the distribution of claims over the life of a book. Historically, the first two to three years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining. Factors, such as persistency of the book, the condition of the economy, including unemployment and housing prices, and others, can affect this pattern. See “Mortgage Insurance Earnings and Cash Flow ~~Cycle.~~Cycle

In general, the majority of any underwriting profit (”i.e., the earned premium revenue minus claims and expenses, excluding investment income) that a book generates occurs in the early years of the book, with the largest portion of the underwriting profit for that book realized in the first year. The earnings we record and the cash flow we receive vary based on the type of MI product and premium plan our customers select. We offer monthly, annual and single premium payment plans. We currently expect that the majority of lenders who purchase MI from us will select one of our monthly premium plans.

Claims Incurred

We expect that ~~losses~~claims incurred for the first two to three years of our operations will be relatively low for the following reasons:

we underwrite every loan and we believe that this will lower our incurred claims;

as stated above, the typical distribution of claims over the life of a book results in fewer defaults during the first two to three years after loans are originated, usually peaking in years three through six and declining thereafter;

we expect that the frequency of claims on our initial primary books of business should be between 3% and 4% of mortgages insured over the life of the book. For claims that we may receive, we expect the severity of the ~~loss~~claim to be between 85% and 95% of the coverage amount. Based on these expectations, we believe that the loss ratio over the life of each book will be between 20% and 25% of earned premiums. Because we expect the ~~losses~~claims on insured mortgages to develop over time, we believe that the reported loss ratio in our first 2-3 years of operation will be less than 10% of earned premiums; and

under the pool insurance agreement between NMIC and Fannie Mae, as discussed above in this report, NMIC is responsible for ~~losses~~claims only to the extent they exceed a deductible.

We developed our estimates of the expected frequency and severity of claims based on statutory filings by many of our competitors, which contain historical book year ~~performance.~~performance, as well as an industry dataset which consists of nearly 150 million mortgages and 80 data fields per mortgage, gathered over the past 17 years. As state-regulated entities, mortgage insurers are required to file actuarial justifications for premium rate changes in many states, many of which are publicly available and include historical information on claim frequency and severity. ~~Historical~~We used this publicly available historical performance data from similar ~~underwriting,~~credit profile, house price appreciation, and interest rate periods ~~were~~and we compared this performance data to today to determine a range of expected performance.

~~Qualified Residential Mortgage Rule~~

Factors that Impact Holding Company Operations

In this section we discuss the results of our consolidated operations. NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) the payment of certain corporate expenses and reimbursable expenses of its insurance subsidiaries; (ii) capital support for our mortgage insurance subsidiaries; (iii) potential payments to the IRS; and (iv) the payment of dividends, if any, on its common stock.

Our future capital requirements depend on many factors, including our ability to successfully write new business and establish premium rates at levels sufficient to cover claims and operating costs. To the extent that the funds generated by our ongoing operations and capitalization are insufficient to fund future operating requirements, we may need to raise additional funds through financing activities or curtail our growth and reduce our expenses.

On March 26, 2014, NMIH contributed $20 million in cash to NMIC. In order to support a minimum surplus of $150 million and maintain a risk-to-capital ratio under 15 to 1 through December 31, 2015 at NMIC, we expect NMIH will make additional capital contributions to NMIC from time-to-time. NMIH could be required to provide additional capital support for NMIC and Re One if additional capital is required pursuant to state insurance laws and regulations, by the GSEs or the rating agencies.

In addition to investment income, dividends from NMIC and permitted payments under our tax- and expense-sharing arrangements with our subsidiaries are NMIH's principal sources of operating cash. The ~~Dodd-Frank Act, which was enacted~~expense-sharing arrangements between NMIH and its insurance subsidiaries, as amended, have been approved by ~~Congress in July 2010, requires a securitizer to retain at least 5% of~~ the ~~credit risk associated with securitized mortgage loans. In some cases the retained risk~~Wisconsin OCI, but such approval may be ~~allocated between~~changed or revoked at any time. NMIC's ability to pay dividends to NMIH is subject to various conditions imposed by the ~~securitizer~~GSEs and by insurance regulations requiring insurance department approval. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Additionally, under agreements with the ~~mortgage originator. This risk retention requirement does~~GSEs, NMIC is not ~~apply~~permitted to ~~mortgage loans~~pay shareholder dividends until December 31, 2015 and under agreements with various state insurance regulators, is not permitted to pay shareholder dividends until January 2016.

NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as NMIH, that are ~~Qualified Residential Mortgages (“QRMs”)~~incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or ~~that are insured~~(subject to certain limitations) recent net profits. As of March 31, 2014, NMIH's shareholders' equity was $453 million.

Liquidity, Capital Resources and Results of Operations

Our financial results to date have been primarily driven by expenditures related to our business development activities, and to a lesser extent, by our investment activities. When we compare the FHA or another federal agency. By exempting QRMs from the risk-retention requirement, the cost of securitizing these mortgages would be reduced, thus providing a market incentive for the origination of loans that are exempt from the risk-retention requirement.

The Dodd-Frank Act requires certain federal regulators, including the Securities and Exchange Commission ("SEC"), the Federal Deposit Insurance Corporation ("FDIC"), the Office of the Comptroller of the Currency ("OCC") and (as to residential mortgage transactions) U.S. Department of Housing and Urban Development ("HUD") and FHFA, to promulgate regulations providing for minimum credit risk-retention requirements in securitizations of residential mortgage loans that do not meet the definition of QRM. Inquarter ended March 2011, federal regulators issued the proposed credit risk retention rule, which the regulators re-proposed with certain revisions on August 28, 2013. The initial proposed rule suggested a maximum loan-to-value ratio (or, "LTV") of 80% in purchase transactions, 75% in rate and term refinance transactions, and 70% in cash-out refinancings, along with other restrictions such as limits on a borrower's debt-to-income ratio. The suggested LTV figures did not give consideration to MI in computing LTV. According31, 2014 to the ~~re-proposal,~~quarter ended March 31, 2013, the primary difference is the fact that we had not written any business prior to April of 2013. Although we expect our year-over-year expenses to increase as we grow our business, we ultimately expect that the majority of ~~commenters,~~our operating expenses will be relatively fixed in the long term. As our business matures and we deploy the majority of our capital, including ~~securitization sponsors, housing industry groups,~~capital raised through equity or debt offerings, or through the use of reinsurance, we are targeting our expense ratio (expenses to premiums written) to fall into a range of 20% to 25%. Until our business matures, our expense ratio is expected to be significantly higher than this range given the low levels of premium written compared to our "fixed" costs customary to operating a mortgage ~~bankers, lenders, consumer groups,~~insurance company. We believe that we will have an efficient expense structure providing us with greater flexibility. We do not expect to achieve operating profitability through at least 2014. Additionally, we are targeting an average unlevered return on equity in the mid-teens over time.

Our MI companies' principal operating sources of liquidity will be premiums that we receive from policies and ~~legislators opposed~~income generated by our investment portfolio. Our MI companies' primary liquidity needs include the agencies' original QRM proposal, recommending instead that almost all mortgages without features such as negative amortization, balloon payments, or teaser rates should qualify for an exemption from risk retention. Some commenters expressed support for additional factors, such as less stringent LTV restrictions and reliancepayment of claims on our MI ~~for high-LTV loans. The re-proposed rule did not carry forward the minimum LTV requirements~~policies, operating expenses, investment expenses and other ~~specific restrictions. Instead,~~costs of our business.

For the ~~federal regulators proposed that whether~~three months ended March 31, 2014, we had direct premiums written of $5.2 million compared to direct premiums written of $0 for the three months ended March 31, 2013. We began writing MI in April 2013 through NMIC. The principal driver of the increase in premiums written was the continued significant development of our customer base.

As of March 31, 2014, we had no claim reserves. However, we expect to establish a ~~particular loan transaction is~~claim reserve during 2014.

We have incurred significant net operating losses since our inception. Our net losses were $15.1 million and $12.0 million for the three months ended March 31, 2014 and 2013, respectively. The primary drivers of the increased net losses between periods were the hiring of management and staff personnel and external and professional costs. Additionally, we entered into a ~~QRM,~~two-year lease in July 2012 for our principal location of operations and ~~thus not subject~~in October 2013, extended the terms of this lease through October 31, 2017. These expenses were slightly offset by premiums written and investment income.

Employee compensation represents the majority of our operating expense, which includes both cash and share-based compensation. Our payroll and related expense was $10.2 million for the three months ended March 31, 2014 and $6.2 million for the three month period ended March 31, 2013. As part of our compensation plan, certain employees were granted stock options and RSUs under our 2012 Stock Incentive Plan. As a result, our share-based compensation expense was $2.3 million for the three months ended March 31, 2014 and $3.0 million for the three month period ended March 31, 2013. We account for our stock options and RSUs under the Financial Accounting Standards Board Accounting Standards Codification ("ASC") No. 718, Compensation — Stock Compensation (“ASC 718”), which requires all compensation expense from share-based payments to be measured and recognized in the financial statements at their grant date fair values.

Our total assets, comprised largely of cash and investments, were $471.2 million at March 31, 2014 compared to total assets of $481.2 million at December 31, 2013. The reduction in 2014 compared to 2013 was driven by operating costs, partially offset by proceeds from our IPO and premium income.

Our accounts payable and accrued expenses were $7.4 million as of March 31, 2014 and $10.1 million at December 31, 2013. The decrease at March 31, 2014 was comprised primarily of accrued bonuses and accrued expenses which were paid during the first quarter of 2014.

As of March 31, 2014, we had approximately $454 million in cash and investments of which $246 million was held at our holding company. As of March 31, 2014, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately $204 million of our consolidated net assets of approximately $453 million.

The following table summarizes our consolidated cash flows from operating, investing and financing activities:



NMIH	For the Three Months Ended March 31,
	2014			2013
Net Cash (Used in) Provided by:	(In Thousands)
Operating Activities	$	(11,991	)	$	(13,244	)
Investing Activities	(1,056		)	(325,209		)
Financing Activities	(90		)	—
Net (Decrease) Increase in Cash and Cash Equivalents	$	(13,137	)	$	(338,453	)

Cash used in operating activities for the quarter ended March 31, 2014 was lower compared to the ~~credit risk retention requirement, should be determined by reference~~same period in 2013 due primarily to the ~~“qualified mortgage” (QM) rule under~~collection of premiums offset by the ~~Truth~~continued hiring of management and staff personnel and professional costs incurred in ~~Lending Act~~conjunction with litigation support.

Cash used in investing activities for the quarter ended March 31, 2014 was lower compared to the same period in 2013 as a result primarily of investing our cash holdings in fixed income securities in the first quarter of 2013. We had very little movement in our investment portfolio during the first quarter of 2014 as during 2013, we focused on balancing and ~~Regulation Z, discussed below. That~~optimizing our portfolio consistent with our investment policy.

Cash used in financing activities for the three months ended March 31, 2014 consisted primarily of taxes paid related to the net share settlement of equity awards. There were no cash flows from financing activities during the same period in 2013.

We expect that cash and investments and projected cash flows from operations will provide us with sufficient liquidity to fund our anticipated growth by providing capital to increase our insurance company surplus as well as for payment of operating expenses through 2015, at which point we currently expect to consider various capital options. We anticipate that as our insurance-in-force grows, the premium revenue we receive will increase. However, if our risk-in-force or expenses materially exceed our expectations or if our risk-to-capital ratio is ifexpected to exceed 15 to 1, we may have to consider our capital options sooner to support our growth. In addition, we may seek to raise additional capital to leverage our fixed expenses in order to achieve a ~~residential mortgage loan is~~return on capital attractive to investors. We expect to leverage and manage our fixed operating expenses so that they grow at a ~~QM loan,~~much slower rate than sales over the ~~loan would be considered a QRM loan. The federal regulators requested comment on whether the common definition~~coming years. Following 2014, as we anticipate an increase in our volume of ~~QRM should be limited~~MI business, we expect to ~~“safe harbor” QM loans or QM loans that satisfy either the “safe harbor” or “rebuttable presumption” QM standard.~~

~~Under this part~~see our costs increase primarily within underwriting and sales; however, we expect to see only marginal increases in what we consider our corporate related costs (i.e., management, finance, legal, risk and information technology) as these areas of the ~~re-proposed rule, because~~business were required to be in place before we could generate significant revenue. We believe we will not need to incur significant additional fixed costs to be able to successfully service an increased volume of business with our existing structure, thereby growing revenue and producing greater levels of operating profits with marginal increases in such fixed costs. Eventually, we will need to expand our fixed cost structure in order to service an even greater level of business. We may choose to generate additional liquidity through the ~~capital support provided by~~issuance of a combination of debt or equity securities, as well as consider our reinsurance options.

Investment Operations

Our net investment income for the ~~U.S. government,~~three months ended March 31, 2014 was $1.5 million compared to $0.4 million for the ~~GSEs~~three months ended March 31, 2013. During the first quarter of 2013, we began investing our cash holdings in fixed income securities which provide a higher yield than cash. We continued to invest our cash holdings in fixed income securities during ~~their conservatorship would not be subject to~~ the ~~Dodd-Frank Act credit risk retention requirements. Changes in the conservatorship status~~remainder of ~~the GSEs or capital support provided to the GSEs by the U.S. government could impact the manner in which the credit risk retention rules apply to the GSEs. If the QRM rule is finalized in accordance~~2013. As of March 31, 2014, we believe our portfolio conforms with ~~the federal regulators' re-proposal, it is difficult to predict the impact on~~our investment guidelines. The principal factors affecting our investment income include the size of our portfolio and its net yield. As measured by amortized cost (which excludes changes in fair market value, such as those resulting from changes in interest rates), the ~~non-GSE loan securitization market~~size of our investment portfolio is mainly a function of capital raised, cash generated from (or used in) operations, such as net premiums received, and investment earnings.

Consistent with Wisconsin law, our investment policies emphasize preservation of capital, as well as total return. Based on our guidelines, our current investment portfolio is comprised entirely of cash and cash equivalents and fixed-income securities, all of which are investment grade and rated “A-” or higher. Our policy guidelines contain limits on the amount of credit exposure to any one issue, issuer and type of instrument. We expect to preserve the liquidity of our portfolio through diversification and investment in publicly traded securities. We plan to maintain a level of liquidity commensurate with our perceived business outlook and the ~~demand~~expected timing, direction and degree of changes in interest rates.

Following GSE Approval, we invested our investment portfolio according to our investment guidelines. The pre-tax net investment income yield was approximately 1.0%, including unrealized gains, for MIthe first three months ended March 31, 2014. The pre-tax investment income yields are calculated based on the market value of the investments. We believe that the yield on our investment portfolio likely will change over time based on potential changes to the interest rate environment, the duration or mix of our investment portfolio or other factors.

The sectors of our investment portfolio, including cash and cash equivalents, at March 31, 2014 appear in the table below:



		Percentage of Portfolio's Fair Value
1.	Corporate debt securities	48	%
2.	U.S. Treasury securities and obligations of U.S. government agencies	24
3.	Asset-backed securities	16
4.	Cash and cash equivalents	10
5.	Municipal bonds	2
	Total	100	%

The ratings of our investment portfolio at March 31, 2014 were:



	Investment Portfolio Ratings
AAA	5	%
AA	41
A	54
Investment grade	100
Below investment grade	—
Total	100	%

The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at March 31, 2014 and December 31, 2013 are shown below.



As of March 31, 2014	Amortized Cost		Unrealized Gains		Unrealized Losses ⁽¹⁾			Fair Value
	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	108,053	$	12	$	(1,224	)	$	106,841
Municipal bonds	12,015		28		(35		)	12,008
Corporate debt securities	221,506		351		(2,888		)	218,969
Asset-backed securities	73,314		296		(552		)	73,058
Total Investments	$	414,888	$	687	$	(4,699	)	$	410,876



As of December 31, 2013	Amortized Cost		Unrealized Gains		Unrealized Losses ⁽¹⁾			Fair Value
	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	108,067	$	—	$	(1,461	)	$	106,606
Municipal bonds	12,017		1		(85		)	11,933
Corporate debt securities	221,899		157		(4,799		)	217,257
Asset-backed securities	74,152		114		(974		)	73,292
Total Investments	$	416,135	$	272	$	(7,319	)	$	409,088


⁽¹⁾	There were no other-than-temporary impairment losses recorded in other comprehensive income at March 31, 2014 or December 31, 2013.



