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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______ to ______
 
Commission file number 001-36174
NMI Holdings, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
45-4914248
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
 
 
 
 
2100 Powell Street
,
Emeryville
,
CA
 
94608
(Address of principal executive offices)
 
(Zip Code)

(855) 530-6642
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Class A Common Stock, par value $0.01
NMIH
Nasdaq
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
Non-accelerated filer
 
Smaller reporting company
 
 
 
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on July 29, 2019 was 67,768,466 shares.




TABLE OF CONTENTS
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.


2



CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "potential," "should," "will," "estimate," "plan," "project," "continuing," "ongoing," "expect," "intend" or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. All forward looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this report. Further, any forward looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We have based these forward looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward looking statements including, but not limited to:
changes in the business practices of Fannie Mae and Freddie Mac (collectively, the GSEs), including decisions that have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement;
our ability to remain an eligible mortgage insurer under the private mortgage insurer eligibility requirements (PMIERs) and other requirements imposed by the GSEs, which they may change at any time;
retention of our existing certificates of authority in each state and the District of Columbia (D.C.) and our ability to remain a mortgage insurer in good standing in each state and D.C.;
our future profitability, liquidity and capital resources;
actions of existing competitors, including other private mortgage insurers and government mortgage insurers like the Federal Housing Administration (FHA), the U.S. Department of Agriculture's Rural Housing Service (USDA) and the Veterans Administration (VA) (collectively, government MIs), and potential market entry by new competitors or consolidation of existing competitors;
developments in the world's financial and capital markets and our access to such markets, including reinsurance;
adoption of new or changes to existing laws and regulations that impact our business or financial condition directly or the mortgage insurance industry generally or their enforcement and implementation by regulators, including any action by the Consumer Financial Protection Bureau to address the planned expiration of the "QM Patch" under the Dodd-Frank Act Ability to Repay/Qualified Mortgage rule;
legislative or regulatory changes to the GSEs' role in the secondary mortgage market or other changes that could affect the residential mortgage industry generally or mortgage insurance in particular;
potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries;
changes in general economic, market and political conditions and policies, interest rates, inflation and investment results or other conditions that affect the housing market or the markets for home mortgages or mortgage insurance;
our ability to successfully execute and implement our capital plans, including our ability to access the capital, credit and reinsurance markets and to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us, the GSEs and our regulators;
our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry;
our ability to attract and retain a diverse customer base, including the largest mortgage originators;
failure of risk management or pricing or investment strategies;
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;

3



potential adverse impacts arising from natural disasters, including, with respect to affected areas, a decline in new business, adverse effects on home prices, and an increase in notices of default on insured mortgages;
the inability of our counter-parties, including third party reinsurers, to meet their obligations to us;
failure to maintain, improve and continue to develop necessary information technology systems or the failure of technology providers to perform; and
ability to recruit, train and retain key personnel.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q, including the exhibits hereto. In addition, for additional discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner, you should review the Risk Factors in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 10-K), as subsequently updated in other reports we file from time to time with the U.S. Securities and Exchange Commission (SEC).
Unless expressly indicated or the context requires otherwise, the terms "we," "our," "us" and the "Company" in this document refer to NMI Holdings, Inc., a Delaware corporation, and its wholly owned subsidiaries on a consolidated basis.


4



PART I
Item 1. Financial Statements



INDEX TO FINANCIAL STATEMENTS

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


5

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


 
June 30, 2019
 
December 31, 2018
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $994,543 and $924,987 as of June 30, 2019 and December 31, 2018, respectively)
$
1,017,607

 
$
911,490

Cash and cash equivalents (including restricted cash of $1,430 and $1,414 as of June 30, 2019 and December 31, 2018, respectively)
35,735

 
25,294

Premiums receivable
42,225

 
36,007

Accrued investment income
6,301

 
5,694

Prepaid expenses
3,358

 
3,241

Deferred policy acquisition costs, net
52,607

 
46,840

Software and equipment, net
25,827

 
24,765

Intangible assets and goodwill
3,634

 
3,634

Prepaid reinsurance premiums
20,426

 
30,370

Other assets
12,679

 
4,708

Total assets
$
1,220,399

 
$
1,092,043

 
 
 
 
Liabilities
 
 
 
Term loan
$
146,253

 
$
146,757

Unearned premiums
151,358

 
158,893

Accounts payable and accrued expenses
24,351

 
31,141

Reserve for insurance claims and claim expenses
18,432

 
12,811

Reinsurance funds withheld
18,092

 
27,114

Warrant liability, at fair value
9,679

 
7,296

Deferred tax liability, net
28,258

 
2,740

Other liabilities (1)
11,597

 
3,791

Total liabilities
408,020

 
390,543

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value; 67,768,466 and 66,318,849 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively (250,000,000 shares authorized)
677

