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 2022 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 2022 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 Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted.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. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in the U.S. housing market by mitigating mortgage credit risk and facilitating the secondary market sale of high-LTV ( i.e., above 80%) residential loans to the GSEs, who are otherwise restricted by their charters from purchasing or guaranteeing high-LTV mortgages that are not covered by certain credit protections. Such credit protection and secondary market sales allow lenders to increase their capacity for mortgage commitments and expand financing access to existing and prospective homeowners. NMIH, a Delaware corporation, was incorporated in May 2011, and we began start-up operations in 2012 and wrote our first MI policy in 2013. Since formation, we have sought to establish customer relationships with a broad group of mortgage lenders and build a diversified, high-quality insured portfolio. As of June 30, 2023, we had issued master policies with 1,922 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 June 30, 2023, we had $191.3 billion of primary insurance-in-force (IIF) and $49.9 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 June 30, 2023, we had 237 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. 27 Conditions and Trends Affecting Our Business Macroeconomic Developments 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. A marked decline in housing demand, a significant and protracted decrease in house prices or a sustained increase in unemployment could reduce the pace of new business activity in the private mortgage insurance market and negatively impact our future new insurance written (NIW) volume, or contribute to an increase in our future default and claim experience. Key Factors Affecting Our Results New Insurance Written, Insurance-In-Force and Risk-In-Force NIW is the aggregate unpaid principal balance of mortgages underpinning new policies written during a given period. Our NIW is affected by the overall size of the mortgage origination market and the volume of high-LTV mortgage originations. Our NIW is also affected by the percentage of such high-LTV originations covered by private versus government MI or other alternative credit enhancement structures and our share of the private MI market. NIW, together with persistency, drives our IIF. IIF is the aggregate unpaid principal balance of the mortgages we insure, as reported to us by servicers at a given date, and represents the sum total of NIW from all prior periods less principal payments on insured mortgages and policy cancellations (including for prepayment, nonpayment of premiums, coverage rescission and claim payments). RIF is related to IIF and represents the aggregate amount of coverage we provide on all outstanding policies at a given date. RIF is calculated as the sum total of the coverage percentage of each individual policy in our portfolio applied to the unpaid principal balance of such insured mortgage. RIF is affected by IIF and the LTV profile of our insured mortgages, with lower LTV loans generally having a lower coverage percentage and higher LTV loans having a higher coverage percentage. Gross RIF represents RIF before consideration of reinsurance. Net RIF is gross RIF net of ceded reinsurance. Net Premiums Written and Net Premiums Earned We set our premium rates on individual policies based on the risk characteristics of the underlying mortgage loans and borrowers, and in accordance with our filed rates and applicable rating rules. On June 4, 2018, we introduced a proprietary risk-based pricing platform, which we refer to as Rate GPS ® . Rate GPS ® considers a broad range of individual variables, including property type, type of loan product, borrower credit characteristics, and lender and market factors, and provides us with the ability to set and charge premium rates commensurate with the underlying risk of each loan that we insure. We introduced Rate GPS ® in June 2018 to replace our previous rate card pricing system. While most of our new business is priced through Rate GPS ® , we also continue to offer a rate card pricing option to a limited number of lender customers who require a rate card for operational reasons. We believe the introduction and utilization of Rate GPS ® provides us with a more granular and analytical approach to evaluating and pricing risk, and that this approach enhances our ability to continue building a high-quality mortgage insurance portfolio and delivering attractive risk-adjusted returns. Premiums are generally fixed for the duration of our coverage of the underlying loans. Net premiums written are equal to gross premiums written minus ceded premiums written under our reinsurance arrangements, less premium refunds and premium write-offs. As a result, net premiums written are generally influenced by: • NIW; • premium rates and the mix of premium payment type, which are either single, monthly or annual premiums, as described below; • cancellation rates of our insurance policies, which are impacted by payments or prepayments on mortgages, refinancings (which are affected by prevailing mortgage interest rates as compared to interest rates on loans underpinning our in force policies), levels of claim payments and home prices; and • cession of premiums under third-party reinsurance arrangements. Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium). Our net premiums written will differ from our net premiums earned due to policy payment type. For single premiums, we receive a single premium payment at origination, which is earned over the estimated life of the policy. Substantially all of our single premium policies in force as of June 30, 2023 were non-refundable under most cancellation scenarios. If non-refundable single premium 28 policies are canceled, we immediately recognize the remaining unearned premium balances as earned premium revenue. Monthly premiums are recognized in the month billed and when the coverage is effective. Annual premiums are earned on a straight-line basis over the year of coverage. Substantially all of our policies provide for either single or monthly premiums. The percentage of IIF that remains on our books after any twelve-month period is defined as our persistency rate. Because our insurance premiums are earned over the life of a policy, higher persistency rates can have a significant impact on our net premiums earned and profitability. Generally, faster speeds of mortgage prepayment