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NMI HOLDINGS, INC. – 10-K – Management's Discussion and Analysis of Financial Condition and Results of Operations
The following analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and notes thereto included below in Item 8 of this report and the Risk Factors included above in Item 1A of this report. In addition, investors should review the "Cautionary Note Regarding Forward Looking Statements" above.
Overview
We provide private MI through our primary insurance subsidiary, NMIC. NMIC is wholly-owned, domiciled inWisconsin and principally regulated by theWisconsin OCI. NMIC is approved as an MI provider by the GSEs and is licensed to write coverage in all 50 states and D.C. Our subsidiary, NMIS, provides outsourced loan review services to mortgage loan originators and our subsidiary, Re One, historically provided reinsurance coverage to NMIC in accordance with certain statutory risk retention requirements. Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted. Re One remains a wholly-owned, licensed insurance subsidiary; however, it does not currently have active insurance exposures. MI protects lenders and investors from default-related losses on a portion of the unpaid principal balance of a covered mortgage. MI plays a critical role in 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 ofDecember 31, 2021 , we had issued master policies with 1,732 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 ofDecember 31, 2021 , we had$152.3 billion of primary insurance-in-force (IIF) and$38.7 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 high-quality customer service experience, establish a differentiated risk management approach that emphasizes the individual underwriting review or validation of the vast majority of the loans we insure, utilizing our proprietary Rate GPS® pricing platform to dynamically evaluate risk and price our policies, and foster a culture of collaboration and excellence that helps us attract and retain experienced industry leaders. Our strategy is to continue to build on our position in the private MI market, expand our customer base and grow our insured portfolio of high-quality residential loans by focusing on long-term customer relationships, disciplined and proactive risk selection and pricing, fair and transparent claim payment practices, responsive customer service, and financial strength and profitability. Our common stock trades on the NASDAQ under the symbol "NMIH." Our headquarters is located inEmeryville, California . As ofDecember 31, 2021 , we had 247 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 , theWorld Health Organization (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. 57 -------------------------------------------------------------------------------- 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 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 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 the
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, and the broad adoption of remote work practices provides individuals with greater flexibility to move between geographic territories - 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 pandemic 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 enacted onMarch 11, 2021 , 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 pandemic 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 pandemic, and we believe this will further contribute to housing market stability in the current period. 58 -------------------------------------------------------------------------------- Purchase mortgage origination volume increased significantly as factors related to the COVID-19 pandemic 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-19 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 "Risk Factors - The COVID-19 pandemic 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 247 employees atDecember 31, 2021 , including 83who typically work at our corporate headquarters inEmeryville, CA and 164who typically work from home in locations across the country. In response to the COVID-19 pandemic, 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 employeeswho prefer a full-time or part-time distributed engagement. We intend to continue offering such flexibility following the pandemic and expect that a significant number of our headquarters-based employees will elect to continue to engage on a full-time or part-time distributed basis. InJanuary 2022 , we modified the lease for our corporate headquarters to reflect our new real estate needs. Under terms of the modified lease, we reduced the square footage of our leased space and secured a reduction in pricing and incremental leasehold improvement concessions. The modified lease term extends throughMarch 2030 .
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$85.6 billion of NIW during the year endedDecember 31, 2021 , up 36% compared to the year endedDecember 31, 2020 and 90% compared to the year endedDecember 31, 2019 . While we currently expect our new business production will remain elevated, the 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. AtDecember 31, 2021 , the weighted average FICO score of our RIF was 753 and we had a 3% mix of below 680 FICO score. Similarly, atDecember 31, 2021 , the weighted average LTV ratio (at origination) of our insured portfolio was 92.5% and we had a 11% mix of 97% LTV risk. 59
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Delinquency Trends and Claims Expense
At
portfolio, which represented a 1.22% default rate against our 512,316 total
policies in-force, and identified 7,019 loans that were enrolled in a
forbearance program, including 4,751 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 in
every month since with consistency. As of
population was 5,912, representing a 1.14% 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
12/31/2020 3/31/2021 6/30/2021 9/30/2021 12/31/2021
Number of loans in default 12,209 11,090 8,764 7,670 6,227
Default rate (1) 3.06% 2.54% 1.86% 1.56% 1.22%
Number of loans in forbearance 19,464 14,805 11,889 9,342 7,019
Forbearance rate (2) 4.87% 3.39% 2.52% 1.90% 1.37%
(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 pandemic 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
pandemic, 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 December 31, 2021 , we generally established lower
reserves for defaults that we consider to be connected to the COVID-19 pandemic,
given our expectation that forbearance, repayment and modification, and other
assistance programs will aid affected borrowers and drive higher cure rates on
such defaults than we would otherwise expect to experience on similarly situated
loans that did not benefit from broad-based assistance programs.
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 pandemic that
had not gone through foreclosure at the onset of the pandemic, have remained in
pre-foreclosure
60
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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 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 . AtDecember 31, 2021 , we reported$2,041 million available assets against$1,186 million risk-based required assets. Our "excess" funding position was$855 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 eligible for Individual Assistance. InJune 2020 , the GSEs issued guidance (subsequently amended and restated in each ofSeptember 2020 ,December 2020 andJune 2021 ) on the risk-based treatment of loans affected by the COVID-19 pandemic 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, effectiveJune 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 and 2021-2 ILN Transactions (related to the initial build of their target credit enhancement levels), 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. EffectiveNovember 30, 2021 , the Lock-Out Event for the 2017 ILN Transaction was deemed to have cleared and amortization of the associated reinsurance coverage, and distribution of collateral assets and amortization of the associated insurance-linked notes resumed. 61 -------------------------------------------------------------------------------- AtDecember 31, 2021 , we had an aggregate$560 million of overcollateralization available across our ILN Transactions to absorb an increase in the PMIERs risk-based required asset amount on ceded RIF. The following table provides detail on the level of overcollateralization of each of our ILN Transactions atDecember 31, 2021 : 2017 ILN 2018 ILN 2019 ILN 2020-1 ILN 2020-2 ILN 2021-1 ILN 2021-2 ILN ($ values in thousands) Transaction Transaction Transaction Transaction Transaction Transaction Transaction Ceded RIF$ 1,083,899 $ 1,165,012 $ 1,315,183 $ 2,830,192 $ 4,337,381 $ 8,025,754 $ 7,692,023 First Layer Retained Loss 121,163 122,569 122,548 169,488 121,177 163,708 146,229 Reinsurance Coverage 27,425 158,489 231,877 49,879 155,129 367,238 363,596 Eligible Coverage$ 148,588 $ 281,058 $ 354,425 $ 219,367 $ 276,306 $ 530,946 $ 509,825 Subordinated Coverage (1) 13.71% 24.12% 26.95% 7.75% 6.25% 6.62% 6.63% PMIERs Charge on Ceded RIF 6.13% 8.01% 7.82% 6.18% 5.57% 6.02% 6.50% Overcollateralization (2) (3)$ 27,425 $ 158,489 $ 231,877 $ 49,879 $ 34,581 $ 47,709 $ 10,133 Delinquency Trigger (4) 4.0% 4.0% 4.0% 6.0% 4.7% 5.0% 5.0% (1) Absent a delinquency trigger, the subordinated coverage is capped at 8.00%, 6.25%, 6.75% and 7.45% for the 2020-1, 2020-2, 2021-1 and 2021-2 ILN Transactions, respectively. (2) Overcollateralization for each of the 2017, 2018, 2019 and 2020-1 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) May not be replicated based on the rounded figures presented in the table. (4) 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, 2021-1 and 2021-2 ILN Transactions are equal to seventy-five percent of the subordinated coverage level and assessed on the basis of a three-month rolling average. 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$855 million excess available asset position atDecember 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 pandemic, 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 ofDecember 31, 2021 , we had$2.2 billion of consolidated cash and investments, including$106 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. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 15, Common Stock." OnJune 19, 2020 , NMIH also completed the sale of$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. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt." NMIH contributed approximately$445 million of capital to NMIC following completion of its respective Notes and common stock offerings. 62 -------------------------------------------------------------------------------- OnNovember 29, 2021 , we amended our$110 million senior secured revolving credit facility (the 2020 Revolving Credit Facility and as amended, the 2021 Revolving Credit Facility), increasing the revolving capacity to$250 million and extending the maturity fromFebruary 22, 2023 toNovember 29, 2025 , or if any existing senior secured notes remain outstanding onFebruary 28, 2025 , then on such date. The 2021 Revolving Credit Facility is undrawn and fully available to NMIH. Amounts drawn under the 2021 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. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt." NMIH also has access to$34.9 million of ordinary course dividend capacity available from NMIC without the prior approval of the Wisconsin OCI. OnFebruary 10, 2022 , the Board of Directors has approved a$125 million share repurchase program throughDecember 31, 2023 , that enables the company to repurchase its common stock. The authorization provides NMI the flexibility to repurchase shares from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. 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 theWisconsin 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 2021 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. AtDecember 31, 2021 , NMIC had$2.1 billion of cash and investments, including$55 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 endedDecember 31, 2021 , NMIC generated$307 million of cash flow from operations and received an additional$117 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 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-19 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 ofSeptember 2020 ,December 2020 andJune 2021 ) that, among other items, required us to notify them of our intent to cancel coverage on policies for which servicers failed to make timely premium payments so that the GSEs could pay the premiums directly to us and preserve the mortgage insurance coverage. ThroughDecember 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
AtDecember 31, 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. AtDecember 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+." AtDecember 31, 2021 , our portfolio was in a$7.2 million aggregate unrealized gain position; it was highly liquid 63 --------------------------------------------------------------------------------
and highly diversified with no Level 3 asset positions and no single issuer
concentration greater than 1.3%. We did not record any allowance for credit
losses in the portfolio during the year ended
recover the amortized cost basis of all securities held.
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.
