NMIH Q2 2015 10-Q


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2015
OR
o
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)


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 x NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).
YES x NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o
Accelerated filer o
Non-accelerated filer x
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x

The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on July 31, 2015 was 58,740,100 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:
our limited operating history;
our future profitability, liquidity and capital resources;
developments in the world's financial and capital markets and our access to such markets;
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.;
changes in the business practices of Fannie Mae and Freddie Mac (collectively, the GSEs), including adoption and implementation of the new Private Mortgage Insurer Eligibility Requirements (PMIERs) or decisions to decrease or discontinue the use of mortgage insurance;
our ability to remain a qualified mortgage insurer under the requirements imposed by the GSEs, which they may change at any time;
actions of existing competitors and potential market entry by new competitors;
adoption of new or changes to existing laws and regulations or their enforcement and implementation by regulators, including (1) 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; and (2) potential future lawsuits, investigations or inquiries or resolution of current inquiries, including a June 2015 letter from the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) requesting that each MI company, including NMIC, respond to a number of inquiries related to whether the company has offered customized terms or rates;
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 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 investment strategy;
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;
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

3



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, and the Risk Factors in Part II, Item 1A of this report and in our subsequent quarterly and other reports filed 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 "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 and Supplementary Data



INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of June 30, 2015 and December 31, 2014
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2015 and 2014
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2015 and the year ended December 31, 2014
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2015 and 2014
Notes to Condensed Consolidated Financial Statements


5

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


 
June 30, 2015
 
December 31, 2014
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $371,759 and $337,718 as of June 30, 2015 and December 31, 2014, respectively)
$
370,042

 
$
336,501

Cash and cash equivalents
64,301

 
103,021

Premiums receivable
2,758

 
1,048

Accrued investment income
1,928

 
1,707

Prepaid expenses
1,869

 
2,054

Deferred policy acquisition costs, net
8,218

 
2,985

Software and equipment, net
13,284

 
11,806

Intangible assets and goodwill
3,634

 
3,634

Other assets
55

 
509

Total assets
$
466,089

 
$
463,265

 
 
 
 
Liabilities
 
 
 
Unearned premiums
$
39,545

 
$
22,069

Reserve for insurance claims and claim expenses
181

 
83

Accounts payable and accrued expenses
12,309

 
10,646

Warrant liability, at fair value
2,230

 
3,372

Deferred tax liability
137

 
137

Total liabilities
54,402

 
36,307

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value;
58,740,100 and 58,428,548 shares issued and outstanding as of June 30, 2015 and December 31, 2014, respectively (250,000,000 shares authorized)
587

 
584

Additional paid-in capital
566,310

 
562,911

Accumulated other comprehensive loss, net of tax
(4,107
)
 
(3,607
)
Accumulated deficit
(151,103
)
 
(132,930
)
Total shareholders' equity
411,687

 
426,958

Total liabilities and shareholders' equity
$
466,089

 
$
463,265

See accompanying notes to consolidated financial statements.

6

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


 
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
(In Thousands, except for share data)
Net premiums written
$
20,347

 
$
5,051

 
33,268

 
10,229

Increase in unearned premiums
(11,491
)
 
(2,958
)
 
(17,476
)
 
(6,232
)
Net premiums earned
8,856

 
2,093

 
15,792

 
3,997

Net investment income
1,688

 
1,468

 
3,283

 
2,957

Net realized investment gains
354

 

 
967

 

Total revenues
10,898

 
3,561

 
20,042

 
6,954

Expenses
 
 
 
 
 
 
 
Insurance claims and claims expenses
(6
)
 
28

 
98

 
28

Underwriting and operating expenses
20,910

 
18,637

 
39,259

 
37,938

Total expenses
20,904

 
18,665

 
39,357

 
37,966

Other (loss) income
 
 
 
 
 
 
 
(Loss) gain from change in fair value of warrant liability
(106
)
 
952

 
1,142

 
1,769

Gain from settlement of warrants

 

 

 
37

Loss before income taxes
(10,112
)
 
(14,152
)
 
(18,173
)
 
(29,206
)
Income tax expense (benefit)
241

 
(1,297
)
 

 
(1,297
)
Net loss
$
(10,353
)
 
$
(12,855
)
 
$
(18,173
)
 
$
(27,909
)
 
 
 
 
 
 
 
 
Net loss per share
 
 
 
 
 
 
 
Basic and diluted loss per share
$
(0.18
)
 
$
(0.22
)
 
$
(0.31
)
 
$
(0.48
)
Weighted average common shares outstanding
58,720,095

 
58,289,801

 
58,603,644

 
58,176,181

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net loss
$
(10,353
)
 
$
(12,855
)
 
$
(18,173
)
 
$
(27,909
)
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Net unrealized (losses) gains in accumulated other comprehensive loss, net of tax (benefit) expense of ($1,431) and $2,664 for the three months ended June 30, 2015 and 2014, respectively, and $0 and $2,664 for the six months ended June 30, 2015 and 2014, respectively
(2,205
)
 
840

 
467

 
3,874

Reclassification adjustment for gains included in net loss, net of tax expense of $0, and $0 for the three months ended June 30, 2015 and 2014, respectively, and $0 and $0 for the six months ended June 30, 2015 and 2014, respectively
(354
)
 

 
(967
)
 

Other comprehensive (loss) income, net of tax
(2,559
)
 
840

 
(500
)
 
3,874

Comprehensive loss
$
(12,912
)
 
$
(12,015
)
 
$
(18,673
)
 
$
(24,035
)
See accompanying notes to consolidated financial statements.

7

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


 
Common Stock
Additional
Paid-in Capital
Accumulated Other Comprehensive Loss
Accumulated Deficit
Total
 
Class A
Class B
 
(In Thousands)
Balances, January 1, 2014
$
581

$

$
553,707

$
(7,047
)
$
(84,024
)
$
463,217

Common stock: class A shares issued under related to warrants
*


13



13

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
3


11



14

Share-based compensation expense


9,180



9,180

Change in unrealized investment gains/losses, net of tax of $2,390



3,440


3,440

Net loss




(48,906
)
(48,906
)
Balances, December 31, 2014
584


562,911

(3,607
)
(132,930
)
426,958

Common stock: class A shares issued under stock plans, net of shares withheld from employee taxes
3


(674
)


(671
)
Share-based compensation expense


4,073



4,073

Change in unrealized investment gains/losses, net of tax of $0



(500
)

(500
)
Net loss




(18,173
)
(18,173
)
Balances, June 30, 2015
$
587

$

$
566,310

$
(4,107
)
$
(151,103
)
$
411,687


*
During 2014, we issued 1,115 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.
See accompanying notes to consolidated financial statements.

8

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


 
For the six months ended June 30,
 
2015
 
2014
Cash flows from operating activities
(In Thousands)
Net loss
$
(18,173
)
 
$
(27,909
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net realized investment gains
(967
)
 

Gain from change in fair value of warrant liability
(1,142
)
 
(1,769
)
Depreciation and other amortization
2,525

 
4,270

Share-based compensation expense
4,085

 
4,701

Noncash intraperiod tax allocation

 
(1,297
)
Changes in operating assets and liabilities:
 
 
 
Accrued investment income
(221
)
 
12

Premiums receivable
(1,710
)
 
(124
)
Prepaid expenses
185

 
380

Deferred policy acquisition costs, net
(5,233
)
 
(961
)
Other assets
454

 
7

Unearned premiums
17,476

 
6,232

Reserve for insurance claims and claims expenses
98

 
28

Accounts payable and accrued expenses
1,256

 
(1,558
)
Net cash used in operating activities
(1,367
)
 
(17,988
)
Cash flows from investing activities
 
 
 
Purchase of fixed-maturity investments, available-for-sale
(108,973
)
 
(110
)
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
75,067

 
1,133

Purchase of software and equipment
(2,769
)
 
(4,270
)
Net cash used in investing activities
(36,675
)
 
(3,247
)
Cash flows from financing activities
 
 
 
Issuance of common stock
402

 
1,086

Taxes paid related to net share settlement of equity awards
(1,080
)
 
(1,072
)
Gain from settlement of warrants

 
(37
)
Net cash used in financing activities
(678
)
 
(23
)
 
 
 
 
Net decrease in cash and cash equivalents
(38,720
)
 
(21,258
)
Cash and cash equivalents, beginning of period
103,021

 
55,929

Cash and cash equivalents, end of period
$
64,301

 
$
34,671

See accompanying notes to consolidated financial statements.

9

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


1. Organization and Basis of Presentation
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). Freddie Mac and Fannie Mae each approved NMIC as an eligible mortgage insurer, on January 15, 2013 and January 16, 2013, respectively, which approvals are conditioned upon NMIC maintaining certain conditions, generally through the end of 2015 (GSE Approval). In April 2013, NMIC, our primary insurance subsidiary, wrote our first mortgage insurance policy. In April 2014, NMIC became fully licensed to write mortgage insurance in all 50 states and the District of Columbia.
As of June 30, 2015, we had $7.2 billion of primary insurance in force (IIF) and $4.5 billion of pool IIF, with $1.7 billion of primary risk-in-force (RIF) and $93.1 million of pool RIF.
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, 2014 included in our Annual Report on Form 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. 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, 2015.
Earnings per Share
Basic net loss per share is based on the weighted-average number of common shares outstanding, while diluted net loss per share is based on the weighted-average number of common shares outstanding and common stock equivalents that would be issuable upon the exercise of stock options, other share-based compensation arrangements, and the dilutive effect of outstanding warrants. As a result of our net losses for the six months ended June 30, 2015 and 2014, 6,835,296 shares and 5,854,306 shares, respectively, of our common stock equivalents issued under share-based compensation arrangements and warrants, respectively, were not included in the calculation of diluted net loss per share as of such dates because they were anti-dilutive.
Deferred Policy Acquisition Costs
Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as deferred policy acquisition costs (DAC). For each book year of business, these costs are amortized to expense in proportion to estimated gross profits over the estimated life of the policies. Total amortization of DAC for the six months ended June 30, 2015 and 2014 were $866 thousand and $61 thousand, respectively.
Premium Deficiency Reserves
We consider whether a premium deficiency exists at each fiscal quarter using best estimate assumptions as of the testing date. Per Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums and anticipated investment income. We have determined that no premium deficiency reserves were necessary for the six months ended June 30, 2015 or 2014.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers (Topic 606). This update is intended to provide a consistent approach in recognizing revenue. In accordance with the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the new standard requires that reporting companies disclose the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The provisions of this update are effective for interim and annual periods beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.

