Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q



(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	June 30, 2019



☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______ to ______

Commission file number 001-36174

NMI Holdings, Inc.

(Exact name of registrant as specified in its charter)



Delaware					45-4914248
(State or other jurisdiction of incorporation or organization)					(I.R.S. Employer Identification No.)

2100 Powell Street	,	Emeryville	,	CA	94608
(Address of principal executive offices)					(Zip Code)

(855) 530-6642

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock, par value $0.01	NMIH	Nasdaq

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on July 29, 2019 was 67,768,466 shares.

TABLE OF CONTENTS



Cautionary Note Regarding Forward Looking Statements		3
PART I		5
Item 1.	Financial Statements	5
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4.	Controls and Procedures	48
PART II		49
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 6.	Exhibits	50
Signatures		53

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "potential," "should," "will," "estimate," "plan," "project," "continuing," "ongoing," "expect," "intend" or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. All forward looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this report. Further, any forward looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We have based these forward looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward looking statements including, but not limited to:


•	changes in the business practices of Fannie Mae and Freddie Mac (collectively, the GSEs), including decisions that have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement;


•	our ability to remain an eligible mortgage insurer under the private mortgage insurer eligibility requirements (PMIERs) and other requirements imposed by the GSEs, which they may change at any time;


•	retention of our existing certificates of authority in each state and the District of Columbia (D.C.) and our ability to remain a mortgage insurer in good standing in each state and D.C.;


•	our future profitability, liquidity and capital resources;


•	actions of existing competitors, including other private mortgage insurers and government mortgage insurers like the Federal Housing Administration (FHA), the U.S. Department of Agriculture's Rural Housing Service (USDA) and the Veterans Administration (VA) (collectively, government MIs), and potential market entry by new competitors or consolidation of existing competitors;


•	developments in the world's financial and capital markets and our access to such markets, including reinsurance;

•

adoption of new or changes to existing laws and regulations that impact our business or financial condition directly or the mortgage insurance industry generally or their enforcement and implementation by regulators, including any action by the Consumer Financial Protection Bureau to address the planned expiration of the "QM Patch" under the Dodd-Frank Act Ability to Repay/Qualified Mortgage rule;


•	legislative or regulatory changes to the GSEs' role in the secondary mortgage market or other changes that could affect the residential mortgage industry generally or mortgage insurance in particular;


•	potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries;


•	changes in general economic, market and political conditions and policies, interest rates, inflation and investment results or other conditions that affect the housing market or the markets for home mortgages or mortgage insurance;


•	our ability to successfully execute and implement our capital plans, including our ability to access the capital, credit and reinsurance markets and to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us, the GSEs and our regulators;


•	our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry;


•	our ability to attract and retain a diverse customer base, including the largest mortgage originators;


•	failure of risk management or pricing or investment strategies;


•	emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;


•	potential adverse impacts arising from natural disasters, including, with respect to affected areas, a decline in new business, adverse effects on home prices, and an increase in notices of default on insured mortgages;


•	the inability of our counter-parties, including third party reinsurers, to meet their obligations to us;


•	failure to maintain, improve and continue to develop necessary information technology systems or the failure of technology providers to perform; and


•	ability to recruit, train and retain key personnel.

For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q, including the exhibits hereto. In addition, for additional discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner, you should review the Risk Factors in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 10-K), as subsequently updated in other reports we file from time to time with the U.S. Securities and Exchange Commission (SEC).

Unless expressly indicated or the context requires otherwise, the terms "we," "our," "us" and the "Company" in this document refer to NMI Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries on a consolidated basis.

