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. 28 Overview We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-LTV ( i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners. NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of September 30, 2021, we had master policies with 1,699 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As of September 30, 2021, we had $143.6 billion of primary insurance-in-force (IIF) and $36.3 billion of primary RIF. 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 September 30, 2021, we had 241 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 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 of 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 29 pandemic. More recently, the broad resumption of personal and business activity nationwide has prompted a sharp economic rebound and provided hope for a sustainable economic recovery. While there is increased optimism that the acute 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 demonstrated significant resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates helped to support housing affordability, medical concerns and lifestyle preferences drove people to move from densely populated urban areas to suburban communities where social distancing was more easily achieved, and shelter-in-place directives 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. 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 increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume also grew dramatically as historically low mortgage rates 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. 30 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 241 e mployees at September 30, 2021, including 81 who typically work at our corporate headquarters in Emeryville, CA and 160 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 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 is 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 has caused us to offer increased flexibility for employees who prefer a full-time or part-time distributed engagement. If we continue to 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 $67.2 billion of NIW during the nine months ended September 30, 2021, up 57% compared to the nine months ended September 30, 2020, which itself was up 29% compared to the nine months ended September 30, 2019. While we currently expect our new business production will remain elevated, the potential onset of a new viral wave could prompt a reintroduction of broad-based shelter in place directives, increased unemployment or other potentially negative economic and societal outcomes that could cause a moderation or decline in our volume going forward. Further, increasing interest rates and rising house prices, which each trace (in part) to the pandemic, may cause certain prospective homebuyers to defer their purchases and impact mortgage origination activity, total private mortgage insurance industry production and our NIW volume in future periods. 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 September 30, 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 September 30, 2021, the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 11% mix of 97% LTV risk. Delinquency Trends and Claims Expense At September 30, 2021 we had 7,670 defaulted loans in our primary insured portfolio, which represented a 1.56% default rate against our 490,714 total policies in-force, and identified 9,342 loans that were enrolled in a forbearance program, including 6,566 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. 31 Our total population of defaulted loans peaked in August 2020 and has declined every month since with consistency. As of October 31, 2021, our default population was 6,988, representing a 1.40% 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 9/30/2020 12/31/2020 3/31/21 6/30/21 9/30/21 Number of loans in default 13,765 12,209 11,090 8,764 7,670 Default rate (1) 3.60% 3.06% 2.54% 1.86% 1.56% Number of loans in forbearance 24,809 19,464 14,805 11,889 9,342 Forbearance rate (2) 6.50% 4.87% 3.39% 2.52% 1.90% (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 economic stress of the COVID crisis recedes, future viral waves 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 introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance and back into performing status. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. At September 30, 2021, we generally established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. Our Master Policies require insureds to file a claim no later than 60-days after completion of a foreclosure, and in connection with the claim, the insured is generally entitled to include in the claim amount (i) 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 enacted following the onset of the COVID-19 pandemic will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amoun t. Given the duration of the foreclosure moratorium mandated by the GSEs, certain loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not gone through foreclosure at the onset of the pandemic, have remained in pre-foreclosure default status for a prolonged period of time. For those loans that do not ultimately cure, the delayed foreclosure cycle and resulting delay in claims submission may increase the severity of claims we ultimately pay. 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 32 million. At September 30, 2021, we reported $1,993 million available assets against $1,366 million risk-based required assets. Our “excess” funding position was $627 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 eligible for Individual Assistance. In June 2020, the GSEs issued guidance (subsequently amended and restated in each of September 2020, December 2020 and June 2021) 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 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. A Lock-Out Event was deemed to have occurred, effective June 25, 2020 for each of the 2017, 2018 and 2019 ILN Transactions (related to the default experience of the underlying reference pools for each respective transaction) and at inception for the 2021-1 ILN Transaction (related to the initial build of its target credit enhancement), and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each such 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 such ILN Transaction, and during such period the overcollateralization within and potential PMIERs capacity provided by each such ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account. At September 30, 2021, we had an aggregate $537 million of