NMI Holdings, Inc. 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm ( BDO USA, LLP ; San Francisco, CA ; PCAOB ID# 243 ) 94 Consolidated Balance Sheets as of December 31, 2021 and 2020 96 Consolidated Statements of Operations and Comprehensive Income for each of the years in the three-year period ended December 31, 2021 97 Consolidated Statements of Changes in Shareholders' Equity for each of the years in the three-year period ended December 31, 2021 98 Consolidated Statements of Cash Flows for each of the years in the three-year period ended December 31, 2021 99 Notes to Consolidated Financial Statements 100 93 Report of Independent Registered Public Accounting Firm Shareholders and Board of Directors of NMI Holdings, Inc. NMI Holdings, Inc. Emeryville, California Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of NMI Holdings, Inc. (the “Company”) as of December 31, 2021 and 2020, the related consolidated statements of operations and comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and financial statements schedules listed in the accompanying index (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2021 , in conformity with accounting principles generally accepted in the United States of America. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company's internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated February 15, 2022 expressed an unqualified opinion thereon. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters 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: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of 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 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 $103.6 million of reserve for insurance claims and claim expenses at December 31, 2021. 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, (ii) claim frequency which is the number of loans in default expected to result in a claim payment, and (iii) the beneficial impact of assistance programs. 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, claim frequency and 94 the beneficial impact of assistance programs. 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 reserve calculations which supported claim severity, claim frequency estimates and the beneficial impact of assistance programs. • 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 and management’s specialist, including assessment of the reasonableness of changes in assumptions and inputs used in developing claim severity, claim frequency and the beneficial impact of assistance programs, (ii) developing an independent estimate of the reserve for insurance claims and claims expense using company and historical mortgage industry data and comparing this independent estimate to management’s and management’s specialist’s estimated reserve and (iii) performing a retrospective review of the prior year reserve estimate against historical figures. /s/ BDO USA, LLP We have served as the Company's auditor since 2011. San Francisco, California February 15, 2022 95 NMI HOLDINGS, INC. CONSOLIDATED BALANCE SHEETS December 31, 2021 December 31, 2020 Assets (In Thousands, except for share data) Fixed maturities, available-for-sale, at fair value (amortized cost of $ 2,078,773 and $ 1,730,835 as of December 31, 2021 and December 31, 2020, respectively) $ 2,085,931 $ 1,804,286 Cash and cash equivalents (including restricted cash of $ 3,165 and $ 5,555 as of December 31, 2021 and December 31, 2020, respectively) 76,646 126,937 Premiums receivable 60,358 49,779 Accrued investment income 11,900 9,862 Prepaid expenses 3,530 3,292 Deferred policy acquisition costs, net 59,584 62,225 Software and equipment, net 32,047 29,665 Intangible assets and goodwill 3,634 3,634 Prepaid reinsurance premiums 2,393 6,190 Reinsurance recoverable 20,320 17,608 Other assets 94,238 53,188 Total assets $ 2,450,581 $ 2,166,666 Liabilities Debt $ 394,623 $ 393,301 Unearned premiums 139,237 118,817 Accounts payable and accrued expenses 72,000 61,716 Reserve for insurance claims and claim expenses 103,551 90,567 Reinsurance funds withheld 5,601 8,653 Warrant liability, at fair value 2,363 4,409 Deferred tax liability, net 164,175 112,586 Other liabilities 3,245 7,026 Total liabilities 884,795 797,075 Commitments and contingencies (see Note 14) Shareholders' equity Common stock - class A shares, $ 0.01 par value; 85,792,849 and 85,163,039 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively ( 250,000,000 shares authorized) 858 852 Additional paid-in capital 955,302 937,872 Accumulated other comprehensive income, net of tax 1,485 53,856 Retained earnings 608,141 377,011 Total shareholders' equity 1,565,786 1,369,591 Total liabilities and shareholders' equity $ 2,450,581 $ 2,166,666 See accompanying notes to consolidated financial statements. 96 NMI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME For the years ended December 31, 2021 2020 2019 (In Thousands, except for per share data) Revenues Net premiums earned $ 444,294 $ 397,172 $ 345,015 Net investment income 38,072 31,897 30,856 Net realized investment gains 729 930 45 Other revenues 1,977 3,284 2,855 Total revenues 485,072 433,283 378,771 Expenses Insurance claims and claim expenses 12,305 59,247 12,507 Underwriting and operating expenses 142,303 131,610 126,621 Service expenses 2,509 2,840 2,248 Interest expense 31,796 24,387 12,085 (Gain) loss from change in fair value of warrant liability ( 566 ) ( 2,907 ) 8,657 Total expenses 188,347 215,177 162,118 Income before income taxes 296,725 218,106 216,653 Income tax expense 65,595 46,540 44,696 Net income $ 231,130 $ 171,566 $ 171,957 Earnings per share Basic $ 2.70 $ 2.20 $ 2.54 Diluted $ 2.65 $ 2.13 $ 2.47 Weighted average common shares outstanding Basic 85,620 78,023 67,573 Diluted 86,885 79,263 69,721 Net income $ 231,130 $ 171,566 $ 171,957 Other comprehensive (loss) income, net of tax: Unrealized (losses) gains in accumulated other comprehensive income, net of tax (benefit) expense of $( 13,768 ), $ 9,525 and $ 8,548 for each of the years in the three-year period ended December 31, 2021, respectively ( 51,795 ) 35,829 32,155 Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $ 153 , $( 196 ) and $ 9 for each of the years in the three-years ended December 31, 2021, respectively ( 576 ) 739 ( 35 ) Other comprehensive (loss) income, net of tax ( 52,371 ) 36,568 32,120 Comprehensive income $ 178,759 $ 208,134 $ 204,077 See accompanying notes to consolidated financial statements. 97 NMI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY Common Stock - Class A Additional Paid-in Capital Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shares Amount (In Thousands) Balances, December 31, 2018 66,319 $ 663 $ 682,181 $ ( 14,832 ) $ 33,488 $ 701,500 Common stock: class A shares issued related to warrant exercises 289 3 8,309 — — 8,312 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 1,750 18 3,482 — — 3,500 Share-based compensation expense — — 13,031 — — 13,031 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 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 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 924 9 ( 99 ) — — ( 90 ) Share-based compensation expense — — 11,115 — — 11,115 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 Common stock: class A shares issued related to warrant exercises 86 1 1,982 — — 1,983 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 544 5 ( 1,230 ) — — ( 1,225 ) Share-based compensation expense — — 16,678 — — 16,678 Change in unrealized investment gains/losses, net of tax benefit of $ 13,921 — — — ( 52,371 ) — ( 52,371 ) Net income — — — — 231,130 231,130 Balances, December 31, 2021 85,793 $ 858 $ 955,302 $ 1,485 $ 608,141 $ 1,565,786 * 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. See accompanying notes to consolidated financial statements. 98 NMI HOLDINGS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, 2021 2020 2019 Cash flows from operating activities (In Thousands) Net income $ 231,130 $ 171,566 $ 171,957 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment gains ( 729 ) ( 930 ) ( 45 ) (Gain) loss from change in fair value of warrant liability ( 566 ) ( 2,907 ) 8,657 Depreciation and amortization 11,232 9,930 9,299 Net amortization of premium on investment securities 6,733 3,668 1,252 Amortization of debt discount and debt issuance costs 1,861 4,036 1,011 Deferred income taxes 65,510 46,506 45,082 Share-based compensation expense 16,678 11,115 13,031 Changes in operating assets and liabilities: Premiums receivable ( 10,579 ) ( 3,694 ) ( 10,078 ) Accrued investment income ( 2,038 ) ( 3,031 ) ( 1,137 ) Prepaid expenses ( 238 ) 220 ( 472 ) Deferred policy acquisition costs, net 2,641 ( 2,253 ) ( 13,132 ) Reinsurance recoverable ( 2,712 ) ( 12,669 ) ( 1,939 ) Other assets ( 42,833 ) ( 38,804 ) ( 8,831 ) Unearned premiums 20,420 ( 17,825 ) ( 22,251 ) Reserve for insurance claims and claim expenses 12,984 66,815 10,941 Reinsurance balances, net ( 683 ) 2,783 917 Accounts payable and accrued expenses 16,908 18,072 3,888 Net cash provided by operating activities 325,719 252,598 208,150 Cash flows from investing activities Purchase of short-term investments ( 10,640 ) ( 42,241 ) ( 230,362 ) Purchase of fixed-maturity investments, available-for-sale ( 514,405 ) ( 1,065,916 ) ( 290,533 ) Proceeds from maturity of short-term investments — 86,045 244,921 Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale 163,103 404,717 91,575 Software and equipment ( 12,238 ) ( 12,159 ) ( 9,956 ) Net cash used in investing activities ( 374,180 ) ( 629,554 ) ( 194,355 ) Cash flows from financing activities Proceeds from issuance of common stock related to public offering, net of issuance costs — 219,687 — Proceeds from issuance of common stock related to employee equity plans 4,201 8,871 21,748 Proceeds from issuance of common stock related to warrant exercises 503 — — Taxes paid related to net share settlement of equity awards ( 5,426 ) ( 8,961 ) ( 18,248 ) Proceeds from senior secured notes — 400,000 — Repayments of term loan — ( 147,750 ) ( 1,500 ) Payments of debt issuance costs ( 1,108 ) ( 9,043 ) — Net cash (used in) provided by financing activities ( 1,830 ) 462,804 2,000 Net (decrease) increase in cash, cash equivalents and restricted cash ( 50,291 ) 85,848 15,795 Cash, cash equivalents and restricted cash, beginning of period 126,937 41,089 25,294 Cash, cash equivalents and restricted cash, end of period $ 76,646 $ 126,937 $ 41,089 Supplemental disclosures of cash flow information Interest paid $ 29,500 $ 17,561 $ 10,691 Income taxes refunded 457 70 64 See accompanying notes to consolidated financial statements. 