PART I

Item 1. Financial Statements

INDEX TO FINANCIAL STATEMENTS



Condensed Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	6
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2019 and 2018	7
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2019 and 2018	8
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2019 and 2018	10
Notes to Condensed Consolidated Financial Statements	11

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)



	June 30, 2019		December 31, 2018
Assets	(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $994,543 and $924,987 as of June 30, 2019 and December 31, 2018, respectively)	$	1,017,607	$	911,490
Cash and cash equivalents (including restricted cash of $1,430 and $1,414 as of June 30, 2019 and December 31, 2018, respectively)	35,735		25,294
Premiums receivable	42,225		36,007
Accrued investment income	6,301		5,694
Prepaid expenses	3,358		3,241
Deferred policy acquisition costs, net	52,607		46,840
Software and equipment, net	25,827		24,765
Intangible assets and goodwill	3,634		3,634
Prepaid reinsurance premiums	20,426		30,370
Other assets	12,679		4,708
Total assets	$	1,220,399	$	1,092,043

Liabilities
Term loan	$	146,253	$	146,757
Unearned premiums	151,358		158,893
Accounts payable and accrued expenses	24,351		31,141
Reserve for insurance claims and claim expenses	18,432		12,811
Reinsurance funds withheld	18,092		27,114
Warrant liability, at fair value	9,679		7,296
Deferred tax liability, net	28,258		2,740
Other liabilities ⁽¹⁾	11,597		3,791
Total liabilities	408,020		390,543
Commitments and contingencies

Shareholders' equity
Common stock - class A shares, $0.01 par value; 67,768,466 and 66,318,849 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively (250,000,000 shares authorized)	677		663
Additional paid-in capital	692,163		682,181
Accumulated other comprehensive income (loss), net of tax	14,052		(14,832		)
Retained earnings	105,487		33,488
Total shareholders' equity	812,379		701,500
Total liabilities and shareholders' equity	$	1,220,399	$	1,092,043


⁽¹⁾	Deferred Ceding Commissions have been reclassified to "Other Liabilities" in prior periods

See accompanying notes to consolidated financial statements.

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)



	For the three months ended June 30,						For the six months ended June 30,
	2019			2018			2019			2018
Revenues	(In Thousands, except for per share data)
Net premiums earned	$	83,249		$	61,615		$	157,118		$	116,529
Net investment income	7,629			5,735			15,012			10,309
Net realized investment (losses) gains	(113		)	59			(300		)	59
Other revenues	415			44			456			108
Total revenues	91,180			67,453			172,286			127,005
Expenses
Insurance claims and claim expenses	2,923			643			5,666			2,212
Underwriting and operating expenses	32,543			29,020			63,392			57,473
Total expenses	35,466			29,663			69,058			59,685
Other expense
(Loss) gain from change in fair value of warrant liability	(1,685		)	109			(7,164		)	529
Interest expense	(3,071		)	(5,560		)	(6,132		)	(8,979		)
Total other expense	(4,756		)	(5,451		)	(13,296		)	(8,450		)

Income before income taxes	50,958			32,339			89,932			58,870
Income tax expense	11,858			7,098			17,933			11,274
Net income	$	39,100		$	25,241		$	71,999		$	47,596

Earnings per share
Basic	$	0.58		$	0.38		$	1.07		$	0.74
Diluted	$	0.56		$	0.37		$	1.04		$	0.70

Weighted average common shares outstanding
Basic	67,590			65,664			67,143			63,891
Diluted	69,590			68,616			69,348			67,171

Net income	$	39,100		$	25,241		$	71,999		$	47,596
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) in accumulated other comprehensive income, net of tax expense (benefit) of $3,662 and ($2,879) for the three months ended June 30, 2019 and 2018 and $7,615 and ($3,304) for the six months ended June 30, 2019 and 2018, respectively	13,779			(1,464		)	28,647			(12,429		)
Reclassification adjustment for realized losses (gains) included in net income, net of tax (benefit) expense of ($24) and $12 for the three months ended June 30, 2019 and 2018 and ($63) and $10 for the six months ended June 30, 2019 and 2018, respectively	89			(46		)	237			(37		)
Other comprehensive income (loss), net of tax	13,868			(1,510		)	28,884			(12,466		)
Comprehensive income	$	52,968		$	23,731		$	100,883		$	35,130

See accompanying notes to consolidated financial statements.

