Document


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, 2016
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 x
Non-accelerated filer o
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 August 4, 2016 was 59,128,011 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, including reinsurance;
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 implementation of the new Private Mortgage Insurer Eligibility Requirements (PMIERs) or decisions that have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement;
our ability to remain an eligible mortgage insurer under the PMIERs and other requirements imposed by the GSEs, which they may change at any time;
actions of existing competitors, including governmental agencies like the Federal Housing Administration (FHA) and the Veterans Administration (VA), and potential market entry by new competitors or consolidation of existing competitors;
adoption of new or changes to existing laws and regulations or their enforcement and implementation by regulators;
changes to the GSEs' role in the secondary mortgage market or other changes that could affect the residential mortgage industry generally or mortgage insurance in particular;
potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries;
changes in general economic, market and political conditions and policies, interest rates, inflation and investment results or other conditions that affect the housing market or the markets for home mortgages or mortgage insurance;
our ability to successfully execute and implement our capital plans, including our ability to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us and to the GSEs;
our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry;
our ability to attract and retain a diverse customer base, including the largest mortgage originators;
failure of risk management or pricing or investment strategies;
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;
our ability to utilize our net operating loss carryforwards, which could be limited or eliminated in various ways, including if we experience an ownership change as defined in Section 382 of the Internal Revenue Code;

3



failure to maintain, improve and continue to develop necessary information technology systems or the failure of technology providers to perform; and
ability to recruit, train and retain key personnel.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q, including the exhibits hereto. In addition, for additional discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner, you should review the Risk Factors in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2015 (2015 10-K), as subsequently updated in other reports we file from time to time with the U.S. Securities and Exchange Commission (SEC).
Unless expressly indicated or the context requires otherwise, the terms "we," "our," "us" and "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, 2016 and December 31, 2015
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2016 and 2015
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2016 and the year ended December 31, 2015
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2016 and 2015
Notes to Condensed Consolidated Financial Statements


5

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


 
June 30, 2016
 
December 31, 2015
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $593,807 and $564,319 as of June 30, 2016 and December 31, 2015, respectively)
$
607,318

 
$
559,235

Cash and cash equivalents
46,827

 
57,317

Premiums receivable
8,868

 
5,143

Accrued investment income
3,068

 
2,873

Prepaid expenses
1,810

 
1,428

Deferred policy acquisition costs, net
25,128

 
17,530

Software and equipment, net
19,690

 
15,201

Intangible assets and goodwill
3,634

 
3,634

Other assets
85

 
90

Total assets
$
716,428

 
$
662,451

 
 
 
 
Liabilities
 
 
 
Term loan
$
144,107

 
$
143,939

Unearned premiums
131,916

 
90,773

Accounts payable and accrued expenses
15,502

 
22,725

Reserve for insurance claims and claim expenses
1,475

 
679

Warrant liability, at fair value
856

 
1,467

Deferred tax
137

 
137

Total liabilities
293,993

 
259,720

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value;
59,128,011 and 58,807,825 shares issued and outstanding as of June 30, 2016 and December 31, 2015, respectively (250,000,000 shares authorized)
591

 
588

Additional paid-in capital
573,342

 
570,340

Accumulated other comprehensive income (loss), net of tax
11,121

 
(7,474
)
Accumulated deficit
(162,619
)
 
(160,723
)
Total shareholders' equity
422,435

 
402,731

Total liabilities and shareholders' equity
$
716,428

 
$
662,451

See accompanying notes to consolidated financial statements.

6

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


For the three months ended June 30,

For the six months ended June 30,

2016

2015

2016

2015
Revenues
(In Thousands, except for share data)
Net premiums written
$
48,862

 
$
20,347

 
$
86,991

 
$
33,268

Increase in unearned premiums
(22,821
)
 
(11,491
)
 
(41,143
)
 
(17,476
)
Net premiums earned
26,041

 
8,856

 
45,848

 
15,792

Net investment income
3,342

 
1,688

 
6,573

 
3,283

Net realized investment gains (losses)
61

 
354

 
(824
)
 
967

Other revenues
37

 

 
69

 

Total revenues
29,481

 
10,898

 
51,666

 
20,042

Expenses
 
 
 
 
 
 
 
Insurance claims and claims expenses
470

 
(6
)
 
928

 
98

Underwriting and operating expenses
23,234

 
20,910

 
45,906

 
39,259

Total expenses
23,704

 
20,904

 
46,834

 
39,357

Other (expense) income
 
 
 
 
 
 
 
(Loss) gain from change in fair value of warrant liability
(59
)
 
(106
)
 
611

 
1,142

Interest expense
(3,707
)
 

 
(7,339
)
 

Total other (expense) income
(3,766
)
 
(106
)
 
(6,728
)
 
1,142

 
 
 
 
 
 
 
 
Income (loss) before income taxes
2,011

 
(10,112
)
 
(1,896
)
 
(18,173
)
Income tax expense

 
241

 

 

Net income (loss)
$
2,011

 
$
(10,353
)
 
$
(1,896
)
 
$
(18,173
)

 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.03


$
(0.18
)

$
(0.03
)

$
(0.31
)
Diluted
$
0.03


$
(0.18
)

$
(0.03
)

$
(0.31
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
59,105,613

 
58,720,095

 
59,005,983

 
58,603,644

Diluted
59,830,899

 
58,720,095

 
59,005,983

 
58,603,644



 

