(1) The 2016 prior period balance sheet and statements of operations have been revised. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for further details.
(2) PMIERs financial requirements as reported by NMIC took effect as of December 31, 2015.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve the dream of homeownership, ensure that we remain a strong and credible counterparty, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders.
Our common stock trades on the NASDAQ under the symbol "NMIH."
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including customer development, new business writings, the composition of our insurance portfolio and other factors that we expect to impact our results.
We have important relationships with customers across all categories and allocation profiles, including National Accounts and Regional Accounts, and centralized and decentralized lenders. Our sales and marketing efforts are broadly focused on expanding our presence with existing customers and activating new customer relationships. We consider an activation to be the point at which we have signed a Master Policy, established IT connectivity and generated a first application or first NIW from a customer. During the year ended December 31, 2017, we activated 127 lenders, compared to 173 and 247 for the years ended December 31, 2016 and December 31, 2015, respectively. We also continued to expand our business with existing customers, deepening our existing relationships and capturing what we believe to be an increasing portion of their annual MI volume. At December 31, 2017, we had 1,267 Master Policies and 841 active customer relationships, compared to 1,131 and 715 as of December 31, 2016 and 964 and 524 as of December 31, 2015.
Premiums are generally fixed over the estimated life of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements and less premium refunds. As a result, net premiums written are generally influenced by:
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include
certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and substantially all of our single premium policies are non-refundable on cancellation, assuming all other factors remain constant, if single premium loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we replace the repaid monthly premium loan with a new loan, our profitability is likely to decline.
We utilize third-party reinsurance to actively manage our risk, ensure PMIERs compliance and support the growth of our business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces net premiums written and earned and also reduces net RIF, providing capital relief to the ceding insurance company and reducing incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota share transactions, which offset the ceding company's acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement, the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit. In general, there are no ceding commissions under excess-of-loss reinsurance agreements. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
NMIC entered into the 2018 QSR Transaction, which took effect January 1, 2018. Under the 2018 QSR Transaction, NMIC agrees to cede 25% of its eligible policies written in 2018 and 20% to 30% (such amount to be determined by NMIC at its sole election by December 1, 2018) of eligible policies written in 2019, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims.
In May 2017, NMIC secured $211.3 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of MI policies written from 2013 through December 31, 2016, through a mortgage insurance-linked notes offering by Oaktown Re. The reinsurance coverage amount under the terms of the 2017 ILN Transaction decreases from $211.3 million at inception over a ten-year period as the underlying covered mortgages amortize and/or are repaid, and was $177 million as of December 31, 2017. For the reinsurance coverage period, NMIC will retain the first layer of $126.8 million of aggregate losses and Oaktown Re will then provide a second layer of coverage up to the outstanding reinsurance coverage amount. NMIC retains losses in excess of the outstanding reinsurance coverage amount.
For the year ended December 31, 2016, net premiums written and earned increased 18% and 143%, respectively, compared to the year ended December 31, 2015. The increases in net premiums written and earned are primarily due to the growth of our IIF and increased NIW production, partially offset by ceded premiums related to the 2016 QSR Transaction, which entailed an initial cession of premiums written on all covered singles policies written prior to the transaction effective date and introduced partial cessions of premiums written and earned on covered policies thereafter.
The table below presents a summary of the change in total primary IIF for the dates and periods indicated.
The table below reflects a summary of our primary IIF and RIF by book year as of the dates indicated.
We utilize certain risk principles that form the basis of how we underwrite and originate primary NIW. We manage our portfolio credit risk by using several loan eligibility matrices which prescribe the maximum LTV, minimum borrower FICO score, maximum borrower DTI ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure. Our loan eligibility matrices, as well as all of our detailed underwriting guidelines, are contained in our Underwriting Guideline Manual that is publicly available on our website. Our eligibility criteria and underwriting guidelines are designed to mitigate the layered risk inherent in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts.
The table below shows selected primary portfolio statistics, by book year, as of December 31, 2017.
The ratio of total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance.
future macroeconomic factors, including unemployment, which affects the likelihood that borrowers may default on their loans, and rising interest rates, which tend to increase persistency, thereby extending the average life of our insured portfolio and increasing expected future claims;
borrowers' FICO scores, with lower FICO scores tending to have higher probabilities of claims;
other borrower and loan level risk characteristics, such as cash-out refinancings, second homes or investment properties
Reserves for claims and allocated claims expenses are established for mortgage loan defaults, which we refer to as case reserves, when we are notified that a borrower has missed two or more mortgage payments (i.e., an NOD). We also make estimates of IBNR defaults, which are defaults that have been incurred but have not been reported by loan servicers, based on historical reporting trends, and establish IBNR reserves for those estimates. We also establish reserves for unallocated claims expenses not associated with a specific claim. The claims expenses consist of the estimated cost of the claim administration process, including legal and other fees as well as other general expenses of administering the claims settlement process.
claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, cure rates, size of the loan and estimated change in property valuation. Reserves are released the month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under the 2016 QSR Transaction and will be ceded under the 2018 QSR Transaction beginning in 2018. We will not cede reserves to the reinsurer under the 2017 ILN Transaction unless losses exceed our retained coverage layer. Reserves are not established for future claims on insured loans which are not currently in default.
