NMI Holdings, Inc. (NMIH), a Delaware corporation incorporated in May 2011 provides private mortgage guaranty insurance (which we refer to as "mortgage insurance" or "MI") through its wholly owned insurance subsidiaries. Our primary insurance subsidiary, National Mortgage Insurance Corporation (NMIC), is a qualified MI provider on loans purchased by the GSEs and is licensed in all 50 states and D.C. to issue MI. Our reinsurance subsidiary, National Mortgage Reinsurance Inc One (Re One), solely provides reinsurance to NMIC on certain loans insured by NMIC, as described in Note 14, Statutory Information - Reinsurance, below. NMIH's wholly owned subsidiary, NMI Services, Inc. (NMIS), began offering outsourced loan review services to mortgage loan originators in the fourth quarter of 2015. Our stock trades on the NASDAQ under the symbol "NMIH."
Top 10, primarily National Accounts, representing approximately 19% of the MI market;
We offer monthly, annual and single premium payment plans. Policies written on a single premium basis are paid through a single, upfront payment, the majority of which is initially deferred as unearned premium and earned over the policy term. For monthly policies, premiums are earned and collected each month as coverage is provided.
The table below shows primary and pool IIF, NIW and premiums written and earned. Single NIW and IIF includes policies written on an aggregated and flow basis.
Primary NIW in 2015 increased 260% from the prior year as a result of an increase in customers with approved master policies as well as an increase in our primary flow business for the year ended December 31, 2015. Single NIW in 2015 increased 216% over the prior year due to greater lender demand for our single premium LPMI products. Single premiums written on an aggregated basis were 20% of total NIW in 2015, down from 46% in the prior year. Monthly NIW in 2015 increased 323% over the prior year as a result of new account activation and continued penetration of existing customer accounts.
NIW, which is the new IIF (aggregate principal amount of the mortgages) that are insured during a period. Many factors affect NIW, including, among others, the volume of low down payment home mortgage originations (which tend to be generated to a greater extent in purchase financings as compared to refinancings) and the competition to provide credit enhancement on those mortgages, which includes primarily competition from the FHA and other private mortgage insurers;
the product mix of our book of business, which includes recurring monthly premiums earned for monthly policies and the recognition of premiums earned from the amortization of our single premiums over the policies' lives. We expect our product mix and the average premium rate we charge to be comparable with the industry in general as our business matures;
We monitor the concentrations of various risk attributes in our insurance portfolio. Generally, insuring loans made to borrowers with higher credit scores tends to result in a lower frequency of claims than with loans made to borrowers with lower credit scores. As of December 31, 2015, our primary IIF and RIF were made up of approximately 64.3% and 64.1%, respectively, of loans to borrowers who had credit scores at or above 740. Our primary weighted average FICO for NIW in the year ended December 31, 2015 was 752. Additionally, as of December 31, 2015, all loans in our insurance portfolio were full documentation loans, and approximately 4% of our RIF was on loans above 95% LTV. Our primary weighted average LTV for NIW in the year ended December 31, 2015 was 91%.
The table below reflects a summary of our primary IIF and RIF by book year.
The tables below reflect our total primary IIF, RIF and average loan size, by FICO.
The table below reflects the percentage of our primary RIF by loan type.
As of December 31, 2015 and 2014, 100% of our pool RIF was comprised of insurance on fixed rate mortgages.
Claims incurred is the current expense that is booked within a particular period to reflect actual and estimated claim payments that we believe will ultimately be made as a result of insured loans that are in default. We do not recognize an estimate of claim expense for loans that are not in default. As of December 31, 2015, we have established reserves for insurance claims of $679 thousand for our thirty-six primary loans in default, compared to a reserve of $83 thousand for six primary loans in default as of December 31, 2014. We have not established any pool reserves for claims or IBNR to date. For additional discussion of our reserves, see, Item 8, "Financial Statements and Supplementary Data - Notes to Condensed Consolidated Financial Statements - Note 6. Reserves for Insurance Claims and Claims Expenses."
