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Item 8. Financial Statements and Supplementary Data

2021-02-24 compared with 2020-02-14 · 495 added, 393 removed, 801 unchanged (53% of the section changed)

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of this critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

(i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Reserve for Insurance Claims and Claims Expense

As described in Notes 2 and 7 to the consolidated financial statements, the Company recorded $23.8 million of reserve for insurance claims and claims expense at December 31, 2019.

The establishment of insurance claims and claims expense reserve is subject to inherent uncertainty and requires significant judgment by management.

As described in Notes 2 and 7 to the consolidated financial statements, the Company recorded $90.6 million of reserve for insurance claims and claim expenses at December 31, 2020.

The establishment of insurance claims and claim expenses reserve is subject to inherent uncertainty and requires significant judgment by management.

The reserve is established by estimating:

(i) claim severity which is the amount of the claim payment expected to be paid on each loan in default, and (ii) claim frequency which is the number of loans in default expected to result in a claim payment.

The claim frequency is determined based on historical observed experience regarding certain loan factors and is also strongly influenced by prevailing economic conditions.

We identified the Company’s estimation of the reserve for insurance claims and claims expense as a critical audit matter.

The principal consideration for our determination is the high degree of subjectivity in estimating claim frequency and claim severity.

The claim frequency is determined based on historical observed experience regarding certain loan factors.

The claim severity and claim frequency estimates are also strongly influenced by current economic conditions.

We identified the Company's estimation of the reserve for insurance claims and claim expenses as a critical audit matter.

The principal consideration for our determination is the high degree of subjectivity in estimating claim severity and claim frequency.

Auditing these elements involved especially challenging auditor judgment due to the nature and extent of audit effort required to address these matters, including the extent of specialized skill or knowledge needed.

The primary procedures we performed to address this critical audit matter included:

Testing the completeness and accuracy of the underlying loans and claims data used in management’s actuarial reserve calculations which supported claim frequency and claim severity estimates.

• Testing the completeness and accuracy of the underlying loans and claims data used in management's reserve calculations which supported claim severity and claim frequency estimates.

• Utilizing personnel with specialized knowledge and skill in actuarial methods to assist in:

(i) evaluating the appropriateness of the methodology and the assumptions used by management’s actuary, including assessment of the reasonableness of changes in assumptions and inputs used in developing claim frequency and claim severity, which included comparing to third party evidence of current economic conditions and evaluating the current and historical loan factors, and (ii) performing a retrospective review of the prior year reserve estimate against historical figures and economic trends.

(i) evaluating the appropriateness of the methodology and the assumptions used by management and management's specialist, including assessment of the reasonableness of changes in assumptions and inputs used in developing claim severity and claim frequency, which included comparing to third-party publications of current economic conditions and evaluating the current and historical loan factors, and (ii) performing a retrospective review of the prior year reserve estimate against historical figures and economic trends.

/s/ BDO USA, LLP

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CONSOLIDATED BALANCE SHEETS

December 31, 2019

December 31, 2018

(In Thousands, except for share data)

December 31, 2020 December 31, 2019

Assets (In Thousands, except for share data)

Fixed maturities, available-for-sale, at fair value (amortized cost of $1,730,835 and $1,113,779 as of December 31, 2020 and December 31, 2019, respectively) $ 1,804,286 $ 1,140,940

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Prepaid reinsurance premiums 6,190 15,488

Reinsurance recoverable (1)

Other assets (1)

53,188 16,232

Total assets $ 2,166,666 $ 1,364,818

Debt $ 393,301 $ 145,764

Unearned premiums 118,817 136,642

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Additional paid-in capital 937,872 707,003

Accumulated other comprehensive income (loss), net of tax

Accumulated other comprehensive income, net of tax 53,856 17,288

Retained earnings 377,011 205,445

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Total liabilities and shareholders' equity $ 2,166,666 $ 1,364,818

"Deferred Ceding Commissions" have been reclassified as "Other liabilities" in prior periods.

(1) Reinsurance recoverable has been reclassified from "Other assets" in the prior period.

See accompanying notes to consolidated financial statements.

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For the years ended December 31,

2020 2019 2018

(In Thousands, except for per share data)

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Interest expense 24,387 12,085 14,979

Loss from change in fair value of warrant liability

(Gain) loss from change in fair value of warrant liability ( 2,907 ) 8,657 1,397

Total expenses 215,177 162,118 139,064

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Income tax expense 46,540 44,696 28,034

Net income $ 171,566 $ 171,957 $ 107,927

Earnings per share

Basic $ 2.20 $ 2.54 $ 1.66

Diluted $ 2.13 $ 2.47 $ 1.60

Weighted average common shares outstanding

Basic 78,023 67,573 65,019

Diluted 79,263 69,721 67,652

Net income $ 171,566 $ 171,957 $ 107,927

Other comprehensive income (loss), net of tax:

Unrealized gains (losses) in accumulated other comprehensive income, net of tax expense (benefit) of $9,525, $8,548 and ($3,285) for each of the years in the three-year period ended December 31, 2020, respectively 35,829 32,155 ( 12,357 )

Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $9, ($27), and $73 for each of the years in the three-years ended December 31, 2019, respectively

Reclassification adjustment for realized losses (gains) included in net income, net of tax (benefit) expense of ($196), $9 and ($27) for each of the years in the three-years ended December 31, 2020, respectively 739 ( 35 ) 102

Other comprehensive income (loss), net of tax 36,568 32,120 ( 12,255 )

Comprehensive income $ 208,134 $ 204,077 $ 95,672

Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.

See accompanying notes to consolidated financial statements.

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CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

Common Stock - Class A

Paid-in Capital

Accumulated Other Comprehensive Income (Loss)

Retained Earnings (Accumulated Deficit)

Common Stock - Class A Additional

Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings (Accumulated Deficit) Total

Shares Amount

(In Thousands)

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Common stock:

class A shares issued related to public offering 4,255 43 79,122 — — 79,165

Common stock:

class A shares issued related to warrant exercises 91 1 1,893 — — 1,894

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Share-based compensation expense — — 12,557 — — 12,557

Change in unrealized investment gains/losses, net of tax expense of $1,307

Change in unrealized investment gains/losses, net of tax benefit of $3,258 — — — ( 12,255 ) — ( 12,255 )

Net income — — — — 107,927 107,927

Balances, December 31, 2018 66,319 $ 663 $ 682,181 $ ( 14,832 ) $ 33,488 $ 701,500

Cumulative effect of change in accounting principle

Common stock:

class A shares issued related to public offering

Common stock:

class A shares issued related to warrant exercises 289 3 8,309 — — 8,312

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Share-based compensation expense — — 13,031 — — 13,031

Change in unrealized investment gains/losses, net of tax benefit of $3,258

Change in unrealized investment gains/losses, net of tax expense of $8,539 — — — 32,120 — 32,120

Net income — — — — 171,957 171,957

Balances, December 31, 2019

Cumulative effect of change in accounting principle

68,358 $ 684 $ 707,003 $ 17,288 $ 205,445 $ 930,420

Common stock:

class A shares issued related to public offering 15,870 159 219,528 — — 219,687

Common stock:

class A shares issued related to warrant exercises 11 * 325 — — 325

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Change in unrealized investment gains/losses, net of tax expense of $9,721 — — — 36,568 — 36,568

Net income — — — — 171,566 171,566

Balances, December 31, 2020

85,163 $ 852 $ 937,872 $ 53,856 $ 377,011 $ 1,369,591

* During 2020, we issued 11,368 common shares with a par value of $ 0.01 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding.

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For the years ended December 31,

Cash flows from operating activities

(In Thousands)

2020 2019 2018

Cash flows from operating activities (In Thousands)

Net income $ 171,566 $ 171,957 $ 107,927

Adjustments to reconcile net income to net cash provided by operating activities:

Net realized investment gains ( 930 ) ( 45 ) ( 57 )

Loss from change in fair value of warrant liability

(Gain) loss from change in fair value of warrant liability ( 2,907 ) 8,657 1,397

Depreciation and amortization 9,930 9,299 7,811

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Deferred policy acquisition costs, net ( 2,253 ) ( 13,132 ) ( 8,915 )

Other assets ( 38,804 ) ( 8,831 ) 1,304

Unearned premiums ( 17,825 ) ( 22,251 ) ( 4,273 )

Reserve for insurance claims and claim expenses 66,815 10,941 4,050

Reinsurance recoverable (1)

( 12,669 ) ( 1,939 ) ( 1,099 )

Reinsurance balances, net (1)

2,783 917 1,659

Accounts payable and accrued expenses 18,072 3,888 6,064

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Taxes paid related to net share settlement of equity awards ( 8,961 ) ( 18,248 ) ( 9,722 )

Proceeds from senior note, net

Proceeds from senior secured notes 400,000 — 149,250

Repayments of term loan ( 147,750 ) ( 1,500 ) ( 147,375 )

Payments of debt issuance/modification costs

Net cash provided by (used in) financing activities

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

Payments of debt issuance costs ( 9,043 ) — ( 3,609 )

Net cash provided by financing activities 462,804 2,000 80,887

Net increase in cash, cash equivalents and restricted cash 85,848 15,795 6,098

Cash, cash equivalents and restricted cash, beginning of period 41,089 25,294 19,196

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Income taxes (refunded) paid ( 70 ) ( 64 ) 867

(1) Reinsurance recoverable has been reclassified from "Reinsurance balance, net" in prior periods.

See accompanying notes to consolidated financial statements.

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Our common stock is listed on the NASDAQ exchange under the ticker symbol "NMIH."

In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy.

NMIC is licensed to write mortgage insurance in all 50 states and the District of Columbia (D.C.) In August 2015, NMIH capitalized a wholly-owned subsidiary, NMI Services, Inc.

NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy in April 2013.

NMIC is licensed to write mortgage insurance in all 50 states and the District of Columbia (D.C.).

In August 2015, NMIH capitalized a wholly-owned subsidiary, NMI Services, Inc.

(NMIS), through which we offer outsourced loan review services to mortgage loan originators.

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Certain reclassifications to previously reported financial information have been made to conform to our current period presentation.

COVID-19 Developments

On January 30, 2020, the World Health Organization (WHO) declared the outbreak of coronavirus (COVID-19) a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020.

In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide.

The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S.

and global economic activity and a record number of Americans have been furloughed or laid-off.

The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope that the recent development, distribution and administration of new vaccines may relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist.

