What changed in this filing

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Item 1. Financial Statements

2021-11-03 compared with 2021-08-04 · 142 added, 102 removed, 639 unchanged (28% of the section changed)

1 unchanged sentence

INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020 6

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2021 and 2020 (Unaudited) 7

Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended June 30, 2021 and 2020 (Unaudited) 8

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (Unaudited) 10

Condensed Consolidated Balance Sheets as of September 30, 2021 (Unaudited) and December 31, 2020 6

Condensed Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended September 30, 2021 and 2020 (Unaudited) 7

Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended September 30, 2021 and 2020 (Unaudited) 8

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 (Unaudited) 10

Notes to Condensed Consolidated Financial Statements (Unaudited) 11

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

Assets (In Thousands, except for share data)

Fixed maturities, available-for-sale, at fair value (amortized cost of $1,954,187 and $1,730,835 as of June 30, 2021 and December 31, 2020, respectively) $ 1,994,280 $ 1,804,286

Cash and cash equivalents (including restricted cash of $4,159 and $5,555 as of June 30, 2021 and December 31, 2020, respectively) 68,080 126,937

Fixed maturities, available-for-sale, at fair value (amortized cost of $ 2,024,639 and $ 1,730,835 as of September 30, 2021 and December 31, 2020, respectively)

$ 2,054,419 $ 1,804,286

Cash and cash equivalents (including restricted cash of $ 3,572 and $ 5,555 as of September 30, 2021 and December 31, 2020, respectively)

97,260 126,937

Premiums receivable 58,499 49,779

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Common stock - class A shares, $ 0.01 par value;

85,703,487 and 85,163,039 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively (250,000,000 shares authorized) 857 852

85,743,638 and 85,163,039 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively ( 250,000,000 shares authorized)

Additional paid-in capital 948,395 937,872

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C ONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED)

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

For the three months ended September 30, For the nine months ended September 30,

2021 2020 2021 2020

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Net investment income 9,831 8,337 28,027 23,511

Net realized investment gains 12 711 12 639

Net realized investment gains (losses) 3 ( 4 ) 15 635

Other revenues 613 648 1,597 2,771

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Other comprehensive income (loss), net of tax:

Unrealized gains (losses) in accumulated other comprehensive gain (loss), net of tax expense (benefit) of $4,995 and $8,978 for the three months ended June 30, 2021 and 2020, and $(7,003) and $5,162 for the six months ended June 30, 2021 and 2020, respectively 18,790 33,773 ( 26,343 ) 19,418

Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $3 and $149 for the three months ended June 30, 2021 and 2020, and $3 and ($258) for the six months ended June 30, 2021 and 2020, respectively ( 10 ) ( 562 ) ( 10 ) 969

Unrealized (losses) gains in accumulated other comprehensive gain (loss), net of tax (benefit) expense of $( 2,165 ) and $ 2,494 for the three months ended September 30, 2021 and 2020, and $( 9,168 ) and $ 7,655 for the nine months ended September 30, 2021 and 2020, respectively

( 8,144 ) 9,381 ( 34,487 ) 28,799

Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $ 1 and $( 1 ) for the three months ended September 30, 2021 and 2020, and $ 3 and $( 258 ) for the nine months ended September 30, 2021 and 2020, respectively

( 2 ) 3 ( 12 ) 972

Other comprehensive income (loss), net of tax ( 8,146 ) 9,384 ( 34,499 ) 29,771

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Change in unrealized investment gains/losses, net of tax benefit of $ 11,997

— — — ( 45,133 ) — ( 45,133 )

Net income — — — — 52,891 52,891

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Change in unrealized investment gains/losses, net of tax expense of $ 4,992

— — — 18,780 — 18,780

Net income — — — — 57,522 57,522

Balances, June 30, 2021 85,703 $ 857 $ 944,121 $ 27,503 $ 487,424 $ 1,459,905

* During the three months ended March 31, 2021, we issued 23,750 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.

During the three months ended June 30, 2021, we issued 8,096 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.

