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 September 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 October 31, 2016 was 59,138,663 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 access the reinsurance market and to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us, the GSEs and our regulators;
our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry;
our ability to attract and retain a diverse customer base, including the largest mortgage originators;
failure of risk management or pricing or investment strategies;
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;
the inability of our counter-parties, including third party reinsurers, to meet their obligations to us;

3



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


5

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


 
September 30, 2016
 
December 31, 2015
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $628,209 and $564,319 as of September 30, 2016 and December 31, 2015, respectively)
$
641,572

 
$
559,235

Cash and cash equivalents
44,522

 
57,317

Premiums receivable
11,378

 
5,143

Accrued investment income
3,615

 
2,873

Prepaid expenses
2,313

 
1,428

Deferred policy acquisition costs, net
28,911

 
17,530

Software and equipment, net
19,924

 
15,201

Intangible assets and goodwill
3,634

 
3,634

Prepaid reinsurance premiums
36,091

 

Other assets
206

 
90

Total assets
$
792,166

 
$
662,451

 
 
 
 
Liabilities
 
 
 
Term loan
$
144,230

 
$
143,939

Unearned premiums
145,401

 
90,773

Accounts payable and accrued expenses
32,568

 
22,725

Reserve for insurance claims and claim expenses
2,133

 
679

Reinsurance funds withheld
28,963

 

Deferred ceding commission
6,697

 

Warrant liability, at fair value
1,654

 
1,467

Current tax payable
114

 

Deferred tax
137

 
137

Total liabilities
361,897

 
259,720

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value;
59,138,663 and 58,807,825 shares issued and outstanding as of September 30, 2016 and December 31, 2015, respectively (250,000,000 shares authorized)
591

 
588

Additional paid-in capital
575,148

 
570,340

Accumulated other comprehensive income (loss), net of tax
10,974

 
(7,474
)
Accumulated deficit
(156,444
)
 
(160,723
)
Total shareholders' equity
430,269

 
402,731

Total liabilities and shareholders' equity
$
792,166

 
$
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 September 30,

For the nine months ended September 30,

2016

2015

2016

2015
Revenues
(In Thousands, except for share data)
Net premiums earned
$
31,808

 
$
12,834

 
$
77,656

 
$
28,626

Net investment income
3,544

 
1,884

 
10,117

 
5,168

Net realized investment gains (losses)
66

 
(15
)
 
(758
)
 
952

Other revenues
102

 

 
172

 

Total revenues
35,520

 
14,703

 
87,187

 
34,746

Expenses
 
 
 
 
 
 
 
Insurance claims and claims expenses
664

 
181

 
1,592

 
279

Underwriting and operating expenses
24,037

 
19,653

 
69,943

 
58,912

Total expenses
24,701

 
19,834

 
71,535

 
59,191

Other (expense) income
 
 
 
 
 
 
 
(Loss) gain from change in fair value of warrant liability
(797
)
 
332

 
(187
)
 
1,473

Interest expense
(3,733
)
 

 
(11,072
)
 

Total other (expense) income
(4,530
)
 
332

 
(11,259
)
 
1,473

 
 
 
 
 
 
 
 
Income (loss) before income taxes
6,289

 
(4,799
)
 
4,393

 
(22,972
)
Income tax expense
114

 

 
114

 

Net income (loss)
$
6,175

 
$
(4,799
)
 
$
4,279

 
$
(22,972
)

 
 
 
 
 
 
 
Earnings (loss) per share
 
 
 
 
 
 
 
Basic
$
0.10


$
(0.08
)

$
0.07


$
(0.39
)
Diluted
$
0.10


$
(0.08
)

$
0.07


$
(0.39
)

 
 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
 
 
 
Basic
59,130,401

 
58,741,328

 
59,047,758

 
58,650,043

Diluted
60,284,746

 
58,741,328

 
59,861,916

 
58,650,043


 
 
 
 
 
 
 
Net income (loss)
$
6,175

 
$
(4,799
)
 
