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 2020 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 2020 10-K, as subsequently updated in other reports we file with the SEC, for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any other period. Overview We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-LTV ( i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners. NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of March 31, 2021, we had master policies with 1,609 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As of March 31, 2021, we had $125.4 billion of total insurance-in-force (IIF), including primary IIF of $123.8 billion, and $31.3 billion of gross RIF, including primary RIF of $31.2 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 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 March 31, 2021, we had 250 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. COVID-19 Developments On January 30, 2020, the WHO declared the outbreak of COVID-19 a global health emergency and subsequently 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 severely curtailed day-to-day activity and local, state and federal regulators imposed a broad set 26 of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, caused a dramatic slowdown in U.S. and global economic activity and a record number of Americans were furloughed or laid-off in the ensuing downturn. The global dislocation caused by COVID-19 was unprecedented. In response to the COVID-19 outbreak and uncertainty that it introduced, we activated our disaster continuity program to ensure our employees were safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration for the increased level of macroeconomic volatility. The U.S. housing market demonstrated notable resiliency in the face of COVID stress, with significant purchase demand, record levels of mortgage origination activity and nationwide house price appreciation emerging shortly after the onset of the pandemic. More recently, the development of new vaccines and accelerating pace of the inoculation effort across the U.S. has allowed for the broad resumption of personal and business activity nationwide, and provided hope for a sharp economic rebound in 2021. While there is increased optimism that the acute health risk posed by and economic impact of COVID-19 has begun to recede, the pandemic continues to affect communities across the U.S. and poses significant risk globally. The path and pace of global economic recovery will depend, in large part, on the course of the virus, which itself remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the ultimate impact COVID-19 will have on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results at this time. Potential Impact on the U.S. Housing Market and Mortgage Insurance Industry The U.S. housing market has demonstrated significant resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates have helped to support housing affordability, medical concerns and lifestyle preferences have driven people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives have reinforced the value of homeownership – all of which contributed to an influx of new home buyers, record levels of purchase demand, and nationwide house price appreciation. While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis and demonstrated resiliency thus far through the pandemic 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 the government, 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 subsequently under the Consolidated Appropriations Act enacted on December 27, 2020 (the CAA) and the American Rescue Plan Act enacted on March 11, 2021 (the American Rescue Plan), as well as across a range of other programs designed to assist unemployed individuals and distressed businesses, and support the smooth functioning of various capital and risk markets 27 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 in the current period. 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 historically low mortgage rates, though rising in recent months, have created refinancing opportunities for a large number of existing borrowers. 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, total U.S. mortgage insurance industry new insurance written (NIW) volume increased to record levels following the onset of the COVID pandemic and the persistency of existing in-force insured risk across the industry declined 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 of our 2020 10K , "Risk Factors - The COVID-19 outbreak may continue to materially adversely affect our business, results of operations and financial condition ." Potential Impact on NMI's Business Performance and Financial Position Operations We had 250 employees at March 31, 2021, including 112 who typically work at our corporate headquarters in Emeryville, CA and 138 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 112 Emeryville-based staff. We transitioned our operations seamlessly and have continued to positively engage with customers on a remote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment are unchanged. We 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. While the broad COVID vaccination effort and relaxation of local restrictions on indoor business operation may allow for a general resumption of in-office activity for our headquarters-based employees, the success of our remote work experience through the pandemic may cause us to offer increased flexibility for employees who prefer a full-time or part-time distributed engagement in the future. If we offer such flexibility and a large enough number of employees elect such an approach, our office and real estate needs could evolve. 