NMI HOLDINGS, INC. The following analysis should be read in conjunction with our unaudited condensed consolidated financial statements and the notes thereto included in this report and our audited financial statements, notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our 2020 10-K, for a more complete understanding of our financial position and results of operations. In addition, investors should review the "Cautionary Note Regarding Forward-Looking Statements" above and the "Risk Factors" detailed in Part II, Item 1A of this report and in Part I, Item 1A of our 2020 10-K, as subsequently updated in other reports we file with theSEC , for a discussion of those risks and uncertainties that have the potential to affect our business, financial condition, results of operations, cash flows or prospects in a material and adverse manner. Our results of operations for interim periods are not necessarily indicative of results to be expected for a full fiscal year or for any other period. 28 --------------------------------------------------------------------------------
Overview
We provide private MI through our wholly-owned insurance subsidiaries NMIC and Re One. NMIC and Re One are domiciled inWisconsin and principally regulated by the Wisconsin OCI. NMIC is our primary insurance subsidiary and is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Re One provides reinsurance to NMIC on insured loans after giving effect to third-party reinsurance. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in theU.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, aDelaware corporation, was incorporated inMay 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 ofSeptember 30, 2021 , we had master policies with 1,699 customers, including national and regional mortgage banks, money center banks, credit unions, community banks, builder-owned mortgage lenders, internet-sourced lenders and other non-bank lenders. As ofSeptember 30, 2021 , we had$143.6 billion of primary insurance-in-force (IIF) and$36.3 billion of primary RIF. We believe that our success in acquiring a large and diverse group of lender customers and growing a portfolio of high-quality IIF traces to our founding principles, whereby we aim to help qualified individuals achieve their homeownership goals, ensure that we remain a strong and credible counter-party, deliver a unique customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPS® pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders. Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claim payment practices, responsive customer service, and financial strength and profitability. Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located inEmeryville, California . As ofSeptember 30, 2021 , we had 241 employees. Our corporate website is located at www.nationalmi.com. Our website and the information contained on or accessible through our website are not incorporated by reference into this report. We discuss below our results of operations for the periods presented, as well as the conditions and trends that have impacted or are expected to impact our business, including new insurance writings, the composition of our insurance portfolio and other factors that we expect to impact our results. COVID-19 Developments OnJanuary 30, 2020 , the WHO declared the outbreak of COVID-19 a global health emergency and subsequently characterized the outbreak as a global pandemic onMarch 11, 2020 . In an effort to stem contagion and control the COVID-19 pandemic, the population at large severely curtailed day-to-day activity and local, state and federal regulators imposed a broad set of restrictions on personal and business conduct nationwide. The COVID-19 pandemic, along with the widespread public and regulatory response, caused a dramatic slowdown inU.S. and global economic activity and a record number of Americans were furloughed or laid-off in the ensuing downturn. The global dislocation caused by COVID-19 was unprecedented. In response to the COVID-19 outbreak and uncertainty that it introduced, we activated our disaster continuity program to ensure our employees were safe and able to manage our business without interruption. We pursued a broad series of capital and reinsurance transactions to bolster our balance sheet and expand our ability to serve our customers and their borrowers, and we updated our underwriting guidelines and policy pricing in consideration of the increased level of macroeconomic volatility. TheU.S. housing market demonstrated notable resiliency in the face of COVID stress, with significant purchase demand, record levels of mortgage origination activity and nationwide house price appreciation emerging shortly after the onset of the 29 -------------------------------------------------------------------------------- pandemic. More recently, the broad resumption of personal and business activity nationwide has prompted a sharp economic rebound and provided hope for a sustainable economic recovery. While there is increased optimism that the acute economic impact of COVID-19 has begun to recede, the pandemic continues to affect communities across theU.S. and poses significant risk globally. The path and pace of global economic recovery will depend, in large part, on the course of the virus, which itself remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the ultimate impact COVID-19 will have on the mortgage insurance market, our business performance or our financial position including our new business production, default and claims experience, and investment portfolio results at this time. Potential Impact on theU.S. Housing Market and Mortgage Insurance Industry TheU.S. housing market demonstrated significant resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates helped to support housing affordability, medical concerns and lifestyle preferences drove people to move from densely populated urban areas to suburban communities where social distancing was more easily achieved, and shelter-in-place directives reinforced the value of homeownership - all of which contributed to an influx of new home buyers, record levels of purchase demand, and nationwide house price appreciation. While the possibility remains that the housing market will soften, we believe the general strength of the market coming into the COVID-19 crisis and demonstrated resiliency thus far through the pandemic will help to mitigate the risk of a severe pullback. We observe several favorable differences in the current environment compared to the period leading up to and through the 2008 Financial Crisis - the last period of significant economic volatility in theU.S. and one noted for its significant housing market dislocation. Such differences include: (i) the generally higher quality borrower base (as measured by weighted average FICO scores and LTV ratios) and tighter underwriting standards (with, among other items, full-documentation required to verify borrower income and asset positions) that prevail in the current market; (ii) the lower concentration of higher risk loan structures, such as negative amortizing, interest-only or short-termed option adjustable-rate mortgages being originated and outstanding in the current market; (iii) the meaningfully higher proportion of loans used for lower risk purposes, such as the purchase of a primary residence or rate-term refinancing in the current market, as opposed to cash-out refinancings, investment properties or second home purchases, which prevailed to a far greater degree in the lead up to the 2008 Financial Crisis; (iv) the availability and immediate application by the government, regulators, lenders, loan servicers and others of a broad toolkit of resources designed to aid distressed borrowers, including forbearance, foreclosure moratoriums and other assistance programs codified under the CARES Act enacted onMarch 27, 2020 ; and (v) the broader and equally immediate application of significant fiscal and monetary stimulus by the federal government under the CARES Act, and subsequently under the Consolidated Appropriations Act enacted onDecember 27, 2020 (the CAA) and the American Rescue Plan Act enacted onMarch 11, 2021 (the American Rescue Plan), as well as across a range of other programs designed to assist unemployed individuals and distressed businesses, and support the smooth functioning of various capital and risk markets. We also perceive the house price environment in the period leading up to the COVID crisis to be anchored by more balanced market fundamentals than that in the period leading up to the 2008 Financial Crisis. We believe the 2008 Financial Crisis was directly precipitated by irresponsible behavior in the housing market that drove home prices to unsustainable heights (a so-called "bubble"). We see a causal link between the housing market and the 2008 Financial Crisis that we do not see in the COVID-19 outbreak, and we believe this will further contribute to housing market stability in the current period. Purchase mortgage origination volume increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume also grew dramatically as historically low mortgage rates created refinancing opportunities for a large number of existing borrowers. Growth in total mortgage origination volume increases the addressable market for theU.S. mortgage insurance industry, while accelerated refinancing activity increases prepayment speed on outstanding insured mortgages. In this context, totalU.S. mortgage insurance industry new insurance written (NIW) volume increased to record levels following the onset of the COVID pandemic and the persistency of existing in-force insured risk across the industry declined meaningfully. 