$
4,279

 
$
(22,972
)
Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Net unrealized gains (losses) in accumulated other comprehensive gain (loss), net of tax (benefit) expense of $0 for all periods presented
(82
)
 
(483
)
 
17,690

 
(15
)
Reclassification adjustment for losses (gains) included in net loss, net of tax expense of $0 for all periods presented
(66
)
 
15

 
758

 
(952
)
Other comprehensive income (loss), net of tax
(148
)

(468
)

18,448


(967
)
Comprehensive income (loss)
$
6,027


$
(5,267
)

$
22,727


$
(23,939
)
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
331

3

(171
)


(168
)
Share-based compensation expense


4,979



4,979

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



18,448


18,448

Net income




4,279

4,279

Balances, September 30, 2016
59,139

$
591

$
575,148

$
10,974

$
(156,444
)
$
430,269


See accompanying notes to consolidated financial statements.

8

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


 
For the nine months ended September 30,
 
2016
 
2015
Cash flows from operating activities
(In Thousands)
Net income (loss)
$
4,279

 
$
(22,972
)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
 
 
 
Net realized investment losses (gains)
758

 
(952
)
Loss (gain) from change in fair value of warrant liability
187

 
(1,473
)
Depreciation and amortization
4,300

 
3,646

Net amortization of premium on investment securities
954

 

Amortization of debt discount and debt issuance costs
1,416

 

Share-based compensation expense
4,987

 
5,895

Changes in operating assets and liabilities:
 
 
 
Current tax payable
114

 

Accrued investment income
(742
)
 
28

Premiums receivable
(6,235
)
 
(2,938
)
Prepaid expenses
(885
)
 
271

Deferred policy acquisition costs, net
(11,381
)
 
(9,196
)
Other assets
(116
)
 
453

Unearned premiums
54,628

 
40,003

Reserve for insurance claims and claims expenses
1,454

 
275

Reinsurance balances, net
(431
)
 

Accounts payable and accrued expenses
(1,075
)
 
3,131

Net cash provided by operating activities
52,212

 
16,171

Cash flows from investing activities
 
 
 
Purchase of fixed-maturity investments, available-for-sale
(251,056
)
 
(111,215
)
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
195,791

 
129,666

Purchase of software and equipment
(8,449
)
 
(4,173
)
Net cash (used in) provided by investing activities
(63,714
)
 
14,278

Cash flows from financing activities
 
 
 
Issuance of common stock
526

 
415

Taxes paid related to net share settlement of equity awards
(694
)
 
(1,094
)
Repayments of term loan
(1,125
)
 

Net cash used in financing activities
(1,293
)
 
(679
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents
(12,795
)
 
29,770

Cash and cash equivalents, beginning of period
57,317

 
103,021

Cash and cash equivalents, end of period
$
44,522

 
$
132,791

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Noncash financing activities
 
 
 
Interest paid
$
9,669

 
$

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 nine months ended September 30, 2016 and 2015, net of a portion of ceding commission related to the 2016 QSR Transaction (see Note 5), was $3.4 million and $1.8 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 nine months ended September 30, 2016 or 2015.
Reinsurance
We account for premiums, losses and loss expenses that are ceded to reinsurers on bases consistent with those we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts. We account for premiums ceded to reinsurers as reductions to premium revenue. We earn profit commissions, which represent a percentage of the profits recognized by the reinsurers that are returned to us, based on the level of losses ceded. We recognize any profit commissions we earn as increases in net premium revenue.
We receive ceding commissions, calculated as a percentage of ceded written premiums, which are intended to cover our costs to acquire and service the direct policies. We earn the ceding commissions in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions as reductions to underwriting and operating expenses.

10

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

We cede a portion of loss reserves, paid losses and loss expenses, which are accounted for as reductions to loss expense and as reinsurance recoverables. We remain directly liable for all loss payments in the event we are unable to collect from any reinsurer.