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 $26.4 billion of NIW during the three months ended March 31, 2021, up 134% compared to the three months ended March 31, 2020. While we currently expect our new business production will remain elevated, the potential onset of a new viral wave and rising case counts, 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 further strengthened the credit risk profile of our NIW volume and IIF. At March 31, 2021, the weighted average FICO score of our RIF was 754 and we had a 3% mix of below 680 FICO score risk. Similarly, at March 31, 2021, the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 10% mix of 97% LTV risk. 28 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 by the COVID-19 outbreak, and the uncertain duration and ultimate global impact of this crisis, we took action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules, following the onset of the pandemic. Delinquency Trends and Claims Expense At March 31, 2021, we had 11,090 defaulted loans in our primary insured portfolio, which represented a 2.5% default rate against our 436,652 total policies in-force, and identified 14,805 loans that were enrolled in a forbearance program, including 9,988 of those in default status. Our default population increased significantly following the outbreak of the pandemic as borrowers faced increased challenges related to COVID-19 and chose to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by private lenders. After this significant initial spike our default experience has steadily improved as an increasing number of impacted borrowers have cured their delinquencies, and fewer new defaults have emerged. Our total population of defaulted loans peaked in August 2020 and has since declined every month with consistency. As of April 30, 2021, our default population was 10,060, representing a 2.24% default rate. The table below highlights default and forbearance activity in our primary portfolio as of the dates indicated Default and Forbearance Activity as of 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/21 Number of loans in default 1,449 10,816 13,765 12,209 11,090 Default rate (1) 0.38% 2.90% 3.60% 3.06% 2.54% Number of loans in forbearance 3,122 28,555 24,809 19,464 14,805 Forbearance rate (2) 0.83% 7.66% 6.50% 4.87% 3.39% (1) Default rate is calculated as the number of loans in default divided by total polices in force (2) Forbearance rate is calculated as the number of loans in forbearance divided by total polices in force. While we are encouraged by the decline in our forbearance and default populations and optimistic that we will see continued improvement as the stress of the COVID crisis recedes, a future viral wave could cause further social and economic dislocation and 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 March 31, 2021, 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. 29 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) up to three years of missed interest payments 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. In February, the GSEs extended their moratorium on the foreclosure of enterprise-backed single-family residential mortgages through June 30, 2021. If the duration of the current foreclosure moratorium mandated by the GSEs is further extended, 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 March 31, 2021, we reported $1,810 million available assets against $1,261 million risk-based required assets. Our “excess” funding position was $549 million. 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 each of September and December 2020) on the risk-based treatment of loans affected by the COVID-19 crisis and the reporting of non-performing loans by aging category. 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 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 potential 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 March 31, 2021: 30 ($ values in thousands) 2017 ILN Transaction 2018 ILN Transaction 2019 ILN Transaction 2020-1 ILN Transaction 2020-2 ILN Transaction Ceded RIF $ 1,635,102 $ 1,865,606 $ 2,252,220 $ 4,235,240 $ 5,335,934 First Layer Retained Loss 121,376 123,051 122,838 169,514 121,177 Reinsurance Coverage 40,226 158,489 231,877 174,314 218,741 Eligible Coverage $ 161,602 $ 281,540 $ 354,715 $ 343,828 $ 339,918 Subordinated Coverage (1) 9.88% 15.09% 15.75% 8.00% 6.25% PMIERs Charge on Ceded RIF 6.23% 7.92% 8.10% 6.40% 5.44% Overcollateralization (2) (4) $ 40,226 $ 133,753 $ 172,206 $ 72,839 $ 49,601 Delinquency Trigger (3) 4.0% 4.0% 4.0% 6.0% 4.7% (1) For the 2020-1 ILN Transaction, absent a delinquency trigger, the subordinated coverage is capped at 8%. For the 2020-2 ILN Transaction, absent a delinquency, the subordinated coverage is capped at 6.25%. (2) Overcollateralization of the 2017 ILN Transaction is equal to its current reinsurance coverage as the PMIERs required asset amount on RIF ceded under the transaction is currently below the remaining first layer retained loss. (3) Delinquency triggers for 2017, 2018 and 2019 ILN Transactions are set at a fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for the 2020-1 and 2020-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average. (4) May not be replicated based on the rounded figures presented in the table. At March 31, 2021, we had an aggregate $469 million of overcollateralization available across our 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 three months ended March 31, 2021, we estimate that our total overcollateralization would increase by up to approximately $33.7 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 $549 million excess available asset position at March 31, 2021, the nationwide applicability of the 70% haircut on delinquent policies subject to a forbearance program accessed in response to a financial hardship related to the COVID-19 crisis, the increasing PMIERs relief automatically provided under each of our quota share treaties and ILN Transactions. 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 generally 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 through the duration of and following the COVID-19 pandemic. Liquidity We evaluate our liquidity position at both a holding company (NMIH) and primary operating subsidiary (NMIC) level. As of March 31, 2021, we had $1.9 billion of consolidated cash and investments, including $78 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. 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 $150 million principal amount outstanding under our 2018 Term Loan. 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 (through the 2020 Revolving Credit Facility) and $1.6 million of ordinary course dividend capacity available from 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 31 support the requirements of our operating subsidiaries if we so decide. Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. 