UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	June 30, 2021

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 July 30, 2021 was 85,708,239 shares.

1

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	28
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59
Item 4.	Controls and Procedures	60
PART II		61
Item 1.	Legal Proceedings	61
Item 1A.	Risk Factors	61
Item 6.	Exhibits	62
Signatures		65

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," "perceive," "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 such as the Federal Housing Administration (FHA), the U.S. Department of Agriculture's Rural Housing Service (USDA) and the U.S. Department of 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 the timing and eventual implementation of the final rules concerning "Qualified Mortgage" and "Qualified Residential Mortgage" definitions and the 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;

3

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

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

•failure of risk management or pricing or investment strategies;

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

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

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

•failure to maintain, improve and continue to develop necessary information technology (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, 2020 (2020 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 June 30, 2021 (Unaudited) and December 31, 2020	6
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (Unaudited)	7
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended June 30, 2021 and 2020 (Unaudited)	8
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (Unaudited)	10
Notes to Condensed Consolidated Financial Statements (Unaudited)	11

5

NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	June 30, 2021		December 31, 2020
Assets	(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,954,187 and $1,730,835 as of June 30, 2021 and December 31, 2020, respectively)	$	1,994,280	$	1,804,286
Cash and cash equivalents (including restricted cash of $4,159 and $5,555 as of June 30, 2021 and December 31, 2020, respectively)	68,080		126,937
Premiums receivable	55,939		49,779
Accrued investment income	11,148		9,862
Prepaid expenses	4,095		3,292
Deferred policy acquisition costs, net	62,137		62,225
Software and equipment, net	31,443		29,665
Intangible assets and goodwill	3,634		3,634
Prepaid reinsurance premiums	3,831		6,190
Reinsurance recoverable	19,726		17,608
Other assets	51,565		53,188
Total assets	$	2,305,878	$	2,166,666
Liabilities
Debt	$	393,949	$	393,301
Unearned premiums	142,148		118,817
Accounts payable and accrued expenses	56,803		61,716
Reserve for insurance claims and claim expenses	101,235		90,567
Reinsurance funds withheld	6,904		8,653
Warrant liability, at fair value	3,385		4,409
Deferred tax liability, net	136,273		112,586
Other liabilities	5,276		7,026
Total liabilities	845,973		797,075
Commitments and contingencies
Shareholders' equity
Common stock - class A shares, $0.01 par value; 85,703,487 and 85,163,039 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively (250,000,000 shares authorized)	857		852
Additional paid-in capital	944,121		937,872
Accumulated other comprehensive income, net of tax	27,503		53,856
Retained earnings	487,424		377,011
Total shareholders' equity	1,459,905		1,369,591
Total liabilities and shareholders' equity	$	2,305,878	$	2,166,666

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

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NMI HOLDINGS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
Revenues	(In Thousands, except for per share data)
Net premiums earned	$	110,888	$	98,944	$	216,767	$	197,661
Net investment income	9,382		7,070		18,196		15,174
Net realized investment gains	12		711		12		639
Other revenues	483		1,223		984		2,123
Total revenues	120,765		107,948		235,959		215,597
Expenses
Insurance claims and claim expenses	4,640		34,334		9,602		40,031
Underwriting and operating expenses	34,725		30,370		68,790		62,647
Service expenses	481		1,090		1,072		1,824
Interest expense	7,922		5,941		15,837		8,685
(Gain) loss from change in fair value of warrant liability	(658)		1,236		(453)		(4,723)
Total expenses	47,110		72,971		94,848		108,464
Income before income taxes	73,655		34,977		141,111		107,133
Income tax expense	16,133		8,129		30,697		22,014
Net income	$	57,522	$	26,848	$	110,414	$	85,119
Earnings per share
Basic	$	0.67	$	0.36	$	1.29	$	1.20
Diluted	$	0.65	$	0.36	$	1.27	$	1.11
Weighted average common shares outstanding
Basic	85,647		73,617		85,483		71,090
Diluted	86,819		74,174		86,729		72,407
Net income	$	57,522	$	26,848	$	110,414	$	85,119
Other comprehensive income (loss), net of tax:
Unrealized gains (losses) in accumulated other comprehensive gain (loss), net of tax expense (benefit) of $4,995 and $8,978 for the three months ended June 30, 2021 and 2020, and $(7,003) and $5,162 for the six months ended June 30, 2021 and 2020, respectively	18,790		33,773		(26,343)		19,418
Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $3 and $149 for the three months ended June 30, 2021 and 2020, and $3 and ($258) for the six months ended June 30, 2021 and 2020, respectively	(10)		(562)		(10)		969
Other comprehensive income (loss), net of tax	18,780		33,211		(26,353)		20,387
Comprehensive income	$	76,302	$	60,059	$	84,061	$	105,506