10

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

Reclassifications
Certain items in the financial statements as of June 30, 2015 and for the periods ended June 30, 2014 have been reclassified to conform to the current period's presentation. There was no effect on net income or shareholders' equity previously reported.
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 as a component of accumulated other comprehensive loss in shareholders' equity. Net realized investment gains and losses are reported in income based upon specific identification of securities sold.
Fair Values and Gross Unrealized Gains and Losses on Investments
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of June 30, 2015
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
88,140

 
$
46

 
$
(503
)
 
$
87,683

Municipal debt securities
14,505

 
16

 
(111
)
 
14,410

Corporate debt securities
205,102

 
489

 
(1,953
)
 
203,638

Asset-backed securities
64,012

 
396

 
(97
)
 
64,311

Total investments
$
371,759

 
$
947

 
$
(2,664
)
 
$
370,042

 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of December 31, 2014
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
68,911

 
$
7

 
$
(573
)
 
$
68,345

Municipal debt securities
12,009

 
27

 
(73
)
 
11,963

Corporate debt securities
200,358

 
883

 
(1,456
)
 
199,785

Asset-backed securities
56,440

 
222

 
(254
)
 
56,408

Total investments
$
337,718

 
$
1,139

 
$
(2,356
)
 
$
336,501

Scheduled Maturities
The amortized cost and fair values of available for sale securities at June 30, 2015 and December 31, 2014, 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 separate categories.
As of June 30, 2015
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
26,560

 
$
26,602

Due after one through five years
172,307

 
172,088

Due after five through ten years
96,168

 
94,472

Due after ten years
12,712

 
12,569

Asset-backed securities
64,012

 
64,311

Total investments
$
371,759

 
$
370,042


11

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

As of December 31, 2014
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
6,110

 
$
6,125

Due after one through five years
195,492

 
194,472

Due after five through ten years
54,360

 
53,891

Due after ten years
25,316

 
25,605

Asset-backed securities
56,440

 
56,408

Total investments
$
337,718

 
$
336,501

Net Realized Investment Gains (Losses) on Investments
Gross realized gains were $0.4 million and $1.3 million for the three and six months ended June 30, 2015, respectively. Gross realized losses were $0.1 million and $0.3 million, respectively, for the three and six months ended June 30, 2015. There were no realized investment gains or losses for the three and six months ended June 30, 2014.
Aging of Unrealized Losses
At June 30, 2015, the investment portfolio had gross unrealized losses of $2.7 million, $0.5 million of which has 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, 2015. We based our conclusion that these investments were not other-than-temporarily impaired at June 30, 2015 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements 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, 2015
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
7

$
31,697

$
(398
)
 
6

$
22,443

$
(105
)
 
13

$
54,140

$
(503
)
Municipal debt securities
2

5,666

(84
)
 
1

1,723

(27
)
 
3

7,389

(111
)
Corporate debt securities
35

117,616

(1,601
)
 
5

13,585

(352
)
 
40

131,201

(1,953
)
Assets-backed securities
7

13,503

(53
)
 
3

9,320

(44
)
 
10

22,823

(97
)
Total investments
51

$
168,482

$
(2,136
)
 
15

$
47,071

$
(528
)
 
66

$
215,553

$
(2,664
)
 
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, 2014
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
4

$
7,228

$
(33
)
 
10

$
49,884

$
(540
)
 
14

$
57,112

$
(573
)
Municipal debt securities
1

3,232

(18
)
 
1

1,695

(55
)
 
2

4,927

(73
)
Corporate debt securities
26

60,334

(559
)
 
22

65,806

(897
)
 
48

126,140

(1,456
)
Assets-backed securities
3

10,614

(57
)
 
4

20,047

(197
)
 
7

30,661

(254
)
Total investments
34

$
81,408

$
(667
)
 
37

$
137,432

$
(1,689
)
 
71

$
218,840

$
(2,356
)

12

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

Net Investment Income
For the three and six months ended June 30, 2015, net investment income was comprised of $1.8 million and $3.5 million of investment income from fixed maturities and $0.1 million and $0.2 million of investment expenses, respectively, compared to $1.6 million and $3.2 million of investment income from fixed maturities and $0.1 million and $0.3 million of investment expenses for the three and six months ended June 30, 2014, respectively.
As of June 30, 2015 and December 31, 2014, there were approximately $7.0 million of cash and investments in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
3. Fair Value of Financial Instruments
The following is a list of those assets and liabilities that are measured at fair value by hierarchy level:
 
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, 2015
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
58,337

 
$
29,346

 
$

 
$
87,683

Municipal debt securities

 
14,410

 

 
14,410

Corporate debt securities

 
203,638

 

 
203,638

Asset-backed securities

 
64,311

 

 
64,311

Cash and cash equivalents
64,301

 

 

 
64,301

Total assets
$
122,638

 
$
311,705

 
$

 
$
434,343

Warrant liability
$

 
$

 
$
2,230

 
$
2,230

Total liabilities
$

 
$

 
$
2,230

 
$
2,230

 
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, 2014
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
39,176

 
$
29,169

 
$

 
$
68,345

Municipal debt securities

 
11,963

 

 
11,963

Corporate debt securities

 
199,785

 

 
199,785

Asset-backed securities

 
56,408

 

 
56,408

Cash and cash equivalents
103,021

 

 

 
103,021

Total assets
$
142,197

 
$
297,325

 
$

 
$
439,522

Warrant liability
$

 
$

 
$
3,372

 
$
3,372

Total liabilities
$

 
$

 
$
3,372

 
$
3,372


13

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

The following is a roll-forward of Level 3 liabilities measured at fair value:
 
For the six months ended June 30,
Warrant Liability
2015
 
2014
 
(In Thousands)
Balance, January 1
$
3,372

 
$
6,371

Change in fair value of warrant liability included in earnings
(1,142
)
 
(1,769
)
Issuance of common stock on warrant exercise

 
(13
)
Gain on settlement of warrants

 
(37
)
Balance, June 30
$
2,230

 
$
4,552

We revalue the warrant liability quarterly using 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. As of June 30, 2015, the assumptions used in the option-pricing model were as follows: a common stock price as of June 30, 2015 of $8.02, risk free interest rate of 1.88%, expected life of 6.19 years, expected volatility of 32.7% and a dividend yield of 0%. The change in fair value is primarily attributable to a decline in the price of our common stock from December 31, 2014 to June 30, 2015.
4. Reserves for Insurance Claims and Claims Expenses
We establish claim reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Our method, consistent with industry practice, is to establish claim reserves only for loans in default. Our claim reserves also include amounts for estimated claims incurred on loans that have been in default for at least 60 days that have not yet been reported to us by the servicers, often referred to as IBNR. In 2013, we entered into a pool insurance agreement with Fannie Mae. We only establish claim or IBNR reserves for pool risk if we expect claims to exceed the deductible under the pool agreement, which represents the amount of claims absorbed by Fannie Mae before we are obligated to pay any claims. At June 30, 2015, thirty-eight loans in the pool were past due by sixty days or more. These thirty-eight loans represent approximately $2.1 million in RIF. Due to the deductible of $10.3 million, the level of notices of default (NODs) reported through June 30, 2015 and the expected severity (all loans in the pool have loan-to-value ratios (LTVs) under 80%), we have not established any pool reserves for claims or IBNR for the three and six months ended June 30, 2015 and 2014. We have not paid any claims or applied any amounts to the deductible through June 30, 2015.

14

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

The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claims expenses:
 
For the six months ended June 30,
 
2015
 
2014
 
(In Thousands)
Reserve at beginning of period
$
83

 
$

 
 
 
 
Claims incurred:
 
 
 
Claims and claim expenses incurred:
 
 
 
Current year
139

 
28

Prior years
(41
)
 

Total claims incurred
98

 
28

 
 
 
 
Claims paid:
 
 
 
Claims and claim expenses paid:
 
 
 
Current year

 

Prior years

 

Total claims paid

 

 
 
 
 
Reserve at end of period
$
181

 
$
28

There was a $41 thousand favorable prior year development during the six months ended June 30, 2015. Reserves remaining as of June 30, 2015 for prior years are $42 thousand as a result of re-estimation of unpaid claims. The decrease in the period is generally the result of ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual claims.
5. Warrants
In April 2012, we issued 992,000 warrants with an aggregate fair value of $5.1 million upon the completion of a private placement of our securities and in conjunction with the acquisition of our insurance subsidiaries. Each warrant gives the holder thereof the right to purchase one share of common stock at an exercise price equal to $10.00.
Upon exercise of these warrants, the amounts are reclassified from warrant liability to additional paid-in capital. During the first quarter of 2014, 7,790 warrants were exercised and we issued 1,115 Class A common shares via a cashless exercise. Upon exercise we recognized a gain of approximately $37 thousand. No warrants were exercised during the first half of 2015.
We account for these warrants to purchase our common shares in accordance with ASC 470-20, Debt with Conversion and Other Options and ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity.
6. Income Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 35%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our effective income tax rate on our pre-tax loss was (2.4)% for the three months ended June 30, 2015, compared to 9.2% for the comparable 2014 period. Our effective income tax rate on our pre-tax loss was 0.0% for the six months ended June 30, 2015, compared to 4.4% for the comparable 2014 period.
The income tax provision of $0 for the six months ended June 30, 2015 is related to the net tax effects of unrealized gains credited for the three months ended March 31, 2015 and losses debited for the three months ended June 30, 2015 to other comprehensive income (OCI). Generally, the amount of tax expense or benefit allocated to continuing operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided in ASC 740-20-45-7 when there is a pre-tax loss from continuing operations and there are items charged or credited to other categories, including OCI, in the current year. The intraperiod tax allocation rules related to items charged or credited directly to OCI can result in disproportionate tax effects that remain in OCI until certain events occur. As a result of net unrealized losses to OCI during the

15

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

six months ended June 30, 2015, this exception was not applicable. Other benefits from income taxes were eliminated or reduced by the recognition of a full valuation allowance which was recorded to reflect the amount of the deferred taxes that may not be realized.
7. Statutory Information
NMIC and Re One's combined statutory net loss, statutory surplus and contingency reserve were as follows:
As of and for the six months ended June 30, 2015 and as of and for the year ended December 31, 2014
June 30, 2015
 
