NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of December 31, 2018, we had master policies with 1,374 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. We had total IIF of $71.5 billion and gross RIF of $17.2 billion as of December 31, 2018, compared to total IIF of $51.7 billion and gross RIF of $11.9 billion as of December 31, 2017, and total IIF of $35.8 billion and gross RIF of $7.9 billion as of December 31, 2016. Included in our total IIF as of December 31, 2018, 2017, and 2016 was $68.6 billion, $48.5 billion and $32.2 billion of primary IIF, respectively. As of December 31, 2018, our gross primary RIF was $17.1 billion, compared to $11.8 billion and $7.8 billion as of December 31, 2017 and 2016, respectively. For the year ended December 31, 2018, we generated NIW of $27.3 billion, compared to $21.6 billion and $21.2 billion for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2018, we had 304 full-time employees.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve the dream of homeownership, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders.
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, 2018, we activated 121 lenders, compared to 127 and 173 for the years ended December 31, 2017 and December 31, 2016, 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, 2018, we had 1,374 Master Policies and 1,005 active customer relationships, compared to 1,267 and 841, respectively, as of December 31, 2017 and 1,131 and 715, respectively, as of December 31, 2016.
We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPSSM. Rate GPS considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While we expect most of our new business will be priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns.
31, 2018 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and 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 at the same premium rate or higher, 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 premiums written and earned and also reduces 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.
Effective September 1, 2016, NMIC entered into the 2016 QSR with a panel of third-party reinsurers. Under the terms of the 2016 QSR Transaction, NMIC ceded premiums written related to (1) 100% of the risk under our pool agreement with Fannie Mae, (2) 25% of the existing risk on eligible policies written as of August 31, 2016 and (3) 25% of the risk on eligible policies written between September 1, 2016 and December 31, 2017, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims.
Effective January 1, 2018, NMIC entered into the 2018 QSR Transaction with a panel of third-party reinsurers. Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of risk on eligible policies written in 2018 and will cede premiums earned related to 20% of risk on 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 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 are amortized or repaid, and/or the mortgage insurance coverage is canceled and was $131.1 million as of December 31, 2018. For the reinsurance coverage period, NMIC retains the first layer of $126.8 million of aggregate losses, of which $125.2 million remained as of December 31, 2018, and Oaktown Re then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount.
In July 2018, NMIC secured $264.5 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from January 1, 2017 through May 31, 2018, through a mortgage insurance-linked notes offering by Oaktown Re II. The reinsurance coverage amount under the terms of the 2018 ILN Transaction decreases from $264.5 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage
is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and was $264.5 million as of December 31, 2018. For the reinsurance coverage period, NMIC retains the first layer of $125.3 million of aggregate losses, of which $125.3 million remained at December 31, 2018, and Oaktown Re II then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount.
For the year ended December 31, 2018, primary NIW increased 26%, compared to the year ended December 31, 2017, due to growth in our monthly premium policy volume tied to increased penetration of existing customer accounts and new customer account activations, offset slightly by a reduction in our single premium policy production. Overall private MI market NIW increased by approximately 8% from 2017 to 2018. For the year ended December 31, 2017, primary NIW increased 2% compared to the year ended December 31, 2016 as growth in our monthly premium policy volume was offset by a reduction in our single premium policy production tied to actions we initiated in 2017 to reduce the concentration of single policies in our product mix.
For the year ended December 31, 2018, net premiums written and earned increased 48% and 52%, respectively, compared to the year ended December 31, 2017. The increases in net premiums written and earned are due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR Transactions and ILN Transactions, and a decrease in earnings from the cancellation of single premium policies.
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated.
The sum of the number of claims paid ever to date and number of loans in default as of the end of the period divided by policies ever in force.
