NMI Holdings, Inc. 10-Q

Item 1. Financial Statements INDEX TO FINANCIAL STATEMENTS Condensed Consolidated Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021 6 Condensed Consolidated Statements of Operations and Comprehensive Income (Loss) for the three and nine months ended September 30, 2022 and 2021 (Unaudited) 7 Condensed Consolidated Statements of Changes in Shareholders' Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited) 8 Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited) 10 Notes to Condensed Consolidated Financial Statements (Unaudited) 11 5 NMI HOLDINGS, INC. CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) September 30, 2022 December 31, 2021 Assets (In Thousands, except for share data) Fixed maturities, available-for-sale, at fair value (amortized cost of $ 2,248,737 and $ 2,078,773 as of September 30, 2022 and December 31, 2021, respectively) $ 1,973,931 $ 2,085,931 Cash and cash equivalents (including restricted cash of $ 2,159 and $ 3,165 as of September 30, 2022 and December 31, 2021, respectively) 125,812 76,646 Premiums receivable 67,202 60,358 Accrued investment income 13,342 11,900 Prepaid expenses 4,694 3,530 Deferred policy acquisition costs, net 59,483 59,584 Software and equipment, net 32,156 32,047 Intangible assets and goodwill 3,634 3,634 Prepaid reinsurance premiums 1,454 2,393 Reinsurance recoverable 19,755 20,320 Other assets 102,380 94,238 Total assets $ 2,403,843 $ 2,450,581 Liabilities Debt $ 395,683 $ 394,623 Unearned premiums 130,652 139,237 Accounts payable and accrued expenses 73,945 72,000 Reserve for insurance claims and claim expenses 94,944 103,551 Reinsurance funds withheld 3,716 5,601 Warrant liability, at fair value — 2,363 Deferred tax liability, net 166,609 164,175 Other liabilities 12,428 3,245 Total liabilities 877,977 884,795 Commitments and contingencies (see Note 11) Shareholders' equity Common stock - class A shares, $ 0.01 par value; 86,463,874 shares issued and 83,796,313 shares outstanding as of September 30, 2022 and 85,792,849 shares issued and outstanding as of December 31, 2021 ( 250,000,000 shares authorized) 865 858 Additional paid-in capital 969,359 955,302 Treasury Stock, at cost: 2,667,561 and 0 common shares as of September 30, 2022 and December 31, 2021, respectively ( 51,195 ) — Accumulated other comprehensive (loss) income, net of tax ( 221,266 ) 1,485 Retained earnings 828,103 608,141 Total shareholders' equity 1,525,866 1,565,786 Total liabilities and shareholders' equity $ 2,403,843 $ 2,450,581 See accompanying notes to condensed consolidated financial statements (unaudited). 6 NMI HOLDINGS, INC. C ONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS) (UNAUDITED) For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 Revenues (In Thousands, except for per share data) Net premiums earned $ 118,317 $ 113,594 $ 355,682 $ 330,361 Net investment income 11,945 9,831 33,065 28,027 Net realized investment gains 14 3 475 15 Other revenues 301 613 1,016 1,597 Total revenues 130,577 124,041 390,238 360,000 Expenses Insurance claims and claim (benefits) expenses ( 3,389 ) 3,204 ( 7,044 ) 12,806 Underwriting and operating expenses 27,144 34,669 90,779 103,460 Service expenses 197 787 963 1,859 Interest expense 8,036 7,930 24,128 23,767 Gain from change in fair value of warrant liability — — ( 1,113 ) ( 454 ) Total expenses 31,988 46,590 107,713 141,438 Income before income taxes 98,589 77,451 282,525 218,562 Income tax expense 21,751 17,258 62,563 47,956 Net income $ 76,838 $ 60,193 $ 219,962 $ 170,606 Earnings per share Basic $ 0.91 $ 0.70 $ 2.58 $ 1.99 Diluted $ 0.90 $ 0.69 $ 2.53 $ 1.96 Weighted average common shares outstanding Basic 84,444 85,721 85,369 85,563 Diluted 85,485 86,880 86,420 86,794 Net income $ 76,838 $ 60,193 $ 219,962 $ 170,606 Other comprehensive loss, net of tax: Unrealized losses in accumulated other comprehensive income (loss), net of tax benefit of $ 15,932 and $ 2,165 for the three months ended September 30, 2022 and 2021, and $ 59,112 and $ 9,168 for the nine month ended September 30, 2022 and 2021, respectively ( 59,936 ) ( 8,144 ) ( 222,374 ) ( 34,487 ) Reclassification adjustment for realized gains included in net income, net of tax expense of $ 3 and $ 1 for the three months ended September 30, 2022 and 2021, and $ 100 and $ 3 for the nine months ended September 30, 2022 and 2021, respectively ( 10 ) ( 2 ) ( 377 ) ( 12 ) Other comprehensive loss, net of tax ( 59,946 ) ( 8,146 ) ( 222,751 ) ( 34,499 ) Comprehensive income (loss) $ 16,892 $ 52,047 $ ( 2,789 ) $ 136,107 See accompanying notes to condensed consolidated financial statements (unaudited). 7 NMI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) Common Stock - Class A Additional Paid-in Capital Treasury Stock, At Cost Accumulated Other Comprehensive Income (Loss) Retained Earnings Total Shares Amount (In Thousands) Balances, December 31, 2021 85,793 $ 858 $ 955,302 $ — $ 1,485 $ 608,141 $ 1,565,786 Common stock: class A shares issued related to warrant exercises 51 1 1,143 — — — 1,144 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 430 4 26 — — — 30 Repurchase of common stock ( 235 ) — — ( 5,000 ) ( 5,000 ) Share-based compensation expense — — 4,196 — — — 4,196 Change in unrealized investment gains/losses, net of tax benefit of $ 26,262 — — — — ( 98,794 ) — ( 98,794 ) Net income — — — — — 67,680 67,680 Balances, March 31, 2022 86,039 $ 863 $ 960,667 $ ( 5,000 ) $ ( 97,309 ) $ 675,821 $ 1,535,042 Common stock: class A shares issued related to warrant exercises 33 * 624 — — — 624 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 68 1 ( 504 ) — — — ( 503 ) Repurchase of common stock ( 1,439 ) — — ( 25,371 ) — — ( 25,371 ) Share-based compensation expense — — 3,867 — — — 3,867 Change in unrealized investment gains/losses, net of tax benefit of $ 17,015 — — — — ( 64,011 ) — ( 64,011 ) Net income — — — — — 75,444 75,444 Balances, June 30, 2022 84,701 $ 864 $ 964,654 $ ( 30,371 ) $ ( 161,320 ) $ 751,265 $ 1,525,092 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 89 1 823 — — — 824 Repurchase of common stock ( 994 ) — — ( 20,824 ) — — ( 20,824 ) Share-based compensation expense — — 3,882 — — — 3,882 Change in unrealized investment gains/losses, net of tax benefit of $ 15,935 — — — — ( 59,946 ) — ( 59,946 ) Net income — — — — — 76,838 76,838 Balances, September 30, 2022 83,796 $ 865 $ 969,359 $ ( 51,195 ) $ ( 221,266 ) $ 828,103 $ 1,525,866 * During the three months ended June 30, 2022, we issued 32,659 common shares with a par value of $ 0.01 in connection with the exercise of warrants, which is not identifiable in this schedule due to rounding. See accompanying notes to condensed consolidated financial statements (unaudited). 8 NMI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) Common Stock - Class A Additional Paid-in Capital Accumulated Other Comprehensive Income Retained Earnings Total Shares Amount (In Thousands) Balances, December 31, 2020 85,163 $ 852 $ 937,872 $ 53,856 $ 377,011 $ 1,369,591 Common stock: class A shares issued related to warrant exercises 24 * 557 — — 557 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 413 4 ( 624 ) — — ( 620 ) Share-based compensation expense — — 3,022 — — 3,022 Change in unrealized investment gains/losses, net of tax benefit of $ 11,997 — — — ( 45,133 ) — ( 45,133 ) Net income — — — — 52,891 52,891 Balances, March 31, 2021 85,600 $ 856 $ 940,827 $ 8,723 $ 429,902 $ 1,380,308 Common stock: class A shares issued related to warrant exercises 8 * 197 — — 197 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 95 1 ( 286 ) — — ( 285 ) Share-based compensation expense — — 3,383 — — 3,383 Change in unrealized investment gains/losses, net of tax expense of $ 4,992 — — — 18,780 — 18,780 Net income — — — — 57,522 57,522 Balances, June 30, 2021 85,703 $ 857 $ 944,121 $ 27,503 $ 487,424 $ 1,459,905 Common stock: class A shares issued related to warrants 28 * 603 — — 603 Common stock: class A shares issued under stock plans, net of shares withheld for employee taxes 12 * ( 45 ) — — ( 45 ) Share-based compensation expense — — 3,716 — — 3,716 Change in unrealized investment gains/losses, net of tax benefit of $ 2,166 — — — ( 8,146 ) — ( 8,146 ) Net income — — — — 60,193 60,193 Balances, September 30, 2021 85,743 $ 857 $ 948,395 $ 19,357 $ 547,617 $ 1,516,226 * During the three months ended March 31, 2021 and June 30, 2021, we issued 23,750 and 8,096 common shares, respectively, with a par value of $ 0.01 in connection with the exercise of warrants, which are not identifiable in this schedule due to rounding. During the three months ended September 30, 2021, we issued 27,715 common shares with a par value of $ 0.01 in connection with the exercise of warrants, and 12,436 common shares with a par value of $ 0.01 in connection with the exercise of options and vesting of restricted stock units granted under our stock plans, which are not identifiable in this schedule due to rounding. See accompanying notes to condensed consolidated financial statements (unaudited). 