30 -------------------------------------------------------------------------------- While we currently observe broad resiliency in the housing and high-LTV mortgage markets and, for the reasons discussed above, expect this trend to continue in the near term, the ultimate impact of COVID-19 remains highly uncertain. See Item 1A of our 2020 10K, "Risk Factors - The COVID-19 outbreak may continue to materially adversely affect our business, results of operations and financial condition." Potential Impact on NMI's Business Performance and Financial Position Operations We had 241 employees atSeptember 30, 2021 , including 81 who typically work at our corporate headquarters inEmeryville, CA and 160 who typically work from home in locations across the country. In response to the COVID-19 outbreak, we activated our business continuity program and instituted additional work-from-home practices for ourEmeryville -based staff. We transitioned our operations seamlessly and have continued to positively engage with customers on a remote basis. Our IT environment, underwriting capabilities, policy servicing platform and risk architecture have continued without interruption, and our internal control environment is unchanged. We achieved this transition without incurring additional capital expenditures or operating expenses, and we believe our current operating platform can continue to support our newly distributed needs for an extended period without further investment beyond that planned in the ordinary course. While the broad COVID vaccination effort and relaxation of local restrictions on indoor business operation may allow for a general resumption of in-office activity for our headquarters-based employees, the success of our remote work experience through the pandemic has caused us to offer increased flexibility for employees who prefer a full-time or part-time distributed engagement. If we continue to offer such flexibility and a large enough number of employees elect such an approach, our office and real estate needs could evolve. New Business Production Our NIW volume increased significantly following the onset of the COVID-19 pandemic driven by the broad resiliency of the housing market, growth in total mortgage origination volume and increasing size of theU.S. mortgage insurance market, as well as the continued expansion of our customer franchise. We wrote$67.2 billion of NIW during the nine months endedSeptember 30, 2021 , up 57% compared to the nine months endedSeptember 30, 2020 , which itself was up 29% compared to the nine months endedSeptember 30, 2019 . While we currently expect our new business production will remain elevated, the potential onset of a new viral wave could prompt a reintroduction of broad-based shelter in place directives, increased unemployment or other potentially negative economic and societal outcomes that could cause a moderation or decline in our volume going forward. Further, increasing interest rates and rising house prices, which each trace (in part) to the pandemic, may cause certain prospective homebuyers to defer their purchases and impact mortgage origination activity, total private mortgage insurance industry production and our NIW volume in future periods. We have broadly defined underwriting standards and loan-level eligibility criteria that are designed to limit our exposure to higher risk loans, and have used Rate GPS to actively shape the mix of our new business production and insured portfolio by, among other risk factors, borrower FICO score, debt-to-income (DTI) ratio and LTV ratio. In the weeks following the outbreak of COVID-19, we adopted changes to our underwriting guidelines, including changes to our loan documentation requirements, asset reserve requirements, employment verification process and income continuance determinations, that further strengthened the credit risk profile of our NIW volume and IIF. AtSeptember 30, 2021 , the weighted average FICO score of our RIF was 754 and we had a 3% mix of below 680 FICO score risk. Similarly, atSeptember 30, 2021 , the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 11% mix of 97% LTV risk. Delinquency Trends and Claims Expense AtSeptember 30, 2021 we had 7,670 defaulted loans in our primary insured portfolio, which represented a 1.56% default rate against our 490,714 total policies in-force, and identified 9,342 loans that were enrolled in a forbearance program, including 6,566 of those in default status. Our default population increased significantly following the outbreak of the pandemic as borrowers faced increased challenges related to COVID-19 and chose to access the forbearance program for federally backed loans codified under the CARES Act or other similar assistance programs made available by private lenders. After this significant initial spike our default experience has steadily improved as an increasing number of impacted borrowers have cured their delinquencies, and fewer new defaults have emerged. 31 --------------------------------------------------------------------------------
Our total population of defaulted loans peaked in
Default and Forbearance Activity as of
9/30/2020 12/31/2020 3/31/21 6/30/21 9/30/21
Number of loans in default 13,765 12,209 11,090 8,764 7,670
Default rate (1) 3.60% 3.06% 2.54% 1.86% 1.56%
Number of loans in
forbearance 24,809 19,464 14,805 11,889 9,342
Forbearance rate (2) 6.50% 4.87% 3.39% 2.52% 1.90%
(1) Default rate is calculated as the number of loans in default divided by
total polices in force.
(2) Forbearance rate is calculated as the number of loans in forbearance
divided by total polices in force.
While we are encouraged by the decline in our forbearance and default
populations and optimistic that we will see continued improvement as the
economic stress of the COVID crisis recedes, future viral waves could cause
further social and economic dislocation and contribute to an increase in our
forbearance and default counts in future periods.
We establish reserves for claims and allocated claim expenses when we are
notified that a borrower is in default. The size of the reserve we establish for
each defaulted loan (and by extension our aggregate reserve and claims expense)
reflects our best estimate of the future claim payment to be made under each
individual policy. Our future claims exposure is a function of the number of
delinquent loans that progress to claim payment (which we refer to as frequency)
and the amount to be paid to settle such claims (which we refer to as severity).
Our estimates of claims frequency and severity are not formulaic, rather they
are broadly synthesized based on historical observed experience for similarly
situated loans and assumptions about future macroeconomic factors.
We generally observe that forbearance programs are an effective tool to bridge
dislocated borrowers from a time of acute stress to a future date when they can
resume timely payment of their mortgage obligations. The effectiveness of
forbearance programs is enhanced by the availability of various repayment and
loan modification options, which allow borrowers to amortize, or in certain
instances fully defer the payments otherwise due during the forbearance period,
over an extended length of time. In response to the onset of the COVID-19
outbreak, the GSEs introduced new repayment and loan modification options to
further assist borrowers with their transition out of forbearance and back into
performing status. Our reserve setting process considers the beneficial impact
of forbearance, foreclosure moratorium and other assistance programs available
to defaulted borrowers. At September 30, 2021 , we generally established lower
reserves for defaults that we consider to be connected to the COVID-19 outbreak,
given our expectation that forbearance, repayment and modification, and other
assistance programs will aid affected borrowers and drive higher cure rates on
such defaults than we would otherwise expect to experience on similarly situated
loans that did not benefit from broad-based assistance programs.
Our Master Policies require insureds to file a claim no later than 60-days after
completion of a foreclosure, and in connection with the claim, the insured is
generally entitled to include in the claim amount (i) up to three years of
missed interest payments and (ii) certain advances, each as incurred through the
date the claim is filed. Under our Master Policies, a national foreclosure
moratorium of the type enacted following the onset of the COVID-19 pandemic will
not limit the amount of accrued interest (subject to the three-year limit) or
advances that may be included in the claim amount. Given the duration of the
foreclosure moratorium mandated by the GSEs, certain loans in our default
inventory, including those with defaults unrelated to the COVID-19 crisis that
had not gone through foreclosure at the onset of the pandemic, have remained in
pre-foreclosure default status for a prolonged period of time. For those loans
that do not ultimately cure, the delayed foreclosure cycle and resulting delay
in claims submission may increase the severity of claims we ultimately pay.
Regulatory Capital Position
As an approved mortgage insurer and Wisconsin -domiciled carrier, we are required
to satisfy financial and/or capitalization requirements stipulated by each of
the GSEs and the Wisconsin OCI.
The financial requirements stipulated by the GSEs are outlined in the PMIERs.
Under the PMIERs, we must maintain available assets that are equal to or exceed
a minimum risk-based required asset amount, subject to a minimum floor of $400
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million. At September 30, 2021 , we reported $1,993 million available assets
against $1,366 million risk-based required assets. Our "excess" funding position
was $627 million .
The risk-based required asset amount under PMIERs is determined at an individual
policy-level based on the risk characteristics of each insured loan. Loans with
higher risk factors, such as higher LTVs or lower borrower FICO scores, are
assessed a higher charge. Non-performing loans that have missed two or more
payments are generally assessed a significantly higher charge than performing
loans, regardless of the underlying borrower or loan risk profile; however,
special consideration is given under PMIERs to loans that are delinquent on
homes located in an area declared by the Federal Emergency Management Agency
(FEMA) to be a Major Disaster zone eligible for Individual Assistance. In June
2020 , the GSEs issued guidance (subsequently amended and restated in each of
September 2020 , December 2020 and June 2021 ) on the risk-based treatment of
loans affected by the COVID-19 crisis and the reporting of non-performing loans
by aging category. Under the guidance, non-performing loans that are subject to
a forbearance program granted in response to a financial hardship related to
COVID-19 will benefit from a permanent 70% risk-based required asset haircut for
the duration of the forbearance period and subsequent repayment plan or trial
modification period.
Our PMIERs minimum risk-based required asset amount is also adjusted for our
reinsurance transactions (as approved by the GSEs). Under our quota share
reinsurance treaties, we receive credit for the PMIERs risk-based required asset
amount on ceded RIF. As our gross PMIERs risk-based required asset amount on
ceded RIF increases, our PMIERS credit for ceded RIF automatically increases as
well (in an unlimited amount). Under our ILN transactions, we generally receive
credit for the PMIERs risk-based required asset amount on ceded RIF to the
extent such requirement is within the subordinated coverage (excess of loss
detachment threshold) afforded by the transaction. We have structured our ILN
transactions to be overcollateralized, such that there are more ILN notes
outstanding and cash held in trust than we currently receive credit for under
the PMIERs. To the extent our PMIERs risk-based required asset amount on RIF
ceded under the ILN transactions grows, we receive increased PMIERs credit under
the treaties. The increasing PMIERs credit we receive under the ILN treaties is
further enhanced by their lockout triggers. In the event of certain credit
enhancement or delinquency events, the ILN notes stop amortizing and the cash
held in trust is secured for our benefit (a Lock-Out Event). As the underlying
RIF continues to run-off, this has the effect of increasing the
overcollateralization within, and excess PMIERs capacity provided by, each ILN
structure.
