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. 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 ofMarch 31, 2021 , we had master policies with 1,609 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 ofMarch 31, 2021 , we had$125.4 billion of total insurance-in-force (IIF), including primary IIF of$123.8 billion , and$31.3 billion of gross RIF, including primary RIF of$31.2 billion . 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 ofMarch 31, 2021 , we had 250 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 26 -------------------------------------------------------------------------------- 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 for 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 pandemic. More recently, the development of new vaccines and accelerating pace of the inoculation effort across theU.S. has allowed for the broad resumption of personal and business activity nationwide, and provided hope for a sharp economic rebound in 2021. While there is increased optimism that the acute health risk posed by and 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 has demonstrated significant resiliency amidst the broader economic dislocation caused by the outbreak of COVID-19. Low interest rates have helped to support housing affordability, medical concerns and lifestyle preferences have driven people to move from densely populated urban areas to suburban communities where social distancing is more easily achieved, and shelter-in-place directives have 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 27 -------------------------------------------------------------------------------- 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 has increased significantly as factors related to the COVID-19 crisis have spurred significant incremental demand for homeownership. Refinancing origination volume has also grown dramatically as historically low mortgage rates, though rising in recent months, have 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. 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 250 employees atMarch 31, 2021 , including 112 who typically work at our corporate headquarters inEmeryville, CA and 138 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 our 112 Emeryville-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 are 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 may cause us to offer increased flexibility for employees who prefer a full-time or part-time distributed engagement in the future. If we 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$26.4 billion of NIW during the three months endedMarch 31, 2021 , up 134% compared to the three months endedMarch 31, 2020 . While we currently expect our new business production will remain elevated, the potential onset of a new viral wave and rising case counts, reintroduction of broad-based shelter in place directives, increased unemployment or other potential outcomes related to COVID-19 could drive a moderation or decline in our volume going forward. 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. AtMarch 31, 2021 , the weighted average FICO score of our RIF was 754 and we had a 3% mix of below 680 FICO score risk. Similarly, atMarch 31, 2021 , the weighted average LTV ratio (at origination) of our insured portfolio was 92.4% and we had a 10% mix of 97% LTV risk. 28 -------------------------------------------------------------------------------- We set our premium rates based on a broad range of individual and market variables, including property type, type of loan product, borrower credit characteristics, and lender profile. Given the significant economic dislocation caused by the COVID-19 outbreak, and the uncertain duration and ultimate global impact of this crisis, we took action to increase the premium rates we charge on all new business production, in accordance with our filed rates and applicable rating rules, following the onset of the pandemic. Delinquency Trends and Claims Expense AtMarch 31, 2021 , we had 11,090 defaulted loans in our primary insured portfolio, which represented a 2.5% default rate against our 436,652 total policies in-force, and identified 14,805 loans that were enrolled in a forbearance program, including 9,988 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. Our total population of defaulted loans peaked inAugust 2020 and has since declined every month with consistency. As ofApril 30, 2021 , our default population was 10,060, representing a 2.24% default rate. The table below highlights default and forbearance activity in our primary portfolio as of the dates indicated Default and Forbearance Activity as of 3/31/2020 6/30/2020 9/30/2020 12/31/2020 3/31/21 Number of loans in default 1,449 10,816 13,765 12,209 11,090 Default rate (1) 0.38% 2.90% 3.60% 3.06% 2.54% Number of loans in forbearance 3,122 28,555 24,809 19,464 14,805 Forbearance rate (2) 0.83% 7.66% 6.50% 4.87% 3.39% (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 stress of the COVID crisis recedes, a future viral wave 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 have 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. AtMarch 31, 2021 , we 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. 