As of March 31, 2014	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	2,674	$	2,675
Due after one through five years	264,257		261,989
Due after five through ten years	59,222		57,975
Due after ten years	15,421		15,179
Asset-backed securities	73,314		73,058
Total Investments	$	414,888	$	410,876



As of December 31, 2013	Amortized Cost		Fair Value
	(In Thousands)
Due in one year or less	$	—	$	—
Due after one through five years	260,855		257,501
Due after five through ten years	65,687		63,440
Due after ten years	15,441		14,855
Asset-backed securities	74,152		73,292
Total Investments	$	416,135	$	409,088

Fair Value Measurements

Fair value measurements for items measured at fair value included the following as of March 31, 2014 and December 31, 2013:



	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, 2014	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	49,675	$	57,166	$	—	$	106,841
Municipal bonds	—		12,008		—		12,008
Corporate debt securities	—		218,969		—		218,969
Asset-backed securities	—		73,058		—		73,058
Cash and cash equivalents	42,792		—		—		42,792
Total Assets	$	92,467	$	361,201	$	—	$	453,668
Warrant liability	—		—		5,504		5,504
Total Liabilities	$	—	$	—	$	5,504	$	5,504



	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, 2013	(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	49,484	$	57,122	$	—	$	106,606
Municipal bonds	—		11,933		—		11,933
Corporate debt securities	—		217,257		—		217,257
Asset-backed securities	—		73,292		—		73,292
Cash and cash equivalents	55,929		—		—		55,929
Total Assets	$	105,413	$	359,604	$	—	$	465,017
Warrant liability	—		—		6,371		6,371
Total Liabilities	$	—	$	—	$	6,371	$	6,371

There were no transfers of securities between Level 1 and Level 2 during the first quarter of 2014 or the year 2013.

The fair value of the warrants issued to FBR and MAC Financial Ltd. (which are now held by the former stockholders of MAC Financial Ltd. as a result of its liquidation) was estimated on the date of grant using the Black-Scholes option-pricing model, including consideration of any potential additional value associated with pricing protection features. The volatility assumption used, 39.0%, was derived from the historical volatility of the share price of a range of publicly-traded companies with business types similar to ours. No allowance was made for any potential illiquidity associated with the private trading of our shares. We revalue the warrant liability quarterly using a Black-Scholes option-pricing model in combination with a binomial model and a Monte-Carlo simulation model to value the pricing protection features within ~~this market.~~the warrant. As of March 31, 2014, the assumptions used in the option pricing model were as follows: a common stock price as of March 31, 2014 of $11.72, risk free interest rate of 2.18%, expected life of 6.57 years and a dividend yield of 0%. The gain from change in fair value for the three months ending March 31, 2014 is primarily due to a decrease in the price of our common stock as compared to December 31, 2013. The warrants have an exercise price of $10.00. The remaining contractual term on the warrants is 8.1 years.

Share Based Compensation

The ~~federal regulators in~~2012 Stock Incentive Plan (the “Plan”) was approved by the re-proposal also presented an alternative approach to defining QRM, referred to as “QM plus.” Under this alternative, only certain types of residential mortgage loans, such as first-lien loans secured by 1-to-4 family principal dwelling units, could be considered QRM transactions. To be eligible for QRM status, the loan would haveBoard on April 16, 2012 and authorized 5.5 million shares to be ~~free of certain loan terms and have an LTV at closing no greater than 70%. Junior liens~~reserved for issuance under the ~~QM plus alternative would~~Plan, with 3.85 million shares available for stock options and 1.65 million shares available for RSU grants. Options granted under the Plan are non-qualified stock options and may be ~~permitted only~~granted to employees, directors and other key persons of the Company. The exercise price per share for the common stock covered by the Plan shall be determined by the Board at the time of grant, but shall not be less than the fair market value on the date of the grant. The term of the stock option grants will be fixed by the Board, but no stock option shall be exercisable more than 10 years after the date the stock option is granted. The vesting period of the stock option grants will also be fixed by the Board at the time of grant and generally is for a three year period. The estimated grant date fair values of the stock options granted during 2014 were calculated using a Black-Scholes valuation model.

The RSUs granted in ~~non-purchase money loan transactions and if permitted, would need~~2014 were valued at our stock price on the date of grant less the present value of anticipated dividends. As of March 31, 2014, there was $5.8 million of total unrecognized compensation cost related to benon-vested RSUs compared to $8.8 million as of March 31, 2013.

For a further discussion on how we account for our share based compensation, see "Note 8, Share Based Compensation," included in the ~~70% LTV calculation. Under this alternative, mortgage insurance would not reduce~~notes to our Financial Statements, above.

Taxes

We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 35%. Our holding company files a consolidated U.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our effective income tax rate on our pre-tax loss was 0% for the ~~minimum LTV requirement. In addition, loans~~three months ended March 31, 2014, which was the same for the comparable 2013 period. During those periods, the benefit from income taxes was eliminated or reduced by the recognition of a full valuation allowance which was recorded to reflect the amount of the deferred taxes that ~~achieve a QM status because they meet the Consumer Financial Protection Bureau's ("CFPB") QM requirements for GSE-eligible transactions would~~may not be ~~considered QRM transactions under~~realized.

As of March 31, 2014 and as of December 31, 2013, we have a net deferred tax liability of $0.1 million as a result of the ~~alternative proposal. Changes~~acquisition of indefinite-lived intangibles in ~~final regulations regarding treatment~~the MAC Acquisition for which no benefit has been reflected in the acquired net operating loss carry forwards. The tax liability incurred at the acquisition was recorded as an increase in goodwill.

Our financial statements reflect a valuation allowance with respect to our net deferred tax assets. If the valuation allowance is reduced in the future, we would recognize an income tax benefit associated primarily with the carry forward of ~~GSE eligible mortgage loans could impact~~federal net operating losses and future stock compensation tax deductions.

Under current guidance, when evaluating a tax position for recognition and measurement, an entity shall presume that the ~~manner~~tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The interpretation adopts (i) a benefit recognition model with a two-step approach; (ii) a more-likely-than-not threshold for recognition and derecognition; and (iii) a measurement attribute that is the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. As of March 31, 2014 and as of December 31, 2013, we had no reserve for unrecognized tax benefits.

Employees

We believe our Company is an attractive, stable place of employment, given that we are a well-capitalized insurance company that has made significant progress in ~~which~~commencing business in the ~~credit risk retention rule applies~~MI marketplace, allowing us to ~~GSE securitizations.~~

attract what we believe to be high-quality talent. We believe that our growth and future success will depend in large part on our services and the ~~industry,~~skills of our management team and our ability to motivate and retain these individuals and other key personnel. As of March 31, 2014, we had significantly developed our employee base to support our regional and national sales teams, policy acquisition and servicing, IT, and all other back-office functions. Based on the execution of our business plan, we hired a substantial number of employees since raising our initial capital in April 2012 and expect to continue to ~~evaluate~~add additional staff through the ~~expected impact~~first half of ~~the re-proposed QRM rule on the MI industry, and such potential impact depends on, among other things, (i) the final definition~~2015. As of ~~QRM and its requirements for LTV, loan features and debt-to-income ratio, (ii) whether the final definition~~March 31, 2014, we had 163 total full-time employees. We believe that our employee compensation costs will affect the size of the high-LTV mortgage market and (iii) the extent to which the mortgage purchase and securitization activities of the GSEs become a smaller portion of the overall mortgage finance market and securitizations subject to the risk retention requirements and the QRM exemption, become a larger part of the mortgage market.

~~Qualified Mortgage Rule~~

The Dodd-Frank Act contains the ability to repay ("ATR") mortgage provisions, which govern the obligation of lenders to determine the borrower's ability to pay when originating a mortgage loan. The CFPB issued final ATR regulations on January 10, 2013 and amendments on May 29, 2013, July 10, 2013 and September 13, 2013 implementing detailed requirements on how lenders must establish a borrower's ability to repay a covered mortgage loan. The ATR rule becomes effective January 10, 2014. A subset of mortgages within the ATR rule are known as "qualified mortgages" ("QMs"). For a mortgage loan to be a ~~QM,~~primary driver of our other underwriting and operating expenses through the ~~rule first prohibits certain loan features, such as negative amortization, points and fees in excess~~remainder of 3% of the loan amount, and terms exceeding 30 years. The rule also establishes underwriting criteria for QMs including that a borrower must have a total debt-to-income ratio of less than or equal to 43%. The ATR rule provides that a covered first mortgage loan meeting the QM definition bearing an annual percentage rate no greater than 1.5% plus a prevailing market rate is regarded as complying with ATR requirements, while if a loan bears an annual percentage rate of greater than 1.5% plus a prevailing market rate, it will carry a rebuttable presumption of compliance with the ATR rule. QMs under the rule benefit from a statutory presumption of compliance with the ATR rule, potentially mitigating the risk of the liability of the creditor and assignee of the creditor under the Truth in Lending Act. Because of the QM evidentiary standard that gives presumption of compliance, we anticipate that most loans originated after the ATR rule goes into effect will be QMs.

The rule also provides a temporary category of QMs that have more flexible underwriting requirements so long as they satisfy the general product feature requirements of QMs and so long as they meet the underwriting requirements of the GSEs or those of HUD, Department of Veterans Affairs or Rural Housing Service (collectively, “Other Federal Agencies”). The temporary category of QMs that meet the underwriting requirements of the GSEs will phase out upon the earlier to occur of the end of the conservatorship of the GSEs or January 10, 2021. The rules for the Other Federal Agencies will terminate when they issue their own qualified mortgage rules, respectively. On September 30, 2013, HUD proposed its own rule to define a "Qualified Mortgage" that would be insured, guaranteed or administered by FHA, and therefore the temporary category QM definition in the ATR rule will terminate upon final adoption of HUD's own rule. We expect that most lenders will be reluctant to make loans that do not qualify as QMs because absent full compliance with the ATR rule, such loans will not be entitled to the presumptions about compliance with the ability-to-repay requirements.

The ATR regulation may impact the mortgage insurance industry in several ways. First, the ATR regulation will have a direct impact on establishing a subset of borrowers who can meet the regulatory QM standards and will have a direct effect on the size of the mortgage market in any given year, once the regulations become effective. Second, under the ATR regulation, if the lender requires the borrower to purchase MI, then the MI premiums are included in monthly mortgage costs in determining the borrower's ability to repay the loan. The demand for MI may decrease if, and to the extent that, monthly MI premiums make it less likely that a loan will qualify for QM status, especially if MI alternatives, such as piggy-back loans, are relatively less expensive.

Third, under the ATR regulation, mortgage insurance premiums that are payable at or prior to consummation of the loan are includible in points and fees for purposes of determining QM status unless, and to the extent that, such up-front premiums (“UFP”) are (i) less than or equal to the UFP charged by the FHA, and (ii) are refundable on a ~~pro rata~~ basis upon satisfaction of the loan. (The FHA currently charges UFP of 1.75% on all residential mortgage loans, but it has the authority to change its UFP from time to time.) As inclusion of MI premiums towards the 3% cap will reduce the capacity for other points and fees in covered transactions, mortgage originators may be less likely to purchase single premium MI products to the extent that the associated premiums are2014.

~~deemed~~GSE Approvals

The GSEs are the principal purchasers of mortgages insured by MI companies, primarily as a result of their legislative mandate to ~~be points~~provide liquidity in the secondary mortgage market. Consequently, the ability to successfully commence mortgage insurance operations in the U.S. is largely dependent on obtaining approvals from Fannie Mae and ~~fees.~~Freddie Mac as a qualified MI provider. Following the Company's Private Placement in April 2012, NMIC's key focus was to first secure approvals from the GSEs. In January 2013, Fannie Mae and Freddie Mac each approved NMIC as a qualified mortgage insurer, and with their approvals, imposed certain capitalization, operational and reporting conditions on NMIC ("GSE Approval"), most of which remain in effect for a three (3) year period from the date of GSE Approval. As a ~~result, we believe~~GSE qualified mortgage insurer, NMIC is subject to ongoing compliance with the conditions in the GSE Approval as well as the GSEs' respective qualified mortgage insurer eligibility requirements ("Eligibility Requirements"), each of which is further discussed below. We expect that the ~~ATR rule~~significant majority of insurance we will write will be for loans sold to the GSEs. With the GSE Approval, our customers who originate loans insured by NMIC may ~~increase demand~~sell such loans to the GSEs (as of April 1, 2013 for ~~monthly~~Freddie Mac and ~~annual MI products relative to single premium products.~~

~~GSE Reform~~as of June 1, 2013 for Fannie Mae).

The ~~FHFA~~conditions in the GSE Approvals require, among other things, that NMIC:

be initially capitalized in the amount of $200 million and that its affiliate reinsurance companies, Re One and Re Two, be initially capitalized in the amount of $10 million each (as of September 30, 2013, Re Two was merged into NMIC, with NMIC surviving the merger. See "Note 1, Organization and Basis of Presentation" in our Financial Statements in Part I of this report);

maintain minimum capital of $150 million;

operate at a risk-to-capital ratio not to exceed 15:1 for its first three (3) years and then pursuant to the GSE Eligibility Requirements then in effect;

not declare or pay dividends to affiliates or to NMIH for its first three (3) years, then pursuant to the Eligibility Requirements;

not enter into capital support agreements or guarantees for the benefit of, or purchase or otherwise invest in the debt of, affiliates without the prior written approval of the GSEs for its first three (3) years, then pursuant to the Eligibility Requirements;

not enter into reinsurance or other risk share arrangements without the GSEs' prior written approval for its first three (3) years, then pursuant to the Eligibility Requirements; and

at the direction of one or both of the GSEs, re-domicile from Wisconsin to another state.

The GSE Approvals also include other conditions, limitations and reporting requirements that we anticipate will be included in the GSEs' revised Eligibility Requirements, such as limits on costs allocated to NMIC under affiliate expense sharing arrangements, risk concentration, rates of return, requirements to obtain a financial strength rating, provision of ancillary services (i.e., non-insurance) to customers, transfers of underwriting to affiliates, notification requirements regarding change of ownership and new five percent (5%) shareholders, provisions regarding underwriting policies and claims processing as well as certain other obligations.

The GSEs each maintain their own Eligibility Requirements, which they have been in the process of revising since mid-2010. The Federal Housing Finance Agency ("FHFA") is the conservator of the GSEs and has the authority to control and direct their operations. The FHFA has announced its intent that the GSEs achieve uniformity in their respective requirements and that the requirements be finalized in the near term future. The GSEs have announced to the MI industry that draft standards will be issued as early as the second quarter of2014 and that there will be a public comment period prior to finalization of the standards. Although the GSEs and FHFA have not publicly commented on the final content of the revised mortgage insurer requirements, we believe they will include a new capital adequacy framework. Because the conditional GSE Approvals already impose capitalization, operational and reporting conditions on NMIC and our holding company, it is difficult to predict whether any changes the GSEs might impose in their revised mortgage insurer eligibility requirements will have an effect on our business.

In addition, in connection with the FHFA's mandate that the GSEs align their mortgage insurer eligibility standards, the GSEs have imposed minimum standards for mortgage insurer master policies, including standards related to limitations on rescission rights. We believe the new standards will be implemented in 2014, and to comply with the GSEs' master policy requirements, we and our competitors have filed new master policies with state insurance regulators.

GSE Reform

The increased role that the federal government has assumed in the residential mortgage market through the ~~GSE~~FHFA's conservatorship of the GSEs may increase the likelihood that the business practices of the GSEs change in ways that affect the MI industry. In addition, these factors may increase the likelihood that the charters of the GSEs are changed by new federal legislation. The Dodd-Frank Act required the U.S. Department of the Treasury to report its recommendations regarding options for ending the conservatorship of the GSEs. This report was released in February 2011 and while it does not provide any definitive timeline for GSE reform, it does recommend using a combination of federal housing policy changes to wind down the GSEs, shrink the government's footprint in housing finance, and help bring private capital back to the mortgage market. Since 2011, there have been numerous legislative proposals, including in the current Congressional session, intended to scale back the GSEs, however, no legislation has been enacted to date.

