0001547903-19-000131.txt : 20191107 0001547903-19-000131.hdr.sgml : 20191107 20191106175733 ACCESSION NUMBER: 0001547903-19-000131 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 74 CONFORMED PERIOD OF REPORT: 20190930 FILED AS OF DATE: 20191107 DATE AS OF CHANGE: 20191106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NMI Holdings, Inc. CENTRAL INDEX KEY: 0001547903 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 454914248 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-36174 FILM NUMBER: 191197557 BUSINESS ADDRESS: STREET 1: 2100 POWELL STREET, 12TH FLOOR CITY: EMERYVILLE STATE: CA ZIP: 94608 BUSINESS PHONE: (855) 530-6642 MAIL ADDRESS: STREET 1: 2100 POWELL STREET, 12TH FLOOR CITY: EMERYVILLE STATE: CA ZIP: 94608 10-Q 1 nmihq3201910-q.htm 10-Q Document
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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
September 30, 2019
OR
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 November 4, 2019 was 67,980,992 shares.




TABLE OF CONTENTS


2



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;

3



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.


4



PART I
Item 1. Financial Statements



INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of September 30, 2019 (Unaudited) and December 31, 2018
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2019 and 2018 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' Equity for the nine months ended September 30, 2019 and 2018 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2019 and 2018 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)


5

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


 
September 30, 2019
 
December 31, 2018
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,043,639 and $924,987 as of September 30, 2019 and December 31, 2018, respectively)
$
1,073,176

 
$
911,490

Cash and cash equivalents (including restricted cash of $2,933 and $1,414 as of September 30, 2019 and December 31, 2018, respectively)
45,889

 
25,294

Premiums receivable
45,730

 
36,007

Accrued investment income
6,885

 
5,694

Prepaid expenses
4,518

 
3,241

Deferred policy acquisition costs, net
56,642

 
46,840

Software and equipment, net
26,303

 
24,765

Intangible assets and goodwill
3,634

 
3,634

Prepaid reinsurance premiums
17,917

 
30,370

Other assets
20,768

 
4,708

Total assets
$
1,301,462

 
$
1,092,043

 
 
 
 
Liabilities
 
 
 
Term loan
$
146,007

 
$
146,757

Unearned premiums
145,146

 
158,893

Accounts payable and accrued expenses
39,296

 
31,141

Reserve for insurance claims and claim expenses
20,505

 
12,811

Reinsurance funds withheld
16,072

 
27,114

Warrant liability, at fair value
6,364

 
7,296

Deferred tax liability, net
43,769

 
2,740

Other liabilities (1)
10,816

 
3,791

Total liabilities
427,975

 
390,543

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value; 67,927,370 and 66,318,849 shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively (250,000,000 shares authorized)
679

 
663

Additional paid-in capital
698,393

 
682,181

Accumulated other comprehensive income (loss), net of tax
19,165

 
(14,832
)
Retained earnings
155,250

 
33,488

Total shareholders' equity
873,487

 
701,500

Total liabilities and shareholders' equity
$
1,301,462

 
$
1,092,043

(1) 
Deferred Ceding Commissions have been reclassified to "Other liabilities" in prior periods.
See accompanying notes to condensed consolidated financial statements (unaudited).

6

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


For the three months ended September 30,

For the nine months ended September 30,

2019
 
2018

2019

2018
Revenues
(In Thousands, except for per share data)
Net premiums earned
$
92,381

 
$
65,407

 
$
249,499

 
$
181,936

Net investment income
7,882

 
6,277

 
22,894

 
16,586

Net realized investment gains (losses)
81

 
(8
)
 
(219
)
 
51

Other revenues
1,244

 
85

 
1,700

 
193

Total revenues
101,588

 
71,761

 
273,874

 
198,766

Expenses
 
 
 
 
 
 
 
Insurance claims and claim expenses
2,572

 
1,099

 
8,238

 
3,311

Underwriting and operating expenses
33,244

 
30,379

 
96,636

 
87,852

Total expenses
35,816

 
31,478

 
104,874

 
91,163

Other expense
 
 
 
 
 
 
 
Gain (loss) from change in fair value of warrant liability
1,139

 
(5,464
)
 
(6,025
)
 
(4,935
)
Interest expense
(2,979
)
 
(2,972
)
 
(9,111
)
 
(11,951
)
Total other expense
(1,840
)
 
(8,436
)
 
(15,136
)
 
(16,886
)
 
 
 
 
 
 
 
 
Income before income taxes
63,932

 
31,847

 
153,864

 
90,717

Income tax expense
14,169

 
7,036

 
32,102

 
18,310

Net income
$
49,763

 
$
24,811

 
$
121,762

 
$
72,407


 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.38

 
$
1.81

 
$
1.12

Diluted
$
0.69

 
$
0.36

 
$
1.75

 
$
1.07

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
67,849

 
65,948

 
67,381

 
64,584

Diluted
70,137

 
68,844

 
69,520

 
67,512


 
 