Other Conditions and Trends Impacting Our Business
We have important relationships with customers across all categories and allocation profiles, including National Accounts and Regional Accounts, and centralized and decentralized lenders. Our sales and marketing efforts are broadly focused on expanding our presence with existing customers and activating new customer relationships. We consider an activation to be the point at which we have signed aMaster Policy , established IT connectivity and generated a first application or first dollar of NIW from a customer. During the year endedDecember 31, 2021 , we activated 122 lenders, compared to 101 and 94 for the years endedDecember 31, 2020 andDecember 31, 2019 , respectively. We also continued to expand our business with existing customers, deepening our existing relationships and capturing what we believe to be an increasing portion of their annual MI volume. AtDecember 31, 2021 , we had issued 1,732 Master Policies and established 1,316 active customer relationships, compared to 1,570 and 1,195, respectively, as ofDecember 31, 2020 and 1,476 and 1,095, respectively, as ofDecember 31, 2019 .
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 customerswho 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: 64 --------------------------------------------------------------------------------
•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 ofDecember 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 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 five active quota share reinsurance treaties - the 2016 QSR Transaction, effectiveSeptember 1, 2016 , the 2018 QSR Transaction, effectiveJanuary 1, 2018 and the 2020 QSR Transaction, effectiveApril 1, 2020 , the 2021 QSR Transaction, effectiveJanuary 1, 2021 and the 2022 QSR Transaction, effectiveOctober 1, 2021 - which we refer to collectively as the QSR Transactions. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies 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 byStandard & Poor's Rating Service (S&P),A.M. Best Company, Inc. (A.M. Best ) or both. Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods 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. 65 -------------------------------------------------------------------------------- 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 (subject to an aggregate risk written limit which was exhausted onOctober 30, 2021 ), in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 57.5% that varies directly and inversely with ceded claims. Under the terms of the 2022 QSR Transaction, NMIC cedes premiums earned related to 20% of the risk on eligible policies written betweenOctober 30, 2021 andDecember 31, 2022 , in exchange for reimbursement of ceded claims and claims expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. In connection with the 2022 QSR Transaction, NMIC entered into an additional back-to-back quota share agreement that is scheduled to incept onJanuary 1, 2023 (the 2023 QSR Transaction). Under the terms of the 2023 QSR Transactions, NMIC will cede premiums earned related to 20% of the risk on eligible policies written in 2023, in exchange for reimbursement of ceded claims and 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. 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 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 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, effectiveJune 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 and 2021-2 ILN Transactions (related to the initial build of their target credit enhancement levels), 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. Effective 66 --------------------------------------------------------------------------------
have cleared and amortization of the associated reinsurance coverage, and
distribution of collateral assets and amortization of the associated
insurance-linked notes resumed.
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
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 $27,425 $126,793 $121,163 2018 ILN Transaction July 25, 2018 1/1/2017 - 5/31/2018 264,545 158,489 125,312 122,569 2019 ILN Transaction July 30, 2019 6/1/2018 - 6/30/2019 326,905 231,877 123,424 122,548 2020-1 ILN Transaction July 30, 2020 7/1/2019 - 3/31/2020 322,076 49,879 169,514 169,488 2020-2 ILN Transaction October 29, 2020 4/1/2020 - 9/30/2020 (2) 242,351 155,129 121,777 121,177 2021-1 ILN Transaction (5) April 27, 2021 10/1/2020 - 3/31/2021 (3) 367,238 367,238 163,708 163,708 2021-2 ILN Transaction (5) October 26, 2021 4/1/2021 - 9/30/2021 (4) 363,596 363,596 146,229 146,229 (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) Approximately 2% of the production covered by the 2021-2 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andMarch 31, 2021 . (5) As ofDecember 31, 2021 , the current reinsurance coverage amount on the 2021-1 ILN and 2021-2 ILN Transactions is equal to the initial reinsurance coverage amount, as the reinsurance coverage provided by the associated Oaktown Re vehicles will not decrease until a target credit enhancement level is met.
See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated
Financial Statements - Note 6, Reinsurance" for further discussion of these
third-party reinsurance arrangements.
Portfolio Data
The following table presents primary and pool NIW and IIF as of the dates and
for the periods indicated. Unless otherwise noted, the tables below do not
include the effects of our third-party reinsurance arrangements described above.
Primary and pool IIF and NIW As of and for the years ended
December 31, 2021 December 31, 2020 December 31, 2019
IIF NIW IIF NIW IIF NIW
(In Millions)
Monthly $ 133,104 $ 77,019 $ 95,336 $ 56,651 $ 77,097 $ 41,357
Single 19,239 8,555 15,916 6,051 17,657 3,784
Primary 152,343 85,574 111,252 62,702 94,754 45,141
Pool 1,229 - 1,855 - 2,570 -
Total $ 153,572 $ 85,574 $ 113,107 $ 62,702 $ 97,324 $ 45,141
For the year ended December 31, 2021 , primary NIW increased 36% compared to the
year ended December 31, 2020 , driven 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 year ended December 31, 2020 ,
primary NIW increased 39% compared to the year ended December 31, 2019 , driven
by growth in our monthly and single premium policy production tied to an
increase in the size of the total mortgage insurance market, as well as the
growth of our customer franchise and market presence.
Total IIF increased 36% at December 31, 2021 compared to December 31, 2020 ,
which in turn grew 16% compared to December 31, 2019 , primarily due to the NIW
generated between such measurement dates, partially offset by the run-off of
in-force policies.
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Our persistency rate improved to 64% at December 31, 2021 from 56% at
December 31, 2020 , as the pace of refinancing activity slowed and an increasing
amount of business written on loans with historically low mortgage note rates
since the beginning of the pandemic began to factor in the persistency
calculation.
Our persistency rate decreased to 56% at
during the year-ended
The following table presents net premiums written and earned for the periods
indicated.
Primary and pool premiums written and earned For the year ended
December 31, December 31, December 31,
2021 2020 2019
(In Thousands)
Net premiums written $ 468,511 $ 388,644 $ 332,652
Net premiums earned 444,294 397,172 345,015
For the year ended December 31, 2021 , net premiums written and earned increased
21% and 12%, respectively, compared to the year ended December 31, 2020 . For the
year ended December 2020 , net premiums written and earned increased 17% and 15%,
respectively, compared to the year ended December 31, 2019 . The successive
year-on-year growth in net premiums written and earned was primarily driven by
the growth of our IIF and increased monthly policy production, partially offset
by increased cessions under the QSR and ILN Transactions. Net premiums earned
for the year ended December 31, 2020 also benefited from an increase in single
premium policy cancellations tied to the increased pace of refinancing activity
and policy turnover triggered by the record low interest rate environment that
developed following the onset of the COVID-19 pandemic.
Pool premiums written and earned for the years ended December 31, 2021 , 2020 and
2019, were $1.6 million , $2.5 million and $3.0 million , respectively, before
giving effect to the 2016 QSR Transaction, under which all of our written and
earned pool premiums are ceded. A portion of our ceded pool premiums written and
earned are recouped through profit commission.
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Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not
include the effects of our third-party reinsurance arrangements described above.
The table below highlights trends in our primary portfolio as of the dates and
for the periods indicated.
Primary portfolio trends As of and for the year ended
December 31, 2021 December 31, 2020 December 31, 2019
($ Values In Millions)
New insurance written $ 85,574 $ 62,702 $ 45,141
Percentage of monthly premium 90 % 90 % 92 %
Percentage of single premium 10 % 10 % 8 %
New risk written $ 21,607 $ 15,602 $ 11,715
Insurance-in-force (1) 152,343 111,252 94,754
Percentage of monthly premium 87 % 86 % 81 %
Percentage of single premium 13 % 14 % 19 %
Risk-in-force (1) $ 38,661 $ 28,164 $ 24,173
Policies in force (count) (1) 512,316 399,429 366,039
Average loan size ($ value in thousands) (1) $ 297 $ 279 $ 259
Coverage percentage (2) 25 % 25 % 26 %
Loans in default (count) (1) 6,227 12,209 1,448
Default rate (1) 1.22 % 3.06 % 0.40 %
Risk-in-force on defaulted loans (1) $ 435 $ 874 $ 84
Average premium yield (3) 0.34 % 0.39 % 0.42 %
Earnings from cancellations $ 30 $ 48 $ 22
Annual persistency (4) 64 % 56 % 77 %
Quarterly run-off (5) 6.7 % 12.5 % 7.7 %
(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.
(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. Figures shown represent fourth quarter values for the
respective years.
The table below presents a summary of the change in total primary IIF for the
dates and periods indicated.
Primary IIF As of and for the year ended
December 31, December 31,
2021 2020 December 31, 2019
(In Millions)
IIF, beginning of period $ 111,252 $ 94,754 $ 68,551
NIW 85,574 62,702 45,141
Cancellations, principal repayments and other
reductions (44,483) (46,204) (18,938)
IIF, end of period $ 152,343 $ 111,252 $ 94,754
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.