We insure mortgages for homes in areas that have been impacted by recent natural disasters, including hurricanes Harvey and Irma and the California wildfires. We do not provide coverage for property or casualty claims related to physical damage of a home underpinning an insured mortgage. We have experienced an increase in NODs on insured loans in the impacted areas. Our ultimate claims exposure will depend on the number of NODs received, proximate cause of each default and cure rate of the NOD population. In the event of natural disasters, cure rates are influenced by the adequacy of homeowners and other hazard insurance carried on a related property, GSE-sponsored forbearance and other assistance programs, and a borrower's access to aid from government entities and private organizations, in addition to other factors which generally impact cure rates in unaffected areas.
(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default since that time.
The increase in the ending default inventory at December 31, 2017 compared to December 31, 2016, was primarily due to new defaults on insured loans in areas impacted by hurricanes Harvey and Irma and the California wildfires, as well as the aging of earlier book years and an increase in the overall number of policies in our portfolio. The increase in the ending default inventory at December 31, 2016 compared to December 31, 2015 is tied to the growth in the number of policies in force and the expected loss development of our portfolio.
(1) Severity represents the total amount of claims paid divided by the related RIF on the loan at the time the claim is perfected.
(1) Defined as the gross reserve per insured loan in default.
The average reserve per default at December 31, 2017 decreased from December 31, 2016 primarily due to new defaults on insured loans in areas impacted by hurricanes Harvey and Irma and the California wildfires. As of December 31, 2017, 533 of the 928 loans in default relate to homes in areas declared by FEMA to be disaster zones following the aforementioned natural disasters. We anticipate that this population of loans in default will cure at a higher rate than the estimated rate we apply to non-disaster related loans in default, due to our Master Policy coverage terms, historical industry experience, and current economic indicators and relief programs. As such, we have established lower reserves for these NODs than we otherwise do for similarly situated NODs in non-disaster zones. Over time, we anticipate that our average reserve per default will revert to our historical averages as the NODs in these zones cure.
As an Approved Insurer, NMIC is subject to ongoing compliance with the PMIERs. (Italicized terms have the same meaning that such terms have in the PMIERs, as described below.) The PMIERs establish operational, business, remedial and financial
The following table provides a comparison of the PMIERs financial requirements as reported by NMIC as of the dates indicated.
Available assets were $528 million at December 31, 2017, compared to $454 million at December 31, 2016 and $431 million at December 31, 2015. The increase in available assets of $74 million at December 31, 2017 and $23 million at December 31, 2016 was driven by positive cash flow from operations and the amortization of unearned premium reserves during each period. The increase in the risk-based required asset amount at each measurement date is due to the growth of our gross RIF, partially offset by the cession of risk relating to our third-party reinsurance agreements.
On December 18, 2017, the GSEs provided us with a confidential summary of the proposed changes to the PMIERs financial, business and other requirements that they are developing with the FHFA. We have engaged in conversations with the FHFA and the GSEs about the proposed changes and expect to continue to provide feedback to them in the coming months. Once changes to the PMIERs requirements are finalized, we expect the industry will be afforded a six month implementation period and currently anticipate that updated PMIERs requirements, if any, will take effect no sooner than the fourth quarter of 2018.
In addition to GSE-imposed asset requirements, NMIC is also subject to state regulatory minimum capital requirements based on its RIF. While formulations of this minimum capital may vary by jurisdiction, the most common measure allows for a maximum permitted RTC ratio of 25:1.
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as public MIs like the FHA and the VA. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price. See Part I, Item 1, "Business - Overview of Residential Mortgage Finance and the Role of the Private MI Industry in the Current Operating Environment - Competition," above. We expect the MI market to remain competitive, with pressure for industry participants to grow or maintain their market share.
(3) The 2016 prior period consolidated statements of operations has been revised. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for further details.