9 NMI HOLDINGS, INC. CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) For the nine months ended September 30, 2022 2021 Cash flows from operating activities (In Thousands) Net income $ 219,962 $ 170,606 Adjustments to reconcile net income to net cash provided by operating activities: Net realized investment gains ( 475 ) ( 15 ) Gain from change in fair value of warrant liability ( 1,113 ) ( 454 ) Depreciation and amortization 8,976 8,250 Net amortization of premium on investment securities 4,864 5,020 Amortization of debt discount and debt issuance costs 1,374 1,349 Deferred income taxes 61,647 47,949 Share-based compensation expense 11,945 10,121 Changes in operating assets and liabilities: Premiums receivable ( 6,844 ) ( 8,720 ) Accrued investment income ( 1,442 ) ( 2,252 ) Prepaid expenses ( 1,164 ) ( 1,117 ) Deferred policy acquisition costs, net 101 863 Reinsurance recoverable 565 ( 2,812 ) Other assets 849 ( 79 ) Unearned premiums ( 8,585 ) 20,807 Reserve for insurance claims and claim expenses ( 8,607 ) 14,037 Reinsurance balances, net ( 1,067 ) ( 174 ) Accounts payable and accrued expenses 617 18,002 Net cash provided by operating activities 281,603 281,381 Cash flows from investing activities Purchase of short-term investments ( 229,816 ) ( 10,640 ) Purchase of fixed-maturity investments, available-for-sale ( 156,973 ) ( 390,988 ) Proceeds from maturity of short-term investments 129,570 — Proceeds from redemptions, maturities and sale of fixed-maturity investments, available-for-sale 82,865 100,215 Software and equipment ( 7,757 ) ( 9,107 ) Net cash used in investing activities ( 182,111 ) ( 310,520 ) Cash flows from financing activities Proceeds from issuance of common stock related to employee equity plans 5,392 4,137 Proceeds from issuance of common stock related to warrants 518 412 Taxes paid related to net share settlement of equity awards ( 5,041 ) ( 5,087 ) Repurchases of common stock ( 51,195 ) — Net cash used in financing activities ( 50,326 ) ( 538 ) Net increase (decrease) in cash, cash equivalents and restricted cash 49,166 ( 29,677 ) Cash, cash equivalents and restricted cash, beginning of period 76,646 126,937 Cash, cash equivalents and restricted cash, end of period $ 125,812 $ 97,260 Supplemental disclosures of cash flow information Interest paid $ 14,750 $ 14,750 Income taxes refunded — 457 See accompanying notes to condensed consolidated financial statements (unaudited). 10 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 1. Organization, Basis of Presentation and Summary of Accounting Principles NMI Holdings, Inc. (NMIH) is a Delaware corporation, incorporated in May 2011, to provide private mortgage guaranty insurance (which we refer to as mortgage insurance or MI) through its wholly owned insurance subsidiaries, National Mortgage Insurance Corporation (NMIC) and National Mortgage Reinsurance Inc One (Re One). Our common stock is listed on the Nasdaq exchange under the ticker symbol "NMIH". NMIC, our primary insurance subsidiary, issued its first mortgage insurance policy in April 2013. NMIC is licensed to write mortgage insurance in all 50 states and the District of Columbia (D.C.). Re One historically provided reinsurance coverage to NMIC in accordance with certain statutory risk retention requirements. Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted. Re One remains a wholly owned, licensed insurance subsidiary; however, it does not currently have active insurance exposures. In August 2015, NMIH capitalized a wholly owned subsidiary, NMI Services, Inc. (NMIS), through which we offer outsourced loan review services to mortgage loan originators. Basis of Presentation The accompanying unaudited condensed consolidated financial statements, which include the results of NMIH and its wholly owned subsidiaries, have been prepared in accordance with the instructions to Form 10-Q as prescribed by the SEC for interim reporting and include other information and disclosures required by accounting principles generally accepted in the U.S. (GAAP). Our accounts are maintained in U.S. dollars. These statements should be read in conjunction with our consolidated financial statements and notes thereto for the year ended December 31, 2021, included in our 2021 10-K. All intercompany transactions have been eliminated. Certain reclassifications to previously reported financial information have been made to conform to our current period presentation. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect reported amounts of assets and liabilities, as well as disclosure of contingent assets and liabilities as of the balance sheet date. Estimates also affect the reported amounts of income and expenses for the reporting period. Actual results could differ from those estimates. The results of operations for the interim period may not be indicative of the results that may be expected for the full year ending December 31, 2022. COVID-19 Developments On January 30, 2020, the World Health Organization (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 spread of the virus, 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. The global dislocation caused by COVID-19 was unprecedented and the pandemic had a direct impact on the U.S. housing market, private mortgage insurance industry, and our business and operating performance for an extended period. More recently, however, the acute economic impact of COVID-19 has begun to recede. While the pandemic continues to pose a global risk and affect communities across the U.S., it is no longer the single dominant driver of our performance that it had been in earlier periods. COVID-19 is now one of several mosaic factors, including a range of macroeconomic forces and public policy initiatives that are influencing our market and business. Although we are optimistic that the nationwide COVID-19 vaccination effort and other medical advances will continue to support a normalization of personal and business activity, the path of the virus remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the impact the pandemic may have on the mortgage insurance market, our business performance or our financial position at this time, and it remains possible COVID-19 could again trigger more severe and adverse outcomes in future periods. Significant Accounting Principles There have been no changes to our significant accounting principles as described in Item 8, " Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 2 - Summary of Accounting Principles " of our 2021 10-K, except as noted in " Share Repurchases" and " Recent Accounting Pronouncements - Adopted " below. Share Repurchases Common stock repurchases are recorded at cost and presented as "Treasury Stock" in the consolidated balance sheet and statement of changes in shareholders' equity. At the date of repurchase, shareholders' equity is reduced by the aggregate repurchase price plus commissions and other expenses that arise from the repurchase transaction. 11 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Recent Accounting Pronouncements - Adopted In August 2020, the Financial Accounting Standards Board (the FASB) issued ASU 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40). The update simplifies the accounting for convertible instruments and contracts on an entity's own equity, including warrants, eliminating certain triggers for derivative accounting. We adopted this ASU on January 1, 2022 and determined it did not have a material impact on our consolidated financial statements, including our warrant liability. Recent Accounting Pronouncements - Not Yet Adopted In August 2018, the FASB issued ASU 2018-12, Targeted Improvements to the Accounting for Long-Duration Contracts (Topic 944). The update provides guidance to the existing recognition, measurement, presentation and disclosure requirements for long-duration contracts issued by an insurance entity. The FASB subsequently issued ASU 2019-09 in November 2019 and ASU 2020-11 in November 2020, which amended the effective date for this standard and provided transition relief to facilitate early application for long duration contracts. The standard will now take effect for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2022. We have evaluated the impact of the adoption of this guidance and have determined it will not have a material impact on our consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848). The update provides optional guidance to ease the potential burden in accounting for reference rate reform on financial reporting. Reference rate reform refers to the global transition away from referencing the London Interbank Offered Rate (LIBOR) in financial contracts, which is expected to be discontinued during a transition period from 2021 through 2023. The ASU includes optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by reference rate reform if certain criteria are met. This standard may be elected and applied prospectively over time from March 12, 2020 through December 31, 2022 as reference rate reform activities occur. We continue to monitor the impact the discontinuance of LIBOR will have on our contracts and other transactions; however, the adoption of, and future elections under this ASU are not expected to have a material impact on our consolidated financial statements as the ASU will ease, if warranted, the requirements for accounting for the future effects of the rate reform. 