Common stock:

class A shares issued related to warrants 28 * 603 — — 603

Common stock:

class A shares issued under stock plans, net of shares withheld for employee taxes 12 * ( 45 ) — — ( 45 )

Share-based compensation expense — — 3,716 — — 3,716

Change in unrealized investment gains/losses, net of tax benefit of $ 2,166

— — — ( 8,146 ) — ( 8,146 )

Net income — — — 60,193 60,193

Balances, September 30, 2021 85,743 $ 857 $ 948,395 $ 19,357 $ 547,617 $ 1,516,226

* During the three months ended March 31, 2021 and June 30, 2021, we issued 23,750 and 8,096 common shares, respectively, with a par value of $ 0.01 in connection with the exercise of warrants, which are not identifiable in this schedule due to rounding.

During the three months ended September 30, 2021, we issued 27,715 common shares with a par value of $ 0.01 in connection with the exercise of warrants, and 12,436 common shares with a par value of $ 0.01 in connection with the exercise of options and vesting of restricted stock units granted under our stock plans, which are not identifiable in this schedule due to rounding.

NMI HOLDINGS, INC.

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Change in unrealized investment gains/losses, net of tax benefit of $ 3,409

— — — ( 12,824 ) — ( 12,824 )

Net income — — — — 58,271 58,271

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Common stock:

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

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

Common stock:

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Change in unrealized investment gains/losses, net of tax expense of $ 8,829

— — — 33,211 — 33,211

Net income — — — — 26,848 26,848

Balances, June 30, 2020 84,805 $ 848 $ 927,950 $ 37,675 $ 290,564 $ 1,257,037

Common stock:

class A shares issued under stock plans, net of shares withheld for employee taxes 4 * — — — —

Share-based compensation expense — — 2,956 — — 2,956

Change in unrealized investment gains, net of tax expense of $ 2,494

— — — 9,384 — 9,384

Net income — — — — 38,179 38,179

Balances, September 30, 2020 84,809 $ 848 $ 930,906 $ 47,059 $ 328,743 $ 1,307,556

* During the three months ended March 31, 2020, we issued 6,474 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.

During three months ended June 30, 2020, we issued 61,226 common shares, with a par value of $ 0.01 in connection with shares issued under stock plan, which is not identifiable in this schedule due to rounding.

During the three months ended June 30, 2020 and September 30, 2020, we issued 61,226 and 3,750 common shares, respectively, with a par value of $ 0.01 in connection with the exercise of options and vesting of restricted stock units granted under our stock plans, which are not identifiable in this schedule due to rounding.

See accompanying notes to condensed consolidated financial statements (unaudited).

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the six months ended June 30,

For the nine months ended September 30,

Cash flows from operating activities (In Thousands)

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Net realized investment gains ( 15 ) ( 635 )

Gain (loss) from change in fair value of warrant liability ( 453 ) ( 4,723 )

Gain from change in fair value of warrant liability ( 454 ) ( 4,286 )

Depreciation and amortization 8,250 7,378

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Actual results could differ from those estimates.

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

The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2021.

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and poses significant risk globally.

The path and pace of global economic recovery will depend, in large part, on the course of the virus (including the newly emergent Delta variant), which itself remains unknown and subject to risk.

The path and pace of global economic recovery will depend, in large part, on the course of the virus, which itself remains unknown and subject to risk.

Given this uncertainty, we are not able to fully assess or estimate the ultimate impact COVID-19 will have 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 at this time.

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(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, October 29, 2020 and April 27, 2021, 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

We evaluated the VIEs at inception to determine whether NMIC

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 reinsurance transaction and, if so, whether we were required to consolidate the assets and liabilities of each VIE.

was the primary beneficiary under each reinsurance transaction 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.

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Cost Gross Unrealized Fair

As of June 30, 2021 (In Thousands)

As of September 30, 2021 (In Thousands)

Treasury securities and obligations of U.S.

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

We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2021 o r December 31, 2020.

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2021 and December 31, 2020:

June 30, 2021 December 31, 2020

We did not own any mortgage-backed securities i n our asset-backed securities portfolio at September 30, 2021 o r December 31, 2020.