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of December 31, 2018 our RIF continues to be relatively more concentrated in California, primarily as a result of the size of the California mortgage market relative to the rest of the country and the location and timing of our acquisition of new customers. The distribution of our primary RIF as of December 31, 2018 is not necessarily representative of the geographic distribution we expect in the future.
borrowers' DTI ratios, with higher DTI ratios tending to have higher probabilities of claims;
other borrower, property-type and loan level risk characteristics, such as cash-out refinancings, second homes or investment properties;
the rate at which we rescind policies, which we expect to be lower for us than recent rescission rates experienced by the private MI industry due to the terms of our Master Policy and generally tighter underwriting standards; and
Based on our experience and industry data, we believe that claims incidence for mortgage insurance is generally highest in the third through sixth years after loan origination. As of December 31, 2018, over 85% of our primary IIF related to business written since January 1, 2016. Although the claims experience on our IIF to date has been modest, we expect incurred claims to increase as a greater amount of our existing insured portfolio reaches its anticipated period of highest claim frequency. Additionally, our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any pool reserves for claims or IBNR to date.
The decrease in the ending default inventory at December 31, 2018 compared to December 31, 2017, primarily relates to cure activity on defaults on insured loans in areas declared by FEMA to be individual assistance disaster zones following Hurricanes Harvey and Irma, and the California wildfires in 2017, and to a lesser extent, cure activity on our non-disaster related NOD population. The impact of this cure activity was partially offset by an increase in new defaults tied to the growth in the number of policies in force, the aging of our earlier book years and, to a more limited extent, default experience in areas declared by FEMA to be individual assistance disaster zones following disasters that we determined to be focal events in 2018. The 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 natural disasters, as well as the growth in the number of policies in force and aging of our earlier book years
influence default experience to a greater extent than does seasonality, our industry has typically experienced a fourth quarter seasonal increase in the number of defaults and a first quarter seasonal decline in the number of defaults and increase in the number of cures.
Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy.
As of December 31, 2018, NMIC's performing primary RIF, net of reinsurance, was approximately $10.0 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $729 million (including contingency reserves) as of December 31, 2018, NMIC's RTC ratio was 13.7:1. Re One had total statutory capital of $35 million as of December 31, 2018, with a RTC ratio of 1.0:1. We continuously monitor our compliance with state capital requirements.
In May 2018, Moody's upgraded its financial strength rating from "Ba1" to "Baa3" for NMIC and issued a "Ba3" rating for NMIH's $150 million senior secured 2018 Term Loan, compared to its previous "B1" rating on the 2015 Term Loan. In August 2018, Moody's assigned a "Ba3" rating to our 2018 Revolving Credit Facility. The outlook for Moody's ratings is stable. In July 2018, S&P affirmed its "BBB-" financial strength and long-term counter-party credit ratings on NMIC and its "BB-" long-term counter-party credit rating on NMIH. The outlook on S&P's ratings is positive.
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as the government MIs. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price. See Item 1, "Business - Overview of Residential Mortgage Finance and the Role of the Private MI Industry in the Current Operating Environment - Competition," above. We expect the MI market to remain competitive, with pressure for industry participants to grow or maintain their market share.
For the year ended December 31, 2018, net premiums earned totaled $251.2 million compared to $165.7 million for the year ended December 31, 2017 and $110.5 million for the year ended December 31, 2016. The increase of net premiums earned of $85.5 million in 2018 was primarily due to the growth of our IIF and increased monthly policy production, partially offset by a decrease in earnings from cancellations and increases in cessions under the QSR Transactions and ILN Transactions. The $55.2 million increase in net premiums earned in 2017 was primarily due to the growth of our IIF and increased monthly policy production, partially offset by a decrease in earnings from cancellations and the impact of cessions under the 2017 ILN transaction and 2016 QSR Transaction.
For the year ended December 31, 2018, net investment income was $23.5 million compared to $16.3 million for the year ended December 31, 2017 and $13.8 million for the year ended December 31, 2016. The increase in both periods was due to an increase in the size of and improved yields on our total investment portfolio.
Underwriting and operating expenses were $117.2 million for the year ended December 31, 2018, compared to $107.0 million and $93.2 million for the years ended December 31, 2017 and 2016, respectively. Employee compensation accounts for the majority of our operating expenses, which increased to support the growth of our business. In addition, certain variable expenses, such as underwriting costs and premium taxes, increased due to the growth in our NIW and IIF. Growth in underwriting and operating expenses in 2018 was partially offset, by increased ceding commissions under the QSR Transactions and a decrease in transaction-related expenses incurred in 2018 as compared to those incurred in 2017. We incurred $2.7 million of expenses in 2018 in connection with the 2018 ILN Transaction, compared to $4.9 million of expenses incurred in 2017 related to the 2017 ILN Transaction and amendment of our 2015 Credit Agreement.
