Enact Holdings, Inc. 10-Q

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our consolidated financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes for the three and nine months ended September 30, 2021 and 2020, and our audited consolidated financial statements and related notes for the years ended December 31, 2020 and 2019 issued on March 23, 2021. This discussion includes forward-looking statements and involves numerous risks, uncertainties and assumptions that could cause actual results to differ materially from management’s expectations, all of which may be exacerbated by COVID-19. Factors that could cause such differences are discussed in this section. For additional information, refer to the sections entitled “Industry and Market Data,” “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” in our final prospectus dated September 15, 2021, (the “Prospectus”), as filed with the Securities and Exchange Commission (“SEC”) pursuant to Rule 424(b)(4) under the Securities Act of 1933 (as amended, the “Securities Act”). We are not undertaking any obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made. Future results could differ significantly from the historical results presented in this section. References to EHI, Enact, Enact Holdings, the “Company,” “we” or “our” herein are, unless the context otherwise requires, to EHI on a consolidated basis. Key Factors Affecting Our Results There have been no material changes to the factors affecting our results, as compared to those disclosed in the Prospectus, other than the impact of COVID-19 as discussed below in “—Trends and Conditions”. Trends and Conditions The United States economy and consumer confidence improved in the third quarter of 2021 compared to the second quarter of 2021. The unemployment rate has continued to decrease since the beginning of the pandemic and was 4.8% in September 2021. While this is elevated compared to the pre-pandemic level of 3.5% in February 2020, it has steadily decreased from a peak of 14.8% in April 2020. Even after the continued recovery in the third quarter of 2021, the number of unemployed Americans stands at approximately 7.7 million, which is 2.0 million higher than in February 2020. Among the unemployed, those on temporary layoff continued to decrease to 1.1 million from a peak of 18 million in April 2020, and the number of permanent job losses decreased to approximately 2.3 million. In addition, the number of long term unemployed over 26 weeks has continued to decrease since March 2021, falling to approximately 2.7 million in September 2021. Specific to housing finance, mortgage origination activity remained robust in the third quarter of 2021 fueled by refinance activity and strong home sales. Refinance activity remained robust compared to the second quarter of 2021 but decreased compared to the third quarter of 2020. The purchase market remained strong, with annualized sales of previously owned homes increasing over the second quarter of 2021 but down from the post-2006 peak in the fourth quarter of 2020. Total unsold inventory of homes remains low at a 2.4-month supply as of September 2021, which continues to drive home prices higher, increasing our average loan amount on new insurance written. Interest rates decreased modestly during the third quarter of 2021 to 2.87%, which was the lowest level since the fourth quarter of 2020. Affordability declined in August compared to one year ago due to rising home prices modestly offset by lower interest rates and rising median family income according to the National Association of Realtors Housing Affordability Index, but remains above a level that a family with median income can afford a median-priced home. The Coronavirus Aid, Relief, and Economic Security (“CARES”) Act requires mortgage servicers to provide up to 180 days of forbearance for borrowers with a federally backed mortgage loan who assert 31 they have experienced a financial hardship related to COVID-19. Forbearance may be extended for an additional 180 days up to a year in total or shortened at the request of the borrower. In addition, on February 25, 2021, the FHFA announced that borrowers with a mortgage backed by the GSEs who are in an active COVID-19 forbearance plan as of February 28, 2021, may request up to two additional forbearance extensions for a maximum of 18 months of total forbearance relief. In addition, the CARES Act provides that furnishers of credit reporting information, including servicers, should continue to report a loan as current to credit reporting agencies if the loan is subject to a payment accommodation, such as forbearance, so long as the borrower abides by the terms of the accommodation. Servicer reported forbearance slowed meaningfully beginning in June 2020 and ended the third quarter of 2021 with approximately 3.2% or 29,526 of our active primary policies reported in a forbearance plan, of which approximately 55% were reported as delinquent. It is difficult to predict the future level of reported forbearance and how many of the policies in a forbearance plan that remain current on their monthly mortgage payment will go delinquent. The foreclosure moratorium for mortgages that are purchased by the GSEs expired on July 31, 2021. However, on June 28, 2021 the Consumer Financial Protection Bureau’s (“CFPB”) issued a final rule to amend Regulation X of the Real Estate Settlement Procedures Act effective August 31, 2021, to assist mortgage borrowers affected by the COVID-19 emergency. The final rule establishes temporary procedural changes that require a loss mitigation review prior to a servicer’s first notice or foreclosure filing on certain mortgages. On June 29, 2021, the FHFA announced that servicers were immediately prohibited from making a first notice or foreclosure filing for mortgages backed by the GSEs that would be prohibited by the CFPB Regulation X Final Rule before it took effect on August 31, 2021. These announcements generally prohibit servicers from starting foreclosures on mortgages purchased by the GSEs until after December 31, 2021. The pandemic continued to affect our financial results in the third quarter of 2021 but to a lesser extent than in the second quarter of 2021 as we experienced elevated, but declining, servicer reported forbearance. While new delinquencies increased during the third quarter of 2021, the magnitude was in-line with historical seasonal trends and the third quarter of 2021 new delinquency rate of 0.8% remained consistent with pre-pandemic levels. The future impact of COVID-19 on our future business results is difficult to predict. Given the maximum length of forbearance plans, the resolution of a delinquency in a plan may not be known for several quarters. While we continue to monitor regulatory and government actions and the resolutions of forbearance delinquencies, it is possible the pandemic could have a significant adverse impact on our future results of operations and financial condition. Private mortgage insurance market penetration (“market penetration”) and eventual market size are affected in part by actions that impact housing or housing finance policy taken by the GSEs and the U.S. government, including but not limited to, the Federal Housing Administration (“FHA”) and the FHFA. In the past, these actions have included announced changes, or potential changes, to underwriting standards, including changes to the GSEs’ automated underwriting systems, FHA pricing, GSE guaranty fees, loan limits and alternative products. On December 17, 2020, the FHFA published the Enterprise Capital Framework, which includes significantly higher regulatory capital requirements for the GSEs over current requirements. However, on September 15, 2021, the FHFA announced a Notice of Proposed Rulemaking to amend the Enterprise Capital Framework, including technical corrections to provisions that were published on December 17, 2020. Higher GSE capital requirements could ultimately lead to increased costs to borrowers of GSE loans, which in turn could shift the market away from the GSEs to the FHA or lender portfolios. Such a shift could result in a smaller market for private mortgage insurance. In conjunction with preparing to release the GSEs from conservatorship, on January 14, 2021, the FHFA and the Treasury Department agreed to amend the Preferred Stock Purchase Agreements (“PSPAs”) between the Treasury Department and each of the GSEs to increase the amount of capital each GSE may retain. Among other things, the amendments to the PSPAs limit the number of certain mortgages the GSEs may acquire with two or more prescribed risk factors, including certain mortgages with combined loan-to-value (“LTV”) ratios above 90%. However, on September 14, 2021, the FHFA and Treasury 32 Department suspended certain provisions of the amendments to the PSPAs, including the limit on the number of mortgages with two or more risk factors that the GSEs may acquire. Such suspensions terminate on the later of one year after September 14, 2021, or six months after the Treasury Department notifies the GSEs of termination. Because the suspension of these limits is based on the current market size, we do not expect any material impact to the private mortgage market in the near term. The CFPB’s Qualified Mortgage (“QM”) regulations also include a temporary category (the “QM Patch”) for mortgages that comply with certain prohibitions and limitations and meet the GSE underwriting and product guidelines. Mortgages that meet certain requirements are deemed to be QMs until the earlier of the time in which the GSEs exit the FHFA conservatorship or the mandatory compliance date of the final amendments to the CFPB rule defining what constitutes a QM (the “QM Rule”). On April 27, 2021, the CFPB promulgated a final rule delaying the mandatory compliance date of the amended QM Rule until October 1, 2022. As provided under the final rule, the prior 43% debt-to-income-based QM Rule definition, the new price-based average prime offer rate (“APOR”) definition and the QM Patch will all remain available to lenders for loan applications received prior to October 1, 2022. However, on April 8, 2021, the GSEs issued notices stating that due to the requirements of the PSPAs they would only acquire loans that meet the new price-based APOR definition set forth under the amended QM Rule for applications received on or after July 1, 2021. We believe that