 

 

Net income (loss)
$
2,011

 
$
(10,353
)
 
$
(1,896
)
 
$
(18,173
)
Other comprehensive income (loss), net of tax:

 

 

 

Net unrealized gains (losses) in accumulated other comprehensive gain (loss), net of tax (benefit) expense of $0 and ($1,431) for the three months ended June 30, 2016 and 2015, respectively, and $0 for both the six months ended June 30, 2016 and 2015
8,670

 
(2,205
)
 
17,771

 
467

Reclassification adjustment for losses (gains) included in net loss, net of tax expense of $0 for all periods presented
(61
)
 
(354
)
 
824

 
(967
)
Other comprehensive income (loss), net of tax
8,609


(2,559
)

18,595


(500
)
Comprehensive income (loss)
$
10,620


$
(12,912
)

$
16,699


$
(18,673
)
See accompanying notes to consolidated financial statements.

7

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


 
Common Stock - Class A
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Accumulated Deficit
Total
 
Shares
Amount
 
(In Thousands)
 
 
 
 
 
Balances, January 1, 2015
58,429

$
584

$
562,911

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

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
379

4

(694
)


(690
)
Share-based compensation expense


8,123



8,123

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



(3,867
)

(3,867
)
Net loss




(27,793
)
(27,793
)
Balances, December 31, 2015
58,808

$
588

$
570,340

$
(7,474
)
$
(160,723
)
$
402,731

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
320

3

(163
)


(160
)
Share-based compensation expense


3,165



3,165

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



18,595


18,595

Net loss




(1,896
)
(1,896
)
Balances, June 30, 2016
59,128

$
591

$
573,342

$
11,121

$
(162,619
)
$
422,435


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,
 
2016
 
2015
Cash flows from operating activities
(In Thousands)
Net loss
$
(1,896
)
 
$
(18,173
)
Adjustments to reconcile net loss to net cash used in operating activities:
 
 
 
Net realized investment losses (gains)
824

 
(967
)
Gain from change in fair value of warrant liability
(611
)
 
(1,142
)
Depreciation and amortization
2,295

 
1,692

Net amortization of premium on investment securities
649

 
833

Amortization of debt discount and debt issuance costs
918

 

Share-based compensation expense
3,156

 
4,085

Changes in operating assets and liabilities:
 
 
 
Accrued investment income
(195
)
 
(221
)
Premiums receivable
(3,725
)
 
(1,710
)
Prepaid expenses
(382
)
 
185

Deferred policy acquisition costs, net
(7,598
)
 
(5,233
)
Other assets
5

 
454

Unearned premiums
41,143

 
17,476

Reserve for insurance claims and claims expenses
796

 
98

Accounts payable and accrued expenses
(7,817
)
 
1,256

Net cash provided by (used in) operating activities
27,562

 
(1,367
)
Cash flows from investing activities
 
 
 
Purchase of fixed-maturity investments, available-for-sale
(174,648
)
 
(108,973
)
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
143,688

 
75,067

Purchase of software and equipment
(6,182
)
 
(2,769
)
Net cash used in investing activities
(37,142
)
 
(36,675
)
Cash flows from financing activities
 
 
 
Issuance of common stock
504

 
402

Taxes paid related to net share settlement of equity awards
(664
)
 
(1,080
)
Repayments of term loan
(750
)
 

Net cash used in financing activities
(910
)
 
(678
)
 
 
 
 
Net decrease in cash and cash equivalents
(10,490
)
 
(38,720
)
Cash and cash equivalents, beginning of period
57,317

 
103,021

Cash and cash equivalents, end of period
$
46,827

 
$
64,301

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Noncash financing activities
 
 
 
Interest paid
$
6,431

 
$

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). In April 2012, we completed a private placement of our securities, through which we offered and sold an aggregate of 55,000,000 of our Class A common stock resulting in net proceeds of approximately $510 million (the Private Placement), and we completed the acquisition of our insurance subsidiaries for $8.5 million in cash, common stock and warrants, plus the assumption of $1.3 million in liabilities. In November 2013, we completed an initial public offering of 2.4 million shares of our common stock, and our common stock began trading on the NASDAQ exchange on November 8, 2013, under the symbol "NMIH."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services on a limited basis to mortgage loan originators.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2015 included in our 2015 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, 2016.
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). DAC is reviewed periodically to determine that it does not exceed recoverable amounts and is adjusted as appropriate for policy cancellations to be consistent with our revenue recognition policy. We estimate the rate of amortization to reflect actual experience and any changes to persistency or loss development. 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, 2016 and 2015 was $2.2 million and $0.9 million, 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, 2016 or 2015.
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. In August 2015, ASU 2015-14 deferred the provisions of ASU 2014-09 to be 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.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts (Topic 944), which requires insurance entities to disclose additional information related to the liability for unpaid claims and claims adjustment expenses. These