2. Investments We hold all investments on an available-for-sale basis and evaluate each position quarterly for impairment. We recognize an impairment on a security through the statement of operations if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the consolidated statement of operations and comprehensive income as a "Net Realized Investment Loss." To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense. The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes. 12 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Fair Values and Gross Unrealized Gains and Losses on Investments Amortized Cost Gross Unrealized Fair Value Gains Losses As of September 30, 2022 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 82,275 $ 82 $ ( 2,445 ) $ 79,912 Municipal debt securities 569,931 33 ( 81,109 ) 488,855 Corporate debt securities 1,409,344 248 ( 185,066 ) 1,224,526 Asset-backed securities 75,783 — ( 6,374 ) 69,409 Total bonds 2,137,333 363 ( 274,994 ) 1,862,702 Short-term investments 111,404 54 ( 229 ) 111,229 Total investments $ 2,248,737 $ 417 $ ( 275,223 ) $ 1,973,931 Amortized Cost Gross Unrealized Fair Value Gains Losses As of December 31, 2021 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 29,443 $ 981 $ — $ 30,424 Municipal debt securities 553,793 5,689 ( 5,404 ) 554,078 Corporate debt securities 1,388,204 22,990 ( 17,364 ) 1,393,830 Asset-backed securities 96,324 684 ( 427 ) 96,581 Total bonds 2,067,764 30,344 ( 23,195 ) 2,074,913 Short-term investments 11,009 9 — 11,018 Total investments $ 2,078,773 $ 30,353 $ ( 23,195 ) $ 2,085,931 We did not own any mortgage-backed securities in our asset-backed securities portfolio at September 30, 2022 or December 31, 2021. The following table presents a breakdown of the fair value of our corporate debt securities by issuer industry group as of September 30, 2022 and December 31, 2021: September 30, 2022 December 31, 2021 Financial 37 % 38 % Consumer 24 24 Communications 12 11 Utilities 10 10 Technology 9 9 Industrial 8 8 Total 100 % 100 % As of September 30, 2022 and December 31, 2021, approximately $ 5.4 million and $ 5.6 million, respectively, of our cash and investments were held in the form of U.S. Treasury securities on deposit with various state insurance departments to satisfy regulatory requirements. 13 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Scheduled Maturities The amortized cost and fair value of available-for-sale securities as of September 30, 2022 and December 31, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed securities provide for periodic payments throughout their lives, they are listed below in a separate category. As of September 30, 2022 Amortized Cost Fair Value (In Thousands) Due in one year or less $ 212,904 $ 211,769 Due after one through five years 896,340 822,528 Due after five through ten years 1,048,875 858,304 Due after ten years 14,835 11,921 Asset-backed securities 75,783 69,409 Total investments $ 2,248,737 $ 1,973,931 As of December 31, 2021 Amortized Cost Fair Value (In Thousands) Due in one year or less $ 81,699 $ 82,201 Due after one through five years 630,625 644,447 Due after five through ten years 1,215,224 1,207,997 Due after ten years 54,901 54,705 Asset-backed securities 96,324 96,581 Total investments $ 2,078,773 $ 2,085,931 Aging of Unrealized Losses As of September 30, 2022, the investment portfolio had gross unrealized losses of $ 275.2 million, of which $ 173.4 million were associated with securities that had been in an unrealized loss position for a period of twelve months or longer. As of December 31, 2021, the investment portfolio had gross unrealized losses of $ 23.2 million, of which $ 6.5 million were associated with securities that had been in an unrealized loss position for a period of twelve months or longer. For those securities in an unrealized loss position, the length of time the securities were in such a position is as follows: Less Than 12 Months 12 Months or Greater Total # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses As of September 30, 2022 ($ In Thousands) U.S. Treasury securities and obligations of U.S. government agencies 23 $ 79,912 $ ( 2,445 ) — $ — $ — 23 $ 79,912 $ ( 2,445 ) Municipal debt securities 114 284,217 ( 39,319 ) 126 201,638 ( 41,790 ) 240 485,855 ( 81,109 ) Corporate debt securities 205 590,692 ( 55,393 ) 115 621,820 ( 129,673 ) 320 1,212,512 ( 185,066 ) Asset-backed securities 19 56,981 ( 4,454 ) 7 12,428 ( 1,920 ) 26 69,409 ( 6,374 ) Short-term investments 9 78,859 ( 229 ) — — — 9 78,859 ( 229 ) Total 370 $ 1,090,661 $ ( 101,840 ) 248 $ 835,886 $ ( 173,383 ) 618 $ 1,926,547 $ ( 275,223 ) 14 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Less Than 12 Months 12 Months or Greater Total # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses # of Securities Fair Value Unrealized Losses As of December 31, 2021 ($ In Thousands) Municipal debt securities 151 $ 314,823 $ ( 4,959 ) 2 $ 8,138 $ ( 445 ) 153 $ 322,961 $ ( 5,404 ) Corporate debt securities 114 653,488 ( 11,426 ) 20 146,003 ( 5,938 ) 134 799,491 ( 17,364 ) Asset-backed securities 11 57,601 ( 357 ) 1 1,977 ( 70 ) 12 59,578 ( 427 ) Total 276 $ 1,025,912 $ ( 16,742 ) 23 $ 156,118 $ ( 6,453 ) 299 $ 1,182,030 $ ( 23,195 ) Allowance for credit losses As of September 30, 2022 and December 31, 2021, we did not recognize an allowance for credit loss for any security in the investment portfolio and we did not record any provision for credit loss for investment securities during the three or nine-month periods ended September 30, 2022 or September 30, 2021. The increase in the number of securities in and the aggregate size of the unrealized loss position as of September 30, 2022, was driven by fluctuations in interest rates and, to a lesser extent, movements in credit spreads following the purchase date of certain securities. We evaluated the securities in an unrealized loss position as of September 30, 2022, assessing their credit ratings as well as any adverse conditions specifically related to the security. Based upon our estimate of the amount and timing of cash flows to be collected over the remaining life of each instrument, we believe the unrealized losses as of September 30, 2022 are not indicative of the ultimate collectability of the current amortized cost of the securities. Net Investment Income The following table presents the components of net investment income: For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 (In Thousands) Investment income $ 12,314 $ 10,170 $ 34,084 $ 29,003 Investment expenses ( 369 ) ( 339 ) ( 1,019 ) ( 976 ) Net investment income $ 11,945 $ 9,831 $ 33,065 $ 28,027 The following table presents the components of net realized investment gains: For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 (In Thousands) Gross realized investment gains $ 24 $ 3 $ 490 $ 15 Gross realized investment losses ( 10 ) — ( 15 ) — Net realized investment gains $ 14 $ 3 $ 475 $ 15 15 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 3. Fair Value of Financial Instruments The following describes the valuation techniques used by us to determine the fair value of our financial instruments: We established a fair value hierarchy by prioritizing the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under this standard are described below: Level 1 - Fair value measurements based on quoted prices in active markets that we have the ability to access for identical assets or liabilities. Market price data generally is obtained from exchange or dealer markets. We do not adjust the quoted price for such instruments. Level 2 - Fair value measurements based on inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 - Fair value measurements based on valuation techniques that use significant inputs that are unobservable. Both observable and unobservable inputs may be used to determine the fair values of positions classified in Level 3. The circumstances for using these measurements include those in which there is little, if any, market activity for the asset or liability. Therefore, we must make certain assumptions, which require significant management judgment or estimation about the inputs a hypothetical market participant would use to value that asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy is determined based on the lowest level input that is significant to the fair value measurement in its entirety. Assets classified as Level 1 and Level 2 To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation. Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information and data changes, and directional moves compared to market moves. This model combines all inputs to arrive at a value assigned to each security. We have not made any adjustments to the prices obtained from the independent pricing sources. Liabilities classified as Level 3 We calculate the fair value of outstanding warrants utilizing Level 3 inputs, including a Black-Scholes option-pricing model, in combination with a binomial model, and we value the pricing protection features within the warrants using a Monte-Carlo simulation model. Variables in the model include the risk-free rate of return, dividend yield, expected life and expected volatility of our stock price. All outstanding and unexercised warrants expired in April 2022 and there was no warrant liability remaining as of September 30, 2022. 16 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following tables present the level within the fair value hierarchy at which our financial instruments were measured: Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value As of September 30, 2022 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 79,912 $ — $ — $ 79,912 Municipal debt securities — 488,855 — 488,855 Corporate debt securities — 1,224,526 — 1,224,526 Asset-backed securities — 69,409 — 69,409 Cash, cash equivalents and short-term investments 237,041 — — 237,041 Total assets $ 316,953 $ 1,782,790 $ — $ 2,099,743 Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value As of December 31, 2021 (In Thousands) U.S. Treasury securities and obligations of U.S. government agencies $ 30,424 $ — $ — $ 30,424 Municipal debt securities — 554,078 — 554,078 Corporate debt securities — 1,393,830 — 1,393,830 Asset-backed securities — 96,581 — 96,581 Cash, cash equivalents and short-term investments 87,664 — — 87,664 Total assets $ 118,088 $ 2,044,489 $ — $ 2,162,577 Warrant liability — — 2,363 2,363 Total liabilities $ — $ — $ 2,363 $ 2,363 There were no transfers between Level 2 and Level 3 of the fair value hierarchy during the nine months ended September 30, 2022, or the year ended December 31, 2021. 17 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table provides a roll-forward of Level 3 liabilities measured at fair value: For the nine months ended September 30, Warrant Liability 2022 2021 (In Thousands) Balance, January 1 $ 2,363 $ 4,409 Change in fair value of warrant liability included in earnings ( 1,113 ) ( 454 ) Issuance of common stock on warrant exercise ( 1,250 ) ( 945 ) Balance, September 30 $ — $ 3,010 All outstanding and unexercised warrants expired in April 2022 and there was no warrant liability remaining as of September 30, 2022. For more information on the expiration of warrants and changes in the fair value of the warrant liability during the nine months ended September 30, 2022 and 2021, see Note 8, "Warrants" . The following table outlines the key inputs and assumptions used to calculate the fair value of the warrant liability in the Black-Scholes option-pricing model as of the date indicated: As of September 30, 2021 Common stock price $ 22.61 Risk free interest rate 0.05 % Expected life 0.56 years Expected volatility 34.4 % Dividend yield 0 % Financial Instruments not Measured at Fair Value On June 19, 2020, we issued $ 400.0 million aggregate principal amount of senior secured notes that mature on June 1, 2025 (the Notes) and used a portion of the proceeds from the Notes offering to repay the outstanding amount due under our $ 150 million term loan (2018 Term Loan). At September 30, 2022, the Notes were carried at a cost of $ 395.7 million, net of unamortized debt issuance costs of $ 4.3 million, and had a fair value of $ 388.4 million as assessed under our Level 2 hierarchy. At December 31, 2021, the Notes were carried at a cost of $ 394.6 million, net of unamortized debt issuance costs of $ 5.4 million, and had a fair value of $ 454.6 million. 4. Debt Senior Secured Notes At September 30, 2022, we had a $ 400.0 million aggregate principal amount of senior secured notes outstanding. The Notes were issued pursuant to an indenture dated June 19, 2020 (the Indenture) and bear interest at a rate of 7.375 %, payable semi-annually on June 1 and December 1. The Notes mature on June 1, 2025. At any time, or from time to time, prior to March 1, 2025, we may elect to redeem the Notes in whole or in part at a price based on 100 % of the aggregate principal amount of any Notes redeemed plus the "Applicable Premium," plus accrued and unpaid interest thereon. Applicable Premium is defined as the greater of (1) 1.0 % of the principal amount of the Notes, or (2) the excess of the present value of the principal value of the Notes plus all future interest payments over the principal amount. At any time on or after March 1, 2025, we may elect to redeem the Notes in whole or in part at a price equal to 100 % of the aggregate principal amount of the Notes to be redeemed plus accrued and unpaid interest thereon. Interest expense for the Notes includes interest and the amortization of capitalized debt issuance costs. In connection with the Notes offering, we recorded capitalized debt issuance costs of $ 7.4 million. Such amounts will be amortized over the contractual life of the Notes using the effective interest method. At September 30, 2022 and December 31, 2021, approximately $ 4.3 million and $ 5.4 million, respectively, of unamortized debt issuance costs remained. At September 30, 2022 and December 31, 2021, $ 9.8 million and $ 2.5 million of accrued and unpaid interest on the Notes was included in "Accounts Payable and Accrued Expenses" on the consolidated balance sheet. 18 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 2021 Revolving Credit Facility On November 29, 2021, we amended our $ 110 million senior secured revolving credit facility (the 2020 Revolving Credit Facility and as amended, the 2021 Revolving Credit Facility), expanding the lender group, increasing the revolving capacity to $ 250 million, and extending the maturity from February 22, 2023 to the earlier of (x) November 29, 2025, or (y) if any existing senior secured notes remain outstanding on such date, February 28, 2025. Borrowings under the 2021 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations, and accrue interest at a variable rate equal to, at our discretion, (i) a Base Rate (as defined in the 2021 Revolving Credit Facility) subject to a floor of 1.00 % per annum) plus a margin of 0.375 % to 1.875 % per annum or (ii) the Adjusted Term Secured Overnight Financing Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375 % to 2.875 % per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. As of September 30, 2022 and December 31, 2021, no amount was drawn under the 2021 Revolving Credit Facility. Under the 2021 Revolving Credit Facility, we are required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175 % to 0.525 %, based on the applicable corporate credit rating at the time. As of September 30, 2022, the applicable commitment fee was 0.30 %. For the three and nine months ended September 30, 2022, we recorded $ 0.2 million and $ 0.6 million of commitment fees in interest expense, respectively. We incurred debt issuance costs of $ 1.1 million in connection with the 2021 Revolving Credit Facility, and had $ 0.6 million of unamortized debt issuance costs associated with the 2020 Revolving Credit Facility remaining at the time of its amendment and replacement. Combined unamortized debt issuance will be amortized through interest expense on a straight-line basis over the contractual life of the 2021 Revolving Credit Facility. At September 30, 2022, remaining unamortized deferred debt issuance costs were $ 1.3 million. We are subject to certain covenants under the 2021 Revolving Credit Facility, including, but not limited to, the following: a maximum debt-to-total capitalization ratio of 35 %, compliance with the private mortgage insurer eligibility requirements (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 at September 30, 2022. 5. Reinsurance We enter into third-party reinsurance transactions to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, (respectively, as defined therein), and support the growth of our business. The Wisconsin Office of the Commissioner of Insurance (Wisconsin OCI) has approved and the GSEs have indicated their non-objection to all such transactions (subject to certain conditions and ongoing review, including levels of approved capital credit). The effect of our reinsurance agreements on premiums written and earned is as follows: For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Thousands) Net premiums written Direct $ 147,192 $ 134,635 $ 429,715 $ 419,811 Ceded (1) ( 33,646 ) ( 22,704 ) ( 81,678 ) ( 65,423 ) Net premiums written $ 113,546 $ 111,931 $ 348,037 $ 354,388 Net premiums earned Direct $ 152,221 $ 137,159 $ 438,299 $ 399,005 Ceded (1) ( 33,904 ) ( 23,565 ) ( 82,617 ) ( 68,644 ) Net premiums earned $ 118,317 $ 113,594 $ 355,682 $ 330,361 (1) Net of profit commission. 