loans which previously qualified under the 43% Debt-to-Income (“DTI”) based QM Rule definition and the QM Patch will continue to qualify under the new price-based APOR definition, and therefore, we expect little impact from this change. For more information about the potential future impact, see “Risk Factors—Risks Relating to Our Business—Changes to the role of the GSEs or to the charters or business practices of the GSEs, including actions or decisions to decrease or discontinue the use of mortgage insurance, could adversely affect our business, results of operations and financial condition” and “Risk Factors—Risks Relating to Our Business—The amount of mortgage insurance we write could decline significantly if alternatives to private mortgage insurance are used or lower coverage levels of mortgage insurance are selected” in our Prospectus. New insurance written of $24.0 billion in the third quarter of 2021 decreased 10% compared to the third quarter of 2020 primarily due to lower estimated private mortgage insurance market in the current year. The year-over-year decrease in estimated private mortgage insurance available market was primarily driven by lower refinance originations. Our primary persistency increased to 65% during the third quarter of 2021 compared to 59% during the third quarter of 2020 but remained below historic levels of approximately 80%. The increase in persistency was primarily driven by a decline in the percentage of our in-force policies with mortgage rates above current mortgage rates. Low persistency has impacted business performance trends in several ways including, but not limited to, offsetting insurance in-force growth from new insurance written, accelerating the recognition of earned premiums due to single premium policy cancellations resulting in higher earned premiums in prior periods, accelerating the amortization of our existing reinsurance transactions reducing their associated Private Mortgage Insurer Eligibility Requirements (“PMIERs”) capital credit and shifting the concentration of our primary IIF to more recent years of policy origination. As of September 30, 2021, our primary insurance in-force has approximately 6% concentration in 2014 and prior book years. More specifically, our 2005 through 2008 book year concentration is approximately 4%. In contrast, our 2020 book year represents 34% of our primary insurance in-force concentration while our 2021 book year is 33% as of September 30, 2021. The U.S. private mortgage insurance industry is highly competitive. Our market share is influenced by the execution of our go to market strategy, including but not limited to, pricing competitiveness relative to our peers and our selective participation in forward commitment transactions. Since the IPO of Enact Holdings, we have held discussions with customers that previously conducted limited to no business with Enact. These discussions have been promising to date and as a result, we expect the volume of business with these customers to increase in future periods, although the ultimate outcome remains uncertain. We continue to manage the quality of new business through pricing and our underwriting guidelines, which we modify from time to time when circumstances warrant. We see the market and underwriting conditions, including the pricing environment, as being well within our risk adjusted return appetite 33 enabling us to write new business at attractive, low-to-mid teen returns. Ultimately, we expect our new insurance written with its strong credit profile and attractive pricing to positively contribute to our future profitability and return on equity. Net earned premiums declined in the third quarter of 2021 compared to the third quarter of 2020 as insurance in force growth was offset by a decrease in single premium cancellations, the continued lapse of older, higher priced policies and higher ceded premiums as the use of credit risk transfer increased. The total number of delinquent loans has declined from the COVID-19 peak in the second quarter of 2020 but remains elevated compared to pre-COVID-19 levels. During this time and consistent with prior years, servicers continued the practice of remitting premiums during the early stages of default. Additionally, we have a business practice of refunding the post-delinquent premiums to the insured party if the delinquent loan goes to claim. We record a liability and a reduction to net earned premiums for the post-delinquent premiums we expect to refund. The post-delinquent premium liability recorded since the beginning of COVID-19 in the second quarter of 2020 through third quarter 2021 was not significant to the change in earned premiums for those periods as a result of the high concentration of new delinquencies being subject to a servicer reported forbearance plan and the lower estimated rate at which delinquencies go to claim (“claim rates”) for these loans. The post-default premium liability increased by $1 million in the third quarter of 2021 and the total liability for all delinquencies was $14 million as of September 30, 2021. As a result of COVID-19, certain state insurance regulators required or requested the provision of grace periods of varying lengths to insureds in the event of non-payment of premium. Regulators differed greatly in their approaches but generally focused on the avoidance of cancellation of coverage for non-payment. While most of these requirements and requests have lapsed, it is possible that some or all of them could be re-issued in the event of declarations of new states of emergency that might result from worsening pandemic conditions. We currently comply with all state regulatory requirements. If timely payment is not made, future premiums could decrease and the certificate of insurance could be subject to cancellation after 60 days, or such longer time as required under applicable law. Our loss reserves continue to be impacted by COVID-19. Borrowers who have experienced a financial hardship including, but not limited to, the loss of income due to the closing of a business or the loss of a job have taken advantage of available forbearance programs and payment deferral options. During the peak of the pandemic, we experienced elevated new delinquencies subject to forbearance plans which may ultimately cure at a higher rate than traditional delinquencies. Unlike a hurricane where the natural disaster occurs at a point in time and the rebuild starts soon after, COVID-19 brought ongoing displacement to the mortgage insurance market, making it more difficult to determine the effectiveness of forbearance and the resulting claim rates for new delinquencies in forbearance plans. Given this difference, our prior hurricane experience was leveraged in combination with recent cure activity from COVID-19 related delinquencies as considerations in the establishment of an appropriate claim rate estimate for new delinquencies in forbearance plans that have emerged as a result of COVID-19. Approximately 36% of our primary new delinquencies in the third quarter of 2021 were subject to a forbearance plan as compared to less than 5% in recent quarters prior to COVID-19. Severity of loss on loans that do go to claim may be positively impacted by home price appreciation, however, severity of loss on loans that do go to claim may be negatively impacted by the extended forbearance timeline, the associated elevated expenses, the higher loan amount of the recent new delinquencies and if current home price appreciation reverses in the future. For loans insured on or after October 1, 2014, our mortgage insurance policies limit the number of months of unpaid interest and associated expenses that are included in the mortgage insurance claim amount to a maximum of 36 months. Our loss ratio for the three months ended September 30, 2021, was 14% as compared to 18% for the three months ended September 30, 2020. The decrease was largely from lower new delinquencies in the current year from the improving economy, partially offset by favorable IBNR development of $23 million in the prior year. New primary delinquencies of 7,427 contributed $33 million of loss expense in the third quarter of 2021. In determining the loss expense estimate, considerations were given to forbearance and non-forbearance delinquencies, recent cure and claim experience, and the ongoing economic impact due 34 to the pandemic. We incurred $61 million of losses from new delinquencies in the third quarter of 2020 driven primarily by an increase in borrower forbearance as a result of COVID-19. As of September 30, 2021, GMICO’s risk-to-capital ratio under the current regulatory framework as established under North Carolina law and enforced by the North Carolina Department of Insurance (“NCDOI”), GMICO’s domestic insurance regulator, was approximately 11.9, compared with a risk-to-capital ratio of 12.0:1 and 12.3:1 as of June 30, 2021, and December 31, 2020, respectively. GMICO’s risk-to-capital ratio remains below the NCDOI’s maximum risk-to-capital ratio of 25:1. North Carolina’s calculation of risk-to-capital excludes the risk-in-force for delinquent loans given the established loss reserves against all delinquencies. As a result, we do not expect any immediate, material pressure to GMICO’s risk-to-capital ratio in the short term as a result of COVID-19. GMICO’s ongoing risk-to-capital ratio will depend principally on the magnitude of future losses incurred by GMICO, the effectiveness of ongoing loss mitigation activities, new business volume and profitability, the amount of policy lapses and the amount of additional capital that is generated or distributed by the business or capital support provided. Under PMIERs, we are subject to operational and financial requirements that private mortgage insurers must meet in order to remain eligible to insure loans that are purchased by the GSEs. On June 29, 2020, the GSEs issued the “PMIERs Amendment.” In September 2020, the GSEs issued an amended and restated version of the PMIERs Amendment that became effective retroactively on June 30, 2020, and included a new reporting requirement that became effective on December 31, 2020. On December 4, 2020, the GSEs issued a revised and restated version of the PMIERs Amendment that revised and replaced the version issued in September 2020. The December 4, 2020, version extended the application of reduced PMIERs capital factors to each non-performing