabilities
Commitments and contingencies
Shareholders' equity
Common stock - class A shares, $0.01 par value;
60,517,512 and 59,145,161 shares issued and outstanding as of December 31, 2017
and December 31, 2016, respectively (250,000,000 shares authorized)
Additional paid-in capital
Accumulated other comprehensive loss, net of tax
Accumulated deficit
Total shareholders' equity
$
$
19,196
25,179
4,212
2,151
37,925
22,802
3,634
40,250
19,929
3,695
47,746
13,728
3,421
1,991
30,109
20,402
3,634
37,921
51,434
542
894,848
$
839,897
143,882
$
163,166
23,364
8,761
34,102
5,024
7,472
385,771
605
585,488
(2,859)
(74,157)
509,077
144,353
152,906
25,297
3,001
30,633
4,831
3,367
364,388
591
576,927
(5,287)
(96,722)
475,509
839,897
Total liabilities and shareholders' equity
$
894,848
$
See accompanying notes to consolidated financial statements.
78
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
Revenues
Net premiums earned
Net investment income
Net realized investment gains (losses)
Other revenues
Total revenues
Expenses
Insurance claims and claims expenses
Underwriting and operating expenses
Total expenses
Other expense
(Loss) gain from change in fair value of warrant liability
Interest expense
Total other expense
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Earnings (loss) per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Net income (loss)
Other comprehensive income (loss), net of tax:
Net unrealized gains (losses) in accumulated other
comprehensive income, net of tax expense of $1,234, $1,178,
and $0 for each of the years in the three-year period ended
December 31, 2017, respectively
Reclassification adjustment for realized losses (gains) included
in net income, net of tax expense of $73, $0, and $0 for each of
the years in the three-years ended December 31, 2017,
respectively
Other comprehensive income (loss), net of tax
$
$
$
$
$
For the years ended December 31,
2017
2016
2015
(In Thousands, except for per share data)
165,740
16,273
208
522
182,743
5,339
106,979
112,318
(4,105)
(13,528)
(17,633)
52,792
30,742
22,050
$
0.37
0.35
$
$
59,816
62,186
110,481
$
13,751
(693)
276
123,815
2,392
93,223
95,615
(1,900)
(14,848)
(16,748)
11,452
(52,549)
64,001
1.08
1.05
59,071
60,829
$
$
$
45,506
7,246
831
25
53,608
650
80,599
81,249
1,905
(2,057)
(152)
(27,793)
—
(27,793)
(0.47)
(0.47)
58,683
58,683
22,050
$
64,001
$
(27,793)
2,559
1,429
(3,518)
(131)
2,428
758
2,187
(349)
(3,867)
(31,660)
See accompanying notes to consolidated financial statements.
79
Comprehensive income (loss)
$
24,478
$
66,188
$
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Common Stock - Class A
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
(In Thousands)
Accumulated
Deficit
Total
Balances, December 31, 2014
58,429 $
584 $
562,911 $
(3,607) $ (132,930) $
426,958
Common stock: class A shares issued under
stock plans, net of shares withheld for
employee taxes
Share-based compensation expense
Change in unrealized investment gains/
losses, net of tax of $0
Net loss
379
—
—
—
4
—
—
—
(694)
8,123
—
—
—
—
—
—
(690)
8,123
(3,867)
—
—
(27,793)
(3,867)
(27,793)
Balances, December 31, 2015
58,808 $
588 $
570,340 $
(7,474) $ (160,723) $
402,731
Common stock: class A shares issued under
stock plans, net of shares withheld for
employee taxes
Share-based compensation expense
Change in unrealized investment gains/
losses, net of tax expense of $1,178
Net income
Balances, December 31, 2016
Cumulative effect of change in accounting
principle
Common stock: class A shares issued related
to warrants
Common stock: class A shares issued under
stock plans, net of shares withheld for
employee taxes
Share-based compensation expense
Change in unrealized investment gains/
losses, net of tax expense of $1,307
Net income
337
—
—
—
3
—
—
—
(227)
6,814
—
—
—
—
2,187
—
—
—
—
64,001
(224)
6,814
2,187
64,001
59,145 $
591 $
576,927 $
(5,287) $
(96,722) $
475,509
—
32
1,341
—
—
—
—
*
14
—
—
—
388
183
(1,494)
9,484
—
—
—
—
—
—
2,428
515
903
—
—
—
—
183
(1,480)
9,484
2,428
—
22,050
22,050
Balances, December 31, 2017
60,518 $
605 $
585,488 $
(2,859) $
(74,157) $
509,077
*
During 2017, we issued 32,368 common shares with a par value of $0.01 related to the exercise of warrants, which is not identifiable
in this schedule due to rounding.
See accompanying notes to consolidated financial statements.
80
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
2017
2016
2015
(In Thousands)
$
22,050
$
64,001
$
(27,793)
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Net realized investment (gains) losses
Loss (gain) from change in fair value of warrant liability
Depreciation and amortization
Net amortization of premium on investment securities
Amortization of debt discount and debt issuance costs
Deferred income taxes
Share-based compensation expense
Changes in operating assets and liabilities:
Premiums receivable
Accrued investment income
Prepaid expenses
Deferred policy acquisition costs, net
Other assets
Unearned premiums
Reserve for insurance claims and claim expenses
Reinsurance balances, net
Accounts payable and accrued expenses
Net cash provided by operating activities
Cash flows from investing activities
Purchase of short-term investments
Purchase of fixed-maturity investments, available-for-sale
Proceeds from maturity of short-term investments
Proceeds from redemptions, maturities and sale of fixed-maturity
investments, available-for-sale
Software and equipment
Net cash used in provided by investing activities
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards
Proceeds from issuance of common stock related to employee equity
plans
Proceeds from issuance of common stock related to warrants
Proceeds from term loan, net of discount
Repayments of term loan
Payments of debt modification costs
Net cash (used in) provided by financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents, beginning of period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes paid
$
$
(208)
4,105
6,663
1,599
1,473
31,102
9,484
(11,451)
(791)
(160)
(7,816)
(3,153)
10,260
5,760
1,332
(2,486)
67,763
(131,196)
(219,079)
170,278
95,435
(8,510)
(93,072)
(8,582)
7,103
183
—
(1,500)
(445)
(3,241)
693
1,900
5,660
1,259
1,914
(52,909)
6,854
(8,585)
(548)
(563)
(12,579)
(452)
62,133
2,322
(2,456)
3,300
71,944
(170,067)
(143,568)
129,033
116,281
(11,471)
(79,792)
(755)
532
—
—
(1,500)
—
(1,723)
(28,550)
47,746
19,196
$
(9,571)
57,317
47,746
$
(831)
(1,905)
4,861
—
251
—
8,174
(4,095)
(1,166)
626
(14,545)
419
68,704
596
—
8,167
41,463
(21,160)
(343,771)
—
140,901
(6,135)
(230,165)
(1,105)
415
—
148,500
(375)
(4,437)
142,998
(45,704)
103,021
57,317
13,355
$
9,669
$
1,220
200
5
—
See accompanying notes to consolidated financial statements.
81
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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). In April 2012, we completed a private
placement of our securities, through which we offered and sold an aggregate of 55,000,000 of our Class A common stock resulting
in net proceeds of approximately $510 million (the Private Placement), and we completed the acquisition of our insurance subsidiaries
for $8.5 million in cash, common stock and warrants, plus the assumption of $1.3 million in liabilities. In November 2013, we
completed an initial public offering of 2.4 million shares of our common stock, and our common stock began trading on the NASDAQ
exchange on November 8, 2013, under the symbol "NMIH."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to
write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly 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.
2. Summary of Accounting Principles
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. Premiums written on pool transactions are earned over the period that coverage
is provided. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and
any refundable premium is returned to the policyholder. Premiums returned to policyholders are recorded as a reduction of written
and earned premiums in the current period.
For the year ended December 31, 2017, one customer represented 11% of our consolidated revenues. At December 31,
2017, approximately 14% of our total risk-in-force (RIF) was concentrated in California.
Use of Estimates
We use accounting principles and methods that conform to GAAP. Where GAAP specifically excludes mortgage insurance
we follow general industry practices. We are required to apply significant judgment and make material estimates in the preparation
of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are
required to apply these principles where actual measurement is not possible or practical.
Reserves for Insurance Claims and Claims Expenses
Consistent with industry practice, we establish reserves for claims based on our best estimate of ultimate claim costs for
defaulted loans using the general principles contained in Accounting Standards Committee (ASC) 944, Financial Services - Insurance
(ASC 944). We establish reserves for loans that have been in default for at least 60 days. Reserves for claims and allocated claims
expenses, referred to as case reserves, are established when we are notified of defaults by loan servicers. Additional claims reserves,
referred to as IBNR reserves, are established for loans that we estimate (based on actuarial review) have been in default for at least
60 days, but have not yet been reported to us as such by servicers. We also establish reserves for unallocated claims expenses not
associated with specific claims. Claims expenses represent the estimated cost of the claim administration process, including legal
and other fees, as well as other general expenses of administering the claims settlement process.
82
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The establishment of claims and claims 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 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, size of the loan and LTV ratios, and are strongly influenced by prevailing economic
conditions, such as mortgage rates, trends in unemployment and house price appreciation. We conduct an annual actuarial review to
evaluate and, if necessary, update these assumptions.
Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains
and losses, after considering the related tax expense or benefit, are recognized as a component of accumulated other comprehensive
income (loss) in shareholders' equity. Net realized investment gains and losses are reported in income based on specific identification
of securities sold, and are reclassified out of accumulated other comprehensive income (loss).
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 the change in effective yields and maturities are recognized on a prospective basis through yield adjustments.
Each quarter, we evaluate our investments to determine whether declines in fair value below amortized cost were considered
other-than-temporary in accordance with applicable guidance. Under the current guidance, a debt security impairment is deemed
other-than-temporary if (i) we either intend to sell the security or it is more likely than not that we will be required to sell the security
before recovery or (ii) we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security. In evaluating
whether a decline in fair value is other-than-temporary, we consider several factors including, but not limited to:
•
•
•
•
•
•
our intent to sell the security or whether it is more likely than not that we will be required to sell the security before
recovery;
severity and duration 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 credit downgrades of the applicable security or the issuer below investment grade; and
adverse conditions specifically related to the security, an industry, or a geographic area.
We consider items such as commercial paper with original maturities of 90 days or less to be short-term investments.
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 deferred policy acquisition costs (DAC).