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)



	Common Stock - Class A			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings		Total
	(In Thousands)
Balances, January 1, 2019	66,319	$	663	$	682,181		$	(14,832	)	$	33,488	$	701,500
Common stock: class A shares issued related to warrants	39	*		944			—			—		944
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	1,144	12		(1,471		)	—			—		(1,459		)
Share-based compensation expense	—	—		2,981			—			—		2,981
Change in unrealized investment gains/losses, net of tax expense of $3,992	—	—		—			15,016			—		15,016
Net income	—	—		—			—			32,899		32,899
Balances, March 31, 2019	67,502	$	675	$	684,635		$	184		$	66,387	$	751,881
Common stock: class A shares issued related to warrants	128	1		3,835			—			—		3,836
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	138	1		218			—			—		219
Share-based compensation expense	—	—		3,475			—			—		3,475
Change in unrealized investment gains/losses, net of tax benefit of $3,686	—	—		—			13,868			—		13,868
Net income	—	—		—			—			39,100		39,100
Balances, June 30, 2019	67,768	$	677	$	692,163		$	14,052		$	105,487	$	812,379


*	During the three months ended March 31, 2019, we issued 39,195 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.

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)



	Common Stock - Class A			Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total
	Shares	Amount		Additional Paid-in Capital			Accumulated Other Comprehensive Income (Loss)			Retained Earnings (Accumulated Deficit)			Total
	(In Thousands)
Balances, January 1, 2018	60,518	$	605	$	585,488		$	(2,859	)	$	(74,157	)	$	509,077
Cumulative effect of change in accounting principle	—	—		—			282			(282		)	—
Common stock: class A shares issued related to public offering	4,255	43		79,122			—			—			79,165
Common stock: class A shares issued related to warrants	26	*		489			—			—			489
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	770	8		(999		)	—			—			(991		)
Share-based compensation expense	—	—		2,805			—			—			2,805
Change in unrealized investment gains/losses, net of tax benefit of $423	—	—		—			(10,956		)	—			(10,956		)
Net income	—	—		—			—			22,355			22,355
Balances, March 31, 2018	65,569	$	656	$	666,905		$	(13,533	)	$	(52,084	)	$	601,944
Common stock: class A shares issued related to warrants	3	*		63			—			—			63
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	182	2		885			—			—			887
Share-based compensation expense	—	—		3,017			—			—			3,017
Change in unrealized investment gains/losses, net of tax benefit of $2,891	—	—		—			(1,510		)	—			(1,510		)
Net income	—	—		—			—			25,241			25,241
Balances, June 30, 2018	65,754	$	658	$	670,870		$	(15,043	)	$	(26,843	)	$	629,642


*	During the three months ended March 31, 2018 and June 30, 2018, we issued 25,686 and 3,751 common shares, respectively, with a par value of $0.01 related to the exercise of warrants, which is not identifiable in this schedule due to rounding.

See accompanying notes to consolidated financial statements.

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)



	For the six months ended June 30,
	2019			2018
Cash flows from operating activities	(In Thousands)
Net income	$	71,999		$	47,596
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Net realized investment losses (gains)	300			(59		)
Loss (gain) from change in fair value of warrant liability	7,164			(529		)
Depreciation and amortization	4,339			3,810
Net amortization of premium on investment securities	622			810
Amortization of debt discount and debt issuance costs	499			2,851
Share-based compensation expense	6,456			5,822
Deferred income taxes	17,840			10,864
Changes in operating assets and liabilities:
Premiums receivable	(6,218		)	(6,073		)
Accrued investment income	(607		)	(577		)
Prepaid expenses	(312		)	(756		)
Deferred policy acquisition costs, net	(5,767		)	(4,438		)
Other assets	(260		)	68
Unearned premiums	(7,535		)	2,492
Reserve for insurance claims and claim expenses	5,621			1,840
Reinsurance balances, net	(438		)	365
Accounts payable and accrued expenses	(6,379		)	(2,733		)
Net cash provided by operating activities	87,324			61,353
Cash flows from investing activities
Purchase of short-term investments	(113,276		)	(83,874		)
Purchase of fixed-maturity investments, available-for-sale	(126,179		)	(219,093		)
Proceeds from maturity of short-term investments	119,748			52,562
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale	49,229			111,485
Additions to software and equipment	(4,491		)	(3,273		)
Net cash used in investing activities	(74,969		)	(142,193		)
Cash flows from financing activities
Proceeds from issuance of common stock related to public offering, net of issuance costs	—			79,165
Proceeds from issuance of common stock related to employee equity plans	12,374			6,173
Taxes paid related to net share settlement of equity awards	(13,538		)	(6,480		)
Proceeds from senior note, net	—			149,250
Repayments of term loan	(750		)	(146,625		)
Payments of debt issuance/modification costs	—			(3,385		)
Net cash (used in) provided by financing activities	(1,914		)	78,098

