We were incorporated in May 2011 and, through our subsidiaries, we provide private MI. Our primary insurance subsidiary, NMIC, is a qualified MI provider on loans purchased by the GSEs and is licensed in all 50 states and D.C. to issue mortgage insurance. Our reinsurance subsidiary, Re One, solely provides reinsurance to NMIC on certain loans insured by NMIC, as described in Note 13, Statutory Information, below. Our stock trades on the NASDAQ under the symbol "NMIH."
The MI industry is a highly regulated, capital intensive industry. Other challenges to entry include the need for a customer-integrated operating platform capable of issuing and servicing mortgage insurance policies, the competitive positions and established customer relationships of existing mortgage insurance providers, and in order to conduct MI business nationwide, the need to obtain and maintain insurance licenses in all 50 states and D.C. Additionally, the resource commitment required by mortgage originators, and larger lenders in particular, to connect to a new mortgage insurance platform, such as ours, is significant.
NMIC currently differentiates itself from its competitors by underwriting all loans it insures either prior to or post close, which permits us to provide loan originators and aggregators with 12-month rescission relief protection, thereby giving our customers consistent confidence of coverage. We have the ability to write new business without the burden of risky legacy exposures and believe our current capital supports our current business writing strategy, while staying within the regulatory guidelines imposed by state insurance departments and the GSEs.
Since we began writing MI in April 2013, we have become a fully operational MI company, with $3.4 billion of primary IIF and $4.7 billion of pool IIF as of December 31, 2014 compared to $161.7 million of primary IIF and $5.1 billion of pool IIF as of December 31, 2013. As of December 31, 2014, the Company had primary RIF of $801.6 million compared to primary RIF of $36.5 million as of December 31, 2013. Pool RIF as of December 31, 2014 and December 31, 2013 was $93.1 million.
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including customer development, new business writings, the composition of our insurance portfolio, and other factors that we expect to impact our results.
Our ability to make progress attaining and retaining customers is primarily dependent on the following factors:
Continue the progress made to date connecting with leading third-party loan origination systems utilized by Regional Accounts. The Regional Accounts who originate loans using these third-party loan origination systems will be able to automatically select us as an MI provider within those systems.
We had 735 master policy holders in 2014, compared to 305 in 2013. Of those master policy holders, 37.7% were delivering business in 2014, compared to 7.2% delivering business in 2013. The table below shows the number of our customers generating NIW within each of the last seven completed fiscal quarters and during the year ended December 31, 2014.
Effective September 1, 2013, NMIC entered into an agreement with Fannie Mae, pursuant to which NMIC initially insured approximately 22,000 loans with IIF of $5.2 billion (as of September 1, 2013). We receive monthly premiums from Fannie Mae for this transaction, which are recorded as written and earned in the month received. The agreement has a term of ten years from September 1, 2013, the coverage effective date.
the amount of capital required in our January 2013 approval letter from Fannie Mae ($150 million); or
5.6% of the RIF under the pool transaction, based upon loan level coverage, before application of the aggregate stop loss and deductible, or;
the aggregate stop loss amount, net of any deductible, for the pool transaction.
We currently underwrite every loan we insure, including loans submitted through our delegated channel. Until recently, we believe the prevailing standard of other companies in the MI industry has been to conduct partial quality assurance testing of delegated underwritten loans. Our pricing policies also help mitigate credit risk in the form of higher premium rates for loan features or borrower characteristics associated with historically higher default rates.
The table below shows primary and pool IIF, NIW and premiums written and earned.
The tables below show the weighted average FICO and the weighted average LTV, by policy type, for the quarter in which the policy was originated.
The table below reflects our total IIF and RIF by FICO as of December 31, 2014.
The following table reflects our RIF by LTV ratio. We calculate the LTV ratio of a loan as a percentage of the original loan amount to the original value of the property securing the loan. In general, the lower the LTV ratio the lower the likelihood of a default, and for loans that default, a lower LTV ratio generally results in a lower severity for any claim, as the borrower has more equity in the property.
