John Swenson – Vice President-Investor Relations and Treasury Brad Shuster – Chairman and Chief Executive Officer Glenn Farrell – Executive Vice President and Chief Financial Officer.

Bose George – KBW Randy Binner – FBR Mackenzie Aron – Zelman & Associates Amy Debone – Compass Point Geoffrey Dunn – Dowling & Partners.

Good day, ladies and gentlemen and welcome to the NMI Holdings Third Quarter 2016 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will be given at that time. [Operator Instructions] As a reminder, this conference call is being recorded.

I would now like to introduce your host for today’s conference, Mr. John Swenson. Sir, you may begin..

Thanks very much. Good afternoon and welcome to the 2016 third quarter conference call for National MI. I’m John Swenson, Vice President of Investor Relations and Treasury. Joining us on the call today are Brad Shuster, Chairman and CEO; Glenn Farrell, our Chief Financial Officer; and Rob Fore, our Controller.

Financial results for the third quarter were released after the close of the market today. The press release may be accessed on NMI’s website located at www.nationalmi.com under the Investors tab. During the course of this call, we may make comments about our expectations for the future.

Actual results could differ materially from those contained in these forward-looking statements. Additional information about the factors that could cause actual results or trends to differ materially from those discussed on the call can be found on our website or through our regulatory filings with the SEC.

If and to the extent the company makes forward-looking statements, we do not undertake any obligation to update those statements in the future in light of subsequent developments. Further, no interested party should rely on the fact that the guidance of forward-looking statements is current at any time other than the time of this call.

Now to our conference call. Brad will open with an update on the state of the business and then Glenn will discuss the financial results in detail. After some closing remarks from Brad, we will take your questions. With that, let me turn it over to Brad Shuster.

Brad?.

Thank you, John. And thank you all for joining us on the call today. In the third quarter National MI generated record net income in returns. The early stages of what we expect will be many years of new records on both of these metrics. We are at an exciting inflection point in our development having crossed the break-even point last quarter.

The majority of incremental premiums are now dropping to the bottom line. This leverage will drive a rapid increase in our underwriting margin and net income as well as returns on equity. As a de novo insurer with no legacy risk and sound risk management guidelines, we expect that our results will be highly predictable with minimal volatility.

Attributes that we believe will deliver rewards to our shareholders in the coming years. We increased insurance-in-force by 5 billion to a record 28 billion which drove a 22% increase in earned premiums for the quarter.

We wrote approximately 6 billion of new insurance written for the quarter and currently expect to write 1 billion [ph] of NIW this year. In the third quarter, we continue to rapidly transition our mix of new insurance written to high-return monthly premium product.

Monthly premium NIW was up 12% over our record result in the second quarter and up a 163% compared with the third quarter of last year. Meanwhile single premium declined by 21% from the prior quarter and 17% versus the third quarter of 2015.

This is consistent with our strategic objectives and follows our decision to raise pricing on single premium products with the introduction of the PMIERs capital charges last January. This trend was also evident in our application mix for October which was 75% monthly and 25% single, roughly in line with the long-term industry average.

At the end of the third quarter, we had 1,100 master policies in place with customers an increase of approximately 150 year-to-date. The healthy origination market continued in the third quarter with a tailwind from strong purchase activity. We are optimistic about the strength of the purchase market going into 2017.

This is good for the industry as purchase drives roughly four times the penetration rate of mortgage insurance versus refinance. The underwriting environment continues to be very high quality, roughly half of our new insurance is above 760 FICO and 90% is above 700.

More importantly, these new writings are supported full documentation of income and include none of the exotic products that existed pre-crisis. What is unique about National MI is that we have underwritten approximately 85% of loans in our portfolio far more than any other mortgage insurer.

As a result, we have directly validated the documentation supporting the lenders underwriting decision. This provides us with several unique benefits including better knowledge of the loans in our portfolio, efficient claims handling and enhanced oversight of lenders underwriting practices.

We believe our portfolio will perform better than the rest of the industry over a full credit cycle. And that this capability will continue to differentiate us with lenders and the GSEs. In general, our portfolio to-date is performing far better than we have modeled.

Based on the weighted average credit quality of our portfolio, our pricing assumes approximately a 2% ultimate default frequency. This would be expected to result in a 20% loss ratio over a full economic cycle. The claims experienced to-date is substantially better than this.