DAC is reviewed periodically to determine that it does not exceed recoverable amounts and is adjusted as appropriate for policy
cancellations to be consistent with our revenue recognition policy. We estimate the rate of amortization to reflect actual experience
and any changes to persistency or loss development. For each book year of business, these costs are amortized to expense in proportion
to estimated gross profits over the estimated life of the policies. Total amortization of DAC for each of the three years in the three-
years period ended December 31, 2017, 2016 and 2015, net of a portion of ceding commission related to the 2016 QSR Transaction
(see Note 6, "Reinsurance"), was $5.8 million, $4.3 million and $2.8 million, respectively.
83
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Premium Deficiency Reserves
We consider whether a premium deficiency exists at each fiscal quarter using best estimate assumptions as of the testing
date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment
expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds 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 years period ended December 31, 2017.
Reinsurance
We account for premiums, claims and claims expenses that are ceded to reinsurers on bases consistent with those we use
to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums ceded
or otherwise paid to reinsurers as reductions to premium revenue.
We earn profit and ceding commissions in connection with our 2016 QSR Transaction (see Note 6, "Reinsurance"). Profit
commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of claims we
cede. We recognize any profit commissions we earn as increases to premium revenue. Ceding commissions are calculated as a
percentage of ceded written premiums, which are intended to cover our costs to acquire and service the direct policies. We earn the
ceding commissions in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of
the policies reinsured. We account for ceding commissions earned as reductions to underwriting and operating expenses.
We cede a portion of claims and claims expenses reserves to our reinsurers, which are accounted for as reinsurance
recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims expense on the consolidated statements
of operations. We remain directly liable for all loss payments in the event we are unable to collect from any reinsurer.
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 by
us using either (i) physical settlement method or (ii) cashless exercise, where shares that are issued upon exercise of the warrants
are reduced, to cover the cost of the exercise, in lieu of the holder remitting a cash payment of the exercise price. The warrants expire
and are not exercisable after the 10th anniversary of the date the warrant was issued. The exercise price and the number of warrants
are subject to anti-dilution provisions whereby the existing exercise price is adjusted downward, and the number of warrants increased,
for events that may not be dilutive. The adjustment may be in excess of any dilution suffered. 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 unit (RSU) and stock option grants
under the NMI Holdings, Inc. 2012 Stock Incentive Plan (2012 Plan) and the NMI Holdings, Inc. Amended and Restated 2014
Omnibus Incentive Plan (Amended 2014 Plan), which amended and restated the NMI Holdings, Inc. 2014 Omnibus Incentive Plan
(2014 Plan). 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 and
the effects of expected exercise and post-vesting termination behavior. RSU grants to employees may contain a service condition,
market and service condition or performance and service condition. RSU grants to employees with a service or a performance
condition and RSU grants to non-employee directors are valued at our stock price on the date of grant less the present value of
84
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
anticipated dividends. The fair value of RSU grants to employees with a market condition is determined based on a Monte Carlo
simulation model at the date of grant.
Earnings per Share
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding, while 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 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 3 to 7 years, unless factors indicate a shorter
useful life. For further detail, see "Note 12, Software and Equipment."
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, 2017.
Our intangible assets consist of state licenses and GSE 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, 2017.
Premiums Receivable
Premiums receivable consist of premiums due on our mortgage insurance policies. If a mortgage insurance premium is
unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled.
We have determined that the receivable write-off was immaterial as of December 31, 2017.
Variable interest entity
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re Ltd. (Oaktown Re), a Bermuda-domiciled
special purpose reinsurer. At inception of the reinsurance agreement, we determined that Oaktown Re was a variable interest entity
(VIE), as defined under GAAP (ASC 810), because it did not have sufficient equity at risk to finance its activities. We evaluated
the VIE to determine whether NMIC was its primary beneficiary and, if so, whether we were required to consolidate the assets and
liabilities of the VIE. The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE,
which most significantly impact its economic performance and (2) has significant economic exposure to the VIE; i.e., the obligation
to absorb losses or receive benefits that could potentially be significant. The determination of whether an entity is the primary
beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results
of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities
that most significantly impact the performance of the VIE.
We concluded that we are not the primary beneficiary of Oaktown Re and that consolidation is not required, as we do not
have significant economic exposure in the entity.
See Note 6, "Reinsurance" for further discussion of the reinsurance arrangement.
85
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue.
In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In
addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash
flows arising from contracts with customers. In August 2015, ASU 2015-14 deferred the provisions of ASU 2014-09 to be effective
for interim and annual periods beginning after December 15, 2017. In December 2016, the FASB clarified that all contracts that are
within the scope of Topic 944, Financial Services-Insurance, are excluded from the scope of ASU 2014-09. Accordingly, this update
will not impact the recognition of revenue related to insurance premiums or investment income, which represent a majority of our
total revenues. The adoption of this update for our loan review services revenue (our only revenue stream in scope), effective January
1, 2018, will be done using the modified-retrospective approach and is immaterial to our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires that businesses recognize rights
and obligations associated with certain leases as assets and liabilities on the balance sheet. The standard also requires additional
disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. For public business entities, this update
is effective for annual periods beginning after December 15, 2018 and interim periods therein. Early adoption is permitted in any
period. We expect to adopt this guidance on January 1, 2019. In September 2017, ASU 2017-13, added guidance from an SEC Staff
Announcement, "Transition Related to Accounting Standards Update No. 2016-02." We anticipate this standard will have an impact
on our financial position, primarily due to our office space operating lease, as we will be required to recognize lease assets and lease
liabilities on our consolidated balance sheet. We will continue to assess the potential impacts of this standard, including the impact
the adoption of this guidance will have on our results of operations or cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This update requires
companies to measure all expected credit losses for financial assets held at the reporting date. The standard also amends the accounting
for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard will take
effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019.
We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update is intended to reduce
diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The
standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2017. We have determined that the adoption of this update, effective January 1, 2018, will have no impact on our
consolidated financial statements.
In August 2016, the FASB issued ASU 2016-16, Income Taxes- Intra-Entity Transfers of Assets Other Than Inventory (Topic
740). This update is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than
inventory. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years,
beginning after December 15, 2017. The adoption of this update, effective January 1, 2018, will have no impact on our consolidated
financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update is intended to
simplify the test for goodwill impairment. The standard will take effect for public business entities for fiscal years, and interim
periods within those fiscal years, after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment
tests performed on testing dates after January 1, 2017. We have determined that the adoption of this ASU will have no impact on our
consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20).
This update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date.
The standard will take effect for public business entities for fiscal years beginning after December 15, 2017. Early adoption is
permitted, and if an entity early adopts the guidance in an interim period, any adjustments are reflected as of the beginning of the
fiscal year that includes that interim period. The adoption of this update, effective January 1, 2018, will have no impact on our
consolidated financial statements.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic
480), and Derivatives and Hedging (Topic 815). This update is intended to simplify the accounting for certain equity-linked financial
instruments. This standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years,
86
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
beginning after December 15, 2018. Early adoption is permitted. The guidance must be applied using a full or modified retrospective
approach. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
Immaterial Correction of Prior Period Amounts
During the first quarter of 2017, after filing the 2016 10-K, including the audited financial statements included therein, we
discovered that $1.8 million of deferred taxes on vested options associated with employees terminated in previous years had not
been reversed. Because our deferred tax asset (DTA) was subject to a valuation allowance prior to December 31, 2016, no expense
would have been recognized in periods prior to December 31, 2016. However, at December 31, 2016, when we released the valuation
allowance against the DTA, the DTA was overstated by $1.8 million and resulted in a $1.8 million overstatement of our 2016 income
tax benefit and net income.
To provide consistency in the consolidated statements and as permitted by Staff Accounting Bulletin (SAB) 108, revisions
for these immaterial amounts to previously reported annual amounts are reflected in the Consolidated Balance Sheet financial
information herein and in the Consolidated Statements of Operations. A comparison of the affected amounts as previously reported
and as adjusted are presented below.
As of and for the full year ended December 31, 2016
As previously reported
As adjusted
Income Statement
Net income
Income tax (benefit)
Basic EPS
Diluted EPS
Balance Sheet
Deferred tax asset, net
Total assets
Accumulated deficit
Total shareholders' equity
Statement of Cash Flows
Net income
Deferred income taxes
Footnote 11. Income Taxes
$
$
$
$
(In thousands)
65,841
(54,389)
1.11
1.08
$
$
53,274
$
841,737
(94,882)
477,349
64,001
(52,549)
1.08
1.05
51,434
839,897
(96,722)
475,509
65,841
$
(54,749)
64,001
(52,909)
Reconciliation between the statutory to effective income tax (benefit) rate:
Valuation allowance
Effective income tax rate
Components of net deferred income tax asset (liability):
Share-based compensation
Valuation allowance
Net deferred income tax asset (liability)
Change in Accounting Principle
(527.0)%
(474.9)%
$
11,231
$
(7,252)
53,274
(511.1)%
(459.0)%
9,080
(6,941)
51,434
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718),
which intends to simplify various aspects of the accounting for and reporting of share-based payments. The new accounting is required
to be adopted using a modified retrospective approach, with a cumulative-effect adjustment to opening retained earnings for any
outstanding liability awards that qualify for equity classification under the new guidance.
87
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
As the guidance is effective for annual and interim reporting periods beginning after December 15, 2016, we adopted the
new guidance in the first quarter of 2017. This required us to reflect any adjustments as of January 1, 2017, the beginning of the
annual period that includes the interim period of adoption. The primary impact of adoption was the recognition of excess tax benefits
in our provision for income taxes in the consolidated statements of operations. Additionally, our consolidated statements of cash
flows now present excess tax benefits as an operating activity on a prospective basis. Finally, we have elected to account for forfeitures
as they occur, rather than estimate expected forfeitures. The net cumulative effect of this change was recognized as a $0.5 million
reduction to the accumulated deficit as of January 1, 2017.
Subsequent Events
NMIC entered into its second quota share reinsurance treaty with a broad panel of highly rated reinsurers that will take
effect January 1, 2018 (2018 QSR Transaction). Under the 2018 QSR Transaction, NMIC agrees to cede 25% of its eligible policies
written in 2018 and 20% to 30% (amount at NMIC's sole election, to be exercised no later than December 1, 2018) of eligible policies
written in 2019. The Company will receive a ceding commission equal to 20% of ceded premiums earned, as well as a profit
commission equal to 61% of ceded premiums earned, reduced by any losses ceded under the treaty. The 2018 QSR Transaction is
scheduled to terminate on December 31, 2029.
3. Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains
and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an
accumulated basis in shareholders' equity. Net realized investment gains and losses are reported in income based on specific
identification of securities sold.