A Lock-Out Event was deemed to have occurred, effective June 25, 2020 for each
of the 2017, 2018 and 2019 ILN Transactions (related to the default experience
of the underlying reference pools for each respective transaction) and at
inception for the 2021-1 ILN Transaction (related to the initial build of its
target credit enhancement), and the amortization of reinsurance coverage, and
distribution of collateral assets and amortization of insurance-linked notes was
suspended for each such ILN Transaction. The amortization of reinsurance
coverage, distribution of collateral assets and amortization of insurance-linked
notes will remain suspended for the duration of the Lock-Out Event for each such
ILN Transaction, and during such period the overcollateralization within and
potential PMIERs capacity provided by each such ILN Transaction will grow as
assets are preserved in the applicable reinsurance trust account.
At September 30, 2021 , we had an aggregate $537 million of overcollateralization
available across our ILN Transactions to absorb an increase in the PMIERs
risk-based required asset amount on ceded RIF. The following table provides
detail on the level of overcollateralization of each of our ILN Transactions at
September 30, 2021 :
2017 ILN 2018 ILN 2019 ILN 2020-1 ILN 2020-2 ILN 2021-1 ILN
($ values in thousands) Transaction Transaction Transaction Transaction Transaction Transaction
Ceded RIF $ 1,227,763 $ 1,333,991 $ 1,533,960 $ 3,128,472 $ 4,689,578 $ 8,334,990
First Layer Retained Loss 121,196 122,750 122,697 169,488 121,177 163,708
Reinsurance Coverage 40,226 158,489 231,877 84,470 177,566 367,238
Eligible Coverage $ 161,422 $ 281,239 $ 354,574 $ 253,958 $ 298,743 $ 530,946
Subordinated Coverage (1) 13.15% 21.08% 23.11% 8.00% 6.25% 6.37%
PMIERs Charge on Ceded RIF 6.47% 8.41% 8.25% 6.50% 5.63% 6.07%
Overcollateralization (2) (4) $ 40,226 $ 158,489 $
227,965
Delinquency Trigger (3) 4.0% 4.0% 4.0% 6.0% 4.7% 4.8%
(1) Absent a delinquency trigger, the subordinated coverage is capped at 8.00%, 6.25% and 6.75% for the 2020-1, 2020-2 and 2021-1 ILN Transactions, respectively.
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(2) Overcollateralization for each of the 2017 and 2018 ILN Transactions is
equal to their current reinsurance coverage as the PMIERs required asset amount
on RIF ceded under each transaction is currently below its remaining first layer
retained loss.
(3) Delinquency triggers for 2017, 2018, and 2019 ILN Transactions are set at a
fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for
the 2020-1, 2020-2 and 2021-1 ILN Transactions are equal to seventy-five percent
of the subordinated coverage level and assessed on the basis of a three-month
rolling average.
(4) May not be replicated based on the rounded figures presented in the table.
Our PMIERs funding requirement will go up in future periods based on the volume
and risk profile of our new business production, and performance of our in-force
insurance portfolio. We estimate, however, that we will remain in compliance
with our PMIERs asset requirements even if the forbearance-driven default rate
on our in-force portfolio materially exceeds its current level, given our $627
million excess available asset position at September 30, 2021 , the nationwide
applicability of the 70% haircut on delinquent policies subject to a forbearance
program accessed in response to a financial hardship related to the COVID-19
crisis, and the increasing PMIERs relief automatically provided under each of
our quota share treaties and ILN Transactions.
NMIC is also subject to state regulatory minimum capital requirements based on
its RIF. Formulations of this minimum capital vary by state, however, the most
common measure allows for a maximum ratio of RIF to statutory capital (commonly
referred to as RTC) of 25:1. The RTC calculation does not assess a different
charge or impose a different threshold RTC limit based on the underlying risk
characteristics of the insured portfolio. Non-performing loans are generally
treated the same as performing loans under the RTC framework. As such, the
PMIERs generally imposes a stricter financial requirement than the state RTC
standard, and we expect this to remain the case through the duration of and
following the COVID-19 pandemic.
Liquidity
We evaluate our liquidity position at both a holding company (NMIH) and primary
operating subsidiary (NMIC) level. As of September 30, 2021 , we had $2.2 billion
of consolidated cash and investments, including $79 million of cash and
investments at NMIH.
On June 8, 2020 , NMIH completed the sale of 15.9 million shares of common stock,
including the exercise of a 15% overallotment option, and raised proceeds of
approximately $220 million , net of underwriting discounts, commissions and other
direct offering expenses. On June 19, 2020 , NMIH also completed the sale of its
$400 million aggregate principal amount of senior secured notes, raising net
proceeds of $244 million after giving effect to offering expenses and the
repayment of the $150 million principal amount outstanding under our 2018 Term
Loan. NMIH contributed approximately $445 million of capital to NMIC following
completion of its respective Notes and common stock offerings.
NMIH also has access to $110 million of undrawn revolving credit capacity
(through the 2020 Revolving Credit Facility) and $1.6 million of ordinary course
dividend capacity available from Re One without the prior approval of the
Wisconsin OCI. Amounts drawn under the 2020 Revolving Credit Facility are
available as directed for NMIH needs or may be down-streamed to support the
requirements of our operating subsidiaries if we so decide. Item 1, "Financial
Statements - Notes to Condensed Consolidated Financial Statements - Note 4,
Debt.
NMIH's principal liquidity demands include funds for the payment of (i) certain
corporate expenses, (ii) certain reimbursable expenses of our insurance
subsidiaries, including NMIC, and (iii) principal and interest as due on our
outstanding debt. NMIH generates cash interest income on its investment
portfolio, receives cash proceeds upon the exercise of outstanding stock
options, and benefits from tax, expense-sharing and debt service agreements with
its subsidiaries. Such agreements have been approved by the Wisconsin OCI and
provide for the reimbursement of substantially all of NMIH's annual cash
expenditures. While such agreements are subject to revocation by the Wisconsin
OCI, we do not expect such action to be taken at this time. The Wisconsin OCI
refreshed its approval of the debt service agreement and provided for the
additional reimbursement by NMIC of interest expense due on our Notes and 2020
Revolving Credit Facility at the time each transaction was completed.
NMIC's principal sources of liquidity include (i) premium receipts on its
insured portfolio and new business production, (ii) interest income on its
investment portfolio and principal repayments on maturities therein, and (iii)
existing cash and cash equivalent holdings. At September 30, 2021 , NMIC had
$2.0 billion of cash and investments, including $81 million of cash and
equivalents. NMIC's principal liquidity demands include funds for the payment of
(i) reimbursable holding company expenses, (ii) premiums ceded under our
reinsurance transactions (iii) claims payments, and (iv) taxes as due or
otherwise deferred through the purchase of tax and loss bonds. NMIC's cash
inflow is generally significantly in excess of its cash outflow in any given
period. During the twelve-month period ended September 30, 2021 , NMIC generated
$316 million of cash flow from operations and received an additional
$140 million of cash flow from the maturity, sale and redemption of securities
held in its investment portfolio. NMIC is not a party to any contracts
(derivative or otherwise) that require it to post an increasing amount of
collateral to any counterparty and NMIC's principal liquidity demands (other
than claims payments) generally develop along a scheduled path (i.e., are of a
contractually predetermined amount and due at a contractually predetermined
date). NMIC's only use of cash that
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develops along an unscheduled path is claims payments. Given the breadth and
duration of forbearance programs available to borrowers, separate foreclosure
moratoriums that have been enacted at a local, state and federal level, and the
general duration of the default to foreclosure to claim cycle, we do not expect
NMIC to use a meaningful amount of cash to settle claims in the near-term.