However, we believe this is a result of low loss development driven by a healthy economy and healthy home price appreciation. We priced our insurance to deliver targeted returns over a full economic cycle which includes cyclical recessions and regional downturns. We assume that over a multi-year economic cycle.

We will see loss development accelerated as a result of an economic slowdown and this is what we insure for. In a potential stress scenario, we have the ability to cover approximately four times the normal defaults with premium revenue.

In other words, we could accommodate as much as an 8% ultimate lifetime default rates before we would begin to exceed lifetime premiums. On a subject of FHA competition we continue to hear nothing out of Washington indicating that officials are contemplating a cut to premiums or a change in the cancel ability of premiums.

In general, we believe that pricing is not the primary factor that swings a borrower from private mortgage insurance to the FHA. The FHA is part of the government's affordable housing mission and does roughly 80% of its endorsements below 720 FICO. We do only 20% of our volume in that credit band.

The industry did not see a meaningful share impact from the FHA premium cut in early 2015. If there were an FHA rate cut. We believe that industry market share relative to FHA would not be materially affected and then our industry would maintain its commitment to risk-based pricing that we're not chased to the lower credit bands.

We also believe that the industry has an opportunity to gain share versus the FHA over time as nearly 20% of FHA production is above 720 FICO where private MI generally offers better value. Recently, we have been pleased to see announcements of an industry consolidation and the potential acquisition of another competitor.

It’s a very healthy development to an industry of seven players go to six rational competitors. This should drive some redistribution of the combined companies pro forma market share as lenders look to diversify counterparty risk. It is also helpful to hear industry commentary on delivering high returns versus increasing market share.

Since we left our industry with a risk-based rate card designed to deliver a uniform mid teens return on PMIERs capital. We have seen stability in pricing for a monthly premium product. Finally, we initiated sessions under our reinsurance agreement in the quarter.

This reinsurance program initially gives us approximately $150 million of capital relief to support our growth. With an after-tax cost of capital of roughly 3%, we expect reinsurance transactions will be our most advantageous form of growth capital going forward.

I'll have some closing comments after Glenn provides more detail on the financial results.

Glenn?.

Thank you, Brad and good afternoon everyone. As Brad mentioned primary insurance-in-force at quarter-end grew to $28.2 billion up nearly $5 billion or 19% from took the $23.6 billion at the end of the second quarter. Premiums earned for the quarter were $31.8 million up from $26 million in the prior quarter.

Annualized premium yield for our primary book in the quarter was 48 basis points up from 47 basis points in the second quarter. Before the impact of reinsurance we expect premium yield on our primary book to continue to migrate upward to around 50 basis points.

Although this can be volatile depending on cancellations of single premium policies and credit quality which impacts premium rate. With reinsurance we expect that reported net premium yield will be approximately 5 basis points lower. We grew monthly NIW by 12% over the prior quarter and 163% compared with the prior year.

Total NIW was essentially with Q2 as single premium product was down 21% versus the prior quarter. It is consistent with our objective of shifting our NIW and insurance-in-force mix to mere the long-term industry average. In the third quarter monthly premium product represented 71% of NIW up from 63% in the second quarter.

The mix of applications which were a precursor to NIW continued to shift toward monthly product reaching 75% in October. In terms of purchase refinance mix for the quarter purchase represented 75% of NIW with refinanced 25% which compares with the sub-228 mix in the second quarter.

Total policies in force as of the end of the quarter increased to 119,000 up 18% from 101,000 in the prior quarter. Weighted average FICO of primary risk in force as of the end of Q3 was 753 roughly flat with the prior quarter. Overall, persistency in the primary book was 82% roughly flat with 83% in Q2.

Investment income in the third quarter was $3.5 million up from $3.3 million in the prior quarter. Total revenues in the third quarter were $35.5 up 20% from $29.6 million in the prior quarter. Underwriting and operating expenses in the third quarter were $24 million including share based compensation expense of $1.8 million.

This compares with underwriting and operating expense of $23.2 million including 1.7 million of share-based compensation in the prior quarter. Gross expenses continued to track with our prior guidance of approximately $96 million for the full year.

