NMI Holdings, Inc.
2 0 1 9 A N N U A L R E P O R T
NMI HOLDINGS, INC. | 2100 Powell Street | 12 TH Floor | Emeryville, CA 94608 | 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, 2019
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
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, $.01 par value per share
NMIH
NASDAQ
Securities registered pursuant to Section 12(g) 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 every Interactive Data File required to be submitted 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 such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
Large accelerated filer
Non-accelerated filer
☒
☐
Accelerated filer
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 Act). Yes ☐ No ☒
As of June 30, 2019, 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 $1,617,138,263
The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on February 11, 2020 was 68,438,109 shares.
Portions of the registrant's Proxy Statement for the 2020 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, 2019.
DOCUMENTS INCORPORATED BY REFERENCE
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
3
5
5
26
45
45
45
45
46
46
47
48
74
75
111
111
113
114
114
114
114
114
114
115
115
118
119
[This page intentionally left blank]
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:
•
•
•
•
•
•
•
•
•
•
•
•
•
•
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 generally, or
with first time homebuyers or on very high loan-to-value mortgages;
our ability to remain an eligible mortgage insurer under the 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 government mortgage insurers like
the Federal Housing Administration (FHA), the U.S. Department of Agriculture's Rural Housing Service (USDA)
and the Veterans Administration (VA) (collectively, government MIs), and potential market entry by new competitors
or consolidation of existing competitors;
developments in the world's financial and capital markets and our access to such markets, including reinsurance;
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 including any
action by the Consumer Financial Protection Bureau to address the planned expiration of the "QM Patch" under the
Dodd-Frank Act Ability to Repay/Qualified Mortgage rule;
legislative or regulatory changes to the GSEs' role in the secondary mortgage market or other changes that could
affect the residential mortgage industry generally or mortgage insurance 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, and investment
results 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 capital, credit
and reinsurance markets and to enter into, and receive approval of, 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 high quality 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 risk management or pricing or investment strategies;
3
•
•
•
•
•
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had
expected to experience;
potential adverse impacts arising from natural disasters, including, with respect to 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 counter-parties, including third party reinsurers, to meet their obligations to us;
failure to maintain, improve and continue to develop necessary information technology (IT) systems or the failure
of technology providers to perform; and
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 Item 1A, "Risk Factors," 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.
4
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 MI coverage
in all 50 states and D.C. Re One provides reinsurance to NMIC on certain insured loans 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, 2019, we had master policies with
1,476 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, 2019, we had $97.3 billion of
total insurance-in-force (IIF), including primary IIF of $94.8 billion, and $24.3 billion of gross risk-in-force (RIF), including primary
RIF of $24.2 billion. For the year ended December 31, 2019, we generated new insurance written (NIW) of $45.1 billion. As of
December 31, 2019, we had 321 full- and part-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 their homeownership goals, ensure
that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk
management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure,
utilize our proprietary Rate GPSSM pricing platform to dynamically evaluate risk and price our policies, and foster a culture of
collaboration and excellence that helps us attract and retain experienced industry leaders.
Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured
portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection
and pricing, fair and transparent 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 $11 trillion of mortgage debt outstanding as of December 31, 2019, 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 governmental
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, real estate investment trusts (REITs) and other financial institutions. Government participants include
government agencies such as the government MIs (e.g., FHA, USDA and VA) and Ginnie Mae, as well as government-sponsored
enterprises, such as Fannie Mae and Freddie Mac.
5
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' demand for high-LTV loans,
mortgage insurance requirements and business practices. See "Business - 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 government MIs and private MI companies,
such as NMIC, 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, government 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, 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 government MI companies, who significantly increased
their share in the MI market following the 2008 financial crisis. Prior to the financial crisis, private mortgage insurers accounted for
the majority of the insured mortgage origination market. During the financial crisis, the government MIs captured an increasing
share of the high-LTV MI market as incumbent private mortgage insurers came under significant financial stress. According to data
reported by Inside Mortgage Finance, in 2007, government MIs accounted for 23% of the total insured mortgage origination market.
By 2009, government MI share had peaked at approximately 82% of the total insured mortgage origination market. Government MI
share has since declined and is estimated to have been 54% in 2019. Previous rate actions and product introductions continue to
impact the government MIs' market share and by extension the private MI market. Although there has been broad policy consensus
toward the need for increasing private capital participation and decreasing government exposure to credit risk in the U.S. housing
finance system, it remains difficult to predict whether the combined market share of government MIs will recede to pre-2008 levels.
A range of factors influence a lender's decision to choose private over government MI, including among others, GSE demand,
premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private
MI products compared to government 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.
6
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.
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 any 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 the 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. We are currently implementing a new master mortgage insurance policy that will replace our existing Master Policy (the
2014 Master Policy) and provide terms of coverage for NIW associated with MI applications we receive on and after March 1, 2020
(the 2020 Master Policy, and together with the 2014 Master Policy, the Master Policies). IIF written prior to March 1, 2020 will
continue to be covered under our 2014 Master Policy. Our Master Policies are publicly available on our website. Upon receipt of
an insurable loan, we issue a certificate of insurance that extends coverage for such loan under the applicable 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 Policies.
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 models that assess risk across a spectrum of variables, including coverage percentages, LTV ratios, loan
and property attributes, borrower debt-to-income (DTI) profiles, and market and macroeconomic conditions. 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 on insured loans 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:
•
•
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 upon our receipt of notice of a mortgage close and then paid in arrears
on a monthly basis over the life of the policy.
7
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 "Business - 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 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 - Third Party Reinsurance - Quota Share Reinsurance."
We did not write any pool insurance in 2019 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 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 for 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, 2019, we had Master Policies with 1,476 customers. 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
8
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.
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
No individual customer accounted for greater than 10% of our consolidated revenues in 2019.
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
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. 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.
Non-delegated lenders deliver all MI applications to us on a non-delegated basis. Certain delegated lenders may choose to deliver
some or all of their MI applications to us on a non-delegated basis, but retain their authority to underwrite our MI on a 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
9
underwriting capacity. We train and require our USPs to follow the same processes and underwriting guidelines that our own
employees follow when rendering insurance decisions.
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. We believe our
Master Policies set 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." National MI’s rescission relief program includes
early and payment-based rescission relief options for both delegated and non-delegated loans, as described below.
In September 2018, the GSEs issued revised Amended and Restated GSE Rescission Relief Principles (RRPs), the rescission
relief provisions that are required to, or may, be included in the master policies of GSE-approved mortgage insurers. We are
implementing the 2020 Master Policy, in part, to provide terms of coverage that conform to the requirements of the revised RRPs
for MI applications we receive on and after March 1, 2020. Our Master Policies generally provide us the ability to rescind coverage
of a loan if there are material misrepresentations, significant underwriting defects and/or fraud in the origination process. When we
rescind coverage of a loan, we cancel the certificate as of the original certificate effective date and return all premiums received
related to the impacted loan.
To qualify for the earliest rescission relief we can provide on a loan, we are required to conduct an independent validation
of such loan. Lenders have the ability to select whether or not to have insured loans subjected to our post-close independent validation
processes. Subject to our validation of coverage of an insured loan, we stipulate in our Master Policies that we will not rescind
coverage of such loan for certain material misrepresentations or underwriting defects, provided the terms of the applicable Master
Policy are met. In our 2014 Master Policy, a loan may be eligible for early rescission relief following an independent validation, if
the borrower makes the first 12 monthly mortgage payments on time. Under the 2020 Master Policy, we are required to grant 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, the 2020 Master Policy provides for a "closing document exception", which permits eligible non-
delegated lenders to obtain early rescission relief without post-close independent validations of qualifying loans, if the borrower
timely makes the first 12 mortgage payments.
Insured loans that do not qualify for early rescission relief may still achieve rescission relief based on a borrower’s payment
history at the 36th or 60th month, provided the conditions in the applicable Master Policy are satisfied. Under both of our Master
Policies, if 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. The 2020 Master Policy further provides for a sunset of our rescission rights at
the 60-month anniversary of the inception of coverage of an insured loan, provided such loan is then current or subsequently cures.
Our Master Policies include additional limitations on our ability to initiate certain investigations or to request information
from our insureds after a loan has achieved rescission relief. On the other hand, rescission relief does not limit our rights and remedies
(i.e., we retain our rescission rights) under certain life-of-coverage exclusions, including for fraud and pattern activity; however, the
evidentiary standard we must meet to pursue these rights under the 2020 Master Policy is more stringent than in the current Master
Policy.
10
Non-delegated lenders who desire our earliest 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 that do not achieve early rescission relief are eligible for 36-month or 60-
month rescission relief in accordance with the terms of the applicable Master Policy.
Delegated lenders who desire our earliest 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 or 60-month rescission relief in accordance with the terms of the applicable Master Policy.
All loans, whether included in our post-close validation processes or not, are eligible for review under our quality control
process, and such QC reviews qualify as independent validations for such loans, making them eligible for early rescission relief.
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 Pricing
We utilize a proprietary risk-based pricing platform, which we refer to as Rate GPS, to establish individualized premium
rates for most new loans that we insure based on our modeled view of the relative risk and anticipated performance of each loan.
Rate GPS considers a broad range of variables, including property type, type of loan product, borrower credit characteristics, and
lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk
of each loan that we insure.
We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While we expect most of our new
business will be priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers
who require a rate card for business process reasons.
Our pricing approach targets through-the-cycle returns that exceed our cost of capital. We believe the introduction and
utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach
enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns.
Policy Servicing
Our Policy Servicing Department is responsible for various servicing activities related to Master Policy and certificate
administration, premium billing and payment processing. 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 applicable 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 to a servicer we
approve, coverage of the loan will continue. We have the right under our Master Policy to revoke approval of a servicer; if the
impacted insureds wish to maintain coverage of insured loans serviced by the disapproved provider, such insureds must find another
servicer that we approve.
Our policies and procedures accommodate various methods for servicers to communicate loan and certificate information
to us. Our Master Policies require 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
11
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. Servicers may also use our own external facing servicing website 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. Generally,
our Master Policies require our insureds to notify us after a loan is two payments in default. Upon receipt of a 60-day NOD, we
establish claim reserves. 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.
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 Policies, 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
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. We have rights under our Master Policies to deny a claim
under certain conditions, such as when a loan servicer does not produce documents necessary to perfect a claim or when the reason
for our underlying loss associated with a claim is not covered by our Master Policies.
When we approve a claim, our Master Policies give us 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 (i.e., the insured's loss on an insured loan, as defined in the Master Policy) in
exchange for the insured's conveyance of good and marketable title to the property to us. If 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 size of the insurance benefit we are responsible to pay. In connection with our approval rights for short sales or deed-
in-lieu of foreclosure transactions, our Master Policies also provide 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 and loan modifications for most GSE-owned loans that we
insure.
12
Reinsurance
Internal Reinsurance
Prior to January 10, 2019, Ohio regulation limited the amount of risk a mortgage insurer was permitted to retain on a single
loan to 25% of the borrower's indebtedness (after giving effect to third-party reinsurance) and, as a result, the portion of such insurance
in excess of 25% was required to be reinsured. Ohio has repealed this requirement for future periods beginning January 10, 2019.
Several other states previously imposed the same or similar coverage restrictions and repealed these measures prior to 2018. To
comply with these previous state coverage limits, NMIC and Re One have reinsurance agreements in place under which Re One
provides reinsurance to NMIC on insured loans with coverage levels in excess of 25%, after giving effect to third-party reinsurance.
Third-Party Reinsurance
We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state regulatory and other
applicable capital requirements, and support the growth of our business. We currently have both excess of loss and quota share
reinsurance agreements in place.
Excess-of-loss reinsurance
NMIC entered into excess-of-loss reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd. and Oaktown Re III
Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018
and July 30, 2019, respectively. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined
portfolio of mortgage insurance policies written during a discrete period. Under each agreement, NMIC retains a first layer of
aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up
to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each
agreement over a 10-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage
is canceled. The respective outstanding reinsurance coverage amounts stop amortizing if certain credit enhancement or delinquency
thresholds, as defined in each agreement, are triggered.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize
their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. Such trust funds
are required to be invested in short-term U.S. Treasury money market funds at all times. Each Oaktown Re Vehicle financed its
respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors. Such insurance-
linked notes mature 10 years from the inception date of each reinsurance agreement. We refer to NMIC's reinsurance agreements
with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd. individually as the
2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.
The following table presents the inception date, covered production period, initial reinsurance coverage amount and initial
and first layer retained aggregate loss under each of the ILN Transactions.
($ values in thousands)
2017 ILN Transaction
2018 ILN Transaction
2019 ILN Transaction
Inception Date
May 2, 2017
July 25, 2018
July 30, 2019
Covered Production
1/1/2013 - 12/31/2016
1/1/2017 - 5/31/2018
6/1/2018 - 6/30/2019
Initial
Reinsurance
Coverage
211,320
$
$
264,545
326,905
Initial First
Layer Retained
Loss
126,793
125,312
123,424
NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which
provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding
reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably
determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment
afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement,
including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to noteholders,
among others.
Under the terms of the 2018 ILN Transaction and the 2019 ILN Transaction, we are required to maintain a certain level of
restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full.
13
We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances will
decrease over time as the outstanding principal balances of the respective insurance-linked notes decline.
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. 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
acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss
performance and serve to reduce ceded premiums. NMIC entered into two quota share reinsurance treaties each with a syndicate of
third party reinsurers, effective September 1, 2016 (the 2016 QSR Transaction) and January 1, 2018 (the 2018 QSR Transaction)
collectively referred to as the QSR Transactions.
Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary
policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae, in
exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit
commission of up to 60% that varies directly and inversely with ceded claims.
Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies
written in 2018 and 20% of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims and claim
expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely
with ceded claims.
Under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers
on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions
going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously
ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences
a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting
obligations under the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on
a cut-off basis. In connection with the termination, ceded premiums written under the 2016 QSR Transaction decreased from 25%
to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction.
For further discussion of the effect of reinsurance on our business, see 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, as well as other risks discussed below in Item 1A, "Risk Factors." 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 enterprise risk committee comprised of senior
members of our management team and led by our Chief Risk Officer. Our internal audit function, which reports to the Audit Committee
of our Board, provides independent ongoing assessments of our management of certain enterprise risks and reports its findings to
our Board's Risk Committee. Our internal audit function also engages external resources to assist in the assessment of enterprise
risks and our related control and monitoring processes.
Credit Market Risk
We have implemented a complementary range of strategies to actively monitor and manage the credit performance of our
insured portfolio, including:
•
establishing prudential underwriting standards and loan-level eligibility matrices which describe the maximum LTV,
minimum FICO, maximum borrower DTI ratio, maximum loan size, property type and occupancy status of loans
that we will insure, and memorializing these standards and eligibility matrices in our underwriting guidelines;
14
•
•
•
•
•
•
•
conducting diligence of our lender customers before and after we formally engage with them to ensure they have
appropriate financial resources, operational capabilities, management experience and a track record of strong
origination quality, and subjecting them to well-defined parameters regarding underwriting delegation status, credit
guideline requirements and, on a more limited basis, variances;
implementing a quality control process to ensure ongoing adherence with our underwriting guidelines and eligibility
criteria, under which our quality control group performs audits of insured loans identified on a random, high risk and
targeted basis 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;
setting concentration limits to regulate the aggregation of loan-level risks in our overall portfolio and manage our
overall portfolio exposure to certain risk classes that typically experience greater volatility and loss during periods
of economic and housing market downturns, such as higher LTV loans, loans with higher borrower DTIs, investor
loans, cash-out refinances, certain state concentration levels and several other borrower or loan attributes;
individually underwriting the significant majority of the loans we insure through our non-delegated platform and
DAR validation process, in order to evaluate borrower and loan-level risk characteristics on an individual policy
level, and monitor and assess the manufacturing capabilities of our lender customers in order to provide them feedback
to help enhance their own production and control processes;
deploying Rate GPS, our proprietary risk-based pricing platform, to dynamically consider a granular set of risk
attributes in our policy pricing process and assign individualized premium rates based on the relative risk and
anticipated performance of each loan we insure;
further utilizing Rate GPS to actively manage the flow of business into our portfolio and target loans with higher
quality risk characteristics that typically experience lower volatility and loss across market cycles; and
securing reinsurance coverage under quota share and excess-of-loss transactions that are structured to absorb losses
in periods of economic and/or housing market stress and, in doing so, mitigate the impact of credit volatility on our
financial results.
We view our comprehensive approach to credit risk management as a core competency and believe that it provides us with
the ability to actively manage the aggregation of borrower default risk in our insured loan portfolio and mitigate the impact of such
exposure under a range of macroeconomic scenarios.
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 and cyber 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.
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:
15
•
•
•
•
•
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
to price and 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;
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; and
designing, developing and deploying Rate GPS, our risk-based pricing platform, which allows us to dynamically
consider a granular set of risk attributes in our policy pricing process and assign individualized rates based on the
relative risk and anticipated performance of each loan we insure.
We 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, 2019, our investment portfolio was comprised of fixed maturity 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. Our investments
are rated by one or more nationally recognized statistical rating organizations. 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, 2019, we had 321 full- and part-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.
16
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:
•
•
•
•
•
•
•
•
•
the PMIERs, including operational, business and remedial requirements and minimum capital levels applicable to
GSE-qualified MI providers;
the terms that the GSEs require to be included in MI policies for loans that they purchase, including terms governing
rescission relief;
the underwriting standards and loan amount limits 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 level of MI coverage, subject to the requirements of the GSEs' charters, when MI is used as the required credit
enhancement on high-LTV mortgages;
the circumstances in which MI coverage can be canceled before reaching the cancellation thresholds established by
law, including under the HOPA;
the amount of loan level delivery fees (which result in higher costs to borrowers) that the GSEs assess on loans that
require private MI, which impacts private MI providers' ability to compete with government MIs and other forms of
credit enhancement used by the GSEs in lieu of private MI;
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; and
the availability and scope of different loan purchase programs, including first time home buyer and affordable lending
initiatives, 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, approved insurers must maintain available assets that equal or exceed minimum required assets, which
17
is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset
amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain
risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for
reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The risk-based
required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the
risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for
each pool insurance policy.
On September 27, 2018, the GSEs published revised PMIERs that took effect and became applicable to NMIC on March
31, 2019 (the Revised PMIERs). The rules governing minimum required assets and calculation of available assets and the risk-based
required asset amount remained largely the same under the Revised PMIERs, with a few differences in the elements that may (e.g.,
certain premiums receivable) and may not (e.g., funds withheld for the benefit of a reinsurer) be included in the calculation of
available assets. The Revised PMIERs also introduced a comprehensive reinsurance counter-party grading framework, which includes
a modest haircut (based on the credit rating of the reinsurer) to the capital credit available to an approved insurer for any un-
collateralized reinsurance coverage.
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, 2019 that NMIC was in full compliance with the PMIERs as of December 31, 2018. NMIC also
has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs
requirements. We continuously monitor NMIC's compliance with the PMIERs.
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, examination 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 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, to determine its capital adequacy under varying economic scenarios
and to prevent the depletion of capital due to the diversion of financial resources in support of non-MI lines of business. 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:
•
•
•
•
•
•
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;
•
•
•
•
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;
18
•
•
•
•
special deposits of securities;
stockholder dividends;
insurance policy sales practices; and
claims handling.
As the ultimate controlling parent of an insurance holding company system, NMIH is registered with the Wisconsin OCI,
which is NMIC and Re One's primary regulator, and must provide insurance holding company annual audited consolidated financial
statements and other information to the Wisconsin OCI on an ongoing basis. 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 all 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, the 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 they 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 Wisconsin 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 NMIH 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,
19
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, or other states, 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.
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 (RTC) requirements." While formulations of minimum capital may vary in certain jurisdictions, the most
common measure applied allows for a maximum permitted 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 capital contributions, and decreases as a result of statutory net loss and capital
distributions), 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 current regulations governing mortgage insurance,
including, among other things, capital requirements, underwriting standards, claims practices and market conduct regulation. The
National Association of Insurance Commissioners (NAIC) has formed a working group within its Financial Condition (E) Committee,
the Mortgage Guaranty Insurance Working Group (the Working Group), to discuss, develop and recommend changes to the solvency
and market practices regulation of mortgage insurers, including changes to the Mortgage Guaranty Insurers Model Act (Model Act).
Proposed amendments to the Model Act include, among other changes, adoption of a risk-based capital model. We, along with other
mortgage insurers, 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 material 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.
20
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 the government MIs 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.
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 government
MIs (i.e., the FHA, USDA and VA) and Ginnie Mae. There is broad policy consensus toward the need for increasing private capital
participation and decreasing government exposure to credit risk in the U.S. housing finance system. 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 authority 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.
There has recently been increased focus on the possibility of administrative reform that the White House and Treasury
Department, in collaboration with the Director of the FHFA, may pursue independent of any legislative action. On September 5,
2019, in response to a Presidential Memorandum issued on March 27, 2019, the Treasury Department released a Housing Reform
Plan that included a compilation of legislative and administrative recommendations for reforms to achieve the goals of (i) ending
the conservatorships of the GSEs, (ii) advancing competition in the housing finance market, (iii) setting regulations for the GSEs
that provide for their safety and soundness and limit their risk to the financial stability of the United States, and (iv) providing proper
compensation to the United States government for any explicit or implicit support it provides to the GSEs. Additionally, the Director
of the FHFA has publicly stated his priority for exiting the GSEs from conservatorship during his five-year term which began in
April 2019. Between the Director of the FHFA and the Treasury Department, they possess significant capacity to effect administrative
GSE reforms.
The passage and timing of comprehensive GSE reform or incremental change (whether legislative or administrative in
nature) is uncertain, making the actual impact on us and our industry difficult to predict. Any such changes that come to pass could
have a significant impact on our business. In addition, while the GSEs remain in conservatorship, the Director of the FHFA may
exercise his oversight authority over the GSEs differently than previous Directors and/or have different objectives with regard to the
GSEs' operations. Any such changes in how the FHFA engages with and influences the GSEs could have a significant impact on our
business.
FHA Reform
We compete with the single-family MI programs of the FHA, which is part of the U.S. Department of Housing and Urban
Development (HUD). During the financial crisis, the FHA captured an increasing share of the high-LTV MI market as incumbent
private MIs came under significant financial stress. Previous FHA rate actions and product introductions continue to impact its market
share, and by extension, the private MI market.
The FHA's role in the mortgage insurance industry is significantly dependent upon regulatory developments. Since 2012,
there have been several legislative proposals intended to reform the FHA; however, no legislation has been enacted to date. The
prospect for future unilateral FHA action on premium rates or the 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.
21
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
Dodd-Frank Act created the Consumer Financial Protection Bureau (CFPB), a federal agency with responsibility for regulating and
enforcing the offering and provision of consumer financial products and services under the federal consumer financial laws. Actions
taken or rules implemented by the CFPB have the potential to impact the overall housing finance market, and by extension the private
MI industry and our business. Leadership at the CFPB changes from time-to-time, and given the significant independence of the
Director of the CFPB in enforcing and administering its authority, it is difficult to predict whether or how the CFPB might seek to
implement these laws in the future.
Ability-to-Repay Rule
In January 2014, the CFPB implemented the Dodd-Frank Act Ability to Repay (ATR) mortgage provisions, which govern
the obligation of lenders to determine a borrower's ability to pay when originating a mortgage loan covered by the rule. 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, borrowers with DTI ratios in excess
of 43% 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 (other than borrower DTI) and so long as they meet the underwriting requirements of the GSEs (the QM Patch).
The QM Patch is scheduled to phase out upon the earlier to occur of the end of conservatorship or receivership of the GSEs or January
10, 2021. In July 2019, the CFPB announced their intent to study possible amendments to the ATR/QM rules in anticipation of the
planned expiration of the QM Patch on January 10, 2021, or following a short extension. On January 17, 2020, the CFPB announced
that the CFPB will propose an amendment to the ATR/QM rule that would move away from DTI, extend the date of expiration of
the QM Patch beyond January 10, 2021 and issue by May 2020 a Notice of Proposed Rulemaking seeking comments on proposed
amendments to the ATR/QM rule. The expiration of the QM Patch or any action by Congress or the CFPB to modify it could affect
the residential mortgage market and demand for private mortgage insurance.
The Dodd-Frank Act also gave statutory authority to HUD, the VA, and the USDA to develop their own definitions of "QM,"
which they have completed. To the extent lenders find that these agencies' definitions of QM are more favorable to certain segments
of their borrowers, they may choose government MI 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 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 restricting their access to mortgage credit
and reducing the size of the mortgage market. While Congress is considering certain reforms that may address this restrictiveness,
there is no certainty about whether legislation will be enacted or be successful in increasing access to mortgage loans for affected
borrowers. The CFPB recently completed its statutorily mandated assessment of the ATR rule's impact and effectiveness in meeting
its objectives. It is unclear what, if any, changes the CFPB may implement to address the findings of this assessment, including in
connection with its broader review of amendments to the ATR/QM rules in anticipation of the QM Patch planned expiration.