For the year ended December 31, 2017, net premiums earned totaled $165.7 million compared to $110.5 million for the year ended December 31, 2016 and $45.5 million for the year ended December 31, 2015. The increase of net premiums earned of $55.2 million in 2017 was primarily due to the growth of our IIF and increased monthly policy production, partially offset by the decreases in single premium NIW and earnings from cancellations, and the impact of cessions under the 2017 ILN transaction and 2016 QSR Transaction. The $65.0 million increase in net premiums earned in 2016 was primarily due to the growth of our IIF, increased single premium NIW production and higher earnings from cancellations, partially offset by the effect of the 2016 QSR Transaction.
Interest expense was $13.5 million, $14.8 million and $2.1 million for the years ended December 31, 2017, 2016 and 2015, respectively. Interest expense declined in 2017 compared to 2016 in connection with the amendment of our Credit Agreement completed in February 2017, which among other items, reduced the interest spread payable on the Term Loan. The interest expense reduction was partially offset by a rise in the underlying LIBOR rate during 2017. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Term Loan." Interest expense increased in 2016 compared to 2015, reflecting a full year of interest expense for the Term Loan, which we established in the fourth quarter of 2015.
(1) The 2016 prior period balance sheet has been revised. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Immaterial Correction of Prior Period Amounts," for further details.
As of December 31, 2017, we had approximately $735.1 million in cash and investments, including $51.0 million held at NMIH. The increase in cash and investments from year-end 2016 primarily relates to cash generated from operations.
Deferred tax asset, net decreased to $19.9 million as of December 31, 2017, from $51.4 million at December 31, 2016 due to the re-measurement of our deferred tax balances at the reduced statutory U.S. federal corporate income tax rate of 21% and the utilization of net operating loss carryforwards during the period. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
Unearned premiums increased $10.3 million to $163.2 million as of December 31, 2017, primarily due to single premium policy origination during the period, offset by the amortization through earnings of existing unearned premiums in accordance with the expiration of risk on the related policies and the cancellation of other single premium policies.
Warrant liability increased to $7.5 million at December 31, 2017, compared to $3.4 million at December 31, 2016 primarily due to an increase in our stock price during the year.
Net cash provided by operating activities was $67.8 million for the year ended December 31, 2017, compared to $71.9 million for the year ended December 31, 2016, and $41.5 million for the year ended December 31, 2015. The decrease in cash generated from operating activities in 2017 compared to 2016 was primarily caused by increased operating expenses in connection with employee compensation and benefits costs and higher claims paid due to an increase in our default inventory offset by growth in direct premiums written. The increase in cash generated from operating activities in 2016 compared to 2015 was primarily due to the higher premiums written offset by increased operating expenses associated with the hiring of management and staff personnel and costs for contract and professional services.
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of principal and interest related to the Term Loan; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as NMIH, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations).
As of December 31, 2017, NMIH had $51.0 million of cash and investments. NMIH's principal source of net cash is investment income and in the future could include dividends from NMIC, if available and permitted under law and by the GSEs.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, but such approval may be changed or revoked at any time. With the Wisconsin OCI's approval, NMIH began allocating the interest expense on its Term Loan to NMIC in the first quarter of 2017, consistent with the benefits NMIC received when NMIH down-streamed the loan proceeds to NMIC.
NMIC's ability to pay dividends to NMIH is subject to insurance department notice or approval. Under Wisconsin law, NMIC may pay dividends up to specified levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31. NMIC has never paid any dividends to NMIH. NMIC reported a statutory net loss for the twelve months ended December 31, 2017 and currently cannot pay any dividends to NMIH through December 31, 2018 without the prior approval of the Wisconsin OCI. Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.
In November 2015, NMIH entered into the Credit Agreement for the Term Loan. On February 10, 2017, NMIH amended the Credit Agreement (Amendment No. 1) to reduce the interest rate and extend the maturity date of the Term Loan from November 10, 2018 to November 10, 2019. The amended Term Loan bears interest at the Eurodollar Rate, as defined in the Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 6.75%, payable monthly or quarterly based on our interest rate election. On October 25, 2017, NMIH further amended the Credit Agreement (Amendment No. 2) to remove a covenant that required NMIH to maintain liquidity (as defined therein) in an aggregate amount no less than all remaining interest payments due under the Term Loan. As modified by Amendment No. 2, the Credit Agreement retains the requirement that NMIH maintain liquidity in an aggregate amount no less than the sum of all remaining principal amortization payments due under the Term Loan, excluding principal scheduled to be paid on its maturity date, determined to be $2.6 million as of December 31, 2017. The Credit Agreement contains other restrictive covenants and required financial ratios and tests (which were not modified by Amendments No.1 or No.2) that we are required to meet or maintain. The current covenants include, but are not limited to the following: a maximum debt-to-total capitalization ratio (as defined therein) of 35%, maximum RTC ratio of 22.0:1.0, minimum liquidity (as modified by Amendment No. 2 and defined therein), compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum shareholders' equity requirements.