Premiums paid to NMIC on monthly policies are generally collected and remitted
by loan servicers. There was broad discussion at the onset of the COVID pandemic
and concerns about potential liquidity challenges that servicers might face in
the event of widespread borrower utilization of forbearance programs. These
concerns have not materialized thus far and we do not believe that loan servicer
liquidity constraints, should they arise in the future, would have a material
impact on NMIC's premium receipts or liquidity profile. Loan servicers are
contractually obligated to advance mortgage insurance premiums in a timely
manner, even if the underlying borrowers fail to remit their monthly mortgage
payments. In June 2020 , the GSEs issued guidance to the PMIERs (subsequently
amended and restated in each of September 2020 , December 2020 and June 2021 )
that, among other items, requires us to notify them of our intent to cancel
coverage on policies for which servicers have failed to make timely premium
payments so that the GSEs can pay the premiums directly to us and preserve the
mortgage insurance coverage. Through September 30, 2021 , we did not see any
notable changes in servicer payment practices, with servicers generally
continuing to remit monthly premium payments as scheduled, including those for
policies covering loans that are in a forbearance program.
Investment portfolio
At September 30, 2021 , we had $2.2 billion of cash and invested assets. Our
investment strategy equally prioritizes capital preservation alongside income
generation, and we have a long-established investment policy that sets
conservative limits for asset types, industry sectors, single issuers and
instrument credit ratings. At September 30, 2021 , our investment portfolio was
comprised of 100% fixed income assets with 100% of our holdings rated investment
grade and our portfolio having an average rating of "A+." At September 30, 2021 ,
our portfolio was in a $30 million aggregate unrealized gain position; it was
highly liquid and highly diversified with no Level 3 asset positions and no
single issuer concentration greater than 1.4%. We did not record any allowance
for credit losses in the portfolio during the three months ended September 30,
2021 , as we expect to recover the amortized cost basis of all securities held.
The pre-tax book yield on our investment portfolio was 2.0% for the three months
ended September 30, 2021 . At the onset of the COVID-19 crisis, we decided to
prioritize liquidity and increased our cash and equivalent holdings as a
percentage of our total portfolio. We believe such action was prudent in light
of the heightened market volatility and general uncertainty developing in the
early stages of the COVID-19 pandemic. We have since redeployed much of our
excess liquidity position.
Taxes
The CARES Act, CAA and American Rescue Plan include, among other items,
provisions relating to refundable payroll tax credits, deferment of social
security payments, net operating loss carryback periods, alternative minimum tax
credit refunds, modifications to the net interest deduction limitations,
increased limitations on qualified charitable contributions, technical
corrections to tax depreciation methods for qualified improvement property, and
temporary 100% deduction for business meals. We continue to monitor the impact
that the CARES Act, CAA and American Rescue Plan may have on our business,
financial condition and results of operations.
New Insurance Written, Insurance-In-Force and Risk-In-Force
NIW is the aggregate unpaid principal balance of mortgages underpinning new
policies written during a given period. Our NIW is affected by the overall size
of the mortgage origination market and the volume of high-LTV mortgage
originations. Our NIW is also affected by the percentage of such high-LTV
originations covered by private versus government MI or other alternative credit
enhancement structures and our share of the private MI market. NIW, together
with persistency, drives our IIF. IIF is the aggregate unpaid principal balance
of the mortgages we insure, as reported to us by servicers at a given date, and
represents the sum total of NIW from all prior periods less principal payments
on insured mortgages and policy cancellations (including for prepayment,
nonpayment of premiums, coverage rescission and claim payments). RIF is related
to IIF and represents the aggregate amount of coverage we provide on all
outstanding policies at a given date. RIF is calculated as the sum total of the
coverage percentage of each individual policy in our portfolio applied to the
unpaid principal balance of such insured mortgage. RIF is affected by IIF and
the LTV profile of our insured mortgages, with lower LTV loans generally having
a lower coverage percentage and higher LTV loans having a higher coverage
percentage. Gross RIF represents RIF before consideration of reinsurance. Net
RIF is gross RIF net of ceded reinsurance.
Net Premiums Written and Net Premiums Earned
We set our premium rates on individual policies based on the risk
characteristics of the underlying mortgage loans and
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borrowers, and in accordance with our filed rates and applicable rating rules.
On June 4, 2018 , we introduced a proprietary risk-based pricing platform, which
we refer to as Rate GPS. Rate GPS considers a broad range of individual
variables, including property type, type of loan product, borrower credit
characteristics, and lender and market factors, and provides us with the ability
to set and charge premium rates commensurate with the underlying risk of each
loan that we insure. We introduced Rate GPS in June 2018 to replace our previous
rate card pricing system. While most of our new business is priced through Rate
GPS, we also continue to offer a rate card pricing option to a limited number of
lender customers who require a rate card for operational reasons. We believe the
introduction and utilization of Rate GPS provides us with a more granular and
analytical approach to evaluating and pricing risk, and that this approach
enhances our ability to continue building a high-quality mortgage insurance
portfolio and delivering attractive risk-adjusted returns.
Premiums are generally fixed for the duration of our coverage of the underlying
loans. Net premiums written are equal to gross premiums written minus ceded
premiums written under our reinsurance arrangements, less premium refunds and
premium write-offs. As a result, net premiums written are generally influenced
by:
•NIW;
•premium rates and the mix of premium payment type, which are either single,
monthly or annual premiums, as described below;
•cancellation rates of our insurance policies, which are impacted by payments or
prepayments on mortgages, refinancings (which are affected by prevailing
mortgage interest rates as compared to interest rates on loans underpinning our
in force policies), levels of claim payments and home prices; and
•cession of premiums under third-party reinsurance arrangements.
Premiums are paid either by the borrower (BPMI) or the lender (LPMI) in a single
payment at origination (single premium), on a monthly installment basis (monthly
premium) or on an annual installment basis (annual premium). Our net premiums
written will differ from our net premiums earned due to policy payment type. For
single premiums, we receive a single premium payment at origination, which is
earned over the estimated life of the policy. Substantially all of our single
premium policies in force as of September 30, 2021 were non-refundable under
most cancellation scenarios. If non-refundable single premium policies are
canceled, we immediately recognize the remaining unearned premium balances as
earned premium revenue. Monthly premiums are recognized in the month billed and
when the coverage is effective. Annual premiums are earned on a straight-line
basis over the year of coverage. Substantially all of our policies provide for
either single or monthly premiums.
The percentage of IIF that remains on our books after any twelve-month period is
defined as our persistency rate. Because our insurance premiums are earned over
the life of a policy, higher persistency rates can have a significant impact on
our net premiums earned and profitability. Generally, faster speeds of mortgage
prepayment lead to lower persistency. Prepayment speeds and the relative mix of
business between single and monthly premium policies also impact our
profitability. Our premium rates include certain assumptions regarding repayment
or prepayment speeds of the mortgages underlying our policies. Because premiums
are paid at origination on single premium policies and our single premium
policies are generally non-refundable on cancellation, assuming all other
factors remain constant, if single premium loans are prepaid earlier than
expected, our profitability on these loans is likely to increase and, if loans
are repaid slower than expected, our profitability on these loans is likely to
decrease. By contrast, if monthly premium loans are repaid earlier than
anticipated, we do not earn any more premium with respect to those loans and,
unless we replace the repaid monthly premium loan with a new loan at the same
premium rate or higher, our revenue is likely to decline.
Effect of reinsurance on our results
We utilize third-party reinsurance to actively manage our risk, ensure
compliance with PMIERs, state regulatory and other applicable capital
requirements, and support the growth of our business. We currently have both
quota share and excess-of-loss reinsurance agreements in place, which impact our
results of operations and regulatory capital and PMIERs asset positions. Under a
quota share reinsurance agreement, the reinsurer receives a premium in exchange
for covering an agreed-upon portion of incurred losses. Such a quota share
arrangement reduces premiums written and earned and also reduces RIF, providing
capital relief to the ceding insurance company and reducing incurred claims in
accordance with the terms of the reinsurance agreement. In addition, reinsurers
typically pay ceding commissions as part of quota share transactions, which
offset the ceding company's acquisition and underwriting expenses. Certain quota
share agreements include profit commissions that are earned based on loss
performance and serve to reduce ceded premiums. Under an excess-of-loss
agreement, the ceding insurer is typically responsible for losses up to an
agreed-upon threshold and the reinsurer then provides coverage in excess of such
threshold up to a maximum agreed-upon limit. We expect to continue to evaluate
reinsurance opportunities in the normal course of business.