Interest expense was $15.0 million, $13.5 million and $14.8 million for the years ended December 31, 2018, 2017 and 2016, respectively. Interest expense increased in 2018 compared to 2017 due in part to $2.2 million of costs incurred with the extinguishment of the 2015 Term Loan and issuance of the 2018 Term Loan, as well as interest expense incurred following the inception of the 2018 Revolving Credit Facility and a rise in the underlying LIBOR rate during 2018. The increase was partially offset by the reduction in interest spread payable on the 2018 Term Loan compared to the 2015 Term Loan. Interest expense declined in 2017 compared to 2016 in connection with the amendment of our 2015 Credit Agreement completed in February 2017, which among other items, reduced the interest spread payable on the 2015 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, Debt."
Diluted EPS was $1.60, $0.35 and $1.05 for the years ended December 31, 2018, 2017 and 2016, respectively. Diluted EPS increased compared to 2017 due to the growth in net income, partially offset by an increase in weighted average diluted shares outstanding primarily driven by our common stock offering in March 2018.
As of December 31, 2018, we had $936.8 million in cash and investments, including $64.3 million held at NMIH. The increase in cash and cash equivalents and investments from December 31, 2017 primarily relates to cash generated from operations and $79.2 million of net proceeds raised from the common stock offering we completed in March 2018.
Premiums receivable increased to $36.0 million as of December 31, 2018, compared to $25.2 million as of December 31, 2017 due to the increase in our monthly premium policies in force, where premiums are generally paid one month in arrears.
Unearned premiums decreased $4.3 million to $158.9 million as of December 31, 2018, primarily due to the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies and the cancellation of other single premium policies, partially offset by single premium policy originations in 2018.
Reserve for insurance claims and claims expenses increased $4.1 million to $12.8 million at December 31, 2018, primarily due to the aging of existing defaults in our insured portfolio, offset by the release of reserves on cured defaults and claims paid during the period. See "- Insurance Claims and Claims Expenses," above for further details.
Reinsurance funds withheld was $27.1 million as of December 31, 2018, representing the net of our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The decrease in reinsurance funds withheld of $7.0 million from December 31, 2017, was a result of a decline in ceded premiums written on single premium policies, due to the end of the reinsurance coverage period for new business under the 2016 QSR Transaction at December 31, 2017. See, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance."
In March 2018, NMIH completed the sale of 4.3 million shares of common stock, including the exercise of a 15% overallotment option to purchase additional shares, and raised proceeds of approximately $79.2 million, net of underwriting discounts, commissions and other direct offering expenses. In April 2018, NMIH made a capital contribution of $70 million to NMIC.
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 the 2015 Term Loan to NMIC in the first quarter of 2017, consistent with the benefits NMIC received when NMIH contributed the loan proceeds to NMIC. NMIH received similar approval from the Wisconsin OCI to allocate interest expense to NMIC on the 2018 Term Loan and 2018 Revolving Credit Facility.
NMIC and Re One's ability to pay dividends to NMIH is subject to insurance department notice or approval. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31.
NMIC has never paid any dividends to NMIH. NMIC reported a statutory net loss for the 12 month period ending December 31, 2018 and cannot pay any dividends to NMIH through December 31, 2019 without the prior approval of the Wisconsin OCI. Re One has never paid dividends to NMIH. Re One has capacity to pay ordinary dividends of up to $2.7 million to NMIH December 31, 2019. Certain other states in which NMIC and Re One are licensed also have statutes or regulations that may restrict their ability to pay dividends.
NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements. NMIC's capital needs also depend on its decision to access the reinsurance markets. NMIH may require liquidity to fund the capital needs of its insurance subsidiaries.
Our investment portfolio consists of fixed maturity instruments. As of December 31, 2018, the fair value of our investment portfolio was $911.5 million. We also had an additional $25.3 million of cash and equivalents as of December 31, 2018. Pre-tax book yield on the investment portfolio for the year ended December 31, 2018 was 2.9%. The book yield is calculated as period-to-date net investment income divided by average amortized cost of the investment portfolio. Yield on the investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our investment portfolio and other factors.