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		Retained Earnings		Total
	Shares	Amount
	(In Thousands)
Balances, December 31, 2020	85,163	$	852	$	937,872	$	53,856	$	377,011	$	1,369,591
Common stock: class A shares issued related to warrant exercises	24	*		557		—		—		557
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	413	4		(624)		—		—		(620)
Share-based compensation expense	—	—		3,022		—		—		3,022
Change in unrealized investment gains/losses, net of tax benefit of $11,997	—	—		—		(45,133)		—		(45,133)
Net income	—	—		—		—		52,891		52,891
Balances, March 31, 2021	85,600	$	856	$	940,827	$	8,723	$	429,902	$	1,380,308
Common stock: class A shares issued related to warrants	8	*		197		—		—		197
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	95	1		(286)		—		—		(285)
Share-based compensation expense	—	—		3,383		—		—		3,383
Change in unrealized investment gains/losses, net of tax expense of $4,992	—	—		—		18,780		—		18,780
Net income	—	—		—		—		57,522		57,522
Balances, June 30, 2021	85,703	$	857	$	944,121	$	27,503	$	487,424	$	1,459,905

*    During the three months ended March 31, 2021, we issued 23,750 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. During the three months ended June 30, 2021, we issued 8,096 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		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
Common stock: class A shares issued related to warrants	15,870	159		219,528		—		—		219,687
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes	61	*		(321)		—		—		(321)
Share-based compensation expense	—	—		2,722		—		—		2,722
Change in unrealized investment gains/losses, net of tax expense of $8,829	—	—		—		33,211		—		33,211
Net income	—	—		—		—		26,848		26,848
Balances, June 30, 2020	84,805	$	848	$	927,950	$	37,675	$	290,564	$	1,257,037

*    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. During three months ended June 30, 2020, we issued 61,226 common shares, with a par value of $0.01 in connection with shares issued under stock plan, 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 six months ended June 30,
	2021		2020
Cash flows from operating activities	(In Thousands)
Net income	$	110,414	$	85,119
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment gains	(12)		(639)
Gain (loss) from change in fair value of warrant liability	(453)		(4,723)
Depreciation and amortization	5,344		4,914
Net amortization of premium on investment securities	3,289		629
Amortization of debt discount and debt issuance costs	893		3,267
Deferred income taxes	30,692		22,006
Share-based compensation expense	6,405		5,274
Changes in operating assets and liabilities:
Premiums receivable	(6,160)		(323)
Accrued investment income	(1,286)		(1,078)
Prepaid expenses	(803)		96
Deferred policy acquisition costs, net	88		(3,647)
Other assets	230		(328)
Unearned premiums	23,331		(21,406)
Reserve for insurance claims and claim expenses	10,668		46,151
Reinsurance recoverable	(2,118)		(9,368)
Reinsurance balances, net	9		2,658
Accounts payable and accrued expenses	2,013		(1,247)
Net cash provided by operating activities	182,544		127,355
Cash flows from investing activities
Purchase of short-term investments	(8,991)		(41,872)
Purchase of fixed-maturity investments, available-for-sale	(286,635)		(451,462)
Proceeds from maturity of short-term investments	—		85,689
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale	60,997		297,977
Software and equipment	(6,050)		(4,638)
Net cash (used in) investing activities	(240,679)		(114,306)
Cash flows from financing activities
Proceeds from issuance of common stock related to public offering, net of issuance costs	—		220,284
Proceeds from issuance of common stock related to employee equity plans	4,043		3,391
Proceeds from issuance of common stock related to warrants	183		—
Taxes paid related to net share settlement of equity awards	(4,948)		(7,462)
Proceeds from senior secured notes	—		400,000
Repayments of term loan	—		(147,750)
Payments of debt issuance/modification costs	—		(7,151)
Net cash (used in) provided by financing activities	(722)		461,312
Net (decrease) increase in cash, cash equivalents and restricted cash	(58,857)		474,361
Cash, cash equivalents and restricted cash, beginning of period	126,937		41,089
Cash, cash equivalents and restricted cash, end of period	$	68,080	$	515,450
Supplemental disclosures of cash flow information
Interest paid	$	14,750	$	4,286
Income taxes refunded	$	457	$	76