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Quota share reinsurance
NMIC is a party to quota share reinsurance treaties - the 2016 QSR Transaction,
effective September 1, 2016 , the 2018 QSR Transaction, effective January 1,
2018 , the 2020 QSR Transaction, effective April 1, 2020 , the 2021 QSR
Transaction, effective January 1, 2021 , the 2022 QSR Transaction, effective
October 1, 2021 , and the 2023 QSR Transaction, effective January 1, 2023 . Under
each of the QSR Transactions, NMIC cedes a proportional share of its risk on
eligible policies written during a discrete period to panels of third-party
reinsurance providers. Each of the third-party reinsurance providers has an
insurer financial strength rating of A- or better by S&P, A.M. Best or both.
Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related
to 25% of the risk on eligible primary policies written for all periods through
December 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae,
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 policies, a 20% ceding commission, and a profit commission
of up to 50% that varies directly and inversely with ceded claims.
Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related
to 22.5% of the risk on eligible policies written in 2021 (subject to an
aggregate risk written limit), in exchange for reimbursement of ceded claims and
claim expenses on covered 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 and 2023 QSR Transactions, NMIC will cede premiums
earned related to 20% of the risk on eligible policies written between January
1, 2022 and December 31, 2023 , in exchange for reimbursement of ceded claims and
claims expenses on covered policies, a 20% ceding commission, and a profit
commission of up to 62% that varies directly and inversely with ceded claims. If
NMIC exhausts the aggregate risk written limit of the 2021 QSR Transaction prior
to December 31, 2021 , the 2022 QSR Transaction will automatically incept and
NMIC will begin to cede risk on eligible policies under the treaty prior to
January 1, 2022 .
NMIC may elect to terminate its engagement with individual reinsurers on a
run-off basis (i.e., reinsurers continue providing coverage on all risk ceded
prior to the termination date, with no new cessions going forward) or cut-off
basis (i.e., the reinsurance arrangement is completely terminated with NMIC
recapturing all previously ceded risk) under certain circumstances. Such
selective termination rights arise when, among other reasons, a reinsurer
experiences a deterioration in its capital position below a prescribed threshold
and/or a reinsurer breaches (and fails to cure) its collateral posting
obligations under the relevant agreement.
Effective April 1, 2019 , NMIC elected to terminate its engagement with one
reinsurer under the 2016 QSR Transaction on a cut-off basis. In connection with
the termination, NMIC recaptured approximately $500 million of previously ceded
primary RIF and stopped ceding new premiums written with respect to the
recaptured risk. With this termination, ceded premiums written under the 2016
QSR Transaction decreased from 25% to 20.5% on eligible policies. The
termination had no effect on the cession of pool risk under the 2016 QSR
Transaction.
Excess-of-loss reinsurance
NMIC is party to reinsurance agreements with the Oaktown Re Vehicles that
provide it with aggregate excess-of-loss reinsurance coverage on defined
portfolios of mortgage insurance policies. Under each agreement, NMIC retains a
first layer of aggregate loss exposure on covered policies and the respective
Oaktown Re Vehicle then provides second layer loss protection up to a defined
reinsurance coverage amount. NMIC then retains losses in excess of the
respective reinsurance coverage amounts.
The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles
decrease from the inception of each agreement over a ten-year period as the
underlying insured mortgages are amortized or repaid, and/or the mortgage
insurance coverage is canceled. As the reinsurance coverage decreases, a
prescribed amount of collateral held in trust by the Oaktown Re Vehicles is
distributed to ILN Transaction note-holders as amortization of the outstanding
insurance-linked note principal
37
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balances occurs. The outstanding reinsurance coverage amounts stop amortizing,
and the collateral distribution to ILN Transaction note-holders and amortization
of insurance-linked note principal is suspended if certain credit enhancement or
delinquency thresholds, as defined in each agreement, are triggered (each, a
Lock-Out Event). A Lock-Out Event was deemed to have occurred, effective June
25, 2020 for each of the 2017, 2018 and 2019 ILN Transactions (related to the
default experience of the underlying reference pools for each respective
transaction) and at inception of the 2021-1 ILN Transaction (related to the
initial build of its target credit enhancement), and the amortization of
reinsurance coverage, and distribution of collateral assets and amortization of
insurance-linked notes was suspended for each ILN Transaction. The amortization
of reinsurance coverage, distribution of collateral assets and amortization of
insurance-linked notes will remain suspended for the duration of the Lock-Out
Event for each ILN Transaction, and during such period assets will be preserved
in the applicable reinsurance trust account to collateralize the excess-of-loss
reinsurance coverage provided to NMIC.
The following table presents the inception date, covered production period,
initial and current reinsurance coverage amount, and initial and current first
layer retained aggregate loss under each of the ILN Transactions. Current
amounts are presented as of September 30, 2021 .
Initial First Current First
Initial Reinsurance Current Reinsurance Layer Layer Retained($ values in thousands) Inception Date Covered Production Coverage Coverage Retained Loss Loss (1) 2017 ILN Transaction May 2, 2017 1/1/2013 - 12/31/2016$211,320 $40,226 $126,793 $121,196 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 122,750 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,697 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 84,470 169,514 169,488 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 177,566 121,777 121,177 2021-1 ILN Transaction (4) April 27, 2021 10/1/2020 - 3/31/2021 (3) 367,238 367,238 163,708 163,708 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure, and cedes reserves for incurred claims and claims expenses to each applicable ILN Transaction and recognizes a reinsurance recoverable if such incurred claims and claims expenses exceed its current first layer retained loss. (2) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andMarch 31, 2020 . (3) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andSeptember 30, 2020 . (4) As ofSeptember 30, 2021 , the current reinsurance coverage amount on the 2021-1 ILN transaction is equal to the initial reinsurance coverage, as the reinsurance coverage provided by Oaktown Re will not decrease until its target credit enhancement is met. See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements. OnOctober 26, 2021 , NMIC secured$363.6 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies primarily written fromApril 1, 2021 toSeptember 30, 2021 , through a mortgage insurance-linked notes offering by Oaktown Re VII. The reinsurance coverage amount under the terms of the 2021-2 ILN Transaction decreases from$363.6 million at inception over a 12.5 year period as the underlying covered mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled. The outstanding reinsurance coverage amount will begin amortizing after an initial period in which a target level of credit enhancement is obtained. For the reinsurance coverage period, NMIC retains the first layer of$146.2 million of aggregate losses and Oaktown Re VII then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. 38 -------------------------------------------------------------------------------- Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended For the nine months ended September 30, September 30, September 30, 2021 September 30, 2020 2021 2020 IIF NIW IIF NIW NIW (In Millions) Monthly$ 124,767 $ 16,861 $ 88,584 $ 16,516 $ 60,047 $ 38,862 Single 18,851 1,223 15,910 1,983 7,185 4,058 Primary 143,618 18,084 104,494 18,499 67,232 42,920 Pool 1,339 - 2,115 - - - Total$ 144,957 $ 18,084 $ 106,609 $ 18,499 $ 67,232 $ 42,920 For the three months endedSeptember 30, 2021 , NIW decreased 2%, compared to the three months endedSeptember 30, 2020 , due to a decline in the size of the total mortgage insurance market. Total private mortgage insurance industry NIW volume was$181 billion in the third quarter of 2020 - the largest quarterly result ever recorded for the industry. The impact of the year-on-year decline in total private mortgage insurance industry volume was partially offset by growth in our customer franchise and market presence tied to the increased penetration of existing customer accounts and new customer account activations. For the nine months endedSeptember 30, 2021 , NIW increased 57%, compared to the nine months endedSeptember 30, 2020 , driven by growth in our monthly and single premium policy production tied to the growth in our customer franchise and market presence. Total IIF increased 36% atSeptember 30, 2021 compared toSeptember 30, 2020 , primarily due to the NIW generated between such measurement dates, partially offset by the run-off of in-force policies. Our persistency rate decreased to 58% atSeptember 30, 2021 from 60% atSeptember 30, 2020 , reflecting the impact of increased refinancing activity during the intervening twelve-month period. The following table presents net premiums written and earned for the periods indicated. Primary and pool premiums written and earned For the three months ended For the nine months ended September 30, September 30, September 30, September 30, 2021 2020 2021 2020 (In Thousands) Net premiums written$ 111,931 $ 101,822 $ 354,388 $ 283,302 Net premiums earned 113,594 98,802 330,361 296,463 For the three and nine months endedSeptember 30, 2021 , net premiums written increased 10% and 25%, respectively, and net premiums earned increased 15% and 11%, respectively, compared to the three and nine months endedSeptember 30, 2020 . The growth in net premiums written and earned were primarily due to the growth of our IIF and increased monthly policy production, partially offset by increased cessions under the QSR and ILN Transactions. Pool premiums written and earned for the three and nine months endedSeptember 30, 2021 and 2020, were$0.4 million and$1.3 million , and$0.6 million and$2.0 million , respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. 39 -------------------------------------------------------------------------------- Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends
As of and for the three months ended
September 30, December 31, September 30,
2021 June 30, 2021 March 31, 2021 2020 2020
($ Values In Millions, except as noted below)
New insurance written $ 18,084 $
22,751
93 % 85 % 90 % 90 % 89 %
Percentage of single premium 7 % 15 % 10 % 10 % 11 %
New risk written $ 4,640 $
5,650
143,618 136,598 123,777 111,252 104,494
Percentage of monthly premium 87 % 86 % 86 % 86 % 85 %
Percentage of single premium 13 % 14 % 14 % 14 % 15 %
Risk-in-force (1) $ 36,253 $
34,366
490,714 471,794 436,652 399,429 381,899
Average loan size ($ value in thousands)
(1) $ 293 $
290 $ 283
25.2 % 25.2 % 25.2 % 25.3 % 25.4 %
Loans in default (count) (1) 7,670 8,764 11,090 12,209 13,765
Default rate (1) 1.56 % 1.86 % 2.54 % 3.06 % 3.60 %
Risk-in-force on defaulted loans (1) $ 546 $
625 $ 785
0.32 % 0.34 % 0.36 % 0.37 % 0.39 %
Earnings from cancellations $ 7.7 $
7.0 $ 9.9
58.1 % 53.9 % 51.9 % 55.9 % 60.0 %
Quarterly run-off (5) 8.1 % 8.0 % 12.5 % 12.5 % 13.1 %
(1) Reported as of the end of the period.