29 -------------------------------------------------------------------------------- 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 currently required will not limit the amount of accrued interest (subject to the three-year limit) or advances that may be included in the claim amount. In February, the GSEs extended their moratorium on the foreclosure of enterprise-backed single-family residential mortgages throughJune 30, 2021 . If the duration of the current foreclosure moratorium mandated by the GSEs is further extended, loans in our default inventory, including those with defaults unrelated to the COVID-19 crisis that had not yet gone through foreclosure, may remain in a pre-foreclosure default status for a prolonged period of time, which would delay our receipt of certain claims for loans that do not cure and could increase the severity of claims we may ultimately be required to pay after the moratorium is lifted. Regulatory Capital Position As an approved mortgage insurer andWisconsin -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 million . AtMarch 31, 2021 , we reported$1,810 million available assets against$1,261 million risk-based required assets. Our "excess" funding position was$549 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 theFederal Emergency Management Agency (FEMA) to be a Major Disaster zone. InJune 2020 , the GSEs issued guidance (subsequently amended and restated in each of September andDecember 2020 ) 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 delinquency 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. EffectiveJune 25, 2020 , a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions 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 the overcollateralization within and potential PMIERs capacity provided by each ILN Transaction will grow as assets are preserved in the applicable reinsurance trust account. The following table provides detail on the level of overcollateralization of each of our ILN Transactions atMarch 31, 2021 : 30 --------------------------------------------------------------------------------
2017 ILN 2018 ILN 2019 ILN 2020-1 ILN 2020-2 ILN
($ values in thousands) Transaction Transaction Transaction Transaction Transaction
Ceded RIF $ 1,635,102 $ 1,865,606 $ 2,252,220 $ 4,235,240 $ 5,335,934
First Layer Retained Loss 121,376 123,051 122,838 169,514 121,177
Reinsurance Coverage 40,226 158,489 231,877 174,314 218,741
Eligible Coverage $ 161,602 $ 281,540 $ 354,715 $ 343,828 $ 339,918
Subordinated Coverage (1) 9.88% 15.09% 15.75% 8.00% 6.25%
PMIERs Charge on Ceded RIF 6.23% 7.92% 8.10% 6.40% 5.44%
Overcollateralization (2) (4) $ 40,226 $ 133,753 Delinquency Trigger (3) 4.0% 4.0% 4.0% 6.0% 4.7% (1) For the 2020-1 ILN Transaction, absent a delinquency trigger, the subordinated coverage is capped at 8%. For the 2020-2 ILN Transaction, absent a delinquency, the subordinated coverage is capped at 6.25%. (2) Overcollateralization of the 2017 ILN Transaction is equal to its current reinsurance coverage as the PMIERs required asset amount on RIF ceded under the transaction is currently below the 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 and 2020-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average. (4) May not be replicated based on the rounded figures presented in the table. AtMarch 31, 2021 , we had an aggregate$469 million of overcollateralization available across our ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. Assuming the Lock-Out Events remain in effect for each of the 2017, 2018 and 2019 ILN Transactions and our underlying RIF continues to run-off at the same rate as it did during the three months endedMarch 31, 2021 , we estimate that our total overcollateralization would increase by up to approximately$33.7 million per quarter. 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$549 million excess available asset position atMarch 31, 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, 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 ofMarch 31, 2021 , we had$1.9 billion of consolidated cash and investments, including$78 million of cash and investments at NMIH. OnJune 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. OnJune 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 31 -------------------------------------------------------------------------------- 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 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 theWisconsin OCI, we do not expect such action to be taken at this time. The Wisconsin OCI has refreshed its approval of the debt service agreement providing for the additional reimbursement by NMIC of interest expense due on our newly issued Notes and 2020 Revolving Credit Facility. 