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."

NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy in April 2013. NMIC is licensed to write mortgage insurance in all 50 states and DC. 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, 2020, included in our 2020 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, 2021.

COVID-19 Developments

On January 30, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 a global health emergency and subsequently characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large severely curtailed day-to-day activity and local, state and federal regulators imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans were furloughed or laid-off in the ensuing downturn.

The global dislocation caused by COVID-19 was unprecedented. In response to the COVID-19 outbreak and uncertainty that it introduced, we activated our disaster continuity program to ensure our employees were safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration of the increased level of macroeconomic volatility.

While there is increased optimism that the acute economic impact of COVID-19 has begun to recede, the pandemic continues to affect communities across the U.S. and poses significant risk globally. The path and pace of global economic recovery will depend, in large part, on the course of the virus (including the newly emergent Delta variant), which itself remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the ultimate impact COVID-19 will have on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results at this time.

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 2020 10-K, except as noted in "Variable Interest Entities" and "Recent Accounting Pronouncements - Adopted" below.

Variable Interest Entities

    NMIC is a party to reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd. Oaktown Re V Ltd., and Oaktown Re VI Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018, July 30, 2019, July 30, 2020, October 29, 2020 and April 27, 2021, respectively. At inception of the respective reinsurance agreements, we determined that each of the Oaktown Re Vehicles were variable interest entities (VIEs), as defined under GAAP Accounting Standards Codification (ASC) 810, because they did not

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NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 reinsurance transaction 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 December 2019, the Financial Accounting Standards Board (the FASB) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The 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. We adopted this ASU on January 1, 2021 and determined it 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 (Topic 944). The 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 and ASU 2020-11 in November 2020, which amended the effective date for this standard and provided transition relief to facilitate early application for long duration contracts. These standards will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. We are currently evaluating the impact the adoption of these ASUs will have, if any, on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The 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 beginning in 2021 through 2023. 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. This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. The adoption of, and future elections under, this ASU are not expected to have a material impact on our consolidated financial statements as the ASU will ease, if warranted, the requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the discontinuance of LIBOR or another reference rate will have on our contracts and other transactions.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity's Own Equity (Subtopic 815-40). This update simplifies the accounting for convertible instruments and contracts on an entity's own equity, including warrants, eliminating certain triggers for derivative accounting. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We have evaluated the impact the adoption of this ASU and we do not expect it to have a material impact on our consolidated financial statements, including our warrant liability.

2. Investments

We hold all investments on an available-for-sale basis and evaluate each position quarterly for impairment. We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Net Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense. The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.

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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 June 30, 2021	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	29,427	$	1,533	$	—	$	30,960
Municipal debt securities	506,433		9,610		(1,600)		514,443
Corporate debt securities	1,295,461		36,011		(7,315)		1,324,157
Asset-backed securities	113,506		1,906		(52)		115,360
Total bonds	1,944,827		49,060		(8,967)		1,984,920
Short-term investments	9,360		1		(1)		9,360
Total investments	$	1,954,187	$	49,061	$	(8,968)	$	1,994,280

	Amortized Cost		Gross Unrealized				Fair Value
			Gains		Losses
As of December 31, 2020	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	29,412	$	2,186	$	—	$	31,598
Municipal debt securities	407,323		14,027		(2)		421,348
Corporate debt securities	1,165,260		55,014		(483)		1,219,791
Asset-backed securities	128,471		2,736		(27)		131,180
Total bonds	1,730,466		73,963		(512)		1,803,917
Short-term investments	369		—		—		369
Total investments	$	1,730,835	$	73,963	$	(512)	$	1,804,286

We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2021 or December 31, 2020.

