See accompanying notes to consolidated financial statements.
Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”), is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities (“GSEs”) to protect against loss from defaults on low down payment residential mortgage loans. MGIC Assurance Corporation (“MAC”) and MGIC Indemnity Corporation (“MIC”), insurance subsidiaries of MGIC, provide insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended December 31, 20162021 included in our 2021 Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management, the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for thean interim period mayare not benecessarily indicative of the results that may be expected for the year ending December 31, 2017.2022.
Substantially allThe substantial majority of our insurance written since 2008NIW has been for loans purchased by the GSEs. We operate under the Private Mortgage Insurer Eligibility RequirementsThe current private mortgage insurer eligibility requirements ("PMIERs") of the GSEs that became effective December 31, 2015include financial requirements, as well as business, quality control and have been amended from time to time.certain transactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s "Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its "Minimum Required Assets" (which are based on an insurer's book and areof risk in force, calculated from tables of factors with several risk dimensions and are subject to a floor amount)dimensions). Based on our interpretationapplication of the PMIERs, as of September 30, 2017,March 31, 2022, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.
Reclassifications
Certain reclassifications to 2016 amounts have been made in the accompanying financial statements to conform to the 2017 presentation.
Subsequent events
We have considered subsequent events through the date of this filing. See Note 12 - “Loss Reserves” for a discussion of the impact recent hurricane activity is having on our notice of default inventory.
Note 2. NewSignificant Accounting PronouncementsPolicies
Adopted
Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
| | | | | | | | | | | | | | |
| Standard / Interpretation |
| Table | 2.1 | | |
| | | |
| Amended Standards | Effective date |
| | |
| | | |
| ASC 944 | Long-Duration Contracts | |
| • | ASU 2018-12 - Financial Services - Insurance (Topic 944): Targeted Improvements to the Accounting for Long-Duration Contracts | January 1, 2023 |
Targeted Improvements to Employee Share-Based Compensation Accountingfor Long Duration Contracts: ASU 2018-12
In March 2016,August 2018, the Financial Accounting Standards Board (“FASB”) issued updated guidance thatwhich simplifies several aspectsthe amortization of deferred insurance policy acquisition costs. It also provides updates to the accountingrecognition, measurement, presentation and disclosure requirements for employee share-based compensation including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows.long duration contracts, which generally do not apply to mortgage insurance. The updated guidance requires that, prospectively, all tax effects related to share-based compensation be made through the statement of operations at the time of settlement. In contrast, the previous guidance required excess tax benefitsdeferred acquisition costs to be recognized in paid-in capital. The updated guidance also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be appliedamortized on a modified retrospectiveconstant level basis with a cumulative effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based compensation are to be reported as operating activities onover the statement of cash flows, a change from the existing requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, for tax withholding purposes, entities will be allowed to withhold an amount of shares up to the employee’s maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classificationexpected term of the award. The changerelated contracts, versus in tax withholding isproportion to be applied on a modified retrospective approach. This updated guidance became effective January 1, 2017. We adopted this guidance in the first quarter of 2017 and because of the adoption:
We recognized discrete tax benefits of $1.5 million in the provision for income taxes on our statement of operations for the nine months ended September 30, 2017 related to excess tax benefits upon vesting of share-based awards during the period.
We recognized a cumulative effect adjustment in opening retained earnings as of January 1, 2017 related
to the recognition of a deferred tax asset related to suspended tax benefits from vesting transactions occurring in prior years and from the elimination of our forfeiture estimate on share-based awards, which was previously applied only to awards with service conditions.
We reclassified excess tax benefits related to share-based compensation for 2016 to operating activities from financing activities.
We reclassified employee taxes paid for withheld shares for 2016 to financing activities from operating activities.
Prospective Accounting Standards
Stock Compensation - Scope of Modification Accounting
premium, gross profits, or gross margins. In May 2017, theNovember 2020, FASB issued updated guidance related to a change inASU 2020-11 deferring the terms or conditions (modification) of a share-based award. The updated guidance provideseffective date, so that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the award (equity or liability instrument) are the same as the original award immediately before the modification. The updated guidance addresses the current diversity in practice on applying modification accounting, as some entities evaluate whether changes to awards are substantive, which is not prescribed within the current accounting guidance. The updated guidance is effectiveit applies for annual periods beginning after December 15, 2017,2022, including interim periods within those annual periods. Early adoption is permitted, including adoption in any interim period. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.
Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium shortening the amortization period to the earliest call date. Under current GAAP, there is diversity in practice in the amortization period for premiums of callable debt securities and in how the potential for exercise of a call is factored into current impairment assessments. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded assuming a model that incorporates consideration of calls (also referred to as “yield-to-worst” pricing). The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures. We currently account for premium amortization on our purchased callable debt securities on a yield-to-worst basis, which generally aligns with the earliest call date.
Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance that improves the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component in the same financial statement caption as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations, if one is presented. Current guidance does not prescribe where the amount of net benefit cost should be presented in an employer’s statement of operations and does not require entities to disclose by line item the amount of net benefit cost that is included in the statement of operations. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to utilize a current expected credit losses (“CECL”) methodology that incorporates their forecasts of future economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. Any allowance for CECL reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect. Credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.
impact.
15| MGIC Investment Corporation - Q3 2017Q1 2022 | 14
Note 4. Reinsurance
The reinsurance agreements to which we have entered intoare a party, are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is as follows:shown in table 4.1 below.
| | | | | | | | | | | | | | | | | | | | | |
| Reinsurance | | | | |
| Table | 4.1 | | | | | | | | |
| | | | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | | | |
| Premiums earned: | | | | | | | | |
| Direct | | $ | 287,273 | | | $ | 296,271 | | | | | |
| Assumed | | 2,126 | | | 2,411 | | | | | |
Ceded (1) | | (34,159) | | | (43,637) | | | | | |
| Net premiums earned | | $ | 255,240 | | | $ | 255,045 | | | | | |
| | | | | | | | |
| Losses incurred: | | | | | | | | |
| Direct | | $ | (21,092) | | | $ | 48,071 | | | | | |
| Assumed | | (207) | | | (25) | | | | | |
| Ceded | | 1,985 | | | (8,410) | | | | | |
| Losses incurred, net | | $ | (19,314) | | | $ | 39,636 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Premiums earned: | | | | | | | | |
| Direct | | $ | 268,709 |
| | $ | 270,718 |
| | $ | 789,317 |
| | $ | 789,671 |
|
| Assumed | | 312 |
| | 152 |
| | 472 |
| | 542 |
|
| Ceded | | (31,938 | ) | | (33,494 | ) | | (92,467 | ) | | (100,040 | ) |
| Net premiums earned | | $ | 237,083 |
| | $ | 237,376 |
| | $ | 697,322 |
| | $ | 690,173 |
|
| | | | | | | | | |
| Losses incurred: | | | | | | | | |
| Direct | | $ | 35,313 |
| | $ | 69,579 |
| | $ | 99,122 |
| | $ | 216,874 |
|
| Assumed | | (97 | ) | | 241 |
| | 69 |
| | 681 |
|
| Ceded | | (5,469 | ) | | (8,923 | ) | | (14,486 | ) | | (25,056 | ) |
| Losses incurred, net | | $ | 29,747 |
| | $ | 60,897 |
| | $ | 84,705 |
| | $ | 192,499 |
|
Quota share reinsurance
We utilizehave entered into quota share reinsurance ("QSR") transactions with panels of third-party reinsurers to managecede a fixed quota share percentage of premiums earned and received and losses incurred on insurance covered by the transactions. We receive the benefit of a ceding commission equal to 20% of premiums ceded before profit commission. We also receive the benefit of a profit commission through a reduction of premiums we cede. The profit commission varies inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at annual loss ratios higher than we have experienced on our exposure to losses resulting fromQSR Transactions.
Each of our mortgage guaranty insuranceQSR Transactions typically have annual loss ratio caps of 300% and lifetime loss ratios of 200%.
Table 4.2 below provides additional detail regarding our QSR Transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| Table | 4.2 | | | | | | | | |
| | |
| Quota Share Contract | | Covered Policy Years | Quota Share % | | Annual Loss Ratio to Exhaust Profit Commission (1) | | Contractual Termination Date |
| 2015 QSR | | Prior to 2017 | 15.0 | % | | 68.0 | % | | December 31, 2031 |
| 2019 QSR | | 2019 | 30.0 | % | | 62.0 | % | | December 31, 2030 |
| 2020 QSR | | 2020 | 12.5 | % | | 62.0 | % | | December 31, 2031 |
| 2020 QSR and 2021 QSR | | 2020 | 17.5 | % | | 62.0 | % | | December 31, 2032 |
| 2020 QSR and 2021 QSR | | 2021 | 17.5 | % | | 61.9 | % | | December 31, 2032 |
| 2021 QSR and 2022 QSR | | 2021 | 12.5 | % | | 57.5 | % | | December 31, 2032 |
| 2021 QSR and 2022 QSR | | 2022 | 15.0 | % | | 57.5 | % | | December 31, 2033 |
| 2022 QSR and 2023 QSR | | 2022 | 15.0 | % | | 62.0 | % | | December 31, 2033 |
| 2022 QSR and 2023 QSR | | 2023 | 15.0 | % | | 62.0 | % | | December 31, 2034 |
Credit Union QSR (2) | | 2020-2025 | 65.0 | % | | 50.0 | % | | December 31, 2039 |
(1)We will receive a profit commission provided the annual loss ratio on policies and to provide reinsurance capital creditcovered under the PMIERs. Our 2017 quota share reinsurance agreement (“2017 QSR Transaction”) provides coverage on newtransaction remains below this ratio.
(2)Eligible credit union business written Januarybefore April 1, 2017 through December 29, 2017 that meets certain eligibility requirements. Under2020 was covered by our 2019 and prior QSR Transactions.
We can elect to terminate the agreement we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, orQSR Transactions under specified scenarios for no feewithout penalty upon prior written notice, including if we will receive less than 90% (80% for the Credit Union QSR Transaction ) of the full credit amount under the PMIERs, full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
Our 2015Table 4.3 provides additional detail regarding optional termination dates and optional reductions to our quota share reinsurance agreement (“2015 QSR Transaction”) covers eligible riskpercentage which can, in force written before 2017. The 2015 QSR Transaction cedes losses incurred and premiums through December 31, 2024, at which time the agreement expires. Early termination of the agreement caneach case, be elected by us effectivefor a fee. Under the optional reduction to the quota share percentage, we may reduce our quota share percentage from the original percentage shown in table 4.2 to the percentage shown in table 4.3.
MGIC Investment Corporation - Q1 2022 | 15
| | | | | | | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| Table | 4.3 | | | | | | |
| | |
| Quota Share Contract | | Optional Termination Date (1) | Optional Quota Share % Reduction Date (2) | | Optional Reduced Quota Share % |
| 2015 QSR | | June 30, 2021 | NA | | NA |
| 2019 QSR | | July 1, 2022 | July 1, 2022 | | 25% or 20% |
| 2020 QSR | | December 31, 2022 | July 1, 2022 | | 10.5% or 8% |
| 2020 QSR and 2021 QSR, 2020 Policy year | | December 31, 2022 | July 1, 2022 | | 14.5% or 12% |
| 2020 QSR and 2021 QSR, 2021 Policy year | | December 31, 2023 | July 1, 2022 | | 14.5% or 12% |
| 2021 QSR and 2022 QSR. 2021 Policy Year | | December 31, 2023 | July 1, 2022 | | 10.5% or 8% |
| 2021 QSR and 2022 QSR, 2022 Policy Year | | December 31, 2024 | July 1, 2023 | | 12.5% or 10% |
| 2022 QSR and 2023 QSR, 2022 Policy Year | | December 31, 2024 | July 1, 2023 | | 12.5% or 10% |
| 2022 QSR and 2023 QSR, 2023 Policy Year | | December 31, 2025 | July 1, 2024 | | 12.5% or 10% |
(1) We can elect early termination of the QSR Transaction beginning on this date, and bi-annually thereafter.
(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.
See Note 9 “Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 20182021 for a fee, or under specified scenarios for no fee upon prior written notice, including if we will receive less than 90%information about the termination of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
Each of the reinsurers under our 20152017 and 20172018 QSR Transactions, has an insurer financial strength ratingwhich resulted in a reinsurance recoverable on paid losses of A- or better by Standard$36 million for loss and Poor’s Rating Services, A.M. Best or both. The structureloss adjustment expenses (“LAE”) reserves incurred at the time of both the 2017 QSR Transaction and 2015 QSR Transaction is a 30% quota share for all policies covered, with a 20% ceding commission as well as a profit
termination.
commission. Generally, under the QSR Transactions, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remainsTable 4.4 below 60%.
Following isprovides a summary of our quota share reinsurance agreements, excluding captive agreements discussed below,QSR Transactions, for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021.
| | | | | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance | | | | |
| Table | 4.4 | | | | | | | | |
| | | | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | | | |
| Ceded premiums written and earned, net of profit commission | | $ | 22,378 | | | $ | 33,390 | | | | | |
| Ceded losses incurred | | (1,985) | | | 8,405 | | | | | |
Ceding commissions (1) | 12,272 | | | 13,067 | | | | | |
| Profit commission | | 38,980 | | | 31,944 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Ceded premiums written and earned, net of profit commission (1) | | $ | 30,880 |
| | $ | 31,707 |
| | $ | 88,692 |
| | $ | 93,334 |
|
| Ceded losses incurred | | 5,879 |
| | 7,432 |
| | 14,990 |
| | 22,015 |
|
Ceding commissions (2) | | 12,500 |
| | 12,137 |
| | 36,751 |
| | 35,659 |
|
| Profit commission | | 31,621 |
| | 28,981 |
| | 95,063 |
| | 84,963 |
|
| |
Ceded losses incurred for the three months ended March 31, 2022 reflect favorable loss reserve development primarily related to delinquencies received in the second and third quarters of 2020 (“Peak COVID-19” delinquencies). See Note 11 - “Loss Reserves” for discussion of our loss reserves. (1)
| Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements. |
| |
(2)
| Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations. |
Under the terms of our QSR Transactions, ceded premiums, ceding commissions, profit commission, and profit commissionceded paid loss and LAE are settled net on a quarterly basis. The ceded premiumpremiums due after deducting the related ceding commission and profit commission is reported within “Other liabilities”Other liabilities on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our QSR Transactions was $35.3$64.7 million as of September 30, 2017March 31, 2022 and $31.8$66.9 million as of December 31, 2016.2021. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the minimum amount of which areis based on the greater of 1) a reinsurer's funding requirements under PMIERs or 2) ceded reserves and unpaid losses. Each of PMIERs that address ceded risk.the reinsurers under our quota share reinsurance agreements described above has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three..
CaptiveExcess of loss reinsurance
InWe have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special purpose insurers (“Home Re Entities”). For the past, MGIC also obtained captive reinsurance. Inreinsurance coverage periods, we retain the first layer of the respective aggregate losses paid, and a captiveHome Re Entity will then provide second layer coverage up to the outstanding reinsurance arrangement,coverage amount. We retain losses paid in excess of the reinsurer is affiliated withoutstanding reinsurance coverage amount. Subject to certain conditions, the lender for whom MGIC provides mortgage insurance. As part of our settlement with the Consumer Financial Protection Bureau (“CFPB”) in 2013 and with the Minnesota Department of Commerce in 2015, MGIC has agreed to not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement forcoverage decreases over a period of teneither 10 or 12.5 years, subsequentdepending on the transaction, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.
The Home Re Entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the respective settlements. In accordance withinitial reinsurance coverage amounts. Each ILN is non-recourse to any assets of MGIC or affiliates. The proceeds of the CFPB settlement, allILNs, which were deposited into reinsurance trusts for the benefit of our active captive arrangements were placed into run-off. In addition,MGIC, will be the GSEs will not approve any futuresource of reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.
The reinsurance recoverableclaim payments to MGIC and principal repayments on loss reserves related to captive agreements was $11 million as of September 30, 2017, which was supported by $80 million of trust assets, while as of December 31, 2016, the reinsurance recoverable
ILNs.
MGIC Investment Corporation - Q3 2017Q1 2022 |16
When a “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments. As of March 31, 2022 a "Trigger Event" has occurred on our Home Re 2018-1 and Home Re 2019-1 ILN transactions because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded a percentage of the total reinsured principal balance of loans specified under each transaction. A “Trigger Event” has also occurred on the Home Re 2021-2 ILN transaction because the credit enhancement of the most senior tranche is less than the target credit enhancement.
Table 4.5 provides a summary of our Home Re Transactions as of March 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | |
| Excess of Loss Reinsurance | | | | | |
| Table 4.5 | | | | | |
| ($ in thousands) | Home Re 2021-2, Ltd. | Home Re 2021-1, Ltd. | Home Re 2020-1, Ltd. | Home Re 2019-1, Ltd. | Home Re 2018-1, Ltd. |
| Issue Date | August 3, 2021 | February 2, 2021 | October 29, 2020 | May 25, 2019 | October 30, 2018 |
| Policy Inforce Dates | January 1, 2021 - May 28, 2021 | August 1, 2020 - December 31, 2020 | January 1, 2020 - July 31, 2020 | January 1, 2018 - March 31, 2019 | July 1, 2016 - December 31, 2017 |
Optional Call Date (1) | July 25, 2028 | January 25, 2028 | October 25, 2027 | May 25, 2026 | October 25, 2025 |
| Legal Maturity | 12.5 years | 12.5 years | 10 years | 10 years | 10 years |
| Initial First Layer Retention | 190,159 | 211,159 | 275,283 | 185,730 | 168,691 |
| Initial Excess of Loss Reinsurance Coverage | 398,429 | 398,848 | 412,917 | 315,739 | 318,636 |
| March 31, 2022 | | | | | |
| Remaining First Layer Retention | 190,159 | 211,142 | 275,172 | 183,807 | 165,179 |
| Remaining Excess of Loss Reinsurance Coverage | 398,429 | 361,362 | 196,552 | 208,146 | 218,343 |
| December 31, 2021 | | | | | |
| Remaining First Layer Retention | 190,159 | 211,142 | 275,204 | 183,917 | 165,365 |
| Remaining Excess of Loss Reinsurance Coverage | 398,429 | 387,830 | 234,312 | 208,146 | 218,343 |
(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after the respective Optional Call Date.
In April 2022, MGIC entered into a $473.6 million excess-of-loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies with inforce dates from May 29, 2021 through December 31, 2021.
MGIC Investment Corporation - Q1 2022 | 17
The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the remaining reinsurance coverage levels, and the investment income collected on the collateral assets held in a reinsurance trust account and used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in the reference rate and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. The Home Re 2021-2 Transaction references SOFR, while the remaining Home Re Transactions reference one-month LIBOR. As a result, we concluded that each Home Re transaction contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at March 31, 2022, were not material to our consolidated balance sheet, and the change in fair value during the three months ended March 31, 2022 was not material to our consolidated statements of operations. Total ceded premiums under the Home Re transaction were $11.8 million for the three months ended March 31, 2022, and $10.3 million for the three months ended March 31, 2021.
At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity that could be significant to the Home Re Entity, consolidation of the Home Re Entities is not required.
We are required to disclose our maximum exposure to loss, reserveswhich we consider to be an amount that we could be required to record in our statements of operations, as a result of our involvement with the VIEs under our Home Re Transactions. As of March 31, 2022, and December 31, 2021, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from the VIEs under our reinsurance transactions. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance transactions. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance transactions. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to captiveour losses ceded under the reinsurance transactions and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements was $19 million, which was supported by $91 million of trust assets. Each captive reinsurer is requiredmay have on our consolidated financial statements. As a result, we are
unable to maintain a separate trust accountquantify our maximum exposure to supportloss related to our involvement with the risk itVIEs. MGIC has reinsured on all annual books. MGIC iscertain termination rights under the sole beneficiaryreinsurance transactions should its claims not be paid. We consider our exposure to loss from our reinsurance transactions with the VIEs to be remote.
Table 4.6 presents the total assets of the trusts.Home Re Entities as of March 31, 2022 and December 31, 2021.
| | | | | | | | | | | |
| Home Re total assets |
| Table | 4.6 | | |
| (In thousands) | | |
| Home Re Entity | | Total VIE Assets |
| March 31, 2022 | | |
| Home Re 2018-1 Ltd. | | $ | 218,343 | |
| Home Re 2019-1 Ltd. | | 208,146 | |
| Home Re 2020-1 Ltd. | | 209,686 | |
| Home Re 2021-1 Ltd. | | 370,621 | |
| Home Re 2021-2 Ltd. | | 398,429 | |
| |
| December 31, 2021 | | |
| Home Re 2018-1 Ltd. | | $ | 218,343 | |
| Home Re 2019-1 Ltd. | | 208,146 | |
| Home Re 2020-1 Ltd. | | 251,387 | |
| Home Re 2021-1 Ltd. | | 398,848 | |
| Home Re 2021-2 Ltd. | | 398,429 | |
| |
The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaamf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.
The total calculated PMIERs credit for risk ceded under our Home Re Transactions is generally based on the PMIERs requirement of the covered policies and the attachment and detachment points of the coverage, all of which fluctuate over time. (see Note 1 - “Nature of Business and Basis of Presentation”).
MGIC Investment Corporation - Q1 2022 | 18
Note 5. Litigation and Contingencies
Before paying an insurance claim, generally we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage or deny a claim on the loan.loan (both referred to as “rescissions”). In our SEC reports, we refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, all of our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call suchpolicy (such reduction of claims “curtailments.”referred to as a “curtailment”). In recent quarters,years, an immaterial percentage of claims received in a quarter have been resolved by rescissions. In each of 2016 and the first nine monthsquarter of 2017,2022 and in 2021, curtailments reduced our average claim paid by approximately 5.5%.
5.3% and 4.4%, respectively. The COVID-19 related foreclosure moratoriums and forbearance plans decreased our claims paid activity beginning in the second quarter of 2020. It is difficult to predict the level of curtailments once foreclosure activity returns to a more typical level. Our loss reserving methodology incorporates our estimates of future rescissions, curtailments, and reversals of rescissions and curtailments. A variance between ultimate actual rescission, curtailment and reversal rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
When the insured disputes our right to rescind coverage or curtail claims, we generally engage in discussions in an attempt to settle the dispute. If we are unable to reach a settlement, the outcome of a dispute ultimately wouldmay be determined by legal proceedings.
Under ASC 450-20, until a liabilityloss associated with settlement discussions or legal proceedings becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes and do not accrue an estimated loss. WhereWhen we have determineddetermine that a loss is probable and can be reasonably estimated, we have recordedrecord our best estimate of our probable loss. IfIn those cases, until settlement negotiations or legal proceedings are concluded (including the receipt of any necessary GSE approvals), it is possible that we are not able to implement settlements we consider probable, we intend to defend MGIC vigorously against any related legal proceedings.will record an additional loss.
In addition, from time to matters for which we have recorded a probable loss,time, we are involved in other discussions and/or proceedings with insureds with respect to our claims paying practices. Although it is reasonably possible that when these matters are resolved we will not prevail in all cases, we are unable to make a reasonable estimate or range of estimates of the potential liability. We estimate the maximum exposure associated with matters where a loss is reasonably possible to be approximately $289 million, although we believe (but can give no assurance that) we will ultimately resolve these matters for significantly less than this amount. This estimate
of our maximum exposure does not include interest or consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in litigationdisputes and regulatory actions related to alleged violations of the anti-referral fee provisions of the Real Estate Settlement Procedures Act, which is commonly known as RESPA, and the notice provisions of the Fair Credit Reporting Act, which is commonly known as FCRA. While these proceedings in the aggregate have not resulted in material liability for MGIC, there can be no assurance that the outcome of future proceedings, if any, under these laws would not have a material adverse affect on us. In addition, various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2016 and the first nine months of 2017 was immaterial to our consolidated financial statements.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course disputes and legal proceedings will not have a material adverse effect on our financial position or results of operations.
17| MGIC Investment Corporation - Q3 2017Q1 2022 | 19
Note 6. Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. The determination of whether components are dilutive is calculated independently for each period. We calculate diluted EPS using the treasury stock method and if-converted method. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if unvested RSUs result in the issuance of common stock. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our convertible debt instruments9% Debentures result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. During the quarter ended September 30, 2017, we had 9% Debentures outstanding that could result in potentially issuable shares. For purposes of calculating basic and diluted EPS, vested restricted stock and restricted stock units ("RSUs") are considered outstanding.