10

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

disclosures include the nature, amount, timing and uncertainty of cash flows related to those liabilities and the effects of those cash flows on comprehensive income. This update is effective for annual periods beginning after December 15, 2015 and interim periods within annual periods beginning after December 15, 2016. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.
In August 2014, the FASB issued an update that requires an entity's management to evaluate whether there is substantial doubt about that entity's ability to continue as a going concern and, if so, disclose that fact. An entity's management will also be required to evaluate and disclose whether its plans alleviate that doubt. The guidance is effective for annual periods ending after December 15, 2016 and for interim and annual periods thereafter. We do not expect the adoption of this update to have a material effect on the presentation of our financial statements and notes therein.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities on the balance sheet. The standard also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases.  For public business entities, this update is effective for annual periods beginning after December 15, 2018, and interim periods therein. Early adoption is permitted in any period. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09, Compensation-Stock Compensation (Topic 718). This update is intended to provide improvements to employee share-based payment accounting. The areas for simplification in the update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public business entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any period. The Company is currently evaluating the impact the adoption of this ASU will have on the consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which requires companies to measure all expected credit losses for financial assets held at the reporting date. The accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration also is amended in the standard. The standard will take effect for SEC filers for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact the adoption of this ASU will have on the presentation of the consolidated financial statements and notes therein.
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, 2016
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
62,725

 
$
835

 
$

 
$
63,560

Municipal debt securities
34,357

 
1,199

 
(21
)
 
35,535

Corporate debt securities
333,485

 
10,581

 
(478
)
 
343,588

Asset-backed securities
118,774

 
1,493

 
(145
)
 
120,122

Total bonds
549,341

 
14,108

 
(644
)
 
562,805

Short-term investments
44,466

 
47

 

 
44,513

Total investments
$
593,807

 
$
14,155

 
$
(644
)
 
$
607,318


11

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

 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of December 31, 2015
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
84,968

 
$
4

 
$
(490
)
 
$
84,482

Municipal debt securities
20,209

 
44

 
(174
)
 
20,079

Corporate debt securities
337,273

 
431

 
(4,377
)
 
333,327

Asset-backed securities
101,320

 
76

 
(603
)
 
100,793

Total bonds
543,770

 
555

 
(5,644
)
 
538,681

Short-term investments
20,549

 
5

 

 
20,554

Total investments
$
564,319

 
$
560

 
$
(5,644
)
 
$
559,235

Scheduled Maturities
The amortized cost and fair values of available for sale securities as of June 30, 2016 and December 31, 2015, 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, 2016
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
67,658

 
$
67,725

Due after one through five years
156,652

 
159,019

Due after five through ten years
238,862

 
248,978

Due after ten years
11,861

 
11,474

Asset-backed securities
118,774

 
120,122

Total investments
$
593,807

 
$
607,318

As of December 31, 2015
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
62,745

 
$
62,743

Due after one through five years
187,633

 
186,629

Due after five through ten years
193,379

 
190,055

Due after ten years
19,242

 
19,015

Asset-backed securities
101,320

 
100,793

Total investments
$
564,319

 
$
559,235

Aging of Unrealized Losses
As of June 30, 2016, the investment portfolio had gross unrealized losses of $0.6 million, $0.2 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, 2016. We based our conclusion that these investments were not other-than-temporarily impaired as of June 30, 2016 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:

12

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

 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
As of June 30, 2016
 
(Dollars in Thousands)
Municipal debt securities
1

1,729

(21
)
 



 
1

1,729

(21
)
Corporate debt securities
8

11,810

(327
)
 
14

15,951

(151
)
 
22

27,761

(478
)
Asset-backed securities
14

17,568

(127
)
 
3

1,614

(18
)
 
17

19,182

(145
)
Total investments
23

$
31,107

$
(475
)
 
17

$
17,565

$
(169
)
 
40

$
48,672

$
(644
)
 
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, 2015
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
14

$
50,558

$
(397
)
 
4

$
10,194

$
(93
)
 
18

$
60,752

$
(490
)
Municipal debt securities
4

11,293

(165
)
 
1

3,242

(9
)
 
5

14,535

(174
)
Corporate debt securities
83

244,128

(4,124
)
 
4

9,220

(253
)
 
87

253,348

(4,377
)
Asset-backed securities
27

69,878

(498
)
 
4

9,208

(105
)
 
31

79,086

(603
)
Total investments
128

$
375,857

$
(5,184
)
 
13

$
31,864

$
(460
)
 
141

$
407,721

$
(5,644
)
Net Investment Income
For the three and six months ended June 30, 2016, net investment income was comprised of $3.5 million and $7.0 million of investment income from fixed maturities and $0.2 million and $0.4 million of investment expenses, respectively, compared to $1.8 million and $3.5 million of investment income from fixed maturities and $0.1 million and $0.2 million of investment expenses for the three and six months ended June 30, 2015, respectively.
As of June 30, 2016 and December 31, 2015, there were approximately $6.9 million and $7.0 million, respectively, of cash and investments in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.
Net Realized Investment Gains (Losses)
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Gross realized investment gains
$
61

 
$
411

 
$
617

 
$
1,260

Gross realized investment losses

 
(57
)
 
(1,441
)
 
(293
)
Net realized investment gains (losses)
$
61

 
$
354

 
$
(824
)
 
$
967


13

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

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, 2016
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
45,713

 
$
17,847

 
$

 
$
63,560

Municipal debt securities

 
35,535

 

 
35,535

Corporate debt securities

 
343,588

 

 
343,588

Asset-backed securities

 
120,122

 

 
120,122

Cash, cash equivalents and short-term investments
91,340

 

 

 
91,340

Total assets
$
137,053

 
$
517,092

 
$

 
$
654,145

Warrant liability

 

 
856

 
856

Total liabilities
$

 
$

 
$
856

 
$
856

 
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, 2015
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
65,185

