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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 Part I, 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 Such requirements have been repealed and the reinsurance coverage provided by Re One to NMIC has been commuted.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, 2022 , we had issued master policies with 1,875 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, 2022 , we had$184.0 billion of primary IIF and$47.6 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, 2022 , we had 242 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. 58 --------------------------------------------------------------------------------
Conditions and Trends Affecting Our Business
COVID-19 and Other Developments
OnJanuary 30, 2020 , theWorld Health Organization 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 spread of the virus, 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. The global dislocation caused by COVID-19 was unprecedented and the pandemic had a direct impact on theU.S. housing market, private mortgage insurance industry, and our business and operating performance for an extended period. More recently, however, the acute economic impact of COVID-19 has begun to recede. While the pandemic continues to pose a global risk and affect communities across theU.S. , it is no longer the single dominant driver of our performance that it had been in earlier periods. COVID-19 is now one of several mosaic factors, including a range of macroeconomic forces and public policy initiatives that are influencing our market and business. Although we are optimistic that the nationwide COVID-19 vaccination effort and other medical advances will continue to support a normalization of personal and business activity, the path of the virus remains unknown and subject to risk. Given this uncertainty, we are not able to fully assess or estimate the impact the pandemic may have on the mortgage insurance market, our business performance or our financial position at this time, and it remains possible COVID-19 could again trigger more severe and adverse outcomes in future periods. It is also possible that emerging macroeconomic factors, including persistent inflation, increasing interest rates, flagging consumer confidence and increasing jobless claims could have a pronounced impact on the housing market, the mortgage insurance industry and our business in future periods. A marked decline in housing demand, a significant and protracted decrease in house prices or a sustained increase in unemployment could reduce the pace of new business activity in the private mortgage insurance market and negatively impact our future NIW volume, or contribute to an increase in our future default and claim experience.
Key Factors Affecting Our Results
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, 2022 , we activated 120 lenders, compared to 122 and 101 for the years endedDecember 31, 2021 andDecember 31, 2020 , 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, 2022 , we had issued 1,875 Master Policies and established 1,434 active customer relationships, compared to 1,732 and 1,316, respectively, as ofDecember 31, 2021 and 1,570 and 1,195, respectively, as ofDecember 31, 2020 .
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.
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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: •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, 2022 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
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for losses up to an agreed-upon threshold and the reinsurer then provides
coverage in excess of such threshold up to a maximum agreed-upon limit. We
expect to continue to evaluate reinsurance opportunities in the normal course of
business.
Excess-of-loss reinsurance Insurance-linked notes NMIC is party to reinsurance agreements with the Oaktown Re Vehicles that provide it with aggregate excess-of-loss reinsurance coverage on defined portfolios of mortgage insurance policies. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the respective Oaktown Re Vehicle then provides second layer loss protection up to a defined reinsurance coverage amount. NMIC then retains losses in excess of the respective reinsurance coverage amounts. The respective reinsurance coverage amounts provided by the Oaktown Re Vehicles decrease over a ten-year period as the underlying insured mortgages are amortized or repaid, and/or the mortgage insurance coverage is canceled (except the coverage provided byOaktown Re VI Ltd. andOaktown Re VII Ltd. , which decreases over a 12.5-year period). As the reinsurance coverage decreases, a prescribed amount of collateral held in trust by the Oaktown Re Vehicles is distributed to ILN Transaction noteholders as amortization of the outstanding insurance-linked note principal balances. The outstanding reinsurance coverage amounts stop amortizing, and the collateral distribution to ILN Transaction noteholders and amortization of insurance-linked note principal is suspended if certain credit enhancement or delinquency thresholds, as defined in each agreement, are triggered (each, a Lock-Out Event). As ofDecember 31, 2022 , the 2018 ILN Transaction was deemed to be inLock Out due to the default experience of its underlying reference pool and the 2021-2 ILN Transaction was deemed to be inLock Out in connection with the initial build of its target credit enhancement level. As such, the amortization of reinsurance coverage, and distribution of collateral assets and amortization of insurance-linked notes was suspended for both ILN Transactions. The amortization of reinsurance coverage, distribution of collateral assets and amortization of insurance-linked notes issued in connection with the 2018 and 2021-2 ILN Transactions will remain suspended for the duration of the Lock-Out Event for each respective 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. EffectiveAugust 31, 2022 , a Lock-Out Event for the 2019 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. NMIC holds optional termination rights under each ILN Transaction, including, among others, an optional call feature which provides NMIC the discretion to terminate the transaction on or after a prescribed date, and a clean-up call if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount at inception or if NMIC reasonably determines that changes to GSE or rating agency asset requirements would cause a material and adverse effect on the capital treatment afforded to NMIC under a given agreement. In addition, there are certain events that trigger mandatory termination of an agreement, including NMIC's failure to pay premiums or consent to reductions in a trust account to make principal payments to noteholders, among others. EffectiveMarch 25, 2022 andApril 25, 2022 , NMIC exercised its optional clean-up call to terminate and commute its previously outstanding excess of loss reinsurance agreements withOaktown Re Ltd. andOaktown Re IV Ltd. , respectively. In connection with the termination and commutation of each respective agreement, the insurance-linked notes issued byOaktown Re Ltd. andOaktown Re IV Ltd. were redeemed in full with a distribution of remaining collateral assets.
The following table presents the inception date, covered production period,
current reinsurance coverage amount, current first layer retained aggregate loss
and detail on the level of overcollateralization under each outstanding ILN
Transaction. Current amounts are presented as of
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2018 ILN 2019 ILN 2020-2 ILN 2021-1 ILN 2021-2 ILN
($ values in thousands) Transaction
Transaction Transaction Transaction Transaction
Inception date
July 25, 2018 July
30, 2019
Covered production
1/1/2017 - 6/1/2018 - 4/1/2020 - 10/1/2020 - 4/1/2021 -
5/31/2018 6/30/2019 9/30/2020 (1) 3/31/2021 (2) 9/30/2021 (3)
Ceded RIF $ 855,081 $ 968,433 $ 3,404,929 $ 6,924,354 $ 6,989,626
Current First Layer Retained Loss 122,202 122,257 121,177 163,665 146,204
Current Reinsurance Coverage 158,489 204,127 95,729 305,139 363,596
Eligible Coverage $ 280,691 $
326,384
Subordinated coverage (4)
32.83% 33.70% 6.25% 6.75% 7.29% PMIERs charge on ceded RIF 7.85% 7.57% 4.98% 6.01% 6.72% Overcollateralization (5) (6)$ 158,489 $
204,127
Delinquency Trigger (7) 4.0% 4.0% 4.7% 5.1% 5.5% (1) Approximately 1% of the production covered by the 2020-2 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andMarch 31, 2020 . (2) Approximately 1% of the production covered by the 2021-1 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andSeptember 30, 2020 . (3) Approximately 2% of the production covered by the 2021-2 ILN Transaction has coverage reporting dates betweenJuly 1, 2019 andMarch 31, 2021 . (4) Absent a delinquency trigger, the subordinated coverage is capped at 7.5%, 6.25%, 6.75% and 7.45% for the 2019, 2020-2, 2021-1 and 2021-2 ILN Transactions, respectively. (5) Overcollateralization for each of the 2018 and 2019 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. (6) May not be replicated based on the rounded figures presented in the table. (7) Delinquency triggers for the 2018 and 2019 ILN Transactions are set at a fixed 4.0% and assessed on a discrete monthly basis; delinquency triggers for the 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. Traditional reinsurance NMIC is a party to three excess-of-loss reinsurance agreements with broad panels of third-party reinsurers - the 2022-1 XOL Transaction, effectiveApril 1, 2022 , the 2022-2 XOL Transaction, effectiveJuly 1, 2022 , and the 2022-3 XOL Transaction, effectiveOctober 1, 2022 - which we refer to collectively as the XOL Transactions. Each XOL Transaction provides NMIC with aggregate excess-of-loss reinsurance coverage on a defined portfolio of mortgage insurance policies. Under each agreement, NMIC retains a first layer of aggregate loss exposure on covered policies and the reinsurers then provide second layer loss protection up to a defined reinsurance coverage amount. The reinsurance coverage amount of each XOL Transaction is set to approximate the PMIERs minimum required assets of its reference pool and decreases from the inception of each respective agreement over a ten-year period in the event the PMIERs minimum required assets of the pool declines. NMIC retains losses in excess of the outstanding reinsurance coverage amount. NMIC holds optional termination rights which provide it the discretion to terminate each XOL Transaction on or after a specified date. NMIC may also elect to terminate the XOL Transactions at any point if the outstanding reinsurance coverage amount amortizes to 10% or less of the reinsurance coverage amount provided at inception, or if it determines that it will no longer be able to take full PMIERs asset credit for the coverage. Additionally, under the terms of the treaties, NMIC may selectively terminate its engagement with individual reinsurers under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a deterioration in its capital position below a prescribed threshold, and/or a reinsurer breaches (and fails to cure) its collateral posting obligation.
