Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                   to                   
 
Commission file number 001-36174
NMI Holdings, Inc.
(Exact name of registrant as specified in its charter)

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

(855) 530-6642
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
YES x NO o
Indicate by check mark whether the registrant has submitted electronically 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 x NO o
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 filer x
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
 
 
Emerging growth company o


 
 
 
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. o


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES o NO x

The number of shares of common stock, $0.01 par value per share, of the registrant outstanding on April 26, 2019 was 67,533,958 shares.




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


2


CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (Securities Act), Section 21E of the Securities Exchange Act of 1934, as amended (Exchange Act), and the U.S. Private Securities Litigation Reform Act of 1995. Any statements about our expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward looking. These statements are often, but not always, made through the use of words or phrases such as "anticipate," "believe," "can," "could," "may," "predict," "potential," "should," "will," "estimate," "plan," "project," "continuing," "ongoing," "expect," "intend" or words of similar meaning and include, but are not limited to, statements regarding the outlook for our future business and financial performance. All forward looking statements are necessarily only estimates of future results, and actual results may differ materially from expectations. You are, therefore, cautioned not to place undue reliance on such statements which should be read in conjunction with the other cautionary statements that are included elsewhere in this report. Further, any forward looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. We have based these forward looking statements on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy and financial needs. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward looking statements including, but not limited to:
•
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;
•
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 Veterans Administration (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;
•
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;
•
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;

3


•
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 systems or the failure of technology providers to perform; and
•
ability to recruit, train and retain key personnel.
For more information regarding these risks and uncertainties as well as certain additional risks that we face, you should refer to Part I, Item 2, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and elsewhere in this report on Form 10-Q, including the exhibits hereto. In addition, for additional discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner, you should review the Risk Factors in Part I, Item 1A, of our Annual Report on Form 10-K for the year ended December 31, 2018 (2018 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 March 31, 2019 and December 31, 2018
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2019 and 2018
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018
Notes to Condensed Consolidated Financial Statements


5
NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)


 
March 31, 2019
 
December 31, 2018
Assets
(In Thousands, except for share data)
Fixed maturities, available-for-sale, at fair value (amortized cost of $934,712 and $924,987 as of March 31, 2019 and December 31, 2018, respectively)
$
940,223

 
$
911,490

Cash and cash equivalents (including restricted cash of $1,422 and $1,414 as of March 31, 2019 and December 31, 2018, respectively)
39,761

 
25,294

Premiums receivable
38,478

 
36,007

Accrued investment income
6,553

 
5,694

Prepaid expenses
4,454

 
3,241

Deferred policy acquisition costs, net
48,820

 
46,840

Software and equipment, net
25,105

 
24,765

Intangible assets and goodwill
3,634

 
3,634

Prepaid reinsurance premiums
27,747

 
30,370

Other assets
12,736

 
4,708

Total assets
$
1,147,511

 
$
1,092,043

 
 
 
 
Liabilities
 
 
 
Term loan
$
146,503

 
$
146,757

Unearned premiums
154,325

 
158,893

Accounts payable and accrued expenses
16,981

 
31,141

Reserve for insurance claims and claim expenses
15,537

 
12,811

Reinsurance funds withheld
25,308

 
27,114

Warrant liability, at fair value
11,831

 
7,296

Deferred tax liability, net
12,770

 
2,740

Other liabilities (1)
12,375

 
3,791

Total liabilities
395,630

 
390,543

Commitments and contingencies


 


 
 
 
 
Shareholders' equity
 
 
 
Common stock - class A shares, $0.01 par value; 67,501,958 and 66,318,849 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively (250,000,000 shares authorized)
675

 
663

Additional paid-in capital
684,635

 
682,181

Accumulated other comprehensive income (loss), net of tax
184

 
(14,832
)
Retain earnings
66,387

 
33,488

Total shareholders' equity
751,881

 
701,500

Total liabilities and shareholders' equity
$
1,147,511

 
$
1,092,043

(1) 
Deferred Ceding Commissions have been reclassified to "Other Liabilities" in prior periods
See accompanying notes to consolidated financial statements.

6
NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED)


For the three months ended March 31,


2019
 
2018

Revenues
(In Thousands, except for per share data)
Net premiums earned
$
73,868

 
$
54,914

 
Net investment income
7,383

 
4,574

 
Net realized investment losses
(187
)
 
—

 
Other revenues
42

 
64

 
Total revenues
81,106

 
59,552

 
Expenses
 
 
 
 
Insurance claims and claim expenses
2,743

 
1,569

 
Underwriting and operating expenses
30,849

 
28,453

 
Total expenses
33,592

 
30,022

 
Other expense
 
 
 
 
Gain (loss) from change in fair value of warrant liability
(5,479
)
 
420

 
Interest expense
(3,061
)
 
(3,419
)
 
Total other expense
(8,540
)
 
(2,999
)
 
 
 
 
 
 
Income before income taxes
38,974

 
26,531

 
Income tax expense
6,075

 
4,176

 
Net income
$
32,899

 
$
22,355

 

 
 
 
 
Earnings per share
 
 
 
 
Basic
$
0.49

 
$
0.36

 
Diluted
$
0.48

 
$
0.34

 
 
 
 
 
 
Weighted average common shares outstanding
 
 
 
 
Basic
66,692

 
62,099

 
Diluted
68,996

 
65,697

 

 
 
 
 
Net income
$
32,899

 
$
22,355

 
Other comprehensive income (loss), net of tax:
 
 
 
 
Unrealized (losses) gains in accumulated other comprehensive income, net of tax (benefit) expense of $3,953 and ($423) for the quarters ended March 31, 2019 and 2018, respectively
14,868

 
(10,956
)
 
Reclassification adjustment for realized losses (gains) included in net income, net of tax expense (benefit) of ($39) and $0 for the quarters ended March 31, 2019 and 2018, respectively
148

 
—

 
Other comprehensive income (loss), net of tax
15,016


(10,956
)

Comprehensive income
$
47,915


$
11,399


See accompanying notes to consolidated financial statements.