The following tables show the distribution by state of our IIF and RIF, for both primary and pool insurance. As of December 31, 2014, our IIF and RIF is more heavily concentrated in California, primarily as a result of the acquisition of new customers. With these new customers, we have placed our MI on a higher proportion of mortgage loans originated in California. With the broadening of our customer base, the concentration of primary IIF and RIF in California as of the end of the second quarter has declined from 21.3% for both, to 16.6% and 16.3%, respectively, as of December 31, 2014. The distribution of risk across the states as of December 31, 2014 is not necessarily representative of the geographic distribution we expect in the future. With our expectations that we will add a significant number of new customers as we grow and receive greater allocations of business from our existing customers, we believe we will have more flexibility to manage our state concentration levels.
For the year ended December 31, 2014, we had net premiums written of $34.0 million and premiums earned of $13.4 million, compared to net premiums written of $3.5 million and premiums earned of $2.1 million for the year ended December 31, 2013. In our 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. We expect the average premium rate we charge on our monthly primary flow MI policies to be comparable with the rates charged by the industry in general.
premium rates, which are based on the risk characteristics of the loans insured, the percentage of coverage on the loans, competition from other mortgage insurers and general industry conditions; and
premiums ceded under reinsurance agreements. The only reinsurance agreements we currently have in place are between NMIC and Re One and they are for the sole purpose of allowing NMIC to comply with certain statutory requirements regarding the amount of risk an MI company may retain on any single MI policy.
In general, the majority of any underwriting profit (i.e., the earned premium revenue minus claims and expenses, excluding investment income) that a book generates occurs in the early years of the book, with the largest portion of the underwriting profit for that book realized in the first year. The earnings we record and the cash flow we receive varies based on the type of MI product and premium plan our customers select. We offer monthly, annual and single premium payment plans. The level of competition within the private MI industry has been intense and is not expected to diminish. Lenders are requesting with greater frequency discounts from mortgage insurers, particularly with respect to LPMI single premium policies. If the percentage of our new business represented by single premium policies continues to remain at elevated levels or if we reduce prices in response to future price competition, it may decrease our premium yields.
We received our first NOD within our primary insurance book in the second quarter of 2014. For the year ended December 31, 2013, we had no primary claim or IBNR reserves. At December 31, 2014, we had established loss reserves of $83 thousand for our primary loans in default. Due to the size of the pool transaction deductible ($10.3 million), the low level of NODs reported through December 31, 2014 and the high quality of the loans (all loans are less than 80% LTV), we have not established any pool reserves for claims or IBNR for the years ended December 31, 2014 and December 31, 2013. See, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Reserves for Insurance Claims and Claims Expenses."
the loan-to-value ratio, with higher average loan-to-value ratios tending to increase claims incurred;
the distribution of claims over the life of a book. Historically, the first two to three years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining. Factors, such as persistency of the book, the condition of the economy, including unemployment and housing prices, and others, can affect this pattern. See "Mortgage Insurance Earnings and Cash Flow Cycle," above.
we currently underwrite every loan and we believe that this will lower our incurred claims;
under the pool insurance agreement between NMIC and Fannie Mae, as discussed above in this report, NMIC is responsible for claims only to the extent they exceed a deductible.
In addition to the requirement that NMIC adhere to certain minimum capital requirements, as described in "Note 13, Statutory Information," NMIC is also subject to state regulatory minimum capital requirements based on its insured RIF. While formulations of this minimum capital may vary in each jurisdiction, the most common measure allows for a maximum permitted risk-to-capital ratio of 25 to 1.
As of December 31, 2014, NMIC's primary RIF was approximately $801.6 million representing insurance on a total of 14,603 policies in force, and pool risk-in-force was approximately $93.1 million, representing insurance on a total of approximately 21,000 loans. Based on NMIC's reported total statutory capital of $231 million at December 31, 2014, NMIC's risk-to-capital ratio was 3.5:1, significantly below the contractual and regulatory maximum risk-to-capital thresholds. Similarly, Re One had total statutory capital of $15 million at December 31, 2014, with a risk-to-capital ratio of 6.2:1.
