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 2021 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 2021 10-K, as subsequently updated in other reports we file with the SEC, for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any other period. Overview We provide private MI through our primary insurance subsidiary, NMIC. NMIC is wholly-owned, domiciled in Wisconsin and principally regulated by the Wisconsin OCI. NMIC is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators and our subsidiary, 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 Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted.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. 29 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 loan-to-value (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, 2022, we had issued master policies with 1,843 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, 2022, we had $179.2 billion of primary insurance-in-force (IIF) and $46.3 billion of primary risk-in-force (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 high-quality 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, 2022, we had 246 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. Conditions and Trends Affecting Our Business COVID-19 and Other 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 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. It is also possible that emerging macroeconomic factors, including persistent inflation, increasing interest rates, flagging consumer confidence and increasing jobless claims could have a pronounced impact on the housing market, the mortgage insurance industry and our business in future periods. 30 Key Factors Affecting Our Results New Insurance Written (NIW), Insurance-In-Force and Risk-In-Force NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our NIW is affected by the overall size of the mortgage origination market and the volume of high-LTV mortgage originations. Our NIW is also affected by the percentage of such high-LTV originations covered by private versus government MI or other alternative credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment, nonpayment of premiums, coverage rescission and claim payments). RIF is related to IIF and represents the aggregate amount of coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans having a higher coverage percentage. Gross RIF represents RIF before consideration of reinsurance. Net RIF is gross RIF net of ceded reinsurance. Net Premiums Written and Net Premiums Earned We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPS. Rate GPS considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS in June 2018 to replace our previous rate card pricing system. While most of our new business is priced through Rate GPS, we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns. Premiums are generally fixed for the duration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements, less premium refunds and premium write-offs. As a result, net premiums written are generally influenced by: • NIW; • premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described below; • cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings (which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force policies), levels of claim payments and home prices; and • cession of premiums under third-party reinsurance arrangements. Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment at origination, which is earned over the estimated life of the policy. Substantially all of our single premium policies in force as of September 30, 2022 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 31 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. Excess-of-loss reinsurance Insurance-linked notes 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 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. 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 Oaktown Re Ltd. and Oaktown Re IV Ltd. were redeemed in full with a distribution of remaining collateral assets. 32 The following table presents the inception date, covered production p eriod, current reinsurance coverage amount, current first layer retained aggregate loss and detail on the level of overcollateralization under each outstanding ILN Transaction. Current amounts are presented as of September 30, 2022. ($ values in thousands) 2018 ILN Transaction 2019 ILN Transaction 2020-2 ILN Transaction 2021-1 ILN Transaction 2021-2 ILN Transaction Inception date July 25, 2018 July 30, 2019 October 29, 2020 April 27, 2021 October 26, 2021 Covered production 1/1/2017 - 5/31/2018 6/1/2018 - 6/30/2019 4/1/2020 - 9/30/2020 (1) 10/1/2020 - 3/31/2021 (2) 4/1/2021 - 9/30/2021 (3) Current ceded RIF $ 900,608 $ 1,010,097 $ 3,638,732 $ 7,177,674 $ 7,129,356 Current first layer retained loss 122,271 122,412 121,177 163,665 146,204 Current reinsurance coverage 158,489 218,121 110,623 322,290 363,596 Eligible coverage $ 280,760 $ 340,533 $ 231,800 $ 485,955 $ 509,800 Subordinated coverage (4) 31.17 % 33.71 % 6.25 % 6.75 % 7.15 % PMIERs charge on ceded RIF 7.83 % 7.46 % 5.03 % 6.12 % 6.65 % Overcollateralization (5) (6) $ 158,489 $ 218,121 $ 48,614 $ 46,392 $ 35,765 Delinquency Trigger (7) 4.0% 4.0% 4.7 % 5.1 % 5.4 % (1) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020. (2) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020. (3) Approximately 2% of the production covered by the 2021-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2021. (4) Absent a delinquency trigger, the subordinated coverage is capped at 7.5%, 6.25%, 6.75% and 7.45% for the 2019, 2020-2, 2021-1 and 2021-2 ILN Transactions, respectively. (5) Overcollateralization for each of the 2018 and 2019 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. (6) May not be replicated based on the rounded figures presented in the table. (7) Delinquency triggers for the 2018 and 2019 ILN Transactions are set at a fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for the 2020-2, 2021-1 and 2021-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average. 