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 multi-year phase-
in periods to achieve full implementation.
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
22
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 a government MI 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.
Current Expected Credit Loss Model
In June 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-13,
Financial Instruments-Credit Losses (Topic 326) which will be effective for public business entities in fiscal years beginning after
December 15, 2019. This standard changes the accounting for credit losses for certain instruments and applies to financial assets
measured at amortized cost, including residential mortgage loans. The new measurement approach based on expected losses,
commonly referred to as the current expected credit loss (commonly known as CECL) model will require financial institutions to
measure the life-time expected credit losses for financial assets held at the reporting date based on historical experience, current
conditions and reasonable and supportable forecasts. This is expected to result in earlier recognition of credit losses as reserves are
required to be recorded for lifetime losses at origination. However, public entities subject to the new measurement and disclosure
standard will be allowed to consider mitigating factors, such as credit enhancement, when estimating lifetime credit losses. Private
mortgage insurance is considered an acceptable form of credit enhancement for such purposes and will provide an offset to a portion
of the lifetime loss reserving requirements. Private mortgage insurance is expected to reduce volatility that CECL introduces and
offset the impact to pricing and financial statements. We believe the continued use of private MI will benefit financial institutions
as they adopt this standard; however, as the accounting change has just become effective, it is difficult to predict what, if any, impact
it will have on the private MI industry.
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 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. Loans insured by government MIs 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
23
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 a private mortgage insurance tax deduction on a temporary basis through the end of 2011. Upon
expiration in 2011, Congress temporarily extended the deduction for each tax year from 2012 through 2017. Congress recently
temporarily extended the deduction through December 31, 2020 and retroactively restored deductibility for the 2018 and 2019 tax
years. 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. Under the Tax Cuts and Jobs Act (TCJA) enacted in December 2017, Congress
increased the standard deduction for individuals and maintained the tax deductibility of second mortgages. The combination of
maintaining the deduction for second mortgages and not extending deductibility for private MI under the TCJA could have the effect
of reducing demand for private MI products.
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
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
24
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.
25
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 Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Risk Factors Relating to Our Business Operations
We face intense competition for business in our industry, and 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 to ours. One or more of our competitors may seek to capture increased market share from
the government MIs 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 IT 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 some or all of these services 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 and more diversified corporations that may have access to greater
amounts of capital and financial resources than we do, or 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 and outside of the traditional MI market, including when the GSEs
pursue alternative forms of credit enhancement other than private MI. In particular, in 2018, each GSE began piloting a new credit
risk transfer program under which the GSE purchases high-LTV loans (i.e., LTVs above 80%) without MI and subsequently places
mortgage insurance with a captive insurer controlled by one of our competitors, which captive in turn cedes 100% of the risk to a
panel of offshore reinsurers. Freddie Mac's program is known as IMAGIN and Fannie Mae's program is known as Enterprise-Paid
Mortgage Insurance or EPMI. We believe these programs compete with traditional LPMI products offered by private MI companies,
including ours, and they may gain traction in the market if, and to the extent, the pricing for these products is lower than prevailing
LPMI rates and features of the GSEs' offerings cause originators and the GSEs to materially modify their historical preference for
private MI as credit enhancement on high-LTV loans. In addition, the pricing of the IMAGIN and EPMI programs and competing
LPMI products may allow these products to begin to impinge on BPMI market share, or may cause MIs, including NMIC, to reduce
BPMI rates to more effectively compete with these products.
Our financial strength ratings are important for our customers to maintain confidence in our products and our competitive
position. PMIERs require all approved insurers, except newly-approved insurers, to maintain at least one rating with a rating agency
acceptable to the GSEs. A downgrade in NMIC's ratings or ratings outlook, or our failure to maintain a rating acceptable to one or
both of the GSEs, could have an adverse effect on our business, including (i) potentially impacting our eligibility as an approved
insurer, (ii) increased scrutiny of our financial condition by our customers, resulting in potential reduction in our NIW or (iii) negative
impacts to our ability to conduct business in the non-GSE mortgage market, where financial strength ratings may be a more important
counter-party consideration for lenders.
26
Our NIW volumes 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:
•
•
•
•
•
lenders using government mortgage insurance programs, including those of the FHA, USDA and 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;
GSEs and other investors using credit enhancements other than MI (including alternative forms of credit risk transfer
such as IMAGIN and EPMI), 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.
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.
Further, at the direction of the FHFA, the GSEs have expanded their credit and mortgage risk transfer programs. These
programs have included the use of structured finance vehicles, obtaining insurance from non-mortgage insurers (e.g., IMAGIN and
EPMI), 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.
During the 2008 financial crisis, the government MIs, principally the FHA and VA, captured an increasing share of the high-
LTV MI market. While declining from peak market share, government MIs' market share remains substantially above their historical
levels. 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 government MIs will recede to pre-2008
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:
•
•
•
•
•
•
•
•
•
•
change to federal housing policy, including government MIs reducing their premiums or loosening their underwriting
guidelines;
increase in premium rates or tightening of underwriting guidelines by private mortgage insurers;
capital constraints in the private MI industry;
increases 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 government 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 government MIs' loan limits above GSE loan limits;
change in GSEs' demand to participate in the high-LTV or first-time homebuyer origination market; and
perceived operational ease of using insurance from government MIs compared to private MI.
27
If the government MIs maintain or increase their share of the mortgage insurance market, our business and industry could be negatively
affected.
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., measured through the combined volume of their retail originations and/or the insured
loans they may acquire from other originators. 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 and pricing 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 or that those lenders who have approved us will continue to maintain our business relationship. 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.
We cannot be certain that any loss of business from one or more customers would be replaced from other new or existing
lender customers. Some lenders may decide to write business only with certain mortgage insurers based on their views with respect
to an insurer's pricing, price delivery system, 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 require our customers to do business
with us. 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, our NIW volume could decline, which would reduce our revenues.
Our NIW volume and 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:
•
•
•
•
•
•
•
•
•
•
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;
restrictions on mortgage credit due to more stringent underwriting standards, more restrictive regulatory and capital
requirements and lender liquidity issues;
the health of the real estate industry and the national economy and conditions in regional and local economies;
housing affordability;
population trends, including the rate of household formation, preferences of potential mortgage borrowers and cultural
shifts;
the rate of home price appreciation, which in times of heavy refinancing can affect whether refinance loans have
LTVs that require MI;
deductibility of mortgage interest or other changes in tax policy, including the TCJA of 2017, which may have an
effect on the residential housing market;
U.S. government housing policy encouraging loans to first-time homebuyers;
GSEs' demand to participate in the high-LTV or first-time homebuyer origination market; 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 a material adverse effect on our operating results.
28
Our underwriting and credit 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 and credit 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 credit risk management guidelines are based on what we believe to be the major factors that influence the performance of
mortgage credit, including borrower and loan-level risk characteristics, lender origination practices and macroeconomic variables
that influence the housing market. The presence of multiple higher-risk characteristics (i.e., layered risk) 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 credit risk management policies and practices may not be sufficient to mitigate
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.
Unexpected material increases in borrower defaults could cause our actual losses to materially exceed our expected loss rates,
including in certain geographic regions in which our business may be concentrated and more susceptible to downturns.
Losses result from events that reduce a borrower's ability or willingness to continue to make mortgage payments, which
include borrower-specific factors, such as job loss, illness, death and divorce, and macroeconomic factors, such as rising
unemployment, market deterioration, rising interest rates and home price depreciation. Borrowers of high-LTV mortgages often have
more difficulty weathering personal financial hardships caused by unforeseen events, because they may not have sufficient personal
savings or available credit to structure viable workout solutions. Rising unemployment rates and deterioration in economic conditions
for extended periods of time, across the U.S. or in specific regional economies, generally increases the likelihood of borrower defaults.
An increase in interest rates typically leads to higher monthly payments for borrowers with existing ARMs and could materially
impact the cost and availability of refinance options for borrowers. 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 when borrowers are
impacted by events that reduce their incomes or increase their expenses. In addition, home price depreciation 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 may result from changes in buyers' perceptions
of the potential for future home price appreciation, rising interest rates or availability of mortgage credit. If our default and loss
projections are materially inaccurate, our actual losses could materially exceed our expectations and adversely affect our financial
condition and operating results.
Additionally, while we seek to diversify our insured loan portfolio geographically, 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. Certain regions of the U.S. from time to time will experience weaker economic conditions, higher unemployment, lower
property values or weaker housing markets. Consequently, loans in these regions will experience higher rates of default, foreclosure
and loss than on loans nationally, and struggling borrowers in regions with an oversupply of homes may be unable to sell their homes
as a means to avoid foreclosure. Any deterioration in housing prices, housing markets or economic conditions in regions in which
we have a significant concentration of IIF and which adversely affects the ability of borrowers to make payments on their insured
loans may increase the likelihood and severity of our losses, which could have a material adverse effect on our financial condition
and operating results.
The premiums we charge may be insufficient 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 certain 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 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
29
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 factors that impact the length of time that our policies remain in force may adversely affect our future revenues and
claims experience.
We set premiums at the time our policies are issued based on a broad range of variables, including property, loan, borrower,
lender and market (e.g., tax reform) factors to target through-the-cycle returns that exceed our cost of capital. 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 and generally cannot be adjusted after
coverage is placed. 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 primary determinant of our future
revenues and claims paying resources.
A lower level of persistency could reduce our future revenues from our monthly-paid premium products, which constituted
about 75% of our primary IIF at year-end 2019. Higher than expected persistency rates could negatively impact our future profitability
on monthly premium policies if market and economic conditions change significantly from those we expected when we established
the premium rates. In addition, a higher than expected persistency rate will decrease the profitability from single premium policies
if they will remain in force longer than was estimated when the policies were written.
The factors affecting persistency include:
•
•
•
•
•
•
•
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, with the time-frames for HOPA required cancellations generally
accelerating in a lower interest rate environment relative to a higher interest rate environment, and mortgage insurance
cancellation policies of the GSEs and other mortgage investors.
In 2019, mortgage interest rates decreased over the course of the year and have remained near historical lows, primarily as
a result of changes in monetary policy by the Federal Reserve. We expect the low interest rate environment to drive higher levels of
refinancings in the mortgage market, including with respect to loans we insure with interest rates that are higher than the current
prevailing rates. We could experience significant turnover in our IIF if the current low-rate environment persists over a prolonged
period of time, which could negatively impact our future revenues. We are unsure, however, what the ultimate impact on our revenues
will be as insured 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 and could be written at lower premium rates.
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 may be inadequate for the corresponding risk. 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 perform their
30
services as expected, 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 Policies' rescission relief provisions, we agree that we will not rescind coverage of an insured loan for
material misrepresentation (including borrower fraud) or underwriting defects if the conditions for such relief are satisfied as specified
in the applicable Master Policy. In addition, after a loan has achieved rescission relief, we have agreed to limitations on our ability
to initiate certain investigations of fraud or misrepresentation by parties involved in the origination of an insured loan. Our earliest
rescission relief on an insured loan is subject to our successful completion of an independent validation on such loan. The current
processes we have in place to validate insured loans may be ineffective in detecting material misrepresentations and/or underwriting
defects. After a loan meets the conditions for rescission relief, we are contractually prohibited from exercising our rights of rescission
for material underwriting defects and certain misrepresentations (including borrower fraud) made in connection with the origination
of the insured loan and placement of our mortgage insurance. In addition, following a loan's attainment of rescission relief, our
rights to conduct investigations of potential fraud or misrepresentation are significantly curtailed and the evidentiary standards we
must meet to pursue rescission for fraud are more stringent. See Item 1, "Business - Underwriting - Independent Validation and
Rescission Relief." With these provisions in our Master Policies, 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, depreciation in the values of properties underpinning 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,
there is no guarantee that our premiums will compensate us for any losses we incur on such loans. 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
programmatic or loan-by-loan exceptions to our underwriting guidelines, including for certain customer programs. We could incur
greater than expected claims incidence and claim severity on insured loans that fall outside of our guidelines, which could negatively
impact our revenues and operating results.
We expect our claims to increase as our insured loan 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, 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 better than expected, we anticipate incurred losses and claims to increase
as each book year reaches its anticipated period of highest claim frequency. The actual default rate and the average loss per default
that we experience 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 also generally affected by macroeconomic
factors. See Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations - Insurance Claims
and Claim Expenses." 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 and 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, use commercially reasonable
efforts to limit and mitigate loss when a loan is in default and if loss mitigation efforts are unsuccessful, to pursue foreclosure of the
31
underlying property in accordance with required time lines and practices, which are generally set by the GSEs. If these servicers fail
to adhere to such servicing standards and fail to limit and mitigate loss when appropriate, our losses may unexpectedly increase.
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.
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.
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 reserves 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. 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.
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 disaster event could
lead to unexpected changes in persistency rates as policyholders 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 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 new business and increased claims from those areas, and adverse
effects on home prices in those areas, which could result in unexpected 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
32
business operations. In addition, a disaster or a pandemic could adversely affect the value of the assets in our investment portfolio
if the event affects companies' ability to pay us principal or interest on their securities.
We insure mortgages for homes in areas that have been impacted by natural disasters, including from hurricanes and wildfires.
Following such natural disasters, we and other MIs typically experience an increase in NODs on mortgages secured by homes in the
impacted areas that negatively impact incurred losses in the periods in which we received such NODs. Our ultimate claims exposure
when we experience these events depends on the number of NODs ultimately received, proximate cause of each default and cure
rate of the NOD population. Cure rates on loan defaults following natural disasters 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 have observed that loans in default in disaster zones typically cure at a higher rate than non-disaster related
loans in default. As such, we historically have established lower reserves for these type of 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 establish for such claims.
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.
We use third-party reinsurance, including the QSR Transactions and the ILN Transactions, to actively manage our risk,
ensure compliance with PMIERs, state regulatory and other applicable capital requirements and support the growth of our business.
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 ILN Transactions) 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.
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 ILN Transactions are fully collateralized with funds deposited into trust accounts to secure the
obligations of the reinsurers to NMIC under the respective reinsurance agreement. See 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.
33
Our operating results depend in large part on our ability to manage the risks related to the growth of our business and on
maintaining and enhancing effective operating procedures and internal controls.
We have experienced significant growth since we started our mortgage insurance business in 2013. Our future operating
results depend to a large extent on our ability to successfully manage the continued growth of our business and the demands such
growth places on our operations personnel and senior management team. The unexpected loss of key management and other personnel,
or the inability to recruit, develop and retain qualified management talent in the future, could have an adverse effect on our business,
financial condition or operating results. 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.
Our future operating results also depend on our ability to continue to implement and improve our operational, credit, financial,
management and other disclosure and internal risk controls and procedures and our reporting systems and procedures. Our
management does not expect that our disclosure and internal risk controls and procedures will prevent all potential errors and fraud.
We may not successfully implement improvements to, or integrate, our controls and procedures in an efficient or timely manner and
may discover deficiencies in existing controls and procedures. There can be no guarantee that we will not experience flaws in our
internal controls and procedures in the future.
The design of any system of controls 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, our business and financial performance could be adversely affected.
We primarily rely on e-commerce and other technologies to provide and distribute our MI products and services. Our
customers require us to provide and service our MI products in a secure manner, including through our proprietary technology
platform, our internet website or direct electronic data transmissions. Accordingly, we invest significant resources in maintaining
and enhancing our technology platform and in establishing and maintaining electronic connectivity with our customers. Our 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 MI 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.
The success of our business depends on our ability to timely and effectively resolve any significant issues that may arise
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 may be significantly harmed. Further, our business would be negatively impacted if we are
unable to enhance our platform when necessary to support our primary business functions, including to match or exceed the
technological capabilities of our competitors over time. We cannot predict with certainty the cost of maintaining and improving our
platform, but failure to make necessary 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.
34
We may not be able to prevent the unauthorized disclosure or misuse of confidential, personal or proprietary information.
Our IT systems process, transmit, store and protect large amounts of personal information of borrowers whose mortgages
we insure, in addition to the confidential, proprietary, financial and other information that are critical to our business. Our technology
systems and networks, including those functions that we may outsource, are vulnerable to unauthorized access, interruptions or
failures due to events that are often beyond our control, including cyber-attacks, natural disasters, theft, terrorist attacks and general
technology failures. Our employees and vendors may use portable computers or mobile devices which can be stolen or lost or mis-
used, making information accessible through such devices more vulnerable to unauthorized access, including by employee
malfeasance. 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 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 and methods. Our employees, customers or other users of our systems are from time-to-
time subject to fraudulent inducements by 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 IT 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 materially 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.
Income from our investment portfolio provides a growing 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 in our portfolio,
including losses resulting from impairments or 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 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. 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 are, 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. The
GSEs set their own counter-party standards for private mortgage insurers, known as PMIERs. (Italicized terms have the same meaning
that such terms have in the PMIERs.) 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.
35
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, some of which do not have materiality thresholds. We certified to the GSEs by April 15, 2019 that NMIC was in full
compliance with the PMIERs as of December 31, 2018.
There can be no assurance, however, that NMIC will continue to comply with the PMIERs financial requirements. If NMIC
were to experience a material reduction to revenues or an unexpected, significant increase in losses, NMIC's available assets could
fall below the minimum required assets mandated by the PMIERs financial requirements. In addition, as NMIC continues to grow
its business and increase its net RIF, NMIC may 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.
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. In
addition, the GSEs may amend or clarify other aspects of the PMIERs at any time. On September 27, 2018, the GSEs published the
Revised PMIERs, including updated financial requirements, which took effect and became applicable to NMIC on March 31, 2019,
after which NMIC has remained in full compliance. There is no assurance NMIC will remain in compliance or that the GSEs will
not make the PMIERs financial requirements more onerous in the future. If any future updates to the PMIERs would require NMIC
to materially increase the amount of available assets to support its 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.
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. For example, we and other approved insurers were required
to draft and implement new master policies to, among other things, include terms that conform to the GSEs' new RRPs. It is possible
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 approved insurers,
including NMIC. Changes in the charters or business practices of Freddie Mac or Fannie Mae could materially 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, or the administration may implement through administrative reform,
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 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. Recently, there has been increased focus on and discussion of administrative
reform independent of legislative action. On September 5, 2019, the Treasury Department released its Housing Reform Plan that
included a compilation of legislative and administrative recommendations for reforms to achieve the goals of (i) ending the
conservatorships of the GSEs, (ii) advancing competition in the housing finance market, (iii) setting regulations for the GSEs that
provide for their safety and soundness and limit their risk to the financial stability of the United States, and (iv) providing proper
36
compensation to the United States government for any explicit or implicit support it provides to the GSEs. Additionally, the Director
of the FHFA has publicly stated his priority for exiting the GSEs from conservatorship during his five-year term which began April
2019. Between the Director of the FHFA and the Treasury Department, they possess significant capacity to effect administrative
GSE reforms. If any GSE reform is adopted, whether through legislation or administrative action, 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, prospects 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. 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 or incremental change (legislative or administrative) is uncertain, making the actual
impact on us and our industry difficult to predict. 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, including IMAGIN and EPMI
and others discussed above in "Our NIW volumes could be adversely affected if lenders and investors select alternatives to private
MI." 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.
We are subject to comprehensive state insurance regulations and capital adequacy requirements, which we must satisfy to continue
to operate our MI business.
The U.S. MI industry and our insurance subsidiaries are subject to comprehensive state regulation in each jurisdiction in
which they are licensed or authorized to do business. 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 applicable regulations could lead to enforcement or disciplinary action, including
the imposition of penalties and the revocation of our authorization to operate.
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 RIF, including through additional
reinsurance, or raise additional capital. If this were to occur, we can give no assurance that our efforts to obtain additional reinsurance
or otherwise reduce our RIF, or to raise capital would be successful, and if such efforts are unsuccessful, we could exceed 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.
The NAIC has formed the Working Group to discuss and recommend changes to the solvency and market practices regulation
of mortgage insurers, including changes to the Model Act. Proposed amendments to the Model Act include, among other changes,
adoption of a risk-based capital model. We, along with other mortgage insurers, 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 are, 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 regulators and state insurance agencies in the ordinary course of operations.
37
In the past, mortgage insurers (excluding 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 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.
From time-to-time, we have been involved in certain legal proceedings in the ordinary course of business. To date, we have
not recognized a material liability related to any of our legal proceedings. However, the outcome of litigation and other legal and
regulatory matters is inherently uncertain, and it is possible that one or more of any such matters in the future 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 effective date for the U.S.
Basel III regulations was January 1, 2014, although the majority of its provisions are subject to multi-year phase-in periods to achieve
full implementation. 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 CFPB 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 CFPB's final ATR rule went into effect on
January 10, 2014. A subset of mortgages within the ATR rule are known as 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, borrowers with DTI ratios above
43% 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 for the "QM Patch,"
so long as loans satisfy the general product feature requirements of QMs (other than borrower DTI) and so long as they meet the
underwriting requirements of the GSEs. The QM Patch is scheduled to phase out upon the earlier to occur of the end of conservatorship
or receivership of the GSEs or January 10, 2021. In July 2019, the CFPB announced their intent to study possible amendments to
the ATR/QM rules in anticipation of the planned expiration of the QM Patch on January 10, 2021 or following a short extension. On
January 17, 2020, the CFPB announced that the CFPB will propose an amendment to the ATR/QM rule that would move away from
DTI, extend the date of expiration of the QM Patch beyond January 10, 2021 and issue by May 2020 a Notice of Proposed Rulemaking
seeking comments on proposed amendments to the ATR/QM rule. The expiration of the QM Patch or any action by Congress or the
CFPB 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 HUD, the VA, and the USDA 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
38
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 restricting their access to mortgage credit and reducing the size of the residential mortgage
market. The CFPB recently completed its statutorily mandated assessment of the ATR rule's impact and effectiveness in meeting its
objectives. It is unclear what, if any, changes the CFPB may implement to address the findings of this assessment, including in
connection with its broader review of amendments to the ATR/QM rules in anticipation of the QM Patch planned expiration. Our
business prospects and operating results could be adversely impacted if, and to the extent that, the QM regulations or the CFPB's
actions have the impact of further reducing the size of the origination market, including potentially when the QM Patch expires.
Uncertainty relating to the potential discontinuation of LIBOR after 2021 may adversely affect our business, results of operations
and financial condition.
We have exposure to LIBOR-indexed financial instruments, including our credit instruments and ILN Transactions. As of
December 31, 2019, we held approximately $90 million of floating-rate securities in our investment portfolio that yield interest based
on an index rate, predominantly LIBOR, plus a margin (the LIBOR-indexed securities). In addition, we believe most ARMs in our
IIF are indexed to LIBOR. In 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced its intention to stop
persuading or compelling the banks that sustain LIBOR to submit rate quotations after 2021. Accordingly, it is uncertain whether
LIBOR will continue to be quoted after 2021, or if it does continue to be quoted, whether it will be reliable.
Efforts to identify and transition to a set of alternative U.S. dollar reference rates have been underway, including proposals
by the Alternative Reference Rates Committee of the Federal Reserve Board (ARRC). In 2017, the ARRC recommended an alternative
reference rate referred to as the Secured Overnight Financing Rate (SOFR) and the Federal Reserve Bank of New York began
publishing SOFR in 2018. However, SOFR is calculated based on different criteria than LIBOR. Accordingly, SOFR and LIBOR
may diverge, particularly in times of macroeconomic stress. Since the initial publication of SOFR in 2018, daily changes in SOFR
have at times been more volatile than daily changes in comparable benchmark or market rates, and SOFR may be subject to direct
influence by activities of the Federal Reserve and the Federal Reserve Bank of New York in ways that other rates may not be.
We continue to analyze potential risks associated with the LIBOR transition, including financial, operational, legal and
market risks. We have created an enterprise plan focused on this transition, including identifying and monitoring our exposure to
LIBOR and monitoring the market adoption of alternative reference rates and industry-standard contractual fall-back provisions.
Each of our LIBOR-indexed financial instruments and we believe most of our LIBOR-indexed securities provides for
determining an alternative reference rate if LIBOR is discontinued. LIBOR-indexed ARMs typically provide lenders with the option
to choose a comparable rate if LIBOR ceases to exist. However, there is considerable uncertainty as to how the financial services
industry will address the discontinuance of LIBOR in these financial instruments. Alternative reference rates that replace LIBOR
may not yield the same or similar economic results over the lives of these financial instruments. In addition, while the ARRC was
created to ensure a successful transition from LIBOR, there can be no assurance that the ARRC will endorse practices that create a
smooth transition and minimize value transfers between market participants, or that its endorsed practices will be broadly adopted
by market participants. In addition, we cannot anticipate how long it will take to develop the systems and processes necessary to
adopt SOFR or other benchmark replacements, which may delay and contribute to uncertainty and volatility surrounding the LIBOR
transition.