As our insurance writings grow and our RIF increases, our risk-to-capital ratio will increase and NMIC's risk-to-capital metrics will become more important to an evaluation of its compliance with all of the capital requirements to which it is subject. The GSEs and state insurance regulators are currently examining their respective capital requirements to determine whether in light of the recent financial crisis, changes are needed to more accurately assess mortgage insurers' ability to withstand stressful economic conditions. As discussed below under "- Proposed PMIERs," the FHFA recently announced updated GSE mortgage insurer eligibility requirements that include new financial requirements. These new financial requirements prescribe a risk-based capital methodology whereby the amount of capital 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, LTV and other risk features. Based on a loan's risk profile, a capital charge is calculated, whereas the current state and GSE-imposed risk-to-capital ratio requirements do not distinguish between the type or quality of the risk. As a result, we believe the proposed PMIERs provide a more sound formulation of capital that needs to be held to support an MI's current risk-in-force. We believe NMIC will fully comply with the new financial requirements within the transition time period. For more discussion, see "- Proposed PMIERs," below.
Under the proposed PMIER financial requirements, an approved insurer 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) the total risk-based required asset amount. (Italicized terms have the same meaning that such terms have in the draft PMIERs, as described in this report.) The total risk-based required asset amount for an approved insurer is a function of its direct risk-in-force (net risk-in-force for certain qualifying reinsurance arrangements) and the risk profile of all loans it has insured as of any determination date. It is calculated by applying the applicable risk-based required asset factor to the risk-in-force under each insured loan and summing over all loans, subject to a floor equal to 5.6% of total risk-in-force. The proposed risk-based required asset factors, which are set forth in tables contained in the draft PMIERs, vary over several risk dimensions including loan-to-value, FICO credit score, vintage, and loan status, i.e., performing or non-performing. In addition, there are surcharges for some non-GSE eligible performing loans that have certain risk characteristics, such as those underwritten with less than full documentation, non-owner occupied, non-fully amortizing or those in which the debt to income ratio exceeds 43%.
As of December 31, 2014, on a consolidated basis, the Company has available assets as defined by the draft PMIERs of approximately $417 million, but only $253 million of the available assets are at NMIC, including the available assets of Re One. Therefore, if the draft PMIERs had taken effect as of December 31, 2014, NMIH would have needed to contribute substantially all of its capital to NMIC to be in compliance. Even if NMIH had contributed substantially all of its capital to NMIC, it is likely that NMIC's available assets would fall below $400 million on the Effective Date. Therefore, assuming the PMIERs are finalized and published as anticipated, we expect that NMIC will submit a transition plan to the GSEs within 90 days of the Effective Date detailing how NMIC will fully comply with the PMIERs on the Compliance Date. Any transition plan will likely include raising additional capital prior to the Compliance Date, which is consistent with the Company's previous guidance regarding the timing of future capital raises to fund growth in the business, which we expect to occur after 2015. Additionally, with periodic capital contributions from NMIH, we expect NMIC's available assets will exceed the total risk-based required asset amount through the end of 2015. If the draft PMIERs were adopted as drafted today, we expect that the amount of capital we would have to hold under our pool insurance
agreement with Fannie Mae would be significantly reduced. We discuss the current and expected capital requirements for this pool transaction above in "- New Insurance Written, Insurance in Force and Risk in Force - Fannie Mae Pool Transaction."
The MI industry has recently been in a state of transition. In 2009, a new MI company was formed and started writing MI in 2010. We began writing MI in April of 2013. In January 2014, an existing reinsurance company completed its acquisition of an existing MI company that had been serving credit unions only, with the intention to expand its operations to serve the entire mortgage market. Given this dynamic, we expect that there will be pressure in the coming years for industry participants to establish, grow or maintain their market share.
We believe that we have an advantage in the marketplace as a result of our strong capital position and competitive terms of coverage. We expect that this advantage will translate to increasing our market share in the near term. Our competitors' share of the private MI market at September 30, 2014 varied from single percentage points penetration to a high of approximately 24%. In general, we expect a slight increase in the total origination market in 2015, based on research published by Fannie Mae.
In December 2014, Fannie Mae and Freddie Mac each announced eligibility guidelines for their purchase of 97% LTV loans. We believe this announcement will result in more lenders offering such loans, which could have a positive impact on the private MI industry by increasing the market for low down-payment loans that require private MI. The potential impact on the private MI industry from the GSEs' announcement may be affected by potential future changes the GSEs may make to their loan level price adjustments and guarantee fees. Given the uncertainty, it is difficult to predict the ultimate impact of this change on our industry's market share.