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of September 30, 2021 and December 31, 2020:

September 30, 2021 December 31, 2020

Financial 38 % 37 %

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Communications 12 10

Utilities 10 11

Technology 10 10

Utilities 10 11

Industrial 7 9

Total 100 % 100 %

As of June 30, 2021 and December 31, 2020, approximately $ 5.6 million and $ 5.7 million, respectively, of our cash and investments were held in the form of U.S.

As of September 30, 2021 and December 31, 2020, approximately $ 5.6 million and $ 5.7 million, respectively, of our cash and investments were held in the form of U.S.

Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements.

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Scheduled Maturities

The amortized cost and fair value of available-for-sale securities as of June 30, 2021 and December 31, 2020, by contractual maturity, are shown below.

The amortized cost and fair value of available-for-sale securities as of September 30, 2021 and December 31, 2020, by contractual maturity, are shown below.

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

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

As of June 30, 2021 Amortized

As of September 30, 2021 Amortized

(In Thousands)

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Aging of Unrealized Losses

As of June 30, 2021, the investment portfolio had gross unrealized losses of $ 9.0 million, none of which had been in an unrealized loss position for a period of twelve months or longer.

As of September 30, 2021, the investment portfolio had gross unrealized losses of $ 13.3 million, of which $ 1.3 million had been in an unrealized loss position for a period of twelve months or longer.

As of December 31, 2020, the investment portfolio had gross unrealized losses of $ 512 thousand, of which $ 8 thousand had been in an unrealized loss position for a period of twelve months or longer.

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

As of June 30, 2021 (Dollars in Thousands)

As of September 30, 2021 (Dollars in Thousands)

Municipal debt securities 116 $ 223,105 $ ( 2,735 ) — $ — 116 $ 223,105 $ ( 2,735 )

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Allowance for credit losses

As of June 30, 2021 and 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 three or six month periods ended June 30, 2021 or June 30, 2020.

The increase in the number of securities in and the aggregate size of the unrealized loss position as of June 30, 2021, was primarily driven by interest rate movements following the purchase date of certain securities.

Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities.

As of September 30, 2021 and 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 three or nine month periods ended September 30, 2021 or September 30, 2020.

The increase in the number of securities in and the aggregate size of the unrealized loss position as of September 30, 2021, was primarily driven by interest rate movements following the purchase date of certain securities.

Based on current facts and circumstances, we believe the unrealized losses as of September 30, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities.

Net Investment Income

The following table presents the components of net investment income:

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

For the three months ended September 30, For the nine months ended September 30,

2021 2020 2021 2020

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The following table presents the components of net realized investment losses:

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

For the three months ended September 30, For the nine months ended September 30,

2021 2020 2021 2020

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Gross realized investment losses — ( 4 ) — ( 4,491 )

Net realized investment gains $ 12 $ 711 $ 12 $ 639

Net realized investment gains (losses) $ 3 $ ( 4 ) $ 15 $ 635

Fair Value of Financial Instruments

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(Level 3) Fair Value

As of June 30, 2021 (In Thousands)

As of September 30, 2021 (In Thousands)

Treasury securities and obligations of U.S.

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

There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the six months ended June 30, 2021, or the year ended December 31, 2020.

There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the nine months ended September 30, 2021, or the year ended December 31, 2020.

NMI HOLDINGS, INC.

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

For the six months ended June 30,

For the nine months ended September 30,

Warrant Liability 2021 2020

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Issuance of common stock on warrant exercise ( 945 ) ( 220 )

Balance, June 30 $ 3,385 $ 2,698

Balance, September 30 $ 3,010 $ 3,135

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

As of June 30,

As of September 30,

Common stock price $ 22.61 $ 17.80

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Dividend yield 0 % 0 %

The changes in fair value of the warrant liability for the six months ended June 30, 2021 and 2020 were driven by the exercise of outstanding warrants, as well as changes in the price of our common stock and other Black-Scholes model inputs during the respective periods.

The changes in fair value of the warrant liability for the nine months ended September 30, 2021 and 2020 were driven by the exercise of outstanding warrants, as well as changes in the price of our common stock and other Black-Scholes model inputs during the respective periods.

Financial Instruments not Measured at Fair Value

On June 19, 2020, we issued $ 400.0 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 June 30, 2021, the Notes were carried at a cost of $ 393.9 million, net of unamortized debt issuance costs of $ 6.1 million, and had a fair value of $ 459.3 million as assessed under our Level 2 hierarchy.