(2) Calculated as end of period RIF divided by end of period IIF.
(3) Calculated as net premiums earned divided by average primary IIF for the
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 For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
(In Millions)
IIF, beginning of period $ 136,598 $
98,905
18,084 18,499 67,232 42,920
Cancellations, principal repayments and other
reductions (11,064) (12,910) (34,866) (33,180)
IIF, end of period $ 143,618 $ 104,494 $ 143,618 $ 104,494
40
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We consider a "book" to be a collective pool of policies insured during a
particular period, normally a calendar year. In general, the majority of
underwriting profit, calculated as earned premium revenue minus claims and
underwriting and operating expenses, generated by a particular book year emerges
in the years immediately following origination. This pattern generally occurs
because relatively few of the claims that a book will ultimately experience
typically occur in the first few years following origination, when premium
revenue is highest, while subsequent years are affected by declining premium
revenues, as the number of insured loans decreases (primarily due to loan
prepayments), and by increasing losses.
The table below presents a summary of our primary IIF and RIF by book year as of
the dates indicated.
Primary IIF and RIF As of September 30, 2021 As of September 30, 2020
IIF RIF IIF RIF
(In Millions)
September 30, 2021 $ 64,885 $ 16,274 $ - $ -
2020 47,196 11,848 40,969 10,255
2019 14,502 3,800 29,865 7,791
2018 5,675 1,446 11,859 3,019
2017 4,845 1,213 9,671 2,413
2016 and before 6,515 1,672 12,130 3,090
Total $ 143,618 $ 36,253 $ 104,494 $ 26,568
We utilize certain risk principles that form the basis of how we underwrite and
originate NIW. We have established prudential underwriting standards and
loan-level eligibility matrices which prescribe the maximum LTV, minimum
borrower FICO score, maximum borrower DTI ratio, maximum loan size, property
type, loan type, loan term and occupancy status of loans that we will insure and
memorialized these standards and eligibility matrices in our Underwriting
Guideline Manual that is publicly available on our website. Our underwriting
standards and eligibility criteria are designed to limit the layering of risk in
a single insurance policy. "Layered risk" refers to the accumulation of
borrower, loan and property risk. For example, we have higher credit score and
lower maximum allowed LTV requirements for investor-owned properties, compared
to owner-occupied properties. We monitor the concentrations of various risk
attributes in our insurance portfolio, which may change over time, in part, as a
result of regional conditions or public policy shifts.
41
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The tables below present our primary NIW by FICO, LTV and purchase/refinance mix
for the periods indicated. We calculate the LTV of a loan as the percentage of
the original loan amount to the original purchase value of the property securing
the loan.
Primary NIW by FICO For the three months ended For the nine months ended
September 30, September 30, September 30, September 30,
2021 2020 2021 2020
(In Millions)
>= 760 $ 8,073 $ 11,600 $ 32,377 $ 25,942
740-759 3,254 2,575 12,812 6,056
720-739 2,563 2,187 9,678 5,373
700-719 2,099 1,217 6,255 3,214
680-699 1,487 793 4,139 1,872
<=679 608 127 1,971 463
Total $ 18,084 $ 18,499 $ 67,232 $ 42,920
Weighted average FICO 749 764 753 761
Primary NIW by LTV For the three months ended For the nine months ended
September 30,
September 30, 2021 September 30, 2020 September 30, 2021 2020
(In Millions)
95.01% and above $ 1,957 $ 587 $ 6,585 $ 1,855
90.01% to 95.00% 8,344 7,767 29,336 18,161
85.01% to 90.00% 4,961 6,968 19,071 16,117
85.00% and below 2,822 3,177 12,240 6,787
Total $ 18,084 $ 18,499 $ 67,232 $ 42,920
Weighted average LTV 91.8 % 90.7 % 91.3 % 90.8 %
Primary NIW by purchase/refinance mix For the three months ended For the nine months ended
September 30, September 30, September 30,
2021 September 30, 2020 2021 2020
(In Millions)
Purchase $ 16,400 $ 12,764 $ 53,220 $ 28,531
Refinance 1,684 5,735 14,012 14,389
Total $ 18,084 $ 18,499 $ 67,232 $ 42,920
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The tables below present our total primary IIF and RIF by FICO and LTV, and
total primary RIF by loan type as of the dates indicated.
Primary IIF by FICO As of
September 30, 2021 September 30, 2020
($ Values In Millions)
>= 760 $ 73,080 51 % $ 53,742 51 %
740-759 24,676 17 16,193 16
720-739 19,898 14 14,352 14
700-719 13,206 9 10,235 10
680-699 8,678 6 6,713 6
<=679 4,080 3 3,259 3
Total $ 143,618 100 % $ 104,494 100 %
Primary RIF by FICO As of
September 30, 2021 September 30, 2020
($ Values In Millions)
>= 760 $ 18,200 51 % $ 13,563 51 %
740-759 6,280 17 4,141 16
720-739 5,086 14 3,694 14
700-719 3,432 9 2,635 10
680-699 2,243 6 1,730 6
<=679 1,012 3 805 3
Total $ 36,253 100 % $ 26,568 100 %
Primary IIF by LTV As of
September 30, 2021 September 30, 2020
($ Values In Millions)
95.01% and above $ 13,179 9 % $ 8,130 8 %
90.01% to 95.00% 63,828 45 47,828 46
85.01% to 90.00% 44,451 31 35,224 33
85.00% and below 22,160 15 13,312 13
Total $ 143,618 100 % $ 104,494 100 %
Primary RIF by LTV As of
September 30, 2021 September 30, 2020
($ Values In Millions)
95.01% and above $ 3,932 11 % $ 2,310 9 %
90.01% to 95.00% 18,810 52 14,056 53
85.01% to 90.00% 10,902 30 8,642 32
85.00% and below 2,609 7 1,560 6
Total $ 36,253 100 % $ 26,568 100 %
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Primary RIF by Loan Type As of
September 30, 2021 September 30, 2020
Fixed 99 % 99 %
Adjustable rate mortgages
Less than five years - -
Five years and longer 1 1
Total 100 % 100 %
The table below presents selected primary portfolio statistics, by book year, as
of September 30, 2021 .