In response to the COVID-19 outbreak and continuing uncertainties, we activated our disaster continuity program to ensure our employees are safe and able to manage our business without interruption.

We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and provide an expanded ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration for the increased level macroeconomic volatility.

While the U.S.

housing market has demonstrated significant resiliency since the onset of the pandemic, with record levels of demand, mortgage origination activity and house price appreciation, much uncertainty remains.

Given the uncertainty that prevails, we cannot fully assess or estimate the ultimate impact of COVID-19 on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results.

Summary of Accounting Principles

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Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Insurance Premium Revenue Recognition

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Annual premiums are initially deferred and earned on a straight-line basis over the year of coverage.

Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable deferred premium is returned to the policyholder and recorded as a reduction to written premium and unearned premium reserve in the period paid.

Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable deferred and unearned premium is returned to the policyholder and recorded as a reduction to written premium and unearned premium reserve in the period paid.

Premiums written on pool transactions are earned over the period that coverage is provided.

Concentrations

For the year ended December 31, 2019 , no customer accounted for more than 10% of our consolidated revenues.

At December 31, 2019 , approximately 12 % of our total risk-in-force (RIF) was concentrated in California.

For the years ended December 31, 2020, December 31, 2019 and December 31, 2018 no customer accounted for more than 10% of our consolidated revenues.

At December 31, 2020, December 31, 2019 and December 31, 2018 approximately 11 %, 12 % and 13 % of our total risk-in-force (RIF) was concentrated in California.

Reserves for Insurance Claims and Claim Expenses

We establish reserves for claims based on our best estimate of ultimate claim costs for defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944).

We establish case reserves when we are notified that a loan has been in default for at least 60 days ( i.e ., a default) and "IBNR" reserves based on an estimate of defaults which have been incurred but have not yet been reported to us by loan servicers.

We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal, other third-party fees, and other general expenses of administering the claim settlement process.

We establish reserves for claims based on our best estimate of the ultimate claim costs for defaulted loans using the general principles contained in ASC 944, Financial Services - Insurance (ASC 944).

A loan is considered to be in "default" as of the payment date at which a borrower has missed the preceding two or more consecutive monthly payments.

We establish reserves for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as incurred but not reported (IBNR) reserves.

We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claim settlement process.

Claim expense reserves are either allocated ( i.e.

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The establishment of claims and claim expense reserves is subject to inherent uncertainty and requires significant judgment by management.

Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

referred to as claim severity.

Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, size of the loan and loan-to-value (LTV) ratios, and are strongly influenced by prevailing economic conditions, such as mortgage rates, trends in unemployment and house price appreciation.

We conduct an annual actuarial review to evaluate and, if necessary, update these assumptions.

We have designated our investment portfolio as available-for-sale and report it at fair value.

The related unrealized gains and losses, after considering the related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (AOCI) (loss) in shareholders' equity.

Net realized investment gains and losses are reported in income based on specific identification of securities sold or other-than-temporarily impaired, and are reclassified out of AOCI (loss).

Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of claim payment expected to be paid on each such loan in default, which is referred to as claim severity.

Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, size of the loan and loan-to-value (LTV) ratios, and are strongly influenced by assumptions about the path of certain economic factors, such as house price appreciation, trends in unemployment and mortgage rates.

We consider the appropriateness of such inputs at each fiscal quarter and conduct an actuarial review annually to evaluate and, if necessary, update these assumptions.

We have designated our investment portfolio as available-for-sale and report our invested assets at fair value.

Unrealized gains and losses in the portfolio, net of related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (AOCI) in shareholders' equity.

We measure fair value and classify invested assets in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure fair value.

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For asset-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary.

Any adjustments required due to changes in effective yields and maturities are recognized on a prospective basis through yield adjustments.

We evaluate our investments each quarter to determine whether declines in fair value below amortized cost are considered other-than-temporary in accordance with applicable guidance.

Under the current guidance, a debt security impairment is deemed other-than-temporary if (i) we either intend to sell the security or it is more likely than not that we will be required to sell the security before recovery or (ii) we do not expect to collect cash flows sufficient to recover the amortized cost basis of the security.

In evaluating whether a decline in fair value is other-than-temporary, we consider several factors including, but not limited to:

our intent to sell the security or whether it is more likely than not that we will be required to sell the security before recovery;

the severity and duration of the decline in fair value;

Any adjustments required due to changes in effective yields and prepayment assumptions are recognized on a prospective basis.

We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security;

or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

For securities in an unrealized loss position where a sale is not intended or likely to be required, we further assess if the decline in fair value below amortized cost is driven by a credit related impairment, considering several items including, but not limited to:

• the severity of the decline in fair value;

• the financial condition of the issuer;

• the failure of the issuer to make scheduled interest or principal payments;

recent credit downgrades of the applicable security or the issuer;

adverse conditions specifically related to the security, an industry, or a geographic area.

Based on this evaluation, we record OTTI adjustments on securities with declines in fair value below their amortized cost, if it is more likely than not that we will sell the securities prior to recovery of their amortized cost or if the present value of the discounted cash flows we expect to collect on the securities through recovery under a "most likely" scenario is less than their amortized cost.

If our intent is to sell securities and their fair value is below amortized cost, the securities are classified as other-than-temporarily impaired and the full amount of the impairment is recognized as a loss in earnings.

Otherwise, losses on other-than-temporarily impaired securities are bifurcated between credit-related losses and losses related to other factors ( e.g.

, interest rate fluctuations), with credit-related losses recognized in earnings and losses related to other factors recognized in AOCI (loss), net of taxes.

• recent rating downgrades of the applicable security or issuer by one or more nationally recognized statistical ratings organization;

• other adverse conditions related to or impacting the security or issuer.

To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense, and presented as a " Realized Investment Loss.

" We recognize an allowance for credit losses for the difference between the amortized cost and present value of future expected cash flows, limited by the amount the fair value of the security is below its amortized cost.

Subsequent changes (favorable and unfavorable) in credit losses are recognized through the statement of operations as a provision for or a reversal of credit loss expense, and presented as a " Realized Investment Gain or Loss.

" The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.

We have elected to present accrued interest receivable separately from available for sale securities on our consolidated balance sheet.

Accrued interest receivable was $ 9.9 million as of December 31, 2020 and is included in " Accrued Investment Income.

" We have elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities.

Accrued interest for available for sale securities is written off against interest income when the receivable has aged 90 days past due.

We did not write off any accrued interest receivable during the twelve months ended December 31, 2020, 2019 or 2018.

We consider items such as commercial paper with original maturities of 90 days or less to be short-term investments.

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DAC is reviewed periodically to determine that it does not exceed recoverable amounts.

DAC is amortized to expense in proportion to estimated gross profits over the estimated life of the associated policies.

We estimate the rate of amortization to reflect actual experience and any changes to persistency or loss development.

Total amortization of DAC for the years ended December 31, 2019 , 2018 and 2017 , net of a portion of ceding commission related to the quota share reinsurance transactions (see " Reinsurance ", below ) , was $ 8.4 million , $ 8.1 million and $ 5.8 million , respectively.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

DAC is amortized to expense in proportion to estimated gross profits over the life of the associated policies.

We revise the rate of amortization to reflect actual experience and any changes to persistency or loss development.

Total amortization of DAC for the years ended December 31, 2020, 2019 and 2018, net of a portion of the ceding commissions earned under our quota share reinsurance agreements (see " Reinsurance ", below ) , was $ 19.1 million, $ 8.4 million and $ 8.1 million, respectively.

Premium Deficiency Reserves

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We have determined that no premium deficiency reserves were necessary for any of the years in the three-year period ended December 31, 2020.

We account for premiums, claims and claim expenses that are ceded to reinsurers on a consistent basis with that which we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts.

We account for premiums, claims and claim expenses that are ceded to reinsurers on basis consistent with that which we use to account for the original policies we issue and pursuant to the terms of our reinsurance contracts.

We account for premiums ceded or otherwise paid to reinsurers as a reduction to premium revenue.

NMIC entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction) and January 1, 2018 (the 2018 QSR Transaction), which we refer to collectively as the QSR Transactions.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

NMIC entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction), January 1, 2018 (the 2018 QSR Transaction) and April 1, 2020 (the 2020 QSR Transaction), which we refer to collectively as the QSR Transactions.

We earn profit and ceding commissions in connection with the QSR Transactions (see Note 6, " Reinsurance ").

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We recognize any profit commissions we earn as an increase to premium revenue.

Ceding commissions are calculated as a percentage of ceded written premiums under the 2016 QSR Transaction and as a percentage of ceded earned premiums under the 2018 QSR Transaction, and are intended to cover our costs of acquiring and servicing direct policies.

We recognize any ceding commissions we earn in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured.

Ceding commissions are calculated as a percentage of ceded written premiums under the 2016 QSR Transaction and as a percentage of ceded earned premiums under the 2018 and 2020 QSR Transactions, and are intended to cover our costs of acquiring and servicing direct policies.

We recognize any ceding commissions generated under the QSR Transactions in a manner consistent with our recognition of earnings on the underlying reinsured policies.

We account for ceding commissions earned as a reduction to underwriting and operating expenses.

Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as reinsurance recoverables in "Other Assets" on the consolidated balance sheets and as reductions to claims expenses on the consolidated statements of operations.

We remain directly liable for all claims payments if we are unable to collect from any reinsurer.

Under the QSR Transactions, we cede a portion of claims and claim expenses and reserves to our reinsurers, and account for such ceded reserves as "Reinsurance Recoverables" on the consolidated balance sheets and such ceded expenses as reductions to claims and claim expenses on the consolidated statements of operations.

As of December 31, 2020, we had $ 17.6 million of reinsurance recoverables under the QSR Transactions.

We remain directly liable for all claim payments if we are unable to collect the recoverables due from our reinsurers and, as such, we actively monitor and manage our counterparty credit exposure to our reinsurance providers.

We establish an allowance for expected credit loss against our reinsurance recoverables if we do not expect to recover amounts due from one or more of our reinsurance counterparties, and report our reinsurance recoverables net of such allowance, if any.

We actively monitor the counterparty credit profiles of our reinsurers and each is required to partially collateralize its obligations under the terms of our QSR Transactions.

As of December 31, 2020, we did not recognize any allowance for credit loss with respect to our reinsurance recoverables.