lead to lower persistency. Prepayment speeds and the relative mix of business between single and monthly premium policies also impact our profitability. Our premium rates include certain assumptions regarding repayment or prepayment speeds of the mortgages underlying our policies. Because premiums are paid at origination on single premium policies and our single premium policies are generally non-refundable on cancellation, assuming all other factors remain constant, if single premium loans are prepaid earlier than expected, our profitability on these loans is likely to increase and, if loans are repaid slower than expected, our profitability on these loans is likely to decrease. By contrast, if monthly premium loans are repaid earlier than anticipated, we do not earn any more premium with respect to those loans and, unless we replace the repaid monthly premium loan with a new loan at the same premium rate or higher, our revenue is likely to decline. Effect of reinsurance on our results We utilize third-party reinsurance to actively manage our risk, ensure compliance with PMIERs, state regulatory and other applicable capital requirements, and support the growth of our business. We currently have both quota share and excess-of-loss reinsurance agreements in place, which impact our results of operations and regulatory capital and PMIERs asset positions. Under a quota share reinsurance agreement, the reinsurer receives a premium in exchange for covering an agreed-upon portion of incurred losses. Such a quota share arrangement reduces premiums written and earned and also reduces RIF, providing capital relief to the ceding insurance company and reducing incurred claims in accordance with the terms of the reinsurance agreement. In addition, reinsurers typically pay ceding commissions as part of quota share transactions, which offset the ceding company's acquisition and underwriting expenses. Certain quota share agreements include profit commissions that are earned based on loss performance and serve to reduce ceded premiums. Under an excess-of-loss agreement, the ceding insurer is typically responsible for losses up to an agreed-upon threshold and the reinsurer then provides coverage in excess of such threshold up to a maximum agreed-upon limit. We expect to continue to evaluate reinsurance opportunities in the normal course of business. 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 noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders 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). 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 noteholders, among others. The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each outstanding ILN Transaction. Current amounts are presented as of June 30, 2023. 29 ( $ values in thousands) Inception Date Covered Production Initial Reinsurance Coverage Current Reinsurance Coverage Initial First Layer Retained Loss Current First Layer Retained Loss (1) 2018 ILN Transaction July 25, 2018 1/1/2017 – 5/31/2018 $ 264,545 $ 142,638 $ 125,312 $ 121,966 2019 ILN Transaction July 30, 2019 6/1/2018 – 6/30/2019 326,905 176,647 123,424 122,085 2020-2 ILN Transaction October 29, 2020 4/1/2020 – 9/30/2020 (2) 242,351 74,728 121,777 121,177 2021-1 ILN Transaction April 27, 2021 10/1/2020 – 3/31/2021 (3) 367,238 257,809 163,708 163,520 2021-2 ILN Transaction October 26, 2021 4/1/2021 – 9/30/2021 (4) 363,596 351,215 146,229 146,112 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claim expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claim expenses exceed its current first layer retained loss. (2) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2020. (3) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates between July 1, 2019 and September 30, 2020. (4) Approximately 2% of the production covered by the 2021-2 ILN Transaction has coverage reporting dates between July 1, 2019 and March 31, 2021. Effective July 25, 2023, NMIC exercised its optional call to terminate the 2018 ILN Transaction. In connection with the termination of the transaction, NMIC’s excess of loss reinsurance agreement with Oaktown Re II Ltd. was commuted and the insurance-linked notes issued by Oaktown Re II Ltd. were redeemed in full with a distribution of remaining collateral assets. Traditional reinsurance NMIC is a party to four excess-of-loss reinsurance agreements with broad panels of third-party reinsurers – the 2022-1 XOL Transaction, effective April 1, 2022, the 2022-2 XOL Transaction, effective July 1, 2022, the 2022-3 XOL Transaction, effective October 1, 2022, and the 2023-1 XOL Transaction, effective January 1, 2023 – 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 (except 2023-1 XOL, which decreases from the end of the covered production period) 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. 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. 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 S&P, A.M. Best or both. The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each outstanding XOL Transaction. Current amounts are presented as of June 30, 2023. ($ values in thousands) Inception Date Covered Production Initial Reinsurance Coverage Current Reinsurance Coverage Initial First Layer Retained Loss Current First Layer Retained Loss (1) 2022-1 XOL Transaction April 1, 2022 10/1/2021 – 3/31/2022 (2) $289,741 $279,416 $133,366 $133,366 2022-2 XOL Transaction July 1, 2022 4/1/2022 – 6/30/2022 (3) 154,306 152,347 78,906 78,906 2022-3 XOL Transaction October 1, 2022 7/1/2022 – 9/30/2022 96,779 96,197 106,265 106,265 2023-1 XOL Transaction (4) January 1, 2023 10/1/2022 – 6/30/2023 89,864 89,864 146,513 146,513 30 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claim expenses to each applicable XOL Transaction and recognizes a reinsurance recoverable if such incurred claims and claim expenses exceed its current first layer retained loss. (2) Approximately 1% of the production covered by the 2022-1 XOL Transaction has coverage reporting dates between October 21, 2019 and September 30, 2021. (3) Approximately 1% of the production covered by the 2022-2 XOL Transaction has coverage reporting dates between January 4, 2021 and March 31, 2022. (4) The 2023-1 XOL Transaction provides coverage for production generated between October 1, 2022 and June 30, 2023. The current reinsurance coverage and current first layer retained loss will decrease in future periods to the extent the PMIERs minimum required assets of the covered pool declines. Quota share reinsurance NMIC is a party to seven 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, the 2022 Seasoned QSR Transaction, effective July 1, 2022 and the 2023 QSR Transaction, effective January 1, 2023 – which we refer to collectively as the QSR Transactions. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies to panels of third-party reinsurance providers. Each of the third-party reinsurance providers that is party to the QSR Transactions has an insurer financial strength rating of A- or better by S&P, A.M. Best or both. Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods through December 31, 2017 and 100% of the risk under our pool agreement with Fannie 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 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. In connection with the 2022 QSR Transaction, NMIC entered into the 2023 QSR Transaction as a springing back-to-back quota share agreement. Under the terms of the 2023 QSR Transactions, NMIC cedes premiums earned related to 20% of the risk on eligible policies written from January 1, 2023 to December 31, 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 retired Oaktown Re Ltd. and Oaktown Re IV Ltd. reinsurance 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 terminate any or all of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreements. Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively 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 31 deterioration in its capital position below a prescribed threshold and/or a reinsurer breaches (and fails to cure) its collateral posting obligations under the relevant agreement. Effective April 1, 2019, NMIC elected to terminate its engagement with one reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with the termination, NMIC recaptured approximately $500 million of previously ceded primary RIF and stopped ceding new premiums written with respect to the recaptured risk. With this termination, ceded premiums written under the 2016 QSR Transaction decreased from 25% to 20.5% on eligible policies. The termination had no effect on the cession of pool risk under the 2016 QSR Transaction. 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 six months ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 IIF NIW IIF NIW NIW (In Millions) Monthly $ 171,685 $ 11,266 $ 148,488 $ 15,695 $ 19,816 $ 28,789 Single 19,621 212 20,151 916 396 1,987 Primary 191,306 11,478 168,639 16,611 20,212 30,776 Pool 1,000 — 1,114 — — — Total $ 192,306 $ 11,478 $ 169,753 $ 16,611 $ 20,212 $ 30,776 NIW for the three months and six months ended June 30, 2023 was $11.5 billion and $20.2 billion, respectively, compared to $16.6 billion and $30.8 billion for the three and six months ended June 30, 2022, respectively. NIW decreased year-on-year primarily due to a decline in the size of the total mortgage insurance market. Total IIF increased 13% at June 30, 2023 compared to June 30, 2022, 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 86.0% at June 30, 2023 from 76.0% at June 30, 2022, 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 June 30, For the six months ended June 30, 2023 2022 2023 2022 (In Thousands) Net premiums written $ 117,144 $ 118,457 $ 230,120 $ 234,491 Net premiums earned 125,985 120,870 247,739 237,365 Net premiums written decreased 1% and 2% during the three and six months ended June 30, 2023, respectively, compared to the three and six months ended June 30, 2022, reflecting an increase in total premiums ceded under our reinsurance transactions and a decline in single premium policy production, partially offset by growth in our monthly IIF and monthly pay policy premium receipts. Net premiums earned during each of the three and six months ended June 30, 2023 increased 4% compared to the three and six months ended June 30, 2022, primarily driven by our NIW production and the growth of our IIF, partially offset by an increase in total premiums ceded under our reinsurance transactions and a decline in the contribution from single premium policy cancellations. Pool premiums written and earned for each of the three and six month periods ended June 30, 2023 and 2022 were $0.3 million and $0.6 million, respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and 32 earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends As of and for the three months ended June 30, 2023 March 31, 2023 December 31, 2022 September 30, 2022 June 30, 2022 ($ Values In Millions, except as noted below) New insurance written $ 11,478 $ 8,734 $ 10,719 $ 17,239 $ 16,611 Percentage of monthly premium 98 % 98 % 98 % 97 % 94 % Percentage of single premium 2 % 2 % 2 % 3 % 6 % New risk written $ 3,022 $ 2,258 $ 2,797 $ 4,616 $ 4,386 Insurance-in-force (1) $ 191,306 $ 186,724 $ 183,968 $ 179,173 $ 168,639 Percentage of monthly premium 90 % 89 % 89 % 89 % 88 % Percentage of single premium 10 % 11 % 11 % 11 % 12 % Risk-in-force (1) $ 49,875 $ 48,494 $ 47,648 $ 46,259 $ 43,260 Policies in force (count) (1) 611,441 600,294 594,142 580,525 551,543 Average loan size ($ value in thousands) (1) $ 313 $ 311 $ 310 $ 309 $ 306 Coverage percentage (2) 26.1 % 26.0 % 25.9 % 25.8 % 25.7 % Loans in default (count) (1) 4,349 4,475 4,449 4,096 4,271 Default rate (1) 0.71 % 0.75 % 0.75 % 0.71 % 0.77 % Risk-in-force on defaulted loans (1) $ 335 $ 337 $ 323 $ 284 $ 295 Net premium yield (3) 0.27 % 0.26 % 0.26 % 0.27 % 0.30 % Earnings from cancellations $ 1.1 $ 1.4 $ 1.5 $ 1.8 $ 2.2 Annual persistency (4) 86.0 % 85.1 % 83.5 % 80.1 % 76.0 % Quarterly run-off (5) 3.7 % 3.2 % 3.3 % 4.0 % 4.3 % (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 period, 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 six months ended June 30, 2023 June 30, 2022 June 30, 2023 June 30, 2022 (In Millions) IIF, beginning of period $ 186,724 $ 158,877 $ 183,968 $ 152,343 NIW 11,478 16,611 20,212 30,776 Cancellations, principal repayments and other reductions (6,896) (6,849) (12,874) (14,480) IIF, end of period $ 191,306 $ 168,639 $ 191,306 $ 168,639 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. 