7
NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)


 
Common Stock - Class A
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total
 
Shares
Amount
 
(In Thousands)
Balances, January 1, 2018
60,518

$
605

$
585,488

$
(2,859
)
$
(74,157
)
$
509,077

Cumulative effect of change in accounting principle
—

—

—

282

(282
)
—

Common stock: class A shares issued related to public offering
4,255

43

79,122

—

—

79,165

Common stock: class A shares issued related to warrants
26

*

489

—

—

489

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
770

8

(999
)
—

—

(991
)
Share-based compensation expense
—

—

2,805

—

—

2,805

Change in unrealized investment gains/losses, net of tax benefit of $423
—

—

—

(10,956
)
—

(10,956
)
Net income
—

—

—

—

22,355

22,355

Balances, March 31, 2018
65,569

$
656

$
666,905

$
(13,533
)
$
(52,084
)
$
601,944



 
Common Stock - Class A
Additional
Paid-in Capital
Accumulated Other Comprehensive Income (Loss)
Retained Earnings (Accumulated Deficit)
Total
 
Shares
Amount
 
(In Thousands)
Balances, January 1, 2019
66,319

$
663

$
682,181

$
(14,832
)
$
33,488

$
701,500

Common stock: class A shares issued related to warrants
39

*

944

—

—

944

Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes
1,144

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, 2019
67,502

$
675

$
684,635

$
184

$
66,387

$
751,881


*
During the three months ended March 31, 2019 and 2018, we issued 39,195 and 25,686 common shares, respectively, with a par value of $0.01 related to the exercise of warrants, which is not identifiable in this schedule due to rounding.
See accompanying notes to consolidated financial statements.

8
NMI HOLDINGS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 
For the three months ended March 31,
 
2019
 
2018
Cash flows from operating activities
(In Thousands)
Net income
$
32,899

 
$
22,355

Adjustments to reconcile net income to net cash provided by (used in) operating activities:
 
 
 
Net realized investment losses
187

 
—

Loss (gain) from change in fair value of warrant liability
5,479

 
(420
)
Depreciation and amortization
2,103

 
1,858

Net amortization of premium on investment securities
314

 
439

Amortization of debt discount and debt issuance costs
248

 
361

Share-based compensation expense
2,981

 
2,805

Deferred income taxes
6,038

 
4,009

Changes in operating assets and liabilities:
 
 
 
Premiums receivable
(2,472
)
 
(2,985
)
Accrued investment income
(859
)
 
(553
)
Prepaid expenses
(1,407
)
 
(1,451
)
Deferred policy acquisition costs, net
(1,980
)
 
(2,101
)
Other assets (1)
191

 
163

Unearned premiums
(4,568
)
 
2,424

Reserve for insurance claims and claim expenses
2,726

 
1,630

Reinsurance balances, net (1)
(148
)
 
153

Accounts payable and accrued expenses
(13,453
)
 
(7,556
)
Net cash provided by operating activities
28,279

 
21,131

Cash flows from investing activities
 
 
 
Purchase of short-term investments
(47,994
)
 
(16,858
)
Purchase of fixed-maturity investments, available-for-sale
(72,586
)
 
(74,095
)
Proceeds from maturity of short-term investments
81,311

 
31,309

Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale
29,043

 
44,444

Additions to software and equipment
(1,751
)
 
(1,370
)
Net cash used in investing activities
(11,977
)
 
(16,570
)
Cash flows from financing activities
 
 
 
Proceeds from issuance of common stock related to public offering, net of issuance costs
—

 
79,249

Proceeds from issuance of common stock related to employee equity plans
11,017

 
4,782

Taxes paid related to net share settlement of equity awards
(12,477
)
 
(5,523
)
Repayments of term loan
(375
)
 
(375
)
Net cash (used in) provided by financing activities
(1,835
)
 
78,133

 
 
 
 
Net decrease in cash, cash equivalents and restricted cash
14,467

 
82,694

Cash, cash equivalents and restricted cash, beginning of period
25,294

 
19,196

Cash, cash equivalents and restricted cash, end of period
$
39,761

 
$
101,890

 
 
 
 
Supplemental disclosures of cash flow information
 
 
 
Noncash financing activities
 
 
 
Interest paid
$
2,617

 
$
3,072

Income tax refunded
$
209

 
$
—

(1) 
Ceded losses recoverable under our quota-share reinsurance transactions were reclassified from "Other Assets" in prior periods to "Reinsurance balance, net".
See accompanying notes to consolidated financial statements.

9
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, 2018, included in our 2018 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 our 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, 2019.
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 2018 10-K, other than as noted in "Recent Accounting Pronouncements - Adopted" below.
Recent Accounting Pronouncements - Adopted    
In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-02, Leases (Topic 842). This update requires that businesses recognize rights and obligations associated with certain leases as assets and liabilities on the balance sheet. The standard also requires additional disclosures regarding the amount, timing, and uncertainty of cash flows arising from leases. We adopted this ASU on January 1, 2019 using the modified-retrospective method and applied it prospectively as of the effective date, without adjusting comparative periods presented as permitted by ASU 2018-11, Leases (Topic 842), Targeted Improvements. Adoption of this new standard increased our assets and liabilities by $7.6 million in connection with the recognition of right-of-use assets and lease liabilities, primarily related to the operating lease on our corporate headquarters. Adoption of this standard did not impact our consolidated statements of operations or cash flows. See Note 10, "Leases" for additional information related to our leases.
In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480), and Derivatives and Hedging (Topic 815). This update is intended to simplify the accounting for certain equity-linked financial instruments. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our consolidated financial statements.
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This update expands the scope of Topic 718 to include share-based payments made to non-employees in connection with the acquisition of goods and services. We adopted this ASU on January 1, 2019. Adoption of this standard had no impact on our financial results at this time as we have not made any share-based grants to non-employees as defined in ASC 718-10-20.
Recent Accounting Pronouncements - Not Yet Adopted
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This update requires companies to measure all expected credit losses for financial assets held at the reporting date. The standard also amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently reviewing the impact the adoption of this ASU will have, if any, on our financial assets. We do not expect it to