 
$
19,297

 
$

 
$
84,482

Municipal debt securities

 
20,079

 

 
20,079

Corporate debt securities

 
333,327

 

 
333,327

Asset-backed securities

 
100,793

 

 
100,793

Cash, cash equivalents and short-term investments
77,872

 

 

 
77,872

Total assets
$
143,057

 
$
473,496

 
$

 
$
616,553

Warrant liability

 

 
1,467

 
1,467

Total liabilities
$

 
$

 
$
1,467

 
$
1,467

The following is a roll-forward of Level 3 liabilities measured at fair value:
 
For the six months ended June 30,
Warrant Liability
2016
 
2015
 
(In Thousands)
Balance, January 1
$
1,467

 
$
3,372

Change in fair value of warrant liability included in earnings
(611
)
 
(1,142
)
Balance, June 30
$
856

 
$
2,230

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, 2016, the assumptions used in the option-pricing model were as follows: a common stock price as of June 30, 2016 of $5.48, risk free interest rate of 1.10%, expected life of 5.67 years, expected volatility of 34.4% 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, 2015 to June 30, 2016.

14

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

4. Term Loan
On November 10, 2015, we entered into a credit agreement (the Credit Agreement) to obtain a three-year senior secured term loan B (the Term Loan) for $150 million. The Term Loan bears interest at the Eurodollar Rate, as defined in the Credit Agreement, (1% floor) plus an annual margin rate of 7.5% (an all-in rate of 8.5% from inception through June 30, 2016), payable quarterly. Quarterly principal payments of $375 thousand are also required. The outstanding balance as of June 30, 2016 was $148.9 million.
Debt issuance costs totaling $4.4 million and a 1% debt discount are being amortized to interest expense, using the effective interest method, over the contractual life of the Term Loan. Effective interest rate for the Term Loan includes interest, amortization of issuance cost and the discount. For the six months ended June 30, 2016, the Company recorded $7.3 million of interest expense, including amortization of the issuance cost and discount.
NMIH is subject to certain quarterly covenants under the Credit Agreement. These covenants include, but are not limited to the following: a maximum debt-to-total capitalization ratio (as defined) of 35%, maximum risk-to-capital (RTC) ratio of 22.0:1.0, liquidity (as defined) of $32 million as of June 30, 2016, compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and equity requirements. This description is not intended to be complete in all respects and is qualified in its entirety by the terms of the Credit Agreement, including its covenants and events of default. We were in compliance with all covenants as of June 30, 2016.
Future principal payments for the Company's Term Loan as of June 30, 2016 are as follows:
As of June 30, 2016
 
Principal
 
 
(In thousands)
2016
 
$
750

2017
 
1,500

2018
 
146,625

Total
 
$
148,875

 
 
 

5. 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 that have been reported to us as having been in default for at least 60 days. 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. As of June 30, 2016, we have established reserves for insurance claims and claims expenses of $1.5 million for 79 primary loans in default. We paid 3 claims totaling $132 thousand during the quarter ended June 30, 2016.
In 2013, we entered into a pool insurance transaction 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, 2016, 40 loans in the pool were past due by 60 days or more. These 40 loans represent approximately $2.6 million in RIF. Due to the size of the remaining deductible of $10.3 million, the low level of notices of default (NODs) reported through June 30, 2016 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, 2016 and 2015. In connection with settlement of pool claims, we applied $18 thousand to the pool deductible through June 30, 2016. We have not paid any pool claims to date.

15

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,
 
2016
 
2015
 
(In Thousands)
Beginning balance
$
679

 
$
83

 
 
 
 
Add claims incurred:
 
 
 
Claims and claim expenses incurred:
 
 
 
Current year
1,113

 
139

Prior years
(185
)
 
(41
)
Total claims and claims expenses incurred
928

 
98

 
 
 
 
Less claims paid:
 
 
 
Claims and claim expenses paid:
 
 
 
Current year

 

Prior years
132

 

Total claims and claim expenses paid
132

 

 
 
 
 
Balance, June 30
$
1,475

 
$
181

There was a $185 thousand favorable prior year development during the six months ended June 30, 2016 as a result of NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual defaults and claims. There were $362 thousand of reserves remaining for defaults occurring in prior years as of June 30, 2016 as a result of the aforementioned favorable prior year development and claim payments.
6. Earnings (Loss) per Share (EPS)

Basic earnings (loss) per share is based on the weighted average number of shares of common stock outstanding, while diluted earning (loss) per share is based on the weighted average number of shares of common stock 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. The following table reconciles the net income and the weighted average shares of common stock outstanding used in the computations of basic and diluted earnings (loss) per share of common stock:

 
For the three months ended June 30,
 
For the six months ended June 30,
 
2016
 
2015
 
2016
 
2015

(In Thousands, except for per share data)
Net income (loss)
$
2,011

 
$
(10,353
)
 
$
(1,896
)
 
$
(18,173
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.03

 
$
(0.18
)
 
$
(0.03
)
 
$
(0.31
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
59,105,613

 
58,720,095

 
59,005,983

 
58,603,644

Dilutive effect of non-vested shares
725,286

 

 

 

Dilutive weighted average shares outstanding
59,830,899

 
58,720,095

 
59,005,983

 
58,603,644

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.03


$
(0.18
)
 
$
(0.03
)
 