 
 
 
 
 
Net income
$
49,763

 
$
24,811

 
$
121,762

 
$
72,407

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) in accumulated other comprehensive income, net of tax expense (benefit) of $1,376 and ($337) for the three months ended September 30, 2019 and 2018, respectively and $8,991 and ($3,676) for the nine months ended September 30, 2019 and 2018, respectively
5,177

 
(1,267
)
 
33,824

 
(13,828
)
Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $17 and ($2) for the three months ended September 30, 2019 and 2018, respectively and ($46) and ($27) for the nine months ended September 30, 2019 and 2018, respectively
(64
)
 
7

 
173

 
102

Other comprehensive income (loss), net of tax
5,113


(1,260
)

33,997


(13,726
)
Comprehensive income
$
54,876


$
23,551


$
155,759


$
58,681

See accompanying notes to condensed consolidated financial statements (unaudited).

7

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
 
(In Thousands)
Balances, December 31, 2018
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 expense 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

Common stock: class A shares issued related to warrants
82

1

2,176



2,177

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
77

1

655



656

Share-based compensation expense


3,399



3,399

Change in unrealized investment gains/losses, net of tax expense of $1,359



5,113


5,113

Net income




49,763

49,763

Balances, September 30, 2019
67,927

$
679

$
698,393

$
19,165

$
155,250

$
873,487


*
During the three months ended March 31, 2019, we issued 39,195 common shares with a par value of $0.01 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding.












8

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)
Accumulated Deficit
Total
 
Shares
Amount
 
(In Thousands)
Balances, December 31, 2017
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

Common stock: class A shares issued related to warrants
57

1

1,244



1,245

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
475

4

3,092



3,096

Share-based compensation expense


2,959



2,959

Change in unrealized investment gains/losses, net of tax benefit of $335



(1,260
)

(1,260
)
Net income




24,811

24,811

Balances, September 30, 2018
66,286

$
663

$
678,165

$
(16,303
)
$
(2,032
)
$
660,493


*
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 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding.
See accompanying notes to condensed consolidated financial statements (unaudited).




9

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
For the nine months ended September 30,
 
2019
 
2018
Cash flows from operating activities
(In Thousands)
Net income
$
121,762

 
$
72,407

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Net realized investment losses (gains)
219

 
(51
)
Loss from change in fair value of warrant liability
6,025

 
4,935

Depreciation and amortization
6,661

 
5,825

Net amortization of premium on investment securities
943

 
1,176

Amortization of debt discount and debt issuance costs
754

 
3,141

Share-based compensation expense
9,855

 
8,781

Deferred income taxes
31,991

 
16,698

Changes in operating assets and liabilities:
 
 
 
Premiums receivable
(9,723
)
 
(9,496
)
Accrued investment income
(1,191
)
 
(1,669
)
Prepaid expenses
(1,472
)
 
(980
)
Deferred policy acquisition costs, net
(9,802
)
 
(6,512
)
Other assets
(8,428
)
 
927

Unearned premiums
(13,747
)
 
(273
)
Reserve for insurance claims and claim expenses
7,694

 
2,147

Reinsurance balances, net
(779
)
 
565

Accounts payable and accrued expenses
(1,195
)
 
1,728

Net cash provided by operating activities
139,567

 
99,349

Cash flows from investing activities
 
 
 
Purchase of short-term investments
(190,122
)
 
(168,751
)
Purchase of fixed-maturity investments, available-for-sale
(186,793
)
 
(310,286
)
Proceeds from maturity of short-term investments
200,105

 
148,997

Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
66,996

 
154,438

Additions to software and equipment
(7,449
)
 
(5,326
)
Net cash used in investing activities
(117,263
)
 
(180,928
)
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
13,733

 
12,557

Proceeds from issuance of common stock related to warrants

 
320

Taxes paid related to net share settlement of equity awards
(14,317
)
 
(10,113
)
Proceeds from senior note, net

 
149,250

Repayments of term loan
(1,125
)
 
(147,000
)
Payments of debt issuance/modification costs

 
(3,609
)
Net cash (used in) provided by financing activities
(1,709
)
 
80,570

 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
20,595

 
(1,009
)
Cash, cash equivalents and restricted cash, beginning of period
25,294

 
19,196

Cash, cash equivalents and restricted cash, end of period
$
45,889

 
$
18,187

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Interest paid
$
8,060

 
$
9,233

Income tax (refunded) paid, net
$
(119
)
 
$
687



See accompanying notes to condensed consolidated financial statements (unaudited).