loan that has an initial missed monthly payment occurring on or after March 1, 2020 and prior to April 1, 2021, and extended the capital preservation period from March 31, 2021, to June 30, 2021. On June 30, 2021, the GSEs issued a revised and restated version of the PMIERs Amendment that replaced the version issued on December 4, 2020. The June 30, 2021, version allows loans that enter a forbearance plan due to a COVID-19 hardship on or after April 1, 2021, to remain eligible for extended application of the reduced PMIERs capital factor for as long as the loan remains in forbearance. The June 30, 2021, version also extends the capital preservation period through December 31, 2021, with certain exceptions, as described below. The PMIERs Amendment implemented both permanent and temporary revisions to PMIERs. For loans that became non-performing due to a COVID-19 hardship, PMIERs was amended with respect to each non-performing loan that (i) has an initial missed monthly payment occurring on or after March 1, 2020, and prior to April 1, 2021, or (ii) is subject to a forbearance plan granted in response to a financial hardship related to COVID-19, the terms of which are materially consistent with terms of forbearance plans offered by the GSEs. The risk-based required asset amount factor for the non-performing loan will be the greater of (a) the applicable risk-based required asset amount factor for a performing loan were it not delinquent, and (b) the product of a 0.30 multiplier and the applicable risk-based required asset amount factor for a non-performing loan. In the case of (i) above, absent the loan being subject to a forbearance plan described in (ii) above, the 0.30 multiplier will be applicable for no longer than three calendar months beginning with the month in which the loan became a non-performing loan due to having missed two monthly payments. Loans subject to a forbearance plan described in (ii) above include those that are either in a repayment plan or loan modification trial period following the forbearance plan unless reported to the approved insurer that the loan is no longer in such forbearance plan, repayment plan, or loan modification trial period. The PMIERs Amendment also imposed temporary capital preservation provisions through December 31, 2021, that require an approved insurer to meet certain PMIERs minimum required assets buffers (150% in the third quarter of 2021 and 115% in the fourth quarter of 2021) or otherwise obtain prior written GSE approval before paying any dividends, pledging or transferring assets to an affiliate or entering into any new, or altering any existing, arrangements under tax sharing and intercompany expense-sharing agreements, even if such insurer had a surplus of available assets. In addition, the PMIERs Amendment imposes permanent revisions to the risk-based 35 required asset amount factor for non-performing loans for properties located in future Federal Emergency Management Agency Declared Major Disaster Areas eligible for individual assistance. In September 2020, subsequent to the issuance of Enact Holdings’ senior notes due in 2025, the GSEs imposed certain restrictions (the “GSE Restrictions”) with respect to capital on our business. In May 2021, in connection with their conditional approval of the then potential partial sale of Enact Holdings, the GSEs confirmed the GSE Restrictions will remain in effect until the following collective conditions (“GSE Conditions”) are met: (a) approval of GMICO’s plan to secure additional capital, if needed, (b) GMICO obtains “BBB+”/“Baa1” (or higher) rating from S&P, Moody’s or Fitch Ratings, Inc. for two consecutive quarters and (c) Genworth achieves certain financial metrics. Prior to the satisfaction of the GSE Conditions, the GSE Restrictions require: • GMICO to maintain 115% of PMIERs minimum required assets through 2021, 120% during 2022 and 125% thereafter; • Enact Holdings to retain $300 million of net proceeds from the 2025 Senior Notes offering that can be drawn down exclusively for debt service of those notes or to contribute to GMICO to meet its regulatory capital needs including PMIERs; and • written approval must be received from the GSEs prior to any additional debt issuance by either GMICO or Enact Holdings. Until the GSE Conditions imposed in connection with the GSE Restrictions are met, Enact Holdings’ liquidity must not fall below 13.5% of its outstanding debt. The GSEs informed us that a sale of our shares resulting in Genworth owning 70% or less of Enact Holdings by year end 2021 would delay each step up of the PMIERs minimum required asset requirements listed in the first bullet above by one calendar year. In addition, Fannie Mae agreed to reconsider the GSE Restrictions if Genworth were to own 50% or less of Enact Holdings at any point prior to their expiration. We understand that Genworth’s current plans do not include a potential sale in which Genworth owns less than 80% of Enact Holdings. As of September 30, 2021, we had estimated available assets of $5,126 million against $2,839 million net required assets under PMIERs compared to available assets of $4,926 million against $2,985 million net required assets as of June 30, 2021. The sufficiency ratio as of September 30, 2021, was 181% or $2,287 million above the published PMIERs requirements, compared to 165% or $1,941 million above the published PMIERs requirements as of June 30, 2021. PMIERs sufficiency is based on the published requirements applicable to private mortgage insurers and does not give effect to the GSE Restrictions imposed on our business. The increase in the PMIERs sufficiency was driven in part by the completion of an insurance linked notes transaction, which added $372 million of additional PMIERs capital credit as of September 30, 2021, elevated lapse driven by prevailing low interest rates, business cash flows and lower delinquencies, partially offset by elevated new insurance written and amortization of our reinsurance transactions executed prior to the third quarter of 2021. Our PMIERs required assets as of September 30, 2021, and June 30, 2021, benefited from the application of a 0.30 multiplier applied to the risk-based required asset amount factor for certain non-performing loans. The application of the 0.30 multiplier to all eligible delinquencies provided $570 million of benefit to our September 30, 2021, PMIERs required assets compared to $760 million of benefit as of June 30, 2021. These amounts are gross of any incremental reinsurance benefit from the elimination of the 0.30 multiplier. On September 2, 2021, we obtained $372 million of fully collateralized excess of loss reinsurance coverage from Triangle Re 2021-3 Ltd. on a portfolio of existing mortgage insurance policies written from January 2021 through June 2021. Credit risk transfer transactions provided an aggregate of approximately $1,597 million of PMIERs capital credit as of September 30, 2021. We may execute future credit risk transfer transactions to maintain a prudent level of financial flexibility in excess of the PMIERs capital requirements in response to potential changes in performance and PMIERs requirements over time. 36 In July 2021, GMICO received approval from the NCDOI for a dividend of $200 million to be distributed by year-end 2021. We believe this is an important milestone as we work to restart the return of capital to shareholders. We continue to assess the economic and business conditions, including the resolution of forbearance related delinquencies, in support of a fourth quarter dividend to shareholders. To date, aggregate performance indications have been supportive. If these indications remain supportive, management intends to recommend the execution of a $200 million 2021 dividend to the Enact Independent Capital Committee and the Enact Board of Directors for their approval. Any future dividend is also subject to market conditions, business performance, business and regulatory approvals. Results of Operations and Key Metrics Results of Operations Three Months Ended September 30, 2021, Compared to Three Months Ended September 30, 2020 The following table sets forth our consolidated results for the periods indicated: Three months ended September 30, Increase (decrease) and percentage change (Amounts in thousands) 2021 2020 2021 vs. 2020 Revenues: Premiums $ 243,063 $ 251,423 $ (8,360) (3) % Net investment income 35,995 33,197 2,798 8 % Net investment gains (losses) 580 (1,609) 2,189 (136) % Other income 671 1,325 (654) (49) % Total revenues 280,309 284,336 (4,027) (1) % Losses and expenses: Losses incurred 34,124 44,475 (10,351) (23) % Acquisition and operating expenses, net of deferrals 55,151 54,994 157 — % Amortization of deferred acquisition costs and intangibles 3,669 3,873 (204) (5) % Interest expense 12,756 5,512 7,244 131 % Total losses and expenses 105,700 108,854 (3,154) (3) % Income before income taxes and change in fair value of unconsolidated affiliate 174,609 175,482 (873) — % Provision for income taxes 37,401 37,467 (66) — % Net income $ 137,208 $ 138,015 $ (807) (1) % Loss ratio (1) 14 % 18 % Expense ratio (net earned premiums) (2) 24 % 23 % _______________ (1) Loss ratio is calculated by dividing losses incurred by net earned premiums. (2) Expense ratio (net earned premiums) is calculated by dividing acquisition and operating expenses, net of deferrals, plus amortization of DAC and intangibles by net earned premiums. Revenues Premiums decreased mainly attributable to lower single premium cancellations, continued lapse of our in-force portfolio as older, higher priced policies continued to lapse in the current low interest rate environment and higher ceded premiums as the use of credit risk transfer increased partially offset by higher IIF. 37 Net investment income increased primarily from higher average invested assets in the current year and higher income from bond calls, partially offset by lower investment yields in the current year. Net investment gains in the current year were primarily driven by realized gains from the sale of fixed maturity securities. Net investment losses in the prior year were largely from realized losses from the sale of fixed maturity securities. Other income primarily includes underwriting fee revenue charged on a per-unit or per-diem basis, as defined in the underwriting agreement. Other income decreased primarily due to lower contract underwriting