InOn March 16, 2014, Senate Banking Committee Chairman Tim Johnson (D-SD) and Ranking Member Mike Crapo (R-ID) released the ~~second quarter~~legislative text of ~~2012, both~~the bipartisan housing finance reform bill titled S. 1217, "The Housing Finance Reform and Taxpayer Protection Act of 2014" ("the Johnson Crapo Bill"). If enacted, the Johnson Crapo Bill would (i) wind down and eliminate Fannie Mae and Freddie Mac ~~reported profits~~to allow for private entities to replace most of the functions of the GSEs; (ii) establish a new regulator called the Federal Mortgage Insurance Corporation, modeled after the Federal Deposit Insurance Corporation ("FDIC"), and (iii) create a reinsurance fund modeled after the Deposit Insurance Fund maintained by the FDIC that would be funded by private companies participating in the reorganized housing finance system.

On March 27, 2014, Congresswoman Maxine Waters (D-CA), Ranking Member of the House Financial Services Committee released a legislative proposal titled "The Housing Opportunities Move the Economy Forward Act of 2014" (the "Act"). The Act proposes eliminating Fannie Mae and Freddie Mac over 5 years and replacing them with the Mortgage Securities Cooperative ("MSC"), which would be made up of lenders and issue mortgage-backed securities. The Act would establish a new regulator called the National Mortgage Finance Administration ("NMFA") to oversee the Federal Home Loan Banks and MSC. The NMFA would establish the Mortgage Insurance Fund to provide a federal guarantee on securities backed by eligible mortgages after the first ~~time since~~loss credit risk and all the ~~fourth quarter of 2006. Also, the second quarter of 2012 was the first time that neither~~capital of the ~~GSEs had~~MSC has been exhausted. The NMFA would set new standards of approval for private mortgage insurers to ~~request financial support from~~be able to provide private mortgage insurance on eligible mortgages.

The passage of either of these bills is uncertain and the ~~U.S. Treasury. Based on continued improvements in the housing market,~~provisions of both could change as of September 30, 2013, Fannie Mae had posted profits for seven consecutive quarters. Through September 30, 2013, Fannie Mae had paid $105.3 billion in dividends to the U.S. Treasury. The payouts do not constitute a repaymentpart of the ~~money~~legislative process, which process could take time, making the ~~U.S. government used~~actual impact on us and our industry difficult to maintain Fannie Mae’s solvency during the housing crisis. The Treasury continues to hold $117.1 billion in senior preferred Fannie Mae shares. Under the terms of the preferred stock investment agreements between the U.S. Treasury and the GSEs, all GSE profits are remitted to the U.S. Treasury, and as such the return to profitability of the GSEs has become a source of revenues to the Federal government at a time of large Federal deficits. The profitability of the GSEs, and the active interest of investors in GSE securities which would benefit from a recapitalization of the GSEs, may impact the pace and direction of housing finance reform.predict.

Competition with FHA

The FHA, which is part of ~~HUD,~~the federal U.S. Department of Housing and Urban Development, substantially increased its share of the total combined private and governmental mortgage insurance market beginning in 2008. We believe that the FHA's market share increased, in part, because private mortgage insurers tightened their underwriting guidelines (which led to increased utilization of the FHA's programs) and because of increases in the amount of loan level delivery fees that the GSEs assess on loans (which result in higher costs to borrowers). We believe that federal legislation and programs that were adopted as emergency measures to support the declining housing market provided the FHA with greater flexibility in establishing new products and resulted in increased market share for the FHA. During 2011, the FHA's market share began to gradually decline. In part, we believe the decline in market share has been driven by multiple increases in the FHA's mortgage insurance premium rates and upfront fees since 2010, as well as greater availability of private capital with new entrants to the MI sector, such as us. We believe that the FHA's current premium pricing, when compared to our current premium pricing (and considering the effects of GSE pricing changes), allows us to be competitive with the FHA.

The below table shows the declining market share of the FHA/VA and the rising market share of private MI.

We believe the MI industry will continue to recover market share from the FHA as it pulls back and permits more private capital to return to the market. On December 6, 2013, HUD announced that beginning on January 1, 2014, the FHA will reduce the maximum size of residential mortgage loans that it will insure in nearly 650 counties. The new national maximum loan limit for certain "high-cost" areas will be reduced from $729,750 to $625,500. The current national standard loan limit for areas where housing costs are relatively low will remain unchanged at $271,050. Areas are eligible for FHA loan limits above the national standard limit, and up to the national maximum level, based on median area home prices. According to HUD's news release, the higher limits that had been in place for six years were established by the Economic Stimulus Act of 2008 as emergency measures to assure that mortgage credit was widely available during a time when private lending options were severely constrained. FHA's Commissioner Carol Galante acknowledged that as the housing market continues its recovery, the FHA lowering its loan limits is an important and appropriate step as private capital returns to portions of the market. We cannot predict, however, the FHA's share of new insurance written in the future due to, among other factors, different loan eligibility terms between the FHA and the GSEs; future increases in guarantee fees charged by the GSEs; changes to the FHA's annual premiums; and the total profitability that may be realized by mortgage lenders from securitizing loans through the Government National Mortgage Association ("Ginnie Mae") when compared to securitizing loans through Fannie Mae or Freddie Mac.

The FHA's role in the mortgage insurance industry is also significantly dependent upon regulatory developments. The U.S. Congress is considering reforms of the housing finance market, which includes consideration of the future mission, size and structure of the FHA. Each year, FHA is required to perform an actuarial projection on its insurance portfolio and report the results to Congress. On December 13, 2013, HUD made a report to Congress that the FHA’s Mutual Mortgage Insurance Fund’s (“Fund”) net worth improved from last year’s estimate, from negative $16.3 billion to negative $1.3 billion. In addition, HUD reported that the Fund’s

capital ratio is -0.11% but is expected to return to a required capital reserve ratio of 2% by 2015, 2 years sooner than earlier projections. Although the Fund’s outlook has improved considerably, Congress continues to consider legislation to reform the FHA. If FHA reform were to raise FHA premiums, tighten FHA credit guidelines, make other changes which make lender use of FHA less attractive, or implement credit risk sharing between FHA and private mortgage insurers, these changes may be beneficial to our business. However, there can be no assurance that any FHA reform legislation will be enacted into law, and even if there is reform legislation, it is uncertain what provisions may be contained in any final legislation, if any. Therefore, the future impact on our business is uncertain.

As a result of the foregoing, it is uncertain what role the GSEs, FHA and private capital, including MI, will play in the domestic residential housing finance system in the future or the impact of any such changes on our business. In addition, the timing of the impact on our business is uncertain. Most meaningful changes would require Congressional action to implement, and it is difficult to estimate when Congress would take action, and if it did, how long it would take for such action to be final and how long any associated phase-in period may last. Considering the recent financial turnaround or the perceived turnaround of the GSEs, the timing of any of these changes becomes more difficult to assess.

~~Mortgage Insurance Earnings~~Off-Balance Sheet Arrangements and ~~Cash Flow Cycle~~Contractual Obligations

~~In general, the majority of any underwriting profit (i.e.~~, the premium revenue minus losses) that a book generates occurs in the early years of the book, with the largest portion of the underwriting profit for that book realized in the first year. The earnings we record and the cash flow we receive varies based on the type of MI product and premium plan our customers select. We ~~offer monthly, annual and single premium payment plans. We currently expect that the majority of lenders who purchase MI from us will select one of our monthly premium plans.~~

~~Factors that Impact Holding Company Operations~~

NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) the payment of certain corporate expenses; (ii) capital support for our mortgage insurance subsidiaries; (iii) potential payments to the IRS; and (iv) the payment of dividends, if any, on its common stock.

Our future capital requirements depend on many factors, including our ability to successfully write new business and establish premium rates at levels sufficient to cover losses. To the extent that the funds generated by our ongoing operations and initial capitalization are insufficient to fund future operating requirements, we may need to raise additional funds through financings or curtail our growth and reduce our assets.

~~In order to support a minimum surplus of~~ ~~$150 million~~ and maintain a risk-to-capital ratio under 15 to 1 through December 31, 2015 at NMIC, NMIH may be required to make additional capital contributions to NMIC. NMIH could be required to provide additional capital support for NMIC and NMRI One if additional capital is required pursuant to insurance laws and regulations, by the GSEs or the rating agencies. As of September 30, 2013, NMIC's and NMRI One's statutory capital was approximately ~~$190 million~~ ~~and~~ ~~$10 million, respectively. As of September 30, 2013, we had approximately~~ ~~$1.2 million~~ ~~in primary risk-in-force and approximately~~ ~~$93.1 million~~ ~~in pool risk-in-force.~~

Dividends from NMIC and permitted payments under our tax- and expense-sharing arrangements with our subsidiaries are NMIH's principal sources of cash. The expense-sharing arrangements between NMIH and our insurance subsidiaries, as amended, have been approved by applicable state insurance departments, but such approval may be changed or revoked at any time. NMIC's ability to pay dividends to NMIH is subject to various conditions imposed by the GSEs and by insurance regulations requiring insurance department approval. In general, dividends in excess of prescribed limits are deemed “extraordinary” and require insurance regulatory approval. Additionally, under agreements with the GSEs, NMIH is not permitted to extract dividends from our insurance subsidiaries until December 31, 2015 and under agreements with various state insurance regulators, is not permitted to extract dividends from our insurance subsidiaries until January 2016.

NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations, such as NMI Holdings, Inc., that are incorporated in Delaware. Delaware corporation law provides that dividends are only payable out of a corporation's capital surplus or (subject to certain limitations) recent net profits. As of ~~December 31, 2012, NMIH's capital surplus was~~ ~~$488.7 million~~.

~~Liquidity and Capital Resources~~

As a holding company, we expect that our principal sources of liquidity over time will be dividends, expense reimbursements from our insurance subsidiaries and income generated by our investment portfolio. However, the issuances of dividends by our insurance subsidiaries are subject to regulatory approval and are further limited by the GSE Approvals and agreements with various state insurance regulators. We expect primary cash uses will be to fund holding company operating expenses, investment expenses and other costs of our business.

Our MI companies' principal sources of liquidity will be premiums that we receive from policies and income generated by our investment portfolio. Our MI companies' primary liquidity needs include the payment of claims on our MI policies, operating expenses, investment expenses and other costs of our business. See "~~Factors Affecting Our Operating Results."~~

~~As part of our initial capitalization, we raised net proceeds of~~ ~~$510 million. We contributed~~ ~~$210 million~~ ~~to NMIC, whereupon NMIC contributed~~ ~~$10 million~~ ~~to its wholly-owned subsidiary, NMRI Two. In addition, we contributed~~ ~~$10 million~~ ~~to NMRI One. On September 30, 2013, we merged NMRI Two into NMIC with NMIC surviving the merger.~~

~~As of~~ ~~September 30, 2013, we had approximately~~ ~~$446.1 million~~ ~~in cash and investments of which~~ ~~$241 million~~ ~~was held at our holding company. As of~~ ~~September 30, 2013, the amount of restricted net assets held by our consolidated insurance subsidiaries totaled approximately~~ ~~$203 million~~ ~~of our consolidated net assets of approximately~~ ~~$447 million~~.

~~The following table summarizes our consolidated cash flows from operating, investing and financing activities:~~

Nine months ended September 30, For the Year Ended December 31, For the Period May 19, 2011 (inception) to December 31, For the Period May 19, 2011 (inception) to September 30,
2013 2012 2012 2011 2013
(In thousands)
Net Cash (Used in) Provided by:
Operating Activities $ (29,281 ) $ (8,864 ) $ (14,596 ) $ (205 ) $ (44,082 )
Investing Activities (420,899 ) (6,612 ) (9,809 ) —
(430,708 )
Financing Activities (1,578 ) 510,260
510,260
205
508,887
Net (Decrease) Increase in Cash and Cash Equivalents $ (451,758 ) $ 494,784
$ 485,855
$ —
$ 34,097

Cash used in operating activities for the first nine months of 2013 was higher compared to the same period in 2012 due primarily to significant hiring of management and staff personnel between May 2012 and September 2013 and external and professional costs incurred in conjunction with our state licensing process.

Cash used in operating activities for the year ended December 31, 2012 compared to the period from May 19, 2011 (inception) to December 31, 2011 was higher due to the ramp up of operations in 2012 following the receipt of proceeds from the private placement offering in April 2012. Prior to the completion of the private placement offering on April 24, 2012, our activities were focused on organizational development, capital raising and other start-up related activities.

Cash used in investing activities for the first nine months of 2013 was higher compared to the same period in 2012 primarily due to investing activities as we began investing our cash holdings in fixed income securities during the first quarter of 2013, following GSE Approval. We continued to invest our cash holdings in fixed income securities during the second and third quarters of 2013.

Cash used in investing activities for the year ended December 31, 2012 consisted of the purchase of short-term investments held on deposit with various states, purchases of software and equipment and the acquisition of MAC. There were no cash flows from investing activities during the period from May 19, 2011 (inception) to December 31, 2011 as our activities were focused on organizational development, capital raising and other start-up related activities.

Cash used in financing activities in the first nine months of 2013 consisted of taxes paid related to the net share settlement of equity awards. Cash provided by financing activities in the first nine months of 2012 and for the year-ended December 31, 2012 consisted of net proceeds from the issuance of common stock through our private placement offering on April 24, 2012. Cash provided by financing activities during the period from May 19, 2011 (inception) to December 31, 2011 consisted of proceeds from a line of credit secured to fund the organizational development and capital raise and other start-up activities until the completion of the private placement offering.

We expect that cash and investments and projected cash flows from operations will provide us with sufficient liquidity to fund our anticipated growth by providing capital to increase our insurance company surplus as well as for payment of operating expenses through 2015, at which point we currently expect to need to seek additional capital. We expect that as our insurance-in-force grows, the premium revenue we receive will increase. However, if our risk-in-force or our expenses materially exceed our expectations or our risk-to-capital ratio is expected to exceed 15 to 1, we may have to raise additional capital sooner to support our growth. In addition, we may raise additional capital to leverage our fixed expenses in order to achieve a return on capital attractive to investors. We expect to leverage and manage our fixed operating expenses so that they grow at a much slower rate than sales over the coming years. As we increase our volume of MI business, we expect to see variable costs increase primarily within underwriting and sales; however, we expect to see only marginal increases in what we consider our fixed cost areas (i.e., management, finance, legal, risk and information technology) as these areas of the business were required to be in place before we could generate revenue. We believe we will not need to incur significant additional fixed costs to be able to successfully service an increased volume of business with our existing structure, thereby growing revenue and producing greater levels of operating profits with marginal increases in such fixed costs. Eventually, we will need to expand our fixed cost structure in order to service an even greater level of business. We may choose to generate additional liquidity through the issuance of a combination of debt or equity securities, as well as financing through borrowing.