The following tableTable 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
| | | | | | | | | | | | | | | | | | | | | | | |
| Earnings per share | | | | |
| Table | 6.1 | | | | | | | | |
| | | | Three Months Ended March 31, | | |
| (In thousands, except per share data) | | 2022 | | 2021 | | | | |
| Basic earnings per share: | | | | | | | | |
| Net income | | $ | 175,013 | | | $ | 150,021 | | | | | |
| Weighted average common shares outstanding - basic | | 315,975 | | | 338,904 | | | | | |
| Basic earnings per share | | $ | 0.55 | | | $ | 0.44 | | | | | |
| | | | | | | | |
| Diluted earnings per share: | | | | | | | |
| Net income | | $ | 175,013 | | | $ | 150,021 | | | | | |
Interest expense, net of tax (1): | | | | | | | | |
| 9% Debentures | | 1,512 | | | 3,712 | | | | | |
| Diluted income available to common shareholders | | $ | 176,525 | | | $ | 153,733 | | | | | |
| | | | | | | | |
| Weighted average common shares outstanding - basic | | 315,975 | | | 338,904 | | | | | |
| Effect of dilutive securities: | | | | | | | | |
| Unvested RSUs | | 2,029 | | | 1,694 | | | | | |
| 9% Debentures | | 6,534 | | | 15,785 | | | | | |
| Weighted average common shares outstanding - diluted | | 324,538 | | | 356,383 | | | | | |
| Diluted earnings per share | | $ | 0.54 | | | $ | 0.43 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands, except per share data) | | 2017 | | 2016 | | 2017 | | 2016 |
| Basic earnings per share: | | | | | | | | |
| Net income | | $ | 120,027 |
| | $ | 56,618 |
| | $ | 328,447 |
| | $ | 235,030 |
|
| Weighted average common shares outstanding - basic | | 370,586 |
| | 349,376 |
| | 359,613 |
| | 343,403 |
|
| Basic earnings per share | | $ | 0.32 |
| | $ | 0.16 |
| | $ | 0.91 |
| | $ | 0.68 |
|
| | | | | | | | | |
| Diluted earnings per share: | | | | | | | |
| Net income | | $ | 120,027 |
| | $ | 56,618 |
| | $ | 328,447 |
| | $ | 235,030 |
|
Interest expense, net of tax (1): | | | | | | | | |
| 2% Notes | | — |
| | 1,324 |
| | 907 |
| | 5,288 |
|
| 5% Notes | | — |
| | 673 |
| | 1,709 |
| | 5,080 |
|
| 9% Debentures | | 3,757 |
| | — |
| | 11,270 |
| | — |
|
| Diluted income available to common shareholders | | $ | 123,784 |
| | $ | 58,615 |
| | $ | 342,333 |
| | $ | 245,398 |
|
| | | | | | | | | |
| Weighted average common shares outstanding - basic | | 370,586 |
| | 349,376 |
| | 359,613 |
| | 343,403 |
|
| Effect of dilutive securities: | | | | | | | | |
| Unvested RSUs | | 1,473 |
| | 1,395 |
| | 1,367 |
| | 1,428 |
|
| 2% Notes | | — |
| | 44,488 |
| | 11,119 |
| | 62,707 |
|
| 5% Notes | | — |
| | 10,791 |
| | 4,743 |
| | 13,885 |
|
| 9% Debentures | | 19,028 |
| | — |
| | 19,028 |
| | — |
|
| Weighted average common shares outstanding - diluted | | 391,087 |
| | 406,050 |
| | 395,870 |
| | 421,423 |
|
| Diluted earnings per share | | $ | 0.32 |
| | $ | 0.14 |
| | $ | 0.86 |
| | $ | 0.58 |
|
| | | | | | | | | |
| Antidilutive securities (in millions) | | — |
| | 19.0 |
| | — |
| | 20.4 |
|
| |
(1)
| Tax effected at a rate of 35%.
|
MGIC Investment Corporation - Q3 2017Q1 2022 |18 20
Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gainsOur fixed income securities classified as available-for-sale at March 31, 2022 and lossesDecember 31, 2021 are shown in tables 7.1a and 7.1b below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details of fixed income securities by category as of March 31, 2022 |
| Table | 7.1a | | | | | | | | | | |
| (In thousands) | | Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 120,223 | | | | | $ | 70 | | | $ | (4,712) | | | $ | 115,581 | |
| Obligations of U.S. states and political subdivisions | | 2,383,899 | | | | | 38,260 | | | (90,246) | | | 2,331,913 | |
| Corporate debt securities | | 2,572,570 | | | | | 14,382 | | | (84,660) | | | 2,502,292 | |
| ABS | | 117,517 | | | | | 91 | | | (3,464) | | | 114,144 | |
| RMBS | | 259,849 | | | | | 56 | | | (11,594) | | | 248,311 | |
| CMBS | | 298,490 | | | | | 267 | | | (9,440) | | | 289,317 | |
| CLOs | | 331,914 | | | | | 5 | | | (1,670) | | | 330,249 | |
| Foreign government debt | | 4,486 | | | | | — | | | (377) | | | 4,109 | |
| | | | | | | | | | |
| Total fixed income securities | | $ | 6,088,948 | | | | | $ | 53,131 | | | $ | (206,163) | | | $ | 5,935,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details of fixed income securities by category as of December 31, 2021 |
| Table | 7.1b | | | | | | | | | | |
| | | |
| (In thousands) | | Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized (Losses) (1) | | Fair Value |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 133,990 | | | | | $ | 285 | | | $ | (868) | | | $ | 133,407 | |
| Obligations of U.S. states and political subdivisions | | 2,408,688 | | | | | 133,361 | | | (7,396) | | | 2,534,653 | |
| Corporate debt securities | | 2,704,586 | | | | | 75,172 | | | (13,776) | | | 2,765,982 | |
| ABS | | 150,888 | | | | | 830 | | | (1,008) | | | 150,710 | |
| RMBS | | 309,991 | | | | | 2,397 | | | (3,278) | | | 309,110 | |
| CMBS | | 315,330 | | | | | 5,736 | | | (1,936) | | | 319,130 | |
| CLOs | | 360,436 | | | | | 609 | | | (106) | | | 360,939 | |
| Foreign government debt | | 13,749 | | | | | — | | | (99) | | | 13,650 | |
| Total fixed income securities | | $ | 6,397,658 | | | | | $ | 218,390 | | | $ | (28,467) | | | $ | 6,587,581 | |
We had $12.8 million and $13.4 million of investments at fair value on deposit with various states as of March 31, 2022 and December 31, 2021, respectively, due to regulatory requirements of those state insurance departments. In connection with our insurance and reinsurance activities within MAC and MIC, insurance subsidiaries of MGIC, we are required to maintain assets in trusts for the benefit of contractual counterparties, which had investments at fair value of the investment portfolio$183.4 million and $189.8 million at September 30, 2017March 31, 2022 and December 31, 2016 are shown below.2021, respectively.
MGIC Investment Corporation - Q1 2022 | 21
|
| | | | | | | | | | | | | | | | |
| September 30, 2017 |
| (In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses (1) | | Fair Value |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 104,168 |
| | $ | 331 |
| | $ | (799 | ) | | $ | 103,700 |
|
| Obligations of U.S. states and political subdivisions | | 2,069,592 |
| | 50,505 |
| | (6,814 | ) | | 2,113,283 |
|
| Corporate debt securities | | 1,865,640 |
| | 16,151 |
| | (6,536 | ) | | 1,875,255 |
|
| ABS | | 9,857 |
| | 3 |
| | — |
| | 9,860 |
|
| RMBS | | 198,756 |
| | 113 |
| | (5,973 | ) | | 192,896 |
|
| CMBS | | 308,735 |
| | 1,517 |
| | (4,827 | ) | | 305,425 |
|
| CLOs | | 109,417 |
| | 446 |
| | (129 | ) | | 109,734 |
|
| Total debt securities | | 4,666,165 |
| | 69,066 |
| | (25,078 | ) | | 4,710,153 |
|
| Equity securities | | 7,202 |
| | 50 |
| | (13 | ) | | 7,239 |
|
| Total investment portfolio | | $ | 4,673,367 |
| | $ | 69,116 |
| | $ | (25,091 | ) | | $ | 4,717,392 |
|
|
| | | | | | | | | | | | | | | | |
| December 31, 2016 |
| (In thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Losses (1) | | Fair Value |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 73,847 |
| | $ | 407 |
| | $ | (724 | ) | | $ | 73,530 |
|
| Obligations of U.S. states and political subdivisions | | 2,147,458 |
| | 20,983 |
| | (25,425 | ) | | 2,143,016 |
|
| Corporate debt securities | | 1,756,461 |
| | 6,059 |
| | (18,610 | ) | | 1,743,910 |
|
| ABS | | 59,519 |
| | 74 |
| | (28 | ) | | 59,565 |
|
| RMBS | | 231,733 |
| | 102 |
| | (7,626 | ) | | 224,209 |
|
| CMBS | | 327,042 |
| | 769 |
| | (7,994 | ) | | 319,817 |
|
| CLOs | | 121,151 |
| | 226 |
| | (202 | ) | | 121,175 |
|
| Total debt securities | | 4,717,211 |
| | 28,620 |
| | (60,609 | ) | | 4,685,222 |
|
| Equity securities | | 7,144 |
| | 8 |
| | (24 | ) | | 7,128 |
|
| Total investment portfolio | | $ | 4,724,355 |
| | $ | 28,628 |
| | $ | (60,633 | ) | | $ | 4,692,350 |
|
| |
(1)
| At September 30, 2017 and December 31, 2016, there were no other-than-temporary impairment losses recorded in other comprehensive income.
|
The FHLB Advance is secured by eligible collateral whose fair value must be maintained at 102% of the outstanding principal balance. As of September 30, 2017, that collateral is included in our total investment portfolio amount with a total fair value of $167.2 million.
The amortized cost and fair values of debtfixed income securities at September 30, 2017,March 31, 2022, by contractual maturity, are shown in the following table. Expectedtable 7.2 below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backedABS, RMBS, CMBS, and mortgage-backed securities and collateralized loan obligationsCLOs provide for periodic payments throughout their lives, they are listed in separate categories.
|
| | | | | | | | |
| September 30, 2017 | | | | |
| (In thousands) | | Amortized Cost | | Fair Value |
| Due in one year or less | | $ | 439,771 |
| | $ | 440,227 |
|
| Due after one year through five years | | 1,333,112 |
| | 1,342,110 |
|
| Due after five years through ten years | | 972,932 |
| | 980,813 |
|
| Due after ten years | | 1,293,585 |
| | 1,329,088 |
|
| | | $ | 4,039,400 |
| | $ | 4,092,238 |
|
| | | | | |
| ABS | | 9,857 |
| | 9,860 |
|
| RMBS | | 198,756 |
| | 192,896 |
|
| CMBS | | 308,735 |
| | 305,425 |
|
| CLOs | | 109,417 |
| | 109,734 |
|
| Total as of September 30, 2017 | | $ | 4,666,165 |
| | $ | 4,710,153 |
|
| | | | | | | | | | | | | | | | | |
| Fixed income securities maturity schedule |
| Table | 7.2 | | | | |
| | March 31, 2022 |
| (In thousands) | | Amortized cost | | Fair Value |
| Due in one year or less | | $ | 319,247 | | | $ | 320,108 | |
| Due after one year through five years | | 1,575,075 | | | 1,557,833 | |
| Due after five years through ten years | | 1,747,456 | | | 1,703,148 | |
| Due after ten years | | 1,439,400 | | | 1,372,806 | |
| | 5,081,178 | | | 4,953,895 | |
| | | | |
| ABS | | 117,517 | | | 114,144 | |
| RMBS | | 259,849 | | | 248,311 | |
| CMBS | | 298,490 | | | 289,317 | |
| CLOs | | 331,914 | | | 330,249 | |
| Total as of March 31, 2022 | | $ | 6,088,948 | | | $ | 5,935,916 | |
The proceeds from the sale of fixed income securities classified as available-for-sale along with gross gains (losses) associated with such sales are shown in table 7.3 below.
| | | | | | | | | | | | | | | | | | |
| Details of fixed income securities gains (losses) | | | | |
| Table | 7.3 | Three Months Ended March 31, | | |
| (in thousands) | 2022 | | 2021 | | | | |
| | | | | | | | |
| Gains on sales | 4,134 | | | 3,016 | | | | | |
| Losses on sales | (4,657) | | | (392) | | | | | |
| Change in credit allowance | — | | | 18 | | | | | |
| | | | | | | | |
| Proceeds from sales of fixed income securities | 216,824 | | | 56,827 | | | | | |
Equity securities
The cost and fair value of investments in equity securities at March 31, 2022 and December 31, 2021 are shown in tables 7.4a and 7.4b below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details of equity security investments as of March 31, 2022 |
| Table | 7.4a | | | | | | | | |
| | | |
| (In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
| Equity securities | | $ | 15,966 | | | $ | 6 | | | $ | (781) | | | $ | 15,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Details of equity security investments as of December 31, 2021 |
| Table | 7.4b | | | | | | | | |
| | | |
| (In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
| Equity securities | | $ | 15,838 | | | $ | 264 | | | $ | (34) | | | $ | 16,068 | |
For the three months ended March 31, 2022, we recognized $1.0 million of net losses on equity securities still held as of March 31, 2022. For the three months ended March 31, 2021, we recognized $0.4 million of net losses, on equity securities still held as of March 31, 2021.
19| MGIC Investment Corporation - Q3 2017Q1 2022 | 22
Other invested assets
At September 30, 2017 and December 31, 2016,2021, the FHLB Advance amount was secured by $167.2 million of eligible collateral. As a result of the prepayment of the outstanding principal balance on the FHLB Advance we are no longer required to maintain collateral Our other invested assets balance includes an investment portfolio had gross unrealizedin FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility.
Unrealized investment losses of $25.1 million
Tables 7.5a and $60.6 million, respectively. For those securities7.5b below summarize, for all available-for-sale investments in an unrealized loss position at March 31, 2022 and December 31, 2021, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.5a and 7.5b are estimated using the securities wereprocess described in such a position,Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report on Form 10-K. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized loss aging for securities by type and length of time as of March 31, 2022 |
| Table | 7.5a | | | | | | | | | | | | |
| | | |
| | Less Than 12 Months | | 12 Months or Greater | | Total |
| (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 89,952 | | | $ | (4,508) | | | $ | 2,589 | | | $ | (204) | | | $ | 92,541 | | | $ | (4,712) | |
| Obligations of U.S. states and political subdivisions | | 1,033,010 | | | (86,569) | | | 36,513 | | | (3,677) | | | 1,069,523 | | | (90,246) | |
| Corporate debt securities | | 1,305,092 | | | (66,461) | | | 168,499 | | | (18,199) | | | 1,473,591 | | | (84,660) | |
| ABS | | 82,000 | | | (3,066) | | | 8,660 | | | (398) | | | 90,660 | | | (3,464) | |
| RMBS | | 204,868 | | | (8,805) | | | 39,473 | | | (2,789) | | | 244,341 | | | (11,594) | |
| CMBS | | 222,998 | | | (7,773) | | | 25,201 | | | (1,667) | | | 248,199 | | | (9,440) | |
| CLOs | | 277,052 | | | (1,238) | | | 41,840 | | | (432) | | | 318,892 | | | (1,670) | |
| Foreign government debt | | 4,108 | | | (377) | | | — | | | — | | | 4,108 | | | (377) | |
| Total | | $ | 3,219,080 | | | $ | (178,797) | | | $ | 322,775 | | | $ | (27,366) | | | $ | 3,541,855 | | | $ | (206,163) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized loss aging for securities by type and length of time as of December 31, 2021 |
| Table | 7.5b | | | | | | | | | | | | |
| | | |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
| (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 91,154 | | | $ | (790) | | | $ | 2,616 | | | $ | (78) | | | $ | 93,770 | | | $ | (868) | |
| Obligations of U.S. states and political subdivisions | | 452,021 | | | (7,189) | | | 15,540 | | | (207) | | | 467,561 | | | (7,396) | |
| Corporate debt securities | | 865,085 | | | (13,260) | | | 10,997 | | | (516) | | | 876,082 | | | (13,776) | |
| ABS | | 100,064 | | | (998) | | | 1,552 | | | (10) | | | 101,616 | | | (1,008) | |
| RMBS | | 180,586 | | | (2,548) | | | 31,641 | | | (730) | | | 212,227 | | | (3,278) | |
| CMBS | | 89,889 | | | (1,887) | | | 1,511 | | | (49) | | | 91,400 | | | (1,936) | |
| CLOs | | 177,663 | | | (71) | | | 21,973 | | | (35) | | | 199,636 | | | (106) | |
| Foreign government debt | | 13,649 | | | (99) | | | — | | | — | | | 13,649 | | | (99) | |
| Total | | $ | 1,970,111 | | | $ | (26,842) | | | $ | 85,830 | | | $ | (1,625) | | | $ | 2,055,941 | | | $ | (28,467) | |
Based on current facts and circumstances, we believe the unrealized losses as measured by their month-end fair values, is as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 | | Less Than 12 Months | | 12 Months or Greater | | Total |
| (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 74,136 |
| | $ | (524 | ) | | $ | 22,423 |
| | $ | (275 | ) | | $ | 96,559 |
| | $ | (799 | ) |
| Obligations of U.S. states and political subdivisions | | 411,460 |
| | (4,520 | ) | | 85,700 |
| | (2,294 | ) | | 497,160 |
| | (6,814 | ) |
| Corporate debt securities | | 434,056 |
| | (4,367 | ) | | 75,592 |
| | (2,169 | ) | | 509,648 |
| | (6,536 | ) |
| ABS | | 2,613 |
| | — |
| | — |
| | — |
| | 2,613 |
| | — |
|
| RMBS | | 37,676 |
| | (713 | ) | | 148,748 |
| | (5,260 | ) | | 186,424 |
| | (5,973 | ) |
| CMBS | | 126,709 |
| | (2,375 | ) | | 57,189 |
| | (2,452 | ) | | 183,898 |
| | (4,827 | ) |
| CLOs | | 7,276 |
| | (129 | ) | | — |
| | — |
| | 7,276 |
| | (129 | ) |
| Equity securities | | 381 |
| | (5 | ) | | 171 |
| | (8 | ) | | 552 |
| | (13 | ) |
| Total | | $ | 1,094,307 |
| | $ | (12,633 | ) | | $ | 389,823 |
| | $ | (12,458 | ) | | $ | 1,484,130 |
| | $ | (25,091 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 | | Less Than 12 Months | | 12 Months or Greater | | Total |
| (In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 48,642 |
| | $ | (724 | ) | | $ | — |
| | $ | — |
| | $ | 48,642 |
| | $ | (724 | ) |
| Obligations of U.S. states and political subdivisions | | 1,136,676 |
| | (24,918 | ) | | 13,681 |
| | (507 | ) | | 1,150,357 |
| | (25,425 | ) |
| Corporate debt securities | | 915,777 |
| | (16,771 | ) | | 35,769 |
| | (1,839 | ) | | 951,546 |
| | (18,610 | ) |
| ABS | | 3,366 |
| | (28 | ) | | 656 |
| | — |
| | 4,022 |
| | (28 | ) |
| RMBS | | 46,493 |
| | (857 | ) | | 171,326 |
| | (6,769 | ) | | 217,819 |
| | (7,626 | ) |
| CMBS | | 205,545 |
| | (7,529 | ) | | 38,587 |
| | (465 | ) | | 244,132 |
| | (7,994 | ) |
| CLOs | | 13,278 |
| | (73 | ) | | 34,760 |
| | (129 | ) | | 48,038 |
| | (202 | ) |
| Equity securities | | 568 |
| | (15 | ) | | 137 |
| | (9 | ) | | 705 |
| | (24 | ) |
| Total | | $ | 2,370,345 |
| | $ | (50,915 | ) | | $ | 294,916 |
| | $ | (9,718 | ) | | $ | 2,665,261 |
| | $ | (60,633 | ) |
of March 31, 2022 presented in table 7.5a above are not indicative of the ultimate collectability of the current amortized cost of the securities. The unrealized losses in all categories of our investments at September 30, 2017 and DecemberMarch 31, 20162022 were primarily caused by changesan increase in prevailing interest rates betweenrates. We also rely upon estimates of several credit and non-credit factors in our review and evaluation of individual investments to determine whether a credit impairment exists. All of the time of purchase and the respective fair value measurement date. securities in an unrealized loss position are current with respect to their interest obligations.
There were 343909 and 607610 securities in an unrealized loss position at September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively.
We report accrued investment income separately from fixed income, available-for-sale, securities.
During each of the three and nine months ended September 30, 2017 and 2016 there were no other-than-temporary impairments (“OTTI”) recognized.The net realized investment gains (losses) on the investment portfolio were as follows:
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Fixed maturities | | $ | (50 | ) | | $ | 1,511 |
| | $ | (227 | ) | | $ | 5,397 |
|
| Equity securities | | 3 |
| | 3,581 |
| | 16 |
| | 3,587 |
|
| Net realized investments (losses) gains | | $ | (47 | ) | | $ | 5,092 |
| | $ | (211 | ) | | $ | 8,984 |
|
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Gains on sales | | $ | 32 |
| | $ | 6,168 |
| | $ | 861 |
| | $ | 11,677 |
|
| Losses on sales | | (79 | ) | | (1,076 | ) | | (1,072 | ) | | (2,693 | ) |
| Net realized investments (losses) gains | | $ | (47 | ) | | $ | 5,092 |
| | $ | (211 | ) | | $ | 8,984 |
|
MGIC Investment Corporation - Q3 2017Q1 2022 |20 23
Note 8. Fair Value Measurements
Under the authoritative guidance,Recurring fair value is disclosed using a fair value hierarchy that prioritizesmeasurements
The following describes the inputs to valuation techniquesmethodologies generally used to measure fair value and categorizes assets and liabilities into Levels 1, 2, and 3 based on inputs available to determine their fair values. To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources, or by us, to measure financial instruments at fair value, including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation.
Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. This model combines all inputs to arrive at a value assigned to each security. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which also include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. We have not made any adjustmentsgeneral classification of such financial instruments pursuant to the prices obtainedvaluation hierarchy.
•Fixed income securities:
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies: Securities with valuations derived from the independent pricing sources.
In accordance with fair value accounting guidance, we applied the following fair value hierarchy to measure fair value for assets and liabilities:
Level 1 - Quotedquoted prices for identical instruments in active markets that we can access. Financial assets utilizingaccess are categorized in Level 1 inputs primarily include U.S. Treasury securities and equity securities.
Level 2 - Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculateof the fair value ofhierarchy. Securities valued by surveying the instruments. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporationsdealer community, obtaining relevant trade data, benchmark quotes and agencies, corporate bonds, mortgage-
backed securities, asset-backed securities,spreads and most municipal bonds.
The independent pricing sources utilize these approaches to determineincorporating this information in the fair value of the instruments invaluation process are categorized as Level 2 of the fair value hierarchy based on type of instrument:hierarchy.
Corporate Debt & U.S. Government and Agency Bonds are evaluatedvalued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluationvaluation process. These securities are generally categorized in Level 2 of the fair value hierarchy.
Obligations of U.S. States & Political Subdivisions are evaluatedvalued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation. These securities are generally categorized in Level 2 of the fair value hierarchy.
Residential Mortgage-Backed Securities (“RMBS”("RMBS") are evaluatedvalued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities. These securities are generally categorized in Level 2 of the fair value hierarchy.
Commercial Mortgage-Backed Securities (“CMBS”("CMBS") are evaluatedvalued using valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. TheEvaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable,applicable. These securities are regularly reviewed as partgenerally categorized in Level 2 of the evaluation.fair value hierarchy.
Asset-Backed Securities (“ABS”("ABS") are evaluatedvalued using spreads and other information solicited from market buy- and sell-sidebuy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offeroffers are applied, resulting in tranche-specifictranche specific prices. These securities are generally categorized in Level 2 of the fair value hierarchy.
Collateralized loan obligations ("CLO"CLOs")are evaluatedvalued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or from par values for equity securities restricted in their ability to be redeemed or sold. The inputs used to derive the fair value hierarchy.
Foreign government debt is valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy.
Commercial Paper, which has an original maturity greater than 90 days, is valued using market data for comparable instruments of similar maturity and average yields. These securities are generally categorized in Level 3 securities reflect our own assumptions about2 of the assumptions a market participant would use in pricing an asset or liability. Financial assets utilizing Level 3 inputs primarily includefair value hierarchy.
•Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”) and Bond Mutual Funds, with valuations derived from quoted prices for identical assets in active markets that we can only be redeemed or sold at their paraccess. These securities are valued in Level 1 of the fair value hierarchy.
•Cash Equivalents: Consists of money market funds and only totreasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in level 1 of the security issuer and a state premium tax credit
investment. Our non-financial assets thatfair value hierarchy. Instruments in this category valued using market data for comparable instruments are classified as Level 3 securities consist of reallevel 2 in the fair value hierarchy.
•Real estate acquired through claim settlement. The fair value of real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends. These securities are categorized in level 3 of the fair value hierarchy.