Our primary objectives with respect to our investment portfolio are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments, concentration limits for asset types, industry sectors, single issuers, and certain credit ratings, and benchmarks for asset duration.
The ratings above are provided by one or more of: Moody's, S&P and Fitch Ratings. If three ratings are available, we assign
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 35% for for all prior years through December 31, 2017. We will be subject to a statutory U.S. federal corporate income tax rate of 21% for the years ending December 31, 2018 and all future periods. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries.
The Tax Cuts and Jobs Act (the Act) was enacted on December 22, 2017. The Act reduces the statutory U.S. federal corporate income tax rate from 35% to 21%. We have not completed our full assessment of the tax effects of the enactment of the Act on our December 31, 2017 balances; however, in certain cases, as described below, we have made reasonable estimates of the effects on our deferred tax balances. We recognized a $13.6 million income tax expense in the year ended December 31, 2017 for the items we could reasonably estimate primarily related to the re-measurement of deferred tax assets and liabilities. We are still analyzing the Act and refining our calculation on deferred our tax asset related to share-based compensation, which could affect the measurement of these balances or give rise to further increases or decreases to our deferred tax amounts. For tax years beginning after December 31, 2017, the Act expanded the number of individuals whose compensation is subject to a $1 million cap on tax deductibility and includes performance-based compensation in the calculation. As a result, the Company recorded a provisional amount to reduce the future tax benefit related to share-based compensation. We will continue to make and refine our calculations as additional analysis is completed. In addition, our estimates may also be affected as we gain a more thorough understanding of the tax law.
our positive earnings trends from quarterly and annual increases in revenue;
At December 31, 2016, we concluded that positive evidence of sufficient quantity and quality outweighed negative evidence and supported our conclusion that it is more-likely-than-not that we will realize our federal and certain state deferred tax assets. The reversal of our beginning-of-the-year valuation allowance against such deferred tax assets (resulting from a change in judgment about the realizability of the related deferred tax assets in future years) is consistent with the requirements of ASC 740-10-45-20. At December 31, 2016, we released the valuation allowance on federal and certain state deferred tax assets. A valuation allowance continued to be recorded against net state deferred tax assets, primarily related to state net operating losses by NMIH that we do not expect to be utilized. NMIH operates at a loss and currently only generates revenue from its investment portfolio.
We have examined the results through December 31, 2017, and performed a review of future expectations, which continue to support the conclusion that it is more-likely-than-not that we will realize our federal and certain state deferred tax assets. We also concluded to continue to apply a valuation allowance to the net state deferred tax assets, primarily related to state net operating losses by NMIH that we do not expect to be utilized.
At December 31, 2017, we had a federal net operating loss carryforward of $93.3 million which expires from 2030 to 2037, and state net operating loss carryforwards of $89.1 million, which expire in varying amounts during the years 2031 to 2037. Section 382 of the Internal Revenue Code imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $7.3 million of NOLs were subject to annual limitations of $0.8 million through 2016, and $0.3 million, thereafter, through 2029.
We had no material off-balance sheet arrangements at December 31, 2017. In connection with the 2017 ILN Transaction, we have certain future contractual commitments to Oaktown Re, a special purpose VIE that is not consolidated in our financial results. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Variable interest entity" and "Note 6, Reinsurance."
Contractual obligations at December 31, 2017 are summarized in the table that follows.
Consistent with industry practice, we establish reserves for claims based on our best estimate of ultimate claim costs for defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944). We establish reserves for loans that have been in default for at least 60 days. Reserves for claims and allocated claims expenses, referred to as case reserves, are established when we are notified of defaults by loan servicers. Additional claims reserves, referred to as IBNR reserves, are established for loans that we estimate (based on actuarial review) have been in default for at least 60 days, but have not yet been reported to us as such by servicers. We also establish reserves for unallocated claims expenses not associated with specific claims. Claims expenses represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process.
referred to as claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, size of the loan and LTV ratios, and are strongly influenced by prevailing economic conditions, such as mortgage rates, trends in unemployment and house price appreciation. We conduct an annual actuarial review to evaluate, and, if necessary, update these assumptions.