$
(0.31
)


16

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

For the three months ended June 30, 2016, 4,049,859 of our common stock equivalents we issued under share-based compensation arrangements and warrants were not included in the calculation of diluted earnings (loss) per share because they were anti-dilutive. Non-vested shares of 725,286 were included in our weighted average number of common shares outstanding for the three months ended June 30, 2016.
As a result of our net losses for the six months ended June 30, 2016 and the three and six months ended June 30, 2015, 6,614,605 and 6,835,296, respectively, of our common stock equivalents we issued under share-based compensation arrangements and warrants were not included in the calculation of diluted earnings (loss) per share as of such dates because they were anti-dilutive.
7. Warrants
We issued 992,000 warrants in connection with our Private Placement. Each warrant gives the holder thereof the right to purchase one share of common stock at an exercise price equal to $10.00. The warrants were issued with an aggregate fair value of $5.1 million.
Upon exercise of these warrants, the amounts will be treated as 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 six months ended June 30, 2016 and 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.
8. 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. We currently pay no federal income tax, and we had a federal net operating loss carryforward as of December 31, 2015 of $139.4 million. Our effective income tax rate on our pre-tax income was 0.0% for the three months ended June 30, 2016, compared to (2.4)% for the comparable 2015 period. Our effective income tax rate on our pre-tax loss was 0.0% for the six months ended June 30, 2016 and 0.0% for the comparable 2015 period. During those periods, the 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.
9. Statutory Information
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory basis accounting principles (SAP) prescribed or permitted by the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI), NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the NAIC. The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws.
NMIC and Re One's combined statutory net loss, statutory surplus, contingency reserve and risk-to-capital (RTC) ratios were as follows:
As of and for the six months and year ended
June 30, 2016
 
December 31, 2015
 
(In Thousands)
Statutory net loss
$
(21,632
)
 
$
(52,322
)
Statutory surplus
370,167

 
391,422

Contingency reserve
55,487

 
32,564

Risk-to-Capital
13.6:1

 
8.7:1

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, 2015, NMIC cannot pay any dividends to NMIH through December 31, 2016, without the prior approval of the Wisconsin OCI.
 

17



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 2015 10-K, 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 Part I, Item 1A of our 2015 10-K, 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 a full fiscal year or for any other period.
Overview
We provide MI through our insurance subsidiaries. Our primary insurance subsidiary, NMIC, is a qualified MI provider on loans purchased by Fannie Mae and Freddie Mac and is licensed in all 50 states and D.C. to issue MI. Our reinsurance subsidiary, Re One, solely provides reinsurance to NMIC on certain loans insured by NMIC to meet state statutory coverage limits. Our subsidiary, NMIS, provides outsourced loan review services on a limited basis to mortgage loan originators. 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 a 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 continue to gain market share with our principal focus on writing insurance on high quality, low down payment residential mortgages in the U.S. As a result of our continued growth, the Company reported, for the first time, positive net income for the quarter ended June 30, 2016.
We had total insurance-in-force (IIF) of $27.6 billion and total risk-in-force (RIF) of $5.8 billion as of June 30, 2016, compared to total IIF of $19.1 billion and total RIF of $3.7 billion as of December 31, 2015. Of total IIF as of June 30, 2016, we had $23.6 billion of primary IIF and $4.0 billion of pool IIF, compared to $14.8 billion of primary IIF and $4.2 billion of pool IIF as of December 31, 2015. As of June 30, 2016, our primary RIF was $5.7 billion, compared to primary RIF of $3.6 billion as of December 31, 2015. Pool RIF was $93.1 million as of June 30, 2016 and December 31, 2015.
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. that fall into two primary categories, which we refer to as "National Accounts" and "Regional Accounts." Since we started MI operations in April 2013, we have consistently increased our customer base and market share, and we expect to continue to acquire new customers and increase our market share with existing customers. We had 1061 master policy holders as of June 30, 2016, compared to 842 master policy holders as of June 30, 2015. Of those master policy holders, 518 or 49% were generating new insurance written (NIW) in the second quarter of 2016, compared to 340 or 40% generating NIW in the second quarter of 2015.
New Insurance Written, Insurance in Force and Premiums
NMIC's primary insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or on an aggregated basis, in which each loan in a portfolio of loans is individually insured in a single transaction. NMIC has also written pool insurance under an agreement with Fannie Mae, in which it insured a group of loans (or pool) in one transaction. NMIC's pool insurance has a stated aggregate loss limit and a deductible under which no losses are paid by NMIC until losses on the pool of loans exceed the deductible. See Item 1, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Reserves for Insurance Claims and Claims Expenses," above.