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. 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 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. 33 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 Standard & Poor's Rating Service (S&P), A.M. Best Company, Inc. (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 which was exhausted on October 30, 2021), in exchange for reimbursement of ceded claims and claim expenses on covered policies, 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 QSR Transaction, NMIC cedes premiums earned related to 20% of the risk on eligible policies written between October 30, 2021 and December 31, 2022, 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. 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, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. 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 in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 35% ceding commission, and a profit commission of up to 55% that varies directly and inversely with ceded claims. NMIC may elect to terminate its engagement with individual reinsurers on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement. Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written 34 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. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance " for further discussion of these third-party reinsurance arrangements. Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 IIF NIW IIF NIW NIW (In Millions) Monthly $ 158,897 $ 16,676 $ 124,767 $ 16,861 $ 45,465 $ 60,047 Single 20,276 563 18,851 1,223 2,550 7,185 Primary 179,173 17,239 143,618 18,084 48,015 67,232 Pool 1,078 — 1,339 — — — Total $ 180,251 $ 17,239 $ 144,957 $ 18,084 $ 48,015 $ 67,232 NIW for the three and nine months ended September 30, 2022 was $17.2 billion and $48.0 billion compared to $18.1 billion and $67.2 billion for the three and nine months ended September 30, 2021. NIW decreased year-on-year primar ily due to a decline in the size of the total mortgage insurance market. Total IIF increased 24% at September 30, 2022 compared to September 30, 2021, primarily due to the NIW generated between such measurement dates, partially offset by the run-off of in-force policies. Our persistency rate improved to 80.1% at September 30, 2022 from 58.1% at September 30, 2021, reflecting a slowdown in the pace of refinancing activity during the intervening twelve-month period driven by an increase in interest and mortgage note rates. The following table presents net premiums written and earned for the periods indicated: Primary and pool premiums written and earned For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Thousands) Net premiums written $ 113,546 $ 111,931 $ 348,037 $ 354,388 Net premiums earned 118,317 113,594 355,682 330,361 Net premiums written increased 1% during the three months ended September 30, 2022 compared to the three months ended September 30, 2021 and decreased 2% during the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The year-on-year development in net premiums written reflects growth in our monthly IIF and monthly pay policy premium receipts during the three and nine months ended September 30, 2022, balanced by a decrease in single premium policy production during the periods. Net premiums earned during the three and nine months ended September 30, 2022 increased 4% and 8%, respectively, compared to the three and nine months ended September 30, 2021. The increases in the net premiums earned were primarily due to the growth of our IIF, partially offset by a decrease in the contribution from single premium policy cancellations and an increase in total premiums ceded under our reinsurance transactions. Pool premiums written and earned for the three and nine months ended September 30, 2022 and 2021, were $0.3 million and $0.9 million , and $0.4 million and $1.3 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. 