we expect that the frequency of claims on our initial primary books of business should be between 2% and 3% of mortgages insured over the life of the book. For claims that we may receive, we expect the severity of the claim to be between 85% and 95% of the coverage amount. Based on these expectations, we estimate that the loss ratio over the life of each book will be between 20% and 25% of earned premiums. Until our portfolio matures, we expect our reported loss ratio will be less than 10%, due to loss development being generally insignificant in the early years of a loan cycle combined with strong growth in earned premiums on a year-over-year basis;
under the pool insurance agreement between NMIC and Fannie Mae, NMIC is responsible for claims only to the extent they exceed a deductible; and
We developed our estimates of the expected frequency and severity of claims based on statutory filings by many of our competitors, which contain historical book year performance, as well as an industry dataset which consists of nearly 150 million mortgages and 80 data fields per mortgage, gathered over the past 17 years. As state-regulated entities, mortgage insurers are required to file actuarial justifications for premium rate changes in many states, many of which are publicly available and include historical information on claim frequency and severity. Historical performance data from similar underwriting, house price, and interest rate periods were compared to today to determine a range of expected performance. To date, our loss experience is developing at a slower pace than historical trends have shown, primarily as a result of the relatively strong economy, which has led to a more favorable housing market and lower interest rates.
The GSEs are the principal purchasers of mortgages insured by MI companies. 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.
Under the PMIERs financial requirements, Approved Insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an Approved Insurer’s net RIF, calculated by applying on a loan-by-loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF. The risk-based required asset amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs financial requirements also increase the amount of available assets that must be held by an Approved Insurer for loans originated on or after January 1, 2016 that are insured under LPMI policies not subject to automatic termination under the HOPA.
As of December 31, 2015, NMIC's primary RIF was approximately $3.6 billion representing insurance on a total of 63,948 policies in force, and pool RIF was approximately $93.1 million, representing insurance on a total of 18,955 loans. Based on NMIC's reported total statutory capital of $395 million at December 31, 2015, NMIC's RTC ratio was 8.4:1, significantly below the regulatory maximum RTC thresholds. Similarly, Re One had total statutory capital of $29 million at December 31, 2015, with a RTC ratio of 12.6:1. As of December 31, 2015, under PMIERs financial requirements, NMIC's minimum required assets were approximately $249.8 million and its available assets were approximately $431.4 million.
In November 2015, Moody's Investors Service (Moody's) assigned a financial strength rating of "Ba2" to NMIC. Also at that time, Moody's assigned a B2 rating to the $150 million Term Loan held by NMIH. Moody's outlook for both companies is "stable."
The MI industry is highly competitive and currently consists of seven private mortgage insurers, including NMIC, as well as governmental agencies like the FHA and the VA. See Part I, Item 1, "Business - Sales and Marketing and Competition - Competition."
Our increases in unearned premiums year-over-year for the periods presented resulted from consecutive annual increases in single premiums written in 2014 and 2015. Net premiums earned in 2014 and 2015 also increased from the prior years, as a result of increases in new business, continued earnings from business written in prior years, and early cancellations related to single premium policies.
Given our growth during 2015, we believe that a quarter-over-quarter comparison of net premiums written is more meaningful than comparing net premiums written year-over-year. For the quarter ended December 31, 2015, we had net premiums written of $45.6 million and net premiums earned of $16.9 million, compared to net premiums written of $35.4 million and net premiums earned of $12.8 million for the quarter ended September 30, 2015. For the quarter ended December 31, 2015, we had net monthly premiums written and earned of $9.6 million compared to $7.3 million for the third quarter of 2015.
We began investing our cash during the first quarter of 2013 and continued to invest and re-balance our portfolio in the second and third quarters of 2013. As a result, our net investment income was lower for the year ended December 31, 2013 compared to the years ended December 31, 2015 and 2014. Additionally, net investment income was higher for the year ended December 31, 2015 as a result of an increase in our consolidated securities portfolio, from $336.5 million at December 31, 2014 to $559.2 million at December 31, 2015. Net realized investment gains also increased for the year ended December 31, 2015 as a result of the re-balancing of our portfolio among a mix of investment categories.
