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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period endedJune 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
 
Commission file number 001-36174
NMI Holdings, Inc.
(Exact name of registrant as specified in its charter)

Delaware 45-4914248
(State or other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
2100 Powell StreetEmeryville,CA 94608
(Address of principal executive offices)(Zip Code)

(855) 530-6642
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A Common Stock, par value $0.01NMIHNASDAQ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No
The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on August 3, 2020 was 84,805,164 shares.
1


TABLE OF CONTENTS
Item 1.
Item 2.
Item 3.
Item 4.
Item 1.
Item 1A.
Item 6.

2


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
        This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "potential," "should," "will," "estimate," "perceive," "plan," "project," "continuing," "ongoing," "expect," "intend" or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. All forward looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this report. Further, any forward looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We have based these forward looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward looking statements including, but not limited to:
uncertainty relating to the coronavirus (COVID-19) pandemic and the measures taken by governmental authorities and other third parties to combat it, including their impact on the global economy, the U.S. housing, real estate, housing finance and mortgage insurance markets, and our business, operations and personnel;
changes in the business practices of Fannie Mae and Freddie Mac (collectively, the GSEs), including decisions that have the impact of decreasing or discontinuing the use of mortgage insurance as credit enhancement generally, or with first time homebuyers or on very high loan-to-value mortgages;
our ability to remain an eligible mortgage insurer under the private mortgage insurer eligibility requirements (PMIERs) and other requirements imposed by the GSEs, which they may change at any time;
retention of our existing certificates of authority in each state and the District of Columbia (D.C.) and our ability to remain a mortgage insurer in good standing in each state and D.C.;
our future profitability, liquidity and capital resources;
actions of existing competitors, including other private mortgage insurers and government mortgage insurers like the Federal Housing Administration (FHA), the U.S. Department of Agriculture's Rural Housing Service (USDA) and the U.S. Department of Veterans Affairs (VA) (collectively, government MIs), and potential market entry by new competitors or consolidation of existing competitors;
developments in the world's financial and capital markets and our access to such markets, including reinsurance;
adoption of new or changes to existing laws and regulations that impact our business or financial condition directly or the mortgage insurance industry generally or their enforcement and implementation by regulators, including any action by the Consumer Financial Protection Bureau to address the planned expiration of the "QM Patch" under the Dodd-Frank Act Ability to Repay/Qualified Mortgage rule;
legislative or regulatory changes to the GSEs' role in the secondary mortgage market or other changes that could affect the residential mortgage industry generally or mortgage insurance in particular;
potential future lawsuits, investigations or inquiries or resolution of current lawsuits or inquiries;
changes in general economic, market and political conditions and policies, interest rates, inflation and investment results or other conditions that affect the housing market or the markets for home mortgages or mortgage insurance;
our ability to successfully execute and implement our capital plans, including our ability to access the capital, credit and reinsurance markets and to enter into, and receive approval of, reinsurance arrangements on terms and conditions that are acceptable to us, the GSEs and our regulators;
3


our ability to implement our business strategy, including our ability to write mortgage insurance on high quality low down payment residential mortgage loans, implement successfully and on a timely basis, complex infrastructure, systems, procedures, and internal controls to support our business and regulatory and reporting requirements of the insurance industry;
our ability to attract and retain a diverse customer base, including the largest mortgage originators;
failure of risk management or pricing or investment strategies;
emergence of unexpected claim and coverage issues, including claims exceeding our reserves or amounts we had expected to experience;
potential adverse impacts arising from natural disasters, including, with respect to affected areas, a decline in new business, adverse effects on home prices, and an increase in notices of default on insured mortgages;
the inability of our counter-parties, including third party reinsurers, to meet their obligations to us;
failure to maintain, improve and continue to develop necessary information technology (IT) systems or the failure of technology providers to perform; and
ability to recruit, train and retain key personnel.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q, including the exhibits hereto. In addition, for additional discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner, you should review the Risk Factors in Part II, Item 1A of this Report and in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2019 (2019 10-K), as subsequently updated in other reports we file from time to time with the U.S. Securities and Exchange Commission (SEC).
Unless expressly indicated or the context requires otherwise, the terms "we," "our," "us" and the "Company" in this document refer to NMI Holdings, Inc., a Delaware corporation, and its wholly-owned subsidiaries on a consolidated basis.

4


PART I
Item 1. Financial Statements



INDEX TO FINANCIAL STATEMENTS

Condensed Consolidated Balance Sheets as of June 30, 2020 (Unaudited) and December 31, 2019
Condensed Consolidated Statements of Operations and Comprehensive Income for the three and six months ended June 30, 2020 and 2019 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2020 and 2019 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019 (Unaudited)
Notes to Condensed Consolidated Financial Statements (Unaudited)

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

June 30, 2020December 31, 2019
Assets(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,286,803 and $1,113,779 as of June 30, 2020 and December 31, 2019, respectively)$1,339,771  $1,140,940  
Cash and cash equivalents (including restricted cash of $2,068 and $2,662 as of June 30, 2020 and December 31, 2019, respectively)515,450  41,089  
Premiums receivable46,408  46,085  
Accrued investment income7,909  6,831  
Prepaid expenses3,416  3,512  
Deferred policy acquisition costs, net63,619  59,972  
Software and equipment, net26,105  26,096  
Intangible assets and goodwill3,634  3,634  
Prepaid reinsurance premiums10,263  15,488  
Reinsurance recoverable (1)
14,307  4,939  
Other assets (1)
16,049  16,232  
Total assets$2,046,931  $1,364,818  
Liabilities
Debt$392,773  $145,764  
Unearned premiums115,236  136,642  
Accounts payable and accrued expenses104,777  39,904  
Reserve for insurance claims and claim expenses69,903  23,752  
Reinsurance funds withheld12,205  14,310  
Warrant liability, at fair value2,698  7,641  
Deferred tax liability, net83,785  56,360  
Other liabilities 8,517  10,025  
Total liabilities789,894  434,398  
Commitments and contingencies
Shareholders' equity
Common stock - class A shares, $0.01 par value; 84,804,766 and 68,358,074 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively (250,000,000 shares authorized)848  684  
Additional paid-in capital927,950  707,003  
Accumulated other comprehensive income, net of tax37,675  17,288  
Retained earnings 290,564  205,445  
Total shareholders' equity1,257,037  930,420  
Total liabilities and shareholders' equity$2,046,931  $1,364,818  
(1) Reinsurance recoverable has been reclassified from "Other assets" in the prior period.

See accompanying notes to condensed consolidated financial statements (unaudited).
6

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

For the three months ended June 30,For the six months ended June 30,
2020201920202019
Revenues(In Thousands, except for per share data)
Net premiums earned$98,944  $83,249  $197,661  $157,118  
Net investment income7,070  7,629  15,174  15,012  
Net realized investment gains (losses)711  (113) 639  (300) 
Other revenues1,223  415  2,123  456  
Total revenues107,948  91,180  215,597  172,286  
Expenses
Insurance claims and claim expenses34,334  2,923  40,031  5,666  
Underwriting and operating expenses(1)
30,370  32,190  62,647  62,990  
Service expenses(1)
1,090  353  1,824  402  
Interest expense5,941  3,071  8,685  6,132  
Loss (gain) from change in fair value of warrant liability1,236  1,685  (4,723) 7,164  
Total expenses72,971  40,222  108,464  82,354  
Income before income taxes34,977  50,958  107,133  89,932  
Income tax expense 8,129  11,858  22,014  17,933  
Net income $26,848  $39,100  $85,119  $71,999  
Earnings per share
Basic$0.36  $0.58  $1.20  $1.07  
Diluted$0.36  $0.56  $1.11  $1.04  
Weighted average common shares outstanding
Basic73,617  67,590  71,090  67,143  
Diluted74,174  69,590  72,407  69,348  
Net income $26,848  $39,100  $85,119  $71,999  
Other comprehensive income, net of tax:
Unrealized gains in accumulated other comprehensive income, net of tax expense of $8,978 and $3,662 for the three months ended June 30, 2020 and 2019, and $5,162 and $7,615 for the six months ended June 30, 2020 and 2019, respectively33,773  13,779  19,418  28,647  
Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $149 and ($24) for the three months ended June 30, 2020 and 2019, and ($258) and ($63) for the six months ended June 30, 2020 and 2019, respectively(562) 89  969  237  
Other comprehensive income, net of tax33,211  13,868  20,387  28,884  
Comprehensive income $60,059  $52,968  $105,506  $100,883  
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
See accompanying notes to condensed consolidated financial statements (unaudited).
7

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

Common Stock - Class AAdditional
Paid-in Capital
Accumulated Other Comprehensive IncomeRetained EarningsTotal
SharesAmount
(In Thousands)
Balances, December 31, 201968,358  $684  $707,003  $17,288  $205,445  $930,420  
Common stock: class A shares issued related to warrant exercises6  *221  —  —  221  
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes510  5  (3,755) —  —  (3,750) 
Share-based compensation expense—  —  2,552  —  —  2,552  
Change in unrealized investment gains/losses, net of tax benefit of $3,409—  —  —  (12,824) —  (12,824) 
Net income—  —  —  —  58,271  58,271  
Balances, March 31, 202068,874  $689  $706,021  $4,464  $263,716  $974,890  
Common stock: class A shares issued related to public offering15,870  159  219,528  —  —  219,687  
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes61  *(321) —  —  (321) 
Share-based compensation expense—  —  2,722  —  —  2,722  
Change in unrealized investment gains, net of tax expense of $8,829—  —  —  33,211  —  33,211  
Net income—  —  —  —  26,848  26,848  
Balances, June 30, 202084,805  $848  $927,950  $37,675  $290,564  $1,257,037  

During the three months ended March 31, 2020, we issued 6,474 common shares, with a par value of $0.01 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding. During three months ended June 30, 2020, we issued 61,226 common shares, with a par value of $0.01 in connection with shares issued under stock plan, which is not identifiable in this schedule due to rounding.


8

NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
Common Stock - Class AAdditional
Paid-in Capital
Accumulated Other Comprehensive IncomeRetained Earnings Total
SharesAmount
(In Thousands)
Balances, December 31, 201866,319  $663  $682,181  $(14,832) $33,488  $701,500  
Common stock: class A shares issued related to warrant exercises39  *944  —  —  944  
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes1,144  12  (1,471) —  —  (1,459) 
Share-based compensation expense—  —  2,981  —  —  2,981  
Change in unrealized investment gains/losses, net of tax expense of $3,992—  —  —  15,016  —  15,016  
Net income—  —  —  —  32,899  32,899  
Balances, March 31, 201967,502  $675  $684,635  $184  $66,387  $751,881  
Common stock: class A shares issued related to warrants128  $1  3,835  —  —  3,836  
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes138  1  218  —  —  219  
Share-based compensation expense—  —  3,475  —  —  3,475  
Change in unrealized investment gains/losses, net of tax expense of $3,686—  —  —  13,868  —  13,868  
Net income—  —  —  —  39,100  39,100  
Balances, June 30, 201967,768  $677  $692,163  $14,052  $105,487  $812,379  

* During the three months ended March 31, 2019, we issued 39,195 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 condensed consolidated financial statements (unaudited).



9

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

For the six months ended June 30,
20202019
Cash flows from operating activities(In Thousands)
Net income $85,119  $71,999  
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized investment (gains) losses(639) 300  
(Gain) loss from change in fair value of warrant liability(4,723) 7,164  
Depreciation and amortization4,914  4,339  
Net amortization of premium on investment securities629  622  
Amortization of debt discount and debt issuance costs3,267  499  
Deferred income taxes22,006  17,840  
Share-based compensation expense5,274  6,456  
Changes in operating assets and liabilities:
Premiums receivable(323) (6,218) 
Accrued investment income(1,078) (607) 
Prepaid expenses96  (312) 
Deferred policy acquisition costs, net(3,647) (5,767) 
Other assets (328) (260) 
Unearned premiums(21,406) (7,535) 
Reserve for insurance claims and claim expenses46,151  5,621  
Reinsurance recoverable(9,368) (774) 
Reinsurance balances, net 2,658  336  
Accounts payable and accrued expenses(1,247) (6,379) 
Net cash provided by operating activities127,355  87,324  
Cash flows from investing activities
Purchase of short-term investments(41,872) (113,276) 
Purchase of fixed-maturity investments, available-for-sale(451,462) (126,179) 
Proceeds from maturity of short-term investments85,689  119,748  
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale297,977  49,229  
Software and equipment(4,638) (4,491) 
Net cash (used in) investing activities(114,306) (74,969) 
Cash flows from financing activities
Proceeds from issuance of common stock related to public offering, net of issuance costs220,284    
Proceeds from issuance of common stock related to employee equity plans3,391  12,374  
Taxes paid related to net share settlement of equity awards(7,462) (13,538) 
Proceeds from senior secured notes400,000    
Repayments of term loan(147,750) (750) 
Payments of debt issuance costs(7,151)   
Net cash provided by (used in) financing activities461,312  (1,914) 
Net increase in cash, cash equivalents and restricted cash474,361  10,441  
Cash, cash equivalents and restricted cash, beginning of period41,089  25,294  
Cash, cash equivalents and restricted cash, end of period$515,450  $35,735  
Supplemental disclosures of cash flow information
Interest paid$4,286  $5,365  
Income taxes refunded$76  $134  
(1) Reinsurance recoverable have been reclassified from "Reinsurance balance, net" in the prior period.
See accompanying notes to condensed consolidated financial statements (unaudited).
10

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

1. Organization, Basis of Presentation and Summary of Accounting Principles
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."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly-owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly-owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2019, included in our 2019 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2020.
COVID-19 Developments
On January 30, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for medical advances that might relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist and if or when any such medical advances may be developed or made available. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees are safe and able to continue serving our customers and their borrowers without interruption. We have also sought to broadly assess the impact that the COVID-19 outbreak has had and may continue to have on the U.S economy and housing market, and the implications for the mortgage insurance market, and our business performance and financial position, including our new business production, default and claims experience, and investment portfolio results. Given the uncertainty that remains, we cannot fully assess or estimate the ultimate impact of COVID-19.
Significant Accounting Principles
There have been no changes to our significant accounting principles as described in Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Accounting Principles" of our 2019 10-K, other than as noted in "Investments," "Premium Receivables," "Reinsurance" and "Recent Accounting Pronouncements - Adopted" below.
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 statement of operations as a "Realized Investment Loss."
11

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 $7.9 million as of June 30, 2020 and is included in "Accrued Investment Income." We have elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. Accrued interest for available for sale securities is written off against interest income when the receivable has aged 90 days past due. We did not write off any accrued interest receivable during the three or six months ended June 30, 2020.
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 did not establish an allowance for credit loss at June 30, 2020.
Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan. We have established a reserve for premium write-offs based on historical experience; such reserve was deemed to be immaterial at June 30, 2020.
Reinsurance
We account for premiums, claims and claim expenses that are ceded to reinsurers on a 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 has entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction), January 1, 2018 (the 2018 QSR Transaction) and April 1, 2020 (the 2020 QSR Transaction), which we refer to collectively as the QSR Transactions. We earn profit and ceding commissions in connection with the QSR Transactions. 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 increases 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 and 2020 QSR Transactions, and are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions we earn in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions earned as a reduction to underwriting and operating expenses.
12

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as "Reinsurance Recoverables" on the consolidated balance sheets and such ceded claims as reductions to claims expenses on the consolidated statements of operations. As of June 30, 2020, we had $14.3 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. As of June 30, 2020, we did not recognize any allowance for credit loss with respect to our reinsurance recoverables.
Recent Accounting Pronouncements - Adopted
In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (Topic 815), Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses shifts from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. We adopted this ASU on January 1, 2020 and determined it did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019, which amended the effective date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We 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). This 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 in 2021. The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The standard is effective
13

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the impact the adoption of this ASU would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.
2. 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 statement of operations as a "Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense. The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
Fair Values and Gross Unrealized Gains and Losses on Investments
Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$31,196  $2,484  $  $33,680  
Municipal debt securities175,035  7,743    182,778  
Corporate debt securities987,938  42,964  (984) 1,029,918  
Asset-backed securities92,278  1,071  (310) 93,039  
Total bonds1,286,447  54,262  (1,294) 1,339,415  
Short-term investments356      356  
Total investments$1,286,803  $54,262  $(1,294) $1,339,771  

Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of December 31, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,203  $784  $(58) $48,929  
Municipal debt securities189,530  1,721  (1,035) 190,216  
Corporate debt securities661,719  23,373  (211) 684,881  
Asset-backed securities170,153  2,603  (114) 172,642  
Total bonds1,069,605  28,481  (1,418) 1,096,668  
Short-term investments44,174  98    44,272  
Total investments$1,113,779  $28,579  $(1,418) $1,140,940  
We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2020 or December 31, 2019. We periodically recognize unsettled trades payable or receivable in connection with our investing activity. Unsettled trades payable represent funds due for investments purchased at period end. Unsettled trades receivable represent funds due for investments sold at period end. Included in "Accounts Payable and Accrued Expenses" are $68.9 million and $5.6 million of unsettled trade payables from the purchase of investment securities at June 30, 2020 and December 31, 2019, respectively.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2020 and December 31, 2019:
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2020December 31, 2019
Financial37 %38 %
Consumer23  26  
Utilities13  9  
Communications10  10  
Technology 10  7  
Industrial7  8  
Energy  2  
Total100 %100 %
As of June 30, 2020 and December 31, 2019, approximately $5.7 million and $5.5 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 June 30, 2020 and December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
As of June 30, 2020Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$72,505  $73,072  
Due after one through five years387,886  410,176  
Due after five through ten years716,261  744,725  
Due after ten years17,873  18,759  
Asset-backed securities92,278  93,039  
Total investments$1,286,803  $1,339,771  

As of December 31, 2019Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$138,776  $139,113  
Due after one through five years406,986  417,208  
Due after five through ten years380,737  394,180  
Due after ten years17,127  17,797  
Asset-backed securities170,153  172,642  
Total investments$1,113,779  $1,140,940  
Aging of Unrealized Losses
As of June 30, 2020, the investment portfolio had gross unrealized losses of $1.3 million, of which $0.1 million had been in an unrealized loss position for a period of 12 months or longer. For those securities in an unrealized loss position, the length of time the length of time the securities were in such a position is as follows:
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of June 30, 2020(Dollars in Thousands)
Corporate debt securities39  194,885  (982) 2  553  (2) 41  195,438  (984) 
Asset-backed securities16  32,683  (227) 1  2,913  (83) 17  35,596  (310) 
Total 55  $227,568  $(1,209) 3  $3,466  $(85) 58  $231,034  $(1,294) 

Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of December 31, 2019(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies4  $12,001  $(58)   $  $  4  $12,001  $(58) 
Municipal debt securities26  92,844  (1,034) 1  999  (1) 27  93,843  (1,035) 
Corporate debt securities10  30,481  (140) 14  23,976  (71) 24  54,457  (211) 
Asset-backed securities9  19,236  (102) 1  2,988  (12) 10  22,224  (114) 
Total49  $154,562  $(1,334) 16  $27,963  $(84) 65  $182,525  $(1,418) 
Allowance for credit losses
As of June 30, 2020, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did record any provision for credit loss for investment securities during the three or six months ended June 30, 2020. Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2020 are not indicative of the ultimate collectability of the current amortized cost of the securities. We believe the gross unrealized losses are primarily attributable to widening credit spreads as a result of uncertainties arising from the COVID-19 pandemic.
During the six months ended June 30, 2019, we recognized $0.4 million other-than-temporarily impaired (OTTI) losses in connection with the planned sale of a security that was disposed of in April 2019.
Net Investment Income
The following table presents the components of net investment income:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Investment income$7,320  $7,741  $15,669  $15,237  
Investment expenses(250) (112) (495) (225) 
Net investment income$7,070  $7,629  $15,174  $15,012  
The following table presents the components of net realized investment gains (losses):
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Gross realized investment gains$4,586  $22  $5,126  $217  
Gross realized investment losses(3,875) (135) (4,487) (517) 
Net realized investment gains (losses)$711  $(113) $639  $(300) 

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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
3. 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.
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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 June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$33,680  $  $  $33,680  
Municipal debt securities  182,778    182,778  
Corporate debt securities  1,029,918    1,029,918  
Asset-backed securities  93,039    93,039  
Cash, cash equivalents and short-term investments515,806      515,806  
Total assets$549,486  $1,305,735  $  $1,855,221  
Warrant liability    2,698  2,698  
Total liabilities$  $  $2,698  $2,698  

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, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,929  $  $  $48,929  
Municipal debt securities  190,216    190,216  
Corporate debt securities  684,881    684,881  
Asset-backed securities  172,642    172,642  
Cash, cash equivalents and short-term investments85,361      85,361  
Total assets$134,290  $1,047,739  $  $1,182,029  
Warrant liability    7,641  7,641  
Total liabilities$  $  $7,641  $7,641  
There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the six months ended June 30, 2020, or the year ended December 31, 2019.
The following is a roll-forward of Level 3 liabilities measured at fair value:
For the six months ended June 30,
Warrant Liability20202019
(In Thousands)
Balance, January 1$7,641  $7,296  
Change in fair value of warrant liability included in earnings(4,723) 7,164  
Issuance of common stock on warrant exercise(220) (4,781) 
Balance, June 30$2,698  $9,679  
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.
As of June 30,
20202019
Common stock price$16.08  $28.39  
Risk free interest rate0.16 %
1.72 - 1.95%
Expected life1.81 years
0.92 - 2.81 years
Expected volatility71.6 %
33.8 - 40.0%
Dividend yield0 %0 %
The changes in fair value of the warrant liability for the six months ended June 30, 2020 and 2019 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in other Black-Scholes model inputs. The change in fair value of the warrant liability for the six months ended June 30, 2019 also reflects the impact of the exercises of outstanding warrants.
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). At June 30, 2020, the Notes were carried at a cost of $392.8 million, net of unamortized debt issuance costs of $7.2 million, and had a fair value of $418.4 million as assessed under our Level 2 hierarchy. At December 31, 2019, our 2018 Term Loan was carried at a cost of $145.8 million, net of unamortized debt issuance costs of $2.0 million, and had a fair value of $147.8 million.
4. Debt
Senior Secured Notes
At June 30, 2020, we had $400 million aggregate principal amount of senior secured notes outstanding. The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. A portion of the proceeds from the Notes offering were used to repay the outstanding amount due under our $150 million term loan (2018 Term Loan) and to pay underwriting fees incurred in connection with the offering. Remaining proceeds of $244.4 million are available for general corporate purposes, including to support the growth of our new business production and operations.
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 Note, or (2) the principal value of the Note plus the present value of all future interest payments. At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon. From time to time prior to June 1, 2022, we may also elect to use proceeds raised from one or more equity offerings to redeem up to 40% of the aggregate principal amount of the Notes at a price equal to 107.375% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, subject to certain exceptions.
Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs. In connection with the Notes offering, we recorded capitalized debt issuance costs of $7.4 million. Such amounts will be amortized over the contractual life of the Notes using the effective interest method. At June 30, 2020, $7.2 million of unamortized debt issuance costs remained.
Interest expense for the three and six months ended June 30, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan and issuance of the Notes.
We are subject to certain covenants under the Notes (as defined in the Indenture), including, but not limited to, a maximum debt-to-total capitalization ratio of 35%. We were in compliance with all Notes covenants as of June 30, 2020.