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, if any, 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 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 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. 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). This update 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 public business entities 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.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230). This update is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company is currently evaluating the impact the adoption of this ASU will have on the presentation of the consolidated financial statements.
2. Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized as a component of accumulated other comprehensive

11

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

income and 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 September 30, 2016
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
57,338

 
$
552

 
$
(13
)
 
$
57,877

Municipal debt securities
40,057

 
919

 
(43
)
 
40,933

Corporate debt securities
336,113

 
10,443

 
(227
)
 
346,329

Asset-backed securities
120,429

 
1,706

 
(66
)
 
122,069

Total bonds
553,937

 
13,620

 
(349
)
 
567,208

Short-term investments
74,272

 
93

 
(1
)
 
74,364

Total investments
$
628,209

 
$
13,713

 
$
(350
)
 
$
641,572

 
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

As of September 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.
Scheduled Maturities
The amortized cost and fair values of available for sale securities as of September 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 September 30, 2016
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
100,443

 
$
100,556

Due after one through five years
158,761

 
161,063

Due after five through ten years
238,559

 
248,040

Due after ten years
10,017

 
9,844

Asset-backed securities
120,429

 
122,069

Total investments
$
628,209

 
$
641,572


12

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

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 September 30, 2016, the investment portfolio had gross unrealized losses of $0.3 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 September 30, 2016. We based our conclusion that these investments were not other-than-temporarily impaired as of September 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:
 
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 September 30, 2016
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
10

$
6,915

$
(13
)
 

$

$

 
10

$
6,915

$
(13
)
Municipal debt securities
4

3,582

(18
)
 
1

1,725

(25
)
 
5

5,307

(43
)
Corporate debt securities
5

11,183

(24
)
 
8

14,085

(203
)
 
13

25,268

(227
)
Asset-backed securities
10

14,481

(59
)
 
4

2,192

(7
)
 
14

16,673

(66
)
Total investments
29

$
36,161

$
(114
)
 
13

$
18,002

$
(235
)
 
42

$
54,163

$
(349
)
 
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
)

13

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

Net Investment Income
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Investment income
$
3,727

 
$
2,012

 
$
10,672

 
$
5,537

Investment expenses
(183
)
 
(128
)
 
(555
)
 
(369
)
Net investment income
$
3,544

 
$
1,884

 
$
10,117

 
$
5,168

Net Realized Investment Gains (Losses)
 
For the three months ended September 30,
 
For the nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(In Thousands)
Gross realized investment gains
$
66

 
$
266

 
$
683

 
$
1,526

Gross realized investment losses

 
(281
)
 
(1,441
)
 
(574
)
Net realized investment gains (losses)
$
66

 
$
(15
)
 
$
(758
)
 
$
952


14

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 September 30, 2016
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
45,398

 
$
12,479

 
$

 
$
57,877

Municipal debt securities

 
40,933

 

 
40,933

Corporate debt securities

 
346,329

 

 
346,329

Asset-backed securities

 
122,069

 

 
122,069

Cash, cash equivalents and short-term investments
118,886

 

 

 
118,886

Total assets
$
164,284

 
$
521,810

 
$

 
$
686,094

Warrant liability

 

 
1,654

 
1,654

Total liabilities
$

 
$

 
$
1,654

 
$
1,654

 
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 nine months ended September 30,
Warrant Liability
2016
 
2015
 
(In Thousands)
Balance, January 1
$
1,467

 
$
3,372

Change in fair value of warrant liability included in earnings
187

 
(1,473
)
Balance, September 30
$
1,654

 
$
1,899

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 September 30, 2016, the assumptions used in the option-pricing model were as follows: a common stock price as of September 30, 2016 of $7.62, risk free interest rate of 1.15%, expected life of 5.08 years, expected volatility of 33.1% and a dividend yield of 0%. The change in fair value is primarily attributable to an increase in the price of our common stock from December 31, 2015 to September 30, 2016.