 
663

Additional paid-in capital
692,163

 
682,181

Accumulated other comprehensive income (loss), net of tax
14,052

 
(14,832
)
Retained earnings
105,487

 
33,488

Total shareholders' equity
812,379

 
701,500

Total liabilities and shareholders' equity
$
1,220,399

 
$
1,092,043

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

6

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


For the three months ended June 30,

For the six months ended June 30,

2019
 
2018

2019

2018
Revenues
(In Thousands, except for per share data)
Net premiums earned
$
83,249

 
$
61,615

 
$
157,118

 
$
116,529

Net investment income
7,629

 
5,735

 
15,012

 
10,309

Net realized investment (losses) gains
(113
)
 
59

 
(300
)
 
59

Other revenues
415

 
44

 
456

 
108

Total revenues
91,180

 
67,453

 
172,286

 
127,005

Expenses
 
 
 
 
 
 
 
Insurance claims and claim expenses
2,923

 
643

 
5,666

 
2,212

Underwriting and operating expenses
32,543

 
29,020

 
63,392

 
57,473

Total expenses
35,466

 
29,663

 
69,058

 
59,685

Other expense
 
 
 
 
 
 
 
(Loss) gain from change in fair value of warrant liability
(1,685
)
 
109

 
(7,164
)
 
529

Interest expense
(3,071
)
 
(5,560
)
 
(6,132
)
 
(8,979
)
Total other expense
(4,756
)
 
(5,451
)
 
(13,296
)
 
(8,450
)
 
 
 
 
 
 
 
 
Income before income taxes
50,958

 
32,339

 
89,932

 
58,870

Income tax expense
11,858

 
7,098

 
17,933

 
11,274

Net income
$
39,100

 
$
25,241

 
$
71,999

 
$
47,596


 
 
 
 
 
 
 
Earnings per share
 
 
 
 
 
 
 
Basic
$
0.58

 
$
0.38

 
$
1.07

 
$
0.74

Diluted
$
0.56

 
$
0.37

 
$
1.04

 
$
0.70

 
 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
67,590

 
65,664

 
67,143

 
63,891

Diluted
69,590

 
68,616

 
69,348

 
67,171


 
 
 
 
 
 
 
Net income
$
39,100

 
$
25,241

 
$
71,999

 
$
47,596

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized gains (losses) in accumulated other comprehensive income, net of tax expense (benefit) of $3,662 and ($2,879) for the three months ended June 30, 2019 and 2018 and $7,615 and ($3,304) for the six months ended June 30, 2019 and 2018, respectively
13,779

 
(1,464
)
 
28,647

 
(12,429
)
Reclassification adjustment for realized losses (gains) included in net income, net of tax (benefit) expense of ($24) and $12 for the three months ended June 30, 2019 and 2018 and ($63) and $10 for the six months ended June 30, 2019 and 2018, respectively
89

 
(46
)
 
237

 
(37
)
Other comprehensive income (loss), net of tax
13,868


(1,510
)

28,884


(12,466
)
Comprehensive income
$
52,968


$
23,731


$
100,883


$
35,130

See accompanying notes to consolidated financial statements.

7

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 
Common Stock - Class A
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings
Total
 
Shares
Amount
 
(In Thousands)
Balances, January 1, 2019
66,319

$
663

$
682,181

$
(14,832
)
$
33,488

$
701,500

Common stock: class A shares issued related to warrants
39

*

944



944

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
1,144

12

(1,471
)


(1,459
)
Share-based compensation expense


2,981



2,981

Change in unrealized investment gains/losses, net of tax expense of $3,992



15,016


15,016

Net income




32,899

32,899

Balances, March 31, 2019
67,502

$
675

$
684,635

$
184

$
66,387

$
751,881

Common stock: class A shares issued related to warrants
128

1

3,835



3,836

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
138

1

218



219

Share-based compensation expense


3,475



3,475

Change in unrealized investment gains/losses, net of tax benefit of $3,686



13,868


13,868

Net income




39,100

39,100

Balances, June 30, 2019
67,768

$
677

$
692,163

$
14,052

$
105,487

$
812,379


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



























8

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)

 
Common Stock - Class A
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total
 
Shares
Amount
 
(In Thousands)
Balances, January 1, 2018
60,518

$
605

$
585,488

$
(2,859
)
$
(74,157
)
$
509,077

Cumulative effect of change in accounting principle



282

(282
)