As of September 30, 2021
Original Remaining % Remaining of Incurred Loss
Insurance Insurance in Original Number of Policies in Number of Loans Ratio (Inception Cumulative Default Current Default
Book Year Written Force Insurance Policies Ever in Force Force in Default # of Claims Paid to Date) (1) Rate (2) Rate (3)
($ Values in Millions)
2013 $ 162 $ 7 4 % 655 52 3 1 0.5 % 0.6 % 5.8 %
2014 3,451 310 9 % 14,786 1,898 68 49 4.2 % 0.8 % 3.6 %
2015 12,422 1,923 15 % 52,548 10,427 366 115 3.3 % 0.9 % 3.5 %
2016 21,187 4,275 20 % 83,626 21,244 797 128 2.9 % 1.1 % 3.8 %
2017 21,582 4,845 22 % 85,897 24,478 1,286 93 4.5 % 1.6 % 5.3 %
2018 27,295 5,675 21 % 104,043 27,844 1,723 81 8.6 % 1.7 % 6.2 %
2019 45,141 14,502 32 % 148,423 57,685 2,038 16 12.7 % 1.4 % 3.5 %
2020 62,702 47,196 75 % 186,174 147,395 1,170 1 6.7 % 0.6 % 0.8 %
2021 67,232 64,885 97 % 205,291 199,691 219 - 1.2 % 0.1 % 0.1 %
Total $ 261,174 $ 143,618 881,443 490,714 7,670 484
(1) Calculated as total claims incurred (paid and reserved) divided by
cumulative premiums earned, net of reinsurance.
(2) Calculated as the sum of the number of claims paid ever to date and number
of loans in default divided by policies ever in force.
(3) Calculated as the number of loans in default divided by number of policies
in force.
Geographic Dispersion
The following table shows the distribution by state of our primary RIF as of the
periods indicated. The distribution of our primary RIF as of September 30, 2021
is not necessarily representative of the geographic distribution we expect in
the future.
Top 10 primary RIF by state As of
September 30, 2021 September 30, 2020
California 10.2 % 11.3 %
Texas 9.9 8.3
Florida 8.6 6.7
Virginia 4.9 5.4
Colorado 4.0 4.0
Maryland 3.8 3.6
Illinois 3.7 4.0
Georgia 3.7 3.0
Washington 3.5 3.5
Pennsylvania 3.2 3.5
Total 55.5 % 53.3 %
44-------------------------------------------------------------------------------- Insurance Claims and Claim Expenses Insurance claims and claim expenses incurred represent estimated future payments on newly defaulted insured loans and any change in our claim estimates for previously existing defaults. Claims incurred are generally affected by a variety of factors, including the macroeconomic environment, national and regional unemployment trends, changes in housing values, borrower risk characteristics, LTV ratios and other loan level risk attributes, the size and type of loans insured, the percentage of coverage on insured loans, and the level of reinsurance coverage maintained against insured exposures. Reserves for claims and claim expenses are established for mortgage loans that are in default. A loan is considered to be in default as of the payment date at which a borrower has missed the preceding two or more consecutive monthly payments. We establish reserves for loans that have been reported to us in default by servicers, referred to as case reserves, and additional loans that we estimate (based on actuarial review and other factors) to be in default that have not yet been reported to us by servicers, referred to as IBNR. We also establish reserves for claim expenses, which represent the estimated cost of the claim administration process, including legal and other fees and other general expenses of administering the claim settlement process. Reserves are not established for future claims on insured loans which are not currently reported or which we estimate are not currently in default. Reserves are established by estimating the number of loans in default that will result in a claim payment, which is referred to as claim frequency, and the amount of the claim payment expected to be paid on each such loan in default, which is referred to as claim severity. Claim frequency and severity estimates are established based on historical observed experience regarding certain loan factors, such as age of the default, cure rates, size of the loan and estimated change in property value. Reserves are released the month in which a loan in default is brought current by the borrower, which is referred to as a cure. Adjustments to reserve estimates are reflected in the period in which the adjustment is made. Reserves are also ceded to reinsurers under the QSR Transactions and ILN Transactions, as applicable under each treaty. We have not yet ceded any reserves under the ILN Transactions as incurred claims and claims expenses on each respective reference pool remain within our retained coverage layer of each transaction. Our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any claims or claim expense reserves for pool exposure to date. The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic concentrations, among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters or global pandemics, and any federal, state or local governmental response thereto. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 outbreak, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the CARES Act. The FHFA and GSEs have offered further assistance by introducing new repayment and loan modification options to assist borrowers with their transition out of forbearance programs and default status. AtSeptember 30, 2020 and 2021, we generally established lower reserves for defaults that we consider to be connected to the COVID-19 outbreak, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs. 45 --------------------------------------------------------------------------------
The following table provides a reconciliation of the beginning and ending gross reserve balances for primary insurance claims and claim expenses.
For the three months ended For the nine months ended
September 30, September 30, September 30,
September 30, 2021 2020 2021 2020
(In Thousands)
Beginning balance $ 101,235 $
69,903
(19,726) (14,307) (17,608) (4,939)
Beginning balance, net of reinsurance
recoverables 81,509 55,596 72,959 18,813
Add claims incurred:
Claims and claim expenses incurred:
Current year (2) 3,649 18,682 19,275 61,198
Prior years (3) (445) (3,015) (6,469) (5,500)
Total claims and claim expenses incurred 3,204 15,667 12,806 55,698
Less claims paid:
Claims and claim expenses paid:
Current year (2) 3 113 15 152
Prior years (3) 526 1,100 1,566 4,309
Total claims and claim expenses paid 529 1,213 1,581 4,461
Reserve at end of period, net of
reinsurance recoverables 84,184 70,050 84,184 70,050
Add reinsurance recoverables (1) 20,420 17,180 20,420 17,180
Ending balance $ 104,604 $ 87,230 $ 104,604 $ 87,230
(1) Related to ceded losses recoverable under the QSR Transactions. See Item 1,
"Financial Statements - Notes to Condensed Consolidated Financial Statements -
Note 5, Reinsurance" for additional information.
(2) Related to insured loans with their most recent defaults occurring in the
current year. For example, if a loan had defaulted in a prior year and
subsequently cured and later re-defaulted in the current year, that default
would be included in the current year. Amounts are presented net of reinsurance
and included $14.0 million attributed to net case reserves and $4.8 million
attributed to net IBNR reserves for the nine months ended September 30, 2021 and
$55.4 million attributed to net case reserves and $4.8 million attributed to net
IBNR reserves for the nine months ended September 30, 2020 .
(3) Related to insured loans with defaults occurring in prior years, which have
been continuously in default before the start of the current year. Amounts are
presented net of reinsurance and included $1.8 million attributed to net case
reserves and $5.0 million attributed to net IBNR reserves for the nine months
ended September 30, 2021 and $4.0 million attributed to net case reserves and
$1.3 million attributed to net IBNR reserves for the nine months ended September
30, 2020 .
The "claims incurred" section of the table above shows claims and claim expenses
incurred on defaults occurring in current and prior years, including IBNR
reserves and is presented net of reinsurance. We may increase or decrease our
claim estimates and reserves as we learn additional information about individual
defaulted loans, and continue to observe and analyze loss development trends in
our portfolio. Gross reserves of $80.6 million related to prior year defaults
remained as of September 30, 2021 .
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The following table provides a reconciliation of the beginning and ending count
of loans in default.
For the three months ended For the nine months ended
September 30, 2021 September 30, 2020 September 30, 2021 September 30, 2020
Beginning default inventory 8,764 10,816 12,209 1,448
Plus: new defaults 1,624 6,588 4,486 16,870
Less: cures (2,694) (3,598) (8,964) (4,426)
Less: claims paid (24) (40) (59) (123)
Less: claims denied - (1) (2) (4)
Ending default inventory 7,670 13,765 7,670 13,765
Ending default inventory declined from September 30, 2020 to September 30, 2021
as an increased number of borrowers impacted by the COVID-19 pandemic cured
their delinquencies, and fewer new defaults emerged as the acute economic stress
of the pandemic crisis began to recede. While our default population declined
from September 30, 2020 to September 30, 2021 , our default inventory remains
elevated compared to historical experience due to the continued challenges
certain borrowers are facing related to the COVID-19 outbreak and their decision
to access the forbearance program for federally backed loans codified under the
CARES Act or similar programs made available by private lenders. As of
September 30, 2021 , 6,566 of our 7,670 defaulted loans were in a COVID-19
related forbearance program.