99 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 1. Organization and Basis of Presentation NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011 to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly-owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). Our common stock is listed on the NASDAQ exchange under the ticker symbol "NMIH." 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.). Re One historically provided reinsurance coverage to NMIC in accordance with certain statutory risk retention requirements. Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted. Re One remains a wholly-owned, licensed insurance subsidiary; however, it does not currently have active insurance exposures. 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. Basis of Presentation The accompanying consolidated financial statements include the results of NMIH and its wholly-owned subsidiaries. All inter-company transactions have been eliminated. These financial statements have been prepared in accordance with accounting principles generally accepted in the U.S. (GAAP) and our accounts are maintained in US dollars. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. COVID-19 Developments On January 30, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 a global health emergency and subsequently 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 severely curtailed day-to-day activity and local, state and federal regulators imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans were furloughed or laid-off in the ensuing downturn. The global dislocation caused by COVID-19 was unprecedented. In response to the COVID-19 outbreak and uncertainty that it introduced, we activated our disaster continuity program to ensure our employees were 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 expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration of the increased level of macroeconomic volatility. While the acute economic impact of COVID-19 has begun to recede, the pandemic continues to affect communities across the U.S. and poses significant risk globally. 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. CEO Transition On September 9, 2021, we announced that Adam Pollitzer, then the company’s Executive Vice President and Chief Financial Officer, was appointed as the company's President and Chief Executive Officer, effective January 1, 2022. Mr. Pollitzer also joined the company’s Board of Directors upon assuming his new role. He succeeded Claudia Merkle, who stepped down as Chief Executive Officer and as a member of the Board, effective December 31, 2021. We recorded $ 3.8 million of severance, restricted stock modification and other expenses related to this transition during the year ended December 31, 2021. 100 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 2. Summary of Accounting Principles Use of Estimates We use accounting principles and methods that conform to GAAP. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. Insurance Premium Revenue Recognition Premiums for primary mortgage insurance policies may be paid in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium), with such election and payment type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums and amortized into earnings over the estimated policy life, in accordance with the anticipated expiration of risk. Monthly premiums are recognized as revenue in the month billed and when the coverage is effective. 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 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 years ended December 31, 2021, 2020 and 2019 no customer accounted for more than 10% of our consolidated revenues. At December 31, 2021, December 31, 2020 and December 31, 2019 approximately 10 %, 11 % and 12 % 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 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. , associated with a specific claim) or unallocated ( i.e. , not associated with a specific claim). 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 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. Investments 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. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). See Note 4, " Fair Value of Financial Instruments " for further discussion. 101 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 Purchases and sales of investments are recorded on a trade date basis. Net investment income is recognized when earned, and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method, and is net of investment management fees and other investment related expenses. 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 prepayment assumptions are recognized on a prospective basis. We recognize an impairment on a security through the consolidated statement of operations and comprehensive income 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 ." 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 rating downgrades of the applicable security or issuer by one or more nationally recognized statistical ratings organization; and • 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 $ 11.9 million as of December 31, 2021 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 years ended December 31, 2021, 2020 or 2019. We consider items such as commercial paper with original maturities of 90 days or less to be short-term investments. Deferred Policy Acquisition Costs (DAC) Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of certain selling expenses and other policy issuance and underwriting expenses, are initially deferred and reported as DAC. 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 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, 2021, 2020 and 2019, net of a portion of the ceding commissions earned under our quota share reinsurance agreements (see " Reinsurance ", below ) , was $ 22.8 million, $ 19.1 million and $ 8.4 million, respectively. Premium Deficiency Reserves We consider whether a premium deficiency exists and premium deficiency reserve is required at each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs and maintenance costs exceeds future premiums, existing reserves and anticipated investment income. We have determined that no premium deficiency reserves were necessary for any of the years in the three-year period ended December 31, 2021. 102 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 Reinsurance 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), January 1, 2018 (the 2018 QSR Transaction), April 1, 2020 (the 2020 QSR Transaction), January 1, 2021 (the 2021 QSR Transaction), October 1, 2021 (the 2022 QSR Transaction), and effective January 1, 2023 (the 2023 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 "). Profit commissions represent a percentage of the profits recognized by reinsurers that are returned to us, based on the level of claims and claim expenses that we cede. 