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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
December 31, 2021 December 31, 2020 December 31, 2019
IIF RIF IIF RIF IIF RIF
(In Millions)
December 31, 2021 $ 81,226 $ 20,591 $ - $ - $ - $ -
2020 43,795 11,023 58,232 14,510 - -
2019 12,407 3,249 25,038 6,548 42,060 10,916
2018 4,929 1,258 9,788 2,494 19,579 4,977
2017 4,233 1,062 8,009 2,002 14,961 3,710
2016 and before 5,753 1,478 10,185 2,610 18,154 4,570
Total $ 152,343 $ 38,661 $ 111,252 $ 28,164 $ 94,754 $ 24,173
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 year ended
December 31, 2021 December 31, 2020 December 31, 2019
(In Millions)
>= 760 $ 40,408 $ 37,437 $ 21,931
740-759 15,927 9,443 7,541
720-739 12,511 7,820 6,643
700-719 8,450 4,644 4,783
680-699 5,792 2,692 3,021
<=679 2,486 666 1,222
Total $ 85,574 $ 62,702 $ 45,141
Weighted average FICO 752 761 753
Primary NIW by LTV For the year ended
December 31, 2021 December 31,
2020
(In
Millions)
95.01% and above $ 8,153 $
3,732 $ 3,192
90.01% to 95.00% 38,215 26,000 21,475
85.01% to 90.00% 24,655 22,356 15,555
85.00% and below 14,551 10,614 4,919
Total $ 85,574 $
62,702 $ 45,141
Weighted average LTV 91.4 % 90.9 % 91.8 %
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For the year ended
December 31, 2021 December 31, 2020 December 31, 2019
(In Millions)
Purchase $ 70,318 $ 41,616 $ 37,405
Refinance 15,256 21,086 7,736
Total $ 85,574 $ 62,702 $ 45,141
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
December 31, 2021 December 31, 2020 December 31, 2019
($ Values In Millions)
>= 760 $ 76,449 50 % $ 58,368 52 % $ 44,793 47 %
740-759 26,219 17 17,442 16 15,728 17
720-739 21,356 14 15,091 14 13,417 14
700-719 14,401 10 10,442 9 10,284 11
680-699 9,654 6 6,777 6 6,774 7
<=679 4,264 3 3,132 3 3,758 4
Total $ 152,343 100 % $ 111,252 100 % $ 94,754 100 %
Primary RIF by FICO As of
December 31, 2021 December 31, 2020 December 31, 2019
($ Values In Millions)
>= 760 $ 19,125 50 % $ 14,634 52 % $ 11,388 47 %
740-759 6,707 17 4,449 16 4,034 17
720-739 5,497 14 3,868 14 3,465 14
700-719 3,771 10 2,692 9 2,632 11
680-699 2,511 6 1,748 6 1,728 7
<=679 1,050 3 773 3 926 4
Total $ 38,661 100 % $ 28,164 100 % $ 24,173 100 %
Primary IIF by LTV As of
December 31, 2021 December 31, 2020
($ Values In Millions) 95.01% and above $ 14,058 9 %$ 9,129 8 %$ 8,640 9 % 90.01% to 95.00% 68,537 45 49,898 45 44,668 47 85.01% to 90.00% 46,971 31 36,972 33 30,163 32 85.00% and below 22,777 15 15,253 14 11,283 12 Total $ 152,343 100 %$ 111,252 100 %$ 94,754 100 % Primary RIF by LTV As of December 31, 2021 December 31, 2020 December 31, 2019 ($ Values In Millions) 95.01% and above $ 4,230 11 %$ 2,637 10 %$ 2,390 10 % 90.01% to 95.00% 20,210 52 14,673 52 13,086 54 85.01% to 90.00% 11,533 30 9,067 32 7,376 31 85.00% and below 2,688 7 1,787 6 1,321 5 Total $ 38,661 100 %$ 28,164 100 %$ 24,173 100 % 71
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Primary RIF by Loan Type As of
December 31, 2021 December 31, 2020 December 31, 2019
Fixed 99 % 99 % 98 %
Adjustable rate mortgages:
Less than five years - - -
Five years and longer 1 1 2
Total 100 % 100 % 100 %
The table below presents selected primary portfolio statistics, by book year, as
of December 31, 2021 .
As of December 31, 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 $ 6 4 % 655 46 1 1 0.4 % 0.3 % 2.2 %
2014 3,451 274 8 % 14,786 1,693 60 49 4.3 % 0.7 % 3.5 %
2015 12,422 1,706 14 % 52,548 9,341 275 117 3.3 % 0.7 % 2.9 %
2016 21,187 3,768 18 % 83,626 18,987 591 129 2.8 % 0.9 % 3.1 %
2017 21,582 4,233 20 % 85,897 21,718 950 101 4.3 % 1.2 % 4.4 %
2018 27,295 4,928 18 % 104,043 24,448 1,328 89 8.2 % 1.4 % 5.4 %
2019 45,141 12,407 27 % 148,423 50,313 1,479 20 11.4 % 1.0 % 2.9 %
2020 62,702 43,795 70 % 186,174 138,203 1,070 1 6.0 % 0.6 % 0.8 %
2021 85,574 81,226 95 % 257,972 247,567 473 - 2.0 % 0.2 % 0.2 %
Total $ 279,516 $ 152,343 934,124 512,316 6,227 507
(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 December 31, 2021
is not necessarily representative of the geographic distribution we expect in
the future.
Top 10 primary RIF by state as of December 31,
2021 As of
December 31, 2021 December 31, 2020 December 31, 2019
California 10.4 % 11.2 % 11.8 %
Texas 9.7 8.8 8.2
Florida 8.6 7.3 5.7
Virginia 4.7 5.1 5.3
Colorado 3.8 4.1 3.4
Georgia 3.8 3.1 2.7
Maryland 3.7 3.7 3.4
Washington 3.7 3.5 3.3
Illinois 3.6 3.8 3.8
Pennsylvania 3.3 3.4 3.6
Total 55.3 % 54.0 % 51.2 %
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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:
•future macroeconomic factors, including national and regional unemployment rates, which affect the likelihood that borrowers may default on their loans and probability of claims, and interest rates, which tend to drive increased persistency as they rise, thereby extending the average life of our insured portfolio and increasing expected future claims and decrease persistency as they fall, thereby shortening the average life of our insured portfolio and moderating future expected claims; •changes in housing values, as such changes affect loss mitigation opportunities (available to us and a borrower) on loans in default, as well as borrowers' behaviors and willingness to default if the values of their homes are below or perceived to be below the balance of their mortgage;
•borrowers' FICO scores, with lower FICO scores tending to have a higher
probability of claims;
•borrowers' DTI ratios, with higher DTI ratios tending to have a higher
probability of claims;
•LTV ratios, with higher average LTV ratios tending to increase the probability
of claims;
•the size of loans insured, with higher loan amounts tending to result in higher
incurred claim amounts than smaller loan amounts;
•the percentage of coverage on insured loans, with higher percentages of
insurance coverage tending to result in higher incurred claim amounts than lower
percentages of insurance coverage;
•other borrower, property-type and loan level risk characteristics, such as
cash-out refinancings, second homes or investment properties; and
•the level and amount of reinsurance coverage maintained with third parties.
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
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options which allow borrowers to amortize or, in certain instances, outright
defer payments otherwise due during the forbearance period over an extended
length of time.
In response to the COVID-19 pandemic, politicians, regulators, lenders, loan servicers and others have offered extraordinary assistance to dislocated borrowers through, among other programs, the forbearance, foreclosure moratorium and other assistance programs codified under the 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. AtDecember 31, 2021 and 2020, we generally established lower reserves for defaults that we consider to be connected to the COVID-19 pandemic, given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
The following table provides a reconciliation of the beginning and ending gross
reserve balances for primary insurance claims and claim expenses.
For the year ended
December 31,
2021 December 31, 2020 December 31, 2019
(In Thousands)
Beginning balance $ 90,567 $ 23,752 $ 12,811
Less reinsurance recoverables (1) (17,608) (4,939) (3,001)
Beginning balance, net of reinsurance
recoverables 72,959 18,813 9,810
Add claims incurred:
Claims and claim expenses incurred:
Current year (2) 23,433 66,943 14,737
Prior years (3) (11,128) (7,696) (2,230)
Total claims and claim expenses incurred 12,305 59,247 12,507
Less claims paid:
Claims and claim expenses paid:
Current year (2) 16 586 204
Prior years (3) 2,017 4,515 3,849
Reinsurance terminations (4) - - (549)
Total claims and claim expenses paid 2,033 5,101 3,504
Reserve at end of period, net of reinsurance
recoverables 83,231 72,959 18,813
Add reinsurance recoverables (1) 20,320 17,608 4,939
Ending balance $ 103,551 $ 90,567 $ 23,752
(1) Related to ceded losses recoverable under the QSR Transactions. See Item 8,
"Financial Statements and Supplementary Data - Notes to Consolidated Financial
Statements - Note 6, Reinsurance," for additional information.
(2) Related to insured loans with their most recent defaults occurring in the
current year. For example, if a loan defaulted in a prior year and subsequently
cured and later re-defaulted in the current year, the default would be included
in the current year. Amounts are presented net of reinsurance and included
$18.1 million attributed to net case reserves and $4.7 million attributed to net
IBNR reserves for the year ended December 31, 2021 , $60.8 million attributed to
net case reserves and $5.0 million attributed to net IBNR reserves for year
ended December 31, 2020 , and $13.2 million attributed to net case reserves and
$1.3 million attributed to net IBNR reserves for year ended December 31, 2019 .
(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 $6.3 million attributed to net case
reserves and $5.0 million attributed to net IBNR reserves for the year ended
December 31, 2021 , $6.2 million attributed to net case reserves and $1.3 million
attributed to net IBNR reserves for the year ended December 31, 2020 , and
$1.5 million attributed to net case reserves and $0.7 million attributed to net
IBNR reserves for year ended December 31, 2019 .
(4) Represents the settlement of reinsurance recoverables in conjunction with
the termination of one reinsurer under the 2016 QSR Transaction on a cut-off
basis. See Item 8, "Financial Statements and Supplementary Data - Notes to
Consolidated Financial Statements - Note 6, Reinsurance," for additional
information.
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
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loss development trends in our portfolio. Gross reserves of
related to prior year defaults remained as of
The following table provides a reconciliation of the beginning and ending count
of loans in default.