Net increase (decrease) in cash, cash equivalents and restricted cash	10,441			(2,742		)
Cash, cash equivalents and restricted cash, beginning of period	25,294			19,196
Cash, cash equivalents and restricted cash, end of period	$	35,735		$	16,454

Supplemental disclosures of cash flow information
Interest paid	$	5,365		$	6,425
Income tax (refunded) paid, net	$	(134	)	$	447

See accompanying notes to consolidated financial statements.

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Organization, Basis of Presentation and Summary of Accounting Principles

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). Our common stock is listed on the NASDAQ exchange under the ticker symbol "NMIH."

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.

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2018, included in our 2018 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to our previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2019.

Significant Accounting Principles

There have been no changes to our significant accounting principles as described in Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Accounting Principles" of our 2018 10-K, other than as noted in "Recent Accounting Pronouncements - Adopted" below.

Recent Accounting Pronouncements - Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. We adopted this ASU 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 Improvements. Adoption of this new standard increased our assets and liabilities by $7.6 million in connection with the recognition of right-of-use assets and lease liabilities, primarily related to the operating lease on our corporate headquarters. Adoption of this standard did not impact our consolidated statements of operations or cash flows. See Note 10, "Leases" for additional information related to our leases.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). This update is intended to simplify the accounting for certain equity-linked financial instruments. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our consolidated financial statements.

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. We adopted this ASU on January 1, 2019. Adoption of this standard had 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.

Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and in April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which includes codification improvements to Topic 326. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses will generally shift from an incurred loss

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities will be recorded through an allowance for credit losses, rather than a write-down of the asset as is currently required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. While we are still finalizing our analysis of this guidance, we do not expect it to have a material impact on our consolidated financial statements. This standard will not impact our accounting for insurance claims and claim expenses as these items are not in the scope of this ASU.

In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adoption of this ASU will not have an impact on our Consolidated Balance Sheet, Statements of Operations and Comprehensive Income, Changes in Shareholders Equity or Cash Flows.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements hosted by a vendor and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. 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.

2. Investments

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 earnings based on specific identification of securities sold or other-than-temporarily impaired.

Fair Values and Gross Unrealized Gains and Losses on Investments



	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
As of June 30, 2019	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	48,193	$	688	$	(116	)	$	48,765
Municipal debt securities	91,650		1,497		(73		)	93,074
Corporate debt securities	634,188		18,569		(785		)	651,972
Asset-backed securities	168,251		3,216		(36		)	171,431
Total bonds	942,282		23,970		(1,010		)	965,242
Short-term investments	52,261		104		—			52,365
Total investments	$	994,543	$	24,074	$	(1,010	)	$	1,017,607

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		Losses			Fair Value
As of December 31, 2018	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	48,171	$	35	$	(1,376	)	$	46,830
Municipal debt securities	92,014		206		(963		)	91,257
Corporate debt securities	554,079		847		(11,688		)	543,238
Asset-backed securities	171,990		792		(1,457		)	171,325
Total bonds	866,254		1,880		(15,484		)	852,650
Short-term investments	58,733		107		—			58,840
Total investments	$	924,987	$	1,987	$	(15,484	)	$	911,490

We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2019 or December 31, 2018.