December 31, 2014
 
(In Thousands)
Statutory net loss
$
(26,153
)
 
$
(47,961
)
Statutory surplus
210,581

 
236,738

Contingency reserve
17,296

 
9,401

As of June 30, 2015, NMIC had $1.6 billion in total RIF with a risk-to-capital (RTC) ratio of 7.7:1, significantly below the GSE and state imposed financial requirements. As of June 30, 2014, NMIC had $270.9 million of RIF, resulting in a RTC ratio of 1.5:1. The RTC calculation for each of our insurance subsidiaries, as well as our combined RTC calculation, is presented below.
As of June 30, 2015
NMIC
 
Re One
 
Combined
 
(In Thousands)
Primary risk-in-force (1)
 
 
 
 
 
Direct
$
1,714,914

 
$

 
$
1,714,914

Assumed

 
154,468

 
154,468

Ceded
(154,468
)
 

 
(154,468
)
Total primary risk-in-force
1,560,446

 
154,468

 
1,714,914

Pool risk-in-force (2)
 
 
 
 
 
Direct
93,090

 

 
93,090

Assumed

 
24,705

 
24,705

Ceded
(24,705
)
 

 
(24,705
)
Total pool risk-in-force
68,385

 
24,705

 
93,090

Total risk-in-force
$
1,628,831

 
$
179,173

 
$
1,808,004

 
 
 
 
 
 
Statutory policyholders' surplus
$
197,396

 
$
13,185

 
$
210,581

Statutory contingency reserve
15,307

 
1,989

 
17,296

Total statutory policyholders' position
$
212,703

 
$
15,174

 
$
227,877

 
 
 
 
 
 
Risk-to-Capital (3)
7.7:1

 
11.8:1

 
7.9:1

(1) 
Primary RIF excludes risk on policies that are currently in default and for which loss reserves have been established.
(2) 
Pool RIF is equal to the aggregate stop loss less a deductible.
(3) 
Represents total RIF divided by statutory policyholders' position which is the metric by which the majority of state insurance regulators will assess our capital adequacy.
NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware, such as NMIH. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or recent net profits (subject to certain limitations). Since inception, NMIC has not paid any dividends to NMIH. As NMIC had a statutory net loss for the year ended December 31, 2014, NMIC cannot pay any dividends to NMIH through December 31, 2015, without the prior approval of the Wisconsin OCI. Additionally, NMIC will not be permitted to pay dividends to NMIH until after December 31, 2015 as a condition of GSE Approval or until January 2016 under agreements with various state insurance regulators.

16



Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis should be read in conjunction with our unaudited consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, 2014, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements" above and the "Risk Factors" detailed in Item 1A of Part II of this report, as subsequently updated in reports we file with the SEC for a 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. Our results of operations for interim periods are not necessarily indicative of results to be expected for the full year or for any other period.
Overview
We provide MI through our subsidiaries. Our primary insurance subsidiary, NMIC, is a qualified MI provider on loans purchased by the GSEs and is licensed in all 50 states and D.C. to issue mortgage insurance. Our reinsurance subsidiary, Re One, solely provides reinsurance to NMIC on certain loans insured by NMIC, as described in Note 7, Statutory Information, above. Our stock trades on the NASDAQ under the symbol "NMIH."
MI protects mortgage lenders from all or a portion of default-related losses on residential mortgage loans made to home buyers who generally make down payments of less than 20% of the home's purchase price. By protecting lenders and investors from credit losses, we help facilitate the availability of mortgages to prospective, primarily first-time, U.S. home buyers, thus promoting homeownership while protecting lenders and investors against potential losses related to a borrower's default. MI also facilitates the sale of these mortgage loans in the secondary mortgage market, most of which are sold to the GSEs. We are one of seven companies in the U.S. who offer MI. Our business strategy is to become a leading national MI company with our principal focus on writing insurance on high quality, low down payment residential mortgages in the U.S.
We are a fully operational MI company, with $7.2 billion of primary IIF and $4.5 billion of pool IIF as of June 30, 2015, compared to $3.4 billion of primary IIF and $4.7 billion of pool IIF as of December 31, 2014. As of June 30, 2015, the Company had primary RIF of $1.7 billion compared to primary RIF of $801.6 million as of December 31, 2014. Pool RIF was $93.1 million as of June 30, 2015 and December 31, 2014.
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including customer development, new business writings, the composition of our insurance portfolio and other factors that we expect to impact our results.
Our headquarters are located in Emeryville, California and our website is www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report.
Conditions and Trends Impacting Our Business    
Customer Development
Our sales and marketing strategy is focused on increasing market share from existing customers and attracting new mortgage originator customers in the U.S. Our customers fall into two distinct categories, which we refer to as "National Accounts" and "Regional Accounts." Since we started MI operations in April 2013, we have significantly increased our customer base, and we expect to continue to acquire new National and Regional Account customers. We had 842 master policy holders as of June 30, 2015, compared to 570 as of June 30, 2014. Of those master policy holders, 340 or 40% were generating new insurance written (NIW) in the second quarter of 2015, compared to 94 or 16%, generating NIW in the second quarter of 2014.
New Insurance Written, Insurance in Force and Risk in Force
Primary insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a non-flow (aggregated) basis, in which each loan in a portfolio of loans is individually insured in a single transaction. MI may also be written in a pool policy, where a group of loans (or pool) are insured under a single contract. Pool insurance may have a stated aggregate loss limit for a pool of loans and may also have a deductible under which no losses are paid by the insurer until losses on the pool of loans exceed the deductible. In our industry, a "book" is a group of loans that an MI company insures in a particular period, normally a calendar year.

17



We utilize certain risk principles that form the basis of how we underwrite and originate primary NIW. We manage our portfolio credit risk by using several loan eligibility matrices which prescribe the maximum LTV, minimum borrower credit score, maximum loan size, property type and occupancy status of loans that we will insure. Our loan eligibility matrices, as well as all of our detailed underwriting guidelines, are contained in our Underwriting Guideline Manual that is publicly available on our website. Our eligibility criteria and underwriting guidelines are designed to mitigate the layered risk inherent in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for riskier property types, such as investor properties, compared to owner-occupied properties.
We monitor the concentrations of the various risk attributes in our insurance portfolio. Our primary IIF and RIF, as of June 30, 2015, were made up of approximately 62% and 61%, respectively, of loans to borrowers who had credit scores at or above 740. Generally, insuring loans made to borrowers with higher credit scores tends to result in a lower frequency of claims. Additionally, as of June 30, 2015, all loans in our insurance portfolio are full documentation loans, and approximately 2% of our RIF is on loans above 95% LTV.
The table below shows primary NIW, IIF, RIF, policies in force, the weighted average coverage and loans in default, by quarter, for the last five quarters.
Primary portfolio trends
As of and for the Quarter Ended
 
June 30, 2015
 
March 31, 2015
 
December 31, 2014
 
September 30, 2014
 
June 30, 2014
 
(Dollars in Thousands)
New insurance written
$
2,548,515

 
$
1,696,142

 
$
1,692,187

 
$
974,910

 
$
429,944

Insurance in force (1)
$
7,190,414

 
$
4,835,248

 
$
3,369,664

 
$
1,812,956

 
$
939,753

Risk in force (1)
$
1,715,442

 
$
1,145,602

 
$
801,561

 
$
435,722

 
$
220,949

Policies in force (1)
31,682

 
21,225

 
14,603

 
7,628

 
3,865

Weighted average coverage (2)
23.9
%
 
23.7
%
 
23.8
%
 
24.0
%
 
23.5
%
Loans in default (count)
9

 
6

 
4

 

 
1

Risk in force on defaulted loans
$
528

 
$
350

 
$
208

 
$

 
$
100


(1) 
Reported as of the end of the period.
(2) 
End of period RIF divided by IIF.
The table below shows primary and pool IIF, NIW and premiums written and earned.
Primary and pool IIF and NIW
As of and for the quarter ended
 
June 30, 2015
 
March 31, 2015
 
IIF
 
NIW
 
IIF
 
NIW
 
(In Thousands)
Monthly
$
3,616,951

 
$
1,460,166

 
$
2,258,776

 
$
918,697

Single
1,155,482

 
485,252

 
680,880

 
235,517

Aggregated single
2,417,981

 
603,097

 
1,895,592

 
541,928

Total primary
$
7,190,414

 
$
2,548,515

 
$
4,835,248

 
$
1,696,142

 
 
 
 
 
 
 
 
Pool
4,475,653

 

 
4,621,346

 

Total
$
11,666,067

 
$
2,548,515

 
$
9,456,594

 
$
1,696,142

Primary and pool premiums written and earned
For the quarter ended
 
June 30, 2015
 
March 31, 2015
 
(In Thousands)
Net premiums written
$
20,347

 
$
12,921

Net premiums earned
8,856

 
6,936


18



Flow monthly and single NIW increased 59% and 106%, respectively, over the first quarter of 2015. Aggregated single NIW increased 11% from the first quarter of 2015 and represented 24% of total NIW in the second quarter of 2015, down from 32% of total NIW in the first quarter of 2015. We intend to continue to focus our sales efforts on expanding market share in our primary flow business and expect aggregated single NIW as a percentage of total NIW to continue to decline.
Premiums written increased to $20.3 million for the quarter ended June 30, 2015 from $12.9 million for the quarter ended March 31, 2015 as a result of the increase in NIW for all primary product types. Premiums earned increased to $8.9 million for the quarter ended June 30, 2015 from $6.9 million for the quarter ended March 31, 2015 as a result of higher monthly and flow single NIW and the continued growth of our IIF, and to a lesser extent, cancellations of single premium policies in the second quarter of 2015. We earned $769 thousand from cancellations of single premium policies for the quarter ended June 30, 2015, compared to $1.4 million for the quarter ended March 31, 2015. The decrease in cancellations reflects a decrease in refinance activity driven by increases in interest rates during the quarter.
The tables below show the primary weighted average FICO and the weighted average LTV, by policy type, for the quarter in which the policy was originated.
Weighted Average FICO
 
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
Monthly
742

 
740

 
747

Single
756

 
749

 
746

Aggregated single
763

 
774

 
758

Weighted Average LTV
 
 
June 30, 2015
 
March 31, 2015
 
June 30, 2014
Monthly
92
%
 
91
%
 
93
%
Single
91

 
91

 
93

Aggregated single
89

 
88

 
90

The table below reflects a summary of the change in total primary IIF for the three and six months ended June 30, 2015 and 2014.
Primary IIF
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
 
(In Thousands)
IIF, beginning of period
4,835,248

 
514,796

 
3,369,664

 
161,731

NIW
2,548,515

 
429,944

 
4,244,657

 
784,257

Cancellations and other reductions
(193,349
)
 
(4,987
)
 
(423,907
)
 
(6,235
)
IIF, end of period
7,190,414

 
939,753

 
7,190,414

 
939,753

The percentage of IIF that remains on our books after any twelve-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, changes in persistency rates can have a significant impact on our profitability. The persistency rate on our portfolio was 71.7% at June 30, 2015. The high volume of single premium policy cancellations, as discussed previously, has contributed to lower persistency than generally expected.