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 March 31, 2021, NMIC had $1.8 billion of cash and investments, including $86 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 March 31, 2021, NMIC generated $283 million of cash flow from operations and received an additional $327 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. There was broad discussion at the onset of the COVID pandemic and concerns about potential liquidity challenges that servicers might face in the event of widespread borrower utilization of forbearance programs. These concerns have not materialized thus far and we do not believe that loan servicer liquidity constraints, should they arise in the future, would 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 each of September and December 2020) that, among other items, requires us to notify them of our intent to cancel coverage on policies for which servicers have failed to make timely premium payments so that the GSEs can pay the premiums directly to us and preserve the mortgage insurance coverage. Through March 31, 2021, 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 March 31, 2021, 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 March 31, 2021, 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 March 31, 2021, our portfolio was in a $16 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 1.5%. We did not record any allowance for credit losses in the portfolio during the three months ended March 31, 2021, as we expect to recover the amortized cost basis of all securities held. The pre-tax book yield on our investment portfolio was 2.0% for the three months ended March 31, 2021. 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, CAA and American Rescue Plan include, among other items, provisions relating to refundable payroll tax credits, deferment of social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, 32 modifications to the net interest deduction limitations, increased limitations on qualified charitable contributions, technical corrections to tax depreciation methods for qualified improvement property, and temporary 100% deduction for business meals. We continue to monitor the impact that the CARES Act, CAA and American Rescue Plan 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; • 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 March 31, 2021 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 twelve-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 33 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 four outstanding quota share reinsurance treaties – the 2016 QSR Transaction, effective September 1, 2016, the 2018 QSR Transaction, effective January 1, 2018, the 2020 QSR Transaction, effective April 1, 2020 and the 2021 QSR Transaction, effective January 1, 2021. 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 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. Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5% of the risk on eligible policies written in 2021, 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 57.5% 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 34 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 March 31, 2021. ( $ 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 $ 121,376 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 123,051 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,838 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 174,314 169,514 169,514 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 218,741 121,777 121,777 (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. (2) Less than 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for further discussion of these third-party reinsurance arrangements. In April 27, 2021, NMIC secured $367.2 million of aggregate excess-of-loss reinsurance coverage at inception for an exi sting portfolio of policies primarily written from October 1, 2020 to March 31, 2021, through a mortgage insurance-linked notes offering by Oaktown Re VI. The reinsurance coverage amount under the terms of the 2021-1 ILN Transaction decreases from $367.2 million at inception over a 12.5 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 $163.7 million of aggregate losses and Oaktown Re VI then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. 35 Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended March 31, 2021 March 31, 2020 IIF NIW IIF NIW (In Millions) Monthly $ 106,920 $ 23,764 $ 81,347 $ 10,461 Single 16,857 2,633 17,147 836 Primary 123,777 26,397 98,494 11,297 Pool 1,642 — 2,487 — Total $ 125,419 $ 26,397 $ 100,981 $ 11,297 For the three months ended March 31, 2021, NIW increased 134%, compared to the three months ended March 31, 2020, 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 March 31, 2021, monthly premium polices accounted for 90% of our NIW, compared to 93% for the three months ended March 31, 2020. As of March 31, 2021, monthly premium policies accounted for 86% of our primary IIF, compared to 83% at March 31, 2020. Total IIF increased 24% at March 31, 2021 compared to March 31, 2020, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of in-force policies. Our persistency rate decreased to 52% at March 31, 2021 from 72% at March 31, 2020, 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 March 31, 2021 March 31, 2020 (In Thousands) Net premiums written $ 115,815 $ 91,371 Net premiums earned 105,879 98,717 For the three months ended March 31, 2021, net premiums written increased 27%, and net premiums earned increased 7%, compared to the three months ended March 31, 2020. The growth in net premiums written and earned were primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR and ILN Transactions. The accelerated rate of growth in net premiums written over growth in net premiums earned is due to increase in single policy production and increase in earnings on cancellations during the three months ended March 31, 2021. Pool premiums written and earned for the three months ended March 31, 2021 and 2020, were $0.5 million and $0.7 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. 36 Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends As of and for the three months ended March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 March 31, 2020 ($ Values In Millions, except as noted below) New insurance written $ 26,397 $ 19,782 $ 18,499 $ 13,124 $ 11,297 Percentage of monthly premium 90 % 90 % 89 % 91 % 93 % Percentage of single premium 10 % 10 % 11 % 9 % 7 % New risk written $ 6,531 $ 4,868 $ 4,577 $ 3,260 $ 2,897 Insurance-in-force (1) 123,777 111,252 104,494 98,905 98,494 Percentage of monthly premium 86 % 86 % 85 % 84 % 83 % Percentage of single premium 14 % 14 % 15 % 16 % 17 % Risk-in-force (1) $ 31,206 $ 28,164 $ 26,568 $ 25,238 $ 25,192 Policies in force (count) (1) 436,652 399,429 381,899 372,934 376,852 Average loan size ($ value in thousands) (1) $ 283 $ 279 $ 274 $ 265 $ 261 Coverage percentage (2) 25.2 % 25.3 % 25.4 % 25.5 % 25.6 % Loans in default (count) (1) 11,090 12,209 13,765 10,816 1,449 Default rate (1) 2.54 % 3.06 % 3.60 % 2.90 % 0.38 % Risk-in-force on defaulted loans (1) $ 785 $ 874 $ 1,008 $ 799 $ 84 Net premium yield (3) 0.36 % 0.37 % 0.39 % 0.40 % 0.41 % Earnings from cancellations $ 9.9 $ 11.7 $ 12.6 $ 15.5 $ 8.6 Annual persistency (4) 51.9 % 55.9 % 60.0 % 64.1 % 71.7 % Quarterly run-off (5) 12.5 % 12.5 % 13.1 % 12.9 % 8.0 % (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 twelve-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 March 31, 2021 March 31, 2020 (In Millions) IIF, beginning of period $ 111,252 $ 94,754 NIW 26,397 11,297 Cancellations, principal repayments and other reductions (13,872) (7,557) IIF, end of period $ 123,777 $ 98,494 37 We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses. The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated. Primary IIF and RIF As of March 31, 2021 As of March 31, 2020 IIF RIF IIF RIF (In Millions) March 31, 2021 $ 26,296 $ 6,508 $ — $ — 2020 53,650 13,397 11,236 2,882 2019 20,402 5,342 39,485 10,259 2018 8,074 2,057 17,545 4,464 2017 6,700 1,678 13,656 3,398 2016 and before 8,655 2,224 16,572 4,189 Total $ 123,777 $ 31,206 $ 98,494 $ 25,192 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. The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan. Primary NIW by FICO For the three months ended March 31, 2021 March 31, 2020 (In Millions) >= 760 $ 12,914 $ 6,290 740-759 5,312 1,615 720-739 3,963 1,579 700-719 2,358 1,038 680-699 1,360 565 <=679 490 210 Total $ 26,397 $ 11,297 Weighted average FICO 755 757 38 Primary NIW by LTV For the three months ended March 31, 2021 March 31, 2020 (In Millions) 95.01% and above $ 2,451 $ 721 90.01% to 95.00% 11,051 5,009 85.01% to 90.00% 7,848 4,082 85.00% and below 5,047 1,485 Total $ 26,397 $ 11,297 Weighted average LTV 91.0 % 91.3 % Primary NIW by purchase/refinance mix For the three months ended March 31, 2021 March 31, 2020 (In Millions) Purchase $ 17,909 $ 7,991 Refinance 8,488 3,306 Total $ 26,397 $ 11,297 The tables below present our total primary IIF and RIF by FICO and LTV, and total primary RIF by loan type as of the dates indicated. Primary IIF by FICO As of March 31, 2021 March 31, 2020 ($ Values In Millions) >= 760 $ 63,919 52 % $ 47,340 48 % 740-759 20,537 16 16,060 16 720-739 17,167 14 14,002 14 700-719 11,536 9 10,518 11 680-699 7,329 6 6,879 7 <=679 3,289 3 3,695 4 Total $ 123,777 100 % $ 98,494 100 % Primary RIF by FICO As of March 31, 2021 March 31, 2020 ($ Values In Millions) >= 760 $ 15,920 51 % $ 12,076 48 % 740-759 5,214 17 4,121 16 720-739 4,378 14 3,626 14 700-719 2,981 9 2,696 11 680-699 1,896 6 1,760 7 <=679 817 3 913 4 Total $ 31,206 100 % $ 25,192 100 % 39 Primary IIF by LTV As of March 31, 2021 March 31, 2020 ($ Values In Millions) 95.01% and above $ 10,616 9 % $ 8,838 9 % 90.01% to 95.00% 54,832 44 46,318 47 85.01% to 90.00% 40,057 32 31,729 32 85.00% and below 18,272 15 11,609 12 Total $ 123,777 100 % $ 98,494 100 % Primary RIF by LTV As of March 31, 2021 March 31, 2020 ($ Values In Millions) 95.01% and above $ 3,106 10 % $ 2,478 10 % 90.01% to 95.00% 16,139 52 13,587 54 85.01% to 90.00% 9,818 31 7,767 31 85.00% and below 2,143 7 1,360 5 Total $ 31,206 100 % $ 25,192 100 % Primary RIF by Loan Type As of March 31, 2021 March 31, 2020 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 March 31, 2021. As of March 31, 2021 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 $ 10 6 % 655 66 2 1 0.4 % 0.5 % 3.0 % 2014 3,451 414 12 % 14,786 2,452 114 48 4.2 % 1.1 % 4.6 % 2015 12,422 2,529 20 % 52,548 13,334 541 113 3.2 % 1.2 % 4.1 % 2016 21,187 5,702 27 % 83,626 27,332 1,256 122 2.8 % 1.6 % 4.6 % 2017 21,582 6,700 31 % 85,897 32,499 1,972 84 4.4 % 2.4 % 6.1 % 2018 27,295 8,074 30 % 104,043 38,090 2,679 64 8.5 % 2.6 % 7.0 % 2019 45,141 20,402 45 % 148,423 77,278 3,276 9 14.1 % 2.2 % 4.2 % 2020 62,702 53,650 86 % 186,174 163,626 1,247 — 8.3 % 0.7 % 0.8 % 2021 26,397 26,296 100 % 82,232 81,975 3 — — % — % — % Total $ 220,339 $ 123,777 758,384 436,652 11,090 441 (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. 40 Geographic Dispersion The following table shows the distribution by state of our primary RIF as of the periods indicated. The distribution of our primary RIF as of March 31, 2021 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of March 31, 2021 March 31, 2020 California 10.8 % 11.5 % Texas 9.5 8.2 Florida 7.9 5.9 Virginia 5.0 5.3 Colorado 4.1 3.6 Maryland 3.8 3.4 Illinois 3.7 3.8 Washington 3.5 3.3 Georgia 3.3 2.7 Pennsylvania 3.3 3.7 Total 54.9 % 51.4 % 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, the percentage of coverage on insured loans, and the level of reinsurance coverage maintained against insured exposures. 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. 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 41 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 March 31, 2021, 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. 42 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 March 31, 2021 March 31, 2020 (In Thousands) Beginning balance $ 90,567 $ 23,752 Less reinsurance recoverables (1) (17,608) (4,939) Beginning balance, net of reinsurance recoverables 72,959 18,813 Add claims incurred: Claims and claim expenses incurred: Current year (2) 10,557 7,558 Prior years (3) (5,595) (1,861) Total claims and claim expenses incurred 4,962 5,697 Less claims paid: Claims and claim expenses paid: Current year (2) 12 — Prior years (3) 492 1,224 Total claims and claim expenses paid 504 1,224 Reserve at end of period, net of reinsurance recoverables 77,417 23,286 Add reinsurance recoverables (1) 18,686 6,193 Ending balance $ 96,103 $ 29,479 (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 and included $5.3 million attributed to net case reserves and $5.3 million attributed to net IBNR reserves for the three months ended March 31, 2021 and $6.0 million attributed to net case reserves and $1.6 million attributed to net IBNR reserves for the three months ended March 31, 2020. (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.and included $0.6 million attributed to net case reserves and $5.0 million attributed to net IBNR reserves for the three months ended March 31, 2021 and $0.6 million attributed to net case reserves and $1.3 million attributed to net IBNR reserves for the three months ended March 31, 2020 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. 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 $83.0 million related to prior year defaults remained as of March 31, 2021. 