Employee compensation represents the majority of our operating expense, which includes both cash and share-based compensation. Our underwriting and operating expenses grew year-over-year primarily as the result of hiring new employees and expanding our operations and sales activities. Our headcount grew from 189 at December 31, 2014 to 243 at December 31, 2015. Underwriting and operating expenses also include costs related to policy acquisition, technology, professional services and facilities.
We incurred interest expense of $2.1 million for the year ended December 31, 2015 related to the Term Loan entered into during the fourth quarter of 2015.
As of December 31, 2015, we had approximately $617 million in cash and investments of which $100.2 million was held at NMIH. During 2015, NMIH received $148.5 million in proceeds, net of debt discount, from drawing down on the $150 million Term Loan. We contributed a substantial portion of the proceeds to our insurance subsidiaries, which they used to purchase securities to support growth in RIF and meet the final PMIERs requirements, effective December 31, 2015. We were cash flow positive from operating activities in 2015, however our cash decreased from year-end 2014 as a result of investment purchases.
Our deferred policy acquisition asset was $17.5 million as of December 31, 2015 compared to $3.0 million at December 31, 2014. The increase was driven by the increase in deferrable costs associated with our increase in premiums written year over year from $34.0 million for the year ended December 31, 2014 to $114.2 million for the year ended December 31, 2015.
As a result of NODs received in 2015, our reserves for insurance claims and claims expenses increased to $679 thousand at December 31, 2015 compared to $83 thousand at December 31, 2014. See, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reserves for Insurance Claims and Claims Expenses."
Our warrant liability decreased to $1.5 million at December 31, 2015 from $3.4 million at December 31, 2014, as a result of a decline in our stock price during 2015.
Cash used in investing activities for the year ended December 31, 2015 was $230.2 million, compared to cash provided in the same period in 2014 of $68.1 million This was a result of security acquisitions during 2015, primarily from the proceeds of the Loan.
Cash flow provided from financing activities totaled $143.0 million for the year ended December 31, 2015, due primarily to the proceeds, net of debt discount, of $148.5 million from the Term Loan. The cash inflows from the Term Loan were partially offset by payments of debt issuance costs and taxes paid related to the net share settlement of equity awards.
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 and reimbursable expenses of its insurance subsidiaries; (ii) capital support for its insurance subsidiaries; (iii) potential payments to the Internal Revenue Service (IRS); (iv) the payment of dividends, if any, on its common stock; and (iv) the payment of principal and interest related to the Term Loan. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as NMIH, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or (subject to certain limitations) recent net profits. As of December 31, 2015, NMIH's shareholders' equity was approximately $403 million.
NMIH has entered into expense-sharing agreements with its insurance subsidiaries which have been approved by the Wisconsin OCI, but such approval may be changed or revoked at any time. NMIC's ability to pay dividends to NMIH is subject to insurance regulations requiring insurance department approval. In general, dividends in excess of prescribed limits are deemed "extraordinary" and require insurance regulatory approval. Since inception, NMIC has not paid any dividends to NMIH. As NMIC had a statutory net loss for the year ended December 31, 2014, NMIC cannot pay any dividends to NMIH through December 31,
Our net investment income for the year ended December 31, 2015 was $7.2 million compared to $5.6 million for the year ended December 31, 2014. As of December 31, 2015, our portfolio conforms with our investment guidelines. The principal factors affecting our investment income include the size and credit rating of our portfolio and its net yield. As measured by amortized cost (which excludes changes in fair market value, such as those resulting from changes in interest rates), the size of our investment portfolio is mainly a function of capital raised, cash generated from (or used in) operations, such as net premiums received, and investment earnings.
Net realized gains for the year ended December 31, 2015 were offset by an other-than-temporary impairment (OTTI) loss of $88.6 thousand due to a planned sales transaction that we expect will result in a loss in February 2016.
As of December 31, 2015, the Company had a federal net operating loss carryforward of $139.4 million, which expires from 2029 to 2035, and state net operating loss carryforwards of $47.0 million, which primarily expires from 2031 to 2035. Section 382 of the Internal Revenue Code (Section 382) imposes annual limitations on a corporation's ability to utilize its net operating losses (NOLs) if it experiences an “ownership change.” As a result of the acquisition of our insurance subsidiaries, $7.3 million of NOLs are subject to annual limitations of $0.8 million through 2016, then $0.3 million through 2029. If the Company were to experience another “ownership change,” further limitations would apply.