15

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 September 30, 2016), payable quarterly. Quarterly principal payments of $375 thousand are also required. The outstanding balance as of September 30, 2016 was $148.5 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 nine months ended September 30, 2016, the Company recorded $11.1 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 $28.4 million as of September 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 September 30, 2016.
Future principal payments for the Company's Term Loan as of September 30, 2016 are as follows:
As of September 30, 2016
 
Principal
 
 
(In thousands)
2016
 
$
375

2017
 
1,500

2018
 
146,625

Total
 
$
148,500

 
 
 

5. Reinsurance
In September 2016, in order to continue to grow our business and manage insurance risk and our minimum required assets under PMIERs financial requirements, the Company entered into a quota-share reinsurance transaction with a panel of third-party reinsurers, subject to certain conditions (2016 QSR Transaction). Each of the third-party reinsurers has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services (S&P), A.M. Best or both. The GSEs and the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) approved the 2016 QSR Transaction (subject to certain conditions), giving full capital credit under PMIERs and statutory accounting principles, respectively, for the risk ceded under the agreement. The credit that we receive under PMIERs is subject to periodic review by the GSEs.

Under the 2016 QSR Transaction, effective September 1, 2016, NMIC ceded premiums related to:

25% of existing risk written on eligible policies as of August 31, 2016;
100% of our existing risk under our pool agreement with Fannie Mae; and
25% of risk on eligible policies written from September 1, 2016 through December 31, 2017.

16

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

Net premiums written and earned, net of reinsurance, is as follows:
 
For the nine months ended
 
September 30, 2016
 
September 30, 2015
 
(In Thousands)
Net premiums written (1)
$
96,190

 
$
68,629

Increase in unearned premiums
(18,534
)
 
(40,003
)
Net premiums earned
$
77,656

 
$
28,626

(1) Net of ceded premiums written under the 2016 QSR Transaction.    
The effect of reinsurance on net premiums written and earned is as follows:
 
For the nine months ended
 
September 30, 2016
 
September 30, 2015
 
(In Thousands)
Net premiums written
 
 
 
Direct
$
133,526

 
$
68,629

Ceded
(37,336
)
 

Net premiums written
$
96,190


$
68,629

 
 
 
 
Net premiums earned
 
 
 
Direct
$
78,900

 
$
28,626

Ceded
(1,244
)
 

Net premiums earned
$
77,656


$
28,626

The following tables show the amounts ceded related to the 2016 QSR Transaction:
 
For the nine months ended
 
September 30, 2016
 
September 30, 2015
 
(In Thousands)
Ceded risk-in-force
$
1,685,145

 
$

Ceded premiums written
(37,336
)
 

Ceded premiums earned
(1,244
)
 

Ceding commission written
7,795

 

Ceding commission earned
(530
)
 

    
NMIC receives a 20% ceding commission for premiums ceded pursuant to this transaction. NMIC will also receive a profit commission, provided that the loss ratio on the loans covered under the agreement generally remains below 60%, as measured annually. Losses on the ceded risk reduce NMIC's profit commission on a dollar-for-dollar basis.
In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. Ceded premiums written are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of income on direct premiums.    
The reinsurance recoverable on loss reserves related to our 2016 QSR Transaction was $90 thousand as of September 30, 2016. The reinsurance recoverable balance is further secured by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements that address ceded risk.
The agreement is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. However, NMIC has the option, based on certain conditions and subject to a

17

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

termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
6. 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 September 30, 2016, we have established reserves for insurance claims and claims expenses of $2.1 million for 115 primary loans in default. We paid 3 claims totaling $93 thousand during the quarter ended September 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 September 30, 2016, 46 loans in the pool were past due by 60 days or more. These 46 loans represent approximately $3.2 million in risk-in-force (RIF). Due to the size of the remaining deductible of $10.2 million, the low level of notices of default (NODs) reported through September 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 nine months ended September 30, 2016 and 2015. In connection with settlement of pool claims, we applied $165 thousand to the pool deductible through September 30, 2016. We have not paid any pool claims to date.
The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claims expenses:
 
For the nine months ended September 30,
 
2016
 
2015
 
(In Thousands)
Beginning balance
$
679

 
$
83

Less reinsurance recoverables (1)