~~Taxes~~

~~We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of approximately~~ ~~35%~~. Our holding company files a consolidated U.S. federal income tax return on behalf of itself and its subsidiaries. As we deploy our capital, we plan to invest a portion of our investment portfolio in tax-exempt municipal securities, which investment may have the effect of lowering our effective tax rate below ~~35%. The effective income tax (benefit) rate on our pre-tax loss was~~ 0% ~~for the~~ ~~nine months ended September 30, 2013~~ ~~and for the~~ ~~year ended December 31, 2012~~. During those periods, the benefit from income taxes was eliminated or reduced by the recognition of a valuation allowance. Reconciliation of the federal statutory income tax (benefit) rate to the effective income tax (benefit) rate is as follows:

Nine months ended September 30, 2013 For the Year Ended December 31, 2012
Federal statutory income tax rate 35.00 % 35.00 %
Loss on Impairment —
(1.48 )
Prior Year Adjustment 5.00
1.66
Other —
(1.00 )
Valuation Allowance (40.00 ) (28.00 )
Purchase Accounting Adjustment —
(6.18 )
Effective income tax rate — % — %

Under current guidance, when evaluating a tax position for recognition and measurement, an entity shall presume that the tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. The interpretation adopts a benefit recognition model with a two-step approach, a more-likely-than-not threshold for recognition and derecognition, and a measurement attribute that is the greatest amount of benefit that is cumulatively greater than 50% likely of being realized. ~~As of December 31, 2012, we~~ had no ~~reserve for unrecognized tax benefits and there was no change during the first nine months of the year. We have capitalized all deductible start-up costs and have taken~~off-balance sheet arrangements at March 31, 2014. There are no material ~~uncertain positions in our tax return which would require measurement and recognition under~~changes outside the ~~guidance.~~

~~Excluded from deferred tax assets is~~ ~~$1.5 million~~ of excess stock compensation for which any benefit realized will be recorded to stockholders' equity. Additionally, Section 382 of the Internal Revenue Code ("Section 382") imposes annual limitations on a corporation's ability to utilize its net operating losses ("NOLs") if it experiences an “ownership change.” As a result of the MAC Acquisition, ~~$7.3 million~~ ~~of NOLs are subject to annual limitations of~~ ~~$0.8 million~~ ~~through 2016, then~~ ~~$0.3 million. Any unused annual limitation may be carried forward up to 20 years. The NOLs will expire in years 2029 through 2033.~~

~~As the Company has limited underwriting operations and premium generation and therefore has no history to provide a basis for reliable future income projections, a valuation allowance of~~ ~~$26.7 million~~ ~~and~~ ~~$8.2 million~~ ~~was recorded at~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, respectively, to reflect the amount of the deferred taxes that may not be realized.~~

~~The net deferred tax liability of~~ ~~$0.1 million~~ ~~as of~~ ~~September 30, 2013~~ is due to the acquisition of indefinite-lived intangibles in the MAC Acquisition for which a benefit has been reflected in the acquired net operating loss carry forwards. The deferred tax liability recorded in connection with the MAC Acquisition effectively increased goodwill that resulted from the transaction.Our financial statements reflect a valuation allowance with respect to our gross deferred tax assets less capitalized software. If the valuation reserve is reduced at some future date, we would recognize an income tax benefit for accounting purposes in the period in which the reserve is reduced. See "~~Note 10—Income Taxes~~."

~~Results of Operations~~

CONSOLIDATED STATEMENTS OF OPERATIONS
SUCCESSOR PRO FORMA PREDECESSOR
NMI Holdings, Inc.
(A Development Stage Company) NMI Holdings, Inc.
(A Development Stage Company) MAC Financial Holding Corporation (A Development Stage Company)
For the Nine Months Ended September 30, 2013 For the Nine Months Ended September 30, 2012 For the Year Ended December 31, 2012 For the Period May 19, 2011 (inception) to December 31, 2011 For the Period May 19, 2011 (inception) to September 30, 2013 For the Year Ended December 31, 2012 For the Period January 1, 2012 to April 24, 2012 For the Year Ended December 31, 2011 For the Period July 6, 2009 (inception) to April 24, 2012
(unaudited) (unaudited) (unaudited) (unaudited)
(In Thousands, except per share data) (In Thousands, except per share data) (In Thousands)
Revenues
Direct premiums written $ 483
$ —
$ —
$ —
$ 483
$ —
$ —
$ —
$ —
(Increase) decrease in unearned premiums —
—
—
—
—
—
—
—
—
Net premiums earned 483
—
—
—
483
—
—
—
—
Net investment income 3,336
1
6
—
3,342
6
—
—
—
Other revenue (438 ) —
278
—
(161 ) 278
—
2
18
Total Revenues 3,381
1
284
—
3,664
284
—
2
18
Expenses
Payroll and related 20,896
5,915
11,559
—
32,455
11,559
—
334
2,402
Share-based compensation 8,827
3,091
6,115
—
14,942
6,115
—
—
—
Professional fees 5,577
2,470
4,255
1,248
11,080
4,255
—
21
725
Depreciation 3,892
—
3
—
3,895
7
4
14
33
Information technology 3,455
282
872
—
4,327
872
—
—
1,219
Other 2,833
2,938
4,971
101
7,905
4,978
6
237
1,280
Total Expenses 45,480
14,696
27,775
1,349
74,604
27,786
10
606
5,659
Net Loss $ (42,099 ) $ (14,695 ) $ (27,491 ) $ (1,349 ) $ (70,940 ) $ (27,502 ) $ (10 ) $ (604 ) $ (5,641 )

Share Data
Basic and Diluted loss per share $ (0.76 ) $ (0.46 ) $ (0.73 ) $ (13,490.00 ) $ (2.11 ) $ (0.73 )
Book value per share $ 8.03
$ 8.99
$ 8.81
$ (13,490.00 ) $ 8.03
$ 8.81

Weighted average common 55,589,674
32,003,750
37,909,936
100
33,585,018
37,909,936

Shares outstanding 55,637,480
55,500,100
55,500,100
100
55,637,480
55,500,100

CONSOLIDATED BALANCE SHEETS
SUCCESSOR PREDECESSOR
NMI Holdings, Inc.
(A Development Stage Company) MAC Financial Holding Corporation (A Development Stage Company)
September 30,
2013 September 30,
2012 December 31,
2012 December 31,
2011 April 24,
2012 December 31,
2011
(unaudited) (unaudited)
(In Thousands) (In Thousands)
Cash and cash equivalents $ 34,097
$ 494,784
$ 485,855
$ —
$ 17
$ 17
Restricted cash —
20,830
40,338
—
—
—
Investment securities 411,983
3,458
4,864
—
—
—
Accrued investment income 1,834
—
—
—
—
—
Goodwill and other intangible assets 3,634
4,702
3,634
—
—
—
Software and equipment, net 9,054
5,761
7,550
—
2,887
2,891
Other assets 1,116
458
526
210
12
19
Total Assets $ 461,719
$ 529,992
$ 542,768
$ 210
$ 2,916
$ 2,927
Accounts payable and accrued expenses $ 9,276
$ 5,339
$ 8,708
$ 1,354
$ 1,467
$ 1,227
Purchase fees and purchase consideration payable —
20,830
40,338
—
—
—
Warrant liability 5,452
5,120
4,842
—
—
—
Other liabilities 133
—
133
205
—
240
Total Liabilities 14,861
31,289
54,020
1,559
1,467
1,467
Total Stockholders' Equity (Deficit) 446,858
498,703
488,748
(1,349 ) 1,449
1,460
Total Liabilities and Stockholders' Equity $ 461,719
$ 529,992
$ 542,768
$ 210
$ 2,916
$ 2,927

Prior to the completion of the MAC Acquisition, our activities were focused on organizational development, capital raising and other start-up related activities. Additionally, for the period from May 19, 2011 through the majority of 2013, our efforts were primarily directed toward building the foundation of the Company which would allow us to write MI. These efforts included, among other things, attracting an executive management team and other key officers and directors, attracting and hiring staff, building our operating processes, designing and developing our business and technology applications, environment and infrastructure, and securing state licensing and GSE Approval.

~~We have funded our operations primarily through funds raised through our private placement offering in which we received net proceeds of approximately~~ ~~$510 million~~.

~~We are currently classified as a development stage company. We believe that our designation as such will change at the end of fiscal year~~ ~~2013. During May 2013 we recorded our first premium revenue. For the nine months ended~~ ~~September 30, 2013, we have net premiums written and earned of approximately~~ ~~$483 thousand. As of~~ ~~September 30, 2013, we have~~ 22 ~~primary policies in force and approximately~~ ~~22,000~~ ~~pool policies in force. All policies written as of~~ ~~September 30, 2013~~ ~~are monthly premium plans.~~

Primary and Pool Insurance and Risk in Force
September 30, December 31,
2013 2012 2011
(In Thousands)
Primary Insurance In Force $ 4,604
$ —
$ —
Pool Insurance in Force 5,171,664
—
—
Total Insurance in Force $ 5,176,268
$ —
$ —

Primary Risk In Force $ 1,196
$ —
$ —
Pool Risk in Force 93,090
—
—
Total Risk in Force $ 94,286
$ —
$ —

Primary insurance may be written on a flow basis, in which loans are insured in individual, loan-by-loan transactions, or may be written on a bulk basis, in which each loan in a portfolio of loans is individually insured in a single, bulk transaction. MI may also be written in a pool policy, where a group of loans (or pool) are insured under a single contract. Pool insurance may have a stated aggregate loss limit for a pool of loans and may also have a deductible under which no losses are paid by the insurer until losses on the pool of loans exceed the deductible. New insurance written on a flow basis was approximately ~~$4.6 million~~ ~~for the~~ ~~first nine months~~ of ~~2013. Pool new insurance written was approximately~~ ~~$5.2 billion~~ ~~during the~~ ~~first nine months~~ of ~~2013. Combined risk-in-force as of~~ ~~September 30, 2013~~ ~~was approximately~~ ~~$94.3 million~~.

~~For the nine months ended September 30, 2013 we have direct premiums written of approximately~~ ~~$0.5 million~~ ~~compared to direct premiums written of~~ $0 ~~for the~~ ~~nine months ended September 30, 2012~~. We commenced writing MI in April 2013 through NMIC. The primary driver of the increase in premiums written was the pool agreement with Fannie Mae, which MI coverage became effective September 1, 2013. We expect that related pool premiums will decline over the 10~~-year term of the agreement as loans in the pool amortize over time.~~

For the nine months ended September 30, 2013, we have no loss reserves. The probability of a default within the first months of loan age, for loans of the quality we have insured, is not statistically significant. Given that IBNR itself is historically a small percentage of actual reported delinquencies, the probability of an IBNR delinquency is also not statistically significant. We expect to establish a loss reserve as we close ~~2013~~.

~~We have incurred significant net losses since our inception. Our net loss was~~ ~~$42.1 million~~ ~~and~~ ~~$27.5 million~~ ~~for the~~ ~~nine month period~~ ~~ended~~ ~~September 30, 2013~~ ~~and the~~ ~~year ended December 31, 2012, respectively, compared to a net loss of~~ ~~$14.7 million~~ ~~and~~ ~~$1.3 million~~ ~~for the~~ ~~nine month period~~ ~~ending~~ ~~September 30, 2012~~ ~~and the period ended~~ ~~December 31, 2011~~, respectively. The primary drivers of the increased net loss between periods were the hiring of management and staff personnel for sales, underwriting and risk operations, information technology, finance and accounting and legal departments and external and professional costs incurred in conjunction with our state licensing and GSE Approval processes. Additionally we entered into a two-year lease in July 2012 for our principal location of operations. These expenses were slightly offset by increased investment income during the nine months ending ~~September 30, 2013, as we began investing our cash following GSE Approval in mid-January 2013.~~

Employee compensation represents the majority of our operating expense, which includes both cash and share-based compensation. As part of our compensation plan, certain employees were granted stock options and restricted stock units. This stock compensation plan was not in place during 2011. As a result, our share-based compensation expense, was approximately ~~$8.8 million~~ ~~for the~~ ~~nine months ended September 30, 2013~~, ~~$6.1 million~~ ~~for the~~ ~~year ended December 31, 2012~~, ~~$3.1 million~~ ~~for the~~ ~~nine month period~~ ~~ending~~ ~~September 30, 2012~~ ~~and~~ $0 ~~for the period ended~~ ~~December 31, 2011. We account for our stock options and restricted stock units under ASC No. 718,~~ ~~Compensation~~ — ~~Stock Compensation~~ ~~(“ASC 718”), which requires all compensation expense from share-based payments to be measured and recognized in the financial statements at their grant date fair values.~~

~~Our total assets, comprised largely of cash and investments, were~~ ~~$461.7 million~~ ~~and~~ ~~$542.8 million~~ ~~as of~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, respectively, compared to total assets of~~ ~~$530.0 million~~ ~~and~~ ~~$0.2 million, as of~~ ~~September 30, 2012~~ ~~and~~ ~~December 31, 2011~~, respectively. The primary driver of the increase was the capital raise in April 2012. Additionally, we retained approximately $40 million of purchase fees and purchase consideration (related to our private placement and MAC Acquisition) as restricted cash and an off-setting liability until GSE Approval in January 2013, at which time we released the respective funds to FBR and MAC Financial Ltd.

Prior to GSE Approval, we held most of our assets in cash, and our investments consisted of U.S. Treasury Notes, which were purchased for the sole purpose of complying with certain state licensing requests. These states required NMIC to place various amounts on deposit with the states as a prerequisite for obtaining a certificate of authority in those states. Other mortgage guaranty insurers also have placed similar deposits. As of ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, we had placed on deposit~~ ~~$6.9 million~~ ~~and~~ ~~$4.9 million~~ ~~respectively, in the form of U.S Treasury Notes and cash.~~

~~Our accounts payable and accrued expenses were~~ ~~$9.3 million~~ ~~as of~~ ~~September 30, 2013~~, ~~$8.7 million~~ at ~~December 31, 2012~~, ~~$5.3 million~~ at ~~September 30, 2012~~ ~~and~~ ~~$1.4 million~~ at ~~December 31, 2011. The balances at~~ ~~September 30, 2013~~ ~~and~~ ~~December 31, 2012, were comprised primarily of accrued bonuses and accrued expenses incurred in the normal~~ordinary course of business ~~compared to the~~ ~~September 30, 2012~~ ~~and~~ ~~December 31, 2011~~ ~~balances which consisted of only accrued vendor payments related to start-up costs.~~

~~Investment Operations~~

Upon GSE Approval, we began investing the investment portfolio according to our investment guidelines. The pre-tax investment income yield was approximately 1.5% for the first nine months of 2013. The pre-tax investment income yields are calculated based on amortized cost of the investments. We believe that the yield on our investment portfolio likely will change over time based on potential changes to the interest rate environment, the duration or mix of our investment portfolio, or other factors.

~~The sectors of our investment portfolio, including cash and cash equivalents, at September 30, 2013 appear~~ in the ~~table below:~~

Percentage of Portfolio's Fair Value

1. Corporate debt securities 49 %
2. U.S. Treasury securities and obligations of U.S. government agencies 24
3. Asset-backed securities 16
4. Cash and cash equivalents 8
5. Municipal bonds 3
100 %

~~The ratings of~~contractual obligations specified in our ~~investment portfolio at September 30,~~ 2013 ~~are:~~



~~Investment Portfolio Ratings~~
	~~September 30, 2013~~
~~AAA~~	16	%
AA	27
A	57
~~Investment grade~~	~~100~~
~~Below investment grade~~	—
~~Total~~	~~100~~	%

~~The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at September 30, 2013, and December 31, 2012 are shown below.~~

September 30, 2013 Amortized
Cost Unrealized
Gains Unrealized
Losses (1) Fair
Value
(In thousands)
U.S. Treasury securities and obligations of U.S. government agencies $ 108,068
$ —
$ (1,179 ) $ 106,889
Municipal bonds 12,019
—
(103 ) 11,916
Corporate debt securities 224,245
150
(4,819 ) 219,576
Asset-backed securities 74,690
82
(1,170 ) 73,602
Total Investments $ 419,022
$ 232
$ (7,271 ) $ 411,983

September 30, 2012 Amortized
Cost Unrealized
Gains Unrealized
Losses (1) Fair
Value
(In thousands)
Short-term investments $ 3,458
$ —
$ —
$ 3,458
Total Investments $ 3,458
$ —
$ —
$ 3,458

December 31, 2012 Amortized
Cost Unrealized
Gains Unrealized
Losses (1) Fair
Value
(In thousands)
Short-term investments $ 4,863
$ 1
$ —
$ 4,864
Total Investments $ 4,863
$ 1
$ —
$ 4,864

~~There were no investment holdings as of December 31, 2011.~~

~~(1) There were no other-than-temporary impairment losses recorded in other comprehensive income at December 31, 2012 and 2011 or at September 30, 2013 and 2012.~~

September 30, 2013 Amortized
Cost Fair
Value
(In thousands)
Due in one year or less $ —
$ —
Due after one through five years 253,500
250,727
Due after five through ten years 75,370
72,704
Due after ten years 15,462
14,950
Asset-backed securities 74,690
73,602
Total Investments $ 419,022
$ 411,983

September 30, 2012 Amortized
Cost Fair
Value
(In thousands)
Due in one year or less $ 3,458
$ 3,458
Due after one through five years —
—
Due after five through ten years —
—
Due after ten years —
—
Asset-backed securities —
—
Total at December 31, 2012 $ 3,458
$ 3,458

December 31, 2012 Amortized
Cost Fair
Value
(In thousands)
Due in one year or less $ 4,863
$ 4,864
Due after one through five years —
—
Due after five through ten years —
—
Due after ten years —
—
Asset-backed securities —
—
Total Investments $ 4,863
$ 4,864