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, 2020, 2021, 2022, and 2023 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 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, 2021, we had $ 20.3 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. The allowance for credit loss established with respect to our reinsurance recoverables was deemed immaterial as of December 31, 2021 and 2020. Income Taxes We account for income taxes using the liability method in accordance with ASC Topic 740, Income Taxes . The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that would result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax expense in the consolidated statement of operations. Warrants We account for warrants to purchase our common shares in accordance with ASC 470-20, Debt with Conversion and Other Options and ASC 815-40 Derivatives and Hedging - Contracts in Entity's Own Equity . Our outstanding warrants may be settled through either (i) physical settlement method, or (ii) cashless exercise, where the number of shares issued upon exercise of the warrants is reduced to cover the cost of the exercise in lieu of the holder remitting a cash payment for the exercise price. The warrants expire and are not exercisable after the 10th anniversary of the date issued. The number of warrants and exercise price are subject to anti-dilution provisions whereby the number of warrants may be increased and their exercise price may be adjusted downward under certain circumstances. The anti-dilutive adjustments may be in excess of any dilution incurred by the warrant holders, and may be triggered by events that are not dilutive. As a result, the warrants are classified as a liability. We revalue the warrants at the end of each reporting period, and any change in fair value is reported in the statements of operations in the period in which the change occurred. We calculated the fair value of the warrants using a Black-Scholes option-pricing model in combination with a binomial model. Share-Based Compensation We account for stock compensation in accordance with ASC 718, Compensation - Stock Compensation , which addresses accounting for share-based awards and recognition of compensation expense, measured using grant date fair value, over the requisite service or performance period of the award. Share-based compensation includes restricted stock units (RSUs) and stock option grants under our Stock Plans. We calculate the fair value of stock option grants using a Black-Scholes option pricing model, which takes into account various subjective assumptions. Key assumptions used in the model include the expected volatility of our stock price, dividend yield and the risk-free interest rate, as well as the expected option term, giving consideration 103 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 to the contractual terms of any award. RSU grants may contain a service condition, or performance and service conditions. 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. Earnings per Share (EPS) Basic earnings (loss) per share is based on the weighted-average number of common shares outstanding. Diluted earnings (loss) per share is based on the weighted-average number of common shares outstanding and common share equivalents that would be issuable upon the vesting of existing service based and certain performance and service based RSUs, and exercise of vested and unvested stock options and outstanding warrants. Cash and Cash Equivalents We consider items such as certificates of deposit and money market funds with original maturities of 90 days or less to be cash equivalents. Software and Equipment We capitalize certain costs associated with the development of internal-use software and equipment. Software and equipment are stated at cost, less accumulated amortization and depreciation. Amortization of software and depreciation of equipment commences at the beginning of the month following our placement of the assets into use. Amortization and depreciation are calculated on a straight-line basis over the estimated useful life of the respective assets, typically from three to five years , unless factors indicate a shorter useful life. For further detail, see Note 12, " Software and Equipment. " Leases 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. 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 Goodwill represents the excess of the purchase price over the estimated fair value of net assets acquired from a business combination. In accordance with ASC 350, Intangibles - Goodwill and Other , we test goodwill for impairment during the third quarter each year, or more frequently if we believe indicators of impairment exist. We have no t identified any impairments of goodwill through December 31, 2021. Our intangible assets consist of state licenses and Fannie Mae and Freddie Mac (collectively, the GSEs) applications which have indefinite lives. We test indefinite-lived intangible assets for impairment during the fourth quarter of each year or more frequently if we believe indicators of impairment exist. We have no t identified any impairments of indefinite-lived intangible assets through December 31, 2021. Premiums Receivable 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 the allowance for credit loss established on premium receivables was deemed immaterial at December 31, 2021 or 2020. 104 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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 $ 2.3 million and $ 1.6 million at December 31, 2021 and 2020, respectively. Variable Interest Entities NMIC is a party to reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd., Oaktown Re V Ltd., Oaktown Re VI Ltd., and Oaktown Re VII 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, October 29, 2020, April 27, 2021, and October 26, 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 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 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. We concluded that we are not the primary beneficiary of each VIE and, as such, we do not consolidate them in our consolidated financial statements. See Note 6, " Reinsurance " for further discussion of the reinsurance arrangements. 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 December 2019, the Financial Accounting Standards Board (the FASB) issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). The 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. We adopted this ASU on January 1, 2021 and determined it did not have a material impact on our consolidated financial statements. Recent Accounting Pronouncements - Not Yet Adopted In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). The 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. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The update provides 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 during a transition period from 2021 through 2023. 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. This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. The adoption of, and future elections under, this ASU are not expected to have a material impact on our consolidated financial statements as the ASU will ease, if warranted, the requirements for accounting for the future effects of the rate reform. We continue to monitor the impact the discontinuance of LIBOR or another reference rate will have on our contracts and other transactions . 105 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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 ). The update simplifies the accounting for convertible instruments and contracts on an entity's own equity, including warrants, eliminating certain triggers for derivative accounting. We adopted this ASU on January 1, 2022 and determined it did not have a material impact on our consolidated financial statements, including our warrant liability. 3. Investments 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 consolidated statement of operations and comprehensive income as a "Net 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. Fair Values and Gross Unrealized Gains and Losses on Investments Amortized Cost Gross Unrealized Fair Value Gains Losses As of December 31, 2021 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 29,443 $ 981 $ — $ 30,424 Municipal debt securities 553,793 5,689 ( 5,404 ) 554,078 Corporate debt securities 1,388,204 22,990 ( 17,364 ) 1,393,830 Asset-backed securities 96,324 684 ( 427 ) 96,581 Total bonds 2,067,764 30,344 ( 23,195 ) 2,074,913 Short-term investments 11,009 9 — 11,018 Total investments $ 2,078,773 $ 30,353 $ ( 23,195 ) $ 2,085,931 Amortized Cost Gross Unrealized Fair Value Gains Losses As of December 31, 2020 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 29,412 $ 2,186 $ — $ 31,598 Municipal debt securities 407,323 14,027 ( 2 ) 421,348 Corporate debt securities 1,165,260 55,014 ( 483 ) 1,219,791 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 We did not own any mortgage-backed securities in our asset-backed securities portfolio at December 31, 2021 or 2020. The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of December 31, 2021 and 2020: 106 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 December 31, 2021 December 31, 2020 Financial 38 % 37 % Consumer 24 23 Communications 11 10 Utilities 10 11 Technology 9 10 Industrial 8 9 Total 100 % 100 % As of December 31, 2021 and 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. Scheduled Maturities The amortized cost and fair value of available-for-sale securities as of December 31, 2021 and 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 December 31, 2021 Amortized Cost Fair Value (In Thousands) Due in one year or less $ 81,699 $ 82,201 Due after one through five years 630,625 644,447 Due after five through ten years 1,215,224 1,207,997 Due after ten years 54,901 54,705 Asset-backed securities 96,324 96,581 Total investments $ 2,078,773 $ 2,085,931 As of December 31, 2020 Amortized Cost Fair Value (In Thousands) Due in one year or less $ 57,429 $ 57,949 Due after one through five years 507,444 536,520 Due after five through ten years 1,016,230 1,056,098 Due after ten years 21,261 22,539 Asset-backed securities 128,471 131,180 Total investments $ 1,730,835 $ 1,804,286 107 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 Aging of Unrealized Losses As of December 31, 2021, the investment portfolio had gross unrealized losses of $ 23.2 million, of which $ 6.5 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. 