33 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 June 30, 2023 As of June 30, 2022 IIF RIF IIF RIF (In Millions) June 30, 2023 $ 19,811 $ 5,176 $ — $ — 2022 54,739 14,496 30,249 7,972 2021 68,016 17,553 76,657 19,522 2020 30,799 7,978 39,154 9,928 2019 8,385 2,220 10,248 2,688 2018 and before 9,556 2,452 12,331 3,150 Total $ 191,306 $ 49,875 $ 168,639 $ 43,260 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 debt-to-income (DTI) ratio, maximum loan size, property type, loan type, loan term and occupancy status of loans that we will insure and memorialized these standards and eligibility matrices in our Underwriting Guideline Manual that is publicly available on our website. Our underwriting standards and eligibility criteria are designed to limit the layering of risk in a single insurance policy. “Layered risk” refers to the accumulation of borrower, loan and property risk. For example, we have higher credit score and lower maximum allowed LTV requirements for investor-owned properties, compared to owner-occupied properties. We monitor the concentrations of various risk attributes in our insurance portfolio, which may change over time, in part, as a result of regional conditions or public policy shifts. The tables below present our primary NIW by FICO, LTV and purchase/refinance mix for the periods indicated. We calculate the LTV of a loan as the percentage of the original loan amount to the original purchase value of the property securing the loan. Primary NIW by FICO For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 (In Millions) >= 760 $ 6,919 $ 7,990 $ 12,170 $ 14,362 740-759 1,836 2,900 3,350 5,288 720-739 1,541 2,056 2,648 3,993 700-719 668 1,650 1,124 3,289 680-699 413 1,277 755 2,521 <=679 101 738 165 1,323 Total $ 11,478 $ 16,611 $ 20,212 $ 30,776 Weighted average FICO 763 751 762 750 Primary NIW by LTV For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 (In Millions) 95.01% and above $ 1,003 $ 1,577 $ 1,361 $ 2,943 90.01% to 95.00% 5,323 8,253 9,408 15,308 85.01% to 90.00% 3,891 4,772 7,125 8,640 85.00% and below 1,261 2,009 2,318 3,885 Total $ 11,478 $ 16,611 $ 20,212 $ 30,776 Weighted average LTV 92.0 % 92.2 % 91.9 % 92.1 % 34 Primary NIW by purchase/refinance mix For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 (In Millions) Purchase $ 11,233 $ 16,203 $ 19,727 $ 29,601 Refinance 245 408 485 1,175 Total $ 11,478 $ 16,611 $ 20,212 $ 30,776 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 June 30, 2023 2022 ($ Values In Millions) >= 760 $ 94,931 50 % $ 83,769 50 % 740-759 33,841 18 29,195 17 720-739 26,862 14 23,240 14 700-719 18,261 9 16,221 10 680-699 12,506 6 11,160 6 <=679 4,905 3 5,054 3 Total $ 191,306 100 % $ 168,639 100 % Primary RIF by FICO As of June 30, 2023 2022 ($ Values In Millions) >= 760 $ 24,472 49 % $ 21,159 49 % 740-759 8,888 18 7,564 17 720-739 7,090 14 6,044 14 700-719 4,865 10 4,289 10 680-699 3,315 7 2,936 7 <=679 1,245 2 1,268 3 Total $ 49,875 100 % $ 43,260 100 % Primary IIF by LTV As of June 30, 2023 2022 ($ Values In Millions) 95.01% and above $ 18,141 10 % $ 16,068 10 % 90.01% to 95.00% 91,719 48 77,804 46 85.01% to 90.00% 58,210 30 51,029 30 85.00% and below 23,236 12 23,738 14 Total $ 191,306 100 % $ 168,639 100 % Primary RIF by LTV As of June 30, 2023 2022 ($ Values In Millions) 95.01% and above $ 5,600 11 % $ 4,914 11 % 90.01% to 95.00% 27,097 54 22,974 53 85.01% to 90.00% 14,400 29 12,553 29 85.00% and below 2,778 6 2,819 7 Total $ 49,875 100 % $ 43,260 100 % 35 Primary RIF by Loan Type As of June 30, 2023 2022 Fixed 98 % 99 % Adjustable rate mortgages: Less than five years — — Five years and longer 2 1 Total 100 % 100 % The table below presents selected primary portfolio statistics, by book year, as of June 30, 2023. As of June 30, 2023 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) 2014 and prior $ 3,613 $ 188 5 % 15,441 1,191 14 56 3.7 % 0.5 % 1.2 % 2015 12,422 1,098 9 % 52,548 6,170 104 131 2.5 % 0.4 % 1.7 % 2016 21,187 2,263 11 % 83,626 11,926 220 157 1.8 % 0.5 % 1.8 % 2017 21,582 2,782 13 % 85,897 14,989 403 129 2.4 % 0.6 % 2.7 % 2018 27,295 3,225 12 % 104,043 16,736 480 121 3.6 % 0.6 % 2.9 % 2019 45,141 8,385 19 % 148,423 35,522 546 44 3.3 % 0.4 % 1.5 % 2020 62,702 30,799 49 % 186,174 101,899 538 10 2.1 % 0.3 % 0.5 % 2021 85,574 68,016 79 % 257,972 214,464 1,283 7 5.3 % 0.5 % 0.6 % 2022 58,734 54,739 93 % 163,281 154,826 753 — 21.8 % 0.5 % 0.5 % 2023 20,212 19,811 98 % 54,625 53,718 8 — 0.2 % — % — % Total $ 358,462 $ 191,306 1,152,030 611,441 4,349 655 (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 June 30, 2023 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of June 30, 2023 2022 California 10.4 % 10.8 % Texas 8.7 9.0 Florida 7.9 8.3 Georgia 4.1 4.0 Virginia 4.0 4.3 Washington 4.0 3.9 Illinois 3.9 3.9 Pennsylvania 3.4 3.3 Colorado 3.4 3.7 Maryland 3.3 3.5 Total 53.1 % 54.7 % 36 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, ILN Transactions and XOL Transactions as applicable under each treaty. We have not yet ceded reserves under any of the ILN Transactions or XOL 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. 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 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 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. 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. Emerging macroeconomic factors, including persistent inflation, elevated 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. A marked decline in housing demand, a significant and protracted decrease in house prices, or a sustained increase in unemployment could contribute to an increase in our future default and claims experience. 37 The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses (benefits): For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 (In Thousands) Beginning balance $ 108,157 $ 102,372 $ 99,836 $ 103,551 Less reinsurance recoverables (1) (23,479) (20,080) (21,587) (20,320) Beginning balance, net of reinsurance recoverables 84,678 82,292 78,249 83,231 Add claims incurred: Claims and claim expenses (benefits) incurred: Current year (2) 17,262 8,707 44,870 18,787 Prior years (3) (14,389) (11,743) (35,296) (22,442) Total claims and claim expenses (benefits) incurred 2,873 (3,036) 9,574 (3,655) Less claims paid: Claims and claim expenses paid: Current year (2) 54 26 54 26 Prior years (3) 1,072 356 1,344 676 Total claims and claim expenses paid 1,126 382 1,398 702 Reserve at end of period, net of reinsurance recoverables 86,425 78,874 86,425 78,874 Add reinsurance recoverables (1) 24,023 19,588 24,023 19,588 Ending balance $ 110,448 $ 98,462 $ 110,448 $ 98,462 (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 $39.1 million attributed to net case reserves and $5.0 million attributed to net IBNR reserves for the six months ended June 30, 2023 and $14.0 million attributed to net case reserves and $4.5 million attributed to net IBNR reserves for the six months ended June 30, 2022. (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 $30.3 million attributed to net case reserves and $4.5 million attributed to net IBNR reserves for the six months ended June 30, 2023 and $17.0 million attributed to net case reserves and $4.7 million attributed to net IBNR reserves for the six months ended June 30, 2022. The "claims incurred" section of the table above shows claims and claim expenses (benefits) 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 $53.1 million related to prior year defaults remained as of June 30, 2023. 