Common stock: class A shares issued related to public offering
4,255

43

79,122



79,165

Common stock: class A shares issued related to warrants
26

*

489



489

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
770

8

(999
)


(991
)
Share-based compensation expense


2,805



2,805

Change in unrealized investment gains/losses, net of tax benefit of $423



(10,956
)

(10,956
)
Net income




22,355

22,355

Balances, March 31, 2018
65,569

$
656

$
666,905

$
(13,533
)
$
(52,084
)
$
601,944

Common stock: class A shares issued related to warrants
3

*

63



63

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
182

2

885



887

Share-based compensation expense


3,017



3,017

Change in unrealized investment gains/losses, net of tax benefit of $2,891



(1,510
)

(1,510
)
Net income




25,241

25,241

Balances, June 30, 2018
65,754

$
658

$
670,870

$
(15,043
)
$
(26,843
)
$
629,642


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




9

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

 
For the six months ended June 30,
 
2019
 
2018
Cash flows from operating activities
(In Thousands)
Net income
$
71,999

 
$
47,596

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Net realized investment losses (gains)
300

 
(59
)
Loss (gain) from change in fair value of warrant liability
7,164

 
(529
)
Depreciation and amortization
4,339

 
3,810

Net amortization of premium on investment securities
622

 
810

Amortization of debt discount and debt issuance costs
499

 
2,851

Share-based compensation expense
6,456

 
5,822

Deferred income taxes
17,840

 
10,864

Changes in operating assets and liabilities:
 
 
 
Premiums receivable
(6,218
)
 
(6,073
)
Accrued investment income
(607
)
 
(577
)
Prepaid expenses
(312
)
 
(756
)
Deferred policy acquisition costs, net
(5,767
)
 
(4,438
)
Other assets
(260
)
 
68

Unearned premiums
(7,535
)
 
2,492

Reserve for insurance claims and claim expenses
5,621

 
1,840

Reinsurance balances, net
(438
)
 
365

Accounts payable and accrued expenses
(6,379
)
 
(2,733
)
Net cash provided by operating activities
87,324

 
61,353

Cash flows from investing activities
 
 
 
Purchase of short-term investments
(113,276
)
 
(83,874
)
Purchase of fixed-maturity investments, available-for-sale
(126,179
)
 
(219,093
)
Proceeds from maturity of short-term investments
119,748

 
52,562

Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
49,229

 
111,485

Additions to software and equipment
(4,491
)
 
(3,273
)
Net cash used in investing activities
(74,969
)
 
(142,193
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock related to public offering, net of issuance costs

 
79,165

Proceeds from issuance of common stock related to employee equity plans
12,374

 
6,173

Taxes paid related to net share settlement of equity awards
(13,538
)
 
(6,480
)
Proceeds from senior note, net

 
149,250

Repayments of term loan
(750
)
 
(146,625
)
Payments of debt issuance/modification costs

 
(3,385
)
Net cash (used in) provided by financing activities
(1,914
)
 
78,098

 
 
 
 
Net increase (decrease) in cash, cash equivalents and restricted cash
10,441

 
(2,742
)
Cash, cash equivalents and restricted cash, beginning of period
25,294

 
19,196

Cash, cash equivalents and restricted cash, end of period
$
35,735

 
$
16,454

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Interest paid
$
5,365

 
$
6,425

Income tax (refunded) paid, net
$
(134
)
 
$
447



See accompanying notes to consolidated financial statements.

10

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


1. Organization, Basis of Presentation and Summary of Accounting Principles
NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011, to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). Our common stock is listed on the NASDAQ exchange under the ticker symbol "NMIH."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2018, included in our 2018 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to our previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2019.
Significant Accounting Principles
There have been no changes to our significant accounting principles as described in Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Accounting Principles" of our 2018 10-K, other than as noted in "Recent Accounting Pronouncements - Adopted" below.
Recent Accounting Pronouncements - Adopted    
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities on the balance sheet. The standard also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. We adopted this ASU on January 1, 2019 using the modified-retrospective method and applied it prospectively as of the effective date, without adjusting comparative periods presented as permitted by ASU 2018-11, Leases (Topic 842), Targeted Improvements. Adoption of this new standard increased our assets and liabilities by $7.6 million in connection with the recognition of right-of-use assets and lease liabilities, primarily related to the operating lease on our corporate headquarters. Adoption of this standard did not impact our consolidated statements of operations or cash flows. See Note 10, "Leases" for additional information related to our leases.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). This update is intended to simplify the accounting for certain equity-linked financial instruments. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This update expands the scope of Topic 718 to include share-based payments made to non-employees in connection with the acquisition of goods and services. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our financial results at this time as we have not made any share-based grants to non-employees as defined in ASC 718-10-20.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and in April 2019, the FASB issued ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments, which includes codification improvements to Topic 326. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses will generally shift from an incurred loss