19 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Excess-of-loss reinsurance Insurance-linked notes NMIC is a party to reinsurance agreements with Oaktown Re Ltd., Oaktown Re II Ltd., Oaktown Re III Ltd., Oaktown Re IV Ltd., Oaktown Re V Ltd., Oaktown Re VI Ltd., and Oaktown Re VII Ltd. (special purpose reinsurance entities collectively referred to as the Oaktown Re Vehicles) effective May 2, 2017, July 25, 2018, July 30, 2019, July 30, 2020, October 29, 2020, April 27, 2021, and October 26, 2021, respectively. Each agreement provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio 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. NMIC makes risk premium payments to the Oaktown Re Vehicles for the applicable outstanding reinsurance coverage amount and pays an additional amount for anticipated operating expenses (capped at $ 250 thousand per year, except with respect to Oaktown Re Ltd., for which the cap is $ 300 thousand per year). NMIC ceded aggregate premiums to the Oaktown Re Vehicles of $ 10.7 million and $ 31.8 million during the three and nine months ended September 30, 2022, respectively, and $ 10.4 million and $ 30.0 million during the three and nine months ended September 30, 2021, respectively. NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each excess-of-loss agreement. NMIC did not cede any incurred losses on covered policies to the Oaktown Re Vehicles during the three and nine months ended September 30, 2022 and 2021, as the aggregate first layer risk retention for each applicable agreement was not exhausted during such periods. Under the terms of each excess-of-loss reinsurance agreement, the Oaktown Re Vehicles are required to fully collateralize their outstanding reinsurance coverage amount to NMIC with funds deposited into segregated reinsurance trusts. Such trust funds are required to be invested in short-term U.S. Treasury money market funds at all times. Each Oaktown Re Vehicle financed its respective collateral requirement through the issuance of mortgage insurance-linked notes to unaffiliated investors. Such insurance-linked notes mature ten years from the inception date of each reinsurance agreement (except the notes issued by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which have a 12.5 -year maturity). We refer to NMIC's reinsurance agreements with and the insurance-linked note issuances by Oaktown Re Vehicles individually as the 2017 ILN Transaction, 2018 ILN Transaction, 2019 ILN Transaction, 2020-1 ILN Transaction, 2020-2 ILN Transaction, 2021-1 ILN Transaction, and 2021-2 ILN Transaction, and collectively as the ILN Transactions. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled (except the coverage provided by Oaktown Re VI Ltd. and Oaktown Re VII Ltd., which decreases over a 12.5 -year period). As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction note-holders as amortization of the outstanding insurance-linked note principal balances. 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). As of September 30, 2022, the 2018 ILN Transaction was deemed to be in Lock Out due to the default experience of its underlying reference pool and the 2021-2 ILN Transaction was deemed to be in Lock Out in connection with the initial build of its target credit enhancement level. As such, the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for both ILN Transactions. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes issued in connection with the 2018 and 2021-2 ILN Transactions will remain suspended for the duration of the Lock-Out Event for each respective 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. Effective August 31, 2022, a Lock-Out Event for the 2019 ILN Transaction was deemed to have cleared and amortization of the associated reinsurance coverage, and distribution of collateral assets and amortization of the associated insurance-linked notes resumed. NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding reinsurance coverage amount amortizes to 10 % or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement, including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to note-holders, among others. 20 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Effective March 25, 2022 and April 25, 2022, NMIC exercised its optional clean-up call to terminate the 2017 and 2020-1 ILN Transactions, respectively. In connection with the termination of each respective transaction, NMIC’s excess of loss reinsurance agreements with Oaktown Re Ltd. and Oaktown Re IV Ltd. were commuted and the insurance-linked notes issued by the respective Oaktown Re Ltd and Oaktown Re IV Ltd. were redeemed in full with a distribution of remaining collateral assets. The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each outstanding ILN Transaction. Current amounts are presented as of September 30, 2022. ( $ values in thousands) Inception Date Covered Production Initial Reinsurance Coverage Current Reinsurance Coverage Initial First Layer Retained Loss Current First Layer Retained Loss (1) 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 $ 264,545 $ 158,489 $ 125,312 $ 122,271 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 218,121 123,424 122,412 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 110,623 121,777 121,177 2021-1 ILN Transaction April 27, 2021 10/1/2020 - 3/31/2021 (3) 367,238 322,290 163,708 163,665 2021-2 ILN Transaction (5) October 26, 2021 4/1/2021 - 9/30/2021 (4) 363,596 363,596 146,229 146,204 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claim expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claim 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) Approximately 2 % of the production covered by the 2021-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2021. (5) As of September 30, 2022, the current reinsurance coverage amount on the 2021-2 ILN Transactions is equal to the initial reinsurance coverage amount, as the reinsurance coverage provided by Oaktown Re VII Ltd. will not begin to amortize until its target credit enhancement level is reached. Under the terms of our ILN Transactions, we are required to maintain a certain level of restricted funds in premium deposit accounts with Bank of New York Mellon until the respective notes have been redeemed in full. "Cash and cash equivalents" on our consolidated balance sheet includes restricted amounts of $ 2.2 million and $ 3.2 million as of September 30, 2022 and December 31, 2021, respectively. The restricted balances required under these transactions will decline over time as the outstanding principal balance of the respective insurance-linked notes are amortized. Traditional reinsurance NMIC is a party to two excess-of-loss reinsurance agreements with broad panels of third-party reinsurers – the 2022-1 XOL Transaction, effective April 1, 2022, and the 2022-2 XOL Transaction, effective July 1, 2022 – which we refer to collectively as the XOL Transactions. Each XOL Transaction provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the reinsurers then provide second layer loss protection up to a defined reinsurance coverage amount. The reinsurance coverage amount of each XOL Transaction is set to approximate the PMIERs minimum required assets of its reference pool and decreases from the inception of each respective agreement over a ten-year period in the event the PMIERs minimum required assets of the pool declines. NMIC retains losses in excess of the outstanding reinsurance coverage amount. As of September 30, 2022, NMIC’s first layer aggregate retained loss exposure under the 2022-1 and 2022-2 XOL Transactions, was $ 133.4 million and $ 78.9 million, respectively, and the outstanding reinsurance coverage amount provided under each agreement was $ 284.0 million and $ 152.3 million, respectively. Under the terms of the XOL Transactions, NMIC makes risk premium payments to its third-party reinsurance providers for the outstanding reinsurance coverage amount and ceded aggregate premiums of $ 4.8 million and $ 7.7 million during the three and nine months ended September 30, 2022, respectively. NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure under each agreement. NMIC did not cede any incurred losses on covered policies under the XOL Transactions during the three and nine months ended September 30, 2022, as the aggregate first layer risk retention for each agreement was not exhausted during such periods. NMIC holds optional termination rights which provide it the discretion to terminate each XOL Transaction on or after a specified date. NMIC may also elect to terminate the XOL Transactions at any point if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount provided at inception, or if it determines that it will no longer be able to take full PMIERs asset credit for the coverage. Additionally, under the terms of the treaties, NMIC may 21 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) selectively terminate its engagement with individual reinsurers 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 obligation. Each of the third-party reinsurance providers that is party to the XOL Transactions has an insurer financial strength rating of A- or better by Standard & Poor’s Rating Service (S&P), A.M. Best Company Inc. (A.M. Best) or both. Quota share reinsurance NMIC is a party to six 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 2022 Seasoned QSR Transaction, effective July 1, 2022 – which we refer to collectively as the QSR Transactions. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies to panels of third-party reinsurance providers. Each of the third-party reinsurance providers that is party to the QSR Transactions 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 Mae. The 2016 QSR Transaction is scheduled to terminate on December 31, 2027, except with respect to the ceded pool risk, which is scheduled to terminate on August 31, 2023. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2020, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk. 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. The 2018 QSR Transaction is scheduled to terminate on December 31, 2029. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2022, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk. 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 to December 31, 2020. The 2020 QSR Transaction is scheduled to terminate on December 31, 2030. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2023, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk. Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5 % of the risk on eligible policies written from January 1, 2021 to October 30, 2021. The 2021 QSR Transaction is scheduled to terminate on December 31, 2031. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2024, or at the end of any calendar quarter thereafter, which would result in NMIC recapturing the related risk. Under the terms of the 2022 QSR Transaction, NMIC cedes premiums earned related to 20 % of the risk on eligible policies written primarily between October 30, 2021 and December 31, 2022. The 2022 QSR Transaction is scheduled to terminate on December 31, 2032. NMIC has the option, based on certain conditions and subject to a termination fee, to terminate the agreement as of December 31, 2025 or semi-annually thereafter, which would result in NMIC recapturing the related risk. In connection with the 2022 QSR Transaction, NMIC entered into an additional back-to-back quota share agreement that is scheduled to incept on January 1, 2023 (the 2023 QSR Transaction). Under the terms of the 2023 QSR Transactions, NMIC will cede premiums earned related to 20 % of the risk on eligible policies written in 2023. Under the terms of the 2022 Seasoned QSR Transaction, NMIC cedes premiums earned related to 95 % of the net risk on eligible policies primarily for a seasoned pool of mortgage insurance policies that had previously been covered under the now retired 2017 and 2020-1 ILN Transactions, after the consideration of coverage provided by other QSR Transactions. The 2022 Seasoned QSR Transaction is scheduled to terminate on June 30, 2032. NMIC has the option, based on certain conditions, to terminate the agreement as of June 30, 2025 or quarterly thereafter through December 31, 2027 with the payment of a termination fee, and as of March 31, 2028 or quarterly thereafter without the payment of a termination fee. Such termination would result in NMIC recapturing the related risk. NMIC may terminate any or all of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the risk-in-force (RIF) ceded under the respective agreements. Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively terminate its engagement with individual reinsurers on a 22 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 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 earned or written with respect to the recaptured risk. With the termination, ceded premiums written under the 2016 QSR Transaction decreased from 25 % to 20.5 % on eligible policies. The termination has no effect on the cession of pool risk under the 2016 QSR Transaction. The following table shows amounts related to the QSR Transactions: As of and for the three months ended As of and for the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Thousands) Ceded risk-in-force $ 12,511,797 $ 7,610,870 $ 12,511,797 $ 7,610,870 Ceded premiums earned ( 42,265 ) ( 28,366 ) ( 101,501 ) ( 81,650 ) Ceded claims and claim expenses (benefits) 248 840 ( 314 ) 3,214 Ceding commission earned 10,193 6,142 22,225 17,265 Profit commission 23,899 15,191 58,400 42,962 Ceded premiums written under the 2016 QSR Transaction are recorded on the balance sheet as prepaid reinsurance premiums and amortized to ceded premiums earned in a manner consistent with the recognition of revenue on direct premiums. Under all other QSR Transactions, premiums are ceded on an earned basis as defined in the agreement. NMIC receives a 20 % ceding commission for premiums ceded under the QSR Transactions, except with respect to the 2022 Seasoned QSR Transaction under which it receives a 35 % ceding commission. NMIC also receives a profit commission under each of the QSR Transactions, provided that the loss ratios on loans covered under the 2016, 2018, 2020, 2021, 2022 QSR and 2022 Seasoned QSR Transactions, generally remain below 60 %, 61 %, 50 %, 57.5 %, 62 %, and 55 % respectively, as measured annually. Ceded claims and claim expenses under each of the QSR Transactions reduce the respective profit commission received by NMIC on a dollar-for-dollar basis. In accordance with the terms of the 2016 QSR Transaction, rather than making a cash payment or transferring investments for ceded premiums written, NMIC established a funds withheld liability, which also includes amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC will be realized from this account until exhausted. NMIC's reinsurance recoverable balance is further supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The reinsurance recoverable on loss reserves related to the 2016 QSR Transaction was $ 3.5 million as of September 30, 2022. In accordance with the terms of the 2018, 2020, 2021, 2022 QSR and 2022 Seasoned QSR Transactions, cash payments for ceded premiums earned are settled on a quarterly basis, offset by amounts due to NMIC for ceding and profit commissions. Any loss recoveries and any potential profit commission to NMIC are also recognized quarterly. NMIC's reinsurance recoverable balance is supported by trust accounts established and maintained by each reinsurer in accordance with the PMIERs funding requirements for risk ceded to non-affiliates. The aggregate reinsurance recoverable on loss reserves related to the 2018, 2020, 2021, 2022 QSR and 2022 Seasoned QSR Transactions was $ 16.3 million as of September 30, 2022. We remain directly liable for all claim payments if we are unable to collect reinsurance recoverable due from our reinsurers and, as such, we actively monitor and manage our counterparty credit exposure to our reinsurance providers. We establish an allowance for expected credit loss against our reinsurance recoverable if we do not expect to recover amounts due from one or more of our reinsurance counterparties, and report our reinsurance recoverable net of such allowance, if any. We actively monitor the counterparty credit profiles of our reinsurers and each is required to partially collateralize its obligations under the terms of our QSR Transactions. The allowance for credit loss established on our reinsurance recoverable was deemed immaterial at September 30, 2022 and December 31, 2021. 23 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 6. Reserves for Insurance Claims and Claim Expenses We hold gross reserves in an amount equal to the estimated liability for insurance claims and claim expenses related to defaults on insured mortgage loans. 