For the year ended December 31, 2014, we had net premiums written of $34.0 million compared to net premiums written of $3.5 million for the year ended December 31, 2013. We wrote no premiums for the year ended December 31, 2012. The principal driver of the increase in premiums written in 2014 was the continued growth of our NIW and the significant development of our customer base.
We had net single premiums written and earned of $11.0 million and $2.4 million, respectively, for the fourth quarter of 2014, compared to net single premiums written and earned of $7.4 million and 1.7 million, respectively, for the third quarter of 2014. Net single premiums earned increased as a result of an increase in single premiums written during the quarter ended December 31, 2014, as well as from cancellations on lender-paid singles, where single premiums received by us are non-refundable and fully earned upon cancellation. Net pool premiums written and earned of $1.3 million was down slightly quarter over quarter due to the pay off of approximately 320 loans in the pool from September 30, 2014. We have not written significant annual premiums through December 31, 2014.
Our contract and professional services expense increased from $2.2 million and $2.7 million for the years ended December 31, 2013 and 2012, respectively, to $8.7 million for the year ended December 31, 2014, largely as a result of the growth in outsourced IT and other services to support our business. Our depreciation and amortization expenses decreased to $5.8 million for the year ended December 31, 2014 compared to $5.9 million for the year ended December 31, 2013, due to the write off of fully depreciated software in October 2014. We purchased this software with our acquisition of our insurance subsidiaries in 2012. The write off was offset by the continued development of our technology platform which has resulted in placing more assets into service and depreciating those assets accordingly. We did not have any depreciation or amortization expenses in 2012 as no assets had been placed in service at that time. Other expenses decreased to $6.3 million for the year ended December 31, 2014, from $8.8 million for the year ended December 31, 2013, as a result of a decline in legal expenses, net of the settlement costs associated with the litigation settled in the third quarter of 2014.
Our total assets, comprised largely of cash and investments, were $463.3 million at December 31, 2014 compared to total assets of $481.2 million at December 31, 2013. The reduction in 2014 compared to 2013 was driven by operating costs, partially offset by premium and investment income. The increase in cash for the year ended December 31, 2014 compared to the year ended December 31, 2013 is the result of re-balancing our investment portfolio to include BBB investments and establishing a cash balance sufficient to fund our operations.
Our deferred policy acquisition asset was $3.0 million as of December 31, 2014 compared to $90 thousand at December 31, 2013. The increase was driven by the increase in deferrable costs associated with our increase in premiums written year over year from $3.5 million for the year ended December 31, 2013 to $34.0 million for the year ended December 31, 2014, as discussed above, and the expense associated with the successful acquisition of that NIW.
Our reserves for insurance claims and claims expenses were $83 thousand at December 31, 2014. We received our first primary NOD in the second quarter of 2014. For the year ended December 31, 2013, we had no claim or IBNR reserves. See, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Reserves for Insurance Claims and Claims Expenses."
Our accounts payable and accrued expenses were $10.6 million as of December 31, 2014 and $10.1 million at December 31, 2013. The increase at December 31, 2014 was primarily the result of our increased headcount.
Our unearned premiums balance increased from $1.4 million as of December 31, 2013 to $22.1 million as of December 31, 2014. The unearned premium balance has increased due to the higher volume of single premiums written in 2014 compared to 2013. We wrote $25.5 million and $1.6 million in single premiums for the years ended December 31, 2014 and 2013, respectively.
Cash used in operating activities for the year ended December 31, 2014 was lower compared to the same period in 2013, due primarily to the collection of premiums offset by the continued hiring of management and staff personnel, professional costs incurred in conjunction with litigation support and costs for other contract and professional services.