For the year ended
December 31, 2021 December 31, 2020 December 31, 2019
Beginning default inventory 12,209 1,448 877
Plus: new defaults 5,730 19,459 2,429
Less: cures (11,626) (8,548) (1,702)
Less: claims paid (82) (143) (152)
Less: claims denied (4) (7) (4)
Ending default inventory 6,227 12,209 1,448
Ending default inventory declined from December 31, 2020 to December 31, 2021 as
an increased number of borrowers initially 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 December 31, 2020 to December 31, 2021 , our default inventory
remains elevated compared to historical experience due to the continued
challenges certain borrowers are facing related to the COVID-19 pandemic and
their decision to access the forbearance program for federally backed loans
codified under the CARES Act or similar programs made available by private
lenders. As of December 31, 2021 , 4,751 of our 6,227 defaulted loans were in a
COVID-related forbearance program.
Ending default inventory increased from
primarily due to the outbreak of the COVID-19 pandemic.
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 year ended
December
31, 2021
($ Values In Thousands)
Number of claims paid (1) 82 143 152
Total amount paid for claims $
2,554 $ 6,434 $ 5,030
Average amount paid per claim
$ 31 $ 45 $ 33 Severity(2) 59 % 80 % 74 %
(1) Count includes 15, 9 and 19 claims settled without payment for the years
ended
(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 82, 143 and 152 claims for the year endedDecember 31, 2021 , 2020 and 2019, respectively. The number of claims paid during the years endedDecember 31, 2020 and 2021 was modest relative to the size of our insured portfolio and number of defaulted loans we reported in each period, primarily due to the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID pandemic and codified under the CARES Act. Such forbearance and foreclosure programs have extended, and may ultimately interrupt, the timeline over which loans would otherwise progress through the default cycle to a paid claim. Our claims paid experience for the years endedDecember 31, 2020 and 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 year endedDecember 31, 2021 was 59% compared to 80% and 74% for the years endedDecember 31, 2020 and 2019, respectively. Claims severity for the year endedDecember 31, 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. 75 -------------------------------------------------------------------------------- Our claims severity increased for the year endedDecember 31, 2020 , notwithstanding the resiliency of the housing market and broad national house price appreciation observed during the period, as we settled an increased portion of claims using the percent option instead of through third-party sales during the first half of the year. Third-party marketing and sales activity was broadly constrained immediately following the outbreak of the COVID-19 pandemic; claims severity moderated in the second half of 2020 as we were once again able to pursue alternative settlement options. 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 December 31, December 31, 2021 December 31, 2020 2019 (In Thousands) Case (1)$ 15.3 $ 6.8$ 15.0 IBNR (1)(2) 1.3 0.6 1.4 Total$ 16.6 $ 7.4$ 16.4
(1) Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
The average reserve per default increased fromDecember 31, 2020 toDecember 31, 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 pandemic given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs, we have increased such reserves over time as individual defaults remain outstanding or "age." The growth in our average reserve per default fromDecember 31, 2020 toDecember 31, 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. The average reserve per default decreased fromDecember 31, 2019 toDecember 31, 2020 , primarily due to new COVID-19 related defaults. AtDecember 31, 2020 , we generally established lower reserves for defaults that we consider to be connected to the COVID-19 pandemic given our expectation that forbearance, repayment and modification, and other assistance programs will aid affected borrowers and drive higher cure rates on such defaults than we would otherwise expect to experience on similarly situated loans that did not benefit from broad-based assistance programs.
Seasonality
Historically, our business has been subject to modest seasonality in both NIW production and default experience. Consistent with the seasonality of home sales, purchase origination volumes typically increase in late spring and peak during the summer months, leading to a rise in NIW volume during the second and third quarters of a given year. The COVID-19 pandemic interrupted this typical seasonal pattern. The COVID pandemic and resulting shelter-in-place directives spurred record NIW production during the years endedDecember 31, 2021 and 2020. Our purchase origination NIW remained elevated throughout the pandemic given the consistently high demand for home ownership. Normal seasonal purchase origination and NIW patterns may emerge again following the pandemic. Refinancing volume does not follow a set seasonal trend and is instead primarily influenced by prevailing mortgage note rates. Our refinancing origination volume declined as rates increased during the year endedDecember 31, 2021 .
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,
76 -------------------------------------------------------------------------------- which is an amount equal to the greater of (i)$400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions and QSR Transactions. The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy. ByApril 15th of each year, NMIC must certify it met all PMIERs requirements as ofDecember 31st of the prior year. We certified to the GSEs byApril 15, 2021 that NMIC was in full compliance with the PMIERs as ofDecember 31, 2020 . NMIC also has an ongoing obligation to immediately notify the GSEs in writing upon discovery of a failure to meet one or more of the PMIERs requirements. We continuously monitor NMIC's compliance with the PMIERs. The following table provides a comparison of the PMIERs available assets and risk-based required asset amount as reported by NMIC as of the dates indicated. As of December 31, December 31, December 31, 2021 2020 2019 ($ values in thousands) Available assets$ 2,041,193 $ 1,750,668 $ 1,016,387 Risk-based required asset amount 1,186,272 984,372 773,474
Available assets were
billion
positive cash flow from operations during the year.
InJune 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$734 million increase in NMIC's available assets in 2020 was driven by the NMIH capital contribution and NMIC's positive cash flow from operations during the year. The increase in the risk-based required asset amount between the dates presented was primarily driven by growth of our gross RIF, an increase in the risk ceded under our third-party reinsurance agreements and development of our default population.
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 orVA . 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 MIswho 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 theU.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
Cybersecurity
We rely on technology to engage with customers, access borrower information and
deliver our products and services. We have established and implemented security
measures, controls and procedures to safeguard our IT systems, and prevent and
detect unauthorized access to such systems or any data processed and/or stored
therein. We periodically engage third parties to evaluate and test the adequacy
of such security measures, controls and procedures. In addition, we have a
business continuity plan that is designed to allow us to continue to operate in
the midst of certain disruptive events, including disruptions to our IT systems,
and
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we have an incident response plan that is designed to address information
security incidents, including any breaches of our IT systems. Despite these
safeguards, disruptions to and breaches of our IT systems are possible and may
negatively impact our business.
We maintain a cybersecurity errors and omissions insurance policy to limit our exposure to loss in the event of an incident. This policy provides coverage for (i) claims related to, among other things, unauthorized network or computer access, unintentional disclosure or misuse of personally identifiable information in our possession, and unintentional failure to disclose a breach, and (ii) certain costs related to privacy notification, crisis management, cyber extortion, data recovery, business interruption and reputational harm.
LIBOR Transition
OnMarch 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 afterJune 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 afterJune 30, 2023 . We have exposure to USD LIBOR-based financial instruments, such as LIBOR-based securities held in our investment portfolio and certain ILN Transactions that require LIBOR-based payments. We are in the process of reviewing our LIBOR-based contracts and transitioning, as necessary and applicable, to a set of alternative reference rates. We will continue to monitor, assess and plan for the phase out of LIBOR; however, we do not expect the impact of such transition to be material to our operations or financial results.
CEO Transition
OnSeptember 9, 2021 , we announced thatAdam Pollitzer , then the company's Executive Vice President and Chief Financial Officer, was appointed as the company's President and Chief Executive Officer, effectiveJanuary 1, 2022 .Mr. Pollitzer also joined the company's Board of Directors upon assuming his new role. He succeededClaudia Merkle ,who stepped down as Chief Executive Officer and as a member of the Board, effectiveDecember 31, 2021 . We recorded$3.8 million of severance, restricted stock modification and other expenses related to this transition during the year endedDecember 31, 2021 . 78 --------------------------------------------------------------------------------
Consolidated Results of Operations
Consolidated statements of operations For the year
ended
2021 2020 2019
Revenues ($ in
thousands, except for per share data)
Net premiums earned$ 444,294 $ 397,172 $ 345,015 Net investment income 38,072 31,897 30,856 Net realized investment gains 729 930 45 Other revenues 1,977 3,284 2,855 Total revenues 485,072 433,283 378,771 Expenses Insurance claims and claim expenses 12,305 59,247 12,507 Underwriting and operating expenses 142,303 131,610 126,621 Service expenses 2,509 2,840 2,248 Interest expense 31,796 24,387 12,085 (Gain) loss from change in fair value of warrant liability (566) (2,907) 8,657 Total expenses 188,347 215,177 162,118 Income before income taxes 296,725 218,106 216,653 Income tax expense 65,595 46,540 44,696 Net income$ 231,130 $ 171,566 $ 171,957 Earnings per share - Basic $ 2.70$ 2.20 $ 2.54 Earnings per share - Diluted $ 2.65$ 2.13 $ 2.47 Loss ratio (1) 2.8 % 14.9 % 3.6 % Expense ratio (2) 32.0 % 33.1 % 36.7 % Combined ratio (3) 34.8 % 48.1 % 40.3 % Non-GAAP financial measures (4) 2021 2020
2019
Adjusted income before tax
Adjusted net income 236,837 173,642
182,437
Adjusted diluted EPS 2.73 2.19 2.62 (1) Loss ratio is calculated by dividing insurance claims and claim expenses by net premiums earned. (2) Expense ratio is calculated by dividing underwriting and operating expenses by net premiums earned. (3) Combined ratio may not foot due to rounding. (4) See "Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures," below.