10
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

impact our accounting for insurance claims and claim expenses as these items are not in the scope of this ASU.
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 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 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. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the adoption of this ASU will have, if any, on our fair value of financial instruments disclosures.
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 hosted by a vendor and provides companies with guidance on the criteria for capitalizing implementation, set-up and other up-front costs incurred in association with these arrangements. The standard will take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. We are currently evaluating the impact the adoption of this ASU will have, if any, on our consolidated financial statements.
2. Investments
We have designated our investment portfolio as available-for-sale and report it at fair value. The related unrealized gains and losses are, after considering the related tax expense or benefit, recognized through comprehensive income and loss, and on an accumulated basis in shareholders' equity. Net realized investment gains and losses are reported in earnings based on specific identification of securities sold or other-than-temporarily impaired.
Fair Values and Gross Unrealized Gains and Losses on Investments
 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of March 31, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,189

 
$
86

 
$
(696
)
 
$
47,579

Municipal debt securities
91,833

 
671

 
(331
)
 
92,173

Corporate debt securities
613,016

 
7,471

 
(2,871
)
 
617,616

Asset-backed securities
156,258

 
1,241

 
(125
)
 
157,374

Total bonds
909,296

 
9,469

 
(4,023
)
 
914,742

Short-term investments
25,416

 
65

 
—

 
25,481

Total investments
$
934,712

 
$
9,534

 
$
(4,023
)
 
$
940,223

 
Amortized
Cost
 
Gross Unrealized
 
Fair
Value
 
 
Gains
 
Losses
 
As of December 31, 2018
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
48,171

 
$
35

 
$
(1,376
)
 
$
46,830

Municipal debt securities
92,014

 
206

 
(963
)
 
91,257

Corporate debt securities
554,079

 
847

 
(11,688
)
 
543,238

Asset-backed securities
171,990

 
792

 
(1,457
)
 
171,325

Total bonds
866,254

 
1,880

 
(15,484
)
 
852,650

Short-term investments
58,733

 
107

 
—

 
58,840

Total investments
$
924,987

 
$
1,987

 
$
(15,484
)
 
$
911,490

We did not own any mortgage-backed securities in our asset-backed securities portfolio as March 31, 2019 and December 31, 2018.

11
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of March 31, 2019 and December 31, 2018:
 
March 31, 2019
 
December 31, 2018
Financial
38
%
 
38
%
Consumer
26

 
27

Communications
11

 
12

Utilities
10

 
7

Industrial
7

 
7

Technology
5

 
6

Energy
2

 
2

Other
1

 
1

Total
100
%
 
100
%
As of March 31, 2019 and December 31, 2018, approximately $5.4 million and $5.3 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 values of available-for-sale securities as of March 31, 2019 and December 31, 2018, 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 March 31, 2019
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
47,004

 
$
46,989

Due after one through five years
399,669

 
400,793

Due after five through ten years
314,593

 
317,471

Due after ten years
17,188

 
17,596

Asset-backed securities
156,258

 
157,374

Total investments
$
934,712

 
$
940,223

As of December 31, 2018
Amortized
Cost
 
Fair
Value
 
(In Thousands)
Due in one year or less
$
76,087

 
$
76,104

Due after one through five years
352,282

 
347,701

Due after five through ten years
318,728

 
310,633

Due after ten years
5,900

 
5,727

Asset-backed securities
171,990

 
171,325

Total investments
$
924,987

 
$
911,490

Aging of Unrealized Losses
As of March 31, 2019, the investment portfolio had gross unrealized losses of $4.0 million, $3.6 million of which has been in an unrealized loss position for a period of 12 months or greater. We did not consider these securities to be other-than-temporarily impaired as of March 31, 2019. We based our conclusion that these investments were not other-than-temporarily impaired as of March 31, 2019 on the following facts: (i) the unrealized losses were primarily caused by interest rate movements and market fluctuations in credit spreads since the purchase date; (ii) we do not intend to sell these investments; and (iii) we do not believe that it is more likely than not that we will be required to sell these investments before recovery of our amortized cost basis, which may

12
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

not occur until maturity. For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows:
 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
As of March 31, 2019
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
—

$
—

$
—

 
17

$
37,425

$
(696
)
 
17

$
37,425

$
(696
)
Municipal debt securities(1)
1

2,000

—

 
19

33,034

(331
)
 
20

35,034

(331
)
Corporate debt securities
23

43,094

(423
)
 
89

158,174

(2,448
)
 
112

201,268

(2,871
)
Asset-backed securities
10

18,173

(46
)
 
20

28,453

(79
)
 
30

46,626

(125
)
Short-term investments(1)
1

994

—

 
—

—

—

 
1

994

—

Total
35

$
64,261

$
(469
)
 
145

$
257,086

$
(3,554
)
 
180

$
321,347

$
(4,023
)
(1) 
Includes securities with unrealized losses of less than 12 months which are not identifiable in the schedule due to rounding.

 
Less Than 12 Months
 
12 Months or Greater
 
Total
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
 
# of Securities
Fair Value
Unrealized Losses
As of December 31, 2018
 
(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
—

$
—

$
—

 
19

$
41,817

$
(1,376
)
 
19

$
41,817

$
(1,376
)
Municipal debt securities
4

7,409

(11
)
 
31

58,658

(952
)
 
35

66,067

(963
)
Corporate debt securities
118

226,477

(3,952
)
 
126

221,675

(7,736
)
 
244

448,152

(11,688
)
Asset-backed securities
25

36,017

(1,136
)
 
22

33,988

(321
)
 
47

70,005

(1,457
)
Total
147

$
269,903

$
(5,099
)
 
198

$
356,138

$
(10,385
)
 
345

$
626,041

$
(15,484
)
Net Investment Income
The following table presents the components of net investment income:
 
For the three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Investment income
$
7,496

 
$
4,782

Investment expenses
(113
)
 
(208
)
Net investment income
$
7,383

 
$
4,574

The following table presents the components of net realized investment losses:
 
For the three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Gross realized investment gains
$
195

 
$
—

Gross realized investment losses
(382
)
 
—

Net realized investment losses
$
(187
)
 
$
—


13
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Investment Securities - Other-than-Temporary Impairment (OTTI)
For the three months ended March 31, 2019, we recognized a $0.4 million OTTI loss in earnings related to the planned sale of a security in a loss position in April 2019. For the three months ended March 31, 2018, we did not recognize any OTTI losses. There were no credit losses recognized in earnings for which a portion of an OTTI loss was recognized in accumulated other comprehensive income (loss) for the three months ended March 31, 2019 or 2018.
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.