 
 
Beginning balance, net of reinsurance recoverables
679

 
83

 
 
 
 
Add claims incurred:
 
 
 
Claims and claim expenses incurred:
 
 
 
Current year (2)
1,803

 
358

Prior years (3)
(214
)
 
(79
)
Total claims and claims expenses incurred
1,589

 
279

 
 
 
 
Less claims paid:
 
 
 
Claims and claim expenses paid:
 
 
 
Current year (2)

 

Prior years (3)
225

 
4

Total claims and claim expenses paid
225

 
4

 
 
 
 
Reserve at end of period, net of reinsurance recoverables
2,043

 
358

Add reinsurance recoverables (1)
90

 

Balance, September 30
$
2,133

 
$
358

(1) Related to ceded losses recoverable on the 2016 QSR Transaction. To date, ceded losses have been immaterial. See Note 5 for additional information.
(2) Related to defaults occurring in the current year.
(3) Related to defaults occurring in prior years.
There was a $214 thousand favorable prior year development during the nine months ended September 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

18

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

learn additional information about individual defaults and claims. There were $240 thousand of reserves remaining for defaults occurring in prior years as of September 30, 2016 as a result of the aforementioned favorable prior year development and claim payments.
7. 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 September 30,
 
For the nine months ended September 30,
 
2016
 
2015
 
2016
 
2015

(In Thousands, except for per share data)
Net income (loss)
$
6,175

 
$
(4,799
)
 
$
4,279

 
$
(22,972
)
 
 
 
 
 
 
 
 
Basic earnings (loss) per share
$
0.10

 
$
(0.08
)
 
$
0.07

 
$
(0.39
)
 
 
 
 
 
 
 
 
Basic weighted average shares outstanding
59,130,401

 
58,741,328

 
59,047,758

 
58,650,043

Dilutive effect of non-vested shares
1,154,345

 

 
814,158

 

Dilutive weighted average shares outstanding
60,284,746

 
58,741,328

 
59,861,916

 
58,650,043

 
 
 
 
 
 
 
 
Diluted earnings (loss) per share
$
0.10


$
(0.08
)
 
$
0.07

 
$
(0.39
)

For the three and nine months ended September 30, 2016, 4,012,046 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 1,154,345 and 814,158 were included in our weighted average number of common shares outstanding for the three and nine months ended September 30, 2016, respectively.
As a result of our net losses for the three and nine months ended September 30, 2015, 6,823,234 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.
8. 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 nine months ended September 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.
9. 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 provision for income taxes for the interim reporting periods are based on an estimated effective tax rate for the year ending December 31, 2016, after the consideration of expected usage of net operating losses. Our effective tax rate on our pre-tax income was 1.8% and 2.6% for the three and nine months ended September 30, 2016, respectively, compared to 0.0% for the comparable 2015 periods. The increase in the effective tax rates for the three and nine months ended September 30, 2016, against the comparable 2015 period was the result of income reported in the current year periods.

19

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

10. 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 OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners. 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 nine months and year ended
September 30, 2016
 
December 31, 2015
 
(In Thousands)
Statutory net loss
$
(23,808
)
 
$
(52,322
)
Statutory surplus
367,987

 
391,422

Contingency reserve
72,014

 
32,564

Risk-to-Capital
11.7:1

 
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.
 

20



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 and Part II, Item IA 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 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 expand our customer base and write insurance on high quality, low down payment residential mortgages in the U.S. The Company reported its first quarterly profit for the quarter ended June 30, 2016 and has reported year-to-date income of $4.3 million as of September 30, 2016.
We had total insurance-in-force (IIF) of $32.1 billion and total risk-in-force (RIF) of $6.9 billion as of September 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 September 30, 2016, we had $28.2 billion of primary IIF and $3.8 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 September 30, 2016, our primary RIF was $6.8 billion, compared to primary RIF of $3.6 billion as of December 31, 2015. Pool RIF was $93.1 million as of September 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 expanding relationships with 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." In the recent quarter, we increased our customer base. We had 1100 master policy holders as of September 30, 2016, compared to 906 master policy holders as of September 30, 2015. Of those master policy holders, 525 or 48% generated new insurance written (NIW) in the third quarter of 2016, compared to 391 or 43% that generated NIW in the third 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 6, Reserves for Insurance Claims and Claims Expenses," above.
We set premiums for an insured loan at the time the loan is insured, based on our filed rates and rating rules. We offer borrower-paid (BPMI) and lender-paid (LPMI) mortgage insurance options. Premium rates are based on the risk characteristics of