Fair Values and Gross Unrealized Gains and Losses on Investments
As of December 31, 2017
U.S. Treasury securities and obligations of
U.S. government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total bonds
Long-term investments - other
Short-term investments
Total investments
Amortized
Cost
Gross Unrealized
Gains
Losses
(In Thousands)
Fair
Value
$
65,669
$
— $
89,973
435,562
100,153
691,357
353
22,149
534
4,231
916
5,681
—
58
$
713,859
$
5,739
$
(981) $
(659)
(1,958)
(125)
(3,723)
—
—
(3,723) $
64,688
89,848
437,835
100,944
693,315
353
22,207
715,875
As of December 31, 2016
U.S. Treasury securities and obligations of
U.S. government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total bonds
Short-term investments
Total investments
Amortized
Cost
Gross Unrealized
Gains
Losses
(In Thousands)
Fair
Value
$
64,135
$
6
$
40,801
349,712
114,456
569,104
61,584
131
1,722
765
2,624
198
$
630,688
$
2,822
$
(962) $
(663)
(2,356)
(560)
(4,541)
—
(4,541) $
63,179
40,269
349,078
114,661
567,187
61,782
628,969
As of December 31, 2017 and December 31, 2016, approximately $7.0 million and $6.9 million 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.
88
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Scheduled Maturities
The amortized cost and fair values of available-for-sale securities as of December 31, 2017 and December 31, 2016, by
contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for
periodic payments throughout their lives, they are listed below in a separate category.
As of December 31, 2017
Due in one year or less
Due after one through five years
Due after five through ten years
Due after ten years
Asset-backed securities
Total investments
As of December 31, 2016
Due in one year or less
Due after one through five years
Due after five through ten years
Due after ten years
Asset-backed securities
Total investments
Aging of Unrealized Losses
Amortized
Cost
Fair
Value
(In Thousands)
97,406
$
195,795
305,798
14,707
100,153
713,859
$
97,394
195,626
306,930
14,981
100,944
715,875
Amortized
Cost
Fair
Value
(In Thousands)
94,382
$
173,296
242,005
6,549
114,456
630,688
$
94,584
173,251
240,060
6,413
114,661
628,969
$
$
$
$
As of December 31, 2017, the investment portfolio had gross unrealized losses of $3.7 million, $2.2 million of which has
been in an unrealized loss position for a period of 12 months or greater. We did not consider these securities to be other-than-
temporarily impaired as of December 31, 2017. We based our conclusion that these investments were not other-than-temporarily
impaired as of December 31, 2017 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements
since the purchase date; (ii) we do not intend to sell these investments; and (iii) we do not believe that it is more likely than not that
we will be required to sell these investments before recovery of our amortized cost basis, which may not occur until maturity. For
those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:
As of December 31, 2017
U.S. Treasury securities and
obligations of U.S.
government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total
Less Than 12 Months
12 Months or Greater
Total
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
(Dollars in Thousands)
10
17,945
26 $ 34,882 $
(587)
(395)
(1,129)
(62)
5
64 $ 114,243 $ (2,173)
48,978
12,438
23
16 $ 29,806 $
21
94
22
38,628
128,313
27,947
(394)
(264)
(829)
(63)
153 $ 224,694 $ (1,550)
89
42 $ 64,688 $
56,573
(981)
(659)
177,291
(1,958)
40,385
(125)
31
117
27
217 $ 338,937 $ (3,723)
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Less Than 12 Months
12 Months or Greater
Total
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
# of
Securities
Fair
Value
Unrealized
Losses
(Dollars in Thousands)
33 $ 51,093 $
28,659
(962)
(617)
135,115
(1,955)
38,702
(510)
14
77
30
— $
— $
1
8
6
1,704
13,873
2,472
—
(46)
(401)
(50)
(497)
33 $ 51,093 $
30,363
(962)
(663)
148,988
(2,356)
41,174
(560)
15
85
36
169 $ 271,618 $ (4,541)
As of December 31, 2016
U.S. Treasury securities and
obligations of U.S.
government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total
154 $ 253,569 $ (4,044)
15 $ 18,049 $
Net Investment Income
The following table presents the components of net investment income:
Investment income
Investment expenses
Net investment income
For the year ended December 31,
2017
2016
(In Thousands)
2015
$
$
17,046
(773)
16,273
$
14,503
(752)
13,751
$
7,729
(483)
7,246
The following table presents the components of net realized investment gains (losses):
Gross realized investment gains
Gross realized investment losses
Net realized investment gains (losses)
For the year ended December 31,
2017
2016
(In Thousands)
2015
$
$
546
(338)
208
$
748
(1,441)
(693) $
1,526
(695)
831
Investment Securities - Other-than-Temporary Impairment (OTTI)
As of December 31, 2017 and 2016, we held no other-than-temporarily impaired securities. For the year ended December
31, 2017, we recognized OTTI losses in earnings of $144 thousand in the first quarter related to a single security with an unfavorable
recovery forecast. The impaired security was liquidated in the second quarter. There were no credit losses recognized in earnings
for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss).
For the year ended December 31, 2015, we recognized an OTTI loss in earnings of $89 thousand due to a planned sale that
we expected would result in a loss. The impaired security was liquidated in February 2016.
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.
90
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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.
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.
91
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
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)
(In Thousands)
Fair Value
As of December 31, 2017
U.S. Treasury securities and obligations of
U.S. government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Long-term investments - other
Cash, cash equivalents and short-term
investments
$
59,844
$
4,844
$
— $
—
—
—
353
41,403
89,848
437,835
100,944
—
—
—
—
—
—
—
Total assets
Warrant liability
Total liabilities
$
$
101,600
$
633,471
$
—
— $
—
— $
— $
7,472
7,472
$
64,688
89,848
437,835
100,944
353
41,403
735,071
7,472
7,472
As of December 31, 2016
U.S. Treasury securities and obligations of
U.S. government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Cash, cash equivalents and short-term
investments
Total assets
Warrant liability
Total liabilities
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)
(In Thousands)
Fair Value
$
$
$
50,719
$
12,460
$
— $
—
—
—
109,528
40,269
349,078
114,661
—
—
—
—
—
160,247
$
516,468
$
—
— $
—
— $
— $
3,367
3,367
$
63,179
40,269
349,078
114,661
109,528
676,715
3,367
3,367
There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level three, of the fair value hierarchy
during the years ended December 31, 2017 and 2016.
The following is a roll-forward of Level 3 liabilities measured at fair value:
For the year ended December 31,
2017
2016
(In Thousands)
2015
Balance, January 1,
Change in fair value of warrant liability included in earnings
Balance, December 31
$
$
3,367
4,105
7,472
$
$
1,467
1,900
3,367
$
$
3,372
(1,905)
1,467
We revalue the warrant liability quarterly using 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. The following table
outlines the key inputs and assumptions used in the option-pricing model as of the dates indicated.
92
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Common Stock Price
Risk free interest rate
Expected life
Expected volatility
Dividend yield
As of December 31,
$
2017
2016
2015
$
17.00
1.99%
3.07 years
30.6%
0%
$
10.65
1.78%
4.33 years
32.7%
0%
6.77
1.91%
5.92 years
32.7%
0%
The changes in fair value of the warrant liability for the years ended December 31, 2017, 2016 and 2015 are primarily
attributable to changes in the price of our common stock during the respective periods.
5. Term Loan
On November 10, 2015, we entered into a credit agreement (the Credit Agreement) to obtain a $150 million three-year
senior secured term loan (the Term Loan). On February 10, 2017, we amended the Credit Agreement (Amendment No. 1) to
reduce the interest rate and extend the maturity date of the Term Loan from November 10, 2018 to November 10, 2019. On
October 25, 2017, we further amended the Credit Agreement (Amendment No. 2) to remove a covenant that required NMIH to
maintain liquidity (as defined therein) in an aggregate amount no less than all remaining interest payments due under the Term
Loan. As modified by Amendment No. 2, the Credit Agreement retains a requirement that NMIH maintain liquidity in an
aggregate amount no less than the sum of all remaining principal amortization payments due under the Term Loan, excluding
principal scheduled to be paid on its maturity date. We have concluded that the amendments to the Credit Agreement should be
treated as modifications.
As of December 31, 2017, the Term Loan bears interest at the Eurodollar Rate, as defined in the Credit Agreement and
subject to a 1.00% floor, plus an annual margin rate of 6.75%, representing an all-in rate of 8.23%, payable monthly or quarterly
based on our interest rate election. Quarterly principal payments of $375 thousand are also required. The outstanding balance of
the Term Loan as of December 31, 2017 was $147 million.
Debt issuance costs totaling $4.9 million, including $445 thousand related to Amendment No.1 and Amendment No.2
modifications and a 1% original issue discount, are being amortized to interest expense, using the effective interest method, over
the contractual life of the Term Loan. Interest expense for the Term Loan includes interest and amortization of issuance costs,
modification costs and the original issue discount. For the twelve months ended December 31, 2017, we recorded $13.5 million of
interest expense.
We are subject to various covenants under the amended Credit Agreement, which include, but are not limited to the
following: a maximum debt-to-total capitalization ratio (as defined therein) of 35%, maximum risk-to-capital (RTC) ratio of
22.0:1.0, minimum liquidity (as defined therein) of $2.6 million as of December 31, 2017, compliance with the PMIERs financial
requirements (subject to any GSE-approved waivers), and minimum shareholders' equity requirements. This description is not
intended to be complete in all respects and is qualified in its entirety by the terms of the amended Credit Agreement, including its
covenants and events of default. We were in compliance with all covenants as of December 31, 2017.
Future principle payments for the Term Loan as of December 31, 2017 are as follows:
As of December 31, 2017
2018
2019
Total
6. Reinsurance
Principal
(In thousands)
$
$
1,500
145,125
146,625
We enter into third-party reinsurance transactions to actively manage our risk, ensure PMIERs compliance and support
the growth of our business. The GSEs and the Wisconsin OCI have approved all such transactions (subject to certain conditions
and periodic ongoing review, including levels of approved capital credit).
93
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The effect of our reinsurance agreements on premiums written and earned is as follows:
Net premiums written
Direct
Ceded (1)
Net premiums written
Net premiums earned
Direct
Ceded (1)
Net premiums earned
(1) Net of profit commission
Excess-of-loss reinsurance
December 31, 2017
December 31, 2016
December 31, 2015
For the year ended
(In Thousands)
$
$
$
$
202,586
(28,914)
173,672
192,326
(26,586)
165,740
$
$
$
$
177,962 $
(43,270)
134,692 $
115,830 $
(5,349)
110,481 $
114,210
—
114,210
45,506
—
45,506
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re that provides for up to $211.3 million of
aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance
policies written from 2013 through December 31, 2016. For the reinsurance coverage period, NMIC will retain the first layer of
$126.8 million of aggregate losses and Oaktown Re will then provide second layer coverage up to the outstanding reinsurance
coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount. The outstanding reinsurance
coverage amount decreases from $211.3 million at inception over a ten-year period as the underlying covered mortgages amortize
and/or are repaid, and was $177 million as of December 31, 2017. The outstanding reinsurance coverage amount will stop amortizing
if certain credit enhancement or delinquency thresholds are triggered.
Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million
to unaffiliated investors (the Notes). The Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of
the Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re to NMIC under the reinsurance
agreement. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds.
We refer collectively to NMIC's reinsurance agreement with Oaktown Re and the issuance of the Notes by Oaktown Re as the 2017
ILN Transaction. Under the terms of the 2017 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding
reinsurance coverage amount and pays Oaktown Re for its anticipated operating expenses (capped at $300 thousand per year). For
the year ended December 31, 2017, NMIC paid risk premiums of $5.0 million. NMIC did not cede any losses to Oaktown Re.
Under the reinsurance agreement, NMIC holds an optional termination right if certain events occur, including, among others,
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 the agreement. In addition, there are certain events that will result
in mandatory termination of the agreement, including NMIC's failure to pay premiums or consent to reductions in the trust account
to make principal payments to noteholders, among others.
At the time the 2017 ILN Transaction was entered into with Oaktown Re, we evaluated the applicability of the accounting
guidance that addresses VIEs. As a result of the evaluation of the 2017 ILN Transaction, we concluded that Oaktown Re is a VIE.
However, given that NMIC does not have significant economic exposure in Oaktown Re, we do not consolidate Oaktown Re in our
consolidated financial statements.
Quota share reinsurance
In September 2016, NMIC entered into a quota-share reinsurance transaction with a panel of third-party reinsurers (2016
QSR Transaction). Each of the third-party reinsurers has an insurer financial strength rating of A- or better by Standard and Poor's
Rating Services (S&P), A.M. Best or both.
94
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Under the 2016 QSR Transaction, effective September 1, 2016, NMIC ceded premiums related to:
•
•
•
25% of existing risk written on eligible policies as of August 31, 2016;
100% of existing risk under our pool agreement with Fannie Mae; and
25% of risk on eligible policies written from September 1, 2016 through December 31, 2017.
The following table shows the amounts related to the 2016 QSR Transaction:
Ceded risk-in-force
Ceded premiums written
Ceded premiums earned
Ceded claims and claims expenses
Ceding commission written
Ceding commission earned
Profit commission
For the year ended
December 31, 2017
December 31, 2016
(In Thousands)
$
2,983,353
(51,948)
(49,619)
1,687
10,390
9,806
28,084
$
2,008,385
(50,553)
(12,632)
297
10,111
2,303
7,283
Ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums
earned in a manner consistent with the recognition of income on direct premiums. NMIC receives a 20% ceding commission for
premiums ceded pursuant to this transaction. NMIC also receives a profit commission, provided that the loss ratio on the loans
covered under the agreement generally remains below 60%, as measured annually. Ceded claims and claims expenses reduce NMIC's
profit commission on a dollar-for-dollar basis.
In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments
for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and
profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until
exhausted. NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer
in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves
related to our 2016 QSR Transaction was $1.9 million as of December 31, 2017.
The agreement 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. However, NMIC has the option, based on certain conditions and subject to a termination fee, to
terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC
reassuming the related risk.
7. Reserves for Insurance Claims and Claim Expenses
We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on
insured mortgage loans. Consistent with industry practice, we establish reserves for loans that have been reported to us by servicers
as having been in default for at least 60 days, referred to as case reserves, and additional loans that we estimate (based on actuarial
review) have been in default for at least 60 days that have not yet been reported to us by servicers, referred to as IBNR reserves. We
also establish claims expense reserves, which represent the estimated cost of the claim administration process, including legal and
other fees, as well as other general expenses of administering the claims settlement process. As of December 31, 2017, we had
reserves for insurance claims and claims expenses of $8.8 million for 928 primary loans in default. For the year ended 2017, we paid
27 claims totaling $1.3 million, including nine claims ceded under the 2016 QSR Transaction representing $81 thousand of ceded
claims and claims 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, 2017, 66 loans in the pool were past due by 60 days or
more. These 66 loans represented approximately $4.3 million of RIF. Due to the size of the remaining deductible, the low level of
notices of default (NODs) reported on loans in the pool through December 31, 2017 and the expected severity (all loans in the pool
have loan-to-value (LTV) ratios under 80%,) we did not have any case or IBNR reserves for pool risks at December 31, 2017 or
95
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
December 31, 2016. In connection with the settlement of pool claims, we applied $368 thousand to the pool deductible through
December 31, 2017. At December 31, 2017, the remaining pool deductible was $10.0 million. We have not paid any pool claims to
date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims
and claim expenses:
December 31, 2017
December 31, 2016
December 31, 2015
For the year ended
Beginning balance
Less reinsurance recoverables (1)
Beginning balance, net of reinsurance recoverables
(In Thousands)
$
$
3,001
(297)
2,704
679
$
—
679
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
Prior years (3)
Total claims and claims expenses incurred
Less claims paid:
Claims and claim expenses paid:
Current year (2)
Prior years (3)
Total claims and claim expenses paid
Reserve at end of period, net of reinsurance recoverables
Add reinsurance recoverables (1)
Ending balance
6,140
(801)
5,339
27
1,157
1,184
6,859
1,902
2,457
(65)
2,392
171
196
367
2,704
297
$
8,761
$
3,001
$
83
—
83
699
(49)
650
50
4
54
679
—
679
(1) Related to ceded losses recoverable on the 2016 QSR Transaction, included in "Other Assets" on the Consolidated Balance Sheets. 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 had defaulted in a prior year and
subsequently cured and later re-defaulted in the current year, that default would be included in the current year.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default since that time.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior
years, including IBNR reserves. The amount of claims incurred relating to current year NODs represents the estimated amount of
claims and claims expenses to be ultimately paid on such loans in default. We recognized $801 thousand, $65 thousand, and $49
thousand of favorable prior year development related to claims incurred in prior years during the year ended December 31, 2017,
2016 and 2015, respectively, due to NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease
our original estimates as we learn additional information about individual defaults and claims and continue to observe and analyze
loss development trends in our portfolio. Gross reserves of $1.0 million related to prior year defaults remained as of December 31,
2017.
96
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The following tables provide claim development data, by accident year and a reconciliation to the reserve for insurance
claims and claims expenses.
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of
Reinsurance (1)
As of December 31, 2017
Accident Year
2013
2014
2015
2016
2017
Total of IBNR
NODs (2)
$
— $
— $
83
—
34
699
2013
2014
2015
2016
2017
($ Values In Thousands)
$
— $
4
664
2,394
Total
$
4
743
1,568
6,028
8,343
$
—
—
2
16
452
470
(1) Amounts include case and IBNR reserves.
(2) The number of NODs outstanding as of December 31, 2017 is the total number of loans in default over 60 days for which we have established reserves.
Accident Year
2013
2014
2015
2016
2017
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, net of Reinsurance
$
— $
(In Thousands)
— $
—
— $
4
50
— $
4
246
171
2013
2014
2015
2016
2017
—
—
3
32
893
928
—
4
684
890
27
Total
$
1,605
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, 2017
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of
Reinsurance
Cumulative Paid Claims and Allocated Claims Adjustment Expenses, net of Reinsurance
Liabilities for unpaid claims and allocated claims adjustment expenses, net of reinsurance
Reinsurance recoverable on unpaid claims
Unallocated claims adjustment expenses
Total gross liability for unpaid claims and claim adjustment expenses
$
$
8,343
(1,605)
6,738
1,902
121
8,761
The following table shows, on average, the percentage of claims and allocated claims adjustment expenses paid over the
years after a claim is incurred.
Average annual percentage payout of incurred claims and allocated claims adjustment expenses by age, net of
reinsurance
Claims duration
disclosure
Year 1
6%
Year 2
Year 3
Year 4
Year 5
57%
97
59%
—%
—%
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
8. Earnings (Loss) per Share (EPS)
Basic earnings (loss) per share is based on the weighted average number of shares of common stock outstanding, while
diluted earnings (loss) per share 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 RSUs, and exercise of vested and unvested stock options and
outstanding warrants. The following table reconciles the net income (loss) and the weighted average shares of common stock
outstanding used in the computations of basic and diluted earnings (loss) per share of common stock:
Basic net income (loss)
Basic weighted average shares outstanding
Basic earnings (loss) per share
Diluted net income (loss)
Basic weighted average shares outstanding
Dilutive effect of issuable shares
Diluted weighted average shares outstanding
Diluted earnings (loss) per share
Anti-dilutive securities
9. Warrants
For the year ended December 31,
2017
2016
2015
(In Thousands, except for per share data)
$
$
$
22,050
59,816
0.37
22,050
59,816
2,370
62,186
$
$
$
64,001
59,071
1.08
64,001
59,071
1,758
60,829
(27,793)
58,683
(0.47)
(27,793)
58,683
—
58,683
0.35
$
1.05
$
(0.47)
995
4,764
6,267
$
$
$
$
We issued 992 thousand warrants in connection with our Private Placement. 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, 2017, 55 thousand warrants were exercised resulting in 32 thousand common shares
issued. No warrants were exercised during the years ended 2016 and 2015.
We account for these 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.
10. Share-Based Compensation
Share-based compensation includes stock options and restricted stock units (RSUs) granted under the 2012 Plan and the
Amended 2014 Plan.
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 3.85 million shares available for stock options and 1.65 million shares available for RSUs. 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
generally is for a three-year period. Upon the exercise of stock options, we issue shares from the authorized, unissued share reserve.
98
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
The 2014 Plan was approved by our stockholders at our annual meeting on May 8, 2014. The 2014 Plan authorized 4.0
million shares of common stock to be reserved for issuance. On May 11, 2017, our stockholders approved the Amended 2014 Plan
at our annual stockholder meeting. The Amended 2014 Plan authorized an additional 2.0 million shares of common stock for issuance
and, when taken together with the 2014 Plan, authorized a total of 6.0 million shares of common stock to be reserved for issuance.
These shares may be either authorized but unissued shares or treasury shares.