We perform a premium deficiency calculation each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds future premiums, existing reserves and anticipated investment income. The calculation of premium deficiency reserves requires the use of significant judgment and estimates to determine the present value of future premiums and present value of expected claims and expenses on our business. The present value of future premiums relies on, among other things, assumptions about persistency and repayment patterns on underlying loans. The present value of expected claims and expenses depends on assumptions relating to severity of claims, claim rates on current defaults and expected defaults in future periods. These assumptions may also include an estimate of expected rescission activity. Assumptions used in calculating premium deficiency reserves can be affected by volatility in the current housing and mortgage lending industries. To the extent premium patterns and actual claim experience differ from the assumptions used in calculating a premium deficiency reserve, the differences between the actual results and our estimate will affect future period earnings. In considering the potential sensitivity of the factors underlying our best estimate of premium deficiency reserves, it is possible that even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have a significant impact on establishing a premium deficiency reserve, should one be needed, and, correspondingly, on our operating results.
Our provision for income taxes for interim financial periods is based on an estimate of our annual effective tax rate for the full year. When estimating our full year effective tax rate, we adjust our forecasted pre-tax income for gains and losses on our investments, changes in the accounting for uncertainty in income taxes, changes in our beginning of year valuation allowance, and other adjustments. The impact of these items is accounted for discretely at the applicable federal tax rate.
We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation, which addresses accounting for share-based awards and recognition of compensation expense, measured using grant date fair value, over the requisite service or performance period of the award. Share-based compensation includes RSUs and stock option grants under the NMI Holdings, Inc. 2012 Stock Incentive Plan (2012 Plan) and the NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan (Amended 2014 Plan), which amended and restated the NMI Holdings, Inc. 2014 Omnibus Incentive Plan (2014 Plan). We calculate the fair value of stock option grants using a Black-Scholes option pricing model, which takes into account various subjective assumptions. Key assumptions used in the model include the expected volatility of our stock price, our expected dividend yield and the risk-free interest rate, as well as the expected option term, giving consideration to the contractual terms of any award and the effects of expected exercise and post-vesting termination behavior. RSU grants to employees may contain a service condition, market and service condition or performance and service condition. RSU grants to employees with a service or a performance condition and RSU grants to non-employee directors are valued at our stock price on the date of grant less the present value of anticipated dividends. The fair value of RSU grants to employees with a market condition are determined based on a Monte Carlo simulation model at the date of grant.
We have audited the accompanying consolidated balance sheets of NMI Holdings, Inc. (the "Company") as of December 31, 2017 and 2016, the related consolidated statements of operations and comprehensive income, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules included in the accompanying index (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2017, in conformity with accounting principles generally accepted in the United States of America.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Premiums for primary mortgage insurance policies may be paid in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium), with such election and payment type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums and amortized into earnings over the estimated policy life, in accordance with the anticipated expiration of risk. Monthly premiums are recognized as revenue in the month billed and when the coverage is effective. Annual premiums are initially deferred and earned on a straight-line basis over the year of coverage. Premiums written on pool transactions are earned over the period that coverage is provided. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable premium is returned to the policyholder. Premiums returned to policyholders are recorded as a reduction of written and earned premiums in the current period.
We use accounting principles and methods that conform to GAAP. Where GAAP specifically excludes mortgage insurance we follow general industry practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical.
We earn profit and ceding commissions in connection with our 2016 QSR Transaction (see Note 6, "Reinsurance"). Profit commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of claims we cede. We recognize any profit commissions we earn as increases to premium revenue. Ceding commissions are calculated as a percentage of ceded written premiums, which are intended to cover our costs to acquire and service the direct policies. We earn the ceding commissions in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions earned as reductions to underwriting and operating expenses.
We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation, which addresses accounting for share-based awards and recognition of compensation expense, measured using grant date fair value, over the requisite service or performance period of the award. Share-based compensation includes restricted stock unit (RSU) and stock option grants under the NMI Holdings, Inc. 2012 Stock Incentive Plan (2012 Plan) and the NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan (Amended 2014 Plan), which amended and restated the NMI Holdings, Inc. 2014 Omnibus Incentive Plan (2014 Plan). We calculate the fair value of stock option grants using a Black-Scholes option pricing model, which takes into account various subjective assumptions. Key assumptions used in the model include the expected volatility of our stock price, dividend yield and the risk-free interest rate, as well as the expected option term, giving consideration to the contractual terms of any award and the effects of expected exercise and post-vesting termination behavior. RSU grants to employees may contain a service condition, market and service condition or performance and service condition. RSU grants to employees with a service or a performance condition and RSU grants to non-employee directors are valued at our stock price on the date of grant less the present value of
anticipated dividends. The fair value of RSU grants to employees with a market condition is determined based on a Monte Carlo simulation model at the date of grant.
Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding, while diluted earnings (loss) per share is based on the weighted-average number of common shares outstanding and common share equivalents that would be issuable upon the vesting of existing service based RSUs, and exercise of vested and unvested stock options and outstanding warrants.
