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	March 31, 2020

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 May 4, 2020 was 68,874,476 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	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	54
Item 4.	Controls and Procedures	55
PART II		56
Item 1.	Legal Proceedings	56
Item 1A.	Risk Factors	56
Item 6.	Exhibits	59
Signatures		62

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:

•uncertainty relating to the coronavirus (COVID-19) pandemic and the measures taken by governmental authorities and other third parties to combat it, including their impact on the global economy, the U.S. housing, real estate, housing finance and mortgage insurance markets, and our business, operations and personnel;

•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 generally, or with first time homebuyers or on very high loan-to-value mortgages;

•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 Affairs (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;

3

•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 (IT) 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 II, Item 1A of this Report and in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 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 March 31, 2020 (Unaudited) and December 31, 2019	6
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2020 and 2019 (Unaudited)	7
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2020 and 2019 (Unaudited)	8
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (Unaudited)	9
Notes to Condensed Consolidated Financial Statements (Unaudited)	10

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NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31, 2020		December 31, 2019
Assets	(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,059,143 and $1,113,779 as of March 31, 2020 and December 31, 2019, respectively)	$	1,070,072	$	1,140,940
Cash and cash equivalents (including restricted cash of $2,505 and $2,662 as of March 31, 2020 and December 31, 2019, respectively)	109,821		41,089
Premiums receivable	46,872		46,085
Accrued investment income	7,192		6,831
Prepaid expenses	4,750		3,512
Deferred policy acquisition costs, net	62,634		59,972
Software and equipment, net	25,667		26,096
Intangible assets and goodwill	3,634		3,634
Prepaid reinsurance premiums	13,100		15,488
Other assets	44,085		21,171
Total assets	$	1,387,827	$	1,364,818
Liabilities
Term loan	$	145,521	$	145,764
Unearned premiums	126,908		136,642
Accounts payable and accrued expenses	20,745		39,904
Reserve for insurance claims and claim expenses	29,479		23,752
Reinsurance funds withheld	12,735		14,310
Warrant liability, at fair value	1,461		7,641
Deferred tax liability, net	66,831		56,360
Other liabilities	9,257		10,025
Total liabilities	412,937		434,398
Commitments and contingencies
Shareholders' equity
Common stock - class A shares, $0.01 par value; 68,873,540 and 68,358,074 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively (250,000,000 shares authorized)	689		684
Additional paid-in capital	706,021		707,003
Accumulated other comprehensive income, net of tax	4,464		17,288
Retained earnings	263,716		205,445
Total shareholders' equity	974,890		930,420
Total liabilities and shareholders' equity	$	1,387,827	$	1,364,818

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

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NMI HOLDINGS, INC.

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

	For the three months ended March 31,
	2020		2019
Revenues	(In Thousands, except for per share data)
Net premiums earned	$	98,717	$	73,868
Net investment income	8,104		7,383
Net realized investment losses	(72)		(187)
Other revenues	900		42
Total revenues	107,649		81,106
Expenses
Insurance claims and claim expenses	5,697		2,743
Underwriting and operating expenses(1)	32,277		30,800
Service expenses(1)	734		49
Interest expense	2,744		3,061
(Gain) loss from change in fair value of warrant liability	(5,959)		5,479
Total expenses	35,493		42,132
Income before income taxes	72,156		38,974
Income tax expense	13,885		6,075
Net income	$	58,271	$	32,899
Earnings per share
Basic	$	0.85	$	0.49
Diluted	$	0.74	$	0.48
Weighted average common shares outstanding
Basic	68,563		66,692
Diluted	70,401		68,996
Net income	$	58,271	$	32,899
Other comprehensive (loss) income, net of tax:
Unrealized (losses) gains in accumulated other comprehensive income, net of tax (benefit) expense of ($3,424) and $3,953 for the quarters ended March 31, 2020 and 2019, respectively	(12,881)		14,868
Reclassification adjustment for realized losses included in net income, net of tax (benefit) of ($15) and ($39) for the quarters ended March 31, 2020 and 2019, respectively	57		148
Other comprehensive (loss) income, net of tax	(12,824)		15,016
Comprehensive income	$	45,447	$	47,915

⁽¹⁾ Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.