However reported expenses net of the ceding commission are likely to be range of $92 million to $93 million. We had 115 notices of delinquency in the primary book as of the end of the third quarter up from 79 at the end of the prior quarter. We recorded $664,000 per claims expense and there were three paid claims in the quarter.

Our third quarter loss ratio defined as claims expense divided by premiums earned was 2.1%. As mentioned last quarter we expect our loss ratios over the next several years to be in the low to mid-single digits.

Now moving to the bottom line, net income for the third quarter was $6.2 million or $0.10 per share which compares with net income of $2 million or $0.03 per share in the prior quarter.

At quarter-end cash and investments were $686 million up from $654 million in the prior quarter, as of quarter-end we had $77 million of cash and investments in the holding company. Year-to-date we generated $52.2 million of cash from operations which compares with $16.2 million over the same period last year.

Book equity as of the end of the third quarter was $430 million equal to $7.28 per share which compares with $422 million or $7.14 per share at the end of the second quarter. This book value excludes any benefit attributable to our deferred tax asset for which we recorded a valuation allowance of approximately $66 million as of December 31, 2015.

With profitability over the past two years, and expected for the full year we have additional support for likely reversal of the valuation allowance on our deferred asset sometime over the next year and possibly as it related to fourth quarter of 2016.

We would expect that the amount of the valuation allowance actually reversed will be reduced slightly from the $66 million. As a result of current income as well as amounts attributable to the state taxes that would not be absorbed by future income.

As of quarter-end total available assets under PMIERs were $489 million which compares to risk-based required assets of $321 million.

In summary, we had another excellent quarter, as Brad mentioned we now expect to report NIW of approximately $21 million to $21 billion for 2016 and we continue to expect pre-tax income of approximately $60 million for 2017. With that, let me now turn it back over to Brad for his closing remarks..

Thank you, Glenn. In closing I want to reiterate our financial objectives for the business. We are highly focused on delivering strong mid-teens returns for our shareholders. This is what drives every decision of the company.

Including choosing the customers who appreciate our value proposition, how we price our product and how we manage risk and expenses. We are always building new customer relationships and seeking to expand our existing relationships, which positions us to achieve our return objectives on behalf of shareholders.

With our continued focus on doing what we do well providing outstanding service to customers, prudently managing risk and controlling expenses. We look forward to many years of increasing profits and higher returns to shareholders. We thank you for your interest and support.

And now let me turn it back to the operator so that we can take your questions..

Thank you. [Operator Instructions] And our first question comes from the line of Bose George with KBW. Your line is now open..

Hey, guys good afternoon.

Actually first question just on the DTA is there a certain number of quarters you need to have earnings before that reverses or it's not a hard and fast rule?.

Bose, this is Glenn. No, it’s not a hard and fast rule, it’s just the positive evidence, out in the negative evidence and that has a variety of different interpretations throughout practice. So there is no hard and fast line on that..

Okay.

But the expectations it could happen in the fourth quarter or otherwise just spills over into in the first?.

Yes. We are looking at it very seriously and we do expect it to be sometime in the next four quarters, but we are looking at it..

Okay, great.

Then can I just get the dollar amounts for the earnings that came from cancellations of singles this quarter?.

We were roughly $5.7 million in cancellations..

Okay, thanks.

And then actually can you remind me the – the warrant liability expense, what is that represent?.

We have approximately 990,000 warrants that were exchanged back in the early days of the company in the acquisition of the original business. Those are accounted for on the liability method and those will fluctuate with the change in the stock – in our stock value..

Okay. Okay, great. Thank you..

Thanks, Bose..

And our next question comes from the line of Randy Binner with FBR. Your line is now open..

Hey, thank you. Good afternoon.

Actually, I just had a quick follow-up on the DTA the 4Q 2016 is that – had it been communicated as being that early before or was – were you all talking about more or like early to mid-2017 before?.

Hey Randy, I think this is the first time we've actually communicated could be as early as Q4, previously we were signaling sometime in the next year.

And so I think that was probably the expectation but as I said to Bose’s question we have been looking at it hard and have been trying to build a positive evidence to recognize it or realize it sooner..

And so the earnings were good this quarter, but they probably weren't dramatically better than you all may have thought I think.

And so is there, I think somewhere in the opening text or something about a more favorable tax items, is there something else just beyond pure earnings that's changing that potential calculus around when to recapture?.