Each of the third-party reinsurance providers that is party to the XOL
Transactions has an insurer financial strength rating of A- or better by S&P,
The following table presents the inception date, covered production period, initial and current reinsurance coverage amount, and initial and current first layer retained aggregate loss under each outstanding XOL Transaction. Current amounts are presented as ofDecember 31, 2022 . 62 --------------------------------------------------------------------------------
Current First
Initial Reinsurance Current
Reinsurance Initial First Layer Layer Retained
($ values in thousands)
Inception Date Covered Production Coverage Coverage Retained Loss Loss (1) 2022-1 XOL TransactionApril 1, 2022 10/1/2021 - 3/31/2022 (2)$289,741 $282,906 $133,366 $133,366 2022-2 XOL TransactionJuly 1, 2022 4/1/2022 - 6/30/2022 (3) 154,306 151,013 78,906 78,906 2022-3 XOL TransactionOctober 1, 2022 7/1/2022 - 9/30/2022 96,779 95,825 106,265 106,265 (1) NMIC applies claims paid on covered policies against its first layer aggregate retained loss exposure and cedes reserves for incurred claims and claim expenses to each applicable XOL Transaction and recognizes a reinsurance recoverable if such incurred claims and claim expenses exceed its current first layer retained loss. (2) Approximately 1% of the production covered by the 2022-1 XOL Transaction has coverage reporting dates betweenOctober 21, 2019 andSeptember 30, 2021 . (3) Approximately 1% of the production covered by the 2022-2 XOL Transaction has coverage reporting dates betweenJanuary 4, 2021 andMarch 31, 2022 .
Quota share reinsurance
NMIC is a party to seven quota share reinsurance treaties - the 2016 QSR Transaction, effectiveSeptember 1, 2016 , the 2018 QSR Transaction, effectiveJanuary 1, 2018 , the 2020 QSR Transaction, effectiveApril 1, 2020 , the 2021 QSR Transaction, effectiveJanuary 1, 2021 , the 2022 QSR Transaction, effectiveOctober 1, 2021 , the 2022 Seasoned QSR Transaction, effectiveJuly 1, 2022 and the 2023 QSR Transaction, effectiveJanuary 1, 2023 - which we refer to collectively as the QSR Transactions. Under each of the QSR Transactions, NMIC cedes a proportional share of its risk on eligible policies to panels of third-party reinsurance providers. Each of the third-party reinsurance providers that is party to the QSR Transactions has an insurer financial strength rating of A- or better by S&P,A.M. Best or both. Under the terms of the 2016 QSR Transaction, NMIC cedes premiums written related to 25% of the risk on eligible primary policies written for all periods throughDecember 31, 2017 and 100% of the risk under our pool agreement with Fannie Mae, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 60% that varies directly and inversely with ceded claims. Under the terms of the 2018 QSR Transaction, NMIC cedes premiums earned related to 25% of the risk on eligible policies written in 2018 and 20% of the risk on eligible policies written in 2019, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 61% that varies directly and inversely with ceded claims. Under the terms of the 2020 QSR Transaction, NMIC cedes premiums earned related to 21% of the risk on eligible policies written fromApril 1, 2020 throughDecember 31, 2020 , in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 50% that varies directly and inversely with ceded claims. Under the terms of the 2021 QSR Transaction, NMIC cedes premiums earned related to 22.5% of the risk on eligible policies written in 2021 (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 claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. In connection with the 2022 QSR Transaction, NMIC entered into the 2023 QSR Transaction as a springing back-to-back quota share agreement. Under the terms of the 2023 QSR Transactions, NMIC cedes premiums earned related to 20% of the risk on eligible policies written fromJanuary 1, 2023 toDecember 31, 2023 , in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 20% ceding commission, and a profit commission of up to 62% that varies directly and inversely with ceded claims. Under the terms of the 2022 Seasoned QSR Transaction, NMIC cedes premiums earned related to 95% of the net risk on eligible policies primarily for a seasoned pool of mortgage insurance policies that had previously been covered under the retiredOaktown Re Ltd. andOaktown Re IV Ltd. reinsurance transactions, after the consideration of coverage provided by other QSR Transactions, in exchange for reimbursement of ceded claims and claim expenses on covered policies, a 35% ceding commission, and a profit commission of up to 55% that varies directly and inversely with ceded claims. 63 -------------------------------------------------------------------------------- NMIC may terminate any or all of the QSR Transactions without penalty if, due to a change in PMIERs requirements, it is no longer able to take full PMIERs asset credit for the RIF ceded under the respective agreements. Additionally, under the terms of the QSR Transactions, NMIC may elect to selectively to terminate its engagement with individual reinsurers on a run-off basis (i.e., reinsurers continue providing coverage on all risk ceded prior to the termination date, with no new cessions going forward) or cut-off basis (i.e., the reinsurance arrangement is completely terminated with NMIC recapturing all previously ceded risk) under certain circumstances. Such selective termination rights arise when, among other reasons, a reinsurer experiences a 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.
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,
2022 2021 2020
IIF NIW IIF NIW IIF NIW
(In Millions)
Monthly $ 163,903 $ 55,916 $ 133,104 $ 77,019 $ 95,336 $ 56,651
Single 20,065 2,818 19,239 8,555 15,916 6,051
Primary 183,968 58,734 152,343 85,574 111,252 62,702
Pool 1,049 - 1,229 - 1,855 -
Total $ 185,017 $ 58,734 $ 153,572 $ 85,574 $ 113,107 $ 62,702
For the year ended December 31, 2022 , NIW decreased 31% compared to the year
ended December 31, 2021 , primarily due to a decline in the size of the total
mortgage insurance market. For the year ended December 31, 2021 , 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.
Total IIF increased 20% at December 31, 2022 compared to December 31, 2021 ,
which in turn grew 36% compared to December 31, 2020 , primarily due to the NIW
generated between such measurement dates, partially offset by the run-off of
in-force policies.
Our persistency rate improved to 84% at December 31, 2022 , compared to 64% at
December 31, 2021 and 56% at December 31, 2020 . Our persistency rate improved
markedly through December 31, 2022 due to a slowdown in the pace of refinancing
activity during the year, driven by an increase in interest and mortgage note
rates. Our persistency rates as of December 31, 2021 and 2020 were historically
low, reflecting the impact of significant mortgage refinancing activity during
both years.
