The table below shows primary portfolio statistics, by book year, as of December 31, 2016.
We intend to build a geographically diverse portfolio without significant geographic concentrations that might expose us to undue risk. We manage geographic concentration risk by establishing targets and limits for new origination mix and/or portfolio limits. If warranted, we would also establish restrictions in certain geographic markets; although, we currently do not have any geographic market restrictions in place. We expect that our insurance origination mix by region will be consistent with the overall distribution of mortgage originations in the U.S. that require mortgage insurance.
The “claims incurred” section of the table above shows claims and claim expenses incurred on default notices received in the current year and in prior years. The amount of claims incurred relating to default notices received in the current year represents the estimated amount to be ultimately paid on such default notices. The decreases during the periods presented in reserves held for prior year defaults are generally the result of 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.
The GSEs are the principal purchasers of mortgages insured by MI companies. As a result, the practices of the private MI industry in the U.S. are driven in large part by the requirements and practices of the GSEs.
Insurance claims and claim expenses increased for the year ended December 31, 2016 compared to the years ended December 31, 2015 and December 31, 2014, as a result of increases in our NODs, primarily due to increases in the number of policies-in-force year-over-year.
We incurred interest expense in 2015 and 2016 related to the Term Loan entered into during the fourth quarter of 2015.
In 2015, NMIH entered into the Credit Agreement for the Term Loan to support the continued growth of its IIF. On February 9, 2017, NMIH amended the Credit Agreement (the Amendment) to reduce the interest rate and extend the maturity date from November 10, 2018 to November 10, 2019. The Credit Agreement contains various restrictive covenants and required financial ratios and tests (which were not modified by the Amendment) that we are required to meet or maintain. These covenants include, but are not limited to the following: a maximum debt-to-total capitalization ratio (as defined) of 35%, maximum RTC ratio of 22.0:1.0, liquidity (as defined) of $25.5 million as of December 31, 2016, compliance with PMIERs financial requirements (subject to any GSE-approved waivers), and minimum equity requirements. Prior to the Amendment, the Term Loan accrued interest at the Eurodollar Rate (1%) plus an annual margin rate of 7.5% (an all-in rate of 8.75% at December 31, 2016), payable quarterly. After the Amendment, the Term Loan bears interest at the Eurodollar Rate (1%) plus an annual margin rate of 6.75%, payable quarterly. The Company recorded $14.8 million of interest expense for the year ended December 31, 2016.
As of December 31, 2016, we had a federal net operating loss carryforward of $121.1 million, which expires from 2030 to 2035, and state net operating loss carryforwards of $63.6 million, which primarily expire from 2031 to 2036. Section 382 of the Internal Revenue Code (Section 382) imposes annual limitations on a corporation's ability to utilize its net operating losses (NOLs) if it experiences an “ownership change.” As a result of the acquisition of our insurance subsidiaries, $7.3 million of NOLs are subject to annual limitations of $0.8 million through 2016, then $0.3 million through 2029. If we were to experience another “ownership change,” further limitations would apply.
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 related unearned premiums 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
NMI Holdings, Inc. (NMIH) is a Delaware corporation, formed in May 2011, to provide mortgage insurance through its wholly owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). In April 2012, we completed a private placement of our securities, through which we offered and sold an aggregate of 55,000,000 of our Class A common shares resulting in net proceeds of approximately $510 million (the Private Placement), and we completed the acquisition of our insurance subsidiaries for $8.5 million in cash, common stock and warrants, plus the assumption of $1.3 million in liabilities. In November 2013, we completed an initial public offering of 2.4 million shares of our common stock, and our common stock began trading on the NASDAQ exchange on November 8, 2013, under the symbol "NMIH." For a further discussion, see "Note 15, Common Stock Offerings."
Consistent with industry accounting practices, for purposes of establishing claim reserves, we adhere to the general claim reserving principles contained in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 944, Financial Services - Insurance (ASC 944), even though that standard expressly excludes mortgage insurance from its guidance. Consistent with our industry, we do not establish claim reserves for anticipated future claims on insured loans that are not currently in default. We do not consider a loan to be in default for claim reserve purposes until we receive notice from the servicer that a borrower has failed to make two consecutive regularly scheduled payments and is at least 60 days in default. In addition to reserves on reported defaults, we establish IBNR reserves for estimated claims incurred on loans that have been in default for at least 60 days that have not yet been reported to us by the servicers.
We establish claim reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Our method, consistent with industry practice, is to establish claim reserves only for loans in default. Our claim reserves also include amounts for reserves incurred but not reported (IBNR). As of December 31, 2016, we have established reserves for insurance claims of $3.0 million for 179 primary loans in default, compared to a reserve of $679 thousand for the year ended December 31, 2015. We paid nine claims totaling $367 thousand during the year ended December 31, 2016.
We test goodwill and intangibles for impairment in the third and fourth quarter, respectively, of every year, or more frequently if we believe indicators of impairment exist. No impairments of indefinite-lived intangibles or goodwill were identified as of December 31, 2016 and 2015.
NMIC and Re One's combined statutory net loss, statutory surplus, contingency reserve and RTC ratios for each of the years in the three-year period ended December 31, 2016 were as follows:
As of December 31, 2016, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately $505 million. The amount of restricted assets used to determine any dividend to NMIH, once all restrictions expire, would be computed under SAP which may differ from the amount of restricted assets computed under GAAP. Since inception, NMIC has not paid any dividends to NMIH. As NMIC had a statutory net loss for the year ended December 31, 2015, NMIC cannot pay any dividends to NMIH through December 31, 2016, without the prior approval of the Wisconsin OCI.