A tax effected valuation allowance of $66.4 million and $53.7 million was recorded at December 31, 2015 and December 31, 2014, respectively, to reflect the amount of the deferred taxes that may not be realized. As the Company has limited history, management has not yet concluded that it is more-likely-than-not that the results of future operations will generate sufficient taxable income. If we conclude the taxable income will be sufficient to release the valuation allowance, we would recognize an income tax benefit associated primarily with the carry forward of federal net operating losses and future share-based compensation tax deductions.
We had no off-balance sheet arrangements at December 31, 2015. Contractual obligations at December 31, 2015 are summarized in the table that follows.
In the MI industry, a "book" is a group of loans that an MI company insures in a particular period, normally a calendar year. We set premiums at the time a policy is issued based on our expectations regarding likely performance over the term of coverage. The policies we write are guaranteed renewable contracts at the policyholder's option on a single, annual or monthly premium basis. We generally have no ability to re-underwrite or reprice these contracts. Premiums written on a single premium basis and an annual premium basis are initially deferred as unearned premium reserve and earned over the policy term commencing in the month coverage begins. Premiums written on policies covering more than one year are amortized over the policy life in accordance with the expiration of risk which is the anticipated claim payment pattern based on industry experience. Premiums written on annual policies are earned on a monthly pro rata basis. Premiums written on monthly policies are earned as coverage is provided. Premiums written on pool transactions are earned over the period that coverage is provided. Upon cancellation of a policy, all premium that is non-refundable is immediately earned. Any refundable premium is returned to the policyholder. Premiums returned to policyholders are recorded as a reduction of written and earned premiums in the current period, which affects premiums written and earned in those periods.
We wrote our first MI policy in April 2013. We do not anticipate a material level of claims (relative to written premiums or stockholder equity) in the first few years of our operations. Our practice is to establish claim reserves only for loans in default. We do not consider a loan to be in default for claim reserve purposes until we receive notice from the servicer that a borrower has failed to make two consecutive regularly scheduled payments and is at least sixty days in default. Default is defined in our Master Policy as the failure by a borrower to pay when due an amount equal to the scheduled mortgage payment due under the terms of a loan or the failure by a borrower to pay all amounts due under a loan after the exercise of the due on sale clause of such loan. In addition to reserves on reported defaults, we establish IBNR reserves for estimated claims incurred on loans that have been in default for at least sixty days that have not yet been reported to us by the servicers.
Consistent with industry accounting practices, for purposes of establishing claim reserves, we adhere to the general claim reserving principles contained in ASC Topic 944, Financial Services - Insurance (ASC 944), even though that standard expressly excludes mortgage insurance from its guidance. Like other mortgage insurers, we will not establish claim reserves for anticipated future claims on insured loans that are not currently in default.
The following describes the valuation techniques used by us to determine the fair value of financial instruments held as of December 31, 2015 and December 31, 2014:
Each fiscal quarter we perform reviews of our investments in order 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 either it is intended that the security be sold, or it is more likely than not that we would be required to sell the security before recovery or 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 may consider several factors including, but not limited to:
failure of the issuer to make scheduled interest or principal payments;
The estimated grant date fair values of the stock options granted during 2015 and 2014 were calculated using the Black-Scholes valuation model based on the following assumptions:
Risk Free Interest Rate - is the U.S. Treasury rate for the date of the grant having a term approximating the expected life of the option.
We have audited the accompanying consolidated balance sheets of NMI Holdings, Inc. as of December 31, 2015 and 2014, and the related consolidated statements of net loss and comprehensive loss, changes in shareholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2015. In connection with our audits of the financial statements, we have also audited the financial statement schedules listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
FOR EACH OF THE YEARS IN THE THREE-YEAR PERIOD ENDED DECEMBER 31, 2015
NMIH is a Delaware corporation, formed in May 2011, to provide mortgage insurance through its wholly owned insurance subsidiaries, NMIC and Re One. In April 2012, we completed a private placement of our securities, through which we offered and sold an aggregate of 55,000,000 of our Class A common shares resulting in net proceeds of approximately $510 million (the Private Placement), and we completed the acquisition of our insurance subsidiaries for $8.5 million in cash, common stock and warrants, plus the assumption of $1.3 million in liabilities. In November 2013, we completed an initial public offering of 2.4 million shares of our common stock, and our common stock began trading on the NASDAQ exchange on November 8, 2013, under the symbol "NMIH." For a further discussion, see "Note 13, Common Stock Offerings."