revenue. Losses and expenses Losses incurred decreased largely from lower new delinquencies from the improving economy. New primary delinquencies of 7,427 contributed $33 million of loss expense in the three months ending September 30, 2021. This compares to $61 million of loss expense from 16,664 primary new delinquencies in 2020 which was partially offset by $23 million favorable IBNR development in the third quarter of 2020. The following table shows incurred losses related to current and prior accident years for the three months ended September 30: (Amounts in thousands) 2021 2020 Losses and LAE incurred related to current accident year $ 33,343 $ 42,928 Losses and LAE incurred related to prior accident years 791 1,527 Total incurred (1) $ 34,134 $ 44,455 _______________ (1) Excludes run-off business. Acquisition and operating expenses, net of deferrals, was primarily flat in the three months ending September 30, 2021, attributable to strategic transaction preparation costs offset by lower costs allocated by our parent in the current year. The expense ratio (net earned premiums) increased mainly driven by lower premiums in the quarter and $3 million of strategic transaction preparation costs and restructuring costs partially offset by lower costs allocated by our parent. The strategic transaction preparation costs and restructuring costs increased the expense ratio by approximately 1 point. Interest expense relates to our 2025 Senior Notes and increased as the notes were outstanding for only a portion of the three months ending September 30, 2020. For additional details see Note 7 to our unaudited condensed consolidated financial statements for the three months ended September 30, 2021 and 2020. Provision for income taxes The effective tax rate was 21.4% and 21.4% for the three months ended September 30, 2021 and 2020, respectively, consistent with the United States corporate federal income tax rate. 38 Nine Months Ended September 30, 2021, Compared to Nine Months Ended September 30, 2020 The following table sets forth our consolidated results for the periods indicated: Nine months ended September 30, Increase (decrease) and percentage change (Amounts in thousands) 2021 2020 2021 vs. 2020 Revenues: Premiums $ 738,085 $ 720,474 $ 17,611 2 % Net investment income 105,943 97,890 8,053 8 % Net investment gains (losses) (2,129) (1,953) (176) 9 % Other income 3,114 4,534 (1,420) (31) % Total revenues 845,013 820,945 24,068 3 % Losses and expenses: Losses incurred 119,501 290,785 (171,284) (59) % Acquisition and operating expenses, net of deferrals 175,823 155,473 20,350 13 % Amortization of deferred acquisition costs and intangibles 11,104 11,453 (349) (3) % Interest expense 38,238 5,512 32,726 594 % Total losses and expenses 344,666 463,223 (118,557) (26) % Income before income taxes and change in fair value of unconsolidated affiliate 500,347 357,722 142,625 40 % Provision for income taxes 107,196 78,482 28,714 37 % Net income $ 393,151 $ 279,240 $ 113,911 41 % Loss ratio (1) 16 % 40 % Expense ratio (net earned premiums) (2) 25 % 23 % _______________ (1) Loss ratio is calculated by dividing losses incurred by net earned premiums. (2) Expense ratio (net earned premiums) is calculated by dividing acquisition and operating expenses, net of deferrals, plus amortization of DAC and intangibles by net earned premiums. Revenues Premiums increased mainly attributable to higher IIF partially offset by a decrease in policy cancellations in our single premium mortgage insurance product driven largely by higher mortgage refinancing, continued lapse of our in-force portfolio as older, higher priced policies continued to lapse in the current low interest rate environment and higher ceded premiums as the use of credit risk transfer increased. Net investment income increased primarily from higher average invested assets in the current year and higher income from bond calls, partially offset by lower investment yields in the current year. Net investment losses in the current year were primarily driven by realized losses from the sale of fixed maturity securities. Net investment losses in the prior year were mainly driven by realized losses from the sale of fixed maturity securities. Other income primarily includes underwriting fee revenue charged on a per-unit or per-diem basis, as defined in the underwriting agreement. Other income decreased primarily due to lower contract underwriting revenue. 39 Losses and expenses Losses incurred decreased largely from lower new delinquencies from the improving economy and unfavorable reserve adjustments in the prior year as a result of COVID-19. New primary delinquencies of 24,342 contributed $107 million of loss expense in the first nine months of 2021. This compares to $258 million of loss expense from 73,151 new primary delinquencies in the first nine months of 2020. In the prior year existing reserves were strengthened by $32 million primarily driven by the deterioration of early cure emergence patterns impacting claim frequency along with a modest increase in claim severity. Additionally, the prior year included additional reserves of $5 million for IBNR delinquencies. During the first nine months of 2021, reserves were strengthened $10 million due to our expectation that pre-COVID-19 delinquencies will have a modestly higher claim rate than our prior best estimate given the slower emergence of cures. The following table shows incurred losses related to current and prior accident years for the nine months ended September 30: (Amounts in thousands) 2021 2020 Losses and LAE incurred related to current accident year $ 104,939 $ 281,621 Losses and LAE incurred related to prior accident years 14,468 10,222 Total incurred (1) $ 119,407 $ 291,843 _______________ (1) Excludes run-off business. Acquisition and operating expenses, net of deferrals, increased primarily attributable to higher costs allocated by our Parent, strategic transaction preparation costs and restructuring charges partially offset by lower volume-related operating costs. The expense ratio (net earned premiums) increased mainly driven by higher costs allocated by our Parent, $10 million of strategic transaction preparation costs and a one-time restructuring charge of $2 million partially offset by lower volume-related operating costs. The strategic transaction preparation costs and restructuring costs increased the expense ratio by approximately 2 points. Interest expense relates to our 2025 Senior Notes and increased as the notes were outstanding for only a portion of the nine months ending September 30, 2020. For additional details see Note 7 to our unaudited condensed consolidated financial statements for the three months ended September 30, 2021 and 2020. Provision for income taxes The effective tax rate was 21.4% and 21.9% for the nine months ended September 30, 2021 and 2020, respectively, consistent with the United States corporate federal income tax rate. Use of Non-GAAP Measures We use a non-U.S. GAAP (“non-GAAP”) financial measure entitled “adjusted operating income.” This non-GAAP financial measure aligns with the way our business performance is evaluated by both management and by our board of directors. This measure has been established in order to increase transparency for the purposes of evaluating our core operating trends and enabling more meaningful comparisons with our peers. Although “adjusted operating income” is a non-GAAP financial measure, for the reasons discussed below we believe this measure aids in understanding the underlying performance of our operations. Our senior management, including our chief operating decision maker, uses “adjusted operating income” as the primary measure to evaluate the fundamental financial performance of our business and to allocate resources. 40 “Adjusted operating income” is defined as U.S. GAAP net income excluding the effects of (i) net investment gains (losses) and (ii) Restructuring costs and infrequent or unusual non-operating items. (i) Net investment gains (losses)—The recognition of realized investment gains or losses can vary significantly across periods as the activity is highly discretionary based on the timing of individual securities sales due to such factors as market opportunities or exposure management. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these realized gains and losses. We do not view them to be indicative of our fundamental operating activities. Therefore, these items are excluded from our calculation of adjusted operating income. (ii) Restructuring costs and infrequent or unusual non-operating items are also excluded from adjusted operating income if, in our opinion, they are not indicative of overall operating trends. In reporting non-GAAP measures in the future, we may make other adjustments for expenses and gains we do not consider reflective of core operating performance in a particular period. We may disclose other non-GAAP operating measures if we believe that such a presentation would be helpful for investors to evaluate our operating condition by including additional information. Total adjusted operating income is not a measure of total profitability, and therefore should not be considered in isolation or viewed as a substitute for U.S. GAAP net income. Our definition of adjusted operating income may not be comparable to similarly named measures reported by other companies, including our peers. Adjustments to reconcile net income to adjusted operating income assume a 21% tax rate (unless otherwise indicated). The following table includes a reconciliation of net income to adjusted operating income for the periods indicated: Three months ended September 30, (Amounts in thousands) 2021 2020 Net income $ 137,208 $ 138,015 Adjustments to net income: Net investment (gains) losses (580) 1,609 Costs associated with reorganization 339 — Taxes on adjustments 50 (338) Adjusted operating income $ 137,017 $ 139,286 Adjusted operating income decreased for the three months ended September 30, 2021, as compared to September 30, 2020, primarily from modestly lower premiums and from higher interest expense associated with senior notes issued in August 2020. These decreases were mostly offset by lower losses in the current year. 41 Nine months ended September 30, (Amounts in thousands) 2021 2020 Net income $ 393,151 $ 279,240 Adjustments to net income: Net investment (gains) losses 2,129 1,953 Costs associated