Fitch Ratings has assigned a 'A-' Insurer Financial Strength (IFS) rating to National Mortgage Insurance Corporation (NMIC) and a 'BBB' Issuer Default Rating (IDR) to NMI Holdings Inc. (National).

Fitch has also assigned a 'BBB+' rating to National's senior secured debt. The Rating Outlook is Stable.

Key Rating Drivers

Moderate Company Profile: National is the smallest of the six active U.S. mortgage insurers (USMIs) but has considerably narrowed the production volume gap with peers in recent years. Market share based on new insurance written (NIW) through 9M23 was 14.0%, while insurance in force (IIF) remains lower as National has less exposure to older vintage years. As of 9M23, vintage years 2020-2023 represented 91% of National's IIF. The company has grown its book of business with a focus on insuring mortgage loans with generally higher quality-risk attributes, with less exposure to lower-quality risk cohorts.

Capitalization: National's capitalization is very strong when measured against the risk-based private mortgage insurer eligibility requirements (PMIERs) coverage ratio. PMIERs coverage was among the highest in the peer group 184% at 9M23, reflecting lower required capital for its high-quality portfolio, buffered by higher than peer average operating leverage (PMIERS capital funded by reinsurance).

National maintained financial leverage of 16.6% at 9M23, down from 17.9% at YE22. The traditional risk-to-capital ratio was 11.4x at 9M23, consistent with recent periods.

Financial Performance Favorable: National posted a GAAP combined ratio of 25.5% through 9M23, reflecting favorable loss experience and improved expense ratio. The reported results included positive reserve development of 12.3 points in 9M23, as cure activity related to recent accident years was stronger than initially anticipated. National operates with the lowest operating expenses in the industry, driving its ability to derive strong returns from a high-quality loan portfolio, including an 18.4% return on equity in 9M23 and three-year average (2020-2022) of 16.4%.

The percentage of loans in default on U.S. primary mortgage insurance declined to 0.74% at Sept. 30, 2023, compared to 1.89% in aggregate for the peer group, reflecting the high-quality portfolio.

Debt Service: Fixed-charge coverage was over 13x at 9M23, compared to a prior three-year average (2020-2022) of 11x. Fitch estimates statutory dividend fixed-charge coverage of approximately 3x for full-year 2023 based on the insurance subsidiaries' maximum ordinary dividend capacity of $98 million during the year. National's financial flexibility also benefited from the addition of a five-year, unsecured revolving credit facility with a syndicate of lenders with an initial aggregate principal amount of $250 million.

Risk Management: National employs a multitier, risk-based pricing approach for the majority of business it underwrites, helping to shape the high-quality portfolio the company targets. National also uses traditional reinsurance and mortgage insurance-linked notes (MILNs) to manage its potential exposure in a severe economic downturn. The reinsurance programs decrease minimum required assets (the numerator of the PMIERs coverage ratio) but increase operating leverage as reflected in a higher than average ratio of PMIERS reinsurance credit to gross required capital.

High Quality Investments: National's takes little risk in the invested asset portfolio, with an asset allocation that is comprised entirely of investment-grade fixed income securities and no exposure to real estate related investments. The risky asset ratio of 0% reflects the company's conservative approach to risk management. Portfolio interest rate risks are largely mitigated with matching of bond durations with estimated liability pay-out patterns.

Holding Company Notching: Standard notching was applied between the implied insurance operating company and holding company IDRs for a ring-fenced regulatory environment. No adjustments were made for financial leverage, coverage or significant holding company liquidity.

Senior Secured Debt Notching: Fitch based the secured debt notching on an assumption that in the heavily regulated insurance industry, recoveries from insurance subsidiaries would likely be less than unregulated corporate companies. Recoveries in the case of a liquidation were likely to be 'Good' meaning in the 51%-70% range, which still results in a single notch uplift from the 'BBB' IDR.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A decline in company profile score to below 'bbb+';

A decline in capital strength, such as a decline in the reported PMIERs coverage ratio to consistently below 130%;

Due to its monoline nature, any strongly negative event for the mortgage insurance industry;

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An improvement in company profile score to 'a-';

Consistently maintaining PMIERs coverage ratio above 150% with a meaningful reduction in operating leverage;

Due to its monoline nature, any strongly positive event for the mortgage insurance industry.

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