19



The table below reflects a summary of our primary IIF and RIF by book year.
Primary IIF and RIF
As of June 30, 2015
 
IIF
 
RIF
 
(In Thousands)
2015, through June 30, 2015
4,191,649

 
997,998

2014
2,915,538

 
698,016

2013
83,227

 
19,428

Total
7,190,414

 
1,715,442

The table below reflects our total primary IIF and RIF by FICO.
 
As of June 30, 2015
Primary IIF and RIF
IIF
 
RIF
 
(Dollars in Thousands)
>= 740
$
4,476,199

62.3
%
 
$
1,048,651

61.1
%
680 - 739
2,409,995

33.5

 
593,075

34.6

620 - 679
304,220

4.2

 
73,716

4.3

<= 619


 


Total
$
7,190,414

100.0
%
 
$
1,715,442

100.0
%
The tables below reflect our average primary loan size by FICO and the percentage of our RIF by loan type.
 
June 30, 2015
 
December 31, 2014
Average primary loan size by FICO
(In Thousands)
>= 740
$
233

 
$
236

680 - 739
219

 
225

620 - 679
203

 
205

<= 619

 

Percentage of RIF by loan type
Primary
 
Pool
As of June 30, 2015
 
 
 
Fixed
97.1
%
 
100.0
%
Adjustable rate mortgages:
 
 
 
Less than five years

 

Five years and longer
2.9

 

Total
100.0
%
 
100.0
%

20



The following table reflects our RIF by LTV. We calculate the LTV of a loan as a percentage of the original loan amount to the original value of the property securing the loan. In general, the lower the LTV the lower the likelihood of a default, and for loans that default, a lower LTV generally results in a lower severity for any claim as the borrower has more equity in the property.
Total RIF by LTV
Primary
 
Pool
 
RIF
 
% of Total LTV
 
Policy Count
 
RIF
 
% of Total LTV
 
Policy Count
As of June 30, 2015
(Dollars in Thousands)
95.01% and above
$
35,966

 
2.1
%
 
680

 
$

 
%
 

90.01% to 95.00%
926,987

 
54.0

 
14,681

 

 

 

85.01% to 90.00%
597,954

 
34.9

 
10,417

 

 

 

80.01% to 85.00%
154,521

 
9.0

 
5,903

 

 

 

80.00% and below
14

 

 
1

 
93,090

 
100.0

 
19,784

Total RIF
$
1,715,442

 
100.0
%
 
31,682

 
$
93,090

 
100.0
%
 
19,784

Geographic Dispersion
The following tables show the distribution by state of our IIF and RIF, for both primary and pool insurance. As of June 30, 2015, our IIF and RIF continues to be relatively more concentrated in California, primarily as a result of the location and timing of the acquisition of new customers. With the broadening of our customer base, the concentration of primary IIF and RIF in California has declined from over 16% for both as of the end of 2014, to 14.1% and 13.6%, respectively, as of June 30, 2015. The distribution of risk across the states as of June 30, 2015 is not necessarily representative of the geographic distribution we expect in the future. We expect to add a significant number of new customers as we grow and receive greater allocations of business from our existing customers, consequently providing increased flexibility to manage our state concentration levels.
Top 10 primary IIF and RIF by state
IIF
 
RIF
As of June 30, 2015
 
1.
California
14.1
%
 
13.6
%
2.
Texas
7.0

 
7.4

3.
Florida
5.2

 
5.3

4.
Michigan
4.7

 
4.8

5.
Colorado
4.2

 
4.2

6.
Ohio
3.7

 
3.9

7.
New Jersey
3.7

 
3.3

8.
Pennsylvania
3.6

 
3.6

9.
Arizona
3.6

 
3.7

10.
North Carolina
3.5

 
3.5

 
Total
53.3
%
 
53.3
%

21



Top 10 pool IIF and RIF by state
IIF
 
RIF
As of June 30, 2015
 
1.
California
28.3
%
 
27.7
%
2.
Texas
5.3

 
5.4

3.
Colorado
3.9

 
3.8

4.
Washington
3.9

 
3.8

5.
Massachusetts
3.7

 
3.7

6.
Illinois
3.7

 
3.7

7.
Virginia
3.7

 
3.7

8.
New York
2.8

 
2.9

9.
New Jersey
2.8

 
2.8

10.
Florida
2.7

 
2.8

 
Total
60.8
%
 
60.3
%
Premiums Written and Earned
We set premiums at the time a policy is issued based on our expectations regarding likely performance over the term of coverage. We expect the average premium rate we charge on our monthly primary flow MI policies to be comparable with the rates charged by the industry in general. Premiums written and earned in a year are generally influenced by NIW, price and persistency. Additionally, premiums earned are influenced by the amortization of earnings over the policy life in accordance with the expiration of risk for policies covering more than one year.
In general, the majority of any underwriting profit (i.e., the earned premium revenue minus claims and expenses, excluding investment income) that a book generates occurs in the early years of the book, with the largest portion of the underwriting profit for that book realized in the first year. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses. The earnings we record and the cash flow we receive varies based on the type of MI product and premium plan our customers select. We offer monthly, annual and single premium payment plans. The level of competition within the private MI industry has been intense and is not expected to diminish. Lenders are requesting discounts from mortgage insurers with greater frequency, particularly with respect to lender paid mortgage insurance single premium policies. If the percentage of our new business represented by single premium policies continues to remain at elevated levels or if we reduce prices in response to future price competition, our premium yields could decrease.
Reserve for Insurance Claims
Claims incurred is the current expense that is booked within a particular period to reflect actual and estimated claim payments that we believe will ultimately be made as a result of insured loans that are in default. We do not recognize an estimate of claim expense for loans that are not in default. As of June 30, 2015, we have established reserves for insurance claims of $181 thousand for our nine primary loans in default compared to a reserve of $28 thousand for one primary loan in default as of June 30, 2014. We have not established any pool reserves for claims or IBNR to date. For additional discussion of our reserves, see, Item 1, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4, Reserves for Insurance Claims and Claims Expenses."
Claims incurred is generally affected by a variety of factors, including: the state of the economy, declines in housing values, and the size of loans insured and the percentage of coverage on insured loans, with higher average loan amounts and percentages of insurance coverage tending to result in higher incurred claim amounts.
We expect that claims incurred for the early years of our operations will be relatively low for the following reasons:
the typical distribution of claims over the life of a book results in fewer defaults during the first two years after loans are originated, usually peaking in years three through six and declining thereafter;
we expect that the frequency of claims on our initial primary books of business should be between 2% and 3% of mortgages insured over the life of the book. For claims that we may receive, we expect the severity of the claim to be between 85% and 95% of the coverage amount. Based on these expectations, we estimate that the loss ratio over the life of each book

22



will be between 20% and 25% of earned premiums. Because we expect the claims on insured mortgages to develop over time, we believe that the reported loss ratio in the early years of operation will be less than 10% of earned premiums;
under the pool insurance agreement between NMIC and Fannie Mae, NMIC is responsible for claims only to the extent they exceed a deductible; and
low NIW in our early years of operations.
We developed our estimates of the expected frequency and severity of claims based on statutory filings by many of our competitors, which contain historical book year performance, as well as an industry dataset which consists of nearly 150 million mortgages and 80 data fields per mortgage, gathered over the past 17 years.  As state-regulated entities, mortgage insurers are required to file actuarial justifications for premium rate changes in many states, many of which are publicly available and include historical information on claim frequency and severity.  Historical performance data from similar underwriting, house price, and interest rate periods were compared to today to determine a range of expected performance.    
GSE Oversight
GSE Approval Conditions
The GSEs are the principal purchasers of mortgages insured by MI companies. In January 2013, the GSEs approved NMIC as a qualified mortgage insurer, and in their approvals imposed certain capitalization, operational and reporting conditions on NMIC (collectively, the GSE Approval), most of which remain in effect until they are superseded on December 31, 2015 by the final PMIERs (discussed below). Until the new PMIERs are effective, NMIC is subject to ongoing compliance with the conditions in the GSE Approval as well as the GSEs' existing respective eligibility requirements.
The conditions in the GSE Approval require, among other things, that NMIC:
maintain minimum capital of $150 million;
operate at a RTC ratio not to exceed 15:1;
not declare or pay dividends to affiliates or to NMIH;
not enter into capital support agreements or guarantees for the benefit of, or purchase or otherwise invest in the debt of, affiliates without the prior written approval of the GSEs; and
not enter into reinsurance or other risk share arrangements without the GSEs' prior written approval.
The GSE Approval also includes other conditions, limitations and reporting requirements, including, among others, limits on costs allocated to NMIC under affiliate expense sharing arrangements; conditions related to risk concentration and rates of return; restrictions on provision of ancillary services (i.e., non-insurance) to customers and transfers of underwriting to affiliates; notification requirements regarding change of ownership and new five percent shareholders; requirement to, at the direction of one or both of the GSEs, re-domicile from Wisconsin to another state; and provisions regarding underwriting policies and claims processing.
GSE PMIERs
On April 17, 2015, the Federal Housing Finance Agency (FHFA) published final updated PMIERs that will be effective on December 31, 2015 (Effective Date) for existing, GSE-approved private mortgage insurers, i.e. Approved Insurers. (Italicized terms have the same meaning that such terms have in the PMIERs, as described below.) The PMIERs establish operational, business, remedial and financial requirements applicable to Approved Insurers. Under the PMIER financial requirements, Approved Insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an Approved Insurer’s net RIF, calculated by applying certain risk-based factors derived from tables set out in the PMIERs to the net RIF. The risk-based required asset amount for primary insurance is subject to a floor of 5.6% of total, performing, primary RIF, and the risk-based required asset amount for pool insurance considers both the factors in the tables and the net remaining stop loss for each pool insurance policy.
By March 1, 2016, each Approved Insurer must certify to the GSEs that it fully complies with the PMIERs as of the Effective Date. If an Approved Insurer meets all of the PMIERs except the financial requirements, by March 31, 2016, that Approved Insurer must submit a transition plan to each GSE detailing how it will comply with the financial requirements not later than June 30, 2017 (Compliance Date). We expect that prior to the Effective Date, NMIC will have undertaken measures to fully comply with the PMIERs financial requirements as of the Effective Date or, by March 31, 2016, NMIC will submit a transition plan to the GSEs detailing how NMIC will fully comply with the PMIERs on the Compliance Date. NMIC's compliance with the PMIERs