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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
        2020 Revolving Credit Facility
On March 20, 2020, we amended our $85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility). Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate (subject to a floor of % per annum) plus a margin of 1.375% to 2.875% per annum, based on the applicable corporate credit rating at the time. As of June 30, 2020, no borrowings were drawn under the 2020 Revolving Credit Facility.
Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of June 30, 2020, the applicable commitment fee was 0.35%. For the three and six months ended June 30, 2020, we recorded $0.1 million and $0.2 million of commitment fees in interest expense, respectively.
We incurred debt issuance costs of $0.8 million in connection with the 2020 Revolving Credit Facility and had $0.6 million of unamortized debt issuance costs associated with the 2018 Revolving Credit Facility remaining at the time of its amendment and replacement. Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2020 Revolving Credit Facility. At June 30, 2020, remaining unamortized deferred debt issuance costs were $1.2 million.
We are subject to certain covenants under the 2020 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants at June 30, 2020.
5. 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 three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Net premiums written
Direct$108,478  $92,213  $211,931  $173,943  
Ceded (1)
(18,369) (9,604) (30,451) (19,411) 
Net premiums written$90,109  $82,609  $181,480  $154,532  
Net premiums earned
Direct$120,150  $95,180  $233,337  $181,478  
Ceded (1)
(21,206) (11,931) (35,676) (24,360) 
Net premiums earned$98,944  $83,249  $197,661  $157,118  
(1) Net of profit commission.
Excess-of-loss reinsurance
NMIC entered into excess-of-loss reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd. and Oaktown Re III Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018 and July 30, 2019, respectively. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies written during a discrete period. Under each agreement, NMIC retains a first
20

NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
layer of 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 $300 thousand per year to Oaktown Re Ltd. and $250 thousand per year to Oaktown Re II, Ltd. and Oaktown Re III, Ltd.). NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $3.3 million and $7.1 million during the three and six months ended June 30, 2020 and $2.9 million and $5.9 million during the three and six months ended June 30, 2019, respectively.
NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement. NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the three and six months ended June 30, 2020 and 2019, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. 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. We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd. individually as the 2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of June 30, 2020.
($ values in thousands)
Inception DateCovered ProductionInitial Reinsurance CoverageCurrent Reinsurance CoverageInitial First Layer Retained Loss
Current First Layer Retained Loss (1)
2017 ILN TransactionMay 2, 20171/1/2013 - 12/31/2016$211,320  $40,226  $126,793  $122,034  
2018 ILN TransactionJuly 25, 20181/1/2017 - 5/31/2018264,545  158,489  125,312  123,694  
2019 ILN TransactionJuly 30, 20196/1/2018 - 6/30/2019326,905  231,877  123,424  123,345  
(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.
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.
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Under the terms of the 2018 ILN Transaction and the 2019 ILN Transaction, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full. "Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $2.1 million as of June 30, 2020. We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions.
        Quota share reinsurance
NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018 and the 2020 QSR Transaction, effective April 1, 2020. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. 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 re-assuming 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 re-assuming the related risk.
Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to eligible policies written from April 1, 2020 to December 31, 2020 (Eligible Policies). At the time the 2020 QSR Transaction agreement was executed, NMIC ceded premiums earned related to 10.5% of the risk on the Eligible Policies, and subsequent to the execution of the agreement, we engaged additional reinsurance counterparties and increased the cession under the 2020 QSR Transaction to 21.0% of the risk on the Eligible Policies, subject in all respects to the terms of the agreement. Financial results for the three and six months ended June 30, 2020, reflect the initial 10.5% cession rate under the 2020 QSR Transaction. The 2020 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 re-assuming 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 risk-in-force (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.
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table shows amounts related to the QSR Transactions:
For the three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Ceded risk-in-force$4,563,676  $4,558,862  $4,563,676  $4,558,862  
Ceded premiums earned(23,210) (20,919) (46,221) (42,387) 
Ceded claims and claim expenses8,669  770  10,201  1,669  
Ceding commission earned4,428  4,171  8,941  8,377  
Profit commission5,271  11,884  17,684  23,945  
Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums. Under the 2018 QSR Transaction and 2020 QSR Transactions, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission for premiums ceded under the QSR Transactions. NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016 QSR Transaction, 2018 QSR Transaction and 2020 QSR Transaction, generally remain below 60%, 61% and 50%, respectively, as measured annually. Ceded claims and claim expenses under each of the QSR Transactions reduce the respective profit commission received by NMIC on a dollar-for-dollar basis.
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 $4.9 million as of June 30, 2020.
In accordance with the terms of the 2018 and 2020 QSR Transactions, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to the 2018 QSR Transaction was $9.4 million as of June 30, 2020. The reinsurance recoverable on loss reserves related to the 2020 QSR Transaction were immaterial as of June 30, 2020.
6. 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 June 30, 2020, we had 10,816 primary loans in default and held gross reserves for insurance claims and claim expenses of $69.9 million. During the six months ended June 30, 2020, we paid 83 claims totaling $4.1 million, including 78 claims covered under the QSR Transactions representing $0.8 million of ceded claims and claim expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At June 30, 2020, 231 loans in the pool were in default. These 231 loans represented approximately $19.6 million of RIF. Due to the size of the remaining deductible, the low level of defaults reported to us on loans in the pool through June 30, 2020 and the expected severity (all loans in the pool have loan-to-value (LTV) ratios under 80%), we did not establish any case or IBNR reserves for pool risk at June 30, 2020. In connection with the settlement of pool claims, we applied $0.9 million to the pool deductible through June 30, 2020. At June 30, 2020, the remaining pool deductible was $9.5 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.
We had 10,816 loans in default in our primary insured portfolio as of June 30, 2020, which represented a 2.90% default
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
rate against 372,934 total policies in-force. We had 1,028 loans in default in our primary insured portfolio as of June 30, 2019, which represented a 0.32% default rate against 324,876 total policies in-force. The increase in our default population is primarily due to challenges borrowers are facing related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief and Economic Security (CARES) Act or similar programs made available by private lenders.
The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default. Our future claims exposure is a function of the number of defaulted loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, the FHFA and GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance programs and default status.
Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. 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. At June 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at June 30, 2020, our total reserve position and claims and claims expenses increased substantially as of and during the period ended June 30, 2020 due to the significant increase in the size of our default population.
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses:
For the six months ended June 30,
20202019
(In Thousands)
Beginning balance$23,752  $12,811  
Less reinsurance recoverables (1)
(4,939) (3,001) 
Beginning balance, net of reinsurance recoverables18,813  9,810  
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
42,516  7,401  
Prior years (3)
(2,485) (1,735) 
Total claims and claim expenses incurred40,031  5,666  
Less claims paid:
Claims and claim expenses paid:
Current year (2)
39    
Prior years (3)
3,209  1,368  
Reinsurance terminations (4)
  (549) 
Total claims and claim expenses paid3,248  819  
Reserve at end of period, net of reinsurance recoverables55,596  14,657  
Add reinsurance recoverables (1)
14,307  3,775  
Ending balance$69,903  $18,432  
(1) Related to ceded losses recoverable under the QSR Transactions. See Note 5, "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.
(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.
(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 5, "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. The amount of claims incurred relating to current year defaults represents the estimated amount of claims and claim expenses to ultimately be paid on such loans. We recognized $2.5 million and $1.7 million of favorable prior year development during the six months ended June 30, 2020 and 2019, respectively, primarily due to the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $16.5 million related to prior year defaults remained as of June 30, 2020.
7. Earnings per Share (EPS)
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.
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NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands, except for per share data)
Net income$26,848  $39,100  $85,119  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Basic earnings per share$0.36  $0.58  $1.20  $1.07  
Net income$26,848  $39,100  $85,119  $71,999  
Gain from change in fair value of warrant liability    (4,723)   
Diluted net income$26,848  $39,100  $80,396  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Dilutive effect of issuable shares557  2,000  1,317  2,205  
Diluted weighted average shares outstanding74,174  69,590  72,407  69,348  
Diluted earnings per share$0.36  $0.56  $1.11  $1.04  
Anti-dilutive shares609  705  78  748  

8. Warrants
We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012. Each warrant gives the holder thereof the right to purchase one share of common stock at an exercise price equal to $10.00. The warrants were issued with an aggregate fair value of $5.1 million.
During the three months ended June 30, 2020, no warrants were exercised. During the six months ended June 30, 2020, nine thousand warrants were exercised resulting in the issuance of six thousand shares of common stock. Upon exercise, we reclassified approximately $0.2 million of warrant fair value from warrant liability to additional paid-in capital.
During the three months ended June 30, 2019, 193 thousand warrants were exercised resulting in the issuance of 129 thousand shares of common stock. Upon exercise, we reclassified approximately $3.9 million of warrant fair value from warrant liability to additional paid-in capital, of which $2.0 million related to changes in fair value during the three months ended June 30, 2019. During the six months ended June 30, 2019, 260 thousand warrants were exercised resulting in the issuance of 168 thousand shares of common stock. Upon exercise, we reclassified approximately $4.8 million of warrant fair value from warrant liability to additional paid-in capital, of which $2.3 million related to changes in fair value during the six months ended June 30, 2019.
9. 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. Our effective tax rate on our pre-tax income was 23.2% and 20.5% for the three and six months ended June 30, 2020, respectively, compared to 23.3% and 19.9% for the three and six months ended June 30, 2019, respectively. Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rate may fluctuate between interim periods due to the impact of discrete items not included in our estimated annual effective tax rate, including the tax effects associated with the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability. Such items are treated on a discrete basis in the reporting period in which they occur.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent. As a result, our interim provision for income taxes for the three and six months ended June 30, 2020 represents a change in our net deferred tax liability. As of June 30, 2020, we held $7.6 million of tax and loss bonds in "Other assets" in our condensed consolidated balance sheet.

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10. Common Stock
As of June 30, 2020, we had 84.8 million outstanding shares of 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.
On June 8, 2020, we completed the sale of 13.8 million shares of common stock and granted the underwriters on the transaction a 15% overallotment option to purchase additional shares. The overallotment option was exercised in full, resulting in a total of 15.9 million shares of common stock issued. The common stock offering generated proceeds of $219.7 million, net of underwriting discounts, commissions and other direct offering expenses.
11. Regulatory Information
        Statutory Requirements
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles (SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners. The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws.
NMIC and Re One's combined statutory net income (loss) was as follows:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Statutory net (loss) gain$(24,705) $6,466  $(17,014) $5,539  
        NMIC and Re One's combined statutory surplus, contingency reserve and risk-to-capital (RTC) ratio were as follows:
June 30, 2020December 31, 2019
(In Thousands)
Statutory surplus$892,160  $449,602  
Contingency reserve648,493  531,825  
RTC ratio
13.0:1
15.8:1
In June 2020, NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings.
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 corporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits. NMIC and Re One are subject to certain rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs that may restrict their ability to pay dividends to NMIH. Since inception, NMIC and Re One have not paid any dividends to NMIH. NMIC and Re One have the capacity to pay aggregate ordinary dividends as calculated under Wisconsin law of $16.1 million to NMIH during the 12-month period ending December 31, 2020.
The Wisconsin OCI has approved the allocation of interest expense on the $400 million Notes and $100 million 2020 Revolving Credit Facility to NMIC, to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
12. Subsequent Event
On July 30, 2020, NMIC entered into a reinsurance agreement with Oaktown Re IV Ltd. (Oaktown Re IV), a Bermuda domiciled special purpose reinsurer, that provides for up to $322.1 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written between July 1, 2019 and March
27


31, 2020. For the reinsurance coverage period, NMIC will retain the first layer of $169.5 million of aggregate losses and Oaktown Re IV will then provide second layer coverage up to the outstanding reinsurance coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount.
Oaktown Re IV financed the coverage by issuing mortgage insurance-linked notes in an aggregate principal amount of $322.1 million to unaffiliated investors. The notes issued by Oaktown Re IV mature on July 25, 2030; all proceeds raised were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re IV to NMIC under the reinsurance agreement. Funds in the reinsurance trust account are required to be invested in high credit quality money market funds at all times. We refer to NMIC's reinsurance agreement with and the insurance-linked notes issued by Oaktown Re IV as the 2020 ILN Transaction. Under the terms of the 2020 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re IV for anticipated operating expenses (capped at $250,000 per year).
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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
        The following analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 10-K, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements" above and the "Risk Factors" detailed in Part II, Item 1A of this report and in Part I, Item 1A of our 2019 10-K, as subsequently updated in other reports we file with the SEC, for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any other period.
Overview
We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators.
MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-LTV (i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners.
NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of June 30, 2020, we had master policies with 1,534 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As of June 30, 2020, we had $101.2 billion of total insurance-in-force (IIF), including primary IIF of $98.9 billion, and $25.3 billion of gross RIF, including primary RIF of $25.2 billion.
We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPSSM pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders.
Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claim payment practices, responsive customer service, financial strength and profitability.
Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located in Emeryville, California. As of June 30, 2020, we had 269 employees. Our corporate website is located at www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report.
We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including new insurance writings, the composition of our insurance portfolio and other factors that we expect to impact our results.
COVID-19 Developments
On January 30, 2020, the WHO declared the outbreak of the COVID-19 virus to be a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread
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public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for medical advances that might relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist and if or when any such medical advances may be developed or made available. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees are safe and able to continue serving our customers without interruption. We have also sought to broadly assess the impact that the COVID-19 outbreak has had and may continue to have on the U.S economy and housing market, and the implications for the mortgage insurance market, and our business performance and financial position.
Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry
The U.S. housing market is demonstrating notable resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates are helping to support housing affordability, and medical concerns and lifestyle preferences are driving people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives are reinforcing the value of homeownership – all of which are contributing to an influx of new home buyers, record levels of purchase demand, and generally stable to rising house prices nationally.
While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis will help to mitigate the risk of a severe pullback. We observe several favorable differences in the current environment compared to the period leading up to and through the 2008 Financial Crisis – the last period of significant economic volatility in the U.S. and one noted for its significant housing market dislocation. Such differences include:
(i) the generally higher quality borrower base (as measured by weighted average FICO scores and LTV ratios) and tighter underwriting standards (with, among other items, full-documentation required to verify borrower income and asset positions) that prevail in the current market;
(ii) the lower concentration of higher risk loan structures, such as negative amortizing, interest-only or short-termed option adjustable-rate mortgages being originated and outstanding in the current market;
(iii) the meaningfully higher proportion of loans used for lower risk purposes, such as the purchase of a primary residence or rate-term refinancing in the current market, as opposed to cash-out refinancings, investment properties or second home purchases, which prevailed to a far greater degree in the lead up to the 2008 Financial Crisis;
(iv) the availability and immediate application by politicians, regulators, lenders, loan servicers and others of a broad toolkit of resources designed to aid distressed borrowers, including forbearance, foreclosure moratoriums and other assistance programs codified under the CARES Act enacted on March 27, 2020; and
(v) the broader and equally immediate application of a massive amount of fiscal and monetary stimulus by the federal government under the CARES Act and across a range of other programs designed to assist unemployed individuals and distressed businesses, as well as support the smooth functioning of various capital and risk markets.
We also perceive the house price environment in the period leading up to the COVID-crisis to be anchored by more balanced market fundamentals than that in the period leading up to the 2008 Financial Crisis. We believe the 2008 Financial Crisis was directly precipitated by irresponsible behavior in the housing market in which home prices were driven to unsustainable heights (a so-called "bubble"). We see a causal link between the housing market and the 2008 Financial Crisis that we do not see in the COVID-19 outbreak, and we believe this will further contribute to housing market stability through the COVID-19 pandemic.
We anticipate that total purchase mortgage origination volume will grow compared to what it otherwise would have been as house prices remain stable (and potentially continue to increase) and purchase transaction volume expands with COVID-19 spurring increased demand for homeownership. We also expect total refinancing origination volume will increase significantly as declining mortgage rates create continued refinancing opportunities for existing borrowers.
Growth in total mortgage origination volume increases the addressable market for the U.S. mortgage insurance industry, while accelerated refinancing activity increases prepayment speed on outstanding insured mortgages. In this context, we anticipate
30


total U.S. mortgage insurance industry new insurance written (NIW) volume will increase, potentially to record levels, while we expect the persistency of existing in-force insured risk across the industry will decline precipitously.
While we currently observe broad resiliency in the housing and high-LTV mortgage markets and, for the reasons discussed above, expect this trend to continue in the near term, the ultimate impact of COVID-19 remains highly uncertain. See Item 1A, "Risk Factors - The COVID-19 outbreak could materially adversely affect our business, results of operations and financial condition."
Potential Impact on NMI's Business Performance and Financial Position
Operations
We had 269 employees at June 30, 2020, including 125 who typically work at our corporate headquarters in Emeryville, CA and 144 who typically work from home in locations across the country. In response to the COVID-19 outbreak, we activated our business continuity program and instituted additional work-from-home practices for our 125 Emeryville-based staff. We have transitioned our operations seamlessly and continue to positively engage with customers on a remote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment and internal controls over financial reporting are unchanged. We have achieved this transition without incurring additional capital expenditures or operating expenses and we believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course.
New Business Production
Our NIW has expanded significantly in past periods, driven by growth in the overall mortgage insurance market and the success we have had further developing our customer franchise. During the three-year period between January 1, 2017 and December 31, 2019, we activated 340 new lenders, growing our franchise by over 45%, and successfully deepened our engagement with many existing customers. In the same period, total U.S. mortgage insurance NIW volume increased by 19% annually - peaking at $384 billion for the year-ended December 31, 2019. Notwithstanding the recent gains and the customer success we have achieved, we initially expected that the onset of COVID-19 would cause our total NIW volume (and total U.S. mortgage insurance industry volume) to decline. Our initial expectations have not borne out – the broad resiliency of the housing market and increased demand for homeownership now being observed are driving record volume for us and the broader U.S. mortgage insurance industry.
We wrote $13.1 billion of NIW during the three months ended June 30, 2020, up 16% compared to the three months ended March 31, 2020. We now expect our NIW volume and total U.S. mortgage insurance industry production will continue to grow in 2020, with the potential for total market production and our NIW volume to reach record levels.
We have broadly defined underwriting standards and loan-level eligibility criteria that are designed to limit our exposure to higher risk loans, and have used Rate GPS to actively shape the mix of our new business production and insured portfolio by, among other risk factors, borrower FICO score, debt-to-income (DTI) ratio and LTV ratio. At June 30, 2020, the weighted average FICO score of our IIF was 752 and we had a 4% mix of below 680 FICO score risk. Similarly, at June 30, 2020, the weighted average LTV ratio (at origination) of our insured portfolio was 91.8% and we had a 9% mix of 97% LTV risk. In the weeks following the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, which we expect will further strengthen the credit risk profile of our new business production.
We set our premium rates based on a broad range of individual and market variables, including property type, type of loan product, borrower credit characteristics, and lender profile. Given the significant economic dislocation caused thus far by the COVID-19 outbreak, and the uncertain duration and ultimate global impact of this crisis, we have taken action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules. We expect the pricing changes we have instituted will increase the rate received on NIW volume in future periods and further enhance the credit mix of our new business production.
Delinquency Trends and Claims Expense
We had 10,816 defaulted loans in our primary insured portfolio at June 30, 2020, which represented a 2.90% default rate against our 372,934 total policies in-force. Our default population has increased significantly as borrowers have faced increasing challenges related to the COVID-19 outbreak and chosen to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by private lenders. We expect our default population will grow in future periods as additional borrowers who have accessed forbearance programs and paused their monthly mortgage
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payments age into default status. At June 30, 2020, 28,555 or 7.7% of the loans we insured in our primary portfolio were enrolled in a forbearance program, including 9,502 of the loans in our default population, 6,752 loans that had missed at least one payment, but not progressed into default status and 12,301 additional loans that were fully performing without any missed payments. As of July 31, 2020, our default population had increased to 14,175, representing a 3.8% default rate.
We establish reserves for claims and allocated claim expenses when we are notified that a borrower is in default. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve and claims expense) will reflect our best estimate of the future claim payment to be made under each individual policy. Our future claims exposure is a function of the number of delinquent 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 fully defer the payments otherwise due during the forbearance period, over an extended length of time. In response to the onset of the COVID-19 outbreak, the GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back into performing status. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At June 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
Our master policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) interest (capped at three years) and (ii) certain advances, each as incurred through the date the claim is filed. Under our master policies, a national foreclosure moratorium of the type currently required will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amount. If the duration of the current foreclosure moratorium mandated by the GSEs is extended beyond August 31, 2020 for an extended period of time, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not yet gone through foreclosure, may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted.
Regulatory Capital Position
As an approved mortgage insurer and Wisconsin-domiciled carrier, we are required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI.
The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, we must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of $400 million. At June 30, 2020, we reported $1,656 million available assets against $1,048 million risk-based required assets for a $609 million of "excess" funding position. The capital relief we expect to receive in connection with our 2020 ILN Transaction is not included in our PMIERs position as of June 30, 2020, as the transaction was completed after quarter end. In future periods, the 2020 ILN Transaction will bolster our "excess" PMIERs funding position, subject to GSE approvals.
The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared by the Federal Emergency Management Agency (FEMA) to be a Major Disaster zone. In June 2020, the GSEs issued additional guidance on the risk-based treatment of loans affected by the COVID-19 crisis. Under the revised guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period.
Our PMIERs minimum risk-based required asset amount is also adjusted for our reinsurance transactions (as approved by the GSEs). Under our quota share reinsurance treaties, we receive credit for the PMIERs risk-based required asset amount on
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ceded RIF. As our gross PMIERs risk-based required asset amount on ceded RIF increases, our PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under our ILN transactions, we generally receive credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. We have structured our ILN transactions to be overcollateralized, such that there are more ILN notes outstanding and cash held in trust than we currently receive credit for under the PMIERs. To the extent our PMIERs risk-based required asset amount on RIF ceded under the ILN transactions grows, we receive increased PMIERs credit under the treaties. The increasing PMIERs credit we receive under the ILN treaties is further enhanced by their delinquency lockout triggers. In the event of certain credit enhancement or delinquency events, the ILN notes stop amortizing and the cash held in trust is secured for our benefit (a Lock-Out Event). As the underlying RIF continues to run-off, this has the effect of increasing the overcollateralization within, and excess PMIERs capacity provided by, each ILN structure.
Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period the overcollateralization within and PMIERs capacity provided by each ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account.
The following table provides detail on the level of overcollateralization of each of our ILN Transactions at June 30, 2020:

($ values in thousands)
2017 ILN Transaction
2018 ILN Transaction
2019 ILN Transaction
Ceded RIF$2,697,982  $3,233,508  $4,065,248  
Current First Layer Retained Loss122,034  123,694  123,345  
Current Reinsurance Coverage40,226  158,489  231,877  
Eligible Coverage$162,260  $282,183  $355,222  
Subordinated Coverage6.01 %8.73 %8.74 %
PMIERs Charge on Ceded RIF5.57 %7.00 %7.40 %
Overcollateralization$11,917  $55,709  $54,238  
Delinquency Trigger
4.0%
4.0%
4.0%
At June 30, 2020, we had an aggregate $122 million of overcollateralization available across the 2017, 2018 and 2019 ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the Lock-Out Events remain in effect for each transaction and our underlying RIF continues to run-off at the same rate as it did during the month ended June 30, 2020, we estimate that our total overcollateralization would increase by up to approximately $80 million per quarter.
Our PMIERs funding requirement will go up in future periods based on the volume and risk profile of our new business production, and performance of our in-force insurance portfolio. We estimate, however, that we will remain in compliance with our PMIERs asset requirements even if the forbearance-driven default rate on our in-force portfolio materially exceeds its current level, given our $609 million excess available asset position at June 30, 2020, the nationwide applicability of the 70% haircut on delinquent policies affected by the COVID-19 crisis, the increasing PMIERs relief automatically provided under each of our quota share treaties and 2017, 2018, and 2019 ILN Transactions and additional risk protection and PMIERs capacity provided under our newly announced 2020 ILN and QSR Transactions.
NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as "risk-to-capital" or "RTC") of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard, and we expect this to remain the case in the aftermath of the COVID-19 outbreak.
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Liquidity
We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of June 30, 2020, we had $1.9 billion of consolidated cash and investments, including $76 million of cash and investments at NMIH.
On June 8 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of approximately $220 million, net of underwriting discounts, commissions and other direct offering expenses. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 10, Common Stock." On June 19, 2020, NMIH also completed the sale of its $400 million aggregate principal amount of senior secured notes, raising net proceeds of $244 million after giving effect to offering expenses and the repayment of the principal amount outstanding under our $150 million 2018 Term Loan. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt." NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings.
NMIH also has access to $100 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility and $16.1 million of aggregate ordinary course dividend capacity available from NMIC and Re One without the prior approval of the Wisconsin OCI. Amounts drawn under the 2020 Revolving Credit Facility are available as directed for NMIH needs or may be down-streamed to support the requirements of our operating subsidiaries if we so decide. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt."
NMIH's principal liquidity demands include funds for the payment of (i) certain corporate expenses, (ii) certain reimbursable expenses of our insurance subsidiaries, including NMIC, and (iii) principal and interest as due on our outstanding debt. NMIH generates cash interest income on its investment portfolio and benefits from tax, expense-sharing and debt service agreements with its subsidiaries. Such agreements have been approved by the Wisconsin OCI and provide for the reimbursement of substantially all of NMIH's annual cash expenditures. While such agreements are subject to revocation by the Wisconsin OCI, we do not expect such action to be taken at this time. The Wisconsin OCI has refreshed its approval of the debt service agreement providing for the additional reimbursement by NMIC of interest expense due on our newly issued Notes and 2020 Revolving Credit Facility.
NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At June 30, 2020, NMIC had $1.7 billion of cash and investments, including $433 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended June 30, 2020, NMIC generated $237 million of cash flow from operations and received an additional $437 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path (i.e., are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to pay meaningful cash claims in the near-term.
Premiums paid to NMIC on monthly policies are generally collected and remitted by loan servicers. We have noted the broad discussion about the liquidity challenges loan servicers may themselves face in the event of widespread borrower utilization of forbearance programs. We do not currently believe that loan servicer liquidity issues will have a material impact on NMIC's premium receipts or liquidity profile. Loan servicers are contractually obligated to advance mortgage insurance premiums in a timely manner, even if the underlying borrowers fail to remit their monthly mortgage payments.In June 2020, the GSEs issued guidance to the PMIERs that, among other items, requires us to notify them of our intent to cancel coverage on policies for which servicers have failed to make timely premium payments so that the GSEs can pay the premiums directly to us and preserve the mortgage insurance coverage. Through June 30, 2020, we did not see any notable changes in servicer payment practices, with servicers generally continuing to remit monthly premium payments as scheduled, including those for policies covering loans that are in a forbearance program.
Investment portfolio
At June 30, 2020, we had $1.9 billion of cash and invested assets. Our investment strategy equally prioritizes capital preservation alongside income generation, and we have a long-established investment policy that sets conservative limits for asset
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types, industry sectors, single issuers and instrument credit ratings. At June 30, 2020, our investment portfolio was comprised of 100% fixed income assets with 100% of our holdings rated investment grade and our portfolio having an average rating of "A+." At June 30, 2020, our portfolio was in a $53 million aggregate unrealized gain position; it was highly liquid and highly diversified with no Level 3 asset positions and no single issuer concentration greater than 1.3%. We did not record any allowance for credit losses in the portfolio during the three months ended June 30, 2020, as we expect to recover the amortized cost basis of all securities held.
The pre-tax book yield on our investment portfolio was 2.4% for the three months ended June 30, 2020. At the onset of the COVID-19 crisis, we decided to prioritize liquidity and increased our cash and equivalent holdings as a percentage of our total portfolio. We believe such action was prudent in light of the heightened market volatility and general uncertainty developing in the early stages of the COVID-19 pandemic; however, it contributed to a decline in our pre-tax book yield during the quarter. We have since redeployed much of our excess liquidity position and expect net investment income to rebound in the future.
Taxes
The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We continue to monitor the impact that the CARES Act may have on our business, financial condition and results of operations.
New Insurance Written, Insurance-In-Force and Risk-In-Force
NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our NIW is affected by the overall size of the mortgage origination market and the volume of high-LTV mortgage originations. Our NIW is also affected by the percentage of such high-LTV originations covered by private versus government MI or other alternative credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment, nonpayment of premiums, coverage rescission and claim payments). RIF is related to IIF and represents the aggregate amount of coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans having a higher coverage percentage. Gross RIF represents RIF before consideration of reinsurance. Net RIF is gross RIF net of ceded reinsurance.
Net Premiums Written and Net Premiums Earned
We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPS. Rate GPS considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While most of our new business is priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns.
Premiums are generally fixed for the duration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements, less premium refunds and premium write-offs. As a result, net premiums written are generally influenced by:
NIW;
premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described below;
cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings (which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force policies), levels of claim payments and home prices; and
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cession of premiums under third-party reinsurance arrangements.
Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment at origination, which is earned over the estimated life of the policy. Substantially all of our single premium policies in force as of June 30, 2020 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums.
The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and our single premium policies are generally non-refundable on cancellation, assuming all other factors remain constant, if single premium loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher, our revenue is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, and support the growth of our business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces premiums written and earned and also reduces RIF, providing capital relief to the ceding insurance company and reducing incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota share transactions, which offset the ceding company's acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement, the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
Quota share reinsurance
NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, and 2020 QSR Transaction, effective April 1, 2020. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. Each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by S&P, 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, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims.
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, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims.
Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to Eligible Policies written from April 1, 2020 through December 31, 2020, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 50% that varies directly and inversely with ceded claims. At the time the 2020 QSR Transaction agreement was executed, NMIC ceded premiums earned related to 10.5% of the risk on the Eligible Policies, and subsequent to the execution of the agreement, we engaged additional reinsurance counterparties and
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increased the cession under the 2020 QSR Transaction to 21.0% of the risk on the Eligible Policies, subject in all respects to the terms of the agreement. Financial results for the three and six months ended June 30, 2020, reflect the initial 10.5% cession rate under the 2020 QSR Transaction.
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 written with respect to the recaptured risk. With this termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction.
Excess-of-loss reinsurance
NMIC has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies written during discrete periods through a series of mortgage insurance-linked note offerings by the Oaktown Re Vehicles. Under each agreement, NMIC retains a first layer of 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.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances occurs. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction note-holders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of June 30, 2020.
($ values in thousands)
Inception DateCovered ProductionInitial Reinsurance CoverageCurrent Reinsurance CoverageInitial First Layer Retained Loss
Current First Layer Retained Loss (1)
2017 ILN TransactionMay 2, 20171/1/2013 - 12/31/2016$211,320  $40,226  $126,793  $122,034  
2018 ILN TransactionJuly 25, 20181/1/2017 - 5/31/2018264,545  158,489  125,312  123,694  
2019 ILN TransactionJuly 30, 20196/1/2018 - 6/30/2019326,905  231,877  123,424  123,345  

(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.
In July 2020, NMIC secured $322.1 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from July 1, 2019 and March 31, 2020, through a mortgage insurance-linked notes offering by Oaktown Re IV. The reinsurance coverage amount under the terms of the 2020 ILN Transaction decreases from $322.1 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained. For the reinsurance coverage period, NMIC retains the first layer of $169.5 million of aggregate losses and Oaktown Re IV then provides second layer coverage up to the outstanding reinsurance coverage amount.
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NMIC then retains losses in excess of the outstanding reinsurance coverage amount. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements.
Portfolio Data
The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above.
Primary and pool IIF and NIWAs of and for the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
IIFNIWIIFNIWNIW
(In Millions)
Monthly$82,848  $11,885  $63,922  $11,067  $22,346  $17,278  
Single16,057  1,239  17,786  1,112  2,075  1,814  
Primary98,905  13,124  81,708  12,179  24,421  19,092  
Pool2,340  —  2,758  —  —  —  
Total$101,245  $13,124  $84,466  $12,179  $24,421  $19,092  
        
For the three and six months ended June 30, 2020, NIW increased 8% and 28%, respectively, compared to the three and six months ended June 30, 2019, primarily due to growth in our monthly and single premium policy production tied to increased penetration of existing customer accounts and new customer account activations, as well as growth in the size of the total mortgage insurance market NIW volume.
For the three months ended June 30, 2020, monthly premium polices accounted for 91% of our NIW. As of June 30, 2020, monthly premium policies accounted for 84% of our primary IIF, as compared to 78% at June 30, 2019. We expect the break-down of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF will continue to trend toward an increased monthly mix over time given the composition of our NIW.
Total IIF increased 20% as of June 30, 2020 compared to June 30, 2019, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of our in-force policies. Our persistency rate decreased to 64% at June 30, 2020 from 86% at June 30, 2019, reflecting the impact of increased refinancing activity tied to record low interest rates.
The following table presents net premiums written and earned for the periods indicated.
Primary and pool premiums written and earnedFor the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Net premiums written$90,109  $82,609  $181,480  $154,532  
Net premiums earned98,944  83,249  197,661  157,118  
For the three and six months ended June 30, 2020, net premiums written increased 9% and 17%, respectively, and net premiums earned increased 19% and 26%, respectively, compared to the three and six months ended June 30, 2019. The increases in net premiums written and earned are primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the 2018 QSR Transaction tied to the growth of our direct premium volume and the inception of the 2019 ILN Transaction and 2020 QSR Transaction. Net premiums earned grew at an accelerated pace compared to net premiums written due to the amortization of unearned premiums and contribution of single premium policy cancellations, partially offset by new single premium policy originations.
Pool premiums written and earned for the three and six months ended June 30, 2020 and 2019, were $0.7 million and $1.4 million, and $0.8 million and $1.6 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of ceded pool premiums written and earned are recouped through profit commission.
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Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated.
Primary portfolio trendsAs of and for the three months ended
June 30, 2020March 31, 2020December 31, 2019September 30, 2019June 30, 2019
($ Values In Millions, except as noted below)
New insurance written $13,124  $11,297  $11,949  $14,100  $12,179  
Percentage of monthly premium91 %93 %93 %92 %91 %
Percentage of single premium%%%%%
New risk written$3,260  $2,897  $3,082  $3,651  $3,183  
Insurance-in-force (1)
98,905  98,494  94,754  89,713  81,708  
Percentage of monthly premium84 %83 %81 %80 %78 %
Percentage of single premium16 %17 %19 %20 %22 %
Risk-in-force (1)
$25,238  $25,192  $24,173  $22,810  $20,661  
Policies in force (count) (1)
372,934  376,852  366,039  350,395  324,876  
Average loan size ($ value in thousands) (1)
$265  $261  $259  $256  $252  
Coverage percentage (2)
25.5 %25.6 %25.5 %25.4 %25.3 %
Loans in default (count) (1)
10,816  1,449  1,448  1,230  1,028  
Percentage of loans in default (1)
2.90 %0.38 %0.40 %0.35 %0.32 %
Risk-in-force on defaulted loans (1)
$799  $84  $84  $70  $58  
Average premium yield (3)
0.40 %0.41 %0.41 %0.43 %0.43 %
Earnings from cancellations$15.5  $8.6  $8.0  $7.4  $4.5  
Annual persistency (4)
64.1 %71.7 %76.8 %82.4 %86.0 %
Quarterly run-off (5)
12.9 %8.0 %7.7 %7.5 %5.1 %
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
(3) Calculated as net premiums earned divided by average primary IIF for the period, annualized.
(4) Defined as the percentage of IIF that remains on our books after a given 12-month period.
(5) Defined as the percentage of IIF that is no longer on our books after a given three month period.
        The table below presents a summary of the change in total primary IIF for the dates and periods indicated.
Primary IIFFor the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Millions)
IIF, beginning of period$98,494  $73,234  $94,754  $68,551  
NIW13,124  12,179  24,421  19,092  
Cancellations, principal repayments and other reductions(12,713) (3,705) (20,270) (5,935) 
IIF, end of period$98,905  $81,708  $98,905  $81,708  
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We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses.
The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated.
Primary IIF and RIFAs of June 30, 2020As of June 30, 2019
IIFRIFIIFRIF
(In Millions)
June 30, 2020$23,949  $6,039  $—  $—  
201934,658  9,017  18,745  4,892  
201814,322  3,643  24,344  6,177  
201711,548  2,877  17,512  4,319  
20169,595  2,428  13,903  3,454  
2015 and before 4,833  1,234  7,204  1,819  
Total$98,905  $25,238  $81,708  $20,661  
We utilize certain risk principles that form the basis of how we underwrite and originate NIW. We have established prudential underwriting standards and loan-level eligibility matrices which prescribe the maximum LTV, minimum borrower FICO score, maximum borrower DTI ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure and memorialized these standards and eligibility matrices in our Underwriting Guideline Manual that is publicly available on our website. Our underwriting standards and eligibility criteria are designed to limit the layering of risk in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts.
In response to the outbreak of COVID-19, we have adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, which we expect will further strengthen the credit risk profile of our new business production.
The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan.
Primary NIW by FICOFor the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Millions)
>= 760$8,052  $5,627  $14,342  $8,684  
740-7591,866  2,165  3,481  3,389  
720-7391,607  1,785  3,186  2,829  
700-719959  1,337  1,997  2,129  
680-699514  891  1,079  1,444  
<=679126  374  336  617  
Total$13,124  $12,179  $24,421  $19,092  
Weighted average FICO762  751  760  751  

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Primary NIW by LTVFor the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Millions)
95.01% and above$547  $971  $1,268  $1,540  
90.01% to 95.00%5,385  5,931  10,394  9,355  
85.01% to 90.00%5,067  4,085  9,149  6,326  
85.00% and below2,125  1,192  3,610  1,871  
Total$13,124  $12,179  $24,421  $19,092  
Weighted average LTV90.7 %92.0 %91.0 %92.1 %

Primary NIW by purchase/refinance mixFor the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Millions)
Purchase$7,776  $10,697  $15,767  $17,080  
Refinance (1)
5,348  1,482  8,654  2,012  
Total$13,124  $12,179  $24,421  $19,092  

The tables below present our total primary IIF and RIF by FICO and LTV and total primary RIF by loan type as of the dates indicated.
Primary IIF by FICOAs of
June 30, 2020June 30, 2019
($ Values In Millions)
>= 760$48,898  49 %$37,830  46 %
740-75915,764  16  13,731  17  
720-73913,882  14  11,388  14  
700-71910,228  10  9,028  11  
680-6996,657   6,045   
<=6793,476   3,686   
Total$98,905  100 %$81,708  100 %

Primary RIF by FICOAs of
June 30, 2020June 30, 2019
($ Values In Millions)
>= 760$12,433  49 %$9,551  46 %
740-7594,031  16  3,499  17  
720-7393,585  14  2,904  14  
700-7192,625  10  2,286  11  
680-6991,706   1,524   
<=679 (1)
858   897   
Total$25,238  100 %$20,661  100 %

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Primary IIF by LTVAs of
June 30, 2020June 30, 2019
($ Values In Millions)
95.01% and above$8,453  %$7,925  10 %
90.01% to 95.00%45,862  46  38,371  47  
85.01% to 90.00%32,603  33  25,099  31  
85.00% and below11,987  12  10,313  12  
Total$98,905  100 %$81,708  100 %

Primary RIF by LTVAs of
June 30, 2020June 30, 2019
($ Values In Millions)
95.01% and above$2,387  %$2,145  10 %
90.01% to 95.00%13,463  53  11,206  54  
85.01% to 90.00%7,985  32  6,108  30  
85.00% and below1,403   1,202   
Total$25,238  100 %$20,661  100 %

Primary RIF by Loan TypeAs of
June 30, 2020June 30, 2019
Fixed98 %98 %
Adjustable rate mortgages
Less than five years—  —  
Five years and longer  
Total100 %100 %
The table below presents selected primary portfolio statistics, by book year, as of June 30, 2020.
As of June 30, 2020
Book yearOriginal Insurance WrittenRemaining Insurance in Force% Remaining of Original InsurancePolicies Ever in ForceNumber of Policies in ForceNumber of Loans in Default# of Claims Paid
Incurred Loss Ratio (Inception to Date) (1)
Cumulative Default Rate (2)
Current Default Rate (3)
($ Values in Millions)
2013$162  $17  10 %655  98    0.3 %0.3 %1.0 %
20143,451  649  19 %14,786  3,633  117  46  4.2 %1.1 %3.2 %
201512,422  4,167  34 %52,548  20,466  559  106  3.4 %1.3 %2.7 %
2016 21,187  9,595  45 %83,626  42,628  1,385  107  3.1 %1.8 %3.2 %
201721,582  11,548  54 %85,897  51,702  2,132  65  5.2 %2.6 %4.1 %
201827,295  14,322  52 %104,043  62,237  2,732  37  8.4 %2.7 %4.4 %
201945,141  34,658  77 %148,423  119,696  3,357   12.5 %2.3 %2.8 %
202024,421  23,949  98 %73,653  72,474  533  —  8.5 %0.7 %0.7 %
Total$155,661  $98,905  563,631  372,934  10,816  365  
(1) Calculated as total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance.
(2) Calculated as the sum of the number of claims paid ever to date and number of loans in default divided by policies ever in force.
(3) Calculated as the number of loans in default divided by number of policies in force.
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Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the periods indicated. As of June 30, 2020, our RIF continues to be modestly more concentrated in California, primarily as a result of the size of the California mortgage market relative to the rest of the country and the location and timing of our acquisition of new customers. The distribution of our primary RIF as of June 30, 2020 is not necessarily representative of the geographic distribution we expect in the future.
Top 10 primary RIF by stateAs of
June 30, 2020June 30, 2019
California11.3 %12.3 %
Texas8.1  8.2  
Florida6.2  5.4  
Virginia5.4  5.2  
Illinois4.0  3.6  
Colorado3.8  3.4  
Pennsylvania3.6  3.6  
Maryland3.5  3.3  
Washington3.4  3.0  
Massachusetts3.4 %2.8 %
Total52.7 %50.8 %

Insurance Claims and Claim Expenses
Insurance claims and claim expenses incurred represent estimated future payments on newly defaulted insured loans and any change in our claim estimates for previously existing defaults. Claims incurred are generally affected by a variety of factors, including the macroeconomic environment, national and regional unemployment trends, changes in housing values, borrower risk characteristics, LTV ratios and other loan level risk attributes, the size and type of loans insured, and the percentage of coverage on insured loans.
Reserves for claims and allocated claim expenses are established for mortgage loans in default. 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 IBNR. We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees and other general expenses of administering the claim settlement process. Reserves are not established for future claims on insured loans which are not currently reported or which we estimate are not currently in default.
Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is 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, cure rates, size of the loan and estimated change in property value. Reserves are released the month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under the QSR Transactions and ILN Transactions, as applicable under each treaty. We have not yet ceded any reserves under the ILN Transactions as incurred claims and claims expenses on each respective reference pool remain within our retained coverage layer of each transaction. Our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any claims or claim expense reserves for pool exposure to date.
The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic concentrations, among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters or global pandemics, and any federal, state or local governmental response thereto.
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Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time.
In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. At June 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses.
For the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Beginning balance$29,479  $15,537  $23,752  $12,811  
Less reinsurance recoverables (1)
(6,193) (3,678) (4,939) (3,001) 
Beginning balance, net of reinsurance recoverables23,286  11,859  18,813  9,810  
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
34,958  3,492  42,516  7,401  
Prior years (3)
(624) (569) (2,485) (1,735) 
Total claims and claim expenses incurred34,334  2,923  40,031  5,666  
Less claims paid:
Claims and claim expenses paid:
Current year (2)
39  —  39  —  
Prior years (3)
1,985  674  3,209  1,368  
Reinsurance terminations (4)
—  (549) —  (549) 
Total claims and claim expenses paid2,024  125  3,248  819  
Reserve at end of period, net of reinsurance recoverables55,596  14,657  55,596  14,657  
Add reinsurance recoverables (1)
14,307  3,775  14,307  3,775  
Ending balance$69,903  $18,432  $69,903  $18,432  
(1) Related to ceded losses recoverable under the QSR Transactions. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for additional information.
(2) Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan had defaulted in a prior year and subsequently cured and later re-defaulted in the current year, that default would be included in the current year. Amounts are presented net of reinsurance.
(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.
(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 Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for additional information.
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The "claims incurred" section of the table above shows claims and claim expenses incurred on defaults occurring in current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred for current year defaults represents the estimated amount of claims and claim expenses to be ultimately be paid on such loans. The decreases during the periods presented in reserves held for prior year defaults represent favorable development and are generally the result of the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $16.5 million related to prior year defaults remained as of June 30, 2020.
The following table provides a reconciliation of the beginning and ending count of loans in default.
For the three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Beginning default inventory1,449  940  1,448  877  
Plus: new defaults9,770  546  10,282  1,120  
Less: cures(353) (433) (828) (907) 
Less: claims paid(49) (25) (83) (62) 
Less: claims denied(1) —  (3) —  
Ending default inventory10,816  1,028  10,816  1,028  
        
The increase in the ending default inventory at June 30, 2020 compared to June 30, 2019, is primarily attributable to the COVID-19 outbreak as borrowers have faced increasing challenges and chosen to access the forbearance program for federally backed loans codified under the CARES Act and other similar assistance programs made available by private lenders. At June 30, 2020, 9,724 of our 10,816 ending default inventory were in a COVID-19 related forbearance program.
The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated.
For the three months endedFor the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
($ In Thousands)
Number of claims paid (1)
49  25  83  62  
Total amount paid for claims$2,578  $788  $4,081  $1,714  
Average amount paid per claim
$53  $32  $49  $28  
Severity (2)
89 %77 %87 %69 %
(1) Count includes one and two claims settled without payment for the three and six months ended June 30, 2020, respectively, and four and seven claims settled without payment for the three and six months ended June 30, 2019, respectively.
(2) Severity represents the total amount of claims paid including claim expenses divided by the related RIF on the loan at the time the claim is perfected, and is calculated including claims settled without payment.

The number of claims paid for the three and six months ended June 30, 2020 increased compared to the three and six months ended June 30, 2019, primarily due to an increase in our default inventory and the continued growth and seasoning of our insured portfolio. The timing and magnitude of future claims paid may be impacted by, among other factors, the forbearance program and foreclosure moratorium codified under the CARES Act, which may extend the timeline over which loans would otherwise progress through the default cycle to claim payment status.
Our claims severity for the three and six months ended June 30, 2020 was 89% and 87%, respectively, compared to 77% and 69% for the three and six months ended June 30, 2019, respectively. The increase in claims severity for the three and six months ended June 30, 2020 can be attributed to an increase in claims settled using the percent option instead of through third-party sales. Third-party marketing and sales of foreclosed properties, which were curtailed in the first half of 2020 due to COVID-19, often mitigate the severity of the claim payment we ultimately pay.
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The following table provides detail on our average reserve per default, before giving effect to reserves ceded under the QSR Transactions, as of the dates indicated.
Average reserve per default:As of June 30, 2020As of June 30, 2019
(In Thousands)
Case (1)
$5.6  $16.4  
IBNR (1)(2)
0.9  1.5  
Total $6.5  $17.9  
(1) Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
The average reserve per default at June 30, 2020 decreased from June 30, 2019, primarily due to new COVID-19 related defaults. At June 30, 2020, we established lower reserves that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at June 30, 2020, our total reserve position and claims and claims expenses increased substantially as of and during the period ended June 30, 2020 due to the significant increase in the size of our default population.
GSE Oversight
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 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 ratio and other risk features. In general, higher quality loans carry lower asset 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 and considered 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, 2020 that NMIC was in full compliance with the PMIERs as of December 31, 2019. 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.
The following table provides a comparison of the PMIERs available assets and risk-based required asset amount as reported by NMIC as of the dates indicated.
As of
June 30, 2020June 30, 2019
(In Thousands)
Available assets$1,656,426  $878,550  
Risk-based required assets1,047,619  782,460  

Available assets were $1,656 million at June 30, 2020, compared to $879 million at June 30, 2019. In June 2020, NMIH completed the sale of 15.9 million shares of common stock raising net proceeds of approximately $220 million and the sale of the $400 million aggregate principal amount of senior secured notes. NMIH contributed approximately $445 million of capital to NMIC following completion of the Notes and equity offerings. The $778 million increase in NMIC's available assets between the
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periods presented was driven by the NMIH capital contribution and NMIC's positive cash flow from operations during the intervening periods.
The increase in the risk-based required asset amount between the periods presented was primarily due to the growth of our gross RIF, increase in our default inventory related to the onset of the COVID-19 pandemic, partially offset by the increased cession of risk under our third-party reinsurance agreements. See "- COVID-19 Developments," above.
LIBOR Transition
In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021, which is expected to render these widely used reference rates unavailable or unreliable. We have exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio. The 2020 Revolving Credit Facility and premiums paid on our ILN Transactions are also LIBOR-based. We are in the process of reviewing our LIBOR-based contracts that extend beyond 2021 and transitioning to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not know the impact it will have on our operations or financial results.
Capital Position of Our Insurance Subsidiaries and Financial Strength Ratings
In addition to GSE-imposed asset requirements, NMIC is subject to state regulatory minimum capital requirements based on its RIF. While formulations of this minimum capital may vary by jurisdiction, the most common measure allows for a maximum permitted RTC ratio of 25:1.
As of June 30, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $20.0 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $1.5 billion (including contingency reserves) as of June 30, 2020, NMIC's RTC ratio was 13.3:1. Re One had total statutory capital of $37 million as of June 30, 2020, and a RTC ratio of 1.3:1. We continuously monitor our compliance with state capital requirements.
In June 2020, Moody's Investors Service (Moody's) affirmed its "Baa2" financial strength rating of NMIC and its "Ba2" rating of NMIH's 2020 Revolving Credit Facility, and assigned a "Ba2" rating to the Notes. The outlook for Moody's ratings is stable. In March 2020, S&P updated its outlook from stable to negative for the mortgage insurance sector, including NMIH and NMIC's financial strength and long-term counter-party credit ratings. In June 3, 2020, S&P assigned a "BB" rating to NMIH's senior secured Notes.
Information Technology
Effective March 31, 2020, we entered into an IT services agreement with Tata Consultancy Services (TCS). Under the agreement, TCS is providing IT services over a seven-year period across such functions as application development and support, infrastructure support, (service desk, end user computing and engineering services), and information security. We expect the engagement with TCS will further our ability to provide innovative IT solutions for our internal and external constituents, while realizing cost efficiencies by leveraging TCS's global platform. In connection with the agreement, a majority of our IT employees transitioned to TCS. We have the ability to terminate the agreement at any time with 120 days' prior notice, subject to the payment of a termination fee and other obligations as specified in the agreement.
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as government MIs such as the FHA, USDA or VA. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price, credit risk tolerance and information technology capabilities. We expect the private MI market to remain competitive, with pressure for industry participants to maintain or grow their market share.
The private MI industry overall competes more broadly with government MIs who significantly increased their share in the MI market following the 2008 financial crisis. Although there has been broad policy consensus toward the need for increasing private capital participation and decreasing government exposure to credit risk in the U.S. housing finance system, it remains difficult to predict whether the combined market share of government MIs will recede to pre-2008 levels. A range of factors influence a lender's and borrower's decision to choose private over government MI, including among others, premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private MI products compared to government MI alternatives.
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Consolidated Results of Operations
Consolidated statements of operationsThree months endedSix months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Revenues($ in thousands, except for per share data)
Net premiums earned$98,944  $83,249  $197,661  $157,118  
Net investment income7,070  7,629  15,174  15,012  
Net realized investment gains (losses)711  (113) 639  (300) 
Other revenues1,223  415  2,123  456  
Total revenues107,948  91,180  215,597  172,286  
Expenses
Insurance claims and claim expenses34,334  2,923  40,031  5,666  
Underwriting and operating expenses(1)
30,370  32,190  62,647  62,990  
Service expenses(1)
1,090  353  1,824  402  
Interest expense5,941  3,071  8,685  6,132  
Loss (gain) from change in fair value of warrant liability1,236  1,685  (4,723) 7,164  
Total expenses72,971  40,222  108,464  82,354  
Income before income taxes34,977  50,958  107,133  89,932  
Income tax expense 8,129  11,858  22,014  17,933  
Net income $26,848  $39,100  $85,119  $71,999  
Earnings per share - Basic$0.36  $0.58  $1.20  $1.07  
Earnings per share - Diluted $0.36  (2)$0.56  $1.11  $1.04  
Loss ratio(3)
34.7 %3.5 %20.3 %3.6 %
Expense ratio(4)
30.7 %38.7 %31.7 %40.1 %
Combined ratio (5)
65.4 %42.2 %51.9 %43.7 %

Three months endedSix months ended
Non-GAAP financial measures (6)
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
Adjusted income before tax$38,292  $53,420  $105,035  $98,060  
Adjusted net income29,726  41,399  82,470  79,925  
Adjusted diluted EPS0.400.591.141.15
(1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
(2) Diluted net income for the six months ended June 30, 2020 excludes the impact of the warrant fair value change as it was anti-dilutive. For all other periods presented in the table, diluted net income equals reported net income as the impact of the warrant fair value change was dilutive.
(3) Loss ratio is calculated by dividing the insurance claims and claim expenses by net premiums earned..
(4) Expense ratio is calculated by dividing underwriting and operating expenses by net premiums earned.
(5) Combined ratio may not foot due to rounding.
(6)  See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.