We account for income taxes using the liability method in accordance with ASC Topic 740, Income Taxes .

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RSU grants may contain a service condition, or performance and service conditions.

RSU grants are valued at our stock

RSU grants are valued at our stock price on the date of grant less the present value of anticipated dividends.

We account for stock option and RSU forfeitures as they occur.

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

price on the date of grant less the present value of anticipated dividends.

We account for stock option and RSU forfeitures as they occur.

Earnings per Share (EPS)

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For further detail, see Note 12, " Software and Equipment.

We recognize right-of-use (ROU) assets and corresponding lease liabilities for our lease arrangements.

Lease liabilities are established based on the estimated present value of lease payments over the relevant lease term.

We estimate a discount rate for each lease based on our estimated incremental borrowing rate at the commencement date of the relevant lease.

Estimated lease terms includes optional renewal periods and early termination payments when it is reasonably certain we will exercise those rights.

ROU assets are measured as the associated lease liability plus any direct costs incurred in connection with the initial establishment of the lease, less any lease incentives received.

Business Combinations, Goodwill and Intangible Assets

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Premiums Receivable

Premiums receivable consist of premiums due on our mortgage insurance policies.

If a mortgage insurance premium is unpaid for more than 120 days, the receivable is written off against earned premium and the related insurance policy is canceled.

Premiums receivable may be written off prior to 120 days in the ordinary course of business for reasons including, but not limited to, the modification or refinancing of underlying insured loans.

Premiums receivable consists of premiums due on our mortgage insurance policies.

If a mortgage insurance premium is unpaid for more than 120 days, the associated receivable is written off against earned premium and the related insurance policy is canceled.

We recognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the life of the receivable.

Due to the nature of our insurance policies (a necessary precondition for access to mortgage credit for covered borrowers) and the short duration of the related receivables, we do not typically experience credit losses against our premium receivables and did not establish an allowance for credit loss at December 31, 2020.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan.

We have established a reserve for premium write-offs based on historical experience;

such reserve was deemed to be immaterial for the years ended December 31, 2019 and December 31, 2018.

such reserve was deemed to be immaterial at December 31, 2020 and December 31, 2019.

Variable Interest Entities

NMIC is a party to reinsurance agreements with three special purpose reinsurance entities - Oaktown Re Ltd., Oaktown Re II Ltd.

and Oaktown Re III Ltd.

- respectively dated May 2, 2017, July 25, 2018 and July 30, 2019.

At inception of the respective reinsurance agreements, we determined that Oaktown Re Ltd., Oaktown Re II, Ltd.

and Oaktown Re III, Ltd, were variable interest entities (VIEs), as defined under GAAP Accounting Standards Codification (ASC) 810, because they did not have sufficient equity at risk to finance their respective activities.

NMIC is a party to reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd.

and Oaktown Re V Ltd.

(special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018, July 30, 2019, July 30, 2020 and October 29, 2020, respectively.

At inception of the respective reinsurance agreements, we determined that each of the Oaktown Re Vehicles were variable interest entities (VIEs), as defined under GAAP Accounting Standards Codification (ASC) 810, because they did not have sufficient equity at risk to finance their respective activities.

We evaluated the VIEs at inception to determine whether NMIC was the primary beneficiary under each deal and, if so, whether we were required to consolidate the assets and liabilities of each VIE.

The primary beneficiary of a VIE is an enterprise that (1) has the power to direct the activities of the VIE, which most significantly impact its economic performance and (2) has significant economic exposure to the VIE, i.e., the obligation to absorb losses or receive benefits that could potentially be significant.

, the obligation to absorb losses or receive benefits that could potentially be significant.

The determination of whether an entity is the primary beneficiary of a VIE is complex and requires management judgment regarding determinative factors, including the expected results of the VIE and how those results are absorbed by beneficial interest holders, as well as which party has the power to direct activities that most significantly impact the performance of the VIE.

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See Note 6, " Reinsurance " for further discussion of the reinsurance arrangements.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Other Revenues

Other revenues represent underwriting fee revenue from our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators.

NMIS fees are earned and recognized as services are provided.

Recent Accounting Pronouncements - Adopted

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842).

This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities on the balance sheet.

The standard also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases.

We adopted this ASU on January 1, 2019 using the modified-retrospective method and applied it prospectively as of the effective date, without adjusting comparative periods presented as permitted by ASU 2018-11, Leases (Topic 842), Targeted Improvements .

Adoption of this new standard increased our assets and liabilities by $ 7.6 million in connection with the recognition of right-of-use (ROU) assets and lease liabilities, primarily related to the operating lease on our corporate headquarters.

Adoption of this standard did not impact our consolidated statements of operations or cash flows.

See Note 14, " Commitments and Contingencies " for additional information related to our leases.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815).

This update is intended to simplify the accounting for certain equity-linked financial instruments.

We adopted this ASU on January 1, 2019.

Adoption of this standard had no impact on our consolidated financial statements.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718).

This update expands the scope of Topic 718 to include share-based payments made to non-employees in connection with the acquisition of goods and services.

We adopted this ASU on January 1, 2019.

Adoption of this standard had no impact on our financial results as we have not made any share-based grants to non-employees as defined in ASC 718-10-20.

Recent Accounting Pronouncements - Not Yet Adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance:

In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance:

ASU 2019-04, Codification Improvements to Topic 326 , Financial Instruments-Credit Losses (Topic 815) , Derivatives and Hedging , and Topic 825, Financial Instruments , ASU 2019-05, Financial Instruments-Credit Losses:

Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses .

Targeted Transition Relief , and ASU 2019-11, C odification Improvements to Topic 326, Financial Instruments-Credit Losses .

These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date.

Under the guidance, the methodology for measuring lifetime credit losses will generally shift from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast.

Credit losses relating to available-for-sale fixed maturity securities will be recorded through an allowance for credit losses, rather than a write-down of the asset as is currently required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost.

Under the guidance, the methodology for measuring lifetime credit losses shifts from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast.

Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost.

The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination.

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Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.

In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts .

This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity.

The FASB subsequently issued ASU 2019-19 in November 2019 and amended the effective date for this standard.

The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820).

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We adopted this ASU on January 1, 2020 and determined it did not have a material impact on our consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements.

In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40).

This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements.

We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date.

The adoption of this ASU did not have a material impact on our consolidated financial statements.

In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740).

This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods.

The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax

Recent Accounting Pronouncements - Not Yet Adopted

In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

goodwill and allocating taxes to members of a consolidated group.

The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity.

The FASB subsequently issued ASU 2019-09 in November 2019 and ASU 2020-11 in November 2020, which amended the effective date for this standard and provided transition relief to facilitate early application for long duration contracts.

The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022.

We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.

We have designated our investment portfolio as available-for-sale and report it at fair value.

The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an accumulated basis in shareholders' equity.

Net realized investment gains and losses are reported in earnings based on specific identification of securities sold or other-than-temporarily impaired.

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740) .

This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods.

The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group.

The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020.

We adopted this ASU on January 1, 2021 and and it did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848).

This update with updates subsequently issued in January 2021 in ASU 2021-01.

These updates provide optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting.

Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate (LIBOR) in financial contracts, which is expected to be discontinued in 2021.The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met.

These standards are effective immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform.

We are currently evaluating the impact the adoption of the ASUs would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.

In August 2020, the FASB issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging— Contracts in Entity's Own Equity (Subtopic 815-40 ).

This update simplifies the accounting for convertible instruments and contracts on an entity's own equity, including warrants, eliminating certain triggers for derivative accounting.

The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021.

Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020.

We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements, including our warrant liability.

We hold all investments on an available-for-sale basis and evaluate each position quarterly for impairment.

We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security;

or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis.

If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense.

The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Fair Values and Gross Unrealized Gains and Losses on Investments

Gross Unrealized

As of December 31, 2019

(In Thousands)

Cost Gross Unrealized Fair

As of December 31, 2020 (In Thousands)

Treasury securities and obligations of U.S.

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Asset-backed securities 128,471 2,736 ( 27 ) 131,180

Total bonds 1,730,466 73,963 ( 512 ) 1,803,917

Short-term investments 369 — — 369

Total investments $ 1,730,835 $ 73,963 $ ( 512 ) $ 1,804,286

Gross Unrealized

As of December 31, 2018

(In Thousands)

Cost Gross Unrealized Fair

As of December 31, 2019 (In Thousands)

Treasury securities and obligations of U.S.

3 unchanged sentences

Asset-backed securities 170,153 2,603 ( 114 ) 172,642

Total bonds 1,069,605 28,481 ( 1,418 ) 1,096,668

Short-term investments 44,174 98 — 44,272

2 unchanged sentences

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of December 31, 2020 and 2019:

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

Financial 37 % 38 %

Consumer 23 26

Communications 10 10

Utilities 11 9

Industrial 9 8

Technology 10 7

Total 100 % 100 %

As of December 31, 2020 and 2019, approximately $ 5.7 million and $ 5.5 million, respectively, of our cash and investments were held in the form of U.S.

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Scheduled Maturities

The amortized cost and fair values of available-for-sale securities as of December 31, 2019 and 2018, by contractual maturity, are shown below.

The amortized cost and fair value of available-for-sale securities as of December 31, 2020 and 2019, by contractual maturity, are shown below.

Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.

As of December 31, 2019

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

As of December 31, 2020 Amortized

(In Thousands)

5 unchanged sentences

Total investments $ 1,730,835 $ 1,804,286

As of December 31, 2018

As of December 31, 2019 Amortized

(In Thousands)

5 unchanged sentences

Total investments $ 1,113,779 $ 1,140,940

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Aging of Unrealized Losses

As of December 31, 2019 , the investment portfolio had gross unrealized losses of $ 1.4 million , of which $ 0.1 million had been in an unrealized loss position for a period of 12 months or greater.

We did not consider these securities to be other-than-temporarily impaired as of December 31, 2019 .

We based our conclusion that these investments were not other-than-temporarily impaired as of December 31, 2019 on the following facts:

(i) the unrealized losses were primarily caused by interest rate movements and market fluctuations in credit spreads since the purchase date, (ii) we do not intend to sell these investments;

and (iii) we do not believe that it is more likely than not that we will be required to sell these investments before recovery of our amortized cost basis, which may not occur until maturity.