________________________MGIC Investment Corporation - Q1 2022 | 24
Fair value measurements for assetsAssets measured at fair value, included the followingby hierarchy level, as of September 30, 2017March 31, 2022 and December 31, 2016:
| September 30, 2017 |
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 103,700 |
| | $ | 13,312 |
| | $ | 90,388 |
| | $ | — |
|
| Obligations of U.S. states and political subdivisions | | 2,113,283 |
| | — |
| | 2,112,903 |
| | 380 |
|
| Corporate debt securities | | 1,875,255 |
| | — |
| | 1,875,255 |
| | — |
|
| ABS | | 9,860 |
| | — |
| | 9,860 |
| | — |
|
| RMBS | | 192,896 |
| | — |
| | 192,896 |
| | — |
|
| CMBS | | 305,425 |
| | — |
| | 305,425 |
| | — |
|
| CLOs | | 109,734 |
| | — |
| | 109,734 |
| | — |
|
| Total debt securities | | 4,710,153 |
| | 13,312 |
| | 4,696,461 |
| | 380 |
|
Equity securities (1) | | 7,239 |
| | 2,971 |
| | — |
| | 4,268 |
|
| Total investment portfolio | | $ | 4,717,392 |
| | $ | 16,283 |
| | $ | 4,696,461 |
| | $ | 4,648 |
|
Real estate acquired (2) | | $ | 11,728 |
| | $ | — |
| | $ | — |
| | $ | 11,728 |
|
| |
(1)
| Equity securities in Level 32021 are carried at cost, which approximates fair value. |
| |
(2)
| Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets. |
| December 31, 2016 |
| | | | | | | | | | | | | | | | |
| (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 73,530 |
| | $ | 30,690 |
| | $ | 42,840 |
| | $ | — |
|
| Obligations of U.S. states and political subdivisions | | 2,143,016 |
| | — |
| | 2,142,325 |
| | 691 |
|
| Corporate debt securities | | 1,743,910 |
| | — |
| | 1,743,910 |
| | — |
|
| ABS | | 59,565 |
| | — |
| | 59,565 |
| | — |
|
| RMBS | | 224,209 |
| | — |
| | 224,209 |
| | — |
|
| CMBS | | 319,817 |
| | — |
| | 319,817 |
| | — |
|
| CLOs | | 121,175 |
| | — |
| | 121,175 |
| | — |
|
| Total debt securities | | 4,685,222 |
| | 30,690 |
| | 4,653,841 |
| | 691 |
|
Equity securities (1) | | 7,128 |
| | 2,860 |
| | — |
| | 4,268 |
|
| Total investment portfolio | | $ | 4,692,350 |
| | $ | 33,550 |
| | $ | 4,653,841 |
| | $ | 4,959 |
|
Real estate acquired (2) | | $ | 11,748 |
| | $ | — |
| | $ | — |
| | $ | 11,748 |
|
| |
(1)
| Equity securities in Level 3 are carried at cost, which approximates fair value. |
| |
(2)
| Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets. |
MGIC Investment Corporation - Q3 2017|22
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three and nine months ended September 30, 2017 and 2016 is shown in the following tables. There were no transfers into or out of Level 3 in those periodstables 8.1a and there were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
|
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2017 |
| (In thousands) | | Debt Securities | | Equity Securities | | Total Investments | | Real Estate Acquired |
| Balance at June 30, 2017 | | $ | 577 |
| | $ | 4,268 |
| | $ | 4,845 |
| | $ | 10,271 |
|
| Total realized/unrealized gains (losses): | | |
| | |
| | |
| | |
|
| Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (592 | ) |
| Purchases | | — |
| | — |
| | — |
| | 8,881 |
|
| Sales | | (197 | ) | | — |
| | (197 | ) | | (6,832 | ) |
| Balance at September 30, 2017 | | $ | 380 |
| | $ | 4,268 |
| | $ | 4,648 |
| | $ | 11,728 |
|
|
| | | | | | | | | | | | | | | | |
| Three Months Ended September 30, 2016 |
| (In thousands) | | Debt
Securities | | Equity
Securities | | Total
Investments | | Real Estate
Acquired |
| Balance at June 30, 2016 | | $ | 1,056 |
| | $ | 6,940 |
| | $ | 7,996 |
| | $ | 9,642 |
|
| Total realized/unrealized gains (losses): | | |
| | |
| | |
| | |
|
| Included in other comprehensive income | | — |
| | (3,519 | ) | | (3,519 | ) | | — |
|
| Included in earnings and reported as net realized investment gains | | — |
| | 3,579 |
| | 3,579 |
| | — |
|
| Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (501 | ) |
| Purchases | | — |
| | 1,167 |
| | 1,167 |
| | 8,938 |
|
| Sales | | (226 | ) | | (3,899 | ) | | (4,125 | ) | | (7,515 | ) |
| Balance at September 30, 2016 | | $ | 830 |
| | $ | 4,268 |
| | $ | 5,098 |
| | $ | 10,564 |
|
|
| | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2017 |
| (In thousands) | | Debt Securities | | Equity Securities | | Total Investments | | Real Estate Acquired |
| Balance at December 31, 2016 | | $ | 691 |
| | $ | 4,268 |
| | $ | 4,959 |
| | $ | 11,748 |
|
| Total realized/unrealized gains (losses): | | |
| | |
| | |
| | |
|
| Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (818 | ) |
| Purchases | | — |
| | — |
| | — |
| | 26,985 |
|
| Sales | | (311 | ) | | — |
| | (311 | ) | | (26,187 | ) |
| Balance at September 30, 2017 | | $ | 380 |
| | $ | 4,268 |
| | $ | 4,648 |
| | $ | 11,728 |
|
|
| | | | | | | | | | | | | | | | |
| Nine Months Ended September 30, 2016 |
| (In thousands) | | Debt
Securities | | Equity
Securities | | Total
Investments | | Real Estate
Acquired |
| Balance at December 31, 2015 | | $ | 1,228 |
| | $ | 2,855 |
| | $ | 4,083 |
| | $ | 12,149 |
|
| Total realized/unrealized gains (losses): | | |
| | |
| | |
| | |
|
| Included in earnings and reported as net realized investment gains | | — |
| | 3,579 |
| | 3,579 |
| | — |
|
| Included in earnings and reported as losses incurred, net | | — |
| | — |
| | — |
| | (143 | ) |
| Purchases | | — |
| | 4,258 |
| | 4,258 |
| | 27,953 |
|
| Sales | | (398 | ) | | (6,424 | ) | | (6,822 | ) | | (29,395 | ) |
| Balance at September 30, 2016 | | $ | 830 |
| | $ | 4,268 |
| | $ | 5,098 |
| | $ | 10,564 |
|
Authoritative guidance over disclosures about the8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” to the consolidated financial instruments requires additional disclosurestatements in our 2021 Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level as of March 31, 2022 |
| Table | 8.1a | | | | | | | | |
| (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 115,581 | | | $ | 90,816 | | | $ | 24,765 | | | $ | — | |
| Obligations of U.S. states and political subdivisions | | 2,331,913 | | | — | | | 2,331,913 | | | — | |
| Corporate debt securities | | 2,502,292 | | | — | | | 2,502,292 | | | — | |
| ABS | | 114,144 | | | — | | | 114,144 | | | — | |
| RMBS | | 248,311 | | | — | | | 248,311 | | | — | |
| CMBS | | 289,317 | | | — | | | 289,317 | | | — | |
| CLOs | | 330,249 | | | — | | | 330,249 | | | — | |
| Foreign government debt | | 4,109 | | | — | | | 4,109 | | | — | |
| | | | | | | | |
| Total fixed income securities | | 5,935,916 | | | 90,816 | | | 5,845,100 | | | — | |
| Equity securities | | 15,191 | | | 15,191 | | | — | | | — | |
| Cash Equivalents | | 473,712 | | | 473,712 | | | — | | | — | |
Real estate acquired (1) | | 1,052 | | | — | | | — | | | 1,052 | |
| Total | | $ | 6,425,871 | | | $ | 579,719 | | | $ | 5,845,100 | | | $ | 1,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Assets carried at fair value by hierarchy level as of December 31, 2021 |
| Table | 8.1b | | | | | | | | |
| (In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
| U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 133,407 | | | $ | 102,153 | | | $ | 31,254 | | | $ | — | |
| Obligations of U.S. states and political subdivisions | | 2,534,653 | | | — | | | 2,534,653 | | | — | |
| Corporate debt securities | | 2,765,982 | | | — | | | 2,765,982 | | | — | |
| ABS | | 150,710 | | | — | | | 150,710 | | | — | |
| RMBS | | 309,110 | | | — | | | 309,110 | | | — | |
| CMBS | | 319,130 | | | — | | | 319,130 | | | — | |
| CLOs | | 360,939 | | | — | | | 360,939 | | | — | |
| Foreign government debt | | 13,650 | | | — | | | 13,650 | | | — | |
| Total fixed income securities | | 6,587,581 | | | 102,153 | | | 6,485,428 | | | — | |
| Equity securities | | 16,068 | | | 16,068 | | | — | | | — | |
| Cash Equivalents | | 254,230 | | | 254,230 | | | — | | | — | |
Real estate acquired (1) | | 1,507 | | | — | | | — | | | 1,507 | |
| Total | | $ | 6,859,386 | | | $ | 372,451 | | | $ | 6,485,428 | | | $ | 1,507 | |
(1)Real estate acquired through claim settlement, which is held for financial instruments not measured at fair value. sale, is reported in “Other assets” on the consolidated balance sheets.
Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”
23| MGIC Investment Corporation - Q3 2017Q1 2022 | 25
Reconciliations of contents
Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2022 and 2021 is shown in table 8.2 below. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
| | | | | | | | | | | | | | | | | |
| Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, |
| Table | 8.2 | | | | |
| Real Estate Acquired |
| (In thousands) | | 2022 | | 2021 |
| Balance at December 31, | | $ | 1,507 | | | $ | 1,092 | |
| Purchases | | 502 | | | 2,008 | |
| Sales | | (1,026) | | | (1,431) | |
| Included in earnings and reported as losses incurred, net | | 69 | | | 125 | |
| Balance at March 31, | | $ | 1,052 | | | $ | 1,794 | |
| | | | | |
|
| | | | | |
| |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Financial Liabilities Not Measuredassets and liabilities not measured at Fair Valuefair value
We incur financial liabilitiesOther invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the normal course of our business.security issuer at par value, approximates fair value. The following table presents the carrying value and fair value of other invested assets is categorized as Level 2.
Financial liabilities include our financial liabilities disclosed, but not carried, at fair value at September 30, 2017 and December 31, 2016.outstanding debt obligations. The fair values of our 5% Notes, 2% Notes, 5.75% and 5.25% Notes and 9% Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using discounted cash flows on current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.
Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at March 31, 2022 and December 31, 2021. |
| | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 |
| (In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| FHLB Advance | | 155,000 |
| | 154,175 |
| | $ | 155,000 |
| | $ | 151,905 |
|
| 5% Notes | | — |
| | — |
| | 144,789 |
| | 147,679 |
|
| 2% Notes | | — |
| | — |
| | 204,672 |
| | 308,605 |
|
| 5.75% Notes | | 418,271 |
| | 468,248 |
| | 417,406 |
| | 445,987 |
|
| 9% Debentures | | 256,872 |
| | 349,798 |
| | 256,872 |
| | 323,040 |
|
| Total financial liabilities | | $ | 830,143 |
| | $ | 972,221 |
| | $ | 1,178,739 |
| | $ | 1,377,216 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Financial assets and liabilities not measured at fair value |
| Table | 8.3 | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
| (In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
| Financial assets | | | | | | | | |
| Other invested assets | | $ | 850 | | | $ | 850 | | | $ | 3,100 | | | $ | 3,100 | |
| | | | | | | | |
| Financial liabilities | | | | | | | | |
| FHLB Advance | | — | | | — | | | 155,000 | | | 157,585 | |
| 5.75% Senior Notes | | 241,419 | | | 251,009 | | | 241,255 | | | 256,213 | |
| 5.25% Senior Notes | | 640,621 | | | 642,941 | | | 640,253 | | | 686,875 | |
| 9% Convertible Junior Subordinated Debentures | | 53,239 | | | 71,597 | | | 110,204 | | | 151,000 | |
| Total financial liabilities | | $ | 935,279 | | | $ | 965,547 | | | $ | 1,146,712 | | | $ | 1,251,673 | |
MGIC Investment Corporation - Q1 2022 | 26
Note 9. Other Comprehensive Income
The pretax and related income tax benefit (expense) benefit components of our other comprehensive income (loss) for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 are included in the following table.table 9.1 below.
| | | | | | | | | | | | | | | | | | | | | |
| Components of other comprehensive income (loss) | | | | |
| Table | 9.1 | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | | | |
| Net unrealized investment gains (losses) arising during the period | | $ | (342,960) | | | $ | (119,150) | | | | | |
| Total income tax benefit (expense) | | 72,022 | | | 25,021 | | | | | |
| Net of taxes | | (270,938) | | | (94,129) | | | | | |
| | | | | | | | |
| Net changes in benefit plan assets and obligations | | 498 | | | 1,105 | | | | | |
| Total income tax benefit (expense) | | (105) | | | (232) | | | | | |
| Net of taxes | | 393 | | | 873 | | | | | |
| | | | | | | | |
| Total other comprehensive income (loss) | | (342,462) | | | (118,045) | | | | | |
| Total income tax benefit (expense) | | 71,917 | | | 24,789 | | | | | |
| Total other comprehensive income (loss), net of tax | | $ | (270,545) | | | $ | (93,256) | | | | | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Net unrealized investment gains (losses) arising during the period | | $ | 17,761 |
| | $ | (22,206 | ) | | $ | 76,022 |
| | $ | 142,852 |
|
| Income tax (expense) benefit | | (6,217 | ) | | 7,772 |
| | (26,608 | ) | | (50,121 | ) |
| Net of taxes | | 11,544 |
| | (14,434 | ) | | 49,414 |
| | 92,731 |
|
| | | | | | | | | |
| Net changes in benefit plan assets and obligations | | (226 | ) | | (370 | ) | | (680 | ) | | (1,110 | ) |
| Income tax benefit | | 79 |
| | 129 |
| | 238 |
| | 388 |
|
| Net of taxes | | (147 | ) | | (241 | ) | | (442 | ) | | (722 | ) |
| | | | | | | | | |
| Net changes in unrealized foreign currency translation adjustment | | — |
| | (16 | ) | | 45 |
| | (1,496 | ) |
| Income tax benefit (expense) | | — |
| | 6 |
| | (14 | ) | | 522 |
|
| Net of taxes | | — |
| | (10 | ) | | 31 |
| | (974 | ) |
| | | | | | | | | |
| Total other comprehensive income (loss) | | 17,535 |
| | (22,592 | ) | | 75,387 |
| | 140,246 |
|
| Total income tax (expense) benefit | | (6,138 | ) | | 7,907 |
| | (26,384 | ) | | (49,211 | ) |
| Total other comprehensive income (loss), net of tax | | $ | 11,397 |
| | $ | (14,685 | ) | | $ | 49,003 |
| | $ | 91,035 |
|
The pretax and related income tax benefit (expense) components of the amounts reclassified from our accumulated other comprehensive lossincome (loss) (“AOCL”AOCI”) to our consolidated statements of operations for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 are included in table 9.2 below.
| | | | | | | | | | | | | | | | | | | | | |
| Reclassifications from AOCI | | | | |
| Table | 9.2 | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In thousands) | | 2022 | | 2021 | | | | |
Reclassification adjustment for net realized (losses) gains(1) | | $ | 4,841 | | | $ | 3,940 | | | | | |
| Income tax benefit (expense) | | (1,017) | | | (827) | | | | | |
| Net of taxes | | 3,824 | | | 3,113 | | | | | |
| | | | | | | | |
Reclassification adjustment related to benefit plan assets and obligations (2) | | (498) | | | (1,105) | | | | | |
| Income tax benefit (expense) | | 105 | | | 232 | | | | | |
| Net of taxes | | (393) | | | (873) | | | | | |
| | | | | | | | |
| Total reclassifications | | 4,343 | | | 2,835 | | | | | |
| Income tax benefit (expense) | | (912) | | | (595) | | | | | |
| Total reclassifications, net of tax | | $ | 3,431 | | | $ | 2,240 | | | | | |
(1)Increases (decreases) Net realized investment gains (losses) on the following table.consolidated statements of operations.
(2)Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
A rollforward of AOCI for the three months ended March 31, 2022, including amounts reclassified from AOCI, are included in table 9.3 below.
| | | | | | | | | | | | | | | | | | | | | | | |
| Rollforward of AOCI |
| Table | 9.3 | | | | | | |
| | | Three Months Ended March 31, 2022 |
| (In thousands) | | Net unrealized gains and (losses) on available-for-sale securities | | Net benefit plan assets and (obligations) recognized in shareholders' equity | | Total accumulated other comprehensive income (loss) |
| Balance at December 31, 2021, net of tax | | $ | 150,038 | | | $ | (30,341) | | | $ | 119,697 | |
| Other comprehensive income before reclassifications | | (267,114) | | | — | | | (267,114) | |
| Less: Amounts reclassified from AOCI | | 3,824 | | | (393) | | | 3,431 | |
| Balance, March 31, 2022, net of tax | | $ | (120,900) | | | $ | (29,948) | | | $ | (150,848) | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
Reclassification adjustment for net realized (losses) gains (1) | | $ | (427 | ) | | $ | 5,248 |
| | $ | (2,566 | ) | | $ | 5,958 |
|
| Income tax benefit (expense) | | 150 |
| | (1,837 | ) | | 898 |
| | (1,963 | ) |
| Net of taxes | | (277 | ) | | 3,411 |
| | (1,668 | ) | | 3,995 |
|
| | | | | | | | | |
Reclassification adjustment related to benefit plan assets and obligations (2) | | 226 |
| | 370 |
| | 680 |
| | 1,110 |
|
| Income tax (expense) | | (79 | ) | | (129 | ) | | (238 | ) | | (388 | ) |
| Net of taxes | | 147 |
| | 241 |
| | 442 |
| | 722 |
|
| | | | | | | | | |
Reclassification adjustment related to foreign currency (3) | | — |
| | — |
| | — |
| | 1,467 |
|
| Income tax (expense) | | — |
| | — |
| | — |
| | (513 | ) |
| Net of taxes | | — |
| | — |
| | — |
| | 954 |
|
| | | | | | | | | |
| Total reclassifications | | (201 | ) | | 5,618 |
| | (1,886 | ) | | 8,535 |
|
| Total income tax benefit (expense) | | 71 |
| | (1,966 | ) | | 660 |
| | (2,864 | ) |
| Total reclassifications, net of tax | | $ | (130 | ) | | $ | 3,652 |
| | $ | (1,226 | ) | | $ | 5,671 |
|
| |
(1)
| Increases (decreases) Net realized investment (losses) gains on the consolidated statements of operations. |
| |
(2)
| Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations. |
| |
(3)
| Increases (decreases) Other revenue on the consolidated statements of operations. |
MGIC Investment Corporation - Q3 2017Q1 2022 |24 27
A rollforward of AOCL for the nine months ended September 30, 2017, including amounts reclassified from AOCL, are included in the table below.
|
| | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, 2017 |
| (In thousands) | | Net unrealized gains and losses on available-for-sale securities | | Net benefit plan assets and obligations recognized in shareholders' equity | | Net unrealized foreign currency translation | | Total AOCL |
| Balance, December 31, 2016, net of tax | $ | (20,797 | ) | | $ | (54,272 | ) | | $ | (31 | ) | | $ | (75,100 | ) |
| Other comprehensive income before reclassifications | | 47,746 |
| | — |
| | 31 |
| | 47,777 |
|
| Less: Amounts reclassified from AOCL | | (1,668 | ) | | 442 |
| | — |
| | (1,226 | ) |
| Balance, September 30, 2017, net of tax | $ | 28,617 |
| | $ | (54,714 | ) | | $ | — |
| | $ | (26,097 | ) |
Note 10. Benefit Plans
The following tables provideTables 10.1 provides the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the three and nine months ended September 30, 2017March 31, 2022 and 2016:2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Components of net periodic benefit cost |
| Table | 10.1 | | | | | | | | |
| | Three Months Ended March 31, |
| | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
| (In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
| Service cost | | $ | 1,757 | | | $ | 1,664 | | | $ | 348 | | | $ | 364 | |
| Interest cost | | 2,877 | | | 2,810 | | | 177 | | | 164 | |
| Expected return on plan assets | | (4,952) | | | (5,202) | | | (2,625) | | | (2,215) | |
| Amortization of net actuarial losses (gains) | | 1,183 | | | 1,550 | | | (754) | | | (439) | |
| Amortization of prior service cost (credit) | | (53) | | | (60) | | | 122 | | | 53 | |
| | | | | | | | |
| Net periodic benefit cost (benefit) | | $ | 812 | | | $ | 762 | | | $ | (2,732) | | | $ | (2,073) | |
|
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | | $ | 2,389 |
| | $ | 2,283 |
| | $ | 203 |
| | $ | 188 |
|
| Interest cost | | 3,869 |
| | 3,976 |
| | 176 |
| | 176 |
|
| Expected return on plan assets | | (5,025 | ) | | (4,877 | ) | | (1,312 | ) | | (1,222 | ) |
| Recognized net actuarial loss | | 1,543 |
| | 1,464 |
| | — |
| | — |
|
| Amortization of prior service cost | | (107 | ) | | (172 | ) | | (1,662 | ) | | (1,662 | ) |
| Net periodic benefit cost (benefit) | | $ | 2,669 |
| | $ | 2,674 |
| | $ | (2,595 | ) | | $ | (2,520 | ) |
|
| | | | | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
| (In thousands) | | 2017 | | 2016 | | 2017 | | 2016 |
| Service cost | | $ | 7,167 |
| | $ | 6,848 |
| | $ | 610 |
| | $ | 564 |
|
| Interest cost | | 11,606 |
| | 11,929 |
| | 529 |
| | 528 |
|
| Expected return on plan assets | | (15,074 | ) | | (14,631 | ) | | (3,936 | ) | | (3,665 | ) |
| Recognized net actuarial loss | | 4,627 |
| | 4,392 |
| | — |
| | — |
|
| Amortization of prior service cost | | (320 | ) | | (515 | ) | | (4,987 | ) | | (4,987 | ) |
| Net periodic benefit cost (benefit) | | $ | 8,006 |
| | $ | 8,023 |
| | $ | (7,784 | ) | | $ | (7,560 | ) |
We have madecurrently intend to make contributions totaling $9.3$6.5 million to our qualified pension plan and supplemental executive retirement plan in 2017.
Note 11. Income Taxes
We have approximately $987.6 million of net operating loss (“NOL”) carryforwards on a regular tax basis and $117.9 million of NOL carryforwards for computing the alternative minimum tax as of September 30, 2017. Any unutilized carryforwards are scheduled to expire at the end of tax years 2032 through 2033.
We evaluate the realizability of our deferred tax assets including our NOL carryforwards on a quarterly basis. Based on our analysis, we have concluded that all of our deferred tax assets are fully realizable and therefore no valuation allowance existed at September 30, 2017 and December 31, 2016.
Tax Contingencies
As previously disclosed, the Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“REMICs”). The IRS indicated that it did not believe that, for various reasons, we had established sufficient tax basis in the REMIC residual interests to deduct the losses from taxable income. We appealed these assessments within the IRS and in August 2010, we reached a tentative settlement agreement with the IRS which was not finalized.
In 2014, we received Notices of Deficiency (commonly referred to as “90 day letters”) covering the 2000-2007 tax years. The Notices of Deficiency reflect taxes and penalties related to the REMIC matters of $197.5 million and at September 30, 2017, there would also be interest related to these matters of approximately $200.3 million. In 2007, we made a payment of $65.2 million to the United States Department of the Treasury which will reduce any amounts we would ultimately owe. The Notices of Deficiency also reflect additional amounts due of $261.4 million, which are primarily associated with the disallowance of the carryback of the 2009 net operating loss to the 2004-2007 tax years. We believe the IRS included the carryback adjustments as a precaution to keep open the statute of limitations on collection of the tax that was refunded when this loss was carried back, and not because the IRS actually intends to disallow the carryback permanently. Depending on the outcome of this matter, additional state income taxes and state interest may become due when a final resolution is reached. As of September 30, 2017, those state taxes and interest would approximate $84.1 million. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of September 30, 2017 is $141.8 million, which represents the tax benefits generated
2022.
25| MGIC Investment Corporation - Q3 2017Q1 2022 | 28
by the REMIC portfolio included in our tax returns that we have not taken benefit for in our financial statements, including any related interest.
We filed a petition with the U.S. Tax Court contesting most of the IRS' proposed adjustments reflected in the Notices of Deficiency and the IRS filed an answer to our petition which continued to assert their claim. The case has twice been scheduled for trial and in each instance, the parties jointly filed, and the U.S. Tax Court approved (most recently in February 2016), motions for continuance to postpone the trial date. Also in February 2016, the U.S. Tax Court approved a joint motion to consolidate for trial, briefing and opinion, our case with similar cases of Radian Group, Inc., as successor to Enhance Financial Services Group, Inc., et al. The parties informed the Tax Court in August 2017 that they had reached agreement in principle on all issues in the case and were preparing the documentation reflecting the terms of their agreement. The agreed settlement terms will be subject to review by the Joint Committee on Taxation ("JCT") before a settlement can be completed and there is no assurance that a settlement will be completed. Based on information that we currently have regarding the status of our ongoing dispute, we recorded a provision for additional taxes and interest of $28.4 million in the first nine months of 2017.
Should a settlement not be completed, ongoing litigation to resolve our dispute with the IRS could be lengthy and costly in terms of legal fees and related expenses. We would need to make further adjustments, which could be material, to our tax provision and liabilities if our view of the probability of success in this matter changes, and the ultimate resolution of this matter could have a material negative impact on our effective tax rate, results of operations, cash flows, available assets and statutory capital. In this regard, see Note 15 - “Statutory Information.”
The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue that would affect our effective tax rate is $119.8 million. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. As of September 30, 2017 and December 31, 2016, we had accrued $50.8 million and $28.9 million, respectively, for the payment of interest.
Note 12.11. Loss Reserves
We establish case reserves and LAE reserves on delinquent loans that were reported to recognize the estimated liability for lossesus as two or more payments past due and loss adjustment expenses (“LAE”) relatedhave not become current or resulted in a claim payment. Such loans are referred to defaults on insured mortgage loans. Lossas being in our delinquency inventory. Case reserves are established by estimating the number of loans in our delinquency inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for estimated losses from delinquencies we estimate have occurred prior to the close of an accounting period, but have not yet been reported to us. IBNR reserves are also established using estimated claim rates and claim severities.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including
unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between defaultdelinquency and claim filing;filing (all else being equal, the longer the period between delinquency and claim filing, the greater the severity); and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment and the continued impact of the COVID-19 pandemic, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance programs and foreclosure moratoriums), and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Loss reserves in future periods will also be dependent on the number of loans reported to us as delinquent.
Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment. Given the uncertainty surrounding the long-term impact of COVID-19, it is difficult to predict the ultimate effect of the COVID-19 related delinquencies and forbearances on our loss incidence.
In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or claim severity could have a material impact on loss reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of March 31, 2022, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately +/- $15 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $18 million.
The “Losses incurred” section of the table 11.1 below shows losses incurred on defaultsdelinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to defaultsdelinquencies that occurred in the current year represents the
estimated amount to be ultimately paid on such defaults.delinquencies. The amount of losses incurred relating to defaultsdelinquencies that occurred in prior years represents the difference between the actual claim rate and claim severity associated with those defaultsdelinquencies resolved in the current year compared to the estimated claim rate and claim severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on defaultsdelinquencies continuing from the end of the prior year. This re-estimation of the claim rate and claim severity is the result of our review of current trends in the defaultdelinquency inventory, such as percentages of defaultsdelinquencies that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of defaultsdelinquencies by geography and changes in average loan exposure.