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2021 and December 31, 2020:

	June 30, 2021		December 31, 2020
Financial	38	%	37	%
Consumer	22		23
Communications	12		10
Utilities	10		11
Technology	10		10
Industrial	8		9
Total	100	%	100	%

As of June 30, 2021 and December 31, 2020, approximately $5.6 million and $5.7 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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Scheduled Maturities

The amortized cost and fair value of available-for-sale securities as of June 30, 2021 and December 31, 2020, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.

As of June 30, 2021	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	71,762	$	72,265
Due after one through five years	581,153		605,423
Due after five through ten years	1,127,385		1,140,283
Due after ten years	60,381		60,949
Asset-backed securities	113,506		115,360
Total investments	$	1,954,187	$	1,994,280

As of December 31, 2020	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	57,429	$	57,949
Due after one through five years	507,444		536,520
Due after five through ten years	1,016,230		1,056,098
Due after ten years	21,261		22,539
Asset-backed securities	128,471		131,180
Total investments	$	1,730,835	$	1,804,286

Aging of Unrealized Losses

As of June 30, 2021, the investment portfolio had gross unrealized losses of $9.0 million, none of which had been in an unrealized loss position for a period of twelve months or longer. As of December 31, 2020, the investment portfolio had gross unrealized losses of $512 thousand, of which $8 thousand had been in an unrealized loss position for a period of twelve months or longer. For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:

	Less Than 12 Months					12 Months or Greater					Total
	# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses		# of Securities	Fair Value		Unrealized Losses
As of June 30, 2021		(Dollars in Thousands)
Municipal debt securities	99	$	169,463	$	(1,600)	—	$	—			99	$	169,463	$	(1,600)
Corporate debt securities	70	464,406		(7,315)		—	—				70	464,406		(7,315)
Asset-backed securities	2	5,136		(52)		—	—				2	5,136		(52)
Short-term investments	2	5,994		(1)		—	—		—		2	5,994		(1)
Total	173	$	644,999	$	(8,968)	—	$	—	$	—	173	$	644,999	$	(8,968)

	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, 2020		(Dollars in Thousands)
Municipal debt securities	4	3,548		(2)		—	—		—		4	3,548		(2)
Corporate debt securities	9	40,081		(483)		1	33		—		10	40,114		(483)
Asset-backed securities	2	5,191		(19)		1	2,495		(8)		3	7,686		(27)
Total	15	$	48,820	$	(504)	2	$	2,528	$	(8)	17	$	51,348	$	(512)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Allowance for credit losses

As of June 30, 2021 and December 31, 2020, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did not record any provision for credit loss for investment securities during the three or six month periods ended June 30, 2021 or June 30, 2020.

The increase in the number of securities in and the aggregate size of the unrealized loss position as of June 30, 2021, was primarily driven by interest rate movements following the purchase date of certain securities. Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities.

Net Investment Income

The following table presents the components of net investment income:

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
	(In Thousands)
Investment income	$	9,608	$	7,320	$	18,833	$	15,669
Investment expenses	(226)		(250)		(637)		(495)
Net investment income	$	9,382	$	7,070	$	18,196	$	15,174

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

	For the three months ended June 30,				For the six months ended June 30,
	2021		2020		2021		2020
	(In Thousands)
Gross realized investment gains	$	12	$	4,586	$	12	$	5,126
Gross realized investment losses	—		(3,875)		—		(4,487)
Net realized investment gains	$	12	$	711	$	12	$	639

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

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	Fair Value Measurements Using
	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value
As of June 30, 2021	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	30,960	$	—	$	—	$	30,960
Municipal debt securities	—		514,443		—		514,443
Corporate debt securities	—		1,324,157		—		1,324,157
Asset-backed securities	—		115,360		—		115,360
Cash, cash equivalents and short-term investments	77,440		—		—		77,440
Total assets	$	108,400	$	1,953,960	$	—	$	2,062,360
Warrant liability	—		—		3,385		3,385
Total liabilities	$	—	$	—	$	3,385	$	3,385