At September 30, 2013, the investment portfolio had gross unrealized losses of approximately $7.3 million. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:

September 30, 2013 Less Than 12 Months 12 Months or Greater Total
Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses
(In thousands)
U.S. Treasury Securities and Obligations of U.S. government agencies $ 106,889
$ (1,179 ) $ —
$ —
$ 106,889
$ (1,179 )
Municipal bonds 11,916
(103 ) —
—
11,916
(103 )
Corporate debt securities 197,642
(4,819 ) —
—
197,642
(4,819 )
Assets-backed securities 66,012
(1,170 ) —
—
66,012
(1,170 )
Total Investments $ 382,459
$ (7,271 ) $ —
$ —
$ 382,459
$ (7,271 )

~~At September 30, 2012 and December 31, 2012 the investment portfolio had no unrealized losses and there were no investment holdings as of December 31, 2011.~~

~~Net investment income is comprised of the following:~~

Nine months ended September 30, 2013 For the Nine months ended September 30, 2012 For the Year Ended December 31, 2012 For the Period May 19, 2011 (inception) to December 31, 2011
(In thousands)
Fixed maturities $ 3,663
$ 1
$ 2
$ —
Cash equivalents —
—
4
—
Other 2
—
—
—
Investment income 3,665
1
6
—
Investment expenses (329 ) —
—
—
Net Investment Income $ 3,336
$ 1
$ 6
$ —

~~Fair Value Measurements~~

~~Fair value measurements for items measured at fair value included the following as of September 30, 2013 and 2012 and December 31, 2012:~~

September 30, 2013 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Fair Value
(In thousands)
U.S. Treasury securities and obligations of U.S. government agencies $ 106,889
$ —
$ —
$ 106,889
Municipal bonds —
11,916
—
11,916
Corporate debt securities —
219,576
—
219,576
Asset-backed securities —
73,602
—
73,602
Cash and cash equivalents 34,097
—
—
34,097
Total Assets $ 140,986
$ 305,094
$ —
$ 446,080
Warrant liability —
—
5,452
5,452
Total Liabilities $ —
$ —
$ 5,452
$ 5,452

September 30, 2012 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Fair Value
(In thousands)
U.S. Treasury securities and obligations of U.S. government agencies $ 3,458
$ —
$ —
$ 3,458
Cash and cash equivalents 515,614
—
—
515,614
Total assets $ 519,072
$ —
$ —
$ 519,072
Warrant liability —
—
5,120
5,120
Other liabilities 26,170
—
—
26,170
Total liabilities $ 26,170
$ —
$ 5,120
$ 31,289

December 31, 2012 Quoted Prices in
Active Markets for
Identical Assets
(Level 1) Significant Other
Observable Inputs
(Level 2) Significant
Unobservable
Inputs
(Level 3) Fair Value
(In thousands)
U.S. Treasury securities and obligations of U.S. government agencies $ 4,864
$ —
$ —
$ 4,864
Cash and cash equivalents 526,194
—
—
526,194
Total Assets $ 531,058
$ —
$ —
$ 531,058
Warrant liability —
—
4,842
4,842
Total Liabilities $ —
$ —
$ 4,842
$ 4,842

~~There were no transfers of securities between Level 1 and Level 2 during 2013 or 2012.~~

For assets and liabilities measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the periods ended September 30, 2013 and 2012 and the years ended December 31, 2012 and 2011 is as follows:

Warrant Liability
(In Thousands)
Balance at December 31, 2012 $ 4,842
Change in fair value of warrant liability included in earnings 610
Balance at September 30, 2013 $ 5,452

Warrant Liability
(In thousands)
Balance at December 31, 2011 $ —
Initial fair value of warrant liability 5,120
Change in fair value of warrant liability included in earnings —
Balance at September 30, 2012 $ 5,120

Warrant Liability
(In thousands)
Balance at December 31, 2011 $ —
Initial fair value of warrant liability 5,120
Change in fair value of warrant liability included in earnings (278 )
Balance at December 31, 2012 $ 4,842

The fair value of the warrants issued to FBR and MAC Financial Ltd. (which are now held by the former stockholders of MAC Financial Ltd. as a result of its liquidation) was estimated on the date of grant using the Black-Scholes option-pricing model, including consideration of any potential additional value associated with pricing protection features. The volatility assumption used, 39.0%, was derived from the historical volatility of the share price of a range of publicly-traded companies with business types similar to ours. No allowance was made for any potential illiquidity associated with the private trading of our shares. We revalue the warrant liability quarterly using a Black-Scholes option-pricing model in combination with a binomial model and a Monte-Carlo simulation model to value the pricing protection features within the warrant. As of September 30, 2013, the assumptions used in the option pricing model were as follows: a common stock price as of September 30, 2013 of $11.40, risk free interest rate of 2.03%, expected life of 7.06 years and a dividend yield of 0%. The gain from change in fair value of warrant liability during the third quarter is primarily due to a decrease in the price of our common stock compared to June 30, 2013. The loss from change in fair value for the nine months ending September 30, 2013 is primarily due to an increase in the price of our common stock as compared to December 31, 2012. The warrants have an exercise price of $10.00. The remaining contractual term on the warrants is approximately 8.6 years.

~~There were no assets or liabilities measured at fair value using significant unobservable inputs as of December 31, 2011.~~

~~Share Based Compensation~~

The 2012 Stock Incentive Plan (the “Plan”) was approved by the Board of Directors (the “Board”) on April 16, 2012, and authorized 5.5 million shares to be reserved for issuance under the Plan with 3.85 million shares available for stock options and 1.65 million shares available for restricted stock unit grants. Options granted under the Plan are Non-Qualified Stock Options and may be granted to employees, directors and other key persons of the Company. The exercise price per share for the common stock covered by this Plan shall be determined by the Board at the time of grant, but shall not be less than the fair market value on the date of the grant. The term of the stock option grants will be fixed by the Board, but no stock option shall be exercisable more than 10 years after the date the stock option is granted. The vesting period of the stock option grants will also be fixed by the Board at the time of grant and generally is for a three year period.

~~A summary of option activity in the plan for the nine months ended September 30, 2013 and for the year ended December 31, 2012 is as follows:~~

Shares Weighted Average Exercise Price Weighted Average Grant Date Fair Value per Share
Options balance at December 31, 2012 2,547
$ 10.00
$ 3.86
Options granted 532
11.78
4.57
Less: Options forfeited (15 ) 10.00
3.84
Options balance outstanding at September 30, 2013 3,064
$ 10.31
$ 3.98

Shares Weighted Average Exercise Price Weighted Average Grant Date Fair Value per Share
Options balance at December 31, 2011 —
$ —
$ —
Options granted 2,829,250
10.00
3.87
Less: Options forfeited (282,500 ) 10.00
3.88
Options balance outstanding at December 31, 2012 2,546,750
$ 10.00
$ 3.86

~~There were no exercises and approximately 659,723 and zero options were exercisable as of September 30, 2013 and December 31, 2012, respectively.~~

The remaining weighted average contractual life of options outstanding as of September 30, 2013 was 8.8 years. As of September 30, 2013, there was approximately $4.6 million of total unrecognized compensation cost related to non-vested stock options. The remaining weighted average contractual life of options outstanding as of December 31, 2012 was 9.4 years. As of December 31, 2012, there was approximately $6.4 million of total unrecognized compensation cost related to non-vested stock options.

~~The estimated grant date fair values of the stock options granted during 2013 were calculated using Black-Scholes valuation model. See "Critical Accounting Estimates—Share-Based Compensation~~."

~~Predecessor Entity~~

MAC Financial Holding Corporation, a wholly-owned subsidiary of MAC Financial Ltd., was formed along with its wholly-owned insurance subsidiaries, Mortgage Assurance Corporation, Mortgage Assurance Reinsurance Inc One and Mortgage Assurance Reinsurance Two, (collectively "MAC"), with the intent of offering mortgage insurance to lenders throughout the United States and to the GSEs. MAC was incorporated and licensed without the usual requisite minimum capital and surplus in order to facilitate the lengthy review for qualified insurer status with both Fannie Mae and Freddie Mac.

MAC's net loss was $11,000, $604,000, and $5.6 million from January 1, 2012 through April 24, 2012, the year ended December 31, 2011, and the period from July 6, 2009 (inception) to April 24, 2012, respectively. The net loss of $5.6 million for the period from inception to April 24, 2012 consisted largely of payroll and related expenses, Information Technology ("IT") and professional fees associated with development stage activities primarily focused on developing IMS and capital raising efforts. For the year-ended 2010, MAC had a working capital deficiency which raised substantial doubt about its ability to continue as a going-concern. The net loss of $604,000 for the year ended December 31, 2011 reflects a significant wind-down of development stage activities and IT development efforts, including the termination of all employees, as MAC focused on conserving capital. On November

30, 2011, the Company entered into an agreement with MAC Financial Ltd. to purchase MAC Financial Holding Corporation and its subsidiaries. MAC's results from January 1, 2012 through April 24, 2012 reflect the costs associated with maintaining the entity and its subsidiaries in a minimal capacity until MAC's acquisition could be completed and is not comparative with prior periods.Form 10-K.

Geographic Dispersion

~~Assuming we are able to obtain all of the necessary licenses and approvals, we plan on writing business in all 50 states and D.C.~~ We intend to build a geographically diverse portfolio ~~without~~and avoid geographic concentrations that might expose ~~the company~~us to undue risk. Risk will be managed by establishing targets and limits for new origination mix and/or portfolio limits. Therefore, aside from the impact of market restrictions, ~~(discussed below),~~ we desire that our insurance origination mix by ~~state~~region be consistent with the overall distribution of mortgage ~~insurance originations.~~originations in the United States that require mortgage insurance.

On an ongoing and recurring basis, we plan to evaluate changing market conditions to determine if it is appropriate to establish, tighten, loosen or eliminate lending restrictions established by geographic area. The evaluation is expected to include factors ~~including~~such as historical performance and the historical performance of other market participants, forward-looking projections for key risk drivers, estimated impact on loss performance, and existing portfolio concentrations. Consistent with our governance processes, the geographic concentrations will be monitored on an ongoing basis and changes to market restrictions will be reviewed and ~~approved.~~adopted as needed. We currently have no geographic market restrictions in place.

Critical Accounting Estimates

We use accounting principles and methods that conform to ~~generally accepted accounting principles in the United States ("GAAP").~~GAAP. Where GAAP specifically excludes mortgage insurance we follow general industry practices. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. ~~These~~On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions.

We believe that the assumptions and estimates associated with revenue recognition, fair value measurements, our investment portfolio, deferred policy acquisition costs, income taxes, warrants and share-based compensation have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting estimates.

There have been no material changes to our critical accounting policies and estimates ~~are summarized below.~~

~~Reserve for Losses and Loss Adjustment Expenses~~

We are a new company and have only recently commenced transacting mortgage insurance. We do not anticipate a material level of losses (relative to written premiums or stockholder equity) in the first few years of our operations. Our practice will be to establish loss reserves only for loans in default. We do not consider a loan to be in default for loss reserve purposes until we receive notice from the servicer that a borrower has failed to make two (2) regularly scheduled payments and is at least 60 days in default. Default is defined in NMIC's mortgage insurance policies as ~~the failure by a borrower to pay when due an amount equal~~compared to the ~~scheduled mortgage payment due under~~critical accounting policies and estimates described in our Annual Report on Form 10-K for the terms of a loan or the failure by a borrower to pay all amounts due under a loan after the exercise of the due on sale clause of such loan. In addition to reserves on reported defaults, we establish reserves for estimated losses incurred on loans that have been in default for at least 60 days that have not yet been reported to us by the servicers (this is often referred to as “incurred but not reported” or “IBNR”).

Consistent with industry accounting practices, for purposes of establishing loss reserves, we consider our MI policies to be short-duration contracts and, as such, we will adhere to the general loss reserving principles contained in ASC Topic 944, ~~Financial Services~~ — ~~Insurance~~ ("ASC 944"), even though that standard expressly excludes mortgage insurance from its guidance. Like other mortgage insurers, however, we will not establish loss reserves for anticipated future claims on insured loans that are not currently in default.

The establishment of loss and IBNR reserves is subject to inherent uncertainty and will require significant judgment by management. We will establish loss reserves using our best estimates of claim rates, ~~i.e., the percent of loan defaults that ultimately result in claim payments, and claim amounts,~~ ~~i.e.~~, the dollar amounts required to settle claims, to estimate the ultimate losses on loans reported to us as being at least 60 days in default as of the end of each reporting period. We will estimate IBNR by analyzing historical lags in default reporting to determine a specific number of IBNR claims in each reporting period. Our actuary will utilize internal and external data to estimate lags in notice of default reporting. We believe that given recent tightening of GSE guidelines lag times have decreased. Additionally, our estimates of claim rates and claim sizes will be strongly influenced by prevailing economic conditions, for example current rates or trends in unemployment, house price appreciation and/or interest rates, and our best judgment as to the future values or trends of these macroeconomic factors. If prevailing economic conditions deteriorate suddenly and/or unexpectedly, our estimates of loss reserves could be materially understated, which may adversely impact our financial condition and operating results. Because loss and IBNR reserves are based on estimates and judgments, there can be no assurance that even in a stable economic environment, actual claims paid by us will not be substantially different than our loss and IBNR reserves for such claims.year ended December 31, 2013.

Changes in loss reserves can materially affect our consolidated net income or loss. It is possible that even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have a significant impact on reserves and, correspondingly, on operating results. The loss reserving process is complex and subjective and, therefore, our ultimate liabilities may vary significantly from our estimates.

~~Fair Value Measurements~~

~~The following describes the valuation techniques used by us to determine the fair value of financial instruments held as of September 30, 2013 and December 31, 2012:~~

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 - Unadjusted quoted prices for identical assets or liabilities in active markets that are accessible at the measurement date for identical assets or liabilities;~~

~~Level 2 - Prices or valuations based on observable inputs other than quoted prices in active markets for identical assets and liabilities; and~~

Level 3 - Unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

The level of market activity used to determine the fair value hierarchy is based on the availability of observable inputs market participants would use to price an asset or a liability, including market value price observations.

~~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. We do however perform quality checks and review of the prices received.

~~Liabilities classified as Level 3~~

The warrants held by FBR and MAC Financial Ltd. (which are now held by its former stockholders after completion of its liquidation) are valued using a Black-Scholes option- pricing model in combination with a binomial model and Monte-Carlo simulation model used to value the pricing protection features within the warrant. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of the Company's stock price.

~~ASC 825,~~ ~~Disclosures about Fair Value of Financial Instruments~~, requires all entities to disclose the fair value of their financial instruments, both assets and liabilities recognized and not recognized in the balance sheet, for which it is practicable to estimate fair value.

5341

~~Investment Portfolio~~

We classify our entire investment portfolio as available-for-sale and report it at fair value. The related unrealized gains or losses, after considering the related tax expense or benefit, are reported as a component of accumulated other comprehensive income in stockholders' equity. We expect to hold short-term investments with maturities of greater than three and less than 12 months when purchased and will be carried at fair value and to determine any realized gains and losses on sales of investments on a specific-identification basis. We expect that our investment income will consist primarily of interest and dividends. We plan to recognize interest income on an accrual basis and dividend income on preferred stock investments on the date of declaration. Net investment income would represent interest and dividend income, net of investment expenses.

The guidance regarding the recognition and presentation of other-than-temporary impairment, or OTTI, requires that an OTTI of a debt security be separated into two components when there are credit-related losses associated with the impaired debt security for which we assert that we do not have the intent to sell the security, and it is more likely than not that we will not be required to sell the security before recovery of our cost basis. Under this guidance the amount of the OTTI related to a credit loss is recognized in earnings, and the amount of the OTTI related to other factors (such as changes in interest rates or market conditions) is recorded as a component of other comprehensive income (loss). In instances where no credit loss exists but it is more likely than not that we would have to sell the debt security prior to the anticipated recovery, the decline in fair value below amortized cost is recognized as an OTTI in earnings. In periods after recognition of an OTTI on debt securities, we plan to account for such securities as if they had been purchased on the measurement date of the OTTI at an amortized cost basis equal to the previous amortized cost basis less the OTTI recognized in earnings. For debt securities for which OTTI are recognized in earnings, the difference between the new amortized cost basis and the cash flows expected to be collected would be accreted or amortized into net investment income.