Revenues
Net premiums earned were$444.3 million ,$397.2 million and$345.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The sequential increase in net premiums earned during each successive year was primarily driven by the growth of our IIF, partially offset by an increase in cessions made under our QSR and ILN Transactions. Net premiums earned for the year endedDecember 31, 2020 also benefited from an increase in single premium policy cancellations tied to the increased pace of refinancing activity and policy turnover triggered by the record low interest rate environment that developed following the onset of the COVID-19 pandemic. Net investment income was$38.1 million ,$31.9 million and$30.9 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The sequential increase in net investment income during each successive year was primarily driven by growth in the size of our total investment portfolio, partially offset by a decline in book yield tied to the prevailing interest rate and credit spread environment. 79 -------------------------------------------------------------------------------- Other revenues were$2.0 million ,$3.3 million and$2.9 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced loan review services to mortgage loan originators. The year-on-year changes in other revenues reflect fluctuations in NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods. Expenses We recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology, professional services and facilities expenses, in connection with the development and operation of our business. We also incur service expenses in connection with NMIS' outsourced loan review activities. Insurance claims and claim expenses were$12.3 million ,$59.2 million and$12.5 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Insurance claims and claim expenses decreased$46.9 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily reflecting a significant decrease in the number of new defaults emerging on loans impacted by the COVID-19 pandemic. Insurance claims and claim expenses for the year endedDecember 31, 2021 also benefited from cure activity and a release of a portion of the reserves we established for anticipated claims payments in prior periods. Insurance claims and claim expenses increased$46.7 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to the outbreak of the COVID-19 pandemic and resulting increase in our default population. Underwriting and operating expenses were$142.3 million ,$131.6 million and$126.6 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Underwriting and operating expenses increased$10.7 million for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to an increase in certain payroll costs incurred in connection with the CEO transition we announced onSeptember 9, 2021 , as well as incremental depreciation and amortization incurred in connection with the completion and on-lining of certain development initiatives, an increase in the recognition of previously deferred policy acquisition costs (DAC) taken in connection with in-force portfolio run-off, and growth in other (non-CEO transition) payroll and related amounts. Underwriting and operating expenses increased$5.0 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to an increase in the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off and an increase in issuance expenses incurred in connection with capital market reinsurance transaction activity, partially offset by reductions in travel and entertainment, and office administration expenses as a result of the COVID-19 pandemic. Underwriting and operating expenses included capital market reinsurance transaction costs of$4.0 million ,$4.6 million and$2.4 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Underwriting and operating expenses for the year endedDecember 31 2021 also included$3.8 million of CEO-transition related expenses. Service expenses were$2.5 million ,$2.8 million and$2.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The year-on-year changes in service expenses reflect fluctuations in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the same periods. Interest expense was$31.8 million ,$24.4 million and$12.1 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Interest expense increased in connection with the$400 million Notes offering and retirement of the$150 million 2018 Term Loan completed inJune 2020 . Interest expense for the year endedDecember 31, 2021 reflects a full year of carrying costs on the Notes. Interest expense for the year endedDecember 31, 2020 reflects a partial year of carrying cost on the Notes and$2.6 million of costs related to the extinguishment of the 2018 Term Loan. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt." Income tax expense was$65.6 million ,$46.5 million and$44.7 million for the years endedDecember 31, 2021 , 2020 and 2019. Income tax expense increased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to the growth in our pre-tax income, as well as an increase in our effective income tax rate. Income tax expense increased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to an increase in our effective income tax rate. As aU.S. taxpayer, we were subject to aU.S. federal corporate income tax rate of 21%. Our effective income tax rate on pre-tax income was 22.1%, 21.3% and 20.6% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Our effective tax rate increased during each successive year primarily due to a decline in the tax benefit realized from excess share-based compensation for vested restricted stock units (RSUs) and exercised stock options. For further 80 -------------------------------------------------------------------------------- information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
Net Income
Net income was$231.1 million ,$171.6 million and$172.0 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Adjusted net income was$236.8 million ,$173.6 million and$182.4 million , for the same periods, respectively. The increase in net income and adjusted net income for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 was primarily driven by growth in our total revenues and a decline in insurance claims and claim expenses, partially offset by an increase in our interest expenses, underwriting and operating expenses, and income tax expenses. Net income and adjusted net income declined for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 primarily due to an increase in insurance claims and claim expenses incurred in connection with significant COVID-related default experience, partially offset by an increase in total revenues. Diluted earnings per share (EPS) was$2.65 ,$2.13 and$2.47 for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Adjusted diluted EPS was$2.73 ,$2.19 and$2.62 for the same periods, respectively. Diluted and adjusted diluted EPS increased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 due to growth in net income and adjusted net income, respectively, partially offset by an increase in weighted average diluted shares outstanding. Diluted and adjusted EPS decreased for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 , primarily due to an increase in weighted average diluted shares outstanding, as well as a decline in net income and adjusted net income. Weighted average diluted shares outstanding increased in connection with the issuance of 15.9 million shares of common stock we completed inJune 2020 . Weighted average diluted shares outstanding for the years endedDecember 31, 2021 and 2020, reflect the inclusion of a full and partial year weighting for the offering, respectively. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For the year ended December 31, 2021 2020 2019 As reported Income before income tax$ 296,725
$ 218,106 $ 216,653 Income tax expense 65,595 46,540 44,696 Net income$ 231,130 $ 171,566 $ 171,957 Adjustments Net realized investment gains (729) (930) (45)
(Gain) loss from change in fair value warrant liability (566)
(2,907) 8,657 Capital market transaction costs 3,979 7,237 2,353 Other infrequent, unusual or non-operating items (1) 3,829 - - Adjusted income before tax 303,238 221,506 227,618 Income tax expense on adjustments (2) 806 1,324 485 Adjusted net income$ 236,837 $ 173,642 $ 182,437 Weighted average diluted shares outstanding 86,885 79,263 69,721 Adjusted diluted effect of non-vested shares - - - Adjusted weighted average diluted shares outstanding 86,885 79,263 69,721 Adjusted diluted EPS$ 2.73 $ 2.19 $ 2.62 (1) Represents severance, restricted stock modification and other expenses incurred in connection with the CEO transition announced onSeptember 9, 2021 . See "CEO Transition" above. (2) Marginal tax impact of non-GAAP adjustments is calculated based on our statutoryU.S. federal corporate income tax rate of 21%, except for those items that are not eligible for an income tax deduction. Such non-deductible items include gains or losses from the change in the fair value of our warrant liability and certain costs incurred in connection with the CEO transition, which are limited under Section 162(m) of the Internal Revenue Code. 81 --------------------------------------------------------------------------------
Explanation and Reconciliation of Our Use of Non-GAAP Financial Measures
We believe the use of the non-GAAP measures of adjusted income before tax, adjusted net income and adjusted diluted EPS enhances the comparability of our fundamental financial performance between periods, and provides relevant information to investors. These non-GAAP financial measures align with the way the company's business performance is evaluated by management. These measures are not prepared in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance. These measures have been presented to increase transparency and enhance the comparability of our fundamental operating trends across periods. Other companies may calculate these measures differently; their measures may not be comparable to those we calculate and present. Adjusted income before tax is defined as GAAP income before tax, excluding the pre-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and other infrequent, unusual or non-operating items in the periods in which such items are incurred. Adjusted net income is defined as GAAP net income, excluding the after-tax effects of the gain or loss related to the change in fair value of our warrant liability, periodic costs incurred in connection with capital markets transactions, net realized gains or losses from our investment portfolio, and other infrequent, unusual or non-operating items in the periods in which such items are incurred. Adjustments to components of pre-tax income are tax effected using the applicable federal statutory tax rate for the respective periods. Adjusted diluted EPS is defined as adjusted net income divided by adjusted weighted average diluted shares outstanding. Adjusted weighted average diluted shares outstanding is defined as weighted average diluted shares outstanding, adjusted for changes in the dilutive effect of non-vested shares that would otherwise have occurred had GAAP net income been calculated in accordance with adjusted net income. There will be no adjustment to weighted average diluted shares outstanding in the years that non-vested shares are anti-dilutive under GAAP. Although adjusted income before tax, adjusted net income and adjusted diluted EPS exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items: (1) are not viewed as part of the operating performance of our primary activities; or (2) are impacted by market, economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, and the reasons for their treatment, are described below. •Change in fair value of warrant liability. Outstanding warrants at the end of each reporting period are revalued, and any change in fair value is reported in the statement of operations in the period in which the change occurred. The change in fair value of our warrant liability can vary significantly across periods and is influenced principally by equity market and general economic factors that do not impact or reflect our current period operating results. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability. •Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles. •Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results. •Other infrequent, unusual or non-operating items. Items that are the result of unforeseen or uncommon events, and are not expected to recur with frequency in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Infrequent, unusual or non-operating adjustments for the year ended 2021, include severance, restricted stock modification and other expenses incurred in connection with the CEO transition we announced onSeptember 9, 2021 . Past adjustments under this category include the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are infrequent or non-recurring in nature, and are not indicative of the performance of, or ongoing trends in, our primary operating activities or business. 82 --------------------------------------------------------------------------------