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. AtMarch 31, 2021 , NMIC had$1.8 billion of cash and investments, including$86 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 endedMarch 31, 2021 , NMIC generated$283 million of cash flow from operations and received an additional$327 million of cash flow on the maturity, sale and redemption of securities held in its investment portfolio. NMIC is not a party to any contracts (derivative or otherwise) that require it to post an increasing amount of collateral to any counterparty and NMIC's principal liquidity demands (other than claims payments) generally develop along a scheduled path (i.e., are of a contractually predetermined amount and due at a contractually predetermined date). NMIC's only use of cash that develops along an unscheduled path is claims payments. Given the breadth and duration of forbearance programs available to borrowers, separate foreclosure moratoriums that have been enacted at a local, state and federal level, and the general duration of the default to foreclosure to claim cycle, we do not expect NMIC to use a meaningful amount of cash to settle claims in the near-term. 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. InJune 2020 , the GSEs issued guidance to the PMIERs (subsequently amended and restated in each of September andDecember 2020 ) 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. ThroughMarch 31, 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 AtMarch 31, 2021 , we had$1.9 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. AtMarch 31, 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+." AtMarch 31, 2021 , our portfolio was in a$16 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 1.5%. We did not record any allowance for credit losses in the portfolio during the three months endedMarch 31, 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 endedMarch 31, 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, 32 -------------------------------------------------------------------------------- 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 borrowers, and in accordance with our filed rates and applicable rating rules. OnJune 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 inJune 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 ofMarch 31, 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 33 -------------------------------------------------------------------------------- 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. Quota share reinsurance NMIC is a party to four outstanding quota share reinsurance treaties - the 2016 QSR Transaction, effectiveSeptember 1, 2016 , the 2018 QSR Transaction, effectiveJanuary 1, 2018 , the 2020 QSR Transaction, effectiveApril 1, 2020 and the 2021 QSR Transaction, effectiveJanuary 1, 2021 . 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 throughDecember 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 fromApril 1, 2020 throughDecember 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, 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. 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. EffectiveApril 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 34 -------------------------------------------------------------------------------- of pool risk under the 2016 QSR Transaction. Excess-of-loss reinsurance NMIC has secured aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies written during discrete periods through a series of mortgage insurance-linked note offerings by the Oaktown Re Vehicles. 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 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). EffectiveJune 25, 2020 , a Lock-Out Event was deemed to have occurred for each of the 2017, 2018 and 2019 ILN Transactions 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 ofMarch 31, 2021 . Initial Current Initial First Current First Reinsurance Reinsurance Layer Retained Layer Retained ($ values in thousands) Inception Date Covered Production Coverage Coverage Loss Loss (1) 2017 ILN Transaction May 2, 2017 1/1/2013 - 12/31/2016$ 211,320 $ 40,226 $ 126,793 $ 121,376 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 123,051 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,838 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 174,314 169,514 169,514 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 218,741 121,777 121,777 (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) Less than 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andMarch 31, 2020 . See Item 1, "Financial Statements - Notes to Condensed Consolidated Financial Statements - Note 5, Reinsurance" for further discussion of these third-party reinsurance arrangements. InApril 27, 2021 , NMIC secured$367.2 million of aggregate excess-of-loss reinsurance coverage at inception for an existing portfolio of policies primarily written fromOctober 1, 2020 toMarch 31, 2021 , through a mortgage insurance-linked notes offering by Oaktown Re VI. The reinsurance coverage amount under the terms of the 2021-1 ILN Transaction decreases from$367.2 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$163.7 million of aggregate losses and Oaktown Re VI then provides second layer coverage up to the outstanding reinsurance coverage amount. NMIC then retains losses in excess of the outstanding reinsurance coverage amount. 