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, 2021 (Dollars in Thousands) Municipal debt securities 151 $ 314,823 $ ( 4,959 ) 2 $ 8,138 $ ( 445 ) 153 $ 322,961 $ ( 5,404 ) Corporate debt securities 114 653,488 ( 11,426 ) 20 146,003 ( 5,938 ) 134 799,491 ( 17,364 ) Asset-backed securities 11 57,601 ( 357 ) 1 1,977 ( 70 ) 12 59,578 ( 427 ) Total 276 $ 1,025,912 $ ( 16,742 ) 23 $ 156,118 $ ( 6,453 ) 299 $ 1,182,030 $ ( 23,195 ) 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 ) Corporate debt securities 9 40,081 ( 483 ) 1 33 — 10 40,114 ( 483 ) Asset-backed securities 2 5,191 ( 19 ) 1 2,495 ( 8 ) 3 7,686 ( 27 ) Total 15 $ 48,820 $ ( 504 ) 2 $ 2,528 $ ( 8 ) 17 $ 51,348 $ ( 512 ) Allowance for credit losses As of December 31, 2021 and 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 years ended December 31, 2021 or 2020. The increase in the number of securities in and the aggregate size of the unrealized loss position as of December 31, 2021, was primarily driven by interest rate movements following the purchase date of certain securities. We evaluated the securities in an unrealized loss position as of December 31, 2021 and assessed the credit ratings and any ratings changes as well as any adverse conditions specifically related to the security. Based on our estimate of the amount and timing of cash flows to be collected, we believe the unrealized losses as of December 31, 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 year ended December 31, 2021 2020 2019 (In Thousands) Investment income $ 39,385 $ 33,140 $ 31,332 Investment expenses ( 1,313 ) ( 1,243 ) ( 476 ) Net investment income $ 38,072 $ 31,897 $ 30,856 108 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 The following table presents the components of net realized investment gains: For the year ended December 31, 2021 2020 2019 (In Thousands) Gross realized investment gains $ 729 $ 5,572 $ 561 Gross realized investment losses — ( 4,642 ) ( 516 ) Net realized investment gains $ 729 $ 930 $ 45 4. Fair Value of Financial Instruments The following describes the valuation techniques used by us to determine the fair value of our financial instruments: We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below: Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments. Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. 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. Assets classified as Level 1 and Level 2 To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources. Liabilities classified as Level 3 We calculate the fair value of outstanding warrants utilizing Level 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price. 109 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 The following tables present the level within the fair value hierarchy at which our financial instruments were measured: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value As of December 31, 2021 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 30,424 $ — $ — $ 30,424 Municipal debt securities — 554,078 — 554,078 Corporate debt securities — 1,393,830 — 1,393,830 Asset-backed securities — 96,581 — 96,581 Cash, cash equivalents and short-term investments 87,664 — — 87,664 Total assets $ 118,088 $ 2,044,489 $ — $ 2,162,577 Warrant liability — — 2,363 2,363 Total liabilities $ — $ — $ 2,363 $ 2,363 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value As of December 31, 2020 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 31,598 $ — $ — $ 31,598 Municipal debt securities — 421,348 — 421,348 Corporate debt securities — 1,219,791 — 1,219,791 Asset-backed securities — 131,180 — 131,180 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 There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the years ended December 31, 2021 or 2020. The following table provides a roll-forward of Level 3 liabilities measured at fair value: For the year ended December 31, Warrant Liability 2021 2020 2019 (In Thousands) Balance, January 1 $ 4,409 $ 7,641 $ 7,296 Change in fair value of warrant liability included in earnings ( 566 ) ( 2,907 ) 8,657 Issuance of common stock on warrant exercise ( 1,480 ) ( 325 ) ( 8,312 ) Balance, December 31 $ 2,363 $ 4,409 $ 7,641 110 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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, 2021 2020 2019 Common stock price $ 21.85 $ 22.65 $ 33.18 Risk free interest rate 0.07 % 0.11 % 1.59 % Expected life 0.31 years 1.31 years 2.31 years Expected volatility 26.3 % 83.7 % 41.4 % Dividend yield — % — % — % The changes in fair value of the warrant liability for the years ended December 31, 2021, 2020, and 2019 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 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, 2021, the Notes were carried at a cost of $ 394.6 million, net of unamortized debt issuance costs of $ 5.4 million, and had a fair value of $ 454.6 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. 5. Debt Senior Secured Notes At December 31, 2021, 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 excess of the present value of the principal value of the Notes plus all future interest payments over the principal amount. 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, 2021 and 2020, approximately $ 5.4 million and $ 6.7 million, respectively, 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, 2021 and 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. 111 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 2021 Revolving Credit Facility On November 29, 2021, we amended our $ 110 million senior secured revolving credit facility (the 2020 Revolving Credit Facility and as amended, the 2021 Revolving Credit Facility), expanding the lender group, increasing the revolving capacity to $ 250 million, and extending the maturity from February 22, 2023 to the earlier of (x) November 29, 2025, or (y) if any existing senior secured notes remain outstanding on such date, February 28, 2025. Borrowings under the 2021 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 the 2021 Revolving Credit Facility) subject to a floor of 1.00 % per annum) plus a margin of 0.375 % to 1.875 % per annum or (ii) the Adjusted Term SOFR Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375 % to 2.875 % per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. As of December 31, 2021 and 2020, no amounts were drawn under the 2021 or 2020 Revolving Credit Facilities, respectively. Under the 2021 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, 2021, the applicable commitment fee was 0.35 %. For the year ended December 31, 2021, we recorded $ 0.4 million of commitment fees in interest expense. We incurred debt issuance costs of $ 1.1 million in connection with the 2021 Revolving Credit Facility, and had $ 0.6 million of unamortized debt issuance costs associated with the 2020 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 2021 Revolving Credit Facility. At December 31, 2021, remaining unamortized deferred debt issuance costs were $ 1.6 million. We are subject to certain covenants under the 2021 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35 %, 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 at December 31, 2021. 6. Reinsurance 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, 2021 December 31, 2020 December 31, 2019 (In Thousands) Net premiums written Direct $ 557,050 $ 455,172 $ 376,052 Ceded (1) ( 88,539 ) ( 66,528 ) ( 43,400 ) Net premiums written $ 468,511 $ 388,644 $ 332,652 Net premiums earned Direct $ 536,630 $ 472,998 $ 398,303 Ceded (1) ( 92,336 ) ( 75,826 ) ( 53,288 ) Net premiums earned $ 444,294 $ 397,172 $ 345,015 (1) Net of profit commission. Excess-of-loss reinsurance NMIC is party to reinsurance agreements with the Oaktown Re Vehicles that provide it with aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies. Under each agreement, NMIC retains a first layer of 112 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts. 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 $ 41.3 million, $ 22.8 million and $ 14.6 million during the years ended December 31, 2021, 2020 and 2019, respectively. The increase in premiums ceded year-on-year is due to the inception of the excess-of-loss reinsurance agreements that NMIC entered in with Oaktown Re IV Ltd. and Oaktown Re V Ltd. in 2020 and Oaktown Re VI Ltd. and Oaktown VII Ltd. in 2021. 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, 2021, 2020 and 2019, 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. Such trust funds are required to be invested in short-term U.S. Treasury money market funds at all times. 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 ten years from the inception date of each reinsurance agreement (except the notes issued by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which have a 12.5 year maturity). We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Vehicles individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction, 2020-2 ILN Transaction, 2021-1 ILN Transaction, and 2021-2 ILN Transaction, and collectively as the ILN Transactions. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled (except the coverage provided by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which decreases over a 12.5 year period). As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re 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). 