The following table presents net premiums written and earned for the periods
indicated:
Primary and pool premiums written and earned For the years ended December 31,
2022 2021 2020
(In Thousands)
Net premiums written $ 460,246 $ 468,511 $ 388,644
Net premiums earned 475,266 444,294 397,172
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-------------------------------------------------------------------------------- Net premiums written decreased 2% during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , reflecting an increase in cessions under our reinsurance transactions and a decline in single premium policy production, balanced by growth in our monthly IIF and monthly pay policy premium receipts during the year. Net premiums written increased 21% during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily driven by the growth of our IIF and increased monthly policy production, partially offset by increased cessions under our reinsurance transactions during the year. Net premiums earned increased 7% and 12% during the years endedDecember 31, 2022 and 2021, respectively. The sequential increase in net premiums earned during each successive year was primarily driven by our NIW production and growth of our IIF, partially offset by an increase in total premiums ceded under our reinsurance transactions, a decline in the contribution from single premium policy cancellations and the run-off of a portion of our prior period monthly policy production and associated premium receipts. Pool premiums written and earned for the years endedDecember 31, 2022 , 2021 and 2020, were$1.2 million ,$1.6 million and$2.5 million , respectively, before giving effect to the 2016 QSR Transaction, under which all of our written and earned pool premiums are ceded. A portion of our ceded pool premiums written and earned are recouped through profit commission.
Portfolio Statistics
Unless otherwise noted, the portfolio statistics tables presented below do not
include the effects of our third-party reinsurance arrangements described above.
The table below highlights trends in our primary portfolio as of the dates and
for the periods indicated.
Primary portfolio trends As of and for the years ended December 31,
2022 2021 2020
($ Values In Millions, except as noted below)
New insurance written $ 58,734 $ 85,574 $ 62,702
Percentage of monthly premium 95 % 90 % 90 %
Percentage of single premium 5 % 10 % 10 %
New risk written $ 15,520 $ 21,607 $ 15,602
Insurance-in-force (1) 183,968 152,343 111,252
Percentage of monthly premium 89 % 87 % 86 %
Percentage of single premium 11 % 13 % 14 %
Risk-in-force (1) $ 47,648 $ 38,661 $ 28,164
Policies in force (count) (1) 594,142 512,316 399,429
Average loan size ($ value in thousands) (1) $ 310 $ 297 $ 279
Coverage percentage (2) 26 % 25 % 25 %
Loans in default (count) (1) 4,449 6,227 12,209
Default rate (1) 0.75 % 1.22 % 3.06 %
Risk-in-force on defaulted loans (1) $ 323 $ 435 $ 874
Average premium yield (3) 0.28 % 0.34 % 0.39 %
Earnings from cancellations $ 8 $ 30 $ 48
Annual persistency (4) 84 % 64 % 56 %
Quarterly run-off (5) 3.3 % 6.7 % 12.5 %
(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.
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The table below presents a summary of the change in total primary IIF for the
dates and periods indicated.
As of and for the years ended December
Primary IIF 31,
2022 2021 2020
(In Millions)
IIF, beginning of period $ 152,343 $ 111,252 $ 94,754
NIW 58,734 85,574 62,702
Cancellations, principal repayments and other
reductions (27,109) (44,483) (46,204)
IIF, end of period $ 183,968 $ 152,343 $ 111,252
We consider a "book" to be a collective pool of policies insured during a
particular period, normally a calendar year. In general, the majority of
underwriting profit, calculated as earned premium revenue minus claims and
underwriting and operating expenses, generated by a particular book year emerges
in the years immediately following origination. This pattern generally occurs
because relatively few of the claims that a book will ultimately experience
typically occur in the first few years following origination, when premium
revenue is highest, while subsequent years are affected by declining premium
revenues, as the number of insured loans decreases (primarily due to loan
prepayments), and by increasing losses.
The table below presents a summary of our primary IIF and RIF by book year as of
the dates indicated.
Primary IIF and RIF As of December 31,
2022 2021 2020
IIF RIF IIF RIF IIF RIF
(In Millions)
December 31, 2022 $ 56,579 $ 14,965 $ - $ - $ - $ -
2021 72,766 18,642 81,226 20,591 - -
2020 34,656 8,860 43,795 11,023 58,232 14,510
2019 9,194 2,423 12,407 3,249 25,038 6,548
2018 3,579 923 4,929 1,258 9,788 2,494
2017 and before 7,194 1,835 9,986 2,540 18,194 4,612
Total $ 183,968 $ 47,648 $ 152,343 $ 38,661 $ 111,252 $ 28,164
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.
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Primary NIW by FICO For the years ended December 31,
2022 2021 2020
(In Millions)
>= 760 $ 26,751 $ 40,408 $ 37,437
740-759 10,853 15,927 9,443
720-739 8,308 12,511 7,820
700-719 6,452 8,450 4,644
680-699 4,636 5,792 2,692
<=679 1,734 2,486 666
Total $ 58,734 $ 85,574 $ 62,702
Weighted average FICO 750 752 761
Primary NIW by LTV For the years ended December 31,
2022 2021 2020
(In Millions)
95.01% and above $ 5,199 $ 8,153 $ 3,732
90.01% to 95.00% 30,031 38,215 26,000
85.01% to 90.00% 16,637 24,655 22,356
85.00% and below 6,867 14,551 10,614
Total $ 58,734 $ 85,574 $ 62,702
Weighted average LTV 92.2 %
91.4 % 90.9 %
Primary NIW by purchase/refinance mix For the years ended December 31,
2022 2021 2020
(In Millions)
Purchase $ 57,045 $ 70,318 $ 41,616
Refinance 1,689 15,256 21,086
Total $ 58,734 $ 85,574 $ 62,702
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,
2022 2021 2020
($ Values In Millions)
>= 760 $ 89,554 48 % $ 76,449 50 % $ 58,368 52 %
740-759 32,691 18 26,219 17 17,442 16
720-739 25,910 14 21,356 14 15,091 14
700-719 18,245 10 14,401 10 10,442 9
680-699 12,480 7 9,654 6 6,777 6
<=679 5,088 3 4,264 3 3,132 3
Total $ 183,968 100 % $ 152,343 100 % $ 111,252 100 %
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Primary RIF by FICO As of December 31,
2022 2021 2020
($ Values In Millions)
>= 760 $ 22,834 48 % $ 19,125 50 % $ 14,634 52 %
740-759 8,556 18 6,707 17 4,449 16
720-739 6,807 14 5,497 14 3,868 14
700-719 4,859 10 3,771 10 2,692 9
680-699 3,305 7 2,511 6 1,748 6
<=679 1,287 3 1,050 3 773 3
Total $ 47,648 100 % $ 38,661 100 % $ 28,164 100 %
Primary IIF by LTV As of December 31,
2022 2021 2020
($ Values In Millions)
95.01% and above $ 17,577 10 % $ 14,058 9 % $ 9,129 8 %
90.01% to 95.00% 87,354 47 68,537 45 49,898 45
85.01% to 90.00% 55,075 30 46,971 31 36,972 33
85.00% and below 23,962 13 22,777 15 15,253 14
Total $ 183,968 100 % $ 152,343 100 % $ 111,252 100 %
Primary RIF by LTV As of December 31,
2022 2021 2020
($ Values In Millions)
95.01% and above $ 5,408 11 % $ 4,230 11 % $ 2,637 10 %
90.01% to 95.00% 25,797 54 20,210 52 14,673 52
85.01% to 90.00% 13,584 29 11,533 30 9,067 32
85.00% and below 2,859 6 2,688 7 1,787 6
Total $ 47,648 100 % $ 38,661 100 % $ 28,164 100 %
Primary RIF by Loan Type As of December 31,
2022 2021 2020
Fixed 99 % 99 % 99 %
Adjustable rate mortgages:
Less than five years - - -
Five years and longer 1 1 1
Total 100 % 100 % 100 %
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-------------------------------------------------------------------------------- The table below presents selected primary portfolio statistics, by book year, as ofDecember 31, 2022 . As of December 31, 2022 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 $ 5 3 % 655 34 - 1 0.2 % 0.2 % - % 2014 3,451 206 6 % 14,786 1,285 30 51 4.0 % 0.5 % 2.3 % 2015 12,422 1,226 10 % 52,548 6,839 135 126 2.7 % 0.5 % 2.0 % 2016 21,187 2,668 13 % 83,626 13,938 277 146 2.1 % 0.5 % 2.0 % 2017 21,582 3,089 14 % 85,897 16,409 487 121 2.8 % 0.7 % 3.0 % 2018 27,295 3,579 13 % 104,043 18,355 611 106 4.8 % 0.7 % 3.3 % 2019 45,141 9,194 20 % 148,423 38,580 646 30 5.1 % 0.5 % 1.7 % 2020 62,702 34,656 55 % 186,174 112,845 628 4 3.2 % 0.3 % 0.6 % 2021 85,574 72,766 85 % 257,972 227,124 1,323 3 6.5 % 0.5 % 0.6 % 2022 58,734 56,579 96 % 163,281 158,733 312 - 11.8 % 0.2 % 0.2 % Total$ 338,250 $ 183,968 1,097,405 594,142 4,449 588 (1) Calculated as total claims incurred (paid and reserved) divided by cumulative premiums earned, net of reinsurance. (2) Calculated as the sum of the number of claims paid ever to date and number of loans in default divided by policies ever in force. (3) Calculated as the number of loans in default divided by number of policies in force. Geographic Dispersion The following table shows the distribution by state of our primary RIF as of the dates indicated. The distribution of our primary RIF as ofDecember 31, 2022 is not necessarily representative of the geographic distribution we expect in the future. Top 10 primary RIF by state As of December 31, 2022 2021 2020 California 10.6 % 10.4 % 11.2 % Texas 8.7 9.7 8.8 Florida 8.2 8.6 7.3 Virginia 4.1 4.7 5.1 Georgia 4.1 3.8 3.1 Illinois 3.9 3.6 3.8 Washington 3.9 3.7 3.5 Colorado 3.5 3.8 4.1 Pennsylvania 3.4 3.3 3.4 Maryland 3.4 3.7 3.7 Total 53.8 % 55.3 % 54.0 %