A summary of option activity during the years ended December 31, 2017, December 31, 2016, and December 31, 2015 is
as follows:
For the year ended December 31, 2017
Shares
Options outstanding at December 31, 2016
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at December 31, 2017
For the year ended December 31, 2016
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
Weighted Average
Exercise Price
3,026
$
574
(273)
(1)
(15)
3,311
3.97
3.89
3.93
4.97
4.76
3.95
$
$
10.27
11.06
10.17
12.32
12.02
10.41
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
Weighted Average
Exercise Price
Options outstanding at December 31, 2015
3,851
$
3.94
$
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at December 31, 2016
—
—
(41)
(784)
3,026
$
—
—
3.33
3.87
3.97
$
10.21
—
—
8.92
10.06
10.27
For the Year Ended December 31, 2015
Shares
Options outstanding at December 31, 2014
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at December 31, 2015
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
Weighted Average
Exercise Price
3,630
$
789
—
(64)
(504)
3,851
$
4.16
3.06
—
4.90
4.05
3.94
$
$
10.66
8.49
—
12.20
10.48
10.21
As of December 31, 2017, there were approximately 2.6 million fully vested and exercisable options. There were 272.8
thousand exercises during the year with an aggregate intrinsic value of $1.3 million. The weighted average exercise price for the
fully vested and exercisable options was $10.39. The remaining weighted average contractual life of fully vested and exercisable
options as of December 31, 2017 was 5.2 years. The aggregate grant date intrinsic value of fully vested and exercisable options was
$17.0 million as of December 31, 2017.
As of December 31, 2017, there was $1.1 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 1.52 years.
We account for stock options under ASC 718, which requires all share-based payments to be recognized in the financial
statements at their fair values. To measure the fair value of outstanding stock options granted or modified, we utilize the Black-
99
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Scholes options pricing model. Compensation expenses are recognized over the requisite service period, which is generally the
three-year vesting period of the options (vesting in one-third increments per year).
The estimated grant date fair values of the stock options granted during the years ended December 31, 2017 and 2015 were
calculated using the Black-Scholes valuation model based on the following assumptions. There were no stock options granted during
2016.
Expected life
Risk free interest rate
Dividend yield
Expected stock price volatility
Projected forfeiture rate
As of December 31,
2017
2016
2015
6 years
2.04%-2.08%
—%
30.5%-32.7%
—%
—
—%
—%
—%
—%
6 years
1.65%-1.78%
—%
34.4%
7.50%
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 historical exercise data is not available and the
options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten 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. At the
time of grants, our common shares' trading history was not sufficient to calculate an expected volatility representative of the volatility
over the expected lives of the options. As a substitute for such estimate, we used historical volatilities of a set of comparable companies
in the industry in which we operate.
Projected Forfeiture Rate - is the estimated percentage of options granted that are expected to be forfeited or canceled before
becoming fully vested. An increase in the forfeiture rate will decrease compensation expense. In the first quarter of 2017, we adopted
ASU 2016-09 and elected to account for forfeitures as they occur, rather than estimate expected forfeitures.
100
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
A summary of RSU activity during the years ended December 31, 2017, 2016 and 2015 are as follows:
For the year ended December 31, 2017
Non-vested restricted stock units at December 31, 2016
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Non-vested restricted stock units at December 31, 2017
For the year ended December 31, 2016
Non-vested restricted stock units at December 31, 2015
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Non-vested restricted stock units at December 31, 2016
For the Year Ended December 31, 2015
Non-vested restricted stock units at December 31, 2014
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Non-vested restricted stock units at December 31, 2015
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
2,538
$
988
(1,367)
(94)
2,065
$
6.01
11.22
6.67
8.96
8.15
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
1,443
$
1,551
(381)
(75)
2,538
$
7.81
4.98
8.71
5.81
6.01
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
1,209
$
784
(465)
(85)
1,443
$
8.90
7.48
9.88
8.95
7.81
At December 31, 2017, we had 2.1 million shares of granted and non-vested RSUs, consisting of 1.9 million shares that are
subject to service condition vesting requirements and 0.2 million shares that are subject to service and performance condition vesting
requirements. All RSUs subject to market and service condition vesting requirements vested prior to December 31, 2017. The total
fair value of shares vested during the year ended December 31, 2017 was $18.1 million. The remaining weighted average contractual
life of non-vested RSUs was 8.6 years. As of December 31, 2017, there was $7.0 million of total unrecognized compensation costs
related to non-vested RSUs, compared to $4.2 million as of December 31, 2016. The weighted-average period over which total
remaining compensation costs related to non-vested RSUs will be recognized was 1.6 years.
Non-vested RSUs subject to service condition vesting requirements vest over a service period ranging from one to five
years. Non-vested RSUs subject to performance condition vesting requirements are scheduled to vest at December 31, 2018, with
the number of shares eligible for vesting based on the satisfaction of a return on equity goal. The fair value of RSUs subject to
service and performance condition vesting requirements 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 service period.
In July 2017, the Board approved a modification to the vesting terms of 29,818 granted and non-vested RSUs held by one
employee. The modification accelerated the vesting date for all RSUs that would otherwise have vested in February 2018 to the
date of the employee's retirement on July 31, 2017. We recognized an incremental compensation cost of $252 thousand in connection
with this modification. The incremental compensation cost was measured as the excess of the fair value of the modified award over
the fair value of the original award immediately before its terms were modified using relevant valuation inputs as of the modification
date.
101
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
401(k) Savings Plan
Beginning on January 1, 2014, we offered to 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. Under the 401(k) Plan, we match up to 100% of eligible
employees' pre-tax contributions up to 4% of eligible compensation. We contributed approximately $1.5 million for the year ended
December 31, 2017, compared to $1.5 million and $1.2 million for the years ended December 31, 2016 and 2015, respectively.
Phantom Shares
In May 2016, we granted 8,169 phantom stock units to one independent director with a grant date fair market value of $50
thousand. Each phantom unit entitled the holder to a cash award equal to the fair market value of the unit based on the price of our
stock on the first anniversary of the grant date. We accounted for these units in accordance with ASC 718-30, Stock Compensation
Awards Classified as Liabilities. These units vested in May 2017 and were settled for $89 thousand in cash. No phantom stock units
were granted during the year ended December 31, 2017 and none remained outstanding as of December 31, 2017.
11. Income Taxes
Total income tax expense (benefit) consists of the following components:
Current
Deferred
Total income tax expense (benefit)
For the year ended December 31,
2017
2016
(In Thousands)
2015
$
$
778
29,964
30,742
$
$
$
360
(52,909)
(52,549) $
—
—
—
For the year ended December 31, 2017, we had income tax expense of $30.7 million, including amounts related to current
year alternative minimum tax and changes to our net deferred tax asset. The changes to our net deferred tax asset reflect a one-time
non-cash charge of $13.6 million primarily due to the re-measurement of our deferred tax assets and liabilities in connection with
the enactment of the Tax Cuts and Jobs Act (the Act) on December 22, 2017.
Provisional amounts
The Act reduces the statutory U.S. federal corporate income tax rate from 35% to 21%. We have not completed our full
assessment of the tax effects of the enactment of the Act on our December 31, 2017 deferred tax balances; however, in certain cases,
as described below, we have made reasonable estimates of the effects on our deferred tax balances. We recognized a $13.6 million
income tax expense in the year ended December 31, 2017 for the items we could reasonably estimate. We are still analyzing the Act
and refining our calculations, which could impact the measurement of our existing deferred tax asset related to share-based
compensation. For tax years beginning after December 31, 2017, the Act expanded the number of individuals whose compensation
is subject to a $1 million cap on tax deductibility and includes performance-based compensation in the calculation. As a result, the
Company recorded a provisional amount to reduce the future tax benefit related to share-based compensation. We will continue to
make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we incorporate
additional guidance that may be issued by the U.S. Treasury Department, the IRS, or other standard-setting bodies.
For the year ended December 31, 2016, we had income tax benefit of $52.5 million primarily related to the release of the
valuation allowance recorded against our federal and certain state net deferred tax assets. At December 31, 2016, we determined
that positive evidence of sufficient quantity and quality outweighed negative evidence, and supported a conclusion that it was more-
likely-than-not that the Company would realize its federal and certain state net deferred tax assets. As a result, at December 31,
2016, we released the valuation allowance previously recorded against federal and certain state net deferred tax assets and recorded
the effects of the change in income from continuing operations, generating financial statement benefits of $58.2 million and $0.3
million related to net federal and certain state net deferred tax assets, respectively. The 2016 provision for income taxes also included
amounts for current year alternative minimum tax and changes to our net deferred tax asset.
For the year ended December 31, 2015, we recorded income tax expense of $0.0 due to the recognition of a valuation
allowance against our federal and state net deferred tax assets.
We are a U.S. taxpayer and are subject to the statutory U.S. federal corporate income tax rate of 35% for all prior years
through December 31, 2017. We will be subject to the statutory U.S. federal corporate income tax rate of 21% for 2018 and all future
102
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
periods. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its
subsidiaries.
The following table presents a reconciliation between the federal statutory income tax rate and our effective income tax
(benefit) rate:
Federal statutory income tax rate
Re-measurement from change in federal statutory rate
Share-based and other compensation
Warrant gain/loss
Other
Valuation allowance
Effective income tax rate
For the year ended December 31,
2017
2016
2015
35.0%
25.7
(4.7)
1.8
0.4
—
58.2%
35.0 %
35.0%
—
9.7
4.0
3.4
(511.1)
(459.0)%
—
—
1.6
(0.8)
(35.8)
—%
The components of our net deferred tax asset are summarized as follows:
Deferred tax asset
Net operating loss carry forwards
Share-based compensation
Unearned premium reserve
Deferred ceding commissions
Capitalized start-up costs
Unrealized loss on investments
Alternative minimum tax credit
Other
Total gross deferred tax asset
Less: valuation allowance
Total deferred tax asset
Deferred tax liability
Deferred acquisition costs
Capitalized software
Unrealized gain on investments
Intangible assets
Other
Total deferred tax liability
Net deferred tax asset
As of December 31,
2017
2016
(In Thousands)
$
25,665
$
6,122
5,306
1,084
517
—
—
2,061
40,755
(7,160)
33,595
(8,185)
(4,603)
(434)
(82)
(362)
(13,666)
19,929
$
$
47,867
9,080
9,514
1,999
833
711
360
5,893
76,257
(6,941)
69,316
(12,456)
(5,076)
—
(137)
(213)
(17,882)
51,434
At December 31, 2017, our net deferred tax asset decreased to $19.9 million from $51.4 million at December 31, 2016 due
to the re-measurement of our deferred tax balances at the reduced statutory U.S. federal corporate income tax rate of 21% and the
utilization of net operating loss carryforwards during 2017.
Provisional amounts
Following enactment of the Act, we re-measured our deferred tax balances based on the rate at which they are expected to
reverse in the future, which is generally 21%. We have not, however, completed our full assessment of the impact the Act will have
on our December 31, 2017 deferred tax balances. We are still analyzing certain aspects of the Act and refining our calculation on
103
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
our deferred tax asset balance related to share-based compensation, which could potentially affect the measurement of these balances
or potentially give rise to further increases or decreases to our deferred tax amounts. The provisional amount recorded primarily
related to the re-measurement of our deferred tax assets and liabilities was $13.6 million.