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 and 2021-2 ILN Transactions (related to the initial build of their target credit enhancement levels), and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each such 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 such 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. Effective November 30, 2021, the Lock-Out Event for the 2017 ILN Transaction was deemed to have cleared and amortization of the associated reinsurance coverage, and distribution of collateral assets and amortization of the associated insurance-linked notes resumed. 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, 2021. ( $ values in thousands) 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 $ 27,425 $ 126,793 $ 121,163 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 122,569 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,548 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 49,879 169,514 169,488 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 155,129 121,777 121,177 2021-1 ILN Transaction (5) April 27, 2021 10/1/2020 - 3/31/2021 (3) 367,238 367,238 163,708 163,708 2021-2 ILN Transaction (5) October 26, 2021 4/1/2021 - 9/30/2021 (4) 363,596 363,596 146,229 146,229 113 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 (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) Approximately 1 % of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020. (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) Approximately 2 % of the production covered by the 2021-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2021. (5) As of December 31, 2021, the current reinsurance coverage amount on the 2021-1 ILN and 2021-2 ILN Transactions is equal to the initial reinsurance coverage amount, as the reinsurance coverage provided by the associated Oaktown Re vehicles will not decrease until a target credit enhancement level 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. 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, 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 consolidated balance sheet includes restricted amounts of $ 3.2 million and $ 5.6 million as of December 31, 2021 and 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. Quota share reinsurance NMIC is a party to five active 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, the 2021 QSR Transaction, effective January 1, 2021 and the 2022 QSR Transaction, effective October 1, 2021 – which we refer to collectively as the QSR Transactions. 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. Each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (A.M. Best) or both. 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 recapturing the related risk. 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 recapturing the related risk. 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. Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5 % of the risk on eligible policies written in 2021, subject to an aggregate risk written limit which was exhausted on October 30, 2021. 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 as of December 31, 2024, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk. Under the terms of the 2022 QSR Transaction, NMIC cedes premiums earned related to 20 % of the risk on eligible policies written primarily between October 30, 2021 and December 31, 2022. The 2022 QSR Transaction is scheduled to 114 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 terminate on December 31, 2032. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2024 or semi-annually thereafter, which would result in NMIC recapturing the related risk. In connection with the 2022 QSR Transaction, NMIC entered into an additional back-to-back quota share agreement that is scheduled to incept on January 1, 2023 (the 2023 QSR Transaction). Under the terms of the 2023 QSR Transactions, NMIC will cede premiums earned related to 20 % of the risk on eligible policies written in 2023. The 2023 QSR Transaction is scheduled to terminate on December 31, 2033. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2025 or semi-annually 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. , reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis ( i.e. , the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement. Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $ 500 million of previously ceded primary RIF and stopped ceding new premiums earned or written with respect to the recaptured risk. With the termination, ceded premiums written under the 2016 QSR Transaction decreased from 25 % to 20.5 % on eligible policies. The termination has no effect on the cession of pool risk under the 2016 QSR Transaction. The following table shows amounts related to the QSR Transactions: For the year ended December 31, 2021 December 31, 2020 December 31, 2019 (In Thousands) Ceded risk-in-force $ 8,194,604 $ 5,543,969 $ 5,137,249 Ceded premiums earned ( 110,140 ) ( 94,899 ) ( 89,211 ) Ceded claims and claim expenses 3,233 14,002 3,465 Ceding commission earned 23,473 18,526 17,652 Profit commission 59,104 41,902 50,513 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 all other 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, 2018, 2020, 2021 and 2022 QSR Transactions, generally remain below 60 %, 61 %, 50 %, 57.5 % and 62 %, 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. In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. 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 $ 4.6 million as of December 31, 2021. In accordance with the terms of the 2016, 2018, 2020, 2021 and 2022 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 aggregate reinsurance recoverable on loss reserves related to the 2018, 2020, 2021 and 2022 QSR Transactions was $ 15.7 million as of December 31, 2021. 115 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 7. Reserves for Insurance Claims and Claim Expenses 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. 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. As of December 31, 2021, we had 6,227 primary loans in default and held gross reserves for insurance claims and claim expenses of $ 103.6 million. During the year ended December 31, 2021, we paid 82 claims totaling $ 2.6 million, including 79 claims covered under the QSR Transactions representing $ 0.5 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 December 31, 2021, 96 loans in the pool were in default. These 96 loans represented approximately $ 7.3 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 December 31, 2021. In connection with the settlement of pool claims, we applied $ 1.0 million to the pool deductible through December 31, 2021. At December 31, 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 6,227 loans in default in our primary insured portfolio as of December 31, 2021 which represented a 1.22 % default rate against 512,316 total policies in-force. 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. Although our default count declined from December 31, 2020 to December 31, 2021, the population remains elevated compared to our historical experience due to the continued challenges certain borrowers are facing related to the COVID-19 pandemic and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief and Economic Security Act (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 pandemic, the FHFA and GSEs 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, 2021 and 2020, we generally established lower reserves for defaults that we consider to be connected to the COVID-19 pandemic 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. 116 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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, 2021 December 31, 2020 December 31, 2019 (In Thousands) Beginning balance $ 90,567 $ 23,752 $ 12,811 Less reinsurance recoverables (1) ( 17,608 ) ( 4,939 ) ( 3,001 ) Beginning balance, net of reinsurance recoverables 72,959 18,813 9,810 Add claims incurred: Claims and claim expenses incurred: Current year (2) 23,433 66,943 14,737 Prior years (3) ( 11,128 ) ( 7,696 ) ( 2,230 ) Total claims and claim expenses incurred 12,305 59,247 12,507 Less claims paid: Claims and claim expenses paid: Current year (2) 16 586 204 Prior years (3) 2,017 4,515 3,849 Reinsurance terminations (4) — — ( 549 ) Total claims and claim expenses paid 2,033 5,101 3,504 Reserve at end of period, net of reinsurance recoverables 83,231 72,959 18,813 Add reinsurance recoverables (1) 20,320 17,608 4,939 Ending balance $ 103,551 $ 90,567 $ 23,752 (1) Related to ceded losses recoverable under the QSR Transactions. See Note 6, " Reinsurance " for additional information. (2) Related to insured loans with their most recent defaults occurring in the current year. 