At September 30, 2021, the Notes were carried at a cost of $ 394.3 million, net of unamortized debt issuance costs of $ 5.7 million, and had a fair value of $ 457.0 million as assessed under our Level 2 hierarchy.

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.

Senior Secured Notes

At June 30, 2021, we had $ 400.0 million aggregate principal amount of senior secured notes outstanding.

At September 30, 2021, we had $ 400.0 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.

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

At June 30, 2021 and December 31, 2020, approximately $ 6.1 million and $ 6.7 million, respectively, of unamortized debt issuance costs remained.

Interest expense for the three and six months ended June 30, 2020 includes $ 2.6 million of costs related to the extinguishment of the 2018 Term Loan and the issuance of the Notes.

At June 30, 2021 and December 31, 2020, $ 2.5 million of accrued and unpaid interest on the Notes was included in "Accounts Payable and Accrued Expenses" on our condensed consolidated balance sheet.

At September 30, 2021 and December 31, 2020, approximately $ 5.7 million and $ 6.7 million, respectively, of unamortized debt issuance costs remained.

Interest expense for the nine months ended September 30, 2020 includes $ 2.6 million of costs related to the extinguishment of the 2018 Term Loan and the issuance of the Notes.

At September 30, 2021 and December 31, 2020, $ 9.8 million and $ 2.5 million, respectively, of accrued and unpaid interest on the Notes was included in "Accounts Payable and Accrued Expenses" on our condensed consolidated balance sheet.

2020 Revolving Credit Facility

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All other terms remained unchanged.

As of June 30, 2021, no amounts were drawn under the 2020 Revolving Credit Facility.

As of September 30, 2021, 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 June 30, 2021, the applicable commitment fee was 0.35 %.

For the three and six months ended June 30, 2021, we recorded $ 0.1 million and $ 0.2 million of commitment fees in interest expense, respectively.

As of September 30, 2021, the applicable commitment fee was 0.35 %.

For the three and nine months ended September 30, 2021, we recorded $ 0.1 million and $ 0.3 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 June 30, 2021, remaining unamortized deferred debt issuance costs were $ 0.8 million.

At September 30, 2021, remaining unamortized deferred debt issuance costs were $ 0.7 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 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 at June 30, 2021.

We were in compliance with all covenants at September 30, 2021.

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.

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

For the three months ended For the six months ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

For the three months ended For the nine months ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

(In Thousands)

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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 $ 250 thousand per year, except with respect to Oaktown Re Ltd., for which the cap is $ 300 thousand per year).

NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $ 10.2 million and $ 19.6 million during the three and six months ended June 30, 2021, respectively, and $ 3.3 million and $ 7.1 million during the three and six months ended June 30, 2020, respectively.

NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $ 10.4 million and $ 30.0 million during the three and nine months ended September 30, 2021, respectively, and $ 6.3 million and $ 13.4 million during the three and nine months ended September 30, 2020, respectively.

The increase in premiums ceded during the respective periods year-on-year is due to the inception of the excess-of-loss reinsurance agreements that NMIC entered in with Oaktown Re IV Ltd., Oaktown Re V Ltd.

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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 three and six months ended June 30, 2021 and 2020, as the aggregate first layer risk retention for each applicable agreement was not exhausted during such periods.

NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the three and nine months ended September 30, 2021 and 2020, as the aggregate first layer risk retention for each applicable agreement was not exhausted 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.

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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).

A Lock-Out Event was deemed to have occurred, effective June 25, 2020 for each of the 2017, 2018 and 2019 ILN Transactions (related to the default experience of the underlying reference pools for each respective transaction) and at inception of the 2021-1 ILN Transaction (related to the initial build of its target credit enhancement), and the amortization of reinsurance

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction.

of the 2021-1 ILN Transaction (related to the initial build of its target credit enhancement), 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 p eriod, 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 June 30, 2021.

Current amounts are presented as of September 30, 2021.

( $ values in thousands)

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(3) Approximately 1 % of the production covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020.