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;
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•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, ILN Transactions and XOL Transactions as applicable under each treaty. We have not yet ceded reserves under any of the ILN Transactions or XOL Transactions as incurred claims and claim expenses on each respective reference pool remain within our retained coverage layer of each transaction. Our pool insurance agreement with Fannie Mae contains a claim deductible through which Fannie Mae absorbs specified losses before we are obligated to pay any claims. We have not established any claims or claim expense reserves for pool exposure to date. The actual claims we incur as our portfolio matures are difficult to predict and depend on the specific characteristics of our current in-force book (including the credit score and DTI of the borrower, the LTV ratio of the mortgage and geographic concentrations, among others), as well as the risk profile of new business we write in the future. In addition, claims experience will be affected by macroeconomic factors such as housing prices, interest rates, unemployment rates and other events, such as natural disasters or global pandemics, and any federal, state or local governmental response thereto. Our reserve setting process considers the beneficial impact of forbearance, foreclosure moratorium and other assistance programs available to defaulted borrowers. We generally observe that forbearance programs are an effective tool to bridge dislocated borrowers from a time of acute stress to a future date when they can resume timely payment of their mortgage obligations. The effectiveness of forbearance programs is enhanced by the availability of various repayment and loan modification options which allow borrowers to amortize or, in certain instances, outright defer payments otherwise due during the forbearance period over an extended length of time. In response to the COVID-19 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. We generally observe that forbearance, repayment and modification, and other assistance programs aid affected borrowers and drive higher cure rates on defaults than would otherwise be expected on similarly situated loans that did not benefit from broad-based assistance programs.
Although we are optimistic that the nationwide COVID-19 vaccination effort and
other medical advances will continue
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to support a normalization of personal and business activity, the path of the
virus remains unknown and subject to risk. It is also possible that emerging
macroeconomic factors, including persistent inflation, increasing interest
rates, flagging consumer confidence and increasing jobless claims could have a
pronounced impact on the housing market, the mortgage insurance industry and our
business in future periods. A marked decline in housing demand, a significant
and protracted decrease in house prices or a sustained increase in unemployment
could contribute to an increase in our future default and claim experience.
The following table provides a reconciliation of the beginning and ending gross
reserve balances for primary insurance claims and claim (benefits) expenses:
For the years ended December 31,
2022 2021 2020
(In Thousands)
Beginning balance $ 103,551 $ 90,567 $ 23,752
Less reinsurance recoverables (1) (20,320) (17,608) (4,939)
Beginning balance, net of reinsurance
recoverables 83,231 72,959 18,813
Add claims incurred:
Claims and claim (benefits) expenses incurred:
Current year (2) 45,168 23,433 66,943
Prior years (3) (48,762) (11,128) (7,696)
Total claims and claim (benefits) expenses
incurred (3,594) 12,305 59,247
Less claims paid:
Claims and claim expenses paid:
Current year (2) 74 16 586
Prior years (3) 1,314 2,017 4,515
Total claims and claim expenses paid 1,388 2,033 5,101
Reserve at end of period, net of reinsurance
recoverables 78,249 83,231 72,959
Add reinsurance recoverables (1) 21,587 20,320 17,608
Ending balance $ 99,836 $ 103,551 $ 90,567
(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
$39.9 million attributed to net case reserves and $4.5 million attributed to net
IBNR reserves for the year ended December 31, 2022 , $18.1 million attributed to
net case reserves and $4.7 million attributed to net IBNR reserves for the year
ended December 31, 2021 , and $60.8 million attributed to net case reserves and
$5.0 million attributed to net IBNR reserves for the year ended December 31,
2020 .
(3) Related to insured loans with defaults occurring in prior years, which have
been continuously in default before the start of the current year. Amounts are
presented net of reinsurance and included $42.5 million attributed to net case
reserves and $4.7 million attributed to net IBNR reserves for the year ended
December 31, 2022 , $6.3 million attributed to net case reserves and $5.0 million
attributed to net IBNR reserves for the year ended December 31, 2021 , and
$6.2 million attributed to net case reserves and $1.3 million attributed to net
IBNR reserves for the year ended December 31, 2020 .
The "claims incurred" section of the table above shows claims and claim expenses
incurred on defaults occurring in current and prior years, including IBNR
reserves and is presented net of reinsurance. We may increase or decrease our
claim estimates and reserves as we learn additional information about individual
defaulted loans and continue to observe and analyze loss development trends in
our portfolio. Gross reserves of $41.5 million related to prior year defaults
remained as of December 31, 2022 .
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The following table provides a reconciliation of the beginning and ending count
of loans in default:
For the years ended December 31,
2022 2021 2020
Beginning default inventory 6,227 12,209 1,448
Plus: new defaults 5,225 5,730 19,459
Less: cures (6,916) (11,626) (8,548)
Less: claims paid (81) (82) (143)
Less: claims denied (6) (4) (7)
Ending default inventory 4,449 6,227 12,209
Ending default inventory declined successively during each of the years ended
December 31, 2022 and 2021, as borrowers initially impacted by the COVID-19
pandemic during the year ended December 31, 2020 continued to cure their
delinquencies and fewer new defaults emerged in each successive period as the
acute economic stress of the pandemic continued to recede.
The following table provides details of our claims paid, before giving effect to
claims ceded under the QSR Transactions for the periods indicated:
For the years ended December 31,
2022 2021 2020
($ Values In Thousands)
Number of claims paid (1) 81 82 143
Total amount paid for claims $ 1,741 $ 2,554 $ 6,434
Average amount paid per claim $ 21 $ 31 $ 45
Severity (2) 49 % 59 % 80 %
(1) Count includes 30, 15 and nine 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 81, 82 and 143 claims for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The number of claims paid was modest relative to the size of our insured portfolio and number of defaulted loans we reported in each period, primarily due to the forbearance program and foreclosure moratorium implemented by the GSEs in response to the COVID-19 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, 2022 , 2021 and 2020, further benefited from 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 years endedDecember 31, 2022 , 2021 and 2020 was 49%, 59% and 80%. Claims severity in each year benefited from the same broad national house price appreciation that supported our claims paid experience. An increase in the value of the homes collateralizing the mortgages we insure provides additional equity support to our risk exposure and raises the prospect of a third-party sale of a foreclosed property, which can mitigate the severity of our settled claims. The number of claims paid and our severity experience in future periods may be impacted by developing economic cycles and each could increase if house price declines serve to limit the alternative paths and incentives to cure delinquencies that are available to defaulted borrowers or erode the equity value of the homes collateralizing the mortgages we insure. 72 -------------------------------------------------------------------------------- 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, 2022 2021 2020 (In Thousands) Case (1)$ 20.8 $ 15.3 $ 6.8 IBNR (1) (2) 1.6 1.3 0.6 Total$ 22.4 $ 16.6 $ 7.4
(1) Defined as the gross reserve per insured loan in default.