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2019 and December 31, 2018:



	June 30, 2019		December 31, 2018
Financial	38	%	38	%
Consumer	27		27
Communications	10		12
Utilities	9		7
Industrial	8		7
Technology	6		6
Energy	1		2
Other	1		1
Total	100	%	100	%

As of June 30, 2019 and December 31, 2018, approximately $5.5 million and $5.3 million, respectively, 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.

Scheduled Maturities

The amortized cost and fair values of available-for-sale securities as of June 30, 2019 and December 31, 2018, 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.



As of June 30, 2019	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	99,314	$	99,375
Due after one through five years	412,820		420,131
Due after five through ten years	300,990		312,792
Due after ten years	13,168		13,878
Asset-backed securities	168,251		171,431
Total investments	$	994,543	$	1,017,607

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



As of December 31, 2018	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	76,087	$	76,104
Due after one through five years	352,282		347,701
Due after five through ten years	318,728		310,633
Due after ten years	5,900		5,727
Asset-backed securities	171,990		171,325
Total investments	$	924,987	$	911,490

Aging of Unrealized Losses

As of June 30, 2019, the investment portfolio had gross unrealized losses of $1.0 million, of which $0.8 million had been in an unrealized loss position for a period of 12 months or greater. We did not consider these securities to be other-than-temporarily impaired as of June 30, 2019. We based our conclusion that these investments were not other-than-temporarily impaired as of June 30, 2019 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements and market fluctuations in credit spreads since the purchase date; (ii) we do not intend to sell these investments; and (iii) we do not believe that it is more likely than not that we will be required to sell these investments before recovery of our amortized cost basis, which may not occur until maturity. For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:



	Less Than 12 Months						12 Months or Greater						Total
	# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses
As of June 30, 2019		(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	—	$	—	$	—		5	$	13,750	$	(116	)	5	$	13,750	$	(116	)
Municipal debt securities⁽¹⁾	1	2,000		—			10	15,025		(73		)	11	17,025		(73		)
Corporate debt securities	13	24,737		(199		)	33	51,099		(586		)	46	75,836		(785		)
Asset-backed securities	2	8,786		(33		)	6	1,953		(3		)	8	10,739		(36		)
Total	16	$	35,523	$	(232	)	54	$	81,827	$	(778	)	70	$	117,350	$	(1,010	)


⁽¹⁾	Includes securities with unrealized losses of less than 12 months which are not identifiable in the schedule due to rounding.



	Less Than 12 Months						12 Months or Greater						Total
	# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses			# of Securities	Fair Value		Unrealized Losses
As of December 31, 2018		(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	—	$	—	$	—		19	$	41,817	$	(1,376	)	19	$	41,817	$	(1,376	)
Municipal debt securities	4	7,409		(11		)	31	58,658		(952		)	35	66,067		(963		)
Corporate debt securities	118	226,477		(3,952		)	126	221,675		(7,736		)	244	448,152		(11,688		)
Asset-backed securities	25	36,017		(1,136		)	22	33,988		(321		)	47	70,005		(1,457		)
Total	147	$	269,903	$	(5,099	)	198	$	356,138	$	(10,385	)	345	$	626,041	$	(15,484	)

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Net Investment Income

The following table presents the components of net investment income:



	For the three months ended June 30,						For the six months ended June 30,
	2019			2018			2019			2018
	(In Thousands)
Investment income	$	7,741		$	5,937		$	15,237		$	10,719
Investment expenses	(112		)	(202		)	(225		)	(410		)
Net investment income	$	7,629		$	5,735		$	15,012		$	10,309

The following table presents the components of net realized investment losses:



	For the three months ended June 30,					For the six months ended June 30,
	2019			2018		2019			2018
	(In Thousands)
Gross realized investment gains	$	22		$	59	$	217		$	59
Gross realized investment losses	(135		)	—		(517		)	—
Net realized investment losses	$	(113	)	$	59	$	(300	)	$	59

Investment Securities - Other-than-Temporary Impairment (OTTI)

As of June 30, 2019, we held no other-than-temporarily impaired securities. During the six months ended June 30, 2019, we recognized a $0.4 million OTTI loss in earnings related to the planned sale of a security in a loss position that was disposed of in April 2019. We did not recognize any OTTI losses for the three months ended June 30, 2019 or the three and six months ended June 30, 2018. 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 the three or six months ended June 30, 2019.