35 Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends As of and for the three months ended September 30, 2022 June 30, 2022 March 31, 2022 December 31, 2021 September 30, 2021 ($ Values In Millions, except as noted below) New insurance written $ 17,239 $ 16,611 $ 14,165 $ 18,342 $ 18,084 Percentage of monthly premium 97 % 94 % 92 % 93 % 93 % Percentage of single premium 3 % 6 % 8 % 7 % 7 % New risk written $ 4,616 $ 4,386 $ 3,721 $ 4,786 $ 4,640 Insurance-in-force (1) $ 179,173 $ 168,639 $ 158,877 $ 152,343 $ 143,618 Percentage of monthly premium 89 % 88 % 88 % 87 % 87 % Percentage of single premium 11 % 12 % 12 % 13 % 13 % Risk-in-force (1) $ 46,259 $ 43,260 $ 40,522 $ 38,661 $ 36,253 Policies in force (count) (1) 580,525 551,543 526,976 512,316 490,714 Average loan size ($ value in thousands) (1) $ 309 $ 306 $ 301 $ 297 $ 293 Coverage percentage (2) 25.8 % 25.7 % 25.5 % 25.4 % 25.2 % Loans in default (count) (1) 4,096 4,271 5,238 6,227 7,670 Default rate (1) 0.71 % 0.77 % 0.99 % 1.22 % 1.56 % Risk-in-force on defaulted loans (1) $ 284 $ 295 $ 362 $ 435 $ 546 Net premium yield (3) 0.27 % 0.30 % 0.30 % 0.31 % 0.32 % Earnings from cancellations $ 1.8 $ 2.2 $ 2.9 $ 5.1 $ 7.7 Annual persistency (4) 80.1 % 76.0 % 71.5 % 63.8 % 58.1 % Quarterly run-off (5) 4.0 % 4.3 % 5.0 % 6.7 % 8.1 % (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 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 Millions) IIF, beginning of period $ 168,639 $ 136,598 $ 152,343 $ 111,252 NIW 17,239 18,084 48,015 67,232 Cancellations, principal repayments and other reductions (6,705) (11,064) (21,185) (34,866) IIF, end of period $ 179,173 $ 143,618 $ 179,173 $ 143,618 36 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, 2022 As of September 30, 2021 IIF RIF IIF RIF (In Millions) September 30, 2022 $ 46,695 $ 12,385 $ — $ — 2021 74,507 19,025 64,885 16,274 2020 36,869 9,386 47,196 11,848 2019 9,621 2,527 14,502 3,800 2018 3,755 965 5,675 1,446 2017 and before 7,726 1,971 11,360 2,885 Total $ 179,173 $ 46,259 $ 143,618 $ 36,253 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. 37 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, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Millions) >= 760 $ 6,815 $ 8,073 $ 21,177 $ 32,377 740-759 3,663 3,254 8,951 12,812 720-739 2,751 2,563 6,744 9,678 700-719 2,245 2,099 5,534 6,255 680-699 1,477 1,487 3,998 4,139 <=679 288 608 1,611 1,971 Total $ 17,239 $ 18,084 $ 48,015 $ 67,232 Weighted average FICO 748 749 749 753 Primary NIW by LTV For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Millions) 95.01% and above $ 1,610 $ 1,957 $ 4,553 $ 6,585 90.01% to 95.00% 9,398 8,344 24,706 29,336 85.01% to 90.00% 4,505 4,961 13,145 19,071 85.00% and below 1,726 2,822 5,611 12,240 Total $ 17,239 $ 18,084 $ 48,015 $ 67,232 Weighted average LTV 92.6 % 91.8 % 92.3 % 91.3 % Primary NIW by purchase/refinance mix For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Millions) Purchase $ 16,944 $ 16,400 $ 46,545 $ 53,220 Refinance 295 1,684 1,470 14,012 Total $ 17,239 $ 18,084 $ 48,015 $ 67,232 38 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, 2022 September 30, 2021 ($ Values In Millions) >= 760 $ 87,152 48 % $ 73,080 51 % 740-759 31,770 18 24,676 17 720-739 25,089 14 19,898 14 700-719 17,852 10 13,206 9 680-699 12,185 7 8,678 6 <=679 5,125 3 4,080 3 Total $ 179,173 100 % $ 143,618 100 % Primary RIF by FICO As of September 30, 2022 September 30, 2021 ($ Values In Millions) >= 760 $ 22,125 48 % $ 18,200 51 % 740-759 8,298 18 6,280 17 720-739 6,574 14 5,086 14 700-719 4,747 10 3,432 9 680-699 3,223 7 2,243 6 <=679 1,292 3 1,012 3 Total $ 46,259 100 % $ 36,253 100 % Primary IIF by LTV As of September 30, 2022 September 30, 2021 ($ Values In Millions) 95.01% and above $ 17,269 10 % $ 13,179 9 % 90.01% to 95.00% 84,396 47 63,828 45 85.01% to 90.00% 53,456 30 44,451 31 85.00% and below 24,052 13 22,160 15 Total $ 179,173 100 % $ 143,618 100 % Primary RIF by LTV As of September 30, 2022 September 30, 2021 ($ Values In Millions) 95.01% and above $ 5,308 12 % $ 3,932 11 % 90.01% to 95.00% 24,921 54 18,810 52 85.01% to 90.00% 13,167 28 10,902 30 85.00% and below 2,863 6 2,609 7 Total $ 46,259 100 % $ 36,253 100 % 39 Primary RIF by Loan Type As of September 30, 2022 September 30, 2021 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, 2022. As of September 30, 2022 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 $ 5 3 % 655 38 1 1 1.0 % 0.3 % 2.6 % 2014 3,451 222 6 % 14,786 1,374 30 50 4.0 % 0.5 % 2.2 % 2015 12,422 1,332 11 % 52,548 7,363 147 125 2.8 % 0.5 % 2.0 % 2016 21,187 2,911 14 % 83,626 15,009 315 141 2.5 % 0.5 % 2.1 % 2017 21,582 3,256 15 % 85,897 17,140 526 115 3.4 % 0.7 % 3.1 % 2018 27,295 3,755 14 % 104,043 19,145 648 103 5.5 % 0.7 % 3.4 % 2019 45,141 9,621 21 % 148,423 40,171 673 27 6.6 % 0.5 % 1.7 % 2020 62,702 36,869 59 % 186,174 118,938 625 3 3.9 % 0.3 % 0.5 % 2021 85,574 74,507 87 % 257,972 231,306 1,027 1 5.3 % 0.4 % 0.4 % 2022 48,015 46,695 97 % 132,911 130,041 104 — 4.9 % 0.1 % 0.1 % Total $ 327,531 $ 179,173 1,067,035 580,525 4,096 566 (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 dates indicated. The distribution of our primary RIF as of September 30, 2022 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of September 30, 2022 September 30, 2021 California 10.7 % 10.2 % Texas 8.7 9.9 Florida 8.2 8.6 Virginia 4.2 4.9 Georgia 4.1 3.7 Illinois 4.0 3.7 Washington 3.9 3.5 Colorado 3.5 4.0 Maryland 3.4 3.8 Pennsylvania 3.4 3.2 Total 54.1 % 55.5 % 40 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 claim 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 pandemic, 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 Coronavirus Aid, Relief, and Economic Security Act (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. 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. 