Losses incurred on defaultsdelinquencies that occurred in the current year decreased in the first nine monthsquarter of 20172022 compared to the same period in 2016,last year primarily due to a decrease in new delinquency notices reported.
For the three months ended March 31, 2022 we experienced favorable loss development of $55.7 million on previously received notices primarily related to a decrease in estimated claim rate on recently reported defaults and a decrease in the number of new defaults, net of related cures.
Peak COVID-19 delinquencies. For the ninethree months ended September 30, 2017 and 2016March 31, 2021 we experienced favorable prior year loss reserve development in large part, due to the resolution of approximately 59% and 54%, respectively, of the prior year default inventory, with improved cure rates.$1.8 million.
MGIC Investment Corporation - Q1 2022 | 29
The “Losses paid” section of the table 11.1 below shows the amount of losses paid on default notices receiveddelinquencies that occurred in the current year and losses paid on default notices receiveddelinquencies that occurred in prior years. For several years,In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums and forbearance plans, the average time it tooktakes to receive a claim associated with a default had increased significantly from our historical experience of approximately twelve months. This was, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. In recent quarters, we have experienced a decline in the average time servicers are utilizing to process
MGIC Investment Corporation - Q3 2017|26
has increased.
foreclosures, which has reduced the average time to receive a claim associated with new notices of default that do not cure. All else being equal, the longer the period between default and claim filing, the greater the severity.
During the first nine months of 2017 and 2016, our losses paid included amounts paid on commutations of coverage on pools of non-performing loans (“NPLs”) and in 2016, our losses paid also included amounts paid in connection with disputes concerning our claims paying practices. The impacts of the commutations of NPLs and settlements were as follows:
2017 - 1,337 notices removed from default inventory with an amount paid of $54 million.
2016 - 1,273 notices removed from default inventory with an amount paid of $52 million.
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $68 million and $85 million at September 30, 2017 and December 31, 2016, respectively.
The following tableTable 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the ninethree months ended September 30, 2017March 31, 2022 and 2016:2021.
| | | | | | | | | | | | | | | | | |
| Development of reserves for losses and loss adjustment expenses |
| Table | 11.1 | | | | |
| | | Three Months Ended March 31, |
| (In thousands) | | 2022 | | 2021 |
| Reserve at beginning of period | | $ | 883,522 | | | $ | 880,537 | |
| Less reinsurance recoverable | | 66,905 | | | 95,042 | |
| Net reserve at beginning of period | | 816,617 | | | 785,495 | |
| | | | |
| Losses incurred: | | | | |
| Losses and LAE incurred in respect of delinquency notices received in: | | | | |
| Current year | | 36,344 | | | 41,425 | |
Prior years (1) | | (55,658) | | | (1,789) | |
| Total losses incurred | | (19,314) | | | 39,636 | |
| | | | |
| Losses paid: | | | | |
| Losses and LAE paid in respect of delinquency notices received in: | | | | |
| Current year | | — | | | — | |
| Prior years | | 10,748 | | | 14,922 | |
| | | | |
| Total losses paid | | 10,748 | | | 14,922 | |
| Net reserve at end of period | | 786,555 | | | 810,209 | |
| Plus reinsurance recoverable | | 64,717 | | | 102,901 | |
| Reserve at end of period | | $ | 851,272 | | | $ | 913,110 | |
|
| | | | | | | | |
| | | Nine months ended September 30, |
| (In thousands) | | 2017 | | 2016 |
| Reserve at beginning of period | | $ | 1,438,813 |
| | $ | 1,893,402 |
|
| Less reinsurance recoverable | | 50,493 |
| | 44,487 |
|
| Net reserve at beginning of period | | 1,388,320 |
| | 1,848,915 |
|
| | | | | |
| Losses incurred: | | | | |
| Losses and LAE incurred in respect of default notices received in: |
| Current year | | 219,485 |
| | 292,090 |
|
Prior years (1) | | (134,780 | ) | | (99,591 | ) |
| Total losses incurred | | 84,705 |
| | 192,499 |
|
| | | | | |
| Losses paid: | | | | |
| Losses and LAE paid in respect of default notices received in: |
| Current year | | 5,474 |
| | 5,942 |
|
| Prior years | | 407,977 |
| | 549,706 |
|
Reinsurance terminations (2) | | 301 |
| | (2,854 | ) |
| Total losses paid | | 413,752 |
| | 552,794 |
|
| Net reserve at end of period | | 1,059,273 |
| | 1,488,620 |
|
| Plus reinsurance recoverables | | 45,878 |
| | 46,863 |
|
| Reserve at end of period | | $ | 1,105,151 |
| | $ | 1,535,483 |
|
| |
(1)
| A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development. |
| |
(2)
| In a termination, the reinsurance agreement is cancelled, with no future premium ceded and amounts for any incurred but unpaid losses paid to us. Amounts paid to (received from) reinsurers result in an increase (decrease) in net losses paid. The change in net losses paid on our losses incurred is offset |
(1)A positive number for prior year loss reserve development indicates a deficiency of prior year reserves. A negative number for prior year loss reserve development indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss reserve development.by a corresponding change in the reinsurance recoverable, resulting in no net impact on losses incurred.
The prior year loss reserve development of the reserves in the first ninethree months of 20172022 and 20162021 is reflected in the following table.table 11.2 below.
| | | | | | | | | | | | | | | | | |
| Reserve development on previously received delinquencies |
| Table | 11.2 | | | | |
| | | Three Months Ended March 31, |
| (In thousands) | | 2022 | | 2021 |
| Increase (decrease) in estimated claim rate on primary defaults | | $ | (55,777) | | | $ | 87 | |
| Increase (decrease) in estimated severity on primary defaults | | (2,172) | | | 59 | |
| Change in estimates related to pool reserves, LAE reserves, reinsurance, and other | | 2,291 | | | (1,935) | |
Total prior year loss development (1) | | $ | (55,658) | | | $ | (1,789) | |
(1)A positive number for prior year loss reserve development indicates a deficiency of prior year loss reserves. A negative number for prior year loss reserve development indicates a redundancy of prior year loss reserves.
|
| | | | | | | | |
| | | Nine months ended September 30, |
| (In millions) | | 2017 | | 2016 |
| Decrease in estimated claim rate on primary defaults | | $ | (138 | ) | | $ | (108 | ) |
| (Decrease) increase in estimated severity on primary defaults | | (2 | ) | | 12 |
|
| Change in estimates related to pool reserves, LAE reserves and reinsurance | | 5 |
| | (4 | ) |
Total prior year loss development (1) | | $ | (135 | ) | | $ | (100 | ) |
| |
(1)
| A negative number for prior year loss development indicates a redundancy of prior year loss reserves. |
Default
MGIC Investment Corporation - Q1 2022 | 30
Delinquency inventory
A rollforward of our primary defaultdelinquency inventory for the three and nine months ended September 30, 2017March 31, 2022 and 20162021 appears in the following table.table 11.3 below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the accuracy of the data provided by servicers, the number of business days in a month and transfers of servicing between loan servicers and whether all servicers have provided the reports in a given month.servicers.
| | | | | | | | | | | | | | | | | | | | | |
| Delinquency inventory rollforward | | | | |
| Table | 11.3 | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| Delinquency inventory at beginning of period | | 33,290 | | | 57,710 | | | | | |
| New notices | | 10,703 | | | 13,011 | | | | | |
| Cures | | (13,200) | | | (17,628) | | | | | |
| Paid claims | | (322) | | | (312) | | | | | |
| Rescissions and denials | | (9) | | | (6) | | | | | |
| | | | | | | | |
| Delinquency inventory at end of period | | 30,462 | | 52,775 | | | | |
|
| | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Default inventory at beginning of period | | 41,317 |
| | 52,558 |
| | 50,282 |
| | 62,633 |
|
| New notices | | 15,950 |
| | 17,607 |
| | 45,352 |
| | 50,418 |
|
| Cures | | (13,546 | ) | | (15,556 | ) | | (45,382 | ) | | (50,249 | ) |
| Paids (including those charged to a deductible or captive) | | (2,195 | ) | | (3,051 | ) | | (7,403 | ) | | (9,619 | ) |
| Rescissions and denials | | (82 | ) | | (125 | ) | | (277 | ) | | (477 | ) |
| Other items removed from inventory | | (209 | ) | | — |
| | (1,337 | ) | | (1,273 | ) |
| Default inventory at end of period | | 41,235 |
| | 51,433 |
| | 41,235 |
| | 51,433 |
|
The decreaseOur delinquency notices increased beginning in the primary default inventorysecond quarter of 2020 because of the impacts of the COVID-19 pandemic, including the high level of unemployment and economic uncertainty resulting from measures to reduce the transmission of COVID-19. Starting in the third quarter of 2020, we experienced an increase in cures associated with our COVID-19 new delinquency notices. Government initiatives and actions taken by the GSEs provided for payment forbearance on mortgages to borrowers experiencing hardship during 2017 and 2016 wasthe COVID-19 pandemic, allowing mortgage payments to be suspended for a period generally across all markets and primarily in book years 2008 and prior.ranging from six to eighteen months.
Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a defaultdelinquency ages it becomesis more likely to result in a claim.
| | | | | | | | | | | | | | |
| Primary delinquency inventory - consecutive months delinquent |
| Table | 11.4 | | | |
| March 31, 2022 | December 31, 2021 | March 31, 2021 |
| 3 months or less | 7,382 | | 7,586 | | 9,194 | |
| 4-11 months | 8,131 | | 7,990 | | 29,832 | |
12 months or more (1) | 14,949 | | 17,714 | | 13,749 | |
| Total | 30,462 | | 33,290 | | 52,775 | |
| 3 months or less | 24 | % | 23 | % | 17 | % |
| 4-11 months | 27 | % | 24 | % | 57 | % |
| 12 months or more | 49 | % | 53 | % | 26 | % |
| Total | 100 | % | 100 | % | 100 | % |
| Primary claims received inventory included in ending delinquent inventory | 217 | | 211 | | 151 | |
27| MGIC Investment Corporation - Q3 2017
Subsequent event
As shown in the table below, we received an increased number of new default notices in October 2017 compared to October 2016 related to loans in locations that the Federal Emergency Management Agency has declared Individual Assistance Disaster Areas (“IADA”) in connection with recent hurricane activity primarily impacting Texas, Florida, and Puerto Rico.
|
| | | | | | |
| | | For the month ended October 31, |
| | | 2017 | | 2016 |
| Default notices for loans in IADAs | | 3,394 |
| | 637 |
|
| Other default notices | | 4,549 |
| | 4,882 |
|
| Total default notices | | 7,943 |
| | 5,519 |
|
The number ofprimary delinquency inventory delinquent for 12 consecutive months a borrower isor more has been delinquent is shown in the following table.
| Consecutive months in default |
| | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| 3 months or less | 11,331 |
| | 27 | % | | 12,194 |
| | 24 | % | | 12,333 |
| | 24 | % |
| 4-11 months | 11,092 |
| | 27 | % | | 13,450 |
| | 27 | % | | 12,648 |
| | 25 | % |
12 months or more (1) (2) | 18,812 |
| | 46 | % | | 24,638 |
| | 49 | % | | 26,452 |
| | 51 | % |
| Total primary default inventory | 41,235 |
| | 100 | % | | 50,282 |
| | 100 | % | | 51,433 |
| | 100 | % |
| | | | | | | | | | | | |
| Primary claims received inventory included in ending default inventory: |
| | 1,063 |
| | 3 | % | | 1,385 |
| | 3 | % | | 1,636 |
| | 3 | % |
| |
(1)
| Approximately 45%, 47%, and 48% of the primary default inventory in default for 12 consecutive months or more has been in default for at least 36 consecutive months as of September 30, 2017, December 31, 2016, and September 30, 2016, respectively.
|
| |
(2)
| The majority of items removed from our default inventory were due to commutations of NPLs during the nine months ended September 30, 2017 were in default for 12 consecutive months or more as of December 31, 2016.
|
The number of months a loan is in the default inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the following table.
| Number of payments delinquent |
| | | | | | | | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| 3 payments or less | 16,916 |
| | 41 | % | | 18,419 |
| | 36 | % | | 18,374 |
| | 36 | % |
| 4-11 payments | 10,583 |
| | 26 | % | | 12,892 |
| | 26 | % | | 12,282 |
| | 24 | % |
12 payments or more (1) | 13,736 |
| | 33 | % | | 18,971 |
| | 38 | % | | 20,777 |
| | 40 | % |
| Total primary default inventory | 41,235 |
| | 100 | % | | 50,282 |
| | 100 | % | | 51,433 |
| | 100 | % |
| |
(1)
| The majority of items removed from our default inventory were due to commutations of NPLs during the nine months ended September 30, 2017 had 12 or more payments delinquent as of December 31, 2016.
|
Pool insurance default inventory decreased to 1,426 at September 30, 2017 from 1,883 atMarch 31, 2022, December 31, 2016,2021, and 1,979 at September 30, 2016.March 31, 2021, respectively.
Claims paying practices
Our loss reserving methodology incorporates our estimates of future rescissions and curtailments. A variance between ultimate actual rescission and curtailment rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
Premium refunds
Our estimate of premiums to be refunded on expected future rescissionsclaim payments is accrued for separately and is included in “Other liabilities”Liabilities” on our consolidated balance sheets.sheets and approximated $36.4 million and $37.3 million at March 31, 2022 and December 31, 2021, respectively.
For information about discussions and legal proceedings with customers with respect to our claims paying practices see Note 5 – “Litigation and Contingencies.”
MGIC Investment Corporation - Q1 2022 | 31
Note 13.12. Shareholders’ Equity
Change in accounting principleAccounting Policy
As described in Note 2 - “New Accounting Pronouncements,” during the first quarter of 2017January 1, 2021, we adopted the updated guidance of “Improvements to Employee Share-Based Compensation Accountingfor "Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”.” The adoptionapplication of this guidance resulted in an immateriala $68.3 million cumulative effect adjustment to our 20172021 beginning retained earnings.earnings and paid in capital to reflect the 9% Debenture as if we had always accounted for the debt as a liability in its entirety.
2017 Capital transactionsShare repurchase programs
2% Notes
As described in Note 3 - “Debt,” in April, holders of approximately $202.5 million of the outstanding principal amount of our 2% Notes exercised their rights to convert their notes into sharesRepurchases of our common stock. As a result,stock may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. In the first quarter of 2022, we issuedrepurchased 8.5 million shares at an average cost of $14.99 per share, which included commissions. In 2021, we repurchased approximately 29.119.0 million shares of our common stock, at an average cost of $15.30 per share, which 18.7included commissions. At March 31, 2022 we had $372 million shares were reissued fromremaining under a share repurchase program approved by our treasury stock and 10.4 million were newly issued shares. The conversionsBoard of the notes increased our shareholders’ equity by the carrying value of the notes at the time of conversion.
MGIC Investment Corporation - Q3 2017|28
2016 Capital transactions
As describedDirectors in Note 3 - “Debt,” in the third quarter of 2016, we issued approximately 18.3 million shares of our common stock as consideration for the purchase of certain of our 2% Notes.2021. In the third quarter of 2016,April 2022, we repurchased an aggregate of approximately 13.5additional 3.0 million shares totaling $39.7 million under the remaining authorization that expires at year end 2023.
Cash dividends
In March 2022, we paid quarterly cash dividends of our common stock, of which approximately 2.1 million shares were unsettled as of September 30, 2016, at a weighted average price$0.08 per share of $8.02,to shareholders which included commissions. The aggregate purchase price of the shares was $108.1 million, which included approximately $16.5 million of cash settled after September 30, 2016. An additional 4.8 million shares were repurchased in October 2016.
As described in Note 3 - “Debt” the purchase of a portion of our 9% Debentures by MGIC, and corresponding elimination of the purchased 9% Debentures in consolidation, resulted in a reduction to our consolidated shareholders’ equity of approximately $6.3totaled $25.8 million. This reduction represented the allocated portion of the consideration paid to reacquire the equity component of the 9% Debentures. The reduction was recognized in paid-in capital and was less than the amount ascribed to paid-in capital at original issuance of the 9% Debentures.
Shareholders Rights Agreement
Our Amended and Restated Rights Agreement dated July 23, 2015 seeks to diminish the risk that our ability to use our NOLs to reduce potential future federal income tax obligations may become substantially limited and to deter certain abusive takeover practices. The benefit of the NOLs would be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, if we were to experience an “ownership change” as defined by Section 382 of the Internal Revenue Code.
Under the Agreement each outstanding share of our Common Stock is accompanied by one Right. The “Distribution Date” occurs on the earlier of ten days after a public announcement that a person has become an “Acquiring Person,” or ten business days after a person announces or begins a tender offer in which consummation of such offer would result in a person becoming an “Acquiring Person.” An “Acquiring Person” is any person that becomes, by itself or together with its affiliates and associates, a beneficial owner of 5% or more of the shares of our Common Stock then outstanding, but excludes, among others, certain exempt and grandfathered persons as defined in the Agreement. The Rights are not exercisable until the Distribution Date. Each Right will initially entitle shareholders to buy one-tenth of one share of our Common Stock at a Purchase Price of $45 per full share (equivalent to $4.50 for each one-tenth share), subject to adjustment. Each exercisable Right (subject to certain limitations) will entitle its holder to purchase, at the Rights’ then-current Purchase Price, a number of our shares of Common Stock (or if after the Shares Acquisition Date, we are acquired in a business
combination, common shares of the acquiror) having a market value at the time equal to twice the Purchase Price. The Rights will expire on August 1, 2018, or earlier as described in the Agreement. The Rights are redeemable at a price of $0.001 per Right at any time prior to the time a person becomes an Acquiring Person. Other than certain amendments,On April 28, 2022, the Board of Directors may amend the Rights in any respect without the consent of thedeclared a quarterly cash dividend to holders of the Rights.company’s common stock of $0.08 per share payable on May 26, 2022, to shareholders of record at the close of business on May 12, 2022.
Note 14.13. Share-Based Compensation
We have certain share-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under our plans generally vest over periods ranging from one to three years.years, although awards to our non-employee directors vest immediately.
TheTable 13.1 shows the number of sharesrestricted stock units (RSUs) granted to employees and the weighted average fair value per share during the periods presented were (shares in thousands):.
| | | | | | | | | | | | | | | | | | | | | | | |
| Restricted stock unit grants |
| Table | 13.1 | | | | | | |
| | | Three months ended March 31, |
| | | 2022 | | 2021 |
| | | RSUs Granted (in thousands) | Weighted Average Share Fair Value | | RSUs Granted (in thousands) | Weighted Average Share Fair Value |
| RSUs subject to performance conditions | (1) | 848 | | $ | 15.46 | | | 966 | | $ | 12.82 | |
| RSUs subject only to service conditions | | 413 | | 15.46 | | | 398 | | 12.82 | |
(1)Shares granted are subject to performance conditions under which the target number of shares granted may vest up to 200%.
MGIC Investment Corporation - Q1 2022 | 32
|
| | | | | | | | | | | | | |
| | Nine months ended September 30, |
| | 2017 | | 2016 |
| | Shares Granted | | Weighted Average Share Fair Value | | Shares Granted | | Weighted Average Share Fair Value |
| RSUs subject to performance conditions | 1,237 |
| | $ | 10.41 |
| | 1,257 |
| | $ | 5.66 |
|
| RSUs subject only to service conditions | 395 |
| | 10.41 |
| | 433 |
| | 5.67 |
|
Note 15.14. Statutory Information
Statutory Capital Requirements
The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in forceRIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements” and, together with the GSE Financial Requirements, the “Financial Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires a minimum policyholder position (“MPP”). TheMGIC’s “policyholder position” of a mortgage insurer isincludes its net worth or surplus, and its contingency reserve and a portion of the reserves for unearned premiums.loss reserve.
At September 30, 2017,March 31, 2022, MGIC’s risk-to-capital ratio was 10.19.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $1.9$3.7 billion above the required MPP of $1.2$1.9 billion. In calculatingThe calculation of our risk-to-capital ratio and MPP we are allowed
29| MGIC Investment Corporation - Q3 2017
fullreflect credit for the risk ceded under our reinsurance transactions with a group of unaffiliated reinsurers. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers.transactions. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the financial requirements of the PMIERs, MGIC may terminate the reinsurance transactions,agreements, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, you should read the rest of these financial statement footnotes for information about matters that could negatively affect such compliance.
At September 30, 2017,March 31, 2022, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was 11.19.2 to 1. Reinsurance agreements with an affiliate permit MGIC to write insurance with a higher coverage percentage than it could on its own under certain state-specific requirements. A higher risk-to-capital ratio on a combined basis may indicate that, in order for MGIC to continue to utilize reinsurance agreements with its affiliate, additional capital contributions to the reinsurance affiliate could be needed.
We ask the Commissioner of Insurance of the State of Wisconsin (the “OCI”) not to object before MGIC pays dividends. In the third quarter of 2017, MGIC paid a $40 million dividend to our holding company. Dividend restrictions
MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without regulatory approval by the OCI is the lesser of adjusted statutory net income or 10% of statutory policyholders’‘policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. The maximum dividend that could be paid is reduced by dividends paid in the twelve months preceding the dividend payment date. Before making any dividend payments, we will notify the OCI to ensure it does not object. In April 2022, MGIC obtained approval to pay a $400 million dividend to our holding company.
The OCI recognizes only statutory accounting practicesprinciples prescribed, or practices permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in the contingency loss reserves through thetheir income statement as changesa change in underwriting deductions.deduction. As a result, in periods in which MGIC is increasing contingency loss reserves, statutory net income is lowered. For the year ended December 31, 2016, MGIC’sreduced.
Statutory Financial Information
The statutory net income, was reduced by $490 million to account for the increase inpolicyholders’ surplus, and contingency reserves.
The NAIC plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk, minimum capital floors, and action level triggers. Currently, we believe that the PMIERs contain the more restrictive capital requirements in most circumstances.
While MGIC currently meets the State Capital Requirements of Wisconsin and all other jurisdictions, it could be prevented from writing new business in the future in all jurisdictions if it fails to meet the State Capital Requirements of Wisconsin, or it could be prevented from writing new business in another jurisdiction if it fails to meet the State Capital Requirements of that jurisdiction, and in each case MGIC does not obtain a waiver of such requirements. It is possible that regulatory action by one or more jurisdictions, including those that do not have specific State Capital Requirements, may prevent MGIC from continuing to write new insurance in such jurisdictions.
If we are unable to write business in all jurisdictions, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future abilityreserve liability of our insurance operationssubsidiaries, which agrees to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. A possible future failure by MGIC to meet the State Capital Requirements or the PMIERs will not necessarily mean that MGIC lacks sufficient resources to pay claims on its insurance liabilities. While we believe MGIC has sufficient claims paying resources to meet its claim obligations on its insuranceamounts utilized in force on a timely basis, you should read the rest of these financial statement footnotes for information about matters that could negatively affect MGIC’s claims paying resources.our risk-to-capital calculations, are shown in table 14.1.
| | | | | | | | | | | | | | |
| Financial information of our insurance subsidiaries |
| Table 14.1 | | | | |
| | As of and for the Three Months Ended March 31, |
| (In thousands) | | 2022 | | 2021 |
| Statutory net income | | $ | 96,018 | | | $ | 47,775 | |
| Statutory policyholders' surplus | | 1,319,633 | | | 1,383,114 | |
| Contingency reserve | | 4,263,599 | | | 3,733,126 | |
| | | | |
MGIC Investment Corporation - Q3 2017Q1 2022 |30 33
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Introduction
The following is management’s discussion and analysis of the financial condition and results of operations of MGIC Investment Corporation for the thirdfirst quarter and first nine months of 2017.2022. As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations. This form 10-Q should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2016.2021. See the “Glossary of terms and acronyms” for definitions and descriptions of terms used throughout this MD&A. Our revenues and losses could be affected by the Risk Factors referred to under “Forward Looking Statements and Risk Factors” below and they are an integral part of the MD&A.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements and Risk Factors” below, actual results may differ materially from the results contemplated by forward looking statements. These forward looking statements speak only as of the date of this filing and are subject to change without notice. We are not undertaking any obligation to update any forward looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward looking statements or other statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.
Through our subsidiary MGIC, we are a leading provider of PMI in the United States, as measured by $191 billion of primary IIF at September 30, 2017.