Our investments are rated by one or more nationally recognized statistical rating organizations. If multiple ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
As of December 31, 2018, 2017 and 2016, we held no other-than-temporarily impaired securities. For the years ended December 31, 2018 and 2016 we did not recognize any OTTI losses. For the year ended December 31, 2017, we recognized $0.1 million of OTTI losses in earnings. There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss) for any period presented.
In December of 2017, the SEC issued Staff Accounting Bulletin No. 118 (SAB 118) which provided a one-year measurement period from December 22, 2017, the enactment date of the TCJA, to allow the registrant sufficient time to obtain, prepare and analyze information to complete the accounting required under Accounting Standards Codification (ASC) 740. We completed our full assessment of the tax effects of the enactment of the TCJA as of December 22, 2018. The impact of our final assessment as compared to the provisional amount recorded at December, 31, 2017 was immaterial.
our net operating loss carryforwards were expected to be fully utilized by 2018;
the substantial growth in our IIF driving the increase in net premiums;
our expectation that we would be in a cumulative profit in a three-year period in 2017.
The primary negative evidence that was considered was our cumulative loss in the three year period through December 31, 2016. Although ASC 740 does not define the term or the length of time to consider when calculating the cumulative loss, practice and interpretations suggest that the guideline, not a "bright line," is to aggregate the pre-tax results as adjusted for permanent items for three years (i.e., the then current and two preceding years).
At December 31, 2016, we concluded that positive evidence of sufficient quantity and quality outweighed negative evidence, and supported our conclusion that it was more-likely-than-not that we would realize our federal and certain state net deferred tax assets. The reversal of our beginning-of-the-year valuation allowance against such net deferred tax assets (resulting from a change in judgment about the realizability of the related net deferred tax assets in future years) was consistent with the requirements of ASC 740-10-45-20.
We continue to evaluate the realizability of our net deferred tax asset position, and our examination of results through December 31, 2018 and review of future expectations, continue to support the conclusion that it is more-likely-than-not that we will realize our federal and certain state net deferred tax assets. We also concluded it was appropriate to continue to apply a valuation allowance against state net deferred tax assets, primarily related to state net operating losses by NMIH that we do not expect to be utilized.
NMIH and its subsidiaries entered into a tax sharing agreement effective August 23, 2012, which was subsequently amended on September 1, 2016. Under original and amended agreements, each of the parties agreed to file consolidated federal income tax returns for all tax years beginning in and subsequent to 2012, with NMIH as the direct tax filer. The tax liability of each subsidiary that is party to the agreement is limited to the amount of the liability it would incur if it filed separate returns.
We had no material off-balance sheet arrangements at December 31, 2018. In connection with the ILN Transactions, we have certain future contractual commitments to Oaktown Re and Oaktown Re II, special purpose VIEs that are not consolidated in our financial results. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2, Summary of Accounting Principles - Variable interest entity."
Long-term debt relates to our 2018 Credit Agreement and includes future interest payments on the 2018 Term Loan using the minimum interest rate in effect at December 31, 2018 and future undrawn commitment fees on the 2018 Revolving Credit Facility at the rate in effect at December 31, 2018.
Based on this evaluation, we record OTTI adjustments on securities with declines in fair value below their amortized cost, if it is more likely than not that we will sell the securities prior to recovery of their amortized cost or if the present value of the discounted cash flows we expect to collect on the securities through recovery under a “most likely” scenario is less than their amortized cost. If our intent is to sell securities and their fair value is below its amortized cost, the securities are classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in earnings Otherwise, losses on other-than-temporarily impaired securities are bifurcated between credit-related losses and losses related to other factors (e.g., interest rate fluctuations), with credit-related losses recognized in the statement of operations and losses related to other factors recognized in accumulated other comprehensive income (loss), net of taxes.
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. DAC is subsequently amortized to expense in proportion to estimated gross profits over the estimated life of the associated policies. DAC is reviewed periodically to determine that it does not exceed recoverable amounts.