38 The following table provides a reconciliation of the beginning and ending count of loans in default: For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Beginning default inventory 4,475 5,238 4,449 6,227 Plus: new defaults 1,417 1,069 2,975 2,232 Less: cures (1,493) (2,011) (3,000) (4,143) Less: claims paid (46) (24) (67) (43) Less: rescission and claims denied (4) (1) (8) (2) Ending default inventory 4,349 4,271 4,349 4,271 Ending default inventory increased from June 30, 2022 to June 30, 2023, primarily due to the growth and natural seasoning of our insured portfolio, largely offset by cure activity amongst our previous default population. The following table provides details of our claims paid, before giving effect to claims ceded under the QSR Transactions for the periods indicated: For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 ($ Values In Thousands) Number of claims paid (1) 46 24 67 43 Total amount paid for claims $ 1,386 $ 471 $ 1,730 $ 873 Average amount paid per claim $ 30 $ 20 $ 26 $ 20 Severity (2) 62 % 46 % 56 % 43 % (1) Count includes 17 and 24 claims settled without payment during the three and six months ended June 30, 2023, respectively, and 10 and 16 claims settled without payment during the three and six months ended June 30, 2022, 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 46 and 67 claims during the three and six months ended June 30, 2023, respectively, and 24 and 43 claims during the three and six months ended June 30, 2022, 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 morato rium implemented by the GSEs in response to the COVID-19 pandemic and codified under the CARES Act. Such forbearance and foreclosure programs remain available 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 six months ended June 30, 2023 and 2022, further benefited from broad national house price appreciation observed through June 2022. An increase in the value of the homes collateralizing the mortgages we insure provides defaulted borrowers with alternative paths and incentives to cure their loan prior to the development of a claim. Although national house prices have contracted from their peak, the scale of decline has been modest relative to the quantum of previous gains, and many borrowers still retain significant net price gains and appreciated equity in their homes. Our claims severity for the three and six months ended June 30, 2023 was 62% and 56%, respectively, compared to 46% and 43% for the three and six months ended June 30, 2022, respectively. Claims severity for the three and six months ended June 30, 2023 and 2022 benefited from the same broad national house price appreciation that supported our claims paid experience. An increase in the value of the homes collateralizing the mortgages we insure provides additional equity support to our risk exposure and raises the prospect of a third-party sale of a foreclosed property, which can mitigate the severity of our settled claims. The number of claims paid and our severity experience in future periods may be impacted by developing economic cycles and each could increase if house price declines serve to limit the alternative paths and incentives to cure delinquencies that are available to defaulted borrowers or erode the equity value of the homes collateralizing the mortgages we insure. 39 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 June 30, 2023 2022 (In Thousands) Case (1) $ 23.5 $ 21.3 IBNR (1)(2) 1.9 1.8 Total $ 25.4 $ 23.1 (1) Defined as the gross reserve per insured loan in default. (2) Amount includes claims adjustment expenses. Average reserve per default increased from June 30, 2022 to June 30, 2023, primarily due to changes in the composition of our default inventory as measured by the size, vintage and current estimated LTV of defaulted loans, as well as the proportion of such loans benefiting from a forbearance program granted in response to a financial hardship related to COVID-19. Average reserves per default were further impacted by changes in observed and forecasted housing market conditions and macroeconomic factors between the measurement dates. 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, XOL 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, 2023 that NMIC was in full compliance with the PMIERs as of December 31, 2022. 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 June 30, 2023 2022 (In Thousands) Available assets $ 2,491,280 $ 2,169,388 Risk-based required assets 1,317,961 1,240,143 Available assets were $2.5 billion at June 30, 2023, compared to $2.2 billion at June 30, 2022. The $322 million increase in available assets between the dates presented was primarily driven by NMIC's positive cash flow from operations during the intervening period, partially offset by the payment of an ordinary course dividend from NMIC to NMIH in May 2023. 40 The increase in the risk-based required asset amount between the dates presented was primarily due to the growth in our gross RIF and aggregate gross-risk based required asset amount, partially offset by an increase in the risk ceded under our third-party reinsurance agreements. LIBOR Transition On March 5, 2021, ICE Benchmark Administration Limited (IBA), the administrator for LIBOR, confirmed it would permanently cease the publication of overnight, one-month, three-month, six-month and twelve-month USD LIBOR settings in their current form after June 30, 2023. The U.K. Financial Conduct Authority, the regulator of IBA, announced on the same day that it intends to stop requiring panel banks to continue to submit to LIBOR and all USD LIBOR settings in their current form will either cease to be provided by any administrator or no longer be representative after June 30, 2023. We have exposure to USD LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio. We reviewed our LIBOR-based contracts and each contains provisions that dictate a transition to an alternative reference rate at the time of the discontinuance of LIBOR. As of June 30, 2023, substantially all of our LIBOR-indexed financial contracts have been transitioned to a SOFR base. The impact of the transition from LIBOR to SOFR has not and is not expected to have a material impact on our operations and financial results. 