(2) Amount includes claims adjustment expenses.
Average reserve per default increased fromDecember 31, 2021 toDecember 31, 2022 , primarily due to an incrementally conservative set of assumptions about future macroeconomic and housing market conditions compared to those assumed atDecember 31, 2021 . The increased average reserve per default atDecember 31, 2022 also reflects the "aging" of early COVID-related defaults. While we initially 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." While average reserve per default increased fromDecember 31, 2021 toDecember 31, 2022 , our aggregate gross reserve position declined in the intervening period due to the decline in our total default inventory.
The average reserve per default increased from
2021
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. Refinancing volume, however, does not follow a set seasonal trend and is instead primarily influenced by mortgage rates. Fluctuations in refinancing volume (driven by changes in prevailing mortgage rates) may serve to mute or magnify the seasonal effect of home purchase patterns on mortgage insurance NIW. Further, the COVID pandemic and resulting shelter-in-place directives spurred record housing demand during the years endedDecember 31, 2021 and 2020, and purchase origination NIW remained elevated through the entirety of each year given the consistently high demand for home ownership. Our NIW production during the year endedDecember 31, 2022 returned to a more normalized seasonal pattern as the impact of the pandemic continued to recede and increasing mortgage rates slowed refinancing activity.
GSE Oversight
As an approved insurer, NMIC is subject to ongoing compliance with the PMIERs established by each of the GSEs (italicized terms have the same meaning that such terms have in the PMIERs, as described below). The PMIERs establish operational, business, remedial and financial requirements applicable to approved insurers. The PMIERs financial requirements prescribe a risk-based methodology whereby the amount of assets required to be held against each insured loan is determined based on certain loan-level risk characteristics, such as FICO, vintage (year of origination), performing vs. non-performing (i.e., current vs. delinquent), LTV ratio and other risk features. In general, higher quality loans carry lower asset charges. Under the PMIERs, approved insurers must maintain available assets that equal or exceed minimum required assets, which is an amount equal to the greater of (i)$400 million or (ii) a total risk-based required asset amount. The risk-based required asset amount is a function of the risk profile of an approved insurer's RIF, assessed on a loan-by-loan basis and considered against certain risk-based factors derived from tables set out in the PMIERs, which is then adjusted on an aggregate basis for reinsurance transactions approved by the GSEs, such as with respect to our ILN Transactions, XOL Transactions and QSR Transactions. The aggregate gross risk-based required asset amount for performing, primary insurance is subject to a floor of 5.6% of performing primary adjusted RIF, and the risk-based required asset amount for pool insurance considers both factors in the PMIERs tables and the net remaining stop loss for each pool insurance policy. 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, 2022 that NMIC was in full compliance with the PMIERs as ofDecember 31, 2021 . NMIC 73 --------------------------------------------------------------------------------
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,
2022 2021 2020
(In Thousands)
Available assets $ 2,378,627 $ 2,041,193 $ 1,750,668
Risk-based required asset amount 1,203,708 1,186,272
984,372
Available assets were$2.4 billion atDecember 31, 2022 , compared to$2.0 billion atDecember 31, 2021 and$1.8 billion atDecember 31, 2020 . The sequential increase in available assets between the dates presented was primarily driven by NMIC's positive cash flow from operations during the respective intervening periods. The increase in available assets during the year endedDecember 31, 2022 was partially offset by the payments in 2022, of an ordinary course dividend from NMIC to NMIH and an extraordinary dividend from Re One to NMIH following the termination and commutation of the reinsurance agreement between NMIC and Re One. The increase in the risk-based required asset amount between the dates presented was primarily driven by growth in our gross RIF and aggregate gross risk-based required asset amount, largely offset by an increase in the risk ceded under our third-party reinsurance agreements.
Competition
The MI industry is highly competitive and currently consists of six private mortgage insurers, including NMIC, as well as government MIs such as the FHA,USDA 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 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 74 -------------------------------------------------------------------------------- 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 reviewed our LIBOR-based contracts and each contains provisions that dictate a transition to an alternative reference rate at the time of the discontinuance of LIBOR. We will continue to monitor the impact of the phase out of LIBOR; however, we do not expect the transition will have a material impact on our operations or financial results. 75 --------------------------------------------------------------------------------
Consolidated Results of Operations
Consolidated statements of operations For the years
ended
2022 2021 2020
Revenues ($ In
Thousands, except for per share data)
Net premiums earned$ 475,266 $ 444,294 $ 397,172 Net investment income 46,406 38,072 31,897 Net realized investment gains 481 729 930 Other revenues 1,192 1,977 3,284 Total revenues 523,345 485,072 433,283 Expenses Insurance claims and claim (benefits) expenses (3,594) 12,305 59,247 Underwriting and operating expenses 117,490 142,303 131,610 Service expenses 1,094 2,509 2,840 Interest expense 32,163 31,796 24,387 Gain from change in fair value of warrant liability (1,113) (566) (2,907) Total expenses 146,040 188,347 215,177 Income before income taxes 377,305 296,725 218,106 Income tax expense 84,403 65,595 46,540 Net income$ 292,902 $ 231,130 $ 171,566 Earnings per share - Basic $ 3.45$ 2.70 $ 2.20 Earnings per share - Diluted $ 3.39$ 2.65 $ 2.13 Loss ratio (1) (0.8) % 2.8 % 14.9 % Expense ratio (2) 24.7 % 32.0 % 33.1 % Combined ratio (3) 24.0 % 34.8 % 48.1 % Non-GAAP financial measures (4) 2022 2021 2020 ($ In Thousands, except for per share data) Adjusted income before tax$ 375,916 $ 303,238 $ 221,506 Adjusted net income 291,571 236,837 173,642 Adjusted diluted EPS 3.39 2.73 2.19 (1) Loss ratio is calculated by dividing insurance claims and claim (benefits) 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$475.3 million ,$444.3 million and$397.2 million for the years endedDecember 31, 2022 , 2021 and 2020, 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 total premiums ceded under our reinsurance transactions and a decline in the contribution from single premium policy cancellations and the run-off of a portion of our prior period monthly policy production and associated premium receipts. Net investment income was$46.4 million ,$38.1 million and$31.9 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. The sequential increase in net investment income during each successive year was primarily driven by the growth in the size of our total investment portfolio, excluding unrealized gains and losses. Other revenues were$1.2 million ,$2.0 million and$3.3 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Other revenues represent underwriting fee revenue generated by our subsidiary, NMIS, which provides outsourced 76 -------------------------------------------------------------------------------- loan review services to mortgage loan originators. The sequential decrease in other revenues during each successive year reflects a decline in NMIS' outsourced loan review volume. Amounts recognized in other revenues generally correspond with amounts incurred as service expenses for outsourced loan review activities in the same periods.