We consider whether a premium deficiency exists and premium deficiency reserve is required at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds future premiums, existing reserves and anticipated investment income. The premium deficiency assessment 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 the premium deficiency calculation can be affected by volatility in the
We are required to establish a valuation allowance against our net deferred tax assets when it is more likely than not that all or a portion of our net deferred tax assets will not be realized. We assess our need for a valuation allowance on a quarterly basis. In the course of our review, we assess all available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences, and are required to exercise judgment and make assumptions in this regard.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the Company's internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and our report dated February 14, 2019 expressed an unqualified opinion thereon.
During 2017, we issued 32,368 common shares with a par value of $0.01 related to the exercise of warrants, which is not identifiable in this schedule due to rounding.
Ceded losses recoverable on the QSR Transactions were reclassified from "Other Assets" in prior periods to "Reinsurance balance, net".
NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011, to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One).
Premiums written on pool transactions are earned over the period that coverage is provided.
For the year ended December 31, 2018, no customer accounted for more than 10% of our consolidated revenues. At December 31, 2018, approximately 13% of our total risk-in-force (RIF) was concentrated in California.
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.
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses, after considering the related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (loss) in shareholders' equity. Net realized investment gains and losses are reported in income based on specific identification of securities sold or other-than-temporarily impaired, and are reclassified out of accumulated other comprehensive income (loss).
Based on this evaluation, we record OTTI adjustments on securities with declines in fair value below their amortized cost, if it is more likely than not that we will sell the securities prior to recovery of their amortized cost or if the present value of the discounted cash flows we expect to collect on the securities through recovery under a "most likely" scenario is less than their amortized cost. If our intent is to sell securities and their fair value is below amortized cost, the securities are classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in earnings. Otherwise, losses on other-than-temporarily impaired securities are bifurcated between credit-related losses and losses related to other factors (e.g., interest rate fluctuations), with credit-related losses recognized in earnings and losses related to other factors recognized in accumulated other comprehensive income (loss), net of taxes.
We account for premiums, claims and claims expenses that are ceded to reinsurers on a consistent basis with that which we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums ceded or otherwise paid to reinsurers as a reduction to premium revenue.
We earn profit and ceding commissions in connection with the QSR Transactions (see Note 6, "Reinsurance"). Profit commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of claims and claims expenses that we cede. We recognize any profit commissions we earn as an increase to premium revenue. Ceding commissions are calculated as a percentage of ceded written premiums under the 2016 QSR Transaction and as a percentage of ceded earned premiums under the 2018 QSR Transaction, and are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions we earn in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions earned as a reduction to underwriting and operating expenses.
Under the QSR Transactions, we cede a portion of claims and claims expenses reserves to our reinsurers, and account for such ceded reserves as reinsurance recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims expenses on the consolidated statements of operations. We remain directly liable for all claims payments if we are unable to collect from any reinsurer.
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, 2018.
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, 2018.
Premiums receivable consist of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled. Premiums receivable may be written off prior to 120 days in the ordinary course of business for reasons including, but not limited to, the modification or refinancing of underlying insured loans. We have determined that the receivable write-off was immaterial as of December 31, 2018.
NMIC entered into aggregate excess of loss reinsurance agreements with Oaktown Re and Oaktown Re II, each a Bermuda-domiciled special purpose reinsurer, in May 2017 and August 2018, respectively. At inception of each reinsurance agreement, we determined that each of Oaktown Re and Oaktown Re II were variable interest entities (VIEs), as defined under GAAP (ASC 810), because they did not have sufficient equity at risk to finance their respective activities. We evaluated the VIEs at inception to determine whether NMIC was the primary beneficiary under each deal and, if so, whether we were required to consolidate the assets and liabilities of each VIE. The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its economic performance and (2) has significant economic exposure to the VIE, i.e., the obligation to absorb losses or receive benefits that could potentially be significant. The determination of whether an entity is the primary
We concluded that we are not the primary beneficiary of either Oaktown Re or Oaktown Re II because NMIC does not have significant economic exposure to either Oaktown Re or Oaktown Re II, and, as such, we do not consolidate the VIEs in 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. We adopted this update effective January 1, 2018 and the adoption had no impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities on the balance sheet. The standard also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. For public business entities, this update is effective for annual periods beginning after December 15, 2018 and interim periods therein. We adopted this update on January 1, 2019 using the modified-retrospective method and applied it prospectively as of the effective date, without adjusting comparative periods presented as permitted by ASU 2018-11, Leases (Topic 842), Targeted Improvement. At adoption, our assets and liabilities each increased by approximately $7.6 million in connection with the recognition of right-of-use assets and lease liabilities, primarily
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This update expands the scope of Topic 718 to include share-based payments made to non-employees in connection with the acquisition of goods and services. The standard will take effect for public business entities for fiscal years, beginning after December 15, 2019, and interim periods within fiscal years, beginning after December 15, 2020. We adopted this ASU on January 1, 2019, and have determined that it has no impact on our financial results at this time as we have not made any share-based grants to non-employees as defined in ASC 718-10-20.