14
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 March 31, 2019
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
47,579

 
$
—

 
$
—

 
$
47,579

Municipal debt securities
—

 
92,173

 
—

 
92,173

Corporate debt securities
—

 
617,616

 
—

 
617,616

Asset-backed securities
—

 
157,374

 
—

 
157,374

Cash, cash equivalents and short-term investments
65,242

 
—

 
—

 
65,242

Total assets
$
112,821

 
$
867,163

 
$
—

 
$
979,984

Warrant liability
—

 
—

 
11,831

 
11,831

Total liabilities
$
—

 
$
—

 
$
11,831

 
$
11,831

 
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, 2018
(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies
$
46,830

 
$
—

 
$
—

 
$
46,830

Municipal debt securities
—

 
91,257

 
—

 
91,257

Corporate debt securities
—

 
543,238

 
—

 
543,238

Asset-backed securities
—

 
171,325

 
—

 
171,325

Cash, cash equivalents and short-term investments
84,134

 
—

 
—

 
84,134

Total assets
$
130,964

 
$
805,820

 
$
—

 
$
936,784

Warrant liability
—

 
—

 
7,296

 
7,296

Total liabilities
$
—

 
$
—

 
$
7,296

 
$
7,296

There were no transfers between Level 1 and Level 2, nor any transfers in or out of Level 3, of the fair value hierarchy during the three months ended March 31, 2019 and the year ended December 31, 2018.
The following is a roll-forward of Level 3 liabilities measured at fair value:
 
For the three months ended March 31,
Warrant Liability
2019
 
2018
 
(In Thousands)
Balance, January 1
$
7,296

 
$
7,472

Change in fair value of warrant liability included in earnings
5,479

 
(420
)
Issuance of common stock on warrant exercise
(944
)
 
(489
)
Balance, March 31
$
11,831

 
$
6,563


15
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 March 31,
 
2019
 
2018
Common stock price
$
25.87

 
$
16.55

Risk free interest rate
2.21 - 2.31%

 
2.37
%
Expected life
1.67 - 3.06 years

 
2.59 years

Expected volatility
42.30 - 45.7%

 
30.1
%
Dividend yield
0%

 
0%

The changes in fair value of the warrant liability for the three months ended March 31, 2019 and 2018 are primarily attributable to changes in the price of our common stock during the respective periods, with additional impact related to changes in the Black-Scholes model inputs and exercises of outstanding warrants.
4. Debt
On May 24, 2018, we entered into a credit agreement (2018 Credit Agreement), which provides for (i) a $150 million 5-year senior secured term loan facility (2018 Term Loan) that matures on May 24, 2023; and (ii) a $85 million three-year secured revolving credit facility (2018 Revolving Credit Facility) that matures on May 24, 2021. Proceeds from the 2018 Term Loan were used to repay in full the outstanding amount due under our $150 million amended term loan (2015 Term Loan) due on November 10, 2019, and to pay fees and expenses incurred in connection with the 2018 Credit Agreement.
2018 Term Loan
The 2018 Term Loan bears interest at the Eurodollar Rate, as defined in the 2018 Credit Agreement and subject to a 1.00% floor, plus an annual margin rate of 4.75%, representing an all-in rate of 7.25% as of March 31, 2019, payable monthly based on our current interest period election. Quarterly principal payments of $375 thousand are also required. As of March 31, 2019, the outstanding principal balance of the 2018 Term Loan was $148.9 million.
Interest expense for the 2018 Term Loan includes interest and the amortization of issuance costs, an original issue discount and capitalized modification costs related to the 2015 Term Loan. For the three months ended March 31, 2019, interest expense was $2.8 million. Remaining unamortized issuance costs were $2.4 million as of March 31, 2019 and are being amortized to interest expense using the effective interest method over the contractual life of the 2018 Term Loan.
We are subject to certain covenants under the 2018 Term Loan (as defined in the 2018 Credit Agreement), including (but not limited to) a maximum debt-to-total capitalization ratio (as defined in the 2018 Credit Agreement) of 35% under the 2018 Term Loan. We were in compliance with all covenants as of March 31, 2019.
Future principal payments due under the 2018 Term Loan as of March 31, 2019 are as follows:
As of March 31, 2019
 
Principal
 
 
 
(In thousands)
 
2019
 
$
1,125

 
2020
 
1,500

 
2021
 
1,500

 
2022
 
1,500

 
2023
 
143,250

 
Total
 
$
148,875

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

16
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 2.00% to 3.50% per annum, based on the applicable corporate credit rating at the time. As of March 31, 2019, no borrowings had been made under the 2018 Revolving Credit Facility.
We are required to pay a quarterly commitment fee on the average daily undrawn amount of the 2018 Revolving Credit Facility, which ranges from 0.30% to 0.60%, based on the applicable corporate credit rating at the time. As of March 31, 2019, the applicable commitment fee was 0.50%. For the three months ended March 31, 2019, we recorded $0.1 million of commitment fees in interest expense.
We incurred issuance costs of $1.5 million in connection with the establishment of the 2018 Revolving Credit Facility, which were deferred and recorded within Other Assets. These costs are being amortized through interest expense over the three-year life of the 2018 Revolving Credit Facility on a straight line basis. For the three months ended March 31, 2019, we recognized $0.1 million of interest expense from the amortization of deferred issuance costs. At March 31, 2019, remaining deferred issuance costs were $1.1 million, net of accumulated amortization.
We are subject to certain covenants under the 2018 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 as of March 31, 2019.
5. Reinsurance
We enter into third-party reinsurance transactions to actively manage our risk, ensure PMIERs compliance and support the growth of our business. The GSEs and the Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) have approved all such transactions (subject to certain conditions and ongoing review, including levels of approved capital credit).
The effect of our reinsurance agreements on premiums written and earned is as follows:
 
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
(In Thousands)
Net premiums written
 
 
 
Direct
$
81,730

 
$
66,027

Ceded (1)
(9,807
)
 
(6,997
)
Net premiums written
$
71,923

 
$
59,030

 


 


Net premiums earned


 


Direct
$
86,298

 
$
63,604

Ceded (1)
(12,430
)
 
(8,690
)
Net premiums earned
$
73,868

 
$
54,914

(1) Net of profit commission
Excess-of-loss reinsurance
2017 ILN Transaction
In May 2017, NMIC entered into a reinsurance agreement with Oaktown Re Ltd. (Oaktown Re), which provides for up to $211.3 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written from 2013 through December 31, 2016. For the reinsurance coverage period, NMIC retains the first layer of $126.8 million of aggregate losses, of which $124.7 million remained at March 31, 2019, and Oaktown Re then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. The outstanding reinsurance coverage amount decreases from $211.3 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 and was $117.4 million as of March 31, 2019. The outstanding reinsurance coverage amount will stop amortizing if certain credit enhancement or delinquency thresholds are triggered.