At December 31, 2017, we had a federal net operating loss carryforward of $93.3 million which expires from 2030 to 2037,
and state net operating loss carryforwards of $89.1 million, which expire in varying amounts during the years 2031 to 2037. Section
382 of the Internal Revenue Code 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 NOLs
were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2029.
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, we recognized a discrete tax benefit of $3.3 million
associated with excess tax benefits for share-based compensation. As of December 31, 2017, our federal net operating loss
carryforward balance included $2.2 million of excess share-based compensation previously excluded from the net deferred tax asset
balance as of December 31, 2016.
We recorded valuation allowances of $7.2 million and $6.9 million at December 31, 2017 and 2016, respectively, to reflect
the amounts of state net deferred tax assets that may not be realized. The valuation allowance at December 31, 2017 primarily relates
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, 2017 and 2016, we had no reserves for unrecognized tax benefits, and had taken no material uncertain
tax positions that would have required recognition and measurement. It is our policy to classify interest and penalties related to
unrecognized tax benefits as income tax expense.
We file income tax returns with the U.S. federal government and various state jurisdictions which 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 2014 and subsequent years and state income tax returns for 2013 and subsequent years remain open by statute.
12. Software and Equipment
Software and equipment consist largely of capitalized software developed to support our MI operations. Software and
equipment, net of accumulated amortization and depreciation, as of December 31, 2017 and December 31, 2016, consists of the
following:
Software
Equipment
Leasehold improvements
Subtotal
Accumulated amortization and depreciation
Software and equipment, net
December 31, 2017
December 31, 2016
$
$
(In Thousands)
31,616
$
4,133
3,491
39,240
(16,438)
22,802
$
23,621
3,102
3,453
30,176
(9,774)
20,402
The capitalized amount for software, equipment, and leasehold during the year ended December 31, 2017, 2016 and 2015,
was $9.1 million, $11.2 million, and $6.7 million, respectively. Amortization and depreciation expense for software, equipment, and
leasehold improvements for the years ended December 31, 2017, 2016, and 2015 was $6.7 million, $4.9 million, and $3.2 million,
respectively.
104
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
13. Intangible Assets and Goodwill
Intangible assets and goodwill consist of identifiable intangible assets and goodwill we purchased in connection with the
acquisition of our insurance subsidiaries, and at December 31, 2017 and December 31, 2016, were as follows for both years:
Goodwill
State licenses
GSE applications
Total intangible assets and goodwill
(In Thousands)
Expected Lives
$
$
3,244
260
130
3,634
Indefinite
Indefinite
Indefinite
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, 2017 and 2016.
14. Commitments and Contingencies
PMIERs
As an Approved Insurer, NMIC is subject to ongoing compliance with the PMIERs. (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 risk characteristics, such as FICO,
vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV and other risk features. An asset
charge is calculated for each insured loan based on its risk profile. In general, higher quality loans carry lower charges.
Under the PMIERs financial requirements, 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 Insurers net RIF, calculated by applying on a loan-by-
loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF, and other transactional adjustments
approved by the GSEs, such as with respect to our 2017 ILN Transaction and 2016 QSR Transaction. The risk-based required asset
amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount
for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs
financial requirements also increase the amount of available assets that must be held by an Approved Insurer for LPMI policies
originated on or after January 1, 2016.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We
certified to the GSEs by April 15, 2017 that NMIC fully complied with the PMIERs as of December 31, 2016. NMIC also has an
ongoing obligation to immediately notify the GSEs in writing upon discovery of its failure to meet one or more of the PMIERs
requirements. We continuously monitor our compliance with the PMIERs
Office Lease
The company leases office space under a facilities lease in Emeryville, California. In December 2016, the Company amended
its lease to extend its term through March 2023.
105
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
As of December 31, 2017, the future minimum lease payments under this lease are as follows:
Years ending December 31,
(In Thousands)
2018
2019
2020
2021
2022
2023
Totals
$
$
1,711
2,346
2,417
2,489
2,564
657
12,184
We incurred rent expense related to this lease of $2.1 million, $1.5 million, and $1.5 million for the years ended December 31,
2017, 2016, and 2015, respectively.
15. 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. The
Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and
reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin
insurance laws.
NMIC and Re One's combined statutory net loss, statutory surplus, contingency reserve and RTC ratios for each of the years
in the three-year period ended December 31, 2017 were as follows:
Statutory net loss
Statutory surplus
Contingency reserve
Risk-to-capital
For the year ended December 31,
2017
2016
(In Thousands)
2015
$
(35,946) $
371,084
186,641
13.2:1
(26,653) $
413,809
90,479
11.6:1
(52,322)
391,422
32,564
8.7:1
Under applicable law in Wisconsin and 15 other states, mortgage insurers must maintain minimum amounts of statutory
capital relative to RIF to continue to write 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. A working group of the National
Association of Commissioners (NAIC) is currently developing a loan level capital model applicable to mortgage guaranty insurers
that is expected to ultimately be incorporated into a revised NAIC Mortgage Guaranty Insurance Model Act. Following adoption
by the NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and perhaps 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, 2017, NMIC's performing primary RIF, net of reinsurance, was approximately $7.3 billion, resulting
in an RTC ratio of 14.0:1, significantly below the state financial requirements. As of December 31, 2016, NMIC's performing primary
RIF, net of reinsurance, was approximately $5.8 billion, resulting in an RTC ratio of 12.4:1.
Reinsurance
Ohio regulation limits the amount of risk a mortgage insurer may retain on a single loan to 25% of the borrower's indebtedness
and, as a result, the portion of such insurance in excess of 25% must be reinsured. NMIC and Re One have entered into a primary
excess share reinsurance agreement, effective August 1, 2012, and a facultative pool reinsurance agreement, effective September 1,
2013, under which NMIC cedes premiums, loss reserves and claims to Re One on an excess share basis for any primary or pool
policy which offers coverage greater than 25% on any loan insured thereunder, after giving effect to third-party reinsurance. NMIC
106
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
will use reinsurance provided by Re One solely for purposes of compliance with Ohio's coverage limit. The facultative pool reinsurance
agreement was amended effective September 1, 2016, to reduce the risk ceded by NMIC to Re One in connection with the inception
of the 2016 QSR Transaction.
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, such as NMIH. Delaware corporation law provides that dividends are only payable out of a corporation's
capital surplus or, subject to certain limitations, recent net profits. As of December 31, 2017, NMIH's shareholders' equity was
approximately $509 million. NMIH's total assets, excluding investment and intercompany receivables for NMIC, Re One, and NMIS,
were approximately $84 million at December 31, 2017.
NMIC and Re One are subject to restrictions on their ability to pay dividends without prior approval of the Wisconsin OCI.
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 law, an extraordinary dividend is defined as any payment or distribution that together with other dividends
and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus
as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31.
NMIC and Re One have never paid any dividends to NMIH. NMIC reported a statutory net loss for the twelve months ended December
31, 2017 and cannot pay any dividends to NMIH through December 31, 2018 without the prior approval of the Wisconsin OCI.
Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.
As of December 31, 2017, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled
approximately $574 million. The amount of restricted assets used to determine any dividend to NMIH, once all restrictions expire,
would be computed under SAP which may differ from the amount of restricted assets computed under GAAP.
107
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
16. Quarterly Financial Data (Unaudited)
Net premiums earned
Net investment income
Net realized investment (losses) gains
Other revenues
Insurance claims and claims expenses
Underwriting and operating expenses
(Loss) gain from change in fair value of warrant
liability
Interest expense
Pre-tax (loss) income
Income tax expense (benefit)
Net (loss) income
(Loss) income per share: (1)
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted average common shares outstanding -
basic
Weighted average common shares outstanding -
diluted
2017 Quarters
First
Second
Third
Fourth
(In Thousands, except per share data)
2017
Year
$
33,225
$
37,917
$
44,519
$
50,079
$
165,740
3,807
(58)
80
635
25,989
(196)
3,494
6,740
1,248
5,492
0.09
0.09
59,184
62,339
$
$
$
3,908
188
185
1,373
28,048
19
3,300
9,496
3,484
6,012
0.10
0.10
59,823
63,010
$
$
$
4,170
4,388
16,273
69
195
957
24,645
(502)
3,352
19,497
7,185
12,312
9
62
2,374
28,297
(3,426)
3,382
17,059
18,825
(1,766)
0.21
0.20
$
$
(0.03) $
(0.03) $
59,884
63,089
60,219
60,219
208
522
5,339
106,979
(4,105)
13,528
52,792
30,742
22,050
0.37
0.35
59,816
62,186
$
$
$
108
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2017
Net premiums earned
Net investment income
Net realized investment (losses) gains
Other revenues
Insurance claims and claims expenses
Underwriting and operating expenses
Gain (loss) from change in fair value of warrant
liability
Interest expense
Pre-tax (loss) income
Income tax expense (benefit)
Net (loss) income
(Loss) income per share: (1)
Basic (loss) earnings per share
Diluted (loss) earnings per share
Weighted average common shares outstanding -
basic
Weighted average common shares outstanding -
diluted
2016 Quarters
First
Second
Third
Fourth
(In Thousands, except per share data)
2016
Year
$
19,807
$
26,041
$
31,808
$
32,825
$
110,481
3,634
13,751
3,231
(885)
32
458
3,342
61
37
470
3,544
66
102
664
65
105
800
22,671
23,234
24,037
23,281
670
3,632
(3,907)
—
(3,907)
(59)
3,707
2,011
—
2,011
(797)
3,733
6,289
114
6,175
(1,714)
3,776
7,059
(52,663)
59,722
(693)
276
2,392
93,223
(1,900)
14,848
11,452
(52,549)
64,001
$
$
(0.07) $
(0.07) $
0.03
0.03
$
$
0.10
0.10
$
$
1.01
0.98
$
$
1.08
1.05
58,937
59,106
59,130
59,140
59,071
58,937
59,831
60,285
61,229
60,829
(1)
Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of quarterly per share data may
not equal the per share data for the year.
109
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports
we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the
SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the
effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of December 31, 2017,
pursuant to Rule 13a-15(e) under the Exchange Act. Management applied its judgment in assessing the costs and benefits of such
controls and procedures, which by their nature, can provide only reasonable assurance regarding management's control objectives.
Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system,
irrespective of how well it is designed and operated, can only provide reasonable assurance and cannot guarantee that it will succeed
in its stated objectives.
Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of December 31, 2017,
our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed
by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time
periods specified in the SEC's rules and forms.
Internal Control Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial
reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. The Company's internal control over financial reporting
is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP. Because of its inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.
Under the supervision of our Chief Executive Officer and Chief Financial Officer, our management assessed the effectiveness
of the Company's internal control over financial reporting as of December 31, 2017. In making this assessment, management used
the criteria set forth in Internal Control-Integrated Framework (2013 framework) issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this assessment, our management has concluded that the Company's internal
control over financial reporting was effective as of December 31, 2017.
Due to the Company's status as an EGC, this annual report does not include an attestation report of our registered public
accounting firm.
There was no change in our internal control over financial reporting that occurred during the period covered by this report
that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
110
Item 10. Directors, Executive Officers and Corporate Governance
PART III
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement,
which will be filed within 120 days after December 31, 2017. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement,
which will be filed within 120 days after December 31, 2017. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement,
which will be filed within 120 days after December 31, 2017. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement,
which will be filed within 120 days after December 31, 2017. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
Item 14. Principal Accountant Fees and Services
The information required by this Item is incorporated by reference to, and will be contained in, our definitive proxy statement,
which will be filed within 120 days after December 31, 2017. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
111
Item 15. Exhibits and Financial Statement Schedules
PART IV
1. Financial Statements — See the "Index to Financial Statements" included in Part II, Item 8 of this report for a list of the financial
statements filed as part of this report.
2. Financial Statement Schedules — See the "Index to Financial Statement Schedules" on page 114 of this report for a list of the
financial statement schedules filed as part of this report.
3. Exhibits — See "Exhibit Index" on page i of this report for a list of exhibits filed as part of this report.
112
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned thereunto duly authorized.
SIGNATURES
NMI HOLDINGS, INC.
Date: February 16, 2018
By: /s/ Bradley M. Shuster
Name: Bradley M. Shuster
Title: Chairman and Chief Executive Officer
Signature
Title
Date
/s/ Bradley M. Shuster
Bradley M. Shuster
/s/ Adam S. Pollitzer
Adam S. Pollitzer
/s/ Julie C. Norberg
Julie C. Norberg
/s/ Steven L. Scheid
Steven L. Scheid
/s/ James G. Jones
James G. Jones
/s/ Regina Muehlhauser
Regina Muehlhauser
/s/ Michael Montgomery
Michael Montgomery
/s/ Michael Embler
Michael Embler
/s/ James H. Ozanne
James H. Ozanne
Chairman and Chief Executive Officer
(Principal Executive Officer)
February 16, 2018
Chief Financial Officer
(Principal Financial Officer)
February 16, 2018
Controller
February 16, 2018
Director
Director
Director
Director
Director
Director
113
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
February 16, 2018
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule I — Summary of Investments — other than investments in related parties as of December 31, 2017
Schedule II — Financial Information of Registrant as of December 31, 2017
Schedule IV — Reinsurance as of December 31, 2017
F-1
F-2
F-6
All other schedules are omitted because the required information is not present or is not present in amounts sufficient to
require submission of the schedules, or because the information required is included in our Consolidated Financial Statements and
notes thereto.
114
NMI HOLDINGS, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2017
Amortized Cost
Fair Value
(In Thousands)
Amount Reflected on
Balance Sheet
U.S. Treasury securities and obligations of U.S. government
agencies
$
65,669
$
64,688
$
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total bonds
Long-term investments - other
Short-term investments
Total investments
89,973
435,562
100,153
691,357
353
22,149
89,848
437,835
100,944
693,315
353
22,207
$
713,859
$
715,875
$
64,688
89,848
437,835
100,944
693,315
353
22,207
715,875
F-1
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 2017
December 31, 2016 (1)
(In Thousands, except for share data)
Assets
Fixed maturities, available-for-sale, at fair value
$
50,505
$
Cash and cash equivalents
Investment in subsidiaries, at equity in net assets
Accrued investment income
Prepaid expenses
Due from affiliates, net
Software and equipment, net
Deferred tax asset, net
Other assets
Total assets
Liabilities
Term loan
Accounts payable and accrued expenses
Warrant liability, at fair value
Total liabilities
Shareholders' equity
Common stock - class A shares, $0.01 par value;
60,517,512 and 59,145,161 shares issued and outstanding as of December 31,
2017 and December 31, 2016, respectively (250,000,000 shares authorized)
Additional paid-in capital
Accumulated other comprehensive loss, net of tax
Accumulated deficit
Total shareholders' equity
$
$
$
$
528
573,695
203
2,108
22,407
22,802
6,610
1,704
680,562
143,882
20,131
7,472
171,485
605
585,488
(2,859)
(74,157)
509,077
Total liabilities and shareholders' equity
$
680,562
$
58,209
15,858
503,731
151
1,991
9,211
20,401
36,534
182
646,268
144,353
23,039
3,367
170,759
591
576,927
(5,287)
(96,722)
475,509
646,268
(1) The 2016 prior period balance sheet has been revised. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for further details.
F-2
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
STATEMENT OF OPERATIONS
PARENT COMPANY ONLY
Revenues
Net investment income
Net realized investment gains
Total revenues
Expenses
Other operating expenses
Total expenses
Other expense
(Loss) gain from change in fair value of warrant liability
Interest expense
Total other expenses
Equity in net income (loss) of subsidiaries
Income (loss) before income taxes
Income tax expense (benefit)
Net income (loss)
Other comprehensive income (loss), net of tax:
For the year ended December 31,
2016 (1)
2015
2017
(In Thousands)
$
691
$
1
692
773
$
53
826
17,600
17,600
(1,900)
(14,848)
(16,748)
16,374
16,374
(4,105)
—
(4,105)
67,146
47,359
25,309
$
22,050
$
58,819
(14,430)
25,297
(38,704)
64,001
$
(28,825)
(1,032)
(27,793)
2,535
379
2,914
17,157
17,157
1,905
(2,057)
(152)
Net unrealized gains in accumulated other comprehensive loss, net
of tax (benefit) expense of ($49), $82, and $0 for each of the years
in the three-year period ended December 31, 2017, respectively
Reclassification adjustment for losses (gains) included in net loss,
net of tax expense of $0 for each of the years in the three-year
period ended December 31, 2017
Equity in other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss), net of tax
(90)
(1)
2,519
2,428
100
53
2,034
2,187
Comprehensive income (loss)
$
24,478
$
66,188
$
141
186
(4,194)
(3,867)
(31,660)
(1) The 2016 prior period consolidated statements of operations has been revised. See Item 8, "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for
further details.
F-3
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
Cash flows from operating activities
Net income (loss)
Adjustments to reconcile net income (loss) to net cash (used in)
provided by operating activities:
Share-based compensation expense
Loss (gain) from change in fair value of warrant liability
Net realized investment gains
Depreciation and amortization
Amortization of debt discount and debt issuance costs
Changes in operating assets and liabilities:
Equity in net (income) loss of subsidiaries
Accrued investment income
Receivable from affiliates
Prepaid expenses
Other assets
Deferred tax asset
Accounts payable and accrued expenses
Net cash (used in) provided by operating activities
Cash flows from investing activities
Capitalization of subsidiaries
Purchase of short-term investments
Purchase of fixed-maturity investments, available-for-sale
Proceeds from maturity of short-term investments
Proceeds from redemptions, maturities and sale of fixed-maturity
investments, available-for-sale
Software and equipment
Net cash provided by (used in) investing activities
Cash flows from financing activities
Taxes paid related to net share settlement of equity awards
Proceeds from issuance of common stock related to employee
equity plans
Proceeds from issuance of common stock related to warrants
Proceeds from term loan, net of discount
Repayments of term loan
Payments of debt modification costs
Net cash (used in) provided by financing activities
Net increase (decrease) in cash and cash equivalents
For the year ended December 31,
2016(1)
2015
2017
(In Thousands)
$
22,050
$
64,001
$
(27,793)
9,484
4,105
(1)
233
1,474
(67,239)
(52)
(13,103)
(116)
(1,523)
30,876
(3,463)
(17,275)
(300)
(98,255)
(19,884)
114,170
11,451
(1,996)
5,186
(8,582)
7,103
183
—
(1,500)
(445)
(3,241)
6,854
1,900
(53)
5,779
1,914
(58,819)
(2)
(828)
(563)
(126)
(36,616)
2,711
(13,848)
(800)
(127,329)
(172)
115,049
41,750
(10,251)
18,247
(756)
532
—
—
(1,500)
—
(1,724)
8,174
(1,905)
(379)
3,885
251
14,430
481
1,566
626
453
—
8,025
7,814
(153,500)
(21,160)
(66,411)
—
79,652
(6,135)
(167,554)
(1,105)
415
—
148,500
(375)
(4,437)
142,998
29,925
Cash and cash equivalents, beginning of period
13,183
Cash and cash equivalents, end of period
(1) The 2016 prior period consolidated statements of cash flows has been revised. See Item 8, "Financial Statements and Supplementary Data -
Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for
further details.
13,183
15,858
$
$
$
2,675
(16,742)
(15,330)
15,858
528
F-4
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
SUPPLEMENTAL NOTES
PARENT COMPANY ONLY
Note A
The NMI Holdings, Inc. (Parent Company) financial statements represent the stand-alone financial statements of the Parent
Company. These financial statements have been prepared on the same basis and using the same accounting policies as described in
the consolidated financial statements included herein. Refer to the Parent Company's consolidated financial statements for additional
information.
Revisions to Prior Periods
Certain other prior balances have been reclassified to conform to the current period presentation.
Note B
Our insurance subsidiaries are subject to statutory regulations as to maintenance of policyholders' surplus and payment of
dividends. The maximum amount of dividends that the insurance subsidiaries may pay in any twelve-month period without regulatory
approval by the Wisconsin OCI is the lesser of adjusted statutory net income or 10% of statutory policyholders' surplus as of the
preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net
of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment
gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three
calendar years.
Note C
The Parent Company provides certain services to its subsidiaries. The Parent Company allocates to its subsidiaries corporate
expense it incurs in the capacity of supporting those subsidiaries, based on either an allocated percentage of time spent or internally
allocated capital. Total operating expenses allocated to subsidiaries for each of the years in the three year period ended December
31, 2017 were $101.0 million, $80.5 million and $76.0 million, respectively. Amounts charged to the subsidiaries for operating
expenses are based on actual cost, without any mark-up. The Parent Company considers these charges fair and reasonable. The
subsidiaries reimburse the Parent Company for these costs in a timely manner, which has the impact of improving the cash flows of
the Parent Company.
F-5
NMI HOLDINGS, INC.