with reorganization 2,655 — Taxes on adjustments (1,005) (410) Adjusted operating income $ 396,930 $ 280,783 We recorded a pre-tax expense of $2 million for the nine months ended September 30, 2021, related to restructuring costs as we evaluate and appropriately size our organizational needs and expenses. Adjusted operating income increased for the nine months ended September 30, 2021, as compared to September 30, 2020, primarily from lower new delinquencies from the improving economy and unfavorable reserve adjustments in the prior year as a result of COVID-19 offset along with a modest increase in premiums from continued IIF growth. These increases were partially offset by interest expense associated with senior notes issued in August 2020 and higher operating costs in the current year. Key Metrics Management reviews the key metrics included within this section when analyzing the performance of our business. The metrics provided in this section exclude activity related to our run-off business, which is immaterial to our consolidated results of operations. The following table sets forth selected operating performance measures on a primary basis as of or for the three months ended September 30: (Dollar amounts in millions) 2021 2020 New insurance written $ 23,972 $ 26,550 Insurance in-force (1) $ 222,464 $ 203,062 Risk in-force $ 55,866 $ 51,393 Persistency rate 65 % 59 % PIF (count) 936,934 913,974 Delinquent loans (count) 28,904 49,692 Delinquency rate 3.08 % 5.44 % _______________ (1) Represents the aggregate unpaid principal balance for loans we insure. Original loan balances are primarily used to determine premiums. 42 The following table sets forth selected operating performance measures on a primary basis as of or for the nine months ended September 30: (Dollar amounts in millions) 2021 2020 New insurance written $ 75,563 $ 72,854 Insurance in-force (1) $ 222,464 $ 203,062 Risk in-force $ 55,866 $ 51,393 Persistency rate 61 % 62 % PIF (count) 936,934 913,974 Delinquent loans (count) 28,904 49,692 Delinquency rate 3.08 % 5.44 % _______________ (1) Represents the aggregate unpaid principal balance for loans we insure. Original loan balances are primarily used to determine premiums. New insurance written NIW for the three months ended September 30, 2021, decreased 10% compared to the three months ended September 30, 2020, primarily due to lower mortgage refinancing originations in the current period. NIW for the nine months ended September 30, 2021, increased 3.7% compared to the nine months ended September 30, 2020, primarily due to higher mortgage purchase originations and a larger private mortgage insurance market in the current period. We manage the quality of new business through pricing and our underwriting guidelines, which we modify from time to time as circumstances warrant. The following table presents NIW by product for the periods indicated: Three months ended September 30, Nine months ended September 30, (Amounts in millions) 2021 2020 2021 2020 Primary $ 23,972 100 % $ 26,550 100 % $ 75,563 100 % $ 72,854 100 % Pool — — 0 % — — — — — — Total $ 23,972 23972 100 % $ 26,550 100 % $ 75,563 100 % $ 72,854 100 % The following table presents primary NIW by underlying type of mortgage for the periods indicated: Three months ended September 30, Nine months ended September 30, (Amounts in millions) 2021 2020 2021 2020 Purchases $ 20,988 88 % $ 19,914 75 % $ 57,631 76 % $ 49,343 68 % Refinances 2,984 12 6,636 25 17,932 24 23,511 32 Total $ 23,972 100 % $ 26,550 100 % $ 75,563 100 % $ 72,854 100 % The following table presents primary NIW by policy payment type for the periods indicated: Three months ended September 30, Nine months ended September 30, (Amounts in millions) 2021 2020 2021 2020 Monthly $ 21,475 90 % $ 23,399 88 % $ 69,720 92 % $ 65,422 90 % Single 2,431 10 3,028 12 5,563 8 7,066 10 Other 66 — 123 — 280 — 366 — Total $ 23,972 100 % $ 26,550 100 % $ 75,563 100 % $ 72,854 100 % 43 The following table presents primary NIW by FICO score for the three months ended September 30: (Amounts in millions) 2021 2020 Over 760 $ 10,708 45 % $ 11,291 43 % 740-759 3,830 16 4,094 15 720-739 3,177 13 3,533 13 700-719 2,702 11 3,115 12 680-699 1,875 8 2,377 9 660-679 (1) 1,010 4 1,279 5 640-659 504 2 613 2 620-639 166 1 248 1 <620 — — — — Total $ 23,972 100 % $ 26,550 100 % ______________ (1) Loans with unknown FICO scores are included in the 660-679 category. The following table presents primary NIW by FICO score for the nine months ended September 30: (Amounts in millions) 2021 2020 Over 760 $ 32,990 44 % $ 31,104 43 % 740-759 11,661 15 12,085 16 720-739 10,067 13 10,338 14 700-719 8,812 12 8,632 12 680-699 6,868 9 6,090 8 660-679 (1) 3,061 4 2,681 4 640-659 1,562 2 1,369 2 620-639 542 1 555 1 <620 — — — — Total $ 75,563 100 % $ 72,854 100 % ______________ (1) Loans with unknown FICO scores are included in the 660-679 category. LTV ratio is calculated by dividing the original loan amount, excluding financed premium, by the property’s acquisition value or fair market value at the time of origination. The following table presents primary NIW by LTV ratio for the three months ended September 30: (Amounts in millions) 2021 2020 95.01% and above $ 3,396 14 % $ 3,700 14 % 90.01% to 95.00% 8,838 37 11,708 44 85.01% to 90.00% 7,454 31 7,053 27 85.00% and below 4,284 18 4,089 15 Total $ 23,972 100 % $ 26,550 100 % 44 The following table presents primary NIW by LTV ratio for the nine months ended September 30: (Amounts in millions) 2021 2020 95.01% and above $ 8,404 11 % $ 8,720 12 % 90.01% to 95.00% 29,049 39 31,665 44 85.01% to 90.00% 24,464 32 20,681 28 85.00% and below 13,646 18 11,788 16 Total $ 75,563 100 % $ 72,854 100 % DTI ratio is calculated by dividing the borrower’s total monthly debt obligations by total monthly gross income. The following table presents primary NIW by DTI ratio for the three months ended September 30: (Amounts in millions) 2021 2020 45.01% and above $ 4,167 17 % $ 3,071 12 % 38.01% to 45.00% 7,949 33 9,921 37 38.00% and below 11,856 50 13,558 51 Total $ 23,972 100 % $ 26,550 100 % The following table presents primary NIW by DTI ratio for the nine months ended September 30: (Amounts in millions) 2021 2020 45.01% and above $ 10,002 13 % $ 10,570 15 % 38.01% to 45.00% 25,899 34 25,521 35 38.00% and below 39,662 53 36,763 50 Total $ 75,563 100 % $ 72,854 100 % Insurance in-force and Risk in-force IIF increased largely from NIW, partially offset by lapse as we experienced historically low persistency during the current year. Primary persistency was 61% and 62% for the nine months ended September 30, 2021 and 2020, respectively. RIF increased primarily as a result of higher IIF. The following table sets forth IIF and RIF as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 Primary IIF $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % Pool IIF 771 — 883 — 928 — Total IIF $ 223,235 100 % $ 208,830 100 % $ 203,990 100 % Primary RIF $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % Pool RIF 117 — 146 — 156 — Total RIF $ 55,983 100 % $ 52,621 100 % $ 51,549 100 % 45 The following table sets forth primary IIF and primary RIF by origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 Purchases IIF $ 169,944 76 % $ 157,805 76 % $ 157,108 77 % Refinances IIF 52,520 24 50,142 24 45,954 23 Total IIF $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % Purchases RIF $ 44,871 80 % $ 41,710 79 % $ 41,415 81 % Refinances RIF 10,995 20 10,765 21 9,978 19 Total RIF $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % The following table sets forth primary IIF and primary RIF as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 Monthly IIF $ 190,702 86 % $ 172,558 83 % $ 165,676 82 % Single IIF 29,013 13 31,628 15 33,192 16 Other IIF 2,749 1 3,761 2 4,194 2 Total IIF $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % Monthly RIF $ 48,495 87 % $ 44,005 84 % $ 42,361 82 % Single RIF 6,709 12 7,576 14 8,034 16 Other RIF 662 1 894 2 998 2 Total RIF $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % The following table sets forth primary IIF by policy year as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 2004 and prior $ 583 — % $ 708 — % $ 743 — % 2005 to 2008 8,380 4 10,614 5 11,457 6 2009 to 2013 1,656 1 3,030 2 3,683 2 2014 2,293 1 3,699 2 4,348 2 2015 5,087 2 7,887 4 9,243 5 2016 10,082 4 15,385 7 18,015 9 2017 10,185 5 16,289 8 19,268 9 2018 10,568 5 17,235 8 20,424 10 2019 24,884 11 39,463 19 45,630 22 2020 75,785 34 93,637 45 70,251 35 2021 72,961 33 — — — — Total $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % 46 The following table sets forth primary RIF by policy year as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 2004 and prior $ 167 — % $ 202 — % $ 212 — % 2005 to 2008 2,142 4 2,716 5 2,932 6 2009 to 2013 441 1 832 2 1,017 2 2014 621 1 999 2 1,174 2 2015 1,355 2 2,104 4 2,465 5 2016 2,676 5 4,063 8 4,727 9 2017 2,631 5 4,180 8 4,938 10 2018 2,656 5 4,322 8 5,119 10 2019 6,239 11 9,840 19 11,346 22 2020 18,965 34 23,217 44 17,463 34 2021 17,973 32 — — — — Total $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % The following table presents the development of primary IIF for the nine months ended September 30: (Amounts in millions) 2021 2020 Beginning balance $ 207,947 $ 181,785 NIW 75,563 72,854 Cancellations, principal repayments and other reductions (1) (61,046) (51,577) Ending balance $ 222,464 $ 203,062 ______________ (1) Includes the estimated amortization of unpaid principal balance of covered loans The following table sets forth primary IIF by LTV ratio at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 95.01% and above $ 34,259 15 % $ 34,520 17 % $ 34,563 17 % 90.01% to 95.00% 94,888 43 92,689 45 91,478 45 85.01% to 90.00% 63,349 28 56,341 27 54,787 27 85.00% and below 29,968 14 24,397 11 22,234 11 Total $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % The following table sets forth primary RIF by LTV ratio at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 95.01% and above $ 9,490 17 % $ 9,279 18 % $ 9,196 18 % 90.01% to 95.00% 27,509 49 26,774 51 26,403 51 85.01% to 90.00% 15,322 28 13,562 26 13,188 26 85.00% and below 3,545 6 2,860 5 2,606 5 Total $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % 47 The following table sets forth primary IIF by FICO score at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 Over 760 $ 87,073 39 % $ 78,488 38 % $ 77,557 38 % 740-759 