No, no. Just the earnings, I think one of the things as I referred to is the Q2 was a profitable quarter that was a quarter ahead of our expectation. So that kind of shifted things up a little bit and as we continue to look at it – as I said building the evidence that we have..

Okay, that's great.

And I have a couple market share type questions I guess first is in response to the commentary around, those consolidation and then potential M&A in the MI space and so is there any way that you can quantify how that would increase your share of the MI market and then the other piece of that is, can any initial thoughts on the size of the MI market in 2017 I think, your refi mixes were bit lower, and I think another writer saw that.

And so that's a piece of the puzzle about the overall market.

So do you see the overall market being flat or a little bit bigger or smaller in 2017 and anyway to kind of think of a quantification of how your role would change in light of the consolidation potential M&A?.

Yes, Randy, this is Brad. With respect to consolidation we can't really qualify or quantify what the effect of that’s going to be, we do believe there will be some positive benefit attributing to us just from customers wanting to spread their counterparty risk a little more evenly throughout the marketplace.

So we’ll just have to wait and see how that plays out, but I think the initial commentary by the acquiring company was – we took as positive and so we're looking forward to that having some positive benefit next year. In terms of market size itself, we see the same estimates the Fannie, the Freddie, the MBA everybody else does.

But we're not overly focused on that as a driver we really focused on how much NIW we have to get to grow our insurance-in-force rapidly and drive the premium earnings to drive profitability in return.

So you won’t see us celebrating if the market gets bigger or wringing our hands if it gets smaller, we're just focused on getting what we need to – we need to get to be successful..

And then just on the refi piece, is that something would you expect there may be a lower part of the NIW mix going forward?.

Yes. I think what we hear is the purchase side of the market which obviously is a better penetration for the MI side. That's going to probably grow with the refi side settling down a little bit. So that the overall market probably would be roughly the same, we don't – we're not going to prognosticate I think any further than that..

Okay, thanks a lot..

Thanks, Randy..

And our next question comes from the line of Mackenzie Aron with Zelman & Associates. Your line is now open..

Thanks. Good afternoon. Just a few questions.

First, just a follow-up on the comments around the consolidation, I know it's still little early for lenders to be reacting, and maybe it was way too soon to really show up in this 3Q numbers, but can you just talk about what you've seen in kind of the conversations that you're having more recently with your customers and potential new customers about the option to really benefit from potentially the overlap between the UP and Arch customer base, and how meaningful that would be to customers that you don't already have master policies left..

Yes. So Mackenzie, obviously we – at the MBA meeting last week we had a full slate of customer meetings and that was certainly a topic on many, if not all of those agendas. The transaction hasn't closed yet, so the integration hasn't begun and so it's really too early for us to try and put numbers around it.

So one thing we have pointed to over several years now, post-crisis the shares among the players in the industry were distributed much more widely than they have historically been with similar number of market participants and as the last couple of years have elapsed, you've seen the shares tend to kind of be much more narrowly distributed.

And so we would expect that to continue over time and with the six competitors rather than seven. I think that that bodes well for the amount of business we will be writing..

Okay, thanks. Appreciate that.

Additionally, on the single premiums, how much of the decline of just the single premium NIW was truly intentional by just trying to get the percentage of the NIW down below that 30% mark that you laid out in the past versus maybe a reaction to any pricing or competitive dynamics in the market where you intentionally stepped back for moreover ROE perspective?.

Well, it's very – it’s very hard to look back and say exactly how much was from our intention. I will say I think the important message is we are laser focused on returns and we have rate cards that drive a store that that mid-teens return.

And as you know there tends to be incrementally more price competition in the single premium space, in the monthly space. So in those cases where we encountered our competition, we're perfectly happy to go and provide our product to other customers where we can get the full return. So we will continue to do that..

Okay. And then I guess, I could just squeeze in one more, just as you kind of look out over the next two to three years and once you get to the $50 billion in insurance-in-force that you laid out is being adequate right now under the existing capital on reinsurance.

Can you just talk a little bit about how you think about the growth trajectory post-side and how we should be thinking about the different capital options available to you?.

Well, as we said in the opening comments, we were really pleased with the reinsurance panel we were able to put together to spur our growth going forward.