Cash used in investing activities for the year ended December 31, 2014 was lower compared to the same period in 2013, as a result primarily of investing our cash holdings in fixed income securities beginning in the first quarter of 2013. We had very little movement in our investment portfolio during the first half of 2014. During the third quarter of 2014, we sold approximately $100 million of our investment portfolio at the holding company. We then contributed $70 million of the proceeds to NMIC in the form of cash. Prior to the third quarter of 2014, our investment portfolio consisted of A rated securities or better. During the third quarter, we made the decision to invest 10-15% of the investment portfolio in BBB securities. As of December 31, 2014, approximately 9% of the investment portfolio was invested in BBB securities, and we will invest additional amounts of the portfolio in the future as we believe appropriate.
Cash from financing activities for the year ended December 31, 2014 consisted primarily of taxes paid related to the net share settlement of equity awards offset by the proceeds from option exercises. During the same period in 2013, cash flows from financing also consisted primarily of the approximately $28 million we received from our Initial Public Offering ("IPO") and taxes paid related to the net share settlement of equity awards. Cash from financing activities in 2012 consisted of the net proceeds we received from our Private Placement.
NMIH's future capital requirements depend on many factors, including NMIC's ability to successfully write new business and establish premium rates at levels sufficient to cover claims and operating costs. To the extent that the funds generated by our ongoing operations and capitalization are insufficient to fund future operating requirements, we may need to raise additional funds through financing activities or curtail our growth and reduce our expenses. We may choose to generate additional liquidity through the issuance of a combination of debt or equity securities, as well as consider our reinsurance options.
We expect that cash and investments and projected cash flows from operations will provide us with sufficient liquidity to fund our anticipated growth by providing capital to increase our insurance company surplus as well as for payment of operating expenses through 2015, at which point we currently expect to consider various capital options. We anticipate that as our IIF grows, the premium revenue we receive will increase. We expect to manage our fixed operating expenses so that they grow at a much slower rate than sales over the coming years. Following 2014, as we anticipate an increase in our volume of MI business, we expect to see our underwriting and sales costs increase; however, we expect to be able to manage our "back-office" corporate related costs (i.e., management, finance, legal, risk and information technology) as these areas of our business are already developed to support our revenue generating operations.
On March 26, 2014, NMIH contributed $20 million in cash to NMIC, and on September 18, 2014, NMIH contributed an additional $70 million in cash to NMIC. NMIH contributed $5 million in cash to Re One on December 19, 2014. In order to support a minimum surplus of $150 million and maintain a risk-to-capital ratio under 15 to 1 through December 31, 2015 at NMIC, we expect NMIH may make additional capital contributions to NMIC from time-to-time. NMIH could be required to provide additional capital
Our MI companies' principal operating sources of liquidity are premiums that we receive from policies and income generated by our investment portfolio. Our MI companies' primary liquidity needs include the payment of claims on our MI policies, operating expenses, investment expenses and other costs of our business.
Consistent with Wisconsin law, our investment policies emphasize preservation of capital, as well as total return. Based on our guidelines, our current investment portfolio is comprised almost entirely of cash and cash equivalents and fixed-income securities, all of which are investment grade. Prior to the third quarter of 2014, our investment portfolio consisted of A rated securities or better. During the third quarter, we changed our investment guidelines to allow 10-15% of the investment portfolio to be invested in BBB securities. As of December 31, 2014, approximately 9% of the investment portfolio was invested in BBB securities, and we will invest additional amounts of the portfolio in the future as we believe appropriate. Our policy guidelines contain limits on the amount of credit exposure to any one issue, issuer and type of instrument. We expect to preserve the liquidity of our portfolio through diversification and investment in publicly traded securities. We plan to maintain a level of liquidity commensurate with our perceived business outlook and the expected timing, direction and degree of changes in interest rates.
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of approximately 35%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our effective income tax rate on our pre-tax loss was 4.7% for the year ended December 31, 2014 and 0.0% for the year ended December 31, 2013. 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 8, Income Taxes."
A tax effected valuation allowance of $53.7 million and $35.8 million was recorded at December 31, 2014 and December 31, 2013, respectively, to reflect the amount of the deferred taxes that may not be realized. As the Company has limited history, management is unable to provide a basis to conclude that it is more-likely-than-not that the results of future operations will generate sufficient taxable income. If the valuation allowance is reduced in the future, 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 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 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, often referred to as IBNR.