3. Fair Value of Financial Instruments

The following describes the valuation techniques used by us to determine the fair value of our financial instruments:

We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below:

Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.

Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.

Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability.

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.

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Assets classified as Level 1 and Level 2

To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources.

Liabilities classified as Level 3

We calculate the fair value of outstanding warrants utilizing Level 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.

The following tables present the level within the fair value hierarchy at which our financial instruments were measured:



	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
As of June 30, 2019	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	48,765	$	—	$	—	$	48,765
Municipal debt securities	—		93,074		—		93,074
Corporate debt securities	—		651,972		—		651,972
Asset-backed securities	—		171,431		—		171,431
Cash, cash equivalents and short-term investments	88,100		—		—		88,100
Total assets	$	136,865	$	916,477	$	—	$	1,053,342
Warrant liability	—		—		9,679		9,679
Total liabilities	$	—	$	—	$	9,679	$	9,679

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)



	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
As of December 31, 2018	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	46,830	$	—	$	—	$	46,830
Municipal debt securities	—		91,257		—		91,257
Corporate debt securities	—		543,238		—		543,238
Asset-backed securities	—		171,325		—		171,325
Cash, cash equivalents and short-term investments	84,134		—		—		84,134
Total assets	$	130,964	$	805,820	$	—	$	936,784
Warrant liability	—		—		7,296		7,296
Total liabilities	$	—	$	—	$	7,296	$	7,296

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 six months ended June 30, 2019 and the year ended December 31, 2018.

The following is a roll-forward of Level 3 liabilities measured at fair value:



	For the six months ended June 30,
Warrant Liability	2019			2018
	(In Thousands)
Balance, January 1	$	7,296		$	7,472
Change in fair value of warrant liability included in earnings	7,164			(529		)
Issuance of common stock on warrant exercise	(4,781		)	(552		)
Balance, June 30	$	9,679		$	6,391

The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.



	As of June 30,
	2019			2018
Common stock price	$	28.39		$	16.30
Risk free interest rate	1.72 - 1.95%			2.60		%
Expected life	0.92 - 2.81 years			2.49 years
Expected volatility	33.8 - 40.0%			32.7		%
Dividend yield	0		%	0		%

The changes in fair value of the warrant liability for the six months ended June 30, 2019 and 2018 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.

4. Debt

On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $150 million 5-year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) a $85 million three-year secured revolving credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021. Proceeds from the 2018 Term Loan were used to repay in full the outstanding amount due under our $150 million amended term loan (2015 Term Loan) due on November 10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement.

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2018 Term Loan

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 6.95% as of June 30, 2019, payable monthly based on our current interest period election. Quarterly principal payments of $375 thousand are also required. As of June 30, 2019, the outstanding principal balance of the 2018 Term Loan was $148.5 million.

Interest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, an original issue discount and capitalized modification costs related to the 2015 Term Loan. For the three and six months ended June 30, 2019, interest expense was $2.8 million and $5.7 million, respectively. Remaining unamortized issuance costs were $2.2 million as of June 30, 2019 and are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan.

We are subject to certain covenants under the 2018 Term Loan (as defined in the 2018 Credit Agreement), including (but not limited to) a maximum debt-to-total capitalization ratio (as defined in the 2018 Credit Agreement) of 35% under the 2018 Term Loan. We were in compliance with all covenants as of June 30, 2019.

Future principal payments due under the 2018 Term Loan as of June 30, 2019 are as follows:



As of June 30, 2019	Principal
	(In thousands)
2019	$	750
2020	1,500
2021	1,500
2022	1,500
2023	143,250
Total	$	148,500

2018 Revolving Credit Facility

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