Accordingly, a change or transition away from LIBOR as a common reference rate in the financial market could have a
range of adverse effects on our business, results of operations and financial condition. In particular any such transition could:
•
•
•
•
•
adversely affect the interest rates we pay on our LIBOR-indexed financial instruments;
cause volatility in the yield of our LIBOR-indexed securities and investment income;
prompt additional inquiries or other actions from regulators in respect of our preparation and readiness for the replacement
of LIBOR with an alternative reference rate;
result in disputes, litigation or other actions with our counterparties regarding the interpretation and enforceability of certain
fall-back language in LIBOR-based instruments and securities we hold; and
disrupt the residential mortgage market, including with respect to ARMs, if replacement indices unilaterally chosen by
lenders negatively impact borrowers, which could give rise to higher than expected rates of default on such loans and
increased litigation.
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. 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. NMIH
depends on these sources of liquidity to make principal and interest payments under its current debt arrangements 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.
Our dividend income is limited to upstream dividend payments from our subsidiaries. With respect to our insurance
subsidiaries, under Wisconsin law, dividends in excess of prescribed limits are deemed "extraordinary" and require approval of the
Wisconsin OCI. Other states in which our insurance subsidiaries are licensed also limit or restrict their ability to pay dividends. It is
possible that Wisconsin and other states that have dividend restrictions 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. In addition, under
the PMIERs, if an approved insurer fails to meet the PMIERs financial requirements, such approved insurer may not pay dividends
without the prior approval of the GSEs.
In addition, to support NMIC's future growth, we could be required to provide additional capital support for NMIC if
additional capital is required by the GSEs or pursuant to insurance laws and regulations. If we were unable to meet our obligations,
NMIC 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, including through
the issuance of additional debt, equity, or a combination of both, reduce our RIF, including through additional reinsurance, or curtail
our growth and reduce our expenses. 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 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 2018 Credit Agreement contains various covenants, restrictions 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 May 2018, NMIH entered into a credit agreement (2018 Credit Agreement), providing for (i) a $150 million five-year
senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) an $85 million three-year secured revolving
credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021. Proceeds from the 2018 Term Loan were used to repay
in full the outstanding amount due under our previous $150 million amended term loan (the 2015 Term Loan) and to pay fees and
expenses incurred in connection with the 2018 Credit Agreement. The 2018 Credit Agreement is secured by substantially all of the
assets of NMIH, including the capital stock of NMIC and Re One.
Among other requirements, under both the 2018 Term Loan and the 2018 Revolving Credit Facility, NMIH may not permit
our debt to total capitalization ratio to exceed 35% as of the last day of any fiscal quarter. Under the 2018 Revolving Credit Facility,
NMIH may not permit (i) the aggregate amount of our unrestricted cash and cash equivalents to be less than $10 million at any time
when NMIH does not have an investment-grade credit rating from both Standard & Poor's Rating Service (S&P) and Moody's
Investors Service (Moody's), (ii) the statutory capital of NMIC to be less than $414,424,624 as of the last day of any fiscal quarter,
or (iii) our consolidated net worth to be, as of the last day of any fiscal quarter, less than the sum of (A) $461,607,905, plus (B) 50%
of our cumulative consolidated net income for each fiscal quarter for which such consolidated net income is positive, plus (C) 50%
of any increase in our consolidated net worth after March 31, 2018 resulting from certain issuances of equity by or capital contributions
to NMIH or our subsidiaries. In addition, under the Revolving Credit Facility, NMIC must remain at all times in compliance with
all applicable "financial requirements" imposed pursuant to the PMIERs, subject to any allowed transition period or forbearance
thereunder.
40
Further, the 2018 Credit Agreement prohibits, restricts or limits, among other things, NMIH's and its subsidiaries' ability
to (i) incur additional indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their
assets, (v) make certain loans or investments, (vi) merge or consolidate and (vii) enter into transactions with affiliates, in each case
subject to certain limitations, exceptions and qualifications as set forth in the 2018 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 2018 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 2018
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 2018 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 2018 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 2018 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 on the 2018 Term Loan, do not meet the financial covenants or otherwise default on the terms of the 2018
Credit Agreement, the lenders under the 2018 Credit Agreement could declare all of the obligations under the 2018 Credit Agreement
to be immediately due and payable. We cannot assure you that our assets would be sufficient to repay such amounts in full if this
were to occur, and the lenders could foreclose on the collateral securing the 2018 Credit Agreement and the Guarantee, including,
subject to regulatory approval, the stock of NMIC and Re One. In addition, although we currently expect that we will have sufficient
assets to repay the outstanding principal of the 2018 Term Loan at maturity; we can give no assurance that our assets at that time
will be sufficient to repay such amounts in full or that NMIH will be able to extend or refinance the 2018 Term Loan. Any of these
actions could have a material adverse effect 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 2018 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.
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, including up to $85 million in borrowings we may choose to make
under the 2018 Revolving Credit Facility. Although our 2018 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 2018 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 2018 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. 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.
41
We do not anticipate paying any dividends on our common stock in the near future, and payment of any declared dividends may
be delayed.
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 could 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:
•
•
•
•
•
•
•
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 and the role of government MIs;
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;
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 and management;
our failure to satisfy the continued listing requirements of the NASDAQ; and
our failure to comply with the Sarbanes-Oxley Act of 2002.
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 of certain companies other than NMIH have sometimes instituted securities class action litigation against such
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, and future issuances of our common stock may depress our share price and dilute the book value of our common
stock.
As of December 31, 2019, we had 68,358,074 shares of our common stock issued and outstanding. 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, and together with the
42
2012 Plan, the Stock Plans). Any shares issued under our Stock Plans, including as a result of the exercise of stock options, would
dilute the percentage ownership held by investors who purchase our shares prior to such issuance.
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
Stock Plans, and securities and instruments that are convertible into shares of our common stock. 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.
Future issuance of debt or preferred stock, which would rank senior to our Class A common stock upon our liquidation, may
adversely affect the market value of our common stock.
Shares of our common stock are equity interests and do not constitute indebtedness of NMIH. 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, if we were liquidated, holders of our debt securities and preferred stock and lenders with respect to our
2018 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 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.
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:
•
•
•
•
•
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
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. Additionally, cumulative voting in the election of our directors in not allowed.
As a Delaware corporation, we are also subject to anti-takeover provisions of Delaware law, including Section 203 of The
Delaware General Corporation Law, 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 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
43
by the board 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.
44
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.
45
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 11, 2019, there were 68,438,109
shares of our Class A common stock outstanding and approximately 13 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 11, 2019 was $35.57.
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 - Note16, Regulatory Information - Dividend Restrictions."
Issuer Purchases of Equity Securities
We did not repurchase any shares of our common stock during 2019.
Common Stock Performance Graph
The following graph compares the cumulative total stockholder return on our Class A common stock from December 31,
2014 until December 31, 2019, with the cumulative total stockholder return on the Russell 2000 Index, S&P Small Cap 600 Index
and an index of selected mortgage insurance companies (Peer Index). The Peer Index includes Essent, MGIC and Radian. 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.
NMI Holdings, Inc.
Russell 2000 Index
S&P Small Cap 600
Peer Index (ESNT, MTG, RDN)
12/30/2014
12/31/2015
12/31/2016
12/31/2017
12/31/2018
12/31/2019
$
100 $
100
100
100
74 $
94
97
84
117 $
113
121
119
186 $
127
135
153
196 $
112
122
121
363
138
147
186
46
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,
2019
2018
2017
2016
2015
Consolidated statements of operations
Net premiums earned
Net investment income
Net realized investment gains (losses)
Total revenues
Insurance claims & claim expenses
Underwriting and operating expenses(1)
Net income (loss)
Basic earnings per share
$
345,015
$
251,197
$
165,740
$
110,481
$
(In Thousands, except for per share data)
30,856
45
378,771
12,507
126,621
171,957
23,538
57
275,025
5,452
116,966
107,927
16,273
208
182,743
5,339
106,362
22,050
13,751
(693)
123,815
2,392
92,731
64,001
2.54
$
1.66
$
0.37
$
1.08
$
Basic weighted average shares outstanding
67,573
65,019
59,816
59,071
45,506
7,246
831
53,608
650
80,503
(27,793)
(0.47)
58,683
2019
2018
2017
2016
2015
Consolidated balance sheets
Total investments
Cash and cash equivalents
Total assets
Term loan
Unearned premiums
Reserve for insurance claims and claim expenses
Shareholders' equity
Book value per share
Selected ratios
Loss ratio(2)
Expense ratio(3)
Combined ratio
Risk-to-capital ratio
(In Thousands, except for ratios)
$
911,490
$
715,875
$
628,969
$
559,235
$ 1,140,940
41,089
25,294
1,364,818
1,092,043
145,764
136,642
23,752
930,420
146,757
158,893
12,811
701,500
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
$
13.61
$
10.58
$
8.41
$
8.04
$
6.85
3.6%
36.7%
40.3%
15.8:1
2.2%
46.6%
48.8%
13.1:1
3.2%
64.2%
67.4%
13.2:1
2.2%
83.9%
86.1%
11.6:1
1.4%
176.9%
178.3%
8.7:1
2019
2018
2017
2016
2015
Other data
New primary insurance written
New primary risk written
Direct primary insurance in force
Direct primary risk in force
$
45,141
11,715
94,754
24,173
Direct pool risk in force
Available Assets (4) ($ thousand)
Net Risk-Based Required Assets (4) ($ thousand)
(1) Prior periods have been reclassified for consistency and presentation purposes.
(2)
1,016,387
773,474
93
(In Millions, except for noted below)
$
27,295
$
21,587
$
21,189
$
12,424
6,909
68,551
17,091
93
733,762
511,268
5,271
48,465
11,843
93
527,897
446,226
5,086
32,168
7,790
93
453,523
366,584
2,932
14,824
3,586
93
431,411
249,805
Loss ratio is calculated by dividing the provision for insurance claims and claim expenses by net premiums earned.
Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
(3)
(4) As reported by NMIC under the PMIERs financial requirements, which took effect as of December 31, 2015 and further amended by the GSEs that became
applicable to NMIC on March 31, 2019.
47
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and notes thereto included below in Item 8 of this report and the Risk Factors included above in
Item 1A of this report. In addition, investors should review the "Cautionary Note Regarding Forward Looking Statements" above.
Overview
We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled
in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI
provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured
loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage
loan originators.
MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered
mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market
sale of high-LTV (i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or
guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market
sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective
homeowners.
NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our
first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders
and build a diversified, high-quality insured portfolio. As of December 31, 2019, we had master policies with 1,476 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, 2019, we had $97.3 billion of total IIF, including
primary IIF of $94.8 billion, and gross RIF of $24.3 billion, including primary RIF of $24.2 billion. For the year ended December
31, 2019, we generated $45.1 billion of NIW, compared to $27.3 billion and $21.6 billion for the years ended December 31, 2018
and 2017, respectively.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-
quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure
that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk
management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure,
utilizing our proprietary Rate GPS pricing platform to dynamically evaluate risk and price our policies, and foster a culture of
collaboration and excellence that helps us attract and retain experienced industry leaders.
Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured
portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection
and pricing, fair and transparent claim payment practices, responsive customer service, financial strength and profitability.
Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located in Emeryville, California.
As of December 31, 2019, we had 321 full- and part-time employees. Our corporate website is located at www.nationalmi.com. Our
website and the information contained on or accessible through our website are not incorporated by reference into this report.
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted
or are expected to impact our business, including new insurance writings, the composition of our insurance portfolio and other factors
that we expect to impact our results.
48
Conditions and Trends Impacting Our Business
Customer Development
We have important relationships with customers across all categories and allocation profiles, including National Accounts
and Regional Accounts, and centralized and decentralized lenders. Our sales and marketing efforts are broadly focused on expanding
our presence with existing customers and activating new customer relationships. We consider an activation to be the point at which
we have signed a Master Policy, established IT connectivity and generated a first application or first dollar of NIW from a customer.
During the year ended December 31, 2019, we activated 94 lenders, compared to 121 and 127 for the years ended December 31,
2018 and December 31, 2017, 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, 2019, we had
1,476 Master Policies and 1,095 active customer relationships, compared to 1,374 and 1,005, respectively, as of December 31, 2018
and 1,267 and 841, respectively, as of December 31, 2017.
New Insurance Written, Insurance-In-Force and Risk-In-Force
NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our
NIW is affected by the overall size of the mortgage origination market and the volume of high-LTV mortgage originations. Our
NIW is also affected by the percentage of such high-LTV originations covered by private versus government MI or other alternative
credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the
aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum
total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment,
nonpayment of premiums, coverage rescission and claim payments). RIF is related to IIF and represents the aggregate amount of
coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each
individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the
LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans
having a higher coverage percentage. Gross RIF represents RIF before consideration of reinsurance. Net RIF is gross RIF net of
ceded reinsurance.
Net Premiums Written and Net Premiums Earned
We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and
borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-
based pricing platform, which we refer to as Rate GPS. Rate GPS considers a broad range of individual variables, including property
type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and
charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to
replace our previous rate card pricing system. While most of our new business is priced through Rate GPS, we also continue to offer
a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the
introduction and utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk,
and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive
risk-adjusted returns.
Premiums are generally fixed for the duration of our coverage of the underlying loans. Net premiums written are equal to
gross premiums written minus ceded premiums written under our reinsurance arrangements, less premium refunds. As a result, net
premiums written are generally influenced by:
•
•
•
•
NIW;
premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described
below;
cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings
(which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force
policies), levels of claim payments and home prices; and
cession of premiums under third-party reinsurance arrangements.
Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium),
on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written
will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment
at origination, which is earned over the estimated life of the policy. Substantially all of our single premium policies in force as of
49
December 31, 2019 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled,
we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized
in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage.
Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our
insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums
earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the
relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include
certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are
paid at origination on single premium policies and our single premium policies are generally non-refundable on cancellation, assuming
all other factors remain constant, if single premium loans are prepaid earlier than expected, our profitability on these loans is likely
to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly
premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we
replace the repaid monthly premium loan with a new loan at the same premium rate or higher, our revenue is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state regulatory and other
applicable capital requirements, and support the growth of our business. We currently have both quota share and excess-of-loss
reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under
a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred
losses. Such a quota share arrangement reduces premiums written and earned and also reduces RIF, providing capital relief to us and
reducing our incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding
commissions as part of quota share transactions, which offset our 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, typically we are responsible for losses up to an agreed-upon threshold and the reinsurer then provides
coverage in excess of such threshold up to a maximum agreed-upon limit. We expect to continue to evaluate reinsurance opportunities
in the normal course of business.
Quota share reinsurance
Effective September 1, 2016, NMIC entered into the 2016 QSR Transaction with a syndicate of third-party reinsurers. Under
the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written
for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae, in exchange for
reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up
to 60% that varies directly and inversely with ceded claims.
Effective January 1, 2018, NMIC entered into the 2018 QSR Transaction with a syndicate of third-party reinsurers. Under
the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in 2018 and 20%
of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims and claim expenses on covered
policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims.
Under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers
on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions
going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously
ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences
a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting
obligations under the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on
a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF
and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written under
the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool
risk under the 2016 QSR Transaction.
Excess-of-loss reinsurance
NMIC has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies
written during discrete periods through a series of mortgage insurance-linked note offerings by the Oaktown Re Vehicles. Under
50
each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle
then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of
the respective reinsurance coverage amounts.
NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-
of-loss agreement. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the
inception of each agreement over a 10-year period as the underlying insured mortgages are amortized or repaid, and/or the
mortgage insurance coverage is canceled.
The following table presents the inception date, covered production period, initial and current reinsurance coverage
amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions.
($ values in thousands)
2017 ILN Transaction
Inception Date
May 2, 2017
Covered Production
1/1/2013 - 12/31/2016
2018 ILN Transaction
July 25, 2018
1/1/2017 - 5/31/2018
Initial
Reinsurance
Coverage
$ 211,320
264,545
2019 ILN Transaction
July 30, 2019
6/1/2018 - 6/30/2019
326,905
Current
Reinsurance
Coverage
$
61,900
Initial First
Layer Retained
Loss
126,793
$
Current First
Layer Retained
Loss
123,330
$
202,396
301,396
125,312
123,424
124,594
123,424
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.
Primary and pool IIF and NIW
As of and for the years ended
Monthly
Single
Primary
Pool
Total
December 31, 2019
December 31, 2018
December 31, 2017
IIF
NIW
IIF
NIW
IIF
NIW
(In Millions)
$
77,097
$
41,357
$
51,655
$
24,122
$
33,268
$
17,560
17,657
94,754
2,570
3,784
45,141
16,896
68,551
3,173
27,295
15,197
48,465
4,027
21,587
—
2,901
—
3,233
—
$
97,324
$
45,141
$
71,452
$
27,295
$
51,698
$
21,587
For the year ended December 31, 2019, primary NIW increased 65% compared to the year ended December 31, 2018, due
to growth in our monthly and single premium policy production tied to increased penetration of existing customer accounts and
new customer account activations. For the year ended December 31, 2018, primary NIW increased 26% compared to the year ended
December 31, 2017, due to growth in our monthly premium policy volume, partially offset by a decrease in our single premium
policy production.
For the year ended December 31, 2019, monthly premium polices accounted for 92% of our NIW, compared to 88% and
81% for the years ended December 31, 2018 and 2017, respectively. As of December 31, 2019, monthly premium policies accounted
for 81% of our primary IIF, compared to 75% at December 31, 2018 and 69% at December 31, 2017. We expect the break-down
of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF will continue to trend
toward an increased monthly mix over time given the composition of our NIW.
Total IIF at December 31, 2019 increased 36% compared to December 31, 2018, which in turn increased 38% compared
to December 31, 2017, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of our
in-force policies. Our persistency rate decreased to 77% at December 31, 2019 from 87% at December 31, 2018 and 86% at
December 31, 2017, reflecting the impact of increased refinancing activity during the year ended December 31, 2019 tied to record
low interest rates.
51
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
Net premiums earned
December 31, 2019
December 31, 2018
December 31, 2017
(In Thousands)
$
332,652
$
256,803
$
345,015
251,197
173,672
165,740
For the year ended December 31, 2019, net premiums written and earned increased 30% and 37%, respectively, compared
to the year ended December 31, 2018. The increases in net premiums written and earned are primarily due to the growth of our IIF
and increased monthly policy production, partially offset by increased cessions under the QSR Transactions tied to the growth of
our direct premium volume and the inception of the 2018 and 2019 ILN Transactions. Net premiums earned grew at an accelerated
pace compared to net premiums written due to the amortization of unearned premiums partially offset by new single premium policy
originations, as well as earnings on single premium policy cancellations.
For the year ended December 31, 2018, net premiums written and earned increased 48% and 52%, respectively, compared
to the year ended December 31, 2017. The increases in net premiums written and earned are due to the growth of our IIF and
increased monthly policy production, partially offset by increased cessions under the QSR Transactions and 2018 and 2017 ILN
Transactions, and a decrease in earnings from the cancellation of single premium policies.
Pool premiums written and earned for the years ended December 31, 2019, 2018 and 2017, were $3.0 million, $3.4 million
and $3.8 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool
premiums have been ceded. A portion of our ceded pool premiums earned are recouped through profit commission under the 2016
QSR Transaction.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance
arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated.
Primary portfolio trends
As of and for the year ended
New insurance written
Percentage of monthly premium
Percentage of single premium
New risk written
Insurance-in-force (1)
Percentage of monthly premium
Percentage of single premium
Risk-in-force (1)
Policies in force (count) (1)
Average loan size (1)
Coverage percentage (2)
Loans in default (count) (1)
Percentage of loans in default (1)
Risk-in-force on defaulted loans (1)
Average premium yield (3)
Earnings from cancellations
Annual persistency (4)
December 31, 2019
December 31, 2018
December 31, 2017
($ Values In Millions)
45,141
$
27,295
$
21,587
92%
8%
11,715
94,754
81%
19%
24,173
366,039
0.259
26%
1,448
0.40%
84
0.42%
22
77%
$
$
$
$
$
88%
12%
6,909
$
68,551
75%
25%
17,091
280,825
0.244
25%
877
0.31%
48
0.43%
11
87%
$
$
$
$
81%
19%
5,271
48,465
69%
31%
11,843
202,351
0.240
24%
928
0.46%
53
0.41%
15
86%
$
$
$
$
$
$
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
52
(3) Calculated as net premiums earned divided by average primary IIF for the period.
(4) Defined as the percentage of IIF that remains on our books after a given 12-month period.
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, principal repayments and other reductions
IIF, end of period
As of and for the year ended
December 31, 2019
December 31, 2018
December 31, 2017
$
$
(In Millions)
68,551
$
48,465
$
45,141
(18,938)
94,754
$
27,295
(7,209)
68,551
$
32,168
21,587
(5,290)
48,465
We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In
general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating
expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs
because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination,
when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured
loans decreases (primarily due to loan prepayments), and by increasing losses.
The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated.
Primary IIF and RIF
As of
December 31, 2019
December 31, 2018
December 31, 2017
IIF
RIF
IIF
RIF
IIF
RIF
42,060
19,579
14,961
11,944
5,370
840
10,916
4,977
3,710
2,995
1,361
214
(In Millions)
—
26,310
18,858
15,400
6,860
1,123
—
6,664
4,627
3,795
1,723
282
—
—
20,739
18,066
8,256
1,404
—
—
5,059
4,383
2,051
350
$
94,754
$
24,173
$
68,551
$
17,091
$
48,465
$
11,843
2019
2018
2017
2016
2015
2014 and before
Total
We utilize certain risk principles that form the basis of how we underwrite and originate NIW. We have established prudential
underwriting standards and loan-level eligibility matrices which prescribe the maximum LTV, minimum borrower FICO score,
maximum borrower DTI ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will
insure and memorialized these standards and eligibility matrices in our Underwriting Guideline Manual that is publicly available
on our website. Our underwriting standards and eligibility criteria are designed to limit the layering of risk in a single insurance
policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and
lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor
the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional
conditions or public policy shifts.
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.
53
Primary NIW by FICO
For the year ended
December 31, 2019
December 31, 2018
December 31, 2017
>= 760
740-759
720-739
700-719
680-699
<=679
Total
Weighted average FICO
Primary NIW by LTV
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
(In Millions)
21,931
$
11,741
$
7,541
6,643
4,783
3,021
1,222
4,629
4,006
3,232
2,227
1,460
45,141
$
27,295
$
753
747
9,711
3,332
2,833
2,539
1,699
1,473
21,587
746
December 31, 2019
December 31, 2018
December 31, 2017
For the year ended
(In Millions)
3,192
$
3,226
$
21,475
15,555
4,919
12,658
8,240
3,171
2,458
9,512
6,242
3,375
45,141
$
27,295
$
21,587
91.8%
92.2%
92.2%
December 31, 2019
December 31, 2018
December 31, 2017
For the year ended
37,405
7,736
45,141
$
$
(In Millions)
25,210
2,085
27,295
$
$
18,627
2,960
21,587
$
$
$
$
$
$
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, 2019
December 31, 2018
December 31, 2017
As of
$
44,793
15,728
13,417
10,284
6,774
3,758
($ Values In Millions)
47% $
17
31,870
11,294
47% $
16
14
11
7
4
9,338
7,574
5,062
3,413
14
11
7
5
23,438
7,781
6,259
5,179
3,408
2,400
$
94,754
100% $
68,551
100% $
48,465
48%
16
13
11
7
5
100%
54
Primary RIF by FICO
As of
December 31, 2019
December 31, 2018
December 31, 2017
($ Values In Millions)
>= 760
740-759
720-739
700-719
680-699
<=679
Total
Primary IIF by LTV
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
Total
Primary RIF by LTV
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
85.00% and below
$
11,388
4,034
3,465
2,632
1,728
926
47% $
17
14
11
7
4
7,955
2,836
2,341
1,886
1,256
817
47% $
16
14
11
7
5
5,764
1,909
1,527
1,256
821
566
$
24,173
100% $
17,091
100% $
11,843
$
$
$
December 31, 2019
As of
December 31, 2018
($ Values In Millions)
December 31, 2017
8,640
44,668
30,163
11,283
94,754
9% $
47
32
12
100% $
6,774
31,507
20,668
9,602
68,551
10% $
46
30
14
100% $
3,946
21,763
14,766
7,990
48,465
December 31, 2019
As of
December 31, 2018
($ Values In Millions)
December 31, 2017
2,390
13,086
7,376
1,321
10% $
54
31
5
1,801
9,185
4,994
1,111
11% $
54
29
6
1,054
6,354
3,523
912
Total
$
24,173
100% $
17,091
100% $
11,843
48%
16
13
11
7
5
100%
8%
45
30
17
100%
9%
53
30
8
100%
Primary RIF by Loan Type
As of
December 31, 2019
December 31, 2018
December 31, 2017
Fixed
Adjustable rate mortgages:
Less than five years
Five years and longer
Total
98%
—
2
100%
98%
—
2
100%
98%
—
2
100%
55
The table below presents selected primary portfolio statistics, by book year, as of December 31, 2019.