23



financial requirements by the Effective Date or by the Compliance Date under a transition plan will likely include raising additional capital, which is consistent with the Company's previous disclosures regarding the need for future capital raises to fund growth in its business. Capital may be in the form of debt, preferred equity or common equity. Any such future capital raise would be conducted by means of a separate prospectus or other appropriate offering document and not by means of this report.
Capital Position of Our Insurance Subsidiaries
In addition to the requirement that NMIC adhere to certain minimum capital requirements, NMIC is also subject to state regulatory minimum capital requirements based on its insured RIF. While formulations of this minimum capital may vary in each jurisdiction, the most common measure allows for a maximum permitted RTC ratio of 25 to 1.
As of June 30, 2015, NMIC's primary RIF was approximately $1.7 billion, representing insurance on a total of 31,682 policies in force, and pool RIF was approximately $93.1 million, representing insurance on a total of 19,784 loans. Based on NMIC's total statutory surplus of $213 million at June 30, 2015, NMIC's RTC ratio was 7.7:1, significantly below the contractual and regulatory maximum RTC thresholds. Similarly, Re One had total statutory capital of $15 million at June 30, 2015, with a RTC ratio of 11.8:1. Under the final PMIERs financial requirements as discussed previously in "GSE Oversight," NMIC will be held to a maximum risk-to-available assets ratio starting on the Effective Date. As of June 30, 2015, NMIC’s risk-to-available assets ratio under the final PMIERs was 7.7:1, which compares with the maximum risk-to-available assets ratio under the final PMIERs of 18:1.
If the final PMIERs were effective as of June 30, 2015, current capital requirements would be approximately $110 million for our primary IIF and $30 million for pool IIF.
As a condition of GSE Approval we were required to obtain a financial strength rating for NMIC. In July 2015, Standard & Poor's (S&P) Ratings Services assigned its "BBB-" financial strength and long-term counter-party credit ratings to NMIC.   At the same time, S&P assigned its "BB-" long-term counter-party credit rating to NMIH.  S&P's outlook for both companies is "stable."
Competition
The MI industry is highly competitive and currently consists of seven private mortgage insurers, including NMIC, as well as governmental agencies like the Federal Housing Administration (FHA) and the Veterans Administration (VA).
Private MI
In recent years, the MI industry has been in a state of transition. There are now seven MI companies serving the mortgage market. Given this dynamic, we expect that there will be pressure in the coming years for industry participants to grow or maintain their market share. Our competitors' share of the private MI market at March 31, 2015 varied from single percentage points penetration to a high of approximately 24%.
Competition with FHA
Although there has been broad policy consensus toward the need for private capital to play a larger role and government credit risk to be reduced in the U.S. housing finance system, recent action by the current administration has made it difficult to predict whether the market share of governmental agencies such as the FHA and VA will continue to recede at the same pace it has since 2010. On January 26, 2015, the FHA reduced some of its single-family annual mortgage insurance premiums. To date, we have not experienced any significant impact from this premium reduction on our business. It is difficult to predict what, if any, material impact this premium reduction will have in the future as there are factors beyond premium rate that influence a lender's decision to choose private MI over FHA insurance, including among others, the FHA's loan eligibility requirements and loan size limits and the relative ease of use of private MI products compared to FHA products. However, we believe our pricing continues to be more attractive than the FHA's pricing for a substantial majority of borrowers with credit and loan characteristics similar to those whose loans we insure.

24



Consolidated Results of Operations
Consolidated statements of operations
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
Revenues
(In Thousands)
Net premiums written
$
20,347

 
$
5,051

 
33,268

 
10,229

Increase in unearned premiums
(11,491
)
 
(2,958
)
 
(17,476
)
 
(6,232
)
Net premiums earned
8,856

 
2,093

 
15,792

 
3,997

Net investment income
1,688

 
1,468

 
3,283

 
2,957

Net realized investment gains
354

 

 
967

 

Total revenues
10,898

 
3,561

 
20,042

 
6,954

Expenses
 
 
 
 
 
 
 
Insurance claims and claims expenses
(6
)
 
28

 
98

 
28

Underwriting and operating expenses
20,910

 
18,637

 
39,259

 
37,938

Total expenses
20,904

 
18,665

 
39,357

 
37,966

Other (loss) income
 
 
 
 
 
 
 
(Loss) gain from change in fair value of warrant liability
(106
)
 
952

 
1,142

 
1,769

Gain from settlement of warrants

 

 

 
37

Loss before income taxes
(10,112
)
 
(14,152
)
 
(18,173
)
 
(29,206
)
Income tax expense (benefit)
241

 
(1,297
)
 

 
(1,297
)
Net loss
$
(10,353
)
 
$
(12,855
)
 
$
(18,173
)
 
$
(27,909
)
For the three months ended June 30, 2015, we had net premiums written of $20.3 million and premiums earned of $8.9 million, compared to net premiums written of $5.1 million and premiums earned of $2.1 million for the three months ended June 30, 2014. For the six months ended June 30, 2015, we had net premiums written of $33.3 million and premiums earned of $15.8 million, compared to net premiums written of $10.2 million and premiums earned of $4.0 million for the six months ended June 30, 2014. The principal drivers of the increases in premiums written and earned for the periods presented were the continued growth of our NIW and IIF and the significant development of our customer base. Additionally, we had $769 thousand of earned premiums in the three months ended June 30, 2015 and $2.2 million for the six months ended June 30, 2015 related to cancellations on single premium policies. Premiums earned from cancellations were negligible for the three and six months ended June 30, 2014. We believe cancellations will decrease as interest rates continue to rise as discussed previously in "Conditions and Trends Impacting our Business - New Insurance Written, Insurance in Force and Risk in Force."
We have incurred significant net operating losses since our inception. Our net losses were $10.4 million and $12.9 million for the three months ended June 30, 2015 and 2014, respectively, and $18.2 million and $27.9 million for the six months ended June 30, 2015 and 2014, respectively. The primary drivers of the decreases in net losses for the periods ended June 30, 2015, compared to the periods ended June 30, 2014 were the significant increases in premiums earned and the increase in net investment income, offset by increases in our personnel costs. Premiums increased due to the addition of new customers and to higher allocations of business to us from existing customers. We rebalanced our investment portfolio in the third quarter of 2014 to more fully deploy into higher yielding, investment grade, fixed-income securities. As a result, our net investment income was higher for the quarter ended June 30, 2015, compared to the quarter ended June 30, 2014.

25



The components of our underwriting and operating expenses for the periods indicated were as follows:
Consolidated underwriting and operating expenses
For the three months ended June 30,
 
For the six months ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In Thousands)
Payroll and related
$
12,667

 
$
8,844

 
$
23,093

 
$
18,277

Share-based compensation
2,080

 
2,370

 
4,085

 
4,701

Contract and professional services
1,640

 
2,056

 
3,270

 
3,889

Technology service expenses
1,118

 
1,005

 
2,217

 
2,080

Depreciation and amortization expenses
991

 
1,661

 
1,692

 
2,975

Other expenses
2,414

 
2,701

 
4,902

 
6,016

Total underwriting and operating expenses
$
20,910

 
$
18,637

 
$
39,259

 
$
37,938

Our financial results to date have been primarily driven by expenditures related to our business development activities, and to a lesser extent, by our investment activities. Although we expect our year-over-year expenses to increase as we grow our business, we ultimately expect that the majority of our operating expenses will be relatively fixed in the long term. As our business matures and we deploy the majority of our capital, including capital raised through equity or debt offerings, or through the use of reinsurance, we are targeting our expense ratio (expenses to premiums written) to fall into a range of 20% to 25%. Until our business matures, our expense ratio is expected to be significantly higher than this range given the low levels of premium written compared to our "fixed" costs customary to operating a mortgage insurance company.
Employee compensation represents the majority of our operating expense. Our payroll and related expense was $12.7 million and $23.1 million for the three and six months ended June 30, 2015, respectively, compared to $8.8 million and $18.3 million for the three and six months ended June 30, 2014, respectively. The increases year over year were driven principally by the addition of new employees and other compensation related expenses, including benefits, bonuses and accrued severance. Our headcount grew from 174 at June 30, 2014 to 209 at June 30, 2015. As part of our compensation plan, certain employees were granted stock options and RSUs under our stock plans. Our share-based compensation expense decreased period over period to $2.1 million and $4.1 million for the three and six months ended June 30, 2015, respectively, compared to $2.4 million and $4.7 million for the three and six months ended June 30, 2014, respectively. The expenses related to prior year grants decrease as the awards near their vesting terms. The 2012 grants fully amortized during the first half of the year. Additionally, we have not incurred the same degree of expense from the recent grants, as they were smaller than the 2012 grants, causing the overall share-based compensation expense to continue to decrease year over year as older grants become fully amortized.
Contract and professional services decreased to $1.6 million and $3.3 million for the three and six months ended June 30, 2015, respectively, compared to $2.1 million and $3.9 million for the three and six months ended June 30, 2014, respectively. The decrease was primarily driven by decreases in information technology consulting fees for software purchased with the acquisition of our insurance subsidiaries retired in 2014. Similarly, our depreciation and amortization expenses decreased to $1.0 million and $1.7 million for the three and six months ended June 30, 2015, respectively, compared to $1.7 million and $3.0 million for the three and six months ended June 30, 2014, respectively, due to the accelerated depreciation and write-off of the software noted above. The write-off was offset by the continued development of our technology platform which has resulted in placing more assets into service and depreciating those assets accordingly. Other expenses decreased to $2.4 million and $4.9 million for the three and six months ended June 30, 2015, respectively, from $2.7 million and $6.0 million for the three and six months ended June 30, 2014, respectively, largely as a result of a decline in legal expenses associated with the litigation that was settled in the third quarter of 2014, partially offset by increases in travel and related costs.