We capitalize certain costs associated with the development of internal-use software and equipment. Software and equipment are stated at cost, less accumulated amortization and depreciation. Amortization of software and depreciation of equipment commences at the beginning of the month following our placement of the assets into use. Amortization and depreciation are calculated on a straight-line basis over the estimated useful life of the respective assets, typically from 3 to 7 years, unless factors indicate a shorter useful life. For further detail, see "Note 12, Software and Equipment."
Goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired from a business combination. In accordance with ASC 350, Intangibles - Goodwill and Other, we test goodwill for impairment during the third quarter each year, or more frequently if we believe indicators of impairment exist. We have not identified any impairments of goodwill through December 31, 2017.
Our intangible assets consist of state licenses and GSE applications which have indefinite lives. We test indefinite-lived intangible assets for impairment during the fourth quarter of each year or more frequently if we believe indicators of impairment exist. We have not identified any impairments of indefinite-lived intangible assets through December 31, 2017.
Premiums receivable consist of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled. We have determined that the receivable write-off was immaterial as of December 31, 2017.
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re Ltd. (Oaktown Re), a Bermuda-domiciled special purpose reinsurer. At inception of the reinsurance agreement, we determined that Oaktown Re was a variable interest entity (VIE), as defined under GAAP (ASC 810), because it did not have sufficient equity at risk to finance its activities. We evaluated the VIE to determine whether NMIC was its primary beneficiary and, if so, whether we were required to consolidate the assets and liabilities of the VIE. The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its economic performance and (2) has significant economic exposure to the VIE; i.e., the obligation to absorb losses or receive benefits that could potentially be significant. The determination of whether an entity is the primary beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIE.
In May 2014, the Financial Accounting Standards Board (the FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. In August 2015, ASU 2015-14 deferred the provisions of ASU 2014-09 to be effective for interim and annual periods beginning after December 15, 2017. In December 2016, the FASB clarified that all contracts that are within the scope of Topic 944, Financial Services-Insurance, are excluded from the scope of ASU 2014-09. Accordingly, this update will not impact the recognition of revenue related to insurance premiums or investment income, which represent a majority of our total revenues. The adoption of this update for our loan review services revenue (our only revenue stream in scope), effective January 1, 2018, will be done using the modified-retrospective approach and is immaterial to our consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This update requires companies to measure all expected credit losses for financial assets held at the reporting date. The standard also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In August 2016, the FASB issued ASU 2016-16, Income Taxes- Intra-Entity Transfers of Assets Other Than Inventory (Topic 740). This update is intended to improve the accounting for the income tax consequences of intra-entity transfers of assets other than inventory. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this update, effective January 1, 2018, will have no impact on our consolidated financial statements.
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350). This update is intended to simplify the test for goodwill impairment. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, after December 15, 2020. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. We have determined that the adoption of this ASU will have no impact on our consolidated financial statements.
In March 2017, the FASB issued ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20). This update shortens the amortization period for the premium on certain purchased callable debt securities to the earliest call date. The standard will take effect for public business entities for fiscal years beginning after December 15, 2017. Early adoption is permitted, and if an entity early adopts the guidance in an interim period, any adjustments are reflected as of the beginning of the fiscal year that includes that interim period. The adoption of this update, effective January 1, 2018, will have no impact on our consolidated financial statements.
To provide consistency in the consolidated statements and as permitted by Staff Accounting Bulletin (SAB) 108, revisions for these immaterial amounts to previously reported annual amounts are reflected in the Consolidated Balance Sheet financial information herein and in the Consolidated Statements of Operations. A comparison of the affected amounts as previously reported and as adjusted are presented below.
NMIC entered into its second quota share reinsurance treaty with a broad panel of highly rated reinsurers that will take effect January 1, 2018 (2018 QSR Transaction). Under the 2018 QSR Transaction, NMIC agrees to cede 25% of its eligible policies written in 2018 and 20% to 30% (amount at NMIC's sole election, to be exercised no later than December 1, 2018) of eligible policies written in 2019. The Company will receive a ceding commission equal to 20% of ceded premiums earned, as well as a profit commission equal to 61% of ceded premiums earned, reduced by any losses ceded under the treaty. The 2018 QSR Transaction is scheduled to terminate on December 31, 2029.
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an accumulated basis in shareholders' equity. Net realized investment gains and losses are reported in income based on specific identification of securities sold.
As of December 31, 2017 and December 31, 2016, approximately $7.0 million and $6.9 million of our cash and investments were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level three, of the fair value hierarchy during the years ended December 31, 2017 and 2016.
The changes in fair value of the warrant liability for the years ended December 31, 2017, 2016 and 2015 are primarily attributable to changes in the price of our common stock during the respective periods.