As of December 31, 2019
Book year
Original
Insurance
Written
Remaining
Insurance
in Force
%
Remaining
of Original
Insurance
Policies
Ever in
Force
Number
of Policies
in Force
Number
of Loans
in
Default
# of
Claims
Paid
Incurred
Loss Ratio
(Inception
to Date) (1)
Cumulative
Default
Rate (2)
Current
Default
Rate (3)
2013
2014
2015
2016
2017
2018
2019
Total
(1)
(2)
(3)
$
162
$
3,451
12,422
21,187
21,582
27,295
22
818
5,370
11,944
14,961
19,579
45,141
$131,240
42,060
$ 94,754
($ Values in Millions)
14%
655
24% 14,786
43% 52,548
56% 83,626
69% 85,897
72% 104,043
93% 148,423
489,978
123
4,406
25,459
51,347
64,041
80,456
140,207
366,039
1
43
179
293
464
399
69
1
40
94
87
41
19
—
1,448
282
0.3%
4.2%
2.8%
2.2%
3.2%
4.0%
1.4%
0.3%
0.6%
0.5%
0.5%
0.6%
0.4%
—%
0.8%
1.0%
0.7%
0.6%
0.7%
0.5%
—%
Calculated as total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance.
Calculated as the sum of the number of claims paid ever to date and number of loans in default divided by policies ever in force.
Calculated as the number of loans in default divided by number of policies in force.
Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of December 31,
2019 our RIF continues, although declining, to be relatively more concentrated in California, primarily as a result of the size of the
California mortgage market relative to the rest of the country and the location and timing of our acquisition of new customers. The
distribution of our primary RIF as of December 31, 2019 is not necessarily representative of the geographic distribution we expect
in the future.
Top 10 primary RIF by state as of December 31, 2019
As of
December 31, 2019
December 31, 2018
December 31, 2017
California
Texas
Florida
Virginia
Arizona
Illinois
Pennsylvania
Michigan
Colorado
Maryland
Total
11.8%
8.2
5.7
5.3
3.9
3.8
3.6
3.5
3.4
3.4
52.6%
13.0%
8.2
5.0
4.9
4.9
3.4
3.6
3.6
3.5
3.2
53.3%
13.5%
7.8
4.5
5.3
4.6
3.4
3.6
3.7
3.6
3.5
53.5%
Insurance Claims and Claim Expenses
Insurance claims and claim expenses represent estimated future payments on newly defaulted insured loans and any change
in our claim estimates for previously existing defaults. Claims and claims expenses are generally affected by a variety of factors,
including:
•
future macroeconomic factors, including unemployment rates, which affect 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;
56
•
•
•
•
•
•
•
•
•
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;
borrowers' DTI ratios, with higher DTI ratios tending to have higher probabilities of claims;
LTV ratios, with higher average LTV ratios tending to increase claims;
the size of loans insured, with higher average loan amounts tending to increase claims;
the percentage of coverage on insured loans, with higher percentages of insurance coverage tending to result in higher
incurred claim amounts than lower percentages of insurance coverage;
other borrower, property-type and loan level risk characteristics, such as cash-out refinancings, second homes or
investment properties;
the level and amount of reinsurance coverage maintained with third parties;
the distribution of claims over the life of a book year.
Reserves for claims and allocated claim expenses are established for reported mortgage loan defaults, which we refer to as
case reserves, when we are notified that a borrower has missed two or more mortgage payments (i.e., an NOD). We also make
estimates of IBNR defaults, which are defaults that have been incurred but have not been reported by loan servicers, based on historical
reporting trends, and establish IBNR reserves for those defaults. We also establish reserves for unallocated claim expenses not
associated with a specific claim. Claim 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 claim settlement process.
Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred
to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is referred to as
claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain
loan factors, such as age of the default, cure rates, size of the loan and estimated change in property value. Reserves are released the
month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates
are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under the QSR Transactions. We
will not cede claims under the ILN Transactions unless losses exceed the respective retained coverage layers. Reserves are not
established for future claims on insured loans which are not currently in default. Our pool insurance agreement with Fannie Mae
contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have
not established any claims or claim expense reserves for pool exposure to date.
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, 2019, approximately 81% of our primary IIF related to
business written since January 1, 2017. Although the claims experience on our IIF to date has been modest, we expect incurred claims
to increase as a greater amount of our existing insured portfolio reaches its anticipated period of highest claim frequency.
The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our
current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic concentrations,
among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by
future macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters.
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 are impacted by natural disasters. We do not provide coverage for property or
casualty claims related to physical damage of a home underpinning an insured mortgage. Our ultimate claims exposure for loans in
areas impacted by natural disasters will depend on the number of NODs received, proximate cause of each default, cure rate of the
NOD population, and potential repair cost curtailment for appropriate claims on damaged properties as permitted under our Master
Policies. Cure rates on loan defaults following natural disasters 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.
57
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims
and claim expenses.
December 31, 2019
December 31, 2018
December 31, 2017
For the year ended
Beginning balance
Less reinsurance recoverables (1)
Beginning balance, net of reinsurance recoverables
$
(In Thousands)
$
12,811
(3,001)
9,810
$
8,761
(1,902)
6,859
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
Prior years (3)
Total claims and claim expenses incurred
Less claims paid:
Claims and claim expenses paid:
Current year (2)
Prior years (3)
Reinsurance terminations (4)
Total claims and claim expenses paid
Reserve at end of period, net of reinsurance recoverables
Add reinsurance recoverables (1)
Ending balance
14,737
(2,230)
12,507
204
3,849
(549)
3,504
18,813
4,939
7,860
(2,408)
5,452
130
2,371
—
2,501
9,810
3,001
$
23,752
$
12,811
$
3,001
(297)
2,704
6,140
(801)
5,339
27
1,157
—
1,184
6,859
1,902
8,761
(1)
(2)
(3)
Related to ceded losses recoverable under the QSR Transactions, 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.
Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan had defaulted in a prior year and subsequently cured
and later re-defaulted in the current year, that default would be included in the current year. Amounts are presented net of reinsurance.
Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year. Amounts are
presented net of reinsurance.
(4) Represents the settlement of reinsurance recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction on a cut-off basis.
See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance," for additional information.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior
years, including IBNR reserves and is presented net of reinsurance. 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 gather additional information about individual defaults
and claims and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $5.2 million related to
prior year defaults remained as of December 31, 2019.
58
The following table provides a reconciliation of the beginning and ending count of loans in default.
For the year ended
Beginning default inventory
Plus: new defaults
Less: cures
Less: claims paid
Less: claims denied
Ending default inventory
December 31, 2019 December 31, 2018 December 31, 2017
179
928
877
2,429
(1,702)
(152)
(4)
1,448
1,559
(1,521)
(89)
—
877
1,262
(486)
(27)
—
928
The increase in the ending default inventory at December 31, 2019 compared to December 31, 2018, primarily relates to
an increase in new defaults tied to the growth in the number of policies in force and the aging of our earlier book years. Our total
policies in force were 366,039 and 280,825 for the years ended December 31, 2019 and 2018, respectively. The increase in new
defaults was partially offset by cure activity on our beginning NOD population. The ratio of cures to new defaults decreased during
the year ended December 31, 2019 compared to the year ended December 31, 2018 due to the elevated level of defaults on insured
loans in areas declared by FEMA to be individual disaster zones following Hurricanes Harvey and Irma, and the California wildfires
in 2017, and the subsequent curing of the majority of such defaults in 2018.
The decrease in the ending default inventory at December 31, 2018 compared to December 31, 2017, primarily relates to
cure activity on defaults on insured loans in areas declared by FEMA to be individual assistance disaster zones following Hurricanes
Harvey and Irma, and the California wildfires in 2017, and to a lesser extent, cure activity on our non-disaster related NOD population.
The impact of this cure activity was partially offset by an increase in new defaults tied to the growth in the number of policies in
force, the aging of our earlier book years and, to a more limited extent, default experience in areas declared by FEMA to be individual
assistance disaster zones following disasters that we determined to be focal events in 2018.
The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions,
for the periods indicated.
Number of claims paid (1)
Total amount paid for claims
Average amount paid per claim
Severity(2)
For the year ended
December 31, 2019 December 31, 2018 December 31, 2017
($ Values In Thousands)
152
5,030
33
74%
$
$
89
3,164
36
72%
$
$
27
1,266
47
86%
$
$
(1)
(2)
Count includes 19 and 8 settled without payment for the years ended December 31, 2019 and 2018, respectively. There were no claims settled without
payment for the year ended December 31, 2017.
Severity represents the total amount of claims paid including claim expenses divided by the related RIF on the loan at the time the claim is perfected, and is
calculated including claims settled without payment.
The increase in the number of claims paid for the year ended December 31, 2019, compared to the years ended December 31,
2018 and 2017, was due to an increase in our default inventory and the continued growth and seasoning of our insured portfolio.
Our claims severity for the year ended December 31, 2019 was 74%, compared to 72% and 86% for the years ended
December 31, 2018 and 2017, respectively. Claims severity in each period benefited from home price appreciation. Increasing values
of the homes underlying the loans we insure generally causes a decline in the severity of claims that we pay. Over time, we expect
the severity of claims paid to be between 85% and 95% of the coverage amount.
59
The following table provides detail on our average reserve per default, before giving effect to reserves ceded under the QSR
Transactions, as of the dates indicated.
Average reserve per default:
As of
Case (1)
IBNR (2)
Total
(1)
(2)
Defined as the gross reserve per insured loan in default.
Amount includes claims adjustment expenses.
December 31, 2019 December 31, 2018 December 31, 2017
$
$
(In Thousands)
15
1
16
$
$
14
1
15
$
$
8
1
9
The average reserve per default at December 31, 2019 increased from December 31, 2018, primarily due to the aging of
our NOD population from non-disaster zones, and to a lesser extent, cure activity on defaults outstanding at December 31, 2018 for
loans in areas impacted by natural disasters.
The average reserve per default at December 31, 2018 increased from December 31, 2017, primarily due to cure activity
on defaults in areas impacted by natural disasters in 2017. We established lower reserves for these NODs than we otherwise do for
similarly situated NODs in non-disaster zones based on our expectation for increased cure activity. As this default population declined,
the average reserve per remaining default increased.
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.
GSE Oversight
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs (italicized
terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business,
remedial and financial requirements applicable to approved insurers. The PMIERs financial requirements prescribe a risk-based
methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level
risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV
ratio and other risk features. In general, higher quality loans carry lower asset charges.
Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which
is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset
amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain
risk-based factors derived from tables set out in the PMIERs, which is then adjusted on an aggregate basis for reinsurance transactions
approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate gross risk-based required
asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the risk-based
required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool
insurance policy.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We
certified to the GSEs by April 15, 2019 that NMIC was in full compliance with the PMIERs as of December 31, 2018. NMIC also
has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs
requirements. We continuously monitor NMIC's compliance with the PMIERs.
60
On September 27, 2018, the GSEs published the Revised PMIERs that took effect and became applicable to NMIC on
March 31, 2019. The following table provides a comparison of the PMIERs available assets and risk-based required asset amount
as reported by NMIC as of the dates indicated as calculated under the applicable PMIERs requirement.
Available Assets
As of
December 31, 2019
December 31, 2018 December 31, 2017
($ values in thousands)
$
1,016,387
$
733,762
$
527,897
Risk-Based Required Asset Amount
773,474
511,268
446,226
Available assets were $1.0 billion at December 31, 2019, compared to $734 million at December 31, 2018 and $528 million
at December 31, 2017. The sequential increase in available assets at each measurement date was primarily driven by our positive
cash flow from operations in the intervening periods. Available assets further increased in 2019 as a result of the adoption of the
Revised PMIERs guidance effective March 31, 2019 and in 2018 as the result of a $70 million capital contribution from NMIH to
NMIC.
The sequential increase in the risk-based required asset amount at each measurement date was due to the growth of our
gross RIF, partially offset by the increased cession of risk under our third-party reinsurance agreements. The risk-based required
asset amount further increased in 2019 as a result of the termination of our engagement with and the recapture of previously ceded
primary RIF from one reinsurer under the 2016 QSR Transaction.
LIBOR Transition
In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to
submit LIBOR rates after 2021, which is expected to render these widely used reference rates unavailable or unreliable. We have
exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio. The 2018 Term
Loan and Revolving Credit Facility as well as premiums paid on our ILN Transactions are also LIBOR-based. The Company is in
process of reviewing its LIBOR-based contracts that extend beyond 2021 and transition to a set of alternative reference rates. We
will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not know the impact it will have to
the Company or its financial results.
Cybersecurity
We rely on technology to engage with customers, access borrower information and deliver our products and services. We
have established and implemented security measures, controls and procedures to safeguard our IT systems, and prevent and detect
unauthorized access to such systems or any data processed and/or stored therein. We periodically engage third parties to evaluate
and test the adequacy of such security measures, controls and procedures. In addition, we have a business continuity plan that is
designed to allow us to continue to operate in the midst of certain disruptive events, including disruptions to our IT systems, and we
have an incident response plan that is designed to address information security incidents, including any breaches of our IT systems.
Despite these safeguards, disruptions to and breaches of our IT systems are possible and may negatively impact our business.
We maintain a cybersecurity errors and omissions insurance policy to limit our exposure to loss in the event of an incident.
This policy provides coverage for (i) claims related to, among other things, unauthorized network or computer access, unintentional
disclosure or misuse of personally identifiable information in our possession, and unintentional failure to disclose a breach, and (ii)
certain costs related to privacy notification, crisis management, cyber extortion, data recovery, business interruption and reputational
harm.
Capital Position of Our Insurance Subsidiaries and Financial Strength Ratings
In addition to GSE-imposed asset requirements, NMIC is subject to state regulatory minimum capital requirements based
on its RIF. 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. The NAIC's Working Group
was formed to discuss, develop and recommend changes to the solvency and market practices regulation of mortgage insurers,
including changes to the Model Act. Proposed amendments to the Model Act include, among other changes, adoption of a risk-based
capital model. Following adoption by the NAIC, some or all of the 16 states that currently have minimum statutory capital requirements,
61
and potentially others that do not, are expected to enact a portion or all of the revised Model Act, including the loan-level capital
model.
As of December 31, 2019, NMIC's performing primary RIF, net of reinsurance, was approximately $15.4 billion. NMIC
ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $945 million (including
contingency reserves) as of December 31, 2019, NMIC's RTC ratio was 16.3:1. Re One had total statutory capital of $36 million as
of December 31, 2019 and a RTC ratio of 1.3:1. We continuously monitor our compliance with state capital requirements.
In October 2019, Moody's upgraded its financial strength rating of NMIC from "Baa3" to "Baa2" and upgraded its rating
of NMIH's $150 million senior secured 2018 Term Loan and 2018 Revolving Credit Facility from "Ba3" to "Ba2". The outlook for
Moody's ratings is stable. In June 2019, S&P upgraded its financial strength and long-term counter-party credit ratings of NMIC
from "BBB-" to "BBB" and upgraded its long-term counter-party credit rating of NMIH from "BB-" to "BB". The outlook for S&P's
ratings is positive.
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as
government MIs such as the FHA, USDA or VA. Private MI companies compete based on service, customer relationships, underwriting
and other factors, including price, credit risk tolerance and information technology capabilities. See Item 1, "Business - Overview of
Residential Mortgage Finance and the Role of the Private MI Industry in the Current Operating Environment - Competition," above.
We expect the private MI market to remain competitive, with pressure for industry participants to maintain or grow their market
share.
The private MI industry overall competes more broadly with government MIs who significantly increased their share in
the MI market following the 2008 financial crisis. Although there has been broad policy consensus toward the need for increasing
private capital participation and decreasing government exposure to credit risk in the U.S. housing finance system, it remains
difficult to predict whether the combined market share of government MIs will recede to pre-2008 levels. A range of factors
influence a lender's and borrower's decision to choose private over government MI, including among others, GSE demand,
premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private
MI products compared to government MI alternatives.
62
Consolidated Results of Operations
Consolidated statements of operations
Revenues
Net premiums earned
Net investment income
Net realized investment gains
Other revenues
Total revenues
Expenses
Insurance claims and claim expenses
Underwriting and operating expenses(1)
Service expenses(1)
Interest expense
Loss from change in fair value of warrant liability
Total expenses
Income before income taxes
Income tax expense
Net income
Earnings per share - Basic
Earnings per share - Diluted
Loss ratio(2)
Expense ratio(3)
Combined ratio
Non-GAAP financial measures (4)
Adjusted income before tax
Adjusted net income
Adjusted diluted EPS
For the year ended December 31,
2019
2018
2017
($ in thousands, except for per share data)
$
345,015
$
251,197
$
30,856
45
2,855
378,771
12,507
126,621
2,248
12,085
8,657
162,118
216,653
44,696
171,957
2.54
2.47
3.6%
36.7%
40.3%
$
$
$
23,538
57
233
275,025
5,452
116,966
270
14,979
1,397
139,064
135,961
28,034
107,927
1.66
1.60
2.2%
46.6%
48.8%
$
$
$
$
$
$
2019
2018
2017
$
227,618
$
142,195
$
182,437
2.62
113,256
1.67
165,740
16,273
208
522
182,743
5,339
106,362
617
13,528
4,105
129,951
52,792
30,742
22,050
0.37
0.35
3.2%
64.2%
67.4%
61,505
41,267
0.63
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
(2)
Loss ratio is calculated by dividing the provision for insurance claims and claim expenses by net premiums earned.
Expense ratio is calculated by dividing other underwriting and operating expenses by net premiums earned.
See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.
(3)
(4)
Revenues
Net premiums earned were $345.0 million, $251.2 million and $165.7 million for the years ended December 31, 2019, 2018
and 2017, respectively. Net premiums earned increased $93.8 million in 2019, primarily due to the growth of our IIF, a rise in
monthly policy production and higher single premium policy cancellations, partially offset by incremental cessions under the QSR
Transactions tied to the growth of our direct premium volume and the inception of the 2018 and 2019 ILN Transactions. Net premiums
earned increased $85.5 million in 2018, primarily due to the growth of our IIF and increased monthly policy production, partially
offset by a decrease in earnings from cancellations and increases in cessions under the QSR Transactions and inception of the 2017
and 2018 ILN Transactions.
Net investment income was $30.9 million, $23.5 million and $16.3 million for the years ended December 31, 2019, 2018
and 2017, respectively. The increase in each year was driven by an increase in the size of and improved book yield on our total
investment portfolio.
63
Other revenues were $2.9 million, $0.2 million and $0.5 million for the years ended December 31, 2019, 2018 and 2017,
respectively. Other revenues represent underwriting fee revenue from our subsidiary, NMIS, which provides outsourced loan review
services to mortgage loan originators. The growth in other revenues for the year ended December 31, 2019 relates to an increase in
NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service
expenses for outsourced loan review activities in the same periods.
Expenses
We recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur
other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology,
professional services and facilities expenses, in connection with the development and operation of our business. We also incur service
expenses in connection with NMIS’ outsourced loan review activities.
Insurance claims and claim expenses were $12.5 million, $5.5 million and $5.3 million for the years ended December 31,
2019, 2018 and 2017, respectively. Insurance claims and claim expenses increased $7.1 million for the year ended December 31,
2019, primarily due to an increase in new defaults tied to the growth in the number of policies in force and the aging of our earlier
book years, and an increase in our average reserve per default from non-disaster zones, partially offset by cure activity on the beginning
NOD population. Insurance claims and claim expenses increased $0.2 million in 2018, primarily due to an increase in our average
reserve per default tied to the aging of our NOD population and composition of our default inventory between loans in disaster and
non-disaster impacted areas, largely offset by a reduction in the total number of NODs and related release of prior year reserves on
cured defaults.
Underwriting and operating expenses were $126.6 million, $117.0 million and $106.4 million for the years ended December
31, 2018 and 2017, respectively. The sequential increase in underwriting and operating expenses in 2018 and 2019 was driven by
increases in certain employee compensation and technology costs to support the growth of our business, and an increase in variable
expenses, such as premium taxes, tied to the growth in our NIW and IIF, partially offset by increased ceding commissions under the
QSR Transactions. Costs incurred in connection with the ILN Transactions are included in underwriting and operating expenses
and were $2.4 million, $2.7 million and $4.0 million in 2019, 2018 and 2017, respectively.
Service expenses were $2.2 million, $0.3 million and $0.6 million for the years ended December 31, 2019, 2018 and 2017.
Service expenses represent net third-party costs incurred by NMIS in connection with the services it provides. The growth in service
expenses for the year ended December 31, 2019 relates to an increase in NMIS' outsourced loan review volume. Amounts incurred
as service expenses generally correspond with amounts recognized in other revenues in the same periods.
Interest expense was $12.1 million, $15.0 million and $13.5 million for the years ended December 31, 2019, 2018 and 2017,
respectively. Interest expense in 2018 included $2.2 million of costs related to the extinguishment of the 2015 Term Loan and issuance
of the 2018 Term Loan completed in May 2018. Interest expense in 2018 and 2019 benefited from a lower interest spread payable
on borrowings under the 2018 Term Loan as compared to the 2015 Term Loan, partially offset by commitment fees recognized in
interest expense for the 2018 Revolving Credit Facility. See Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 5, Debt."
Income tax expense was $44.7 million, $28.0 million and $30.7 million for the years ended December 31, 2019, 2018 and
2017. Income tax expense increased from 2018 to 2019 primarily due to the growth in our pre-tax income. As a U.S. taxpayer, we
were subject to a U.S. federal corporate income tax rate of 21% in 2018 and 2019, and 35% for all prior years through 2017. Income
tax expense for the year ended December 31, 2017 also reflects a $13.6 million one-time non-cash charge related to the re-measurement
of net deferred tax assets in connection with the enactment of the TCJA. For further information regarding income taxes and their
impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 11, Income Taxes."
Net Income
Net income was $172.0 million, $107.9 million and $22.1 million for the years ended December 31, 2019, 2018 and 2017,
respectively. Adjusted net income was $182.4 million, $113.3 million and $41.3 million, for the same periods, respectively. The
sequential increases in net income and adjusted net income in 2018 and 2019 were driven by growth in total revenues, partially offset
by increases in total expenses.
Diluted earnings per share (EPS) was $2.47, $1.60 and $0.35 for the years ended December 31, 2019, 2018 and 2017,
respectively. Adjusted diluted EPS was $2.62, $1.67 and $0.63 for the same periods, respectively. The sequential increases in diluted
EPS and adjusted diluted EPS in 2018 and 2019 were driven by growth in net income and adjusted net income, respectively, partially
offset by increases in weighted average diluted shares outstanding.
64
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented
to enhance the comparability of financial results between periods.
Non-GAAP Financial Measure Reconciliations
As reported
Income before income tax
Income tax expense
Net income
Adjustments
Net realized investment gains
Loss from change in fair value warrant liability
Capital market transaction costs
Adjusted income before tax
Income tax expense on adjustments
Deferred tax expense adjustments
Adjusted net income
Weighted average diluted shares outstanding
Adjusted diluted effect of non-vested shares
Adjusted weighted average diluted shares outstanding
Adjusted diluted EPS
For the year ended December 31,
2019
2018
2017
216,653
44,696
171,957
$
$
135,961
28,034
107,927
$
$
52,792
30,742
22,050
(45)
8,657
2,353
227,618
(57)
1,397
4,894
142,195
485
—
182,437
$
905
—
113,256
$
69,721
—
69,721
67,652
—
67,652
2.62
$
1.67
$
(208)
4,105
4,816
61,505
3,050
(13,554)
41,267
62,186
3,449
65,635
0.63
$
$
$
$
Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted
EPS enhance the comparability of our fundamental financial performance between periods, and provides relevant information to
investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management.
These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of
performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental
operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable
to those we calculate and present.
Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related
to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized
gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items
are incurred.
Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change
in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or
losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are
incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective
periods.
Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding.
Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes
in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance
with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested
shares are anti-dilutive under GAAP.
Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred
in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our
primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating
trends, or both. These adjustments, and the reasons for their treatment, are described below.
65
•
•
•
•
Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any
change in fair value is reported in the statement of operations in the period in which the change occurred. The change in
fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and
general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating
performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant
liability.
Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve
our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance
transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and
overall market cycles.
Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly
across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital
profile, and overall market cycles that do not reflect our current period operating results.
Infrequent or unusual non-operating items. Items that are the result of unforeseen or uncommon events, which occur
separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items
provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments
under this category include the effects of the release of the valuation allowance recorded against our net federal and certain
state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in
2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect
our current period operating results.
Consolidated balance sheets
Total investment portfolio
Cash and cash equivalents
Premiums receivable
Deferred policy acquisition costs, net
Software and equipment, net
Prepaid reinsurance premiums
Other assets
Total assets
Term loan
Unearned premiums
Accounts payable and accrued expenses
Reserve for insurance claims and claim expenses
Reinsurance funds withheld
Warrant liability
Deferred tax liability, net
Other liabilities
Total liabilities
Total shareholders' equity
December 31, 2019
December 31, 2018
(In Thousands)
$
1,140,940
$
911,490
41,089
46,085
59,972
26,096
15,488
35,148
$
$
1,364,818
145,764
136,642
$
$
39,904
23,752
14,310
7,641
56,360
10,025
434,398
930,420
25,294
36,007
46,840
24,765
30,370
17,277
1,092,043
146,757
158,893
31,141
12,811
27,114
7,296
2,740
3,791
390,543
701,500
Total liabilities and shareholders' equity
$
1,364,818
$
1,092,043
As of December 31, 2019, we had $1.2 billion in cash and investments, including $54.7 million held by NMIH. The increase
in cash and investments from December 31, 2018 relates to cash generated from operations.
Premiums receivable was $46.1 million as of December 31, 2019, compared to $36.0 million as of December 31, 2018.
The increase was primarily driven by the increase in our monthly premium policies in force, where premiums are generally paid one
month in arrears.
66
Net deferred policy acquisition costs (DAC) were $60.0 million as of December 31, 2019, compared to $46.8 million as of
December 31, 2018. The increase was primarily driven by growth in the number of policies written during the year ended December 31,
2019 and the deferral of certain costs associated with the origination of those policies, partially offset by the amortization of previously
deferred acquisition costs.
Prepaid reinsurance premiums were $15.5 million as of December 31, 2019, compared to $30.4 million as of December 31,
2018. Prepaid reinsurance premiums, which represent the unearned premiums on single premium policies ceded under the 2016 QSR
Transaction, decreased due to the termination of our engagement with one reinsurer under the 2016 QSR Transaction and the continued
amortization of previously ceded unearned premiums.
Other assets increased from $17.3 million as of December 31, 2018 to $35.1 million as of December 31, 2019. Other assets
as of December 31, 2019 includes $7.6 million of tax and loss bonds and $6.4 million of operating lease right-of-use (ROU) assets,
which we recognized following the adoption of ASU 2016-02, Leases (Topic 842). See Item 8, "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes" and "Financial Statements and
Supplementary Data - Notes to Consolidated Financial Statements - Note 14, Commitments and Contingencies."
Unearned premiums decreased from $158.9 million as of December 31, 2018 to $136.6 million as of December 31, 2019,
primarily due to the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related
single premium policies and the cancellation of other single premium policies, partially offset by single premium policy originations
in 2019.
Accounts payable and accrued expenses increased from $31.1 million as of December 31, 2018 to $39.9 million as of
December 31, 2019, primarily due to unsettled payments from the purchase of certain securities and an increase in reinsurance
premiums payable and payroll accruals.
Reserve for insurance claims and claim expenses increased from $12.8 million as of December 31, 2018 to $23.8 million
as of December 31, 2019, primarily due to an increase in NODs tied to the growth in the number of policies in force and the aging
of our earlier book years and an increase in our average reserve per default tied to the aging of our NOD population from non-disaster
zones and composition of our default inventory between loans in disaster and non-disaster impacted areas, partially offset by the
release of prior year reserves tied to NOD cures and ongoing analysis of recent loss development trends. See "Insurance Claims
and Claim Expenses" above for further details.
Reinsurance funds withheld was $14.3 million as of December 31, 2019, representing the net of our ceded reinsurance
premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The decrease in reinsurance
funds withheld of $12.8 million from December 31, 2018, relates to the termination of our engagement with one reinsurer under the
2016 QSR Transaction and the continued decline in ceded premiums written on single premium policies, due to the end of the
reinsurance coverage period for new business under the 2016 QSR Transaction at December 31, 2017. See, Item 8, "Financial
Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance."
Warrant liability increased from $7.3 million at December 31, 2018 to $7.6 million at December 31, 2019, primarily due
to an increase in our stock price, partially offset by the reclassification of a portion of the warrant liability to additional paid-in capital
following the exercise of warrants during the year. For further information regarding the valuation of our warrant liability and its
impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 4, Fair Value of Financial Instruments."
Net deferred tax liability increased from $2.7 million at December 31, 2018 to $56.4 million at December 31, 2019, primarily
due to an increase in the claimed deductibility of our statutory contingency reserve and the change in unrealized gains recorded in
other comprehensive income. Our ability to claim a contingency reserve deduction in prior periods was not required as we were able
to reduce our taxable income with the utilization of our net operating loss carry forward. During the year ended December 31, 2018,
we utilized the entire remaining balance of our non-limited net operating loss carry forward and began to claim a deduction on our
statutory contingency reserve. 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."
Other liabilities as of December 31, 2019 include $7.4 million of operating lease liabilities, which we recognized following
the adoption of ASU 2016-02, Leases (Topic 842). See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 14, Commitments and Contingencies."
67
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Consolidated cash flows
Net cash provided by (used in):
Operating activities
Investing activities
Financing activities
Net increase (decrease) in cash and cash equivalents
For the years ended December 31,
2019
2018
(In Thousands)
2017
$
$
208,150
$
145,861
$
(194,355)
(220,650)
2,000
15,795
$
80,887
6,098
$
67,763
(93,072)
(3,241)
(28,550)
Net cash provided by operating activities was $208.2 million for the year ended December 31, 2019, compared to $145.9
million for the year ended December 31, 2018 and $67.8 million for the year ended December 31, 2017. The increases in cash
generated from operating activities in both periods were primarily driven by growth in premiums written and investment income,
partially offset by increased operating expenses and growth in claims paid tied to the growth and aging of our insured portfolio. The
increase in cash generated from operating activities for the year ended December 31, 2019 was further offset by the purchase of tax
and loss bonds.
Cash used in investing activities for the periods presented reflects the purchase of fixed and short-term maturities with cash
provided by operating and financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our
investment portfolio. Cash used in investing activities for the year ended December 31, 2018 further reflects the investment of net
cash proceeds raised in a common stock offering we completed in March 2018.
Cash provided by financing activities was $2.0 million and $80.9 million for the years ended December 31, 2019 and
December 31, 2018, respectively. Cash provided by financing activities for the year ended December 31, 2019 primarily relates to
proceeds from the issuance of common stock generated in connection with the exercise of employee stock options. Cash provided
by financing activities for the year ended December 31, 2018 reflects $79.2 million of net cash proceeds raised in a common stock
offering we completed in March 2018. Cash used in financing activities was $3.2 million for the year ended December 31, 2017
and primarily relates to taxes paid on the net share settlement of equity awards for certain employees.
Holding Company Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its
own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain
reimbursable expenses of its insurance subsidiaries; (iii) payment of principal and interest related to the 2018 Term Loan and 2018
Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment
of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally
applicable to corporations that are incorporated in Delaware. Delaware law provides that dividends are only payable out of a
corporation's surplus or recent net profits (subject to certain limitations).
As of December 31, 2019, NMIH had $54.7 million of cash and investments. NMIH's principal source of net cash is
investment income. NMIH also has access to $85 million of undrawn revolving credit capacity under the 2018 Revolving Credit
Facility and $16.1 million of aggregate ordinary course dividend capacity from NMIC and Re One.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin
OCI. With the Wisconsin OCI's approval, NMIH began allocating the interest expense on the 2015 Term Loan to NMIC in the first
quarter of 2017, consistent with the benefits NMIC received when NMIH contributed the loan proceeds to NMIC. NMIH received
similar approval from the Wisconsin OCI to allocate interest expense to NMIC on the 2018 Term Loan and 2018 Revolving Credit
Facility. Such approvals may be changed or revoked at any time.
NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which
they are authorized to operate and the GSEs. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels
(i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends,
are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any
payment or distribution that, together with other dividends and distributions made within the preceding 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 dividends to NMIH. NMIC and Re
One have the capacity to pay aggregate ordinary dividends of $16.1 million to NMIH during the 12-month period ending December
31, 2020.
68
As an approved insurer under PMIERs, NMIC would be subject to additional restrictions on its ability to pay dividends to
NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the PMIERs financial
requirements are not permitted to pay dividends without prior approval from the GSEs.
NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium
rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset
thresholds under the PMIERs and minimum state capital requirements. NMIH may require liquidity to fund the capital needs of its
insurance subsidiaries.
In May 2018, NMIH entered into the 2018 Credit Agreement covering the 2018 Term Loan and 2018 Revolving Credit
Facility. The 2018 Term Loan bears interest at the Eurodollar Rate, as defined in the 2018 Credit Agreement and subject to a 1.00%
floor, plus an annual margin rate of 4.75%, payable monthly based on our current interest period election. Borrowings under the
2018 Revolving Credit Facility will accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the 2018
Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 1.00% to 2.50% per annum, based on the applicable
corporate credit rating at the time, or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 2.00% to
3.50% per annum, based on the applicable corporate credit rating at the time. The 2018 Revolving Credit Facility also requires a
quarterly commitment fee on the average daily undrawn amount ranging from 0.30% to 0.60%, based on the applicable corporate
credit rating at the time.
We are subject to certain covenants under the 2018 Term Loan and 2018 Revolving Credit Facility. Under the 2018 Term
Loan (and as defined in the 2018 Credit Agreement), we are subject a maximum debt-to-total capitalization ratio of 35%. Under the
2018 Revolving Credit Facility (and as defined in the 2018 Credit Agreement), we are subject to a maximum debt-to-total capitalization
ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE-approved
waivers), and minimum consolidated net worth and statutory capital requirements. We were in compliance with all covenants as of
December 31, 2019.
Consolidated Investment Portfolio
The primary objectives of our investment activity are to preserve capital and generate investment income, while maintaining
sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have
adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset
types, industry sectors, single issuers and certain credit ratings; and benchmarks for asset duration.
Our investment portfolio is entirely comprised of fixed maturity investments. As of December 31, 2019, the fair value of
our investment portfolio was $1.1 billion. We also had an additional $41.1 million of cash and equivalents as of December 31, 2019.
Pre-tax book yield on the investment portfolio for the year ended December 31, 2019 was 3.0%. The book yield is calculated as
period-to-date net investment income divided by average amortized cost of the investment portfolio. Yield on the investment portfolio
is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our investment portfolio
and other factors.
The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type
and credit rating:
Percentage of portfolio's fair value
Corporate debt securities
Municipal debt securities
Asset-backed securities
Cash, cash equivalents, and short-term investments
U.S. treasury securities and obligations of U.S. government agencies
Total
December 31, 2019
December 31, 2018
58%
16
15
7
4
100%
58%
10
18
9
5
100%
69
Investment portfolio ratings at fair value (1)
AAA
AA(2)
A(2)
BBB(2)
BB (3)
Total
December 31, 2019
December 31, 2018
20%
19
47
14
—
100%
22%
18
42
18
—
100%
(1)
Excluding certain operating cash accounts.
Includes +/– ratings.
(2)
(3) We held one security with a BB rating at December 31, 2018, which is not identifiable in the table due to rounding.
Our investments are rated by one or more nationally recognized statistical rating organizations. If two or more ratings are
available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
Investment Securities - Other-than-Temporary Impairment (OTTI)
As of December 31, 2019, 2018 and 2017, we held no other-than-temporarily impaired securities. For the years ended
December 31, 2019 and 2017, we recognized $0.4 million and $0.1 million of OTTI losses in earnings, respectively. For the year
ended December 31, 2018 we did not recognize any OTTI losses. There were no credit losses recognized in earnings for which a
portion of an OTTI loss was recognized in accumulated other comprehensive income (AOCI) (loss) for any period presented.
Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. Our holding company
files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Prior to the enactment
of the TCJA on December 22, 2017, we were subject to a statutory U.S. federal corporate income tax rate of 35% for all prior years
through December 31, 2017.
Our effective income tax rate on pre-tax income was 20.6% for each of the years ended December 31, 2019 and 2018, and
58.2% for the year ended December 31, 2017. The differences between our statutory tax rates and our effective tax rates for the
years ended December 31, 2019 and 2018 were primarily due to tax benefits 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, 2017 was primarily due to a tax expense of $13.6 million associated with the enactment of the TCJA,
partially offset by a tax benefit from excess share-based compensation for vested RSUs and exercised stock options.
At December 31, 2019, we had federal net operating loss carryforwards of $2.3 million, which expire in varying amounts
in 2030 and 2031, and state net operating loss carryforwards of $126.8 million, which expire in varying amounts from 2031 to 2039.
Our ability to utilize our remaining federal net operating loss carryforwards is restricted by Section 382 of the Internal Revenue Code
(IRC), which imposes annual limitations if there is an "ownership change." As a result of the acquisition of our insurance subsidiaries
in 2012, $7.3 million of federal NOLs were subject to annual limitations of $0.8 million through 2016, and $0.3 million thereafter.
Our federal net operating loss carryforwards balance is a result of this limitation.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve
balance, subject to certain limitations outlined under Section 832(e) of the IRC, and only to the extent we acquire tax and loss bonds
in an amount equal to the tax benefit derived from the claimed deduction. As of December 31, 2019, we held $7.6 million of tax
and loss bonds, which are reported as prepaid federal income tax and grouped in "Other assets" in our condensed consolidated balance
sheet.
We record a valuation allowance against the state net operating losses generated by NMIH as NMIH operates at a loss, and
we do not expect to utilize such net deferred tax assets in the future. We continue to evaluate the realizability of our state net deferred
tax asset position, and our examination of results through December 31, 2019 and review of future expectations support the continued
application of a valuation allowance against such state net deferred tax assets.
NMIH and its subsidiaries entered into a tax sharing agreement effective August 23, 2012, which was subsequently amended
on September 1, 2016. Under original and amended agreements, each of the parties agreed to file consolidated federal income tax
returns for all tax years beginning in and subsequent to 2012, with NMIH as the direct tax filer. The tax liability of each subsidiary
that is party to the agreement is limited to the amount of the liability it would incur if it filed separate returns.
70
Off-Balance Sheet Arrangements and Contractual Obligations
We had no material off-balance sheet arrangements as of December 31, 2019. In connection with the ILN Transactions,
we have certain future contractual commitments to the Oaktown Re Vehicles (special purpose variable interest entities (VIEs) that
are 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 entities."
Contractual obligations at December 31, 2019 are summarized in the following table:
Less than 1 year
1-3 years
3-5 years
More than 5 years
Contractual obligations
Long-term debt obligations (1)
Capital lease obligations
Operating lease obligations (2)
Purchase obligations
Other long-term liabilities reflected on the
registrant's balance sheet under GAAP
$
— $
(In Thousands)
— $
11,485
—
2,537
6,309
—
22,384
—
5,183
882
—
— $
147,181
—
462
—
—
Total
$
20,331
$
28,449
$
147,643
$
—
—
—
—
—
—
—
(1) Long-term debt relates to our 2018 Credit Agreement and includes future interest payments on the 2018 Term Loan using the minimum interest rate in
effect at December 31, 2019 and future undrawn commitment fees on the 2018 Revolving Credit Facility at the rate in effect at December 31, 2019.
(2) Amounts represent undiscounted lease payments.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial
statements, which have been prepared in conformity with GAAP. In preparing our consolidated financial statements, management
has made estimates and assumptions, and applied judgments that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses during the reporting periods. As a result, actual results
could differ materially from those estimates. A summary of the accounting policies that management believes are critical to the
preparation of our consolidated financial statements is set forth below.
Insurance Premium Revenue Recognition
Premiums for primary mortgage insurance policies may be paid in a single 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 as coverage is effective. Annual premiums are initially deferred and earned on a straight-
line basis over the year of coverage. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is
immediately earned, and any refundable deferred premium is returned to the policyholder and recorded as a reduction to written
premium and the unearned premium reserve in the period paid.
Premiums written on pool transactions are earned over the period that coverage is provided.
Reserve for Claims and Claim Expenses
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 case reserves when we are notified that
a loan has been in default for at least 60 days (i.e., a default) and IBNR reserves based on an estimate of defaults which have been
incurred but have not yet been reported to us by loan servicers. We also establish reserves for claim expenses, which represent the
estimated cost of the claim administration process, including legal, other third-party fees and other general expenses of administering
the claim settlement process. Claim expense reserves are either allocated (i.e., associated with a specific claim) or unallocated (i.e.,
not associated with a specific claim).
The establishment of claims and claim expense reserves is subject to inherent uncertainty and requires significant judgment
by management. Reserves are established by estimating the number of loans in default that will result in a claim payment, which is
referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is
71
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 AOCI (loss) in shareholders' equity.
Net realized investment gains and losses are reported in income based on specific identification of securities sold or other than
temporarily impaired, and are reclassified out of AOCI (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."
We evaluate our investments each quarter to determine whether declines in fair value below amortized cost are 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;
the 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; and
adverse conditions specifically related to the security, an industry or a geographic area.
Based on this evaluation, we record OTTI adjustments on securities with declines in fair value below their amortized cost,
if it is more likely than not that we will sell the securities prior to recovery of their amortized cost or if the present value of the
discounted cash flows we expect to collect on the securities through recovery under a "most likely" scenario is less than their amortized
cost. If our intent is to sell securities and their fair value is below amortized cost, the securities are classified as other-than-temporarily
impaired and the full amount of the impairment is recognized as a loss in earnings. Otherwise, losses on other-than-temporarily
impaired securities are bifurcated between credit-related losses and losses related to other factors (e.g., interest rate fluctuations),
with credit-related losses recognized in earnings and losses related to other factors recognized in AOCI (loss), net of taxes.
Deferred Policy Acquisition Costs
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses
and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. DAC is subsequently amortized
to expense in proportion to estimated gross profits over the estimated life of the associated policies and is reviewed periodically to
determine that the aggregate balance does not exceed recoverable amounts.
Premium Deficiency Reserves
We consider whether a premium deficiency exists and premium deficiency reserve is required each quarter using best
estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected
claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance
costs exceeds future premiums, existing reserves and anticipated investment income. The premium deficiency assessment requires
the use of significant judgment and estimates to determine the present value of future premiums, and expected claim costs and
expenses. The present value of future premiums relies on, among other things, assumptions about persistency and repayment patterns
on the underlying insured loans. The present value of expected claim costs and expenses relies on assumptions about the severity of
claims, claim rates on current defaults and expected defaults in future periods. Assumptions used in the premium deficiency calculation
can be affected by changes in the macroeconomic environment, including the rate of house price appreciation and prevailing interest
rates. Relatively small changes in estimated claim rates or estimated claim amounts could have a significant impact on our premium
72
deficiency analysis. If we determine it is necessary and appropriate to establish a premium deficiency reserve, and actual premium
patterns and claims experience differ from the assumptions used to establish the reserve, the difference between the actual results
and our estimates would affect future period earnings.
73
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large investment portfolio of various holdings, types and maturities. NMIH's principal source of
operating cash is investment income. The assets within the investment portfolio are exposed to the same factors that affect overall
financial market performance.
We manage market risk via a defined investment policy implemented by our treasury function with oversight from our
Board's Risk Committee. Important drivers of our market risk exposure monitored and managed by us include but are not limited
to:
•
•
Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held
in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing
rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates of
our insurance portfolio, and as a result we may determine that our investment portfolio needs to be restructured to
better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated
when market conditions are adverse. Additionally, the changes in Eurodollar based interest rates affect the interest
expense related to the Company's debt.
Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along
the yield curve. These changes may have unforeseen impacts on the value of certain assets.
• Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of
investments, identified through changes to our own or third party (e.g., rating agency) assessments, will reduce the
value and potentially the liquidity of investments.
•
•
Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values
are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset
or a group of highly correlated assets.
Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their
advantage. This typically occurs when rates fall below the interest rate of the debt.
The carrying value of our investment portfolio as of December 31, 2019 and 2018 was $1,141 million and $911 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, 2019, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.56 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 3.56% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 3.59 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 3.59% in fair value of our fixed income portfolio.
We are also subject to market risk related to our 2018 Term Loan and the ILN Transactions. As discussed in Item 8, "Financial
Statements - Notes to Consolidated Financial Statements - Note 5, Debt," the 2018 Term Loan bears interest at a variable rate and,
as a result, increases in market interest rates would generally result in increased interest expense on our outstanding principal.
The risk premium amounts under the ILN Transactions are calculated by multiplying the outstanding reinsurance coverage
amount at the beginning of any payment period by a coupon rate, which is the sum of 1-month LIBOR and a risk margin, and then
subtracting actual investment income earned on the trust balance during that payment period. An increase in 1-month LIBOR rates
would generally increase the risk premium payments, while an increase to money market rates, which directly affect investment
income earned on the trust balance, would generally decrease them. Although we expect the two rates to move in tandem, to the
extent they do not, it could increase or decrease the risk premium payments that otherwise would be due.
74
Item 8. Financial Statements and Supplementary Data
INDEX TO FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2019 and 2018
Consolidated Statements of Operations and Comprehensive Income for each of the years in the three-year period ended
December 31, 2019
Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended
December 31, 2019
Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2019
Notes to Consolidated Financial Statements
76
78
79
80
81
82
75
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors of NMI Holdings, Inc.
NMI Holdings, Inc.
Emeryville, CA
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of NMI Holdings, Inc. (the "Company") and subsidiaries as of
December 31, 2019 and 2018, 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, 2019, and the related notes and
financial statement schedules included in the accompanying index (collectively referred to as the "consolidated financial
statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of
the Company and subsidiaries at December 31, 2019 and 2018, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2019, in conformity with accounting principles generally accepted in the United
States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the Company's internal control over financial reporting as of December 31, 2019, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission ("COSO") and our report dated February 13, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an
opinion on the Company's consolidated financial statements based on our audits. We are a public accounting firm registered with
the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and
the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a
test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements
that was communicated or required to be communicated to the audit committee and that: (i) relates to accounts or disclosures that
are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.
The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken
as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter
or on the accounts or disclosures to which it relates.
Reserve for Insurance Claims and Claims Expense
As described in Notes 2 and 7 to the consolidated financial statements, the Company recorded $23.8 million of reserve for insurance
claims and claims expense at December 31, 2019. The establishment of insurance claims and claims expense reserve is subject to
inherent uncertainty and requires significant judgment by management. The reserve is established by estimating: (i) claim severity
which is the amount of the claim payment expected to be paid on each loan in default, and (ii) claim frequency which is the number
of loans in default expected to result in a claim payment. The claim frequency is determined based on historical observed experience
regarding certain loan factors and is also strongly influenced by prevailing economic conditions.
76
We identified the Company’s estimation of the reserve for insurance claims and claims expense as a critical audit matter. The principal
consideration for our determination is the high degree of subjectivity in estimating claim frequency and claim severity. Auditing
these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these
matters, including the extent of specialized skill or knowledge needed.
The primary procedures we performed to address this critical audit matter included:
•
•
Testing the completeness and accuracy of the underlying loans and claims data used in management’s actuarial reserve
calculations which supported claim frequency and claim severity estimates.
Utilizing personnel with specialized knowledge and skill in actuarial methods to assist in: (i) evaluating the appropriateness
of the methodology and the assumptions used by management’s actuary, including assessment of the reasonableness of
changes in assumptions and inputs used in developing claim frequency and claim severity, which included comparing to
third party evidence of current economic conditions and evaluating the current and historical loan factors, and (ii) performing
a retrospective review of the prior year reserve estimate against historical figures and economic trends.
/s/ BDO USA, LLP
We have served as the Company's auditor since 2011.