Expenses
We recognize insurance claims and claim expenses in connection with the loss experience of our insured portfolio and incur other underwriting and operating expenses, including employee compensation and benefits, policy acquisition costs, and technology, professional services and facilities expenses, in connection with the development and operation of our business. We also incur service expenses in connection with NMIS' outsourced loan review activities. Insurance claims and claim expenses were a benefit of$3.6 million for the year endedDecember 31, 2022 , compared to insurance claims and claim expenses of$12.3 million and$59.2 million for the years endedDecember 31, 2021 and 2020, respectively. The sequential decline in insurance claims and claim expenses during each successive year reflects a decrease in the number of new defaults emerging on loans impacted by the COVID-19 pandemic, and benefited from cure activity and the associated release of a portion of the reserves we established for anticipated claims payments in prior periods. Underwriting and operating expenses were$117.5 million ,$142.3 million and$131.6 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Underwriting and operating expenses decreased$24.8 million for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 , driven by a decrease in the amortization of deferred policy acquisition costs tied to the improved persistency of our IIF, a decrease in payroll and stock-based compensation costs, a step-down in technology costs related to our agreement with Tata Consultancy Services (TCS) and a decline in capital markets transaction costs, partially offset by an increase in travel and entertainment expenses tied to the easing of COVID-19 related restrictions, as well as an increase in depreciation and amortization incurred in connection with the completion and implementation of certain software and equipment initiatives. Underwriting and operating expenses for the year endedDecember 31, 2022 further benefited from an increase in ceding commissions received upon the introduction of the 2022 Seasoned QSR Transaction effectiveJuly 1, 2022 . 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 of certain development initiatives, an increase in the recognition of previously deferred policy acquisition costs taken in connection with in-force portfolio run-off and growth in other (non-CEO transition) payroll and related amounts. Service expenses were$1.1 million ,$2.5 million and$2.8 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Service expenses represent third-party costs incurred by NMIS in connection with the services it provides. The sequential decline in service expenses in each successive year was primarily driven by a decrease in NMIS' outsourced loan review volume. Amounts incurred as service expenses generally correspond with amounts recognized in other revenues in the same periods. Interest expense was$32.2 million ,$31.8 million and$24.4 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Interest expense increased during the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 due to an increase in commitment fees associated with the 2021 Revolving Credit Facility which had extended its borrowing capacity from$110 million to$250 million inNovember 2021 . Interest expense increased during the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 in connection with the$400 million Notes offering and retirement of the$150 million 2018 Term Loan completed inJune 2020 . See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt." Income tax expense was$84.4 million ,$65.6 million and$46.5 million for the years endedDecember 31, 2022 , 2021 and 2020. The sequential increase in income tax expense during each successive year was primarily driven by the growth in our pre-tax income. As aU.S. taxpayer, we are subject to aU.S. federal corporate income tax rate of 21%. Our effective income tax rate on pre-tax income was 22.4%, 22.1% and 21.3% for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Our effective tax rate increased for the year endedDecember 31, 2022 compared to the year endedDecember 31, 2021 primarily due to a re-measurement of deferred tax balances related to changes in state income tax rates. Our effective tax rate increased for the year endedDecember 31, 2021 compared to the year endedDecember 31, 2020 , primarily due to a decline in the tax benefit realized from excess share-based compensation for vested restricted stock units (RSUs), exercised stock options, and the change in the fair value of our warrant liability in the period. 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." 77 --------------------------------------------------------------------------------
Net Income
Net income was$292.9 million ,$231.1 million and$171.6 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Adjusted net income was$291.6 million ,$236.8 million and$173.6 million , for the same periods, respectively. The increase in net income and adjusted net income during each successive year was primarily driven by growth in our total revenues and a decline in insurance claims and claim expenses, partially offset by an increase in income tax expenses. Net income and adjusted net income for the year endedDecember 31, 2022 further benefited from a decline in our underwriting and operating expenses during the period. Diluted earnings per share (EPS) was$3.39 ,$2.65 and$2.13 for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Adjusted diluted EPS was$3.39 ,$2.73 and$2.19 for the same periods, respectively. Diluted and adjusted diluted EPS increased during each successive year due to growth in our net income and adjusted net income. Diluted and adjusted diluted EPS for the year endedDecember 31, 2022 further benefited from a decline in the number of weighted average diluted shares outstanding tied to share repurchase activity during the period. The non-GAAP financial measures adjusted income before tax, adjusted net income and adjusted diluted EPS are presented to enhance the comparability of financial results between periods. Non-GAAP Financial Measure Reconciliations For
the years ended
2022 2021 2020
($ In Thousands, except for per share data)
As reported
Income before income tax $ 377,305 $ 296,725 $ 218,106
Income tax expense 84,403 65,595 46,540
Net income $ 292,902 $ 231,130 $ 171,566
Adjustments
Net realized investment gains (481) (729) (930)
Gain from change in fair value warrant liability (1,113) (566) (2,907)
Capital market transaction costs 205 3,979 7,237
Other infrequent, unusual or non-operating items - 3,829 -
Adjusted income before tax 375,916 303,238 221,506
Income tax (benefit) expense on adjustments (1) (58) 806 1,324
Adjusted net income $ 291,571 $ 236,837 $ 173,642
Weighted average diluted shares outstanding 85,999 86,885 79,263
Adjusted diluted EPS $ 3.39 $ 2.73 $ 2.19
(1) Marginal tax impact of non-GAAP adjustments is calculated based on our
statutory U.S. federal corporate income tax rate of 21%, except for those items
that are not eligible for an income tax deduction. 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.
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,
78
--------------------------------------------------------------------------------
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. Furthermore, all unexercised warrants expired inApril 2022 and, as such, no change in fair value will be recognized in future reporting periods. We believe trends in our operating performance can be more clearly identified by excluding fluctuations related to the change in fair value of our warrant liability. •Capital markets transaction costs. Capital markets transaction costs result from activities that are undertaken to improve our debt profile or enhance our capital position through activities such as debt refinancing and capital markets reinsurance transactions that may vary in their size and timing due to factors such as market opportunities, tax and capital profile, and overall market cycles. •Net realized investment gains and losses. The recognition of the net realized investment gains or losses can vary significantly across periods as the timing is highly discretionary and is influenced by factors such as market opportunities, tax and capital profile, and overall market cycles that do not reflect our current period operating results. •Other infrequent, unusual or non-operating items. Items that are the result of unforeseen or uncommon events, and are not expected to recur with frequency in the future. Identification and exclusion of these items provides clarity about the impact special or rare occurrences may have on our current financial performance. Past adjustments under this category include infrequent, unusual or non-operating adjustments related to severance, restricted stock modification and other expenses incurred in connection with the CEO transition announced inSeptember 2021 and the effects of the release of the valuation allowance recorded against our net federal and certain state net deferred tax assets in 2016 and the re-measurement of our net deferred tax assets in connection with tax reform in 2017. We believe such items are infrequent or non-recurring in nature, and are not indicative of the performance of, or ongoing trends in, our primary operating activities or business. 79 --------------------------------------------------------------------------------
December 31,
Consolidated balance sheets 2022 December 31, 2021
(In Thousands)
Total investment portfolio $ 2,099,389 $ 2,085,931
Cash and cash equivalents 44,426 76,646
Premiums receivable 69,680 60,358
Deferred policy acquisition costs, net 58,564 59,584
Software and equipment, net 31,930 32,047
Reinsurance recoverable 21,587 20,320
Prepaid federal income taxes (1) 154,409 89,244
Other assets (1) (2) 36,045 26,451
Total assets $ 2,516,030 $ 2,450,581
Debt $ 396,051 $ 394,623
Unearned premiums 123,035 139,237
Accounts payable and accrued expenses 74,576 72,000
Reserve for insurance claims and claim expenses 99,836 103,551
Reinsurance funds withheld 2,674 5,601
Warrant liability - 2,363
Deferred tax liability, net 193,859 164,175
Other liabilities 12,272 3,245
Total liabilities 902,303 884,795
Total shareholders' equity 1,613,727 1,565,786
Total liabilities and shareholders' equity $ 2,516,030