Revenues
For the three and six months ended June 30, 2020, net premiums earned increased $15.7 million or 19% and $40.5 million or 26%, respectively, compared to the three and six months ended June 30, 2019. The increase is primarily due to the growth of our IIF, a rise in monthly policy production and higher single premium policy cancellations, partially offset by increased cessions under the 2018 QSR Transaction tied to the growth of our direct premium volume and the inception of the 2019 ILN Transaction and 2020 QSR Transaction.
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For the three and six months ended June 30, 2020, net investment income decreased $0.6 million and $0.2 million, respectively, compared to the three and six months ended June 30, 2019. The decreases were driven by a decline in book yield partially offset by an increase in the size of our total investment portfolio. Our book yield declined for the six months ended June 30, 2020 as we prioritized liquidity and increased cash and cash equivalent positions at the onset of the COVID-19 crisis.
For the three and six months ended June 30, 2020, other revenues increased $0.8 million and $1.7 million, respectively, compared to the three and six months ended June 30, 2019. Other revenues represent underwriting fee revenue from our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The growth in other revenues for the three and six months ended relates to an increase in NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods.
Expenses
We recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology, professional services and facilities expenses, in connection with the development and operation of our business. We also incur service expenses in connection with NMIS' outsourced loan review activities.
Insurance claims and claim expenses increased $31.4 million and $34.4 million for the three and six months ended June 30, 2020, respectively, compared to the three and six months ended June 30, 2019, as a result of an increase in defaults, driven by new defaults on insured loans impacted by COVID-19 outbreak, and an increase in the overall number of policies in our portfolio and aging of earlier book years, offset partially by the release of certain reserves related to prior year defaults.
        Underwriting and operating expenses decreased $1.8 million or 6%, and $0.3 million or 1% for the three and six months ended June 30, 2020, respectively, compared to the three and six months ended June 30, 2019. The decrease was primarily driven by reductions in payroll, travel and entertainment, and office administrative expenses as a result of the COVID-19 outbreak. During the three and six months ended June 30, 2020, we also incurred $0.2 million and $0.6 million of underwriting and operating expenses, respectively, related to the capital market reinsurance transaction.
Service expenses were $1.1 million and $1.8 million for the three and six months ended June 30, 2020, respectively, compared to $0.4 million for the three and six months ended June 30, 2019. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The growth in service expenses for the three and six months ended June 30, 2020 relates to an increase in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the same periods.
Interest expense was $5.9 million and $8.7 million for the three and six months ended June 30, 2020, respectively, compared to $3.1 million and $6.1 million for the three and six months ended June 30, 2019, respectively. Interest expense for the three and six months ended June 30, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan. Interest expense for the three and six months ended June 30, 2020 benefited from a lower LIBOR indexed to the 2018 Term Loan compared to the three and six months ended June 30, 2019. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt."
Income tax expense was $8.1 million and $22.0 million for the three and six months ended June 30, 2020, respectively, compared to $11.9 million and $17.9 million for the three and six months ended June 30, 2019, respectively. Income tax expense decreased for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 due to the decrease in our pre-tax income. Income tax expense increased for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 due to the growth in our pre-tax income. We are subject to a 21% statutory U.S. federal corporate income tax rate. Our effective tax rate on our pre-tax income was 23.2% and 20.5% for the three and six months ended June 30, 2020, respectively, compared to 23.3% and 19.9% for the three and six months ended June 30, 2019, respectively. Our provision for income taxes for interim periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rates for the three and six months ended June 30, 2020 and 2019 reflect the discrete tax effects of the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability in each period. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
Net Income
Net income was $26.8 million and $85.1 million for the three and six months ended June 30, 2020, respectively, compared to $39.1 million and $72.0 million for the three and six months ended June 30, 2019, respectively. Adjusted net income was $29.7 million and $82.5 million for the three and six months ended June 30, 2020, respectively, compared to $41.4
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million and $79.9 million for the three and six months ended June 30, 2019, respectively. For the three months ended June 30, 2020, the decrease in net income and adjusted net income can be attributed to an increase in total expense primarily due to increased insurance claims and claims expense resulting from the COVID-19 pandemic, partially offset by an increase in total revenue. For the six months ended June 30, 2020, the increase in net income and adjusted net income can be attributed by increases in total revenues partially offset by increased insurance claims and claims expense.
Diluted EPS was $0.36 and $1.11 for the three and six months ended June 30, 2020, respectively, compared to $0.56 and $1.04 for the three and six months ended June 30, 2019, respectively. Adjusted diluted EPS was $0.40 and $1.14 for the three and six months ended June 30, 2020, respectively, compared to $0.59 and $1.15 for the three and six months ended June 30, 2019, respectively. Fluctuations in diluted and adjusted diluted EPS for all periods shown were driven by an increase in weighted average diluted shares which is attributed to the common stock offering resulting in the sale of 15.9 million shares of common stock in June of 2020.
The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods.
Non-GAAP Financial Measure ReconciliationsFor the three months ended June 30,For the six months ended June 30,
2020201920202019
As reported($ in thousands, except for per share data)
Income before income taxes$34,977  $50,958  $107,133  $89,932  
Income tax expense8,129  11,858  22,014  17,933  
Net income$26,848  $39,100  $85,119  $71,999  
Adjustments
Net realized investment (gains) losses(711) 113  (639) 300  
Loss (gain) from change in fair value warrant liability1,236  1,685  (4,723) 7,164  
Capital market transaction costs2,790  664  3,264  664  
Adjusted income before tax38,292  53,420  105,035  98,060  
Income tax expense on adjustments437  163  551  202  
Adjusted net income$29,726  $41,399  $82,470  $79,925  
Weighted average diluted shares outstanding74,174  69,590  72,407  69,348  
Adjusted diluted EPS$0.40  $0.59  $1.14  $1.15  
Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhance the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present.
Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred.
Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such
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items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods.
Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP.
Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below.
Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability.
Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles.
Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results.
Infrequent or unusual non-operating items. Items that are the result of unforeseen or uncommon events, which occur separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect our current period operating results.

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Consolidated balance sheetsJune 30, 2020December 31, 2019
(In Thousands)
Total investment portfolio$1,339,771  $1,140,940  
Cash and cash equivalents515,450  41,089  
Premiums receivable46,408  46,085  
Deferred policy acquisition costs, net63,619  59,972  
Software and equipment, net26,105  26,096  
Prepaid reinsurance premiums10,263  15,488  
Reinsurance recoverable (1)
14,307  4,939  
Other assets (1)
31,008  30,209  
Total assets$2,046,931  $1,364,818  
Debt$392,773  $145,764  
Unearned premiums115,236  136,642  
Accounts payable and accrued expenses104,777  39,904  
Reserve for insurance claims and claim expenses69,903  23,752  
Reinsurance funds withheld12,205  14,310  
Warrant liability2,698  7,641  
Deferred tax liability, net83,785  56,360  
Other liabilities8,517  10,025  
Total liabilities789,894  434,398  
Total shareholders' equity1,257,037  930,420  
Total liabilities and shareholders' equity$2,046,931  $1,364,818  
(1) Reinsurance recoverable has been reclassified from "Other assets" in prior periods.
As of June 30, 2020, we had $1.9 billion in cash and investments, including $75.6 million held by NMIH. The increases in cash and investments from December 31, 2019 was primarily related to net proceeds of approximately $220 million from the common stock offering and net proceeds of approximately $245 million from the issuance of the Notes, both of which were completed in June 2020.
Net deferred policy acquisition costs were $63.6 million as of June 30, 2020, compared to $60.0 million as of December 31, 2019. The increase was primarily driven by growth in the number of policies written during the period and the deferral of certain costs associated with the origination of those policies, partially offset by the amortization of previously deferred acquisition costs.
Prepaid reinsurance premiums were $10.3 million as of June 30, 2020, compared to $15.5 million as of December 31, 2019. Prepaid reinsurance premiums, which represent the unearned premiums on single premium policies ceded under the 2016 QSR Transaction, decreased due to the continued amortization of previously ceded unearned premiums.
Other assets increased to $31.0 million as of June 30, 2020 from $30.2 million as of December 31, 2019. The increase in other assets was primarily driven by an increase in ceded losses recoverable associated with our QSR transactions due to an increase in defaults and reserves for insurance claims and claims expense resulting from the COVID-19 pandemic, and the capitalization of deferred debt issuance costs incurred in connection with the 2020 Revolving Credit Facility.
Unearned premiums decreased from $136.6 million as of December 31, 2019 to $115.2 million as of June 30, 2020, primarily due to the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies and the cancellation of other single premium policies, partially offset by single premium policy originations during the six months ended June 30, 2020.
Debt was $392.8 million as of June 30, 2020, compared to $145.8 million as of December 31, 2019. Debt at December 31, 2019, represented the carry value of the $150 million 2018 Term Loan, which was repaid in full during the second quarter of 2020. Debt at June 30, 2020, represented the carry value of the recently issued the Notes completed in June 2020.
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Accounts payable and accrued expenses increased from $39.9 million as of December 31, 2019 to $104.8 million as of June 30, 2020, primarily due to unsettled payments from the purchase of certain investment securities, partially offset by the settlement of previously accrued compensation during the six months ended June 30, 2020.
Reserve for insurance claims and claim expenses increased from $23.8 million as of December 31, 2019 to $69.9 million as of June 30, 2020, primarily due to an increase in defaults, driven by new defaults on insured loans impacted by the COVID-19 outbreak, and an increase in the overall number of policies in our portfolio and aging of earlier book years. This was partially offset by the release of prior year reserves primarily tied to default cures. See "- Insurance Claims and Claim Expenses," above for further details.
Reinsurance funds withheld was $12.2 million as of June 30, 2020, representing the net of our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The decrease in reinsurance funds withheld of $2.1 million from December 31, 2019, relates to the continued decline in ceded premiums written on single premium policies, due to the end of the reinsurance coverage period for new business under the 2016 QSR Transaction at December 31, 2017. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance."
Warrant liability decreased from $7.6 million at December 31, 2019 to $2.7 million at June 30, 2020, primarily due to a decrease in our stock price. For further information regarding the valuation of our warrant liability and its impact on our results of operations and financial position, see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 3, Fair Value of Financial Instruments."
Net deferred tax liability increased from $56.4 million as of December 31, 2019 to $83.8 million as of June 30, 2020, primarily due an increase in the claimed deductibility of our statutory contingency reserve. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes."
The following table summarizes our consolidated cash flows from operating, investing and financing activities.
Consolidated cash flowsFor the six months ended June 30,
20202019
Net cash provided by (used in):(In Thousands)
Operating activities$127,355  $87,324  
Investing activities(114,306) (74,969) 
Financing activities461,312  (1,914) 
Net increase in cash and cash equivalents$474,361  $10,441  

Net cash provided by operating activities was $127.4 million for the six months ended June 30, 2020, compared to $87.3 million for the six months ended June 30, 2019. The increase in cash generated from operating activities was primarily driven by growth in premiums written, partially offset by an increase in claims paid.
Cash used in investing activities for the periods presented was driven by the purchase of fixed and short-term maturities with cash provided by operating and, as available, financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash used in investing activities for the six months ended June 30, 2020, reflects, in part, the investment of net cash proceeds from the common stock and Notes offerings we completed in June 2020.
Cash provided by financing activities was $461.3 million for the six months ended June 30, 2020, compared to cash used in financing activities of $1.9 million for the six months ended June 30, 2019. Cash provided by financing activities for the six months ended June 30, 2020 reflects $220.3 million net cash proceeds raised in our 2020 common stock offering and $245.9 million net cash proceeds raised in our 2020 Notes offering.
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Holding Company Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2020 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. 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 surplus or recent net profits (subject to certain limitations).
As of June 30, 2020, NMIH had $75.6 million of cash and investments. NMIH's principal source of net cash is investment income. NMIH also has access to $100 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility. Our insurance operating subsidiaries also have the capacity, under Wisconsin law, to pay $16.1 million of aggregate ordinary dividends to NMIH during the 12-month period ending December 31, 2020.
On June 8, 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of approximately $219.7 million, net of underwriting discounts, commissions and other direct offering expenses. In June 2020, NMIH also completed the sale of the Notes, raising net proceeds of $244.4 million after giving effect to offering expenses and the repayment of principal amount outstanding under our $150 million 2018 Term Loan. In June 2020, NMIH contributed approximately $445.4 million of capital to NMIC following completion of the Notes and equity offerings.
NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, with such approvals subject to change or revocation at any time. Among such agreements, the Wisconsin OCI has approved the allocation of interest expense on the Notes and $100 million 2020 Revolving Credit Facility to NMIC to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
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. 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, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31. Since inception, NMIC and Re One have not paid any dividends to NMIH. NMIC and Re One have the capacity to pay $16.1 million of aggregate ordinary dividends to NMIH during the 12-month period ending December 31, 2020.
As an approved insurer under PMIERs, NMIC would be subject to additional restrictions on its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the PMIERs financial requirements are not permitted to pay dividends without prior approval from the GSEs. Through March 31, 2021, even if an approved insurer has an available assets surplus, approved insurers must obtain Fannie Mae's prior written approval before taking any of the following actions: a) pay dividends, make payments of principal or increase payments of interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by the approved insurer, make any other payments, unless related to expenses incurred in the normal course of business or to commitments made prior to the guidance effective date, or pledge or transfer asset(s) to any affiliate or investor, or b) enter into any new arrangements or alter any existing arrangements under tax sharing and intercompany expense-sharing agreements other than renewals and extensions of agreements in effect prior to the guidance effective date.
NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements (respectively, as defined therein). NMIH may require liquidity to fund the capital needs of its insurance subsidiaries.
The Notes mature on June 19, 2025 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. Our $100 million 2020 Revolving Credit Facility matures on February 22, 2023 and accrues interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 1.375% to 2.875% per annum, in each case based on the applicable corporate credit rating at the time. Borrowings under the 2020 Revolving
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Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations.
Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of June 30, 2020, the applicable commitment fee was 0.35%.
We are subject to certain covenants under the Notes and 2020 Revolving Credit Facility. Under the Notes (and as defined in the Indenture), we are subject to a maximum debt-to-total capitalization ratio of 35%. Under the 2020 Revolving Credit Facility (as defined in the Credit Agreement), we are subject to a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of June 30, 2020.
Consolidated Investment Portfolio
The primary objectives of our investment activity are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset types, industry sectors, single issuers, and certain credit ratings; and benchmarks for asset duration.
Our investment portfolio is comprised entirely of fixed maturity instruments. As of June 30, 2020, the fair value of our investment portfolio was $1.3 billion. We also had an additional $515.5 million of cash and equivalents as of June 30, 2020. Pre-tax book yield on the investment portfolio for the six months ended June 30, 2020 was 2.5%. The book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. Yield on the investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our portfolio holdings and other factors.
The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type and credit rating:
Percentage of portfolio's fair valueJune 30, 2020December 31, 2019
Corporate debt securities55 %58 %
Cash, cash equivalents, and short-term investments28   
Municipal debt securities10  16  
Asset-backed securities 15  
U.S. treasury securities and obligations of U.S. government agencies  
Total100 %100 %

Investment portfolio ratings at fair value (1)
June 30, 2020December 31, 2019
AAA 32 %20 %
AA(2)
13  19  
A(2)
40  47  
BBB(2)
15  14  
Total100 %100 %
(1) Excluding certain operating cash accounts.
(2) Includes +/– ratings.

All of our investments are rated by one or more nationally recognized statistical rating organizations. If three or more ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
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Investment Securities - Allowance for credit losses
As of June 30, 2020, we did not recognize an allowance for credit loss for any security in our investment portfolio. As of June 30, 2019, we held no other-than-temporarily impaired securities. During the six months ended June 30, 2019, we recognized a $0.4 million loss in earnings related to the planned sale of a security in a loss position that was disposed of in April 2019. We did not recognize any OTTI losses for the three months ended June 30, 2019.
Off-Balance Sheet Arrangements and Contractual Obligations
We had no material off-balance sheet arrangements as of June 30, 2020. In connection with the ILN Transactions, we have certain future contractual commitments to the Oaktown Re Vehicles (special purpose variable interest entities that are not consolidated in our financial results). See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1. Organization, Basis of Presentation and Summary of Accounting Principles."
Effective March 31, 2020, we entered into a seven-year IT services agreement with TCS under which we outsource certain IT support and expertise functions. See "- Information Technology" above for more information.
Critical Accounting 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. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.
We believe that the assumptions and estimates associated with revenue recognition, our investment portfolio, deferred policy acquisition costs, premium deficiency reserves, and reserves for insurance claims and claim expenses have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting estimates. There have not been any material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 10-K.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large portfolio of various holdings, types and maturities. NMIH's principal source of operating cash is investment income. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance.
We manage market risk via a defined investment policy implemented by our treasury function with oversight from our Board of Director's Risk Committee. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:
Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates of our insurance portfolio, and as a result we may determine that our investment portfolio needs to be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse. Additionally, the changes in Eurodollar based interest rates affect the interest expense related to the Company's debt.
Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.
Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.
Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.
Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates fall below the interest rate of the debt.
The carrying value of our investment portfolio as of June 30, 2020 and December 31, 2019 was $1.3 billion and $1.1 billion, respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support.
As of June 30, 2020, the duration of our fixed income portfolio, including cash and cash equivalents, was 3.61 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 3.61% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 4.68 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 4.68% in fair value of our fixed income portfolio.
We are also subject to market risk related to the Notes and the ILN Transactions. As discussed in Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt" the Notes bear interest at a variable rate and, as a result, increases in market interest rates would generally result in increased interest expense on our outstanding principal.
The risk premium amounts under the ILN Transactions are calculated by multiplying the outstanding reinsurance coverage amount at the beginning of any payment period by a coupon rate, which is the sum of 1-month LIBOR and a risk margin, and then subtracting actual investment income earned on the trust balance during that payment period. An increase in 1-month LIBOR rates would generally increase the risk premium payments, while an increase to money market rates, which directly affect investment income earned on the trust balance, would generally decrease them. Although we expect the two rates to move in tandem, to the extent they do not, it could increase or decrease the risk premium payments that otherwise would be due.
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Item 4. Controls and Procedures
Disclosure Controls and Procedures
We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of June 30, 2020 pursuant to Rule 13a-15(e) under the Exchange Act. Management applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management's control objectives. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance and cannot guarantee that it will succeed in its stated objectives.
Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2020 our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.
Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II
Item 1. Legal Proceedings
Certain lawsuits and claims arising in the ordinary course of business may be filed or pending against us or our affiliates from time to time. In accordance with applicable accounting guidance, we establish accruals for all lawsuits, claims and expected settlements when we believe it is probable that a loss has been incurred and the amount of the loss is reasonably estimable. When a loss contingency is not both probable and estimable, we do not establish an accrual. Any such loss estimates are inherently uncertain, based on currently available information and are subject to management's judgment and various assumptions. Due to the inherent subjectivity of these estimates and unpredictability of outcomes of legal proceedings, any amounts accrued may not represent the ultimate resolution of such matters.
To the extent we believe any potential loss relating to such lawsuits and claims may have a material impact on our liquidity, consolidated financial position, results of operations, and/or our business as a whole and is reasonably possible but not probable, we will disclose information relating to any such potential loss, whether in excess of any established accruals or where there is no established accrual. We will also disclose information relating to any material potential loss that is probable but not reasonably estimable. Where reasonably practicable, we will provide an estimate of loss or range of potential loss. No disclosures are generally made for any loss contingencies that are deemed to be remote.
Based upon information available to us and our review of lawsuits and claims filed or pending against us to date, we have not recognized a material accrual liability for these matters, nor do we currently expect it is reasonably possible that these matters will result in a material liability to the Company. However, the outcome of litigation and other legal and regulatory matters is inherently uncertain, and it is possible that one or more of such matters currently pending or threatened could have an unanticipated material adverse effect on our liquidity, consolidated financial position, results of operations, and/or our business as a whole, in the future.
Item 1A. Risk Factors
Risk factors that affect our business and financial results are discussed in Part I, Item 1A of our 2019 10-K. As of the date of this report, other than as included below, we are not aware of any material changes in our risk factors from the risk factors disclosed in our 2019 10-K. You should carefully consider the risks and uncertainties described herein and in our 2019 10-K, which have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. The risks described herein and in our 2019 10-K are not the only risks we face, as there are additional risks and uncertainties not currently known to us or that we currently deem to be immaterial which may in the future adversely affect our business, financial condition and/or operating results.
The COVID-19 outbreak could materially adversely affect our business, results of operations and financial condition.