F or 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

# of Securities

Unrealized Losses

# of Securities

Unrealized Losses

# of Securities

Unrealized Losses

As of December 31, 2019

(Dollars in Thousands)

Treasury securities and obligations of U.S.

government agencies

As of December 31, 2020, the investment portfolio had gross unrealized losses of $ 0.5 million, of which $ 8 thousand had been in an unrealized loss position for a period of twelve months or longer.

As of December 31, 2019, the investment portfolio had gross unrealized losses of $ 1.4 million, of which $ 84 thousand had been in an unrealized loss position for a period of twelve months or longer.

For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:

Less Than Twelve Months Twelve Months or Greater Total

# of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses

As of December 31, 2020 (Dollars in Thousands)

Municipal debt securities 4 3,548 ( 2 ) — — — 4 3,548 ( 2 )

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Asset-backed securities 2 5,191 ( 19 ) 1 2,495 ( 8 ) 3 7,686 ( 27 )

Less Than 12 Months

12 Months or Greater

# of Securities

Unrealized Losses

# of Securities

Unrealized Losses

# of Securities

Unrealized Losses

As of December 31, 2018

(Dollars in Thousands)

Total 15 $ 48,820 $ ( 504 ) 2 $ 2,528 $ ( 8 ) 17 $ 51,348 $ ( 512 )

Less Than Twelve Months Twelve 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, 2019 (Dollars in Thousands)

Treasury securities and obligations of U.S.

3 unchanged sentences

Asset-backed securities 9 19,236 ( 102 ) 1 2,988 ( 12 ) 10 22,224 ( 114 )

Total 49 $ 154,562 $ ( 1,334 ) 16 $ 27,963 $ ( 84 ) 65 $ 182,525 $ ( 1,418 )

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Allowance for credit losses

As of December 31, 2020, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did not record any provision for credit loss for investment securities during the year ended December 31, 2020.

Based on current facts and circumstances, we believe the unrealized losses as of December 31, 2020 are not indicative of the ultimate collectability of the current amortized cost of the securities.

During the year ended December 31, 2019, we recognized $ 0.4 million other-than-temporarily impaired (OTTI) losses in earnings.

For the year ended December 31, 2018, we did no t recognize any OTTI losses.

Net Investment Income

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For the year ended December 31,

2020 2019 2018

(In Thousands)

4 unchanged sentences

For the year ended December 31,

2020 2019 2018

(In Thousands)

2 unchanged sentences

Net realized investment gains $ 930 $ 45 $ 57

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

Investment Securities - Other-than-Temporary Impairment (OTTI)

As of December 31, 2019 , 2018 and 2017 , we held no other-than-temporarily impaired securities.

For the years ended December 31, 2019 and 2017, we recognized $ 0.4 million and $ 0.1 million of OTTI losses in earnings, respectively.

For the year ended December 31, 2018 we did no t recognize any OTTI losses.

There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in AOCI (loss) for any period presented.

Fair Value of Financial Instruments

14 unchanged sentences

In such cases, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Assets classified as Level 1 and Level 2

12 unchanged sentences

Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

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

3 unchanged sentences

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

As of December 31, 2019

(In Thousands)

(Level 2) Significant

(Level 3) Fair Value

As of December 31, 2020 (In Thousands)

Treasury securities and obligations of U.S.

4 unchanged sentences

Cash, cash equivalents and short-term investments 127,306 — — 127,306

Total assets $ 158,904 $ 1,772,319 $ — $ 1,931,223

Warrant liability — — 4,409 4,409

Total liabilities $ — $ — $ 4,409 $ 4,409

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Fair Value Measurements Using

2 unchanged sentences

Identical Assets

Significant Other

(Level 1) Significant Other

Observable Inputs

As of December 31, 2018

(In Thousands)

(Level 2) Significant

(Level 3) Fair Value

As of December 31, 2019 (In Thousands)

Treasury securities and obligations of U.S.

4 unchanged sentences

Cash, cash equivalents and short-term investments 85,361 — — 85,361

Total assets $ 134,290 $ 1,047,739 $ — $ 1,182,029

Warrant liability — — 7,641 7,641

Total liabilities $ — $ — $ 7,641 $ 7,641

There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level 3, of the fair value hierarchy during the years ended December 31, 2019 or 2018 .

There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the years ended December 31, 2020 or 2019.

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

For the year ended December 31,

Warrant Liability 2020 2019 2018

(In Thousands)

3 unchanged sentences

Balance, December 31 $ 4,409 $ 7,641 $ 7,296

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

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

As of December 31,

2020 2019 2018

Common stock price $ 22.65 $ 33.18 $ 17.85

Risk free interest rate 0.11 % 1.59 % 2.46 - 2.47%

Expected life

2.58 - 3.31 years

Expected life 1.31 years 2.31 years 2.58 - 3.31 years

Expected volatility 83.7 % 41.4 % 41.1 - 42.5%

Dividend yield — % — % — %

The changes in fair value of the warrant liability for the years ended December 31, 2019 , 2018 , and 2017 are primarily attributable to changes in the price of our common stock and exercises of outstanding warrants during the respective periods, with additional impact related to changes in other Black-Scholes model inputs.

The changes in fair value of the warrant liability for the years ended December 31, 2020, 2019, and 2018 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in other Black-Scholes model inputs and the exercise of outstanding warrants.

Financial Instruments not Measured at Fair Value

At December 31, 2019 , our 2018 Term Loan was carried at a cost of $ 145.8 million , net of debt issuance costs of $ 2.0 million , and had a fair value of $ 147.8 million as assessed under our Level 2 hierarchy.

At December 31, 2018, our 2018 Term Loan was carried at a cost of $ 146.8 million , net of debt issuance costs of $ 2.5 million , and had a fair value of $ 146.3 million .

On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $ 150 million 5-year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023;

and (ii) a $ 85 million three-year secured revolving credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021.

Proceeds from the 2018 Term Loan were used to repay in full the outstanding amount due under our $ 150 million amended term loan (2015 Term Loan) due on November 10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement.

2018 Term Loan

The 2018 Term Loan bears interest at the LIBOR, as defined in the 2018 Credit Agreement and subject to a 1.00 % floor, plus an annual margin rate of 4.75 % , representing an all-in rate of 6.55 % as of December 31, 2019 , payable monthly based on our current interest period election.

Quarterly principal payments of $ 0.4 million are also required.

As of December 31, 2019 , the outstanding principal balance of the 2018 Term Loan was $ 147.8 million .

Interest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, an original issue discount and capitalized modification costs related to the 2015 Term Loan.

For the year ended December 31, 2019 , we recorded $ 11.2 million of interest expense.

Remaining unamortized issuance costs and original issue discount were $ 2.0 million as of December 31, 2019 and are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan.

We are subject to certain covenants under the 2018 Term Loan (as defined in the 2018 Credit Agreement), including (but not limited to) a maximum debt-to-total capitalization ratio (as defined in the 2018 Credit Agreement) of 35 % under the 2018 Term Loan.

We were in compliance with all covenants as of December 31, 2019 .

Future principal payments due under the 2018 Term Loan as of December 31, 2019 are as follows:

As of December 31, 2019

(In thousands)

On June 19, 2020, we issued $ 400 million aggregate principal amount of senior secured notes that mature on June 1, 2025 (the Notes) and used a portion of the proceeds from the Notes offering to repay the outstanding amount due under our $ 150 million term loan (2018 Term Loan).

At December 31, 2020, the Notes were carried at a cost of $ 393.3 million, net of unamortized debt issuance costs of $ 6.7 million, and had a fair value of $ 447.1 million as assessed under our Level 2 hierarchy.

At December 31, 2019, the 2018 Term Loan was carried at a cost of $ 145.8 million, net of unamortized debt issuance costs of $ 2.0 million, and had a fair value of $ 147.8 million.

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

Senior Secured Notes

At December 31, 2020, we had $ 400 million aggregate principal amount of senior secured notes outstanding.

The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375 %, payable semi-annually on June 1 and December 1.

$ 244.4 million of proceeds from the Notes offering were contributed to our lead operating subsidiary, NMIC and remaining proceeds were used to repay the outstanding amount due under the 2018 Term Loan due on May 24, 2023 and to pay underwriting fees incurred connection with the offering.

The Notes mature on June 1, 2025.

At any time, or from time to time, prior to March 1, 2025, we may elect to redeem the Notes in whole or in part at a price based on 100 % of the aggregate principal amount of any Notes redeemed plus the "Applicable Premium," plus accrued and unpaid interest thereon.

Applicable Premium is defined as the greater of (1) 1.0 % of the principal amount of the Notes, or (2) the principal value of the Notes plus the present value of all future interest payments.

At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100 % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon.

From time to time prior to June 1, 2022, we may also elect to use proceeds raised from one or more equity offerings to redeem up to 40 % of the aggregate principal amount of the Notes at a price equal to 107.375 % of the aggregate principal amount thereof plus accrued and unpaid interest thereon, subject to certain exceptions.

Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs.

In connection with the Notes offering, we recorded capitalized debt issuance costs of $ 7.4 million.

Such amounts will be amortized over the contractual life of the Notes using the effective interest method.

At December 31, 2020, $ 6.7 million of unamortized debt issuance costs remained.

Interest expense for the year ended December 31, 2020 includes $ 2.6 million of costs related to the extinguishment of the 2018 Term Loan and issuance of the Notes.

At December 31, 2020, $ 2.5 million of accrued and unpaid interest on the Notes is included in "Accounts Payable and Accrued Expenses" on the Consolidated Balance Sheet.

2020 Revolving Credit Facility

Borrowings under the 2018 Revolving Credit Facility may be used for general corporate purposes and will accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the 2018 Credit Agreement, subject to a floor of 1.00 % per annum) plus a margin of 1.00 % to 2.50 % per annum, based on the applicable corporate credit rating at the time, or (ii) the Eurodollar Rate (subject to a floor of 0.00 % per annum) plus a margin of 2.00 % to 3.50 % per annum, based on the applicable corporate credit rating at the time.

As of December 31, 2019 , no borrowings had been made under the 2018 Revolving Credit Facility.

We are required to pay a quarterly commitment fee on the average daily undrawn amount of the 2018 Revolving Credit Facility, which ranges from 0.30 % to 0.60 % , based on the applicable corporate credit rating at the time.

On March 20, 2020, we amended our $ 85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $ 100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility).

Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00 % per annum) plus a margin of 0.375 % to 1.875 % per annum or (ii) the Eurodollar Rate plus a margin of 1.375 % to 2.875 % per annum, based on the applicable corporate credit rating at the time.