26



Consolidated balance sheets
June 30, 2015
 
December 31, 2014
 
(In Thousands)
Total investment portfolio
$
370,042

 
$
336,501

Cash and cash equivalents
64,301

 
103,021

Deferred policy acquisition costs, net
8,218

 
2,985

Software and equipment, net
13,284

 
11,806

Other assets
10,244

 
8,952

Total assets
$
466,089

 
$
463,265

Reserve for insurance claims and claims expenses
$
181

 
$
83

Unearned premiums
39,545

 
22,069

Accounts payable and accrued expenses
12,309

 
10,646

Warrant liability
2,230

 
3,372

Deferred tax liability
137

 
137

Total liabilities
54,402

 
36,307

Total shareholders' equity
411,687

 
426,958

Total liabilities and shareholders' equity
$
466,089

 
$
463,265

As of June 30, 2015, we had approximately $434 million in cash and investments, of which $163 million was held at NMIH. As of June 30, 2015, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately $239 million of our consolidated net assets of approximately $412 million. The decrease in cash from year end 2014 is the result of re-balancing of our investment portfolio and re-investing cash during the first half of the year.
Our deferred policy acquisition costs asset was $8.2 million as of June 30, 2015, compared to $3.0 million at December 31, 2014. The increase was driven by the increase in deferrable costs associated with our increase in premiums written year over year to $33.3 million for the six months ended June 30, 2015, from $10.2 million for the six months ended June 30, 2014, as discussed above, and the expense associated with the successful acquisition of that NIW.
Our unearned premiums balance increased to $39.5 million as of June 30, 2015, from $22.1 million as of December 31, 2014 due to single premiums written in the first half of 2015, offset by cancellations of lender-paid single premium policies, as discussed previously, and earnings of existing unearned premiums in accordance with the expiration of risk in the related policies.
The following table summarizes our consolidated cash flows from operating, investing and financing activities:
Consolidated cash flows
For the six months ended June 30,
 
2015
 
2014
Net cash used in:
(In Thousands)
Operating activities
$
1,367

 
$
17,988

Investing activities
36,675

 
3,247

Financing activities
678

 
23

Net decrease in cash and cash equivalents
$
38,720

 
$
21,258

Net cash used in operating activities decreased for the six months ended June 30, 2015, compared to the same period in 2014, primarily due to the increase in premiums written year over year, offset by increased personnel costs.
Cash used in investing activities for the six months ended June 30, 2015 was higher compared to the same period in 2014, as a result primarily of further portfolio re-balancing and re-investing of cash in the first half of 2015. We had very little movement in our investment portfolio during the first half of 2014 as we had just completed the investment of our original cash holdings throughout 2013.
Cash from financing activities for the six months ended June 30, 2015 and June 30, 2014 consisted primarily of taxes paid related to the net share settlement of equity awards offset by the proceeds from exercises.

27



Holding Company Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses and reimbursable expenses of its insurance subsidiaries; (ii) capital support for its insurance subsidiaries; (iii) potential payments to the Internal Revenue Service (IRS); and (iv) the payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as NMIH, that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or (subject to certain limitations) recent net profits. As of June 30, 2015, NMIH's shareholders' equity was approximately $412 million.
As of June 30, 2015, NMIH had $163 million of cash and investments at the holding company. In addition to investment income, NMIH's principal sources of operating cash are permitted payments under our tax- and expense-sharing arrangements with our subsidiaries as well as future dividends from NMIC, if available and permitted under our agreements with the GSEs and state regulators.
NMIH's future capital requirements depend on many factors, including NMIC's ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs and meet minimum required asset thresholds under the PMIERs. See "- GSE Oversight," above. We expect NMIH may make additional capital contributions to its insurance subsidiaries to support their applicable capital adequacy requirements from time-to-time. To the extent that the funds generated by our ongoing operations and capitalization are insufficient to fund future operating requirements, we may need to raise additional funds through financing activities or curtail our growth and reduce our expenses. We may choose to generate additional liquidity through the issuance of a combination of debt or equity securities. Any such future capital raise would be conducted by means of a separate prospectus or other appropriate offering document and not by means of this report.
The expense-sharing arrangements between NMIH and its insurance subsidiaries have been approved by the Wisconsin OCI, but such approval may be changed or revoked at any time. NMIC's ability to pay dividends to NMIH is subject to various conditions imposed by the GSEs and by insurance regulations requiring insurance department approval. In general, dividends in excess of prescribed limits are deemed "extraordinary" and require insurance regulatory approval. Since inception, NMIC has not paid any dividends to NMIH. As NMIC had a statutory net loss for the year ended December 31, 2014, NMIC cannot pay any dividends to NMIH through December 31, 2015, without the prior approval of the Wisconsin OCI. Additionally, under agreements with the GSEs, NMIC is not permitted to pay shareholder dividends until December 31, 2015 and, under agreements with various state insurance regulators, is not permitted to pay shareholder dividends until January 2016. Other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends.
Our MI companies' principal operating sources of liquidity are premiums that we receive from policies and income generated by our investment portfolio. Our MI companies' primary liquidity needs include the payment of claims on our MI policies, operating expenses, investment expenses and other costs of our business. We anticipate that as our IIF grows, the premium revenue we receive will increase. We expect to manage our fixed operating expenses so that they grow at a much slower rate than revenues over the coming years. As we anticipate an increase in our volume of MI business, we expect to see our underwriting and sales costs increase; however, we expect to be able to manage our "back-office" corporate related costs (i.e., management, finance, legal, risk and information technology) as these areas of our business are already substantially developed to support our revenue generating operations.
Consolidated Investment Portfolio
Our net investment income for the six months ended June 30, 2015 was $3.3 million, compared to $3.0 million for the six months ended June 30, 2014. As of June 30, 2015, our portfolio conforms with our investment guidelines. The principal factors affecting our investment income include the size and credit rating of our portfolio and its net yield. As measured by amortized cost (which excludes changes in fair market value, such as those resulting from changes in interest rates), the size of our investment portfolio is mainly a function of capital raised, cash generated from (or used in) operations, such as net premiums received, and investment earnings.
Consistent with Wisconsin law, our investment policies emphasize preservation of capital, as well as total return. Based on our investment policy guidelines, our investment portfolio is comprised almost entirely of cash and cash equivalents and fixed-income securities, all of which are investment grade. Our policy guidelines contain limits on the amount of credit exposure to any one issue, issuer and type of instrument. We expect to preserve the liquidity of our portfolio through diversification and investment in publicly traded securities. We plan to maintain a level of liquidity commensurate with our perceived business outlook and the expected timing, direction and degree of changes in interest rates.

28



The pre-tax book yield on our portfolio at June 30, 2015 was 1.2%, excluding unrealized gains and losses. The book yield is calculated on our year-to-date net investment income over our average portfolio book value at June 30, 2015. We believe that the yield on our investment portfolio likely will change over time based on potential changes to the interest rate environment, the duration or mix of our investment portfolio or other factors.
The sectors of our investment portfolio, including cash and cash equivalents appear in the table below:
Percentage of portfolio's fair value
June 30, 2015
 
December 31, 2014
1.
Corporate debt securities
47
%
 
45
%
2.
U.S. treasury securities and obligations of U.S. government agencies
20

 
16

3.
Asset-backed securities
15

 
13

4.
Cash and cash equivalents
15

 
24

5.
Municipal debt securities
3

 
2

 
Total
100
%
 
100
%
The ratings of our investment portfolio were:
Investment portfolio ratings
June 30, 2015
 
December 31, 2014
AAA
34
%
 
39
%
AA
9

 
8

A
42

 
44

BBB
15

 
9

Total
100
%
 
100
%
The ratings above are provided by one or more of: Moody's, S&P and Fitch Ratings. If three ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of approximately 35%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our effective income tax rate on our pre-tax loss was (2.4)% for the three months ended June 30, 2015 and 9.2% for the three months ended June 30, 2014. Our effective income tax rate on our pre-tax loss was 0.0% for the six months ended June 30, 2015 and 4.4% for the six months ended June 30, 2014. For further information regarding income taxes and their impact on our results of operations and financial position, see, Item 1, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Income Taxes."
Under a tax sharing agreement between NMIH and its subsidiaries, each of the parties mutually agreed to file a consolidated federal income tax return with NMIH as the direct tax filer. The tax liability of each insurer that is party to the agreement is limited to the amount of liability it would incur if it filed a separate tax return. Any settlements under the agreement between NMIH and a subsidiary will be made within 30 days of the filing of the applicable federal corporate income tax return with the IRS, including subsequent amended filings and IRS adjustments, except when a refund is due to a subsidiary, in which case payment shall be made to the insurer within 30 days after NMIH's receipt of the applicable tax refund.
Our financial statements reflect a valuation allowance with respect to our net deferred tax assets. As the Company has limited history, management is unable to provide a basis to conclude that it is more-likely-than-not that the results of future operations will generate sufficient taxable income. If the valuation allowance is reduced in the future, we would recognize an income tax benefit associated primarily with the carry forward of federal net operating losses and future share-based compensation tax deductions.
Other Items
Off-Balance Sheet Arrangements and Contractual Obligations
We had no off-balance sheet arrangements at June 30, 2015. There are no material changes outside the ordinary course of business in the contractual obligations specified in our 2014 Form 10-K.

29



Critical Accounting Estimates
We use accounting principles and methods that conform to GAAP. Where GAAP specifically excludes mortgage insurance we follow general industry practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition, fair value measurements, our investment portfolio, deferred policy acquisition costs, income taxes, reserves for insurance claims and claims expenses, warrants and share-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting estimates.
There have been no material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our Annual Report on Form 10-K for the year ended December 31, 2014.

30



Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large portfolio of various holdings, types and maturities. Investment income is one of our primary sources of cash flow supporting operations and claim payments. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance.
We manage market risk via a defined investment policy implemented by our treasury function with oversight from our Board of Director's (Board) Risk Committee. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:
Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates of our insurance portfolio, and as a result we may determine that our investment portfolio needs to be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse.
Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.
Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.
Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.
Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates fall below the interest rate of the debt.
The carrying value of our investment portfolio as of June 30, 2015 and December 31, 2014 was $370 million and $337 million, respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support.
At June 30, 2015, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.29 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 3.29% in fair value of our fixed income portfolio.  Excluding cash, our fixed income portfolio duration was 3.65 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 3.65% in fair value of our fixed income portfolio.