43 The following table provides a reconciliation of the beginning and ending count of loans in default. For the three months ended March 31, 2021 March 31, 2020 Beginning default inventory 12,209 1,448 Plus: new defaults 1,767 512 Less: cures (2,868) (475) Less: claims paid (16) (34) Less: claims denied (2) (2) Ending default inventory 11,090 1,449 The increase in the ending default inventory at March 31, 2021 compared to March 31, 2020, is primarily attributable to the COVID-19 outbreak as borrowers have faced increasing challenges and chosen to access the forbearance program for federally backed loans codified under the CARES Act and other similar assistance programs made available by private lenders. At March 31, 2021, 9,988 of our 11,090 ending default inventory were in a COVID-19 related forbearance program. The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated. For the three months ended March 31, 2021 March 31, 2020 ($ In Thousands) Number of claims paid (1) 16 34 Total amount paid for claims $ 606 $ 1,503 Average amount paid per claim $ 38 $ 44 Severity (2) 61 % 83 % (1) Count include s one claim settled without payment in each of the three months ended March 31, 2021 and 2020. (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 months ended March 31, 2021 decreased compared to the three months ended March 31, 2020, despite the growth and seasoning of our insured portfolio, and significant increase in our default population, primarily as a result of the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID outbreak and codified under the CARES Act. Such forbearance and foreclosure programs have extended, and may ultimately interrupt, the timeline over which loans would otherwise progress through the default cycle to a paid claim. Our claims severity for the three months ended March 31, 2021 was 61%, compared to 83% for the three months ended March 31, 2020. Claims severity for the three months ended March 31, 2021 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 and raises the prospect of a third-party sale of a foreclosed property, which can mitigate the severity of our settled claims. 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 March 31, 2021 As of March 31, 2020 (In Thousands) Case (1) $ 7.9 $ 18.6 IBNR (1)(2) 0.8 1.7 Total $ 8.7 $ 20.3 (1) Defined as the gross reserve per insured loan in default. (2) Amount includes claims adjustment expenses. 44 The average reserve per default at March 31, 2021 decreased from March 31, 2020, primarily due to new COVID-19 related defaults. At March 31, 2021, 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 March 31, 2021, our total reserve position increased substantially 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, 2021 that NMIC was in full compliance with the PMIERs as of December 31, 2020. 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 March 31, 2021 March 31, 2020 (In Thousands) Available assets $ 1,809,589 $ 1,069,695 Risk-based required assets 1,261,015 912,321 Available assets were $1.8 billion at March 31, 2021, compared to $1.1 billion at March 31, 2020. 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 $740 million increase in NMIC's available assets between the dates presented was driven by the NMIH capital contribution and NMIC's positive cash flow from operations during the intervening period. The increase in the risk-based required asset amount between the dates presented was primarily due to the growth of our gross RIF, and increase in our default inventory related to the onset of the COVID-19 pandemic, p artially offset by the increased cession of risk under our third-party reinsurance agreements. See " - COVID-19 Developments, " above. 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 IT 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 45 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, the cancelability of private coverage, loan size limits and the relative ease of use of private MI products compared to government MI alternatives. LIBOR Transition On March 5, 2021, ICE Benchmark Administration Limited (“IBA”), the administrator for LIBOR, confirmed it would permanently cease the publication of overnight, one-month, three-month, six-month and twelve-month USD LIBOR settings in their current form after June 30, 2023. The U.K. Financial Conduct Authority ("FCA"), the regulator of IBA, announced on the same day that it intends to stop requiring panel banks to continue to submit to LIBOR and all USD LIBOR settings in their current form will either cease to be provided by any administrator or no longer be representative after June 30, 2023. We have exposure to USD LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio, and our 2020 Revolving Credit Facility and certain ILN Transactions that require LIBOR-based payments. We are in the process of reviewing our LIBOR-based contracts and transitioning, as necessary and applicable, to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we cannot currently estimate the impact such transition will have on our operations or financial results. 46 Consolidated Results of Operations Consolidated statements of operations Three months ended March 31, 2021 March 31, 2020 Revenues ($ in thousands, except for per share data) Net premiums earned $ 105,879 $ 98,717 Net investment income 8,814 8,104 Net realized investment losses — (72) Other revenues 501 900 Total revenues 115,194 107,649 Expenses Insurance claims and claim expenses 4,962 5,697 Underwriting and operating expenses 34,065 32,277 Service expenses 591 734 Interest expense 7,915 2,744 Loss (gain) from change in fair value of warrant liability 205 (5,959) Total expenses 47,738 35,493 Income before income taxes 67,456 72,156 Income tax expense 14,565 13,885 Net income $ 52,891 $ 58,271 Earnings per share - Basic $ 0.62 $ 0.85 Earnings per share - Diluted $ 0.61 $ 0.74 Loss ratio (1) 4.7 % 5.8 % Expense ratio (2) 32.2 % 32.7 % Combined ratio 36.9 % 38.5 % Three months ended Non-GAAP financial measures (3) March 31, 2021 March 31, 2020 ($ in thousands, except for per share data) Adjusted income before tax $ 68,039 $ 66,743 Adjusted net income 53,395 52,743 Adjusted diluted EPS 0.62 0.75 (1) Loss ratio is calculated by dividing insurance claims and claim expenses by net premiums earned. (2) Expense ratio is calculated by dividing underwriting and operating expenses by net premiums earned. (3) See " Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures, " below. Revenues Net premiums earned were $105.9 million for the three months ended March 31, 2021 compared to $98.7 million for the three months ended March 31, 2020. The increase from period-to-period was primarily due to the growth of our IIF, a rise in our monthly policy production and higher single premium policy cancellations, partially offset by increased cessions under our QSR and ILN Transactions. Net investment income was $8.8 million for the three months ended March 31, 2021 compared to $8.1 million for the three months ended March 31, 2020. The increase was driven by growth in the size of our total investment portfolio, partially 47 offset by a decline in book yield tied to the prevailing interest rate and credit spread environment. Other revenues were $0.5 million for the three months ended March 31, 2021, compared to $0.9 million for the three months ended March 31, 2020. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The decline in other revenues relates to a decrease in 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 were $5.0 million for the three months ended March 31, 2021, compared to $5.7 million for the three months ended March 31, 2020. Insurance claims and claim expenses decreased period-to-period despite an increase in the number of new defaults reported during the three months ended March 31, 2021, primarily because we established lower reserves per default for loans that we consider to be impaired in connection with the COVID pandemic 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. Insurance claims and claim expenses during the three months ended March 31, 2021 also benefited from cure activity and a release of reserves previously held against certain loans that defaulted prior to the onset of the COVID pandemic. Underwriting and operating expenses were $34.1 million for the three months ended March 31, 2021, compared to $32.3 million for the three months ended March 31, 2020. The increase primarily relates to the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off, 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 $0.4 million and $0.5 million, for the three months ended March 31, 2021 and 2020, respectively. Service expenses were $0.6 million for the three months ended March 31, 2021, compared to $0.7 million for the three months ended March 31, 2020. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The decline in service expenses was driven by a decrease in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the same periods. Interest expense was $7.9 million for the three months ended March 31, 2021 compared to $2.7 million for the three months ended March 31, 2020. Interest expense increased due to the increased amount and cost of our outstanding debt following the issuance of the $400 million Notes and retirement of the $150 million 2018 Term Loan in June 2020. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " Income tax expense was $14.6 million for the three months ended March 31, 2021 compared to $13.9 million for the three months ended March 31, 2020. The increase in income tax expense was primarily driven by an increase in our effective tax rate. As a U.S. taxpayer, we are subject to a U.S. federal corporate income tax rate of 21%. Our provision for income taxes for interim periods is established based on our estimated annual effective tax rate for a given year, and reflects the impact of discrete tax effects in the period in which they occur. Our effective tax rate on pre-tax income was 21.6% for the three months ended March 31, 2021, compared to 19.2% for the three months ended March 31, 2020. The increase in our effective tax rate period-to-period reflects a decrease in the discrete tax benefits realized during the three months ended March 31, 2021 from the change in the fair value of our warrant liability, and excess share-based compensation realized upon the vesting of RSUs and exercise of stock options. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " Net Income Net income was $52.9 million for the three months ended March 31, 2021 compared to $58.3 million for the three months ended March 31, 2020. Adjusted net income was $53.4 million for the three months ended March 31, 2021 compared to $52.7 million for the three months ended March 31, 2020. The decreases in net income from period-to-period was primarily driven by a shift in the impact of the change in the fair value of our warrant liability from a gain during the three months ended March 31, 2020 to a loss during the three months ended March 31, 2021. Our adjusted net income, which excludes the gain or 48 loss associated with the change in the fair value of the warrant liability, increased during the three months ended March 31, 2021, driven by an increase in total revenues and decline in insurance claim and claim expenses, partially offset by an increase in our interest expense and effective tax rate. Diluted EPS was $0.61 for the three months ended March 31, 2021, compared to $0.74 for the three months ended March 31, 2020. Adjusted diluted EPS was $0.62 for the three months ended March 31, 2021, compared to $0.75 for the three months ended March 31, 2020. Diluted and adjusted diluted EPS decreased primarily due to an increase in weighted average diluted shares outstanding in connection with the issuance of 15.9 million shares of common stock we completed in June 2020. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For the three months ended March 31, 2021 2020 As reported ($ in thousands, except for per share data) Income before income taxes $ 67,456 $ 72,156 Income tax expense 14,565 13,885 Net income $ 52,891 $ 58,271 Adjustments Net realized investment losses — 72 Loss (gain) from change in fair value warrant liability 205 (5,959) Capital market transaction costs 378 474 Adjusted income before tax 68,039 66,743 Income tax expense on adjustments 79 115 Adjusted net income $ 53,395 $ 52,743 Weighted average diluted shares outstanding 86,487 70,401 Adjusted diluted EPS $ 0.62 $ 0.75 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. 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. 49 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. 