41 The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim (benefits) expenses: For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 (In Thousands) Beginning balance $ 98,462 $ 101,235 $ 103,551 $ 90,567 Less reinsurance recoverables (1) (19,588) (19,726) (20,320) (17,608) Beginning balance, net of reinsurance recoverables 78,874 81,509 83,231 72,959 Add claims incurred: Claims and claim (benefits) expenses incurred: Current year (2) 9,348 3,649 28,135 19,275 Prior years (3) (12,737) (445) (35,179) (6,469) Total claims and claim (benefits) expenses incurred (3,389) 3,204 (7,044) 12,806 Less claims paid: Claims and claim expenses paid: Current year (2) 47 3 73 15 Prior years (3) 249 526 925 1,566 Total claims and claim expenses paid 296 529 998 1,581 Reserve at end of period, net of reinsurance recoverables 75,189 84,184 75,189 84,184 Add reinsurance recoverables (1) 19,755 20,420 19,755 20,420 Ending balance $ 94,944 $ 104,604 $ 94,944 $ 104,604 (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 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 $58.9 million related to prior year defaults remained as of September 30, 2022. 42 The following table provides a reconciliation of the beginning and ending count of loans in default: For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 Beginning default inventory 4,271 8,764 6,227 12,209 Plus: new defaults 1,354 1,624 3,586 4,486 Less: cures (1,511) (2,694) (5,654) (8,964) Less: claims paid (16) (24) (59) (59) Less: rescission and claims denied (2) — (4) (2) Ending default inventory 4,096 7,670 4,096 7,670 Ending default inventory declined from September 30, 2021 to September 30, 2022 as borrowers initially impacted by the COVID-19 pandemic continued to cure their delinquencies, and fewer new defaults emerged as the acute economic stress of the pandemic crisis continued to recede. While our default population declined from September 30, 2021 to September 30, 2022, our default inventory remains elevated compared to historical experience due to the continued challenges certain borrowers are facing related to the COVID-19 pandemic and their decision to access the forbearance program for federally backed loans codified under the CARES Act or similar programs made available by private lenders. As of September 30, 2022, 2,145 of our 4,096 defaulted loans were in a COVID-19 related forbearance program. The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions and ILN Transactions, for the periods indicated: For the three months ended For the nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 ($ In Thousands) Number of claims paid (1) 16 24 59 59 Total amount paid for claims $ 376 $ 674 $ 1,249 $ 1,982 Average amount paid per claim $ 24 $ 28 $ 21 $ 34 Severity (2) 55 % 55 % 46 % 60 % (1) Count include s three and 19 claims settled without payment during the three and nine months ended September 30, 2022, respectively, and six and ten claims settled without payment during the three and nine months ended September 30, 2021 , 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. We paid 16 and 59 claims during the three and nine months ended September 30, 2022, respectively, and 24 and 59 claims during the three and nine months ended September 30, 2021, respectively. The number of claims paid was modest relative to the size of our insured portfolio and number of defaulted loans we reported in each period, primarily due to the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID-19 pandemic 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, 2022 and 2021, further benefited from broad national house price appreciation. An increase in the value of the homes collateralizing the mortgages we i nsure 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, 2022 was 55% and 46%, respectively, compared to 55% and 60% for the three and nine months ended September 30, 2021, respectively. Claims severity for the three and nine months ended September 30, 2022 and 2021 remained low compared to historical industry experience, primarily because of the same broad national house price appreciation that our claims paid benefit from. 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. 43 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, 2022 As of September 30, 2021 (In Thousands) Case (1) $ 21.5 $ 12.6 IBNR (1)(2) 1.7 1.0 Total $ 23.2 $ 13.6 (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, 2021 to September 30, 2022 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 pandemic given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs, we have increased such reserves over time as individual defaults remain outstanding or “age.” The increased average reserve per default at September 30, 2022 also reflects an incrementally conservative set of assumptions about future macroeconomic and housing market conditions compared to those assumed at September 30, 2021. While average reserve per default increased from September 30, 2021 to September 30, 2022, our aggregate gross reserve position declined in the intervening period due to the significant 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, 2022 that NMIC was in full compliance with the PMIERs as of December 31, 2021. 