overcollateralization available across our ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. The following table provides detail on the level of overcollateralization of each of our ILN Transactions at September 30, 2021: ($ values in thousands) 2017 ILN Transaction 2018 ILN Transaction 2019 ILN Transaction 2020-1 ILN Transaction 2020-2 ILN Transaction 2021-1 ILN Transaction Ceded RIF $ 1,227,763 $ 1,333,991 $ 1,533,960 $ 3,128,472 $ 4,689,578 $ 8,334,990 First Layer Retained Loss 121,196 122,750 122,697 169,488 121,177 163,708 Reinsurance Coverage 40,226 158,489 231,877 84,470 177,566 367,238 Eligible Coverage $ 161,422 $ 281,239 $ 354,574 $ 253,958 $ 298,743 $ 530,946 Subordinated Coverage (1) 13.15% 21.08% 23.11% 8.00% 6.25% 6.37% PMIERs Charge on Ceded RIF 6.47% 8.41% 8.25% 6.50% 5.63% 6.07% Overcollateralization (2) (4) $ 40,226 $ 158,489 $ 227,965 $ 50,704 $ 34,887 $ 25,038 Delinquency Trigger (3) 4.0% 4.0% 4.0% 6.0% 4.7% 4.8% (1) Absent a delinquency trigger, the subordinated coverage is capped at 8.00%, 6.25% and 6.75% for the 2020-1, 2020-2 and 2021-1 ILN Transactions, respectively. 33 (2) Overcollateralization for each of the 2017 and 2018 ILN Transactions is equal to their current reinsurance coverage as the PMIERs required asset amount on RIF ceded under each transaction is currently below its 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, 2020-2 and 2021-1 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. 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 $627 million excess available asset position at September 30, 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, and 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 September 30, 2021, we had $2.2 billion of consolidated cash and investments, including $79 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 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, receives cash proceeds upon the exercise of outstanding stock options, 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 refreshed its approval of the debt service agreement and provided for the additional reimbursement by NMIC of interest expense due on our Notes and 2020 Revolving Credit Facility at the time each transaction was completed. NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. At September 30, 2021, NMIC had $2.0 billion of cash and investments, including $81 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended September 30, 2021, NMIC generated $316 million of cash flow from operations and received an additional $140 million of cash flow from 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 34 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 2020, December 2020 and June 2021) 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 September 30, 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 September 30, 2021, we had $2.2 billion of cash and invested assets. Our investment strategy equally prioritizes capital preservation alongside income generation, and we have a long-established investment policy that sets conservative limits for asset types, industry sectors, single issuers and instrument credit ratings. At September 30, 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 September 30, 2021, our portfolio was in a $30 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 1.4%. We did not record any allowance for credit losses in the portfolio during the three months ended September 30, 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 September 30, 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, 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 35 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 September 30, 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 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. 36 Quota share reinsurance NMIC is a party to 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, the 2021 QSR Transaction, effective January 1, 2021, the 2022 QSR Transaction, effective October 1, 2021, and the 2023 QSR Transaction, effective January 1, 2023. 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 (subject to an aggregate risk written limit), 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. Under the terms of the 2022 and 2023 QSR Transactions, NMIC will cede premiums earned related to 20% of the risk on eligible policies written between January 1, 2022 and December 31, 2023, in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. If NMIC exhausts the aggregate risk written limit of the 2021 QSR Transaction prior to December 31, 2021, the 2022 QSR Transaction will automatically incept and NMIC will begin to cede risk on eligible policies under the treaty prior to January 1, 2022. NMIC may elect to terminate its engagement with individual reinsurers on a run-off basis ( i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis ( i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement. Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction. Excess-of-loss reinsurance NMIC is party to reinsurance agreements with the Oaktown Re Vehicles that provide it with aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies. 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 37 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). A Lock-Out Event was deemed to have occurred, effective June 25, 2020 for each of the 2017, 2018 and 2019 ILN Transactions (related to the default experience of the underlying reference pools for each respective transaction) and at inception of the 2021-1 ILN Transaction (related to the initial build of its target credit enhancement), and the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for each ILN Transaction. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes will remain suspended for the duration of the Lock-Out Event for each ILN Transaction, and during such period assets will be preserved in the applicable reinsurance trust account to collateralize the excess-of-loss reinsurance coverage provided to NMIC. The following table presents the inception date, covered production p eriod, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each of the ILN Transactions. Current amounts are presented as of September 30, 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 $121,196 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 122,750 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,697 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 84,470 169,514 169,488 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 177,566 121,777 121,177 2021-1 ILN Transaction (4) April 27, 2021 10/1/2020 - 3/31/2021 (3) 367,238 367,238 163,708 163,708 (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 expenses exceed its current first layer retained loss. (2) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020. (3) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020. (4) As of September 30, 2021, the current reinsurance coverage amount on the 2021-1 ILN transaction is equal to the initial reinsurance coverage, as the reinsurance coverage provided by Oaktown Re will not decrease until its target credit enhancement is met. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for further discussion of these third-party reinsurance arrangements. On October 26, 2021, NMIC secured $363.6 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies primarily written from April 1, 2021 to September 30, 2021, through a mortgage insurance-linked notes offering by Oaktown Re VII. The reinsurance coverage amount under the terms of the 2021-2 ILN Transaction decreases from $363.6 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 $146.2 million of aggregate losses and Oaktown Re VII then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. 38 Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 IIF NIW IIF NIW NIW (In Millions) Monthly $ 124,767 $ 16,861 $ 88,584 $ 16,516 $ 60,047 $ 38,862 Single 18,851 1,223 15,910 1,983 7,185 4,058 Primary 143,618 18,084 104,494 18,499 67,232 42,920 Pool 1,339 — 2,115 — — — Total $ 144,957 $ 18,084 $ 106,609 $ 18,499 $ 67,232 $ 42,920 For the three months ended September 30, 2021, NIW decreased 2%, compared to the three months ended September 30, 2020, due to a decline in the size of the total mortgage insurance market. Total private mortgage insurance industry NIW volume was $181 billion in the third quarter of 2020 – the largest quarterly result ever recorded for the industry. The impact of the year-on-year decline in total private mortgage insurance industry volume was partially offset by growth in our customer franchise and market presence tied to the increased penetration of existing customer accounts and new customer account activations. For the nine months ended September 30, 2021, NIW increased 57%, compared to the nine months ended September 30, 2020, driven by growth in our monthly and single premium policy production tied to the growth in our customer franchise and market presence. Total IIF increased 36% at September 30, 2021 compared to September 30, 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 58% at September 30, 2021 from 60% at September 30, 2020, reflecting the impact of increased refinancing activity during the intervening twelve-month period. The following table presents net premiums written and earned for the periods indicated. Primary and pool premiums written and earned For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Thousands) Net premiums written $ 111,931 $ 101,822 $ 354,388 $ 283,302 Net premiums earned 113,594 98,802 330,361 296,463 For the three and nine months ended September 30, 2021, net premiums written increased 10% and 25%, respectively, and net premiums earned increased 15% and 11%, respectively, compared to the three and nine months ended September 30, 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. Pool premiums written and earned for the three and nine months ended September 30, 2021 and 2020, were $0.4 million and $1.3 million, and $0.6 million and $2.0 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. 39 Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends As of and for the three months ended September 30, 2021 June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 ($ Values In Millions, except as noted below) New insurance written $ 18,084 $ 22,751 $ 26,397 $ 19,782 $ 18,499 Percentage of monthly premium 93 % 85 % 90 % 90 % 89 % Percentage of single premium 7 % 15 % 10 % 10 % 11 % New risk written $ 4,640 $ 5,650 $ 6,531 $ 4,868 $ 4,577 Insurance-in-force (1) 143,618 136,598 123,777 111,252 104,494 Percentage of monthly premium 87 % 86 % 86 % 86 % 85 % Percentage of single premium 13 % 14 % 14 % 14 % 15 % Risk-in-force (1) $ 36,253 $ 34,366 $ 31,206 $ 28,164 $ 26,568 Policies in force (count) (1) 490,714 471,794 436,652 399,429 381,899 Average loan size ($ value in thousands) (1) $ 293 $ 290 $ 283 $ 279 $ 274 Coverage percentage (2) 25.2 % 25.2 % 25.2 % 25.3 % 25.4 % Loans in default (count) (1) 7,670 8,764 11,090 12,209 13,765 Default rate (1) 1.56 % 1.86 % 2.54 % 3.06 % 3.60 % Risk-in-force on defaulted loans (1) $ 546 $ 625 $ 785 $ 874 $ 1,008 Net premium yield (3) 0.32 % 0.34 % 0.36 % 0.37 % 0.39 % Earnings from cancellations $ 7.7 $ 7.0 $ 9.9 $ 11.7 $ 12.6 Annual persistency (4) 58.1 % 53.9 % 51.9 % 55.9 % 60.0 % Quarterly run-off (5) 8.1 % 8.0 % 12.5 % 12.5 % 13.1 % (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 For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Millions) IIF, beginning of period $ 136,598 $ 98,905 $ 111,252 $ 94,754 NIW 18,084 18,499 67,232 42,920 Cancellations, principal repayments and other reductions (11,064) (12,910) (34,866) (33,180) IIF, end of period $ 143,618 $ 104,494 $ 143,618 $ 104,494 40 We consider a "book" to be a collective pool of policies insured during a particular period, normally a calendar year. In general, the majority of underwriting profit, calculated as earned premium revenue minus claims and underwriting and operating expenses, generated by a particular book year emerges in the years immediately following origination. This pattern generally occurs because relatively few of the claims that a book will ultimately experience typically occur in the first few years following origination, when premium revenue is highest, while subsequent years are affected by declining premium revenues, as the number of insured loans decreases (primarily due to loan prepayments), and by increasing losses. The table below presents a summary of our primary IIF and RIF by book year as of the dates indicated. Primary IIF and RIF As of September 30, 2021 As of September 30, 2020 IIF RIF IIF RIF (In Millions) September 30, 2021 $ 64,885 $ 16,274 $ — $ — 2020 47,196 11,848 40,969 10,255 2019 14,502 3,800 29,865 7,791 2018 5,675 1,446 11,859 3,019 2017 4,845 1,213 9,671 2,413 2016 and before 6,515 1,672 12,130 3,090 Total $ 143,618 $ 36,253 $ 104,494 $ 26,568 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. 