San Francisco, California
February 13, 2020
77
NMI HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS
Assets
December 31, 2019
December 31, 2018
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,113,779 and
$924,987 as of December 31, 2019 and December 31, 2018, respectively)
$
1,140,940
$
911,490
Cash and cash equivalents (including restricted cash of $2,662 and $1,414 as of
December 31, 2019 and December 31, 2018, respectively)
Premiums receivable
Accrued investment income
Prepaid expenses
Deferred policy acquisition costs, net
Software and equipment, net
Intangible assets and goodwill
Prepaid reinsurance premiums
Other assets
Total assets
Liabilities
Term loan
Unearned premiums
Accounts payable and accrued expenses
Reserve for insurance claims and claim expenses
Reinsurance funds withheld
Warrant liability, at fair value
Deferred tax liability, net
Other liabilities (1)
Total liabilities
Commitments and contingencies (see Note 14)
Shareholders' equity
41,089
46,085
6,831
3,512
59,972
26,096
3,634
15,488
21,171
25,294
36,007
5,694
3,241
46,840
24,765
3,634
30,370
4,708
$
$
1,364,818
$
1,092,043
145,764
$
136,642
39,904
23,752
14,310
7,641
56,360
10,025
146,757
158,893
31,141
12,811
27,114
7,296
2,740
3,791
434,398
390,543
Common stock - class A shares, $0.01 par value; 68,358,074 and 66,318,849 shares
issued and outstanding as of December 31, 2019 and December 31, 2018,
respectively (250,000,000 shares authorized)
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Total shareholders' equity
684
707,003
17,288
205,445
930,420
663
682,181
(14,832)
33,488
701,500
Total liabilities and shareholders' equity
$
1,364,818
$
1,092,043
(1)
"Deferred Ceding Commissions" have been reclassified as "Other liabilities" in prior periods.
See accompanying notes to consolidated financial statements.
78
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
Revenues
Net premiums earned
Net investment income
Net realized investment gains
Other revenues
Total revenues
Expenses
Insurance claims and claim expenses
Underwriting and operating expenses(1)
Service expenses(1)
Interest expense
Loss from change in fair value of warrant liability
Total expenses
Income before income taxes
Income tax expense
Net income
Earnings per share
Basic
Diluted
Weighted average common shares outstanding
Basic
Diluted
Net income
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) in accumulated other comprehensive
income, net of tax expense (benefit) of $8,548, ($3,285) and
$1,234 for each of the years in the three-year period ended
December 31, 2019, respectively
Reclassification adjustment for realized (gains) losses included
in net income, net of tax expense (benefit) of $9, ($27), and $73
for each of the years in the three-years ended December 31,
2019, respectively
Other comprehensive income (loss), net of tax
For the years ended December 31,
2019
2018
2017
(In Thousands, except for per share data)
$
345,015
$
251,197
$
30,856
45
2,855
378,771
12,507
126,621
2,248
12,085
8,657
162,118
216,653
44,696
23,538
57
233
275,025
5,452
116,966
270
14,979
1,397
139,064
135,961
28,034
$
$
$
171,957
$
107,927
$
2.54
2.47
$
$
1.66
1.60
$
$
67,573
69,721
65,019
67,652
165,740
16,273
208
522
182,743
5,339
106,362
617
13,528
4,105
129,951
52,792
30,742
22,050
0.37
0.35
59,816
62,186
$
171,957
$
107,927
$
22,050
32,155
(12,357)
2,559
(35)
32,120
102
(12,255)
(131)
2,428
24,478
See accompanying notes to consolidated financial statements.
79
Comprehensive income
$
204,077
$
95,672
$
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Balances, December 31, 2016
59,145 $
591 $
576,927 $
(5,287) $
(96,722) $
475,509
Common Stock - Class A
Shares
Amount
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income (Loss)
Retained
Earnings
(Accumulated
Deficit)
Total
(In Thousands)
— $
— $
388 $
— $
515 $
32
1,341
—
—
—
*
14
—
—
—
183
(1,494)
9,484
—
—
—
—
—
2,428
—
—
—
—
—
22,050
903
183
(1,480)
9,484
2,428
22,050
60,518 $
605 $
585,488 $
(2,859) $
(74,157) $
509,077
— $
— $
— $
282 $
(282) $
—
Cumulative effect of change in accounting
principle
Common stock: class A shares issued related
to warrant exercises
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
Balances, December 31, 2017
Cumulative effect of change in accounting
principle
Common stock: class A shares issued related
to public offering
Common stock: class A shares issued related
to warrant exercises
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 benefit of $3,258
4,255
91
1,455
—
—
43
1
14
—
—
79,122
1,893
3,121
12,557
—
—
682,181 $
—
8,309
3,482
13,031
—
—
707,003 $
—
—
—
—
(12,255)
—
(14,832) $
—
—
—
—
32,120
—
—
—
—
—
107,927
33,488 $
—
—
—
—
—
—
17,288 $
171,957
205,445 $
79,165
1,894
3,135
12,557
(12,255)
107,927
701,500
—
8,312
3,500
13,031
32,120
171,957
930,420
Net income
Balances, December 31, 2018
—
66,319 $
—
663 $
Cumulative effect of change in accounting
principle
Common stock: class A shares issued related
to warrant exercises
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 $8,539
—
289
1,750
—
—
—
3
18
—
—
Net income
Balances, December 31, 2019
—
68,358 $
—
684 $
*
During 2017, we issued 32,368 common shares with a par value of $0.01 in connection with the exercise of warrants, which is not identifiable
in this schedule due to rounding.
See accompanying notes to consolidated financial statements.
80
NMI HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
For the years ended December 31,
2019
2018
2017
$
171,957
(In Thousands)
$
107,927
$
22,050
Net realized investment gains
Loss 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 investing activities
Cash flows from financing activities
(45)
8,657
9,299
1,252
1,011
45,082
13,031
(10,078)
(1,137)
(472)
(13,132)
(8,831)
(22,251)
10,941
(1,022)
3,888
208,150
(230,362)
(290,533)
244,921
91,575
(9,956)
(57)
1,397
7,811
1,519
3,390
25,927
12,557
(10,828)
(1,482)
(1,090)
(8,915)
1,304
(4,273)
4,050
560
6,064
145,861
(257,916)
(356,337)
221,685
179,978
(8,060)
(194,355)
(220,650)
Proceeds from issuance of common stock related to public offering, net of issuance
costs
—
79,165
Proceeds from issuance of common stock related to employee equity plans
Proceeds from issuance of common stock related to warrant exercises
Taxes paid related to net share settlement of equity awards
Proceeds from senior note, net
Repayments of term loan
Payments of debt issuance/modification costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
Cash, cash equivalents and restricted cash, end of period
Supplemental disclosures of cash flow information
Interest paid
Income taxes (refunded) paid
21,748
—
(18,248)
—
(1,500)
—
2,000
15,795
25,294
41,089
10,691
(64)
12,857
321
(9,722)
149,250
(147,375)
(3,609)
80,887
6,098
19,196
25,294
12,093
867
$
$
$
$
$
$
(208)
4,105
6,663
1,599
1,473
31,102
9,484
(11,451)
(791)
(160)
(7,816)
(1,547)
10,260
5,760
(274)
(2,486)
67,763
(131,196)
(219,079)
170,278
95,435
(8,510)
(93,072)
—
7,103
183
(8,582)
—
(1,500)
(445)
(3,241)
(28,550)
47,746
19,196
13,355
1,220
See accompanying notes to consolidated financial statements.
81
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
1. Organization and Basis of Presentation
NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011 to provide private mortgage guaranty
insurance (which we refer to as mortgage insurance or MI) through its wholly-owned insurance subsidiaries, National Mortgage
Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). Our common stock is listed on the NASDAQ
exchange under the ticker symbol "NMIH."
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 the District of Columbia (D.C.) In August 2015, NMIH capitalized a wholly-owned
subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Basis of Presentation
The accompanying consolidated financial statements include the results of NMIH and its wholly-owned subsidiaries. All
inter-company transactions have been eliminated. These financial statements have been prepared in accordance with accounting
principles generally accepted in the U.S. (GAAP) and our accounts are maintained in US dollars. The preparation of financial
statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets
and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported
amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications
to previously reported financial information have been made to conform to our current period presentation.
2. Summary of Accounting Principles
Use of Estimates
We use accounting principles and methods that conform to GAAP. We are required to apply significant judgment and make
material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure
matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical.
Insurance Premium Revenue Recognition
Premiums for primary mortgage insurance policies may be paid in a single payment at origination (single premium), on a
monthly installment basis (monthly premium) or on an annual installment basis (annual premium), with such election and payment
type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums
and amortized into earnings over the estimated policy life, in accordance with the anticipated expiration of risk. Monthly premiums
are recognized as revenue in the month billed and when the coverage is effective. Annual premiums are initially deferred and earned
on a straight-line basis over the year of coverage. Upon cancellation of a policy, all remaining non-refundable deferred and unearned
premium is immediately earned, and any refundable deferred premium is returned to the policyholder and recorded as a reduction
to written premium and unearned premium reserve in the period paid.
Premiums written on pool transactions are earned over the period that coverage is provided.
Concentrations
For the year ended December 31, 2019, no customer accounted for more than 10% of our consolidated revenues. At
December 31, 2019, approximately 12% of our total risk-in-force (RIF) was concentrated in California.
Reserves for Insurance Claims and Claim Expenses
We establish reserves for claims based on our best estimate of ultimate claim costs for defaulted loans using the general
principles contained in ASC 944, Financial Services - Insurance (ASC 944). We establish case reserves when we are notified that
a loan has been in default for at least 60 days (i.e., a default) and "IBNR" reserves based on an estimate of defaults which have been
incurred but have not yet been reported to us by loan servicers. We also establish reserves for claim expenses, which represent the
estimated cost of the claim administration process, including legal, other third-party fees, and other general expenses of administering
the claim settlement process. Claim expense reserves are either allocated (i.e., associated with a specific claim) or unallocated (i.e.,
not associated with a specific claim).
The establishment of claims and claim expense reserves is subject to inherent uncertainty and requires significant judgment
by management. Reserves are established by estimating the number of loans in default that will result in a claim payment, which is
referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is
82
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
referred to as claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding
certain loan factors, such as age of the default, size of the loan and loan-to-value (LTV) ratios, and are strongly influenced by 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 (AOCI) (loss) in shareholders' equity. Net realized investment gains and losses are reported in income based on specific
identification of securities sold or other-than-temporarily impaired, and are reclassified out of AOCI (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 changes in effective yields and maturities are recognized on a prospective basis through yield adjustments.
We evaluate our investments each quarter to determine whether declines in fair value below amortized cost are 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;
the 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; and
adverse conditions specifically related to the security, an industry, or a geographic area.
Based on this evaluation, we record OTTI adjustments on securities with declines in fair value below their amortized cost,
if it is more likely than not that we will sell the securities prior to recovery of their amortized cost or if the present value of the
discounted cash flows we expect to collect on the securities through recovery under a "most likely" scenario is less than their amortized
cost. If our intent is to sell securities and their fair value is below amortized cost, the securities are classified as other-than-temporarily
impaired and the full amount of the impairment is recognized as a loss in earnings. Otherwise, losses on other-than-temporarily
impaired securities are bifurcated between credit-related losses and losses related to other factors (e.g., interest rate fluctuations),
with credit-related losses recognized in earnings and losses related to other factors recognized in AOCI (loss), net of taxes.
We consider items such as commercial paper with original maturities of 90 days or less to be short-term investments.
Deferred Policy Acquisition Costs (DAC)
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses
and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. DAC is reviewed periodically to
determine that it does not exceed recoverable amounts. DAC is amortized to expense in proportion to estimated gross profits over
the estimated life of the associated policies. We estimate the rate of amortization to reflect actual experience and any changes to
persistency or loss development. Total amortization of DAC for the years ended December 31, 2019, 2018 and 2017, net of a portion
of ceding commission related to the quota share reinsurance transactions (see "Reinsurance", below), was $8.4 million, $8.1 million
and $5.8 million, respectively.
83
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Premium Deficiency Reserves
We consider whether a premium deficiency exists and premium deficiency reserve is required at each fiscal quarter using
best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected
claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance
costs exceeds future premiums, existing reserves and anticipated investment income. We have determined that no premium deficiency
reserves were necessary for any of the years in the three-year period ended December 31, 2019.
Reinsurance
We account for premiums, claims and claim expenses that are ceded to reinsurers on a consistent basis with that which we
use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums
ceded or otherwise paid to reinsurers as a reduction to premium revenue.
NMIC entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction) and January
1, 2018 (the 2018 QSR Transaction), which we refer to collectively as the QSR Transactions. We earn profit and ceding commissions
in connection with the QSR Transactions (see Note 6, "Reinsurance"). Profit commissions represent a percentage of the profits
recognized by reinsurers that are returned to us, based on the level of claims and claim expenses that we cede. We recognize any
profit commissions we earn as an increase to premium revenue. Ceding commissions are calculated as a percentage of ceded written
premiums under the 2016 QSR Transaction and as a percentage of ceded earned premiums under the 2018 QSR Transaction, and
are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions we earn 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 a reduction to underwriting and operating expenses.
Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for
such ceded reserves as reinsurance recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims
expenses on the consolidated statements of operations. We remain directly liable for all claims payments if 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
through either (i) physical settlement method, or (ii) cashless exercise, where the number of shares issued upon exercise of the
warrants is reduced to cover the cost of the exercise in lieu of the holder remitting a cash payment for the exercise price. The warrants
expire and are not exercisable after the 10th anniversary of the date issued. The number of warrants and exercise price are subject
to anti-dilution provisions whereby the number of warrants may be increased and their exercise price may be adjusted downward
under certain circumstances. The anti-dilutive adjustments may be in excess of any dilution incurred by the warrant holders, and
may be triggered by events that are not dilutive. As a result, the warrants are classified as a liability. We revalue the warrants at the
end of each reporting period, and any change in fair value is reported in the statements of operations in the period in which the change
occurred. We calculated the fair value of the warrants using a Black-Scholes option-pricing model in combination with a binomial
model.
Share-Based Compensation
We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation, which addresses
accounting for share-based awards and recognition of compensation expense, measured using grant date fair value, over the requisite
service or performance period of the award. Share-based compensation includes restricted stock units (RSUs) and stock option grants
under our Stock Plans. We calculate the fair value of stock option grants using a Black-Scholes option pricing model, which takes
into account various subjective assumptions. Key assumptions used in the model include the expected volatility of our stock price,
dividend yield and the risk-free interest rate, as well as the expected option term, giving consideration to the contractual terms of
any award. RSU grants may contain a service condition, or performance and service conditions. RSU grants are valued at our stock
84
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
price on the date of grant less the present value of anticipated dividends. We account for stock option and RSU forfeitures as they
occur.
Earnings per Share (EPS)
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding. Diluted earnings
(loss) per share is based on the weighted-average number of common shares outstanding and common share equivalents that would
be issuable upon the vesting of existing service based and certain performance and service based RSUs, and exercise of vested and
unvested stock options and outstanding warrants.
Cash and Cash Equivalents
We consider items such as certificates of deposit and money market funds with original maturities of 90 days or less to be
cash equivalents.
Software and Equipment
We capitalize certain costs associated with the development of internal-use software and equipment. Software and equipment
are stated at cost, less accumulated amortization and depreciation. Amortization of software and depreciation of equipment commences
at the beginning of the month following our placement of the assets into use. Amortization and depreciation are calculated on a
straight-line basis over the estimated useful life of the respective assets, typically from three to five years, unless factors indicate a
shorter useful life. For further detail, see Note 12, "Software and Equipment."
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, 2019.
Our intangible assets consist of state licenses and Fannie Mae and Freddie Mac (collectively, the GSEs) applications which
have indefinite lives. We test indefinite-lived intangible assets for impairment during the fourth quarter of each year or more frequently
if we believe indicators of impairment exist. We have not identified any impairments of indefinite-lived intangible assets through
December 31, 2019.
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.
Premiums receivable may be written off prior to 120 days in the ordinary course of business for reasons including, but not limited
to, the modification or refinancing of underlying insured loans. We have established a reserve for premium write-offs based on
historical experience; such reserve was deemed to be immaterial for the years ended December 31, 2019 and December 31, 2018.
Variable Interest Entities
NMIC is a party to reinsurance agreements with three special purpose reinsurance entities - Oaktown Re Ltd., Oaktown Re
II Ltd. and Oaktown Re III Ltd. - respectively dated May 2, 2017, July 25, 2018 and July 30, 2019. At inception of the respective
reinsurance agreements, we determined that Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd, were variable interest
entities (VIEs), as defined under GAAP Accounting Standards Codification (ASC) 810, because they did not have sufficient equity
at risk to finance their respective activities. We evaluated the VIEs at inception to determine whether NMIC was the primary
beneficiary under each deal and, if so, whether we were required to consolidate the assets and liabilities of each VIE. The primary
beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its
economic performance and (2) has significant economic exposure to the VIE, i.e., the obligation to absorb losses or receive benefits
that could potentially be significant. The determination of whether an entity is the primary beneficiary of a VIE is complex and
requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are
absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the
performance of the VIE. We concluded that we are not the primary beneficiary of each VIE and as such, we do not consolidate them
in our consolidated financial statements.
See Note 6, "Reinsurance" for further discussion of the reinsurance arrangements.
85
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Recent Accounting Pronouncements - Adopted
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. We adopted this ASU on January 1, 2019 using the modified-retrospective method and applied it
prospectively as of the effective date, without adjusting comparative periods presented as permitted by ASU 2018-11, Leases (Topic
842), Targeted Improvements. Adoption of this new standard increased our assets and liabilities by $7.6 million in connection with
the recognition of right-of-use (ROU) assets and lease liabilities, primarily related to the operating lease on our corporate headquarters.
Adoption of this standard did not impact our consolidated statements of operations or cash flows. See Note 14, "Commitments and
Contingencies" for additional information related to our leases.
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. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our consolidated financial
statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This update expands the
scope of Topic 718 to include share-based payments made to non-employees in connection with the acquisition of goods and services.
We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our financial results as we have not made any
share-based grants to non-employees as defined in ASC 718-10-20.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued
amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses,
Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses:
Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These
updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held
at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses will generally shift from an
incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL)
model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed
maturity securities will be recorded through an allowance for credit losses, rather than a write-down of the asset as is currently
required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time
an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss
determination. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on
our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items
are not in scope of the guidance.
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts.
This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration
contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-19 in November 2019 and amended the effective
date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those
fiscal years, beginning after December 15, 2021. We are currently evaluating the impact the adoption of this ASU will have, if any,
on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value
measurement disclosure requirements of ASC 820. We adopted this ASU on January 1, 2020 and determined it did not have a material
impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic
350-40).This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance
on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We
adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The
adoption of this ASU did not have a material impact on our consolidated financial statements.
In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update eliminates certain exceptions
for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods.
The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax
86
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
goodwill and allocating taxes to members of a consolidated group. The standard will take effect for public business entities for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the
impact the adoption of this ASU will have, if any, on our consolidated financial statements.
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 earnings based on specific
identification of securities sold or other-than-temporarily impaired.
Fair Values and Gross Unrealized Gains and Losses on Investments
As of December 31, 2019
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
As of December 31, 2018
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)
$
48,203
$
784
$
189,530
661,719
170,153
1,069,605
44,174
1,721
23,373
2,603
28,481
98
$
1,113,779
$
28,579
$
(58) $
(1,035)
(211)
(114)
(1,418)
—
(1,418) $
Amortized
Cost
Gross Unrealized
Gains
Losses
(In Thousands)
$
48,171
$
35
$
92,014
554,079
171,990
866,254
58,733
206
847
792
1,880
107
$
924,987
$
1,987
$
(1,376) $
(963)
(11,688)
(1,457)
(15,484)
—
(15,484) $
Fair
Value
48,929
190,216
684,881
172,642
1,096,668
44,272
1,140,940
Fair
Value
46,830
91,257
543,238
171,325
852,650
58,840
911,490
We did not own any mortgage-backed securities in our asset-backed securities portfolio at December 31, 2019 or 2018.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of
December 31, 2019 and 2018:
87
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Financial
Consumer
Communications
Utilities
Industrial
Technology
Energy
Other
Total
December 31, 2019
December 31, 2018
38%
26
10
9
8
7
2
—
100%
38%
27
12
7
7
6
2
1
100%
As of December 31, 2019 and 2018, approximately $5.5 million and $5.3 million, respectively, of our cash and investments
were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
Scheduled Maturities
The amortized cost and fair values of available-for-sale securities as of December 31, 2019 and 2018, 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, 2019
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, 2018
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
Amortized
Cost
Fair
Value
(In Thousands)
138,776
$
406,986
380,737
17,127
170,153
139,113
417,208
394,180
17,797
172,642
1,113,779
$
1,140,940
Amortized
Cost
Fair
Value
(In Thousands)
76,087
$
352,282
318,728
5,900
171,990
924,987
$
76,104
347,701
310,633
5,727
171,325
911,490
$
$
$
$
88
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Aging of Unrealized Losses
As of December 31, 2019, the investment portfolio had gross unrealized losses of $1.4 million, of which $0.1 million had
been in an unrealized loss position for a period of 12 months or greater. We did not consider these securities to be other-than-
temporarily impaired as of December 31, 2019. We based our conclusion that these investments were not other-than-temporarily
impaired as of December 31, 2019 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements
and market fluctuations in credit spreads 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:
Less Than 12 Months
12 Months or Greater
# of
Securities Fair Value
Unrealized
Losses
# of
Securities Fair Value
Unrealized
Losses
# of
Securities
Total
Fair
Value
Unrealized
Losses
As of December 31, 2019
U.S. Treasury securities and
obligations of U.S.
government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total
10
92,844
4 $ 12,001 $
26
(58)
(1,034)
(140)
9
(102)
49 $ 154,562 $ (1,334)
30,481
19,236
(Dollars in Thousands)
— $
1
— $
999
14
23,976
2,988
1
16 $ 27,963 $
—
(1)
(71)
(12)
(84)
24
93,843
4 $ 12,001 $
27
(58)
(1,035)
(211)
10
(114)
65 $ 182,525 $ (1,418)
54,457
22,224
Less Than 12 Months
12 Months or Greater
# of
Securities Fair Value
Unrealized
Losses
# of
Securities Fair Value
Unrealized
Losses
# of
Securities
Total
Fair
Value
Unrealized
Losses
As of December 31, 2018
U.S. Treasury securities and
obligations of U.S.
government agencies
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total
Net Investment Income
118
— $
7,409
— $
4
—
(11)
(3,952)
25
(1,136)
147 $ 269,903 $ (5,099)
226,477
36,017
(Dollars in Thousands)
126
58,658
19 $ 41,817 $ (1,376)
(952)
31
(7,736)
22
(321)
198 $ 356,138 $ (10,385)
221,675
33,988
244
66,067
19 $ 41,817 $ (1,376)
(963)
35
(11,688)
47
(1,457)
345 $ 626,041 $ (15,484)
448,152
70,005
The following table presents the components of net investment income:
Investment income
Investment expenses
Net investment income
For the year ended December 31,
2019
2018
(In Thousands)
2017
$
$
31,332
(476)
30,856
$
$
24,342
(804)
23,538
$
$
17,046
(773)
16,273
The following table presents the components of net realized investment gains:
Gross realized investment gains
Gross realized investment losses
Net realized investment gains
For the year ended December 31,
2019
2018
(In Thousands)
2017
561
(516)
45
$
$
525
(468)
57
$
$
546
(338)
208
$
$
89
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Investment Securities - Other-than-Temporary Impairment (OTTI)
As of December 31, 2019, 2018 and 2017, we held no other-than-temporarily impaired securities. For the years ended
December 31, 2019 and 2017, we recognized $0.4 million and $0.1 million of OTTI losses in earnings, respectively. For the year
ended December 31, 2018 we did not recognize any OTTI losses. There were no credit losses recognized in earnings for which a
portion of an OTTI loss was recognized in AOCI (loss) for any period presented.
4. Fair Value of Financial Instruments
The following describes the valuation techniques used by us to determine the fair value of our financial instruments:
We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The
hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1
measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
under this standard are described below:
Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical
assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted
price for such instruments.
Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the
asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active
markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted
prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly
quoted intervals.
Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both
observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The
circumstances for using these measurements include those in which there is little, if any, market activity for the asset or
liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about
the inputs a hypothetical market participant would use to value that asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases,
the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in
its entirety.
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.