The following describes the valuation techniques used by us to determine the fair value of financial instruments held as of December 31, 2014 and December 31, 2013:
The guidance regarding the recognition and presentation of OTTI requires that an OTTI of a debt security be separated into two components when there are credit-related losses associated with the impaired debt security for which we assert that we do not have the intent to sell the security and it is more likely than not that we will not be required to sell the security before recovery of our cost basis. Under this guidance, the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors (such as changes in interest rates or market conditions) is recorded as a component of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that we would have to sell the debt security prior to the anticipated recovery, the decline in fair value below amortized cost is recognized as an OTTI in earnings. In periods after recognition of an OTTI on debt securities, we plan to account for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI are recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected would be accreted or amortized into net investment income.
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:
premium patterns and actual claim experience differ from the assumptions used in calculating a premium deficiency reserve, the differences between the actual results and our estimate will affect future period earnings. In considering the potential sensitivity of the factors underlying our best estimate of premium deficiency reserves, it is possible that even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have a significant impact on establishing a premium deficiency reserve, should one be needed, and, correspondingly, on our operating results.
We account for warrants to purchase our common shares in accordance with ASC 470-20 Debt with Conversion and Other Options and ASC 815-40 Derivatives and Hedging - Contracts in Entity's Own Equity. Our outstanding warrants may be settled by us using either (i) a physical settlement method or (ii) cashless exercise, where shares that are issued upon exercise of the warrants are reduced to cover the cost of the exercise, in lieu of the holder remitting a cash payment of the exercise price. The warrants expire after the 10th anniversary of the dates they were issued, after which they are not exercisable. The exercise price and the number of warrants are subject to anti-dilution provisions whereby the existing exercise price is adjusted downward, and the number of warrants increased, for events that may not be dilutive. The adjustment may be in excess of any dilution suffered. As a result, the warrants are classified as a liability. We revalue the warrants at the end of each reporting period and any change in fair value is reported in the statements of operations in the period in which the change occurred. The fair value of the warrants is calculated using a Black-Scholes option-pricing model in combination with a binomial model. We use a Monte Carlo simulation model to value the pricing protection features within the warrants. Variables in the model include the fair value of the stock, risk-free rate of return, dividend yield, expected life and expected volatility of the Company's stock price.
Expected Stock Price Volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate. At the time of grant, our common share trading history was less than six months, which was not sufficient to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for such estimate, we used historical volatilities of a set of comparable companies in the industry in which we operate.
Projected Forfeiture Rate - is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NMI Holdings, Inc. at December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
During 2014, we issued 1,115 common shares with a par value of $0.01 related to the exercise of warrants, which is not identifiable in this schedule due to rounding.
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 April 2013, NMIC, our primary insurance subsidiary, wrote our first mortgage insurance policy.
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.
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, 2014.
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, 2014.
Our intangible assets consist of state licenses and GSE applications which have indefinite lives. We test indefinite-lived intangible assets for impairment during the fourth quarter of each year or more frequently if we believe indicators of impairment exist. We do not believe that the indefinite-lived intangible assets were impaired as of December 31, 2014.
Gross realized gains were $0.7 million and $0.6 million for the years ended December 31, 2014 and 2013, respectively. Gross realized losses were $0.5 million and $0.4 million for the years ended December 31, 2014 and 2013, respectively. There were no realized investment gains or losses for the year ended December 31, 2012.
As of December 31, 2014 and December 31, 2013, 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.
The following describes the valuation techniques used by us to determine the fair value of financial instruments held at December 31, 2014 and December 31, 2013:
Level 1 - Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical assets or liabilities. Financial assets utilizing Level 1 inputs are U.S. Treasury securities;
We calculate the fair value of outstanding warrants using a Black-Scholes option-pricing model in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte Carlo simulation. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.
We revalue the warrant liability quarterly using a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. As of December 31, 2014, the assumptions used in the option pricing model were as follows: a common stock price as of December 31, 2014 of $9.13, risk free interest rate of 1.88%, expected life of 6.44 years, expected volatility of 37.4% and a dividend yield of 0%. The change in fair value is primarily attributable to a decline in the price of our common stock from December 31, 2013 to December 31, 2014.