The following table provides details of our claims paid, before giving effect to
claims ceded under the QSR Transactions and ILN Transactions, for the periods
indicated.
For the three months ended For the nine months ended
September 30, September 30,
September 30, 2021 September 30, 2020 2021 2020
($ In Thousands)
Number of claims paid (1) 24 40 59 123
Total amount paid for claims $ 674 $ 1,540 $ 1,982 $ 5,621
Average amount paid per claim $ 28 $ 39 $ 34 $ 46
Severity (2) 55 % 67 % 60 % 80 %
(1) Count includes six and ten claims settled without payment during the three
and nine months ended September 30, 2021 , respectively, and six and eight claims
settled without payment during the three and nine months ended September 30,
2020 , respectively.
(2) Severity represents the total amount of claims paid including claim
expenses divided by the related RIF on the loan at the time the claim is
perfected, and is calculated including claims settled without payment.
The Company paid 24 and 59 claims during the three and nine months ended
September 30, 2021 , respectively, and 40 and 123 claims during three and nine
months ended September 30, 2020 , respectively. The number of claims paid in each
period was low relative to the size of our insured portfolio and the number of
defaulted loans we reported, primarily due to the forbearance program and
foreclosure moratorium implemented by the GSEs in response to the COVID outbreak
and codified under the CARES Act. Such forbearance and foreclosure programs have
extended, and may ultimately interrupt, the timeline over which loans would
otherwise progress through the default cycle to a paid claim. Our claims paid
experience for the three and nine months ended September 30, 2021 , further
benefited from the resiliency of the housing market and broad national house
price appreciation. An increase in the value of the homes collateralizing the
mortgages we insure provides defaulted borrowers with alternative paths and
incentives to cure their loan prior to the development of a claim.
Our claims severity for the three and nine months ended September 30, 2021 was
55% and 60%, respectively, compared to 67% and 80% for the three and nine months
ended September 30, 2020 , respectively. Claims severity for the three and nine
months ended September 30, 2021 benefited from the same resiliency of the
housing market and broad national house price appreciation as our claims paid.
An increase in the value of the homes collateralizing the mortgages we insure
provides additional equity support to our risk exposure and raises the prospect
of a third-party sale of a foreclosed property, which can mitigate the severity
of our settled claims.
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The following table provides detail on our average reserve per default, before
giving effect to reserves ceded under the QSR Transactions, as of the dates
indicated.
Average reserve per default: As of September 30, 2021 As of September 30, 2020
(In Thousands)
Case (1) $ 12.6 $ 5.8
IBNR (1)(2) 1.0 0.5
Total $ 13.6 $ 6.3
(1) Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
Average reserve per default increased from September 30, 2020 to September 30,
2021 , primarily due to the "aging" of early COVID-related defaults. While we
have generally established lower reserves for defaults that we consider to be
connected to the COVID-19 outbreak given our expectation that forbearance,
repayment and modification, and other assistance programs will aid affected
borrowers and drive higher cure rates on such defaults than we would otherwise
expect to experience on similarly situated loans that did not benefit from
broad-based assistance programs, we have increased such reserves over time as
individual defaults remain outstanding or "age." The growth in our average
reserve per default from September 30, 2020 to September 30, 2021 far exceeded
the growth in our aggregate gross reserve position in the intervening period as
the impact of the increase in our average reserve per default was largely offset
by the decline in our total default inventory.
GSE Oversight
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs
established by each of the GSEs (italicized terms have the same meaning that
such terms have in the PMIERs, as described below). The PMIERs establish
operational, business, remedial and financial requirements applicable to
approved insurers. The PMIERs financial requirements prescribe a risk-based
methodology whereby the amount of assets required to be held against each
insured loan is determined based on certain loan-level risk characteristics,
such as FICO, vintage (year of origination), performing vs. non-performing
(i.e., current vs. delinquent), LTV ratio and other risk features. In general,
higher quality loans carry lower asset charges.
Under the PMIERs, approved insurers must maintain available assets that equal or
exceed minimum required assets, which is an amount equal to the greater of (i)
$400 million or (ii) a total risk-based required asset amount. The risk-based
required asset amount is a function of the risk profile of an approved insurer's
RIF, assessed on a loan-by-loan basis and considered against certain risk-based
factors derived from tables set out in the PMIERs, which is then adjusted on an
aggregate basis for reinsurance transactions approved by the GSEs, such as with
respect to our ILN Transactions and QSR Transactions. The aggregate gross
risk-based required asset amount for performing, primary insurance is subject to
a floor of 5.6% of performing primary adjusted RIF, and the risk-based required
asset amount for pool insurance considers both factors in the PMIERs tables and
the net remaining stop loss for each pool insurance policy.
By April 15th of each year, NMIC must certify it met all PMIERs requirements as
of December 31st of the prior year. We certified to the GSEs by April 15, 2021
that NMIC was in full compliance with the PMIERs as of December 31, 2020 . NMIC
also has an ongoing obligation to immediately notify the GSEs in writing upon
discovery of a failure to meet one or more of the PMIERs requirements. We
continuously monitor NMIC's compliance with the PMIERs.
The following table provides a comparison of the PMIERs available assets and
risk-based required asset amount as reported by NMIC as of the dates indicated.
As of
September 30, 2021 September 30, 2020
(In Thousands)
Available assets $ 1,992,964 $ 1,671,990
Risk-based required assets 1,365,656 990,678
Available assets were $2.0 billion at September 30, 2021 , compared to $1.7
billion at September 30, 2020 . The $321 million increase in available assets
between the dates presented was primarily driven by NMIC's positive cash flow
from operations during the intervening period.
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The increase in the risk-based required asset amount between the dates presented
was primarily due to the growth of our gross RIF, partially offset by an
increase in the risk ceded under our third-party reinsurance agreements.
Competition
The MI industry is highly competitive and currently consists of six private
mortgage insurers, including NMIC, as well as government MIs such as the FHA,
USDA or VA . Private MI companies compete based on service, customer
relationships, underwriting and other factors, including price, credit risk
tolerance and IT capabilities. We expect the private MI market to remain
competitive, with pressure for industry participants to maintain or grow their
market share.
The private MI industry overall competes more broadly with government MIs who
significantly increased their share in the MI market following the 2008
Financial Crisis. Although there has been broad policy consensus toward the need
for increasing private capital participation and decreasing government exposure
to credit risk in the U.S. housing finance system, it remains difficult to
predict whether the combined market share of government MIs will recede to
pre-2008 levels. A range of factors influence a lender's and borrower's decision
to choose private over government MI, including among others, premium rates and
other charges, loan eligibility requirements, the cancelability of private
coverage, loan size limits and the relative ease of use of private MI products
compared to government MI alternatives.
LIBOR Transition
On March 5, 2021 , ICE Benchmark Administration Limited ("IBA"), the
administrator for LIBOR, confirmed it would permanently cease the publication of
overnight, one-month, three-month, six-month and twelve-month USD LIBOR settings
in their current form after June 30, 2023 . The U.K. Financial Conduct Authority
("FCA"), the regulator of IBA, announced on the same day that it intends to stop
requiring panel banks to continue to submit to LIBOR and all USD LIBOR settings
in their current form will either cease to be provided by any administrator or
no longer be representative after June 30, 2023 . We have exposure to USD
LIBOR-based financial instruments, such as LIBOR-based securities held in our
investment portfolio, and our 2020 Revolving Credit Facility and certain ILN
Transactions that require LIBOR-based payments. We are in the process of
reviewing our LIBOR-based contracts and transitioning, as necessary and
applicable, to a set of alternative reference rates. We will continue to
monitor, assess and plan for the phase out of LIBOR; however, we cannot
currently estimate the impact such transition will have on our operations or
financial results.
CEO Transition
On September 9, 2021 , we announced that Adam Pollitzer , currently the company's
Executive Vice President and Chief Financial Officer, was appointed as the
company's President and Chief Executive Officer, effective January 1, 2022 . Mr.
Pollitzer will also join the company's Board of Directors upon assuming his new
role. He succeeds Claudia Merkle , who will step down as Chief Executive Officer
and as a member of the Board, effective December 31, 2021 . During the three
months ended September 30, 2021 , the Company recorded $1.3 million of severance,
restricted stock modification and other expenses related to this transition.
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