We continue to closely monitor developments related to the COVID-19 pandemic to assess its impact on our business. As a result of the COVID-19 pandemic, the U.S. federal government and certain U.S. states have adopted numerous measures to contain the virus, such as travel bans and restrictions, quarantines, shelter-in-place orders, social-distancing measures and business shut-downs. The COVID-19 pandemic and related containment measures have had, and are expected to continue to have, a substantial negative impact on nearly every sector of the U.S. economy and on the financial, capital and credit markets.
Since the outbreak of the COVID-19 pandemic, there have been a number of governmental and GSE efforts to implement programs designed to assist individuals and businesses impacted by the virus. On March 27, 2020, the U.S. Congress enacted the CARES Act. The CARES Act provides financial assistance for businesses and individuals and targeted regulatory relief for financial institutions. Among many other things, the CARES Act suspended foreclosures and evictions for at least 60 days from March 18, 2020, on mortgages purchased or securitized by the GSEs, which moratorium has been extended by the GSEs through at least August 31, 2020 and may be further extended. In addition, the CARES Act enacts into law a requirement to provide payment forbearance on mortgages to borrowers experiencing hardship during the COVID-19 emergency. Forbearance under the CARES Act allows for a mortgage payment to be suspended for up to 360 days due to hardship caused by COVID-19. The CARES Act also provides for enhanced unemployment benefits, direct aid to individuals in the form of refundable tax credit rebates and increased flexibility under retirement plans, among other things.
The GSEs, the primary purchasers of mortgages we insure, have also adopted certain measures to assist borrowers impacted by COVID-19. Consistent with the CARES Act, the GSEs will provide a forbearance plan to any borrower who requests a forbearance with an attestation of the financial hardship, directly or indirectly caused by the COVID-19 emergency; and no additional documentation other than the borrower's attestation to a financial hardship caused by the COVID-19 emergency is required. Borrowers that avail themselves of forbearance relief will not incur interest or late fees on deferred amounts. In addition, the GSEs have announced that, at the end of a forbearance plan, the affected borrower will not be required to pay back their
59


reduced or suspended mortgage payments in one lump sum, but may be eligible for a number of different options offered by their mortgage servicer depending on their financial situation, including:
if the borrower is unable to repay their deferred payments all at once and can afford to pay a higher monthly mortgage payment for a period of time, the borrower may be eligible for a repayment plan that allows them to repay past due amounts over a period of time;
if the borrower can afford to resume their monthly mortgage payment, they may be eligible for a payment deferral in which missed mortgage payments are due at the sale or refinancing of the home or are moved to the end of the maturity of the loan; and
if the borrower has a sustained reduction in income and is unable to afford their regular monthly mortgage payment, they may be eligible for a loan modification that changes the terms of the mortgage loan to enable an affordable payment, including through a change to the maturity and amortization schedule of the mortgage loan.
Due to the evolving and highly uncertain nature of this crisis, it is too soon to fully assess or predict the ultimate impact COVID-19 will have on the markets in which we operate and on our business, but we believe it will be material and could adversely affect our business, operations and financial condition. We are currently unable to estimate precisely the magnitude of the impact that the pandemic will ultimately have on our business, operations and financial condition. We believe there are or will be a range of adverse effects on our markets, customers and new business, revenues, loss development and related impacts to our capital needs, employee health and productivity, investment portfolio performance, and ability to access capital and reinsurance markets in the future if we need to. In turn, these impacts may cause changes, which also cannot be precisely determined at this time, to our estimates of future earnings and other guidance we have provided to the markets. In particular, we believe we will experience the following impacts, among others:
Containment measures implemented to mitigate the negative effects of the pandemic could adversely impact our ability to continue to conduct our business. Although we have been able to continue operations under our business continuity program, the spread of COVID-19 could negatively impact a significant number of our employees and the availability of key personnel necessary to conduct our business activities. Such a spread or outbreak could also negatively impact the business and operations of our customers and critical third-party service providers. Further, extreme market volatility may leave us unable to react to market events in a manner consistent with our historical practices in dealing with more orderly markets.
The COVID-19 pandemic and related containment measures could also affect the number of new mortgages available for us to insure. Our NIW volume and future revenues are significantly dependent on the volume of high-LTV loan originations. If there is a significant decline in our NIW, our future revenue could be negatively impacted.
Mortgage delinquencies are typically affected by a variety of factors, including illness, death, unemployment and other life events, among others, many of which are likely exacerbated by the COVID-19 pandemic. While there are efforts underway to combat the spread and severity of COVID-19 and the related economic impacts, these measures may be ineffective in mitigating the spike in defaults we have received, and expect to continue to receive, as a direct result of the COVID-19 pandemic. It is unclear how many borrowers will obtain forbearance plans, the length of assistance borrowers will require, and whether borrowers will be able to resume their mortgage payments thereafter. Increases in unemployment as well as borrowers entering into forbearance plans will result in further increases in the defaults we receive in the near term. In addition, as a result of COVID-19-related relief programs, the defaults related to the pandemic, if not cured, could remain in our default inventory for a protracted period of time, potentially resulting in higher levels of claim severity for those loans that ultimately result in claims. There may be additional, extended or extensive forbearance programs or other changes in regulations or laws which may adversely impact us.
We include a loan in our default population and establish loss reserves on such loan when we have received notice from the servicer that as of a particular payment date, the borrower has missed the preceding two or more consecutive monthly payments. In addition, PMIERs generally requires us to treat such loans as non-performing, which then increases the capital we are required to hold against such loans. Under PMIERs, non-performing loans that have missed two or more payments are generally assessed a significantly higher capital charge than performing loans. The GSEs issued PMIERs guidance, effective June 30, 2020, on the risk-based treatment of loans affected by the COVID-19 crisis (COVID Guidance). The GSEs clarified that for each non-performing loan that: i) has an initial missed payment (as defined in the COVID Guidance) occurring on or after March 1, 2020 and prior to January 1, 2021 (COVID-19 Crisis Period); or ii) is subject to a forbearance plan granted in response to a financial hardship related to COVID-19 (which shall be assumed to be the case for any loan that has an initial missed payment (as defined in the COVID Guidance) occurring during the COVID-19 Crisis Period and is subject to a forbearance
60


plan), the PMIERs charge on such non-performing loans is adjusted by a 30% multiplier (inversely, a 70% haircut). As such, the PMIERs risk-based required asset charge for all newly delinquent loans nationwide (including those that go delinquent under a forbearance program) are reduced by 70%. Under the COVID Guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period. As a result of costs incurred in connection with rising defaults associated with the COVID-19 crisis, the impact to our capital needs and incurred losses could be material and adversely impact our NIW opportunity and our business, results of operations and financial condition.
Whether delinquencies ultimately result in claims will depend on a variety of factors, including the length of the crisis and ultimate success of forbearance, government stimulus and other initiatives established to assist homeowners with curing their delinquencies. Due to the inherent uncertainty and significant judgment involved in our assumptions when we establish loss estimates for loans in default, they may turn out to be materially inaccurate and we can provide no assurance that actual claims paid by us, if any, with respect to defaults arising from the pandemic will not be substantially more than the reserves we establish for such defaults.
Our master policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) interest (capped at three years) and (ii) certain advances, each as incurred through the date the claim is filed. Under our master policies, a national foreclosure moratorium of the type currently required will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amount. If the duration of the current foreclosure moratorium mandated by the GSEs is continued beyond August 31, 2020 for an extended period of time, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not yet gone through foreclosure, may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted.
Home values could materially decline as a result of a persistent economic downturn arising from the COVID-19 pandemic. Depreciation in the values of properties underpinning our insured loans may increase the likelihood of default and negatively impact borrowers' abilities to sell their properties for amounts sufficient to cover their unpaid principal. In turn, the frequency or severity of losses we may incur would be negatively impacted.
Servicers of our insured loans could experience liquidity impacts, which may affect their willingness and/or ability to continue to pay premiums to us. Although our master policies do not require payment of premiums after a loan has gone into default, most servicers continue to remit premiums to us to avoid a lapse in coverage if the borrower cures the default; however, in the current environment, it remains uncertain whether servicers will continue to do so. As set forth in the COVID Guidance, during the COVID-19 Crisis Period, if one or more servicers are unable to continue to remit premiums on loans in default, we, and other GSE-approved mortgage insurers, have agreed to notify the relevant GSE and give such GSE the opportunity to pay the premium to keep the coverage in force. Notwithstanding our agreement with the GSEs, if there are wide-spread servicer liquidity issues and the GSEs choose not to remit premiums, we could experience adverse impacts to our liquidity, which could be material.
Our investment portfolio (and, specifically, the valuations of investment assets we hold) has been, and may continue to be, adversely affected as a result of market deterioration caused by the COVID-19 pandemic and uncertainty regarding its outcome.
The COVID-19 pandemic has caused significant volatility and disruption to the financial, capital and reinsurance markets, making access to such markets difficult. To the extent that our current sources of income and capitalization are insufficient to meet GSE and state capital requirements (respectively, as defined therein) or to fund our future operations, we would need to raise additional funds through future financing activities, including through the issuance of additional debt, equity, or a combination of both, reduce our RIF, including through additional reinsurance, or curtail our growth and reduce our expenses. We can give no assurance that any such efforts to raise capital, obtain additional reinsurance or otherwise reduce our RIF would be successful. If we cannot obtain adequate capital, our business, results of operations and financial condition could be adversely affected.
For the reasons described above, it is uncertain at this time what impact the COVID-19 crisis will ultimately have on our revenues, losses, expenses, required assets under PMIERs, statutory and GAAP capital, and liquidity, and that impact may be material and adverse over time. The ultimate significance of COVID-19 on our business will depend on, among other things: the extent and duration of, and severity of illness caused by, the pandemic; the effects on the economy and the time it takes to stabilize; the extent and duration of current and future containment measures implemented by governmental authorities; current and future governmental assistance programs; and the long-term impact on the mortgage origination and mortgage insurance
61


markets. While at this time we cannot estimate the short or long-term impacts of COVID-19 on our business, the above and other factors, including those set forth under the heading "Risk Factors" contained in our 2019 10-K could have a material adverse effect on our business, liquidity, results of operations and financial condition.
Changes in the business practices of the GSEs, including a decision to decrease or discontinue the use of private MI, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.
The requirements and practices of the GSEs impact the operating results and financial performance of approved insurers, including NMIC. Changes in the charters or business practices of Freddie Mac or Fannie Mae could materially reduce the number of mortgages they purchase that are insured by us and consequently diminish our franchise value. The GSEs could be directed to make such changes by the FHFA, which was appointed as their conservator in September 2008 and has the authority to control and direct the operations of the GSEs.
With the GSEs in a prolonged conservatorship, there has been ongoing debate over the future role and purpose of the GSEs in the U.S. housing market. The U.S. Congress may legislate, or the administration may implement through administrative reform, structural and other changes to the GSEs and the functioning of the secondary mortgage market. Since 2011, there have been numerous legislative proposals intended to incrementally scale back the GSEs (such as a statutory mandate for the GSEs to transfer mortgage credit risk to the private sector) or to completely reform the housing finance system. Congress, however, has not enacted any legislation to date. The proposals vary with regard to the government's role in the housing market, and more specifically, with regard to the existence of an explicit or implicit government guarantee. Recently, there has been increased focus on and discussion of administrative reform independent of legislative action. On September 5, 2019, the Treasury Department released its Housing Reform Plan that included a compilation of legislative and administrative recommendations for reforms to achieve the goals of (i) ending the conservatorships of the GSEs, (ii) advancing competition in the housing finance market, (iii) setting regulations for the GSEs that provide for their safety and soundness and limit their risk to the financial stability of the United States, and (iv) providing proper compensation to the United States government for any explicit or implicit support it provides to the GSEs. Additionally, the Director of the FHFA has publicly stated his priority for exiting the GSEs from conservatorship during his five-year term which began April 2019. Between the Director of the FHFA and the Treasury Department, they possess significant capacity to effect administrative GSE reforms. If any GSE reform is adopted, whether through legislation or administrative action, it could impact the current role of private mortgage insurance as credit enhancement, including its reduction or elimination, which would have an adverse effect on our revenue, operating results, prospects or financial condition. As a result of these matters, it is uncertain what role private capital, including MI, will play in the domestic residential housing finance system in the future or the impact of any such changes on our business. Any changes to the charters or statutory authorities of the GSEs would require Congressional action to implement. Passage and timing of any comprehensive GSE reform or incremental change (legislative or administrative) is uncertain, making the actual impact on us and our industry difficult to predict. Any such changes that come to pass could have a significant impact on our business.
In 2018, the FHFA issued a proposed rule to establish a new enterprise regulatory capital framework (ECF) for the GSEs, which included provisions governing the capital relief allowed to the GSEs for loans with private MI. On May 20, 2020, the FHFA announced a re-proposal of the ECF rule for comment (2020 Proposal), which includes substantial revision to the 2018 proposed rule. The 2020 Proposal is subject to review and comment by August 30, 2020, and any determination by the FHFA or outcome on a final rule is uncertain. The 2020 version, in respect of the capital relief that would be allowed to the GSEs for loans with private MI, treats private MI more favorably than the 2018 proposal; however, until any final rule is adopted, we cannot predict the impact on us or any future implications for PMIERs.
In recent years, the FHFA has set goals for the GSEs to transfer significant portions of the GSEs' mortgage credit risk to the private sector. To date, several credit risk transfer products have been created under the program, including IMAGIN and EPMI and others discussed above in "Our NIW volumes could be adversely affected if lenders and investors select alternatives to private MI." To the extent these credit risk products evolve in a manner that displaces primary MI coverage, the amount of insurance we write may be reduced. It is difficult to predict the impact of alternative credit risk transfer products, if any, that are developed to meet the goals established by the FHFA.
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Item 6. Exhibits
Exhibit Number
Description
2.1
Stock Purchase Agreement, dated November 30, 2011, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
2.2
Amendment to Stock Purchase Agreement, dated April 6, 2012, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.1
Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.2
Third Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to our Form 8-K, filed on December 9, 2014)
4.1
Specimen Class A common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.2
Registration Rights Agreement between NMI Holdings, Inc. and FBR Capital Markets & Co., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.3
Registration Rights Agreement by and between MAC Financial Ltd. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.4
Registration Rights Agreement between FBR & Co., FBR Capital Markets LT, Inc., FBR Capital Markets & Co., FBR Capital Markets PT, Inc. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.5
Warrant No. 1 to Purchase Common Stock of NMI Holdings, Inc. issued to FBR Capital Markets & Co., dated June 13, 2013 (incorporated herein by reference to Exhibit 4.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.6
Form of Warrant to Purchase Common Stock of NMI Holdings, Inc. issued to former stockholders of MAC Financial Ltd. (incorporated herein by reference to Exhibit 4.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.7
10.1 ~
NMI Holdings Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement (registration No. 333-191635), filed on October 9, 2013)
10.2 ~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Management (incorporated herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.3 ~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Chief Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.4 ~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Management (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.5 ~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Directors (incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.6 ~
10.7 ~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Employees (incorporated herein by reference to Exhibit 10.9 to our Form 10-K, filed on February 17, 2017)
10.8 ~
Amended and Restated Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated December 23, 2015 (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on December 29, 2015)
10.9 ~
Offer Letter by and between NMI Holdings, Inc. and William Leatherberry, dated July 11, 2014 (incorporated herein by reference to Exhibit 10.10 to our Form 10-Q, filed on April 28, 2016)
63


10.10 ~
Offer Letter by and between NMI Holdings, Inc. and Adam Pollitzer, dated February 1, 2017 (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on February 3, 2017)
10.11 ~
Form of Indemnification Agreement between NMI Holdings, Inc. and its directors and certain executive officers (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on November 25, 2014)
10.12 +
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20 ~
NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to our 2017 Annual Proxy Statement, filed on March 30, 2017)
10.21 ~
10.22 ~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award Agreement for Executive Officers (incorporated herein by reference to Exhibit 10.20 to our Form 10-Q filed on August 1, 2017)
10.23 ~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award Agreement for Employees (incorporated herein by reference to Exhibit 10.21 to our Form 10-Q filed on August 1, 2017)
10.24 ~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award Agreement for Independent Directors (incorporated herein by reference to Exhibit 10.22 to our Form 10-Q filed on August 1, 2017)
10.25 ~
10.26 ~
10.27 ~
Form of NMI Holdings, Inc. 2014 Omnibus Incentive Plan Performance Based Restricted Stock Unit Award Agreement for Chief Executive Officer (incorporated herein by reference to Exhibit 10.26 to our Form 10-K, filed on February 17, 2017)
10.28 ~
NMI Holdings, Inc. Severance Benefit Plan (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on February 17, 2016)
10.29 ~
10.30 ~
NMI Holdings, Inc. Clawback Policy (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on February 23, 2017)
64


10.31 ~
Employment Letter by and between NMI Holdings, Inc. and Bradley M. Shuster, effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.1 to our Form 8-K, filed on December 28, 2018)
10.32 ~
Employment Letter by and between NMI Holdings, Inc. and Claudia J. Merkle, effective as of January 1, 2019 (incorporated herein by reference to Exhibit 10.2 to our Form 8-K, filed on December 28, 2018)
10.33~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Independent Directors (incorporated herein by reference to Exhibit 10.30 to our Form 10-Q, filed on May 2, 2019)
10.34~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Employees (incorporated herein by reference to Exhibit 10.31 to our Form 10-Q, filed on May 2, 2019)
10.35~
Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 10.32 to our Form 10-Q, filed on May 2, 2019)
10.36~
10.37~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award Agreement for Employees (incorporated herein by reference to Exhibit 10.34 to our Form 10-Q, filed on May 2, 2019)
10.38~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Nonqualified Stock Option Agreement for Employees (incorporated herein by reference to Exhibit 10.35 to our Form 10-Q, filed on May 2, 2019)
10.39~
Form of NMI Holdings, Inc. Amended and Restated 2014 Omnibus Incentive Plan Restricted Stock Unit Award Agreement (Performance Based) (incorporated herein by reference to Exhibit 10.38 to our Form 10-Q, filed on May 7, 2020)
21.1
Subsidiaries of NMI Holdings, Inc. (incorporated herein by reference to Exhibit 21.1 to our Form 10-Q, filed on October 30, 2015)
31.1
31.2
32.1 #
101The following financial information from NMI Holdings, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 formatted in XBRL (eXtensible Business Reporting Language):
(i) Condensed Consolidated Balance Sheets as of June 30, 2020 and December 31, 2019;
(ii) Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and six months ended June 30, 2020 and 2019;
(iii) Condensed Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2020 and 2019;
(iv) Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2020 and 2019; and
(v) Notes to Condensed Consolidated Financial Statements. The instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document.

~Indicates a management contract or compensatory plan or contract.
+Confidential treatment granted as to certain portions, which portions have been filed separately with the SEC.
#In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed "filed" for purposes of Section 18 of the Exchange Act or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act except to the extent that the registrant specifically incorporates it by reference.

65


SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
NMI HOLDINGS, INC.
Date: August 5, 2020
By: /s/ Adam S. Pollitzer                
Name: Adam S. Pollitzer
Title: Chief Financial Officer and Duly Authorized Signatory


66
Document
EXHIBIT 31.1

PRINCIPAL EXECUTIVE OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Claudia J. Merkle, certify that:
1.I have reviewed this quarterly report on Form 10-Q of NMI Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
August 5, 2020/s/ Claudia J. Merkle                             
Claudia J. Merkle
Chief Executive Officer
(Principal Executive Officer)


Document
EXHIBIT 31.2
PRINCIPAL FINANCIAL OFFICER’S CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Adam S. Pollitzer, certify that:
1.I have reviewed this quarterly report on Form 10-Q of NMI Holdings, Inc.;
2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4.The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a)Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b)Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c)Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d)Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a)All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b)Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
August 5, 2020/s/ Adam Pollitzer                                   
Adam S. Pollitzer
Chief Financial Officer
(Principal Financial Officer)

Document
EXHIBIT 32.1

CERTIFICATION OF CEO AND CFO PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of NMI Holdings, Inc. (the "Company") on Form 10-Q for the quarter ended June 30, 2020, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of such officer's knowledge:
The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
August 5, 2020
/s/ Claudia J. Merkle
Claudia Merkle
Chief Executive Officer
(Principal Executive Officer)

August 5, 2020
/s/ Adam S. Pollitzer
Adam S. Pollitzer
Chief Financial Officer
(Principal Financial Officer)
A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signatures that appear in typed form within the electronic version of this written statement required by Section 906, has been provided to NMI Holdings, Inc. and will be retained by NMI Holdings, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.