90
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The following tables present the level within the fair value hierarchy at which our financial instruments were measured:
As of December 31, 2019
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
As of December 31, 2018
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)
$
$
$
48,929
$
— $
—
—
—
190,216
684,881
172,642
85,361
134,290
$
—
1,047,739
$
—
— $
—
— $
— $
—
—
—
—
— $
7,641
7,641
$
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)
$
$
$
46,830
$
— $
—
—
—
84,134
91,257
543,238
171,325
—
130,964
$
805,820
$
—
— $
—
— $
— $
—
—
—
—
— $
7,296
7,296
$
Fair Value
48,929
190,216
684,881
172,642
85,361
1,182,029
7,641
7,641
Fair Value
46,830
91,257
543,238
171,325
84,134
936,784
7,296
7,296
There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level 3, of the fair value hierarchy
during the years ended December 31, 2019 or 2018.
The following is a roll-forward of Level 3 liabilities measured at fair value:
Balance, January 1
Change in fair value of warrant liability included in earnings
Issuance of common stock on warrant exercise
Balance, December 31
For the year ended December 31,
2019
2018
2017
(In Thousands)
7,296
$
7,472
$
8,657
(8,312)
7,641
$
1,397
(1,573)
7,296
$
$
$
3,367
4,105
—
7,472
91
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the
Black-Scholes option-pricing model as of the dates indicated.
Common stock price
Risk free interest rate
Expected life
Expected volatility
Dividend yield
As of December 31,
$
2019
2018
2017
33.18
1.59%
2.31 years
41.4%
—%
$
17.85
$
2.46 - 2.47%
2.58 - 3.31 years
41.1 - 42.5%
—%
17.00
1.99%
3.07 years
30.6%
—%
The changes in fair value of the warrant liability for the years ended December 31, 2019, 2018, and 2017 are primarily
attributable to changes in the price of our common stock and exercises of outstanding warrants during the respective periods, with
additional impact related to changes in other Black-Scholes model inputs.
Financial Instruments not Measured at Fair Value
At December 31, 2019, our 2018 Term Loan was carried at a cost of $145.8 million, net of debt issuance costs of $2.0
million, and had a fair value of $147.8 million as assessed under our Level 2 hierarchy. At December 31, 2018, our 2018 Term Loan
was carried at a cost of $146.8 million, net of debt issuance costs of $2.5 million, and had a fair value of $146.3 million.
5. Debt
On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $150 million 5-
year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) a $85 million three-year secured
revolving credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021. Proceeds from the 2018 Term Loan were
used to repay in full the outstanding amount due under our $150 million amended term loan (2015 Term Loan) due on November
10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement.
2018 Term Loan
The 2018 Term Loan bears interest at the LIBOR, as defined in the 2018 Credit Agreement and subject to a 1.00% floor,
plus an annual margin rate of 4.75%, representing an all-in rate of 6.55% as of December 31, 2019, payable monthly based on our
current interest period election. Quarterly principal payments of $0.4 million are also required. As of December 31, 2019, the
outstanding principal balance of the 2018 Term Loan was $147.8 million.
Interest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, an original issue discount
and capitalized modification costs related to the 2015 Term Loan. For the year ended December 31, 2019, we recorded $11.2 million
of interest expense. Remaining unamortized issuance costs and original issue discount were $2.0 million as of December 31, 2019
and are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan.
We are subject to certain covenants under the 2018 Term Loan (as defined in the 2018 Credit Agreement), including (but
not limited to) a maximum debt-to-total capitalization ratio (as defined in the 2018 Credit Agreement) of 35% under the 2018 Term
Loan. We were in compliance with all covenants as of December 31, 2019.
Future principal payments due under the 2018 Term Loan as of December 31, 2019 are as follows:
As of December 31, 2019
2020
2021
2022
2023
Total
Principal
(In thousands)
1,500
1,500
1,500
143,250
147,750
$
$
92
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
2018 Revolving Credit Facility
Borrowings under the 2018 Revolving Credit Facility may be used for general corporate purposes and will accrue interest
at a variable rate equal to, at our discretion, (i) a base rate (as defined in the 2018 Credit Agreement, subject to a floor of 1.00% per
annum) plus a margin of 1.00% to 2.50% per annum, based on the applicable corporate credit rating at the time, or (ii) the Eurodollar
Rate (subject to a floor of 0.00% per annum) plus a margin of 2.00% to 3.50% per annum, based on the applicable corporate credit
rating at the time. As of December 31, 2019, no borrowings had been made under the 2018 Revolving Credit Facility.
We are required to pay a quarterly commitment fee on the average daily undrawn amount of the 2018 Revolving Credit
Facility, which ranges from 0.30% to 0.60%, based on the applicable corporate credit rating at the time. As of December 31, 2019,
the applicable commitment fee was 0.40%. For the year ended December 31, 2019, we recorded $0.4 million of commitment fees
in interest expense.
We incurred issuance costs of $1.5 million in connection with the establishment of the 2018 Revolving Credit Facility,
which were deferred and recorded within "Other assets." These costs are being amortized through interest expense over the three-
year life of the 2018 Revolving Credit Facility on a straight line basis. For the year ended December 31, 2019, we recognized $0.5
million of interest expense from the amortization of deferred issuance costs. At December 31, 2019, remaining deferred issuance
costs were $0.7 million, net of accumulated amortization.
We are subject to certain covenants under the 2018 Revolving Credit Facility, including (but not limited to) the following:
a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the private mortgage insurer
eligibility requirements (PMIERs) financial requirements (subject to any GSE-approved waivers), and minimum consolidated net
worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of
December 31, 2019.
6. Reinsurance
We enter into third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, state
regulatory and other applicable capital requirements, and support the growth of our business. The GSEs and the Wisconsin Office
of the Commissioner of Insurance (Wisconsin OCI) have approved all such transactions (subject to certain conditions and ongoing
review, including levels of approved capital credit).
The effect of our reinsurance agreements on premiums written and earned is as follows:
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, 2019
December 31, 2018
December 31, 2017
For the year ended
(In Thousands)
$
$
$
$
376,052
(43,400)
332,652
398,303
(53,288)
345,015
$
$
$
$
287,791
(30,988)
256,803
292,064
(40,867)
251,197
$
$
$
$
202,586
(28,914)
173,672
192,326
(26,586)
165,740
NMIC entered into excess-of-loss reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd. and Oaktown Re III
Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018
and July 30, 2019, respectively. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined
portfolio of mortgage insurance policies written during a discrete period. Under each agreement, NMIC retains a first layer of
aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up
to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts.
93
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each
agreement over a 10 year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage
is canceled. The respective outstanding reinsurance coverage amounts stop amortizing if certain credit enhancement or delinquency
thresholds, as defined in each agreement, are triggered.
NMIC makes risk premium payments to the Oaktown Re Vehicles for the applicable outstanding reinsurance coverage
amount and pays an additional amount for anticipated operating expenses (capped at $300 thousand per year to Oaktown Re Ltd.
and $250 thousand per year to Oaktown Re II, Ltd. and Oaktown Re III, Ltd.). NMIC ceded aggregate premiums to the Oaktown
Re Vehicles of $14.6 million, $9.6 million and $5.0 million during the years ended December 31, 2019, 2018 and 2017, respectively.
NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-
loss agreement. NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the years ended
December 31, 2019, 2018 or 2017, as the aggregate first layer risk retention was not exhausted for each applicable agreement during
such periods.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize
their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. Such trust funds
are required to be invested in short-term U.S. Treasury money market funds at all times. Each Oaktown Re Vehicle financed its
respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors. Such insurance-
linked notes mature 10 years from the inception date of each reinsurance agreement. We refer to NMIC's reinsurance agreements
with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd. individually as the
2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount,
and initial and current first layer retained aggregate loss under each of the ILN Transactions.
($ values in thousands)
Inception Date
2017 ILN Transaction May 2, 2017
Covered Production
1/1/2013 - 12/31/2016
2018 ILN Transaction
July 25, 2018
1/1/2017 - 5/31/2018
Initial
Reinsurance
Coverage
$ 211,320
264,545
2019 ILN Transaction
July 30, 2019
6/1/2018 - 6/30/2019
326,905
Current
Reinsurance
Coverage
$
61,900
Initial First
Layer Retained
Loss
126,793
$
Current First
Layer Retained
Loss
123,330
$
202,396
301,396
125,312
123,424
124,594
123,424
NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which
provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding
reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably
determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment
afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement,
including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to noteholders,
among others.
Under the terms of the 2018 ILN Transaction and the 2019 ILN Transaction, we are required to maintain a certain level of
restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full.
"Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $2.7 million as of
December 31, 2019. We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted
balances required under these transactions will decrease over time as the outstanding principal balances of the respective insurance-
linked notes decline.
94
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Quota share reinsurance
Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a
discrete period to panels of third-party reinsurance providers. Each of the third-party reinsurance providers has an insurer financial
strength rating of A- or better by Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (A.M. Best) or both.
Under the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies
written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae. The 2016 QSR
Transaction is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to
terminate on August 31, 2023. NMIC has the option, based on certain conditions and subject to a 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.
Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in
2018 and 20% of the risk on eligible policies written in 2019. The 2018 QSR Transaction is scheduled to terminate on December
31, 2029. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of
December 31, 2022, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
NMIC may terminate either or both of the QSR Transactions without penalty if, due to a change in PMIERs requirements,
it is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreements. Additionally, under the terms
of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a run-off basis (i.e.,
reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-
off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain
circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its
capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under
the relevant agreement.
Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on
a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF
and stopped ceding new premiums earned or written with respect to the recaptured risk. With the termination, ceded premiums
written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination has no effect on the
cession of pool risk under the 2016 QSR Transaction.
The following table shows the amounts related to the QSR Transactions:
Ceded risk-in-force
Ceded premiums earned
Ceded claims and claim expenses
Ceding commission earned
Profit commission
December 31, 2019
December 31, 2018
December 31, 2017
For the year ended
(In Thousands)
$
$
5,137,249
(89,211)
3,465
17,652
50,513
$
4,292,450
(74,068)
1,763
14,585
42,846
2,983,353
(49,619)
1,687
9,806
28,084
Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums
and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums. Under the 2018
QSR Transaction, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission
for premiums ceded under the QSR Transactions. NMIC also receives a profit commission under each of the QSR Transactions,
provided that the loss ratios on loans covered under the 2016 QSR Transaction and 2018 QSR Transaction generally remain below
60% and 61%, respectively, as measured annually. Ceded claims and claim expenses under each of the QSR Transactions reduce
the respective profit commission received by NMIC on a dollar-for-dollar basis.
In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments
for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and
profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until
exhausted. NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer
95
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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 $2.8 million as of December 31, 2019.
In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a
quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit
commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established
and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance
recoverable on loss reserves related to our 2018 QSR Transaction was $2.1 million as of December 31, 2019.
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 claim expense reserves, which represent the estimated cost of the claim administration process, including legal
and other fees, as well as other general expenses of administering the claims settlement process. As of December 31, 2019, we had
reserves for insurance claims and claim expenses of $23.8 million for 1,448 primary loans in default. During the year ended
December 31, 2019, we paid 152 claims totaling $5.0 million, including 142 claims covered under the QSR Transactions representing
$1.0 million of ceded claims and claim expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which
represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves
for pool risk if we expect claims to exceed this deductible. At December 31, 2019, 46 loans in the pool were past due by 60 days or
more. These 46 loans represented approximately $3.0 million of RIF. Due to the size of the remaining deductible, the low level of
notices of defaults (NODs) reported on loans in the pool through December 31, 2019 and the expected severity (all loans in the pool
have LTV ratios under 80%), we did not establish any case or IBNR reserves for pool risk at December 31, 2019. In connection with
the settlement of pool claims, we applied $0.8 million to the pool deductible through December 31, 2019. At December 31, 2019,
the remaining pool deductible was $9.5 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under
the 2016 QSR Transaction.
96
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims
and claim expenses:
December 31, 2019
December 31, 2018
December 31, 2017
For the year ended
Beginning balance
Less reinsurance recoverables (1)
Beginning balance, net of reinsurance recoverables
$
(In Thousands)
$
12,811
(3,001)
9,810
$
8,761
(1,902)
6,859
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
Prior years (3)
Total claims and claim expenses incurred
Less claims paid:
Claims and claim expenses paid:
Current year (2)
Prior years (3)
Reinsurance terminations (4)
Total claims and claim expenses paid
Reserve at end of period, net of reinsurance recoverables
Add reinsurance recoverables (1)
Ending balance
14,737
(2,230)
12,507
204
3,849
(549)
3,504
18,813
4,939
7,860
(2,408)
5,452
130
2,371
—
2,501
9,810
3,001
$
23,752
$
12,811
$
3,001
(297)
2,704
6,140
(801)
5,339
27
1,157
—
1,184
6,859
1,902
8,761
(1) Related to ceded losses recoverable under the QSR Transactions, 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 defaulted in a prior year and
subsequently cured and later re-defaulted in the current year, the default would be included in the current year. Amounts are presented net of
reinsurance.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year.
Amounts are presented net of reinsurance.
(4) Represents the settlement of reinsurance recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction
on a cut-off basis. See Note 6, "Reinsurance" for additional information.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior
years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred relating to current year NODs
represents the estimated amount of claims and claim expenses to be ultimately paid on such loans in default. We recognized $2.2
million, $2.4 million, and $0.8 million of favorable prior year development during the years ended December 31, 2019, 2018 and
2017, 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 $5.2 million related to prior year defaults remained as of December 31, 2019.
97
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
The following tables provide claim development data, by accident year and a reconciliation to the reserve for insurance
claims and claim expenses.
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of
Reinsurance (1)
As of December 31, 2019
Accident
Year
2013
2014
2015
2016
2017
2018
2019
2013
2014
2015
2016
2017
2018
2019
Total of
IBNR
NODs (2)
$
— $
— $
83
— $
34
699
($ Values In Thousands)
— $
4
— $
4
— $
4
— $
4
664
2,394
743
1,568
6,028
764
1,790
3,475
7,779
894
1,934
3,570
5,271
Total
14,391
$ 26,064
$
$
—
1
4
30
155
1,097
1,287
—
1
5
34
174
1,234
1,448
(1) Amounts include case and IBNR reserves.
(2) The number of NODs outstanding as of December 31, 2019 is the total number of loans in default over 60 days.
Accident Year
2013
2014
2015
2016
2017
2018
2019
Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance
2013
2014
2015
2016
2017
2018
2019
$
— $
(In Thousands)
— $
—
— $
4
50
— $
4
246
171
— $
4
— $
4
684
890
27
720
1,596
1,655
130
Total
$
—
4
804
1,826
2,925
1,981
69
7,609
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, 2019
Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of
Reinsurance
Cumulative Paid Claims and 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
$
$
26,064
7,609
18,455
4,939
358
23,752
98
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
Year 1
3%
Year 2
38%
Year 3
91%
Year 4
96%
Year 5
95%
Year 6
100%
Claims duration disclosure
8. Earnings per Share
Basic EPS is based on the weighted average number of shares of common stock outstanding. Diluted EPS is based on the
weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the
vesting of service based and performance and service based RSUs, and the exercise of vested and unvested stock options and
outstanding warrants. The number of shares issuable for RSUs subject to performance and service based vesting requirements are
only included in diluted shares if the relevant performance measurement period has commenced and results during such period meet
the necessary performance criteria. The following table reconciles the net income and the weighted average shares of common stock
outstanding used in the computations of basic and diluted EPS of common stock.
Net income
Basic weighted average shares outstanding
Basic earnings per share
Net income
Gain from change in fair value of warrant liability
Diluted net income
Basic weighted average shares outstanding
Dilutive effect of issuable shares
Diluted weighted average shares outstanding
Diluted earnings per share
Anti-dilutive shares
9. Warrants
For the year ended December 31,
2019
2018
2017
(In Thousands, except for per share data)
$
$
$
$
$
$
$
$
$
171,957
67,573
2.54
171,957
—
171,957
67,573
2,148
69,721
$
$
$
$
107,927
65,019
1.66
107,927
—
107,927
65,019
2,633
67,652
2.47
$
1.60
$
565
843
22,050
59,816
0.37
22,050
—
22,050
59,816
2,370
62,186
0.35
995
We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012. 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, 2019, 448 thousand warrants were exercised resulting in the issuance of 289 thousand
shares of common stock. Upon exercise, we reclassified approximately $8.3 million of warrant fair value from warrant liability to
additional paid-in capital, of which $4.1 million related to changes in fair value during the twelve months ended December 31, 2019.
During the year ended December 31, 2018, 151 thousand warrants were exercised resulting in the issuance of 91 thousand
shares of common stock. Upon exercise, we reclassified approximately $1.6 million of warrant fair value from warrant liability to
additional paid-in capital, of which $0.4 million related to changes in fair value during the twelve months ended December 31, 2018.
During the year ended December 31, 2017, 55 thousand warrants were exercised resulting in the issuance of 32 thousand shares of
common stock.
99
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
10. Share-Based Compensation
Share-based compensation includes stock options and RSUs granted under our 2012 Stock Incentive Plan (2012 Plan) and
our Amended and Restated 2014 Omnibus Incentive Plan (2014 Plan, and together with the 2012 Plan, the Stock Plans).
The 2012 Plan was approved by the Board on April 16, 2012 and authorized 5.5 million shares of common stock to be
reserved for issuance, with limits of 3.85 million shares available for stock option issuance and 1.65 million shares available for
RSU issuance. Options granted under the 2012 Plan are non-qualified stock options and may be granted to employees, directors and
other key persons. The exercise price per share for options covered by the 2012 Plan is determined by the Board at the time of grant,
but shall not be less than the fair market value of our common stock, defined as the closing price of our common stock, on the date
of the grant. The term of the stock option grants is established by the Board, but no stock option shall be exercisable more than ten
years after the date the stock option is granted. The vesting period of the stock option grants is also established by the Board at the
time of grant and is generally a three-year period. Upon the exercise of stock options, we issue shares from the authorized, unissued
share reserve.
The 2014 Plan was originally approved by our stockholders at our annual meeting on May 8, 2014 and authorized 4.0
million shares of common stock to be reserved for issuance. On May 11, 2017, our stockholders approved amendments to the 2014
Plan at our annual stockholder meeting, authorizing an additional 2.0 million shares of common stock for issuance, increasing the
total shares of common stock reserved for issuance under the plan to 6.0 million. These shares may be either authorized but unissued
shares or treasury shares.
For the years ended December 31, 2019, 2018 and 2017, we incurred $13.0 million, $12.6 million and $9.5 million,
respectively, of expenses related to awards granted under our Stock Plans. We recognized related income tax benefits of $2.7 million,
$2.6 million and $2.0 million for the years ended December 31, 2019, 2018 and 2017, respectively.
A summary of option activity during the years ended December 31, 2019, 2018 and 2017, is as follows:
For the year ended December 31, 2019
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
Weighted Average
Exercise Price
Options outstanding at December 31, 2018
Options granted
Options exercised
Options forfeited
Options expired
2,882
$
163
(1,117)
—
—
$
4.24
8.85
3.88
—
—
Options outstanding at December 31, 2019
1,928
$
4.84
$
11.42
22.19
10.19
—
—
13.04
For the Year Ended December 31, 2018
Shares
Options outstanding at December 31, 2017
Options granted
Options exercised
Options forfeited
Options expired
Options outstanding at December 31, 2018
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
Weighted Average
Exercise Price
3,311
$
383
(803)
—
(9)
2,882
$
3.95
6.32
4.06
—
4.05
4.24
$
$
10.41
18.08
10.43
—
10.51
11.42
100
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
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
As of December 31, 2019, there were approximately 1.3 million fully vested and exercisable options. There were 1.1 million
exercises during the year with an aggregate intrinsic value of $19.4 million. The weighted average exercise price for the fully vested
and exercisable options was $11.22. The remaining weighted average contractual life of fully vested and exercisable options as of
December 31, 2019 was 4.79 years. The aggregate grant date intrinsic value of fully vested and exercisable options was $29.0 million
as of December 31, 2019.
As of December 31, 2019, 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 1.31 years.
The estimated grant date fair values of the stock options granted during the years ended December 31, 2019, 2018, and
2017 were calculated using the Black-Scholes valuation model based on the following assumptions.
Expected life
Risk free interest rate
Dividend yield
Expected stock price volatility
For the years ended December 31,
2019
6 years
2.57%
—%
36.8%
2018
6 years
2.66-2.89%
—%
30.1-30.6%
2017
6 years
2.04-2.08%
—%
30.5-32.7%
Expected life - is the period of time over which the options granted are expected to remain outstanding giving consideration
to vesting schedules, historical exercise and forfeiture patterns. We use the simplified method outlined in SEC Staff Accounting
Bulletin No. 107 to estimate expected life for options granted during the period as sufficient historical exercise data is not available
and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of 10 years.
Risk-free interest rate - is the U.S. Treasury rate on the date of the grant having a term approximating the expected life of
the option.
Dividend yield - is calculated by dividing the expected annual dividend by our stock price at the valuation date.
Expected price volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate.
A summary of RSU activity during the years ended December 31, 2019, 2018 and 2017 is as follows:
For the year ended December 31, 2019
Non-vested restricted stock units at December 31, 2018
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Non-vested restricted stock units at December 31, 2019
101
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
1,753
470
(970)
(51)
1,202
$
$
12.06
24.42
9.71
15.06
18.67
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
For the year ended December 31, 2018
Non-vested restricted stock units at December 31, 2017
Restricted stock units granted
Restricted stock units vested
Restricted stock units forfeited
Non-vested restricted stock units at December 31, 2018
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
Shares
Weighted Average
Grant Date Fair
Value per Share
(Shares in Thousands)
2,065
$
701
(913)
(100)
1,753
$
8.15
17.22
7.42
9.89
12.06
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
At December 31, 2019, we had 1.2 million shares of granted and non-vested RSUs, consisting of 1.0 million shares that are
subject to service condition vesting requirements and 0.2 million shares that are subject to performance and service condition vesting
requirements. The total fair value of RSUs vested during the year ended December 31, 2019 was $9.4 million. The remaining
weighted average contractual life of non-vested RSUs was 1.37 years. As of December 31, 2019, there was $7.2 million of total
unrecognized compensation costs related to non-vested RSUs, compared to $7.8 million as of December 31, 2018. The weighted-
average period over which total remaining compensation costs related to non-vested RSUs will be recognized is 1.40 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 and service condition vesting requirements are scheduled to vest in 2020, with the
number of shares eligible to vest based on the achievement of a return on equity goal. The fair value of non-vested RSUs is measured
as the closing price of our common stock on the date of grant less the present value of anticipated dividends to be paid during the
service period.
401(k) Savings Plan
We offer our employees a 401(k) Savings Plan (401(k) Plan) that qualifies as a deferred salary arrangement under Section 401
(k) of the Internal Revenue Code (IRC). Under the 401(k) Plan, we match up to 100% of eligible employees' pre-tax contributions
up to 5% of eligible compensation. During the years ended December 31, 2019, 2018 and 2017, we incurred approximately $2.5
million, $1.6 million and $1.5 million of expense related to our matching 401(k) Plan contributions, respectively.
11. Income Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. NMIH files a consolidated
U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Prior to the enactment of the Tax Cuts and
Jobs Act (TCJA) on December 22, 2017, we were subject to a statutory U.S. federal corporate income tax rate of 35% for all prior
years through December 31, 2017.
Total income tax expense consists of the following components:
Current
Deferred
Total income tax expense
For the year ended December 31,
2019
2018
(In Thousands)
2017
$
$
(386) $
45,082
44,696
$
1,677
26,357
28,034
$
$
778
29,964
30,742
102
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
For the year ended December 31, 2019, we had income tax expense of $44.7 million, including amounts related to a current
state income tax benefit and changes to our federal and state net deferred tax liability.
For the year ended December 31, 2018, we had income tax expense of $28.0 million, including amounts related to federal
and state income taxes and changes to our net deferred tax liability.
For the year ended December 31, 2017, we had income tax expense of $30.7 million, including 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 TCJA on December 22, 2017.
The following table presents a reconciliation between the federal statutory income tax rate and our effective income tax
rate:
Federal statutory income tax rate
State provision
Share-based and other compensation
Warrant gain/loss
Re-measurement from change in federal statutory rate
Other (1)
Effective income tax rate
(1)
Prior periods have been reclassified for consistency and presentation purposes.