50 Consolidated balance sheets March 31, 2021 December 31, 2020 (In Thousands) Total investment portfolio $ 1,831,511 $ 1,804,286 Cash and cash equivalents 115,517 126,937 Premiums receivable 52,206 49,779 Deferred policy acquisition costs, net 62,294 62,225 Software and equipment, net 31,298 29,665 Prepaid reinsurance premiums 4,842 6,190 Reinsurance recoverable 18,686 17,608 Other assets 71,477 69,976 Total assets $ 2,187,831 $ 2,166,666 Debt $ 393,622 $ 393,301 Unearned premiums 127,407 118,817 Accounts payable and accrued expenses 57,139 61,716 Reserve for insurance claims and claim expenses 96,103 90,567 Reinsurance funds withheld 7,569 8,653 Warrant liability 4,239 4,409 Deferred tax liability, net 115,150 112,586 Other liabilities 6,294 7,026 Total liabilities 807,523 797,075 Total shareholders' equity 1,380,308 1,369,591 Total liabilities and shareholders' equity $ 2,187,831 $ 2,166,666 Total cash and investments were $1.9 billion as of March 31, 2021 and December 31, 2020. Cash and investments at March 31, 2021 included $78.2 million held by NMIH. The increase in total cash and investments between the respective measurement dates reflects cash generated from operations, partially offset by a decrease in the unrealized gain position of our fixed income portfolio caused by a rise in interest rates. Net deferred policy acquisition costs were $62.3 million as of March 31, 2021, compared to $62.2 million as of December 31, 2020. 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 $4.8 million as of March 31, 2021, compared to $6.2 million as of December 31, 2020. 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 $18.7 million as of March 31, 2021, compared to $17.6 million as of December 31, 2020. The increase was driven by an increase in ceded losses recoverable associated with our QSR Transactions. Other assets increased to $71.5 million as of March 31, 2021, compared to $70.0 million as of December 31, 2020, primarily driven by a $1.6 million increase in software and equipment. Included in other assets are $46.4 million of tax and loss bonds held by the Company at both March 31, 2021 and December 31, 2020. see Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " Unearned premiums were $127.4 million as of March 31, 2021, compared to $118.8 million as of December 31, 2020. The increase was driven by single premium policy originations during the three months ended March 31, 2021, partially offset by the cancellation of other single premium policies and the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies. Accounts payable and accrued expenses were $57.1 million as of March 31, 2021, compared to $61.7 million as of December 31, 2020. The decrease was primarily driven by the payment of an unsettled trade payable related to the purchase of 51 investment securities at year-end 2020 and the settlement of previously accrued compensation during the three months ended March 31, 2021, partially offset by an increase in accrued and unpaid interest on the Notes. Reserve for insurance claims and claim expenses was $96.1 million as of March 31, 2021, compared to $90.6 million as of December 31, 2020. Reserve for insurance claims and claim expenses increased at March 31, 2021 despite a decline in the total size of our default population because of an increase in the average case reserve held against previously defaulted loans and the establishment of initial reserves newly defaulted loans during the period. While we have generally established lower reserves per default for loans that we consider to be impaired in connection with the COVID pandemic, we have increased the initial reserves held for such loans as they have aged in default status. The increase in the reserves for insurance claims and claim expenses at March 31, 2021 was partially offset by the release of prior year reserves tied to the curing of certain loans that had defaulted prior to the onset of the COVID pandemic. See " - Insurance Claims and Claim Expenses ," above for further details. Reinsurance funds withheld, which represents our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction was $7.6 million as of March 31, 2021, compared to $8.7 million as of December 31, 2020. The decrease 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 was $4.2 million at March 31, 2021, compared to $4.4 million at December 31, 2020. The decrease was primarily driven by the exercise of outstanding warrants during the three months ended March 31, 2021, partially offset by the change in Black-Scholes pricing model inputs between the respective measurement dates. 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 was $115.2 million at March 31, 2021 compared to $112.6 million at December 31, 2020. The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve, offset by the change in unrealized gains recorded in other comprehensive income. 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 three months ended March 31, 2021 2020 Net cash provided by (used in): (In Thousands) Operating activities $ 85,464 $ 47,852 Investing activities (96,447) 25,783 Financing activities (437) (4,903) Net increase in cash and cash equivalents $ (11,420) $ 68,732 Net cash provided by operating activities was $85.5 million for the three months ended March 31, 2021, compared to $47.9 million for the three months ended March 31, 2020. The increase in cash generated from operating activities was primarily driven by growth in premiums written, with further increase tied to a decline in claims and cash interest paid from period-to-period. Cash used in investing activities for the three months ended March 31, 2021 was driven by the purchase of fixed and short-term maturities, with cash provided by operating activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash provided by investing activities for the three months ended March 31, 2020 represent the net cash proceeds from maturities of fixed maturity investments and the sales of short-term investments, partially offset by purchases. We paused reinvestment activities at the onset of the COVID-19 pandemic in the first quarter of 2020 to bolster liquidity within our investment portfolio. Cash used in financing activities was $0.4 million for the three months ended March 31, 2021, compared to cash used in financing activities of $4.9 million for the three months ended March 31, 2020. The cash used in financing activities primarily relates to taxes paid on the net share settlement of equity awards for certain employees. The cash used in financing activities for the three months ended March 31, 2020 also includes cash paid for debt issuance costs in connection with the 2020 Revolving Credit Facility. 52 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 March 31, 2021, NMIH had $78.2 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 4, Debt. Re One also has the capacity, under Wisconsin law, to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. In the future, NMIH may benefit from ordinary course dividend capacity available from NMIC as well. 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 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. 