On October 30, 2020, we entered into a Joinder Agreement to the Credit Agreement, increasing the aggregate principal amount of commitments under the 2020 Revolving Credit Facility from $ 100 million to $ 110 million.

All other terms remained unchanged.

As of December 31, 2020, no amounts were drawn under the 2020 Revolving Credit Facility.

Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175 % to 0.525 %, based on the applicable corporate credit rating at the time.

As of December 31, 2020, the applicable commitment fee was 0.35 %.

For the year ended December 31, 2019 , we recorded $ 0.4 million of commitment fees in interest expense.

We incurred issuance costs of $ 1.5 million in connection with the establishment of the 2018 Revolving Credit Facility, which were deferred and recorded within "Other assets." These costs are being amortized through interest expense over the three-year life of the 2018 Revolving Credit Facility on a straight line basis.

For the year ended December 31, 2019 , we recognized $ 0.5 million of interest expense from the amortization of deferred issuance costs.

At December 31, 2019 , remaining deferred issuance costs were $ 0.7 million , net of accumulated amortization.

For the year ended December 31, 2020, we recorded $ 0.4 million of commitment fees in interest expense, respectively.

We incurred debt issuance costs of $ 0.8 million in connection with the 2020 Revolving Credit Facility and had $ 0.6 million of unamortized debt issuance costs associated with the 2018 Revolving Credit Facility remaining at the time of its amendment and replacement.

Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2020 Revolving Credit Facility.

At December 31, 2020, remaining unamortized deferred debt issuance costs were $ 1.1 million.

We are subject to certain covenants under the 2020 Revolving Credit Facility, including, but not limited to, the following:

a maximum debt-to-total capitalization ratio of 35 % , a minimum liquidity requirement, compliance with the private mortgage insurer eligibility requirements (PMIERs) financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein).

We were in compliance with all covenants as of December 31, 2019 .

We enter into third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, and support the growth of our business.

The GSEs and the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) have approved all such transactions (subject to certain conditions and ongoing review, including levels of approved capital credit).

a maximum debt-to-total capitalization ratio of 35 %, a minimum liquidity requirement, compliance with the private mortgage insurer eligibility requirements (PMIERs) financial requirements (subject to any GSE approved waivers), and minimum

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

consolidated net worth and statutory capital requirements (respectively, as defined therein).

We were in compliance with all covenants at December 31, 2020.

We enter into third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, (respectively, as defined therein), and support the growth of our business.

The Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) has approved and the GSEs have indicated their non-objection to all such transactions (subject to certain conditions and ongoing review, including levels of approved capital credit).

The effect of our reinsurance agreements on premiums written and earned is as follows:

For the year ended

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

(In Thousands)

Net premiums written

Direct $ 455,172 $ 376,052 $ 287,791

( 66,528 ) ( 43,400 ) ( 30,988 )

Net premiums written $ 388,644 $ 332,652 $ 256,803

Net premiums earned

Direct $ 472,998 $ 398,303 $ 292,064

( 75,826 ) ( 53,288 ) ( 40,867 )

Net premiums earned $ 397,172 $ 345,015 $ 251,197

1 unchanged sentence

Excess-of-loss reinsurance

NMIC entered into excess-of-loss reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd.

and Oaktown Re III Ltd.

(special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018 and July 30, 2019, respectively.

NMIC entered into excess-of-loss reinsurance agreements with the Oaktown Re Vehicles.

Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies written during a discrete period.

1 unchanged sentence

NMIC then retains losses in excess of the respective reinsurance coverage amounts.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a 10 year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled.

The respective outstanding reinsurance coverage amounts stop amortizing if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered.

NMIC makes risk premium payments to the Oaktown Re Vehicles for the applicable outstanding reinsurance coverage amount and pays an additional amount for anticipated operating expenses (capped at $ 300 thousand per year to Oaktown Re Ltd.

and $ 250 thousand per year to Oaktown Re II, Ltd.

and Oaktown Re III, Ltd.).

and $ 250 thousand per year to Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd.

and Oaktown Re V Ltd.).

NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $ 22.8 million, $ 14.6 million and $ 9.6 million during the years ended December 31, 2020, 2019 and 2018, respectively.

NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement.

NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the years ended December 31, 2019, 2018 or 2017, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.

NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the years ended December 31, 2020, 2019 and 2018, respectively, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.

Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts.

2 unchanged sentences

Each Oaktown Re Vehicle financed its respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors.

Such insurance-linked notes mature 10 years from the inception date of each reinsurance agreement.

We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd.

and Oaktown Re III, Ltd.

individually as the 2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.

Such insurance-linked notes mature ten years from the inception date of each reinsurance agreement.

We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd.

and Oaktown Re V Ltd., individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction and 2020-2 ILN Transaction, and collectively as the ILN Transactions.

The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled.

As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances.

The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event).

Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction.

The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.

The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions.

Current amounts are presented as of December 31, 2020.

( $ values in thousands)

Inception Date

Covered Production

Initial Reinsurance Coverage

Current Reinsurance Coverage

Initial First Layer Retained Loss

Current First Layer Retained Loss

2017 ILN Transaction

1/1/2013 - 12/31/2016

2018 ILN Transaction

July 25, 2018

1/1/2017 - 5/31/2018

2019 ILN Transaction

July 30, 2019

Inception Date Covered Production Initial Reinsurance Coverage Current Reinsurance Coverage Initial First Layer Retained Loss Current First Layer Retained Loss (1)

2017 ILN Transaction May 2, 2017 1/1/2013 - 12/31/2016 $ 211,320 $ 40,226 $ 126,793 $ 121,423

2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 123,234

2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,874

2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 250,685 169,514 169,514

2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2)

242,351 242,351 121,777 121,177

(1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss.

(2) Less than 1 % of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020.

NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding reinsurance coverage amount amortizes to 10 % or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under a given agreement.

In addition, there are certain events that trigger mandatory termination of an agreement, including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to noteholders, among others.

Under the terms of the 2018 ILN Transaction and the 2019 ILN Transaction, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full.

"Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $ 2.7 million as of December 31, 2019 .

We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions will decrease over time as the outstanding principal balances of the respective insurance-linked notes decline.

Under the terms of the 2018, 2019, 2020-1 and 2020-2 ILN Transactions, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full.

"Cash and cash equivalents" on our consolidated balance sheet includes restricted amounts of $ 5.6 million as of December 31, 2020.

We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions will decline over time as the outstanding principal balance of the respective insurance-linked notes are amortized.

NMI HOLDINGS, INC.

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Quota share reinsurance

NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018 and the 2020 QSR Transaction, effective April 1, 2020.

Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers.

2 unchanged sentences

Best) or both.

Under the 2016 QSR Transaction, NMIC cedes premiums written related to 25 % of the risk on eligible primary policies written for all periods through December 31, 2017 and 100 % of the risk under our pool agreement with Fannie Mae.

Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25 % of the risk on eligible primary policies written for all periods through December 31, 2017 and 100 % of the risk under our pool agreement with Fannie Mae.

The 2016 QSR Transaction 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.

NMIC has the option, based on certain conditions and subject to a 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.

Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25 % of the risk on eligible policies written in 2018 and 20 % of the risk on eligible policies written in 2019.

Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25 % of the risk on eligible policies written in 2018 and 20 % of the risk on eligible policies written in 2019.

The 2018 QSR Transaction is scheduled to terminate on December 31, 2029.

NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2022, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.

NMIC may terminate either or both of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreements.

Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to 21 % of the risk on eligible policies written from April 1, 2020 to December 31, 2020.

The 2020 QSR Transaction is scheduled to terminate on December 31, 2030.

NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2023, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk.

NMIC may terminate any or all of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreements.

Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a run-off basis ( i.e.

6 unchanged sentences

The termination has no effect on the cession of pool risk under the 2016 QSR Transaction.

The following table shows the amounts related to the QSR Transactions:

The following table shows amounts related to the QSR Transactions:

For the year ended

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

(In Thousands)

5 unchanged sentences

Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums.

Under the 2018 QSR Transaction, premiums are ceded on an earned basis as defined in the agreement.

Under the 2018 QSR Transaction and 2020 QSR Transactions, premiums are ceded on an earned basis as defined in the agreement.

NMIC receives a 20 % ceding commission for premiums ceded under the QSR Transactions.

NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016 QSR Transaction and 2018 QSR Transaction generally remain below 60 % and 61 % , respectively, as measured annually.

NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016 QSR

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Transaction, 2018 QSR Transaction and 2020 QSR Transaction, generally remain below 60 %, 61 % and 50 %, respectively, as measured annually.

Ceded claims and claim expenses under each of the QSR Transactions reduce the respective profit commission received by NMIC on a dollar-for-dollar basis.

1 unchanged sentence

Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted.

NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer

NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates.

The reinsurance recoverable on loss reserves related to the 2016 QSR Transaction was $ 4.5 million as of December 31, 2020.

In accordance with the terms of the 2018 and 2020 QSR Transactions, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions.

Any loss recoveries and any potential profit commission to NMIC are also recognized quarterly.

NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates.

The reinsurance recoverable on loss reserves related to the 2018 QSR Transaction was $ 12.6 million as of December 31, 2020.

The reinsurance recoverable on loss reserves related to the 2020 QSR Transaction was $ 0.5 million as of December 31, 2020.

NMI HOLDINGS, INC.

1 unchanged sentence

DECEMBER 31, 2020

in accordance with the PMIERs funding requirements for risk ceded to non-affiliates.

The reinsurance recoverable on loss reserves related to our 2016 QSR Transaction was $ 2.8 million as of December 31, 2019 .

In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions.

Any loss recoveries and any potential profit commission to NMIC are also settled quarterly.

NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates.

The reinsurance recoverable on loss reserves related to our 2018 QSR Transaction was $ 2.1 million as of December 31, 2019 .

Reserves for Insurance Claims and Claim Expenses

We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans.

Consistent with industry practice, we establish reserves for loans that have been reported to us by servicers as having been in default for at least 60 days, referred to as case reserves, and additional loans that we estimate (based on actuarial review) have been in default for at least 60 days that have not yet been reported to us by servicers, referred to as "IBNR" reserves.

We also establish claim expense reserves, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process.