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

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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, 2019	68,358	$	684	$	707,003	$	17,288	$	205,445	$	930,420
Common stock: class A shares issued related to warrant exercises	6	*		221		—		—		221
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	510	5		(3,755)		—		—		(3,750)
Share-based compensation expense	—	—		2,552		—		—		2,552
Change in unrealized investment gains/losses, net of tax benefit of $3,409	—	—		—		(12,824)		—		(12,824)
Net income	—	—		—		—		58,271		58,271
Balances, March 31, 2020	68,874	$	689	$	706,021	$	4,464	$	263,716	$	974,890

* During the three months ended March 31, 2020, we issued 6,474 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.

	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 warrant exercises	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

* 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.

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

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NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the three months ended March 31,
	2020		2019
Cash flows from operating activities	(In Thousands)
Net income	$	58,271	$	32,899
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment losses	72		187
(Gain) loss from change in fair value of warrant liability	(5,959)		5,479
Depreciation and amortization	2,441		2,103
Net amortization of premium on investment securities	318		314
Amortization of debt discount and debt issuance costs	258		248
Deferred income taxes	13,880		6,038
Share-based compensation expense	2,552		2,981
Changes in operating assets and liabilities:
Premiums receivable	(787)		(2,472)
Accrued investment income	(361)		(859)
Prepaid expenses	(1,238)		(1,407)
Deferred policy acquisition costs, net	(2,662)		(1,980)
Other assets	(157)		191
Unearned premiums	(9,734)		(4,568)
Reserve for insurance claims and claim expenses	5,727		2,726
Reinsurance balances, net	(691)		(148)
Accounts payable and accrued expenses	(14,078)		(13,453)
Net cash provided by operating activities	47,852		28,279
Cash flows from investing activities
Purchase of short-term investments	(41,872)		(47,994)
Purchase of fixed-maturity investments, available-for-sale	(58,427)		(72,586)
Proceeds from maturity of short-term investments	81,207		81,311
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale	46,368		29,043
Software and equipment	(1,493)		(1,751)
Net cash provided by used in investing activities	25,783		(11,977)
Cash flows from financing activities
Proceeds from issuance of common stock related to employee equity plans	3,367		11,017
Taxes paid related to net share settlement of equity awards	(7,117)		(12,477)
Repayments of term loan	(375)		(375)
Payments of debt issuance/modification costs	(778)		—
Net cash (used in) financing activities	(4,903)		(1,835)
Net increase in cash, cash equivalents and restricted cash	68,732		14,467
Cash, cash equivalents and restricted cash, beginning of period	41,089		25,294
Cash, cash equivalents and restricted cash, end of period	$	109,821	$	39,761
Supplemental disclosures of cash flow information
Interest paid	$	2,403	$	2,617
Income taxes refunded	$	—	$	209

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

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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, 2019, included in our 2019 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 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, 2020.

        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 2019 10-K, other than as noted in "Investments," "Premium Receivables," "Reinsurance" and "Recent Accounting Pronouncements - Adopted" below.

Investments

We evaluate our investments each quarter to determine whether declines in fair value are below amortized cost. For any impaired debt security we evaluate if we either intend to sell the security or it is more likely than not that we will be required to sell the security before recovery. If our intent is to sell a security and its fair value is below amortized cost, the securities amortized cost basis is written down to fair value and a loss is recognized in earnings.

For available for sale debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider several factors including, but not limited to:

•the severity of the decline in fair value;

•the financial condition of the issuer;

•the failure of the issuer to make scheduled interest or principal payments;

•recent credit downgrades of the applicable security or the issuer; and

•adverse conditions specifically related to the security, an industry, or a geographic area.

If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of the cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any impairment that has not been recorded through the allowance for credit losses is recognized in other comprehensive income.