11

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

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

In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. Adoption of this ASU will not have an impact on our Consolidated Balance Sheet, Statements of Operations and Comprehensive Income, Changes in Shareholders Equity or Cash Flows.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements hosted by a vendor and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
2. Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an accumulated basis in shareholders' equity. Net realized investment gains and losses are reported in earnings based on specific identification of securities sold or other-than-temporarily impaired.
Fair Values and Gross Unrealized Gains and Losses on Investments
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of June 30, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,193

 
$
688

 
$
(116
)
 
$
48,765

Municipal debt securities
91,650

 
1,497

 
(73
)
 
93,074

Corporate debt securities
634,188

 
18,569

 
(785
)
 
651,972

Asset-backed securities
168,251

 
3,216

 
(36
)
 
171,431

Total bonds
942,282

 
23,970

 
(1,010
)
 
965,242

Short-term investments
52,261

 
104

 

 
52,365

Total investments
$
994,543

 
$
24,074

 
$
(1,010
)
 
$
1,017,607


12

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

 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of December 31, 2018
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,171

 
$
35

 
$
(1,376
)
 
$
46,830

Municipal debt securities
92,014

 
206

 
(963
)
 
91,257

Corporate debt securities
554,079

 
847

 
(11,688
)
 
543,238

Asset-backed securities
171,990

 
792

 
(1,457
)
 
171,325

Total bonds
866,254

 
1,880

 
(15,484
)
 
852,650

Short-term investments
58,733

 
107

 

 
58,840

Total investments
$
924,987

 
$
1,987

 
$
(15,484
)
 
$
911,490


We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2019 or December 31, 2018.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2019 and December 31, 2018:
 
June 30, 2019
 
December 31, 2018
Financial
38
%
 
38
%
Consumer
27

 
27

Communications
10

 
12

Utilities
9

 
7

Industrial
8

 
7

Technology
6

 
6

Energy
1

 
2

Other
1

 
1

Total
100
%
 
100
%

As of June 30, 2019 and December 31, 2018, approximately $5.5 million and $5.3 million, respectively, of our cash and investments were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
Scheduled Maturities
The amortized cost and fair values of available-for-sale securities as of June 30, 2019 and December 31, 2018, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
As of June 30, 2019
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
99,314

 
$
99,375

Due after one through five years
412,820

 
420,131

Due after five through ten years
300,990

 
312,792

Due after ten years
13,168

 
13,878

Asset-backed securities
168,251

 
171,431

Total investments
$
994,543

 
$
1,017,607



13

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

As of December 31, 2018
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
76,087

 
$
76,104

Due after one through five years
352,282

 
347,701

Due after five through ten years
318,728

 
310,633

Due after ten years
5,900

 
5,727

Asset-backed securities
171,990

 
171,325

Total investments
$
924,987

 
$
911,490


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

$

$

 
5

$
13,750

$
(116
)
 
5

$
13,750

$
(116
)
Municipal debt securities(1)
1

2,000


 
10

15,025

(73
)
 
11

17,025

(73
)
Corporate debt securities
13

24,737

(199
)
 
33

51,099

(586
)
 
46

75,836

(785
)
Asset-backed securities
2

8,786

(33
)
 
6

1,953

(3
)
 
8

10,739

(36
)
Total
16

$
35,523

$
(232
)
 
54

$
81,827

$
(778
)
 
70

$
117,350

$
(1,010
)
(1) 
Includes securities with unrealized losses of less than 12 months which are not identifiable in the schedule due to rounding.

 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
As of December 31, 2018
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies

$

$

 
19

$
41,817

$
(1,376
)
 
19

$
41,817

$
(1,376
)
Municipal debt securities
4

7,409

(11
)
 
31

58,658

(952
)
 
35

66,067

(963
)
Corporate debt securities
118

226,477

(3,952
)
 
126

221,675

(7,736
)
 
244

448,152

(11,688
)
Asset-backed securities
25

36,017

(1,136
)
 
22

33,988

(321
)
 
47

70,005

(1,457
)
Total
147

$
269,903

$
(5,099
)
 
198

$
356,138

$
(10,385
)
 
345

$
626,041

$
(15,484
)

14

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

Net Investment Income
The following table presents the components of net investment income:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Investment income
$
7,741