10

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 "Variable interest entities" and "Recent Accounting Pronouncements - Adopted" below.
Variable Interest Entities
NMIC is a party to reinsurance agreements with three special purpose reinsurance entities - Oaktown Re Ltd., Oaktown Re II Ltd. and Oaktown Re III Ltd. - respectively dated May 2, 2017, July 25, 2018 and July 30, 2019. At inception of the respective reinsurance agreements, we determined that Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd, were variable interest entities (VIEs), as defined under GAAP Accounting Standards Codification (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 beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIE. We concluded that we are not the primary beneficiary of each VIE and as such, we do not consolidate them in our consolidated financial statements.
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 (ROU) 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.

11

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 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 subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, and ASU 2019-05, Financial Instruments – Credit Losses: Targeted Transition Relief. 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 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. The impact of this guidance and the extent of the impact will depend on, among other things, economic conditions and the composition and credit quality of our financial assets as of the date of adoption. While we are still evaluating the impact 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. We do not expect the revised disclosure requirements to have a material impact on our consolidated financial statements.
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 structured as service contracts, 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, and we have elected to adopt this ASU prospectively for eligible costs incurred after the effective date of January 1, 2020. 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.
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.

12

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Fair Values and Gross Unrealized Gains and Losses on Investments
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of September 30, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,198

 
$
1,095

 
$
(40
)
 
$
49,253

Municipal debt securities
103,974

 
1,790

 
(133
)
 
105,631

Corporate debt securities
663,066

 
23,432

 
(520
)
 
685,978

Asset-backed securities
179,651

 
3,765

 
(31
)
 
183,385

Total bonds
994,889

 
30,082

 
(724
)
 
1,024,247

Short-term investments
48,750

 
179

 

 
48,929

Total investments
$
1,043,639

 
$
30,261

 
$
(724
)
 
$
1,073,176

 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
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 September 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 September 30, 2019 and December 31, 2018:
 
September 30, 2019
 
December 31, 2018
Financial
38
%
 
38
%
Consumer
27

 
27

Communications
10

 
12

Utilities
10

 
7

Industrial
8

 
7

Technology
5

 
6

Energy
2

 
2

Other

 
1

Total
100
%
 
100
%

As of September 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.

13

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Scheduled Maturities
The amortized cost and fair values of available-for-sale securities as of September 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 September 30, 2019
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
102,581

 
$
102,787

Due after one through five years
424,455

 
434,248

Due after five through ten years
313,804

 
329,061

Due after ten years
23,148

 
23,695

Asset-backed securities
179,651

 
183,385

Total investments
$
1,043,639

 
$
1,073,176

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 September 30, 2019, the investment portfolio had gross unrealized losses of $0.7 million, of which $0.4 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 September 30, 2019. We based our conclusion that these investments were not other-than-temporarily impaired as of September 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 September 30, 2019
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
5

$
13,822

$
(40
)
 

$

$

 
5

$
13,822

$
(40
)
Municipal debt securities
4

15,720

(102
)
 
4

4,337

(31
)
 
8

20,057

(133
)
Corporate debt securities
10

26,812

(122
)
 
20

30,812

(398
)
 
30

57,624

(520
)
Asset-backed securities
3

13,451

(20
)
 
2

3,583

(11
)
 
5

17,034

(31
)
Short-term investments(1)
1

9,999


 



 
1

9,999


Total
23

$
79,804

$
(284
)
 
26

$
38,732

$
(440
)
 
49

$
118,536

$
(724
)
(1) 
Includes securities with unrealized losses of less than 12 months which are not identifiable in the schedule due to rounding.


14

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
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
)
Net Investment Income
The following table presents the components of net investment income:
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Investment income
$
8,003

 
$
6,473

 
$
23,240

 
$
17,192

Investment expenses
(121
)
 
(196
)
 
(346
)
 
(606
)
Net investment income
$
7,882

 
$
6,277

 
$
22,894

 
$
16,586


The following table presents the components of net realized investment losses:
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Gross realized investment gains
$
81

 
$
461

 
$
297

 
$
520

Gross realized investment losses

 
(469
)
 
(516
)
 
(469
)
Net realized investment gains (losses)
$
81

 
$
(8
)
 
$
(219
)
 
$
51


Investment Securities - Other-than-Temporary Impairment (OTTI)
As of September 30, 2019, we held no other-than-temporarily impaired securities. During the nine months ended September 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 September 30, 2019 or the three and nine months ended September 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 nine months ended September 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

15

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.    
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 September 30, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
49,253

 
$

 
$

 
$
49,253

Municipal debt securities

 
105,631

 

 
105,631

Corporate debt securities

 
685,978

 

 
685,978

Asset-backed securities

 
183,385

 

 
183,385

Cash, cash equivalents and short-term investments
94,818

 

 

 
94,818

Total assets
$
144,071

 
$
974,994

 
$

 
$
1,119,065

Warrant liability

 

 
6,364

 
6,364

Total liabilities
$

 
$

 
$
6,364

 
$
6,364



16

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