As of December 31, 2019 , we had reserves for insurance claims and claim expenses of $ 23.8 million for 1,448 primary loans in default.

We hold gross reserves in an amount equal to the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans.

A loan is considered to be in "default" as of the payment date at which a borrower has missed the preceding two or more consecutive monthly payments.

As of December 31, 2020, we had 12,209 primary loans in default and held gross reserves for insurance claims and claim expenses of $ 90.6 million.

During the year ended December 31, 2020, we paid 143 claims totaling $ 6.4 million, including 137 claims covered under the QSR Transactions representing $ 1.3 million of ceded claims and claim expenses.

2 unchanged sentences

We only establish reserves for pool risk if we expect claims to exceed this deductible.

At December 31, 2019 , 46 loans in the pool were past due by 60 days or more.

At December 31, 2020, 219 loans in the pool were in default.

These 219 loans represented approximately $ 17.6 million of RIF.

Due to the size of the remaining deductible, the low level of notices of defaults (NODs) reported on loans in the pool through December 31, 2019 and the expected severity (all loans in the pool have LTV ratios under 80 % ), we did not establish any case or IBNR reserves for pool risk at December 31, 2019 .

Due to the size of the remaining deductible, our expectation that a limited number of loans in default will progress to a claim and the expected severity on such claim submissions (all loans in the pool have LTV ratios under 80 %), we did not establish any case or IBNR reserves for pool risk at December 31, 2020.

In connection with the settlement of pool claims, we applied $ 1.0 million to the pool deductible through December 31, 2020.

2 unchanged sentences

100 % of our pool RIF is reinsured under the 2016 QSR Transaction.

We had 12,209 loans in default in our primary insured portfolio as of December 31, 2020 which represented a 3.06 % default rate against 399,429 total policies in-force.

We had 1,448 loans in default in our primary insured portfolio as of December 31, 2019, which represented a 0.40 % default rate against 366,039 total policies in-force.

The increase in our default population is primarily due to challenges borrowers are facing related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief, and Economic Security (CARES) Act or similar programs made available by private lenders.

The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default.

Our future claims exposure is a function of the number of defaulted loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity).

Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors.

We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations.

The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time.

In response to the COVID-19 outbreak, the Federal Housing Financing Agency (FHFA) and GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance programs and default status.

Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers.

At December 31, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.

While we established lower reserves per defaulted loan at December 31, 2020, our total reserve position and claims and claim expenses increased as of and during the year ended December 31, 2020 due to the growth in the size of our default population.

NMI HOLDINGS, INC.

1 unchanged sentence

DECEMBER 31, 2020

The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claim expenses:

The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses:

For the year ended

December 31, 2019

December 31, 2018

December 31, 2017

December 31, 2020 December 31, 2019 December 31, 2018

(In Thousands)

1 unchanged sentence

Less reinsurance recoverables (1)

( 4,939 ) ( 3,001 ) ( 1,902 )

Beginning balance, net of reinsurance recoverables 18,813 9,810 6,859

2 unchanged sentences

Current year (2)

66,943 14,737 7,860

Prior years (3)

( 7,696 ) ( 2,230 ) ( 2,408 )

Total claims and claim expenses incurred 59,247 12,507 5,452

3 unchanged sentences

Prior years (3)

4,515 3,849 2,371

Reinsurance terminations (4)

2 unchanged sentences

Add reinsurance recoverables (1)

17,608 4,939 3,001

Ending balance $ 90,567 $ 23,752 $ 12,811

Related to ceded losses recoverable under the QSR Transactions, included in "Other assets" on the Consolidated Balance Sheets.

(1) Related to ceded losses recoverable under the QSR Transactions.

See Note 6, " Reinsurance " for additional information.

6 unchanged sentences

See Note 6, " Reinsurance " for additional information.

The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves and is presented net of reinsurance.

The amount of claims incurred relating to current year NODs represents the estimated amount of claims and claim expenses to be ultimately paid on such loans in default.

We recognized $ 2.2 million , $ 2.4 million , and $ 0.8 million of favorable prior year development during the years ended December 31, 2019 , 2018 and 2017 , respectively, due to 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 and continue to observe and analyze loss development trends in our portfolio.

The "claims incurred" section of the table above shows claims and claim expenses incurred on defaults occurring in current and prior years, including IBNR reserves and is presented net of reinsurance.

The amount of claims incurred relating to current year defaults represents the estimated amount of claims and claim expenses to ultimately be paid on such loans.

We recognized $ 7.7 million, $ 2.2 million, and $ 2.4 million of favorable prior year development during the years ended December 31, 2020, 2019 and 2018, respectively, primarily due to the curing of previously reported defaults.

We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio.

Gross reserves of $ 8.3 million related to prior year defaults remained as of December 31, 2020.

5 unchanged sentences

As of December 31, 2020

Accident Year

Total of IBNR

Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 Total of IBNR Defaults (2)

($ Values In Thousands)

2013 $ — $ — $ — $ — $ — $ — $ — $ — $ — —

2014 83 34 4 4 4 4 4 — —

2015 699 664 743 764 894 894 — —

2016 2,394 1,568 1,790 1,934 1,936 8 5

2017 6,028 3,475 3,570 3,807 20 16

2018 7,779 5,271 4,709 88 77

2019 14,391 7,229 364 422

2020 65,769 4,514 11,689

Total $ 84,348 $ 4,994 12,209

(1) Amounts include case and IBNR reserves.

The number of NODs outstanding as of December 31, 2019 is the total number of loans in default over 60 days.

(2) Number of defaults outstanding as of December 31, 2020.

Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance

1 unchanged sentence

(In Thousands)

2013 $ — $ — $ — $ — $ — $ — $ — $ —

2014 — 4 4 4 4 4 4

2015 50 246 684 720 804 894

2016 171 890 1,596 1,826 1,827

2017 27 1,655 2,925 3,494

2018 130 1,981 3,537

2019 69 2,368

Total $ 12,710

Reconciliation of Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses

10 unchanged sentences

DECEMBER 31, 2020

The following table shows, on average, the percentage of claims and allocated claims adjustment expenses paid over the years after a claim is incurred.

The following table shows the average percentage of claims and allocated claims adjustment expenses paid in the years following the incurrence of a claim.

Average annual percentage payout of incurred claims and allocated claims adjustment expenses by age, net of reinsurance

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

Claims duration disclosure 3 % 37 % 88 % 95 % 95 % 100 % 100 %

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For the year ended December 31,

2020 2019 2018

(In Thousands, except for per share data)

Net income $ 171,566 $ 171,957 $ 107,927

Basic weighted average shares outstanding 78,023 67,573 65,019

Basic earnings per share $ 2.20 $ 2.54 $ 1.66

Net income $ 171,566 $ 171,957 $ 107,927

Gain from change in fair value of warrant liability ( 2,907 ) — —

5 unchanged sentences

Anti-dilutive shares 58 565 843

We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012.

We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012, of which 312 thousand remained outstanding available for exercise at December 31, 2020.

Each warrant gives the holder thereof the right to purchase one share of common stock at an exercise price equal to $ 10.00 .

1 unchanged sentence

During the year ended December 31, 2020, 18 thousand warrants were exercised resulting in the issuance of 11 thousand shares of common stock.

Upon exercise, we reclassified approximately $ 8.3 million of warrant fair value from warrant liability to additional paid-in capital, of which $ 4.1 million related to changes in fair value during the twelve months ended December 31, 2019 .

During the year ended December 31, 2018 , 151 thousand warrants were exercised resulting in the issuance of 91 thousand shares of common stock.

Upon exercise, we reclassified approximately $ 1.6 million of warrant fair value from warrant liability to additional paid-in capital, of which $ 0.4 million related to changes in fair value during the twelve months ended December 31, 2018 .

Upon exercise, we reclassified approximately $ 0.3 million of warrant fair value from warrant liability to additional paid-in capital.

During the year ended December 31, 2019, 448 thousand warrants were exercised resulting in the issuance of 289 thousand shares of common stock.

Upon exercise, we reclassified approximately $ 8.3 million of warrant fair value from warrant liability to additional paid-in capital.

NMI HOLDINGS, INC.

1 unchanged sentence

DECEMBER 31, 2020

Changes in fair value of $ 0.1 million, $ 4.1 million, and $ 0.4 million was recognized for warrants exercised during the years ended December 31, 2020, 2019 and 2018, respectively.

Share-Based Compensation

Share-based compensation includes stock options and RSUs granted under our 2012 Stock Incentive Plan (2012 Plan) and our Amended and Restated 2014 Omnibus Incentive Plan (2014 Plan, and together with the 2012 Plan, the Stock Plans).

Share-based compensation includes stock options, service-based RSUs and performance and service based RSUs granted under our 2012 Stock Incentive Plan (2012 Plan) and our Amended and Restated 2014 Omnibus Incentive Plan (2014 Plan, and together with the 2012 Plan, the Stock Plans).

The 2012 Plan was approved by the Board on April 16, 2012 and authorized 5.5 million shares of common stock to be reserved for issuance, with limits of 3.85 million shares available for stock option issuance and 1.65 million shares available for RSU issuance.

10 unchanged sentences

A summary of option activity during the years ended December 31, 2020, 2019 and 2018, is as follows:

For the year ended December 31, 2019

Weighted Average Grant Date Fair Value per Share

Weighted Average Exercise Price

For the year ended December 31, 2020 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price

(Shares in Thousands)

5 unchanged sentences

Options outstanding at December 31, 2020 1,493 $ 5.02 $ 13.59

For the Year Ended December 31, 2018

Weighted Average Grant Date Fair Value per Share

Weighted Average Exercise Price

For the year ended December 31, 2019 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price

(Shares in Thousands)

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DECEMBER 31, 2020

For the year ended December 31, 2017

Weighted Average Grant Date Fair Value per Share

Weighted Average Exercise Price

For the Year Ended December 31, 2018 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price

(Shares in Thousands)

12 unchanged sentences

The weighted-average period over which total remaining compensation costs related to non-vested stock options will be recognized is 0.86 years.

No stock options were granted during the year ended December 31, 2020.

The estimated grant date fair values of the stock options granted during the years ended December 31, 2019 and 2018 were calculated using the Black-Scholes valuation model based on the following assumptions.