41 The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan. Primary NIW by FICO For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Millions) >= 760 $ 8,073 $ 11,600 $ 32,377 $ 25,942 740-759 3,254 2,575 12,812 6,056 720-739 2,563 2,187 9,678 5,373 700-719 2,099 1,217 6,255 3,214 680-699 1,487 793 4,139 1,872 <=679 608 127 1,971 463 Total $ 18,084 $ 18,499 $ 67,232 $ 42,920 Weighted average FICO 749 764 753 761 Primary NIW by LTV For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Millions) 95.01% and above $ 1,957 $ 587 $ 6,585 $ 1,855 90.01% to 95.00% 8,344 7,767 29,336 18,161 85.01% to 90.00% 4,961 6,968 19,071 16,117 85.00% and below 2,822 3,177 12,240 6,787 Total $ 18,084 $ 18,499 $ 67,232 $ 42,920 Weighted average LTV 91.8 % 90.7 % 91.3 % 90.8 % Primary NIW by purchase/refinance mix For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Millions) Purchase $ 16,400 $ 12,764 $ 53,220 $ 28,531 Refinance 1,684 5,735 14,012 14,389 Total $ 18,084 $ 18,499 $ 67,232 $ 42,920 42 The tables below present our total primary IIF and RIF by FICO and LTV, and total primary RIF by loan type as of the dates indicated. Primary IIF by FICO As of September 30, 2021 September 30, 2020 ($ Values In Millions) >= 760 $ 73,080 51 % $ 53,742 51 % 740-759 24,676 17 16,193 16 720-739 19,898 14 14,352 14 700-719 13,206 9 10,235 10 680-699 8,678 6 6,713 6 <=679 4,080 3 3,259 3 Total $ 143,618 100 % $ 104,494 100 % Primary RIF by FICO As of September 30, 2021 September 30, 2020 ($ Values In Millions) >= 760 $ 18,200 51 % $ 13,563 51 % 740-759 6,280 17 4,141 16 720-739 5,086 14 3,694 14 700-719 3,432 9 2,635 10 680-699 2,243 6 1,730 6 <=679 1,012 3 805 3 Total $ 36,253 100 % $ 26,568 100 % Primary IIF by LTV As of September 30, 2021 September 30, 2020 ($ Values In Millions) 95.01% and above $ 13,179 9 % $ 8,130 8 % 90.01% to 95.00% 63,828 45 47,828 46 85.01% to 90.00% 44,451 31 35,224 33 85.00% and below 22,160 15 13,312 13 Total $ 143,618 100 % $ 104,494 100 % Primary RIF by LTV As of September 30, 2021 September 30, 2020 ($ Values In Millions) 95.01% and above $ 3,932 11 % $ 2,310 9 % 90.01% to 95.00% 18,810 52 14,056 53 85.01% to 90.00% 10,902 30 8,642 32 85.00% and below 2,609 7 1,560 6 Total $ 36,253 100 % $ 26,568 100 % 43 Primary RIF by Loan Type As of September 30, 2021 September 30, 2020 Fixed 99 % 99 % Adjustable rate mortgages Less than five years — — Five years and longer 1 1 Total 100 % 100 % The table below presents selected primary portfolio statistics, by book year, as of September 30, 2021. As of September 30, 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 $ 7 4 % 655 52 3 1 0.5 % 0.6 % 5.8 % 2014 3,451 310 9 % 14,786 1,898 68 49 4.2 % 0.8 % 3.6 % 2015 12,422 1,923 15 % 52,548 10,427 366 115 3.3 % 0.9 % 3.5 % 2016 21,187 4,275 20 % 83,626 21,244 797 128 2.9 % 1.1 % 3.8 % 2017 21,582 4,845 22 % 85,897 24,478 1,286 93 4.5 % 1.6 % 5.3 % 2018 27,295 5,675 21 % 104,043 27,844 1,723 81 8.6 % 1.7 % 6.2 % 2019 45,141 14,502 32 % 148,423 57,685 2,038 16 12.7 % 1.4 % 3.5 % 2020 62,702 47,196 75 % 186,174 147,395 1,170 1 6.7 % 0.6 % 0.8 % 2021 67,232 64,885 97 % 205,291 199,691 219 — 1.2 % 0.1 % 0.1 % Total $ 261,174 $ 143,618 881,443 490,714 7,670 484 (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. 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 September 30, 2021 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of September 30, 2021 September 30, 2020 California 10.2 % 11.3 % Texas 9.9 8.3 Florida 8.6 6.7 Virginia 4.9 5.4 Colorado 4.0 4.0 Maryland 3.8 3.6 Illinois 3.7 4.0 Georgia 3.7 3.0 Washington 3.5 3.5 Pennsylvania 3.2 3.5 Total 55.5 % 53.3 % 44 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 dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. At September 30, 2020 and 2021, we generally 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. 45 The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses. For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 (In Thousands) Beginning balance $ 101,235 $ 69,903 $ 90,567 $ 23,752 Less reinsurance recoverables (1) (19,726) (14,307) (17,608) (4,939) Beginning balance, net of reinsurance recoverables 81,509 55,596 72,959 18,813 Add claims incurred: Claims and claim expenses incurred: Current year (2) 3,649 18,682 19,275 61,198 Prior years (3) (445) (3,015) (6,469) (5,500) Total claims and claim expenses incurred 3,204 15,667 12,806 55,698 Less claims paid: Claims and claim expenses paid: Current year (2) 3 113 15 152 Prior years (3) 526 1,100 1,566 4,309 Total claims and claim expenses paid 529 1,213 1,581 4,461 Reserve at end of period, net of reinsurance recoverables 84,184 70,050 84,184 70,050 Add reinsurance recoverables (1) 20,420 17,180 20,420 17,180 Ending balance $ 104,604 $ 87,230 $ 104,604 $ 87,230 (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 $14.0 million attributed to net case reserves and $4.8 million attributed to net IBNR reserves for the nine months ended September 30, 2021 and $55.4 million attributed to net case reserves and $4.8 million attributed to net IBNR reserves for the nine months ended September 30, 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 $1.8 million attributed to net case reserves and $5.0 million attributed to net IBNR reserves for the nine months ended September 30, 2021 and $4.0 million attributed to net case reserves and $1.3 million attributed to net IBNR reserves for the nine months ended September 30, 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 $80.6 million related to prior year defaults remained as of September 30, 2021. 46 The following table provides a reconciliation of the beginning and ending count of loans in default. For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Beginning default inventory 8,764 10,816 12,209 1,448 Plus: new defaults 1,624 6,588 4,486 16,870 Less: cures (2,694) (3,598) (8,964) (4,426) Less: claims paid (24) (40) (59) (123) Less: claims denied — (1) (2) (4) Ending default inventory 7,670 13,765 7,670 13,765 Ending default inventory declined from September 30, 2020 to September 30, 2021 as an increased number of borrowers impacted by the COVID-19 pandemic cured their delinquencies, and fewer new defaults emerged as the acute economic stress of the pandemic crisis began to recede. While our default population declined from September 30, 2020 to September 30, 2021, our default inventory remains elevated compared to historical experience due to the continued challenges certain borrowers are facing related to the COVID-19 outbreak and their decision to access the forbearance program for federally backed loans codified under the CARES Act or similar programs made available by private lenders. As of September 30, 2021, 6,566 of our 7,670 defaulted loans were in a COVID-19 related forbearance program. The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated. For the three months ended For the nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 ($ In Thousands) Number of claims paid (1) 24 40 59 123 Total amount paid for claims $ 674 $ 1,540 $ 1,982 $ 5,621 Average amount paid per claim $ 28 $ 39 $ 34 $ 46 Severity (2) 55 % 67 % 60 % 80 % (1) Count include s six and ten claims settled without payment during the three and nine months ended September 30, 2021, respectively, and six and eight claims settled without payment during the three and nine months ended September 30, 2020, respectively. (2) Severity represents the total amount of claims paid including claim expenses divided by the related RIF on the loan at the time the claim is perfected, and is calculated including claims settled without payment. The Company paid 24 and 59 claims during the three and nine months ended September 30, 2021, respectively, and 40 and 123 claims during three and nine months ended September 30, 2020, respectively. The number of claims paid in each period was low relative to the size of our insured portfolio and the number of defaulted loans we reported, primarily due to 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 paid experience for the three and nine months ended September 30, 2021, further 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 defaulted borrowers with alternative paths and incentives to cure their loan prior to the development of a claim. Our claims severity for the three and nine months ended September 30, 2021 was 55% and 60%, respectively, compared to 67% and 80% for the three and nine months ended September 30, 2020, respectively. Claims severity for the three and nine months ended September 30, 2021 benefited from the same resiliency of the housing market and broad national house price appreciation as our claims paid. 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. 47 The following table provides detail on our average reserve per default, before giving effect to reserves ceded under the QSR Transactions, as of the dates indicated. Average reserve per default: As of September 30, 2021 As of September 30, 2020 (In Thousands) Case (1) $ 12.6 $ 5.8 IBNR (1)(2) 1.0 0.5 Total $ 13.6 $ 6.3 (1) Defined as the gross reserve per insured loan in default. (2) Amount includes claims adjustment expenses. Average reserve per default increased from September 30, 2020 to September 30, 2021, primarily due to the “aging” of early COVID-related defaults. While we have generally 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, we have increased such reserves over time as individual defaults remain outstanding or “age.” The growth in our average reserve per default from September 30, 2020 to September 30, 2021 far exceeded the growth in our aggregate gross reserve position in the intervening period as the impact of the increase in our average reserve per default was largely offset by the decline in our total default inventory. 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 September 30, 2021 September 30, 2020 (In Thousands) Available assets $ 1,992,964 $ 1,671,990 Risk-based required assets 1,365,656 990,678 Available assets were $2.0 billion at September 30, 2021, compared to $1.7 billion at September 30, 2020. The $321 million increase in available assets between the dates presented was primarily driven by NMIC's positive cash flow from operations during the intervening period. 48 The increase in the risk-based required asset amount between the dates presented was primarily due to the growth of our gross RIF, p artially offset by an increase in the risk ceded under our third-party reinsurance agreements. 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 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. CEO Transition On September 9, 2021, we announced that Adam Pollitzer, currently the company’s Executive Vice President and Chief Financial Officer, was appointed as the company's President and Chief Executive Officer, effective January 1, 2022. Mr. Pollitzer will also join the company’s Board of Directors upon assuming his new role. He succeeds Claudia Merkle, who will step down as Chief Executive Officer and as a member of the Board, effective December 31, 2021. During the three months ended September 30, 2021, the Company recorded $1.3 million of severance, restricted stock modification and other expenses related to this transition. 49 Consolidated Results of Operations Consolidated statements of operations Three months ended Nine months ended September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 Revenues ($ in thousands, except for per share data) Net premiums earned $ 113,594 $ 98,802 $ 330,361 $ 296,463 Net investment income 9,831 8,337 28,027 23,511 Net realized investment gains (losses) 3 (4) 15 635 Other revenues 613 648 1,597 2,771 Total revenues 124,041 107,783 360,000 323,380 Expenses Insurance claims and claim expenses 3,204 15,667 12,806 55,698 Underwriting and operating expenses 34,669 33,969 103,460 96,616 Service expenses 787 557 1,859 2,381 Interest expense 7,930 7,796 23,767 16,481 (Gain) loss from change in fair value of warrant liability — 437 (454) (4,286) Total expenses 46,590 58,426 141,438 166,890 Income before income taxes 77,451 49,357 218,562 156,490 Income tax expense 17,258 11,178 47,956 33,192 Net income $ 60,193 $ 38,179 $ 170,606 $ 123,298 Earnings per share - Basic $ 0.70 $ 0.45 $ 1.99 $ 1.63 Earnings per share - Diluted $ 0.69 $ 0.45 (2) $ 1.96 (2) $ 1.55 Loss ratio (1) 2.8 % 15.9 % 3.9 % 18.8 % Expense ratio (2) 30.5 % 34.4 % 31.3 % 32.6 % Combined ratio (3) 33.3 % 50.2 % 35.2 % 51.4 % Three months ended Nine months ended Non-GAAP financial measures (4) September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020 ($ in thousands, except for per share data) Adjusted income before tax $ 79,218 $ 52,052 $ 221,856 $ 157,087 Adjusted net income 61,821 40,400 173,345 122,870 Adjusted diluted EPS 0.71 0.47 2.00 1.60 (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) Combined ratio may not foot due to rounding (4) See " Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures, " below. Revenues Net premiums earned were $113.6 million and $330.4 million for the three and nine months ended September 30, 2021, respectively, compared to $98.8 million and $296.5 million for the three and nine months ended September 30, 2020, respectively. The year-on-year increase in net premiums earned in each respective period was primarily driven by the growth of our IIF, partially offset by an increase in cessions made under our QSR and ILN Transactions, and a decline in the contribution from single premium policy cancellations. Net investment income was $9.8 million and $28.0 million for the three and nine months ended September 30, 2021, 50 respectively, compared to $8.3 million and $23.5 million for the three and nine months ended September 30, 2020, respectively. The year-on-year increase in net investment income in each respective period was primarily driven by growth in the size of our total investment portfolio, partially offset by a decline in book yield tied to the prevailing interest rate and credit spread environment. Other revenues were $613 thousand and $1.6 million for the three and nine months ended September 30, 2021, respectively, compared to $648 thousand and $2.8 million for the three and nine months ended September 30, 2020, respectively. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The year-on-year decline in other revenues in each respective period 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 $3.2 million and $12.8 million for the three and nine months ended September 30, 2021, respectively, compared to $15.7 million and $55.7 million for the three and nine months ended September 30, 2020, respectively. The year-on-year decline in insurance claims and claim expenses in each respective period primarily reflects a significant decrease in the number of new defaults emerging on loans impacted by the COVID-19 outbreak. Insurance claims and claim expenses during the three and nine months ended September 30, 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 $34.7 million and $103.5 million for the three and nine months ended September 30, 2021, respectively, compared to $34.0 million and $96.6 million for the three and nine months ended September 30, 2020. The year-on-year increase in underwriting and operating expenses for the three months ended September 30, 2021 primarily reflects severance, restricted stock modification and other expenses incurred in connection with the CEO transition we announced on September 9, 2021, as well as an increase in travel and entertainment expenses tied to the easing of COVID-19 related restrictions, incremental depreciation and amortization incurred in connection with the completion and on-lining of certain development initiatives, and other (non-CEO transition) payroll and related amounts. Such increases were largely offset by a decline in administrative costs due to the timing of ILN issuance and a reduction in technology service expenses tied to our long-term IT services agreement with Tata Consultancy Services. See Item 1 of our 2020 10K, "Business - Information Technology Systems and Intellectual Property" and Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Information Technology" for more details about IT services agreement entered into with Tata Consultancy Services. The year-on-year increase in underwriting and operating expenses for the nine months ended September 30, 2021, further reflects an increase in the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off. Underwriting and operating expenses included capital market reinsurance transaction costs of $0.5 million and $2.5 million, respectively, for the three months and nine months ended September 30, 2021, and $2.3 million and $2.9 million, respectively, for the three and nine months ended September 30, 2020, as well as $1.3 million of CEO-transition related expenses for the three and nine months ended September 30, 2021. Service expenses were $787 thousand and $1.9 million for the three and nine months ended September 30, 2021, respectively, compared to $557 thousand and $2.4 million for the three and nine months ended September 30, 2020, respectively. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The year-on-year decline in service expenses in each respective period 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 and $23.8 million for the three and nine months ended September 30, 2021, respectively, compared to $7.8 million and $16.5 million for the three and nine months ended September 30, 2020, respectively. Interest expense for the three and nine months ended September 30, 2021 and three months ended September 30, 2020 includes the carrying costs of our $400 million Notes for each period in full, while interest expense for the nine months ended September 30, 2020 includes partial period carry costs for the Notes (which were issued on June 19, 2020) and partial period carrying costs for the $150 million 2018 Term Loan (which was retired with a portion of net proceeds from the Notes offering). Interest expense for the nine months ended September 30, 2020, also includes $2.6 million of costs related to the extinguishment of the 2018 Term Loan. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " 51 Income tax expense was $17.3 million and $48.0 million for the three and nine months ended September 30, 2021, respectively, compared to $11.2 million and $33.2 million for the three and nine months ended September 30, 2020, respectively. The year-on-year increase in income tax expense in each respective period was primarily driven by growth in our pre-tax income. Our effective tax rate on pre-tax income was 22.3% and 21.9% for the three and nine months ended September 30, 2021, respectively, compared to 22.6% and 21.2% for the three and nine months ended September 30, 2020, respectively. As a U.S. taxpayer, we are subject to a statutory 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 rates for the three and nine months ended September 30, 2021 and 2020 reflect the discrete tax effects of the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability in each period. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes." Net Income Net income was $60.2 million and $170.6 million for the three and nine months ended September 30, 2021, respectively, compared to $38.2 million and $123.3 million for the three and nine months ended September 30, 2020, respectively. Adjusted net income was $61.8 million and $173.3 million for the three and nine months ended September 30, 2021, respectively, compared to $40.4 million and $122.9 million for the three and nine months ended September 30, 2020, respectively. The year-on-year increases in net income and adjusted net income in each respective period were primarily driven by growth in our total revenues and decrease in insurance claims and claim expenses, partially offset by an increase in our interest expenses, underwriting and operating expenses, and income tax expense. Diluted EPS was $0.69 and $1.96 for the three and nine months ended September 30, 2021, respectively, compared to $0.45 and $1.55 for the three and nine months ended September 30, 2020, respectively. Adjusted diluted EPS was $0.71 and $2.00 for the three and nine months ended September 30, 2021, respectively, compared to $0.47 and $1.60 for the three and nine months ended September 30, 2020, respectively. Diluted and adjusted diluted EPS increased due to growth in net income and adjusted net income, respectively, partially offset for the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, by an increase in weighted average diluted shares outstanding in connection with the issuance of 15.9 million shares of common stock we completed in June 2020, and, to a lesser extent for all comparative periods, by stock awards made under our share-based compensation plans. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. 52 Non-GAAP Financial Measure Reconciliations For the three months ended September 30, For the nine months ended September 30, 2021 2020 2021 2020 As reported ($ in thousands, except for per share data) Income before income taxes $ 77,451 $ 49,357 $ 218,562 $ 156,490 Income tax expense 17,258 11,178 47,956 33,192 Net income $ 60,193 $ 38,179 $ 170,606 $ 123,298 Adjustments Net realized investment (gains) loss (3) 4 (15) (635) (Gain) loss from change in fair value warrant liability — 437 (454) (4,286) Capital market transaction costs 481 2,254 2,474 5,518 Other infrequent, unusual or non-operating items (1) 1,289 — 1,289 — Adjusted income before tax 79,218 52,052 221,856 157,087 Income tax expense on adjustments (2) 139 474 555 1,025 Adjusted net income $ 61,821 $ 40,400 $ 173,345 $ 122,870 Weighted average diluted shares outstanding 86,880 85,599 86,794 76,867 Adjusted diluted EPS $ 0.71 $ 0.47 $ 2.00 $ 1.60 (1) Represents severance, restricted stock modification and other expenses incurred in connection with the CEO transition announced on September 9, 2021. See " CEO Transition" above. (2) Marginal tax impact of non-GAAP adjustments is calculated based on our statutory U.S. federal corporate income tax rate of 21%, except for those items that are not eligible for an income tax deduction. Such non-deductible items include gains or losses from the change in the fair value of our warrant liability and certain costs incurred in connection with the CEO transition, which are limited under Section 162(m) of the Internal Revenue Code. 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 other infrequent, unusual or 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 other infrequent, unusual or non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods. Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP. 53 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. • Other infrequent, unusual or non-operating items . Items that are the result of unforeseen or uncommon events, and are not expected to recur with frequency 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. Infrequent, unusual or non-operating adjustments for the three and nine months ended September 30, 2021, include severance, restricted stock modification and other expenses incurred in connection with the CEO transition we announced on September 9, 2021. 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 infrequent or non-recurring in nature, and are not indicative of the performance of, or ongoing trends in, our primary operating activities or business. 54 Consolidated balance sheets September 30, 2021 December 31, 2020 (In Thousands) Total investment portfolio $ 2,054,419 $ 1,804,286 Cash and cash equivalents 97,260 126,937 Premiums receivable 58,499 49,779 Deferred policy acquisition costs, net 61,362 62,225 Software and equipment, net 32,066 29,665 Prepaid reinsurance premiums 2,969 6,190 Reinsurance recoverable 20,420 17,608 Other assets 71,319 69,977 Total assets $ 2,398,314 $ 2,166,666 Debt $ 394,282 $ 393,301 Unearned premiums 139,624 118,817 Accounts payable and accrued expenses 78,657 61,716 Reserve for insurance claims and claim expenses 104,604 90,567 Reinsurance funds withheld 6,280 8,653 Warrant liability 3,010 4,409 Deferred tax liability, net 151,364 112,586 Other liabilities 4,267 7,026 Total liabilities $ 882,088 797,075 Total shareholders' equity 1,516,226 1,369,591 Total liabilities and shareholders' equity $ 2,398,314 $ 2,166,666 Total cash and investments were $2.2 billion as of September 30, 2021, compared to $1.9 billion as of December 31, 2020. Cash and investments at September 30, 2021 included $79.3 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 tied to the prevailing interest rate and credit spread environment. Premiums receivable was $58.5 million as of September 30, 2021, compared to $49.8 million as December 31, 2020. The increase was primarily driven by growth in our monthly premium policies in force, where premiums are generally paid one month in arrears. Net deferred policy acquisition costs were $61.4 million as of September 30, 2021, compared to $62.2 million as of December 31, 2020. The decrease was primarily driven by the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off, and was largely offset by the deferral of certain costs associated with the origination of new policies between the respective balance sheet dates. Prepaid reinsurance premiums were $3.0 million as of September 30, 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 $20.4 million as of September 30, 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 $71.3 million as of September 30, 2021, compared to $70.0 million as of December 31, 2020. Other assets included $46.4 million of tax and loss bonds held by the Company at both September 30, 2021 and December 31, 2020. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " Unearned premiums were $139.6 million as of September 30, 2021, compared to $118.8 million as of December 31, 2020. The increase was driven by single premium policy originations during the nine months ended September 30, 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. 