35,177 16 33,635 16 33,208 17 720-739 31,374 14 30,058 14 29,277 14 700-719 27,371 12 25,870 12 24,723 12 680-699 21,458 10 20,140 10 19,129 9 660-679 (1) 10,309 5 9,819 5 9,387 5 640-659 6,009 3 5,935 3 5,756 3 620-639 2,787 1 2,902 1 2,861 1 <620 906 — 1,100 1 1,164 1 Total $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % ______________ (1) Loans with unknown FICO scores are included in the 660-679 category. The following table sets forth primary RIF by FICO score at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 Over 760 $ 21,767 39 % $ 19,691 37 % $ 19,549 38 % 740-759 8,824 16 8,497 16 8,424 16 720-739 7,966 14 7,673 15 7,489 15 700-719 6,923 12 6,579 12 6,288 12 680-699 5,383 10 5,100 10 4,864 9 660-679 (1) 2,568 5 2,442 5 2,331 5 640-659 1,497 3 1,472 3 1,423 3 620-639 705 1 737 1 725 1 <620 233 — 284 1 300 1 Total $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % ______________ (1) Loans with unknown FICO scores are included in the 660-679 category. The following table sets forth primary IIF by DTI score at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 45.01% and above $ 31,772 14 % $ 31,047 15 % $ 31,202 15 % 38.01% to 45.00% 78,302 35 73,555 35 70,751 35 38.00% and below 112,390 51 103,345 50 101,109 50 Total $ 222,464 100 % $ 207,947 100 % $ 203,062 100 % The following table sets forth primary RIF by DTI score at origination as of the dates indicated: (Amounts in millions) September 30, 2021 December 31, 2020 September 30, 2020 45.01% and above $ 8,048 14 % $ 7,855 15 % $ 7,897 15 % 38.01% to 45.00% 19,773 36 18,647 36 17,966 35 38.00% and below 28,045 50 25,973 49 25,530 50 Total $ 55,866 100 % $ 52,475 100 % $ 51,393 100 % 48 Delinquent loans and claims Our delinquency management process begins with notification by the loan servicer of a delinquency on an insured loan. “Delinquency” is defined in our master policies as the borrower’s failure to pay when due an amount equal to the scheduled monthly mortgage payment under the terms of the mortgage. Generally, the master policies require an insured to notify us of a delinquency if the borrower fails to make two consecutive monthly mortgage payments prior to the due date of the next mortgage payment. We generally consider a loan to be delinquent and establish required reserves after the insured notifies us that the borrower has failed to make two scheduled mortgage payments. Borrowers default for a variety of reasons, including a reduction of income, unemployment, divorce, illness/death, inability to manage credit, falling home prices and interest rate levels. Borrowers may cure delinquencies by making all of the delinquent loan payments, agreeing to a loan modification, or by selling the property in full satisfaction of all amounts due under the mortgage. In most cases, delinquencies that are not cured result in a claim under our policy. The following table shows a roll forward of the number of primary loans in default for the nine months ended September 30: (Loan count) 2021 2020 Number of delinquencies, beginning of period 44,904 16,392 New defaults 24,342 73,151 Cures (39,697) (38,848) Claims paid (620) (996) Rescissions and claim denials (25) (7) Number of delinquencies, end of period 28,904 49,692 The following table sets forth changes in our direct primary case loss reserves for the nine months ended September 30: (Amounts in thousands) (1) 2021 2020 Loss reserves, beginning of period $ 516,863 $ 204,749 Claims paid (21,603) (45,923) Increase in reserves 117,494 277,233 Loss reserves, end of period $ 612,754 $ 436,059 ______________ (1) Direct primary case reserves exclude LAE, IBNR and reinsurance reserves. The following tables set forth primary delinquencies, direct case reserves and RIF by aged missed payment status as of the dates indicated: September 30, 2021 (Dollar amounts in millions) Delinquencies Direct case reserves (1) Risk in-force Reserves as % of risk in-force Payments in default: 3 payments or less 6,192 $ 32,548 $ 319,466 10 % 4 - 11 payments 9,021 127,583 528,465 24 % 12 payments or more 13,691 452,623 813,386 56 % Total 28,904 $ 612,754 $ 1,661,317 37 % 49 December 31, 2020 (Dollar amounts in millions) Delinquencies Direct case reserves (1) Risk in-force Reserves as % of risk in-force Payments in default: 3 payments or less 10,484 $ 43,361 $ 548,704 8 % 4 - 11 payments 30,324 330,848 1,853,423 18 % 12 payments or more 4,096 142,654 204,228 70 % Total 44,904 $ 516,863 $ 2,606,355 20 % September 30, 2020 (Dollar amounts in millions) Delinquencies Direct case reserves (1) Risk in-force Reserves as % of risk in-force Payments in default: 3 payments or less 13,904 $ 48,730 $ 763,139 6 % 4 - 11 payments 32,366 264,201 2,013,517 13 % 12 payments or more 3,422 123,128 168,492 73 % Total 49,692 $ 436,059 $ 2,945,148 15 % ______________ (1) Direct primary case reserves exclude loss adjustment expenses, incurred but not reported and reinsurance reserves. The total increase in reserves as a percentage of RIF as of September 30, 2021, compared to December 31, 2020, was primarily driven by higher reserves in relation to a decrease in delinquent RIF. Delinquent RIF decreased mainly from lower total delinquencies as cures outpaced new delinquencies in the first nine months of 2021, while reserves increased primarily from new delinquencies and reserve strengthening in the current year. In addition, due to foreclosure moratoriums and the uncertainty around the lack of progression through the foreclosure process, recent cure performance was not recognized in the reserve estimate. This assumes that remaining delinquencies will have a higher likelihood of going to claim. As of September 30, 2021, we have experienced an increase in loans that are delinquent for 12 months or more due in large part to borrowers entering a forbearance plan over a year ago driven by COVID-19. We estimated the loss reserve for COVID-19 related delinquencies by applying a claim rate estimate which considers the emergence of cures on forbearance and non-forbearance delinquencies and the ongoing economic impact due to the pandemic. The large volume of additional forbearance delinquencies moving to 12 or more payments in default combined with lower loss expectations on delinquencies subject to a forbearance plan drove the decrease in reserves as a percentage of RIF in the 12 or more payments in default category as of September 30, 2021. Forbearance plans may be extended up to 18 months, therefore, it is possible we could experience elevated delinquencies in this aged category for the remainder of 2021. Resolution of a delinquency in a forbearance plan, whether it ultimately results in a cure or a claim, is difficult to estimate and may not be known for several quarters, if not longer. Primary insurance delinquency rates differ from region to region in the United States at any one time depending upon economic conditions and cyclical growth patterns. Delinquency rates are shown by region based upon the location of the underlying property, rather than the location of the lender. The table below sets forth our primary delinquency rates for the ten largest states by our primary RIF as of September 30, 2021: 50 Percent of RIF Percent of direct primary case reserves Delinquency rate By State: California 11 % 11 % 3.91 % Texas 8 8 3.47 % Florida (1) 7 9 3.73 % New York 5 12 4.41 % Illinois 5 6 3.53 % Michigan 4 2 2.01 % Arizona 4 2 2.64 % North Carolina 4 2 2.54 % Pennsylvania 3 3 2.75 % Washington 3 3 3.65 % All other states (2) 46 42 2.80 % Total 100 % 100 % 3.08 % ______________ (1) Jurisdiction predominantly uses a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed. (2) Includes the District of Columbia. The table below sets forth our primary delinquency rates for the ten largest states by our primary RIF as of December 31, 2020: Percent of RIF Percent of direct primary case reserves Delinquency rate By State: California 11 % 11 % 6.20 % Texas 8 8 5.82 % Florida (1) 7 10 6.92 % Illinois (1) 5 6 5.21 % New York (1) 5 11 6.92 % Michigan 4 2 2.93 % Washington 4 3 5.37 % Pennsylvania (1) 4 3 4.11 % North Carolina 4 2 3.84 % Arizona 3 2 4.54 % All other states (2) 45 42 4.32 % Total 100 % 100 % 4.86 % ______________ (1) Jurisdiction predominantly uses a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed. (2) Includes the District of Columbia. 51 The table below sets forth our primary delinquency rates for the ten largest Metropolitan Statistical Areas (“MSA”) or Metro Divisions (“MD”) by our primary RIF as of September 30, 2021: Percent of RIF Percent of direct primary case reserves Delinquency rate By MSA or MD: Chicago-Naperville, IL MD 3 % 4 % 4.38 % Phoenix, AZ MSA 3 2 2.64 % New York, NY MD 3 8 6.48 % Atlanta, GA MSA 2 3 4.00 % Washington-Arlington, DC MD 2 2 3.88 % Houston, TX MSA 2 3 4.51 % Riverside-San Bernardino CA MSA 2 2 4.42 % Los Angeles-Long Beach, CA MD 2 3 4.98 % Dallas 2 2 3.02 % Nassau County, NY 2 4 6.93 % All Other MSAs 77 67 2.79 % Total 100 % 100 % 3.08 % The table below sets forth our primary delinquency rates for the ten largest MSAs or MDs by our primary RIF as of December 31, 2020: Percent of RIF Percent of direct primary case reserves Delinquency rate By MSA or MD: Chicago-Naperville, IL MD 3 % 4 % 6.36 % Phoenix, AZ MSA 3 2 4.63 % New York, NY MD 3 8 10.25 % Atlanta, GA MSA 2 3 6.68 % Washington-Arlington, DC MD 2 2 6.09 % Houston, TX MSA 2 3 7.59 % Riverside-San Bernardino CA MSA 2 2 7.08 % Los Angeles-Long Beach, CA MD 2 2 7.57 % Dallas 2 2 5.10 % Seattle-Bellevue, WA MD 2 2 6.33 % All Other MSAs/MDs 77 70 4.43 % Total 100 % 100 % 4.86 % The frequency of delinquencies may not correlate directly with the number of claims received because delinquencies may cure. The rate at which delinquencies cure is influenced by borrowers’ financial resources and circumstances and regional economic differences. Whether a delinquency leads to a claim correlates highly with the borrower’s equity at the time of delinquency, as it influences the borrower’s willingness to continue to make payments, the borrower’s or the insured’s ability to sell the home for an amount sufficient to satisfy all amounts due under the mortgage loan and the borrower’s financial ability to continue making payments. When we receive notice of a delinquency, we use our proprietary model to determine whether a delinquent loan is a candidate for a modification. When our model identifies such a candidate, our loan workout