31| MGIC Investment Corporation - Q3 2017Q1 2022 | 34
Overview
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Summary financial results of MGIC Investment Corporation | | | | | | |
| | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (In millions, except per share data, unaudited) | | 2022 | | 2021 | | % Change | | | | | | |
| Selected statement of operations data | | | | | | | | | | | | |
| Net premiums earned | $ | 255.2 | | | $ | 255.0 | | | — | | | | | | | |
| Investment income, net of expenses | | 38.3 | | | 37.9 | | | 1 | | | | | | | |
| Losses incurred, net | | (19.3) | | | 39.6 | | | (149) | | | | | | | |
| Other underwriting and operating expenses, net | | 54.7 | | | 48.0 | | | 14 | | | | | | | |
| Loss on debt extinguishment | | 22.1 | | | — | | | N/M | | | | | | |
| Income before tax | | 219.4 | | | 189.6 | | | 16 | | | | | | | |
| Provision for income taxes | | 44.4 | | | 39.6 | | | 12 | | | | | | | |
| Net income | | 175.0 | | | 150.0 | | | 17 | | | | | | | |
| Diluted income per share | | $ | 0.54 | | | $ | 0.43 | | | 26 | | | | | | | |
| | | | | | | | | | | | |
Non-GAAP Financial Measures (1) | | | | | | |
| Adjusted pre-tax operating income | | $ | 242.1 | | | $ | 187.0 | | | 29 | | | | | | | |
| Adjusted net operating income | | 192.9 | | | 148.0 | | | 30 | | | | | | | |
| Adjusted net operating income per diluted share | | $ | 0.60 | | | $ | 0.42 | | | 43 | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Summary Financial Results of MGIC Investment Corporation |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions, except per share data, unaudited) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Selected statement of operations data | | | | | | | | | | | | |
| Total revenues | | $ | 270.4 |
| | $ | 273.9 |
| | (1 | ) | | $ | 794.6 |
| | $ | 796.0 |
| | — |
|
| Losses incurred, net | | 29.7 |
| | 60.9 |
| | (51 | ) | | 84.7 |
| | 192.5 |
| | (56 | ) |
| Loss on debt extinguishment | | — |
| | 75.2 |
| | N/M |
| | 0.1 |
| | 90.5 |
| | N/M |
|
| Income before tax | | 184.5 |
| | 83.7 |
| | 120 |
| | 539.0 |
| | 352.7 |
| | 53 |
|
| Provision for income taxes | | 64.4 |
| | 27.1 |
| | 138 |
| | 210.6 |
| | 117.6 |
| | 79 |
|
| Net income | | 120.0 |
| | 56.6 |
| | 112 |
| | 328.4 |
| | 235.0 |
| | 40 |
|
| Diluted income per share | | $ | 0.32 |
| | $ | 0.14 |
| | 129 |
| | $ | 0.86 |
| | $ | 0.58 |
| | 48 |
|
| | | | | | | | | | | | | |
Non-GAAP Financial Measures (1) | | | | | | |
| Adjusted pre-tax operating income | | $ | 184.5 |
| | $ | 153.9 |
| | 20 |
| | $ | 539.3 |
| | $ | 434.2 |
| | 24 |
|
| Adjusted net operating income | | 120.7 |
| | 102.4 |
| | 18 |
| | 357.0 |
| | 288.6 |
| | 24 |
|
| Adjusted net operating income per diluted share | | $ | 0.32 |
| | $ | 0.25 |
| | 28 |
| | $ | 0.93 |
| | $ | 0.71 |
| | 31 |
|
SUMMARY OF THIRD QUARTER AND YEAR TO DATE 2017 RESULTSSummary of first quarter 2022 results
Comparative quarterly results
We recorded thirdfirst quarter 20172022 net income of $120.0$175.0 million, or $0.32$0.54 per diluted share. Net income increased by $63.4$25.0 million compared withfrom net income of $56.6$150.0 million in the prior year primarily reflecting decreases in losses incurred partially offset by a loss on debt extinguishment, higher other underwriting and operating expenses, net, and a higher provision for income taxes. Diluted income per share increased primarily due to lower losses incurred,an increase in net income and the prior year having losses from debt extinguishment transactions. In addition, oura decrease in diluted weighted average shares outstanding decreased from the prior year due to reductions in our convertible debt outstanding, resulting in a 129% increase in diluted income per share.outstanding.
Adjusted net operating income for the thirdfirst quarter 20172022 was $120.7$192.9 million (Q3 2016: $102.4(Q1 2021: $148.0 million) and adjusted net operating income per diluted share was $0.32 (Q3 2016: $0.25)$0.60 (Q1 2021: $0.42). The 18% increase in adjusted net operating income was driven primarily by lower losses incurred, net. In addition to the increase in adjusted net operating income, our diluted weighted average shares outstanding decreased from the prior year, resulting in a 28% increase in adjusted net operating income per diluted share.
Losses incurred, netfor the first quarter of 2022 were $29.7$(19.3) million, down 51%a decrease of $58.9 million compared to the prior year. Newfirst quarter of 2021 losses incurred of $39.6 million. While new delinquency notices added approximately $36.3 million to losses incurred in the thirdfirst quarter were 9% lower than the prior year and the claim rate appliedof 2022, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of $55.7 million, primarily related to the new notices was approximately 11%, down from approximately 12%a decrease in the prior year. Our estimated claim rate on newPeak COVID-19 delinquencies. In the first quarter of 2021, our re-estimation of loss reserves on previously received delinquency notices reflectsdid not result in any significant development.
In the current economic environment and anticipated cure activity onfirst quarter of 2022, the notices received.
Loss$22.1 million loss on debt extinguishment inreflects a $20.8 million loss on the prior year period reflects the repurchasesrepurchase of a portion of our 2% Notes9% Debentures at an amountcosts that were in excess of their carrying value and a prepayment fee of $1.3 million on the repayment of our carrying value.FHLB advance.
The increase in other underwriting and operating expenses, net is primarily due to increases in expenses related to our investments in technology and data and analytics infrastructure.
The increase in our provision for income taxes in the thirdfirst quarter of 20172022 as compared to the same period in the prior year was primarily due to an increase in our income before tax.
Capital
MGIC dividend payments to our holding company
The ability of MGIC to pay dividends is restricted by insurance regulation. Amounts in excess of prescribed limits are deemed “extraordinary” and may not be paid if disapproved by the OCI. A dividend is extraordinary when the proposed dividend amount, plus dividends paid in the twelve months preceding the dividend payment date exceed the ordinary dividend level. In September 2017,2022, MGIC can pay $122 million of ordinary dividends without OCI approval, before taking into consideration dividends paid in the preceding twelve months. In the twelve months ended March 31, 2022, MGIC paid a$400 million in dividends in cash and investments to the holding company. We did not make dividend of $40 millionpayments to our holding company during the three months ended March 31, 2022 and we expectMarch 31, 2021. Future dividend payments from MGIC to the holding company will continue to pay quarterly dividends.be determined in consultation with the board.
Comparative yearShare repurchase programs
Repurchases of our common stock may be made from time to date results
time on the open market, including through 10b5-1 plans, or through privately negotiated transactions. We recorded net incomerepurchased 8.5 million shares of $328.4 million, or $0.86 per diluted sharecommon stock during the first ninethree months 2017. Net income increasedended March 31, 2022. We did not repurchase shares during the three months ended March 31, 2021. As of March 31, 2022 we had remaining authorization to repurchase $372 million of our common stock through the end of 2023 under a share repurchase program approved by $93.4our Board of Directors in October 2021. As of March 31, 2022, we had approximately 313 million compared with net incomeshares of $235.0 million in the same period of 2016, primarily due to lower losses incurred, net and the prior year significant losses from debt extinguishment transactions, partially offset by an increase in our effective tax rate discussed below. In addition, our diluted weighted average shares outstanding decreased from the prior year due to reductions in our convertible debt outstanding, resulting in a 48% increase in diluted income per share.common stock outstanding.
Adjusted net operating income for the first nine months of 2017 was $357.0 million (2016: $288.6 million) and adjusted net operating income per diluted share was $0.93 (2016: $0.71). The 24% increase in adjusted net operating income was driven primarily by lower losses incurred, net. In addition to the increase in adjusted net operating income, our weighted average shares outstanding decreased from the prior year, resulting in a 31% increase in adjusted net operating income per diluted share.
MGIC Investment Corporation - Q3 2017Q1 2022 |32 35
Losses incurred, netwere $84.7 million, down 56% comparedDividends to the prior year. New delinquency notices inshareholders
In the first nine monthsquarter of 2017 were 10% lower than the prior year and the claim rate applied to the new notices was approximately 11%, down from approximately 13% in the prior year.
Loss on debt extinguishment in the prior year reflects the repurchases2022, we paid dividends of a portion of our outstanding 2% and 5% Notes at amounts above our carrying values. The loss on debt extinguishment from MGIC’s purchase of our 9% Debentures represents the difference between the fair value and carrying value of the liability component on the purchase date.
The increase in our provision for income taxes for the first nine months of 2017 as compared to the prior year was the result of an increase in our income before tax and an additional provision recorded for the expected settlement of our IRS litigation as more fully described in Note 11 - “Income Taxes”$0.08 per common share totaling $25.8 million to our consolidated financial statements. Excluding the additional provision and interest relatedshareholders. On April 28, 2022, our Board of Directors declared a quarterly cash dividend of $0.08 per common share to our IRS litigation, the effective tax rate was approximately 33.8% in the first nine monthsshareholders of 2017, compared to 33.2% in the prior year period.record on May, 12, 2022, payable on May 26, 2022.
See “Consolidated Results of Operations”below for additional discussion of our results for the three and nine months ended September 30, 2017 compared to the respective prior year periods.
CAPITAL
The following debt transactions have been completed during 2017:
2% Notes - In April, holders of approximately $202.5 million of the outstanding principal amount of the notes exercised their rights to convert their notes to shares of our common stock and we issued approximately 29.1 million shares of our common stock, which included newly issued shares and the reissuance of treasury stock. The remaining $5.1 million of outstanding principal amount of the notes was redeemed for cash. The conversions and cash redemptions eliminated our debt obligation for the 2% Notes and the conversions increased our shareholders’ equity by the carrying value of the converted notes. The notes redeemed for cash eliminated approximately 0.7 million potentially dilutive shares. These shares were included in our calculation of diluted weighted average shares and diluted EPS up to the date of the notes redemption.
5% Notes - On May 1, 2017, our 5% Notes matured and were repaid with $145 million of holding company cash. The repayment of our 5% Notes eliminated approximately 10.8 million potentially dilutive shares. These shares were included in our calculation of diluted weighted average shares and diluted EPS up to the date of the notes repayment.
Revolving credit facility - In March, we borrowed $150 million on our revolving credit facility to fund, if
necessary, the redemption price of our 2% Notes. In April, we repaid the amount borrowed because most holders of our 2% Notes elected to convert their notes.
The above 2% and 5% Notes transactions, along with net income generated in the first nine months of 2017, reduced our long-term debt to shareholders’ equity ratio to approximately 27% as of September 30, 2017, down from approximately 47% as of December 31, 2016.
GSEs
We must comply with the PMIERsa GSE’s PMIERS to be eligible to insure loans delivered to or purchased by the GSEs.that GSE. The PMIERs include financial requirements, as well as business, quality control and certain transactiontransactional approval requirements. The financial requirements of the PMIERs require a mortgage insurer’s Available Assets"Available Assets" (generally only the most liquid assets of an insurer) to equal or exceed its Minimum"Minimum Required Assets.Assets" (which are based on an insurer's book of risk in force, calculated from tables of factors with several risk dimensions, reduced for credit given for risk ceded under reinsurance transactions, and subject to a floor amount). Based on our interpretationapplication of the more restrictive PMIERs as of September 30, 2017,March 31, 2022, MGIC’s Available Assets totaled $4.7$6.0 billion, anor $2.4 billion in excess of $0.8 billion over its Minimum Required Assets. MGIC is in compliance with the
The PMIERs and eligible to insure loans purchased by the GSEs. Beginning in October 2017, we have begun to receive an increased number of new default notices related to loans in locations that FEMA has declared IADAs in connection with recent hurricane activity primarily impacting Texas, Florida, and Puerto Rico. As a result, our excess Available Assets may decline as the PMIERSgenerally require us to maintainhold significantly more Minimum Required Assets for delinquent loans than for performing loans.loans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases.
If MGIC ceases to be eligible to insure loans purchased by one or both of the GSEs, it would significantly reduce the volume of our new business writings. FactorsNIW, the substantial majority of which is for loans delivered to or purchased by the GSEs. In addition to the increase in Minimum Required Assets associated with delinquent loans, factors that may negatively impact MGIC’s ability to continue to comply with the financial requirements of the PMIERs include the following:
| | | | | |
è
| The GSEs may make the PMIERs more onerous in the future. The GSEs could make the PMIERs more onerous in the future; in this regard, the PMIERs provide that the factors that determine Minimum Required Assets will be updated periodically, or as needed if there is a significant change in macroeconomic conditions or loan performance. We do not anticipate that the regular periodic updates will occur more frequently than once every two years. The PMIERs state that the GSEs will provide notice 180 days prior to the effective date of updates to the factors; however, the GSEs may amend any portion of the PMIERs at any time. |
è
| The PMIERS may be changed in response to the final regulatory capital framework for the GSEs which was established in February 2022. |
| è | Our future operating results may be negatively impacted by the matters discussed in our Risk Factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets. |
| è | Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt. |
Our reinsurance transactions enable us to earn higher returns on our business than we would without them because they reduce the Minimum Required Assets willwe must hold under PMIERs. However, reinsurance may not always be updated every two yearsavailable to us; or available on similar terms, and may be updated more frequentlyour quota share reinsurance subjects us to reflect changes in macroeconomic conditions or loan performance.counterparty credit risk. The GSEs have informed us that they currently docalculated credit for excess of loss reinsurance transactions under PMIERs is generally based on the PMIERs requirement of the covered loans and the attachment and detachment point of the coverage. PMIERs credit is generally not expect any updatesgiven for the reinsured risk above the PMIERs requirement. Our existing reinsurance transactions are subject to be effective before the fourth quarter of 2018 and we expectperiodic review by the GSEs and there is a risk we will provide notice 180 days prior tonot receive our current level of credit in future periods for the effective daterisk ceded under them. In addition, we may not receive the same level of such updates. The GSEs may amend the PMIERs at any time.
| |
• | The GSEs may reduce the amountcredit under future transactions that we receive under existing transactions. If MGIC is not allowed certain levels of credit they allow under the PMIERs for the risk ceded under our quota share reinsurance transactions. The GSEs’ ongoing approval of those transactions is subject to several conditions and the transactions will be reviewed under the PMIERs at least annually by the GSEs. For more information about the transactions, see Note 4 - “Reinsurance” to our consolidated financial statements. |
33| MGIC Investment Corporation - Q3 2017
Our future operating results may be negatively impacted by the matters discussed in our risk factors. Such matters could decrease our revenues, increase our losses or require the use of assets, thereby creating a shortfall in Available Assets.
Should capital be needed by MGIC in the future, capital contributions from our holding company may not be available due to competing demands on holding company resources, including for repayment of debt.
While on an overall basis, the amount of Available Assets MGIC must hold in order to continue to insure GSE loans increased under the PMIERs, over what state regulation currently requires, ourunder certain circumstances, MGIC may terminate the reinsurance transactions mitigatewithout penalties.
GSE reform
The FHFA has been the negative effectconservator of the PMIERsGSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change, including through administrative action, in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation.
As a result of the 2021 change in the Presidential Administration, the June 2021 appointment of a new Acting Director of the FHFA who has also been nominated to become the full-time Director, and the 2021 U.S. Supreme Court decision that allows the President to remove the FHFA Director at will, it is uncertain what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future. The timing and impact on our returns. In this regard,business of any resulting changes is uncertain. Many of the proposed changes would require Congressional action to implement and it is difficult to estimate when Congressional action would be final and how long any associated phase-in period may last.
For additional information about the business practices of the GSEs, see our Risk Factor titled “Changes in the second bullet point above.business practices of the GSEs, federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses.”
State Regulations
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC’sour domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its risk in forceRIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires an MPP. MGIC’s “policyholder position” includes its net worth or surplus and its, contingency reserve.
MGIC Investment Corporation - Q1 2022 | 36
At September 30, 2017,March 31, 2022, MGIC’s risk-to-capital ratio was 10.19.2 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $1.9$3.7 billion above the required MPP of $1.2$1.9 billion. In calculating ourOur risk-to-capital ratio and MPP we are allowedreflect full credit for the risk ceded under our reinsurance transactions with a group of unaffiliated reinsurers. It is possible that under the revised State Capital Requirements discussed below, MGIC will not be allowed full credit for the risk ceded to the reinsurers. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the PMIERs, MGIC may terminate the reinsurance transactions, without penalty. At this time, we expect MGIC to continue to comply with the current State Capital Requirements; however, refertransactions. Refer to our risk factorRisk Factor titled “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis” for more information about matters that could negatively affect such compliance.impact our compliance with State Capital Requirements.
At March 31, 2022, the risk-to-capital ratio of our combined insurance operations was 9.2 to 1.
COVID-19 Pandemic
The NAIC plans to reviseCOVID-19 pandemic materially impacted our 2020 financial results, as we reserved for losses associated with the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital
requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk, minimum capital floors, and action level triggers. Currently we believe that the PMIERs contain the more restrictive capital requirements in most circumstances.
GSE REFORM
The FHFA has been the conservator of the GSEs since 2008 and has the authority to control and direct their operations. The increased role that the federal government has assumed in the residential housing finance system through the GSE conservatorship may increase the likelihood that the business practices of the GSEs change in ways that have a material adverse effect on us and that the charters of the GSEs are changed by new federal legislation. In the past, members of Congress have introduced several bills intended to change the business practices of the GSEs and the FHA; however, no legislation has been enacted. The Administration has indicated that the conservatorship of the GSEs should end; however, it is unclear whether and when that would occur and how that would impact us. As a result of the matters referred to above, it isdelinquency notices received. While uncertain, what role the GSEs, FHA and private capital, including private mortgage insurance, will play in the residential housing finance system in the future or the impact of any such changesthe COVID-19 pandemic on our business. In addition, the timingCompany’s future business, financial results, liquidity and/or financial condition may also be material. The magnitude of the impact will be influenced by various factors, including the length and severity of any resulting changesthe pandemic in the United States, efforts to reduce the transmission of COVID-19, the level of unemployment, and the impact of government initiatives and actions taken by the GSEs (including mortgage forbearance and modification programs) to mitigate the economic harm caused by the COVID-19 pandemic.
Forbearance for federally-insured mortgages (including those delivered to or purchased by the GSEs) whose borrowers were affected by COVID-19 allows mortgage payments to be suspended for a period generally ranging from 6 to 18 months. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan delinquency will cure, including through modification, when forbearance ends will depend on the economic circumstances of the borrower at that time. The severity of losses associated with delinquencies that do not cure will depend on economic conditions at that time, including home prices.
Foreclosures on mortgages purchased or securitized by the GSEs were suspended through July 31, 2021. Under a CFPB rule that was effective through December 31, 2021, with limited exceptions, servicers were required to ensure that at least one temporary procedural safeguard had been met before referring 120-day delinquent loans for foreclosure. With the expiration of the CFPB rule, it is likely that foreclosures and claims will increase.
Factors affecting our results
As noted above, the COVID-19 pandemic may adversely affect our future business, results of operations, and financial condition. The extent of the adverse effects depend on the duration and severity of the COVID-19 Pandemic, the impact of government initiatives and actions taken by the GSEs (including mortgage forbearance and modification programs), the ultimate effect of COVID-19 related delinquencies and forbearances on our loss incidence, and the effect of the pandemic on the U.S. economy and housing market. We have addressed some of the potential impacts throughout this document.
The future effects of changing climatic conditions on our business is uncertain. Most meaningful changes would require Congressional actionFor information about possible effects,
please refer to implementour Risk Factor titled “Pandemics, hurricanes and itother natural disasters may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs.”
Russia’s invasion of Ukraine has added increased risk to the U.S. economy, which is difficult to estimate when Congressional action would be finalalready contending with higher inflation and how long any associated phase-in period may last.
interest rates. For additional information about the possible effects of this on our business practices of the GSEs, seeplease refer to our risk factor titled “Changes in the business practices of the GSEs, federal legislation that changes their charters Risk Factor title “The Russia-Ukraine war and/or a restructuring of the GSEs could reduce our revenues or increase our losses.”
LOAN MODIFICATIONS AND OTHER SIMILAR PROGRAMS
The federal government, including throughother global events may adversely affect the U.S. Department of the Treasuryeconomy and the GSEs, and several lenders have modification and refinance programs to make loans more affordable to borrowers with the goal of reducing the number of foreclosures. These programs have included HAMP, which expired at the end of 2016, and HARP, which is scheduled to expire at the end of 2018. The GSEs have introduced other loan modification programs to replace HAMP.our business.
From 2008 through 2012, we were notified of modifications that cured delinquencies that, had they become paid claims, would have resulted in a material increase in our incurred losses. More recently, the number of modifications has decreased significantly. Nearly all of the reported loan modifications were for loans insured in 2009 and prior.
MGIC Investment Corporation - Q3 2017|34
We cannot determine the total benefit we may derive from loan modification programs, particularly given the uncertainty around the re-default rates for defaulted loans that have been modified. Our loss reserves do not account for potential re-defaults of current loans.
As shown in the following table, as of September 30, 2017 approximately 16% of our primary RIF has been modified.
|
| | | | | | |
| Policy year | | HARP Modifications (1) | | HAMP & Other Modifications |
| 2003 and prior | | 11.0 | % | | 39.4 | % |
| 2004 | | 19.0 | % | | 40.9 | % |
| 2005 | | 25.3 | % | | 39.3 | % |
| 2006 | | 28.7 | % | | 38.6 | % |
| 2007 | | 40.2 | % | | 30.6 | % |
| 2008 | | 55.3 | % | | 18.2 | % |
| 2009 | | 35.0 | % | | 5.0 | % |
| 2010 - Q3 2017 | | — | % | | 0.2 | % |
| | | | | |
| Total | | 8.7 | % | | 7.7 | % |
| |
(1)
| Includes proprietary programs that are substantially the same as HARP. |
As of September 30, 2017, based on loan count, the loans associated with 97.6% of HARP modifications and 76.9% of HAMP and other modifications were current.
FACTORS AFFECTING OUR RESULTS
Our results of operations are affected by:
Premiums written and earned
Premiums written and earned in a year are influenced by:
•NIW, which increases IIF, is the aggregate principal amount of the mortgages that are insured during a period.IIF. Many factors affect NIW, including the volume of low down payment home mortgage originations and competition to provide credit enhancement on those mortgages including competition from the FHA, the VA, other mortgage insurers, and other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance and other alternatives to mortgage insurance. NIW does not include loans previously insured by us that are modified, such as loans modified under HARP.
•Cancellations, which reduce IIF. Cancellations due to refinancings are affected by the level of current mortgage interest rates compared to the mortgage coupon rates throughout the in force book, current home values compared to values when the loans in the in force book were insured and the terms on which mortgage credit is available. Home price appreciation can give homeowners the right to cancel mortgage insurance on their loans if sufficient home equity is achieved. Cancellations also result from policy rescissions, which require us to return any premiums received on the rescinded policies and claim payments, which require us
to return any premium received on the related policies from the date of default on the insured loans. Cancellations of single premium policies, which are generally non-refundable, resultsresult in immediate recognition of any remaining unearned premium.
•Premium rates, which are affected by product type, competitive pressures, the risk characteristics of the insured loans, and the percentage of coverage on the insured loans.loans, and PMIERs capital requirements. The substantial majority of our monthly and annual mortgage insurance premiums are under premium plans for which, for the first ten years of the policy, the amount of premium is determined by multiplying the initial premium rate by the original loan balance; thereafter, the premium rate resets andto a lower premium rate is used for the remaining life of the policy. However, for loans that have utilized HARP, the initial ten-year period resets as of the date of the HARP transaction. The remainder of our monthly and annual premiums are under premium plans for which premiums are determined by a fixed percentage of the loan’s amortizing balance over the life of the policy.
| |
• | Premiums ceded, net of a profit commission, under reinsurance agreements. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements. |
MGIC Investment Corporation - Q1 2022 | 37
•Premiums ceded, net of profit commission, under our QSR Transactions and premiums ceded under our Home Re Transactions. The profit commission varies inversely with the level of ceded losses incurred on a “dollar for dollar” basis and can be eliminated at ceded loss levels higher than what we have experienced on our QSR Transactions. As a result, lower levels of losses incurred result in a higher profit commission and less benefit from ceded losses incurred; higher levels of losses incurred result in more benefit from ceded losses incurred and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance transactions.
Premiums earned are generated by the insurance that is in force during all or a portion of the period. A change in the average IIF in the current period compared to an earlier period is a factor that will increase (when the average in force is higher) or reduce (when it is lower) premiums written and earned in the current period, although this effect may be enhanced (or mitigated) by differences in the average premium rate between the two periods as well as by premiums that are returned or expected to be returned in connection with claim payments and rescissions, and premiums ceded under reinsurance agreements. Also, NIW and cancellations during a period will generally have a greater effect on premiums written and earned in subsequent periods than in the period in which these events occur.factors discussed immediately above.
Investment income
Our investment portfolio is composed principally of investment grade fixed income securities. The principal factors that influence investment income are the size of the portfolio and its yield. As measured by amortized cost (which excludes changes in fair value, such as from changes in interest rates), the size of the investment portfolio is mainly a function of cash generated from (or used in) operations, such as NPW,net premiums written, investment income, net claim payments and expenses, and cash provided by (or used for) non-operating activities, such as debt or stock issuances or repurchases.repurchases, and dividends.
Losses incurred
Losses incurred are the current expense that reflects estimatedclaim payments, costs of settling claims, and changes in our estimates of payments that will ultimately be made as a result
35| MGIC Investment Corporation - Q3 2017
of delinquencies on insured loans. As explained under “Critical Accounting Policies”Estimates” in our 2021 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. The level of new delinquencies has historically followed a seasonal pattern, with new delinquencies in the first part of the year lower than new delinquencies in the latter part of the year, though this pattern can be affected by theyear. The state of the economy, and local housing markets.markets and various other factors, including the COVID-19 pandemic, may result in delinquencies not following the typical pattern. Losses incurred are generally affected by:
•The state of the economy, including unemployment and housing values, each of which affects the likelihood that loans will become delinquent and whether loans that are delinquent cure their delinquency.
•The product mix of the in force book, with loans having higher risk characteristics generally resulting in higher delinquencies and claims.
•The size of loans insured, with higher average loan amounts tending to increase losses incurred.incurred losses.
•The percentage of coverage on insured loans, with deeper average coverage tending to increase incurred losses.losses incurred.
•The rate at which we rescind policies or curtail claims. Our estimated loss reserves incorporate our estimates of future rescissions of policies and curtailments of claims, and reversals of rescissions and curtailments. We collectively refer to such rescissions and denials as “rescissions” and variations of this term. We call reductions to or denials of claims “curtailments.”