For the years ended December 31,

Expected life

Expected life 6 years 6 years

Risk free interest rate 2.57 % 2.66-2.89%

10 unchanged sentences

A summary of RSU activity during the years ended December 31, 2020, 2019 and 2018 is as follows:

For the year ended December 31, 2019

Weighted Average Grant Date Fair Value per Share

For the year ended December 31, 2020 Shares Weighted Average Grant Date Fair Value per Share

(Shares in Thousands)

7 unchanged sentences

DECEMBER 31, 2020

For the year ended December 31, 2018

Weighted Average Grant Date Fair Value per Share

For the year ended December 31, 2019 Shares Weighted Average Grant Date Fair Value per Share

(Shares in Thousands)

4 unchanged sentences

Non-vested restricted stock units at December 31, 2019 1,202 $ 18.67

For the year ended December 31, 2017

Weighted Average Grant Date Fair Value per Share

For the Year Ended December 31, 2018 Shares Weighted Average Grant Date Fair Value per Share

(Shares in Thousands)

4 unchanged sentences

Non-vested restricted stock units at December 31, 2018 1,753 $ 12.06

At December 31, 2019 , we had 1.2 million shares of granted and non-vested RSUs, consisting of 1.0 million shares that are subject to service condition vesting requirements and 0.2 million shares that are subject to performance and service condition vesting requirements.

At December 31, 2020, we had 1.1 million granted and non-vested RSUs, consisting of 1.0 million RSUs that are subject to service condition vesting requirements and 0.1 million RSUs that are subject to performance and service condition vesting requirements.

The total fair value of RSUs vested during the year ended December 31, 2020 was $ 11.7 million.

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The weighted-average period over which total remaining compensation costs related to non-vested RSUs will be recognized is 1.49 years.

Non-vested RSUs subject to service condition vesting requirements vest over a service period ranging from one to five years .

Non-vested RSUs subject to performance and service condition vesting requirements are scheduled to vest in 2020, with the number of shares eligible to vest based on the achievement of a return on equity goal.

The fair value of non-vested RSUs is measured as the closing price of our common stock on the date of grant less the present value of anticipated dividends to be paid during the service period.

Non-vested RSUs subject to service condition vesting requirements vest over a period ranging from one to five years .

Non-vested RSUs subject to performance and service condition vesting requirements vest over a three year period, with the number of shares issued upon vesting based on a compound annual book value per share growth target.

The fair value of non-vested RSUs is measured as the closing price of our common stock on the date of grant less the present value of anticipated dividends to be paid during the vesting period.

401(k) Savings Plan

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During the years ended December 31, 2020, 2019 and 2018, we incurred approximately $ 2.2 million, $ 2.5 million and $ 1.6 million of expense related to our matching 401(k) Plan contributions, respectively.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

We are a U.S.

3 unchanged sentences

federal and various state income tax returns on behalf of itself and its subsidiaries.

Prior to the enactment of the Tax Cuts and Jobs Act (TCJA) on December 22, 2017, we were subject to a statutory U.S.

federal corporate income tax rate of 35% for all prior years through December 31, 2017.

Total income tax expense consists of the following components:

For the year ended December 31,

2020 2019 2018

(In Thousands)

Current $ 34 $ ( 386 ) $ 1,677

Deferred 46,506 45,082 26,357

Total income tax expense $ 46,540 $ 44,696 $ 28,034

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

For the year ended December 31, 2019 , we had income tax expense of $ 44.7 million , including amounts related to a current state income tax benefit and changes to our federal and state net deferred tax liability.

For the year ended December 31, 2018 , we had income tax expense of $ 28.0 million , including amounts related to federal and state income taxes and changes to our net deferred tax liability.

For the year ended December 31, 2017 , we had income tax expense of $ 30.7 million , including a one-time non-cash charge of $ 13.6 million primarily due to the re-measurement of our deferred tax assets and liabilities in connection with the enactment of the TCJA on December 22, 2017.

For the years ended December 31, 2020, 2019 and 2018, we had income tax expenses of $ 46.5 million, $ 44.7 million, and $ 28.0 million, respectively, including amounts related to current state income taxes and changes to our federal and state net deferred tax liability.

The following table presents a reconciliation between the federal statutory income tax rate and our effective income tax rate:

For the year ended December 31,

2020 2019 2018

Federal statutory income tax rate 21.0 % 21.0 % 21.0 %

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Warrant gain/loss ( 0.3 ) 0.9 0.2

Re-measurement from change in federal statutory rate

Other — ( 0.1 ) 0.1

Effective income tax rate 21.3 % 20.6 % 20.6 %

Prior periods have been reclassified for consistency and presentation purposes.

NMI HOLDINGS, INC.

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As of December 31,

Deferred tax asset

(In Thousands)

Deferred tax asset (In Thousands)

Net operating loss carry forwards $ 7,938 $ 9,244

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Accrued expenses 3,198 4,539

Capitalized start-up costs

Deferred ceding commissions

Unrealized loss on investments

Total gross deferred tax asset 22,639 26,927

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Capitalized software ( 5,569 ) ( 5,107 )

Intangible assets

( 1,804 ) ( 2,057 )

Total deferred tax liability ( 127,615 ) ( 75,430 )

Net deferred income tax (liability) $ ( 112,586 ) $ ( 56,360 )

(1) Prior periods have been reclassified for consistency and presentation purposes.

As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent.

As a result, we had no current federal income tax provision for the year ended December 31, 2019.

During the year ended December 31, 2019 , we had net purchases of $ 7.6 million of tax and loss bonds, and as of December 31, 2019 , we held $ 7.6 million of tax and loss bonds in "Other assets" in our condensed consolidated balance sheet.

During the years ended December 31, 2020 and 2019, we purchased $ 38.8 million and $ 7.6 million of tax and loss bonds, respectively.

As a result, we had no current federal income tax provision for the years ended December 31, 2020 and 2019.

As of December 31, 2020 and 2019, we held $ 46.4 million and $ 7.6 million of tax and loss bonds, respectively, in "Other assets" in our consolidated balance sheet.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220).

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The valuation allowances for both years primarily relate to state net operating losses generated by NMIH, as NMIH operates at a loss and currently only generates revenue from its investment portfolio.

As of December 31, 2020 and 2019, we had no reserves for unrecognized tax benefits as we have taken no material uncertain tax positions that would have required a reserve to be measured and recognized.

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

As of December 31, 2019 and 2018 , we had no reserves for unrecognized tax benefits, and had taken no material uncertain tax positions that would have required recognition and measurement.

We file income tax returns with the U.S.

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Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2020 and 2019, consists of the following:

December 31, 2019

December 31, 2018

December 31, 2020 December 31, 2019

(In Thousands)

Software $ 59,678 $ 46,522

Equipment 9,123 8,992

Leasehold improvements 3,402 3,442

Subtotal 72,203 58,956

Accumulated amortization and depreciation ( 42,538 ) ( 32,860 )

Software and equipment, net $ 29,665 $ 26,096

Capitalized costs for software, equipment, and leasehold improvements during the year ended December 31, 2019 , 2018 and 2017 , were $ 10.6 million , $ 9.8 million , and $ 9.1 million , respectively.

Capitalized costs for software, equipment, and leasehold improvements during the years ended December 31, 2020, 2019 and 2018, were $ 14.5 million, $ 10.6 million, and $ 9.8 million, respectively.

Amortization and depreciation expense for software, equipment, and leasehold improvements for the years ended December 31, 2020, 2019, and 2018 were $ 9.9 million, $ 9.3 million, and $ 7.8 million, respectively.

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Intangible assets and goodwill as of both December 31, 2020 and 2019 were as follows:

(In Thousands)

Expected Lives

State licenses

GSE applications

(In Thousands) Expected Lives

Goodwill $ 3,244 Indefinite

State licenses 260 Indefinite

GSE applications 130 Indefinite

Total intangible assets and goodwill $ 3,634

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No impairments of indefinite-lived intangibles or goodwill were identified during the years ended December 31, 2020, 2019 and 2018.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Commitments and Contingencies

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Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets , which is an amount equal to the greater of (i) $ 400 million or (ii) a total risk-based required asset amount .

The risk-based required asset amount is a function of the risk profile of an approved insurer's net RIF, assessed on a loan-by-loan basis and considered against

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2019

certain risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions.

The risk-based required asset amount is a function of the risk profile of an approved insurer's net RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs to gross RIF, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions.

The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6 % of performing, primary adjusted RIF , and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy.

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We continuously monitor NMIC's compliance with the PMIERs.

We have two operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating ROU assets and lease liabilities of $ 6.4 million and $ 7.4 million in "Other assets" and "Other liabilities," respectively, on our condensed consolidated balance sheet as of December 31, 2019 .

As of December 31, 2019 , we did not have any finance leases.

We recognize ROU assets and lease liabilities in connection with the adoption of ASU 2016-02, Leases (Topic 842).

ROU assets and lease liabilities are established based on the estimated present value of lease payments over the relevant lease term.

We estimate a discount rate for each lease based on our estimated incremental borrowing rate at the commencement date of the relevant lease.

ROU assets obtained in exchange for new operating lease liabilities for the year ended December 31, 2019 were $ 8.1 million .

We have two operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating ROU assets and lease liabilities of $ 4.6 million and $ 5.3 million in " Other assets " and " Other liabilities ," respectively, on our consolidated balance sheet as of December 31, 2020.

As of December 31, 2019, we recognized operating ROU assets and lease liabilities of $ 6.4 million and $ 7.4 million, respectively.

As of December 31, 2020 and 2019, we did not have any finance leases.

We did not enter any new operating leases or recognize any new ROU assets or lease liabilities during the year ended December 31, 2020.

ROU assets exchanged for new operating lease liabilities for the year ended December 31, 2019 were $ 8.1 million, primarily in connection with our initial adoption of ASU 2016-02, Leases (Topic 842).

The following table provides a summary of our ROU asset and lease liability assumptions as of December 31, 2020:

Weighted-average remaining lease term

Weighted-average remaining lease term 2.2 years

Weighted-average discount rate 6.21 %

Cash paid on our operating lease liabilities for the year ended December 31, 2019 was $ 2.5 million .

Lease expenses recognized on our operating lease liabilities for the year ended December 31, 2019 were $ 2.2 million .

Cash paid on our operating leases for the years ended December 31, 2020, 2019 and 2018 was $ 2.5 million, $ 2.5 million and $ 2.3 million and lease expense incurred was $ 2.3 million, $ 2.2 million and $ 2.1 million during each respective period, reflecting the net benefit of incentives received at inception of the lease.