specialists prioritize cases for loss mitigation based upon the likelihood that the loan will result in a claim. Loss mitigation actions include loan modification, 52 extension of credit to bring a loan current, foreclosure forbearance, pre-foreclosure sale and deed-in-lieu. These loss mitigation efforts often are an effective way to reduce our claim exposure and ultimate payouts. The following table sets forth the dispersion of primary RIF and direct primary case reserves by policy year and delinquency rates as of September 30, 2021: Percent of RIF Percent of direct primary case reserves Delinquency rate Cumulative delinquency rate (1) Policy Year: 2004 and prior — % 3 % 14.96 % 3.61 % 2005-2008 4 24 11.14 % 18.44 % 2009-2013 1 3 6.03 % 0.78 % 2014 1 3 5.81 % 1.12 % 2015 2 5 4.67 % 1.22 % 2016 5 8 4.31 % 1.45 % 2017 5 10 5.31 % 1.89 % 2018 5 13 6.51 % 2.29 % 2019 11 18 4.43 % 2.14 % 2020 34 12 1.43 % 1.16 % 2021 32 1 0.24 % 0.23 % Total portfolio 100 % 100 % 3.08 % 4.50 % ______________ (1) Calculated as the sum of the number of policies where claims were ever paid to date and number of policies for loans currently in default divided by policies ever in-force. The following table sets forth the dispersion of primary RIF and loss reserves by policy year and delinquency rates as of December 31, 2020: Percent of RIF Percent of direct primary case reserves Delinquency rate Cumulative delinquency rate (1) Policy Year: 2004 and prior — % 3 % 16.82 % 3.62 % 2005 to 2008 5 25 13.35 % 18.79 % 2009 to 2013 2 2 5.44 % 0.91 % 2014 2 3 6.06 % 1.57 % 2015 4 5 5.66 % 1.97 % 2016 7 9 5.46 % 2.49 % 2017 8 12 6.51 % 3.34 % 2018 8 14 7.70 % 4.01 % 2019 19 19 5.60 % 3.93 % 2020 45 8 1.09 % 1.04 % Total portfolio 100 % 100 % 4.86 % 4.86 % ______________ (1) Calculated as the sum of the number of policies where claims were ever paid to date and number of policies for loans currently in default divided by policies ever in-force. 53 Loss reserves in policy years 2005 through 2008 are outsized compared to their representation of RIF. The size of these policy years at origination combined with the significant decline in home prices led to significant losses in policy years prior to 2009. Although uncertainty remains with respect to the ultimate losses we will experience on these policy years, they have become a smaller percentage of our total mortgage insurance portfolio. The largest portion of loss reserves has shifted to newer book years as a result of COVID-19 given their significant representation of RIF. As of September 30, 2021, our 2014 and newer policy years represented approximately 93% of our primary RIF and 70% of our total direct primary case reserves. Investment Portfolio Our investment portfolio is affected by factors described below, each of which in turn may be affected by COVID-19 as noted above in “—Trends and Conditions.” Management of our investment portfolio has been delegated to our Parent’s investment committee and chief investment officer. Our Parent’s investment team, with oversight from our board of directors and our senior management team, is responsible for the execution of our investment strategy. Our investment portfolio is an important component of our consolidated financial results and represents our primary source of claims paying resources. Our investment portfolio primarily consists of a diverse mix of highly rated fixed income securities and is designed to achieve the following objectives: • Meet policyholder obligations through maintenance of sufficient liquidity; • Preserve capital; • Generate investment income; • Maximize statutory capital; and • Increase shareholder value, among other objectives. To achieve our portfolio objectives, our investment strategy focuses primarily on: • Our business outlook, current and expected future investment conditions; • Investments selection based on fundamental, research-driven strategies; • Diversification across a mix of fixed income, low-volatility investments while actively pursuing strategies to enhance yield; • Regular evaluation and optimization of our asset class mix; • Continuous monitoring of investment quality, duration, and liquidity; • Regulatory capital requirements; and • Restriction of investments correlated to the residential mortgage market. 54 Fixed Maturity Securities Available-for-Sale The following table presents the fair value of our fixed maturity securities available-for-sale as of the dates indicated: September 30, 2021 December 31, 2020 (Amounts in thousands) Fair value % of total Fair value % of total U.S. government, agencies and government-sponsored enterprises $ 65,117 1 % $ 138,224 3 % State and political subdivisions 459,783 9 187,377 4 Non-U.S. government 22,758 — 31,031 — U.S. corporate 2,948,106 55 2,888,625 57 Non-U.S. corporate 712,603 13 607,669 12 Other asset-backed 1,167,700 22 1,193,670 24 Total available-for-sale fixed maturity securities $ 5,376,067 100 % $ 5,046,596 100 % Our investment portfolio did not include any direct residential real estate or whole mortgage loans as of September 30, 2021, December 31, 2020, and September 30, 2020. We have no derivative financial instruments in our investment portfolio. As of September 30, 2021, and December 31, 2020, 97% and 98% of our investment portfolio was rated investment grade, respectively. The following table presents the security ratings of our fixed maturity securities as of the dates indicated: September 30, 2021 December 31, 2020 AAA 9 % 11 % AA 17 13 A 34 36 BBB 37 38 BB & below 3 2 Total 100 % 100 % The table below presents the effective duration and investment yield on our investments available-for-sale, excluding cash and cash equivalents as of the dates indicated: September 30, 2021 December 31, 2020 Duration (in years) 3.7 3.4 Pre-tax yield (% of average investment portfolio assets) 2.7 % 2.8 % We manage credit risk by analyzing issuers, transaction structures and any associated collateral. We also manage credit risk through country, industry, sector and issuer diversification and prudent asset allocation practices. We primarily mitigate interest rate risk by employing a buy and hold investment philosophy that seeks to match fixed income maturities with expected liability cash flows in modestly adverse economic scenarios. 55 Liquidity and Capital Resources Cash Flows The following table summarizes our consolidated cash flows for the nine months ended September 30: (Amounts in thousands) 2021 2020 Net cash provided by (used in): Operating activities $ 411,082 $ 560,546 Investing activities (412,294) (891,969) Financing activities — 303,099 Net increase (decrease) in cash and cash equivalents $ (1,212) $ (28,324) Our most significant source of operating cash flows is from premiums received from our insurance policies, while our most significant uses of operating cash flows are generally for claims paid on our insured policies and our operating expenses. Net cash from operating activities decreased due to timing of tax payments made to our Parent and $48 million of interest payments on our 2025 Senior Notes issued in August 2020, partially offset by higher premiums received from a larger IIF balance and lower claims paid in the current year. Investing activities are primarily related to purchases, sales, and maturities of our investment portfolio. Net cash used by investing activities decreased primarily as a result of lower net purchases of fixed maturity securities in the current year. No dividends were paid during the nine months ended September 30, 2021. Financing activities in the nine months ended September 30, 2020, reflects $738.8 million net proceeds from the issuance of our 2025 Senior Notes, partially offset by a $435.7 million dividend paid to Genworth from the net proceeds of that offering. The amount and timing of future dividends will depend on the economic recovery from COVID-19, among other factors as described below. Capital Resources and Financing Activities We issued our 2025 Senior Notes in 2020 with interest payable semi-annually in arrears on February 15 and August 15 of each year. We made our first interest payment in the current quarter of $23.6 million. The 2025 Senior Notes mature on August 15, 2025. We may redeem the 2025 Senior Notes, in whole or in part, at any time prior to February 15, 2025, at our option, by paying a make-whole premium, plus accrued and unpaid interest, if any. At any time on or after February 15, 2025, we may redeem the 2025 Senior Notes, in whole or in part, at our option, at 100% of the principal amount, plus accrued and unpaid interest. The 2025 Senior Notes contain customary events of default, which subject to certain notice and cure conditions, can result in the acceleration of the principal and accrued interest on the outstanding 2025 Senior Notes if we breach the terms of the indenture. Pursuant to the GSE Restrictions, we are required to retain $300 million of our holding company cash that can be drawn down exclusively for our debt service or to contribute to GMICO to meet its regulatory capital needs including PMIERs. See “—Trends and Conditions” for additional information regarding the GSE Restrictions. Restrictions on the Payment of Dividends The ability of our regulated insurance operating subsidiaries to pay dividends and distributions to us is restricted by certain provisions of North Carolina insurance laws. Our insurance subsidiaries may pay dividends only from unassigned surplus; payments made from sources other than unassigned surplus, such as paid-in and contributed surplus, are categorized as distributions. Notice of all dividends must be submitted to the Commissioner of the NCDOI (the “Commissioner”) within 5 business days after 56 declaration of the dividend or distribution, and at least 30 days before payment thereof. No dividend may be paid until 30 days after the Commissioner has received notice of the declaration thereof and (i) has not within that period disapproved the payment or (ii) has approved the payment within the 30-day period. Any distribution, regardless of amount, requires that same 30-day notice to the Commissioner, but also requires the Commissioner’s affirmative approval before being paid. Based on our estimated statutory results and in accordance with applicable dividend restrictions, GMICO has the capacity to pay dividends from unassigned surplus of $229 million as of September 30, 2021, with 30 day advance notice to the Commissioner of