Each fiscal quarter we expect to perform reviews of our investments in order to determine whether declines in fair value below amortized cost are considered other-than-temporary in accordance with applicable guidance. In evaluating whether a decline in fair value is other-than-temporary, we may consider several factors including, but not limited to:

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

~~extent and duration of the decline;~~

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

~~change in rating below investment grade; and~~

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

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

~~Deferred Policy Acquisition Costs~~

Costs directly associated with the successful acquisition of mortgage insurance policies, consisting of employee compensation and other policy issuance and underwriting expenses, are initially deferred and reported as deferred insurance policy acquisition costs. Deferred insurance policy acquisition costs arising from each book of business are charged against revenue in the same proportion that the underwriting profit for the period of the charge bears to the total underwriting profit over the life of the policies. The underwriting profit and the life of the policies are estimated and are reviewed quarterly and updated when necessary to reflect actual experience and any changes to key variables such as persistency or loss development. Because our insurance premiums are earned over time, changes in persistency result in deferred insurance policy acquisition costs being amortized against revenue over a comparable period of time.

If a premium deficiency exists, we reduce the related deferred insurance policy acquisition costs by the amount of the deficiency or to zero through a charge to current period earnings. If the deficiency is more than the deferred insurance policy acquisition costs balance, we then establish a premium deficiency reserve equal to the excess, by means of a charge to current period earnings.

~~Premium Deficiency Reserve~~

After our loss reserves are established, we will perform a premium deficiency calculation each fiscal quarter using best estimate assumptions as of the testing date. Per ASC 944, a premium deficiency reserve shall be recognized if the sum of expected claim costs and claim adjustment expenses, expected dividends to policyholders, unamortized acquisition costs, and maintenance costs exceeds related unearned premiums. The calculation of premium deficiency reserves requires the use of significant judgment and estimates to determine the present value of future premium and present value of expected losses and expenses on our business. The present value of future premium relies on, among other things, assumptions about persistency and repayment patterns on underlying loans. The present value of expected losses and expenses depends on assumptions relating to severity of claims and claim rates on current defaults, and expected defaults in future periods. These assumptions also include an estimate of expected rescission activity. Assumptions used in calculating the deficiency reserves can be affected by volatility in the current housing and mortgage lending industries. To the extent premium patterns and actual loss experience differ from the assumptions used in calculating the premium deficiency reserves, the differences between the actual results and our estimate will affect future period earnings. In considering the potential sensitivity of the factors underlying our best estimate of premium deficiency reserves, it is possible that even a relatively small change in estimated claim rate or a relatively small percentage change in estimated claim amount could have a significant impact on the premium deficiency reserve, should one be needed, and, correspondingly, on our operating results.

~~Income Taxes~~

~~We account for income taxes using the liability method in accordance with ASC Topic 740,~~ ~~Income Taxes~~. The liability method measures the expected future tax effects of temporary differences at the enacted tax rates applicable for the period in which the deferred asset or liability is expected to be realized or settled. Temporary differences are differences between the tax basis of an asset or liability and its reported amount in the consolidated financial statements that would result in future increases or decreases in taxes owed on a cash basis compared to amounts already recognized as tax expense in the consolidated statement of operations. We evaluate the need for a valuation allowance against deferred tax assets on a quarterly basis. In the course of our review, we assess all available evidence, both positive and negative, including future sources of income, tax planning strategies, future contractual cash flows and reversing temporary differences. Additional valuation allowance benefits or charges could be recognized in the future due to changes in management's expectations regarding the realization of tax benefits.

~~Warrants~~

In conjunction with the MAC Acquisition and funding of our start-up costs, we issued warrants. The stockholders of MAC Financial Ltd. have wound up its affairs pursuant to a members voluntary liquidation under Bermuda law. The shares of our common stock and the warrant previously held by MAC Financial Ltd. have been divided and distributed to its former stockholders. We account for these warrants to purchase common shares of the Company 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.~~ These warrants may be settled by us using the physical settlement method or through cash-less-exercises in which shares subject to the warrants are reduced in lieu of cash payment of the exercise price. The exercise price and the number of warrants are subject to anti-dilution provisions whereby the existing exercise price is adjusted downward and the number of warrants increased for events that may not be dilutive and the adjustment may be in excess of any dilution suffered. As a result, the warrants are classified as a liability. We are required to revalue the warrants at the end of each reporting period and any change in fair value is reported in the statements of operations in the period in which the change occurred. We revalue the warrant liability quarterly using a Black-Scholes option-pricing model in combination with a binomial model and Monte-Carlo simulation model used to value the pricing protection features within the warrant. Variables in the ~~model include the risk-free rate of return, dividend yield, expected life and expected volatility of the Company's stock price.~~

~~Share-Based Compensation~~

~~The Company adopted ASC 718,~~ ~~Compensation - Stock Compensation~~ (“ASC 718”). ASC 718 addresses accounting for share-based awards and recognizes compensation expense, measured using grant date fair value, over the requisite service or performance period of the award. Share-based payments include restricted stock and stock option grants under the 2012 Stock Incentive Plan. The fair value of stock option grants issued are determined based on an option pricing model which takes into account various assumptions that are subjective. Key assumptions used in the stock option valuation include the expected term of the equity award taking into account the contractual term of the award, the effects of expected exercise and post-vesting termination behavior, expected volatility, expected dividends and the risk-free interest rate for the expected term of the award. Restricted stock grants to employees contain a market and service condition. The fair value of restricted stock grants to employees is determined based on a Monte Carlo Simulation model at the date of grant. Restricted grants to non-employee directors are valued at the Company's stock price on the date of grant less the present value of anticipated dividends. Expense is recognized over the required service period, which is generally a three-year vesting period for the options (vesting in one-third increments per year).

~~The estimated grant date fair values of the stock options granted during~~ ~~2013~~ ~~were calculated using Black-Scholes valuation model based on the following weighted-average assumptions:~~

~~Expected Life -~~ ~~6.0 years~~

~~Risk free interest rate -~~ ~~0.85%~~

~~Dividend yield -~~ ~~0.00%~~

~~Expected stock price volatility -~~ ~~39.00%~~

~~Projected forfeiture rate -~~ ~~1.00%~~

~~Expected Stock Price Volatility~~ — is a measure of the amount by which a price has fluctuated or is expected to fluctuate. At the time of grant, the Company's common shares trading history was less than six months which was not sufficient to calculate an expected volatility representative of the volatility over the expected lives of the options. As a substitute for such estimate, the Company used historical volatilities of a set of comparable companies in the industry in which the Company operates.

~~Risk Free Interest Rate -~~ ~~is the U.S. Treasury rate for the date of the grant having a term approximating the expected life of the option.~~

~~Expected Life -~~ is the period of time over which the options granted are expected to remain outstanding giving consideration to vesting schedules, historical exercise and forfeiture patterns. The Company uses the simplified method outlined in SEC Staff Accounting Bulletin No. 107 to estimate expected lives for options granted during the period as historical exercise data is not available and the options meet the requirements set out in the Bulletin. Options granted have a maximum term of ten years.

~~Projected Forfeiture Rate -~~ ~~is the estimated percentage of options granted that are expected to be forfeited or canceled before becoming fully vested. An increase in the forfeiture rate will decrease compensation expense.~~

~~Dividend Yield -~~ ~~is calculated by dividing the expected annual dividend by the stock price of the Company at the valuation date.~~

~~Restricted Stock Units~~

~~The estimated grant date fair values of the restricted stock units granted in~~ ~~2012~~ ~~that are subject to both a market and service condition were calculated using a Monte Carlo Simulation model based on the average outcome of 150,000 simulations using the following assumptions:~~

~~Expected Life -~~ ~~5.0 years~~

~~Risk free interest rate -~~ ~~0.86%~~

~~Dividend yield -~~ ~~0.00%~~

~~Expected stock price volatility -~~ ~~39.00%~~

~~Projected forfeiture rate -~~ ~~1.00%~~

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We own and manage a large investment portfolio of various holdings, types and maturities as a result of (i) our initial capitalization pursuant to which we were required to hold our proceeds in an investment account until we obtained GSE Approval, and (ii) ongoing operations in which claim payments are back-loaded relative to premium revenue.maturities. Investment income is one of our primary sources of cash flow supporting operations and claim payments. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance. While our investment portfolio is exposed to factors affecting global companies and markets worldwide, ~~because the company insures loans only in the United States,~~ it is most sensitive to fluctuations in the drivers of U.S. markets.

We manage market risk via a defined investment policy implemented by our ~~Treasury~~treasury function with oversight from ~~the~~our Board's Risk Committee. Important drivers of our market risk exposure monitored and managed by us include but are not limited to:

Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates to the extent that the investment portfolio must be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse.

Changes to the term structure of interest rates. Rising or falling rates typically change by different amounts along the yield curve. These changes may have unforeseen impacts on the value of certain assets.

Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments.

Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.

Prepayment Risk. Bonds may have call provisions that permit debtors to repay prior to maturity when it is to their advantage. This typically occurs when rates fall below the interest rate of the debt.

Market risk will be measured using reporting by investment type and concentration. Market risk will be measured via segmentation by asset type and maturity, and an interest rate sensitivity analysis will be completed. Market risks inherent in the business that are not fully captured by the quantitative analysis will be highlighted. In addition, material market risk changes that occur from the last reporting period to the current will be discussed. Changes to how risks are managed will also be identified and described.

~~We did not have any market risk at December~~At March 31, ~~2012. The only investments held were short-term securities. At September 30, 2013,~~2014, the duration of our fixed income portfolio, including cash and cash equivalents, was ~~3.51~~3.05 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of ~~3.51%~~3.05% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was ~~3.65~~3.30 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of ~~3.65%~~3.30% in fair value of our fixed income portfolio.

5742

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports we file or submit under the ~~Securities and~~ Exchange Act ~~of 1934 ,as amended, (the "Exchange Act")~~ is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, including our Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) of the Exchange Act) as of ~~September 30, 2013,~~March 31, 2014, pursuant to Rule 15d-15(e) under the Exchange Act. Management ~~necessarily~~ applied its judgment in assessing the costs and benefits of such controls and procedures, which by their nature, can provide only reasonable assurance regarding management's control objectives. Management does not expect that our disclosure controls and procedures will prevent or detect all errors and fraud. A control system, irrespective of how well it is designed and operated, can only provide reasonable assurance, and cannot guarantee that it will succeed in its stated objectives.

Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as of ~~September 30, 2013,~~March 31, 2014, our disclosure controls and procedures were effective to provide reasonable assurance that the information required to be disclosed by us in the reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms.

Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

5843

PART II ~~- OTHER INFORMATION~~

Item 1. Legal Proceedings

On August 8, 2012, Germaine Marks, as Receiver, and Truitte Todd, as Special Deputy Receiver, of PMI Mortgage Insurance Co. ~~(“PMI”)~~, an Arizona insurance company in receivership, filed a complaint (the “PMI Complaint”) against the Company, NMIC and certain named individuals, in California Superior Court, Alameda ~~County.~~County (the "Court"). The PMI Complaint, as amended, alleges breach of fiduciary duty, breach of loyalty, aiding and abetting breach of fiduciary duty and loyalty, misappropriation of trade secrets, conversion, breach of proprietary information agreement, breach of separation agreement, ~~and~~ intentional interference with contractual relations and unfair competition. The lawsuit seeks injunctive relief as well as unspecified monetary damages. We and the individual defendants believe these claims are without merit and have filed ~~an answer~~answers denying all ~~allegations~~allegations. We and the individual defendants intend to defend ourselves vigorously.

On January 30, 2014, Arch announced the closing of its acquisition of CMG and certain assets of PMI. The terms of the February 7, 2013 Asset Purchase Agreement ("APA") between Arch and PMI provide that effective as of the closing of that transaction, PMI shall transfer and assign to Arch all causes of action being pursued in the PMI Complaint. The APA further provides that within thirty (30) days after the closing of the transaction, Arch shall have its attorney file appropriate pleadings and other documents and instruments with the court requesting that PMI be removed as a party plaintiff in the PMI Complaint and that Arch be substituted as the real party in interest. Although Arch has not yet filed any such request with the Court, the plaintiff is now described in pleadings as “Plaintiff and Real Party in Interest Arch U.S. MI Services, Inc.”

If the lawsuit is determined adversely to us, the ~~court~~Court could subject us to significant monetary damages and/or ~~prevent~~enter an injunction that might include preventing NMIC from conducting insurance ~~operations, including obtaining a license in Wyoming, where we do not currently have one.~~operations. In addition, if the lawsuit is determined adversely to any of our ~~officers who are individual defendants in the lawsuit,~~employees, we ~~would likely~~may be required to remove and replace those ~~officers~~employees under the terms of agreements NMIC ~~and~~and/or NMIH entered into with each of the Alabama Department of Insurance, the ~~Arizona Department of Insurance, the~~ Florida Office of Insurance Regulation, the Kentucky Department of Insurance, the Texas Commissioner of Insurance and the New York State Department of Financial Services, as a condition of NMIC obtaining certificates of authority in those ~~states, as well as under an agreement with the Wisconsin OCI.~~states. The Court has set the trial date for ~~May 27,~~September 29, 2014.

Because the litigation and related discovery are ~~at a preliminary stage,~~ongoing, we do not have sufficient information to determine or predict the ultimate outcome or estimate the range of possible losses, if any. Accordingly, no provision for litigation losses has been included in our financial statements.

5944

Item 1A. Risk Factors

~~Investing in our common stock involves a high degree~~We are not aware of risk. You should carefully consider the following risk factors, as well as all of the other information contained in this report, including our consolidated financial statements and the related notes thereto, before deciding to invest in our common stock. The occurrence of any of the following risks or any of the risks previously disclosed beginning on page 15 of the Company’s Prospectus filed with the Securities and Exchange Commission on December 9, 2013 as part of the Company’s Registration Statement on Form S-1 (File No. 333-189507) (the "Prospectus") under the caption "Risk Factors" could materially and adversely affect our business, prospects, financial condition, operating results and cash flow. In such case, the trading price of our common stock could decline and you could lose all or part of your investment.

This report contains forward-looking statements that involve risks and uncertainties. See “Cautionary Note Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in these forward-looking statements, including any such statements made in Management's Discussion and Analysis of Financial Condition and Results of Operations.

~~The following risk factor previously disclosed in the Prospectus under the caption "Risk Factors" is updated as set forth below. With the exception of these changes, there have been no~~ material changes in our risk factors from the risk factors disclosed in our Annual Report on Form 10-K for the ~~Prospectus.~~year ended December 31, 2013.

Our mortgage insurance master policies contain restrictions on our ability to rescind coverage for fraud and underwriting defects, and if we were to fail to timely discover any such fraud or underwriting defects, our rights of rescission would be significantly limited, and we could suffer increased losses as a result of paying claims on loans with unacceptable risk profiles.

On December 10, 2013, we announced that we will introduce a new version of our master policy which will provide rescission relief after a borrower has timely made 12 consecutive monthly payments on a loan, rather than 18 months as provided in the current master policy. The new master policy is pending final approvals from the GSEs, FHFA and state insurance regulators. Under our current mortgage insurance policies, after a borrower has timely made 18 consecutive monthly payments on a loan we insure, we have agreed that we will not rescind or cancel coverage of that loan for borrower fraud or underwriting defects. In addition, upon the borrower attaining 18 full and timely consecutive monthly payments, we have agreed to limitations on our ability to initiate an investigation of fraud or misrepresentation by our insureds or any other party involved in the origination of an insured loan, which we collectively refer to in our master policies as a "First Party." Although we have processes in place to review every loan we insure, we may not discover fraud and/or underwriting defects prior to a borrower making the 18th payment, or after we implement our new master policy, after the 12th payment. If this were to occur, we would be contractually prohibited from exercising our rights of rescission for borrower fraud; our rights to investigate potential First Party fraud or misrepresentation would be curtailed; and we may be obligated to pay claims on certain loans with unacceptable risk profiles or which failed to meet our underwriting guidelines at the time of origination. As a result, we could suffer significant unexpected losses, which could adversely impact our business, financial condition and operating results.