Changes in allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes the uncollectibility of a security is met.

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NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

We have elected to present accrued interest receivable separately from available for sale securities on the consolidated balance sheet in "Accrued Investment Income." Accrued interest receivable was $7.2 million as of March 31, 2020 relating almost entirely to available for sale debt securities. We have also elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. For all classes of available for sale securities, the accrual of interest is discontinued when the contractual payment of principal or interest has become 90 days past due and write-off of accrued interest receivable is recognized by reversing interest income. We did not write off any accrued interest receivable during the three months ended March 31, 2020.

Premiums Receivable

        Premiums receivable consists of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled. We recognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the life of the receivable. Due to the nature of our insurance policies and the short-term duration of the related receivables an allowance for credit loss was not required at March 31, 2020.

Reinsurance

        NMIC has entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction) and January 1, 2018 (the 2018 QSR Transaction), which we refer to collectively as the QSR Transactions. Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as reinsurance recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims expenses on the consolidated statements of operations. The company actively manages and monitors its credit risk associated with its reinsurance recoverables and recognizes an allowance for credit losses based on losses expected to arise over the life of the asset.

As it relates to its QSR transactions, each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (A.M.Best) or both. In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balances are further supported by trust accounts established and maintained by each reinsurer in accordance with the private mortgage insurer eligibility requirements (PMIERs) funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to our QSR Transactions was $6.2 million as of March 31, 2020 and an allowance for credit losses was not required.

Recent Accounting Pronouncements - Adopted 

In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (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, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. 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 shifts 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 are recorded through an allowance for credit losses, rather than a write-down of the asset as was 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. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.

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. We adopted this ASU on January 1, 2020 and determined it did not 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

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NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.

Recent Accounting Pronouncements - Not Yet Adopted

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 FASB subsequently issued ASU 2019-09 in November 2019, which amended the effective date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.

In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. 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 March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). This update provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate (LIBOR) in financial contracts, which is expected to be discontinued in 2021. The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The standard is effective immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the impact the adoption of this ASU would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.

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 any impairment that has been recorded through the allowance for credit losses. If our intent is to sell a security and its fair value is below amortized cost, the security's amortized cost basis is written down to fair value and a loss is recognized in earnings.

        Fair Values and Gross Unrealized Gains and Losses on Investments

	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
As of March 31, 2020	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	48,207	$	3,519	$	—	$	51,726
Municipal debt securities	196,750		3,853		(668)		199,935
Corporate debt securities	628,834		18,272		(6,658)		640,448
Asset-backed securities	180,514		404		(7,811)		173,107
Total bonds	1,054,305		26,048		(15,137)		1,065,216
Short-term investments	4,838		18		—		4,856
Total investments	$	1,059,143	$	26,066	$	(15,137)	$	1,070,072

12

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
As of December 31, 2019	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	48,203	$	784	$	(58)	$	48,929
Municipal debt securities	189,530		1,721		(1,035)		190,216
Corporate debt securities	661,719		23,373		(211)		684,881
Asset-backed securities	170,153		2,603		(114)		172,642
Total bonds	1,069,605		28,481		(1,418)		1,096,668
Short-term investments	44,174		98		—		44,272
Total investments	$	1,113,779	$	28,579	$	(1,418)	$	1,140,940

We did not own any mortgage-backed securities in our asset-backed securities portfolio at March 31, 2020 or December 31, 2019.

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of March 31, 2020 and December 31, 2019:

	March 31, 2020		December 31, 2019
Financial	40	%	38	%
Consumer	23		26
Communications	11		10
Utilities	10		9
Industrial	9		8
Technology	7		7
Energy	—		2
Total	100	%	100	%

As of March 31, 2020 and December 31, 2019, approximately $5.7 million and $5.5 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 March 31, 2020 and December 31, 2019, 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 March 31, 2020	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	83,740	$	83,736
Due after one through five years	408,063		415,419
Due after five through ten years	373,220		383,838
Due after ten years	13,606		13,972
Asset-backed securities	180,514		173,107
Total investments	$	1,059,143	$	1,070,072