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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2015, pursuant to Rule 13a-15(e) under the Exchange Act. Management applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management's control objectives. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance and cannot guarantee that it will succeed in its stated objectives.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2015, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
Item 1. Legal Proceedings
We currently are not a party to any pending legal proceedings. We may in the future become subject to lawsuits and claims arising in the ordinary course of business.
Item 1A. Risk Factors
You should carefully consider the following risk factors, as well as all of the other information contained in this report, including our consolidated financial statements and the related notes thereto, before deciding to invest in our common stock. The occurrence of any of the following risks could materially and adversely affect our business, prospects, financial condition, operating results and cash flow. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.
This report contains forward-looking statements that involve risks and uncertainties. See "Cautionary Note Regarding Forward-Looking Statements." Our actual results could differ materially and adversely from those anticipated in these forward-looking statements, including any such statements made in Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Risk Factors Relating to Our Business Generally
We began writing mortgage insurance policies in April 2013, and prior to that, we did not engage in any substantive insurance operations. Therefore, we do not have a long operating history on which investors may rely for purposes of projecting our future operating results.
Prior to writing our first mortgage insurance policies in April 2013, we did not engage in any substantive operations and, therefore, do not have a long operating history on which investors may rely for purposes of projecting future operating results. Having a short insurance operating history, we are subject to substantial business and financial risks and could suffer significant losses, all of which are difficult to predict. We continue to develop business relationships, enhance our technology platform, gain customers, establish operating procedures, continue to hire staff and complete other tasks appropriate for the conduct of our intended business activities. Our long-term success will also be dependent upon our ability to continue to execute the operating procedures we have established and to continue to develop the internal controls to effectively support our business and our regulatory and reporting requirements. Further, industry conditions may change in a manner that adversely affects the development or profitability of our business, and there can be no assurance that we will be successful in our efforts to develop our business in a timely manner, if at all.
We have reported net losses since our inception, expect to continue to report net losses in the near term, and cannot assure you when we will achieve profitability.
We have reported net losses since our inception.We currently expect to continue to report net losses in the near term, the size of which will depend primarily on the amount of insurance business we can transact and the returns generated from our investment portfolio. We cannot assure you when, or if, we will achieve profitability. Conditions that could delay our profitability primarily include our ability to attract and retain a diverse customer base, to achieve a diversified mix of business across the spectrum of our product offerings, maintain GSE eligibility and our certificates of authority from state insurance departments, and to a lesser extent, include increasing unemployment rates, decreasing housing values, adverse changes in interest rates and unfavorable GSE reform or actions by the GSEs or the FHFA that negatively impact us and the MI industry
If we are unable to timely attract and retain the most significant mortgage originators as customers, our ability to achieve our business goals could be negatively impacted.
The success of our mortgage insurance business is highly dependent on our ability to attract and retain as customers the most significant mortgage originators in the U.S., as determined by volume of their own originations as well as volume of insured business they may acquire from other originators through their correspondent channels.  We believe these mortgage originators are critical to the achievement of our business goals because of their dominant market share.  As a result of their size and market share, these entities originate a significant majority of low down payment mortgages in the U.S. and, therefore, influence the size of the MI market.  We are currently doing business with a majority of these originators.  However, there is no assurance we will receive approvals from each of the remaining lenders to do MI business in a timely manner or at all.  If we fail to obtain and retain one or more approvals, our business, financial condition and operating results could be adversely impacted.  Even if these lenders become our customers, we cannot be certain that any loss of business from one would be replaced from other new or existing lenders.  Such lending customers may decide to write business only with certain mortgage insurers based on their views with respect to an insurer's pricing, underwriting guidelines, loss mitigation practices, financial strength or other factors.  Our customers

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may choose to diversify the mortgage insurers with which they do business, which could negatively affect our level of NIW and our market share.  In addition, our master policy does not, and by law cannot, require our customers to do business with us.  The loss of business from a significant customer could have an adverse effect on the amount of new business we are able to write, and consequently, our financial condition and operating results.
As a participant in the mortgage lending and MI industry, we rely on e-commerce and other technologies to conduct business with our customers. Our inability to meet the technological demands of customers could adversely impact our business, financial condition and operating results.
We primarily rely on e-commerce and other technologies to provide and expand our products and services. Customers require us to provide and service our mortgage insurance products in a secure manner, either electronically via our internet website or through direct electronic data transmissions. Accordingly, we invest resources in establishing and maintaining electronic connectivity with customers and, more generally, in e-commerce and technological advancements. In order to integrate electronically with mortgage lenders, we need to continue to connect our system to the industry's leading third-party loan origination systems. We expect this integration process to continue into the foreseeable future and may take a significant amount of time before it is complete. We are also working to integrate directly with those lenders that maintain their own, proprietary loan origination and servicing system technologies, recognizing that the time-lines for these integrations are heavily dependent upon the lenders' internal technology resources. Our inability to continue to make progress with these e-commerce connections could negatively impact our ability to attract as customers the larger mortgage lenders who rely on these connections to do business. Many customers require us to have such connectivity in place as a precursor to doing business with them. Our business, financial condition and operating results may be adversely impacted if we do not successfully establish these arrangements or otherwise keep pace with the technological demands of customers.
If we, together with third parties with whom we have contracted, are unable to develop, enhance and maintain our technology platform with respect to the products and services we offer, our business and financial performance could be significantly harmed.
We have developed an enterprise technology platform designed to support our mortgage insurance operations. If our technology platform fails to perform in the manner we expect, our business, financial condition and operating results will be significantly harmed. Further, our business would be negatively impacted if we are unable to timely and effectively enhance our platform when necessary to support our primary business functions. There is no assurance that we will not experience difficulties with the operation of our technology platform. The success of our business will be dependent on our ability to resolve any issues identified with our technology platform during operations and to make timely improvements. Further, we will need to match or exceed the technological capabilities of our competitors over time. We cannot predict with certainty the cost of such maintenance and improvements, but failure to make such improvements and any significant shortfall in any technology enhancements or negative variance in the time-line in which system enhancements are delivered could have an adverse effect on our business, financial condition and operating results.
In addition, we have contracted with a number of third parties in connection with the development and operation of the platform, and we rely on these third parties to competently perform their obligations in a timely manner. Any failure to maintain acceptable arrangements with these third parties, or the failure of any of these third parties to perform and/or deliver in an acceptable and timely manner, could have an adverse effect on our business, financial condition and operating results.
Our master policy contains restrictions on our ability to rescind coverage for fraud and underwriting defects, and if we were to fail to timely discover any such fraud or underwriting defects, our rights of rescission would be significantly limited, and we could suffer increased losses as a result of paying claims on loans with unacceptable risk profiles.
Under our master policy, we agree that we will not rescind or cancel coverage of an insured loan for material borrower misrepresentation or underwriting defects after a borrower timely makes a certain number of payments (either 12 or 36), as specified in our master policy. In addition, upon the borrower attaining such full and timely consecutive monthly payments, we have agreed to limitations on our ability to initiate an investigation of fraud or misrepresentation by our insureds or any other party involved in the origination of an insured loan, which we collectively refer to in our master policy as a "First Party." We refer to these limitation of rescission provisions in our master policy as "rescission relief." 12-month rescission relief is subject to our confirmation of coverage eligibility of an insured loan, which we refer to in our master policy as "Independent Validation." If we do not perform an Independent Validation on an insured loan, such loan will qualify for rescission relief after a borrower timely makes 36 consecutive monthly payments. The current processes we have in place to review insured loans may be ineffective in detecting fraud and/or underwriting defects prior to a borrower making the requisite number of payments. If this were to occur, we would be contractually prohibited from exercising our rights of rescission for borrower fraud and certain First Party misrepresentations; our rights to investigate potential First Party fraud or misrepresentation would be significantly curtailed; and we may be obligated to pay claims