v3.20.2
COVER PAGE - shares
6 Months Ended
Jun. 30, 2020
Aug. 03, 2020
Cover [Abstract]    
Document Type 10-Q  
Document Quarterly Report true  
Document Period End Date Jun. 30, 2020  
Document Transition Report false  
Entity File Number 001-36174  
Entity Registrant Name NMI Holdings, Inc.  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 45-4914248  
Entity Address, Address Line One 2100 Powell Street  
Entity Address, City or Town Emeryville  
Entity Address, State or Province CA  
Entity Address, Postal Zip Code 94608  
City Area Code 855  
Local Phone Number 530-6642  
Title of 12(b) Security Class A Common Stock, par value $0.01  
Trading Symbol NMIH  
Security Exchange Name NASDAQ  
Entity Current Reporting Status Yes  
Entity Interactive Data Current Yes  
Entity Filer Category Large Accelerated Filer  
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Entity Common Stock, Shares Outstanding   84,805,164
Entity Central Index Key 0001547903  
Current Fiscal Year End Date --12-31  
Document Fiscal Year Focus 2020  
Document Fiscal Period Focus Q2  
Amendment Flag false  
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Assets    
Fixed maturities, available-for-sale, at fair value (amortized cost of $1,286,803 and $1,113,779 as of June 30, 2020 and December 31, 2019, respectively) $ 1,339,771 $ 1,140,940
Cash and cash equivalents (including restricted cash of $2,068 and $2,662 as of June 30, 2020 and December 31, 2019, respectively) 515,450 41,089
Premiums receivable 46,408 46,085
Accrued investment income 7,909 6,831
Prepaid expenses 3,416 3,512
Deferred policy acquisition costs, net 63,619 59,972
Software and equipment, net 26,105 26,096
Intangible assets and goodwill 3,634 3,634
Prepaid reinsurance premiums 10,263 15,488
Other assets [1] 16,049 16,232
Total assets 2,046,931 1,364,818 [1]
Liabilities    
Debt 392,773 145,764
Unearned premiums 115,236 136,642
Accounts payable and accrued expenses 104,777 39,904
Reserve for insurance claims and claim expenses 69,903 23,752
Reinsurance funds withheld 12,205 14,310
Warrant liability, at fair value 2,698 7,641
Deferred tax liability, net 83,785 56,360
Other liabilities 8,517 10,025
Total liabilities 789,894 434,398
Commitments and contingencies
Shareholders' equity    
Common stock - class A shares, $0.01 par value; 84,804,766 and 68,358,074 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively (250,000,000 shares authorized) 848 684
Additional paid-in capital 927,950 707,003
Accumulated other comprehensive income, net of tax 37,675 17,288
Retained earnings 290,564 205,445
Total shareholders' equity 1,257,037 930,420
Total liabilities and shareholders' equity 2,046,931 1,364,818
Reinsurance Recoverables, Gross [1] $ 14,307 $ 4,939
[1] Reinsurance recoverable has been reclassified from "Other assets" in the prior period.
v3.20.2
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Statement of Financial Position [Abstract]    
Fixed maturities, available-for-sale, amortized cost $ 1,286,803 $ 1,113,779
Restricted cash $ 2,068 $ 2,662
Common stock, par value (in dollars per share) $ 0.01 $ 0.01
Common stock, issued (in shares) 84,804,766 68,358,074
Common stock, outstanding (in shares) 84,804,766 68,358,074
Common stock, authorized (in shares) 250,000,000 250,000,000
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Revenues        
Net premiums earned $ 98,944 $ 83,249 $ 197,661 $ 157,118
Net investment income 7,070 7,629 15,174 15,012
Net realized investment gains (losses) 711 (113) 639 (300)
Other revenues 1,223 415 2,123 456
Total revenues 107,948 91,180 215,597 172,286
Expenses        
Insurance claims and claim expenses 34,334 2,923 40,031 5,666
Underwriting and operating expenses [1] 30,370 32,190 62,647 62,990
Service expenses [1] 1,090 353 1,824 402
Interest expense 5,941 3,071 8,685 6,132
Loss (gain) from change in fair value of warrant liability 1,236 1,685 (4,723) 7,164
Total expenses 72,971 40,222 108,464 82,354
Income before income taxes 34,977 50,958 107,133 89,932
Income tax expense 8,129 11,858 22,014 17,933
Net income $ 26,848 $ 39,100 $ 85,119 $ 71,999
Earnings per share        
Basic (in dollars per share) $ 0.36 $ 0.58 $ 1.20 $ 1.07
Diluted (in dollars per share) $ 0.36 $ 0.56 $ 1.11 $ 1.04
Weighted average common shares outstanding        
Basic (in shares) 73,617 67,590 71,090 67,143
Diluted (in shares) 74,174 69,590 72,407 69,348
Comprehensive income:        
Net income $ 26,848 $ 39,100 $ 85,119 $ 71,999
Other comprehensive income, net of tax:        
Unrealized gains in accumulated other comprehensive income, net of tax expense of $8,978 and $3,662 for the three months ended June 30, 2020 and 2019, and $5,162 and $7,615 for the six months ended June 30, 2020 and 2019, respectively 33,773 13,779 19,418 28,647
Reclassification adjustment for realized (gains) losses included in net income, net of tax expense (benefit) of $149 and ($24) for the three months ended June 30, 2020 and 2019, and ($258) and ($63) for the six months ended June 30, 2020 and 2019, respectively (562) 89 969 237
Other comprehensive income, net of tax 33,211 13,868 20,387 28,884
Comprehensive income $ 60,059 $ 52,968 $ 105,506 $ 100,883
[1] Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods.
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (UNAUDITED) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Statement [Abstract]        
Net unrealized (losses) gains in accumulated other comprehensive income, tax (benefit) expense $ 8,978 $ 3,662 $ 5,162 $ 7,615
Reclassification adjustment for realized losses (gains) included in net income, tax expense (benefit) $ 149 $ (24) $ (258) $ (63)
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) - USD ($)
$ in Thousands
Total
Common Stock - Class A
Additional Paid-in Capital
Accumulated Other Comprehensive Income
Retained Earnings
Beginning balance at Dec. 31, 2018 $ 701,500 $ 663 $ 682,181 $ (14,832) $ 33,488
Beginning balance (in shares) at Dec. 31, 2018   66,319,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to warrant exercises 944   944    
Common stock: class A shares issued related to warrant exercises (in shares)   39,195      
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (1,459) $ 12 (1,471)    
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (in shares)   1,144,000      
Share-based compensation expense 2,981   2,981    
Change in unrealized investment gains/losses, net of tax benefit/expense 15,016     15,016  
Net income 32,899       32,899
Ending balance at Mar. 31, 2019 751,881 $ 675 684,635 184 66,387
Ending balance (in shares) at Mar. 31, 2019   67,502,000      
Beginning balance at Dec. 31, 2018 $ 701,500 $ 663 682,181 (14,832) 33,488
Beginning balance (in shares) at Dec. 31, 2018   66,319,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to warrant exercises (in shares) 168,000        
Net income $ 71,999        
Ending balance at Jun. 30, 2019 812,379 $ 677 692,163 14,052 105,487
Ending balance (in shares) at Jun. 30, 2019   67,768,000      
Beginning balance at Mar. 31, 2019 751,881 $ 675 684,635 184 66,387
Beginning balance (in shares) at Mar. 31, 2019   67,502,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to warrant exercises $ 3,836 $ 1 3,835    
Common stock: class A shares issued related to warrant exercises (in shares) 129,000 128,000      
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes $ 219 $ 1 218    
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (in shares)   138,000      
Share-based compensation expense 3,475   3,475    
Change in unrealized investment gains/losses, net of tax benefit/expense 13,868     13,868  
Net income 39,100       39,100
Ending balance at Jun. 30, 2019 812,379 $ 677 692,163 14,052 105,487
Ending balance (in shares) at Jun. 30, 2019   67,768,000      
Beginning balance at Dec. 31, 2019 930,420 $ 684 707,003 17,288 205,445
Beginning balance (in shares) at Dec. 31, 2019   68,358,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to warrant exercises 221   221    
Common stock: class A shares issued related to warrant exercises (in shares)   6,474      
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (3,750) $ 5 (3,755)    
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (in shares)   510,000      
Share-based compensation expense 2,552   2,552    
Change in unrealized investment gains/losses, net of tax benefit/expense (12,824)     (12,824)  
Net income 58,271       58,271
Ending balance at Mar. 31, 2020 974,890 $ 689 706,021 4,464 263,716
Ending balance (in shares) at Mar. 31, 2020   68,874,000      
Beginning balance at Dec. 31, 2019 $ 930,420 $ 684 707,003 17,288 205,445
Beginning balance (in shares) at Dec. 31, 2019   68,358,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to warrant exercises (in shares) 6,000        
Net income $ 85,119        
Ending balance at Jun. 30, 2020 1,257,037 $ 848 927,950 37,675 290,564
Ending balance (in shares) at Jun. 30, 2020   84,805,000      
Beginning balance at Mar. 31, 2020 974,890 $ 689 706,021 4,464 263,716
Beginning balance (in shares) at Mar. 31, 2020   68,874,000      
Increase (Decrease) in Stockholders' Equity [Roll Forward]          
Common stock: class A shares issued related to public offering 219,687 $ 159 219,528    
Common stock: class A shares issued related to public offering (in shares)   15,870,000      
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (321)   (321)    
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (in shares)   61,226      
Share-based compensation expense 2,722   2,722    
Change in unrealized investment gains/losses, net of tax benefit/expense 33,211     33,211  
Net income 26,848       26,848
Ending balance at Jun. 30, 2020 $ 1,257,037 $ 848 $ 927,950 $ 37,675 $ 290,564
Ending balance (in shares) at Jun. 30, 2020   84,805,000      
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) (Parenthetical) - USD ($)
$ in Thousands
3 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2019
Mar. 31, 2019
Change in unrealized investment gains/losses, tax expense $ 8,829 $ (3,409) $ 3,686 $ 3,992
Common stock: class A shares issued related to warrant exercises (in shares)     129,000  
Common stock, par value (in dollars per share) $ 0.01      
Common Stock        
Common stock: class A shares issued related to warrant exercises (in shares)   6,474 128,000 39,195
Common stock, par value (in dollars per share)   $ 0.01   $ 0.01
Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes (in shares) 61,226 510,000 138,000 1,144,000
v3.20.2
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2018
Cash flows from operating activities      
Net income $ 85,119 $ 71,999  
Adjustments to reconcile net income to net cash provided by operating activities:      
Net realized investment (gains) losses (639) 300  
(Gain) loss from change in fair value of warrant liability (4,723) 7,164  
Depreciation and amortization 4,914 4,339  
Net amortization of premium on investment securities 629 622  
Amortization of debt discount and debt issuance costs 3,267 499  
Deferred income taxes 22,006 17,840  
Share-based compensation expense 5,274 6,456  
Changes in operating assets and liabilities:      
Premiums receivable (323) (6,218)  
Accrued investment income (1,078) (607)  
Prepaid expenses 96 (312)  
Deferred policy acquisition costs, net (3,647) (5,767)  
Other assets (328) (260)  
Unearned premiums (21,406) (7,535)  
Reserve for insurance claims and claim expenses 46,151 5,621  
Reinsurance recoverable (9,368) (774)  
Reinsurance balances, net 2,658 336  
Accounts payable and accrued expenses (1,247) (6,379)  
Net cash provided by operating activities 127,355 87,324  
Cash flows from investing activities      
Purchase of short-term investments (41,872) (113,276)  
Purchase of fixed-maturity investments, available-for-sale (451,462) (126,179)  
Proceeds from maturity of short-term investments 85,689 119,748  
Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale 297,977 49,229  
Software and equipment (4,638) (4,491)  
Net cash (used in) investing activities (114,306) (74,969)  
Cash flows from financing activities      
Proceeds from issuance of common stock related to public offering, net of issuance costs 220,284 0  
Proceeds from issuance of common stock related to employee equity plans 3,391 12,374  
Taxes paid related to net share settlement of equity awards (7,462) (13,538)  
Proceeds from senior secured notes 400,000 0  
Repayments of term loan (147,750) (750)  
Payments of debt issuance costs (7,151) 0  
Net cash provided by (used in) financing activities 461,312 (1,914)  
Net increase in cash, cash equivalents and restricted cash 474,361 10,441  
Cash, cash equivalents and restricted cash, beginning of period 41,089 25,294  
Cash, cash equivalents and restricted cash, end of period 515,450 $ 35,735  
Supplemental disclosures of cash flow information      
Interest paid 4,286   $ 5,365
Income taxes refunded $ 76   $ 134
v3.20.2
Organization, Basis of Presentation and Summary of Accounting Principles
6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Organization, Basis of Presentation and Summary of Accounting Principles Organization, Basis of Presentation and Summary of Accounting Principles
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."
In April 2013, NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy. NMIC is licensed to write mortgage insurance in all 50 states and D.C. In August 2015, NMIH capitalized a wholly-owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly-owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2019, included in our 2019 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2020.
COVID-19 Developments
On January 30, 2020, the World Health Organization (WHO) declared the outbreak of COVID-19 a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off.
The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for medical advances that might relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist and if or when any such medical advances may be developed or made available. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees are safe and able to continue serving our customers and their borrowers without interruption. We have also sought to broadly assess the impact that the COVID-19 outbreak has had and may continue to have on the U.S economy and housing market, and the implications for the mortgage insurance market, and our business performance and financial position, including our new business production, default and claims experience, and investment portfolio results. Given the uncertainty that remains, we cannot fully assess or estimate the ultimate impact of COVID-19.
Significant Accounting Principles
There have been no changes to our significant accounting principles as described in Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Accounting Principles" of our 2019 10-K, other than as noted in "Investments," "Premium Receivables," "Reinsurance" and "Recent Accounting Pronouncements - Adopted" below.
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 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 $7.9 million as of June 30, 2020 and is included in "Accrued Investment Income." We have elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. Accrued interest for available for sale securities is written off against interest income when the receivable has aged 90 days past due. We did not write off any accrued interest receivable during the three or six months ended June 30, 2020.
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 did not establish an allowance for credit loss at June 30, 2020.
Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan. We have established a reserve for premium write-offs based on historical experience; such reserve was deemed to be immaterial at June 30, 2020.
Reinsurance
We account for premiums, claims and claim expenses that are ceded to reinsurers on a 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 has entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction), January 1, 2018 (the 2018 QSR Transaction) and April 1, 2020 (the 2020 QSR Transaction), which we refer to collectively as the QSR Transactions. We earn profit and ceding commissions in connection with the QSR Transactions. 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 increases 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 and 2020 QSR Transactions, and are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions we earn in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions earned as a reduction to underwriting and operating expenses.
Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as "Reinsurance Recoverables" on the consolidated balance sheets and such ceded claims as reductions to claims expenses on the consolidated statements of operations. As of June 30, 2020, we had $14.3 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. As of June 30, 2020, we did not recognize any allowance for credit loss with respect to our reinsurance recoverables.
Recent Accounting Pronouncements - Adopted
In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (Topic 815), Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses shifts from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. We adopted this ASU on January 1, 2020 and determined it did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019, which amended the effective date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We 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). This 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 in 2021. The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The standard is effective
immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the impact the adoption of this ASU would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.
v3.20.2
Investments
6 Months Ended
Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Investments 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 statement of operations as a "Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense. The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
Fair Values and Gross Unrealized Gains and Losses on Investments
Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$31,196  $2,484  $—  $33,680  
Municipal debt securities175,035  7,743  —  182,778  
Corporate debt securities987,938  42,964  (984) 1,029,918  
Asset-backed securities92,278  1,071  (310) 93,039  
Total bonds1,286,447  54,262  (1,294) 1,339,415  
Short-term investments356  —  —  356  
Total investments$1,286,803  $54,262  $(1,294) $1,339,771  

Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of December 31, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,203  $784  $(58) $48,929  
Municipal debt securities189,530  1,721  (1,035) 190,216  
Corporate debt securities661,719  23,373  (211) 684,881  
Asset-backed securities170,153  2,603  (114) 172,642  
Total bonds1,069,605  28,481  (1,418) 1,096,668  
Short-term investments44,174  98  —  44,272  
Total investments$1,113,779  $28,579  $(1,418) $1,140,940  
We did not own any mortgage-backed securities in our asset-backed securities portfolio at June 30, 2020 or December 31, 2019. We periodically recognize unsettled trades payable or receivable in connection with our investing activity. Unsettled trades payable represent funds due for investments purchased at period end. Unsettled trades receivable represent funds due for investments sold at period end. Included in "Accounts Payable and Accrued Expenses" are $68.9 million and $5.6 million of unsettled trade payables from the purchase of investment securities at June 30, 2020 and December 31, 2019, respectively.
The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2020 and December 31, 2019:
June 30, 2020December 31, 2019
Financial37 %38 %
Consumer23  26  
Utilities13   
Communications10  10  
Technology 10   
Industrial  
Energy—   
Total100 %100 %
As of June 30, 2020 and December 31, 2019, approximately $5.7 million and $5.5 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 June 30, 2020 and December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
As of June 30, 2020Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$72,505  $73,072  
Due after one through five years387,886  410,176  
Due after five through ten years716,261  744,725  
Due after ten years17,873  18,759  
Asset-backed securities92,278  93,039  
Total investments$1,286,803  $1,339,771  

As of December 31, 2019Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$138,776  $139,113  
Due after one through five years406,986  417,208  
Due after five through ten years380,737  394,180  
Due after ten years17,127  17,797  
Asset-backed securities170,153  172,642  
Total investments$1,113,779  $1,140,940  
Aging of Unrealized Losses
As of June 30, 2020, the investment portfolio had gross unrealized losses of $1.3 million, of which $0.1 million had been in an unrealized loss position for a period of 12 months or longer. For those securities in an unrealized loss position, the length of time the length of time the securities were in such a position is as follows:
Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of June 30, 2020(Dollars in Thousands)
Corporate debt securities39  194,885  (982)  553  (2) 41  195,438  (984) 
Asset-backed securities16  32,683  (227)  2,913  (83) 17  35,596  (310) 
Total 55  $227,568  $(1,209)  $3,466  $(85) 58  $231,034  $(1,294) 

Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of December 31, 2019(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies $12,001  $(58) —  $—  $—   $12,001  $(58) 
Municipal debt securities26  92,844  (1,034)  999  (1) 27  93,843  (1,035) 
Corporate debt securities10  30,481  (140) 14  23,976  (71) 24  54,457  (211) 
Asset-backed securities 19,236  (102)  2,988  (12) 10  22,224  (114) 
Total49  $154,562  $(1,334) 16  $27,963  $(84) 65  $182,525  $(1,418) 
Allowance for credit losses
As of June 30, 2020, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did record any provision for credit loss for investment securities during the three or six months ended June 30, 2020. Based on current facts and circumstances, we believe the unrealized losses as of June 30, 2020 are not indicative of the ultimate collectability of the current amortized cost of the securities. We believe the gross unrealized losses are primarily attributable to widening credit spreads as a result of uncertainties arising from the COVID-19 pandemic.
During the six months ended June 30, 2019, we recognized $0.4 million other-than-temporarily impaired (OTTI) losses in connection with the planned sale of a security that was disposed of in April 2019.
Net Investment Income
The following table presents the components of net investment income:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Investment income$7,320  $7,741  $15,669  $15,237  
Investment expenses(250) (112) (495) (225) 
Net investment income$7,070  $7,629  $15,174  $15,012  
The following table presents the components of net realized investment gains (losses):
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Gross realized investment gains$4,586  $22  $5,126  $217  
Gross realized investment losses(3,875) (135) (4,487) (517) 
Net realized investment gains (losses)$711  $(113) $639  $(300) 
v3.20.2
Fair Value of Financial Instruments
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments 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.
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 June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$33,680  $—  $—  $33,680  
Municipal debt securities—  182,778  —  182,778  
Corporate debt securities—  1,029,918  —  1,029,918  
Asset-backed securities—  93,039  —  93,039  
Cash, cash equivalents and short-term investments515,806  —  —  515,806  
Total assets$549,486  $1,305,735  $—  $1,855,221  
Warrant liability—  —  2,698  2,698  
Total liabilities$—  $—  $2,698  $2,698  

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, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,929  $—  $—  $48,929  
Municipal debt securities—  190,216  —  190,216  
Corporate debt securities—  684,881  —  684,881  
Asset-backed securities—  172,642  —  172,642  
Cash, cash equivalents and short-term investments85,361  —  —  85,361  
Total assets$134,290  $1,047,739  $—  $1,182,029  
Warrant liability—  —  7,641  7,641  
Total liabilities$—  $—  $7,641  $7,641  
There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the six months ended June 30, 2020, or the year ended December 31, 2019.
The following is a roll-forward of Level 3 liabilities measured at fair value:
For the six months ended June 30,
Warrant Liability20202019
(In Thousands)
Balance, January 1$7,641  $7,296  
Change in fair value of warrant liability included in earnings(4,723) 7,164  
Issuance of common stock on warrant exercise(220) (4,781) 
Balance, June 30$2,698  $9,679  
The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.
As of June 30,
20202019
Common stock price$16.08  $28.39  
Risk free interest rate0.16 %
1.72 - 1.95%
Expected life1.81 years
0.92 - 2.81 years
Expected volatility71.6 %
33.8 - 40.0%
Dividend yield%%
The changes in fair value of the warrant liability for the six months ended June 30, 2020 and 2019 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in other Black-Scholes model inputs. The change in fair value of the warrant liability for the six months ended June 30, 2019 also reflects the impact of the exercises of outstanding warrants.
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). At June 30, 2020, the Notes were carried at a cost of $392.8 million, net of unamortized debt issuance costs of $7.2 million, and had a fair value of $418.4 million as assessed under our Level 2 hierarchy. At December 31, 2019, our 2018 Term Loan was carried at a cost of $145.8 million, net of unamortized debt issuance costs of $2.0 million, and had a fair value of $147.8 million.
v3.20.2
Debt
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Debt Debt
Senior Secured Notes
At June 30, 2020, we had $400 million aggregate principal amount of senior secured notes outstanding. The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. A portion of the proceeds from the Notes offering were used to repay the outstanding amount due under our $150 million term loan (2018 Term Loan) and to pay underwriting fees incurred in connection with the offering. Remaining proceeds of $244.4 million are available for general corporate purposes, including to support the growth of our new business production and operations.
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 Note, or (2) the principal value of the Note plus the present value of all future interest payments. At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100% of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon. From time to time prior to June 1, 2022, we may also elect to use proceeds raised from one or more equity offerings to redeem up to 40% of the aggregate principal amount of the Notes at a price equal to 107.375% of the aggregate principal amount thereof plus accrued and unpaid interest thereon, subject to certain exceptions.
Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs. In connection with the Notes offering, we recorded capitalized debt issuance costs of $7.4 million. Such amounts will be amortized over the contractual life of the Notes using the effective interest method. At June 30, 2020, $7.2 million of unamortized debt issuance costs remained.
Interest expense for the three and six months ended June 30, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan and issuance of the Notes.
We are subject to certain covenants under the Notes (as defined in the Indenture), including, but not limited to, a maximum debt-to-total capitalization ratio of 35%. We were in compliance with all Notes covenants as of June 30, 2020.
        2020 Revolving Credit Facility
On March 20, 2020, we amended our $85 million three-year secured revolving credit facility (the 2018 Revolving Credit Facility), increasing borrowing capacity under the facility to $100 million, extending its maturity date from May 24, 2021 to February 22, 2023, and reducing the interest cost related to both undrawn commitments and drawn borrowings under the facility (as amended, the 2020 Revolving Credit Facility). Borrowings under the 2020 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in our existing credit agreement (the Credit Agreement), subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate (subject to a floor of —% per annum) plus a margin of 1.375% to 2.875% per annum, based on the applicable corporate credit rating at the time. As of June 30, 2020, no borrowings were drawn under the 2020 Revolving Credit Facility.
Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of June 30, 2020, the applicable commitment fee was 0.35%. For the three and six months ended June 30, 2020, we recorded $0.1 million and $0.2 million of commitment fees in interest expense, respectively.
We incurred debt issuance costs of $0.8 million in connection with the 2020 Revolving Credit Facility and had $0.6 million of unamortized debt issuance costs associated with the 2018 Revolving Credit Facility remaining at the time of its amendment and replacement. Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2020 Revolving Credit Facility. At June 30, 2020, remaining unamortized deferred debt issuance costs were $1.2 million.
We are subject to certain covenants under the 2020 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants at June 30, 2020.
v3.20.2
Reinsurance
6 Months Ended
Jun. 30, 2020
Reinsurance Disclosures [Abstract]  
Reinsurance 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 three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Net premiums written
Direct$108,478  $92,213  $211,931  $173,943  
Ceded (1)
(18,369) (9,604) (30,451) (19,411) 
Net premiums written$90,109  $82,609  $181,480  $154,532  
Net premiums earned
Direct$120,150  $95,180  $233,337  $181,478  
Ceded (1)
(21,206) (11,931) (35,676) (24,360) 
Net premiums earned$98,944  $83,249  $197,661  $157,118  
(1) Net of profit commission.
Excess-of-loss reinsurance
NMIC entered into excess-of-loss reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd. and Oaktown Re III Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018 and July 30, 2019, respectively. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies written during a discrete period. Under each agreement, NMIC retains a first
layer of 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 $300 thousand per year to Oaktown Re Ltd. and $250 thousand per year to Oaktown Re II, Ltd. and Oaktown Re III, Ltd.). NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $3.3 million and $7.1 million during the three and six months ended June 30, 2020 and $2.9 million and $5.9 million during the three and six months ended June 30, 2019, respectively.
NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement. NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the three and six months ended June 30, 2020 and 2019, as the aggregate first layer risk retention was not exhausted for each applicable agreement during such periods.
Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. 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. We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Ltd., Oaktown Re II, Ltd. and Oaktown Re III, Ltd. individually as the 2017 ILN Transaction, 2018 ILN Transaction and 2019 ILN Transaction, and collectively as the ILN Transactions.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of June 30, 2020.
($ values in thousands)
Inception DateCovered ProductionInitial Reinsurance CoverageCurrent Reinsurance CoverageInitial First Layer Retained Loss
Current First Layer Retained Loss (1)
2017 ILN TransactionMay 2, 20171/1/2013 - 12/31/2016$211,320  $40,226  $126,793  $122,034  
2018 ILN TransactionJuly 25, 20181/1/2017 - 5/31/2018264,545  158,489  125,312  123,694  
2019 ILN TransactionJuly 30, 20196/1/2018 - 6/30/2019326,905  231,877  123,424  123,345  
(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.
NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement, including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to noteholders, among others.
Under the terms of the 2018 ILN Transaction and the 2019 ILN Transaction, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full. "Cash and cash equivalents" on our condensed consolidated balance sheet includes restricted amounts of $2.1 million as of June 30, 2020. We are not required to deposit additional funds into the premium deposit accounts in the future and the restricted balances required under these transactions.
        Quota share reinsurance
NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018 and the 2020 QSR Transaction, effective April 1, 2020. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. 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 re-assuming 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 re-assuming the related risk.
Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to eligible policies written from April 1, 2020 to December 31, 2020 (Eligible Policies). At the time the 2020 QSR Transaction agreement was executed, NMIC ceded premiums earned related to 10.5% of the risk on the Eligible Policies, and subsequent to the execution of the agreement, we engaged additional reinsurance counterparties and increased the cession under the 2020 QSR Transaction to 21.0% of the risk on the Eligible Policies, subject in all respects to the terms of the agreement. Financial results for the three and six months ended June 30, 2020, reflect the initial 10.5% cession rate under the 2020 QSR Transaction. The 2020 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 re-assuming 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 risk-in-force (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 three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Ceded risk-in-force$4,563,676  $4,558,862  $4,563,676  $4,558,862  
Ceded premiums earned(23,210) (20,919) (46,221) (42,387) 
Ceded claims and claim expenses8,669  770  10,201  1,669  
Ceding commission earned4,428  4,171  8,941  8,377  
Profit commission5,271  11,884  17,684  23,945  
Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums. Under the 2018 QSR Transaction and 2020 QSR Transactions, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission for premiums ceded under the QSR Transactions. NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016 QSR Transaction, 2018 QSR Transaction and 2020 QSR Transaction, generally remain below 60%, 61% and 50%, respectively, as measured annually. Ceded claims and claim expenses under each of the QSR Transactions reduce the respective profit commission received by NMIC on a dollar-for-dollar basis.
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 $4.9 million as of June 30, 2020.
In accordance with the terms of the 2018 and 2020 QSR Transactions, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to the 2018 QSR Transaction was $9.4 million as of June 30, 2020. The reinsurance recoverable on loss reserves related to the 2020 QSR Transaction were immaterial as of June 30, 2020.
v3.20.2
Reserves for Insurance Claims and Claim Expenses
6 Months Ended
Jun. 30, 2020
Insurance [Abstract]  
Reserves for Insurance Claims and Claim Expenses 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 June 30, 2020, we had 10,816 primary loans in default and held gross reserves for insurance claims and claim expenses of $69.9 million. During the six months ended June 30, 2020, we paid 83 claims totaling $4.1 million, including 78 claims covered under the QSR Transactions representing $0.8 million of ceded claims and claim expenses.
In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At June 30, 2020, 231 loans in the pool were in default. These 231 loans represented approximately $19.6 million of RIF. Due to the size of the remaining deductible, the low level of defaults reported to us on loans in the pool through June 30, 2020 and the expected severity (all loans in the pool have loan-to-value (LTV) ratios under 80%), we did not establish any case or IBNR reserves for pool risk at June 30, 2020. In connection with the settlement of pool claims, we applied $0.9 million to the pool deductible through June 30, 2020. At June 30, 2020, the remaining pool deductible was $9.5 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.
We had 10,816 loans in default in our primary insured portfolio as of June 30, 2020, which represented a 2.90% default
rate against 372,934 total policies in-force. We had 1,028 loans in default in our primary insured portfolio as of June 30, 2019, which represented a 0.32% default rate against 324,876 total policies in-force. The increase in our default population is primarily due to challenges borrowers are facing related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief and Economic Security (CARES) Act or similar programs made available by private lenders.
The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default. Our future claims exposure is a function of the number of defaulted loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic factors. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, the FHFA and GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance programs and default status.
Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. 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. At June 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at June 30, 2020, our total reserve position and claims and claims expenses increased substantially as of and during the period ended June 30, 2020 due to the significant increase in the size of our default population.
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses:
For the six months ended June 30,
20202019
(In Thousands)
Beginning balance$23,752  $12,811  
Less reinsurance recoverables (1)
(4,939) (3,001) 
Beginning balance, net of reinsurance recoverables18,813  9,810  
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
42,516  7,401  
Prior years (3)
(2,485) (1,735) 
Total claims and claim expenses incurred40,031  5,666  
Less claims paid:
Claims and claim expenses paid:
Current year (2)
39  —  
Prior years (3)
3,209  1,368  
Reinsurance terminations (4)
—  (549) 
Total claims and claim expenses paid3,248  819  
Reserve at end of period, net of reinsurance recoverables55,596  14,657  
Add reinsurance recoverables (1)
14,307  3,775  
Ending balance$69,903  $18,432  
(1) Related to ceded losses recoverable under the QSR Transactions. See Note 5, "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.
(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.
(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 5, "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. The amount of claims incurred relating to current year defaults represents the estimated amount of claims and claim expenses to ultimately be paid on such loans. We recognized $2.5 million and $1.7 million of favorable prior year development during the six months ended June 30, 2020 and 2019, respectively, primarily due to the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $16.5 million related to prior year defaults remained as of June 30, 2020.
v3.20.2
Earnings per Share (EPS)
6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Earnings per Share (EPS) Earnings per Share (EPS)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 three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands, except for per share data)
Net income$26,848  $39,100  $85,119  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Basic earnings per share$0.36  $0.58  $1.20  $1.07  
Net income$26,848  $39,100  $85,119  $71,999  
Gain from change in fair value of warrant liability—  —  (4,723) —  
Diluted net income$26,848  $39,100  $80,396  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Dilutive effect of issuable shares557  2,000  1,317  2,205  
Diluted weighted average shares outstanding74,174  69,590  72,407  69,348  
Diluted earnings per share$0.36  $0.56  $1.11  $1.04  
Anti-dilutive shares609  705  78  748  
v3.20.2
Warrants
6 Months Ended
Jun. 30, 2020
Debt Disclosure [Abstract]  
Warrants Warrants
We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012. Each warrant gives the holder thereof the right to purchase one share of common stock at an exercise price equal to $10.00. The warrants were issued with an aggregate fair value of $5.1 million.
During the three months ended June 30, 2020, no warrants were exercised. During the six months ended June 30, 2020, nine thousand warrants were exercised resulting in the issuance of six thousand shares of common stock. Upon exercise, we reclassified approximately $0.2 million of warrant fair value from warrant liability to additional paid-in capital.
During the three months ended June 30, 2019, 193 thousand warrants were exercised resulting in the issuance of 129 thousand shares of common stock. Upon exercise, we reclassified approximately $3.9 million of warrant fair value from warrant liability to additional paid-in capital, of which $2.0 million related to changes in fair value during the three months ended June 30, 2019. During the six months ended June 30, 2019, 260 thousand warrants were exercised resulting in the issuance of 168 thousand shares of common stock. Upon exercise, we reclassified approximately $4.8 million of warrant fair value from warrant liability to additional paid-in capital, of which $2.3 million related to changes in fair value during the six months ended June 30, 2019.
v3.20.2
Income Taxes
6 Months Ended
Jun. 30, 2020
Income Tax Disclosure [Abstract]  
Income Taxes 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. Our effective tax rate on our pre-tax income was 23.2% and 20.5% for the three and six months ended June 30, 2020, respectively, compared to 23.3% and 19.9% for the three and six months ended June 30, 2019, respectively. Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rate may fluctuate between interim periods due to the impact of discrete items not included in our estimated annual effective tax rate, including the tax effects associated with the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability. Such items are treated on a discrete basis in the reporting period in which they occur.
As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent. As a result, our interim provision for income taxes for the three and six months ended June 30, 2020 represents a change in our net deferred tax liability. As of June 30, 2020, we held $7.6 million of tax and loss bonds in "Other assets" in our condensed consolidated balance sheet.
v3.20.2
Common Stock
6 Months Ended
Jun. 30, 2020
Equity [Abstract]  
Common Stock Common Stock
As of June 30, 2020, we had 84.8 million outstanding shares of 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.
On June 8, 2020, we completed the sale of 13.8 million shares of common stock and granted the underwriters on the transaction a 15% overallotment option to purchase additional shares. The overallotment option was exercised in full, resulting in a total of 15.9 million shares of common stock issued. The common stock offering generated proceeds of $219.7 million, net of underwriting discounts, commissions and other direct offering expenses.
v3.20.2
Regulatory Information
6 Months Ended
Jun. 30, 2020
Insurance [Abstract]  
Regulatory Information Regulatory Information
        Statutory Requirements
Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles (SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners. The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws.
NMIC and Re One's combined statutory net income (loss) was as follows:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Statutory net (loss) gain$(24,705) $6,466  $(17,014) $5,539  
        NMIC and Re One's combined statutory surplus, contingency reserve and risk-to-capital (RTC) ratio were as follows:
June 30, 2020December 31, 2019
(In Thousands)
Statutory surplus$892,160  $449,602  
Contingency reserve648,493  531,825  
RTC ratio
13.0:1
15.8:1
In June 2020, NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings.
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 corporate law provides that dividends are only payable out of a corporation's capital surplus or, subject to certain limitations, recent net profits. NMIC and Re One are subject to certain rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs that may restrict their ability to pay dividends to NMIH. Since inception, NMIC and Re One have not paid any dividends to NMIH. NMIC and Re One have the capacity to pay aggregate ordinary dividends as calculated under Wisconsin law of $16.1 million to NMIH during the 12-month period ending December 31, 2020.
The Wisconsin OCI has approved the allocation of interest expense on the $400 million Notes and $100 million 2020 Revolving Credit Facility to NMIC, to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC.
v3.20.2
COVID-19 Developments and Coronavirus Aid, Relief, and Economic Security (CARES) Act
6 Months Ended
Jun. 30, 2020
Unusual or Infrequent Items, or Both [Abstract]  
COVID-19 Developments and Coronavirus Aid, Relief, and Economic Security (CARES) Act COVID-19 Developments and Coronavirus Aid, Relief, and Economic Security (CARES) ActCOVID-19 Developments
v3.20.2
Subsequent Event
6 Months Ended
Jun. 30, 2020
Subsequent Events [Abstract]  
Subsequent Event Subsequent EventOn July 30, 2020, NMIC entered into a reinsurance agreement with Oaktown Re IV Ltd. (Oaktown Re IV), a Bermuda domiciled special purpose reinsurer, that provides for up to $322.1 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written between July 1, 2019 and March
31, 2020. For the reinsurance coverage period, NMIC will retain the first layer of $169.5 million of aggregate losses and Oaktown Re IV will then provide second layer coverage up to the outstanding reinsurance coverage amount. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount.
Oaktown Re IV financed the coverage by issuing mortgage insurance-linked notes in an aggregate principal amount of $322.1 million to unaffiliated investors. The notes issued by Oaktown Re IV mature on July 25, 2030; all proceeds raised were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re IV to NMIC under the reinsurance agreement. Funds in the reinsurance trust account are required to be invested in high credit quality money market funds at all times. We refer to NMIC's reinsurance agreement with and the insurance-linked notes issued by Oaktown Re IV as the 2020 ILN Transaction. Under the terms of the 2020 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re IV for anticipated operating expenses (capped at $250,000 per year).
v3.20.2
Organization, Basis of Presentation and Summary of Accounting Principles (Policies)
6 Months Ended
Jun. 30, 2020
Organization, Consolidation and Presentation of Financial Statements [Abstract]  
Basis of Presentation
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly-owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2019, included in our 2019 10-K. All intercompany transactions have been eliminated. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. Certain reclassifications to previously reported financial information have been made to conform to current period presentation. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2020.
Investments
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 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 $7.9 million as of June 30, 2020 and is included in "Accrued Investment Income." We have elected not to measure an allowance for credit losses for accrued interest receivable on available for sale securities. Accrued interest for available for sale securities is written off against interest income when the receivable has aged 90 days past due. We did not write off any accrued interest receivable during the three or six months ended June 30, 2020.
Premiums Receivable
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 did not establish an allowance for credit loss at June 30, 2020.
Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan. We have established a reserve for premium write-offs based on historical experience; such reserve was deemed to be immaterial at June 30, 2020.
Reinsurance
Reinsurance
We account for premiums, claims and claim expenses that are ceded to reinsurers on a 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 has entered into quota share reinsurance treaties effective September 1, 2016 (the 2016 QSR Transaction), January 1, 2018 (the 2018 QSR Transaction) and April 1, 2020 (the 2020 QSR Transaction), which we refer to collectively as the QSR Transactions. We earn profit and ceding commissions in connection with the QSR Transactions. 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 increases 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 and 2020 QSR Transactions, and are intended to cover our costs of acquiring and servicing direct policies. We recognize any ceding commissions we earn in a manner consistent with our recognition of earnings on the underlying insurance policies, over the terms of the policies reinsured. We account for ceding commissions earned as a reduction to underwriting and operating expenses.
Under the QSR Transactions, we cede a portion of claims and claim expense reserves to our reinsurers, and account for such ceded reserves as "Reinsurance Recoverables" on the consolidated balance sheets and such ceded claims as reductions to claims expenses on the consolidated statements of operations. As of June 30, 2020, we had $14.3 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. As of June 30, 2020, we did not recognize any allowance for credit loss with respect to our reinsurance recoverables.
Recent Accounting Pronouncements
Recent Accounting Pronouncements - Adopted
In June 2016, the Financial Accounting Standard Board (FASB) issued Accounting Standards Update (ASU) 2016-13, Financial Instruments-Credit Losses (Topic 326) and subsequently issued amendments to the initial guidance: ASU 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (Topic 815), Derivatives and Hedging, and Topic 825, Financial Instruments, ASU 2019-05, Financial Instruments-Credit Losses: Targeted Transition Relief, and ASU 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. These updates will require companies to measure and establish reserves for lifetime expected credit losses on many financial assets held at a given reporting date. Under the guidance, the methodology for measuring lifetime credit losses shifts from an incurred loss model, whereby losses are only recognized once probable and estimable, to a current expected credit loss (CECL) model, whereby losses are recognized upfront based on a future economic forecast. Credit losses relating to available-for-sale fixed maturity securities are recorded through an allowance for credit losses, rather than a write-down of the asset as was required, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. The length of time an available-for sale fixed maturity security has been held in an unrealized loss position will no longer impact its credit loss determination. We adopted these updates on January 1, 2020. Adoption of the updated standards did not have a material impact on our consolidated financial statements, and had no impact on our accounting for insurance claims and claim expenses as these items are not in scope of the guidance.
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). This update modifies the fair value measurement disclosure requirements of ASC 820. We adopted this ASU on January 1, 2020 and determined it did not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40). This update applies to cloud computing arrangements structured as service contracts, and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. We adopted this ASU on January 1, 2020 and applied it on a prospective basis for eligible costs incurred after the effective date. The adoption of this ASU did not have a material impact on our consolidated financial statements.
Recent Accounting Pronouncements - Not Yet Adopted
In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts. This update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019, which amended the effective date for this standard. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
In November 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740). This update eliminates certain exceptions for recognizing deferred taxes for investments, performing intra-period allocations and calculating income taxes in interim periods. The ASU also includes guidance to reduce complexity in certain income tax areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. We 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). This 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 in 2021. The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. The standard is effective
immediately through December 31, 2022 for all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. We are currently evaluating the impact the adoption of this ASU would have, if any, to our contract modifications that are affected by the discontinuation of LIBOR.
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.
v3.20.2
Investments (Tables)
6 Months Ended
Jun. 30, 2020
Investments, Debt and Equity Securities [Abstract]  
Schedule of Fair Values and Gross Unrealized Gains and Losses
Fair Values and Gross Unrealized Gains and Losses on Investments
Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$31,196  $2,484  $—  $33,680  
Municipal debt securities175,035  7,743  —  182,778  
Corporate debt securities987,938  42,964  (984) 1,029,918  
Asset-backed securities92,278  1,071  (310) 93,039  
Total bonds1,286,447  54,262  (1,294) 1,339,415  
Short-term investments356  —  —  356  
Total investments$1,286,803  $54,262  $(1,294) $1,339,771  