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 incurred but not reported (IBNR) reserves. We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees, as well as other general expenses of administering the claim settlement process. As of September 30, 2022, we had 4,096 primary loans in default and held gross reserves for insurance claims and claim expenses of $ 94.9 million. During the nine months ended September 30, 2022, we paid 59 claims totaling $ 1.2 million, including 56 claims covered under the QSR Transactions representing $ 0.3 million of ceded claims and claim expenses. In 2013, we entered into a pool insurance transaction with Fannie Mae. The pool transaction includes a deductible, which represents the amount of claims to be absorbed by Fannie Mae before we are obligated to pay any claims. We only establish reserves for pool risk if we expect claims to exceed this deductible. At September 30, 2022, 47 loans in the pool were in default. These 47 loans represented approximately $ 3.6 million of RIF. Due to the size of the remaining deductible, our expectation that a limited number of loans in default will progress to a claim and the expected severity on such claim submissions (all loans in the pool had loan-to-value (LTV) ratios under 80 % at origination), we did not establish any case or IBNR reserves for pool risk at September 30, 2022. In connection with the settlement of pool claims, we applied $ 1.0 million to the pool deductible through September 30, 2022. At September 30, 2022, the remaining pool deductible was $ 9.4 million. We have not paid any pool claims to date. 100 % of our pool RIF is reinsured under the 2016 QSR Transaction. We had 4,096 loans in default in our primary insured portfolio as of September 30, 2022, which represented a 0.71 % default rate against 580,525 to tal policies in-force. We had 7,670 loans in default in our primary insured portfolio as of September 30, 2021, which represented a 1.56 % default rate against 490,714 total policies in-force. Although our default count declined from September 30, 2021 to September 30, 2022, the population remains elevated compared to our historical experience due to the continued challenges certain borrowers are facing related to the COVID-19 pandemic and their decision to access the forbearance program for federally backed loans codified under the Coronavirus Aid, Relief and Economic Security (CARES) Act or similar programs made available by private lenders. The size of the reserve we establish for each defaulted loan (and by extension our aggregate reserve for claims and claim expenses) reflects our best estimate of the future claim payment to be made for each individual loan in default. Our future claims exposure is a function of the number of defaulted 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 factors. 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 pandemic, the FHFA and GSEs introduced new repayment and loan modification options to further assist borrowers with their transition out of forbearance programs and default status. We generally observe that forbearance, repayment and modification, and other assistance programs aid affected borrowers and drive higher cure rates on defaults than would otherwise be expected on similarly situated loans that did not benefit from broad-based assistance programs. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. 24 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim (benefits) expenses: For the nine months ended September 30, 2022 2021 (In Thousands) Beginning balance $ 103,551 $ 90,567 Less reinsurance recoverables (1) ( 20,320 ) ( 17,608 ) Beginning balance, net of reinsurance recoverables 83,231 72,959 Add claims incurred: Claims and claim (benefits) expenses incurred: Current year (2) 28,135 19,275 Prior years (3) ( 35,179 ) ( 6,469 ) Total claims and claim (benefits) expenses incurred ( 7,044 ) 12,806 Less claims paid: Claims and claim expenses paid: Current year (2) 73 15 Prior years (3) 925 1,566 Total claims and claim expenses paid 998 1,581 Reserve at end of period, net of reinsurance recoverables 75,189 84,184 Add reinsurance recoverables (1) 19,755 20,420 Ending balance $ 94,944 $ 104,604 (1) Related to ceded losses recoverable under the QSR Transactions. See 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 defaulted in a prior year and subsequently cured and later re-defaulted in the current year, the default would be included in the current year. Amounts are presented net of reinsurance and included $ 23.3 million attributed to net case reserves and $ 4.2 million attributed to net IBNR reserves for the nine months ended September 30, 2022 and $ 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. (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 $ 29.2 million attributed to net case reserves and $ 4.7 million attributed to net IBNR reserves for the nine months ended September 30, 2022 and $ 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. The "claims incurred" section of the table above shows claims and claim (benefits) 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 $ 58.9 million related to prior year defaults remained as of September 30, 2022. 7. Earnings per Share (EPS) Basic EPS is based on the weighted average number of shares of common stock outstanding. Diluted EPS is based on the weighted average number of shares of common stock outstanding and common stock equivalents that would be issuable upon the vesting of service based and performance and service-based restricted stock units (RSUs), and the exercise of vested and unvested stock options and outstanding warrants. The number of shares issuable for RSUs subject to performance and service based vesting requirements are only included in diluted shares if the relevant performance measurement period has commenced and results during such period meet the necessary performance criteria. The following table reconciles the net income and the weighted average shares of common stock outstanding used in the computations of basic and diluted EPS of common stock: 25 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 (In Thousands, except for per share data) Net income $ 76,838 $ 60,193 $ 219,962 $ 170,606 Basic weighted average shares outstanding 84,444 85,721 85,369 85,563 Basic earnings per share $ 0.91 $ 0.70 $ 2.58 $ 1.99 Net income $ 76,838 $ 60,193 $ 219,962 $ 170,606 Gain from change in fair value of warrant liability — — ( 1,113 ) ( 454 ) Diluted net income $ 76,838 $ 60,193 $ 218,849 $ 170,152 Basic weighted average shares outstanding 84,444 85,721 85,369 85,563 Dilutive effect of issuable shares 1,041 1,159 1,051 1,231 Diluted weighted average shares outstanding 85,485 86,880 86,420 86,794 Diluted earnings per share $ 0.90 $ 0.69 $ 2.53 $ 1.96 Anti-dilutive shares 30 1 30 2 8. Warrants We issued 992 thousand warrants in connection with a private placement of our common stock in April 2012 with a ten-year contractual term that expired in April 2022. Each warrant provided the holder thereof the right to purchase one share of common stock at an exercise price equal to $ 10.00 . The warrants were issued with an aggregate fair value of $ 5.1 million. On April 24, 2022, 90 thousand warrants expired unexercised, resulting in a gain of approximately $ 0.9 million. No warrants remained outstanding as of September 30, 2022 and there were no warrant exercises or changes in warrant liability fair value during the three months ended September 30, 2022. During the nine months ended September 30, 2022, 110 thousand warrants were exercised resulting in the issuance of 84 thousand shares of common stock. Upon exercise, we reclassified approximately $ 1.3 million of warrant fair value from warrant liability to additional paid-in capital. During the three months ended September 30, 2021, 32 thousand warrants were exercised resulting in the issuance of 28 thousand shares of common stock. Upon exercise, we reclassified approximately $ 0.4 million of warrant fair value from warrant liability to additional paid-in capital. During the nine months ended September 30, 2021, 73 thousand warrants were exercised resulting in the issuance of 60 thousand shares of common stock. Upon exercise, we reclassified approximately $ 0.9 million of warrant fair value from warrant liability to additional paid-in capital. 9. Income Taxes We are a U.S. taxpayer and are subject to a statutory U.S. federal corporate income tax rate of 21%. Taxable income is reported on our consolidated U.S. federal and various state income tax returns, filed by NMIH on behalf of itself and its subsidiaries. Our effective tax rate on our pre-tax income was 22.1 % for the three and nine months ended September 30, 2022, respectively, compared to 22.3 % and 21.9 % for the three and nine months ended September 30, 2021, respectively. Our provision for income taxes for interim reporting periods is established based on our estimated annual effective tax rate for a given year. Our effective tax rate may fluctuate between interim periods due to the impact of discrete items not included in our estimated annual effective tax rate, including the tax effects associated with the vesting of RSUs and exercise of options, and the change in fair value of our warrant liability. Such items are treated on a discrete basis in the reporting period in which they occur. As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under IRC Section 832(e), and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction, which is our intent. As a result, our interim provision for income taxes for the three and nine months ended September 30, 2022 represents a change in our net deferred tax liability. As of September 30, 2022 and December 31, 2021, we held $ 89.2 million of tax and loss bonds in "Other assets" on our consolidated balance sheet. 