(1) "Prepaid federal income taxes" have been reclassified from "Other assets" in the prior period. (2) "Prepaid reinsurance premiums" have been reclassified as "Other assets" in the prior period. Total cash and investments were$2.1 billion as ofDecember 31, 2022 , compared to$2.2 billion as ofDecember 31, 2021 . Cash and investments atDecember 31, 2022 included$88.9 million held by NMIH. The decrease in total cash and investments reflects an increase in the unrealized loss position of our fixed income portfolio tied to the prevailing interest rate and credit spread environment, as well as share repurchase activity during the year endedDecember 31, 2022 , partially offset by cash generated from operations. Excluding unrealized gains and losses, total cash and investments were$2.4 billion atDecember 31, 2022 compared to$2.1 billion atDecember 31, 2021 . Premium receivable was$69.7 million as ofDecember 31, 2022 , compared to$60.4 million as ofDecember 31, 2021 . 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$58.6 million as ofDecember 31, 2022 , compared to$59.6 million as ofDecember 31, 2021 . The decrease was primarily driven by the recognition of previously deferred policy acquisition costs and was largely offset by the deferral of certain costs associated with the origination of new policies between the respective balance sheet dates. Reinsurance recoverable was$21.6 million as ofDecember 31, 2022 , compared to$20.3 million as ofDecember 31, 2021 . The increase was driven by an increase in ceded losses recoverable associated with our QSR transactions. Prepaid federal income taxes were$154.4 million as ofDecember 31, 2022 , compared to$89.2 million as ofDecember 31, 2021 . The increase was driven by the purchase of$65.2 million of tax and loss bonds during the year endedDecember 31, 2022 . For more information, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes." Other assets increased to$36.0 million as ofDecember 31, 2022 , compared to$26.5 million as ofDecember 31, 2021 . The increase was primarily driven by the recognition of incremental right-of-use assets in connection with the modification of the operating lease for our corporate headquarters inJanuary 2022 . For more information, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 14. Commitments and Contingencies." 80 -------------------------------------------------------------------------------- Unearned premiums were$123.0 million as ofDecember 31, 2022 , compared to$139.2 million as ofDecember 31, 2021 . The decrease was driven by the amortization of existing unearned premiums through earnings in accordance with the expiration of risk on related single premium policies and the cancellations of other single premium policies, partially offset by single premium policy originations during the year endedDecember 31, 2022 . Accounts payable and accrued expenses were$74.6 million as ofDecember 31, 2022 , compared to$72.0 million as ofDecember 31, 2021 . The increase was primarily driven by an increase in reinsurance premiums payable and the timing of other contractual payments due, partially offset by a decrease in accrued compensation expenses and premium taxes. Reserve for insurance claims and claim expenses was$99.8 million as ofDecember 31, 2022 , compared to$103.6 million as ofDecember 31, 2021 . The decrease was primarily driven by a release of a portion of the reserves we established for anticipated claims payments in prior periods, cure activity and a decline in the total size of our default population. The decrease was partially offset by an increase in the average reserve carried per default. 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$2.7 million as ofDecember 31, 2022 , compared to$5.6 million as ofDecember 31, 2021 . 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 . For more information, see, Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 6, Reinsurance." All unexercised warrants expired at their contractual maturity inApril 2022 . No warrants or warrant liability remained atDecember 31, 2022 . Warrant liability was$2.4 million atDecember 31, 2021 . 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$193.9 million as ofDecember 31, 2022 , compared to$164.2 million as ofDecember 31, 2021 . The increase was primarily due to an increase in the claimed deductibility of our statutory contingency reserve, partially offset by the increase in unrealized losses recorded in other comprehensive income. For further information regarding income taxes and their impact on our results of operations and financial position, see Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 11, Income Taxes."
The following table summarizes our consolidated cash flows from operating,
investing and financing activities:
Consolidated cash flows For the years
ended
2022 2021 2020
Net cash provided by (used in): (In
Thousands)
Operating activities$ 313,394 $ 325,719 $ 252,598 Investing activities (289,786) (374,180) (629,554) Financing activities (55,828) (1,830) 462,804 Net (decrease) increase in cash and cash equivalents$ (32,220) $
(50,291)
Net cash provided by operating activities was$313.4 million ,$325.7 million and$252.6 million for the years endedDecember 31, 2022 , 2021 and 2020, respectively. Cash provided by operating activities declined during the year endedDecember 31, 2022 primarily due to an increase in the purchase of tax and loss bonds during the period, as well as a decrease in premium written tied to a decline in single premium policies written during the period, both of which were largely offset by a reduction in the technology service costs paid under our long-term IT services agreement with TCS. Cash provided by operating activities increased during the year endedDecember 31, 2021 primarily due to growth in premiums written, partially offset by a sequential increase in cash interest expenses and the purchase of tax and loss bonds. Cash used in investing activities for the years endedDecember 31, 2022 , 2021 and 2020 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 . 81 -------------------------------------------------------------------------------- Cash used in financing activities was$55.8 million and$1.8 million for the years endedDecember 31, 2022 andDecember 31, 2021 , respectively, and cash provided by financing activities was$462.8 million for the year endedDecember 31, 2020 . Cash used in financing activities during the year endedDecember 31, 2022 primarily relates to the repurchase of common stock. Cash used in financing activities during the year endedDecember 31, 2021 primarily reflects 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.
Liquidity and Capital Resources
NMIH serves as the holding company for our insurance subsidiaries and does not have any significant operations of its own. NMIH's principal liquidity demands include funds for (i) payment of certain corporate expenses; (ii) payment of certain reimbursable expenses of its insurance subsidiaries; (iii) payment of the interest related to the Notes and 2021 Revolving Credit Facility; (iv) tax payments to the Internal Revenue Service; (v) capital support for its subsidiaries; (vi) repurchase of its common stock; and (vii) payment of dividends, if any, on its common stock. NMIH is not subject to any limitations on its ability to pay dividends except those generally applicable to corporations that are incorporated 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, 2022 , NMIH had$88.9 million of cash and investments. NMIH's principal sources of net cash are dividends from its subsidiaries and investment income. NMIC has the capacity to pay aggregate ordinary dividends of$98.0 million to NMIH during the twelve-month period endingDecember 31, 2023 . NMIH also has access to$250 million of undrawn revolving credit capacity under the 2021 Revolving Credit Facility. See Item 8, "Financial Statements and Supplementary Data - Notes to Consolidated Financial Statements - Note 5, Debt". OnFebruary 10, 2022 , our Board of Directors approved a$125 million share repurchase program throughDecember 31, 2023 , that enables the company to repurchase its common stock. The authorization provides NMIH the flexibility to repurchase stock from time to time in the open market or in privately negotiated transactions, based on market and business conditions, stock price and other factors. During the year endedDecember 31, 2022 , NMIH repurchased 2.9 million shares of common stock pursuant to trading plans under Rule 10b-18 and Rule 10b5-1 of the Exchange Act, at a total cost of$56.6 million , including associated costs. As ofDecember 31, 2022 ,$68.4 million of repurchase authority remained available under the program. NMIH has entered into tax and expense-sharing agreements with its subsidiaries which have been approved by the Wisconsin OCI, with such approvals subject to change or revocation at any time. Among such agreements, the Wisconsin OCI has approved the allocation of interest expense on the Notes and the 2021 Revolving Credit Facility to NMIC to the extent proceeds from such offering and facility are distributed to NMIC or used to repay, redeem or otherwise defease amounts raised by NMIC under prior credit arrangements that have previously been distributed to NMIC. The Notes mature 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, 2022 , the applicable commitment fee was 0.30%. 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 82 -------------------------------------------------------------------------------- 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, (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, 2022 . 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 . During the year endedDecember 31, 2022 , NMIC paid a$34.9 million ordinary course dividend to NMIH. NMIC has the capacity to pay aggregate ordinary dividends of$98.0 million to NMIH during the twelve-month period endingDecember 31, 2023 . As an approved insurer under PMIERs, NMIC would generally be subject to additional restrictions on its ability to pay dividends to NMIH if it failed to meet the financial requirements prescribed by PMIERs. Approved insurers that fail to meet the prescribed PMIERs financial requirements are not permitted to pay dividends without prior approval from the GSEs. NMIH may require liquidity to fund the capital needs of its insurance subsidiaries. NMIC's capital needs depend on many factors including its ability to successfully write new business, establish premium rates at levels sufficient to cover claims and operating costs, access the reinsurance markets and meet minimum required asset thresholds under the PMIERs and minimum state capital requirements (respectively, as defined therein). 