SCHEDULE IV - FINANCIAL INFORMATION OF REGISTRANT
REINSURANCE
PARENT COMPANY ONLY
In September 2016, to continue to grow our business and manage insurance risk and our minimum required assets under
PMIERs financial requirements, NMIC entered into a quota-share reinsurance transaction with a panel of third-party reinsurers.
The Parent Company has no reinsurance agreements. The insurance subsidiaries are both mono-line mortgage insurance
companies and the assets of each are dedicated only to the support of our mortgage insurance operations. NMIC only writes direct
mortgage insurance business and assumes no business from any other entity. Re One only assumes business from NMIC to allow
NMIC to comply with Ohio's coverage limit, after giving effect to third-party reinsurance. Neither NMIC nor Re One count any
subsidiary of any kind in their admitted statutory assets.
Gross Amount
Ceded to Other
Companies
Assumed from
Other Companies
Net Amount
Percentage of
Amount Assumed
to Net
For the years ended December 31,
(In thousands)
2017
$
192,326
$
26,586
$
— $
2016
2015
2014
115,830
—
—
5,349
—
—
—
—
—
165,740
110,481
—
—
—%
—%
—%
—%
F-6
Exhibit
Number
2.1
2.2
3.1
3.2
4.1
4.2
4.3
4.4
4.5
4.6
10.1 ~
10.2 ~
10.3 ~
10.4 ~
10.5 ~
10.6 ~
10.7 ~
10.8 ~
10.9 ~
10.10 ~
EXHIBIT INDEX
Description
Stock Purchase Agreement, dated November 30, 2011, between NMI Holdings, Inc. and MAC Financial Ltd.
(incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Amendment to Stock Purchase Agreement, dated April 6, 2012, between NMI Holdings, Inc. and MAC
Financial Ltd. (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration Statement
(Registration No. 333-191635), filed on October 9, 2013)
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to
our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
Third Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to our Form 8-K, filed
on December 9, 2014)
Specimen Class A common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1
Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
Registration Rights Agreement between NMI Holdings, Inc. and FBR Capital Markets & Co., dated April 24,
2012 (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Registration Rights Agreement by and between MAC Financial Ltd. and NMI Holdings, Inc., dated April 24,
2012 (incorporated herein by reference to Exhibit 4.3 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Registration Rights Agreement between FBR & Co., FBR Capital Markets LT, Inc., FBR Capital Markets & Co.,
FBR Capital Markets PT, Inc. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to
Exhibit 4.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
Warrant No. 1 to Purchase Common Stock of NMI Holdings, Inc. issued to FBR Capital Markets & Co., dated
June 13, 2013 (incorporated herein by reference to Exhibit 4.5 to our Form S-1 Registration Statement
(Registration No. 333-191635), filed on October 9, 2013)
Form of Warrant to Purchase Common Stock of NMI Holdings, Inc. issued to former stockholders of MAC
Financial Ltd. (incorporated herein by reference to Exhibit 4.6 to our Form S-1 Registration Statement
(Registration No. 333-191635), filed on October 9, 2013)
NMI Holdings Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to our Form S-1
Registration Statement (registration No. 333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Chief Executive
Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.2 to our Form S-1 Registration
Statement (Registration No. 333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Management
(incorporated herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Directors
(incorporated herein by reference to Exhibit 10.4 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Chief
Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.5 to our Form S-1
Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for
Management (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration Statement (Registration
No. 333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Directors
(incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration No.
333-191635), filed on October 9, 2013)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Chief
Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.8 to our Form 10-K,
filed on February 17, 2017)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Employees
(incorporated herein by reference to Exhibit 10.9 to our Form 10-K, filed on February 17, 2017)
Amended and Restated Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated
December 23, 2015 (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on December 29, 2015)
i
10.11 ~
10.12 ~
10.13 ~
10.14 ~
10.15 +
10.16
10.17
10.18
10.19 ~
10.20 ~
10.21 ~
10.22 ~
10.23 ~
10.24 ~
10.25 ~
10.26 ~
10.27 ~
10.28 ~
10.29 ~
10.30 ~
10.31 ~
21.1
23.1
31.1
31.2
Offer Letter by and between NMI Holdings, Inc. and Glenn Farrell, effective December 4, 2014 (incorporated
herein by reference to Exhibit 10.1 to our Form 8-K, filed on December 9, 2014)
Offer Letter by and between NMI Holdings, Inc. and William Leatherberry, dated July 11, 2014 (incorporated herein
by reference to Exhibit 10.10 to our Form 10-Q, filed on April 28, 2016)
Offer Letter by and between NMI Holdings, Inc. and Adam Pollitzer, dated February 1, 2017 (incorporated herein
by reference to Exhibit 10.1 to our Form 8-K, filed on February 3, 2017)
Form of Indemnification Agreement between NMI Holdings, Inc. and its directors and certain executive officers
(incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on November 25, 2014)
Commitment Letter dated July 12, 2013 for Bulk Fannie Mae-Paid Loss-on-Sale Mortgage Insurance on the Portfolio
of approximately $5.46 billion Purchased by Fannie Mae and Identified by Fannie Mae as Deal No. 2013 MIRT
01 and by the Company as Policy No. P-0001-01 (incorporated herein by reference to Exhibit 10.14 to our Form
S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
Credit Agreement, dated November 10, 2015, between NMI Holdings, Inc., the lenders party thereto and JPMorgan
Chase Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 4.1 to our Form 8-K, filed
on November 10, 2015)
Amendment No. 1, dated February 10, 2017, to the Credit Agreement dated November 10, 2015, between NMI
Holdings, Inc., the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated
herein by reference to Exhibit 10.1 to our Form 8-K, filed on February 10, 2017)
Amendment No. 2, dated October 25, 2017, to the Credit Agreement dated November 10, 2015, between NMI
Holdings, Inc., the lender parties thereto and JPMorgan Chase Bank, N.A., as administrative agent (incorporated
herein by reference to Exhibit 10.1 to our Form 8-K, filed on October 26, 2017)
NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan (incorporated herein by reference to
Appendix A to our 2017 Annual Proxy Statement, filed on March 30, 2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award
Agreement for Chief Executive Officer (incorporated herein by reference to Exhibit 10.19 to our Form 10-Q filed
on August 1, 2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award
Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.20 to our Form 10-Q filed on
August 1, 2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award
Agreement for Employees (incorporated herein by reference to Exhibit 10.21 to our Form 10-Q filed on August 1,
2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award
Agreement for Independent Directors (incorporated herein by reference to Exhibit 10.22 to our Form 10-Q filed
on August 1, 2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Nonqualified Stock Option
Award Agreement for Chief Executive Officer (incorporated herein by reference to Exhibit 10.23 to our Form 10-
Q filed on August 1, 2017)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Nonqualified Stock Option
Award Agreement for Executive Officers and Employees (incorporated herein by reference to Exhibit 10.24 to our
Form 10-Q filed on August 1, 2017)
Form of NMI Holdings, Inc. 2014 Omnibus Incentive Plan Phantom Unit Award Agreement for Independent
Directors (incorporated herein by reference to Exhibit 10.21 to our Form 10-Q, filed on August 5, 2015)
Form of NMI Holdings, Inc. 2014 Omnibus Incentive Plan Performance Based Restricted Stock Unit Award
Agreement for Chief Executive Officer (incorporated herein by reference to Exhibit 10.26 to our Form 10-K, filed
on February 17, 2017)
NMI Holdings, Inc. Severance Benefit Plan (incorporated herein by reference to Exhibit 10.1 to our Form 8-K,
filed on February 17, 2016)
NMI Holdings, Inc. Change in Control Severance Benefit Plan (incorporated herein by reference to Exhibit 10.1
to our Form 8-K, filed on February 23, 2017)
NMI Holdings, Inc. Clawback Policy (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on
February 23, 2017)
Separation Agreement between NMI Holdings, Inc. and Glenn Farrell effective July 31, 2017 (incorporated herein
by reference to Exhibit 10.1 to our Form 8-K, filed on August 1, 2017)
Subsidiaries of NMI Holdings, Inc. (incorporated herein by reference to Exhibit 21.1 to our Form 10-Q, filed on
October 30, 2015)
Consent of BDO USA, LLP
Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Principal Financial Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
ii
32.1 #
101 *
Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
The following financial information from NMI Holdings, Inc.'s Annual Report on Form 10-K for the year ended
December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language):
(i) Consolidated Balance Sheets as of December 31, 2017 and 2016
(ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the three years in
the period ended December 31, 2017
(iii) Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period
ended December 31, 2017
(iv) Consolidated Statements of Cash Flows for each of the three years ended December 31, 2017, and
(v) Notes to Consolidated Financial Statements.
~ Indicates a management contract or compensatory plan or contract.
+ Confidential treatment granted as to certain portions, which portions have been filed separately with the SEC.
# In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto
are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act or deemed to be
incorporated by reference into any filing under the Exchange Act or the Securities Act except to the extent that the registrant specifically
incorporates it by reference.
* In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed "filed" for purposes of
Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act
or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.
iii
EXHIBIT 23.1
Consent of Independent Registered Public Accounting Firm
NMI Holdings, Inc.
Emeryville, California
We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 333-192540 and No.
333-218050) of NMI Holdings, Inc. of our report dated February 16, 2018, relating to the consolidated financial statements and
financial statement schedules which appears in this Form 10-K.
/s/ BDO USA, LLP
San Francisco, California
February 16, 2018
PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 31.1
I, Bradley M. Shuster, certify that:
1. I have reviewed this annual report on Form 10-K of NMI Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 16, 2018
/s/ Bradley M. Shuster
Bradley M. Shuster
Chairman and Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Adam Pollitzer, certify that:
1. I have reviewed this annual report on Form 10-K of NMI Holdings, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all
material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods
presented in this report;
4. The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed
under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is
being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to
be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our
conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by
this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting;
and
5. The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over
financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial
reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the
registrant’s internal control over financial reporting.
February 16, 2018
/s/ Adam S. Pollitzer
Adam S. Pollitzer
Chief Financial Officer
(Principal Financial Officer)
EXHIBIT 32.1
CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of NMI Holdings, Inc. (the "Company") on Form 10-K for the year ended December 31,
2017, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers
of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of such officer’s knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934;
and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results
of operations of the Company.
February 16, 2018
February 16, 2018
/s/ Bradley M. Shuster
Bradley M. Shuster
Chairman and Chief Executive Officer
(Principal Executive Officer)
/s/ Adam S. Pollitzer
Adam S. Pollitzer
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or
otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by
Section 906, has been provided to NMI Holdings, Inc. and will be retained by NMI Holdings, Inc. and furnished to the
Securities and Exchange Commission or its staff upon request.