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on certain loans with unacceptable risk profiles or which failed to meet our underwriting guidelines at the time of origination. As a result, we could suffer unexpected losses, which could adversely impact our business, financial condition and operating results.
We are outsourcing the underwriting of our mortgage insurance on certain loans to third-party underwriting service providers (USPs). If these USPs fail to adequately perform their underwriting services or place our coverage on loans we would deem ineligible, we could experience increased losses on loans underwritten by them and our customer relationships could be negatively impacted.
If our USPs fail to adequately perform their underwriting services, such as mishandling of customer inquiries or an inability to underwrite a sufficient volume of applications per day, we may lose opportunities to place mortgage insurance coverage on particular loans, our reputation may suffer and customers may choose not to do business with us at all. In addition, if our USPs place our coverage on loans that are ineligible for coverage under our underwriting guidelines, our risk of loss will be increased on those loans or the premiums we charge will be inadequate given the risk presented. We do not have the right under our master policy to cancel coverage of an ineligible loan as a result of a USP making an incorrect decision. Further, other than being able to terminate our contracts with these USPs, we do not have explicit monetary contractual remedies against these USPs if we are obligated to pay claims on ineligible loans that they improperly agreed to insure on our behalf. If these USPs fail to adequately perform their underwriting services or consistently place coverage on ineligible loans, we could experience increased losses on loans underwritten by them and our customer relationships could be negatively impacted, which would have an adverse impact on our business, financial condition and operating results.
There can be no assurance that the GSEs will continue to treat us as a qualified mortgage insurer in the future, and our failure to comply with the GSEs' final PMIERs could adversely impact our business, financial condition and operating results.
In January 2013, the GSEs approved NMIC as a qualified mortgage insurer, and with their approvals, imposed certain capitalization, operational and reporting conditions on NMIC (collectively the GSE Approval), most of which remain in effect until they are superseded on December 31, 2015 by the final PMIERs. Until the final PMIERs are effective, NMIC is subject to ongoing compliance with the conditions in the GSE Approval as well as the GSEs' existing respective eligibility requirements. The significant majority of insurance we write is on loans sold to the GSEs. As a result, our compliance with the GSE Approval, their existing eligibility requirements and, after December 31, 2015, the PMIERs is necessary to continue to successfully operate as a private mortgage insurer in the current market in the U.S. Even though we are currently GSE-approved, there can be no assurance that the GSEs will continue to treat us as a qualified mortgage insurer in the future. In addition, the GSEs may modify or change their interpretation of terms they require us to include in our mortgage insurance policies for loans purchased by them, requiring us to modify our terms of coverage or operational procedures in order to remain a GSE-qualified mortgage insurer, and such changes could have a material adverse impact on our financial position and operating results. Although not as likely, the GSEs could, in their own discretion, require additional limitations and/or conditions on certain of our activities and practices that are not currently in the GSE Approval, existing eligibility requirements or PMIERs in order for us to remain qualified. The GSEs may amend the PMIERs at any time. Additional requirements or conditions imposed by the GSEs could limit our operating flexibility and the areas in which we may write new business. If, in the future, either or both of the GSEs were to cease to consider us a qualified mortgage insurer and cease accepting our MI products, our financial condition and results of operations would be materially and adversely affected.
As a condition of the GSE Approval, we have agreed to limit NMIC's RTC ratio to no greater than 15 to 1 for the first three years of operations (expiring December 31, 2015) and at all times to maintain total statutory capital of at least $150 million. After that date, we agreed to comply with any financial requirements that are imposed in the GSEs' then existing Eligibility Requirements. On April 17, 2015, the FHFA published final updated PMIERs that will be effective on December 31, 2015 (Effective Date) for existing, GSE-approved private mortgage insurers, i.e. Approved Insurers. (Italicized terms have the same meaning that such terms have in the PMIERs.) By March 1, 2016, each Approved Insurer must certify to the GSEs that it fully complies with the PMIERs as of the Effective Date. If an Approved Insurer meets all of the PMIERs except the financial requirements, by March 31, 2016, that Approved Insurer must submit a transition plan to each GSE detailing how it will comply with the financial requirements not later than June 30, 2017 (Compliance Date). We expect that prior to the Effective Date, NMIC will have undertaken measures to fully comply with the PMIERs financial requirements as of the Effective Date or, by March 31, 2016, NMIC will submit a transition plan to the GSEs detailing how NMIC will fully comply with the PMIERs on the Compliance Date. If we are required to present a transition plan to the GSEs to meet their requirements, there is no certainty that the GSEs will agree to any proposed plan we submit to them. Even with a GSE approved transition plan, there is no assurance NMIC will be able to comply with the PMIER financial requirements by the Compliance Date.
NMIC's compliance with the PMIERs financial requirements by the Effective Date or by the Compliance Date under a transition plan will likely include raising additional capital, which is consistent with the Company's previous disclosures regarding the need for future capital raises to fund growth in its business. Capital options include debt, preferred equity or common equity and may be senior to our common stock and may result in dilution to you. No assurance as to the ultimate availability, costs or other

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terms of any such additional capital can be given at this time. Any such future capital raise would be conducted by means of a separate prospectus or other appropriate offering document and not by means of this report. Further, our efforts to raise capital may not be successful. If we are unable to raise additional capital or enter into alternative arrangements to reduce our RIF, we may not be able to successfully comply with the financial requirements by the Compliance Date. If this were to occur, we may lose our GSE eligibility, which would substantially impair our business prospects and adversely impact our financial position and operating results.
In addition, there is no assurance the GSEs will not make the PMIERs financial requirements more onerous in the future. In particular, the PMIERs provide that the table of factors that determine minimum required assets will be updated every two years or more frequently to reflect macroeconomic conditions or loan performance. If we are required under the PMIERs to increase the amount of available assets in order to support our business writings, the amount of capital our insurance subsidiaries are required to hold will increase, which may have a negative effect on our returns. Any such effect could have a negative impact on our flexibility to meet our business plans and our future operating results.
NMIC is required to maintain minimum capital under its agreements with certain states, and if NMIC falls below these capital requirements or exceeds certain RTC ratios, we could be required to cease writing business in these states, which would adversely impact our business, financial condition and operating results.
In connection with NMIC's applications for licensure in multiple states, including Wisconsin, we agreed to maintain NMIC's RTC ratio below certain thresholds that are lower than these states' statutory maximum RTC requirements. If our business grows faster (i.e. our RIF grows faster than expected) or is less profitable than expected (i.e. our revenues do not generate the return we expect), our actual RTC ratios over the short to mid-term could exceed our expected RTC ratios and could begin to approach the limits to which we are subject, which could require us to raise additional capital or enter into alternative arrangements to reduce our RIF, including through reinsurance. We can give no assurance that our efforts to raise capital or reduce our RIF would be successful. If we are unable to raise additional capital or enter into alternative arrangements to reduce our RIF, we may exceed these state-imposed capital requirements. If this were to occur, we may be required to cease transacting new business in these states, which would substantially impair our business and adversely impact our financial position and operating results.
Our insurance subsidiary is subject to state insurance department capital adequacy requirements, which if breached, could result in NMIC being required to cease writing new business in such states.
NMIC's principal regulator is the Wisconsin OCI. Under applicable Wisconsin law, as well as that of 15 other states, a mortgage insurer must maintain a minimum amount of statutory capital relative to the RIF in order for the mortgage insurer to continue to write new business. While formulations of minimum capital may vary in each jurisdiction that has such a requirement, the most common measure applied allows for a maximum permitted RTC ratio of 25 to 1. Wisconsin and certain other states, including California and Illinois, apply a substantially similar requirement referred to as minimum policyholders' position. Accordingly, if we fail to meet the capital adequacy requirements in one or more states, we could be required to suspend writing business in some or all of the states in which we do business.
We face intense competition for business in our industry from existing MI providers and potentially from new entrants. If we are unable to compete effectively, we may not be able to gain market share and our business may be adversely affected.
The MI industry is highly competitive. With seven private MI companies actively competing for business from the same residential mortgage originators, it is important that we continue to differentiate ourselves from the other companies who sell substantially similar products as ours. We compete with other private mortgage insurers based on our financial strength, underwriting guidelines, information security, product features, pricing, operating efficiencies, customer relationships, name recognition, reputation, the strength of management teams and field organizations, comprehensiveness of databases covering insured loans, effective use of technology and innovation in the delivery and servicing of insurance products and ability to execute. However, the existing MI companies, many of which have larger operations than we do and/or are part of larger diversified companies, have established relationships and infrastructure, personnel and other resources than we are anticipated to have during our initial years of operation. One or more of our competitors may seek to capture increased market share from government-supported insurance programs, such as the FHA, or from other MI companies by reducing pricing, offering alternative coverage and product options, including offerings for loans not intended to be sold to the GSEs, loosening their underwriting guidelines or relaxing risk management policies, which could, in turn, improve their competitive positions in the industry and negatively impact our ability to increase our market share. Competition within the MI industry could result in our loss of customers, lower premiums, riskier credit guidelines and other changes that could lower our revenues or increase our expenses. If our information technology systems are inferior to our competitors', existing and potential customers may choose our competitors' products over ours. If we are unable to compete effectively against our competitors and attract our target customers, our revenue may be adversely impacted and we may not be able to gain market share, which could adversely impact our growth and profitability.

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In addition, most of our competitors, either directly or indirectly, offer certain ancillary services to mortgage lenders with which they also conduct MI business, including loan underwriting, training and other services. For various reasons, including related to resources or compliance, we may choose not to offer these services at all or not to offer them in a form that is comparable to the prevailing offerings of our competitors. If we choose not to offer these services, or if we were to offer ancillary services that are not well-received by the market and fail to perform as anticipated, we could be at a competitive disadvantage which could adversely impact our profitability.
Our underwriting and risk management policies and practices may not anticipate all risks and/or the magnitude of potential for loss as the result of unforeseen risks.
We have established underwriting and risk management policies and practices that seek to mitigate our exposure to borrower default risk in our insured loan portfolio by anticipating future risks and the magnitude of those risks. Our underwriting and risk management guidelines are based on what we believe to be the major factors that impact mortgage credit risk. Those factors include, among others, the borrower's credit strength, the loan product, origination practices of lenders, the percentage coverage and size of insured loans and the condition of the economy. In addition, there are certain types of loan characteristics relating to the individual loan or borrower that affect the risk potential for a loan, including its LTV, purpose and terms and the credit profile of the borrower. The presence of multiple higher-risk characteristics in a loan materially increases the likelihood of a claim on such a loan unless there are other characteristics to mitigate the risk.
The frequency and severity of claims we incur will be uncertain and will depend largely on general economic conditions, including rates of unemployment and home prices. To the extent that a risk is unforeseen or is underestimated in terms of magnitude of loss, our underwriting and risk management policies and practices may not completely insulate us from the effects of those risks. If these policies and practices do not correctly anticipate risk or the potential for loss, we may underwrite business for which we have not charged premium commensurate with the risk or we may establish our reserves at a level that does not accurately approximate our actual ultimate loss payments. Either one of these could result in materially adverse effects on our results.
Our insurance in force may be concentrated in specific geographic regions and could make our business highly susceptible to downturns in local economies, which could be detrimental to our financial condition.
We seek to diversify our insured loan portfolio geographically; however, the availability of business might lead to concentrations in specific regions in the U.S., which could make our business more susceptible to economic downturns in these regions. Our IIF and RIF is currently more heavily concentrated in California, primarily as a result of the location and timing of acquisition of new customers. A deterioration in local or national economic conditions in the mortgage market and other economic conditions, including home prices, levels of unemployment and interest rates or an increase in default rates in specific geographic areas or generally could have a material adverse effect on our operating results and financial position.
Actual premiums and investment earnings may not be sufficient to cover claim payments and our operating costs.
We set premiums at the time a policy is issued based on our expectations regarding likely performance over the term of the policy. Our premiums are subject to approval by state insurance regulators, which can delay or limit our ability to increase our premiums. Generally, we will not be able to cancel the MI coverage or adjust renewal premiums during the life of an MI policy. As a result, higher than anticipated claims generally will not be able to be offset by premium increases on policies in force or mitigated by our non-renewal or cancellation of insurance coverage. While we believe our initial capital, premiums and investment earnings will provide a pool of resources sufficient to cover expected loss payments and have made estimates regarding loss payments and potential claims, the ultimate number and magnitude of claims we experience cannot be predicted with certainty and the actual premiums and investment earnings may not be sufficient to cover losses and/or our operating costs. An increase in the number or size of claims, compared to what we anticipate, could adversely affect our operating results or financial condition. We may not be able to achieve the results that we expect, and there can be no assurance that losses will not exceed our total resources.
Adverse investment performance may affect our financial results and abi