17
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Oaktown Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $211.3 million to unaffiliated investors (the 2017 Notes). The 2017 Notes mature on April 26, 2027. All of the proceeds paid to Oaktown Re from the sale of the 2017 Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re 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 collectively to NMIC's reinsurance agreement with Oaktown Re and the issuance of the 2017 Notes by Oaktown Re as the 2017 ILN Transaction. Under the terms of the 2017 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re for anticipated operating expenses (capped at $300 thousand per year). For the three months ended March 31, 2019 and 2018, NMIC ceded risk premiums of $1.4 million and $1.6 million, respectively. NMIC did not cede any losses to Oaktown Re during the three months ended March 31, 2019 and 2018.
2018 ILN Transaction
In July 2018, NMIC entered into a reinsurance agreement with Oaktown Re II Ltd. (Oaktown Re II), which provides for up to $264.5 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies written between January 1, 2017 and May 31, 2018. For the reinsurance coverage period, NMIC retains the first layer of $125.3 million of aggregate losses, of which $125.3 million remained at March 31, 2019, and Oaktown Re II then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. The outstanding reinsurance coverage amount decreases from $264.5 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, and was $264.5 million as of March 31, 2019. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained and will stop amortizing if certain credit enhancement or delinquency thresholds are triggered.
Oaktown Re II financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of $264.5 million to unaffiliated investors (the 2018 Notes). The 2018 Notes mature on July 25, 2028. All of the proceeds paid to Oaktown Re II from the sale of the 2018 Notes were deposited into a reinsurance trust to collateralize and fund the obligations of Oaktown Re II 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 collectively to NMIC's reinsurance agreement with Oaktown Re II and the issuance of the 2018 Notes by Oaktown Re II as the 2018 ILN Transaction. Under the terms of the 2018 ILN Transaction, NMIC makes risk premium payments for the applicable outstanding reinsurance coverage amount and pays Oaktown Re II for anticipated operating expenses (capped at $250 thousand per year). For the three months ended March 31, 2019, NMIC ceded risk premiums of $1.7 million and did not cede any losses to Oaktown Re II.
Under the terms of the 2018 ILN Transaction, we are required to maintain a certain level of restricted funds in a premium deposit account with Bank of New York Mellon until the 2018 Notes have been redeemed in full. "Cash and cash equivalents" on our balance sheet includes restricted cash of $1.4 million as of March 31, 2019. We are not required to deposit additional funds into the premium deposit account and the restricted balance will decrease over time as the principal balance of the 2018 Notes declines.
We refer collectively to the 2017 ILN Transaction and 2018 ILN Transaction as the ILN Transactions. NMIC holds optional termination rights under each ILN Transaction in the event of certain occurrences, including, among others, 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.
At inception of each ILN Transaction, we determined that Oaktown Re and Oaktown Re II were variable interest entities (VIEs). However, we concluded that we are not the primary beneficiary of either Oaktown Re or Oaktown Re II because NMIC does not have significant economic exposure to either Oaktown Re or Oaktown Re II, and, as such, we do not consolidate the VIEs in our consolidated financial statements.
Quota share reinsurance
2016 QSR Transaction
Effective September 1, 2016, NMIC entered into a quota-share reinsurance (QSR) transaction (the 2016 QSR Transaction) with a panel of third-party reinsurers. Each of the third-party reinsurers has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services (S&P), A.M. Best or both.

18
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Under the 2016 QSR Transaction, NMIC ceded premiums written related to:
•
25% of existing risk written on eligible policies as of August 31, 2016;
•
100% of existing risk under our pool agreement with Fannie Mae; and
•
25% of risk on eligible policies written from September 1, 2016 through December 31, 2017.
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. However, NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
2018 QSR Transaction
Effective January 1, 2018, NMIC entered into a second quota share reinsurance treaty with a panel of third-party reinsurers (the 2018 QSR Transaction, together with the 2016 QSR Transaction, the QSR Transactions). Each of the third-party reinsurers has an insurer financial strength rating of A- or better by S&P, AM Best or both. Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of risk on eligible policies written in 2018 and 20% of risk on eligible policies written in 2019. The 2018 QSR Transaction is scheduled to terminate on December 31, 2029. However, NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2022, or at the end of any calendar quarter thereafter, which would result in NMIC reassuming the related risk.
NMIC may terminate either or both of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the 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 this termination, ceded premiums written under the 2016 QSR Transaction will decrease 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 the amounts related to the QSR Transactions:
 
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
(In Thousands)
Ceded risk-in-force
$
4,534,353

 
$
3,304,335

Ceded premiums written
(18,845
)
 
(14,525
)
Ceded premiums earned
(21,468
)
 
(16,218
)
Ceded claims and claim expenses
899

 
543

Ceding commission written
3,771

 
2,905

Ceding commission earned
4,206

 
3,151

Profit commission
12,061

 
9,201

Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums. Under the 2018 QSR Transaction, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20% ceding commission for premiums ceded under the QSR Transactions. NMIC also receives a profit commission, provided that the loss ratio on the loans covered under the 2016 QSR Transaction and 2018 QSR Transaction generally remains below 60% and 61%, respectively, as measured annually. Ceded claims and claim expenses under the QSR Transactions reduce NMIC's profit commission on a dollar-for-dollar basis.