For the year ended December 31,
2019
2018
2017
21.0%
0.5
(1.7)
0.9
—
(0.1)
20.6%
21.0%
0.7
(1.4)
0.2
—
0.1
20.6%
35.0%
0.6
(4.7)
1.8
25.7
(0.2)
58.2%
103
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
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
Accrued expenses
Capitalized start-up costs
Deferred ceding commissions
Unrealized loss on investments
Other
Total gross deferred tax asset
Less: valuation allowance
Total deferred tax asset
Deferred tax liability
Contingency reserve
Deferred acquisition costs
Unrealized gain on investments
Capitalized software
Intangible assets
Other
Total deferred tax liability
Net deferred income tax (liability)
As of December 31,
2019
2018
$
(In Thousands)
9,244
$
5,959
5,213
4,539
634
566
—
772
26,927
(7,857)
19,070
(47,730)
(12,902)
(7,634)
(5,107)
(111)
(1,946)
(75,430)
(56,360) $
$
6,896
6,791
5,568
5,495
727
821
2,923
364
29,585
(8,136)
21,449
(8,149)
(10,145)
—
(4,757)
(82)
(1,056)
(24,189)
(2,740)
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve
balance, subject to certain limitations outlined under IRC Section 832(e), to the extent we acquire tax and loss bonds in an amount
equal to the tax benefit derived from the claimed deduction, which is our intent. As a result, we had no current federal income tax
provision for the year ended December 31, 2019. During the year ended December 31, 2019, we had net purchases of $7.6 million
of tax and loss bonds, and as of December 31, 2019, we held $7.6 million of tax and loss bonds in "Other assets" in our condensed
consolidated balance sheet.
In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other
Comprehensive Income (Topic 220). This update permits the reclassification of the disproportionate income tax effects, commonly
referred to as "stranded tax," that result from the TCJA on items within AOCI to retained earnings. We adopted this update effective
January 1, 2018, resulting in a $0.3 million reduction to retained earnings as of January 1, 2018. The remaining $4.2 million of
stranded tax that remains in AOCI relates to our available-for-sale fixed income holdings.
At December 31, 2019, we had a federal net operating loss carryforward of $2.3 million which expires in varying amounts
in 2030 and 2031, and state net operating loss carryforward of $126.8 million which expire in varying amounts from 2031 to 2039.
Section 382 of the IRC imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it
experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $7.3 million of federal net
operating losses were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2028. Our
federal net operating loss carryforward arises from this limitation and the constraint on our ability to utilize the net operating loss
carryforward in full during the current period.
At December 31, 2019 and 2018, we recorded valuation allowances of $7.9 million and $8.1 million, respectively against
state net deferred tax assets that may not be realized in future periods. The valuation allowances for both years primarily relate to
state net operating losses generated by NMIH, as NMIH operates at a loss and currently only generates revenue from its investment
portfolio.
104
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
As of December 31, 2019 and 2018, we had no reserves for unrecognized tax benefits, and had taken no material uncertain
tax positions that would have required recognition and measurement.
We file income tax returns with the U.S. federal government and various state jurisdictions that are subject to potential
examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax
returns for 2016 and subsequent years and state income tax returns for 2015 and subsequent years remain open by statute.
12. Software and Equipment
Software and equipment consist largely of capitalized software developed to support our mortgage insurance operations.
Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2019 and 2018, consists of the
following:
Software
Equipment
Leasehold improvements
Subtotal
Accumulated amortization and depreciation
Software and equipment, net
December 31, 2019
December 31, 2018
$
$
(In Thousands)
46,522
$
8,992
3,442
58,956
(32,860)
26,096
$
38,450
7,035
3,491
48,976
(24,211)
24,765
Capitalized costs for software, equipment, and leasehold improvements during the year ended December 31, 2019, 2018
and 2017, were $10.6 million, $9.8 million, and $9.1 million, respectively. Amortization and depreciation expense for software,
equipment, and leasehold improvements for the years ended December 31, 2019, 2018, and 2017 were $9.3 million, $7.8 million,
and $6.7 million, respectively.
13. Intangible Assets and Goodwill
Intangible assets and goodwill consist of identifiable intangible assets and goodwill purchased in connection with the
acquisition of our insurance subsidiaries. Intangible assets and goodwill as of both December 31, 2019 and 2018 were as follows:
Goodwill
State licenses
GSE applications
Total intangible assets and goodwill
(In Thousands)
3,244
260
130
3,634
$
$
Expected Lives
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, 2019, 2018 and 2017.
14. Commitments and Contingencies
PMIERs
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs (italicized
terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business,
remedial and financial requirements applicable to approved insurers. The PMIERs financial requirements prescribe a risk-based
methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level
risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV
and other risk features. In general, higher quality loans carry lower charges.
Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which
is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset
amount is a function of the risk profile of an approved insurer's net RIF, assessed on a loan-by-loan basis and considered against
105
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
certain risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for
reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate
gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing, primary
adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net
remaining stop loss for each pool insurance policy.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We
certified to the GSEs by April 15, 2019, that NMIC was in full compliance with the PMIERs as of December 31, 2018. NMIC also
has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs
requirements. We continuously monitor NMIC's compliance with the PMIERs.
Leases
We have two operating lease agreements related to our corporate headquarters and a data center facility for which we
recognized operating ROU assets and lease liabilities of $6.4 million and $7.4 million in "Other assets" and "Other liabilities,"
respectively, on our condensed consolidated balance sheet as of December 31, 2019. As of December 31, 2019, we did not have any
finance leases.
We recognize ROU assets and lease liabilities in connection with the adoption of ASU 2016-02, Leases (Topic 842). ROU
assets and lease liabilities are established based on the estimated present value of lease payments over the relevant lease term. We
estimate a discount rate for each lease based on our estimated incremental borrowing rate at the commencement date of the relevant
lease.
ROU assets obtained in exchange for new operating lease liabilities for the year ended December 31, 2019 were $8.1 million.
The following table provides a summary of our ROU asset and lease liability assumptions as of December 31, 2019:
Weighted-average remaining lease term
Weighted-average discount rate
3.2 years
6.21%
Cash paid on our operating lease liabilities for the year ended December 31, 2019 was $2.5 million. Lease expenses
recognized on our operating lease liabilities for the year ended December 31, 2019 were $2.2 million.
Future payments due under our existing operating leases as of December 31, 2019 are as follows:
Years ending December 31,
(In Thousands)
2020
2021
2022
2023
Total undiscounted lease payments
Less effects of discounting
Present value of lease payments
$
$
2,537
2,609
2,574
462
8,182
(780)
7,402
Lease expense is recorded in underwriting and operating expenses on the consolidated statements of operations. Our existing
operating leases have original terms that range from three to five years. The lease for our corporate headquarters includes an option
to renew for an additional five years at prevailing market rates at time of renewal. We have not included this renewal option in our
calculation of minimum lease payments as it is not reasonably certain to be exercised.
106
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
As of December 31, 2018, the future minimum lease payments as accounted for prior to our adoption of ASU 2016-02,
Leases (Topic 842) were as follows:
Years ending December 31,
2019
2020
2021
2022
2023
Totals
(In Thousands)
2,346
2,417
2,489
2,564
463
10,279
$
$
Lease expense for our corporate headquarters was $2.1 million and $1.5 million for the years ended December 31, 2018
and 2017 respectively before the adoption of ASU 2016-02.
15. Common Stock
As of December 31, 2019, we had 68.4 million outstanding shares of Class A common stock. Holders of our common stock
have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable
to the common stock. Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the
stockholders, and there are no cumulative voting rights. Holders of common shares are entitled to receive dividends ratably if any
are declared.
In March 2018, we completed the sale of 3.7 million shares of common stock and granted the underwriters on the transaction
a 15% overallotment option to purchase additional shares. The overallotment option was exercised in full, resulting in a total of 4.3
million shares of common stock issued. The common stock offering generated total proceeds of approximately $79.2 million, net of
underwriting discounts, commissions and other direct offering expenses.
16. Regulatory Information
Statutory Requirements
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles
(SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations
and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC).
The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining
and reporting the financial condition and results of operations of an insurance company and for determining its solvency under
Wisconsin insurance laws.
NMIC and Re One's combined statutory net gain (loss), statutory surplus, contingency reserve and risk-to-capital (RTC)
ratios as of and for the years ended December 31, 2019, 2018 and 2017 were as follows:
Statutory net gain (loss)
Statutory surplus
Contingency reserve
Risk-to-capital
As of and for the year ended December 31,
2019
2018
(In Thousands)
2017
$
15,233
$
449,602
531,825
15.8:1
(19,784) $
430,785
332,702
13.1:1
(35,946)
371,084
186,641
13.2:1
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. The NAIC's Mortgage Guaranty
Insurance Working Group (the Working Group) was formed to discuss, develop and recommend changes to the solvency and market
practices regulation of mortgage insurers, including changes to the Mortgage Guaranty Insurance Model Act (Model Act). Proposed
amendments to the Model Act include, among other changes, adoption of a risk-based capital model. Following adoption by the
107
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and potentially others that do not,
are expected to enact a portion or all of the revised Model Act, including the loan-level capital model.
As of December 31, 2019, NMIC's performing primary RIF, net of reinsurance, was approximately $15.4 billion and its
RTC ratio was 16.3:1, significantly below applicable limits. As of December 31, 2018, NMIC's performing primary RIF, net of
reinsurance, was approximately $10.0 billion and its RTC ratio was 13.7:1.
Reinsurance
Prior to January 10, 2019, Ohio regulation limited the amount of risk a mortgage insurer was permitted to retain on a single
loan to 25% of the borrower's indebtedness (after giving effect to third-party reinsurance) and, as a result, the portion of such insurance
in excess of 25% was required to be reinsured. Ohio repealed this requirement for future periods beginning January 10, 2019. Several
other states previously imposed similar coverage restrictions and repealed these measures prior to 2018. To comply with these previous
state coverage limits, NMIC and Re One have reinsurance agreements in place under which Re One provides reinsurance to NMIC
on certain insured loans with coverage levels in excess of 25%, after giving effect to third-party reinsurance.
Dividend Restrictions
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that
are incorporated in Delaware. Delaware corporate law provides that dividends are only payable out of a corporation's capital surplus
or, subject to certain limitations, recent net profits. As of December 31, 2019, NMIH's shareholders' equity was approximately $930.4
million.
NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which
they are authorized to operate and the GSEs. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels
(i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts (i.e.,"extraordinary"
dividends), are subject to the Wisconsin OCI's prior approval. Under Wisconsin law, an extraordinary dividend is defined as any
payment or distribution that together with other dividends and distributions made within the preceding 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 dividends to NMIH. NMIC and Re
One have the capacity to pay aggregate ordinary dividends of $16.1 million to NMIH during the 12-month period ending December
31, 2020.
As an approved insurer under PMIERs, NMIC would be subject to prior GSE approval of its ability to pay dividends to
NMIH if it failed to meet the financial requirements prescribed by PMIERs.
108
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
17. Quarterly Financial Data (Unaudited)
Net premiums earned
Net investment income
Net realized investment (losses) gains
Other revenues
Insurance claims and claim expenses
Underwriting and operating expenses(1)
Service expenses(1)
Interest expense
Loss (gain) from change in fair value of warrant
liability
Pre-tax income
Income tax expense
Net income
Income per share:(2)
Basic earnings per share
Diluted earnings per share
Weighted average common shares outstanding -
basic
Weighted average common shares outstanding -
diluted
2019 Quarters
First
Second
Third
Fourth
(In Thousands, except per share data)
2019
Year
$
73,868
$
83,249
$
92,381
$
95,517
$
345,015
7,383
(187)
42
2,743
30,800
49
3,061
5,479
38,974
6,075
32,899
0.49
0.48
$
$
$
7,629
(113)
415
2,923
32,190
353
3,071
1,685
50,958
11,858
39,100
0.58
0.56
$
$
$
7,882
81
1,244
2,572
32,335
909
2,979
(1,139)
63,932
14,169
49,763
0.73
0.69
$
$
$
7,962
264
1,154
4,269
31,296
937
2,974
2,632
62,789
12,594
50,195
0.74
0.71
$
$
$
30,856
45
2,855
12,507
126,621
2,248
12,085
8,657
216,653
44,696
171,957
2.54
2.47
66,692
67,590
67,849
68,140
67,573
68,996
69,590
70,137
70,276
69,721
$
$
$
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
(2) Due to the use of weighted average shares outstanding when calculating EPS , the sum of quarterly per share data may not equal the per share
data for the year.
109
NMI HOLDINGS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2019
Net premiums earned
Net investment income
Net realized investment gains (losses)
Other revenues
Insurance claims and claim expenses
Underwriting and operating expenses(1)
Service expenses(1)
Interest expense
(Gain) loss from change in fair value of warrant
liability
Pre-tax income
Income tax expense
Net income
Income per share:(2)
Basic earnings per share
2018 Quarters
First
Second
Third
Fourth
(In Thousands, except per share data)
2018
Year
$
54,914
$
61,615
$
65,407
$
69,261
$
251,197
4,574
5,735
—
64
1,569
28,346
107
3,419
(420)
26,531
4,176
22,355
0.36
$
$
59
44
643
28,958
62
5,560
(109)
32,339
7,098
25,241
0.38
$
$
6,277
(8)
85
1,099
30,323
56
2,972
5,464
31,847
7,036
24,811
0.38
$
$
6,952
23,538
6
40
2,141
29,339
45
3,028
(3,538)
45,244
9,724
35,520
0.54
$
$
57
233
5,452
116,966
270
14,979
1,397
135,961
28,034
107,927
1.66
$
$
$
Diluted earnings per share
Weighted average common shares outstanding -
basic
Weighted average common shares outstanding -
diluted
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
(2) Due to the use of weighted average shares outstanding when calculating EPS, the sum of quarterly per share data may not equal the per share
67,652
69,013
65,019
62,099
68,616
68,844
65,664
65,697
66,308
65,948
0.46
0.36
0.34
0.37
1.60
$
$
$
$
data for the year.
110
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, 2019,
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, 2019,
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, 2019. In making this assessment, management used
the criteria set forth in the 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, 2019. The effectiveness of our internal control over financial
reporting as of December 31, 2019 has been audited by BDO USA, LLP., an independent registered public accounting firm, as stated
in their report, which appears below.
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.
111
Report of Independent Registered Public Accounting Firm
Shareholders and Board of Directors
NMI Holdings, Inc.
Emeryville, California
Opinion on Internal Control over Financial Reporting
We have audited NMI Holdings, Inc.'s (the "Company's") internal control over financial reporting as of December 31, 2019, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of
the Treadway Commission (the “COSO criteria”). In our opinion, the Company maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
("PCAOB"), the consolidated balance sheets of the Company and subsidiaries at December 31, 2019 and 2018, and 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, 2019 and the related notes and financial statement schedules listed in the accompanying
index and our report dated February 13, 2020 expressed an unqualified opinion thereon.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying "Item 9A, Controls and Procedures."
Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a
public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance
with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit of internal control over financial reporting in accordance with the standards of the PCAOB. Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial
reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in
the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a
material effect on the financial statements.
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.
/s/ BDO USA, LLP
San Francisco, California
February 13, 2020
112
Item 9B. Other Information
None.
113
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, 2019. 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, 2019. 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, 2019. 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, 2019. 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, 2019. Accordingly, we have omitted the information from this Item pursuant
to General Instruction G (3) of Form 10-K.
114
Item 15. Exhibits and Financial Statement Schedules
PART IV
1. Financial Statements — See the "Index to Financial Statements" included in 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 119 of this report for a list of the
financial statement schedules filed as part of this report.
3. Exhibits
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 ~
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 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 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)
115
10.7 ~
10.8 ~
10.9 ~
10.10 ~
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 ~
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)
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)
Credit Agreement, dated May 24, 2018, between NMI Holdings, Inc., the lender party thereto, and JPMorgan Chase
Bank, N.A., as administrative agent (incorporated herein by reference to Exhibit 4.1 to our Form 8-K, filed on May
25, 2018)
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 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. Amended and Restated Change in Control Severance Benefit Plan (incorporated herein by
reference to Exhibit 10.30 to our Form 10-Q, filed on October 30, 2018)
NMI Holdings, Inc. Clawback Policy (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on
February 23, 2017)
Employment Letter by and between NMI Holdings, Inc. and Bradley M. Shuster, effective as of January 1, 2019
(incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on December 28, 2018)
Employment Letter by and between NMI Holdings, Inc. and Claudia J. Merkle, effective as of January 1, 2019
(incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on December 28, 2018)
116
10.30~
10.31~
10.32~
10.33~
10.34~
10.35~
21.1
23.1
31.1
31.2
32.1 #
101
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Independent
Directors (incorporated herein by reference to Exhibit 10.30 to our Form 10-Q, filed on May 2, 2019)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for
Employees (incorporated herein by reference to Exhibit 10.31 to our Form 10-Q, filed on May 2, 2019)
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Agreement for
Employees (incorporated herein by reference to Exhibit 10.32 to our Form 10-Q, filed on May 2, 2019)
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 10.33 to our Form 10-Q, filed
on May 2, 2019)
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 10.34 to our Form 10-Q, filed on May 2,
2019)
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Nonqualified Stock Option
Agreement for Employees (incorporated herein by reference to Exhibit 10.35 to our Form 10-Q, filed on May 2,
2019)
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
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, 2019 formatted in XBRL (eXtensible Business Reporting Language):
(i) Consolidated Balance Sheets as of December 31, 2019 and 2018
(ii) Consolidated Statements of Operations and Comprehensive Income (Loss) for each of the three years in
the period ended December 31, 2019
(iii) Consolidated Statements of Changes in Shareholders' Equity for each of the three years in the period
ended December 31, 2019
(iv) Consolidated Statements of Cash Flows for each of the three years ended December 31, 2019, and
(v) Notes to Consolidated Financial Statements. The instance document does not appear in the Interactive
Data File because XBRL tags are embedded within the Inline XBRL document.
~ 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-K 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.
117
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 14, 2020
By: /s/ Claudia J. Merkle
Name: Claudia J. Merkle
Title: Chief Executive Officer
Signature
Title
Date
/s/ Claudia J. Merkle
Claudia J. Merkle
/s/ Adam S. Pollitzer
Adam S. Pollitzer
/s/ Julie C. Norberg
Julie C. Norberg
/s/ Bradley M. Shuster
Bradley M. Shuster
/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
/s/ Lynn S. McCreary
Lynn S. McCreary
Chief Executive Officer
(Principal Executive Officer)
Chief Financial Officer
(Principal Financial Officer)
February 14, 2020
February 14, 2020
Controller
February 14, 2020
Executive Chairman
February 14, 2020
Director
Director
Director
Director
Director
Director
Director
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
February 14, 2020
INDEX TO FINANCIAL STATEMENT SCHEDULES
Schedule I — Summary of Investments — other than investments in related parties as of December 31, 2019
Schedule II — Financial Information of Registrant as of December 31, 2019
Schedule IV — Reinsurance as of December 31, 2019
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.
119
[This page intentionally left blank]
NMI HOLDINGS, INC.
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 2019
Amortized Cost
Fair Value
(In Thousands)
Amount Reflected on
Balance Sheet
U.S. Treasury securities and obligations of U.S. government
agencies
$
48,203
$
48,929
$
Municipal debt securities
Corporate debt securities
Asset-backed securities
Total bonds
Short-term investments
Total investments
189,530
661,719
170,153
1,069,605
44,174
190,216
684,881
172,642
1,096,668
44,272
48,929
190,216
684,881
172,642
1,096,668
44,272
$
1,113,779
$
1,140,940
$
1,140,940
F-1
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
PARENT COMPANY ONLY
December 31, 2019
December 31, 2018
(In Thousands, except for share data)
Assets
Fixed maturities, available-for-sale, at fair value
$
41,220
$
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
Other assets
Total assets
Liabilities
Term loan
Accounts payable and accrued expenses
Warrant liability, at fair value
Deferred tax liability, net
Other liabilities
Total liabilities
Shareholders' equity
Common stock - class A shares, $0.01 par value; 68,358,074 and 66,318,849
shares issued and outstanding as of December 31, 2019 and December 31, 2018,
respectively (250,000,000 shares authorized)
Additional paid-in capital
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Total shareholders' equity
$
$
$
$
13,431
1,025,286
219
3,332
62,241
26,096
7,188
1,179,013
145,764
24,871
7,641
62,921
7,396
248,593
684
707,003
17,288
205,445
930,420
Total liabilities and shareholders' equity
$
1,179,013
$
51,957
12,345
766,193
216
3,118
41,340
24,766
1,664
901,599
146,757
27,237
7,296
18,809
—
200,099
663
682,181
(14,832)
33,488
701,500
901,599
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
Interest expense
Loss from change in fair value of warrant liability
Total expenses
For the year ended December 31,
2019
2018
(In Thousands)
2017
$
1,124
$
1,145
$
1
1,125
11,714
—
8,657
20,371
5
1,150
21,095
2,227
1,397
24,719
Equity in net income of subsidiaries
226,480
134,127
Income before income taxes
Income tax expense
Net income
207,234
35,277
110,558
2,631
$
171,957
$
107,927
$
308
(128)
—
31,812
32,120
2
(12,129)
(12,255)
95,672
$
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) in accumulated other comprehensive
loss, net of tax expense (benefit) of $82, ($34), and ($49) for each
of the years in the three-year period ended December 31, 2019,
respectively
Reclassification adjustment for losses (gains) included in net loss,
net of tax (benefit) expense of $0, ($1) and $0 for each of the years
in the three-year period ended December 31, 2019, respectively
Equity in other comprehensive income (loss) of subsidiaries
Other comprehensive income (loss), net of tax
Comprehensive income
$
204,077
$
F-3
691
1
692
16,374
—
4,105
20,479
67,146
47,359
25,309
22,050
(90)
(1)
2,519
2,428
24,478
NMI HOLDINGS, INC.
SCHEDULE II - FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
PARENT COMPANY ONLY
For the year ended December 31,
2019
2018
(In Thousands)
2017
$
171,957
$
107,927
$
22,050
Cash flows from operating activities
Net income
Adjustments to reconcile net income to net cash (used in) provided
by operating activities:
Loss from change in fair value of warrant liability
Net realized investment gains
Depreciation and amortization
Amortization of debt discount and debt issuance costs
Deferred income taxes
Share-based compensation expense
Changes in operating assets and liabilities:
Equity in net income of subsidiaries (1)
Accrued investment income
Receivable from affiliates
Prepaid expenses
Other assets
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
Proceeds from issuance of common stock related to public offering, net
of issuance costs
Proceeds from issuance of common stock related to employee
equity plans
Proceeds from issuance of common stock related to warrant exercises
Taxes paid related to net share settlement of equity awards
Proceeds from term loan, net
Repayments of term loan
Payments of debt issuance/modification costs
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash, beginning of period
8,657
(1)
286
1,011
44,030
13,031
(226,480)
(3)
(20,902)
(409)
165
(1,640)
(10,298)
(800)
(104,192)
(2,186)
111,539
5,877
(854)
9,384
1,397
(5)
274
3,390
25,163
12,557
(133,837)
(14)
(18,932)
(1,010)
1,258
5,393
3,561
(70,500)
(134,376)
(12,906)
122,612
22,954
(415)
(72,631)
—
79,165
21,748
—
(18,248)
—
(1,500)
—
2,000
1,086
12,345
12,857
321
(9,722)
149,250
(147,375)
(3,609)
80,887
11,817
528
4,105
(1)
233
1,474
30,876
9,484
(67,239)
(52)
(13,103)
(116)
(1,523)
(3,463)
(17,275)
(300)
(98,255)
(19,884)
114,170
11,451
(1,996)
5,186
—
7,103
183
(8,582)
—
(1,500)
(445)
(3,241)
(15,330)
15,858
528
Cash, cash equivalents and restricted cash, end of period
$
13,431
$
12,345
$
(1) Amount in 2018 includes $0.3 million reduction to retained earnings as of January 1, 2018 as a result of the adoption of ASU 2018-02. For
more information related to this adjustment, See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 11, Income Taxes."
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.
Note B
Our insurance subsidiaries are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in
which they are authorized to operate and the GSEs. Under Wisconsin law, NMIC and Re One may pay dividends up to specified
levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts (i.e.,"extraordinary"
dividends), are subject to the Wisconsin OCI's prior approval. Under Wisconsin law, an extraordinary dividend is defined as any
payment or distribution that together with other dividends and distributions made within the preceding 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 the capacity to pay aggregate ordinary dividends of $16.1 million to NMIH during the 12-month
period ending December 31, 2020, and their remaining net assets are considered restricted. As of December 31, 2019, the amount
of restricted net assets held by our consolidated insurance subsidiaries, which represents our equity investment in those insurance
subsidiaries less their aggregate dividend capacity, totaled $1.0 billion, compared to $0.8 billion as of December 31, 2018.
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,
2019 were $117.1 million, $111.6 million and $101.0 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
Gross Amount
Ceded to Other
Companies
Assumed from
Other Companies
Net Amount
Percentage of
Amount Assumed
to Net
For the years ended December 31,
2019
$
398,303
$
53,288
$
2018
2017
2016
292,064
192,326
115,830
40,867
26,586
5,349
(In thousands)
— $
—
—
—
345,015
251,197
165,740
110,481
—%
—%
—%
—%
F-6