Amortized
Cost
Gross UnrealizedFair
Value
GainsLosses
As of December 31, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,203  $784  $(58) $48,929  
Municipal debt securities189,530  1,721  (1,035) 190,216  
Corporate debt securities661,719  23,373  (211) 684,881  
Asset-backed securities170,153  2,603  (114) 172,642  
Total bonds1,069,605  28,481  (1,418) 1,096,668  
Short-term investments44,174  98  —  44,272  
Total investments$1,113,779  $28,579  $(1,418) $1,140,940  
Schedule of Investments by Industry Group The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of June 30, 2020 and December 31, 2019:
June 30, 2020December 31, 2019
Financial37 %38 %
Consumer23  26  
Utilities13   
Communications10  10  
Technology 10   
Industrial  
Energy—   
Total100 %100 %
Schedule of Investments by Maturity
The amortized cost and fair value of available-for-sale securities as of June 30, 2020 and December 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category.
As of June 30, 2020Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$72,505  $73,072  
Due after one through five years387,886  410,176  
Due after five through ten years716,261  744,725  
Due after ten years17,873  18,759  
Asset-backed securities92,278  93,039  
Total investments$1,286,803  $1,339,771  

As of December 31, 2019Amortized
Cost
Fair
Value
(In Thousands)
Due in one year or less$138,776  $139,113  
Due after one through five years406,986  417,208  
Due after five through ten years380,737  394,180  
Due after ten years17,127  17,797  
Asset-backed securities170,153  172,642  
Total investments$1,113,779  $1,140,940  
Schedule of Aging Unrealized Losses
Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of June 30, 2020(Dollars in Thousands)
Corporate debt securities39  194,885  (982)  553  (2) 41  195,438  (984) 
Asset-backed securities16  32,683  (227)  2,913  (83) 17  35,596  (310) 
Total 55  $227,568  $(1,209)  $3,466  $(85) 58  $231,034  $(1,294) 

Less Than 12 Months12 Months or GreaterTotal
# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses# of SecuritiesFair ValueUnrealized Losses
As of December 31, 2019(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies $12,001  $(58) —  $—  $—   $12,001  $(58) 
Municipal debt securities26  92,844  (1,034)  999  (1) 27  93,843  (1,035) 
Corporate debt securities10  30,481  (140) 14  23,976  (71) 24  54,457  (211) 
Asset-backed securities 19,236  (102)  2,988  (12) 10  22,224  (114) 
Total49  $154,562  $(1,334) 16  $27,963  $(84) 65  $182,525  $(1,418) 
Schedule of Components of Net Investment Income
The following table presents the components of net investment income:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Investment income$7,320  $7,741  $15,669  $15,237  
Investment expenses(250) (112) (495) (225) 
Net investment income$7,070  $7,629  $15,174  $15,012  
Schedule of Net Realized Investment Gains (Losses)
The following table presents the components of net realized investment gains (losses):
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Gross realized investment gains$4,586  $22  $5,126  $217  
Gross realized investment losses(3,875) (135) (4,487) (517) 
Net realized investment gains (losses)$711  $(113) $639  $(300) 
v3.20.2
Fair Value of Financial Instruments (Tables)
6 Months Ended
Jun. 30, 2020
Fair Value Disclosures [Abstract]  
Schedule of Fair Value Measurements of Financial Instruments
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 June 30, 2020(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$33,680  $—  $—  $33,680  
Municipal debt securities—  182,778  —  182,778  
Corporate debt securities—  1,029,918  —  1,029,918  
Asset-backed securities—  93,039  —  93,039  
Cash, cash equivalents and short-term investments515,806  —  —  515,806  
Total assets$549,486  $1,305,735  $—  $1,855,221  
Warrant liability—  —  2,698  2,698  
Total liabilities$—  $—  $2,698  $2,698  