the intent to pay. In addition to dividends and distributions, alternative mechanisms, such as share repurchases, subject to any requisite regulatory approvals, may be utilized from time to time to upstream surplus. On June 30, 2021, the GSEs issued a revised and restated version of the PMIERs Amendment that imposed temporary capital preservation provisions through December 31, 2021, that require an approved insurer to meet certain PMIERs minimum required asset buffers (115% in the fourth quarter of 2021) or otherwise obtain prior written GSE approval before paying any dividends, pledging or transferring assets to an affiliate or entering into any new, or altering any existing, arrangements under tax sharing and intercompany expense-sharing agreements, even if such insurer had a surplus of available assets. In addition, prior to the satisfaction of the GSE Conditions, the GSE Restrictions require GMICO to maintain 115% of PMIERs Minimum Required Assets through 2021, 120% during 2022 and 125% thereafter (unless our Parent directly or indirectly owns 70% or less of our common stock by December 31, 2021, in which case, the GSE Restrictions require GMICO to maintain 115% of PMIERs Minimum Required Assets through 2022, 120% during 2023 and 125% thereafter). We understand that our Parent’s current plans do not include a potential sale in which it owns less than 80% of Enact Holdings. In addition, we review multiple other considerations in parallel to determine a prospective dividend strategy for our regulated insurance operating subsidiaries. Given the regulatory focus on the reasonableness of an insurer’s surplus in relation to its outstanding liabilities and the adequacy of its surplus relative to its financial needs for any dividend, our insurance subsidiaries consider the minimum amount of policyholder surplus after giving effect to any contemplated future dividends. Regulatory minimum policyholder surplus is not codified in North Carolina law and limitations may vary based on prevailing business conditions including, but not limited to, the prevailing and future macroeconomic conditions. We estimate regulators would require a minimum policyholder surplus of approximately $300 million to meet their threshold standard. Given (i) we are subject to statutory accounting requirements that establish a contingency reserve of at least 50% of net earned premiums annually for ten years, after which time it is released into policyholder surplus and (ii) that no material 10-year contingency reserve releases are scheduled before 2024, we expect modest growth in policyholder surplus through 2024. As a result, minimum policyholder surplus could be a limitation on the future dividends of our regulated operating subsidiaries. As mentioned above, another consideration in the development of the dividend strategies for our regulated insurance operating subsidiaries is our expected level of compliance with PMIERs. Under PMIERs, GMICO is subject to operational and financial requirements that approved insurers must meet in order to remain eligible to insure loans purchased by the GSEs. Refer to “—Trends and Conditions” for recent updates related to these requirements. Our regulated insurance operating subsidiaries are also subject to statutory RTC requirements that affect the dividend strategies of our regulated operating subsidiaries. GMICO’s domiciliary regulator, the NCDOI, requires the maintenance of a statutory RTC ratio not to exceed 25:1. See “—Risk-to-Capital Ratio” for additional RTC trend analysis. We consider potential future dividends compared to the prior year statutory net income in the evaluation of dividend strategies for our regulated operating subsidiaries. We also consider the dividend payout ratio, or the ratio of potential future dividends compared to the estimated U.S. GAAP net income, in the evaluation of our dividend strategies. In either case, we do not have prescribed target or maximum thresholds, but we do evaluate the reasonableness of a potential dividend relative to the actual or 57 estimated income generated in the proceeding or preceding calendar year after giving consideration to prevailing business conditions including, but not limited to the prevailing and future macroeconomic conditions. In addition, the dividend strategies of our regulated operating subsidiaries are made in consultation with our Parent. Risk-to-Capital Ratio We compute our RTC ratio on a separate company statutory basis, as well as for our combined insurance operations. The RTC ratio is net RIF divided by policyholders’ surplus plus statutory contingency reserve. Our net RIF represents RIF, net of reinsurance ceded, and excludes risk on policies that are currently delinquent and for which loss reserves have been established. Statutory capital consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. Certain states have insurance laws or regulations that require a mortgage insurer to maintain a minimum amount of statutory capital (including the statutory contingency reserve) relative to its level of RIF in order for the mortgage insurer to continue to write new business. While formulations of minimum capital vary in certain states, the most common measure applied allows for a maximum permitted RTC ratio of 25:1. The following table presents the calculation of our RTC ratio for our combined insurance subsidiaries as of the dates indicated: (Dollar amounts in millions) September 30, 2021 December 31, 2020 Statutory policyholders' surplus $ 1,558 $ 1,555 Contingency reserves 2,914 2,518 Combined statutory capital $ 4,472 $ 4,073 Adjusted RIF (1) $ 52,752 $ 49,104 Combined risk-to-capital ratio 11.8 12.1 ______________ (1) Adjusted RIF for purposes of calculating combined statutory RTC differs from RIF presented elsewhere in this periodic report. In accordance with NCDOI requirements, adjusted RIF excludes delinquent policies. The following table presents the calculation of our RTC ratio for our principal insurance company, GMICO, as of the dates indicated: (Dollar amounts in millions) September 30, 2021 December 31, 2020 Statutory policyholders' surplus $ 1,508 $ 1,475 Contingency reserves 2,913 2,518 GMICO statutory capital $ 4,421 $ 3,993 Adjusted RIF (1) $ 52,608 $ 49,021 GMICO risk-to-capital ratio 11.9 12.3 ______________ (1) Adjusted RIF for purposes of calculating GMICO statutory RTC differs from RIF presented elsewhere herein. In accordance with NCDOI requirements, adjusted RIF excludes delinquent policies. Liquidity As of September 30, 2021, we maintained liquidity in the form of cash and cash equivalents of $452 million compared to $453 million as of December 31, 2020, and we also held significant levels of investment-grade fixed maturity securities that can be monetized should our cash and cash equivalents be insufficient to meet our obligations. On August 21, 2020, we issued the 2025 Senior Notes. The GSE Restrictions required us to retain $300 million of the net 2025 Senior Notes proceeds that can be drawn 58 down exclusively for our debt service or to contribute to GMICO to meet its regulatory capital needs including PMIERs, until the GSE Conditions are satisfied. See “—Trends and Conditions” for additional details. We distributed $437 million of the net proceeds to Genworth Holdings at the closing of the offering of our 2025 Senior Notes. The 2025 Senior Notes were issued to persons reasonably believed to be qualified institutional buyers in a private offering exempt from registration pursuant to Rule 144A under the Securities Act and to non-U.S. persons outside of the United States in compliance with Regulation S under the Securities Act. The principal sources of liquidity in our business currently include insurance premiums, net investment income and cash flows from investment sales and maturities. We believe that the operating cash flows generated by our mortgage insurance subsidiary will provide the funds necessary to satisfy our claim payments, operating expenses and taxes. However, our subsidiaries are subject to regulatory and other capital restrictions with respect to the payment of dividends. The $300 million of the net proceeds of the 2025 Senior Notes offering retained by EHI comprises substantially all of the cash and cash equivalents held directly by EHI and initially available to pay interest on the 2025 Senior Notes. To the extent the $300 million of net proceeds retained from the 2025 Senior Notes offering is used to provide capital support to GMICO, the GSEs and the NCDOI may seek to prevent GMICO from returning that capital to EHI in the form of a dividend, distribution or an intercompany loan. We currently have no material financing commitments, such as lines of credit or guarantees, that are expected to affect our liquidity over the next five years, other than the 2025 Senior Notes. Financial Strength Ratings The following GMICO financial strength ratings have been independently assigned by third-party rating organizations and represent our current ratings, which are subject to change. Name of Agency Rating Outlook Change Date of Rating Moody’s Investor Service, Inc. Baa2 Stable Upgrade September 24, 2021 Fitch Ratings, Inc. BBB+ Stable Upgrade September 17, 2021 Standard & Poor’s Financial Services, LLC BBB Positive Upgrade September 24, 2021 Contractual Obligations and Commitments We experienced an increase in loss reserves during the nine months ended September 30, 2021, driven mostly by new delinquencies from borrower forbearance programs due to COVID-19. We expect a large portion of these delinquencies to cure before becoming an active claim; however, reserves recorded related to borrower forbearance have a high degree of estimation. Therefore, it is possible we could have higher contractual obligations related to these loss reserves if they do not cure as we expect. Other than the aforementioned loss reserves, there have been no material additions or changes to our contractual obligations as compared to the amounts disclosed within our audited consolidated financial statements for the years ended December 31, 2020 and 2019. New Accounting Standards Refer to Note 2 in our unaudited condensed consolidated financial statements for the nine months ended September 30, 2021 and 2020, and in our audited consolidated financial statements for the years ended December 31, 2020 and 2019, for a discussion of recently adopted and not yet adopted accounting standards. 59