In the mortgage insurance industry, a "book" is a group of loans that an MI company insures in a particular period, normally a calendar year. We set premiums at the time a policy is issued based on our expectations regarding likely performance over the term of coverage. The policies we issue are guaranteed renewable contracts at the policyholder's option. Premiums may be paid to us on a single, annual or monthly basis. Premiums written on a single premium basis and an annual premium basis are initially deferred as unearned premium reserve and earned over the policy term commencing in the month coverage is effective. Premiums written on policies covering more than one year are amortized over the policy life in accordance with the expiration of risk, which is the anticipated claim payment pattern based on industry experience. Premiums written on annual policies are earned on a monthly pro rata basis. Premiums written on monthly policies are earned as coverage is provided. Premiums written on pool transactions are earned over the period that coverage is provided. Upon cancellation of a policy, all premium that is non-refundable is immediately earned and any refundable premium is returned to the policyholder. Premiums returned to policyholders are recorded as a reduction of written and earned premiums in the current period. The actual return of premium for all periods affects premiums written and earned in those periods.
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as deferred policy acquisition costs (DAC). For each book year of business, these costs are amortized to expense in relation to the anticipated recognition of premiums. Total amortization of DAC each of the years in the three-year period ended December 31, 2015 was $2.8 million, $0.4 million and $0.7 thousand, respectively.
We consider whether a premium deficiency exists at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and anticipated investment income. We have determined that no premium deficiency reserves were necessary for each of the years in the three-year period ended December 31, 2015.
We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation. This 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 payments include RSUs and stock option grants under the 2012 Stock Incentive Plan and the NMIH 2014 Omnibus Incentive Plan. We determine the fair value of issued stock option grants using an option pricing model, which takes into account various assumptions that are subjective. Key assumptions used in the stock option valuation include the expected term of the equity award, taking into account the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk free interest rate for the expected term of the award. RSU grants to employees contain a market condition and/or service condition. The fair value of RSU grants to employees with a market condition is determined based on a Monte Carlo simulation model at the date of grant. RSU grants to employees with a service condition and RSU grants to non-employee directors are valued at our stock price on the date of grant less the present value of anticipated dividends.
Basic net loss per share is based on the weighted-average number of common shares outstanding, while diluted net loss per share is based on the weighted-average number of common shares outstanding and common stock equivalents that would be issuable upon the exercise of stock options, other stock-based compensation arrangements, and the dilutive effect of outstanding warrants. As a result of our net losses for each of the years in the three-year period ended December 31, 2015, 6,266,905 shares, 5,839,909 shares, and 5,303,394 shares of our common stock equivalents issued under stock-based compensation arrangements and warrants, respectively, were not included in the calculation of diluted net loss per share as of such dates because they were anti-dilutive.
Certain costs associated with the development of internal-use software are capitalized. Software and equipment are stated at cost, less accumulated amortization and depreciation. Once the software is ready for its intended use, amortization and depreciation are calculated using the straight-line method over the estimated useful lives of the respective assets ranging typically from 3 to 7 years, unless factors indicate a shorter useful life. Amortization of software and depreciation of equipment commences at the beginning of the month following our placement of the assets into use. For further detail, see "Note 10, Software and Equipment."
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.
In April 2015 , the FASB issued Accounting Standard Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Cost (Subtopic 835-30). This update is intended to simplify the presentation of debt issuance costs. In accordance with the new standard, debt issuance costs are presented as a direct deduction from long-term debt. The amended guidance is effective for fiscal years, and interim periods within those fiscal years, beginning December 15, 2015, with early adoption permitted. The Company has elected to early adopt ASU 2015-03 beginning with the year ended December 31, 2015. Application of this standard eliminated the presentation of a deferred cost (asset) and instead required debt issuance costs be presented as a direct deduction from total debt.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, ASU 2015-14 deferred the provisions of ASU 2014-09 to be effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.