21



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.
Effect of reinsurance on our results
In September 2016, we entered into the 2016 QSR Transaction, which will impact our results of operations while the agreement is in effect.
Under the terms of the agreement, premiums are ceded to reinsurers who assume a portion of the risk under the insurance policies we write. Our net premiums written and earned are net of ceded amounts, offset by a profit commission associated with the premiums ceded. The 2016 QSR Transaction protects us against a fixed percentage of losses arising from policies covered by the agreement, and reduces capital requirements imposed by state regulations and by the GSEs. Going forward, we expect reinsurance to continue to be a component of our capital structure.
Our reinsurance affects premiums, underwriting expenses and losses incurred. In the quarter ended September 30, 2016, our net cost of reinsurance was approximately $600 thousand.
We cede a fixed percentage of premiums on insurance covered by the agreement.
We receive the benefit of a profit commission through a reduction in the premiums we cede. The profit commission varies directly and inversely with the level of losses on a dollar for dollar basis and is eliminated at levels of losses that we do not expect to occur. This means that lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more benefit from ceded losses and a lower profit commission (or for levels of losses we do not expect, its elimination).
We receive the benefit of a ceding commission equal to 20% of premiums ceded. The ceding commission is deferred and recognized as a reduction in underwriting expenses over the expected life of the risk associated with the reinsured policies.
We cede a fixed percentage of losses incurred on insurance covered by the agreement.
The effects described above result in an implied after-tax cost of capital of approximately 3-4%, although the cost of capital is expected to vary depending on the level of ceded losses. An increase in the amount of losses ceded will reduce our profit commissions and ultimately reduce our after-tax cost of capital.
Portfolio Data
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. Unless otherwise noted, the following tables do not include the effects of the 2016 QSR Transaction, as described above.
Primary and pool IIF and NIW
As of and for the quarter ended
 
For the nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
IIF
 
NIW
 
IIF
 
NIW
 
NIW
 
(In Millions)
 
(In Millions)
Monthly
$
16,038

 
$
4,162

 
$
5,087

 
$
1,582

 
$
10,354

 
$
3,960

Single
12,190

 
1,695

 
5,514

 
2,051

 
5,595

 
3,917

Primary
28,228

 
5,857

 
10,601

 
3,633

 
15,949

 
7,877

 
 
 
 
 
 
 
 
 
 
 
 
Pool
3,826

 

 
4,340

 

 

 

Total
$
32,054

 
$
5,857

 
$
14,941

 
$
3,633

 
$
15,949

 
$
7,877

For the quarter ended September 30, 2016, primary NIW increased 61% over the third quarter of 2015 as a result of continued growth in our customer base and primary flow business. In the third quarter of 2016, monthly premium NIW increased