The 2012 Stock Incentive Plan (the "Plan") was approved by the Board on April 16, 2012 and authorized 5.5 million shares to be reserved for issuance under the Plan, with 3.85 million shares available for stock options and 1.65 million shares available for RSUs. Options granted under the Plan are non-qualified stock options and may be granted to employees, directors and other key persons. The exercise price per share for the common stock covered by this Plan shall be determined by the Board at the time of grant, but shall not be less than the fair market value, defined as the closing price of our common stock, on the date of the grant. The term of the stock option grants will be 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 will also be established by the Board at the time of grant and generally is for a three-year period. Upon the exercise of stock options, we issue shares from the authorized, unissued share reserve.
As of December 31, 2014, there were 108,606 exercises and approximately 1,742,822 options were fully vested and exercisable. The weighted average exercise price for the fully vested and exercisable options was $10.20. The remaining weighted average contractual life of options fully vested and exercisable as of December 31, 2014 was 7.5 years. The aggregate intrinsic value for fully vested and exercisable options was $0 as of December 31, 2014.
The remaining weighted average contractual life of options outstanding as of December 31, 2014 was 7.9 years. As of December 31, 2014, there was $2.4 million of total unrecognized compensation cost related to non-vested stock options. The weighted-average period over which total compensation related to non-vested stock options will be recognized is 1.28 years.
Expected Price Volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate. At the time of grant, 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.
At December 31, 2014, the 1.2 million shares of granted and non-vested RSUs consisted of 0.5 million shares that are subject to both a market and service condition and 0.7 million shares that are subject only to service conditions. The non-vested RSUs subject to both a market and service condition vest in one-half increments upon the achievement of certain market price goals and continued service. Non-vested RSUs subject only to a service condition vest over a service period ranging from one to three years. The fair value of RSUs subject to market and service conditions is determined based on a Monte Carlo simulation model at the date of grant. The fair value of RSUs subject only to service conditions are valued at our stock price on the date of grant less the present value of anticipated dividends.
There were no RSUs granted in 2014 or 2013 that were subject to a market condition, therefore the Monte Carlo simulation was not used.
Following is a reconciliation of our net deferred income tax asset (liability) as of December 31, 2014 and December 31, 2013:
As of December 31, 2014, the Company had federal net operating loss carryforwards of $114.5 million, which expire from 2029 to 2034 and state net operating loss carryforwards of $36.0 million, which expire from 2031 to 2034. Section 382 of the Internal Revenue Code imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries, $7.3 million of NOLs are subject to annual limitations of $0.8 million through 2016, then $0.3 million through 2029.
As we have just recently begun insurance operations and have no history to provide a basis for reliable future net income projections, a valuation allowance of $53.7 million and $35.8 million was recorded at December 31, 2014 and December 31, 2013, respectively, to reflect the amount of the deferred tax asset that may not be realized.
We file income tax returns with the U.S. federal government and various state jurisdictions which are subject to potential examination by tax authorities. We are not currently under examination, and federal and state tax years remain open by statute.
Amortization and depreciation expense for software and equipment for the years ended December 31, 2014 and 2013 was $5.8 million and $5.9 million, respectively. In the second quarter of 2013, we reduced the useful life and shortened the amortization period of some of the software we purchased in connection with the acquisition of our insurance subsidiaries. This software was completely amortized by November 2014, and the original cost and accumulated amortization of $9.8 million were written off at that time.
Intangible assets and goodwill consist of identifiable intangible assets and goodwill we purchased in connection with the acquisition of our insurance subsidiaries, and at December 31, 2014 and December 31, 2013, were as follows for both years:
We test goodwill and intangibles for impairment in the third and fourth quarter, respectively, of every year, or more frequently if we believe indicators of impairment exist. As of December 31, 2012, we determined the carrying value of operational manuals acquired with NMIC and Re One would not be recovered, and the manuals could not be sold and would be disposed; as a result, we assessed the fair value at zero and recognized a loss on impairment of $1.2 million. No impairments of indefinite-lived intangibles or goodwill were identified as of December 31, 2014 and 2013.
