NMI Holdings, Inc. 10-Q

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2019 10-K, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements" above and the "Risk Factors" detailed in Part II, Item 1A of this report and in Part I, Item 1A of our 2019 10-K, as subsequently updated in other reports we file with the SEC, for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any other period. Overview We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-LTV ( i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners. NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of September 30, 2020, we had master policies with 1,551 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As of September 30, 2020, we had $106.6 billion of total insurance-in-force (IIF), including primary IIF of $104.5 billion, and $26.7 billion of gross RIF, including primary RIF of $26.6 billion. We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPS SM pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders. Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claim payment practices, responsive customer service, and financial strength and profitability. Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located in Emeryville, California. As of September 30, 2020, we had 261 employees. Our corporate website is located at www.nationalmi.com . Our website and the information contained on or accessible through our website are not incorporated by reference into this report. We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including new insurance writings, the composition of our insurance portfolio and other factors that we expect to impact our results. 29 COVID-19 Developments On January 30, 2020, the WHO declared the outbreak of the COVID-19 virus to be a global health emergency and characterized the outbreak as a global pandemic on March 11, 2020. In an effort to stem contagion and control the COVID-19 pandemic, the population at large has severely curtailed day-to-day activity and local, state and federal regulators have imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, has caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans have been furloughed or laid-off. The global dislocation caused by COVID-19 is unprecedented and, while there is broad hope for medical advances that might relieve the crisis and provide for a near-term return to normalized activity, it is not known how long the dislocation will persist and if or when any such medical advances may be developed or made available. In response to the COVID-19 outbreak and continuing uncertainties, we activated our business continuity program to ensure our employees are safe and able to continue serving our customers without interruption. We have also sought to broadly assess the impact that the COVID-19 outbreak has had and may continue to have on the U.S economy and housing market, and the implications for the mortgage insurance market, and our business performance and financial position. Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry The U.S. housing market is demonstrating notable resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates are helping to support housing affordability, medical concerns and lifestyle preferences are driving people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives are reinforcing the value of homeownership – all of which are contributing to an influx of new home buyers, record levels of purchase demand, and generally stable to rising house prices nationally. While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis will help to mitigate the risk of a severe pullback. We observe several favorable differences in the current environment compared to the period leading up to and through the 2008 Financial Crisis – the last period of significant economic volatility in the U.S. and one noted for its significant housing market dislocation. Such differences include: (i) the generally higher quality borrower base (as measured by weighted average FICO scores and LTV ratios) and tighter underwriting standards (with, among other items, full-documentation required to verify borrower income and asset positions) that prevail in the current market; (ii) the lower concentration of higher risk loan structures, such as negative amortizing, interest-only or short-termed option adjustable-rate mortgages being originated and outstanding in the current market; (iii) the meaningfully higher proportion of loans used for lower risk purposes, such as the purchase of a primary residence or rate-term refinancing in the current market, as opposed to cash-out refinancings, investment properties or second home purchases, which prevailed to a far greater degree in the lead up to the 2008 Financial Crisis; (iv) the availability and immediate application by politicians, regulators, lenders, loan servicers and others of a broad toolkit of resources designed to aid distressed borrowers, including forbearance, foreclosure moratoriums and other assistance programs codified under the CARES Act enacted on March 27, 2020; and (v) the broader and equally immediate application of significant fiscal and monetary stimulus by the federal government under the CARES Act and across a range of other programs designed to assist unemployed individuals and distressed businesses, as well as support the smooth functioning of various capital and risk markets. We also perceive the house price environment in the period leading up to the COVID-crisis to be anchored by more balanced market fundamentals than that in the period leading up to the 2008 Financial Crisis. We believe the 2008 Financial Crisis was directly precipitated by irresponsible behavior in the housing market that drove home prices to unsustainable heights (a so-called "bubble"). We see a causal link between the housing market and the 2008 Financial Crisis that we do not see in the COVID-19 outbreak, and we believe this will further contribute to housing market stability through the COVID-19 pandemic. Purchase mortgage origination volume has increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume has also grown dramatically as declining mortgage rates have created refinancing opportunities for a large number of existing borrowers. 30 Growth in total mortgage origination volume increases the addressable market for the U.S. mortgage insurance industry, while accelerated refinancing activity increases prepayment speed on outstanding insured mortgages. In this context, we anticipate total U.S. mortgage insurance industry new insurance written (NIW) volume will increase, potentially to record levels, while we expect the persistency of existing in-force insured risk across the industry will decline meaningfully. While we currently observe broad resiliency in the housing and high-LTV mortgage markets and, for the reasons discussed above, expect this trend to continue in the near term, the ultimate impact of COVID-19 remains highly uncertain. See Item 1A, " Risk Factors - The COVID-19 outbreak could materially adversely affect our business, results of operations and financial condition ." Potential Impact on NMI's Business Performance and Financial Position Operations We had 261 employees at September 30, 2020, including 113 who typically work at our corporate headquarters in Emeryville, CA and 148 who typically work from home in locations across the country. In response to the COVID-19 outbreak, we activated our business continuity program and instituted additional work-from-home practices for our 113 Emeryville-based staff. We have transitioned our operations seamlessly and continue to positively engage with customers on a re mote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment and internal controls over financial reporting are unchanged. We have achieved this transition without incurring additional capital expenditures or operating expenses and we believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course. New Business Production Our NIW volume increased significantly following the onset of the COVID-19 pandemic driven by the broad resiliency of the housing market, growth in total mortgage origination volume and increasing size of the U.S. mortgage insurance market, as well as the continued expansion of our customer franchise. We wrote $18.5 billion of NIW during the three months ended September 30, 2020, up 41% compared to the three months ended June 30, 2020 and 31% compared to the three months ended September 30, 2019. We expect our NIW volume and total mortgage insurance industry production will remain elevated through the remainder of 2020, with the potential for total market production and our NIW volume to reach record levels. While we currently expect our new business production will remain elevated, the potential onset of a second viral wave, reintroduction of broad-based shelter-in-place directives, increased unemployment or other potential outcomes related to COVID-19 could drive a moderation or decline in our volume going forward. We have broadly defined underwriting standards and loan-level eligibility criteria that are designed to limit our exposure to higher risk loans, and have used Rate GPS to actively shape the mix of our new business production and insured portfolio by, among other risk factors, borrower FICO score, debt-to-income (DTI) ratio and LTV ratio. In the weeks following the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that have further strengthened the credit risk profile of our NIW volume and IIF. At September 30, 2020, the weighted average FICO score of our RIF was 754 and we had a 3% mix of below 680 FICO score risk. Similarly, at September 30, 2020, the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 9% mix of 97% LTV risk. We set our premium rates based on a broad range of individual and market variables, including property type, type of loan product, borrower credit characteristics, and lender profile. Given the significant economic dislocation caused thus far by the COVID-19 outbreak, the uncertain duration and ultimate global impact of this crisis, and the continued potential that it will have a deleterious effect on the residential housing market, we have taken action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules. Delinquency Trends and Claims Expense We had 13,765 defaulted loans in our primary insured portfolio at September 30, 2020, which represented a 3.60% default rate against our 381,899 total policies in-force. Our default population has increased significantly since the outbreak of the pandemic as borrowers have faced increasing challenges related to COVID-19 and chosen to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by private lenders. At September 30, 2020, 24,809 or 6.5% of the loans we insured in our primary portfolio were enrolled in a forbearance program, 31 including 12,665 of the loans in our default population, 1,772 loans that had missed at least one payment, but not progressed into default status and 10,372 additional loans that were fully performing without any missed payments. As of October 31, 2020, our default population had decreased to 13,108, representing a 3.41% default rate and identified 23,727 loans in forbearance programs. While we are encouraged by the recent decline in our forbearance and default populations, and the rising level of cure activity amongst COVID impacted borrowers, the continued social and economic dislocation caused by the pandemic may contribute to an increase in our forbearance and default counts in future periods. We establish reserves for claims and allocated claim expenses when we are notified that a borrower is in default. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve and claims expense) reflects our best estimate of the future claim payment to be made under each individual policy. Our future claims exposure is a function of the number of delinquent loans that progress to claim payment (which we refer to as frequency) and the amount to be paid to settle such claims (which we refer to as severity). Our estimates of claims frequency and severity are not formulaic, rather they are broadly synthesized based on historical observed experience for similarly situated loans and assumptions about future macroeconomic fact ors. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options, which allow borrowers to amortize, or in certain instances fully defer the payments otherwise due during the forbearance period, over an extended length of time. In response to the onset of the COVID-19 outbreak, the GSEs have introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back into performing status. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At September 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. Our master policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) interest (capped at three years) and (ii) certain advances, each as incurred through the date the claim is filed. Under our master policies, a national foreclosure moratorium of the type currently required will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amount. If the duration of the current foreclosure moratorium mandated by the GSEs is extended beyond December 31, 2020 for an extended period of time, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not yet gone through foreclosure, may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted. Regulatory Capital Position As an approved mortgage insurer and Wisconsin-domiciled carrier, we are required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI. The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, we must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of $400 million. At September 30, 2020, we reported $1,672 million available assets against $991 million risk-based required assets for a $681 million of "excess" funding position. The capital relief we expect to receive in connection with our 2020-2 ILN Transaction is not included in our PMIERs position as of September 30, 2020, as the transaction was completed after quarter end. In future periods, the 2020-2 ILN Transaction will bolster our "excess" PMIERs funding position, subject to GSE approvals. The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared by the Federal Emergency Management Agency (FEMA) to be a Major Disaster zone. In June 2020, the GSEs issued guidance (subsequently amended and restated in September 2020) on the risk-based treatment of loans affected by the COVID-19 crisis. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a 32 permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period. Our PMIERs minimum risk-based required asset amount is also adjusted for our reinsurance transactions (as approved by the GSEs). Under our quota share reinsurance treaties, we receive credit for the PMIERs risk-based required asset amount on ceded RIF. As our gross PMIERs risk-based required asset amount on ceded RIF increases, our PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under our ILN transactions, we generally receive credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. We have structured our ILN transactions to be overcollateralized, such that there are more ILN notes outstanding and cash held in trust than we currently receive credit for under the PMIERs. To the extent our PMIERs risk-based required asset amount on RIF ceded under the ILN transactions grows, we receive increased PMIERs credit under the treaties. The increasing PMIERs credit we receive under the ILN treaties is further enhanced by their delinquency lockout triggers. In the event of certain credit enhancement or delinquency events, the ILN notes stop amortizing and the cash held in trust is secured for our benefit (a Lock-Out Event). As the underlying RIF continues to run-off, this has the effect of increasing the overcollateralization within, and excess PMIERs capacity provided by, each ILN structure. Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period the overcollateralization within and PMIERs capacity provided by each ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account. The following table provides detail on the level of overcollateralization of each of our ILN Transactions at September 30, 2020: ($ values in thousands) 2017 ILN Transaction 2018 ILN Transaction 2019 ILN Transaction 2020-1 ILN Transaction Ceded RIF $ 2,275,759 $ 2,703,393 $ 3,358,641 $ 6,055,359 Current First Layer Retained Loss 121,602 123,354 123,072 169,514 Current Reinsurance Coverage 40,226 158,489 231,877 322,076 Eligible Coverage $ 161,828 $ 281,843 $ 354,949 $ 491,590 Subordinated Coverage (1) 7.11% 10.43% 10.57% 8.00% PMIERs Charge on Ceded RIF 5.93% 7.48% 7.79% 6.13% Overcollateralization $ 26,875 $ 79,629 $ 93,311 $ 120,396 Delinquency Trigger (2) 4.0% 4.0% 4.0% 6.0% (1) For the 2020-1 ILN Transaction, absent a delinquency trigger, the subordinated coverage is capped at 8%. (2) For the 2020-1 ILN Transaction, the delinquency trigger is equal to seventy-five percent of subordinated coverage. At September 30, 2020, we had an aggregate $320 million of overcollateralization available across our 2017, 2018, 2019 and 2020-1 ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the Lock-Out Events remain in effect for each of the 2017, 2018 and 2019 ILN Transactions and our underlying RIF continues to run-off at the same rate as it did during the month ended September 30, 2020, we estimate that our total overcollateralization would increase by up to approximately $70 million per quarter. Our PMIERs funding requirement will go up in future periods based on the volume and risk profile of our new business production, and performance of our in-force insurance portfolio. We estimate, however, that we will remain in compliance with our PMIERs asset requirements even if the forbearance-driven default rate on our in-force portfolio materially exceeds its current level, given our $681 million excess available asset position at September 30, 2020, the nationwide applicability of the 70% haircut on delinquent policies affected by the COVID-19 crisis, the increasing PMIERs relief automatically provided under each of our quota share treaties and 2017, 2018, 2019 and 2020-1 ILN Transactions and the additional risk protection and PMIERs capacity provided under our recently announced 2020-2 ILN Transaction. 33 NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as RTC) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard, and we expect this to remain the case in the aftermath of the COVID-19 outbreak. Liquidity We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of September 30, 2020, we had $1.9 billion of consolidated cash and investments, including $75 million of cash and investments at NMIH. On June 8, 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of approximately $220 million, net of underwriting discounts, commissions and other direct offering expenses. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 10, Common Stock ." On June 19, 2020, NMIH also completed the sale of its $400 million aggregate principal amount of senior secured notes, raising net proceeds of $244 million after giving effect to offering expenses and the repayment of the principal amount outstanding under our $150 million 2018 Term Loan. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " NMIH contributed approximately $445 million of capital to NMIC following completion of its respective Notes and common stock offerings. NMIH also has access to $110 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility and $16.1 million of aggregate ordinary course dividend capacity available from NMIC and Re One without the prior approval of the Wisconsin OCI. Amounts drawn under the 2020 Revolving Credit Facility are available as directed for NMIH needs or may be down-streamed to support the requirements of our operating subsidiaries if we so decide. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt and Note 12, Subsequent Event ." NMIH's principal liquidity demands include funds for the payment of (i) certain corporate expenses, (ii) certain reimbursable expenses of our insurance subsidiaries, including NMIC, and (iii) principal and interest as due on our outstanding debt. NMIH generates cash interest income on its investment portfolio and benefits from tax, expense-sharing and debt service agreements with its subsidiaries. Such agreements have been approved by the Wisconsin OCI and provide for the reimbursement of substantially all of NMIH's annual cash expenditures. While such agreements are subject to revocation by the Wisconsin OCI, we do not expect such action to be taken at this time. The Wisconsin OCI has refreshed its approval of the debt service agreement providing for the additional reimbursement by NMIC of interest expense due on our newly issued Notes and 2020 Revolving Credit Facility. NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At September 30, 2020, NMIC had $1.8 billion of cash and investments, including $158 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended September 30, 2020, NMIC generated $268 million of cash flow from operations and received an additional $411 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path ( i.e. , are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term. Premiums paid to NMIC on monthly policies are generally collected and remitted by loan servicers. We have noted the broad discussion about the liquidity challenges loan servicers may themselves face in the event of widespread borrower utilization of forbearance programs. We do not currently believe that loan servicer liquidity issues will have a material impact on NMIC's premium receipts or liquidity profile. Loan servicers are contractually obligated to advance mortgage insurance premiums in a timely manner, even if the underlying borrowers fail to remit their monthly mortgage payments. In June 2020, the GSEs issued guidance to the PMIERs (subsequently amended and restated in September 2020) that, among other items, requires us, and we have agreed, to notify them of our intent to cancel coverage on policies for which servicers have failed to make timely premium 34 payments so that the GSEs can pay the premiums directly to us and preserve the mortgage insurance coverage. Through September 30, 2020, we did not see any notable changes in servicer payment practices, with servicers generally continuing to remit monthly premium payments as scheduled, including those for policies covering loans that are in a forbearance program. Investment portfolio At September 30, 2020, we had $1.9 billion of cash and invested assets. Our investment strategy equally prioritizes capital preservation alongside income generation, and we have a long-established investment policy that sets conservative limits for asset types, industry sectors, single issuers and instrument credit ratings. At September 30, 2020, our investment portfolio was comprised of 100% fixed income assets with 100% of our holdings rated investment grade and our portfolio having an average rating of "A+." At September 30, 2020, our portfolio was in a $65 million aggregate unrealized gain position; it was highly liquid and highly diversified with no Level 3 asset positions and no single issuer concentration greater than 1.6% . We did not record any allowance for credit losses in the portfolio during the three months ended September 30, 2020, as we expect to recover the amortized cost basis of all securities held. The pre-tax book yield on our investment portfolio was 2.3% for the three months ended September 30, 2020. At the onset of the COVID-19 crisis, we decided to prioritize liquidity and increased our cash and equivalent holdings as a percentage of our total portfolio. We believe such action was prudent in light of the heightened market volatility and general uncertainty developing in the early stages of the COVID-19 pandemic. We have since redeployed much of our excess liquidity position. Taxes The CARES Act, among other things, includes provisions relating to refundable payroll tax credits, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, and technical corrections to tax depreciation methods for qualified improvement property. We continue to monitor the impact that the CARES Act may have on our business, financial condition and results of operations. New Insurance Written, Insurance-In-Force and Risk-In-Force NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our NIW is affected by the overall size of the mortgage origination market and the volume of high-LTV mortgage originations. Our NIW is also affected by the percentage of such high-LTV originations covered by private versus government MI or other alternative credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment, nonpayment of premiums, coverage rescission and claim payments). RIF is related to IIF and represents the aggregate amount of coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans having a higher coverage percentage. Gross RIF represents RIF before consideration of reinsurance. Net RIF is gross RIF net of ceded reinsurance. Net Premiums Written and Net Premiums Earned We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPS. Rate GPS considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While most of our new business is priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns. Premiums are generally fixed for the duration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements, less premium refunds and premium write-offs. As a result, net premiums written are generally influenced by: • NIW; 35 • premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described below; • cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings (which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force policies), levels of claim payments and home prices; and • cession of premiums under third-party reinsurance arrangements. Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment at origination, which is earned over the estimated life of the policy. Substantially all of our single premium policies in force as of September 30, 2020 were non-refundable under most cancellation scenarios. If non-refundable single premium policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums. The percentage of IIF that remains on our books after any 12-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and our single premium policies are generally non-refundable on cancellation, assuming all other factors remain constant, if single premium loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher, our revenue is likely to decline. Effect of reinsurance on our results We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, and support the growth of our business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces premiums written and earned and also reduces RIF, providing capital relief to the ceding insurance company and reducing incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota share transactions, which offset the ceding company's acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement, the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit. We expect to continue to evaluate reinsurance opportunities in the normal course of business. Quota share reinsurance NMIC is a party to three outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, and 2020 QSR Transaction, effective April 1, 2020. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies written during a discrete period to panels of third-party reinsurance providers. Each of the third-party reinsurance providers has an insurer financial strength rating of A- or better by S&P, A.M. Best or both. Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie M ae, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in 2018 and 20% of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims 36 and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims. Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to 21% of the risk on eligible policies written from April 1, 2020 through December 31, 2020, in exchange for reimbursement of ceded claims and claim expenses on covered po licies, a 20% ceding commission, and a profit commission of up to 50% that varies directly and inversely with ceded claims. NMIC may elect to terminate its engagement with individual reinsurers on a run-off basis ( i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis ( i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement. Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction. Excess-of-loss reinsurance NMIC has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies written during discrete periods through a series of mortgage insurance-linked note offerings by the Oaktown Re Vehicles. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease from the inception of each agreement over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances occurs. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction note-holders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). Effective June 25, 2020, a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC. The following table presents the inception date, covered production p eriod, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of September 30, 2020. ( $ values in thousands) Inception Date Covered Production Initial Reinsurance Coverage Current Reinsurance Coverage Initial First Layer Retained Loss Current First Layer Retained Loss (1) 2017 ILN Transaction May 2, 2017 1/1/2013 - 12/31/2016 $ 211,320 $ 40,226 $ 126,793 $ 121,602 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 123,354 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 123,072 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 322,076 169,514 169,514 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure, and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expense s exceed its current first layer retained loss. In October 2020, NMIC secured $242.4 million of aggregate excess-of-loss reinsurance coverage at inception for an exi sting portfolio of policies primarily written from April 1, 2020 to September 30, 2020, through a mortgage insurance-linked 37 notes offering by Oaktown Re V. The reinsurance coverage amount under the terms of the 2020-2 ILN Transaction decreases from $242.4 million at inception over a ten-year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained. For the reinsurance coverage period, NMIC retains the first layer of $121.2 million of aggregate losses and Oaktown Re V then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for further discussion of these third-party reinsurance arrangements. Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 IIF NIW IIF NIW NIW (In Millions) Monthly $ 88,584 $ 16,516 $ 71,814 $ 12,994 $ 38,862 $ 30,272 Single 15,910 1,983 17,899 1,106 4,058 2,920 Primary 104,494 18,499 89,713 14,100 42,920 33,192 Pool 2,115 — 2,668 — — — Total $ 106,609 $ 18,499 $ 92,381 $ 14,100 $ 42,920 $ 33,192 For the three and nine months ended September 30, 2020, NIW increased 31% and 29%, respectively, compared to the three and nine months ended September 30, 2019, due to growth in our monthly and single premium policy production tied to growth in the size of the total mortgage insurance market, as well as the increased penetration of existing customer accounts and new customer account activations. For the three months ended September 30, 2020, monthly premium polices accounted for 89% of our NIW. As of September 30, 2020, monthly premium policies accounted for 85% of our primary IIF, as compared to 80% at September 30, 2019. We expect the break-down of monthly premium policies and single premium policies (which we refer to as "mix") in our primary IIF will continue to trend toward an increased monthly mix over time given the composition of our NIW. Total IIF increased 15% as of September 30, 2020 compared to September 30, 2019, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of our in-force policies. Our persistency rate decreased to 60% at September 30, 2020 from 82% at September 30, 2019, reflecting the impact of increased refinancing activity tied to record low interest rates. The following table presents net premiums written and earned for the periods indicated. Primary and pool premiums written and earned For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Thousands) Net premiums written $ 101,822 $ 88,679 $ 283,302 $ 243,211 Net premiums earned 98,802 92,381 296,463 249,499 For the three and nine months ended September 30, 2020, net premiums written increased 15% and 16%, respectively, and net premiums earned increased 7% and 19%, respectively, compared to the three and nine months ended September 30, 2019. The increases in net premiums written and earned are primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR and ILN Transactions. Pool premiums written and earned for the three and nine months ended September 30, 2020 and 2019, were $0.6 million and $2.0 million, and $0.7 million and $2.3 million, respectively, before giving effect to the 2016 QSR Transaction, under which 38 all of our written and earned pool premiums are ceded. A portion of ceded pool premiums written and earned are recouped through profit commission. Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends As of and for the three months ended September 30, 2020 June 30, 2020 March 31, 2020 December 31, 2019 September 30, 2019 ($ Values In Millions, except as noted below) New insurance written $ 18,499 $ 13,124 $ 11,297 $ 11,949 $ 14,100 Percentage of monthly premium 89 % 91 % 93 % 93 % 92 % Percentage of single premium 11 % 9 % 7 % 7 % 8 % New risk written $ 4,577 $ 3,260 $ 2,897 $ 3,082 $ 3,651 Insurance-in-force (1) 104,494 98,905 98,494 94,754 89,713 Percentage of monthly premium 85 % 84 % 83 % 81 % 80 % Percentage of single premium 15 % 16 % 17 % 19 % 20 % Risk-in-force (1) $ 26,568 $ 25,238 $ 25,192 $ 24,173 $ 22,810 Policies in force (count) (1) 381,899 372,934 376,852 366,039 350,395 Average loan size ($ value in thousands) (1) $ 274 $ 265 $ 261 $ 259 $ 256 Coverage percentage (2) 25.4 % 25.5 % 25.6 % 25.5 % 25.4 % Loans in default (count) (1) 13,765 10,816 1,449 1,448 1,230 Default rate (1) 3.60 % 2.90 % 0.38 % 0.40 % 0.35 % Risk-in-force on defaulted loans (1) $ 1,008 $ 799 $ 84 $ 84 $ 70 Net premium yield (3) 0.39 % 0.40 % 0.41 % 0.41 % 0.43 % Earnings from cancellations $ 12.6 $ 15.5 $ 8.6 $ 8.0 $ 7.4 Annual persistency (4) 60.0 % 64.1 % 71.7 % 76.8 % 82.4 % Quarterly run-off (5) 13.1 % 12.9 % 8.0 % 7.7 % 7.5 % (1) Reported as of the end of the period. (2) Calculated as end of period RIF divided by end of period IIF. (3) Calculated as net premiums earned divided by average primary IIF for the p eriod, annualized. (4) Defined as the percentage of IIF that remains on our books after a given 12-month period. (5) Defined as the percentage of IIF that is no longer on our books after a given three month period. The table below presents a summary of the change in total primary IIF for the dates and periods indicated. Primary IIF For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Millions) IIF, beginning of period $ 98,905 $ 81,708 $ 94,754 $ 68,551 NIW 18,499 14,100 42,920 33,192 Cancellations, principal repayments and other reductions (12,910) (6,095) (33,180) (12,030) IIF, end of period $ 104,494 $ 89,713 $ 104,494 $ 89,713 39 We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses. The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated. Primary IIF and RIF As of September 30, 2020 As of September 30, 2019 IIF RIF IIF RIF (In Millions) September 30, 2020 $ 40,969 $ 10,255 $ — $ — 2019 29,865 7,791 31,844 8,283 2018 11,859 3,019 21,932 5,571 2017 9,671 2,413 16,283 4,028 2016 8,050 2,047 12,944 3,231 2015 and before 4,080 1,043 6,710 1,697 Total $ 104,494 $ 26,568 $ 89,713 $ 22,810 We utilize certain risk principles that form the basis of how we underwrite and originate NIW. We have established prudential underwriting standards and loan-level eligibility matrices which prescribe the maximum LTV, minimum borrower FICO score, maximum borrower DTI ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure and memorialized these standards and eligibility matrices in our Underwriting Guideline Manual that is publicly available on our website. Our underwriting standards and eligibility criteria are designed to limit the layering of risk in a single insurance policy. "Layered risk" refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts. In response to the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that have further strengthened the credit risk profile of our NIW volume and IIF. The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan. Primary NIW by FICO For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Millions) >= 760 $ 11,600 $ 6,994 $ 25,942 $ 15,678 740-759 2,575 2,288 6,056 5,677 720-739 2,187 2,102 5,373 4,931 700-719 1,217 1,450 3,214 3,579 680-699 793 915 1,872 2,359 <=679 127 351 463 968 Total $ 18,499 $ 14,100 $ 42,920 $ 33,192 Weighted average FICO 764 754 761 752 40 Primary NIW by LTV For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Millions) 95.01% and above $ 587 $ 989 $ 1,855 $ 2,529 90.01% to 95.00% 7,767 6,592 18,161 15,947 85.01% to 90.00% 6,968 4,933 16,117 11,259 85.00% and below 3,177 1,586 6,787 3,457 Total $ 18,499 $ 14,100 $ 42,920 $ 33,192 Weighted average LTV 90.7 % 91.7 % 90.8 % 91.9 % Primary NIW by purchase/refinance mix For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Millions) Purchase $ 12,764 $ 11,284 $ 28,531 $ 28,364 Refinance 5,735 2,816 14,389 4,828 Total $ 18,499 $ 14,100 $ 42,920 $ 33,192 The tables below present our total primary IIF and RIF by FICO and LTV and total primary RIF by loan type as of the dates indicated. Primary IIF by FICO As of September 30, 2020 September 30, 2019 ($ Values In Millions) >= 760 $ 53,742 51 % $ 41,855 47 % 740-759 16,193 16 15,028 17 720-739 14,352 14 12,666 14 700-719 10,235 10 9,822 11 680-699 6,713 6 6,559 7 <=679 3,259 3 3,783 4 Total $ 104,494 100 % $ 89,713 100 % Primary RIF by FICO As of September 30, 2020 September 30, 2019 ($ Values In Millions) >= 760 $ 13,563 51 % $ 10,611 47 % 740-759 4,141 16 3,847 17 720-739 3,694 14 3,257 14 700-719 2,635 10 2,501 11 680-699 1,730 6 1,665 7 <=679 805 3 929 4 Total $ 26,568 100 % $ 22,810 100 % 41 Primary IIF by LTV As of September 30, 2020 September 30, 2019 ($ Values In Millions) 95.01% and above $ 8,130 8 % $ 8,500 10 % 90.01% to 95.00% 47,828 46 42,255 47 85.01% to 90.00% 35,224 33 28,083 31 85.00% and below 13,312 13 10,875 12 Total $ 104,494 100 % $ 89,713 100 % Primary RIF by LTV As of September 30, 2020 September 30, 2019 ($ Values In Millions) 95.01% and above $ 2,310 9 % $ 2,326 10 % 90.01% to 95.00% 14,056 53 12,358 54 85.01% to 90.00% 8,642 32 6,854 30 85.00% and below 1,560 6 1,272 6 Total $ 26,568 100 % $ 22,810 100 % Primary RIF by Loan Type As of September 30, 2020 September 30, 2019 Fixed 99 % 98 % Adjustable rate mortgages Less than five years — — Five years and longer 1 2 Total 100 % 100 % The table below presents selected primary portfolio statistics, by book year, as of September 30, 2020. As of September 30, 2020 Book year Original Insurance Written Remaining Insurance in Force % Remaining of Original Insurance Policies Ever in Force Number of Policies in Force Number of Loans in Default # of Claims Paid Incurred Loss Ratio (Inception to Date) (1) Cumulative Default Rate (2) Current Default Rate (3) ($ Values in Millions) 2013 $ 162 $ 13 8 % 655 82 4 1 0.8 % 0.8 % 4.9 % 2014 3,451 556 16 % 14,786 3,172 139 48 4.2 % 1.3 % 4.4 % 2015 12,422 3,511 28 % 52,548 17,706 674 108 3.3 % 1.5 % 3.8 % 2016 21,187 8,050 38 % 83,626 36,731 1,609 116 3.0 % 2.1 % 4.4 % 2017 21,582 9,671 45 % 85,897 44,498 2,584 79 5.0 % 3.1 % 5.8 % 2018 27,295 11,859 43 % 104,043 52,967 3,246 49 8.8 % 3.2 % 6.1 % 2019 45,141 29,865 66 % 148,423 105,991 4,327 4 15.4 % 2.9 % 4.1 % 2020 42,920 40,969 95 % 125,639 120,752 1,182 — 12.7 % 0.9 % 1.0 % Total $ 174,160 $ 104,494 615,617 381,899 13,765 405 (1) Calculated as total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance. (2) Calculated as the sum of the number of claims paid ever to date and number of loans in default divided by policies ever in force. (3) Calculated as the number of loans in default divided by number of policies in force. 42 Geographic Dispersion The following table shows the distribution by state of our primary RIF as of the periods indicated. As of September 30, 2020, our RIF continues to be modestly more concentrated in California, primarily as a result of the size of the California mortgage market relative to the rest of the country and the location and timing of our acquisition of new customers. The distribution of our primary RIF as of September 30, 2020 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of September 30, 2020 September 30, 2019 California 11.3 % 11.9 % Texas 8.3 8.1 Florida 6.7 5.6 Virginia 5.4 5.3 Colorado 4.0 3.4 Illinois 4.0 3.8 Maryland 3.6 3.3 Washington 3.5 3.2 Pennsylvania 3.5 3.6 Massachusetts 3.5 3.1 Total 53.8 % 51.3 % Insurance Claims and Claim Expenses Insurance claims and claim expenses incurred represent estimated future payments on newly defaulted insured loans and any change in our claim estimates for previously existing defaults. Claims incurred are generally affected by a variety of factors, including the macroeconomic environment, national and regional unemployment trends, changes in housing values, borrower risk characteristics, LTV ratios and other loan level risk attributes, the size and type of loans insured, and the percentage of coverage on insured loans. Reserves for claims and claim expenses are established for mortgage loans that are in default. A loan is considered to be in default as of the payment date at which a borrower has missed the preceding two or more consecutive monthly payments. We establish reserves for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as IBNR. We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees and other general expenses of administering the claim settlement process. Reserves are not established for future claims on insured loans which are not currently reported or which we estimate are not currently in default. Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is referred to as claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, cure rates, size of the loan and estimated change in property value. Reserves are released the month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under the QSR Transactions and ILN Transactions, as applicable under each treaty. We have not yet ceded any reserves under the ILN Transactions as incurred claims and claims expenses on each respective reference pool remain within our retained coverage layer of each transaction. Our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any claims or claim expense reserves for pool exposure to date. The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic concentrations, among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters or global pandemics, and any federal, state or local governmental response thereto. 43 Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. At September 30, 2020, we established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses. For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 (In Thousands) Beginning balance $ 69,903 $ 18,432 $ 23,752 $ 12,811 Less reinsurance recoverables (1) (14,307) (3,775) (4,939) (3,001) Beginning balance, net of reinsurance recoverables 55,596 14,657 18,813 9,810 Add claims incurred: Claims and claim expenses incurred: Current year (2) 18,682 3,547 61,198 10,948 Prior years (3) (3,015) (975) (5,500) (2,710) Total claims and claim expenses incurred 15,667 2,572 55,698 8,238 Less claims paid: Claims and claim expenses paid: Current year (2) 113 — 152 — Prior years (3) 1,100 1,033 4,309 2,401 Reinsurance terminations (4) — — — (549) Total claims and claim expenses paid 1,213 1,033 4,461 1,852 Reserve at end of period, net of reinsurance recoverables 70,050 16,196 70,050 16,196 Add reinsurance recoverables (1) 17,180 4,309 17,180 4,309 Ending balance $ 87,230 $ 20,505 $ 87,230 $ 20,505 (1) Related to ceded losses recoverable under the QSR Transactions. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for additional information. (2) Related to insured loans with their most recent defaults occurring in the current year. For example, if a loan had defaulted in a prior year and subsequently cured and later re-defaulted in the current year, that default would be included in the current year. Amounts are presented net of reinsurance. (3) Related to insured loans with defaults occurring in prior years, which have been continuously in default before the start of the current year. Amounts are presented net of reinsurance. (4) Represents the settlement of reinsuranc e recoverables in conjunction with the termination of one reinsurer under the 2016 QSR Transaction on a cut-off basis. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for additional information. 44 The "claims incurred" section of the table above shows claims and claim expenses incurred on defaults occurring in current and prior years, including IBNR reserves and is presented net of reinsurance. The amount of claims incurred for current year defaults represents the estimated amount of claims and claim expenses to be ultimately be paid on such loans. The decreases during the periods presented in reserves held for prior year defaults represent favorable development and are generally the result of the curing of previously reported defaults. We may increase or decrease our claim estimates and reserves as we learn additional information about individual defaulted loans, and continue to observe and analyze loss development trends in our portfolio. Gross reserves of $11.4 million related to prior year defaults remained as of September 30, 2020. The following table provides a reconciliation of the beginning and ending count of loans in default. For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Beginning default inventory 10,816 1,028 1,448 877 Plus: new defaults 6,588 718 16,870 1,838 Less: cures (3,598) (476) (4,426) (1,383) Less: claims paid (40) (37) (123) (98) Less: claims denied (1) (3) (4) (4) Ending default inventory 13,765 1,230 13,765 1,230 The increase in the ending default inventory at September 30, 2020 compared to September 30, 2019, is primarily attributable to the COVID-19 outbreak as borrowers have faced increasing challenges and chosen to access the forbearance program for federally backed loans codified under the CARES Act and other similar assistance programs made available by private lenders. At September 30, 2020, 12,238 of our 13,765 ending default inventory were in a COVID-19 related forbearance program. The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated. For the three months ended For the nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 ($ In Thousands) Number of claims paid (1) 40 37 123 98 Total amount paid for claims $ 1,540 $ 1,265 $ 5,621 $ 2,979 Average amount paid per claim $ 39 $ 34 $ 46 $ 30 Severity (2) 67 % 70 % 80 % 70 % (1) Count include s six and eight claims settled without payment for the three and nine months ended September 30, 2020, respectively, and eight and fourteen claims settled without payment for the three and nine months ended September 30, 2019, respectively. (2) Severity represents the total amount of claims paid including claim expenses divided by the related RIF on the loan at the time the claim is perfected, and is calculated including claims settled without payment. The number of claims paid for the three and nine months ended September 30, 2020 increased compared to the three and nine months ended September 30, 2019, primarily due to an increase in our default inventory and the continued growth and seasoning of our insured portfolio. The timing and magnitude of future claims paid may be impacted by, among other factors, the forbearance program and foreclosure moratorium codified under the CARES Act and implemented by the GSEs through at least December 31, 2020, which may extend the timeline over which loans would otherwise progress through the default cycle to a paid claim. Our claims severity for the three and nine months ended September 30, 2020 was 67% and 80%, respectively, compared to 70% for each of the three and nine month periods ended September 30, 2019. Claims severity for the three months ended September 30, 2020 benefited from the resiliency of the housing market and broad national house price appreciation. An increase in the value of the homes collateralizing the mortgages we insure provides additional equity support to our risk exposure by increasing the possibility of a third-party sale of the foreclosed property, which can mitigate the severity of our settled claims. The increase in claims severity for the nine months ended September 30, 2020 relates to an increase in the portion of claims settled using the percent option instead of through third-party sales during the six months ended June 30, 2020 as third-party marketing and sales activity was broadly constrained in the period immediately following the outbreak of the COVID-19 pandemic. 45 The following table provides detail on our average reserve per default, before giving effect to reserves ceded under the QSR Transactions, as of the dates indicated. Average reserve per default: As of September 30, 2020 As of September 30, 2019 (In Thousands) Case (1) $ 5.8 $ 15.3 IBNR (1)(2) 0.5 1.4 Total $ 6.3 $ 16.7 (1) Defined as the gross reserve per insured loan in default. (2) Amount includes claims adjustment expenses. The average reserve per default at September 30, 2020 decreased from September 30, 2019, primarily due to new COVID-19 related defaults. At September 30, 2020, we established lower reserves that we consider to be connected to the COVID-19 outbreak given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. While we established lower reserves per defaulted loan at September 30, 2020, our total reserve position and claims and claims expenses increased substantially as of and during the period ended September 30, 2020 due to the increase in the size of our default population. GSE Oversight As an approved insurer , NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs ( italicized terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business, remedial and financial requirements applicable to approved insurers . The PMIERs financial requirements prescribe a risk-based methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing ( i.e., current vs. delinquent), LTV ratio and other risk features. In general, higher quality loans carry lower asset charges. Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets , which is an amount equal to the greater of (i) $400 million or (ii) a total risk-based required asset amount . The risk-based required asset amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF , and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy. By April 15th of each year, NMIC must certify it met all PMIERs requirements as of December 31st of the prior year. We certified to the GSEs by April 15, 2020 that NMIC was in full compliance with the PMIERs as of December 31, 2019. NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC's compliance with the PMIERs. The following table provides a comparison of the PMIERs available assets and risk-based required asset amount as reported by NMIC as of the dates indicated. As of September 30, 2020 September 30, 2019 (In Thousands) Available assets $ 1,671,990 $ 955,554 Risk-based required assets 990,678 637,914 Available assets were $1,672 million at September 30, 2020, compared to $956 million at September 30, 2019. In June 2020, NMIH completed the sale of 15.9 million shares of common stock raising net proceeds of approximately $220 million and the sale of the $400 million aggregate principal amount of senior secured notes. N MIH contributed approximately $445 million of capital to NMIC following completion of the Notes and equity offerings. The $716 million increase in NMIC's available assets 46 between the periods presented was driven by the NMIH capital contribution and NMIC's positive cash flow from operations during the intervening periods. The increase in the risk-based required asset amount between the periods presented was primarily due to the growth of our gross RIF, increase in our default inventory related to the onset of the COVID-19 pandemic, partially offset by the increased cession of risk under our third-party reinsurance agreements including the inception of the 2020-1 ILN Transaction. See " - COVID-19 Developments, " above. LIBOR Transition In July 2017, the U.K. Financial Conduct Authority announced that it intends to stop persuading or compelling banks to submit LIBOR rates after 2021, which is expected to render these widely used reference rates unavailable or unreliable. We have exposure to LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio. The 2020 Revolving Credit Facility and premiums paid on our ILN Transactions are also LIBOR-based. We are in the process of reviewing our LIBOR-based contracts that extend beyond 2021 and transitioning to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we currently do not know the impact it will have on our operations or financial results. Capital Position of Our Insurance Subsidiaries and Financial Strength Ratings In addition to GSE-imposed asset requirements, NMIC is subject to state regulatory minimum capital requirements based on its RIF. While formulations of this minimum capital may vary by jurisdiction, the most common measure allows for a maximum permitted RTC ratio of 25:1. As of September 30, 2020, NMIC's performing primary RIF, net of reinsurance, was approximately $19.9 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $1.6 billion (including contingency reserves) as of September 30, 2020, NMIC's RTC ratio was 12.8:1. Re One had total statutory capital of $37 million as of September 30, 2020, and a RTC ratio of 1.2:1. We continuously monitor our compliance with state capital requirements. In June 2020, Moody's Investors Service (Moody's) affirmed its "Baa2" financial strength rating of NMIC and its "Ba2" rating of NMIH's 2020 Revolving Credit Facility, and assigned a "Ba2" rating to the Notes. The outlook for Moody's ratings is stable . In March 2020, S&P updated its outlook from stable to negative for the mortgage insurance sector, including NMIH and NMIC's financial strength and long-term counter-party credit ratings. In June 3, 2020, S&P assigned a "BB" rating to NMIH's senior secured Notes. Information Technology Effective March 31, 2020, we entered into an IT services agreement with Tata Consultancy Services (TCS). Under the agreement, TCS is providing IT services over a seven-year period across such functions as application development and support, infrastructure support, (service desk, end user computing and engineering services), and information security. We expect the engagement with TCS will further our ability to provide innovative IT solutions for our internal and external constituents, while realizing cost efficiencies by leveraging TCS's global platform. In connection with the agreement, a majority of our IT employees transitioned to TCS. We have the ability to terminate the agreement at any time with 120 days' prior notice, subject to the payment of a termination fee and other obligations as specified in the agreement. Competition The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as government MIs such as the FHA, USDA or VA. Private MI companies compete based on service, customer relationships, underwriting and other factors, including price, credit risk tolerance and information technology capabilities. We expect the private MI market to remain competitive, with pressure for industry participants to maintain or grow their market share. The private MI industry overall competes more broadly with government MIs who significantly increased their share in the MI market following the 2008 Financial Crisis. Although there has been broad policy consensus toward the need for increasing private capital participation and decreasing government exposure to credit risk in the U.S. housing finance system, it remains difficult to predict whether the combined market share of government MIs will recede to pre-2008 levels. A range of factors influence a lender's and borrower's decision to choose private over government MI, including among others, premium rates and other charges, loan eligibility requirements, cancelability, loan size limits and the relative ease of use of private MI products compared to government MI alternatives. 47 Consolidated Results of Operations Consolidated statements of operations Three months ended Nine months ended September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 Revenues ($ in thousands, except for per share data) Net premiums earned $ 98,802 $ 92,381 $ 296,463 $ 249,499 Net investment income 8,337 7,882 23,511 22,894 Net realized investment (losses) gains (4) 81 635 (219) Other revenues 648 1,244 2,771 1,700 Total revenues 107,783 101,588 323,380 273,874 Expenses Insurance claims and claim expenses 15,667 2,572 55,698 8,238 Underwriting and operating expenses (1) 33,969 32,335 96,616 95,325 Service expenses (1) 557 909 2,381 1,311 Interest expense 7,796 2,979 16,481 9,111 Loss (gain) from change in fair value of warrant liability 437 (1,139) (4,286) 6,025 Total expenses 58,426 37,656 166,890 120,010 Income before income taxes 49,357 63,932 156,490 153,864 Income tax expense 11,178 14,169 33,192 32,102 Net income $ 38,179 $ 49,763 $ 123,298 $ 121,762 Earnings per share - Basic $ 0.45 $ 0.73 $ 1.63 $ 1.81 Earnings per share - Diluted $ 0.45 $ 0.69 (2) $ 1.55 (2) $ 1.75 Loss ratio (3) 15.9 % 2.8 % 18.8 % 3.3 % Expense ratio (4) 34.4 % 35.0 % 32.6 % 38.2 % Combined ratio (5) 50.2 % 37.8 % 51.4 % 41.5 % Three months ended Nine months ended Non-GAAP financial measures (6) September 30, 2020 September 30, 2019 September 30, 2020 September 30, 2019 ($ in thousands, except for per share data) Adjusted income before tax $ 52,052 $ 64,401 $ 157,087 $ 162,461 Adjusted net income 40,400 49,894 122,870 129,819 Adjusted diluted EPS 0.47 0.71 1.60 1.87 (1) Certain "Underwriting and operating expenses" have been reclassified as "Service expenses" in prior periods. (2) Diluted net income for the three months ended September 30, 2019 and the nine months ended September 30, 2020 excludes the impact of the warrant fair value change as it was anti-dilutive. For all other periods presented in the table, diluted net income equals reported net income as the impact of the warrant fair value change was dilutive. (3) Loss ratio is calculated by dividing the insurance claims and claim expenses by net premiums earned.. (4) Expense ratio is calculated by dividing underwriting and operating expenses by net premiums earned. (5) Combined ratio may not foot due to rounding. (6) See " Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures ," below. Revenues For the three and nine months ended September 30, 2020, net premiums earned increased $6.4 million or 7% and $47.0 million or 19%, respectively, compared to the three and nine months ended September 30, 2019. The increase is primarily due to the growth of our IIF, a rise in monthly policy production and higher single premium policy cancellations, partially offset by 48 increased cessions under the QSR and ILN Transactions. For the three and nine months ended September 30, 2020, net investment income increased $0.5 million and $0.6 million, respectively, compared to the three and nine months ended September 30, 2019. The increases were driven by an increase in the size of our total investment portfolio, partially offset by a decline in book yield tied to the prevailing interest rate and credit spread environment. For the three months ended September 30, 2020, other revenues decreased $0.6 million compared to the three months ended September 30, 2019. For the nine months ended September 30, 2020, other revenues increased $1.1 million, compared to nine months ended September 30, 2019. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. Fluctuations in other revenues were driven by the size of NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods. Expenses We recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology, professional services and facilities expenses, in connection with the development and operation of our business. We also incur service expenses in connection with NMIS' outsourced loan review activities. Insurance claims and claim expenses increased $13.1 million and $47.5 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019, as a result of an increase in defaults, driven by new defaults on insured loans impacted by COVID-19 outbreak, and an increase in the overall number of policies in our portfolio and aging of earlier book years, partially offset by the release of certain reserves related to prior year defaults. Underwriting and operating expenses increased $1.6 million, and $1.3 million for the three and nine months ended September 30, 2020, respectively, compared to the three and nine months ended September 30, 2019. The increase primarily relates to the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off and an increase in issuance expenses incurred in connection with capital market reinsurance transaction activity, partially offset by reductions in payroll, travel and entertainment, and office administrative expenses as a result of the COVID-19 outbreak. Underwriting and operating expenses included capital market reinsurance transaction costs of $2.3 million and $1.7 million, for the three months ended September 30, 2020 and 2019, respectively, and $2.9 million and $2.4 million, for the nine months ended September 30, 2020 and 2019, respectively. Service expenses were $0.6 million and $2.4 million for the three and nine months ended September 30, 2020, respectively, compared to $0.9 million and $1.3 million for the three and nine months ended September 30, 2019, respectively . Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. Fluctuations in service expenses for the three and nine months ended September 30, 2020, were driven by the size of NMIS' outsourced loan review volume. Amounts incurred as service expenses generally corre spond with amounts recognized in other revenues in the same periods. Interest expense was $7.8 million and $16.5 million for the three and nine months ended September 30, 2020, respectively, compared to $3.0 million and $9.1 million for the three and nine months ended September 30, 2019, respectively. Interest expense increased in connection with the $400 million Notes issuance and retirement of the $150 million 2018 Term Loan completed in June 2020. Interest expense for the nine months ended September 30, 2020 includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " Income tax expense was $11.2 million and $33.2 million for the three and nine months ended September 30, 2020, respectively, compared to $14.2 million and $32.1 million for the three and nine months ended September 30, 2019, respectively. Fluctuations in income tax expense for the three and nine months ended September 30, 2020, reflect fluctuations in pre-tax income during such periods. We are subject to a 21% statutory U.S. federal corporate income tax rate. Our effective tax rate on pre-tax income was 22.6% and 21.2% for the three and nine months ended September 30, 2020, respectively, compared to 22.2% and 20.9% for the three and nine months ended September 30, 2019, respectively. Our provision for income taxes for interim periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rates for the three and nine months ended September 30, 2020 and 2019 reflect the discrete tax effects of the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability in each period. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " 49 Net Income Net income was $38.2 million and $123.3 million for the three and nine months ended September 30, 2020, respectively, compared to $49.8 million and $121.8 million for the three and nine months ended September 30, 2019, respectively. Adjusted net income was $40.4 million and $122.9 million for the three and nine months ended September 30, 2020, respectively, compared to $49.9 million and $129.8 million for the three and nine months ended September 30, 2019, respectively. Net income and adjusted net income for the three and nine months ended September 30, 2020, benefited from an increase in total revenues, but were also impacted by defaults caused by the COVID-19 pandemic, which drove an increase in insurance claims and claim expenses. Diluted EPS was $0.45 and $1.55 for the three and nine months ended September 30, 2020, respectively, compared to $0.69 and $1.75 for the three and nine months ended September 30, 2019, respectively. Adjusted diluted EPS was $0.47 and $1.60 for the three and nine months ended September 30, 2020, respectively, compared to $0.71 and $1.87 for the three and nine months ended September 30, 2019, respectively. Diluted and adjusted diluted EPS decreased primarily due to an increase in weighted average diluted shares outstanding in connection with the issuance of 15.9 million shares of common stock we completed in June 2020. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For the three months ended September 30, For the nine months ended September 30, 2020 2019 2020 2019 As reported ($ in thousands, except for per share data) Income before income taxes $ 49,357 $ 63,932 $ 156,490 $ 153,864 Income tax expense 11,178 14,169 33,192 32,102 Net income $ 38,179 $ 49,763 $ 123,298 $ 121,762 Adjustments Net realized investment losses (gains) 4 (81) (635) 219 Loss (gain) from change in fair value warrant liability 437 (1,139) (4,286) 6,025 Capital market transaction costs 2,254 1,689 5,518 2,353 Adjusted income before tax 52,052 64,401 157,087 162,461 Income tax expense on adjustments 474 338 1,025 540 Adjusted net income $ 40,400 $ 49,894 $ 122,870 $ 129,819 Weighted average diluted shares outstanding 85,599 70,137 76,867 69,520 Adjusted diluted EPS $ 0.47 $ 0.71 $ 1.60 $ 1.87 Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhances the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present. Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred. 50 Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and discrete, non-recurring and non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods. Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP. Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below. • Change in fair value of warrant liability . Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability. • Capital markets transaction costs . Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles. • Net realized investment gains and losses . The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results. • Infrequent or unusual non-operating items . Items that are the result of unforeseen or uncommon events, which occur separately from operating earnings and are not expected to recur in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are non-recurring in nature, are not part of our primary operating activities and do not reflect our current period operating results. 51 Consolidated balance sheets September 30, 2020 December 31, 2019 (In Thousands) Total investment portfolio $ 1,689,815 $ 1,140,940 Cash and cash equivalents 194,199 41,089 Premiums receivable 48,159 46,085 Deferred policy acquisition costs, net 63,194 59,972 Software and equipment, net 28,131 26,096 Prepaid reinsurance premiums 8,014 15,488 Reinsurance recoverable (1) 17,180 4,939 Other assets (1) 33,128 30,209 Total assets $ 2,081,820 $ 1,364,818 Debt $ 392,987 $ 145,764 Unearned premiums 116,008 136,642 Accounts payable and accrued expenses 59,316 39,904 Reserve for insurance claims and claim expenses 87,230 23,752 Reinsurance funds withheld 10,364 14,310 Warrant liability 3,135 7,641 Deferred tax liability, net 97,451 56,360 Other liabilities 7,773 10,025 Total liabilities 774,264 434,398 Total shareholders' equity 1,307,556 930,420 Total liabilities and shareholders' equity $ 2,081,820 $ 1,364,818 (1) Reinsurance recoverable has been reclassified from "Other assets" in prior periods. As of September 30, 2020, we had $1.9 billion in cash and investments, including $75.1 million held by NMIH. The increases in cash and investments from December 31, 2019 related to net proceeds of approximately $220 million raised from the issuance of common stock and approximately $245 million raised from the issuance of the Notes, both of which were completed in June 2020, as well as cash generated from operations. Net deferred policy acquisition costs were $63.2 million as of September 30, 2020, compared to $60.0 million as of December 31, 2019. The increase was primarily driven by growth in the number of policies written during the period and the deferral of certain costs associated with the origination of those policies, partially offset by the amortization of previously deferred acquisition costs. Prepaid reinsurance premiums were $8.0 million as of September 30, 2020, compared to $15.5 million as of December 31, 2019. Prepaid reinsurance premiums, which represent the unearned premiums on single premium policies ceded under the 2016 QSR Transaction, decreased due to the continued amortization of previously ceded unearned premiums. Reinsurance recoverable was $17.2 million as of September 30, 2020, compared to $4.9 million as of December 31, 2019. The increase in reinsurance recoverable was primarily driven by an increase in ceded losses recoverable associated with our QSR transactions due to an increase in defaults and related reserves for insurance claims and claims expense resulting from the COVID-19 pandemic. Unearned premiums decreased from $136.6 million as of December 31, 2019 to $116.0 million as of September 30, 2020, primarily due to the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies and the cancellation of other single premium policies, partially offset by single premium policy originations during the nine months ended September 30, 2020. Debt was $393.0 million as of September 30, 2020, compared to $145.8 million as of December 31, 2019. Debt at December 31, 2019, represented the carrying value of the $150 million 2018 Term Loan, which was repaid in full during the second quarter of 2020. Debt at September 30, 2020, represented the carrying value of the recently issued the Notes completed in June 2020. 52 Accounts payable and accrued expenses increased from $39.9 million as of December 31, 2019 to $59.3 million as of September 30, 2020, primarily due to an increase in reinsurance premiums payable, accrued interest due and payable semi-annually on the Notes issued in June 2020, unsettled payments from the purchase of certain investment securities, and timing of other payments due, partially offset by the settlement of previously accrued compensation during the nine months ended September 30, 2020. Reserve for insurance claims and claim expenses increased from $23.8 million as of December 31, 2019 to $87.2 million as of September 30, 2020, primarily due to an increase in defaults, driven by new defaults on insured loans impacted by the COVID-19 outbreak, and an increase in the overall number of policies in our portfolio and aging of earlier book years. This was partially offset by the release of prior year reserves primarily tied to default cures. See " - Insurance Claims and Claim Expenses ," above for further details. Reinsurance funds withheld was $10.4 million as of September 30, 2020, representing the net of our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction. The decrease in reinsurance funds withheld of $3.9 million from December 31, 2019, relates to the continued decline in ceded premiums written on single premium policies, due to the end of the reinsurance coverage period for new business under the 2016 QSR Transaction at December 31, 2017. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance ." Warrant liability decreased from $7.6 million at December 31, 2019 to $3.1 million at September 30, 2020, primarily due to a decrease in our stock price. For further information regarding the valuation of our warrant liability and its impact on our results of operations and financial position, see Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 3, Fair Value of Financial Instruments. " Net deferred tax liability increased from $56.4 million as of December 31, 2019 to $97.5 million as of September 30, 2020, primarily due an increase in the tax deduction claimed for our statutory contingency reserve. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " The following table summarizes our consolidated cash flows from operating, investing and financing activities. Consolidated cash flows For the nine months ended September 30, 2020 2019 Net cash provided by (used in): (In Thousands) Operating activities $ 214,977 $ 139,567 Investing activities (520,878) (117,263) Financing activities 459,011 (1,709) Net increase in cash and cash equivalents $ 153,110 $ 20,595 Net cash provided by operating activities was $215.0 million for the nine months ended September 30, 2020, compared to $139.6 million for the nine months ended September 30, 2019. The increase in cash generated from operating activities was primarily driven by growth in premiums written, partially offset by an increase in claims paid. Cash used in investing activities for the periods presented was driven by the purchase of fixed and short-term maturities with cash provided by operating and, as available, financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash used in investing activities for the nine months ended September 30, 2020, reflects, in part, the investment of net cash proceeds from the common stock and Notes offerings we completed in June 2020. Cash provided by financing activities was $459.0 million for the nine months ended September 30, 2020, compared to cash used in financing activities of $1.7 million for the nine months ended September 30, 2019. Cash provided by financing activities for the nine months ended September 30, 2020 refle cts $219.7 million net cash proceeds raised in our 2020 common stock offering and $244.2 million net cash proceeds raised in our 2020 Notes offering. 53 Holding Company Liquidity and Capital Resources NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for: (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2020 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations). As of September 30, 2020, NMIH had $75.1 million of cash and investments. NMIH's principal source of net cash is investment income. NMIH also has access to $110 million of undrawn revolving credit capacity under the 2020 Revolving Credit Facility (See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 12, Subsequent Event "). Our insurance operating subsidiaries also have the capacity, under Wisconsin law, to pay $16.1 million of aggregate ordinary dividends to NMIH during the 12-month period ending December 31, 2020. On June 8, 2020, NMIH completed the sale of 15.9 million shares of common stock, including the exercise of a 15% overallotment option, and raised proceeds of $219.7 million, net of underwriting discounts, commissions and other direct offering expenses. In June 2020, NMIH also completed the sale of the Notes, raising net proceeds of $244.4 million after giving effect to offering expenses and the repayment of principal amount outstanding under our $150 million 2018 Term Loan. In June 2020, NMIH contributed $445.4 million of capital to NMIC following completion of the equity and Notes offerings. NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, with such approvals subject to change or revocation at any time. Among such agreements, the Wisconsin OCI has approved the allocation of interest expense on the Notes and $100 million of the 2020 Revolving Credit Facility to NMIC to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC. NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. Under Wisconsin law, NMIC and Re One may pay dividends up to specified levels ( i.e. , "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. Under Wisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that together with other dividends and distributions made within the preceding 12 months exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the preceding December 31 or (ii) adjusted statutory net income for the 12-month period ending the preceding December 31. Since inception, NMIC and Re One have not paid any dividends to NMIH. NMIC and Re One have the capacity to pay $16.1 million of aggregate ordinary dividends to NMIH during the 12-month period ending December 31, 2020. As an approved insurer under PMIERs, NMIC would be subject to additional restrictions on its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the PMIERs financial requirements are not permitted to pay dividends without prior approval from the GSEs. Through March 31, 2021, even if an approved insurer has an available assets surplus, approved insurers must obtain Fannie Mae's prior written approval before taking any of the following actions: a) pay dividends, make payments of principal or increase payments of interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by the approved insurer, make any other payments, unless related to expenses incurred in the normal course of business or to commitments made prior to the guidance effective date, or pledge or transfer asset(s) to any affiliate or investor, or b) enter into any new arrangements or alter any existing arrangements under tax sharing and intercompany expense-sharing agreements other than renewals and extensions of agreements in effect prior to the guidance effective date. NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements (respectively, as defined therein). NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. The Notes mature on Ju ne 19, 202 5 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. Our $100 million 2020 Revolving Credit Facility matures on February 22, 2023 and accrues interest at a variable rate equal to, at our discretion, (i) a base rate (as defined in the Credit Agreement, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Eurodollar Rate (subject to a floor of 0.00% per annum) plus a margin of 1.375% to 2.875% per annum, in each case based on the applicable corporate credit rating at the time. Borrowings under the 2020 Revolving 54 Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations. Under the 2020 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As of September 30, 2020, the applicable commitment fee was 0.35%. We are subject to certain covenants under the Notes and 2020 Revolving Credit Facility. Under the Notes (and as defined in the Indenture), we are subject to a maximum debt-to-total capitalization ratio of 35%. Under the 2020 Revolving Credit Facility (as defined in the Credit Agreement), we are subject to a maximum debt-to-total capitalization ratio of 35%, a minimum liquidity requirement, compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of September 30, 2020. Consolidated Investment Portfolio The primary objectives of our investment activity are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset types, industry sectors, single issuers, and certain credit ratings; and benchmarks for asset duration. Our investment portfolio is comprised entirely of fixed maturity instruments. As of September 30, 2020, the fair value of our investment portfolio was $1.7 billion and we held an additional $194.2 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the nine months ended September 30, 2020 was 2.3%. The book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. Yield on the investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our portfolio holdings and other factors. The following tables present a breakdown of our investment portfolio and cash and cash equivalents by investment type and credit rating: Percentage of portfolio's fair value September 30, 2020 December 31, 2019 Corporate debt securities 63 % 58 % Municipal debt securities 18 16 Cash, cash equivalents, and short-term investments 10 7 Asset-backed securities 7 15 U.S. treasury securities and obligations of U.S. government agencies 2 4 Total 100 % 100 % Investment portfolio ratings at fair value (1) September 30, 2020 December 31, 2019 AAA 16 % 20 % AA (2) 23 19 A (2) 43 47 BBB (2) 18 14 Total 100 % 100 % (1) Excluding certain operating cash accounts. (2) Includes +/– ratings. All of our investments are rated by one or more nationally recognized statistical rating organizations. If three or more ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating. 55 Investment Securities - Allowance for credit losses As of September 30, 2020, we did not recognize an allowance for credit loss for any security in our investment portfolio and we did not record any provision for credit loss for investment securities during the three and nine months ended September 30, 2020. As of September 30, 2019, we held no OTTI securities. During the nine months ended September 30, 2019, we recognized a $0.4 million loss in earnings related to the planned sale of a security in a loss position that was disposed of in April 2019. We did not recognize any OTTI losses for the three months ended September 30, 2019. Off-Balance Sheet Arrangements and Contractual Obligations We had no material off-balance sheet arrangements as of September 30, 2020. In connection with the ILN Transactions, we have certain future contractual commitments to the Oaktown Re Vehicles (special purpose VIE that are not consolidated in our financial results). See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 1. Organization, Basis of Presentation and Summary of Accounting Principles. " Effective March 31, 2020, we entered into a seven-year IT services agreement with TCS under which we outsource certain IT support and expertise functions. See "- Information Technology " above for more information. Critical Accounting Estimates We use accounting principles and methods that conform to GAAP. We are required to apply significant judgment and make material estimates in the preparation of our financial statements and with regard to various accounting, reporting and disclosure matters. Assumptions and estimates are required to apply these principles where actual measurement is not possible or practical. On an ongoing basis, we evaluate our estimates and assumptions. Our actual results may differ from these estimates under different assumptions or conditions. We believe that the assumptions and estimates associated with revenue recognition, our investment portfolio, deferred policy acquisition costs, premium deficiency reserves, and reserves for insurance claims and claim expenses have the greatest potential impact on our consolidated financial statements. Therefore, we consider these to be our critical accounting estimates. There have not been any material changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates described in our 2019 10-K. 56