December 31,
Consolidated balance sheets 2021 December 31, 2020
(In Thousands)
Total investment portfolio $ 2,085,931 $ 1,804,286
Cash and cash equivalents 76,646 126,937
Premiums receivable 60,358 49,779
Deferred policy acquisition costs, net 59,584 62,225
Software and equipment, net 32,047 29,665
Prepaid reinsurance premiums 2,393 6,190
Reinsurance recoverable 20,320 17,608
Other assets 113,302 69,976
Total assets $ 2,450,581 $ 2,166,666
Debt $ 394,623 $ 393,301
Unearned premiums 139,237 118,817
Accounts payable and accrued expenses 72,000 61,716
Reserve for insurance claims and claim expenses 103,551 90,567
Reinsurance funds withheld 5,601 8,653
Warrant liability 2,363 4,409
Deferred tax liability, net 164,175 112,586
Other liabilities 3,245 7,026
Total liabilities 884,795 797,075
Total shareholders' equity 1,565,786 1,369,591
Total liabilities and shareholders' equity $ 2,450,581
Total cash and investments were$2.2 billion as ofDecember 31, 2021 , compared to$1.9 billion as ofDecember 31, 2020 . Cash and investments atDecember 31, 2021 included$106.0 million held by NMIH. The increase in total cash and investments reflects cash generated from operations, partially offset by a decrease in the unrealized gain position of our fixed income portfolio tied to the prevailing interest rate and credit spread environment. Premium receivable was$60.4 million as ofDecember 31, 2021 , compared to$49.8 million as ofDecember 31, 2020 . The increase was primarily driven by growth in our monthly premium policies in force, where premiums are generally paid one month in arrears. Net deferred policy acquisition costs were$59.6 million as ofDecember 31, 2021 , compared to$62.2 million as ofDecember 31, 2020 . The decrease was primarily driven by the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off, and was largely offset by the deferral of certain costs associated with the origination of new policies between the respective balance sheet dates. Prepaid reinsurance premiums were$2.4 million as ofDecember 31, 2021 , compared to$6.2 million as ofDecember 31, 2020 . Prepaid reinsurance premiums, which represent the unearned premiums on single premium policies ceded under the 2016 QSR Transaction, decreased due to the continued amortization of previously ceded unearned premiums. Reinsurance recoverable was$20.3 million as ofDecember 31, 2021 , compared to$17.6 million as ofDecember 31, 2020 . The increase was driven by an increase in ceded losses recoverable associated with our QSR transactions. Other assets were$113.3 million as ofDecember 31, 2021 , compared to$70.0 million as ofDecember 31, 2020 . The increase was primarily driven by the purchase of$42.9 million of tax and loss bonds during the year endedDecember 31, 2021 . AtDecember 31, 2021 , we held$89.2 million of tax and loss bonds, compared to$46.4 million as ofDecember 31, 2020 . See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes." Unearned premiums were$139.2 million as ofDecember 31, 2021 , compared to$118.8 million as ofDecember 31, 2020 . The increase was driven by single premium policy originations during the year endedDecember 31, 2021 , partially offset by the cancellation of other single premium policies and the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies. 83 -------------------------------------------------------------------------------- Accounts payable and accrued expenses were$72.0 million as ofDecember 31, 2021 , compared to$61.7 million as ofDecember 31, 2020 . The increase was primarily driven by an increase in reinsurance premiums payable, and accrued payroll and bonuses, and the timing of other contractual payments due, partially offset by the settlement of trade payables in our investment portfolio. Reserve for insurance claims and claim expenses was$103.6 million as ofDecember 31, 2021 , compared to$90.6 million as ofDecember 31, 2020 . Reserve for insurance claims and claim expenses increased atDecember 31, 2021 , despite a decline in the total size of our default population because of an increase in the average case reserve held against previously defaulted loans and the establishment of initial reserves on newly defaulted loans during the year. While we have generally established lower reserves per default for loans that we consider to be impaired in connection with the COVID-19 pandemic, we have increased the initial reserves held for such loans as they have aged in default status. The increase in the reserves for insurance claims and claim expenses atDecember 31, 2021 was partially offset by cure activity and a release of a portion of the reserves we established for anticipated claims payments in prior periods. See "- Insurance Claims and Claim Expenses," above for further details. Reinsurance funds withheld, which represents our ceded reinsurance premiums written, less our profit and ceding commission receivables related to the 2016 QSR Transaction was$5.6 million as ofDecember 31, 2021 , compared to$8.7 million as ofDecember 31, 2020 . The decrease relates to the continued decline in ceded premiums written on single premium policies, due to the end of the reinsurance coverage period for new business under the 2016 QSR Transaction atDecember 31, 2017 . See, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance." Warrant liability was$2.4 million atDecember 31, 2021 , compared to$4.4 million atDecember 31, 2020 . The decrease was driven by the exercise of outstanding warrants, and changes in the price of our common stock and other Black-Scholes model inputs between the respective measurement dates. For further information regarding the valuation of our warrant liability and its impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4, Fair Value of Financial Instruments." Net deferred tax liability was$164.2 million atDecember 31, 2021 , compared to$112.6 million atDecember 31, 2020 . The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve, partially offset by the change in unrealized gains recorded in other comprehensive income. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
The following table summarizes our consolidated cash flows from operating,
investing and financing activities:
Consolidated cash flows For the years
ended
2021 2020 2019
Net cash provided by (used in) provided by: (In
Thousands)
Operating activities$ 325,719 $ 252,598 $ 208,150 Investing activities (374,180) (629,554) (194,355) Financing activities (1,830) 462,804 2,000 Net (decrease) increase in cash and cash equivalents$ (50,291) $
85,848
Net cash provided by operating activities was$325.7 million ,$252.6 million and$208.2 million for the years endedDecember 31, 2021 , 2020 and 2019, respectively. The sequential increase in cash provided by operating activities during each successive year was primarily driven by growth in premiums written, partially offset by an increase in cash interest expenses and the purchase of tax and loss bonds from year-to-year. Net cash provided by operating activities for the year endedDecember 31, 2021 further benefited from a decline in claims paid. Cash used in investing activities for the years endedDecember 31, 2021 , 2020 and 2019 reflects the purchase of fixed and short-term maturities with cash provided by operating activities and, as available, financing activities, and the reinvestment of coupon payments, maturities and sale proceeds within our investment portfolio. Cash used in investing activities for the year endedDecember 31, 2020 , reflects, in part, the investment of net cash proceeds from the common stock and Notes offerings we completed inJune 2020 . 84 -------------------------------------------------------------------------------- Cash used in financing activities was$1.8 million for the year endedDecember 31, 2021 , while cash provided by financing activities was$462.8 million and$2.0 million for the years endedDecember 31, 2020 and 2019, respectively. Cash used in financing activities during the year endedDecember 31, 2021 primarily relates to debt issuance costs paid in connection with the 2021 Revolving Credit Facility and taxes paid on the net share settlement of equity awards for certain employees. Cash provided by financing activities for the year endedDecember 31, 2020 primarily reflects$219.7 million net cash proceeds raised in connection with our 2020 equity offering and$244.4 million net cash proceeds raised in connection with our 2020 Notes offering. Cash provided by financing activities for the year endedDecember 31, 2019 primarily relates to proceeds from the issuance of common stock generated in connection with the exercise of employee stock options.
Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2021 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; and (vi) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated inDelaware .Delaware law provides that dividends are only payable out of a corporation's surplus or recent net profits (subject to certain limitations). As ofDecember 31, 2021 , NMIH had$106.0 million of cash and investments. NMIH's principal source of net cash is investment income. NMIH also has access to$250 million of undrawn revolving credit capacity under 2021 Revolving Credit Facility. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt". NMIC also has the capacity, underWisconsin law, to pay$34.9 million of aggregate ordinary course dividends to NMIH during the twelve-month period endingDecember 31, 2022 . OnFebruary 10, 2022 , the Board of Directors has approved a$125 million share repurchase program throughDecember 31, 2023 , that enables the company to repurchase its common stock. The authorization provides NMI the flexibility to repurchase shares from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, with such approvals subject to change or revocation at any time. Among such agreements, the Wisconsin OCI has approved the allocation of interest expense on the Notes and the 2021 Revolving Credit Facility to NMIC to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC. The Notes mature onJune 1, 2025 and bear interest at a rate of 7.375%, payable semi-annually onJune 1 andDecember 1 . The 2021 Revolving Credit Facility matures on the earlier of (x)November 29, 2025 or (y) if any existing senior secured notes remain outstanding on such date,February 28, 2025 , and accrues interest at a variable rate equal to, at our discretion, (i) a Base Rate (as defined in the 2021 Revolving Credit Facility, subject to a floor of 1.00% per annum) plus a margin of 0.375% to 1.875% per annum or (ii) the Adjusted Term SOFR Rate (as defined in the 2021 Revolving Credit Facility) plus a margin of 1.375% to 2.875% per annum, with the margin in each of (i) or (ii) based on our applicable corporate credit rating at the time. Borrowings under the 2021 Revolving Credit Facility may be used for general corporate purposes, including to support the growth of our new business production and operations. Under the 2021 Revolving Credit Facility, NMIH is required to pay a quarterly commitment fee on the average daily undrawn amount of 0.175% to 0.525%, based on the applicable corporate credit rating at the time. As ofDecember 31, 2021 , the applicable commitment fee was 0.35%. We are subject to certain covenants under the 2021 Revolving Credit Facility. Under the 2021 Revolving Credit Facility, NMIH may not permit (i) our debt to total capitalization ratio to exceed 35% as of the last day of any fiscal quarter, (ii) the statutory capital of NMIC to be less than$1,290,314,825 as of the last day of any fiscal quarter, or (iii) our consolidated net worth to be, as of the last day of any fiscal quarter, less than the sum of (A)$1,047,808,462 , plus (B) 50% of our cumulative consolidated net income for each fiscal quarter for which such consolidated net income is positive, plus (C) 50% of any increase in our consolidated net worth afterSeptember 30, 2021 resulting from certain issuances of equity by or capital contributions to NMIH or our subsidiaries. In addition, NMIC must remain at all times in compliance with all applicable "financial requirements" imposed pursuant to the PMIERs, subject to any allowed transition period or forbearance thereunder. The credit agreement for 2021 Revolving Credit Facility also prohibits, restricts or limits, among other things, NMIH's and its subsidiaries' ability to (i) incur additional indebtedness, (ii) incur liens on their property, (iii) pay dividends or make other distributions, (iv) sell their assets, 85 -------------------------------------------------------------------------------- (v) make certain loans or investments, (vi) merge or consolidate and (vii) enter into transactions with affiliates, in each case subject to certain limitations, exceptions and qualifications as set forth in the credit