	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, 2020	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	31,598	$	—	$	—	$	31,598
Municipal debt securities	—		421,348		—		421,348
Corporate debt securities	—		1,219,791		—		1,219,791
Asset-backed securities	—		131,180		—		131,180
Cash, cash equivalents and short-term investments	127,306		—		—		127,306
Total assets	$	158,904	$	1,772,319	$	—	$	1,931,223
Warrant liability	—		—		4,409		4,409
Total liabilities	$	—	$	—	$	4,409	$	4,409

There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the six months ended June 30, 2021, or the year ended December 31, 2020.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

	For the six months ended June 30,
Warrant Liability	2021		2020
	(In Thousands)
Balance, January 1	$	4,409	$	7,641
Change in fair value of warrant liability included in earnings	(453)		(4,723)
Issuance of common stock on warrant exercise	(571)		(220)
Balance, June 30	$	3,385	$	2,698

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

	As of June 30,
	2021			2020
Common stock price	$	22.48		$	16.08
Risk free interest rate	0.06		%	0.16		%
Expected life	0.81 years			1.81 years
Expected volatility	39.0		%	71.6		%
Dividend yield	0		%	0		%

The changes in fair value of the warrant liability for the six months ended June 30, 2021 and 2020 were driven by the exercise of outstanding warrants, as well as changes in the price of our common stock and other Black-Scholes model inputs during the respective periods.

Financial Instruments not Measured at Fair Value

On June 19, 2020, we issued $400.0 million aggregate principal amount of senior secured notes that mature on June 1, 2025 (the Notes) and used a portion of the proceeds from the Notes offering to repay the outstanding amount due under our $150 million term loan (2018 Term Loan). At June 30, 2021, the Notes were carried at a cost of $393.9 million, net of unamortized debt issuance costs of $6.1 million, and had a fair value of $459.3 million as assessed under our Level 2 hierarchy. At December 31, 2020, the Notes were carried at a cost of $393.3 million, net of unamortized debt issuance costs of $6.7 million, and had a fair value of $447.1 million.

4. Debt

Senior Secured Notes

At June 30, 2021, we had $400.0 million aggregate principal amount of senior secured notes outstanding. The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. $244.4 million of proceeds from the Notes offering were contributed to our lead operating subsidiary, NMIC and remaining proceeds were used to repay the outstanding amount due under the 2018 Term Loan due on May 24, 2023 and to pay underwriting fees incurred connection with the offering.

The Notes mature on June 1, 2025. At any time, or from time to time, prior to March 1, 2025, we may elect to redeem the Notes in whole or in part at a price based on 100% of the aggregate principal amount of any Notes redeemed plus the "Applicable Premium," plus accrued and unpaid interest thereon. Applicable Premium is defined as the greater of (1) 1.0% of the principal amount of the Notes, or (2) the principal value of the Notes plus the present value of all future interest payments. At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon. From time to time prior to June 1, 2022, we may also elect to use proceeds raised from one or more equity offerings to redeem up to 40% of the aggregate principal amount of the Notes at a price equal to 107.375% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, subject to certain exceptions.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs. In connection with the Notes offering, we recorded capitalized debt issuance costs of $7.4 million. Such amounts will be amortized over the contractual life of the Notes using the effective interest method. At June 30, 2021 and December 31, 2020, approximately $6.1 million and $6.7 million, respectively, of unamortized debt issuance costs remained.

Interest expense for the three and six months ended June 30, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan and the issuance of the Notes.

At June 30, 2021 and December 31, 2020, $2.5 million of accrued and unpaid interest on the Notes was included in "Accounts Payable and Accrued Expenses" on our condensed consolidated balance sheet.

    2020 Revolving Credit Facility

On March 20, 2020, we amended our $85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility). Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate plus a margin of 1.375% to 2.875% per annum, based on the applicable corporate credit rating at the time.

On October 30, 2020, we entered into a Joinder Agreement to the Credit Agreement, increasing the aggregate principal amount of commitments under the 2020 Revolving Credit Facility from $100 million to $