In January 2013, the GSEs approved NMIC as a qualified mortgage insurer, and with their approvals, imposed certain capitalization, operational and reporting conditions on NMIC, most of which remain in effect for a three-year period from the date of GSE Approval. As a GSE qualified mortgage insurer, NMIC is subject to ongoing compliance with the conditions in the GSE Approval as well as the GSEs' Eligibility Requirements.
not enter into reinsurance or other risk share arrangements without the GSEs' prior written approval for its first three years, then pursuant to the Eligibility Requirements.
The GSE Approvals also include other conditions, limitations and reporting requirements, including, among others, limits on costs allocated to NMIC under affiliate expense sharing arrangements; conditions related to risk concentration and rates of return; requirements to obtain a financial strength rating; restrictions on provision of ancillary services (i.e., non-insurance) to customers and transfers of underwriting to affiliates; notification requirements regarding change of ownership and new five percent shareholders; requirement to, at the direction of one or both of the GSEs, re-domicile from Wisconsin to another state; and provisions regarding underwriting policies and claims processing.
Management expects that, in the normal course of business, as of December 31, 2014, future minimum lease payments under this lease will be as follows:
On November 8, 2013, we filed a final prospectus announcing the sale of 2.1 million shares of common stock through an initial public offering. The underwriters of the offering were granted a 30-day option to purchase up to an additional 315,000 shares of common stock from us at an initial public offering price of $13.00, which they exercised on November 12, 2013. The offering closed on November 14, 2013. Gross proceeds to us were $31.4 million. Net proceeds from the offering were approximately $28 million.
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory basis accounting principles ("SAP") prescribed or permitted by the Wisconsin OCI. NMIC's principal regulator is the Wisconsin OCI. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the 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 income, statutory surplus and contingency reserve as of and for each of the years in the three-year period ended December 31, 2014 were as follows:
Under applicable Wisconsin law and 15 other states, a mortgage insurer must maintain a minimum amount of statutory capital relative to its risk-in-force (risk-to-capital ratio or "RTC ratio") 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 to 1. Wisconsin and certain other states, including California and Illinois, apply a substantially similar requirement referred to as minimum policyholders' position. Our operation plan filed with the Wisconsin OCI and other state insurance departments in connection with NMIC's applications for licensure includes the expectation that NMIH will downstream additional capital if needed so that NMIC does not exceed risk-to-capital ratios agreed to with those states. NMIC may in the future seek state insurance department approvals, as needed, of an amendment to our business plan to increase this ratio to the Wisconsin regulatory minimum of 25 to 1. In addition, under the terms of our conditional approvals from the GSEs we are required to operate at a risk-to-capital ratio not to exceed 15:1 for our first three years of operations.
Certain states limit the amount of risk a mortgage insurer may retain on a single loan to 25% of the indebtedness to the insured and, as a result, the portion of such insurance in excess of 25% must be reinsured. NMIC and Re One have entered into a primary excess share reinsurance agreement, effective August 1, 2012, and a facultative pool reinsurance agreement, effective September 1, 2013, under which NMIC cedes premiums, loss reserves and claims to Re One on an excess share basis for any primary or pool policy which offers coverage greater than 25% on any loan insured thereunder. NMIC will use reinsurance provided by Re One solely for purposes of compliance with these state statutory coverage limits. Currently, NMIC has no other reinsurance agreements. During April 2013, NMIC began writing its first mortgage insurance policies and ceding premium and risk to Re One the following month.
Our net risk in force includes both primary and pool risk in force, and excludes risk on policies that are currently in default and for which loss reserves have been established.
The GSEs and state insurance regulators may restrict our insurance subsidiaries' ability to pay dividends to NMIH. In addition to the restrictions imposed during the GSE Approval and state licensing processes, 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 dividends without the prior approval of the Wisconsin OCI ("ordinary dividends") 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. As of December 31, 2014, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately $252 million of NMIH's consolidated
net assets of $427 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, 2013, NMIC cannot pay any dividends to NMIH through December 31, 2014, without the prior approval of the Wisconsin OCI. Additionally, NMIC will not be permitted to pay dividends to NMIH until after December 31, 2015 as a condition of GSE Approval or until January 2016 under agreements with various state insurance regulators.