41 Consolidated Results of Operations Consolidated statements of operations For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 Revenues ($ In Thousands, except for per share data) Net premiums earned $ 125,985 $ 120,870 $ 247,739 $ 237,365 Net investment income 16,518 10,921 31,412 21,120 Net realized investment gains (losses) — 53 (33) 461 Other revenues 182 376 346 715 Total revenues 142,685 132,220 279,464 259,661 Expenses Insurance claims and claim expenses (benefits) 2,873 (3,036) 9,574 (3,655) Underwriting and operating expenses 27,448 30,700 53,234 63,635 Service expenses 267 336 347 766 Interest expense 8,048 8,051 16,087 16,092 Gain from change in fair value of warrant liability — (1,020) — (1,113) Total expenses 38,636 35,031 79,242 75,725 Income before income taxes 104,049 97,189 200,222 183,936 Income tax expense 23,765 21,745 45,480 40,812 Net income $ 80,284 $ 75,444 $ 154,742 $ 143,124 Earnings per share - Basic $ 0.97 $ 0.88 $ 1.86 $ 1.67 Earnings per share - Diluted $ 0.95 $ 0.86 $ 1.83 $ 1.63 Loss ratio (1) 2.3 % (2.5) % 3.9 % (1.5) % Expense ratio (2) 21.8 % 25.4 % 21.5 % 26.8 % Combined ratio (3) 24.1 % 22.9 % 25.4 % 25.3 % For the three months ended June 30, For the six months ended June 30, Non-GAAP financial measures (4) 2023 2022 2023 2022 ($ In Thousands, except for per share data) Adjusted income before tax $ 104,049 $ 96,061 $ 200,255 $ 182,567 Adjusted net income 80,284 74,339 154,768 141,809 Adjusted diluted EPS 0.95 0.86 1.83 1.63 (1) Loss ratio is calculated by dividing insurance claims and claim expenses (benefits) 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 $126.0 million and $247.7 million for the three and six months ended June 30, 2023, respectively, compared to $120.9 million and $237.4 million for the three and six months ended June 30, 2022, respectively. The year-on-year increase in net premiums earned in each respective period was primarily driven by our NIW production and the growth of our IIF, partially offset by an increase in total premiums ceded under our reinsurance transactions and a decline in the contribution from single premium policy cancellations. Net investment income was $16.5 million and $31.4 million for the three and six months ended June 30, 2023, respectively, compared to $10.9 million and $21.1 million for the three and six months ended June 30, 2022, respectively. 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 invested asset base, as well as an increase in the book yield of the investment portfolio tied to the deployment of new cash 42 flows and reinvestment of rolling maturities at incrementally higher rates. Other revenues were $0.2 million and $0.3 million for the three and six months ended June 30, 2023, respectively, compared to $0.4 million and $0.7 million for the three and six months ended June 30, 2022, 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 decrease in other revenues in each respective period reflects a decline 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 $2.9 million and $9.6 million for the three and six months ended June 30, 2023, respectively, compared to insurance claims and claim benefits of $3.0 million and $3.7 million for the three and six months ended June 30, 2022, respectively. The increase in insurance claims and claim expenses in each respective period was primarily driven by the establishment of initial reserves on newly defaulted loans, as well as an increase in the average case reserve held against previously defaulted loans that have aged in their delinquency status, and was partially offset by the release of a portion of the reserves we established for anticipated claims payments in prior periods in connection with cure activity and ongoing analysis of recent loss development trends. Underwriting and operating expenses were $27.4 million and $53.2 million for the three and six months ended June 30, 2023, respectively, compared to $30.7 million and $63.6 million for the three and six months ended June 30, 2022, respectively. The year-on-year decline in underwriting and operating expenses in each respective period primarily reflects an increase in ceding commissions received upon the introduction of the 2022 Seasoned QSR Transaction effective July 1, 2022, a decrease in the amortization of deferred acquisition costs tied to the increased persistency of our IIF, and a step-down in outsourced technology costs related to our agreement with Tata Consultancy Services, partially offset by an increase in employee compensation costs and miscellaneous IT expenses. Service expenses were $0.3 million for both the three and six month periods ended June 30, 2023, compared to $0.3 million and $0.8 million for the three and six months ended June 30, 2022, 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 $16.1 million for the three and six months ended June 30, 2023, respectively, compared to $8.1 million and $16.1 million for the three and six months ended June 30, 2022, respectively. Interest expense primarily reflects the carrying costs of the Notes. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 4, Debt. " Income tax expense was $23.8 million and $45.5 million for the three and six months ended June 30, 2023, respectively, compared to $21.7 million and $40.8 million for the three and six months ended June 30, 2022, 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 22.8% and 22.7% for the three and six months ended June 30, 2023, respectively, compared to 22.4% and 22.2% for the three and six months ended June 30, 2022, 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 six months ended June 30, 2023 and 2022 reflect the discrete tax effects of the vesting of RSUs and exercise of options. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 8, Income Taxes. " Net Income Net income was $80.3 million and $154.7 million for the three and six months ended June 30, 2023, respectively, compared to $75.4 million and $143.1 million for the three and six months ended June 30, 2022, respectively. Adjusted net income was $80.3 million and $154.8 million for the three and six months ended June 30, 2023, respectively, compared to $74.3 million and $141.8 million for the three and six months ended June 30, 2022, respectively. The year-on-year increases in net 43 income and adjusted net income in each respective period were primarily driven by growth in our total revenues, as well as a decline in our underwriting and operating expenses, partially offset by increases in our insurance claims and claim expenses and income tax expense. Diluted EPS was $0.95 and $1.83 for the three and six months ended June 30, 2023, respectively, compared to $0.86 and $1.63 for the three and six months ended June 30, 2022, respectively. Adjusted diluted EPS was $0.95 and $1.83 for the three and six months ended June 30, 2023, respectively, compared to $0.86 and $1.63 for the three and six months ended June 30, 2022, respectively. Diluted and adjusted diluted EPS increased primarily due to growth in our net income and adjusted net income, as well as a decline in the number of weighted average diluted shares outstanding tied to share repurchase activity. The non-GAAP financial measures of adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For the three months ended June 30, For the six months ended June 30, 2023 2022 2023 2022 As reported ($ In Thousands, except for per share data) Income before income taxes $ 104,049 $ 97,189 $ 200,222 $ 183,936 Income tax expense 23,765 21,745 45,480 40,812 Net income $ 80,284 $ 75,444 $ 154,742 $ 143,124 Adjustments Net realized investment (gains) losses — (53) 33 (461) Gain from change in fair value warrant liability — (1,020) — (1,113) Capital market transaction costs — (55) — 205 Adjusted income before tax 104,049 96,061 200,255 182,567 Income tax (benefit) expense on adjustments (1) — (23) 7 (54) Adjusted net income $ 80,284 $ 74,339 $ 154,768 $ 141,809 Weighted average diluted shares outstanding 84,190 86,577 84,504 86,943 Adjusted diluted EPS $ 0.95 $ 0.86 $ 1.83 $ 1.63 (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. Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhances the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present. Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and other infrequent, unusual or non-operating items in the periods in which such items are incurred. Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and other infrequent, unusual or non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods. 44 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 thereafter. 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. 45 Consolidated balance sheets June 30, 2023 December 31, 2022 (In Thousands) Total investment portfolio $ 2,233,656 $ 2,099,389 Cash and cash equivalents 73,319 44,426 Premiums receivable 72,367 69,680 Deferred policy acquisition costs, net 61,162 58,564 Software and equipment, net 32,262 31,930 Reinsurance recoverable 24,023 21,587 Prepaid federal income tax 154,409 154,409 Other assets 38,652 36,045 Total assets $ 2,689,850 $ 2,516,030 Debt $ 396,808 $ 396,051 Unearned premiums 105,067 123,035 Accounts payable and accrued expenses 72,506 74,576 Reserve for insurance claims and claim expenses 110,448 99,836 Reinsurance funds withheld 1,696 2,674 Deferred tax liability, net 242,144 193,859 Other liabilities 12,226 12,272 Total liabilities 940,895 902,303 Total shareholders' equity 1,748,955 1,613,727 Total liabilities and shareholders' equity $ 2,689,850 $ 2,516,030 Total cash and investments were $2.3 billion as of June 30, 2023, compared to $2.1 billion as of December 31, 2022. Cash and investments at June 30, 2023 included $138.9 million held by NMIH. The increase in total cash and investments reflects the addition of incremental cash provided by operating activities, as well as a decrease in the unrealized loss position of our fixed income portfolio, partially offset by share repurchase activity during the six months ended June 30, 2023. Premiums receivable was $72.4 million as of June 30, 2023, compared to $69.7 million as of December 31, 2022. The increase was primarily driven by growth in our monthly premium policies in force, where premiums are generally paid one month in arrears. Net deferred policy acquisition costs were $61.2 million as of June 30, 2023, compared to $58.6 million as of December 31, 2022. The increase was primarily driven by the deferral of certain costs associated with the origination of new policies between the respective balance sheet dates, partially offset by the recognition of previously deferred policy acquisition costs. Reinsurance recoverable was $24.0 million as of June 30, 2023, compared to $21.6 million as of December 31, 2022. The increase was driven by an increase in ceded losses recoverable under our QSR Transactions. Prepaid federal income tax was $154.4 million as of both June 30, 2023 and December 31, 2022. Prepaid federal income tax represents tax and loss bonds purchased in connection with our claimed tax deduction for our statutory contingency reserve position. See Item 1, " Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 8, Income Taxes. " Other assets were $38.7 million as of June 30, 2023, compared to $36.0 million as of December 31, 2022. The increase was primarily driven by increases in our accrued investment income and prepaid expenses. Unearned premiums were $105.1 million as of June 30, 2023, compared to $123.0 million as of December 31, 2022. The decrease was driven by the amortization of existing unearned premiums through earnings in accordance with the 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 six months ended June 30, 2023. Accounts payable and accrued expenses were $72.5 million as of June 30, 2023, compared to $74.6 million as of December 31, 2022. The decrease was primarily driven by the settlement of previously accrued compensation expenses and 46 certain contractual payables during the six months ended June 30, 2023, partially offset by increases in our reinsurance premium and current tax payables. Reserve for insurance claims and claim expenses was $110.4 million as of June 30, 2023, compared to $99.8 million as of December 31, 2022. The increase was primarily driven by the establishment of initial reserves on newly defaulted loans during the six months ended June 30, 2023, as well as an increase in the average case reserve held against previously defaulted loans that have aged in their delinquency status. The increase in the reserves for insurance claims and claim expenses was partially offset by the release of a portion of the reserves we established for anticipated claims payments in prior periods in connection with cure activity and ongoing analysis of recent loss development trends, as well as the payment of previously reserved claims during the period. 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 $1.7 million as of June 30, 2023, compared to $2.7 million as of December 31, 2022. 