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, 2022 September 30, 2021 (In Thousands) Available assets $ 2,275,487 $ 1,992,964 Risk-based required assets 1,172,581 1,365,656 44 Available assets were $2.3 billion at September 30, 2022, compared to $2.0 billion at September 30, 2021. The $283 million increase in available assets between the dates presented was primarily driven by NMIC's positive cash flow from operations during the intervening period, partially offset by the payment of an ordinary course dividend by NMIC to NMIH in April 2022 and the extraordinary dividend paid from Re One to NMIH following the termination and commutation of the reinsurance agreement between NMIC and Re One in December 2021. The decrease in the risk-based required asset amount between the dates presented was primarily due to an increase in the risk ceded under our third-party reinsurance agreements, partially offset by the growth in our gross RIF and aggregate gross-risk based required asset amount. 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, 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 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 do not expect the impact of such transition to be material to our operations or financial results. 45 Consolidated Results of Operations Consolidated statements of operations Three months ended Nine months ended September 30, 2022 September 30, 2021 September 30, 2022 September 30, 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 Earnings per share - Diluted $ 0.90 $ 0.69 $ 2.53 $ 1.96 Loss ratio (1) (2.9) % 2.8 % (2.0) % 3.9 % Expense ratio (2) 22.9 % 30.5 % 25.5 % 31.3 % Combined ratio (3) 20.1 % 33.3 % 23.5 % 35.2 % Three months ended Nine months ended Non-GAAP financial measures (4) September 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021 ($ In Thousands, except for per share data) Adjusted income before tax $ 98,575 $ 79,218 $ 281,142 $ 221,856 Adjusted net income 76,827 61,821 218,636 173,345 Adjusted diluted EPS 0.90 0.71 2.53 2.00 (1) Loss ratio is calculated by dividing insurance claims and claim (benefits) 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 $118.3 million and $355.7 million for the three and nine months ended September 30, 2022, respectively, compared to $113.6 million and $330.4 million for the three and nine months ended September 30, 2021, 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 a decline in the contribution from single premium policy cancellations and an increase in total premiums ceded under our reinsurance transactions. Net investment income was $11.9 million and $33.1 million for the three and nine months ended September 30, 2022, respectively, compared to $9.8 million and $28.0 million for the three and nine months ended September 30, 2021, respectively. 46 The year-on-year increase in net investment income in each respective period was primarily driven by the growth in the size of our total investment portfolio, excluding unrealized gains and losses and an increase in book yield tied to the prevailing interest rate and credit spread environment. Other revenues were $0.3 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, compared to $0.6 million and $1.6 million for the three and nine months ended September 30, 2021, 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 a benefit of $3.4 million and $7.0 million for the three and nine months ended September 30, 2022, respectively, compared to insurance claims and claim expenses of $3.2 million and $12.8 million for the three and nine months ended September 30, 2021, respectively. Insurance claims and claim expenses during the three and nine months ended September 30, 2022 benefited from cure activity and the associated release of a portion of the reserves we established for anticipated claims payments in prior periods. Underwriting and operating expenses were $27.1 million and $90.8 million for the three and nine months ended September 30, 2022, respectively, compared to $34.7 million and $103.5 million for the three and nine months ended September 30, 2021, respectively. The year-on-year decline in underwriting and operating expenses in each respective period was driven by a decrease in the amortization of deferred policy acquisition costs tied to the increased persistency of our IIF, a step-down in technology costs related to our agreement with Tata Consultancy Services (TCS) and a decline in capital markets transaction costs, partially offset by an increase in travel and entertainment expenses tied to the easing of COVID-19 related restrictions, as well as an increase in depreciation and amortization incurred in connection with the completion and implementation of certain software and equipment initiatives. Underwriting and operating expenses during the three and nine months ended September 30, 2022 further benefited from an increase in ceding commissions received upon the introduction of the 2022 Seasoned QSR Transaction effective July 1, 2022. Service expenses were $0.2 million and $1.0 million for the three and nine months ended September 30, 2022, respectively, compared to $0.8 million and $1.9 million for the three and nine months ended September 30, 2021, 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 primarily 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 $8.0 million and $24.1 million for the three and nine months ended September 30, 2022, respectively, compared to $7.9 million and $23.8 million for the three and nine months ended September 30, 2021, respectively. Interest expense primarily reflects the carrying costs of the Notes. The increase in interest expense period-to-period was due to an increase in commitment fees associated with the 2021 Revolving Credit Facility which had extended its borrowing capacity from $110 million to $250 million in November 2021. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " Income tax expense was $21.8 million and $62.6 million for the three and nine months ended September 30, 2022, respectively, compared to $17.3 million and $48.0 million for the three and nine months ended September 30, 2021, 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 22.1% 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. 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, 2022 and 2021 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. " 47 Net Income Net income was $76.8 million and $220.0 million for the three and nine months ended September 30, 2022, respectively, compared to $60.2 million and $170.6 million for the three and nine months ended September 30, 2021, respectively. Adjusted net income was $76.8 million and $218.6 million for the three and nine months ended September 30, 2022, respectively, compared to $61.8 million and $173.3 million for the three and nine months ended September 30, 2021, 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, as well as declines in our insurance claims and claim expenses and underwriting and operating expenses, partially offset by an increase in our income tax expense. Diluted EPS was $0.90 and $2.53 for the three and nine months ended September 30, 2022, respectively, compared to $0.69 and $1.96 for the three and nine months ended September 30, 2021, respectively. Adjusted diluted EPS was $0.90 and $2.53 for the three and nine months ended September 30, 2022, respectively, compared to $0.71 and $2.00 for the three and nine months ended September 30, 2021, respectively. Diluted and adjusted diluted EPS increased primarily due to growth in net income and adjusted net income, as well as a decline in the number of weighted average diluted shares outstanding tied to share repurchase activity. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For the three months ended September 30, For the nine months ended September 30, 2022 2021 2022 2021 As reported ($ In Thousands, except for per share data) 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 Adjustments Net realized investment gains (14) (3) (475) (15) Gain from change in fair value warrant liability — — (1,113) (454) Capital market transaction costs — 481 205 2,474 Other infrequent, unusual or non-operating items — 1,289 — 1,289 Adjusted income before tax 98,575 79,218 281,142 221,856 Income tax (benefit) expense on adjustments (1) (3) 139 (57) 555 Adjusted net income $ 76,827 $ 61,821 $ 218,636 $ 173,345 Weighted average diluted shares outstanding 85,485 86,880 86,420 86,794 Adjusted diluted EPS $ 0.90 $ 0.71 $ 2.53 $ 2.00 (1) 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. 48 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. 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. Furthermore, all unexercised warrants expired in April 2022 and, as such, no change in fair value will be recognized in future reporting periods. 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. Past adjustments under this category include infrequent, unusual or non-operating adjustments related to severance, restricted stock modification and other expenses incurred in connection with the CEO transition announced in September 2021 and 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. 49 Consolidated balance sheets September 30, 2022 December 31, 2021 (In Thousands) Total investment portfolio $ 1,973,931 $ 2,085,931 Cash and cash equivalents 125,812 76,646 Premiums receivable 67,202 60,358 Deferred policy acquisition costs, net 59,483 59,584 Software and equipment, net 32,156 32,047 Prepaid reinsurance premiums 1,454 2,393 Reinsurance recoverable 19,755 20,320 Other assets 124,050 113,302 Total assets $ 2,403,843 $ 2,450,581 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 — 2,363 Deferred tax liability, net 166,609 164,175 Other liabilities 12,428 3,245 Total liabilities 877,977 884,795 Total shareholders' equity 1,525,866 1,565,786 Total liabilities and shareholders' equity $ 2,403,843 $ 2,450,581 Total cash and investments were $2.1 billion as of September 30, 2022, compared to $2.2 billion as of December 31, 2021. Cash and investments at September 30, 2022 included $97.4 million held by NMIH. The decrease in total cash and investments reflects an increase in the unrealized loss positions of our fixed income portfolio tied to the prevailing interest rate and credit spread environment and share repurchases during the nine months ended September 30, 2022, partially offset by cash generated from operations. Premiums receivable was $67.2 million as of September 30, 2022, compared to $60.4 million as December 31, 2021. 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 $59.5 million as of September 30, 2022, compared to $59.6 million as of December 31, 2021. The decrease was primarily driven by the recognition of previously deferred policy acquisition costs 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 $1.5 million as of September 30, 2022, compared to $2.4 million as of December 31, 2021. 