Future payments due under our existing operating leases as of December 31, 2020 are as follows:

Years ending December 31,

(In Thousands)

Years ending December 31, (In Thousands)

Total undiscounted lease payments 5,645

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Present value of lease payments $ 5,254

Lease expense is recorded in underwriting and operating expenses on the consolidated statements of operations.

Lease expense is recorded in underwriting and operating expenses on our consolidated statements of operations.

Our existing operating leases have original terms that range from three to five years .

The lease for our corporate headquarters includes an option to renew for an additional five years at prevailing market rates at time of renewal.

We have not included this renewal option in our calculation of minimum lease payments as it is not reasonably certain to be exercised.

The lease for our corporate headquarters includes

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

As of December 31, 2018, the future minimum lease payments as accounted for prior to our adoption of ASU 2016-02, Leases (Topic 842) were as follows:

Years ending December 31,

(In Thousands)

Lease expense for our corporate headquarters was $ 2.1 million and $ 1.5 million for the years ended December 31, 2018 and 2017 respectively before the adoption of ASU 2016-02.

an option to renew for an additional five years at prevailing market rates at time of renewal.

We have not included this renewal option in our calculation of minimum lease payments as it is not reasonably certain to be exercised.

As of December 31, 2020, we had 85.2 million outstanding shares of Class A common stock.

Holders of our common stock have no preemptive or conversion rights or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock.

Each holder of our common stock is entitled to one vote for each share on all matters to be voted upon by the stockholders, and there are no cumulative voting rights.

Holders of common shares are entitled to receive dividends ratably if any are declared.

In March 2018, we completed the sale of 3.7 million shares of common stock and granted the underwriters on the transaction a 15 % overallotment option to purchase additional shares.

Each holder of our common stock is entitled to one vote per share on all matters to be voted upon by stockholders, and there are no cumulative voting rights.

Holders of common stock are entitled to receive dividends ratably if any are declared.

On June 8, 2020, we completed the sale of 13.8 million shares of common stock and granted the underwriters on the transaction a 15 % overallotment option to purchase additional shares.

The overallotment option was exercised in full, resulting in a total of 15.9 million shares of common stock issued.

The common stock offering generated total proceeds of approximately $ 79.2 million , net of underwriting discounts, commissions and other direct offering expenses.

The common stock offering generated proceeds of $ 219.7 million, net of underwriting discounts, commissions and other direct offering expenses.

Regulatory Information

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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 gain (loss), statutory surplus, contingency reserve and risk-to-capital (RTC) ratios as of and for the years ended December 31, 2019 , 2018 and 2017 were as follows:

The Wisconsin OCI has imposed a prescribed accounting practice for the treatment of statutory contingency reserves that differs from the treatment promulgated by the NAIC.

Under Wisconsin OCI's prescribed practice mortgage guaranty insurers are required to reflect changes in their contingency reserves through statutory income.

Such approach contrasts with the NAIC's treatment, which records changes to contingency reserves directly to unassigned funds.

As a Wisconsin-domiciled insurer, NMIC's statutory net income reflects an expense associated with the change in its contingency reserve.

While such treatment impacts NMIC's statutory net income, it does not have an effect on the company's statutory capital position.

NMIC and Re One's combined statutory net income (loss), statutory surplus, contingency reserve, statutory capital and risk-to-capital (RTC) ratios as of and for the years ended December 31, 2020, 2019 and 2018 were as follows:

As of and for the year ended December 31,

2020 2019 2018

(In Thousands)

Statutory net gain (loss)

Statutory net (loss) gain $ ( 20,136 ) $ 15,233 $ ( 19,784 )

Statutory surplus 894,331 449,602 430,785

Contingency reserve 768,324 531,825 332,702

Statutory capital (1)

1,662,655 981,427 763,487

Risk-to-capital 11.7:1 15.8:1 13.1:1

Under applicable law in Wisconsin and 15 other states, mortgage insurers must maintain minimum amounts of statutory capital relative to RIF to continue to write new business.

(1) Represents the total of the statutory surplus and contingency reserve.

In June 2020, NMIH contributed approximately $445 million of capital to NMIC following completion of its common stock and senior notes offerings.

Under applicable law in Wisconsin and 15 other states, mortgage insurers must maintain minimum amounts of statutory capital relative to RIF to continue writing new business.

While formulations of minimum statutory capital may vary in each state, the most common measure allows for a maximum permitted RTC ratio of 25:1.

Wisconsin and certain other states, including California and Illinois, apply a substantially similar requirement referred to as minimum policyholders' position.

The NAIC's Mortgage Guaranty Insurance Working Group (the Working Group) was formed to discuss, develop and recommend changes to the solvency and market practices regulation of mortgage insurers, including changes to the Mortgage Guaranty Insurance Model Act (Model Act).

Proposed amendments to the Model Act include, among other changes, adoption of a risk-based capital model.

Following adoption by the

NMI HOLDINGS, INC.

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DECEMBER 31, 2020

NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and potentially others that do not, are expected to enact a portion or all of the revised Model Act, including the loan-level capital model.

The NAIC formed a Mortgage Guaranty Insurance Working Group (the Working Group) in 2012 to discuss, develop and recommend changes to the regulatory oversight and solvency standards of the mortgage insurance industry, including changes to the Mortgage Guaranty Insurance Model Act (Model Act).

The Working Group has proposed amendments to the Model Act that include, among other changes, adoption of a risk-based capital model.

If adopted by the NAIC, some or all of the 16 states that currently have minimum statutory capital requirements, and potentially others that do not, are expected to enact a portion or all of the revised Model Act, including the loan-level capital model.

As of December 31, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $ 19.4 billion and its RTC ratio was 12.0:1, significantly below applicable limits.

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Delaware corporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits.

As of December 31, 2019 , NMIH's shareholders' equity was approximately $ 930.4 million.

NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs.

NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs that may restrict their ability to pay dividends to NMIH.

Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels ( i.e.

, "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI.

Dividends in larger amounts ( i.e.

,"extraordinary" dividends), are subject to the Wisconsin OCI's prior approval.

Under Wisconsin law, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10 % of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31.

Dividends in larger amounts ( i.e .,"extraordinary" dividends), are subject to the Wisconsin OCI's prior approval.

Under Wisconsin law, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding twelve months exceeds the lesser of (i) 10 % of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the twelve-month period ending the preceding December 31.

NMIC and Re One have never paid dividends to NMIH.

NMIC and Re One have the capacity to pay aggregate ordinary dividends of $ 16.1 million to NMIH during the 12-month period ending December 31, 2020.

As an approved insurer under PMIERs, NMIC would be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs.

Re One has the capacity to pay aggregate ordinary dividends of $ 1.6 million to NMIH during the twelve-month period ending December 31, 2021.

NMIC reported a statutory net loss for the year ended December 31, 2020 and does not have the capacity to pay dividends to NMIH during the twelve-month period ended December 31, 2021 without prior approval from the Wisconsin OCI.

The Wisconsin OCI has approved the allocation of interest expense on the $ 400 million Notes and $ 110 million 2020 Revolving Credit Facility to NMIC, to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.

As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs.

In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs prior to paying any dividends, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs.

NMI HOLDINGS, INC.

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2020 Quarters 2020

First Second Third Fourth Year

(In Thousands, except per share data)

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Interest expense 2,744 5,941 7,796 7,906 24,387

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

(Gain) loss from change in fair value of warrant liability ( 5,959 ) 1,236 437 1,379 ( 2,907 )

Pre-tax income 72,156 34,977 49,357 61,616 218,106

Income tax expense 13,885 8,129 11,178 13,348 46,540

Income per share:

Net income $ 58,271 $ 26,848 $ 38,179 $ 48,268 $ 171,566

Basic earnings per share (1)

$ 0.85 $ 0.36 $ 0.45 $ 0.57 $ 2.20

Diluted earnings per share (1)

$ 0.74 $ 0.36 $ 0.45 $ 0.56 $ 2.13

Weighted average common shares outstanding - basic 68,563 73,617 84,805 84,956 78,023

Weighted average common shares outstanding - diluted 70,401 74,174 85,599 86,250 79,263

Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.

(1) Due to the use of weighted average shares outstanding when calculating EPS, the sum of quarterly per share data may not equal the per share data for the year.

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2019 Quarters 2019

First Second Third Fourth Year

(In Thousands, except per share data)

1 unchanged sentence

Net investment income 7,383 7,629 7,882 7,962 $ 30,856

Net realized investment gains (losses)

Net realized investment (losses) gains ( 187 ) ( 113 ) 81 264 $ 45

Other revenues 42 415 1,244 1,154 $ 2,855

3 unchanged sentences

Interest expense 3,061 3,071 2,979 2,974 $ 12,085

(Gain) loss from change in fair value of warrant liability

Loss (gain) from change in fair value of warrant liability 5,479 1,685 ( 1,139 ) 2,632 $ 8,657

Pre-tax income 38,974 50,958 63,932 62,789 $ 216,653

Income tax expense 6,075 11,858 14,169 12,594 $ 44,696

Income per share:

Net income $ 32,899 $ 39,100 $ 49,763 $ 50,195 $ 171,957

Basic earnings per share (1)

$ 0.49 $ 0.58 $ 0.73 $ 0.74 $ 2.54

Diluted earnings per share (1)

$ 0.48 $ 0.56 $ 0.69 $ 0.71 $ 2.47

Weighted average common shares outstanding - basic 66,692 67,590 67,849 68,140 67,573

Weighted average common shares outstanding - diluted 68,996 69,590 70,137 70,276 69,721

Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.

(1) Due to the use of weighted average shares outstanding when calculating EPS, the sum of quarterly per share data may not equal the per share data for the year.

NMI HOLDINGS, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 31, 2020

Subsequent Event

Quota share reinsurance

Effective January 1, 2021, NMIC entered into its fourth quota share reinsurance treaty with a broad panel of highly rated reinsurers (2021 QSR Transaction).

Under the 2021 QSR Transaction, NMIC will cede premiums earned related to 22.5 % of the risk on eligible policies written from January 1, 2021 through December 31, 2021, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20 % ceding commission, and a profit commission of up to 57.5 % that varies directly and inversely with ceded claims.

The 2021 QSR Transaction is scheduled to terminate on December 31, 2031.

NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement at December 31, 2026, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the reinsured risk.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 8. Financial Statements and Supplementary Data