(4) As of June 30, 2021, the current reinsurance coverage amount on the 2021-1 ILN transaction is equal to the initial reinsurance coverage, as the reinsurance coverage provided by Oaktown Re will not decrease until its target credit enhancement is met.

(4) As of September 30, 2021, the current reinsurance coverage amount on the 2021-1 ILN transaction is equal to the initial reinsurance coverage, as the reinsurance coverage provided by Oaktown Re will not decrease until its target credit enhancement is met.

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.

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Under the terms of the 2018, 2019 and 2020-1 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 condensed consolidated balance sheet includes restricted amounts of $ 4.2 million and $ 5.6 million as of June 30, 2021 and December 31, 2020, respectively.

"Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $ 3.6 million and $ 5.6 million as of September 30, 2021 and December 31, 2020, respectively.

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.

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The following table shows amounts related to the QSR Transactions:

For the three months ended For the six months ended

June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020

For the three months ended For the nine months ended

September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020

(In Thousands)

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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 $ 4.7 million as of June 30, 2021.

The reinsurance recoverable on loss reserves related to the 2016 QSR Transaction was $ 4.8 million as of September 30, 2021.

In accordance with the terms of the 2018, 2020 and 2021 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.

1 unchanged sentence

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 aggregate reinsurance recoverable on loss reserves related to the 2018, 2020 and 2021 QSR Transactions was $ 15.0 million as of June 30, 2021.

The aggregate reinsurance recoverable on loss reserves related to the 2018, 2020 and 2021 QSR Transactions was $ 15.6 million as of September 30, 2021.

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

1 unchanged sentence

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 June 30, 2021, we did not recognize any allowance for credit loss with respect to our reinsurance recoverable.

As of September 30, 2021, we did not recognize any allowance for credit loss with respect to our reinsurance recoverable.

Reserves for Insurance Claims and Claim Expenses

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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.

As of June 30, 2021, we had 8,764 primary loans in default and held gross reserves for insurance claims and claim expenses of $ 101.2 million.

During the six months ended June 30, 2021, we paid 35 claims totaling $ 1.3 million, including 34 claims covered under the QSR Transactions representing $ 0.3 million of ceded claims and claim expenses.

As of September 30, 2021, we had 7,670 primary loans in default and held gross reserves for insurance claims and claim expenses of $ 104.6 million.

During the nine months ended September 30, 2021, we paid 59 claims totaling $ 2.0 million, including 57 claims covered under the QSR Transactions representing $ 0.4 million of ceded claims and claim expenses.

In 2013, we entered into a pool insurance transaction with Fannie Mae.

The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims.

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

At June 30, 2021, 156 loans in the pool were in default.

We only establish

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

156 loans represented approximately $ 13.4 million of RIF.

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 had loan-to-value (LTV) ratios under 80 % at origination), we did not establish any case or IBNR reserves for pool risk at June 30, 2021.

In connection with the settlement of pool claims, we applied $ 1.0 million to the pool deductible through June 30, 2021.

At June 30, 2021, the remaining pool deductible was $ 9.4 million.

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

At September 30, 2021, 121 loans in the pool were in default.

These 121 loans represented approximately $ 9.9 million of RIF.

In connection with the settlement of pool claims, we applied $ 1.0 million to the pool deductible through September 30, 2021.

At September 30, 2021, the remaining pool deductible was $ 9.4 million.

We have not paid any pool claims to date.

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

We had 8,764 loans in default in our primary insured portfolio as of June 30, 2021, which represented a 1.86 % default rate against 471,794 to tal policies in-force.

We had 10,816 loans in default in our primary insured portfolio as of June 30, 2020, which represented a 2.90 % default rate against 372,934 total policies in-force.

Although our default count declined from June 30, 2020 to June 30, 2021, the population remains elevated compared to our historical experience due to the continued challenges certain 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.

We had 7,670 loans in default in our primary insured portfolio as of September 30, 2021, which represented a 1.56 % default rate against 490,714 to tal policies in-force.

We had 13,765 loans in default in our primary insured portfolio as of September 30, 2020, which represented a 3.60 % default rate against 381,899 total policies in-force.

Although our default count declined from September 30, 2020 to September 30, 2021, the population remains elevated compared to our historical experience due to the continued challenges certain 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.