35 -------------------------------------------------------------------------------- Portfolio Data The following table presents primary and pool NIW and IIF as of the dates and for the periods indicated. Unless otherwise noted, the tables below do not include the effects of our third-party reinsurance arrangements described above. Primary and pool IIF and NIW As of and for the three months ended March 31, 2021 March 31, 2020 IIF NIW IIF NIW (In Millions) Monthly$ 106,920 $ 23,764 $ 81,347 $ 10,461 Single 16,857 2,633 17,147 836 Primary 123,777 26,397 98,494 11,297 Pool 1,642 - 2,487 - Total$ 125,419 $ 26,397 $ 100,981 $ 11,297 For the three months endedMarch 31, 2021 , NIW increased 134%, compared to the three months endedMarch 31, 2020 , due to growth in our monthly and single premium policy production tied to growth in the size of the total mortgage insurance market, as well as the increased penetration of existing customer accounts and new customer account activations. For the three months endedMarch 31, 2021 , monthly premium polices accounted for 90% of our NIW, compared to 93% for the three months endedMarch 31, 2020 . As ofMarch 31, 2021 , monthly premium policies accounted for 86% of our primary IIF, compared to 83% atMarch 31, 2020 . Total IIF increased 24% atMarch 31, 2021 compared toMarch 31, 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 52% atMarch 31, 2021 from 72% atMarch 31, 2020 , reflecting the impact of increased refinancing activity tied to record low interest 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 March 31, 2021 March 31, 2020 (In Thousands) Net premiums written$ 115,815 $ 91,371 Net premiums earned 105,879 98,717 For the three months endedMarch 31, 2021 , net premiums written increased 27%, and net premiums earned increased 7%, compared to the three months endedMarch 31, 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. The accelerated rate of growth in net premiums written over growth in net premiums earned is due to increase in single policy production and increase in earnings on cancellations during the three months endedMarch 31, 2021 . Pool premiums written and earned for the three months endedMarch 31, 2021 and 2020, were$0.5 million and$0.7 million , respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission. 36 -------------------------------------------------------------------------------- Portfolio Statistics Unless otherwise noted, the portfolio statistics tables presented below do not include the effects of our third-party reinsurance arrangements described above. The table below highlights trends in our primary portfolio as of the dates and for the periods indicated. Primary portfolio trends
As of and for the three months ended
December 31, September 30,
March 31, 2021 2020 2020 June 30, 2020 March 31, 2020
($ Values In Millions, except as noted below)
New insurance written $ 26,397 $ 19,782 $ 18,499 $ 13,124 $ 11,297
Percentage of monthly premium 90 % 90 % 89 % 91 % 93 %
Percentage of single premium 10 % 10 % 11 % 9 % 7 %
New risk written $ 6,531 $ 4,868 $ 4,577 $ 3,260 $ 2,897
Insurance-in-force (1) 123,777 111,252 104,494 98,905 98,494
Percentage of monthly premium 86 % 86 % 85 % 84 % 83 %
Percentage of single premium 14 % 14 % 15 % 16 % 17 %
Risk-in-force (1) $ 31,206 $ 28,164 $ 26,568 $ 25,238 $ 25,192
Policies in force (count) (1) 436,652 399,429 381,899 372,934 376,852
Average loan size ($ value in thousands)
(1) $ 283 $ 279 $ 274 $ 265 $ 261
Coverage percentage (2) 25.2 % 25.3 % 25.4 % 25.5 % 25.6 %
Loans in default (count) (1) 11,090 12,209 13,765 10,816 1,449
Default rate (1) 2.54 % 3.06 % 3.60 % 2.90 % 0.38 %
Risk-in-force on defaulted loans (1) $ 785
$ 1,008 $ 799 $ 84 Net premium yield (3) 0.36 % 0.37 % 0.39 % 0.40 % 0.41 % Earnings from cancellations $ 9.9$ 11.7 $ 12.6 $ 15.5 $ 8.6 Annual persistency (4) 51.9 % 55.9 % 60.0 % 64.1 % 71.7 % Quarterly run-off (5) 12.5 % 12.5 % 13.1 % 12.9 % 8.0 % (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 March 31, 2021 March 31, 2020 (In Millions) IIF, beginning of period$ 111,252 $ 94,754 NIW 26,397 11,297 Cancellations, principal repayments and other reductions (13,872) (7,557) IIF, end of period$ 123,777 $ 98,494 37
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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 March 31, 2021 As of March 31, 2020
IIF RIF IIF RIF
(In Millions)
March 31, 2021 $ 26,296 $ 6,508 $ - $ -
2020 53,650 13,397 11,236 2,882
2019 20,402 5,342 39,485 10,259
2018 8,074 2,057 17,545 4,464
2017 6,700 1,678 13,656 3,398
2016 and before 8,655 2,224 16,572 4,189
Total $ 123,777 $ 31,206 $ 98,494 $ 25,192
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.