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 $ 18.1 million attributed to net case reserves and $ 4.7 million attributed to net IBNR reserves for the year ended December 31, 2021, $ 60.8 million attributed to net case reserves and $ 5.0 million attributed to net IBNR reserves for year ended December 31, 2020, and $ 13.2 million attributed to net case reserves and $ 1.3 million attributed to net IBNR reserves for year ended December 31, 2019. (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 $ 6.3 million attributed to net case reserves and $ 5.0 million attributed to net IBNR reserves for the year ended December 31, 2021, $ 6.2 million attributed to net case reserves and $ 1.3 million attributed to net IBNR reserves for the year ended December 31, 2020, and $ 1.5 million attributed to net case reserves and $ 0.7 million attributed to net IBNR reserves for year ended December 31, 2019. (4) Represents the settlement of reinsurance recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction on a cut-off basis. See Note 6, " Reinsurance " for additional information. 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 $ 74.4 million related to prior year defaults remained as of December 31, 2021. 117 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 The following tables provide claim development data by accident year and a reconciliation to the reserve for insurance claims and claim expenses: Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of Reinsurance (1) As of December 31, 2021 Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 Total of IBNR Defaults (2) ($ Values In Thousands) 2013 $ — $ — $ — $ — $ — $ — $ — $ — $ — $ — — 2014 83 34 4 4 4 4 4 4 — — 2015 699 664 743 764 894 894 894 — — 2016 2,394 1,568 1,790 1,934 1,936 1,930 4 3 2017 6,028 3,475 3,570 3,807 3,716 5 9 2018 7,779 5,271 4,709 4,533 56 47 2019 14,391 7,229 5,781 192 228 2020 65,769 56,154 4,112 2,547 2021 22,847 362 3,393 Total $ 95,859 $ 4,731 6,227 (1) Amounts include case and IBNR reserves. (2) Number of defaults outstanding as of December 31, 2021. Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance Accident Year 2013 2014 2015 2016 2017 2018 2019 2020 2021 (In Thousands) 2013 $ — $ — $ — $ — $ — $ — $ — $ — $ — 2014 — 4 4 4 4 4 4 4 2015 50 246 684 720 804 894 894 2016 171 890 1,596 1,826 1,827 1,877 2017 27 1,655 2,925 3,494 3,640 2018 130 1,981 3,537 3,780 2019 69 2,368 3,212 2020 586 1,320 2021 16 Total $ 14,743 Reconciliation of Disclosure of Incurred and Paid Claims Development to the Liability for Unpaid Claims and Claim Adjustment Expenses (In Thousands) As of December 31, 2021 Cumulative Incurred Claims and Allocated Claims Adjustment Expenses, net of Reinsurance $ 95,859 Cumulative Paid Claims and Claims Adjustment Expenses, net of Reinsurance 14,743 Liabilities for unpaid claims and allocated claims adjustment expenses, net of reinsurance 81,116 Reinsurance recoverable on unpaid claims 20,320 Unallocated claims adjustment expenses 2,115 Total gross liability for unpaid claims and claim adjustment expenses $ 103,551 118 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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 Year 8 Claims duration disclosure 2 % 32 % 82 % 93 % 96 % 99 % 100 % 100 % 8. Earnings per Share Basic EPS is based on the weighted average number of shares of common stock outstanding. Diluted EPS is based on the weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the vesting of service based and performance and service-based restricted stock units (RSUs), and the exercise of vested and unvested stock options and outstanding warrants. The number of shares issuable for RSUs subject to performance and service based vesting requirements are only included in diluted shares if the relevant performance measurement period has commenced and results during such period meet the necessary performance criteria. The following table reconciles the net income and the weighted average shares of common stock outstanding used in the computations of basic and diluted EPS of common stock : For the year ended December 31, 2021 2020 2019 (In Thousands, except for per share data) Net income $ 231,130 $ 171,566 $ 171,957 Basic weighted average shares outstanding 85,620 78,023 67,573 Basic earnings per share $ 2.70 $ 2.20 $ 2.54 Net income $ 231,130 $ 171,566 $ 171,957 Gain from change in fair value of warrant liability ( 566 ) ( 2,907 ) — Diluted net income $ 230,564 $ 168,659 $ 171,957 Basic weighted average shares outstanding 85,620 78,023 67,573 Dilutive effect of issuable shares 1,265 1,240 2,148 Diluted weighted average shares outstanding 86,885 79,263 69,721 Diluted earnings per share $ 2.65 $ 2.13 $ 2.47 Anti-dilutive shares 3 58 565 9. Warrants We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012, of which 199 thousand remained outstanding available for exercise at December 31, 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 year ended December 31, 2021, 113 thousand warrants were exercised resulting in the issuance of 86 thousand shares of common stock. Upon exercise, we reclassified approximately $ 1.5 million of warrant fair value from warrant liability to additional paid-in capital. 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 $ 0.3 million of warrant fair value from warrant liability to additional paid-in capital. 119 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 Changes in fair value of $ 0.1 million, $ 0.1 million, and $ 4.1 million were recognized for warrants exercised during the years ended December 31, 2021, 2020 and 2019, respectively. 10. Share-Based Compensation 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. Options granted under the 2012 Plan are non-qualified stock options and may be granted to employees, directors and other key persons. The exercise price per share for options covered by the 2012 Plan is determined by the Board at the time of grant, but shall not be less than the fair market value of our common stock, defined as the closing price of our common stock, on the date of the grant. The term of the stock option grants is established by the Board, but no stock option shall be exercisable more than ten years after the date the stock option is granted. The vesting period of the stock option grants is also established by the Board at the time of grant and is generally a three-year period. Upon the exercise of stock options, we issue shares from the authorized, unissued share reserve. The 2014 Plan was originally approved by our stockholders at our annual meeting on May 8, 2014 and authorized 4.0 million shares of common stock to be reserved for issuance. On May 11, 2017, our stockholders approved amendments to the 2014 Plan at our annual stockholder meeting, authorizing an additional 2.0 million shares of common stock for issuance, increasing the total shares of common stock reserved for issuance under the plan to 6.0 million with the full amount available to be issued as either RSUs or options. These shares may be either authorized but unissued shares or treasury shares. For the years ended December 31, 2021, 2020 and 2019, we incurred $ 16.7 million, $ 11.1 million and $ 13.0 million, respectively, of expenses related to awards granted under our Stock Plans. We recognized gross income tax benefits of $ 3.5 million, $ 2.3 million and $ 2.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. A summary of option activity during the years ended December 31, 2021, 2020 and 2019, is as follows: For the year ended December 31, 2021 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price (Shares in Thousands) Options outstanding at December 31, 2020 1,493 $ 5.02 $ 13.59 Options granted — — — Options exercised ( 122 ) ( 4.43 ) 11.42 Options forfeited — — — Options expired — — — Options outstanding at December 31, 2021 1,371 $ 5.07 $ 13.78 For the year ended December 31, 2020 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price (Shares in Thousands) Options outstanding at December 31, 2019 1,928 $ 4.84 $ 13.04 Options granted — — — Options exercised ( 435 ) 4.21 11.17 Options forfeited — — — Options expired — — — Options outstanding at December 31, 2020 1,493 $ 5.02 $ 13.59 120 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 For the Year Ended December 31, 2019 Shares Weighted Average Grant Date Fair Value per Share Weighted Average Exercise Price (Shares in Thousands) Options outstanding at December 31, 2018 2,882 $ 4.24 $ 11.42 Options granted 163 8.85 22.19 Options exercised ( 1,117 ) 3.88 10.19 Options forfeited — — — Options expired — — — Options outstanding at December 31, 2019 1,928 $ 4.84 $ 13.04 As of December 31, 2021, there were 1.3 million fully vested and exercisable options. During the year ended December 31, 2021, 0.1 million options were exercised with an aggregate intrinsic value of $ 1.5 million. The weighted average exercise price for fully vested and exercisable options outstanding as of December 31, 2021 was $ 13.51 and the weighted average remaining contractual life of such options was 3.95 years as of December 31, 2021. The aggregate intrinsic value of such fully vested and exercisable options was $ 11.1 million as of December 31, 2021. As of December 31, 2021, there was $ 14 thousand of total unrecognized compensation cost related to non-vested stock options. The weighted-average period over which total remaining unrecognized compensation costs related to non-vested stock options will be recognized is 0.12 years. No stock options were granted during the years ended December 31, 2021 and 2020. The estimated grant date fair value of stock options granted during the year ended December 31, 2019 was calculated using the Black-Scholes valuation model based on the following assumptions: For the year ended December 31, 2019 Expected life 6 years Risk free interest rate 2.57 % Dividend yield — % Expected stock price volatility 