22



163% over the third 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
 
September 30, 2016
 
September 30, 2015
 
(In Thousands)
Net premiums written (1)
$
9,199

 
$
35,360

Net premiums earned (1)
31,808

 
12,834

(1) Premiums written and earned are reported net of the 2016 QSR Transaction.
For the quarter ended September 30, 2016, we had net premiums written of $9.2 million and premiums earned of $31.8 million, compared to net premiums written of $35.4 million and premiums earned of $12.8 million for the quarter ended September 30, 2015. The decrease in net premiums written for the quarter ended September 30, 2016 is primarily the result of the 2016 QSR Transaction, in which we ceded approximately 25% of premiums written on existing policies as of August 31, 2016. The associated unearned premium reserve was also ceded.
Premiums written and earned are 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 September 30, 2016 were $1.1 million, compared to pool premiums written and earned of $1.2 million for the quarter ended September 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 approximately 75% of industry NIW.  To target a mid-teens return on PMIERs required assets across the risk spectrum, we generally increased rates on low FICO/high LTV loans and reduced rates on high FICO/low LTV loans.  See, "- GSE Oversight," below for a discussion of the PMIERs financial requirements. Most of the industry has since moved to similar rate cards for monthly premium policies. 
Single-premium LPMI, which historically has represented approximately 25% 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 nine months of 2016, we have seen a reduction in LPMI single NIW as a percentage of our mix, as compared to the first nine months of 2015.  As a result, during the first nine months of 2016, our mix of MI products has shifted to a higher percentage of monthly premium policies. For the nine months ended September 30, 2016, 65% of our NIW consisted of monthly premium policies. We expect our product mix to continue to trend toward the industry average.
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 81.8% at September 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.

23



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
 
September 30, 2016
 
June 30, 2016
 
March 31, 2016
 
December 31, 2015
 
September 30, 2015
 
($ Values In Millions)
New insurance written
$
5,857

 
$
5,838

 
$
4,254

 
$
4,547

 
$
3,633

New risk written
1,415

 
1,411

 
1,016

 
1,105

 
887

Insurance in force (1)
28,228

 
23,624

 
18,564

 
14,824

 
10,601

Risk in force (1)
6,847

 
5,721

 
4,487

 
3,586

 
2,553

Policies in force (count) (1)
119,002

 
100,547

 
79,700

 
63,948

 
46,175

Weighted-average coverage (2)
24.3
%
 
24.2
%
 
24.2
%
 
24.2
%
 
24.1
%
Loans in default (count)
115

 
79

 
55

 
36

 
20

Percentage of loans in default
0.1
%
 
0.1
%
 
0.1
%
 
0.1
%
 
%
Risk in force on defaulted loans
$
6

 
$
4

 
$
3

 
$
2

 
$
1

Average premium yield (3)
0.48
%
 
0.47
%
 
0.45
%
 
0.49
%
 
0.52
%
Annual persistency (4)
81.8
%
 
83.3%

 
82.7
%
 
79.6
%
 
71.6
%

(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, net of reinsurance, by average gross IIF for the period, annualized.
(4) 
Defined as the percentage of IIF that remains on our books after any 12-month period.
The table below reflects a summary of the change in total primary IIF for the three and nine months ended September 30, 2016 and 2015.
Primary IIF
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In Millions)
IIF, beginning of period
$
23,624

 
$
7,190

 
$
14,824

 
$
3,370

NIW
5,857

 
3,633

 
15,949

 
7,877

Cancellations and other reductions
(1,253
)
 
(222
)
 
(2,545
)
 
(646
)
IIF, end of period
$
28,228

 
$
10,601

 
$
28,228

 
$
10,601


The table below reflects a summary of our primary IIF and RIF by book year as of September 30, 2016 and 2015.
Primary IIF and RIF
As of September 30, 2016
 
As of September 30, 2015
 
IIF
 
RIF
 
IIF
 
RIF
 
(In Millions)
September 30, 2016
$
15,433

 
$
3,719

 
$

 
$

2015
10,679

 
2,610

 
7,725

 
1,862

2014
2,062

 
505

 
2,800

 
673

2013
54

 
13

 
76

 
18

Total
$
28,228

 
$
6,847

 
$
10,601

 
$
2,553


24



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 nine months ended September 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
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In Millions)
>= 760
$
2,975

 
$
1,755

 
$
8,418

 
$
3,795

740-759
934

 
583

 
2,606

 
1,201

720-739
725

 
505

 
1,870

 
1,156

700-719
588

 
376

 
1,540

 
770

680-699
387

 
271

 
940

 
613

<=679
248

 
143

 
575

 
342

Total
$
5,857

 
$
3,633

 
$
15,949

 
$
7,877

Primary NIW by LTV
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In Millions)
95.01% and above
$
347