18



We set premiums at the time a policy is issued based on our expectations regarding likely performance over the term of coverage. We offer borrower-paid (BPMI) and lender-paid (LPMI) mortgage insurance options. Premium rates are based on the risk characteristics of each insured loan and the capital required to support particular products.  Capital charges are governed primarily by the GSEs' private mortgage insurer eligibility requirements (PMIERs), as well as by regulatory and economic capital requirements. See "- GSE Oversight" and "- Capital Position of our Insurance Subsidiaries," below.
We offer monthly, single and annual premium payment plans. For monthly policies, premiums are collected and earned each month as coverage is provided. Policies written on a single premium basis are paid through a single, upfront payment, the majority of which is initially deferred as unearned premium and earned over the policy's expected life. Annual policies represent an insignificant amount of our NIW to date.
The tables below show primary and pool IIF, NIW and premiums written and earned. Single NIW and IIF include policies written on an aggregated and flow basis.
Primary and pool IIF and NIW
As of and for the quarter ended
 
For the six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
IIF

NIW
 
IIF

NIW
 
NIW
 
(In Millions)
 
(In Millions)
Monthly
$
12,529

 
$
3,700

 
$
3,617

 
$
1,460

 
$
6,192

 
$
2,378

Single
11,095

 
2,138

 
3,573

 
1,089

 
3,900

 
1,866

Primary
23,624

 
5,838

 
7,190

 
2,549

 
10,092

 
4,244

 
 
 
 
 
 
 
 
 
 
 
 
Pool
3,999

 

 
4,476

 

 

 

Total
$
27,623

 
$
5,838

 
$
11,666

 
$
2,549

 
$
10,092

 
$
4,244

For the quarter ended June 30, 2016, primary NIW increased 129% over the second quarter of 2015 as a result of continued growth in our customer base and primary flow business. In the second quarter of 2016, monthly premium NIW increased 153% over the second quarter of 2015 due to greater lender demand for our monthly premium MI products and the growth of our insurance business.
Primary and pool premiums written and earned
For the quarter ended
 
June 30, 2016
 
June 30, 2015
 
(In Thousands)
Net premiums written
$
48,862

 
$
20,347

Net premiums earned
26,041

 
8,856

For the quarter ended June 30, 2016, we had net premiums written of $48.9 million and premiums earned of $26.0 million, compared to net premiums written of $20.3 million and premiums earned of $8.9 million for the quarter ended June 30, 2015. Premiums written and earned are generally influenced by NIW, product mix, pricing and persistency. Additionally, premiums earned are influenced by the amortization of earnings on our single premium product over the policies' expected lives in accordance with the expiration of risk for policies covering more than one year. Pool premiums written and earned for the quarter ended June 30, 2016 were $1.1 million, compared to pool premiums written and earned of $1.2 million for the quarter ended June 30, 2015.
In our industry, a "book" is a group of loans that an MI company insures in a particular period, normally a calendar 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 vary based on the type of MI product (e.g., BPMI or LPMI) and premium plan (e.g., single or monthly) our customers select.
The premium rates for our products have changed substantially in response to the PMIERs financial requirements that became effective January 2016. In 2016, based on these requirements, we introduced new rates for monthly premium policies, which historically have represented 70-75% of industry NIW.  To target a mid-teens return on PMIERs required assets, we generally increased rates on low FICO/high LTV loans and reduced rates on high FICO/low LTV loans.  See, "- GSE Oversight," below for

19



a discussion of the PMIERs required asset requirements. Most of the industry has since moved to similar rate cards for monthly premium policies. 
Single-premium LPMI, which historically has represented 25-30% of industry NIW, has generally seen greater price competition.   In January 2016, in response to the required assets provisions of PMIERs, including the additional capital charges applied to LPMI products, we implemented new LPMI single premium rates, which we expect will improve premium yields on our LPMI single premium policies.
Through 2015, single premium policies had comprised a majority of our NIW, some of which were written at rates below our published rate card. In the first six months of 2016, we have seen reduced volume of LPMI single NIW, as compared with our volume for the last six months of 2015.  As a result, during the first six months of 2016, our mix of MI products has shifted to a higher percentage of monthly premium policies. For the six months ended June 30, 2016, 61% of our NIW consisted of monthly premium policies. As our business matures, we expect our product mix to align with industry averages.
Our persistency rate is the percentage of IIF that remains on our books after any 12-month period. Because our insurance premiums are earned over the life of a policy, changes in persistency rates can have a significant impact on our earnings. The persistency rate on our portfolio was 83.3% at June 30, 2016. Persistency rates are sensitive to fluctuations in interest rates. Decreases in interest rates typically increase our portfolio's cancellation rate. When cancellations increase, we experience lower profitability and returns on our monthly premium business, and conversely, higher returns on our single premium business because, rather than amortizing the single premium over the expected life of the policy, upon cancellation, we immediately recognize all unamortized single premium as earned.
Portfolio Statistics
The table below shows primary portfolio trends, by quarter, for the last five quarters.
Primary portfolio trends
As of and for the quarter ended
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
June 30, 2015
 
($ Values In Millions)
New insurance written
$
5,838

 
$
4,254

 
$
4,547

 
$
3,633

 
$
2,549

New risk written
1,411

 
1,016

 
1,105

 
887

 
615

Insurance in force (1)
23,624

 
18,564

 
14,824

 
10,601

 
7,190

Risk in force (1)
5,721

 
4,487

 
3,586

 
2,553

 
1,715

Policies in force (count) (1)
100,547

 
79,700

 
63,948

 
46,175

 
31,682

Weighted-average coverage (2)
24.2
%
 
24.2
%
 
24.2
%
 
24.1
%
 
23.9
%
Loans in default (count)
79

 
55

 
36

 
20

 
9

Percentage of loans in default
0.1
%
 
0.1
%
 
0.1
%
 
%
 
%
Risk in force on defaulted loans
$
4

 
$
3

 
$
2

 
$
1

 
$
1

Average premium yield (3)
0.47
%
 
0.45
%
 
0.49
%
 
0.52
%
 
0.51
%
Annual persistency (4)
83.3%

 
82.7
%
 
79.6
%
 
71.6
%
 
65.5
%

(1) 
Reported as of the end of the period.
(2) 
End of period RIF divided by IIF.
(3) 
Average premium yield is calculated by dividing primary net premiums earned by average IIF for the period, annualized.
(4) 
Defined as the percentage of IIF that remains on our books after any 12-month period.