Debt issuance costs totaling $4.9 million, including $445 thousand related to Amendment No.1 and Amendment No.2 modifications and a 1% original issue discount, are being amortized to interest expense, using the effective interest method, over the contractual life of the Term Loan. Interest expense for the Term Loan includes interest and amortization of issuance costs, modification costs and the original issue discount. For the twelve months ended December 31, 2017, we recorded $13.5 million of interest expense.
Future principle payments for the Term Loan as of December 31, 2017 are as follows:
We enter into third-party reinsurance transactions to actively manage our risk, ensure PMIERs compliance and support the growth of our business. The GSEs and the Wisconsin OCI have approved all such transactions (subject to certain conditions and periodic ongoing review, including levels of approved capital credit).
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re that provides for up to $211.3 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written from 2013 through December 31, 2016. For the reinsurance coverage period, NMIC will retain the first layer of $126.8 million of aggregate losses and Oaktown Re will then provide second layer coverage up to the outstanding reinsurance coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount. The outstanding reinsurance coverage amount decreases from $211.3 million at inception over a ten-year period as the underlying covered mortgages amortize and/or are repaid, and was $177 million as of December 31, 2017. The outstanding reinsurance coverage amount will stop amortizing if certain credit enhancement or delinquency thresholds are triggered.
Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million to unaffiliated investors (the Notes). The Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of the Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re to NMIC under the reinsurance agreement. At all times, funds in the reinsurance trust account are required to be invested in high credit quality money market funds. We refer collectively to NMIC's reinsurance agreement with Oaktown Re and the issuance of the Notes by Oaktown Re as the 2017 ILN Transaction. Under the terms of the 2017 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re for its anticipated operating expenses (capped at $300 thousand per year). For the year ended December 31, 2017, NMIC paid risk premiums of $5.0 million. NMIC did not cede any losses to Oaktown Re.
25% of risk on eligible policies written from September 1, 2016 through December 31, 2017.
In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to our 2016 QSR Transaction was $1.9 million as of December 31, 2017.
We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Consistent with industry practice, we establish reserves for loans that have been reported to us by servicers as having been in default for at least 60 days, referred to as case reserves, and additional loans that we estimate (based on actuarial review) have been in default for at least 60 days that have not yet been reported to us by servicers, referred to as IBNR reserves. We also establish claims expense reserves, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process. As of December 31, 2017, we had reserves for insurance claims and claims expenses of $8.8 million for 928 primary loans in default. For the year ended 2017, we paid 27 claims totaling $1.3 million, including nine claims ceded under the 2016 QSR Transaction representing $81 thousand of ceded claims and claims expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At December 31, 2017, 66 loans in the pool were past due by 60 days or more. These 66 loans represented approximately $4.3 million of RIF. Due to the size of the remaining deductible, the low level of notices of default (NODs) reported on loans in the pool through December 31, 2017 and the expected severity (all loans in the pool have loan-to-value (LTV) ratios under 80%,) we did not have any case or IBNR reserves for pool risks at December 31, 2017 or
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claim expenses:
Basic earnings (loss) per share is based on the weighted average number of shares of common stock outstanding, while diluted earnings (loss) per share is based on the weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the vesting of service based RSUs, and exercise of vested and unvested stock options and outstanding warrants. The following table reconciles the net income (loss) and the weighted average shares of common stock outstanding used in the computations of basic and diluted earnings (loss) per share of common stock:
As of December 31, 2017, there were approximately 2.6 million fully vested and exercisable options. There were 272.8 thousand exercises during the year with an aggregate intrinsic value of $1.3 million. The weighted average exercise price for the fully vested and exercisable options was $10.39. The remaining weighted average contractual life of fully vested and exercisable options as of December 31, 2017 was 5.2 years. The aggregate grant date intrinsic value of fully vested and exercisable options was $17.0 million as of December 31, 2017.
As of December 31, 2017, there was $1.1 million of total unrecognized compensation cost related to non-vested stock options. The weighted-average period over which total remaining compensation costs related to non-vested stock options will be recognized is 1.52 years.
We account for stock options under ASC 718, which requires all share-based payments to be recognized in the financial statements at their fair values. To measure the fair value of outstanding stock options granted or modified, we utilize the Black-
The estimated grant date fair values of the stock options granted during the years ended December 31, 2017 and 2015 were calculated using the Black-Scholes valuation model based on the following assumptions. There were no stock options granted during 2016.
Expected Life - is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. We use the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected life for options granted during the period as historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years.
Risk-Free Interest Rate - is the U.S. Treasury rate on the date of the grant having a term approximating the expected life of the option.