•The distribution of claims over the life of a book. Historically, the first few years after loans are originated are a period of relatively low claims, with claims increasing substantially for several years subsequent and then declining, although persistency, the condition of the economy, including unemployment and housing prices, and other factors can affect this pattern. For example, a weak economy or housing value declines can lead to claims from older books increasing, continuing at stable levels or experiencing a lower rate of decline. See further information under “Mortgage Insurance Earningsinsurance earnings and Cash Flow Cycle”cash flow cycle” below.
| |
• | Losses ceded under reinsurance agreements. See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of our reinsurance agreements. |
Underwriting and other expenses
Most of our operating expenses are fixed, with some variability due to contract underwriting volume. Contract underwriting generates fee income included in “Other revenue.” Underwriting and other expenses are net of any ceding commission associated with our•Losses ceded under reinsurance agreements.transactions. See Note 4 - “Reinsurance” to our consolidatedfinancial statements for a discussion of our reinsurance agreements.transactions.
Underwriting and other expenses
Underwriting and other expenses includes items such as employee compensation, fees for professional and consulting services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions associated with our QSR transactions. Employee compensation expenses are variable due to share-based compensation, changes in benefits, and changes in headcount (which can fluctuate due to volume). See Note 4 - “Reinsurance” to our consolidated financial statements for a discussion of ceding commission on our QSR transactions.
Interest expense
Interest expense reflects the interest associated with our outstanding debt obligations. For information about ourconsolidated outstanding debt obligations see discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” below. Other
Certain activities that we do not consider being part of our fundamental operating activities may also impact our results of operations and are described below.
Net realized investment gains (losses)
•Fixed income securities. Realized investment gains and losses are a function ofreflect the difference between the amount received on the sale of a fixed income security and the fixed income security’s cost basis, as well as any credit allowances and any “other than temporary” impairments (“OTTI”) recognized in earnings. The amount received on the sale of fixed income securities is affected by the coupon rate of the security compared to the yield of comparable securities at the time of sale.
•Equity securities. Realized investment gains and losses are accounted for as a function of the periodic change in fair value.
MGIC Investment Corporation - Q1 2022 | 38
Loss on debt extinguishment
At times, we may undertakeGains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt. Extinguishing our outstanding debt obligations early through these discretionary activities may result in losses primarily driven by the payment of consideration in excess of our carrying value.value, and the write off of unamortized debt issuance costs on the extinguished portion of the debt.
MORTGAGE INSURANCE EARNINGS AND CASH FLOW CYCLEMortgage insurance earnings and cash flow cycle
In general, the majority of any underwriting profit that a book generates occurs in the early years of the book, with the largest portion of any underwriting profit realized in the first year following the year the book was written. Subsequent years of a book generallymay result in either less underwriting profit or in underwriting losses. This pattern of results typically occurs because relatively few of the claimsincurred losses on delinquencies that a book will ultimately experience typically occur in the first few years of the book, when premium revenue is highest, while subsequent years are affected by declining premium revenue,revenues, as the number of insured loans decreases (primarily due to loan prepayments) and increasing losses. The typical pattern is also a function of premium rates generally resetting to lower levels after ten years. The state of the economy, local housing markets and various other factors, including the COVID-19 pandemic, may result in delinquencies not following the typical pattern.
Cybersecurity
We are increasingly reliant on the efficient and uninterrupted operation of complex information technology systems. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including by third-party cyber attacks, including those involving ransomware. The Company discovers vulnerabilities and experiences malicious attacks and other attempts to gain unauthorized access to its systems on a regular basis. Globally, attacks are expected to continue accelerating in both frequency and sophistication with increasing use by actors of tools and techniques that will hinder the Company’s ability to identify, investigate and recover from incidents. In response to the COVID-19 pandemic, the Company transitioned to a primarily virtual workforce model and is now operating under a hybrid model. Virtual and hybrid workforce models may be more vulnerable to security breaches.
While we have information security policies and systems in place to secure our information technology systems and to prevent unauthorized access to or disclosure of sensitive information, there can be no assurance with respect to our systems and those of our third-party vendors that unauthorized access to the systems or disclosure of the sensitive information, either through the actions of third parties or employees, will not occur.
MGIC Investment Corporation - Q3 2017Q1 2022 |36 39
Explanation and reconciliation of our use of non-GAAP financial measures
Non-GAAP financial measures
We believe that use of the Non-GAAP financial measures of adjusted pre-tax operating income (loss), adjusted net operating income (loss) and adjusted net operating income (loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing relevant information to investors. These measures are not recognized in accordance with GAAP and should not be viewed as alternatives to GAAP measures of performance.
Adjusted pre-tax operating income (loss)is defined as GAAP income (loss) before tax, excluding the effects of net realized investment gains (losses), gain (loss)and losses on debt extinguishment, net impairment losses recognized in income (loss)earnings and infrequent or unusual non-operating items where applicable.
Adjusted net operating income (loss)is defined as GAAP net income (loss) excluding the after-tax effects of net realized investment gains (losses), gain (loss)and losses on debt extinguishment, net impairment losses recognized in income (loss),earnings, and infrequent or unusual non-operating items where applicable. The amounts of adjustments to components of pre-tax operating income (loss) are tax effected using a federal statutory tax rate of 35%21%.
Adjusted net operating income (loss) per diluted shareis calculated in a manner consistent with the accounting standard regarding earnings per share by dividing (i) adjusted net operating income (loss) after making adjustments for interest expense on convertible debt, whenever the impact is dilutive by (ii) diluted weighted average common shares outstanding, which reflects share dilution from unvested restricted stock units and from convertible debt when dilutive under the “if-converted” method.
Although adjusted pre-tax operating income (loss) and adjusted net operating income (loss) exclude certain items that have occurred in the past and are expected to occur in the future, the excluded items represent items that are: (1) not viewed as part of the operating performance of our primary activities; or (2) impacted by both discretionary and other economic or regulatory factors and are not necessarily indicative of operating trends, or both. These adjustments, along with the reasons for their treatment, are described below. Trends in the profitability of our fundamental operating activities can be more clearly identified without the fluctuations of these adjustments. Other companies may calculate these measures differently. Therefore, their measures may not be comparable to those used by us.
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(1) | Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.
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(2) | Gains and losses on debt extinguishment. Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve our debt profile, and/or reduce potential dilution from our outstanding convertible debt.
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(3) | Infrequent or unusual non-operating items. Income tax expense related to our IRS dispute is related to past transactions which are non-recurring in nature and are not part of our primary operating activities.
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(1)Net realized investment gains (losses). The recognition of net realized investment gains or losses can vary significantly across periods as the timing of individual securities sales is highly discretionary and is influenced by such factors as market opportunities, our tax and capital profile, and overall market cycles.
(2)Gains and losses on debt extinguishment. Gains and losses on debt extinguishment result from discretionary activities that are undertaken to enhance our capital position, improve
our debt profile, and/or reduce potential dilution from our outstanding convertible debt.
(3)Net impairment losses recognized in earnings. The recognition of net impairment losses on investments can vary significantly in both size and timing, depending on market credit cycles, individual issuer performance, and general economic conditions.
37| (4)Infrequent or unusual non-operating items. Items that are non-recurring in nature and are not part of our primary operating activities.
MGIC Investment Corporation - Q3 2017Q1 2022 | 40
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| Non-GAAP reconciliations |
|
| Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income |
| | Three Months Ended March 31, |
| | 2022 | | 2021 |
| (In thousands, except per share amounts) | | Pre-tax | | Tax effect | | Net
(after-tax) | | Pre-tax | | Tax effect | | Net
(after-tax) |
| Income before tax / Net income | | $ | 219,439 | | | 44,426 | | | $ | 175,013 | | | $ | 189,617 | | | 39,596 | | | $ | 150,021 | |
| Adjustments: | | | | | | | | | | | | |
| Loss on debt extinguishment | | 22,107 | | | 4,642 | | | 17,465 | | | — | | | — | | | — | |
| Net realized investment (gains) losses | | 511 | | | 107 | | | 404 | | | (2,622) | | | (551) | | | (2,071) | |
| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 242,057 | | | $ | 49,175 | | | $ | 192,882 | | | $ | 186,995 | | | $ | 39,045 | | | $ | 147,950 | |
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| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
| Weighted average diluted shares outstanding | | | | | | 324,538 | | | | | | | 356,383 | |
| | | | | | | | | | | | |
| Net income per diluted share | | | | | | $ | 0.54 | | | | | | | $ | 0.43 | |
| Loss on debt extinguishment | | | | | | 0.05 | | | | | | | — | |
| Net realized investment (gains) losses | | | | | | — | | | | | | | (0.01) | |
| Adjusted net operating income per diluted share | | | | | | $ | 0.60 | | (1) | | | | | | $ | 0.42 | |
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| (1) Does not foot due to rounding. | | | | | | | | | | | | |
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| Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income |
| | | | | | | | | | | | | |
| | | Three Months Ended September 30, |
| | | 2017 | | 2016 |
| (In thousands, except per share amounts) | | Pre-tax | | Tax provision (benefit) | | Net
(after-tax) | | Pre-tax | | Tax provision (benefit) | | Net
(after-tax) |
| Income before tax / Net income | | $ | 184,467 |
| | $ | 64,440 |
| | $ | 120,027 |
| | $ | 83,749 |
| | $ | 27,131 |
| | $ | 56,618 |
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| Adjustments: | | | | | | | | | | | | |
| Additional income tax provision related to IRS litigation | | — |
| | (619 | ) | | 619 |
| | — |
| | (194 | ) | | 194 |
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| Net realized investment losses (gains) | | 47 |
| | 16 |
| | 31 |
| | (5,092 | ) | | (1,782 | ) | | (3,310 | ) |
| Loss on debt extinguishment | | — |
| | — |
| | — |
| | 75,223 |
| | 26,328 |
| | 48,895 |
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| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 184,514 |
| | $ | 63,837 |
| | $ | 120,677 |
| | $ | 153,880 |
| | $ | 51,483 |
| | $ | 102,397 |
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| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
| | | | | | | | | | | | | |
| Weighted average diluted shares outstanding | | | | | | 391,087 |
| | | | | | 406,050 |
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| Net income per diluted share | | | | | | $ | 0.32 |
| | | | | | $ | 0.14 |
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| Additional income tax provision related to IRS litigation | | | | | | — |
| | | | | | — |
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| Net realized investment losses (gains) | | | | | | — |
| | | | | | (0.01 | ) |
| Loss on debt extinguishment | | | | | | — |
| | | | | | 0.12 |
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| Adjusted net operating income per diluted share | | | | | | $ | 0.32 |
| | | | | | $ | 0.25 |
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| Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income |
| | | | | | | | | | | | | |
| | | Nine Months Ended September 30, |
| | | 2017 | | 2016 |
| (In thousands, except per share amounts) | | Pre-tax | | Tax provision (benefit) | | Net
(after-tax) | | Pre-tax | | Tax provision (benefit) | | Net
(after-tax) |
| Income before tax / Net income | | $ | 539,040 |
| | $ | 210,593 |
| | $ | 328,447 |
| | $ | 352,676 |
| | $ | 117,646 |
| | $ | 235,030 |
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| Adjustments: | | | | | | | | | | | | |
| Additional income tax provision related to IRS litigation | | — |
| | (28,402 | ) | | 28,402 |
| | — |
| | (535 | ) | | 535 |
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| Net realized investment losses (gains) | | 211 |
| | 74 |
| | 137 |
| | (8,984 | ) | | (3,144 | ) | | (5,840 | ) |
| Loss on debt extinguishment | | 65 |
| | 23 |
| | 42 |
| | 90,531 |
| | 31,686 |
| | 58,845 |
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| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 539,316 |
| | $ | 182,288 |
| | $ | 357,028 |
| | $ | 434,223 |
| | $ | 145,653 |
| | $ | 288,570 |
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| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
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| Weighted average diluted shares outstanding | | | | 395,870 |
| | | | | | 421,423 |
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| Net income per diluted share | | | | | | $ | 0.86 |
| | | | | | $ | 0.58 |
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| Additional income tax provision related to IRS litigation | | | | | | 0.07 |
| | | | | | — |
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| Net realized investment losses (gains) | | | | | | — |
| | | | | | (0.01 | ) |
| Loss on debt extinguishment | | | | | | — |
| | | | | | 0.14 |
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| Adjusted net operating income per diluted share | | | | | | $ | 0.93 |
| | | | | | $ | 0.71 |
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MGIC Investment Corporation - Q3 2017Q1 2022 |38 41
Mortgage Insurance Portfolio
NEW INSURANCE WRITTENMortgage originations
According to Inside Mortgage Finance and GSE estimates, total mortgage originations for the third quarter and first nine months of 2017 decreased from the respective prior year periods due to a decline in refinance originations that was only partially offset by an increase in purchase originations. The total amount of mortgage originations is generally influenced by the level of new and existing home sales, the percentage of homes purchased for cash, and the level of refinance activity. PMI market share of total mortgage originations is generally influenced by the mix of purchase and refinance originations as PMI market share is 3-4 times higher for purchase originations than refinance originations. PMI market share is also impacted by the market share of total originations forof the FHA, VA, USDA, and USDA.other alternatives to mortgage insurance, including GSE programs that may reduce or eliminate the demand for mortgage insurance.
NIW for the thirdfirst quarter of 20172022 was $14.1$19.6 billion (Q3 2016: $14.2(Q1 2021: $30.8 billion) and. The decrease when compared with the same period last year was primarily due to a decrease in refinance transactions that require mortgage insurance.
For the remainder of the year, we expect the decrease in refinance activity to drive a decrease in our NIW compared to 2021.
The following tables present characteristics of our primary NIW for the first ninethree months of 2017 was $36.3 billion (YTD 2016: $35.1 billion)ended March 31, 2022 and continued to have what we believe are favorable risk characteristics (see tables 01 and 02). 2021.
The percentage of purchase mortgages insuredour NIW with DTI ratios over 45% and LTV’s over 95% increased infor the three and nine months ended September 30, 2017March 31, 2022 when compared towith the same periods of the prior year because the level of refinance transactions declined as mortgageperiod last year. The increase was primarily driven by higher home price and interest rates, in the current year were generallyand a higher than those in 2016, particularly in the third quarterpercentage of 2016 when rates neared historic lows (see table 04).NIW from purchase transactions.
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| Primary NIW by FICO score | | | | |
| | Three Months Ended March 31, | | |
| (% of primary NIW) | | 2022 | | 2021 | | | | |
| 760 and greater | | 43.4 | % | | 46.6 | % | | | | |
| 740 - 759 | | 19.0 | % | | 17.2 | % | | | | |
| 720 - 739 | | 14.6 | % | | 13.5 | % | | | | |
| 700 - 719 | | 10.7 | % | | 11.5 | % | | | | |
| 680 - 699 | | 7.2 | % | | 7.3 | % | | | | |
| 660 - 679 | | 3.2 | % | | 2.1 | % | | | | |
| 640 - 659 | | 1.4 | % | | 1.3 | % | | | | |
| 639 and less | | 0.5 | % | | 0.5 | % | | | | |
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| Primary NIW by loan-to-value | | | | |
| | Three Months Ended March 31, | | |
| (% of primary NIW) | | 2022 | | 2021 | | | | |
| 95.01% and above | | 11.4 | % | | 7.9 | % | | | | |
| 90.01% to 95.00% | | 52.1 | % | | 35.6 | % | | | | |
| 85.01% to 90.00% | | 26.6 | % | | 32.8 | % | | | | |
| 80.01% to 85% | | 9.9 | % | | 23.7 | % | | | | |
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| Primary NIW by debt-to-income ratio | | | | |
| | Three Months Ended March 31, | | |
| (% of primary NIW) | | 2022 | | 2021 | | | | |
| 45.01% and above | | 17.2 | % | | 11.9 | % | | | | |
| 38.01% to 45.00% | | 31.6 | % | | 29.3 | % | | | | |
| 38.00% and below | | 51.2 | % | | 58.8 | % | | | | |
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| Primary NIW by policy payment type | | | | |
| | Three Months Ended March 31, | | |
| (% of primary NIW) | | 2022 | | 2021 | | | | |
| Monthly premiums | | 93.3 | % | | 90.6 | % | | | | |
| Single premiums | | 6.6 | % | | 9.3 | % | | | | |
| Annual premiums | | 0.1 | % | | 0.1 | % | | | | |
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| Primary NIW by type of mortgage | | | | |
| Three Months Ended March 31, | | |
| (% of primary NIW) | 2022 | | 2021 | | | | |
| Purchases | 94.2 | % | | 59.7 | % | | | | |
| Refinances | 5.8 | % | | 40.3 | % | | | | |
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01 | PRIMARY NIW BY FICO SCORE % OF PRIMARY NIW
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| 740 and greater | | 58.7 | % | | 61.2 | % | | 58.9 | % | | 58.5 | % |
| 700-739 | | 25.8 | % | | 24.8 | % | | 25.9 | % | | 25.5 | % |
| 660-699 | | 12.2 | % | | 11.3 | % | | 12.0 | % | | 12.7 | % |
| 659 and less | | 3.3 | % | | 2.7 | % | | 3.2 | % | | 3.3 | % |
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02 | LOAN-TO-VALUE % OF PRIMARY NIW
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| 95.01% and above | | 11.6 | % | | 6.0 | % | | 10.0 | % | | 5.5 | % |
| 90.01% to 95.00% | | 46.4 | % | | 46.9 | % | | 47.2 | % | | 48.8 | % |
| 85.01% to 90.00% | | 29.3 | % | | 31.9 | % | | 29.8 | % | | 31.8 | % |
| 80.01% to 85% | | 12.7 | % | | 15.2 | % | | 13.0 | % | | 13.9 | % |
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03 | POLICY PAYMENT TYPE % OF PRIMARY NIW
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Monthly premiums | | 80.3 | % | | 82.0 | % | | 81.6 | % | | 79.8 | % |
| Single premiums | | 19.5 | % | | 17.7 | % | | 18.2 | % | | 19.9 | % |
| Annual premiums | | 0.2 | % | | 0.3 | % | | 0.2 | % | | 0.3 | % |
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04 | TYPE OF MORTGAGE % OF PRIMARY NIW
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| Purchases | | 90.7 | % | | 80.8 | % | | 89.0 | % | | 81.9 | % |
| Refinances | | 9.3 | % | | 19.2 | % | | 11.0 | % | | 18.1 | % |
INSURANCE AND RISK IN FORCE (see table 05)Insurance and risk in force
The amount of our IIF and RIF is impacted by the amount of NIW and cancellations of primary IIF during the period. Cancellation activity is primarily due to refinancing activity, but is also impacted by rescissions, cancellations due to claim payment, and policies cancelled when borrowers achieve the required amount of home equity. Refinancing activity has historically been affected by the level of mortgage interest rates and the level of home price appreciation. Cancellations generally move inversely to the change in the direction of interest rates, although they generally lag a change in direction.
Persistency
Our persistency was 78.8%66.9% at September 30, 2017March 31, 2022 compared to 76.9%62.6% at December 31, 20162021 and 78.3%56.2% at September 30, 2016.March 31, 2021. Since 2000, our year-end persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at December 31, 2003. With the current and expected level of mortgage interest rates we expect a low level of refinance activity and that our persistency will increase gradually in subsequent periods.
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| IIF and RIF | | | | |
| | Three Months Ended March 31, | | |
| (In billions) | | 2022 | | 2021 | | | | |
| NIW | | $ | 19.6 | | | $ | 30.8 | | | | | |
| Cancellations | | (16.7) | | | (25.7) | | | | | |
| Increase in primary IIF | | $ | 2.9 | | | $ | 5.1 | | | | | |
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| Direct primary IIF as of March 31, | | $ | 277.3 | | | $ | 251.7 | | | | | |
| Direct primary RIF as of March 31, | | $ | 70.6 | | | $ | 62.6 | | | | | |
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05 | INSURANCE AND RISK IN FORCE IN BILLIONS
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| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In billions) | | 2017 | | 2016 | | 2017 | | 2016 |
| NIW | | $ | 14.1 |
| | $ | 14.2 |
| | $ | 36.3 |
| | $ | 35.1 |
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| Cancellations | | (10.4 | ) | | (11.6 | ) | | (27.3 | ) | | (29.5 | ) |
| Increase in primary IIF | | $ | 3.7 |
| | $ | 2.6 |
| | $ | 9.0 |
| | $ | 5.6 |
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| (In billions) | | 2017 | | 2016 |
| Direct primary IIF as of September 30, | | $ | 191.0 |
| | $ | 180.1 |
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| Direct primary RIF as of September 30, | | $ | 49.4 |
| | $ | 46.8 |
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39| MGIC Investment Corporation - Q3 2017Q1 2022 | 42
Credit profile of contents
CREDIT PROFILE OF OUR PRIMARY RIF (see table 06)
Our totalour primary RIF written after 2008 as a percentage of total primary RIF has been steadily increasing.
Our 2009 and later books possess significantly improved creditrisk characteristics when compared to our 2005-2008 books. The loans we insured beginning in 2009, on average, have substantially higher FICO scoresModification and lower LTVs than those insured in 2005-2008. The credit profile of our RIF has also benefited fromrefinance programs, such as HARP.HAMP and HARP, allowswhich expired at the end of 2016 and 2018, respectively, but have been replaced by other GSE modification programs, make outstanding loans more affordable to borrowers who are not delinquent, but who may not otherwise be able to refinance theirwith the goal of reducing the number of foreclosures. As of March 31, 2022, loans under the current GSE underwriting standards, due to, for example, the current LTV exceeding 100%, to refinance and lower their note rate. Loans associated with 97.6% of all of our HARP modifications were current as of September 30, 2017. The aggregate of our 2009-2017 book years and our HARP modificationsmodification programs accounted for approximately 85%5.0% of our total RIF, compared to 5.4% at December 31, 2021. As of March 31, 2022, 87% of loans associated with modifications programs were current.
The following table sets forth certain statistics associated with our primary IIF and RIF at September 30, 2017 (see table 06).as of March 31, 2022:
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| Primary insurance in force and risk in force by policy year |
| (in millions) | Insurance in Force | | Risk In Force | | Weighted Avg. Interest Rate | | Delinquency Rate | | Cede Rate % (1) | | % of Original Remaining |
| Policy Year | Total | % of Total | | Total | % of Total | | | | |
| 2004 and prior | $ | 1,701 | | 0.6 | % | | $ | 474 | | 0.7 | % | | 7.3 | % | | 12.8 | % | | 0.5 | % | | NM |
| 2005-2008 | 13,019 | | 4.7 | % | | 3,459 | | 4.9 | % | | 6.9 | % | | 11.6 | % | | 3.7 | % | | 5.4 | % |
| 2009-2015 | 9,174 | | 3.3 | % | | 2,500 | | 3.5 | % | | 4.3 | % | | 4.9 | % | | 14.2 | % | | 5.2 | % |
| 2016 | 8,647 | | 3.1 | % | | 2,312 | | 3.3 | % | | 3.9 | % | | 3.5 | % | | 13.0 | % | | 18.0 | % |
| 2017 | 9,737 | | 3.5 | % | | 2,532 | | 3.6 | % | | 4.2 | % | | 4.4 | % | | — | % | | 19.8 | % |
| 2018 | 9,884 | | 3.6 | % | | 2,517 | | 3.6 | % | | 4.8 | % | | 5.2 | % | | 0.9 | % | | 19.7 | % |
| 2019 | 21,016 | | 7.6 | % | | 5,346 | | 7.6 | % | | 4.1 | % | | 2.8 | % | | 27.2 | % | | 32.3 | % |
| 2020 | 77,880 | | 28.1 | % | | 19,096 | | 27.0 | % | | 3.2 | % | | 1.0 | % | | 28.2 | % | | 68.1 | % |
| 2021 | 109,782 | | 39.6 | % | | 27,984 | | 39.6 | % | | 3.1 | % | | 0.5 | % | | 29.0 | % | | 93.2 | % |
| 2022 | 16,444 | | 5.9 | % | | 4,386 | | 6.2 | % | | 3.6 | % | | 0.0 | % | | 29.9 | % | | 99.6 | % |
| Total | $ | 277,285 | | 100.0 | % | | $ | 70,606 | | 100.0 | % | | | | | | | | |
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06 | PRIMARY RIF $IN BILLIONS
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(1)Cede Rate % is calculated as the risk in force ceded to our QSR transactions divided by the total risk in force. |
| | | | | | | | | | | | | | | | | | |
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Policy Year | | RIF | % of RIF | | RIF | % of RIF | | RIF | % of RIF |
| 2009+ | | $ | 37,700 |
| 76 | % | | $ | 33,368 |
| 71 | % | | $ | 32,242 |
| 69 | % |
| 2005 - 2008 (HARP) | | 3,957 |
| 8 | % | | 4,489 |
| 9 | % | | 4,673 |
| 10 | % |
| Other years (HARP) | | 328 |
| 1 | % | | 396 |
| 1 | % | | 423 |
| 1 | % |
| Subtotal | | 41,985 |
| 85 | % | | 38,253 |
| 81 | % | | 37,338 |
| 80 | % |
| Other years (Non-HARP) | | 1,177 |
| 2 | % | | 1,475 |
| 3 | % | | 1,577 |
| 3 | % |
| 2005- 2008 (Non-HARP) | | 6,219 |
| 13 | % | | 7,467 |
| 16 | % | | 7,918 |
| 17 | % |
| Subtotal | | 7,396 |
| 15 | % | | 8,942 |
| 19 | % | | 9,495 |
| 20 | % |
| Total Primary RIF | | $ | 49,381 |
| 100 | % | | $ | 47,195 |
| 100 | % | | $ | 46,833 |
| 100 | % |
| | | | | | | | | | |
Pool and other insurance
MGIC has written no new pool insurance since 2009,2008; however, for a variety of reasons, including responding to capital market alternatives to PMI and customer demands, MGIC may write pool risk in the future. Our direct pool risk in force was $489$293 million ($238199 million on pool policies with aggregate loss limits and $251$94 million on pool policies without aggregate loss limits) at September 30, 2017March 31, 2022 compared to $547$305 million ($244206 million on pool policies with aggregate loss limits and $303$99 million on pool policies without aggregate loss limits) at December 31, 2016.2021. If claim payments associated with a specific pool reach the aggregate loss limit, the remaining IIF within the pool would be cancelled and any remaining defaultsdelinquencies under the pool would be removed from our defaultdelinquency inventory.