We did not own any mortgage-backed securities in our asset-backed portfolio as December 31, 2018 and 2017.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of December 31, 2018 and 2017:
As of December 31, 2018 and December 31, 2017, approximately $5.3 million and $7.0 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.
The amortized cost and fair values of available-for-sale securities as of December 31, 2018 and December 31, 2017, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the
right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
The following describes the valuation techniques used by us to determine the fair value of our financial instruments:
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.
The following tables present the level within the fair value hierarchy at which our financial instruments were measured:
There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level 3, of the fair value hierarchy during the years ended December 31, 2018 and 2017.
The changes in fair value of the warrant liability for the years ended December 31, 2018, 2017, and 2016 are primarily attributable to changes in the price of our common stock during the respective periods with additional impact related to changes in the Black-Scholes model inputs and exercises of outstanding warrants.
The 2018 Term Loan bears interest at the Eurodollar Rate, as defined in the 2018 Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 4.75%, representing an all-in rate of 7.27% as of December 31, 2018, payable monthly based on our current interest period election. Quarterly principal payments of $375 thousand are also required.
Interest expense for the year ended December 31, 2018 includes amounts related to our interest payment, one-time financing costs and the amortization of issuance costs and original issue discount. For the year ended December 31, 2018, we recorded $14.4 million of interest expense, including $2.2 million of costs related to the extinguishment of the 2015 Term Loan and issuance of the 2018 Term Loan. Capitalized debt issuance costs totaling $1.8 million, including $820 thousand related to modified lenders from the 2015 Term Loan; and original issue discount totaling $1.0 million, including $236 thousand related to modified lenders from the 2015 Term Loan, are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan. As of December 31, 2018, the remaining unamortized issuance costs and original issue discount totaled $2.5 million, and the outstanding principal balance of the 2018 Term Loan was $149.3 million.
Borrowings under the 2018 Revolving Credit Facility may be used for general corporate purposes and will accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the 2018 Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 1.00% to 2.50% per annum, based on the applicable corporate credit rating at the time, or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 2.00% to 3.50% per annum, based on the applicable corporate credit rating at the time. As of December 31, 2018, no borrowings had been made under the 2018 Revolving Credit Facility.
We are subject to certain covenants under the 2018 Revolving Credit Facility, including (but not limited to) the following: a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of December 31, 2018.
Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million to unaffiliated investors (the 2017 Notes). The 2017 Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of the 2017 Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re to NMIC under the reinsurance agreement. Funds in the reinsurance trust account are required to be invested in high credit quality money market funds at all times. We refer collectively to NMIC's reinsurance agreement with Oaktown Re and the issuance of the 2017 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 anticipated operating expenses (capped at $300 thousand per year). NMIC ceded risk premiums of $6.3 million and $5.0 million and did not cede any losses to Oaktown Re for the years ended December 31, 2018 and 2017, respectively.
In July 2018, NMIC entered into a reinsurance agreement with Oaktown Re II, which provides for up to $264.5 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written between January 1, 2017 and May 31, 2018. For the reinsurance coverage period, NMIC retains the first layer of $125.3 million of aggregate losses, of which $125.3 million remained at December 31, 2018, and Oaktown Re II then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. The outstanding reinsurance coverage amount decreases from $264.5 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled, and was $264.5 million as of December 31, 2018. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and will stop amortizing if certain credit enhancement or delinquency thresholds are triggered.