We had a number of new names in that that hadn't participated previously and all indications are that there will be additional capacity there at similarly attractive rate to support growth going forward. We're also exploring other reinsurance type solutions that can be provided by capital markets and we're excited about our preliminary work there.

And then we also have our debt which is available or can be refinanced without prepayment penalty in another couple of weeks. And so there's a whole variety of options available to us. But I think you'll find us continue to focus on the lowest cost most attractive sources of growth capital so that we can maintain returns at a very high level..

Okay, perfect. Thanks Brad..

Thank you..

[Operator Instructions] And our next question comes from the line of Amy Debone with Compass Point. Your line is now open..

Hi, good afternoon. Congrats on the beat.

Could you guys just provide an update on NIW capacity including this future impact of the reinsurance agreement, and then just maybe if you comment on how sensitive that number is to refi volume in persistency levels?.

Hi, Amy, it’s Glenn. In terms of capacity we said that we believe that the reinsurance vehicle gives us the capacity to continue to grow at the rate we have been growing in supply the next or supplies with capital into the foreseeable future.

I think as Brad pointed out as opportunity provided or arises other opportunities come along that we may also look at potential capital relief from other types of reinsurance at this stage.

So from a growth perspective we're seeing the similar type of growth that we've had, we've obviously seen the seasonal aspects in this quarter so far, but we expect that the next quarter or next 12 months a very similar growth pattern that we've seen in the last few months. That said the equity and capital that we have at our disposal now.

Is sufficient for that growth and as I said we'll explore other opportunities as they arise..

Okay..

You also asked a question about refi….

Persistency..

Would you ask about persistency of refis..

Right, how sensitive that number is to changes in these inputs?.

We use kind of the historical average of about 80% persistency in our modeling for the future. So I think that's pretty much what we've seen the industry – how the industry has behaved. So if we see some upticks in the interest rates over the next few months. That should have obviously increased their persistency a little bit.

But we’ve incorporated those types of assumptions into our modeling as well..

Amy, if it's helpful. This is John. So we definitely think about the capital base in the context of how much insurance-in-force that supports and obviously at persistency ends up being stronger than expected you need to write less in order to get to those levels.

And conversely if it's – if persistency is lower than expected then you're writing more over time to reach that that insurance-in-force number.

So we're thinking about this less in the context of how much of writing capacity if you will then insurance-in-force?.

Okay, great.

And then on the FHA cut the annual rate in January of 2015, did you – did you see any indication that there would be a change prior to the announcement from HUD?.

Amy, this is Brad. I recall there were rumors in the marketplace some time leading after that. But the rumors about the rate cut we're discussing about sometime in the future if ever those rumors have been going on for over a year now.

I mean I remember hearing this like a year ago the VA convention in San Diego had a steady stream of rumors and now but nothing concrete or actionable..

Right. Okay, great. Thank you..

Okay, thanks..

And our next question comes from the line of Geoffrey Dunn with Dowling.com. Your line is now open..

Thanks, good afternoon. It’s Dowling & Partners. I apologize if it’s redundant I have knocked off for the first quarter – our first question too but, can you provide some of the financial details of the reinsurance impact on the quarter as well as the refunded premium impact..

Hey, Geoff, it’s Glenn. We had about $600,000 left to our bottom line as a result of the one month of reinsurance activity as you recall it was incepted on September 1. So we have about 600 grand effect on that and what was the second part of the question. I'm sorry..

Refunded premium..

Cancellation, it was $5.8 million in the quarter..

Okay. And with respect to single, I think you indicated kind of a 75/25 is the longer-term mix [indiscernible] and looking at people more recently it seems like that trends more to 20.

Would you expect your book to generally follow the average of the industry, if we do see singles continue to trend down to a smaller piece of overall books?.

Yes. Geoff, this is Brad. Yes we would, I think we said a long-term mix as it been about 75/25 and it may be trending down a little bit, but we don't see any reason why over the long haul, will be any different in the industry there..

Okay. All right, great. Thank you..

Thank you..

And I'm showing no further questions at this time. I'd now like to turn the call back over to management for any closing remarks..

Well, thank you all for joining us on the call. We will be hosting our Investor Day in New York on the morning of November 18 and we hope to see you there. We will also be presenting at the J.P. Morgan Specialty Finance Conference in late November. Thank you again for joining us on the call today..

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may now disconnect. Everyone have a great day..