19
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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 our 2016 QSR Transaction was $3.1 million as of March 31, 2019.
In accordance with the terms of the 2018 QSR Transaction, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also settled quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to our 2018 QSR Transaction was $0.6 million as of March 31, 2019.
6. Reserves for Insurance Claims and Claim Expenses
We establish reserves to recognize the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. Consistent with industry practice, we establish reserves for loans that have been reported to us by servicers as having been in default for at least 60 days, referred to as case reserves, and additional loans that we estimate (based on actuarial review) have been in default for at least 60 days that have not yet been reported to us by servicers, referred to as incurred but not reported (IBNR) reserves. We also establish claim expense reserves, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claims settlement process. As of March 31, 2019, we had reserves for insurance claims and claim expenses of $15.5 million for 940 primary loans in default. During the three months ended March 31, 2019, we paid 37 claims totaling $0.9 million, including 36 claims covered under the QSR Transactions representing $0.2 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 March 31, 2019, 53 loans in the pool were past due by 60 days or more. These 53 loans represented approximately $3.3 million of RIF. Due to the size of the remaining deductible, the low level of notices of default (NODs) reported on loans in the pool through March 31, 2019 and the expected severity (all loans in the pool have loan-to-value ratios (LTV) ratios under 80%), we did not establish any case or IBNR reserves for pool risk at March 31, 2019. In connection with the settlement of pool claims, we applied $0.6 million to the pool deductible through March 31, 2019. At March 31, 2019, the remaining pool deductible was $9.7 million. We have not paid any pool claims to date. 100% of our pool RIF is reinsured under the 2016 QSR Transaction.

20
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The following table provides a reconciliation of the beginning and ending reserve balances for primary insurance claims and claim expenses:
 
For the three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Beginning balance
$
12,811

 
$
8,761

Less reinsurance recoverables (1)
(3,001
)
 
(1,902
)
Beginning balance, net of reinsurance recoverables
9,810

 
6,859

 
 
 
 
Add claims incurred:
 
 
 
Claims and claim expenses incurred:
 
 
 
Current year (2)
3,909

 
1,940

Prior years (3)
(1,166
)
 
(371
)
Total claims and claim expenses incurred
2,743

 
1,569

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

 
—

Prior years (3)
694

 
371

Total claims and claim expenses paid
694

 
371

 
 
 
 
Reserve at end of period, net of reinsurance recoverables
11,859

 
8,057

Add reinsurance recoverables (1)
3,678

 
2,334

Ending balance
$
15,537

 
$
10,391

(1) 
Related to ceded losses recoverable on the QSR Transactions, included in "Other Assets" on the Condensed Consolidated Balance Sheets. 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 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 since that time. Amounts are presented net of reinsurance.
The "claims incurred" section of the table above shows claims and claim expenses incurred on NODs for current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred relating to current year NODs represents the estimated amount of claims and claim expenses to be ultimately paid on such loans in default.  We recognized $1.2 million and $0.4 million of favorable prior year development during the three months ended March 31, 2019 and 2018, respectively, due to NOD cures and ongoing analysis of recent loss development trends. We may increase or decrease our original estimates as we learn additional information about individual defaults and claims and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $10.4 million related to prior year defaults remained as of March 31, 2019.
7. Earnings per Share (EPS)
Basic earnings per share is based on the weighted average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the vesting of service based and performance and service based 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 earnings per share of common stock.

21
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 
For the three months ended March 31,
 
2019
 
2018

(In Thousands, except for per share data)
Net income
$
32,899

 
$
22,355

Basic weighted average shares outstanding
66,692

 
62,099

Basic earnings per share
$
0.49

 
$
0.36

 
 
 
 
Net income
$
32,899

 
$
22,355

Warrant gain, net of tax
—

 
(332
)
Diluted net income
$
32,899

 
$
22,023

 
 
 
 
Basic weighted average shares outstanding
66,692

 
62,099

Dilutive effect of issuable shares
2,304

 
3,598

Diluted weighted average shares outstanding
68,996

 
65,697

 
 
 
 
Diluted earnings per share
$
0.48

 
$
0.34

 
 
 
 
Anti-dilutive shares
754

 
169

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 March 31, 2019, 67 thousand warrants were exercised resulting in the issuance of 39 thousand common shares. Upon exercise, we reclassified approximately $0.9 million of warrant fair value from warrant liability to additional paid-in capital, of which $0.3 million related to changes in fair value during the three months ended March 31, 2019. During the three months ended March 31, 2018, 54 thousand warrants were exercised resulting in the issuance of 26 thousand common shares. Upon exercise, we reclassified approximately $0.5 million of warrant fair value from warrant liability to additional paid-in capital, of which $0.1 million related to changes in fair value during the three months ended March 31, 2018.
We account for these warrants to purchase our common shares in accordance with ASC 470-20, Debt with Conversion and Other Options and ASC 815-40, Derivatives and Hedging - Contracts in Entity's Own Equity.
9. Income Taxes
We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. NMIH files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rates for a given year. Our effective tax rate on our pre-tax income was 15.6% for the three months ended March 31, 2019, compared to 15.7% for the three months ended March 31, 2018. As a mortgage guaranty insurance company, we are eligible to claim a tax deduction of 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 months ended March 31, 2019 represents a change in our net deferred tax liability.
10. Leases
We have two operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating right-of-use (ROU) assets and lease liabilities of $7.7 million and $8.9 million, respectively, as of March 31, 2019. As of March 31, 2019, we did not have any finance leases.
We recognize ROU assets and lease liabilities in connection with the adoption of ASU 2016-02, Leases (Topic 842). ROU assets and lease liabilities are established based on the estimated present value of lease payments over the relevant lease term. We estimate a discount rate for each lease based on our estimated incremental borrowing rate at the commencement date of the relevant lease.

22
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Right-of-use assets obtained in exchange for new operating lease liabilities for the three months ended March 31, 2019 were $8.1 million. The following table provides a summary of our ROU asset and lease liability assumptions as of March 31, 2019:
Weighted-average remaining lease term
4 years

Weighted-average discount rate
6.21
%
Cash paid and lease expenses recognized on our operating lease liabilities for the three months ended March 31, 2019 were $0.6 million. Future payments due under our existing operating leases as of March 31, 2019 are as follows:
As of March 31, 2019
(In Thousands)

2019
$
1,853

2020
2,537

2021
2,609

2022
2,574

2023
462

Total undiscounted lease payments
10,035

Less effects of discounting
(1,164
)
Present value of lease payments
$
8,871

Lease expense is recorded in underwriting and operating expenses on the consolidated statements of operations. Our existing operating leases have terms that range from three to five years. The lease for our corporate headquarters includes an option to renew for an additional five years at prevailing market rates at time of renewal. We have not included this renewal option in our calculation of minimum lease payments as it is not reasonably certain to be exercised.
As of December 31, 2018, the future minimum lease payments as accounted for prior to our adoption of ASU 2016-02, Leases (Topic 842) are as follows:
Year ending December 31,
 
 
(In Thousands)
2019
$
2,346

2020
2,417

2021
2,489

2022
2,564

2023
463

Totals
$
10,279

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.