In connection with the GSEs' CRT programs, an insurance subsidiary of MGIC provides insurance and reinsurance covering portions of the credit risk related to certain reference pools of mortgages acquired by the GSEs. Our RIF, as reported to us, related to these programs was approximately $315 million and $321 million as of March 31, 2022 and December 31, 2021, respectively.
MGIC Investment Corporation - Q3 2017Q1 2022 |40 43
Consolidated Results of Operations
The following section of the MD&A provides a comparative discussion of MGIC Investment Corporation’s Consolidated Results of Operations for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021.
Revenues
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| (in millions) | | 2022 | | 2021 | | % Change | | | | | | |
| Net premiums written | | $ | 242.7 | | | $ | 241.5 | | | — | | | | | | | |
| | | | | | | | | | | | |
| Net premiums earned | | $ | 255.2 | | | $ | 255.0 | | | — | | | | | | | |
| Investment income, net of expenses | | 38.3 | | | 37.9 | | | 1 | | | | | | | |
| Net realized investment gains (losses) | | (1.5) | | | 2.2 | | | N/M | | | | | | |
| Other revenue | | 2.6 | | | 2.8 | | | (7) | | | | | | | |
| Total revenues | | $ | 294.6 | | | $ | 298.0 | | | (1) | | | | | | | |
Net premiums written and earned
| Revenues |
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Net premiums written | | $ | 255.9 |
| | $ | 250.3 |
| | 2 |
| | $ | 738.4 |
| | $ | 731.6 |
| | 1 |
|
| | | | | | |
|
| | | | | | |
| Net premiums earned | | $ | 237.1 |
| | $ | 237.4 |
| | — |
| | $ | 697.3 |
| | $ | 690.2 |
| | 1 |
|
| Investment income, net of expenses | | 30.4 |
| | 27.5 |
| | 11 |
| | 89.6 |
| | 82.6 |
| | 8 |
|
| Net realized investment (losses) gains | | — |
| | 5.1 |
| | N/M |
| | (0.2 | ) | | 9.0 |
| | N/M |
|
| Other revenue | | 2.9 |
| | 3.9 |
| | (26 | ) | | 7.8 |
| | 14.2 |
| | (45 | ) |
| Total revenues | | $ | 270.4 |
| | $ | 273.9 |
| | (1 | ) | | $ | 794.5 |
| | $ | 796.0 |
| | — |
|
NET PREMIUMS WRITTEN AND EARNED
Comparative quarterly results
NPWNet premiums written increased 2%slightly for the three months ended March 31, 2022 compared with the prior year. The increase was due to an increase in IIF and a decline in premium refunds and lower ceded premiums due to a higher profit commission. NPE declined marginally due to lower premiums from our IIF during the period, mostly offset by declinesdecrease in ceded premiums and premium refunds when compared to the prior year.
Comparative year to date results
NPW increased 1% due to a decline in premium refunds and lower ceded premiums due to a higher profit commission,under our quota share reinsurance transactions, partially offset in part by a decrease in our premium yield. Net premiums from our IIF duringearned increased slightly for the periodthree months ended March 31, 2022 compared with the prior year primarily due to the prior year. NPE increased 1% due to declinesincrease in premium refunds and cedednet premiums offset in part by a decrease in premiums from our IIF during the period compared to the prior year.written.
See “Overview - Factors Affecting Our Results” above for additional factors that influenced the amount of net premiums written and earned during the period.periods. See “Reinsurance Transactions” below for discussion of our ceded premiums written and earned.
Premium Yield (see table 07)
Premium yields
Net premium yield (NPEis net premiums earned divided by average IIF) decreased fromIIF during the prior year periods to 50.1 and 49.8 basis points for Q3 and YTD 2017, respectively, (Q3 2016: 53.1 basis points, YTD 2016: 51.9 basis points)period and is influenced by a number of key drivers. The following table presents the key drivers which have a varying impact from period to period.
The decline inof our net premium yield compared tofor each of the respective prior year periods reflects:three months ended March 31, 2022 and March 31, 2021.
A larger percentage of our IIF from book years with lower premium rates due to a decline in premium rates in recent periods and a portion of our book years undergoing premium rate resets on their ten-year anniversary, as well as less of a positive impact from acceleration of premium recognition upon cancellation of single premium policies; offset in part by,
| | | | | | | | | | | | | | |
| Premium Yield | | | |
| | | | | |
| | Three Months Ended March 31, | | |
| (in basis points) | | 2022 | 2021 | | | |
| In force portfolio yield | (1) | 40.0 | | 43.9 | | | | |
| Premium refunds | | (0.2) | | (0.8) | | | | |
| Accelerated earnings on single premium policies | | 1.7 | | 4.4 | | | | |
| Total direct premium yield | | 41.5 | | 47.5 | | | | |
| Ceded premiums earned, net of profit commission and assumed premiums | (2) | (4.6) | | (6.6) | | | | |
| Net premium yield | | 36.9 | | 40.9 | | | | |
less of an adverse impact from(1) Total direct premiums earned, excluding premium refunds and reinsurance, each primarily dueaccelerated premiums from single premium policy cancellations divided by average primary insurance in force.
(2) Assumed premiums include those from our participation in GSE CRT programs, of which the impact on the net premium yield was 0.3 bps for the three months ended March 31, 2022 compared to lower claim activity.0.4 bps for the three months ended March 31, 2021.
The following table reconciles our
Changes in the net premium yield for the three and nine months ended September 30, 2017 fromMarch 31, 2022 compared to the respective prior year periods.three months ended March 31, 2021 reflect the following:
|
| | | | |
07In force Portfolio Yield |
è
| PREMIUM YIELD IN BASIS POINTS
A larger percentage of our IIF from book years with lower premium rates due to a decline in premium rates in recent years resulting from pricing competition, insuring mortgages with lower risk characteristics, lower required capital, the availability of reinsurance, and certain policies undergoing premium rate resets on their ten-year anniversaries. |
| Premium Refunds |
è
| Premium refunds adversely impact our net premium yield and are primarily driven by claim activity and our estimate of refundable premiums on our delinquency inventory. The low level of claims received have resulted in a lower level of premium refunds. |
| Accelerated earnings on single premium policies |
è
| Accelerated earned premium from cancellation of single premium policies prior to their estimated policy life, primarily due to refinancing activity, increase our yield. The lower level of refinance transactions have reduced this benefit. |
| Ceded premiums earned, net of profit commission and assumed premiums |
è
| Ceded premiums earned, net of profit commission adversely impact our net premium yield. Ceded premiums earned, net of profit commission, are associated with the QSR Transactions and the Home Re Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See “Reinsurance Transactions“ below for further discussion on our reinsurance transactions. |
|
| | | | | | |
| | | Three Months Ended | | Nine Months Ended |
| Premium yield - September 30, 2016 | | 53.1 |
| | 51.9 |
|
| Reconciliation: | | | | |
| Change in premium rates | | (3.9 | ) | | (3.7 | ) |
| Change in premium refunds and accruals | | 1.0 |
| | 1.3 |
|
| Single premium policy persistency | | (0.9 | ) | | (0.6 | ) |
| Reinsurance | | 0.8 |
| | 0.9 |
|
| Premium yield - September 30, 2017 | | 50.1 |
| | 49.8 |
|
MGIC Investment Corporation - Q1 2022 | 44
Reinsurance Transactions
Reinsurance agreements (see tables 08 and 09)Quota share reinsurance
Our quota share reinsurance affects various lines of our statements of operations and therefore we believe it should be analyzed by reviewing its total effect on our pre-tax income, described as follows.
| | | | | | | | |
| è | | We cede a fixed percentage of premiums on insurance covered by the agreements. |
| è | | We receive the benefit of a profit commission through a reduction in the premiums we cede. The profit commission varies inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at loss levels higher than what we are currently experiencing. As a result, lower levels of ceded losses result in less benefit from ceded losses and a higher profit commission; higher levels of ceded losses result in more benefit from ceded losses and a lower profit commission (or for certain levels of accident year loss ratios, its elimination). |
| è | | We receive the benefit of a ceding commission through a reduction in underwriting expenses equal to 20% of premiums ceded (before the effect of the profit commission). |
| è | | We cede a fixed percentage of losses incurred on insurance covered by the agreements. |
The following table provides information related to our quota share reinsurance transactions for each of the three months ended March 31, 2022 and March 31, 2021.
| | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| | | | | | | | |
| | Three Months Ended March 31, | | |
| (Dollars in thousands) | | 2022 | | 2021 | | | | |
|
| Ceded premiums written and earned, net of profit commission | | $22,378 | | $33,390 | | | | |
| % of direct premiums written | | 8% | | 12% | | | | |
| % of direct premiums earned | | 8% | | 11% | | | | |
| Profit commission | | $38,980 | | $31,944 | | | | |
| Ceding commissions | $12,272 | | $13,067 | | | | |
| Ceded losses incurred | | $(1,985) | | $8,405 | | | | |
| | | | | | | | |
| Mortgage insurance portfolio: |
| Ceded RIF (Dollars in millions) | | | | | | | | |
| 2015 QSR | | $785 | | $1,393 | | | | |
| 2017 QSR | — | | 1,131 | | | | |
| 2018 QSR | | — | | 1,133 | | | | |
| 2019 QSR | 1,398 | | 2,368 | | | | |
| 2020 QSR | | 4,522 | | 5,831 | | | | |
| 2021 QSR | | 7,288 | | 1,738 | | | | |
| 2022 QSR | | 1,364 | | — | | | | |
| Credit Union QSR | | 1,723 | | 998 | | | | |
| Total ceded RIF | | $17,080 | | $14,592 | | | | |
Ceded losses incurred for the three months ended March 31, 2022 reflect favorable loss reserve development on previously received delinquency notices. See "Losses Incurred, net” below for discussion of our loss reserves.
We cede a fixed percentageterminated our 2017 and 2018 QSR Transactions effective December 31, 2021.
Covered risk
The percentages of premiums on insurance covered by the agreements.
We receive the benefit of a profit commission through a reductionour NIW, new risk written, IIF, and RIF subject to our QSR Transactions as shown in the premiums we cede. The profit commission varies directly and inversely with the level of losses on a “dollar for dollar” basis and is eliminated at levels of losses that we do not expect to occur. As a result, lower levels of losses result in a higher profit commission and less benefit from ceded losses; higher levels of losses result in more
41| MGIC Investment Corporation - Q3 2017
benefit from ceded losses and a lower profit commission (or for levels of losses we do not expect, its elimination).
We receive the benefit of a ceding commission through a reduction in underwriting expenses equal to 20% of premiums ceded (before the effect of the profit commission).
We cede a fixed percentage of losses incurred on insurance covered by the agreements.
The effects described above result in a net cost of the reinsurance, with respect to a covered loan, of 6% (but can be lower if losses are materially higher than we expect). This cost is derived by dividing the reduction in our pre-tax net income from such loans with reinsurance by our direct (that is, without reinsurance) premiums from such loan. Although the net cost of the reinsurance is generally constant at 6%, the effect of the reinsurance on the various components of pre-tax income discussed abovefollowing table will vary from period to period depending on the level of ceded losses.
The amount of our NIW subject to our QSR Transactions (see table 08) will vary from period to periodin part due to loan level exclusion terms. For example, our 2017 QSR Transaction excludes NIW with amortization terms of 20 years or less, but allows higher limits on debt-to-income and loan levels than our 2015 QSR Transaction. In addition, the QSR Transactions contain coverage thresholds that may be triggered depending on the mix of our risk written during the period.
| | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| NIW subject to QSR Transactions | | 87.5 | % | | 73.7 | % | | | | |
| New Risk Written subject to QSR Transactions | | 93.1 | % | | 85.9 | % | | | | |
| IIF subject to QSR Transactions | | 73.6 | % | | 74.7 | % | | | | |
| RIF subject to QSR Transactions | | 79.8 | % | | 81.6 | % | | | | |
The following tablesincrease in NIW and new risk written subject to quota share reinsurance increased for the three months ended March 31, 2022 compared to the same period of the prior year primarily due to a decrease in refinance transaction which resulted in a decrease in NIW with LTVs less than or equal to 85% and amortization terms less than or equal to 20 years, which generally have lower coverage percentages, and are excluded from the QSR Transactions.
As of March 31, 2022, the weighted average coverage percentage of our QSR transactions was 30% based on RIF.
Excess of loss reinsurance
As of March 31, 2022 our excess of loss reinsurance provided $1.4 billion of loss coverage on a portfolio of policies having an in force date from July 1, 2016 through March 31, 2019, and from January 1, 2020 through May 28, 2021; all dates inclusive. For the reinsurance coverage, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide additional information relatedsecond layer coverage up to the outstanding reinsurance amount.
As of March 31, 2022, the remaining first layer retention and remaining excess of loss reinsurance coverage under our Home Re Transactions was as follows.
| | | | | | | | | | | | | | |
| ($ In thousands) | | Remaining First Layer Retention | Remaining Excess of Loss Reinsurance Coverage |
| Home Re 2018-1 | | $ | 165,179 | | $ | 218,343 | |
| Home Re 2019-1 | | 183,807 | | 208,146 | |
| Home Re 2020-1 | | 275,172 | | 196,552 | |
| Home Re 2021-1 | | 211,142 | | 361,362 | |
| Home Re 2021-2 | | 190,159 | | 398,429 | |
In April 2022, MGIC entered into a $473.6 million excess of loss reinsurance agreement (executed through an insurance linked notes transaction) on a portfolio of policies having an in force date from May 29, 2021 through December 31, 2021.
We ceded premiums of $11.8 million for the three months ended March 31, 2022, and $10.3 million for the three months ended March 31, 2021.
MGIC Investment Corporation - Q1 2022 | 45
When a “Trigger Event” is in effect, payment of principal on the notes that were sold by the Home Re Entity to raise capital to supports its reinsurance obligation will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments. As of March 31, 2022, a "Trigger Event" has occurred on our Home Re 2018-1 and Home Re 2019-1 ILN transactions because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded the limit specified in each transaction. A "Trigger Event" has also occurred on the Home Re 2021-2 ILN transactions because the credit enhancement of the most senior tranche is less than the target credit enhancement. See Note 4 - “Reinsurance" to our reinsurance agreementsconsolidated financial statements for 2017 and 2016.a discussion of our excess of loss reinsurance. |
| |
08 | QUOTA SHARE REINSURANCE |
|
| | | | | | | | |
| | | As of and For the Nine Months Ended September 30, |
| ($ in thousands, unless otherwise stated) | | 2017 | | 2016 |
| NIW subject to quota share reinsurance agreements | | 87 | % | | 89 | % |
| IIF subject to quota share reinsurance agreements | | 78 | % | | 75 | % |
| | | | | |
| Statements of operations: | | | | |
| Ceded premiums written, net | | $ | 88,692 |
| | $ | 93,334 |
|
| % of direct premiums written | | 11 | % | | 11 | % |
| Ceded premiums earned, net | | $ | 88,692 |
| | $ | 93,334 |
|
| % of direct premiums earned | | 11 | % | | 12 | % |
| Profit commission | | $ | 95,063 |
| | $ | 84,963 |
|
| Ceding commissions | | $ | 36,751 |
| | $ | 35,659 |
|
| Ceded losses incurred | | $ | 14,990 |
| | $ | 22,015 |
|
| | | | | |
| Mortgage insurance portfolio: | |
| |
|
Ceded RIF (in millions) | | $ | 11,619 |
| | $ | 10,537 |
|
| | | | | |
|
| | | | | | | | |
| | | As of and For the Nine Months Ended September 30, |
| ($ in thousands) | | 2017 | | 2016 |
| IIF subject to captive reinsurance agreements | | 1 | % | | 2 | % |
| | | | | |
| Statements of operations: | | | | |
| Ceded premiums written | | $ | 3,516 |
| | $ | 6,265 |
|
| % of direct premiums written | | 0.4 | % | | 0.8 | % |
| Ceded premiums earned | | $ | 3,545 |
| | $ | 6,361 |
|
| % of direct premiums earned | | 0.4 | % | | 0.8 | % |
| | | | | |
INVESTMENT INCOMEInvestment income
Comparative quarterly and year to date results
Net investment income in the third quarter of 2017three months ended March 31, 2022 and March 31, 2021, was $30.4$38.3 million up from $27.5and $37.9 million, in the prior year period.respectively. Net investment income in the first nine months of 2017 was $89.6 million, up from $82.6 million in the prior year period. The increase in investment income in both periods was due to an increase in the average balance of the investment portfolio along withimpacted by slightly higher investment yields over the periods.
NET REALIZED INVESTMENT (LOSSES) GAINS
Comparative quarterly and year to date results
Net realized losses for the third quarter and first nine months of 2017 were immaterial to our consolidated financial statements in both periods, whereas we recorded net realized gains of $5.1 million and $9.0 million for the third quarter and first nine months of 2016, respectively.
The net unrealized gains (losses) position of our investment portfolio) as of September 30, 2017 and December 31, 2016 is presentedpartially offset by a decrease in the following chart (10).investment portfolio.
|
| |
10 | NET UNREALIZED INVESTMENT GAINS (LOSSES)
IN MILLIONS
|
Losses and expenses
| | | | | | | | | | | | | | | | | | | | | |
| Losses and expenses | | | | |
| | Three Months Ended March 31, | | |
| (In millions) | | 2022 | | 2021 | | | | |
| Losses incurred, net | | $ | (19.3) | | | $ | 39.6 | | | | | |
| Amortization of deferred policy acquisition costs | | 2.7 | | | 2.7 | | | | | |
| Other underwriting and operating expenses, net | | 54.7 | | | 48.0 | | | | | |
| Loss on debt extinguishment | | 22.1 | | | — | | | | | |
| Interest expense | | 14.9 | | | 18.0 | | | | | |
| Total losses and expenses | | $ | 75.1 | | | $ | 108.3 | | | | | |
MGIC Investment Corporation - Q3 2017|42
OTHER REVENUE
Comparative quarterly results
Other revenue for the third quarter of 2017 was $2.9 million, down from $3.9 million in the prior year primarily due to a decline in contract underwriting fees.
Comparative year to date results
Other revenue for the first nine months of 2017 was $7.8 million, down from $14.2 million in the prior year period. Contract underwriting fees were lower in the current year and the prior year included approximately $4 million of gains recognized upon the substantial liquidation of our Australian operations resulting from changes in foreign currency exchange rates.
| Losses and expenses |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (in millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Losses incurred, net | | $ | 29.7 |
| | $ | 60.9 |
| | $ | 84.7 |
| | $ | 192.5 |
|
| Amortization of deferred policy acquisition costs | | 3.0 |
| | 2.6 |
| | 7.8 |
| | 6.8 |
|
| Other underwriting and operating expenses, net | | 39.9 |
| | 37.9 |
| | 119.2 |
| | 113.0 |
|
| Interest expense | | 13.3 |
| | 13.5 |
| | 43.8 |
| | 40.5 |
|
| Loss on debt extinguishment | | — |
| | 75.2 |
| | 0.1 |
| | 90.5 |
|
| Total losses and expenses | | $ | 85.9 |
| | $ | 190.1 |
| | $ | 255.6 |
| | $ | 443.3 |
|
LOSSES INCURRED, NETLosses incurred, net
As discussed in “Critical Accounting Policies” in our 2021 10-K MD&A, and consistent with industry practices, we establish case loss reserves for future claims only foron delinquent loans that are currently delinquent. The terms “delinquent” and “default” are used interchangeably by us. We consider a loan in default when it iswere reported to us as two or more payments past due. Lossdue and have not become current or resulted in a claim payment. Such loans are referred to as being in our delinquency inventory. Case loss reserves are established based on estimating the number of loans in our defaultdelinquency inventory that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for delinquencies estimated to have occurred prior to the close of an accounting period, but have not yet been reported to us. IBNR reserves are established using estimated delinquencies, claim rates, and claim severities.
Estimation of losses is inherently judgmental. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment, and the current and future strength of local housing markets.markets; exposure on insured loans; the amount of time between delinquency and claim filing; and curtailments and rescissions. The actual
amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment and the continued impact of the COVID-19 pandemic, leading to a reduction in borrowerborrowers’ income and thus their ability to make mortgage payments, the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance programs and foreclosure moratoriums), and a drop in housing values that could result in, among other things, greater losses on loans, and may affect borrower willingness to continue to make mortgage payments when the net value of the home is
below the mortgage balance. Loss reserves in the future will also be dependent on the number of loans reported to us as delinquent.
Historically, losses incurred have followed a seasonal trend in which the second half of the year has weaker credit performance than the first half, with higher new notice activity and a lower cure rate. Changes in economic circumstances, including those associated with the COVID-19 pandemic, affected this pattern starting in the second quarter of 2020.
As discussed in our Risk Factors titled “The Covid-19 pandemic may materially impact our future financial results, business, liquidity and/or financial condition" and “The future impact of Covid-19 related forbearance and foreclosure mitigation activities is unknown,” the impact of the COVID-19 pandemic on our future incurred losses is uncertain and may be material. As discussed in our Risk Factor titled “Because we establish loss reserves only upon a loan delinquency rather than based on estimates of our ultimate losses on risk in force, losses may have a disproportionate adverse effect on our earnings in certain periods” if we have not received a notice of delinquency with respect to a loan and if we have not estimated the loan to be delinquent as of March 31, 2022 through our IBNR reserve, then we have not yet recorded an incurred loss with respect to that loan.
Our estimates are also affected by any agreements we enter into regarding our claims paying
practices, such as the settlement agreements discussed in Note 5 – “Litigation and Contingencies” to our consolidated financial statements. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment.practices.
Losses incurred, net(see table 11)
Comparative quarterly results
Losses incurred, net infor the thirdfirst quarter of 2017 decreased 51% to $302022 were $(19.3) million, a decrease of $58.9 million compared to $61the first quarter of 2021 losses incurred, net of $39.6 million. While new delinquency notices added approximately $36.3 million to losses incurred in the prior year. The decrease was duefirst quarter of 2022, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of $55.7 million, primarily related to a decrease in losses and LAE incurred on defaults reported in the current year. Losses incurred on current year defaults declined due to a 9% reduction in new notices received and a lowerestimated claim rate on new notices (see chart 13). Favorable developmentdelinquencies received on prior year defaults occurred inPeak COVID-19 pandemic delinquencies. In the thirdfirst quarter of 2017 and 2016 primarily due to a lower claim rate.2021, our re-estimation of loss reserves on previously received delinquency notices did not result in any significant development.
Comparative year to date results | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Composition of losses incurred | | | | | | |
| | Three Months Ended March 31, | | |
| (in millions) | | 2022 | | 2021 | | % Change | | | | | | |
| Current year / New notices | $36.3 | | $41.4 | | (12) | | | | | | |
| Prior year reserve development | (55.7) | | (1.8) | | N/M | | | | | | |
| Losses incurred, net | $(19.3) | | $39.6 | | (149) | | | | | | |
Losses incurred, net in the first nine months of 2017 decreased 56% to $85 million compared to $192 million in the prior year. The decrease was due to a decrease in losses and LAE incurred on defaults reported in the current year and higher favorable development on prior year defaults. Losses incurred on current year defaults declined due to a 10% reduction in new notices received and a lower claim rate on new notices (see chart 13). Favorable development on prior year defaults occurred in both the 2017 and 2016 periods primarily due to a lower claim rate. The favorable development in 2016 was partially offset by an increase in our severity assumption. The increase in our severity assumption generally reflected a rising trend in our average claim paid at that time (see table 15).
|
| |
11 | COMPOSITION OF LOSSES INCURRED
$ IN MILLIONS
|
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Current year / New notices | | $ | 60.6 |
| | $ | 95.5 |
| | (37 | ) | | $ | 219.5 |
| | $ | 292.1 |
| | (25 | ) |
| Prior year reserve development | | (30.8 | ) | | (34.7 | ) | | (11 | ) | | (134.8 | ) | | (99.6 | ) | | 35 |
|
| Losses incurred, net | | $ | 29.7 |
| | $ | 60.9 |
| | (51 | ) | | $ | 84.7 |
| | $ | 192.5 |
| | (56 | ) |
43| MGIC Investment Corporation - Q3 2017Q1 2022 | 46
Loss Ratio (see chart 12)ratio
The loss ratio is the ratio, expressed as a percentage, of the sum of incurred losses and loss adjustment expenses to net premiums earned. The declineloss ratio was (7.6%) and 15.5% for the three months ended March 31, 2022 and 2021, respectively. The decrease in the loss ratio infor the three and nine months ended September 30, 2017March 31, 2022 compared to the respective prior year periodsperiod was primarily due to a lower level ofdecrease in losses incurred net.discussed above.
New Notice Claim Rate (see chart 13)
Q3 2017: ~11% compared to Q3 2016: ~12%
YTD 2017: ~11% compared to YTD 2016: ~13%
The quarterly new notice claim rate during 2017 has generally ranged from 10.5% to 11%, down
The number of new delinquency notices received for the three months ended March 31, 2022 decreased 18% from the same prior year period last year. The estimated claim rate on delinquency notices received in whichthe first quarter of 2022 was consistent with the new notice claim rate generally ranged from 12% to 13%. We expectin 2021.
The table below presents our new notice claim rates for the remainderdelinquency notices received, delinquency inventory, percentage of 2017 to be lower than the comparable 2016 rates.