36.8 % Expected life - is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. We use the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected life for options granted during the period as sufficient historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of 10 years. Risk-free interest rate - is the U.S. Treasury rate on the date of the grant having a term approximating the expected life of the option. Dividend yield - is calculated by dividing the expected annual dividend by our stock price at the valuation date. Expected price volatility - is a measure of the amount by which a price has fluctuated or is expected to fluctuate. A summary of RSU activity during the years ended December 31, 2021, 2020 and 2019 is as follows: For the year ended December 31, 2021 Shares Weighted Average Grant Date Fair Value per Share (Shares in Thousands) Non-vested restricted stock units at December 31, 2020 1,062 $ 21.61 Restricted stock units granted 589 23.73 Restricted stock units vested ( 536 ) 19.98 Restricted stock units forfeited ( 40 ) 21.58 Non-vested restricted stock units at December 31, 2021 1,075 $ 23.59 121 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 For the year ended December 31, 2020 Shares Weighted Average Grant Date Fair Value per Share (Shares in Thousands) Non-vested restricted stock units at December 31, 2019 1,202 $ 18.67 Restricted stock units granted 646 22.67 Restricted stock units vested ( 664 ) 17.68 Restricted stock units forfeited ( 122 ) 19.55 Non-vested restricted stock units at December 31, 2020 1,062 $ 21.61 For the Year Ended December 31, 2019 Shares Weighted Average Grant Date Fair Value per Share (Shares in Thousands) Non-vested restricted stock units at December 31, 2018 1,753 $ 12.06 Restricted stock units granted 470 24.42 Restricted stock units vested ( 970 ) 9.71 Restricted stock units forfeited ( 51 ) 15.06 Non-vested restricted stock units at December 31, 2019 1,202 $ 18.67 At December 31, 2021, we had 1.1 million granted and non-vested RSUs, consisting of 0.9 million RSUs that are subject to service condition vesting requirements and 0.2 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, 2021 was $ 10.7 million. The remaining weighted average contractual life of non-vested RSUs was 1.24 years. As of December 31, 2021 and 2020, there were $ 8.8 million of total unrecognized compensation costs related to non-vested RSUs. The weighted-average period over which total remaining unrecognized compensation costs related to non-vested RSUs outstanding at December 31, 2021 will be recognized is 1.25 years. 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 the actual achievement of compound annual book value per share growth compared to a target established at the time of grant. The grant date 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 We offer our employees a 401(k) Savings Plan (401(k) Plan) that qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code (IRC). Under the 401(k) Plan, we match up to 100 % of eligible employees' pre-tax contributions up to 5 % of eligible compensation. During the years ended December 31, 2021, 2020 and 2019, we incurred approximately $ 2.0 million, $ 2.2 million and $ 2.5 million of expense related to our matching 401(k) Plan contributions, respectively. 11. Income Taxes We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. NMIH files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Total income tax expense consists of the following components: For the year ended December 31, 2021 2020 2019 (In Thousands) Current $ 85 $ 34 $ ( 386 ) Deferred 65,510 46,506 45,082 Total income tax expense $ 65,595 $ 46,540 $ 44,696 For the years ended December 31, 2021, 2020 and 2019, we had income tax expenses of $ 65.6 million, $ 46.5 million, 122 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 and $ 44.7 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, 2021 2020 2019 Federal statutory income tax rate 21.0 % 21.0 % 21.0 % State provision 0.5 % 0.5 0.5 Share-based and other compensation 0.6 % 0.1 ( 1.7 ) Warrant gain/loss — % ( 0.3 ) 0.9 Other — % — ( 0.1 ) Effective income tax rate 22.1 % 21.3 % 20.6 % The components of our net deferred tax asset are summarized as follows: As of December 31, 2021 2020 Deferred tax asset (In Thousands) Net operating loss carry forwards $ 8,759 $ 7,938 Share-based compensation 6,090 5,067 Unearned premium reserve 5,878 4,844 Accrued expenses 2,852 3,198 Other 1,067 1,592 Total gross deferred tax asset 24,646 22,639 Less: valuation allowance ( 8,582 ) ( 7,610 ) Total deferred tax asset 16,064 15,029 Deferred tax liability Contingency reserve ( 157,919 ) ( 91,429 ) Deferred acquisition costs ( 12,797 ) ( 13,381 ) Capitalized software ( 7,286 ) ( 5,569 ) Unrealized gain on investments ( 1,503 ) ( 15,432 ) Other ( 734 ) ( 1,804 ) Total deferred tax liability ( 180,239 ) ( 127,615 ) Net deferred income tax (liability) $ ( 164,175 ) $ ( 112,586 ) 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. During the years ended December 31, 2021, 2020 and 2019, we purchased $ 42.9 million, $ 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, 2021, 2020 and 2019. As of December 31, 2021 and 2020, we held $ 89.2 million and $ 46.4 million of tax and loss bonds, respectively, in "Other assets" in our consolidated balance sheet. At December 31, 2021, we had a federal net operating loss carryforward of $ 1.8 million which expires in varying amounts in 2030 and 2031, and state net operating loss carryforward of $ 132.4 million which expire in varying amounts from 2031 to 2042. Section 382 of the IRC imposes annual limitations on a corporation's ability to utilize its net operating loss carryforwards if it experiences an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012, $ 7.3 million of federal net operating losses were subject to annual limitations of $ 0.8 million through 2016, and $ 0.3 million, 123 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 thereafter, through 2028. Our federal net operating loss carryforward arises from this limitation and the constraint on our ability to utilize the net operating loss carryforward in full during the current period. At December 31, 2021 and 2020, we recorded valuation allowances of $ 8.6 million and $ 7.6 million, respectively, against state net deferred tax assets that may not be realized in future periods. 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, 2021 and 2020, we had zero 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. We file income tax returns with the U.S. federal government and various state jurisdictions that are subject to potential examination by tax authorities. We are not currently under examination by federal or state jurisdictions. Our U.S. federal income tax returns for 2018 and subsequent years, and state income tax returns for 2017 and subsequent years, remain open by statute. 12. Software and Equipment Software and equipment consist largely of capitalized software developed to support our mortgage insurance operations. Software and equipment, net of accumulated amortization and depreciation, as of December 31, 2021 and 2020, consists of the following: December 31, 2021 December 31, 2020 (In Thousands) Software $ 72,481 $ 59,677 Equipment 9,654 9,123 Leasehold improvements 3,402 3,402 Subtotal 85,537 72,203 Accumulated amortization and depreciation ( 53,490 ) ( 42,538 ) Software and equipment, net $ 32,047 $ 29,665 Capitalized costs for software, equipment, and leasehold improvements during the years ended December 31, 2021, 2020 and 2019 were $ 13.6 million, $ 14.5 million, and $ 10.6 million, respectively. Amortization and depreciation expense for software, equipment, and leasehold improvements for the years ended December 31, 2021, 2020, and 2019 were $ 11.2 million, $ 9.9 million, and $ 9.3 million, respectively. 13. Intangible Assets and Goodwill Intangible assets and goodwill consist of identifiable intangible assets and goodwill purchased in connection with the acquisition of our insurance subsidiaries. Intangible assets and goodwill as of both December 31, 2021 and 2020 were as follows: (In Thousands) Expected Lives Goodwill $ 3,244 Indefinite State licenses 260 Indefinite GSE applications 130 Indefinite Total intangible assets and goodwill $ 3,634 We test goodwill and intangible assets for impairment annually or more frequently if we believe indicators of impairment exist. No impairments of indefinite-lived intangibles or goodwill were identified during the years ended December 31, 2021, 2020 and 2019. 14. Commitments and Contingencies PMIERs As an approved insurer , NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs ( italicized terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business, remedial and financial requirements applicable to approved insurers . The PMIERs financial requirements 124 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 prescribe a risk-based methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing ( i.e. , current vs. delinquent), LTV and other risk features. In general, higher quality loans carry lower charges. 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 RIF, assessed on a loan-by-loan basis against certain risk-based factors derived from tables set out in the PMIERs , 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. By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We certified to the GSEs by April 15, 2021, that NMIC was in full compliance with the PMIERs as of December 31, 2020. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC's compliance with the PMIERs. Leases 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 $ 2.6 million and $ 2.9 million in " Other assets " and " Other liabilities ," respectively, on our consolidated balance sheet as of December 31, 2021. As of December 31, 2020, we recognized operating ROU assets and lease liabilities of $ 4.6 million and $ 5.3 million, respectively. As of December 31, 2021 and 2020, 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 years ended December 31, 2021 and 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, 2021: Weighted-average remaining lease term 1.2 years Weighted-average discount rate 6.21 % Cash paid on our operating leases for the years ended December 31, 2021, 2020 and 2019 was $ 2.6 million, $ 2.5 million and $ 2.5 million and lease expense incurred was $ 2.3 million, $ 2.3 million and $ 2.2 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, 2021 are as follows: Years ending December 31, (In Thousands) 2022 $ 2,574 2023 462 Total undiscounted lease payments 3,036 Less effects of discounting ( 135 ) Present value of lease payments $ 2,901 In January 2022 we modified the lease for our corporate headquarters, securing a reduction in pricing and incremental leasehold improvement concessions, reducing the square footage of leased space and extending the remaining term through March 2030. In connection with these changes we expect to record a net increase of approximately $ 9.0 million to both ROU assets and lease liabilities, in the first quarter of 2022. Future lease payments due at the time of modification are $ 15.9 million and supersede any future payments otherwise due under the previous lease for our corporate headquarters outstanding as of December 31, 2021. Lease expense is recorded in underwriting and operating expenses on our consolidated statement of operations. Our operating leases have original terms that range from three to seven years . The existing and modified lease for our corporate 125 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 headquarters both include an option to renew for an additional five years at prevailing market rates at time of renewal. Such renewal option is not included in the calculation of future lease payments due under the existing lease as presented above. 15. Common Stock As of December 31, 2021, we had 85.8 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 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. As of December 31, 2020, we had 85.2 million outstanding shares of Class A common stock. On June 8, 2020, we completed the sale of 15.9 million shares of common stock which generated proceeds of $ 219.7 million, net of underwriting discounts, commissions and other direct offering expenses. 16. Regulatory Information Statutory Requirements Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles (SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws. 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, 2021, 2020 and 2019 were as follows: As of and for the year ended December 31, 2021 2020 2019 (In Thousands) Statutory net income (loss) $ 37,950 $ ( 20,136 ) $ 15,233 Statutory surplus 899,476 894,331 449,602 Contingency reserve 1,036,639 768,324 531,825 Statutory capital (1) 1,936,115 1,662,655 981,427 Risk-to-capital (2) 11.6 :1 11.7 :1 15.8 :1 (1) Represents the total of the statutory surplus and contingency reserve. (2) Excludes Re One as of December 31, 2021 as it had no risk in force remaining following the termination and commutation of the reinsurance agreement with NMIC. 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. 126 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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, the introduction 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, could enact a portion or all of the revised Model Act, including the loan-level capital model. Such risk-based capital model, if introduced and enacted at a state level, is not expected to replace maximum permitted RTC ratio or minimum policyholders' position as the determinant driver of mortgage insurer minimum statutory capital requirements; rather, it is expected that such enactment would introduce new, non-operative statutory disclosure requirements. As of December 31, 2021, NMIC's performing primary RIF, net of reinsurance, was approximately $ 22.3 billion and its RTC ratio was 11.6:1. 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. Reinsurance Prior to January 10, 2019, Ohio regulation limited the amount of risk a mortgage insurer was permitted to retain on a single loan to 25 % of the borrower's indebtedness (after giving effect to third-party reinsurance) and, as a result, the portion of such insurance in excess of 25 % was required to be reinsured. Ohio repealed this requirement for future periods beginning January 10, 2019. Several other states previously imposed similar coverage restrictions and repealed these measures prior to 2018. To comply with these previous state coverage limits, NMIC and Re One had a reinsurance agreement in place under which Re One provided reinsurance to NMIC on certain insured loans with coverage levels in excess of 25 %, after giving effect to third-party reinsurance. Effective October 1, 2021, the reinsurance agreement between NMIC and Re One was commuted and all ceded risk was transferred back to NMIC. In connection with the commutation, Re One paid $ 8.4 million of fees to NMIC to settle all outstanding reinsurance obligations. Following the commutation, NMIC will no longer cede any premiums or loss to Re One, and Re One has no risk in force or further obligation on future claims. Dividend Restrictions NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. 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 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 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 has the capacity to pay aggregate ordinary dividends of $ 34.9 million to NMIH during the twelve-month period ending December 31, 2022. Following the commutation of the reinsurance agreement between NMIC and Re One, Re One distributed $ 26.0 million to NMIH in the form of a $ 1.6 million ordinary dividend and a $ 24.4 million extraordinary dividend with prior approval of the WI OCI. The Wisconsin OCI has approved the allocation of interest expense on the $ 400 million Notes and $ 250 million 2021 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. 127 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 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-19 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. 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. NMIC did not pay any dividends during the year ended December 31, 2021. 17. Quarterly Financial Data (Unaudited) 2021 Quarters 2021 First Second Third Fourth Year (In Thousands, except per share data) Net premiums earned $ 105,879 $ 110,888 $ 113,594 $ 113,933 $ 444,294 Net investment income 8,814 9,382 9,831 10,045 38,072 Net realized investment gains — 12 3 714 729 Other revenues 501 483 613 380 1,977 Insurance claims and claim expenses (benefit) 4,962 4,640 3,204 ( 500 ) 12,305 (2) Underwriting and operating expenses 34,065 34,725 34,669 38,843 142,303 (2) Service expenses 591 481 787 650 2,509 Interest expense 7,915 7,922 7,930 8,029 31,796 Loss (gain) from change in fair value of warrant liability 205 ( 658 ) — ( 112 ) ( 566 ) (2) Pre-tax income 67,456 73,655 77,451 78,162 296,725 (2) Income tax expense 14,565 16,133 17,258 17,639 65,595 Net income $ 52,891 $ 57,522 $ 60,193 $ 60,523 $ 231,130 (2) Basic earnings per share (1) $ 0.62 $ 0.67 $ 0.70 $ 0.71 $ 2.70 Diluted earnings per share (1) $ 0.61 $ 0.65 $ 0.69 $ 0.69 $ 2.65 Weighted average common shares outstanding - basic 85,317 85,647 85,721 85,757 85,620 Weighted average common shares outstanding - diluted 86,487 86,819 86,880 87,117 86,885 (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. (2) May not foot by summing up the quarterly results due to rounding. 128 NMI HOLDINGS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2021 2020 Quarters 2020 First Second Third Fourth Year (In Thousands, except per share data) Net premiums earned $ 98,717 $ 98,944 $ 98,802 $ 100,709 $ 397,172 Net investment income 8,104 7,070 8,337 8,386 31,897 Net realized investment (losses) gains ( 72 ) 711 ( 4 ) 295 930 Other revenues 900 1,223 648 513 3,284 Insurance claims and claim expenses 5,697 34,334 15,667 3,549 59,247 Underwriting and operating expenses 32,277 30,370 33,969 34,994 131,610 Service expenses 734 1,090 557 459 2,840 Interest expense 2,744 5,941 7,796 7,906 24,387 (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 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 (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. 18. Subsequent Event On February 10, 2022, the Board of Directors has approved a $ 125 million share repurchase program through December 31, 2023, that enables the company to repurchase its common stock. The authorization provides NMI the flexibility to repurchase shares from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. 129 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None.