20



The table below reflects a summary of the change in total primary IIF for the three and six months ended June 30, 2016 and 2015.
Primary IIF
Three months ended
 
Six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(In Millions)
IIF, beginning of period
$
18,564

 
$
4,835

 
$
14,824

 
$
3,370

NIW
5,838

 
2,548

 
10,092

 
4,244

Cancellations and other reductions
(778
)
 
(193
)
 
(1,292
)
 
(424
)
IIF, end of period
$
23,624

 
$
7,190

 
$
23,624

 
$
7,190


The table below reflects a summary of our primary IIF and RIF by book year as of June 30, 2016 and 2015.
Primary IIF and RIF
As of June 30, 2016
 
As of June 30, 2015
 
IIF
 
RIF
 
IIF
 
RIF
 
(In Millions)
June 30, 2016
$
9,951

 
$
2,393

 
$

 
$

2015
11,348

 
2,762

 
4,191

 
998

2014
2,266

 
552

 
2,916

 
698

2013
59

 
14

 
83

 
19

Total
$
23,624

 
$
5,721

 
$
7,190

 
$
1,715

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, loan type, loan term 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 various risk attributes in our insurance portfolio. Generally, insuring loans made to borrowers with higher credit scores tends to result in a lower frequency of claims than with loans made to borrowers with lower credit scores.    
The tables below reflect our total primary NIW by FICO, LTV and purchase/refinance mix for the three and six months ended June 30, 2016 and 2015. We calculate the LTV of a loan as the 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 lower severity for a resulting claim, as the borrower has more equity in the property.
Primary NIW by FICO
Three months ended
 
Six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(In Millions)
>= 760
$
3,160

 
$
1,182

 
$
5,442

 
$
2,041

740-759
961

 
377

 
1,672

 
617

720-739
672

 
422

 
1,144

 
651

700-719
541

 
242

 
952

 
394

680-699
308

 
203

 
554

 
342

<=679
196

 
123

 
328

 
200

Total
$
5,838

 
$
2,549

 
$
10,092

 
$
4,245


21



Primary NIW by LTV
Three months ended
 
Six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(In Millions)
95.01% and above
$
362

 
$
84

 
$
571

 
$
110

90.01% to 95.00%
2,633

 
1,149

 
4,448

 
1,808

85.01% to 90.00%
1,732

 
842

 
3,153

 
1,469

85.00% and below
1,111

 
474

 
1,920

 
858

Total
$
5,838

 
$
2,549

 
$
10,092

 
$
4,245

Primary NIW by purchase/refinance mix
Three months ended
 
Six months ended
 
June 30, 2016
 
June 30, 2015
 
June 30, 2016
 
June 30, 2015
 
(In Millions)
Purchase
$
4,199

 
$
1,619

 
$
7,118

 
$
2,420

Refinance
1,639

 
930

 
2,974

 
1,825

Total
$
5,838

 
$
2,549

 
$
10,092

 
$
4,245

The tables below show the primary weighted average FICO and weighted average LTV, by policy type, for NIW in the quarters presented.
Weighted Average FICO
For the three months ended
 
June 30, 2016
 
June 30, 2015
Monthly
752
 
742
Single
762
 
760
Weighted Average LTV
For the three months ended
 
June 30, 2016
 
June 30, 2015
Monthly
92
%
 
92
%
Single
91
%
 
91
%
The tables below reflect our total primary IIF and RIF by FICO, average loan size, LTV and loan type.
Primary IIF by FICO
As of
 
June 30, 2016
 
June 30, 2015
 
($ Values In Millions)
>= 760
$
11,929

 
50
%
 
$
3,323

 
47
%
740-759
3,876

 
16

 
1,153

 
16

720-739
3,082

 
13

 
1,109

 
15

700-719
2,341

 
10

 
706

 
10

680-699
1,561

 
7

 
595

 
8

<=679
835

 
4

 
304

 
4

Total
$
23,624

 
100
%
 
$
7,190

 
100
%

22



Primary RIF by FICO
As of
 
June 30, 2016
 
June 30, 2015
 
($ Values In Millions)
>= 760
$
2,895

 
51
%
 
$
772

 
45
%
740-759
951

 
17

 
276

 
16

720-739
750

 
13

 
273

 
16

700-719
566

 
10

 
173

 
10

680-699
369

 
6

 
147

 
9

<=679
190

 
3

 
74

 
4

Total
$
5,721

 
100
%
 
$
1,715

 
100
%
Primary Average Loan Size by FICO
As of
 
June 30, 2016
 
June 30, 2015
 
(In Millions)
>= 760
$
249

 
$
241

740-759
239

 
233

720-739
234

 
227

700-719
232

 
221

680-699
223

 
217

<=679
209

 
205

Primary IIF by LTV
As of
 
June 30, 2016
 
June 30, 2015
 
($ Values In Millions)
95.01% and above
$
1,049

 
4
%
 
$
122

 
2
%
90.01% to 95.00%
10,574

 
45

 
3,132

 
43

85.01% to 90.00%
7,754

 
33

 
2,534

 
35

85.00% and below
4,247

 
18

 
1,402

 
20

Total
$
23,624

 
100
%
 
$
7,190

 
100
%
Primary RIF by LTV
As of
 
June 30, 2016
 
June 30, 2015
 
($ Values In Millions)
95.01% and above
$
293

 
5
%
 
$
36

 
2
%
90.01% to 95.00%
3,116

 
55

 
927

 
54

85.01% to 90.00%
1,838

 
32

 
598

 
35

85.00% and below
474

 
8

 
154

 
9

Total
$
5,721

 
100
%
 
$
1,715

 
100
%
Primary RIF by Loan Type
As of
 
June 30, 2016
 
June 30, 2015
 
 
 