23
NMI HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

NMIC and Re One's combined statutory net income (loss) was as follows:
 
For the three months ended March 31,
 
2019
 
2018
 
(In Thousands)
Statutory net income (loss)
$
(927
)
 
$
(6,814
)
NMIC and Re One's combined statutory surplus, contingency reserve and risk-to-capital (RTC) ratios were as follows:
 
March 31, 2019
 
December 31, 2018
 
(Dollars In Thousands)
Statutory surplus
$
431,824

 
$
430,785

Contingency reserve
375,823

 
332,702

RTC Ratio
14:1

 
13.1:1

NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. 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's ability to pay dividends to NMIH is subject to Wisconsin OCI notice or approval. Certain other states in which NMIC is licensed also have statutes or regulations that restrict its ability to pay dividends. Since inception, NMIC and Re One have not paid any dividends to NMIH.

24


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 2018 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 2018 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 March 31, 2019, we had master policies with 1,392 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 March 31, 2019, we had $76.1 billion of total insurance-in-force (IIF), including primary IIF of $73.2 billion, and $18.5 billion of gross RIF, including primary RIF of $18.4 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 the dream of homeownership, 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, 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 March 31, 2019, we had 308 full time employees. Our website is www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report.
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.
New Insurance Written, Insurance-In-Force and Risk-In-Force
New insurance written (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, which tend to be generated to a greater extent in purchase originations as compared to refinancings. 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

25


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 GPSSM. 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. 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
•
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. A majority of our single premium policies in force as of March 31, 2019 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 substantially all of our single premium policies are 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 profitability is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure PMIERs compliance 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

26


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. In general, there are no ceding commissions under excess-of-loss reinsurance agreements. We expect to continue to evaluate reinsurance opportunities in the normal course of business.
Quota share reinsurance
Effective September 1, 2016, NMIC entered into the 2016 QSR Transaction with a panel of third-party reinsurers. Under the terms of the 2016 QSR Transaction, NMIC ceded premiums written related to (1) 100% of the risk under our pool agreement with Fannie Mae, (2) 25% of the existing risk on eligible policies written as of August 31, 2016 and (3) 25% of the risk on eligible policies written between September 1, 2016 and December 31, 2017, 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.
Effective January 1, 2018, NMIC entered into the 2018 QSR Transaction with a panel of third-party reinsurers. Under the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of risk on eligible policies written in 2018 and will cede premiums earned related to 20% of 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 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 this termination, ceded premiums written under the 2016 QSR Transaction will decrease from 25% to 20.5% on eligible policies. The termination has no effect on the cession of pool risk under the 2016 QSR Transaction. We estimate that PMIERs risk-based required assets would have increased by approximately $27 million at March 31, 2019 as a result of the termination.
Excess-of-loss reinsurance
In May 2017, NMIC secured $211.3 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from 2013 through December 31, 2016, through a mortgage insurance-linked notes offering by Oaktown Re. The reinsurance coverage amount under the terms of the 2017 ILN Transaction decreases from $211.3 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 and was $117.4 million as of March 31, 2019. For the reinsurance coverage period, NMIC retains the first layer of $126.8 million of aggregate losses, of which $124.7 million remained as of March 31, 2019, and Oaktown Re then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount.
In July 2018, NMIC secured $264.5 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies written from January 1, 2017 through May 31, 2018, through a mortgage insurance-linked notes offering by Oaktown Re II. The reinsurance coverage amount under the terms of the 2018 ILN Transaction decreases from $264.5 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 and was $264.5 million as of March 31, 2019. For the reinsurance coverage period, NMIC retains the first layer of $125.3 million of aggregate losses, of which $125.3 million remained at March 31, 2019, and Oaktown Re II then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount.

27


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 NIW
As of and for the three months ended
 
March 31, 2019
 
March 31, 2018
 
IIF
 
NIW
 
IIF
 
NIW
 
(In Millions)
Monthly
$
55,995

 
$
6,211

 
$
37,574

 
$
5,441

Single
17,239

 
702

 
15,860

 
1,019

Primary
73,234

 
6,913

 
53,434

 
6,460

 
 
 
 
 
 
 
 
Pool
2,838

 
—

 
3,153

 
$
—

Total
$
76,072

 
$
6,913

 
$
56,587

 
$
6,460

For the three months ended March 31, 2019, NIW increased 7%, compared to the three months ended March 31, 2018, primarily due to growth in our monthly premium policy volume tied to increased penetration of existing customer accounts and new customer account activations, partially offset by a reduction in our single premium policy production. For the three months ended March 31, 2019, monthly premium NIW increased 14%, compared to the three months ended March 31, 2018.
For the three months ended March 31, 2019, monthly premium polices accounted for 90% of our NIW. As of March 31, 2019, monthly premium policies accounted for 76% of our primary IIF, as compared to 70% at March 31, 2018. We expect the break-down of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF to continue to trend toward an increased monthly mix over time given the composition of our NIW. Our primary IIF increased 37% as of March 31, 2019 compared to March 31, 2018, primarily due to the NIW generated between such measurement dates and the persistency of in force policies.
The following table presents net premiums written and earned for the periods indicated.
Primary and pool premiums written and earned
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
(In Thousands)
Net premiums written
$
71,923

 
$
59,030

Net premiums earned
$
73,868

 
$
54,914

For the three months ended March 31, 2019, net premiums written increased 22% and net premiums earned increased 35% compared to the three months ended March 31, 2018. The increases in net premiums written and earned are due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR Transactions tied to the growth of our direct premium volume and the inception of the 2018 ILN Transaction.
Pool premiums written and earned for the three months ended March 31, 2019 and 2018, were $0.8 million and $0.9 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums have been ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission under the 2016 QSR Transaction.