We have considered subsequent events through the date of this filing.
Gross realized gains were $1.5 million. $0.7 million, and $0.6 million for each of the years in the three-year period ended December 31, 2015, respectively; gross realized losses were $0.7 million , $0.5 million and $0.4 million for the same periods. The first-in, first-out method was followed in determining the cost of investments sold.
As of December 31, 2015 and December 31, 2014, there were approximately $7.0 million of cash and investments in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
For the year ended December 31, 2015, we recognized an OTTI loss in earnings of $88.6 thousand due to a planned sales transaction that we expect will result in a loss in February 2016.
Level 2 - Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities. Financial assets utilizing Level 2 inputs include certain obligations of U.S. government agencies, municipal and corporate debt securities and asset-backed securities; and
The following is a list of those assets and liabilities that are measured at fair value by hierarchy level as of December 31, 2015 and December 31, 2014:
yield of 0.00%. The change in fair value is primarily attributable to a decline in the price of our common stock from December 31, 2014 to December 31, 2015.
There were no transfers in or out of Level 3 of the fair value hierarchy during the year ended December 31, 2015.
On November 10, 2015, we entered into the Credit Agreement to obtain a three-year senior secured term loan B (the Term Loan) for $150 million. The Term Loan bears interest at the Eurodollar based rate (1% floor) plus an annual margin rate of 7.5% (8.5% for 2015), payable quarterly. Quarterly principal payments of $375 thousand are also required. The outstanding balance as of December 31, 2015 was $149.6 million.
Debt issuance costs totaling $4.4 million and a 1% debt discount are being amortized to interest expense, using the effective interest method, over the contractual life of the Term Loan. Effective interest rate for the Term Loan includes interest, amortization of issuance cost and the discount. For the year ended December 31, 2015, the Company recorded $2.1 million of interest expense, including amortization of the issuance cost and discount.
We establish claim reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Our method, consistent with industry practice, is to establish claim reserves only for loans in default. Our claim reserves also include amounts for IBNR. As of December 31, 2015, we have established reserves for insurance claims of $679 thousand for thirty-six primary loans in default, compared to a reserve of $83 thousand for the year ended December 31, 2014. We paid two claims totaling $54 thousand for the year ended December 31, 2015.
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claims expenses:
We issued 992,000 warrants in connection with our Private Placement. Each warrant gave 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.
Upon exercise of these warrants, the amounts will be treated as additional paid-in capital. During the first quarter of 2014, 7,790 warrants were exercised and we issued 1,115 Class A common shares via a cashless exercise. Upon exercise, we reclassified the fair value of the warrants from warrant liability to additional paid in capital and recognized a gain of approximately $37 thousand. No other warrants were exercised during 2014 or 2015.
Dividend Yield - is calculated by dividing the expected annual dividend by our stock price at the valuation date.
Expected Price Volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate. At the time of grants, our common shares trading history was not sufficient to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for such estimate, we used historical volatilities of a set of comparable companies in the industry in which we operate.
A summary of RSU activity in the plan during the years ended December 31, 2015 and December 31, 2014 is as follows:
There were no RSUs granted in 2015, 2014 or 2013 that were subject to a market condition.
Beginning on January 1, 2014, we offered to our employees a 401(k) Savings Plan (401(k) Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, we match up to 100% of eligible employees' pre-tax contributions up to 4% of eligible compensation. We contributed approximately $1.2 million for the year ended December 31, 2015.
In May 2015, we granted 12,062 phantom stock units to two independent directors with a grant date fair market value of $100 thousand. Each phantom unit entitles the participants to a cash award equal to the fair market value of the unit based on the price of our stock on the first anniversary of the grant date. We have accounted for these units in accordance with ASC 718-30, Stock Compensation Awards Classified as Liabilities. The fair value of the awards is remeasured at each reporting period until settled. At December 31, 2015, based on a closing share price of $6.77, we recognized $50 thousand as share-based compensation expense with a corresponding liability which is recorded in accounts payable and accrued expenses in our Consolidated Balance Sheets as of December 31, 2015.