6045

Item 6. Exhibits



Exhibit Number		Description

2.1		Stock Purchase Agreement, dated November 30, 2011, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
2.2		Amendment to Stock Purchase Agreement, dated April 6, 2012, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.1		Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.2		Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to our Form 8-K, filed on May 12, 2014)
4.1		Specimen Class A common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.2		Registration Rights Agreement between NMI Holdings, Inc. and FBR Capital Markets & Co., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.3		Registration Rights Agreement by and between MAC Financial Ltd. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.4		Registration Rights Agreement between FBR & Co., FBR Capital Markets LT, Inc., FBR Capital Markets & Co., FBR Capital Markets PT, Inc. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.5		Warrant No. 1 to Purchase Common Stock of NMI Holdings, Inc. issued to FBR Capital Markets & Co., dated June 13, 2013 (incorporated herein by reference to Exhibit 4.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.6		Form of Warrant to Purchase Common Stock of NMI Holdings, Inc. issued to former stockholders of MAC Financial Ltd.(incorporated herein by reference to Exhibit 4.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.1		NMI Holdings, Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.2		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Chief Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.3		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Management (incorporated herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.4		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Directors (incorporated herein by reference to Exhibit 10.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.5		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Chief Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.6		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Management (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.7		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Directors (incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.8		Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated March 6, 2012 and Amendment, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.8 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.9		Amendment to Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.9 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)



Exhibit Number		Description
10.10		Employment Agreement by and between NMI Holdings, Inc. and Jay M. Sherwood, dated March 6, 2012 and Amendment, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.10 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.11		Amendment to Employment Agreement by and between NMI Holdings, Inc. and Jay M. Sherwood, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.11 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.12		Letter Agreement by and between NMI Holdings, Inc. and Stanley M. Pachura, dated April 26, 2012 (incorporated herein by reference to Exhibit 10.12 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.13		Form of Indemnification Agreement between NMI Holdings, Inc. and certain of its directors (incorporated herein by reference to Exhibit 10.13 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.14		Commitment Letter dated July 12, 2013 for Bulk Fannie Mae-Paid Loss-on-Sale Mortgage Insurance on the Portfolio of approximately $5.46 billion Purchased by Fannie Mae and Identified by Fannie Mae as Deal No. 2013 MIRT 01 and by the Company as Policy No. P-0001-01 (incorporated herein by reference to Exhibit 10.14 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.15		NMI Holdings, Inc. 2014 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to our 2014 Annual Proxy Statement filed on March 26, 2014)
21.1		Subsidiaries of NMI Holdings, Inc. (incorporated herein by reference to Exhibit 21.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
23.1		Consent of BDO USA, LLP (incorporated herein by reference to Exhibit 23.1 to our Form 10-K for the period ended December 31, 2013, filed on March 12, 2014)
31.1		Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Principal Financial Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 #		Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1		Conditional Approval Letter, dated January 15, 2013, from Freddie Mac to National Mortgage Insurance Corporation (incorporated herein by reference to Exhibit 99.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
99.2		Conditional Approval Agreement, dated January 16, 2013, by and among Federal National Mortgage Association, NMI Holdings, Inc. and National Mortgage Insurance Corporation (incorporated herein by reference to Exhibit 99.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
101 *		The following financial information from NMI Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2013,~~March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013 (ii) Condensed Consolidated Statements of ~~Operations and~~ Comprehensive ~~Income (Loss)~~Loss (Unaudited) for the three months ended March 31, 2014 and ~~nine months ended September 30, 2013 and 2012, and for the period from May 19, 2011 (inception) to September 30,~~ 2013 (iii) Condensed Consolidated Statements of Changes in Common Shareholders' Equity (Unaudited) for the ~~period from January 1, 2013 to September 30, 2013, for~~three months ended March 31, 2014 and the year ended December 31, ~~2012 and for the period from May 19, 2011 (inception) to September 30,~~ 2013 (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and ~~2012 and for the period from May 19, 2011 (inception) to September 30,~~ 2013, and (v) Notes to Condensed Consolidated Financial Statements (Unaudited)



#	In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the ~~Securities~~ Exchange Act ~~of 1934 (the “Exchange Act”)~~ or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act ~~of 1933 (the “Securities Act”)~~ except to the extent that the registrant specifically incorporates it by reference.
*	In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.

6147

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	NMI HOLDINGS, INC.
~~December 17, 2013~~May 14, 2014	~~/s/~~By: /s/ John (Jay) M. Sherwood, Jr.
	Name: John (Jay) M. Sherwood, Jr. Title: Chief Financial Officer

6248

EXHIBIT INDEX



Exhibit Number		Description

2.1		Stock Purchase Agreement, dated November 30, 2011, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
2.2		Amendment to Stock Purchase Agreement, dated April 6, 2012, between NMI Holdings, Inc. and MAC Financial Ltd. (incorporated herein by reference to Exhibit 2.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.1		Second Amended and Restated Certificate of Incorporation (incorporated herein by reference to Exhibit 3.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
3.2		Second Amended and Restated By-Laws (incorporated herein by reference to Exhibit 3.1 to our Form 8-K, filed on May 12, 2014)
4.1		Specimen Class A common stock certificate (incorporated herein by reference to Exhibit 4.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.2		Registration Rights Agreement between NMI Holdings, Inc. and FBR Capital Markets & Co., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.3		Registration Rights Agreement by and between MAC Financial Ltd. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.4		Registration Rights Agreement between FBR & Co., FBR Capital Markets LT, Inc., FBR Capital Markets & Co., FBR Capital Markets PT, Inc. and NMI Holdings, Inc., dated April 24, 2012 (incorporated herein by reference to Exhibit 4.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.5		Warrant No. 1 to Purchase Common Stock of NMI Holdings, Inc. issued to FBR Capital Markets & Co., dated June 13, 2013 (incorporated herein by reference to Exhibit 4.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
4.6		Form of Warrant to Purchase Common Stock of NMI Holdings, Inc. issued to former stockholders of MAC Financial Ltd.(incorporated herein by reference to Exhibit 4.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.1		NMI Holdings, Inc. 2012 Stock Incentive Plan (incorporated herein by reference to Exhibit 10.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.2		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Chief Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.3		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Management (incorporated herein by reference to Exhibit 10.3 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.4		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Restricted Stock Unit Award Agreement for Directors (incorporated herein by reference to Exhibit 10.4 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.5		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Chief Executive Officer and Chief Financial Officer (incorporated herein by reference to Exhibit 10.5 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.6		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Management (incorporated herein by reference to Exhibit 10.6 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.7		Form of NMI Holdings, Inc. 2012 Stock Incentive Plan Nonqualified Stock Option Award Agreement for Directors (incorporated herein by reference to Exhibit 10.7 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.8		Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated March 6, 2012 and Amendment, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.8 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.9		Amendment to Employment Agreement by and between NMI Holdings, Inc. and Bradley M. Shuster, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.9 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)



Exhibit Number		Description
10.10		Employment Agreement by and between NMI Holdings, Inc. and Jay M. Sherwood, dated March 6, 2012 and Amendment, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.10 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.11		Amendment to Employment Agreement by and between NMI Holdings, Inc. and Jay M. Sherwood, dated April 24, 2012 (incorporated herein by reference to Exhibit 10.11 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.12		Letter Agreement by and between NMI Holdings, Inc. and Stanley M. Pachura, dated April 26, 2012 (incorporated herein by reference to Exhibit 10.12 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.13		Form of Indemnification Agreement between NMI Holdings, Inc. and certain of its directors (incorporated herein by reference to Exhibit 10.13 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.14		Commitment Letter dated July 12, 2013 for Bulk Fannie Mae-Paid Loss-on-Sale Mortgage Insurance on the Portfolio of approximately $5.46 billion Purchased by Fannie Mae and Identified by Fannie Mae as Deal No. 2013 MIRT 01 and by the Company as Policy No. P-0001-01 (incorporated herein by reference to Exhibit 10.14 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
10.15		NMI Holdings, Inc. 2014 Omnibus Incentive Plan (incorporated herein by reference to Appendix A to our 2014 Annual Proxy Statement, filed on March 26, 2014)
21.1		Subsidiaries of NMI Holdings, Inc. (incorporated herein by reference to Exhibit 21.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
23.1		Consent of BDO USA, LLP (incorporated herein by reference to Exhibit 23.1 to our Form 10-K for the period ended December 31, 2013, filed on March 12, 2014)
31.1		Principal Executive Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Principal Financial Officer's Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32 #		Certifications of CEO and CFO Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
99.1		Conditional Approval Letter, dated January 15, 2013, from Freddie Mac to National Mortgage Insurance Corporation (incorporated herein by reference to Exhibit 99.1 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
99.2		Conditional Approval Agreement, dated January 16, 2013, by and among Federal National Mortgage Association, NMI Holdings, Inc. and National Mortgage Insurance Corporation (incorporated herein by reference to Exhibit 99.2 to our Form S-1 Registration Statement (Registration No. 333-191635), filed on October 9, 2013)
101 *		The following financial information from NMI Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended ~~September 30, 2013,~~March 31, 2014, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Balance Sheets (Unaudited) as of ~~September 30, 2013~~March 31, 2014 and December 31, ~~2012~~2013 (ii) Condensed Consolidated Statements of ~~Operations and~~ Comprehensive ~~Income (Loss)~~Loss (Unaudited) for the three months ended March 31, 2014 and ~~nine months ended September 30, 2013 and 2012, and for the period from May 19, 2011 (inception) to September 30,~~ 2013 (iii) Condensed Consolidated Statements of Changes in Common Shareholders' Equity (Unaudited) for the ~~period from January 1, 2013 to September 30, 2013, for~~three months ended March 31, 2014 and the year ended December 31, ~~2012 and for the period from May 19, 2011 (inception) to September 30,~~ 2013 (iv) Condensed Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30, 2013~~March 31, 2014 and ~~2012 and for the period from May 19, 2011 (inception) to September 30,~~ 2013, and (v) Notes to Condensed Consolidated Financial Statements (Unaudited)



#	In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release No. 34-47986, the certifications furnished in Exhibit 32 hereto are deemed to accompany this Form 10-Q and will not be deemed “filed” for purposes of Section 18 of the ~~Securities~~ Exchange Act ~~of 1934 (the “Exchange Act”)~~ or deemed to be incorporated by reference into any filing under the Exchange Act or the Securities Act ~~of 1933 (the “Securities Act”)~~ except to the extent that the registrant specifically incorporates it by reference.
*	In accordance with Rule 406T of Regulation S-T, the information furnished in these exhibits will not be deemed “filed” for purposes of Section 18 of the Exchange Act. Such exhibits will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act except to the extent that the registrant specifically incorporates it by reference.

63ii



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)



Large accelerated filer o	Accelerated filer o	Non-accelerated filer x	Smaller reporting company o
		(Do not check if a smaller reporting company)



CLASS OF STOCK	PAR VALUE	DATE	NUMBER OF SHARES
Common stock	$0.01	December 1, 2013	58,052,480



	September 30, 2013			December 31, 2012
	(Unaudited)			(Audited)
Assets
Investments, available-for-sale, at fair value:
Fixed maturities (amortized cost of $419,021,671 and $0 as of September 30, 2013 and December 31, 2012, respectively)	$	411,983,016		$	—
Short-term investments	—			4,864,206
Total investment portfolio	411,983,016			4,864,206
Cash and cash equivalents	34,097,356			485,855,418
Accrued investment income	1,834,079			—
Prepaid expenses	1,053,057			416,861
Restricted cash	—			40,338,155
Deferred policy acquisition costs, net	4,226			—
Goodwill and other intangible assets	3,634,197			3,634,197
Software and equipment, net	9,053,995			7,550,095
Other assets	59,050			108,802
Total Assets	$	461,718,976		$	542,767,734
Liabilities
Accounts payable and accrued expenses	$	9,275,843		$	8,707,573
Placement fee payable	—			38,305,405
Purchase consideration payable	—			2,032,750
Warrant liability	5,452,428			4,841,765
Deferred tax liability	132,600			132,600
Total Liabilities	14,860,871			54,020,093
Commitments and Contingencies

Shareholders' Equity
Common stock - Class A shares, $0.01 par value, 55,637,480 and 55,250,100 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively (250,000,000 shares authorized)	556,375			552,501
Common stock - Class B shares, $0.01 par value, 0 and 250,000 shares issued and outstanding as of September 30, 2013 and December 31, 2012, respectively (250,000 authorized)	—			2,500
Additional paid-in capital	524,280,385			517,032,619
Accumulated other comprehensive (loss) income	(7,038,655		)	559
Deficit accumulated during the development phase	(70,940,000		)	(28,840,538		)
Total Shareholders' Equity	446,858,105			488,747,641
Total Liabilities and Shareholders' Equity	$	461,718,976		$	542,767,734



Condensed Consolidated Balance Sheets as of March 31, 2014 and December 31, 2013	6
Condensed Consolidated Statements of Comprehensive Loss for the three months ended March 31, 2014 and 2013	7
Condensed Consolidated Statements of Changes in Shareholders' Equity for the three months ended March 31, 2014 and the year ended December 31, 2013	8
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2014 and 2013	9
Notes to Condensed Consolidated Financial Statements	10



(Mark One)
x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended ~~September 30, 2013~~March 31, 2014



o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to



Cautionary Note Regarding Forward Looking Statements ~~— Safe Harbor Provisions~~		3

PART I ~~— FINANCIAL INFORMATION~~		5
Item 1.	Financial Statements	5
	~~Consolidated Balance Sheets~~ ~~as of September 30, 2013 (unaudited) and December 31, 2012 (audited)~~	5
	~~Consolidated Statements of Operations and Comprehensive Income (Loss)~~	6
	~~Consolidated Statements of Shareholders' Equity~~	7
	~~Consolidated Statements of Cash Flows~~	8
	~~Notes to Unaudited Condensed Consolidated Financial Statements~~	9
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	2722
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	5742
Item 4.	Controls and Procedures	5843

PART II ~~— OTHER INFORMATION~~		5944
Item 1.	Legal Proceedings	5944
Item 1A.	Risk Factors	6045
Item 6.	Exhibits	61

~~SIGNATURES~~		6246
~~EXHIBIT INDEX~~Signatures		6348
Exhibit Index		i



	March 31, 2014			December 31, 2013
Assets	(In Thousands, except for share data)
Investments, available-for-sale, at fair value:
Fixed maturities (amortized cost of $414,888 and $416,135 as of March 31, 2014 and December 31, 2013, respectively)	$	410,876		$	409,088
Total investments	410,876			409,088
Cash and cash equivalents	42,792			55,929
Accrued investment income	1,791			2,001
Premiums receivable	129			19
Prepaid expenses	1,702			1,519
Deferred policy acquisition costs, net	977			90
Goodwill and other indefinite lived intangible assets	3,634			3,634
Software and equipment, net	9,226			8,876
Other assets	57			63
Total Assets	$	471,184		$	481,219
Liabilities
Unearned premiums	$	4,721		$	1,446
Reserve for insurance claims and claims expenses	—			—
Accounts payable and accrued expenses	7,373			10,052
Warrant liability, at fair value	5,504			6,371
Deferred tax liability	133			133
Total Liabilities	17,731			18,002
Commitments and contingencies

Shareholders' Equity
Common stock - Class A shares, $0.01 par value, 58,067,326 and 58,052,480 shares issued and outstanding as of March 31, 2014 and December 31, 2013, respectively (250,000,000 shares authorized)	581			581
Additional paid-in capital	555,963			553,707
Accumulated other comprehensive loss	(4,012		)	(7,047		)
Accumulated deficit	(99,079		)	(84,024		)
Total Shareholders' Equity	453,453			463,217
Total Liabilities and Shareholders' Equity	$	471,184		$	481,219