 
$
162

 
$
918

 
$
272

90.01% to 95.00%
2,557

 
1,656

 
7,005

 
3,463

85.01% to 90.00%
1,844

 
1,208

 
4,996

 
2,677

85.00% and below
1,109

 
607

 
3,030

 
1,465

Total
$
5,857

 
$
3,633

 
$
15,949

 
$
7,877

Primary NIW by purchase/refinance mix
Three months ended
 
Nine months ended
 
September 30, 2016
 
September 30, 2015
 
September 30, 2016
 
September 30, 2015
 
(In Millions)
Purchase
$
4,400

 
$
2,604

 
$
11,518

 
$
5,023

Refinance
1,457

 
1,029

 
4,431

 
2,854

Total
$
5,857

 
$
3,633

 
$
15,949

 
$
7,877

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
 
September 30, 2016
 
September 30, 2015
Monthly
748
 
742
Single
763
 
758

25



Weighted Average LTV
For the three months ended
 
September 30, 2016
 
September 30, 2015
Monthly
91
%
 
92
%
Single
90
%
 
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
 
September 30, 2016
 
September 30, 2015
 
($ Values In Millions)
>= 760
$
14,258

 
50
%
 
$
4,969

 
47
%
740-759
4,612

 
16

 
1,703

 
16

720-739
3,648

 
13

 
1,582

 
15

700-719
2,813

 
10

 
1,063

 
10

680-699
1,863

 
7

 
848

 
8

<=679
1,034

 
4

 
436

 
4

Total
$
28,228

 
100
%
 
$
10,601

 
100
%
Primary RIF by FICO
As of
 
September 30, 2016
 
September 30, 2015
 
($ Values In Millions)
>= 760
$
3,470

 
51
%
 
$
1,174

 
46
%
740-759
1,130

 
17

 
413

 
16

720-739
887

 
13

 
391

 
16

700-719
680

 
10

 
260

 
10

680-699
443

 
6

 
209

 
8

<=679
237

 
3

 
106

 
4

Total
$
6,847

 
100
%
 
$
2,553

 
100
%
Primary Average Loan Size by FICO
As of
 
September 30, 2016
 
September 30, 2015
 
(In Thousands)
>= 760
$
250

 
$
244

740-759
240

 
234

720-739
235

 
227

700-719
233

 
225

680-699
224

 
218

<=679
209

 
207

Primary IIF by LTV
As of
 
September 30, 2016
 
September 30, 2015
 
($ Values In Millions)
95.01% and above
$
1,363

 
5
%
 
$
282

 
3
%
90.01% to 95.00%
12,644

 
45

 
4,710

 
44

85.01% to 90.00%
9,157

 
32

 
3,658

 
35

85.00% and below
5,064

 
18

 
1,951

 
18

Total
$
28,228

 
100
%
 
$
10,601

 
100
%

26



Primary RIF by LTV
As of
 
September 30, 2016
 
September 30, 2015
 
($ Values In Millions)
95.01% and above
$
380

 
6
%
 
$
80

 
3
%
90.01% to 95.00%
3,725

 
54

 
1,392

 
55

85.01% to 90.00%
2,174

 
32

 
866

 
34

85.00% and below
568

 
8

 
215

 
8

Total
$
6,847

 
100
%
 
$
2,553

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

 

Five years and longer
2

 
3

Total
100
%
 
100
%

As of September 30, 2016 and September 30, 2015, 100% of each 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 September 30, 2016.
 
As of September 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

 
$
54

 
33
%
 
655

 
264

 

 
1

 
%
 
0.2
%
2014
3,451

 
2,062

 
60
%
 
14,786

 
9,824

 
46

 
2

 
2.7
%
 
0.3
%
2015
12,422

 
10,678

 
86
%
 
52,550

 
46,902

 
61

 
5

 
1.7
%
 
0.1