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 ." Net deferred tax liability was $242.1 million as of June 30, 2023, compared to $193.9 million as of December 31, 2022. The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve and the decrease 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 8, Income Taxes ." The following table summarizes our consolidated cash flows from operating, investing and financing activities: Consolidated cash flows For the six months ended June 30, 2023 2022 Net cash provided by (used in): (In Thousands) Operating activities $ 191,740 $ 173,834 Investing activities (119,470) (147,756) Financing activities (43,377) (30,326) Net increase in cash and cash equivalents $ 28,893 $ (4,248) Net cash provided by operating activities was $191.7 million for the six months ended June 30, 2023, compared to $173.8 million for the six months ended June 30, 2022. Cash provided by operating activities increased during the six months ended June 30, 2023, primarily due to the growth in our investment income, an increase in net premiums receipts and a reduction in the payment of incentive compensation. Cash used in investing activities for the six months ended June 30, 2023 and June 30, 2022 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. Cash used in financing activities was $43.4 million for the six months ended June 30, 2023, compared to $30.3 million for the six months ended June 30, 2022. Cash used in financing activities 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 June 30, 2023, NMIH had $138.9 million of cash and investments. NMIH's principal sources of net cash are dividends from its subsidiaries and investment income. NMIC paid a $98.0 million ordinary course dividend to NMIH in May 2023, representing its full ordinary course dividend capacity payable under Wisconsin law for the twelve-month period ending 47 December 31, 2023. 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 (excluding associated costs and applicable taxes) through December 31, 2023, that enables the company to repurchase its common stock. The authorization provides NMIH the flexibility, based on market and business conditions, stock price and other factors, to repurchase stock from time to time through open market repurchases, privately negotiated transactions, or other means, including pursuant to Rule 10b5-1 trading plans. During the six months ended June 30, 2023, NMIH repurchased 1.7 million shares of common stock at a total cost of $41.1 million, including associated costs and applicable taxes. As of June 30, 2023, $27.7 million of repurchase authority remained available under the program. On July 31, 2023, our Board of Directors approved a new $200 million share repurchase program (excluding associated costs and applicable taxes) effective through December 31, 2025. Concurrent with the new authorization, our Board also approved an extension of our existing $125 million share repurchase program through December 31, 2025 to align its remaining tenor with that of the new $200 million 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 SOFR Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375% to 2.875% per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. 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 June 30, 2023, 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 June 30, 2023. 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 by 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 May 12, 2023, NMIC paid a $98.0 million ordinary course dividend to NMIH, representing its full ordinary course dividend capacity payable under Wisconsin law for the twelve-month period ending December 31, 2023. As an approved insurer under PMIERs, NMIC would generally be subject to additional restrictions on its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the prescribed PMIERs financial requirements are not permitted to pay dividends without prior approval from the GSEs. 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). 48 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 June 30, 2023, NMIC reported $2,491 million available assets against $1,318 million risk-based required assets for a $1,173 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 the Federal Emergency Management Agency 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 and XOL 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 June 30, 2023, NMIC's performing primary RIF, net of reinsurance, was approximately $26.4 billion. NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of $2.3 billion (including contingency reserves) as of June 30, 2023, NMIC's RTC ratio was 11.3:1. 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 June 30, 2023, NMIC had $2.2 billion of cash and investments, including $16.1 million of cash and cash 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 June 30, 2023, NMIC generated $338 million of cash flow from operations and received an additional $300 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 remain available, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term. Debt and Financial Strength Ratings NMIC's financial strength is rated "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. The outlook for all ratings provided by Moody's and S&P is stable. 49 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 June 30, 2023, the fair value of our investment portfolio was $2.2 billion and we held an additional $73.3 million of cash and cash equivalents. Pre-tax book yield on the investment portfolio for the six months ended June 30, 2023 was 2.5%. 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 June 30, 2023 December 31, 2022 Corporate debt securities 58 % 60 % Municipal debt securities 26 23 Cash, cash equivalents, and short-term investments 9 10 U.S. Treasury securities and obligations of U.S. government agencies 4 4 Asset-backed securities 3 3 Total 100 % 100 % Investment portfolio ratings at fair value (1) June 30, 2023 December 31, 2022 AAA 14 % 19 % AA (2) 29 25 A (2) 43 41 BBB (2) 14 15 BB (3) — — Total 100 % 100 % (1) Excluding certain operating cash accounts. (2) Includes +/– ratings. (3) We held one security with a BB+ rating at June 30, 2023 and December 31, 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 June 30, 2023 or December 31, 2022, and we did not record any provision for credit loss for investment securities during the three or six month periods ended June 30, 2023 or June 30, 2022. As of June 30, 2023, the investment portfolio had gross unrealized losses of $234.6 million, of which $224.9 million were associated with securities that had been in an unrealized loss position for a period of twelve months or longer. As of December 31, 2022, the investment portfolio had gross unrealized losses of $254.7 million, of which $218.5 million were associated with securities that had been in an unrealized loss position for a period of twelve months or longer. We evaluated the securities in an unrealized loss position as of June 30, 2023, 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 June 30, 2023 are not indicative of the ultimate collectability of the current amortized cost of the securities. Rather, the unrealized losses on securities held as of June 30, 2023 were primarily driven by fluctuations in interest rates, and to a lesser extent, movements in credit spreads following the purchase of those securities. 50 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 2022 10-K. 51