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

At June 30, 2020 and 2021, 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.

At September 30, 2020 and 2021, we generally 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.

NMI HOLDINGS, INC.

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

For the six months ended June 30,

For the nine months ended September 30,

(In Thousands)

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For example, if a loan defaulted in a prior year and subsequently cured and later re-defaulted in the current year, the default would be included in the current year.

Amounts are presented net of reinsurance and included $ 9.8 million attributed to net case reserves and $ 5.6 million attributed to net IBNR reserves for the six months ended June 30, 2021 and $ 34.7 million attributed to net case reserves and $ 7.1 million attributed to net IBNR reserves for the six months ended June 30, 2020.

Amounts are presented net of reinsurance and included $ 14.0 million attributed to net case reserves and $ 4.8 million attributed to net IBNR reserves for the nine months ended September 30, 2021 and $ 55.4 million attributed to net case reserves and $ 4.8 million attributed to net IBNR reserves for the nine months ended September 30, 2020.

(3) Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year.

Amounts are presented net of reinsurance and included $ 1.1 million attributed to net case reserves and $ 5.0 million attributed to net IBNR reserves for the six months ended June 30, 2021 and $ 1.1 million attributed to net case reserves and $ 1.3 million attributed to net IBNR reserves for the six months ended June 30, 2020.

Amounts are presented net of reinsurance and included $ 1.8 million attributed to net case reserves and $ 5.0 million attributed to net IBNR reserves for the nine months ended September 30, 2021 and $ 4.0 million attributed to net case reserves and $ 1.3 million attributed to net IBNR reserves for the nine months ended September 30, 2020.

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.

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 $ 81.8 million related to prior year defaults remained as of June 30, 2021.

Gross reserves of $ 80.6 million related to prior year defaults remained as of September 30, 2021.

Earnings per Share (EPS)

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

For the three months ended September 30, For the nine months ended September 30,

2021 2020 2021 2020

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Anti-dilutive shares 1 420 2 91

We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012, of which 271 thousand remained outstanding available for exercise at June 30, 2021.

We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012, of which 239 thousand remained outstanding available for exercise at September 30, 2021.

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

The warrants were issued with an aggregate fair value of $ 5.1 million.

During the three months ended June 30, 2021, 14 thousand warrants were exercised resulting in the issuance of eight thousand shares of common stock.

During the three months ended September 30, 2021, 32 thousand warrants were exercised resulting in the issuance of 28 thousand shares of common stock.

Upon exercise, we reclassified approximately $ 0.4 million of warrant fair value from warrant liability to additional paid-in capital.

During the six months ended June 30, 2021, 41 thousand warrants were exercised resulting in the issuance of 32 thousand shares of common stock.

During the nine months ended September 30, 2021, 73 thousand warrants were exercised resulting in the issuance of 60 thousand shares of common stock.

Upon exercise, we reclassified approximately $ 0.9 million of warrant fair value from warrant liability to additional paid-in capital.

During the three months ended June 30, 2020, no warrants were exercised.

During the six months ended June 30, 2020, nine thousand warrants were exercised resulting in the issuance of six thousand shares of common stock.

During the three months ended September 30, 2020, no warrants were exercised.

During the nine months ended September 30, 2020, nine thousand warrants were exercised resulting in the issuance of six thousand shares of common stock.

Upon exercise, we reclassified approximately $ 0.2 million of warrant fair value from warrant liability to additional paid-in capital.

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

Our effective tax rate on our pre-tax income was 21.9 % and 21.8 % for the three and six months ended June 30, 2021, respectively, compared to 23.2 % and 20.5 % for the three and six months ended June 30, 2020, respectively.

Our effective tax rate on our pre-tax income was 22.3 % and 21.9 % for the three and nine months ended September 30, 2021, respectively, compared to 22.6 % and 21.2 % for the three and nine months ended September 30, 2020, respectively.

Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rate for a given year.

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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), and only 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, our interim provision for income taxes for the three and six months ended June 30, 2021 represents a change in our net deferred tax liability.

As of June 30, 2021 and December 31, 2020, we held $ 46.4 million of tax and loss bonds in "Other assets" on our condensed consolidated balance sheet.