Non-vested RSUs subject to service condition vesting requirements vest over a service period ranging from one to five years. Non-vested RSUs subject to performance condition vesting requirements are scheduled to vest at December 31, 2018, with the number of shares eligible for vesting based on the satisfaction of a return on equity goal. The fair value of RSUs subject to service and performance condition vesting requirements is measured as the closing price of our common stock on the date of grant less the present value of anticipated dividends to be paid during the service period.
Beginning on January 1, 2014, we offered to our employees a 401(k) Savings Plan (401(k) Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan, we match up to 100% of eligible employees' pre-tax contributions up to 4% of eligible compensation. We contributed approximately $1.5 million for the year ended December 31, 2017, compared to $1.5 million and $1.2 million for the years ended December 31, 2016 and 2015, respectively.
We are a U.S. taxpayer and are subject to the statutory U.S. federal corporate income tax rate of 35% for all prior years through December 31, 2017. We will be subject to the statutory U.S. federal corporate income tax rate of 21% for 2018 and all future
As a result of the adoption of ASU 2016-09 in the first quarter of 2017, we recognized a discrete tax benefit of $3.3 million associated with excess tax benefits for share-based compensation. As of December 31, 2017, our federal net operating loss carryforward balance included $2.2 million of excess share-based compensation previously excluded from the net deferred tax asset balance as of December 31, 2016.
As of December 31, 2017 and 2016, we had no reserves for unrecognized tax benefits, and had taken no material uncertain tax positions that would have required recognition and measurement. It is our policy to classify interest and penalties related to unrecognized tax benefits as income tax expense.
We file income tax returns with the U.S. federal government and various state jurisdictions which are subject to potential examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax returns for 2014 and subsequent years and state income tax returns for 2013 and subsequent years remain open by statute.
Software and equipment consist largely of capitalized software developed to support our MI operations. Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2017 and December 31, 2016, consists of the following:
Under the PMIERs financial requirements, Approved Insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an Approved Insurers net RIF, calculated by applying on a loan-by-loan basis certain risk-based factors derived from tables set out in the PMIERs to the net RIF, and other transactional adjustments approved by the GSEs, such as with respect to our 2017 ILN Transaction and 2016 QSR Transaction. The risk-based required asset amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy. The PMIERs financial requirements also increase the amount of available assets that must be held by an Approved Insurer for LPMI policies originated on or after January 1, 2016.
We incurred rent expense related to this lease of $2.1 million, $1.5 million, and $1.5 million for the years ended December 31, 2017, 2016, and 2015, respectively.
Under applicable law in Wisconsin and 15 other states, mortgage insurers must maintain minimum amounts of statutory capital relative to RIF to continue to write new business. While formulations of minimum statutory capital may vary in each state, the most common measure allows for a maximum permitted RTC ratio of 25:1. Wisconsin and certain other states, including California and Illinois, apply a substantially similar requirement referred to as minimum policyholders' position. A working group of the National Association of Commissioners (NAIC) is currently developing a loan level capital model applicable to mortgage guaranty insurers that is expected to ultimately be incorporated into a revised NAIC Mortgage Guaranty Insurance Model Act. Following adoption by the NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and perhaps others that do not, are expected to enact a portion or all of the revised Model Act, including the loan-level capital model.
As of December 31, 2017, NMIC's performing primary RIF, net of reinsurance, was approximately $7.3 billion, resulting in an RTC ratio of 14.0:1, significantly below the state financial requirements. As of December 31, 2016, NMIC's performing primary RIF, net of reinsurance, was approximately $5.8 billion, resulting in an RTC ratio of 12.4:1.
Ohio regulation limits the amount of risk a mortgage insurer may retain on a single loan to 25% of the borrower's indebtedness and, as a result, the portion of such insurance in excess of 25% must be reinsured. NMIC and Re One have entered into a primary excess share reinsurance agreement, effective August 1, 2012, and a facultative pool reinsurance agreement, effective September 1, 2013, under which NMIC cedes premiums, loss reserves and claims to Re One on an excess share basis for any primary or pool policy which offers coverage greater than 25% on any loan insured thereunder, after giving effect to third-party reinsurance. NMIC
will use reinsurance provided by Re One solely for purposes of compliance with Ohio's coverage limit. The facultative pool reinsurance agreement was amended effective September 1, 2016, to reduce the risk ceded by NMIC to Re One in connection with the inception of the 2016 QSR Transaction.
NMIC and Re One are subject to restrictions on their ability to pay dividends without prior approval of the Wisconsin OCI. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin law, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31. NMIC and Re One have never paid any dividends to NMIH. NMIC reported a statutory net loss for the twelve months ended December 31, 2017 and cannot pay any dividends to NMIH through December 31, 2018 without the prior approval of the Wisconsin OCI. Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.