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, 2019(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies$48,929  $—  $—  $48,929  
Municipal debt securities—  190,216  —  190,216  
Corporate debt securities—  684,881  —  684,881  
Asset-backed securities—  172,642  —  172,642  
Cash, cash equivalents and short-term investments85,361  —  —  85,361  
Total assets$134,290  $1,047,739  $—  $1,182,029  
Warrant liability—  —  7,641  7,641  
Total liabilities$—  $—  $7,641  $7,641  
Roll-Forward of Level 3 Liabilities Measured at Fair Value
The following is a roll-forward of Level 3 liabilities measured at fair value:
For the six months ended June 30,
Warrant Liability20202019
(In Thousands)
Balance, January 1$7,641  $7,296  
Change in fair value of warrant liability included in earnings(4,723) 7,164  
Issuance of common stock on warrant exercise(220) (4,781) 
Balance, June 30$2,698  $9,679  
Schedule of Key Inputs and Assumptions in Option-Pricing Model he following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the dates indicated.
As of June 30,
20202019
Common stock price$16.08  $28.39  
Risk free interest rate0.16 %
1.72 - 1.95%
Expected life1.81 years
0.92 - 2.81 years
Expected volatility71.6 %
33.8 - 40.0%
Dividend yield%%
v3.20.2
Reinsurance (Tables)
6 Months Ended
Jun. 30, 2020
Reinsurance Disclosures [Abstract]  
Schedule of Effects of Reinsurance
The effect of our reinsurance agreements on premiums written and earned is as follows:
For the three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Net premiums written
Direct$108,478  $92,213  $211,931  $173,943  
Ceded (1)
(18,369) (9,604) (30,451) (19,411) 
Net premiums written$90,109  $82,609  $181,480  $154,532  
Net premiums earned
Direct$120,150  $95,180  $233,337  $181,478  
Ceded (1)
(21,206) (11,931) (35,676) (24,360) 
Net premiums earned$98,944  $83,249  $197,661  $157,118  
(1) Net of profit commission.
he following table shows amounts related to the QSR Transactions:
For the three months ended For the six months ended
June 30, 2020June 30, 2019June 30, 2020June 30, 2019
(In Thousands)
Ceded risk-in-force$4,563,676  $4,558,862  $4,563,676  $4,558,862  
Ceded premiums earned(23,210) (20,919) (46,221) (42,387) 
Ceded claims and claim expenses8,669  770  10,201  1,669  
Ceding commission earned4,428  4,171  8,941  8,377  
Profit commission5,271  11,884  17,684  23,945  
Schedule of ILN Transactions
($ values in thousands)
Inception DateCovered ProductionInitial Reinsurance CoverageCurrent Reinsurance CoverageInitial First Layer Retained Loss
Current First Layer Retained Loss (1)
2017 ILN TransactionMay 2, 20171/1/2013 - 12/31/2016$211,320  $40,226  $126,793  $122,034  
2018 ILN TransactionJuly 25, 20181/1/2017 - 5/31/2018264,545  158,489  125,312  123,694  
2019 ILN TransactionJuly 30, 20196/1/2018 - 6/30/2019326,905  231,877  123,424  123,345  
(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.
v3.20.2
Reserves for Insurance Claims and Claim Expenses (Tables)
6 Months Ended
Jun. 30, 2020
Insurance [Abstract]  
Reconciliation of Liability for Insurance Claims and Claim Expenses
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses:
For the six months ended June 30,
20202019
(In Thousands)
Beginning balance$23,752  $12,811  
Less reinsurance recoverables (1)
(4,939) (3,001) 
Beginning balance, net of reinsurance recoverables18,813  9,810  
Add claims incurred:
Claims and claim expenses incurred:
Current year (2)
42,516  7,401  
Prior years (3)
(2,485) (1,735) 
Total claims and claim expenses incurred40,031  5,666  
Less claims paid:
Claims and claim expenses paid:
Current year (2)
39  —  
Prior years (3)
3,209  1,368  
Reinsurance terminations (4)
—  (549) 
Total claims and claim expenses paid3,248  819  
Reserve at end of period, net of reinsurance recoverables55,596  14,657  
Add reinsurance recoverables (1)
14,307  3,775  
Ending balance$69,903  $18,432  
(1) Related to ceded losses recoverable under the QSR Transactions. See Note 5, "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.
(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.
(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 5, "Reinsurance" for additional information.
v3.20.2
Earnings per Share (EPS) (Tables)
6 Months Ended
Jun. 30, 2020
Earnings Per Share [Abstract]  
Schedule of Earnings per Share, Basic and Diluted 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 three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands, except for per share data)
Net income$26,848  $39,100  $85,119  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Basic earnings per share$0.36  $0.58  $1.20  $1.07  
Net income$26,848  $39,100  $85,119  $71,999  
Gain from change in fair value of warrant liability—  —  (4,723) —  
Diluted net income$26,848  $39,100  $80,396  $71,999  
Basic weighted average shares outstanding73,617  67,590  71,090  67,143  
Dilutive effect of issuable shares557  2,000  1,317  2,205  
Diluted weighted average shares outstanding74,174  69,590  72,407  69,348  
Diluted earnings per share$0.36  $0.56  $1.11  $1.04  
Anti-dilutive shares609  705  78  748  
v3.20.2
Regulatory Information (Tables)
6 Months Ended
Jun. 30, 2020
Insurance [Abstract]  
Schedule of Statutory Net Income (Loss), Surplus, Contingency Reserve and Risk-to-Capital Ratio
NMIC and Re One's combined statutory net income (loss) was as follows:
For the three months ended June 30,For the six months ended June 30,
2020201920202019
(In Thousands)
Statutory net (loss) gain$(24,705) $6,466  $(17,014) $5,539  
        NMIC and Re One's combined statutory surplus, contingency reserve and risk-to-capital (RTC) ratio were as follows:
June 30, 2020December 31, 2019
(In Thousands)
Statutory surplus$892,160  $449,602  
Contingency reserve648,493  531,825  
RTC ratio
13.0:1
15.8:1
v3.20.2
Organization, Basis of Presentation and Summary of Accounting Principles - Narrative (Details)
$ in Thousands
Jun. 30, 2020
USD ($)
state
Dec. 31, 2019
USD ($)
Jun. 30, 2019
USD ($)
Dec. 31, 2018
USD ($)
Organization, Consolidation and Presentation of Financial Statements [Abstract]        
Number of states in which the entity operates | state 50      
Effects of Reinsurance [Line Items]        
Accrued interest receivable $ 7,900      
Reinsurance recoverable on loss reserve 14,307 $ 4,939 $ 3,775 $ 3,001
Third-Party Reinsurers | QSR Transactions        
Effects of Reinsurance [Line Items]        
Reinsurance recoverable on loss reserve $ 14,300      
v3.20.2
Investments - Fair Values and Gross Unrealized Gains and Losses (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost $ 1,286,803 $ 1,113,779
Gross Unrealized Gains 54,262 28,579
Gross Unrealized Losses (1,294) (1,418)
Fair Value 1,339,771 1,140,940
U.S. Treasury securities and obligations of U.S. government agencies    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 31,196 48,203
Gross Unrealized Gains 2,484 784
Gross Unrealized Losses 0 (58)
Fair Value 33,680 48,929
Municipal debt securities    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 175,035 189,530
Gross Unrealized Gains 7,743 1,721
Gross Unrealized Losses 0 (1,035)
Fair Value 182,778 190,216
Corporate debt securities    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 987,938 661,719
Gross Unrealized Gains 42,964 23,373
Gross Unrealized Losses (984) (211)
Fair Value 1,029,918 684,881
Asset-backed securities    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 92,278 170,153
Gross Unrealized Gains 1,071 2,603
Gross Unrealized Losses (310) (114)
Fair Value 93,039 172,642
Total bonds    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 1,286,447 1,069,605
Gross Unrealized Gains 54,262 28,481
Gross Unrealized Losses (1,294) (1,418)
Fair Value 1,339,415 1,096,668
Short-term investments    
Debt Securities, Available-for-sale [Line Items]    
Amortized Cost 356 44,174
Gross Unrealized Gains 0 98
Gross Unrealized Losses 0 0
Fair Value $ 356 $ 44,272
v3.20.2
Investments - Corporate Debt Securities by Industry Group (Details)
Jun. 30, 2020
Dec. 31, 2019
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 100.00% 100.00%
Financial    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 37.00% 38.00%
Consumer    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 23.00% 26.00%
Utilities    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 13.00% 9.00%
Communications    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 10.00% 10.00%
Technology    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 10.00% 7.00%
Industrial    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 7.00% 8.00%
Energy    
Debt Securities By Industry [Line Items]    
Corporate debt securities as component of total (percent) 0.00% 2.00%
v3.20.2
Investments - Narrative (Details) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Dec. 31, 2019
Debt Securities, Available-for-sale [Line Items]    
Unrealized loss position, accumulated loss $ 1,294 $ 1,418
Unrealized loss position, 12 months or greater 85 84
OTTI loss in earnings 400  
Unsettled trade payable 68,900 5,600
U.S. Treasury securities and obligations of U.S. government agencies    
Debt Securities, Available-for-sale [Line Items]    
Cash and investments held with various state insurance departments $ 5,700 5,500
Unrealized loss position, accumulated loss   58
Unrealized loss position, 12 months or greater   $ 0
v3.20.2
Investments - Scheduled Maturities (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Amortized Cost    
Due in one year or less $ 72,505 $ 138,776
Due after one through five years 387,886 406,986
Due after five through ten years 716,261 380,737
Due after ten years 17,873 17,127
Asset-backed securities 92,278 170,153
Amortized Cost 1,286,803 1,113,779
Fair Value    
Due in one year or less 73,072 139,113
Due after one through five years 410,176 417,208
Due after five through ten years 744,725 394,180
Due after ten years 18,759 17,797
Asset-backed securities 93,039 172,642
Fair Value $ 1,339,771 $ 1,140,940
v3.20.2
Investments - Aging of Unrealized Losses (Details)
$ in Thousands
Jun. 30, 2020
USD ($)
security
Dec. 31, 2019
USD ($)
security
Debt Securities, Available-for-sale [Line Items]    
Number of securities, less than 12 months | security 55 49
Fair value, less than 12 months $ 227,568 $ 154,562
Unrealized losses, less than 12 months $ (1,209) $ (1,334)
Number of securities,12 months or greater | security 3 16
Fair value, 12 months or greater $ 3,466 $ 27,963
Unrealized losses, 12 months or greater $ (85) $ (84)
Number of securities, total | security 58 65
Fair value $ 231,034 $ 182,525
Unrealized Losses $ (1,294) $ (1,418)
U.S. Treasury securities and obligations of U.S. government agencies    
Debt Securities, Available-for-sale [Line Items]    
Number of securities, less than 12 months | security   4
Fair value, less than 12 months   $ 12,001
Unrealized losses, less than 12 months   $ (58)
Number of securities,12 months or greater | security   0
Fair value, 12 months or greater   $ 0
Unrealized losses, 12 months or greater   $ 0
Number of securities, total | security   4
Fair value   $ 12,001
Unrealized Losses   $ (58)
Municipal debt securities    
Debt Securities, Available-for-sale [Line Items]    
Number of securities, less than 12 months | security   26
Fair value, less than 12 months   $ 92,844
Unrealized losses, less than 12 months   $ (1,034)
Number of securities,12 months or greater | security   1
Fair value, 12 months or greater   $ 999
Unrealized losses, 12 months or greater   $ (1)
Number of securities, total | security   27
Fair value   $ 93,843
Unrealized Losses   $ (1,035)
Corporate debt securities    
Debt Securities, Available-for-sale [Line Items]    
Number of securities, less than 12 months | security 39 10
Fair value, less than 12 months $ 194,885 $ 30,481
Unrealized losses, less than 12 months $ (982) $ (140)
Number of securities,12 months or greater | security 2 14
Fair value, 12 months or greater $ 553 $ 23,976
Unrealized losses, 12 months or greater $ (2) $ (71)
Number of securities, total | security 41 24
Fair value $ 195,438 $ 54,457
Unrealized Losses $ (984) $ (211)
Asset-backed securities    
Debt Securities, Available-for-sale [Line Items]    
Number of securities, less than 12 months | security 16 9
Fair value, less than 12 months $ 32,683 $ 19,236
Unrealized losses, less than 12 months $ (227) $ (102)
Number of securities,12 months or greater | security 1 1
Fair value, 12 months or greater $ 2,913 $ 2,988
Unrealized losses, 12 months or greater $ (83) $ (12)
Number of securities, total | security 17 10
Fair value $ 35,596 $ 22,224
Unrealized Losses $ (310) $ (114)
v3.20.2
Investments - Net Investment Income (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Investment Income, Net [Abstract]        
Investment income $ 7,320 $ 7,741 $ 15,669 $ 15,237
Investment expenses (250) (112) (495) (225)
Net investment income $ 7,070 $ 7,629 $ 15,174 $ 15,012
v3.20.2
Investments - Net Realized Investment Gains (Losses) (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Investments, Debt and Equity Securities [Abstract]        
Gross realized investment gains $ 4,586 $ 22 $ 5,126 $ 217
Gross realized investment losses (3,875) (135) (4,487) (517)
Net realized investment gains (losses) $ 711 $ (113) $ 639 $ (300)
v3.20.2
Fair Value of Financial Instruments - Assets and Liabilities at Fair Value (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities $ 1,339,771 $ 1,140,940
U.S. Treasury securities and obligations of U.S. government agencies    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 33,680 48,929
Municipal debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 182,778 190,216
Corporate debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 1,029,918 684,881
Asset-backed securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 93,039 172,642
Recurring    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Cash, cash equivalents and short-term investments 515,806 85,361
Total assets 1,855,221 1,182,029
Warrant liability 2,698 7,641
Total liabilities 2,698 7,641
Recurring | U.S. Treasury securities and obligations of U.S. government agencies    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 33,680 48,929
Recurring | Municipal debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 182,778 190,216
Recurring | Corporate debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 1,029,918 684,881
Recurring | Asset-backed securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 93,039 172,642
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Cash, cash equivalents and short-term investments 515,806 85,361
Total assets 549,486 134,290
Warrant liability 0 0
Total liabilities 0 0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | U.S. Treasury securities and obligations of U.S. government agencies    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 33,680 48,929
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Municipal debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Corporate debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Quoted Prices in Active Markets for Identical Assets (Level 1) | Asset-backed securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Significant Other Observable Inputs (Level 2)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Cash, cash equivalents and short-term investments 0 0
Total assets 1,305,735 1,047,739
Warrant liability 0 0
Total liabilities 0 0
Recurring | Significant Other Observable Inputs (Level 2) | U.S. Treasury securities and obligations of U.S. government agencies    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Significant Other Observable Inputs (Level 2) | Municipal debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 182,778 190,216
Recurring | Significant Other Observable Inputs (Level 2) | Corporate debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 1,029,918 684,881
Recurring | Significant Other Observable Inputs (Level 2) | Asset-backed securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 93,039 172,642
Recurring | Significant Unobservable Inputs (Level 3)    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Cash, cash equivalents and short-term investments 0 0
Total assets 0 0
Warrant liability 2,698 7,641
Total liabilities 2,698 7,641
Recurring | Significant Unobservable Inputs (Level 3) | U.S. Treasury securities and obligations of U.S. government agencies    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Significant Unobservable Inputs (Level 3) | Municipal debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Significant Unobservable Inputs (Level 3) | Corporate debt securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities 0 0
Recurring | Significant Unobservable Inputs (Level 3) | Asset-backed securities    
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]    
Fair value of securities $ 0 $ 0
v3.20.2
Fair Value of Financial Instruments - Rollforward of Level 3 Liabilities (Details) - Significant Unobservable Inputs (Level 3) - Warrant liability - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Roll-forward of Level 3 liabilities:    
Beginning balance $ 7,641 $ 7,296
Change in fair value of warrant liability included in earnings (4,723) 7,164
Issuance of common stock on warrant exercise (220) (4,781)
Ending balance $ 2,698 $ 9,679
v3.20.2
Fair Value of Financial Instruments - Valuation Assumptions for Warrant Liabilities (Details) - Significant Unobservable Inputs (Level 3) - Valuation Technique, Option Pricing Model
Jun. 30, 2020
$ / shares
Jun. 30, 2019
$ / shares
Common stock price    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input 16.08 28.39
Risk free interest rate    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input 0.0016  
Risk free interest rate | Minimum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input   0.0172
Risk free interest rate | Maximum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input   0.0195
Expected life    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, expected life 1 year 9 months 21 days  
Expected life | Minimum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, expected life   11 months 1 day
Expected life | Maximum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, expected life   2 years 9 months 21 days
Expected volatility    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input 0.716  
Expected volatility | Minimum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input   0.338
Expected volatility | Maximum    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input   0.400
Dividend yield    
Key Inputs and Assumptions, Valuation Techniques    
Warrant liability, measurement input 0 0
v3.20.2
Fair Value of Financial Instruments - Narrative (Details) - Senior debt - USD ($)
Jun. 30, 2020
Jun. 19, 2020
Dec. 31, 2019
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]      
Debt instrument face amount $ 400,000,000 $ 400,000,000  
Debt 392,800,000   $ 145,800,000
Debt issuance costs 7,200,000 $ 7,400,000 2,000,000.0
Significant Other Observable Inputs (Level 2)      
Fair Value, Assets and Liabilities Measured on Recurring and Nonrecurring Basis [Line Items]      
Fair value of long term debt $ 418,400,000   $ 147,800,000
v3.20.2
Debt - Narrative (Details) - USD ($)
3 Months Ended 6 Months Ended
Jun. 19, 2020
Mar. 20, 2020
Mar. 19, 2020
Jun. 30, 2020
Jun. 30, 2020
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Debt Instrument [Line Items]                
Repayments of term loan           $ 147,750,000 $ 750,000  
Proceeds from senior secured notes           400,000,000 $ 0  
General Corporate Purposes                
Debt Instrument [Line Items]                
Proceeds from senior secured notes $ 244,400,000              
2018 Term Loan                
Debt Instrument [Line Items]                
Repayments of term loan 150,000,000              
Loss on extinguishment of debt       $ 2,600,000   2,600,000    
2018 Revolving Credit Facility                
Debt Instrument [Line Items]                
Debt issuance costs     $ 600,000          
Revolving Credit Facility                
Debt Instrument [Line Items]                
Commitment fees in interest expense       100,000   $ 200,000    
Revolving Credit Facility | 2020 Revolving Credit Facility                
Debt Instrument [Line Items]                
Debt instrument covenant, maximum debt-to-total capitalization ratio           35.00%    
Credit facility borrowing capacity   $ 100,000,000   100,000,000 $ 100,000,000 $ 100,000,000    
Borrowings outstanding       0 $ 0 0    
Commitment fee (percent)         0.35%      
Debt Issuance costs   $ 800,000            
Remaining deferred issuance costs, net of accumulated amortization       1,200,000 $ 1,200,000 1,200,000    
Revolving Credit Facility | 2020 Revolving Credit Facility | Minimum                
Debt Instrument [Line Items]                
Commitment fee (percent)   0.175%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Maximum                
Debt Instrument [Line Items]                
Commitment fee (percent)   0.525%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Base Rate                
Debt Instrument [Line Items]                
Variable rate floor (percent)   1.00%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Base Rate | Minimum                
Debt Instrument [Line Items]                
Basis spread on variable rate (percent)   0.375%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Base Rate | Maximum                
Debt Instrument [Line Items]                
Basis spread on variable rate (percent)   1.875%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Eurodollar                
Debt Instrument [Line Items]                
Variable rate floor (percent)   0.00%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Eurodollar | Minimum                
Debt Instrument [Line Items]                
Basis spread on variable rate (percent)   1.375%            
Revolving Credit Facility | 2020 Revolving Credit Facility | Eurodollar | Maximum                
Debt Instrument [Line Items]                
Basis spread on variable rate (percent)   2.875%            
Revolving Credit Facility | 2018 Revolving Credit Facility                
Debt Instrument [Line Items]                
Credit facility borrowing capacity     $ 85,000,000          
Debt instrument term (years)     3 years          
Senior debt                
Debt Instrument [Line Items]                
Debt instrument face amount $ 400,000,000     400,000,000 400,000,000 400,000,000    
Stated interest rate (in percent) 7.375%              
Applicable premium 1.00%              
Percent of aggregate balance redeemable with equity offerings 40.00%              
Debt issuance costs $ 7,400,000     7,200,000 7,200,000 7,200,000   $ 2,000,000.0
Capitalized issuance cost and issue discounts       $ 7,200,000 $ 7,200,000 $ 7,200,000    
Debt instrument covenant, maximum debt-to-total capitalization ratio 35.00%              
Senior debt | Prior To March 1, 2025                
Debt Instrument [Line Items]                
Redemption price (in percent) 100.00%              
Senior debt | After March 1, 2025                
Debt Instrument [Line Items]                
Redemption price (in percent) 100.00%              
Senior debt | Prior to June 1, 2022                
Debt Instrument [Line Items]                
Redemption price (in percent) 107.375%              
v3.20.2
Reinsurance - Effect of Reinsurance Agreements on Premiums Written and Earned (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Net premiums written        
Direct $ 108,478 $ 92,213 $ 211,931 $ 173,943
Ceded (18,369) (9,604) (30,451) (19,411)
Net premiums written 90,109 82,609 181,480 154,532
Net premiums earned        
Direct 120,150 95,180 233,337 181,478
Ceded (21,206) (11,931) (35,676) (24,360)
Net premiums earned $ 98,944 $ 83,249 $ 197,661 $ 157,118
v3.20.2
Reinsurance - Narrative (Details)
$ in Thousands
3 Months Ended 6 Months Ended
Apr. 01, 2020
Apr. 01, 2019
USD ($)
Mar. 31, 2019
Jun. 30, 2020
USD ($)
Jun. 30, 2020
USD ($)
Jun. 30, 2019
USD ($)
Jun. 30, 2020
USD ($)
quotaShareAgreement
Jun. 30, 2019
USD ($)
Dec. 31, 2019
USD ($)
Dec. 31, 2018
USD ($)
Ceded Credit Risk [Line Items]                    
Reinsurance coverage, term of underlying mortgage amortization (in years)             10 years      
Restricted cash       $ 2,068 $ 2,068   $ 2,068   $ 2,662  
Reinsurance recoverable on unpaid claims       $ 14,307 $ 14,307 $ 3,775 $ 14,307 $ 3,775 $ 4,939 $ 3,001
Numer of Quota Share Agreements | quotaShareAgreement             3      
ILN Transactions                    
Ceded Credit Risk [Line Items]                    
Reinsurance coverage amount amortized (as a percent)       10.00% 10.00%   10.00%      
Third-Party Reinsurers | 2017 ILN Transaction                    
Ceded Credit Risk [Line Items]                    
Risk premiums paid         $ 3,300 $ 2,900 $ 7,100 $ 5,900    
Third-Party Reinsurers | 2017 ILN Transaction | Maximum                    
Ceded Credit Risk [Line Items]                    
Anticipated payment related to annual operating expenses             300      
Third-Party Reinsurers | 2018 ILN Transaction | Maximum                    
Ceded Credit Risk [Line Items]                    
Anticipated payment related to annual operating expenses             $ 250      
Third-Party Reinsurers | QSR Transactions                    
Ceded Credit Risk [Line Items]                    
Percentage of ceding commission received             20.00%      
Reinsurance recoverable on unpaid claims       $ 14,300 14,300   $ 14,300      
Third-Party Reinsurers | Risk Written Policies in 2018                    
Ceded Credit Risk [Line Items]                    
Percent of premiums earned under 2018 QSR Transaction             25.00%      
Third-Party Reinsurers | Risk Written Policies in 2019                    
Ceded Credit Risk [Line Items]                    
Percent of premiums ceded under QSR Transaction             20.00%      
Third-Party Reinsurers | Risk Written Policies in 2020                    
Ceded Credit Risk [Line Items]                    
Percent of premiums earned under 2018 QSR Transaction 10.50%     21.00%            
Third-Party Reinsurers | 2016 QSR Transaction                    
Ceded Credit Risk [Line Items]                    
Percent of premiums ceded under QSR Transaction   20.50% 25.00%              
Previously ceded primary RIF recaptured   $ 500,000                
Threshold for loss ratio on loans to qualify for profit commission             60.00%      
Reinsurance recoverable on unpaid claims       $ 4,900 4,900   $ 4,900      
Third-Party Reinsurers | 2018 QSR Transaction                    
Ceded Credit Risk [Line Items]                    
Threshold for loss ratio on loans to qualify for profit commission             61.00%      
Reinsurance recoverable on unpaid claims       $ 9,400 $ 9,400   $ 9,400      
Third-Party Reinsurers | 2020 QSR Transaction                    
Ceded Credit Risk [Line Items]                    
Threshold for loss ratio on loans to qualify for profit commission             50.00%      
Third-Party Reinsurers | Eligible Policies, Pool One                    
Ceded Credit Risk [Line Items]                    
Percent of premiums ceded under QSR Transaction             25.00%      
Third-Party Reinsurers | Fannie Mae                    
Ceded Credit Risk [Line Items]                    
Percent of premiums ceded under QSR Transaction             100.00%      
v3.20.2
Reinsurance - ILN Transactions (Details) - USD ($)
$ in Thousands
Jun. 30, 2020
Jul. 30, 2019
Jul. 25, 2018
May 02, 2017
2017 ILN Transaction        
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]        
Initial Reinsurance Coverage       $ 211,320
Current Reinsurance Coverage $ 40,226      
Initial First Layer Retained Loss       $ 126,793
Current First Layer Retained Loss 122,034      
2018 ILN Transaction        
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]        
Initial Reinsurance Coverage     $ 264,545  
Current Reinsurance Coverage 158,489      
Initial First Layer Retained Loss     $ 125,312  
Current First Layer Retained Loss 123,694      
2019 ILN Transaction        
Deferred Compensation Arrangement with Individual, Excluding Share-based Payments and Postretirement Benefits [Line Items]        
Initial Reinsurance Coverage   $ 326,905    
Current Reinsurance Coverage 231,877      
Initial First Layer Retained Loss   $ 123,424    
Current First Layer Retained Loss $ 123,345      
v3.20.2
Reinsurance - Amounts Related to QSR Transactions (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Ceded Credit Risk [Line Items]        
Ceded premiums earned $ (21,206) $ (11,931) $ (35,676) $ (24,360)
Third-Party Reinsurers        
Ceded Credit Risk [Line Items]        
Ceded risk-in-force 4,563,676 4,558,862 4,563,676 4,558,862
Ceded premiums earned (23,210) (20,919) (46,221) (42,387)
Ceded claims and claim expenses 8,669 770 10,201 1,669
Ceding commission earned 4,428 4,171 8,941 8,377
Profit commission $ 5,271 $ 11,884 $ 17,684 $ 23,945
v3.20.2
Reserves for Insurance Claims and Claim Expenses - Narrative (Details)
$ in Thousands
6 Months Ended
Jun. 30, 2020
USD ($)
claim
loan
policy
Jun. 30, 2019
USD ($)
policy
loan
Dec. 31, 2019
USD ($)
Dec. 31, 2018
USD ($)
Liability for Claims and Claims Adjustment Expense [Line Items]        
Primary loans in default | loan 10,816 1,028    
Total gross liability for unpaid claims and claim adjustment expenses $ 69,903 $ 18,432 $ 23,752 $ 12,811
Number of claims paid | claim 83      
Claims paid, including amounts covered by insurance $ 4,100      
Default percent (in percent) 2.90% 0.32%    
Total number of policies in-force | policy 372,934 324,876    
Favorable prior year development $ 2,485 $ 1,735    
Reserve for prior year insurance claims and claim expenses $ 16,500      
Fannie Mae        
Liability for Claims and Claims Adjustment Expense [Line Items]        
Number of loans in pool past due 60 days or more | loan 231      
Risk-in-Force of loans in pool past due 60 days or more $ 19,600      
Loan-to-value ratio (less than) 0.80      
Claims applied to pool deductible $ 900      
Deductible on policy $ 9,500      
QSR Transactions        
Liability for Claims and Claims Adjustment Expense [Line Items]        
Number of covered claims included in number of claims paid | claim 78      
Component of claims paid covered under QSR Transaction $ 800      
2016 QSR Transaction | Fannie Mae        
Liability for Claims and Claims Adjustment Expense [Line Items]        
Percent of pool RIF reinsured 100.00%      
v3.20.2
Reserves for Insurance Claims and Claim Expenses - Reconciliation of Reserve Balances for Insurance Claims and Claim Expense (Details) - USD ($)
$ in Thousands
6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Liability for Unpaid Claims and Claims Adjustment Expense [Roll Forward]    
Beginning balance $ 23,752 $ 12,811
Less reinsurance recoverables (4,939) (3,001)
Beginning balance, net of reinsurance recoverables 18,813 9,810
Claims and claim expenses incurred:    
Current year 42,516 7,401
Prior years (2,485) (1,735)
Total claims and claim expenses incurred 40,031 5,666
Claims and claim expenses paid:    
Current year 39 0
Prior years 3,209 1,368
Reinsurance terminations 0 (549)
Total claims and claim expenses paid 3,248 819
Reserve at end of period, net of reinsurance recoverables 55,596 14,657
Add reinsurance recoverables 14,307 3,775
Ending balance $ 69,903 $ 18,432
v3.20.2
Earnings per Share (EPS) (Details) - USD ($)
$ / shares in Units, shares in Thousands, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Mar. 31, 2020
Jun. 30, 2019
Mar. 31, 2019
Jun. 30, 2020
Jun. 30, 2019
Earnings per Share, Basic [Abstract]            
Net income $ 26,848 $ 58,271 $ 39,100 $ 32,899 $ 85,119 $ 71,999
Basic weighted average shares outstanding (in shares) 73,617   67,590   71,090 67,143
Basic earnings per share (in dollars per share) $ 0.36   $ 0.58   $ 1.20 $ 1.07
Earnings per Share, Diluted [Abstract]            
Net income $ 26,848 $ 58,271 $ 39,100 $ 32,899 $ 85,119 $ 71,999
Gain from change in fair value of warrant liability 0   0   (4,723) 0
Diluted net income $ 26,848   $ 39,100   $ 80,396 $ 71,999
Basic weighted average shares outstanding (in shares) 73,617   67,590   71,090 67,143
Dilutive effect of issuable shares (in shares) 557   2,000   1,317 2,205
Dilutive weighted average shares outstanding (in shares) 74,174   69,590   72,407 69,348
Diluted earnings per share (in dollars per share) $ 0.36   $ 0.56   $ 1.11 $ 1.04
Anti-dilutive shares (in shares) 609   705   78 748
v3.20.2
Warrants (Details) - USD ($)
$ / shares in Units, $ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2019
Apr. 30, 2012
Debt Disclosure [Abstract]            
Warrants issued (in shares)           992,000
Right to purchase, number of shares per warrant (in shares)           1
Exercise price of warrants (in dollars per warrant)           $ 10.00
Warrant liability, at fair value $ 2,698   $ 2,698   $ 7,641 $ 5,100
Warrants exercised (in shares) 0 193,000 9,000 260,000    
Stock issued upon exercise of warrants (in shares)   129,000 6,000 168,000    
Fair value of warrant liability reclassified to additional paid in capital upon exercise   $ 3,900 $ 200 $ 4,800    
Change in fair value of warrant liability in current period   $ 2,000   $ 2,300    
v3.20.2
Income Taxes (Details) - USD ($)
$ in Millions
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
Income Tax Disclosure [Abstract]        
Effective income tax rate on pre-tax income or loss 23.20% 23.30% 20.50% 19.90%
Tax and loss bonds $ 7.6   $ 7.6  
v3.20.2
Common Stock (Details)
$ in Millions
6 Months Ended
Jun. 08, 2020
USD ($)
shares
Jun. 30, 2020
vote
shares
Dec. 31, 2019
shares
Class of Stock [Line Items]      
Common stock, outstanding (in shares)   84,804,766 68,358,074
Number of votes per common share | vote   1  
Over-Allotment Option | Common Stock      
Class of Stock [Line Items]      
Over-allotment option to purchase shares (in percent) 15.00%    
Public Stock Offering | Common Stock      
Class of Stock [Line Items]      
Number of shares sold (in shares) 13,800,000    
Net proceeds of sale of stock | $ $ 219.7    
Public Stock Offering and Over Allotment Option | Common Stock      
Class of Stock [Line Items]      
Number of shares sold (in shares) 15,900,000    
v3.20.2
Regulatory Information - Statutory Net Income (Loss) (Details) - USD ($)
$ in Thousands
3 Months Ended 6 Months Ended
Jun. 30, 2020
Jun. 30, 2019
Jun. 30, 2020
Jun. 30, 2019
NMIC and Re One Combined        
Statutory Accounting Practices [Line Items]        
Statutory net (loss) gain $ (24,705) $ 6,466 $ (17,014) $ 5,539
v3.20.2
Regulatory Information - Schedule of Statutory Surplus, Contingency Reserve and RTC Ratio (Details) - NMIC and Re One Combined
$ in Thousands
Jun. 30, 2020
USD ($)
Dec. 31, 2019
USD ($)
Statutory Accounting Practices [Line Items]    
Statutory surplus $ 892,160 $ 449,602
Contingency reserve $ 648,493 $ 531,825
RTC ratio 13 15.8
v3.20.2
Regulatory Information - Narrative (Details) - USD ($)
6 Months Ended
Jun. 19, 2020
Jun. 30, 2020
Jun. 30, 2019
Dec. 31, 2020
Mar. 20, 2020
Statutory Accounting Practices [Line Items]          
Proceeds from senior secured notes   $ 400,000,000 $ 0    
Revolving Credit Facility | 2020 Revolving Credit Facility          
Statutory Accounting Practices [Line Items]          
Credit facility borrowing capacity   100,000,000     $ 100,000,000
NMIC          
Statutory Accounting Practices [Line Items]          
Proceeds from senior secured notes $ 445,000,000        
General Corporate Purposes          
Statutory Accounting Practices [Line Items]          
Proceeds from senior secured notes 244,400,000        
Senior debt          
Statutory Accounting Practices [Line Items]          
Debt instrument face amount $ 400,000,000 $ 400,000,000      
NMIC and Re One Combined | Forecast          
Statutory Accounting Practices [Line Items]          
Aggregate dividend capacity       $ 16,100,000  
v3.20.2
Subsequent Event (Details) - Subsequent Event
Jul. 30, 2020
USD ($)
Oaktown Re IV Ltd.  
Subsequent Event [Line Items]  
Amount reinsured $ 322,100,000
Amount retained 169,500,000
Maximum | Oaktown Re IV Ltd.  
Subsequent Event [Line Items]  
Annual risk premium payments, capped amount 250,000
Mortgage Insurance-Linked Notes | Oaktown Re IV Ltd.  
Subsequent Event [Line Items]  
Debt instrument face amount $ 322,100,000