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, 2022 , NMIC reported$2,379 million available assets against$1,204 million risk-based required assets for a$1,175 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 (which was subsequently amended and restated) on the risk-based treatment of loans affected by the COVID-19 pandemic. Under the guidance, non-performing loans that are subject to a forbearance program granted in response to a financial hardship related to COVID-19 will benefit from a permanent 70% risk-based required asset haircut for the duration of the forbearance period and subsequent repayment plan or trial modification period. NMIC's PMIERs minimum risk-based required asset amount is also adjusted for its reinsurance transactions (as approved by the GSEs). Under NMIC's quota share reinsurance treaties, it receives credit for the PMIERs risk-based required asset amount on ceded RIF. As its gross PMIERs risk-based required asset amount on ceded RIF increases, the PMIERS credit for ceded RIF automatically increases as well (in an unlimited amount). Under NMIC's ILN and XOL Transactions, it generally receives credit for the PMIERs risk-based required asset amount on ceded RIF to the extent such requirement is within the subordinated coverage (excess of loss detachment threshold) afforded by the transaction. NMIC is also subject to state regulatory minimum capital requirements based on its RIF. Formulations of this minimum capital vary by state, however, the most common measure allows for a maximum ratio of RIF to statutory capital (commonly referred to as RTC) of 25:1. The RTC calculation does not assess a different charge or impose a different threshold RTC limit based on the underlying risk characteristics of the insured portfolio. Non-performing loans are treated the same as performing loans under the RTC framework. As such, the PMIERs generally imposes a stricter financial requirement than the state RTC standard. As ofDecember 31, 2022 , NMIC's performing primary RIF, net of reinsurance, was approximately$25.0 billion . NMIC ceded 100% of its pool RIF pursuant to the 2016 QSR Transaction. Based on NMIC's total statutory capital of$2.2 billion (including contingency reserves) as ofDecember 31, 2022 , NMIC's RTC ratio was 11.1:1. Re One has no risk in force remaining and no longer reports a RTC ratio. 83 -------------------------------------------------------------------------------- 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, 2022 , NMIC had$2.0 billion of cash and investments, including$37 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, 2022 , NMIC generated$272 million of cash flow from operations and received an additional$162 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 "Baa1" by Moody's and "BBB" by S&P. NMIH's Notes are rated "Ba1" by Moody's and its long-term counter-party credit profile is rated "BB" by S&P. Moody's outlook for both its ratings is stable and S&P's outlook for both its ratings is positive.
Consolidated Investment Portfolio
The primary objectives of our investment activity are to generate investment income and preserve capital, while maintaining sufficient liquidity to cover our operating needs. We aim to achieve diversification by type, quality, maturity, and industry. We have adopted an investment policy that defines, among other things, eligible and ineligible investments; concentration limits for asset types, industry sectors, single issuers, and certain credit ratings; and benchmarks for asset duration. Our investment portfolio is comprised entirely of fixed maturity instruments. As ofDecember 31, 2022 , the fair value of our investment portfolio was$2.1 billion and we held an additional$44 million of cash and equivalents. Pre-tax book yield on the investment portfolio for the year endedDecember 31, 2022 was 2.1%. Book yield is calculated as period-to-date net investment income divided by the average amortized cost of the investment portfolio. The yield on our investment portfolio is likely to change over time based on movements in interest rates, credit spreads, the duration or mix of our holdings and other factors.
The following tables present a breakdown of our investment portfolio and cash
and cash equivalents by investment type and credit rating:
Percentage of portfolio's fair value December 31, 2022 December 31, 2021 Corporate debt securities 60 % 64 % Municipal debt securities 23 26 Cash, cash equivalents, and short-term investments 10 4U.S. treasury securities and obligations ofU.S. government agencies 4 1 Asset-backed securities 3 5 Total 100 % 100 % 84
-------------------------------------------------------------------------------- Investment portfolio ratings at fair value (1) December 31, 2022 December 31, 2021 AAA 19 % 9 % AA (2) 25 28 A (2) 41 46 BBB (2) 15 17 BB (3) - - Total 100 % 100 % (1) Excluding certain operating cash accounts. (2) Includes +/- ratings. (3) We held one security with a BB+ rating atDecember 31, 2022 , which is not identifiable in the table due to rounding. All of our investments are rated by one or more nationally recognized statistical rating organizations. If three or more ratings are available, we assign the middle rating for classification purposes, otherwise we assign the lowest rating.
We did not recognize an allowance for credit loss for any security in the
investment portfolio as of
provision for credit loss for investment securities during the years ended
As ofDecember 31, 2022 , the investment portfolio had gross unrealized losses of$254.7 million , of which$218.5 million had been in an unrealized loss position for a period of twelve months or longer. 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. The increase in the aggregate size of the unrealized loss position as ofDecember 31, 2022 , was primarily driven by fluctuations in interest rates and, to a lesser extent, movements in credit spreads following the purchase date of certain securities. We evaluated the securities in an unrealized loss position as ofDecember 31, 2022 , assessing their credit ratings as well as any adverse conditions specifically related to the security. Based upon our estimate of the amount and timing of cash flows to be collected over the remaining life of each instrument, we believe the unrealized losses as ofDecember 31, 2022 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 22.4%, 22.1% and 21.3% for the years endedDecember 31, 2022 , 2021 and 2020, 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, 2022 , we had federal net operating loss carryforwards of$1.5 million , which expire in varying amounts in 2030 and 2031, and state net operating loss carryforwards of$133.2 million , which expire in varying amounts from 2031 to 2043. 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 net operating losses were subject to annual limitations of$0.8 million through 2016,$0.5 million in 2017 and$0.3 million , thereafter, through 2028. Our remaining federal net operating loss carryforwards balance is a result of this limitation. 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, 2022 , we held$154.4 million of tax and loss bonds in "Prepaid federal income taxes" on our consolidated balance sheets. 85 -------------------------------------------------------------------------------- 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, 2022 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. The Inflation Reduction Act (IRA) enacted inAugust 2022 imposed, among other provisions, a 1% excise tax on the net value of stock repurchases made on or afterJanuary 1, 2023 . As ofDecember 31, 2022 ,$68.4 million of repurchase authority remained available under the$125 million share repurchase program authorized by our Board of Directors throughDecember 31, 2023 . We expect future repurchase amounts will be subject to the IRA excise tax as executed; however, we do not currently expect the excise tax or other provisions of the IRA to have a material impact on our financial condition or result of operations.
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.
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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, 2022 , assuming all other estimates remain constant,
a one percentage point increase/decrease in our average claim severity factor
would cause approximately a +/- $0.8 million change in our reserve position, and
a one percentage point increase/decrease in our average claim frequency factor
cause approximately a +/- $1.4 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 (DAC)
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 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 year endedDecember 31, 2021 , we accelerated the rate and recognized an additional$11.1 million 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. During the year endedDecember 31 , 87 -------------------------------------------------------------------------------- 2022, we reverted to a normalized historical amortization rate given the marked improvement in our persistency during the period tied to an increase in interest and mortgage note rates, and slowdown in the pace of refinancing activity during the year.
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.
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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, 2022 and 2021 was$2.1 billion , 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, 2022 , the duration of our fixed income portfolio, including cash and cash equivalents, was 3.87 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 3.87% in fair value of our fixed income portfolio. Excluding cash, our fixed income portfolio duration was 3.89 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 3.89% in fair value of our fixed income portfolio. We are also subject to market risk related to the 2021 Revolving Credit Facility and the ILN Transactions. As discussed in Item 8, "Financial Statements - Notes to Consolidated Financial Statements - Note 5, Debt" the 2021 Revolving Credit Facility bears interest at a variable rate and, as a result, increases in market interest rates would generally result in increased interest expense on our outstanding drawn balance. 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 or SOFR, as applicable, 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 or SOFR, as applicable, 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. 89
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