 
$
5,937

 
$
15,237

 
$
10,719

Investment expenses
(112
)
 
(202
)
 
(225
)
 
(410
)
Net investment income
$
7,629

 
$
5,735

 
$
15,012

 
$
10,309


The following table presents the components of net realized investment losses:
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(In Thousands)
Gross realized investment gains
$
22

 
$
59

 
$
217

 
$
59

Gross realized investment losses
(135
)
 

 
(517
)
 

Net realized investment losses
$
(113
)
 
$
59

 
$
(300
)
 
$
59


Investment Securities - Other-than-Temporary Impairment (OTTI)
As of June 30, 2019, we held no other-than-temporarily impaired securities. During the six months ended June 30, 2019, we recognized a $0.4 million OTTI loss in earnings related to the planned sale of a security in a loss position that was disposed of in April 2019. We did not recognize any OTTI losses for the three months ended June 30, 2019 or the three and six months ended June 30, 2018. There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss) for the three or six months ended June 30, 2019.
3. Fair Value of Financial Instruments
The following describes the valuation techniques used by us to determine the fair value of our financial instruments:
We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below:
Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments.
Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.    

15

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

Assets classified as Level 1 and Level 2
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources.
Liabilities classified as Level 3
We calculate the fair value of outstanding warrants utilizing Level 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.
The following tables present the level within the fair value hierarchy at which our financial instruments were measured: 
 
Fair Value Measurements Using
 
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
As of June 30, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,765

 
$

 
$

 
$
48,765

Municipal debt securities

 
93,074

 

 
93,074

Corporate debt securities

 
651,972

 

 
651,972

Asset-backed securities

 
171,431

 

 
171,431

Cash, cash equivalents and short-term investments
88,100

 

 

 
88,100

Total assets
$
136,865

 
$
916,477

 
$

 
$
1,053,342

Warrant liability

 

 
9,679

 
9,679

Total liabilities
$

 
$

 
$
9,679

 
$
9,679



16

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

 
Fair Value Measurements Using
 
 
 
Quoted Prices in
Active Markets for
Identical Assets
(Level 1)
 
Significant Other
Observable Inputs
(Level 2)
 
Significant
Unobservable
Inputs
(Level 3)
 
Fair Value
As of December 31, 2018
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
46,830

 
$

 
$

 
$
46,830

Municipal debt securities

 
91,257

 

 
91,257

Corporate debt securities

 
543,238

 

 
543,238

Asset-backed securities

 
171,325

 

 
171,325

Cash, cash equivalents and short-term investments
84,134

 

 

 
84,134

Total assets
$
130,964

 
$
805,820

 
$

 
$
936,784

Warrant liability

 

 
7,296

 
7,296

Total liabilities
$

 
$

 
$
7,296

 
$
7,296


There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level 3, of the fair value hierarchy during the six months ended June 30, 2019 and the year ended December 31, 2018.
The following is a roll-forward of Level 3 liabilities measured at fair value:
 
For the six months ended June 30,
Warrant Liability
2019
 
2018
 
(In Thousands)
Balance, January 1
$
7,296

 
$
7,472

Change in fair value of warrant liability included in earnings
7,164

 
(529
)
Issuance of common stock on warrant exercise
(4,781
)
 
(552
)
Balance, June 30
$
9,679

 
$
6,391


The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.
 
As of June 30,
 
2019
 
2018
Common stock price
$
28.39

 
$
16.30

Risk free interest rate
1.72 - 1.95%

 
2.60
%
Expected life
0.92 - 2.81 years

 
2.49 years

Expected volatility
33.8 - 40.0%

 
32.7
%
Dividend yield
0
%
 
0
%

The changes in fair value of the warrant liability for the six months ended June 30, 2019 and 2018 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in the Black-Scholes model inputs and exercises of outstanding warrants.
4. Debt
On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $150 million 5-year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) a $85 million three-year secured revolving credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021. Proceeds from the 2018 Term Loan were used to repay in full the outstanding amount due under our $150 million amended term loan (2015 Term Loan) due on November 10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement.

17

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

2018 Term Loan
The 2018 Term Loan bears interest at the Eurodollar Rate, as defined in the 2018 Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 4.75%, representing an all-in rate of 6.95% as of June 30, 2019, payable monthly based on our current interest period election. Quarterly principal payments of $375 thousand are also required. As of June 30, 2019, the outstanding principal balance of the 2018 Term Loan was $148.5 million.
Interest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, an original issue discount and capitalized modification costs related to the 2015 Term Loan. For the three and six months ended June 30, 2019, interest expense was </