agreement for 2021 Revolving Credit Facility. We were in compliance with all covenants atDecember 31, 2021 . NMIC and Re One are subject to certain capital and dividend rules and regulations prescribed by jurisdictions in which they are authorized to operate and the GSEs. UnderWisconsin law, NMIC and Re One may pay dividends up to specified levels (i.e., "ordinary" dividends) with 30 days' prior notice to the Wisconsin OCI. Dividends in larger amounts, or "extraordinary" dividends, are subject to the Wisconsin OCI's prior approval. UnderWisconsin insurance laws, an extraordinary dividend is defined as any payment or distribution that, together with other dividends and distributions made within the preceding twelve months, exceeds the lesser of (i) 10% of the insurer's statutory policyholders' surplus as of the precedingDecember 31 or (ii) adjusted statutory net income for the twelve-month period ending the precedingDecember 31 . NMIC has the capacity to pay$34.9 million of aggregate ordinary course dividends to NMIH during the twelve-month period endingDecember 31, 2022 . EffectiveOctober 1, 2021 , the reinsurance agreement between NMIC and Re One was commuted and all risk ceded under the treaty was transferred back to NMIC. Following the commutation, Re One has no risk in force or further obligation on future claims. InDecember 2021 , Re One distributed$26.0 million to NMIH in the form of a$1.6 million ordinary dividend and a$24.4 million extraordinary dividend. As an approved insurer under PMIERs, NMIC would generally be subject to prior GSE approval of its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. In response to the COVID-19 pandemic, the GSEs issued temporary PMIERs guidance, effective for the period fromJune 30, 2020 toJune 30, 2021 , that requires approved insurers to secure approval from the GSEs, even if the approved insurer otherwise satisfies the financial requirements prescribed by PMIERs, prior to taking any of the following actions: (i) pay dividends, make payments of principal or increase payments of interest beyond those commitments made prior to the guidance effective date associated with surplus notes issued by the approved insurer, make any other payments, unless related to expenses incurred in the normal course of business or to commitments made prior to the guidance effective date, or pledge or transfer asset(s) to any affiliate or investor, or (ii) enter into any new arrangements or alter any existing arrangements under tax sharing and intercompany expense-sharing agreements other than renewals and extensions of agreements in effect prior to the guidance effective date. OnJune 30, 2021 , the GSEs updated the temporary PMIERs guidance to permit approved insurers to pay dividends or undertake other actions described in (i) and (ii) above without securing prior approval if certain prescribed financial requirements are met during the period fromJuly 1, 2021 toDecember 31, 2021 . NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements (respectively, as defined therein). As an approved mortgage insurer andWisconsin -domiciled carrier, NMIC is required to satisfy financial and/or capitalization requirements stipulated by each of the GSEs and the Wisconsin OCI. The financial requirements stipulated by the GSEs are outlined in the PMIERs. Under the PMIERs, NMIC must maintain available assets that are equal to or exceed a minimum risk-based required asset amount, subject to a minimum floor of$400 million . AtDecember 31, 2021 , NMIC reported$2,041 million available assets against$1,186 million risk-based required assets for an$855 million "excess" funding position. The risk-based required asset amount under PMIERs is determined at an individual policy-level based on the risk characteristics of each insured loan. Loans with higher risk factors, such as higher LTVs or lower borrower FICO scores, are assessed a higher charge. Non-performing loans that have missed two or more payments are generally assessed a significantly higher charge than performing loans, regardless of the underlying borrower or loan risk profile; however, special consideration is given under PMIERs to loans that are delinquent on homes located in an area declared byFEMA to be a Major Disaster zone eligible for Individual Assistance. InJune 2020 , the GSEs issued guidance (amended and restated in each ofSeptember 2020 ,December 2020 andJune 2021 ) on the risk-based treatment of loans affected by the COVID-19 pandemic. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period. NMIC's PMIERs minimum risk-based required asset amount is also adjusted for its reinsurance transactions (as approved by the GSEs). Under NMIC's quota share reinsurance treaties, it receives credit for the PMIERs risk-based required asset amount on ceded RIF. As its gross PMIERs risk-based required asset amount on ceded RIF increases, the PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under NMIC's ILN transactions, it generally receives credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. 86 -------------------------------------------------------------------------------- NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as RTC) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard. As ofDecember 31, 2021 , NMIC's performing primary RIF, net of reinsurance, was approximately$22.3 billion . NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of$1.9 billion (including contingency reserves) as ofDecember 31, 2021 , NMIC's RTC ratio was 11.6:1. Re One had no risk in force remaining atDecember 31, 2021 and, as such, did not report a RTC ratio. NMIC's principal sources of liquidity include (i) premium receipts on its insured portfolio and new business production, (ii) interest income on its investment portfolio and principal repayments on maturities therein, and (iii) existing cash and cash equivalent holdings. AtDecember 31, 2021 , NMIC had$2.1 billion of cash and investments, including$55 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 endedDecember 31, 2021 , NMIC generated$307 million of cash flow from operations and received an additional$117 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.
Debt and Financial Strength Ratings
NMIC's financial strength is rated "Baa2" by Moody's and "BBB" by S&P. InJune 2020 , Moody's affirmed its financial strength rating of NMIC and its "Ba2" rating of NMIH's 2021 Revolving Credit Facility, and assigned a "Ba2" rating to the Notes. Moody's ratings outlook is stable. InJune 2020 , S&P assigned a "BB" rating to NMIH's senior secured Notes. InApril 2021 , S&P upgraded its outlook from negative to positive for the financial strength rating of NMIC's and NMIH's long-term counter-party credit profile.
Consolidated Investment Portfolio
The primary objectives of our investment activity are to preserve capital and generate investment income, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset types, industry sectors, single issuers, and certain credit ratings; and benchmarks for asset duration. Our investment portfolio is comprised entirely of fixed maturity instruments. As ofDecember 31, 2021 , the fair value of our investment portfolio was$2.1 billion and we held an additional$76.6 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the year endedDecember 31, 2021 was 2.0%. Book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. The yield on our investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our holdings and other factors. 87 --------------------------------------------------------------------------------
The following tables present a breakdown of our investment portfolio and cash
and cash equivalents by investment type and credit rating:
Percentage of portfolio's fair value
December 31, 2021 December 31, 2020 Corporate debt securities 64 % 63 % Municipal debt securities 26 % 22 Asset-backed securities 5 % 7 Cash, cash equivalents, and short-term investments 4 % 6U.S. treasury securities and obligations ofU.S. government agencies 1 % 2 Total 100 % 100 % Investment portfolio ratings at fair value (1) December 31, 2021 December 31, 2020 AAA 9 % 12 % AA (2) 28 % 27 A (2) 46 % 43 BBB (2) 17 % 18 Total 100 % 100 % (1) Excluding certain operating cash accounts. (2) Includes +/- ratings. All of our investments are rated by one or more nationally recognized statistical rating organizations. If three or more ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
As of
loss for any security in the investment portfolio and we did not record any
provision for credit loss for investment securities during the years ended
As ofDecember 31, 2021 , the investment portfolio had gross unrealized losses of$23.2 million , of which$6.5 million had been in an unrealized loss position for a period of twelve months or longer. As ofDecember 31, 2020 , the investment portfolio had gross unrealized losses of$512 thousand , of which$8 thousand had been in an unrealized loss position for a period of twelve months or longer. The increase in the aggregate size of the unrealized loss position as ofDecember 31, 2021 , was primarily driven by interest rate movements following the purchase date of certain securities. Based on current facts and circumstances, we believe the unrealized losses as ofDecember 31, 2021 are not indicative of the ultimate collectability of the current amortized cost of the securities.
Taxes
We are aU.S. taxpayer and are subject to a statutoryU.S. federal corporate income tax rate of 21%. Our holding company files a consolidatedU.S. federal and various state income tax returns on behalf of itself and its subsidiaries. Our effective income tax rate on pre-tax income was 22.1%, 21.3% and 20.6% for the years endedDecember 31, 2021 , 2020 and 2019, respectively. Our effective income tax rate may vary from the statutory tax rate in a given period due to the inclusions and exclusions of income and deductions for tax purposes. Inclusions of tax deductions may include tax benefits from excess share based compensation for vested RSUs and exercised stock options; and exclusions from income may include the fair value fluctuation of our warrant liability. AtDecember 31, 2021 , we had federal net operating loss carryforwards of$1.8 million , which expire in varying amounts in 2030 and 2031, and state net operating loss carryforwards of$132.4 million , which expire in varying amounts from 2031 to 2042. Our ability to utilize our remaining federal net operating loss carryforwards is restricted by Section 382 of the Internal Revenue Code (IRC), which imposes annual limitations if there is an "ownership change." As a result of the acquisition of our insurance subsidiaries in 2012,$7.3 million of federal NOLs were subject to annual limitations of$0.8 million through 2016, and$0.3 million thereafter. Our remaining federal net operating loss carryforwards balance is a result of this limitation. 88 -------------------------------------------------------------------------------- As a mortgage guaranty insurance company, we are eligible to claim a tax deduction for our statutory contingency reserve balance, subject to certain limitations outlined under Section 832(e) of the IRC, and only to the extent we acquire tax and loss bonds in an amount equal to the tax benefit derived from the claimed deduction. As ofDecember 31, 2021 , we held$89.2 million of tax and loss bonds, which are reported as prepaid federal income tax and included in "Other assets" in our consolidated balance sheet. We record a valuation allowance against the state net operating losses generated by NMIH as NMIH operates at a loss, and we do not expect to utilize such net deferred tax assets in the future. We continue to evaluate the realizability of our state net deferred tax asset position, and our examination of results throughDecember 31, 2021 and review of future expectations support the continued application of a valuation allowance against such state net deferred tax assets. NMIH and its subsidiaries entered into a tax sharing agreement effectiveAugust 23, 2012 , which was subsequently amended onSeptember 1, 2016 . Under original and amended agreements, each of the parties agreed to file consolidated federal income tax returns for all tax years beginning in and subsequent to 2012, with NMIH as the direct tax filer. The tax liability of each subsidiary that is party to the agreement is limited to the amount of the liability it would incur if it filed separate returns.
Critical Accounting Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in conformity with GAAP. In preparing our consolidated financial statements, management has made estimates and assumptions, and applied judgments that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. As a result, actual results could differ materially from those estimates. A summary of the accounting policies that management believes are critical to the preparation of our consolidated financial statements is set forth below.