	Three Months Ended September 30,						Nine months ended September 30,						For the Period from May 19, 2011 (inception) to September 30
	2013			2012			2013			2012			2013
Revenues
Direct premiums written	$	481,529		$	—		$	482,566		$	—		$	482,566
Increase (decrease) in unearned premiums	—			—			—			—			—
Net premiums earned	481,529			—			482,566			—			482,566
Net investment income	1,519,361			874			3,336,150			874			3,341,975
Net realized investment gains (losses)	(308,418		)	—			172,291			—			172,291
Gain (Loss) from change in fair value of warrant liability	468,848			—			(610,663		)	—			(332,859		)
Total Revenues	2,161,320			874			3,380,344			874			3,663,973
Expenses
Payroll and related	7,090,357			4,085,597			20,896,375			5,914,924			32,455,289
Share-based compensation	1,967,980			2,045,215			8,827,053			3,091,096			14,942,413
Depreciation and amortization	2,045,306			—			3,892,054			—			3,894,971
Professional fees	2,348,771			1,143,135			5,576,684			2,470,368			11,079,486
Information technology	1,328,268			281,364			3,455,087			281,364			4,327,540
Travel and related costs	262,701			227,634			965,569			424,502			1,691,033
Rent and office expenses	212,040			97,852			524,849			124,690			757,841
Financial fees and interest expense	—			—			—			1,628,635			1,632,364
Loss on impairment	—			—			—			—			1,200,000
Other	778,571			232,750			1,342,135			760,118			2,623,036
Total Expenses	16,033,994			8,113,547			45,479,806			14,695,697			74,603,973
Net Loss	$	(13,872,674	)	$	(8,112,673	)	$	(42,099,462	)	$	(14,694,823	)	$	(70,940,000	)

Share Data
Basic and Diluted loss per share	$	(0.25	)	$	(0.15	)	$	(0.76	)	$	(0.46	)	$	(2.11	)
Weighted average common shares	55,637,480			55,500,100			55,589,674			32,003,750			33,585,018

Other Comprehensive Income (Loss) (net of tax)
Net unrealized holding gains (losses) for the period included in accumulated other comprehensive income (loss)	2,283,106			—			(7,039,214		)	—			(7,038,655		)
Other Comprehensive Income (Loss) (net of tax)	2,283,106			—			(7,039,214		)	—			(7,038,655		)
Total Comprehensive Loss	$	(11,589,568	)	$	(8,112,673	)	$	(49,138,676	)	$	(14,694,823	)	$	(77,978,655	)



	Common stock								Additional Paid-in capital			Accumulated other comprehensive income (loss)			Deficit Accumulated During the Development Phase			Total
	Class A			Class B
	Shares	Amount		Shares		Amount
Period from year-ended December 31, 2011
Balance, December 31, 2011	100	$	1	—		$	—		$	—		$	—		$	(1,348,825	)	$	(1,348,824	)
Issuance of Class A shares of common stock	55,000,000	550,000		—		—			508,419,759			—			—			508,969,759
Issuance of Class B shares of common stock	—	—		250,000		2,500			—			—			—			2,500
Issuance of common stock related to acquisition of subsidiaries	250,000	2,500		—		—			2,497,500			—			—			2,500,000
Share-based compensation expense	—	—		—		—			6,115,360			—			—			6,115,360
Change in unrealized investment gains	—	—		—		—			—			559			—			559
Net loss	—	—		—		—			—			—			(27,491,713		)	(27,491,713		)
Balance, December 31, 2012	55,250,100	$	552,501	250,000		$	2,500		$	517,032,619		$	559		$	(28,840,538	)	$	488,747,641
Period from May 19, 2011 (inception) to September 30, 2013
Balance, May 19, 2011	—	$	—	—		$	—		$	—		$	—		$	—		$	—
Issuance of Class A shares of common stock	55,137,480	551,375		—		—			506,840,472			—			—			507,391,847
Issuance of Class B shares of common stock	—	—		250,000		2,500			—			—			—			2,500
Conversion of Class B shares of common stock into Class A shares of common stock	250,000	2,500		(250,000	)	(2,500		)	—			—			—			—
Issuance of common stock related to acquisition of subsidiaries	250,000	2,500		—		—			2,497,500			—			—			2,500,000
Share-based compensation expense	—	—		—		—			14,942,413			—			—			14,942,413
Change in unrealized investment gains/losses	—	—		—		—			—			(7,038,655		)	—			(7,038,655		)
Net loss	—	—		—		—			—			—			(70,940,000		)	(70,940,000		)
Balance, September 30, 2013	55,637,480	$	556,375	—		$	—		$	524,280,385		$	(7,038,655	)	$	(70,940,000	)	$	446,858,105
Nine months ended September 30, 2013
Balance, December 31, 2012	55,250,100	$	552,501	250,000		$	2,500		$	517,032,619		$	559		$	(28,840,538	)	$	488,747,641
Issuance of Class A shares of common stock	137,380	1,374		—		—			(1,579,287		)	—			—			(1,577,913		)
Conversion of Class B shares of common stock into Class A shares of common stock	250,000	2,500		(250,000	)	(2,500		)	—			—			—			—
Share-based compensation expense	—	—		—		—			8,827,053			—			—			8,827,053
Change in unrealized investment gains/losses	—	—		—		—			—			(7,039,214		)	—			(7,039,214		)
Net loss	—	—		—		—			—			—			(42,099,462		)	(42,099,462		)
Balance, September 30, 2013	55,637,480	$	556,375	—		$	—		$	524,280,385		$	(7,038,655	)	$	(70,940,000	)	$	446,858,105



	Common stock					Additional Paid-in Capital			Accumulated Other Comprehensive Loss			Accumulated Deficit			Total
	Class A		Class B
	(In Thousands)
Balance, December 31, 2012	$	553	$	2		$	517,032		$	1		$	(28,840	)	$	488,748
Common stock Class A share issuance related to restricted stock units	1		—			(1,579		)	—			—			(1,578		)
Common stock Class A share issuance related to initial public offering (net of expenses of $3,483)	25		—			27,887			—			—			27,912
Conversion of Class B shares of common stock into Class A shares of common stock	2		(2		)	—			—			—			—
Share-based compensation expense	—		—			10,367			—			—			10,367
Change in unrealized investment gains/losses	—		—			—			(7,048		)	—			(7,048		)
Net loss	—		—			—			—			(55,184		)	(55,184		)
Balance, December 31, 2013	$	581	$	—		$	553,707		$	(7,047	)	$	(84,024	)	$	463,217

Balance, January 1, 2014	$	581	$	—		$	553,707		$	(7,047	)	$	(84,024	)	$	463,217
Common stock Class A share issuance related to warrants	*		—			13			—			—			13
Common stock Class A share issuance related to equity awards	*		—			(90		)	—			—			(90		)
Share-based compensation expense	—		—			2,333			—			—			2,333
Change in unrealized investment gains/losses	—		—			—			3,035			—			3,035
Net loss	—		—			—			—			(15,055		)	(15,055		)
Balance, March 31, 2014	$	581	$	—		$	555,963		$	(4,012	)	$	(99,079	)	$	453,453


*	During the first quarter of 2014, we issued 1,115 and 13,731 common shares with a par value of $0.01 related to the exercise of warrants and equity awards, respectively, which are not visible in this schedule due to rounding.



April 24, 2012
Current assets	$	52,159
Intangibles	1,590,000
Capitalized software	5,000,000
Goodwill	3,244,197
Subtotal	9,886,356
Current liabilities and deferred tax liabilities	(1,386,356		)
Estimated fair value of net assets acquired	$	8,500,000


	Amortized Cost		Gross Unrealized					Fair Value		Amortized Cost		Gross Unrealized					Fair Value
	Amortized Cost		Gains		(Losses)			Fair Value		Amortized Cost		Gains		Losses			Fair Value
As of September 30, 2013
As of March 31, 2014										(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	108,067,508	$	—	$	(1,178,688	)	$	106,888,820	$	108,053	$	12	$	(1,224	)	$	106,841
Municipal bonds	12,019,214		—		(103,372		)	11,915,842		12,015		28		(35		)	12,008
Corporate debt securities	224,245,377		150,482		(4,818,660		)	219,577,199		221,506		351		(2,888		)	218,969
Asset-backed securities	74,689,572		81,955		(1,170,372		)	73,601,155		73,314		296		(552		)	73,058
Total Investments	$	419,021,671	$	232,437	$	(7,271,092	)	$	411,983,016	$	414,888	$	687	$	(4,699	)	$	410,876



YESx NO o	NO x



YESx NO x	NOo



~~YES~~ o	NO x



	Three Months Ended September 30, 2013			Nine months ended September 30, 2013			For the Period from May 19, 2011 (inception) to September 30, 2013
Corporate Bond	$	(206,875	)	$	309,234		$	309,234
U.S. Treasury securities and obligations of U.S. government agencies	(71,700		)	(87,359		)	(87,359		)
Mortgage-backed security	(29,843		)	(49,584		)	(49,584		)
Total Net Realized Investment (Losses) Gains	$	(308,418	)	$	172,291		$	172,291



	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, 2014		(Dollars in Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	41	$	87,817	$	(1,224	)	—	$	—	$	—		41	$	87,817	$	(1,224	)
Municipal bonds	1	1,715		(35		)	—	—		—			1	1,715		(35		)
Corporate debt securities	93	152,174		(2,668		)	4	10,928		(220		)	97	163,102		(2,888		)
Assets-backed securities	26	37,101		(425		)	2	5,669		(127		)	28	42,770		(552		)
Total Investments	161	$	278,807	$	(4,352	)	6	$	16,597	$	(347	)	167	$	295,404	$	(4,699	)


	Fair Value Measurements Using								Fair Value Measurements Using
Assets and Liabilities at Fair Value	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Fair Value		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 September 30, 2013
As of March 31, 2014									(In Thousands)
U.S. Treasury securities and obligations of U.S. government agencies	$	106,888,820	$	—	$	—	$	106,888,820	$	49,675	$	57,166	$	—	$	106,841
Municipal bonds	—		11,915,842		—		11,915,842		—		12,008		—		12,008
Corporate debt securities	—		219,577,199		—		219,577,199		—		218,969		—		218,969
Asset-backed securities	—		73,601,155		—		73,601,155		—		73,058		—		73,058
Cash and cash equivalents	34,097,356		—		—		34,097,356		42,792		—		—		42,792
Total Assets	$	140,986,176	$	305,094,196	$	—	$	446,080,372	$	92,467	$	361,201	$	—	$	453,668
Warrant liability	—		—		$	5,452,428	$	5,452,428	$	—	$	—	$	5,504	$	5,504
Total Liabilities	$	—	$	—	$	5,452,428	$	5,452,428	$	—	$	—	$	5,504	$	5,504



Level 3 Instruments Only	Warrant Liability
Three Months Ended March 31, 2014	(In Thousands)
Balance, January 1, 2014	$	6,371
Change in fair value of warrant liability included in earnings	(817		)
Gain on settlement of warrants	(37		)
Issuance of common stock on warrant exercise	(13		)
Balance, March 31, 2014	$	5,504



Level 3 Instruments Only	Warrant Liability
Year Ended December 31, 2013	(In Thousands)
Balance, January 1, 2013	$	4,842
Change in fair value of warrant liability included in earnings	1,529
Balance, December 31, 2013	$	6,371



	Total Fair Value Measurements
Nine months ended September 30, 2013
Level 3 Instruments Only	Warrant Liability

Balance, January 1, 2013	$	4,841,765
Change in fair value of warrant liability included in earnings	610,663
Balance, September 30, 2013	$	5,452,428

	Total Fair Value Measurements
Period from May 19, 2011 (inception) to September 30, 2013
Level 3 Instruments Only	Warrant Liability

Balance, May 19, 2011	$	—
Initial fair value of warrant liability	5,119,569
Change in fair value of warrant liability included in earnings	332,859
Balance, September 30, 2013	$	5,452,428


As of September 30, 2013
				As of March 31,			As of December 31,
				2014			2013
				(In Thousands)
Software	$	12,526,481		$	15,726		$	14,140
Equipment	387,446			544			542
Leasehold Improvements	35,039
Less accumulated amortization and depreciation	(3,894,971		)
Leasehold improvements				217			141
Subtotal				16,487			14,823
Accumulated amortization and depreciation				(7,261		)	(5,947		)
Software and equipment, net	$	9,053,995		$	9,226		$	8,876



As of December 31, 2012
Software	$	7,268,439
Equipment	284,573
Less accumulated amortization and depreciation	(2,917		)
Software and equipment, net	$	7,550,095



As of September 30, 2013 and December 31, 2012			Expected Lives
State licenses	$	260,000	Indefinite
GSE Approvals	130,000		Indefinite
Total Intangible Assets	$	390,000



As of March 31, 2014 and December 31, 2013	(In Thousands)		Expected Lives
Goodwill	$	3,244	Indefinite
State licenses	260		Indefinite
GSE approvals	130		Indefinite
Total Intangible Assets and Goodwill	$	3,634



Years ending December 31,
2013	$	205,884
2014	416,176
Totals	$	622,060



	September 30, 2013
	Gross			Tax Effected
Deferred tax asset:
Capitalized start-up costs	$	40,318,967		$	13,708,449
Stock compensation	13,159,292			4,474,159
Unrealized loss on investments	7,038,655			2,393,143
Net operating loss carry forwards	14,825,590			5,040,701
Other	5,647,019			1,919,986
Total gross deferred tax assets	80,989,523			27,536,438
Less: valuation allowance	78,544,235			26,705,040
Total deferred tax assets	2,445,288			831,398
Deferred tax liability:
Capitalized Software	(2,439,542		)	(829,444		)
Intangible Assets	(390,000		)	(132,600		)
Other	(5,746		)	(1,954		)
Total deferred tax liabilities	(2,835,288		)	(963,998		)
Net deferred income tax liability	$	(390,000	)	$	(132,600	)



	Shares		Weighted Average Exercise Price		Weighted Average Grant Date Fair Value per Share
	(Shares in Thousands)
Options outstanding at December 31, 2013	3,063		$	10.31	$	3.98
Options granted	693		12.32		4.97
Options exercised	(2	)	10.00		3.84
Options forfeited	(28	)	10.71		4.15
Options outstanding at March 31, 2014	3,726		$	10.68	$	4.17



	Shares		Weighted Average Grant Date Fair Value per Share
Options balance at December 31, 2012	2,546,750		$	3.86
Options granted	531,829		4.57
Less: Options forfeited	(14,701	)	3.84
Options balance outstanding at September 30, 2013	3,063,878		$	3.98



~~Expected life~~	~~6.00 years~~
~~Risk free interest rate~~	~~0.85%~~
~~Dividend yield~~	~~0.00~~	%
~~Expected stock price volatility~~	~~39.00~~	%
~~Projected forfeiture rates~~	~~1.00~~	%



	Shares		Weighted Average Grant Date Fair Value per Share
Restricted Stock Units balance at December 31, 2012	1,429,260		$	7.35
Restricted Stock Units Granted	82,000		11.75
Less: Restricted Stock Units Vested	(262,610	)	6.79
Less: Restricted Stock Units Forfeited	—		—
Restricted Stock Units balance outstanding at September 30, 2013	1,248,650		$	7.76



~~Expected life~~	~~5.00 years~~
~~Risk free interest rate~~	~~0.86~~	%
~~Dividend yield~~	~~0.00~~	%
~~Expected stock price volatility~~	~~39.00~~	%
~~Projected forfeiture rates~~	~~1.00~~	%


As of March 31, 2014			NMIC			Re One		Combined
	September 30, 2013		(In Thousands)
	(In Thousands)
Primary risk-in-force
Direct			$	115,467		$	—	$	115,467
Assumed			—			8,172		8,172
Ceded			(8,172		)	—		(8,172		)
Total primary risk-in-force			107,295			8,172		115,467
Pool risk-in-force ⁽¹⁾	$	93,090
Primary risk-in-force	1,196
Direct			93,090			—		93,090
Assumed			—			25,163		25,163
Ceded			(25,163		)	—		(25,163		)
Total pool risk-in-force			67,927			25,163		93,090
Total risk-in-force	$	94,286	175,222			33,335		208,557

Statutory policyholders' surplus	$	198,981	187,593			9,355		196,948
Statutory contingency reserve	2,149		2,631			634		3,265
Statutory policyholders' position	$	201,130
Total statutory policyholders' position			$	190,224		$	9,989	$	200,213

Risk-to-capital ⁽²⁾	0.5:1
Risk-to-Capital ⁽²⁾			0.9:1			3.3:1		1:1


⁽¹⁾	Pool risk-in-force as shown in the table above is equal to the aggregate stop loss less a deductible.


a.	the amount of required capital specified in our January 2013 approval letter from Fannie Mae ($150 million); or