26 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) 10. Stockholders' Equity On February 10, 2022, our Board of Directors approved a $ 125 million share repurchase program effective through December 31, 2023. The authorization provides us the flexibility to repurchase stock from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. During the three and nine months ended September 30, 2022, we repurchased 1.0 million and 2.7 million shares, respectively, at average prices of $ 20.94 and $ 19.17 per share (excluding associated costs) pursuant to a trading plans under Rule 10b-18 and Rule 10b5-1 of the Exchange Act. As of September 30, 2022, $ 73.8 million of repurchase authority remained available under the program. 11. Commitments and Contingencies Leases We have two operating lease agreements related to our corporate headquarters and a data center facility for which we recognized operating right-of-use (ROU) assets and lease liabilities of $ 10.7 million and $ 12.2 million in "Other assets" and "Other liabilities," respectively, on our consolidated balance sheet as of September 30, 2022. As of December 31, 2021, we recognized operating ROU assets and lease liabilities of $ 2.6 million and $ 2.9 million, respectively. As of September 30, 2022 and December 31, 2021, we did no t have any finance leases. In January 2022, we modified the lease for our corporate headquarters, securing a reduction in pricing and incremental leasehold improvement concessions, reducing the square footage of leased space and extending the remaining term through March 2030. In February 2022, we renewed the lease of our data center facility, extending its term through January 2024. Upon the respective modification and extension, the ROU asset and liability associated with each lease was remeasured, using our current estimated incremental borrowing rate, resulting in an aggregate increase to ROU assets and lease liabilities of $ 9.7 million. The following table provides a summary of our ROU asset and lease liability assumptions as of September 30, 2022: Weighted-average remaining lease term 7.4 years Weighted-average discount rate 6.50 % Cash paid on our operating leases for the three and nine months ended September 30, 2022 was $ 0.4 million and $ 0.5 million, respectively, compared to $ 0.6 million and $ 1.9 million for the three and nine months ended September 30, 2021, respectively. Lease expenses incurred for the three and nine months ended September 30, 2022 were $ 0.5 million and $ 1.5 million, respectively, compared to $ 0.6 million and $ 1.7 million for the three and nine months ended September 30, 2021. Future payments due under our existing operating leases as of September 30, 2022 are as follows: (In Thousands) Remaining in 2022 $ 313 2023 1,498 2024 2,080 2025 2,128 2026 2,190 2027 2,256 2028 and thereafter 5,316 Total undiscounted lease payments 15,781 Less effects of discounting ( 3,576 ) Present value of lease payments $ 12,205 Lease expense is recorded in underwriting and operating expenses on the consolidated statements of operations and comprehensive income. Our existing leases have original terms ranging from two to eight years . The lease for our corporate headquarters includes an option to renew for an additional five years at prevailing market rates at the time of renewal. This renewal option is not included in the calculation of future lease payments due under the existing lease as presented above as it is not reasonably certain to be exercised. 27 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Litigation We record a liability when we believe that it is probable that a loss has been incurred, and the amount can be reasonably estimated. If we determine that a loss is reasonably possible, we disclose an estimate of the possible loss or range of loss. If no estimate can be made, we disclose the matter as such. We evaluate litigation and other legal developments that could affect the amount of liability that may need to be accrued, related reasonably possible losses disclosed and make adjustments as appropriate. Significant judgment is required to determine both the likelihood and the estimated amount of losses related to such matters. We are currently monitoring litigation regarding the refund of certain mortgage insurance premiums as it pertains to provisions of the Homeowners Protection Act and have been named as a third-party defendant in one such case. We are unable to assess the outcome of such litigation at this time or its potential impact on us. 12. Premium Receivable Premiums receivable consists of premiums due on our mortgage insurance policies. If a mortgage insurance premium is unpaid for more than 120 days, the associated receivable is written off against earned premium and the related insurance policy is canceled. We recognize an allowance for credit losses for premiums receivable based on credit losses expected to arise over the life of the receivable. Due to the nature of our insurance policies (a necessary precondition for access to mortgage credit for covered borrowers) and the short duration of the related receivables, we do not typically experience credit losses against our premium receivables and the allowance for credit loss established on premium receivable was deemed immaterial at September 30, 2022 and December 31, 2021. Premiums receivable may be written off prior to 120 days in the ordinary course of business for non-credit events including, but not limited to, the modification or refinancing of an underlying insured loan. We established a $ 2.0 million and $ 2.3 million reserve for premium write-offs at September 30, 2022 and December 31, 2021, respectively. 13. Regulatory Information Statutory Requirements Our insurance subsidiaries, NMIC and Re One, file financial statements in conformity with statutory accounting principles (SAP) prescribed or permitted by the Wisconsin OCI, NMIC's principal regulator. Prescribed SAP includes state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). The Wisconsin OCI recognizes only statutory accounting practices prescribed or permitted by the state of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company and for determining its solvency under Wisconsin insurance laws. NMIC and Re One generated combined statutory net income of $ 23.6 million and $ 67.8 million for the three and nine months ended September 30, 2022, respectively, compared to $ 8.7 million and $ 23.9 million for the three and nine months September 30, 2021, respectively. The Wisconsin OCI has imposed a prescribed accounting practice for the treatment of statutory contingency reserves that differs from the treatment promulgated by the NAIC. Under Wisconsin OCI's prescribed practice mortgage guaranty insurers are required to reflect changes in their contingency reserves through statutory income. Such approach contrasts with the NAIC's treatment, which records changes to contingency reserves directly to unassigned funds. As a Wisconsin-domiciled insurer, NMIC's statutory net income reflects an expense associated with the change in its contingency reserve. While such treatment impacts NMIC's statutory net income, it does not have an effect on NMIC's statutory capital position. 28 NMI HOLDINGS, INC. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) The following table presents NMIC's statutory surplus, contingency reserve, statutory capital and risk-to-capital (RTC) ratio as of September 30, 2022 and December 31, 2021. September 30, 2022 December 31, 2021 (In Thousands) Statutory surplus $ 911,369 $ 893,848 Contingency reserve 1,255,789 1,036,639 Statutory capital (1) $ 2,167,158 $ 1,930,487 Risk-to-capital 10.9 :1 11.6 :1 (1) Represents the total of the statutory surplus and contingency reserve. Re One had $ 5.6 million of statutory capital at September 30, 2022 and December 31, 2021. Effective October 1, 2021, the reinsurance agreement between NMIC and Re One was commuted and all ceded risk was transferred back to NMIC. Following the commutation, Re One has no risk in force or further obligation on future claims. 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 capital surplus or, subject to certain limitations, recent net profits. NMIC and Re One are subject to certain rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs that may restrict their ability to pay dividends to NMIH. NMIC has the capacity to pay $ 34.9 million of aggregate ordinary dividends to NMIH during the twelve-month period ending December 31, 2022 and on April 1, 2022, NMIC paid a $ 34.9 million ordinary course dividend to NMIH. 14. Subsequent Events On November 1, 2022, NMIC entered into a reinsurance agreement with a broad panel of highly rated reinsurers that provides for $ 96.8 million of aggregate excess-of-loss reinsurance coverage at inception for new delinquencies on an existing portfolio of mortgage insurance policies primarily written between July 1, 2022, and September 30, 2022 (2022-3 XOL Transaction). For the reinsurance coverage period, NMIC will retain the first layer of $ 106.3 million of aggregate losses and reinsurers then provide second layer coverage up to $ 96.8 million, subject to retained participation limits. NMIC will then retain losses in excess of the outstanding reinsurance coverage amount.