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. The 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 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, NMIH is 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 March 31, 2021, the applicable commitment fee was 0.35%. We are subject to certain covenants under the Notes and the 2020 Revolving Credit Facility (as defined in the Credit Agreement). Under the Notes (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, a requirement to maintain compliance with the PMIERs financial requirements (subject to any GSE-approved waivers), and minimum consolidated net worth and statutory capital requirements (respectively, as defined therein). We were in compliance with all covenants as of March 31, 2021. 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 twelve 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 twelve-month period ending the preceding December 31. Re One has the capacity to pay $1.6 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2021. NMIC reported a statutory net loss for the year ended December 31, 2020 and does not have the capacity to pay dividends to NMIH during the twelve-m onth period ended December 31, 2021 without prior approval from the Wisconsin OCI. Since inception, neither NMIC nor Re One have paid any dividends to NMIH. As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID pandemic, the GSEs issued temporary PMIERs guidance, effective for the period from June 30, 2020 to June 30, 2021, that requires approved insurers to secure approval from the GSEs, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs, prior to taking any of the following actions: (i) pay dividends, make payments of principal or increase payments of 53 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 (ii) 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. We cannot be certain that the GSEs will not amend the terms, or extend the duration, of this prior approval requirement beyond its current expiration of June 30, 2021. NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. 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). As an approved mortgage insurer and Wisconsin-domiciled carrier, NMIC is 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, NMIC 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 March 31, 2021, we reported $1,810 million available assets against $1,261 million risk-based required assets for a $549 million of "excess" funding position 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 FEMA to be a Major Disaster zone. In June 2020, the GSEs issued guidance restated in each of September and December 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 permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period. NMIC's PMIERs minimum risk-based required asset amount is also adjusted for its reinsurance transactions (as approved by the GSEs). Under NMIC's quota share reinsurance treaties, it receives credit for the PMIERs risk-based required asset amount on ceded RIF. As its gross PMIERs risk-based required asset amount on ceded RIF increases, the PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under NMIC's ILN transactions, it generally receives 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. 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. As of March 31, 2021, NMIC's performing primary RIF, net of reinsurance, was approximately $22.8 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $1.7 billion (including contingency reserves) as of March 31, 2021, NMIC's RTC ratio was 13.4:1 Re One had total statutory capital of $37.3 million as of March 31, 2021 and a RTC ratio of 1.8:1 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 March 31, 2021, NMIC had $1.8 billion of cash and investments, including $86 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 March 31, 2021, NMIC generated $283 million of cash flow from operations and received an additional $327 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 54 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. Debt and Financial Strength Ratings NMIC's financial strength is rated "Baa2" by Moody's and "BBB" by S&P. In June 2020, Moody's affirmed its financial strength rating of NMIC and its "Ba2" rating of NMIH's 2020 Revolving Credit Facility, and assigned a "Ba2" rating to the Notes. Moody's ratings outlook is stable. In June 3, 2020, S&P assigned a "BB" rating to NMIH's senior secured Notes. In April 2021, S&P upgraded its outlook from negative to positive for the financial strength rating of NMIC's and NMIH's long-term counter-party credit profile. 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 March 31, 2021, the fair value of our investment portfolio was $1.8 billion and we held an additional $115.5 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the three months ended March 31, 2021 was 2.0%. Book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. The yield on our investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our 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 March 31, 2021 December 31, 2020 Corporate debt securities 61 % 63 % Municipal debt securities 24 22 Asset-backed securities 7 7 Cash, cash equivalents, and short-term investments 6 6 U.S. treasury securities and obligations of U.S. government agencies 2 2 Total 100 % 100 % Investment portfolio ratings at fair value (1) March 31, 2021 December 31, 2020 AAA 11 % 12 % AA (2) 28 27 A (2) 42 43 BBB (2) 19 18 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 We did not recognize an allowance for credit loss for any security in the investment portfolio as of March 31, 2021 or December 31, 2020, and we did not record any provision for credit loss for investment securities during the three months ended March 31, 2021, and March 31, 2020. As of March 31, 2021, the investment portfolio had gross unrealized losses of $25.5 million, none of which had been in an unrealized loss position for a period of twelve months or longer. As of December 31, 2020, the investment portfolio had gross unrealized losses of $0.5 million, of which $8 thousand had been in an unrealized loss position for a period of twelve months or longer. The increase in the number of securities in and the aggregate size of the unrealized loss position as of March 31, 2021, was primarily driven by interest rate movements following the purchase date of certain securities. Based on current facts and circumstances, we believe the unrealized losses as of March 31, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities. 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 2020 10-K. 56