As a result, our interim provision for income taxes for the three and nine months ended September 30, 2021 represents a change in our net deferred tax

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

As of September 30, 2021 and December 31, 2020, we held $ 46.4 million of tax and loss bonds in "Other assets" on our condensed consolidated balance sheet.

Premium Receivable

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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 June 30, 2021 and 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 establish a reserve for the write-off of premiums receivable based on historical experience.

Our premium write-off reserve was not material at June 30, 2021 or December 31, 2020.

Our premium write-off reserve was not material at September 30, 2021 or December 31, 2020.

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 generated combined statutory net income of $ 8.8 million and $ 15.1 million for the three and six months ended June 30, 2021, respectively, and combined statutory net loss of $ 24.7 million and $ 17.0 million for the three and six months ended June 30, 2020, respectively.

NMIC and Re One generated combined statutory net income of $ 8.7 million and $ 23.9 million for the three and nine months ended September 30, 2021, respectively, and combined statutory net loss of $ 5.6 million and $ 22.6 million for the three and nine months ended September 30, 2020, respectively.

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.

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The following table presents NMIC and Re One's combined statutory surplus, contingency reserve, statutory capital and risk-to-capital (RTC) ratio:

June 30, 2021 December 31, 2020

September 30, 2021 December 31, 2020

(In Thousands)

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

NMIC and Re One are subject to certain 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.

Re One has the capacity to pay $ 1.6 million of aggregate ordinary dividends 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

NMIC and Re One are subject to certain rules and regulations prescribed by jurisdictions in which they are authorized to

NMI HOLDINGS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

period ended December 31, 2021 without prior approval from the Wisconsin OCI.

operate and the GSEs that may restrict their ability to pay dividends to NMIH.

Re One has the capacity to pay $ 1.6 million of aggregate ordinary dividends 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.

Neither Re One nor NMIC have ever paid dividends to NMIH.

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On June 30, 2021, the GSEs updated the temporary PMIERs guidance to permit approved insurers to pay dividends without securing prior approval if certain prescribed financial requirements are met during the period from July 1, 2021 to December 31, 2021.

Subsequent Event

Excess-of-loss reinsurance

On October 26, 2021, NMIC entered into a reinsurance agreement with Oaktown Re VII Ltd.

(Oaktown Re VII), a Bermuda domiciled special purpose reinsurer, that provides for up to $ 363.6 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies primarily written between April 1, 2021 and September 30, 2021.

For the reinsurance coverage period, NMIC will retain the first layer of $ 146.2 million of aggregate losses and Oaktown Re VII will then provide second layer coverage up to the outstanding reinsurance coverage amount.

NMIC will then retain losses in excess of the outstanding reinsurance coverage amount.

Oaktown Re VII financed the coverage by issuing mortgage insurance-linked notes in an aggregate principal amount of $ 363.6 million to unaffiliated investors.

The notes issued by Oaktown Re VII mature on April 25, 2034;

all proceeds raised were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re VII to NMIC under the reinsurance agreement.

Funds in the reinsurance trust account are required to be invested in high credit quality money market funds at all times.

We refer to NMIC's reinsurance agreement with and the insurance-linked notes issued by Oaktown Re VII as the 2021-2 ILN Transaction.

Under the terms of the 2021-2 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re VII for anticipated operating expenses (capped at $ 250,000 per year).

Quota share reinsurance

In October 2021, NMIC entered into two back-to-back quota share reinsurance treaties that will provide coverage for mortgage insurance policies to be written primarily in 2022 and 2023 (the “2022 QSR Transaction” and “2023 QSR Transaction”).

Under the terms of the 2022 and 2023 QSR Transactions, NMIC will cede premiums earned related to 20 % of the risk on eligible policies written between January 1, 2022 and December 31, 2023, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20 % ceding commission, and a profit commission of up to 62 % that varies directly and inversely with ceded claims.

If NMIC exhausts the aggregate risk written limit of the 2021 QSR Transaction prior to December 31, 2021, the 2022 QSR Transaction will automatically incept and NMIC will begin to cede risk on eligible policies under the treaty prior to January 1, 2022.

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-Q

Item 1. Financial Statements