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 $19.8 million as of September 30, 2022, compared to $20.3 million as of December 31, 2021. The decrease was driven by a decrease in ceded losses recoverable associated with our QSR Transactions. Other assets increased to $124.1 million as of September 30, 2022, compared to $113.3 million as of December 31, 2021. The increase was primarily driven by the recognition of incremental ROU assets in connection with the modification of the operating lease for our corporate headquarters in January 2022. Other assets included $89.2 million of tax and loss bonds held by the Company at both September 30, 2022 and December 31, 2021. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 9, Income Taxes. " Unearned premiums were $130.7 million as of September 30, 2022, compared to $139.2 million as of December 31, 2021. The decrease was driven by the amortization of existing unearned premiums through earnings in accordance with the 50 expiration of risk on related single premium policies and the cancellations of other single premium policies, partially offset by single premium policy originations during the nine months ended September 30, 2022. Accounts payable and accrued expenses were $73.9 million as of September 30, 2022, compared to $72.0 million as of December 31, 2021. The increase was primarily driven by accrued and unpaid interest on the Notes which is payable semi-annually in June and December and reinsurance premiums payable, partially offset by the settlement of previously accrued compensation expenses, premium taxes and other contractual payables during the nine months ended September 30, 2022. Reserve for insurance claims and claim expenses was $94.9 million as of September 30, 2022, compared to $103.6 million as of December 31, 2021. The decrease was primarily driven by a release of a portion of the reserves we established for anticipated claims payments in prior periods, cure activity, and a decline in the total size of our default population. The decrease was partially offset by an increase in the average reserve carried per default. While we have generally established lower reserves per default for loans that we consider to be impaired in connection with the COVID-19 pandemic, we have increased the initial reserves held for such loans as they have aged in default status. 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 $3.7 million as of September 30, 2022, compared to $5.6 million as of December 31, 2021. 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 ." All unexercised warrants expired at their contractual maturity in April 2022. No warrants or warrant liability remained at September 30, 2022. Warrant liability was $2.4 million at December 31, 2021. 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 $166.6 million at September 30, 2022, compared to $164.2 million at December 31, 2021. The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve and was largely offset by the increase in unrealized losses 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 ." Other liabilities increased to $12.4 million as of September 30, 2022, compared to $3.2 million as of December 31, 2021. The increase was primarily driven by the recognition of an incremental lease liability in connection with the modification of the operating lease for our corporate headquarters in January 2022. The following table summarizes our consolidated cash flows from operating, investing and financing activities: Consolidated cash flows For the nine months ended September 30, 2022 2021 Net cash provided by (used in): (In Thousands) Operating activities $ 281,603 $ 281,381 Investing activities (182,111) (310,520) Financing activities (50,326) (538) Net increase (decrease) in cash and cash equivalents $ 49,166 $ (29,677) Net cash provided by operating activities was $281.6 million for the nine months ended September 30, 2022, compared to $281.4 million for the nine months ended September 30, 2021. Cash provided by operating activities during the nine months ended September 30, 2022 reflects a reduction in technology service costs paid under our long-term IT services agreement with TCS, largely offset by a decline in premium written tied to a decrease in single premium policies written during the period. Cash used in investing activities for the nine months ended September 30, 2022 and 2021 reflects the purchase of fixed and short-term maturities with cash provided by operating activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. 51 Cash used in financing activities was $50.3 million for the nine months ended September 30, 2022, compared to $0.5 million for the nine months ended September 30, 2021. Cash used in financing activities during the nine months ended September 30, 2022 primarily relates to the repurchase of common stock. 