55 Accounts payable and accrued expenses were $78.7 million as of September 30, 2021, compared to $61.7 million as of December 31, 2020. The increase was primarily driven by accrued and unpaid interest on the Notes which is payable semi-annually in June and December, reinsurance premiums payable, accrued payroll, and timing of other contractual payments due, partially offset by payment of unsettled trade payable. Reserve for insurance claims and claim expenses was $104.6 million as of September 30, 2021, compared to $90.6 million as of December 31, 2020. Reserve for insurance claims and claim expenses increased at September 30, 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 on 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 September 30, 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 $6.3 million as of September 30, 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 $3.0 million at September 30, 2021, compared to $4.4 million at December 31, 2020. The decrease was driven by the exercise of outstanding warrants, and changes in the price of our common stock and other Black-Scholes 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 $151.4 million at September 30, 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, partially 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 nine months ended September 30, 2021 2020 Net cash provided by (used in): (In Thousands) Operating activities $ 281,381 $ 214,977 Investing activities (310,520) (520,878) Financing activities (538) 459,011 Net (decrease) increase in cash and cash equivalents $ (29,677) $ 153,110 Net cash provided by operating activities was $281.4 million for the nine months ended September 30, 2021, compared to $215.0 million for the nine months ended September 30, 2020. The increase in cash generated from operating activities year-on-year was primarily driven by growth in premiums written, with further increase tied to a decline in claims paid, partially offset by an increase in cash interest expense from period-to-period. Cash used in investing activities for the nine months ended September 30, 2021 and 2020 reflects the purchase of fixed and short-term maturities with cash provided by operating and, as available, financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash used in financing activities was $0.5 million for the nine months ended September 30, 2021, compared to cash provided by financing activities of $459.0 million for the nine months ended September 30, 2020. Cash used in financing activities during the nine months ended September 30, 2021 primarily relates to taxes paid on the net share settlement of equity awards for certain employees. Cash provided by financing activities for the nine months ended September 30, 2020 primarily reflects $220.3 million net cash proceeds raised in connection with our 2020 equity offering and $245.9 million net cash proceeds raised in connection with our 2020 Notes offering. 56 Liquidity and Capital Resources NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2020 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated in Delaware. Delaware law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations). As of September 30, 2021, NMIH had $79.3 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 also benefit from ordinary course dividend capacity available from NMIC. 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 September 30, 2021, the applicable commitment fee was 0.35%. We are subject to certain covenants under the 2020 Revolving Credit Facility (as defined in the Credit Agreement), including 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 September 30, 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-19 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 interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by 57 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. On June 30, 2021, the GSEs updated the temporary PMIERs guidance to permit approved insurers to pay dividends or undertake other actions described in (i) and (ii) above without securing prior approval if certain prescribed financial requirements are met during the period from July 1, 2021 to December 31, 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 September 30, 2021, we reported $1,993 million available assets against $1,366 million risk-based required assets, for a $627 million "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 eligible for Individual Assistance. In June 2020, the GSEs issued guidance (amended and restated in each of September 2020, December 2020 and June 2021) 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 September 30, 2021, NMIC's performing primary RIF, net of reinsurance, was approximately $23.4 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $1.8 billion (including contingency reserves) as of September 30, 2021, NMIC's RTC ratio was 12.7:1 Re One had total statutory capital of $38.0 million as of September 30, 2021 and a RTC ratio of 2.2:1 . 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 September 30, 2021, NMIC had $2.0 billion of cash and investments, including $81 million of cash and equivalents. NMIC's principal liquidity demands include funds for the payment of (i) reimbursable holding company expenses, (ii) premiums ceded under our reinsurance transactions (iii) claims payments, and (iv) taxes as due or otherwise deferred through the purchase of tax and loss bonds. NMIC's cash inflow is generally significantly in excess of its cash outflow in any given period. During the twelve-month period ended September 30, 2021, NMIC generated $316 million of cash flow from operations and received an additional $140 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 58 ( 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. 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 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 September 30, 2021, the fair value of our investment portfolio was $2.1 billion and we held an additional $97.3 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the nine months ended September 30, 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 September 30, 2021 December 31, 2020 Corporate debt securities 65 % 63 % Municipal debt securities 24 22 Asset-backed securities 5 7 Cash, cash equivalents, and short-term investments 5 6 U.S. treasury securities and obligations of U.S. government agencies 1 2 Total 100 % 100 % Investment portfolio ratings at fair value (1) September 30, 2021 December 31, 2020 AAA 10 % 12 % AA (2) 28 27 A (2) 45 43 BBB (2) 17 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. 59 Investment Securities - Allowance for credit losses We did not recognize an allowance for credit loss for any security in the investment portfolio as of September 30, 2021 or December 31, 2020, and we did not record any provision for credit loss for investment securities during the three or nine month periods ended September 30, 2021 or September 30, 2020. As of September 30, 2021, the investment portfolio had gross unrealized losses of $13.3 million, of which $1.3 million 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 $512 thousand, 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 September 30, 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 September 30, 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. 60