Reconciliation of the federal statutory income tax (benefit) rate to the effective income tax (benefit) rate is as follows:
Following is a reconciliation of our net deferred income tax asset (liability) as of December 31, 2015 and December 31, 2014:
As we have limited history to provide a basis for reliable future net income projections, a valuation allowance of $66.4 million and $53.7 million was recorded at December 31, 2015 and December 31, 2014, respectively, to reflect the amount of the deferred tax asset that may not be realized.
Software and equipment consist largely of capitalized software developed to support our MI operations. Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2015 and December 31, 2014, consists of the following:
Amortization and depreciation expense for software, equipment, and leasehold improvements for the years ended December 31, 2015 and 2014 was $3.2 million and $5.8 million, respectively.
In the second quarter of 2015, the FHFA published final updated PMIERs that went into effect on December 31, 2015 (Effective Date) for existing, GSE-approved private mortgage insurers, i.e., Approved Insurers. (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. Under the PMIERs financial requirements, Approved Insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an Approved Insurer’s net RIF, calculated by applying on a loan-by-loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF. The risk-based required asset amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs financial requirements also increase the amount of available assets that must be held by an Approved Insurer for loans originated on or after January 1, 2016 that are insured under LPMI policies not subject to automatic termination under the HOPA.
As of December 31, 2015, management expects that future minimum lease payments under this lease will be as follows:
We incurred rent expense related to this lease of $1.5 million and $1.6 million for the years ended December 31, 2015 and 2014, respectively.
NMIC and Re One's combined statutory net loss, statutory surplus, contingency reserve and RTC ratios for each of the years in the three-year period ended December 31, 2015 were as follows:
As of December 31, 2015, NMIC had 63,948 policies in force totaling approximately $3.3 billion in total RIF with a RTC ratio of 8.4:1, significantly below the PMIERs and state financial requirements. As of December 31, 2014, NMIC had 14,603 policies in force totaling approximately $801.4 million of primary RIF, resulting in an RTC ratio of 3.5:1.
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware, such as NMIH. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or (subject to certain limitations) recent net profits. As of December 31, 2015, NMIH's shareholders' equity was approximately $403 million. NMIH's total assets, excluding investment and intercompany receivables for NMIC, Re One, and NMIS, were approximately $117 million at December 31, 2015, and were unencumbered by any debt or other subsidiary commitments or obligations. The insurance subsidiaries are both mono-line mortgage insurance companies, and the assets of each are dedicated only to the support of direct risk and obligations of each mortgage insurance entity. NMIC only writes direct mortgage insurance business and assumes no business from any other entity. Re One only assumes business from NMIC to allow NMIC to comply with statutory risk requirements. Neither NMIC nor Re One have subsidiaries, and therefore do not have subsidiary risks and obligations that compete for its resources.
The ability of our insurance subsidiaries to pay dividends to NMIH is limited by insurance laws of the State of Wisconsin and certain other states. Wisconsin law provides that an insurance company may pay out "ordinary dividends" without the prior approval of the Wisconsin OCI in an amount, when added to other shareholder distributions made in the prior 12 months, not to exceed the lesser of (a) 10% of the insurer's surplus as regards to policyholders as of the prior December 31 or (b) its net income (excluding realized capital gains) for the twelve month period ending December 31 of the immediately preceding calendar year. In determining net income, an insurer may carry forward net income from the previous calendar years that has not already been paid out as a dividend. Dividends that exceed this amount are "extraordinary dividends," which require prior approval of the Wisconsin OCI. Since inception, NMIC has not paid any dividends to NMIH.
As of December 31, 2015, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately $441 million. The amount of restricted assets used to determine any dividend to NMIH, once all restrictions expire, would be computed under SAP which may differ from the amount of restricted assets computed under GAAP. Since inception, NMIC has not paid any dividends to NMIH. As NMIC had a statutory net loss for the year ended December 31, 2014, NMIC cannot pay any dividends to NMIH through December 31, 2015, without the prior approval of the Wisconsin OCI.