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
March 31, 2021 March 31, 2020
(In Millions)
>= 760 $ 12,914 $ 6,290
740-759 5,312 1,615
720-739 3,963 1,579
700-719 2,358 1,038
680-699 1,360 565
<=679 490 210
Total $ 26,397 $ 11,297
Weighted average FICO 755 757
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Primary NIW by LTV For the three months ended
March 31, 2021 March 31, 2020
(In Millions)
95.01% and above $ 2,451 $ 721
90.01% to 95.00% 11,051 5,009
85.01% to 90.00% 7,848 4,082
85.00% and below 5,047 1,485
Total $ 26,397 $ 11,297
Weighted average LTV 91.0 % 91.3 %
Primary NIW by purchase/refinance mix For the three months ended
March 31, 2021 March 31, 2020
(In Millions)
Purchase $ 17,909 $ 7,991
Refinance 8,488 3,306
Total $ 26,397 $ 11,297
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
March 31, 2021 March 31, 2020
($ Values In Millions)
>= 760 $ 63,919 52 % $ 47,340 48 %
740-759 20,537 16 16,060 16
720-739 17,167 14 14,002 14
700-719 11,536 9 10,518 11
680-699 7,329 6 6,879 7
<=679 3,289 3 3,695 4
Total $ 123,777 100 % $ 98,494 100 %
Primary RIF by FICO As of
March 31, 2021 March 31, 2020
($ Values In Millions)
>= 760 $ 15,920 51 % $ 12,076 48 %
740-759 5,214 17 4,121 16
720-739 4,378 14 3,626 14
700-719 2,981 9 2,696 11
680-699 1,896 6 1,760 7
<=679 817 3 913 4
Total $ 31,206 100 % $ 25,192 100 %
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Primary IIF by LTV As of
March 31, 2021 March 31, 2020
($ Values In Millions)
95.01% and above $ 10,616 9 % $ 8,838 9 %
90.01% to 95.00% 54,832 44 46,318 47
85.01% to 90.00% 40,057 32 31,729 32
85.00% and below 18,272 15 11,609 12
Total $ 123,777 100 % $ 98,494 100 %
Primary RIF by LTV As of
March 31, 2021 March 31, 2020
($ Values In Millions)
95.01% and above $ 3,106 10 % $ 2,478 10 %
90.01% to 95.00% 16,139 52 13,587 54
85.01% to 90.00% 9,818 31 7,767 31
85.00% and below 2,143 7 1,360 5
Total $ 31,206 100 % $ 25,192 100 %
Primary RIF by Loan Type As of
March 31, 2021 March 31, 2020
Fixed 99 % 98 %
Adjustable rate mortgages
Less than five years - -
Five years and longer 1 2
Total 100 % 100 %
The table below presents selected primary portfolio statistics, by book year, as
of March 31, 2021 .
As of March 31, 2021
Original Remaining % Remaining of Incurred Loss
Insurance Insurance in Original Number of Policies in Number of Loans in Ratio (Inception Cumulative Default Current Default
Book Year Written Force Insurance Policies Ever in Force Force Default # of Claims Paid to Date) (1) Rate (2) Rate (3)
($ Values in Millions)
2013 $ 162 $ 10 6 % 655 66 2 1 0.4 % 0.5 % 3.0 %
2014 3,451 414 12 % 14,786 2,452 114 48 4.2 % 1.1 % 4.6 %
2015 12,422 2,529 20 % 52,548 13,334 541 113 3.2 % 1.2 % 4.1 %
2016 21,187 5,702 27 % 83,626 27,332 1,256 122 2.8 % 1.6 % 4.6 %
2017 21,582 6,700 31 % 85,897 32,499 1,972 84 4.4 % 2.4 % 6.1 %
2018 27,295 8,074 30 % 104,043 38,090 2,679 64 8.5 % 2.6 % 7.0 %
2019 45,141 20,402 45 % 148,423 77,278 3,276 9 14.1 % 2.2 % 4.2 %
2020 62,702 53,650 86 % 186,174 163,626 1,247 - 8.3 % 0.7 % 0.8 %
2021 26,397 26,296 100 % 82,232 81,975 3 - - % - % - %
Total $ 220,339 $ 123,777 758,384 436,652 11,090 441
(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.
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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 March 31, 2021 is
not necessarily representative of the geographic distribution we expect in the
future.
Top 10 primary RIF by state As of
March 31, 2021 March 31, 2020
California 10.8 % 11.5 %
Texas 9.5 8.2
Florida 7.9 5.9
Virginia 5.0 5.3
Colorado 4.1 3.6
Maryland 3.8 3.4
Illinois 3.7 3.8
Washington 3.5 3.3
Georgia 3.3 2.7
Pennsylvania 3.3 3.7
Total 54.9 % 51.4 %
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
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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. At March 31, 2021 , we 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.