28


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 trends
As of and for the three months ended
 
March 31, 2019
 
December 31, 2018

September 30, 2018

June 30, 2018

March 31, 2018
 
($ Values In Millions)
New insurance written
$
6,913

 
$
6,962

 
$
7,361

 
$
6,513

 
$
6,460

Percentage of monthly premium
90
%
 
90
%
 
91
%
 
88
%
 
84
%
Percentage of single premium
10
%
 
10
%
 
9
%
 
12
%
 
16
%
New risk written
$
1,799

 
$
1,799

 
$
1,883

 
$
1,647

 
$
1,580

Insurance-in-force (IIF) (1)
73,234

 
68,551

 
63,527

 
58,089

 
53,434

Percentage of monthly premium
76
%
 
75
%
 
74
%
 
72
%
 
70
%
Percentage of single premium
24
%
 
25
%
 
26
%
 
28
%
 
30
%
Risk-in-force (1)
$
18,373

 
$
17,091

 
$
15,744

 
$
14,308

 
$
13,085

Policies in force (count) (1)
297,232

 
280,825

 
262,485

 
241,993

 
223,263

Average loan size (1)
$
0.246

 
$
0.244

 
$
0.242

 
$
0.240

 
$
0.239

Average coverage (2)
25.1
%
 
24.9
%
 
24.8
%
 
24.6
%
 
24.5
%
Loans in default (count) (1)
940

 
877

 
746

 
768

 
1,000

Percentage of loans in default
0.3
%
 
0.3
%
 
0.3
%
 
0.3
%
 
0.5
%
Risk in force on defaulted loans (1)
$
53

 
$
48

 
$
42

 
$
43

 
$
57

Average premium yield (3)
0.42
%
 
0.42
%
 
0.43
%
 
0.44
%
 
0.43
%
Earnings from cancellations
$
2.3

 
$
2.1

 
$
2.6

 
$
3.1

 
$
2.8

Annual persistency (4)
87.2
%
 
87.1
%
 
86.1
%
 
85.5
%
 
85.7
%
Quarterly run-off (5)
3.3
%
 
3.1
%
 
3.3
%
 
3.5
%
 
3.1
%
(1) 
Reported as of the end of the period.
(2) 
Calculated as end of period RIF divided by IIF.
(3) 
Calculated as net primary and pool premiums earned, net of reinsurance, divided by average primary IIF for the period, annualized.
(4) 
Defined as the percentage of IIF that remains on our books after any 12-month period.
(5) 
Defined as the percentage of IIF that is no longer on our books after any 3-month period.
The table below presents a summary of the change in total primary IIF for the dates and periods indicated.
Primary IIF
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
(In Millions)
IIF, beginning of period
$
68,551

 
$
48,465

NIW
6,913

 
6,460

Cancellations and other reductions
(2,230
)
 
(1,491
)
IIF, end of period
$
73,234

 
$
53,434


29


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 RIF
As of March 31, 2019
 
As of March 31, 2018
 
IIF
 
RIF
 
IIF
 
RIF
 
(In Millions)
March 31, 2019
$
6,872

 
$
1,789

 
$
—

 
$
—

2018
25,609

 
6,492

 
6,427

 
1,573

2017
18,353

 
4,514

 
20,272

 
4,948

2016
14,750

 
3,652

 
17,497

 
4,262

2015
6,585

 
1,658

 
7,913

 
1,971

2014 and before
1,065

 
268

 
1,325

 
331

Total
$
73,234

 
$
18,373

 
$
53,434

 
$
13,085

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 debt-to-income (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.
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 FICO
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
>= 760
$
3,057

 
$
2,619

740-759
1,224

 
1,073

720-739
1,044

 
914

700-719
792

 
811

680-699
553

 
567

<=679
243

 
476

Total
$
6,913

 
$
6,460

Weighted average FICO
749

 
743


30


Primary NIW by LTV
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
95.01% and above
$
569

 
$
997

90.01% to 95.00%
3,424

 
2,765

85.01% to 90.00%
2,241

 
1,755

85.00% and below
679

 
943

Total
$
6,913

 
$
6,460

Weighted average LTV
92.2
%
 
92.5
%
Primary NIW by purchase/refinance mix
For the three months ended
 
March 31, 2019
 
March 31, 2018
 
(In Millions)
Purchase
$
6,383

 
$
5,425

Refinance
530

 
1,035

Total
$
6,913

 
$
6,460

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 FICO
As of
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
>= 760
$
33,902

 
46
%
 
$
25,371

 
48
%
740-759
12,160

 
17

 
8,635

 
16

720-739
10,096

 
14

 
6,981

 
13

700-719
8,122

 
11

 
5,814

 
11

680-699
5,435

 
7

 
3,852

 
7

<=679
3,519

 
5

 
2,781

 
5

Total
$
73,234

 
100
%
 
$
53,434

 
100
%
Primary RIF by FICO
As of
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
>= 760
$
8,506

 
46
%
 
$
6,246

 
48
%
740-759
3,076

 
17

 
2,125

 
16

720-739
2,550

 
14

 
1,710

 
13

700-719
2,036

 
11

 
1,416

 
11

680-699
1,357

 
7

 
932

 
7

<=679
848

 
5

 
656

 
5

Total
$
18,373

 
100
%
 
$
13,085

 
100
%

31


Primary IIF by LTV
As of
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
95.01% and above
$
7,204

 
10
%
 
$
4,872

 
9
%
90.01% to 95.00%
34,024

 
46

 
23,937

 
45

85.01% to 90.00%
22,208

 
30

 
16,034

 
30

85.00% and below
9,798

 
14

 
8,591

 
16

Total
$
73,234

 
100
%
 
$
53,434

 
100
%
Primary RIF by LTV
As of
 
March 31, 2019
 
March 31, 2018
 
($ In Millions)
95.01% and above
$
1,928

 
10
%
 
$
1,294

 
10
%
90.01% to 95.00%
9,923

 
54

 
6,978

 
53

85.01% to 90.00%
5,384

 
30

 
3,831

 
29

85.00% and below
1,138

 
6

 
982

 
8

Total
$
18,373

 
100
%
 
$
13,085

 
100
%
Primary RIF by Loan Type
As of
 
March 31, 2019
 
March 31, 2018
 
 
 
 
Fixed
98
%
 
98
%
Adjustable rate mortgages:
 
 
 
Less than five years
—

 
—

Five years and longer
2

 
2

Total
100
%
 
100
%
The table below presents selected primary portfolio statistics, by book year, as of March 31, 2019.
 
As of March 31, 2019
Book year
Original Insurance Written
 </