13

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of December 31, 2019	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	138,776	$	139,113
Due after one through five years	406,986		417,208
Due after five through ten years	380,737		394,180
Due after ten years	17,127		17,797
Asset-backed securities	170,153		172,642
Total investments	$	1,113,779	$	1,140,940

        Aging of Unrealized Losses

        We evaluate our investments each quarter to determine whether declines in fair value are below amortized costs. As of March 31, 2020, the investment portfolio had gross unrealized losses of $15.1 million, of which $0.1 million had been in an unrealized loss position for a period of 12 months or greater. For any impaired security we evaluate if we either intend to sell the security or it is more likely than not that we will be required to sell the security before recovery of its amortized cost. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through earnings. For securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the securities by a rating agency, and any adverse condition specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, and an allowance for credit losses is recorded. Any impairment that has not been recorded through an allowance for credit loss is recognized in other comprehensive income. The following table summarizes the investment portfolio in an unrealized loss position for which an allowance is not recorded, aggregated by major security type and length of time in a continuous unrealized loss position:

	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 March 31, 2020		(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	—	$	—	$	—	—	$	—	$	—	—	$	—	$	—
Municipal debt securities	14	46,936		(668)		—	—		—		14	46,936		(668)
Corporate debt securities	87	178,776		(6,630)		5	3,294		(28)		92	182,070		(6,658)
Asset-backed securities	60	133,997		(7,745)		1	2,934		(66)		61	136,931		(7,811)
Total	161	$	359,709	$	(15,043)	6	$	6,228	$	(94)	167	$	365,937	$	(15,137)

	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, 2019		(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	4	$	12,001	$	(58)	—	$	—	$	—	4	$	12,001	$	(58)
Municipal debt securities	26	92,844		(1,034)		1	999		(1)		27	93,843		(1,035)
Corporate debt securities	10	30,481		(140)		14	23,976		(71)		24	54,457		(211)
Asset-backed securities	9	19,236		(102)		1	2,988		(12)		10	22,224		(114)
Total	49	$	154,562	$	(1,334)	16	$	27,963	$	(84)	65	$	182,525	$	(1,418)

14

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Allowance of credit losses

As of March 31, 2020, we did not recognize an allowance of credit losses on our investment portfolio. The increase in securities in an unrealized loss position as of March 31, 2020 can be attributed to a widening of credit spreads and surging demand for liquidity across the broader debt markets, partially offset by interest rate movements since the purchase date. We evaluated the securities in an unrealized loss position as of March 31, 2020 and assessed the credit ratings and any ratings changes as well as any adverse conditions specifically related to the security. Based on our estimate of the amount and timing of cash flows to be collected we expect to recover the amortized cost basis of these securities.

For the three months ended March 31, 2019, we recognized a $0.4 million other than temporarily impaired (OTTI) loss in earnings related to the planned sale of a security in a loss position in April 2019. 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 months ended March 31, 2019.

Net Investment Income

        The following table presents the components of net investment income:

	For the three months ended March 31,
	2020		2019
	(In Thousands)
Investment income	$	8,349	$	7,496
Investment expenses	(245)		(113)
Net investment income	$	8,104	$	7,383

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

	For the three months ended March 31,
	2020		2019
	(In Thousands)
Gross realized investment gains	$	540	$	195
Gross realized investment losses	(612)		(382)
Net realized investment (losses)	$	(72)	$	(187)

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.

15

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

        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 March 31, 2020	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	51,726	$	—	$	—	$	51,726
Municipal debt securities	—		199,935		—		199,935
Corporate debt securities	—		640,448		—		640,448
Asset-backed securities	—		173,107		—		173,107
Cash, cash equivalents and short-term investments	114,677		—		—		114,677
Total assets	$	166,403	$	1,013,490	$	—	$	1,179,893
Warrant liability	—		—		1,461		1,461
Total liabilities	$	—	$	—	$	1,461	$