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--------------------------------------------------------------------------------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
March 31, 2021 March 31, 2020
(In Thousands)
Beginning balance $ 90,567 $ 23,752
Less reinsurance recoverables (1) (17,608) (4,939)
Beginning balance, net of reinsurance recoverables 72,959 18,813
Add claims incurred:
Claims and claim expenses incurred:
Current year (2) 10,557 7,558
Prior years (3) (5,595) (1,861)
Total claims and claim expenses incurred 4,962 5,697
Less claims paid:
Claims and claim expenses paid:
Current year (2) 12 -
Prior years (3) 492 1,224
Total claims and claim expenses paid 504 1,224
Reserve at end of period, net of reinsurance recoverables 77,417 23,286
Add reinsurance recoverables (1) 18,686 6,193
Ending balance $ 96,103 $ 29,479
(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 $5.3 million attributed to net case reserves and $5.3 million
attributed to net IBNR reserves for the three months ended March 31, 2021 and
$6.0 million attributed to net case reserves and $1.6 million attributed to net
IBNR reserves for the three months ended March 31, 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 $0.6 million attributed to net case
reserves and $5.0 million attributed to net IBNR reserves for the three months
ended March 31, 2021 and $0.6 million attributed to net case reserves and $1.3
million attributed to net IBNR reserves for the three months ended March 31,
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 $83.0 million related to prior year defaults
remained as of March 31, 2021 .
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--------------------------------------------------------------------------------The following table provides a reconciliation of the beginning and ending count of loans in default.
For the three months ended
March 31, 2021 March 31, 2020
Beginning default inventory 12,209 1,448
Plus: new defaults 1,767 512
Less: cures (2,868) (475)
Less: claims paid (16) (34)
Less: claims denied (2) (2)
Ending default inventory 11,090 1,449
The increase in the ending default inventory at March 31, 2021 compared to
March 31, 2020 , is primarily attributable to the COVID-19 outbreak as borrowers
have faced increasing challenges and chosen to access the forbearance program
for federally backed loans codified under the CARES Act and other similar
assistance programs made available by private lenders. At March 31, 2021 , 9,988
of our 11,090 ending default inventory were in a COVID-19 related forbearance
program.
The following table provides details of our claims paid, before giving effect to
claims ceded under the QSR Transactions and ILN Transactions, for the periods
indicated.
For the three months ended
March 31, 2021 March 31, 2020
($ In Thousands)
Number of claims paid (1) 16 34
Total amount paid for claims $ 606 $
1,503
Average amount paid per claim $ 38 $ 44 Severity (2) 61 % 83 %
(1) Count includes one claim settled without payment in each of the three
months ended
The number of claims paid for the three months endedMarch 31, 2021 decreased compared to the three months endedMarch 31, 2020 , despite the growth and seasoning of our insured portfolio, and significant increase in our default population, primarily as a result of 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 severity for the three months endedMarch 31, 2021 was 61%, compared to 83% for the three months endedMarch 31, 2020 . Claims severity for the three months endedMarch 31, 2021 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 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 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 March 31, 2021 As of March 31, 2020 (In Thousands) Case (1) $ 7.9 $ 18.6 IBNR (1)(2) 0.8 1.7 Total $ 8.7 $ 20.3
(1) Defined as the gross reserve per insured loan in default. (2) Amount includes claims adjustment expenses.
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The average reserve per default at March 31, 2021 decreased from March 31, 2020 ,
primarily due to new COVID-19 related defaults. At March 31, 2021 , we
established lower reserves 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. While
we established lower reserves per defaulted loan at March 31, 2021 , our total
reserve position increased substantially due to the increase in the size of our
default population.
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
March 31, 2021 March 31, 2020
(In Thousands)
Available assets $ 1,809,589 $ 1,069,695
Risk-based required assets 1,261,015 912,321
Available assets were $1.8 billion at March 31, 2021 , compared to $1.1 billion
at March 31, 2020 . In June 2020 , NMIH completed the sale of 15.9 million shares
of common stock raising net proceeds of approximately $220 million and the sale
of the $400 million aggregate principal amount of senior secured notes. NMIH
contributed approximately $445 million of capital to NMIC following completion
of the Notes and equity offerings. The $740 million increase in NMIC's available
assets between the dates presented was driven by the NMIH capital contribution
and NMIC's positive cash flow from operations during the intervening period.
The increase in the risk-based required asset amount between the dates presented
was primarily due to the growth of our gross RIF, and increase in our default
inventory related to the onset of the COVID-19 pandemic, partially offset by the
increased cession of risk under our third-party reinsurance agreements. See "-
COVID-19 Developments," above.
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
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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.
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