Insurance Premium Revenue Recognition
Premiums for primary mortgage insurance policies may be paid in a single payment at origination (single premium), on a monthly installment basis (monthly premium) or on an annual installment basis (annual premium), with such election and payment type fixed at policy inception. Premiums written at origination for single premium policies are initially deferred as unearned premiums and amortized into earnings over the estimated policy life in accordance with the anticipated expiration of risk. Monthly premiums are recognized as revenue in the month billed and when coverage is effective. Annual premiums are initially deferred and earned on a straight-line basis over the year of coverage. Upon cancellation of a policy, all remaining non-refundable deferred and unearned premium is immediately earned, and any refundable deferred and unearned premium is returned to the policyholder and recorded as a reduction to written premium and unearned premium reserve in the period paid.
Premiums written on pool transactions are earned over the period that coverage
is provided.
Reserve for Insurance Claims and Claim Expenses
We establish reserves for claims based on our best estimate of the ultimate
claim costs for defaulted loans using the general principles contained in ASC
944, Financial Services - Insurance (ASC 944). 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 incurred but not reported (IBNR) reserves. We also establish
reserves for claim expenses, which represent the estimated cost of the claim
administration process, including legal and other fees, as well as other general
expenses of administering the claim settlement process. Claim expense reserves
are either allocated (i.e., associated with a specific claim) or unallocated
(i.e., not associated with a specific claim).
The establishment of claims and claim expense reserves is subject to inherent
uncertainty and requires significant judgment by management. 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 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, size of the loan and LTV ratios, and are strongly influenced by
assumptions about the path of certain economic factors, such as house price
appreciation, trends in unemployment and mortgage rates. We consider the
appropriateness of such inputs at each fiscal quarter and conduct an actuarial
review annually to evaluate and, if necessary, update these assumptions.
89
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At December 31, 2021 , we generally established lower reserves for defaults that
we consider to be connected to the COVID-19 pandemic given our expectation that
forbearance, repayment and modification, and other assistance programs will aid
affected borrowers and drive higher cure rates on such defaults than we would
otherwise expect to experience on similarly situated loans that did not benefit
from broad-based assistance programs. It is possible that a relatively small
change in our estimates for claim frequency or claim severity could have a
material impact on our reserve position and our consolidated results of
operations, even in a stable macroeconomic environment. At December 31, 2021 ,
assuming all other estimates remain constant, a one percentage point
increase/decrease in our average claim severity factor would cause approximately
a +/- $1.1 million change in our reserve position, and a one percentage point
increase/decrease in our average claim frequency factor cause approximately a
+/- $2.1 million change in our reserve position.
Investments
We have designated our investment portfolio as available-for-sale and report our invested assets at fair value. Unrealized gains and losses in the portfolio, net of related tax expense or benefit, are recognized as a component of accumulated other comprehensive income (AOCI) in shareholders' equity. We measure fair value and classify invested assets in a hierarchy for disclosure purposes consisting of three "levels" based on the observability of inputs available in the marketplace used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). See Item 8, Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 4, Fair Value of Financial Instruments." Purchases and sales of investments are recorded on a trade date basis. Net investment income is recognized when earned, and includes interest and dividend income together with amortization of market premiums and discounts using the effective yield method, and is net of investment management fees and other investment related expenses. For asset-backed securities and any other holdings for which there is a prepayment risk, prepayment assumptions are evaluated and revised as necessary. Any adjustments required due to changes in effective yields and prepayment assumptions are recognized on a prospective basis. We recognize an impairment on a security through the consolidated statement of operations and comprehensive income if (i) we intend to sell the impaired security; or (ii) it is more likely than not that we will be required to sell the impaired security prior to recovery of its amortized cost basis. If a sale is intended or likely to be required, we write down the amortized cost basis of the security to fair value and recognize the full amount of the impairment through the statement of operations as a "Realized Investment Loss." For securities in an unrealized loss position where a sale is not intended or likely to be required, we further assess if the decline in fair value below amortized cost is driven by a credit related impairment, considering several items including, but not limited to:
•the severity of the decline in fair value;
•the financial condition of the issuer;
•the failure of the issuer to make scheduled interest or principal payments;
•recent rating downgrades of the applicable security or issuer by one or more
nationally recognized statistical ratings organization; and
•other adverse conditions related to or impacting the security or issuer.
To the extent we determine that a security impairment is credit-related, an impairment loss is recognized through the statement of operations as a provision for credit loss expense, and presented as a "Realized Investment Loss." We recognize an allowance for credit losses for the difference between the amortized cost and present value of future expected cash flows, limited by the amount the fair value of the security is below its amortized cost. Subsequent changes (favorable and unfavorable) in credit losses are recognized through the statement of operations as a provision for or a reversal of credit loss expense, and presented as a "Realized Investment Gain or Loss." The portion of a security impairment attributed to other non-credit related factors is recognized in other comprehensive income, net of taxes.
Deferred Policy Acquisition Costs
Costs directly associated with the successful acquisition of mortgage insurance
policies, consisting of certain selling expenses and other policy issuance and
underwriting expenses, are initially deferred and reported as DAC. DAC is
reviewed periodically to determine that it does not exceed recoverable amounts.
DAC is amortized to expense in proportion to estimated gross profits over the
life of the associated policies. We revise the rate of amortization to reflect
actual experience and changes to
90
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our persistency or loss development assumptions, and may accelerate or slow such
rate in future periods as experience and future changes to estimates dictate.
During the years ended December 31, 2021 and 2020, we recognized an additional
$11.1 million and $8.6 million , respectively, of DAC amortization due to the
significant increase in mortgage refinancing activity and material decline in
persistency on certain prior book years' insurance in-force experienced during
the period.
Premium Deficiency Reserves
We consider whether a premium deficiency exists and premium deficiency reserve
is required at each fiscal quarter using best estimate assumptions as of the
testing date. Per ASC 944, a premium deficiency reserve shall be recognized if
the sum of expected claim costs and claim adjustment expenses, expected
dividends to policyholders, unamortized acquisition costs and maintenance costs
exceeds future premiums, existing reserves and anticipated investment income.
The premium deficiency assessment requires the use of significant judgment and
estimates to determine the present value of future premiums, and expected claim
costs and expenses. The present value of future premiums relies on, among other
things, assumptions about persistency and repayment patterns on the underlying
insured loans. The present value of expected claim costs and expenses relies on
assumptions about the severity of claims, claim rates on current defaults and
expected defaults in future periods. Assumptions used in the premium deficiency
calculation can be affected by changes in the macroeconomic environment,
including the rate of house price appreciation and prevailing interest rates.
Relatively small changes in estimated claim rates or estimated claim amounts
could have a significant impact on our premium deficiency analysis. If we
determine it is necessary and appropriate to establish a premium deficiency
reserve, and actual premium patterns and claims experience differ from the
assumptions used to establish the reserve, the difference between the actual
results and our estimates would affect our consolidated results of operations in
future periods.
91
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We own and manage a large investment portfolio of various holdings, types and maturities. NMIH's principal source of operating cash is investment income. The assets within the investment portfolio are exposed to the same factors that affect overall financial market performance.
We manage market risk via a defined investment policy implemented by our
treasury function with oversight from our Board's Risk Committee. Important
drivers of our market risk exposure monitored and managed by us include but are
not limited to:
•Changes to the level of interest rates. Increasing interest rates may reduce the value of certain fixed-rate bonds held in the investment portfolio. Higher rates may cause variable rate assets to generate additional income. Decreasing rates will have the reverse impact. Significant changes in interest rates can also affect persistency and claim rates of our insurance portfolio, and as a result we may determine that our investment portfolio needs to be restructured to better align it with future liabilities and claim payments. Such restructuring may cause investments to be liquidated when market conditions are adverse. Additionally, the changes in Eurodollar based interest rates affect the interest expense related to the Company's debt.
•Changes to the term structure of interest rates. Rising or falling rates
typically change by different amounts along the yield curve. These changes may
have unforeseen impacts on the value of certain assets.
•Market volatility/changes in the real or perceived credit quality of investments. Deterioration in the quality of investments, identified through changes to our own or third-party (e.g., rating agency) assessments, will reduce the value and potentially the liquidity of investments. •Concentration Risk. If the investment portfolio is highly concentrated in one asset, or in multiple assets whose values are highly correlated, the value of the total portfolio may be greatly affected by the change in value of just one asset or a group of highly correlated assets.
•Prepayment Risk. Bonds may have call provisions that permit debtors to repay
prior to maturity when it is to their advantage. This typically occurs when
rates fall below the interest rate of the debt.
The carrying value of our investment portfolio as ofDecember 31, 2021 and 2020 was$2.1 billion and$1.8 billion , respectively, of which 100% was invested in fixed maturity securities. The primary market risk to our investment portfolio is interest rate risk associated with investments in fixed maturity securities. We mitigate the market risk associated with our fixed maturity securities portfolio by matching the duration of our fixed maturity securities with the expected duration of the liabilities that those securities are intended to support. As ofDecember 31, 2021 , the duration of our fixed income portfolio, including cash and cash equivalents, was 4.98 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 4.98% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 5.00 years, which means that an instantaneous parallel shift (movement up or down) in the yield curve of 100 basis points would result in a change of 5.00% in fair value of our fixed income portfolio. We are also subject to market risk related to the ILN Transactions. The risk premium amounts under the ILN Transactions are calculated by multiplying the outstanding reinsurance coverage amount at the beginning of any payment period by a coupon rate, which is the sum of one-month LIBOR and a risk margin, and then subtracting actual investment income earned on the trust balance during that payment period. An increase in one-month LIBOR rates would generally increase the risk premium payments, while an increase to money market rates, which directly affect investment income earned on the trust balance, would generally decrease them. Although we expect the two rates to move in tandem, to the extent they do not, it could increase or decrease the risk premium payments that otherwise would be due. 92
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