Under the reinsurance agreement, NMIC holds an optional termination right if certain events occur, including, among others, a clean-up call if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under the agreement. In addition, there are certain events that will result in mandatory termination of the agreement, including NMIC's failure to pay premiums or consent to reductions in the trust account to make principal payments to noteholders, among others.
25% of existing risk written on eligible policies as of August 31, 2016;
100% of existing risk under our pool agreement with Fannie Mae; and
The 2016 QSR Transaction is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. However, NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
The following table shows the amounts related to the QSR Transactions:
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred relating to current year NODs represents the estimated amount of claims and claims expenses to be ultimately paid on such loans in default. We recognized $2.4 million, $0.8 million, and $0.1 million of favorable prior year development during the year ended December 31, 2018, 2017 and 2016, respectively, due to NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual defaults and claims and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $2.7 million related to prior year defaults remained as of December 31, 2018.
For the years ended December 31, 2018, 2017 and 2016, we incurred $12.6 million, $9.5 million, and $6.9 million, respectively, of expenses related to awards granted under our Stock Plans. We recognized related income tax benefits of $2.2 million, $1.9 million and $1.4 million for the years ended December 31, 2018, 2017 and 2016, respectively.
A summary of option activity during the years ended December 31, 2018, 2017 and 2016 is as follows:
As of December 31, 2018, there were approximately 2.1 million fully vested and exercisable options. There were 0.8 million exercises during the year with an aggregate intrinsic value of $8.4 million. The weighted average exercise price for the fully vested and exercisable options was $10.28. The remaining weighted average contractual life of fully vested and exercisable options as of December 31, 2018 was 4.65 years. The aggregate grant date intrinsic value of fully vested and exercisable options was $16.0 million as of December 31, 2018.
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-Scholes options pricing model. Compensation expenses are recognized over the requisite service period, which is generally the three-year vesting period of the options.
Expected price volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate. At the time of grants, our common shares' trading history was not sufficient to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for such estimate, we used historical volatilities of a set of comparable companies in the industry in which we operate.
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. NMIH files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Prior to the enactment of the TCJA on December 22, 2017, we were subject to a statutory U.S. federal corporate income tax rate of 35% for all prior years through December 31, 2017.
At December 31, 2018, our net deferred tax liability was $2.7 million compared to a net deferred tax asset of $19.9 million at December 31, 2017. The change from a net deferred tax asset to liability position was driven by our utilization of net operating loss carryforwards and claimed deductibility of our statutory contingency reserve. As a mortgage guaranty insurance company, we are eligible to claim a tax deduction of our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction.
As of December 31, 2018 and 2017, we had no reserves for unrecognized tax benefits, and had taken no material uncertain tax positions that would have required recognition and measurement.
We file income tax returns with the U.S. federal government and various state jurisdictions that are subject to potential examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax returns for 2015 and subsequent years and state income tax returns for 2014 and subsequent years remain open by statute.
The capitalized amount for software, equipment, and leasehold improvements during the year ended December 31, 2018, 2017 and 2016, was $9.8 million, $9.1 million, and $11.2 million, respectively. Amortization and depreciation expense for software, equipment, and leasehold improvements for the years ended December 31, 2018, 2017, and 2016 was $7.8 million, $6.7 million, and $4.9 million, respectively.
Intangible assets and goodwill consist of identifiable intangible assets and goodwill we purchased in connection with the acquisition of our insurance subsidiaries. Intangible assets and goodwill as of both December 31, 2018 and 2017 were as follows:
We test goodwill and intangible assets for impairment in the third and fourth quarter, respectively, of every year, or more frequently if we believe indicators of impairment exist. No impairments of indefinite-lived intangibles or goodwill were identified during the years ended December 31, 2018, 2017 and 2016.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We certified to the GSEs by April 15, 2018 that NMIC was in full compliance with the PMIERs as of December 31, 2017. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC’s compliance with the PMIERs,
We incurred rent expense related to the Lease of $2.1 million, $2.1 million, and $1.5 million for the years ended December 31, 2018, 2017, and 2016, respectively.
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware corporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits. As of December 31, 2018, NMIH's shareholders' equity was approximately $701.5 million.