 
Fixed
98
%
 
97
%
Adjustable rate mortgages:
 
 
 
Less than five years

 

Five years and longer
2

 
3

Total
100
%
 
100
%

23




As of June 30, 2016 and June 30, 2015, 100% of our pool IIF and RIF was comprised of insurance on fixed rate mortgages.
The table below shows primary portfolio statistics, by book year, as of June 30, 2016.
 
As of June 30, 2016
Origination year
Original Insurance Written
 
Remaining Insurance in Force
 
% Remaining of Original Insurance
 
Policies Ever in Force
 
Number of Policies in Force
 
Number of Loans in Default
 
# of Claims Paid
 
Incurred Loss Ratio (Inception to Date) (1)
 
Cumulative default rate (2)
 
($ Values in Millions)
2013
$
162

 
$
59

 
36
%
 
655

 
289

 

 
1

 
%
 
0.2
%
2014
3,451

 
2,266

 
66
%
 
14,786

 
10,640

 
30

 
2

 
2.0
%
 
%
2015
12,422

 
11,348

 
91
%
 
52,550

 
49,180

 
47

 
2

 
1.9
%
 
0.4
%
2016 (through June 30)
10,092

 
9,951

 
99
%
 
40,862

 
40,438

 
2

 

 
0.2
%
 
%
Total
$
26,127

 
$
23,624

 

 
108,853

 
100,547

 
79

 
5

 

 


(1) 
The ratio of total losses incurred (paid and reserved) divided by cumulative premiums earned.
(2) 
The sum of claims paid ever to date and notices of default as of the end of the period divided by policies ever in force.

Geographic Dispersion
The following table shows the distribution by state of our primary RIF. As of June 30, 2016, our RIF continues to be relatively more concentrated in California, primarily as a result of the location and timing of the acquisition of new customers. The distribution of risk across the states as of June 30, 2016 is not necessarily representative of the geographic distribution we expect in the future. As we add new customers and receive greater allocations of business from our existing customers, we expect we will have increased flexibility to manage our state concentration levels.
Top 10 primary RIF by state as of June 30, 2016
As of
 
June 30, 2016
 
June 30, 2015
California
13.0
%
 
13.6
%
Texas
6.8

 
7.4

Virginia
6.4

 
5.3

Florida
5.0

 
4.8

Colorado
4.1

 
4.2

Michigan
4.1

 
3.6

Arizona
3.8

 
3.7

Pennsylvania
3.5

 
3.3

Maryland
3.4

 
3.5

North Carolina
3.4

 
2.1

Total
53.5
%
 
51.5
%
Reserve for Insurance Claims and Claims Expenses
Claims incurred is the 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, 2016, we have established reserves for insurance claims of $1.5 million for 79 primary loans in default, compared to a reserve of $181 thousand for 9 primary loans in default as of June 30, 2015. We also establish reserves for the related claims expenses, which are the estimated costs to adjust and settle claims. 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 Condensed Consolidated Financial Statements - Note 5. Reserves for Insurance Claims and Claims Expenses."

24



Claims incurred is affected by a variety of factors, including the state of the economy, declines in housing values, product mix of IIF, the size of loans insured and the percentage of coverage on insured loans. Policies with higher loan amounts and coverage percentages tend to result in higher incurred claim amounts.
We expect that claims incurred will be relatively low in the foreseeable future 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;
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.
Until our portfolio matures, we expect our reported loss ratio will be less than 10%, due to loss development being generally insignificant in the early years of a loan cycle combined with strong growth in earned premiums on a year-over-year basis. 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 will be between 20% and 25% of earned premiums.    
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.    To date, our loss experience is developing at a slower pace than historical trends have shown, as a result of high quality underwriting and a favorable housing market.
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claims expenses.
 
For the three months ended June 30,
 
For the six months ended June 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Beginning balance
$
1,137

 
$
187

 
$
679

 
$
83

 
 
 
 
 
 
 
 
Add claims incurred:
 
 
 
 
 
 
 
Claims and claim expenses incurred:
 
 
 
 
 
 
 
Current year
560

 
59

 
1,113

 
139

Prior years
(90
)
 
(65
)
 
(185
)
 
(41
)
Total claims and claims expenses incurred
470

 
(6
)
 
928

 
98

 
 
 
 
 
 
 
 
Less claims paid:
 
 
 
 
 
 
 
Claims and claim expenses paid:
 
 
 
 
 
 
 
Current year

 

 

 

Prior years
132

 

 
132

 

Total claims and claim expenses paid
132

 

 
132

 

 
 
 
 
 
 
 
 
Balance, June 30
$
1,475