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 2021 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; (vi) repurchase of its common stock; and (vii) 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, 2022, NMIH had $97.4 million of cash and investments. NMIH's principal sources of net cash are dividends from its subsidiaries and investment income. NMIC paid a $34.9 million ordinary course dividend to NMIH in April 2022, representing its full ordinary course dividend capacity payable under Wisconsin law for the twelve-month period ending December 31, 2022. NMIH also has access to $250 million of undrawn revolving credit capacity under the 2021 Revolving Credit Facility. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt." On February 10, 2022, our Board of Directors approved a $125 million share repurchase program through December 31, 2023, that enables the company to repurchase its common stock. The authorization provides NMIH 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 nine months ended September 30, 2022, NMIH repurchased 2.7 million shares of common stock pursuant to a trading plans under Rule 10b-18 and Rule 10b5-1 of the Exchange Act, at a total cost of $51.2 million, including associated costs. As of September 30, 2022, $73.8 million of repurchase authority remained available under the program. 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 2021 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 June 1, 2025 and bear interest at a rate of 7.375%, payable semi-annually on June 1 and December 1. The 2021 Revolving Credit Facility matures on the earlier of (x) November 29, 2025 or (y) if any existing senior secured notes remain outstanding on such date, February 28, 2025, and accrues 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 (SOFR) (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. 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. Under the 2021 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, 2022, the applicable commitment fee was 0.30%. We are subject to certain covenants under the 2021 Revolving Credit Facility, including: a maximum debt-to-total capitalization ratio of 35%, 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 at September 30, 2022. 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 . On April 1, 2022, NMIC paid a 52 $34.9 million ordinary course dividend to NMIH. 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, 2022, NMIC reported $2,275 million available assets against $1,173 million risk-based required assets, for a $1,102 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 (which was subsequently amended and restated) on the risk-based treatment of loans affected by the COVID-19 pandemic. 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, 2022, NMIC's performing primary RIF, net of reinsurance, was approximately $23.7 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $2.2 billion (including contingency reserves) as of September 30, 2022, NMIC's RTC ratio was 10.9:1. Re One has no risk in force remaining and no longer reports a RTC ratio. 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, 2022, NMIC had $2.0 billion of cash and investments, including $108 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, 2022, NMIC generated $272 million of cash flow from operations and received an additional $162 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path ( i.e. , are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term. 53 Debt and Financial Strength Ratings NMIC's financial strength is rated "Baa1" by Moody's and "BBB" by S&P. NMIH’s Notes are rated “Ba1” by Moody’s and its long-term counter-party credit profile is rated “BB” by S&P. Moody's outlook for both its ratings is stable and S&P’s outlook for both its ratings is positive. Consolidated Investment Portfolio The primary objectives of our investment activity are to generate investment income and preserve capital, 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, 2022, the fair value of our investment portfolio was $2.0 billion and we held an additional $125.8 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the nine months ended September 30, 2022 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, 2022 December 31, 2021 Corporate debt securities 59 % 64 % Municipal debt securities 23 26 Cash, cash equivalents, and short-term investments 11 4 U.S. treasury securities and obligations of U.S. government agencies 4 1 Asset-backed securities 3 5 Total 100 % 100 % Investment portfolio ratings at fair value (1) September 30, 2022 December 31, 2021 AAA 19 % 9 % AA (2) 26 28 A (2) 40 46 BBB (2) 15 17 BB (3) — — Total 100 % 100 % (1) Excluding certain operating cash accounts. (2) Includes +/– ratings. (3) We held one security with a BB+ rating at September 30, 2022, which is not identifiable in the table due to rounding. 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. 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, 2022 or December 31, 2021, 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 2021. As of September 30, 2022, the investment portfolio had gross unrealized losses of $275.2 million, of which $173.4 million 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 had been in an unrealized loss position for a period of twelve months or longer. The increase in the aggregate size of the unrealized loss position as of September 30, 2022, was primarily driven by 54 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. 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 2021 10-K. 55