New notice activity continues to be primarily driven by loans insured in 2008forbearance, and prior (see chart 14), which continue to experience a cycle whereby many loans default, cure, and re-default. This cycle, along with the duration that defaults may ultimately remain in our notice inventory, results in significant judgment in establishing the estimated claim rate.
|
| |
13 | PRIMARY NEW NOTICE COUNT
NOTICE CLAIM RATE (1)(2) %
|
| |
(1)
| Claim rate is the approximate quarterly rate. |
| |
(2)
| Claim rate is the approximate year-to-date rate. |
|
| |
14 | NEW NOTICE COUNT FROM BOOK YEARS 2008 AND PRIOR
PREVIOUSLY DELINQUENT %
|
MGIC Investment Corporation - Q3 2017|44
Claims Severity (see table 15)
Factors that impact claim severity include the exposure on the loan (the unpaid principal balance of the loan times our insurance coverage percentage), the amount of time between default and claim filing (which impacts the amount of interest and expenses) and curtailments. All else being equal, the longer the period between default and claim filing, the greater the severity. As discussed in Note 12 - “Loss Reserves”, the average time servicers are utilizing to process foreclosures has shortened and therefore we expect the average number of missed payments atfor the time aloans in our delinquency inventory by policy year | | | | | | | | | | | | | | | |
| | | | | |
| New notices and delinquency inventory during the three months ended and as of: |
| March 31, 2022 |
| Policy Year | New Notices in 2022 | | Delinquency Inventory | % of Delinquency Inventory in Forbearance | Avg. Number of Missed Payments of Delinquency Inventory |
| 2004 and prior | 1,002 | | | 2,745 | | 17.5 | % | 19 |
| 2005-2008 | 3,127 | | | 10,171 | | 17.3 | % | 19 |
| 2009-2015 | 860 | | | 2,886 | | 23.5 | % | 13 |
| 2016 | 555 | | | 1,724 | | 27.4 | % | 12 |
| 2017 | 719 | | | 2,419 | | 28.7 | % | 12 |
| 2018 | 815 | | | 2,844 | | 29.6 | % | 12 |
| 2019 | 862 | | | 2,790 | | 36.5 | % | 11 |
| 2020 | 1,315 | | | 3,079 | | 62.0 | % | 8 |
| 2021 | 1,448 | | | 1,804 | | 54.8 | % | 4 |
| 2022 | — | | | — | | — | % | 0 |
| Total | 10,703 | | | 30,462 | | 29.0 | % | 14 |
Claim rate on new notices (1) | 8 | % | | | | |
| | | | | |
| March 31, 2021 |
| Policy Year | New Notices in 2021 | | Delinquency Inventory | % of Delinquency Inventory in Forbearance | Avg. Number of Missed Payments of Delinquency Inventory |
| 2004 and prior | 1,133 | | | 3,617 | | 25.4 | % | 17 |
| 2005-2008 | 3,929 | | | 15,892 | | 37.2 | % | 16 |
| 2009-2015 | 1,342 | | | 6,142 | | 65.3 | % | 10 |
| 2016 | 800 | | | 4,026 | | 74.9 | % | 9 |
| 2017 | 1,154 | | | 5,806 | | 75.4 | % | 9 |
| 2018 | 1,341 | | | 6,626 | | 77.9 | % | 9 |
| 2019 | 1,505 | | | 6,954 | | 82.1 | % | 8 |
| 2020 | 1,793 | | | 3,698 | | 79.2 | % | 6 |
| 2021 | 14 | | | 14 | | — | % | 1 |
| Total | 13,011 | | | 52,775 | | 60.7 | % | 11 |
Claim rate on new notices (1) | 7 | % | | | | |
| | | | | |
| (1) Claim rate is the respective quarter or year to date weighted average rate and is rounded to the nearest whole percent. |
MGIC Investment Corporation - Q1 2022 | 47
Claims severity
Factors that impact claim is received to be approximately 18 to 24 for new notices receivedseverity include:
| | | | | | | | |
| è | | economic conditions at time of claim filing, including home prices compared to home prices at the time of placement of coverage, |
| è | | exposure of the loan, which is the unpaid principal balance of the loan times our insurance coverage percentage, |
| è | | length of time between delinquency and claim filing (which impacts the amount of interest and expenses, with a longer time between default and claim filing generally increasing severity), and |
| è | | curtailments. |
As discussed in future periods. In recent periods, defaults resulting in claim payments had an average of 35 missed payments at the claim received date. OurNote 11 - “Loss Reserves,” our loss reserves estimates take into consideration current trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend. In light of the forbearance and foreclosure moratorium programs associated with the COVID-19 pandemic, the average number of missed payments at the time a claim is received and expected to be received will increase throughout 2022. Although foreclosure moratoriums are expiring, under a CFPB rule that was generally effective through December 31, 2021, with limited exceptions, servicers were required to ensure that at least one temporary safeguard was met before referring 120-day delinquent loans for foreclosure. With the expiration of the CFPB rule, it is likely that foreclosures and claims will increase.
The majority of loans from 2005-2008insured prior to 2009 (which represent 42% of the majority of loans in the delinquentdelinquency inventory) are covered by master policy terms that, except under certain circumstances, do not limit the number of years that an insured can include interest when filing a claim. Under our current master policy terms, an insured can include accumulated interest when filing a claim if theyonly for the first three years the loan is delinquent. In each case, the insured must comply with theirits obligations under the terms of the applicable master policy.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Claims severity trend for claims paid during the period |
| Period | | Average exposure on claim paid | | Average claim paid | | % Paid to exposure | | Average number of missed payments at claim received date |
| | | | | | | | |
| | | | | | | | |
| Q1 2022 | | 38,009 | | | 27,662 | | | 72.8 | % | | 45 | |
| Q4 2021 | | 43,485 | | | 32,722 | | | 75.2 | % | | 42 | |
| Q3 2021 | | 42,468 | | | 36,138 | | | 85.1 | % | | 34 | |
| Q2 2021 | | 40,300 | | | 34,068 | | | 84.5 | % | | 36 | |
| Q1 2021 | | 46,807 | | | 36,725 | | | 78.5 | % | | 34 | |
| Q4 2020 | | 48,321 | | | 40,412 | | | 83.6 | % | | 32 | |
| Q3 2020 | | 47,780 | | | 40,600 | | | 85.0 | % | | 27 | |
| Q2 2020 | | 44,905 | | | 42,915 | | | 95.6 | % | | 32 | |
| Q1 2020 | | 46,247 | | | 47,222 | | | 102.1 | % | | 33 | |
| | | | | | | | |
| Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies. |
|
| | | | | | | | | | | | | | |
Note: Table excludes material settlements(1). |
| Period | | Average exposure on claim paid | | Average claim paid | | % Paid to exposure | | Average number of missed payments at claim received date |
| Q3 2017 | | $ | 43,313 |
| | $ | 46,389 |
| | 107.1 | % | | 35 |
|
| Q2 2017 | | 44,747 |
| | 49,105 |
| | 109.7 | % | | 35 |
|
| Q1 2017 | | 44,238 |
| | 49,110 |
| | 111.0 | % | | 35 |
|
| | | | | | | | | |
| Q4 2016 | | 43,200 |
| | 48,297 |
| | 111.8 | % | | 35 |
|
| Q3 2016 | | 43,747 |
| | 48,050 |
| | 109.8 | % | | 34 |
|
| Q2 2016 | | 43,709 |
| | 47,953 |
| | 109.7 | % | | 35 |
|
| Q1 2016 | | 44,094 |
| | 49,281 |
| | 111.8 | % | | 34 |
|
| | | | | | | | | |
| Q4 2015 | | 44,342 |
| | 49,134 |
| | 110.8 | % | | 35 |
|
| Q3 2015 | | 44,159 |
| | 48,156 |
| | 109.1 | % | | 33 |
|
| Q2 2015 | | 44,683 |
| | 48,587 |
| | 108.7 | % | | 34 |
|
| Q1 2015 | | 44,403 |
| | 47,366 |
| | 106.7 | % | | 33 |
|
(1) Settlements include amounts paid in settlement disputes for claims paying practices and commutations of NPLs. |
In consideringClaims that were resolved after the potential sensitivityfirst quarter of the factors underlying our estimate of2020 experienced an increase in loss reserves, it is possible that even a relatively small change in our estimated claim rate or severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations evenmitigation activities, primarily third party acquisitions (sometimes referred to as “short sales”), resulting in a stable economic environment. For example, as of September 30, 2017, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the reserve amount by approximately +/- $20 million. A 1 percentage point increase/decrease in the average claim rate reserve factor would changepaid and the reserve amount by approximately +/- $23 million.
See Note 12 – “Loss Reserves”average claim paid as a percentage of exposure. At the end of 2021, the average number of missed payments at the time claims were received increased compared to the previous quarter as foreclosure moratoriums expired resulting in an increase in our consolidated financial statements for a discussionclaims received. However, at March 31, 2022, claims received are still below levels experienced prior to the second quarter of our losses incurred2020. As foreclosure moratoriums and forbearance plans end, we expect to see an increase in claims received and claims paying practices (including curtailments).paid at exposure levels above those experienced subsequent to the second quarter of 2020. The magnitude and timing of the increases are uncertain.
The length of time a loan is in the delinquency inventory (see Note 11- “Loss Reserves,” table 11.4) can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the following table.
MGIC Investment Corporation - Q1 2022 | 48
| | | | | | | | | | | | | | | | | | | | | | | |
| Delinquency inventory - number of payments delinquent |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| 3 payments or less | | 9,586 | | | 9,529 | | | 11,440 | |
| 4-11 payments | | 8,803 | | | 9,208 | | | 25,016 | |
12 payments or more (1) | | 12,073 | | | 14,553 | | | 16,319 | |
| Total | | 30,462 | | | 33,290 | | | 52,775 | |
| | | | | | |
| 3 payments or less | | 31 | % | | 28 | % | | 22 | % |
| 4-11 payments | | 29 | % | | 28 | % | | 47 | % |
| 12 payments or more | | 40 | % | | 44 | % | | 31 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
(1)Approximately 16%, 13%, and 26% of the primary delinquency inventory with 12 payments or more delinquent has at least 36 payments delinquent as of March 31, 2022, December 31, 2021, and March 31, 2021, respectively.
Net losses and LAE paid
Net losses and LAE paid in the three and nine months ended September 30, 2017 declined 30% and 25%, respectively,March 31, 2022 decreased by $4 million or 27% compared to the same periodsperiod in the prior year primarily due to a lower average claim activity on our primarypaid and pool businessLAE paid. While foreclosure moratoriums and a reductionpayment forbearance plans remain in losses paid under settlement agreements. We believeplace, net losses and LAE paid willare expected to continue to decline asbe lower. As the credit profilevarious moratorium and forbearance plans end, we expect net losses and LAE paid to increase, however, the magnitude and timing of our RIF continues to improve and our delinquent inventory declines.the increases are uncertain.
The following table presents our net losses and LAE paid for the three and nine months ended September 30, 2017March 31, 2022 and 2016.2021.
| | | | | | | | | | | | | | | | | | | | | |
| Net losses and LAE paid | | | | |
| | Three Months Ended March 31, | | |
| (In millions) | | 2022 | | 2021 | | | | |
| Total primary (excluding settlements) | | $ | 9 | | | $ | 12 | | | | | |
| | | | | | | | |
| Pool | | — | | | — | | | | | |
| Direct losses paid | | 9 | | | 12 | | | | | |
| Reinsurance | | — | | | (1) | | | | | |
| Net losses paid | | 9 | | | 11 | | | | | |
| LAE | | 2 | | | 4 | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net losses and LAE paid | | $ | 11 | | | $ | 15 | | | | | |
| | | | | | | | | |
| Net Losses and LAE Paid |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| Total primary (excluding settlements) | | $ | 101 |
| | $ | 147 |
| | $ | 357 |
| | $ | 466 |
|
Claims paying practices and NPL settlements(1) | | 9 |
| | 1 |
| | 54 |
| | 52 |
|
Pool (2) | | 2 |
| | 14 |
| | 8 |
| | 42 |
|
| Direct losses paid | | 112 |
| | 162 |
| | 419 |
| | 560 |
|
| Reinsurance | | (3 | ) | | (5 | ) | | (18 | ) | | (19 | ) |
| Net losses paid | | 109 |
| | 157 |
| | 401 |
| | 541 |
|
| LAE | | 4 |
| | 4 |
| | 13 |
| | 14 |
|
| Net losses and LAE paid | | $ | 113 |
| | $ | 161 |
| | $ | 414 |
| | $ | 555 |
|
| |
(1)
| See Note 12 - “Loss Reserves” for additional information on our settlements of disputes for claims paying practices and commutations of NPLs. |
| |
(2)
| The three and nine months ended September 30,2016 includes $11 million and $32 million, respectively, paid under the terms of the settlement with Freddie Mac. The final payment under this settlement was made on December 1, 2016.
|
45| MGIC Investment Corporation - Q3 2017
Primary claimsThe primary average claim paid for the top 15 jurisdictions (based on 2017 losses paid) and all other jurisdictions for the three and nine months ended September 30, 2017March 31, 2022 and 2016 appears in the following table.
| Paid Losses by Jurisdiction |
| | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions) | | 2017 | | 2016 | | 2017 | | 2016 |
| New Jersey | | $ | 12 |
| | $ | 14 |
| | $ | 47 |
| | $ | 45 |
|
| Florida | | 10 |
| | 19 |
| | 40 |
| | 69 |
|
| New York | | 8 |
| | 11 |
| | 29 |
| | 27 |
|
| Illinois | | 7 |
| | 10 |
| | 22 |
| | 33 |
|
| Maryland | | 5 |
| | 7 |
| | 19 |
| | 23 |
|
| Pennsylvania | | 4 |
| | 7 |
| | 18 |
| | 21 |
|
| California | | 5 |
| | 7 |
| | 15 |
| | 20 |
|
| Puerto Rico | | 5 |
| | 3 |
| | 15 |
| | 11 |
|
| Ohio | | 4 |
| | 6 |
| | 12 |
| | 16 |
|
| Massachusetts | | 2 |
| | 4 |
| | 10 |
| | 11 |
|
| Connecticut | | 3 |
| | 3 |
| | 9 |
| | 10 |
|
| Georgia | | 2 |
| | 3 |
| | 8 |
| | 10 |
|
| Virginia | | 2 |
| | 4 |
| | 8 |
| | 12 |
|
| Indiana | | 2 |
| | 3 |
| | 7 |
| | 8 |
|
| Washington | | 1 |
| | 4 |
| | 6 |
| | 13 |
|
| All other jurisdictions | | 29 |
| | 42 |
| | 92 |
| | 137 |
|
| Total primary (excluding settlements) | $ | 101 |
| | $ | 147 |
| | $ | 357 |
| | 466 |
|
2021 was $27,662 and $36,725, respectively. The primary average claim paid can vary materially from period to period based upon a variety of factors, including the local market conditions, average loan amount, average coverage percentage, the amount of time between defaultdelinquency and claim filing, and our loss mitigation efforts on loans for which claims are paid.
The primary average claim paidRIF on delinquent loans at March 31, 2022, December 31, 2021 and March 31, 2021 for the top 5 statesjurisdictions (based on 2017 losses paid) for the three and nine months ended September 30, 2017 and 2016March 31, 2022 delinquency inventory) appears in the following table.
| | | | | | | | | | | | | | | | | | | | |
| Primary average RIF - delinquent loans |
| | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| Florida | $ | 56,088 | | | $ | 56,227 | | | $ | 56,930 | |
| Texas | 51,212 | | | 51,037 | | | 52,870 | |
| Illinois | 40,997 | | | 40,798 | | | 41,234 | |
| California | 90,420 | | | 89,935 | | | 89,785 | |
| New York | 74,374 | | | 74,836 | | | 73,708 | |
| All other jurisdictions | 46,978 | | | 47,538 | | | 49,467 | |
| All jurisdictions | $ | 51,423 | | | $ | 51,887 | | | $ | 53,497 | |
| Primary Average Claim Paid |
| | | | | | | | | | | | | | | |
| | Three Months Ended September 30, | | Nine Months Ended September 30, |
| | 2017 | | 2016 | | 2017 | | 2016 |
| New Jersey | $ | 84,426 |
| | $ | 82,061 |
| | $ | 85,868 |
| | $ | 81,949 |
|
| Florida | 56,482 |
| | 58,540 |
| | 63,121 |
| | 61,065 |
|
| New York | 73,285 |
| | 84,634 |
| | 80,077 |
| | 73,150 |
|
| Illinois | 45,750 |
| | 53,620 |
| | 46,276 |
| | 50,004 |
|
| Maryland | 72,153 |
| | 65,978 |
| | 76,864 |
| | 72,639 |
|
| All other jurisdictions | 38,882 |
| | 40,400 |
| | 39,124 |
| | 40,824 |
|
| All jurisdictions | 46,389 |
| | 48,050 |
| | 48,302 |
| | 48,449 |
|
The primary average RIF on all loans was $60,945, $59,518, and $55,418 at March 31, 2022, December 31, 2021, and March 31, 2021, respectively.
Loss reserves
Our primary delinquency rate at March 31, 2022 was 2.61% (YE 2021: 2.84%, March 31, 2021: 4.65%). Our primary delinquency inventory was 30,462 loans at March 31, 2022, representing a decrease of 8.5% from December 31, 2021 and 42.3% from March 31, 2021. Generally, a defaulted loan with more missed payments is more likely to result in a claim. We experienced an increase in the number of delinquencies in inventory with twelve or more missed payments at March 31, 2022 and December 31, 2021 when compared to March 31, 2021. The increase is due to the number of new delinquency notices received in the second quarter of 2020 resulting from the impacts of the COVID-19 pandemic that remain in the delinquency inventory. (See Note 11- “Loss Reserves,” table 11.4)
Note: Jurisdictions in italics
MGIC Investment Corporation - Q1 2022 | 49
The gross reserves at March 31, 2022, December 31, 2021, and March 31, 2021 appear in the table abovebelow.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross reserves |
| | March 31, 2022 | December 31, 2021 | March 31, 2021 |
| Primary: | | | | | | | |
| Direct case loss reserves (in millions) | | $ | 766 | | | $ | 795 | | | $ | 825 | | |
| Direct IBNR and LAE reserves | | 79 | | | 82 | | | 80 | | |
| Total primary direct loss reserves | | $ | 845 | | | $ | 877 | | | $ | 905 | | |
| | | | | | | |
| Ending delinquent inventory | | | 30,462 | | | 33,290 | | | 52,775 | |
| Percentage of loans delinquent (delinquency rate) | | | 2.61 | % | | 2.84 | % | | 4.65 | % |
| Average total primary loss reserves per delinquency | | | $ | 27,538 | | | $ | 26,156 | | | $ | 17,147 | |
| Primary claims received inventory included in ending delinquent inventory | | | 217 | | | 211 | | | 151 | |
| | | | | | | |
Pool (1): | | | | | | | |
| Direct loss reserves (in millions): | | | | | | | |
| With aggregate loss limits | | $ | 4 | | | $ | 4 | | | $ | 5 | | |
| Without aggregate loss limits | | 2 | | | 2 | | | 2 | | |
| Total pool direct loss reserves | | $ | 6 | | | $ | 6 | | | $ | 7 | | |
| | | | | | | |
| Ending default inventory: | | | | | | | |
| With aggregate loss limits | | | 296 | | | 313 | | | 395 | |
| Without aggregate loss limits | | | 176 | | | 185 | | | 210 | |
| Total pool ending delinquent inventory | | | 472 | | | 498 | | | 605 | |
| Pool claims received inventory included in ending delinquent inventory | | | 2 | | | 1 | | | 6 | |
Other gross reserves (2) (in millions) | | $ | — | | | $ | 1 | | | $ | 1 | | |
(1)Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct reserve per delinquency for our pool business.
(2)Other Gross Reserves includes direct and assumed reserves that are thosenot included within our primary or pool loss reserves.
MGIC Investment Corporation - Q1 2022 | 50
The primary delinquency inventory for the top 15 jurisdictions (based on March 31, 2022 delinquency inventory) at March 31, 2022, December 31, 2021 and March 31, 2021 appears in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Primary delinquency inventory by jurisdiction |
| | | | | | March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| Florida * | | | | | | 2,576 | | | 2,948 | | | 5,198 | |
| Texas | | | | | | 2,314 | | | 2,572 | | | 4,259 | |
| Illinois * | | | | | | 1,929 | | | 2,082 | | | 3,345 | |
| California | | | | | | 1,617 | | | 1,852 | | | 3,283 | |
| New York * | | | | | | 1,586 | | | 1,674 | | | 2,253 | |
| Pennsylvania * | | | | | | 1,579 | | | 1,672 | | | 2,375 | |
| Ohio * | | | | | | 1,373 | | | 1,458 | | | 2,260 | |
| Georgia | | | | | | 1,167 | | | 1,272 | | | 2,188 | |
| New Jersey * | | | | | | 1,056 | | | 1,169 | | | 1,749 | |
| Michigan | | | | | | 1,041 | | | 1,144 | | | 1,614 | |
| Maryland | | | | | | 893 | | | 929 | | | 1,469 | |
| North Carolina | | | | | | 881 | | | 987 | | | 1,550 | |
| Virginia | | | | | | 722 | | | 766 | | | 1,289 | |
| Minnesota | | | | | | 712 | | | 725 | | | 1,168 | |
| Indiana | | | | | | 680 | | | 736 | | | 1,065 | |
| All other jurisdictions | | | | | | 10,336 | | | 11,304 | | | 17,710 | |
| Total | | | | | | 30,462 | | | 33,290 | | | 52,775 | |
Note: Asterisk denotes jurisdictions in the table above that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
The primary average exposure of our primary RIFdelinquency inventory by policy year at September 30, 2017,March 31, 2022, December 31, 20162021 and September 30, 2016 and for the top 5 jurisdictions (based on 2017 losses paid)March 31, 2021 appears in the following table.
| | | | | | | | | | | | | | | | | | | | |
| Primary delinquency inventory by policy year |
| March 31, 2022 | | December 31, 2021 | | March 31, 2021 |
| Policy year: | | | | | |
| 2004 and prior | 2,745 | | | 2,829 | | | 3,617 | |
| 2004 and prior % | 9 | % | | 8 | % | | 7 | % |
| 2005 | 1,644 | | | 1,703 | | | 2,265 | |
| 2006 | 2,763 | | | 2,928 | | | 4,013 | |
| 2007 | 4,607 | | | 4,973 | | | 7,469 | |
| 2008 | 1,157 | | | 1,278 | | | 2,145 | |
| 2005 - 2008 % | 33 | % | | 33 | % | | 30 | % |
| 2009 | 75 | | | 84 | | | 149 | |
| 2010 | 57 | | | 56 | | | 95 | |
| 2011 | 68 | | | 79 | | | 137 | |
| 2012 | 111 | | | 143 | | | 314 | |
| 2013 | 394 | | | 441 | | | 816 | |
| 2014 | 894 | | | 1,055 | | | 1,849 | |
| 2015 | 1,287 | | | 1,542 | | | 2,782 | |
| 2009 - 2015 % | 10 | % | | 10 | % | | 12 | % |
| 2016 | 1,724 | | | 2,004 | | | 4,026 | |
| 2017 | 2,419 | | | 2,949 | | | 5,806 | |
| 2018 | 2,844 | | | 3,412 | | | 6,626 | |
| 2019 | 2,790 | | | 3,340 | | | 6,954 | |
| 2020 | 3,079 | | | 3,308 | | | 3,698 | |
| 2021 | 1,804 | | | 1,166 | | | 14 | |
| 2022 | — | | | — | | | — | |
| 2016 and later % | 48 | % | | 49 | % | | 51 | % |
| | | | | |
| Total | 30,462 | | | 33,290 | | | 52,775 | |
| Primary Average Exposure |
| | | | | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| New Jersey | $ | 64,178 |
| | $ | 63,351 |
| | $ | 63,146 |
|
| Florida | 50,372 |
| | 49,908 |
| | 49,714 |
|
| New York | 52,663 |
| | 52,006 |
| | 51,845 |
|
| Illinois | 41,409 |
| | 40,696 |
| | 40,732 |
|
| Maryland | 65,341 |
| | 63,812 |
| | 63,652 |
|
| All other jurisdictions | 48,048 |
| | 46,481 |
| | 46,160 |
|
| | | | | | |
| All jurisdictions | 48,694 |
| | 47,276 |
| | 46,983 |
|
Hurricanes Harvey, Irma, and Maria
As discussed in Note 12 - “Loss Reserves,” recent hurricane activity primarily impacting Texas, Florida, and Puerto Rico has increased the number of new notices of default reported to us in October and we expect to continue to see elevated levels of new notice activity on loans in the impacted areas through the remainder of 2017. Based on our analysis and past experience, we expect the majority of new defaults in the hurricane affected areas to cure and to not result in a material increase in our incurred losses or losses paid. When establishing our loss reserves in the near-term, we expect to apply a lower estimated claim rate to new default notices from the affected areas than the claim rate we apply to other notices in our default inventory. See our risk factors titled “Recent hurricanes may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default and our Minimum Required Assets under PMIERs” and “Downturns in the domestic economy or declines in the value of borrowers’ homes from their value at the time their loans closed may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns” for factors that could cause our actual results to differ from our expectations expressed in this paragraph.
MGIC Investment Corporation - Q3 2017|46
Loss reserves
Our primary default rate at September 30, 2017 was 4.07% (YE 2016: 5.04%, September 30, 2016: 5.16%). Our primary default inventory contained 41,235 loans at September 30, 2017, representing a decrease of 18% from December 31, 2016 and 20% from September 30, 2016. The reduction in our primary default inventory is the result of the total number of defaulted loans: (1) that have cured; (2) for which claim payments have been made; or (3) that have resulted in rescission, claim denial, or removal from inventory due to settlements, collectively exceeding the total number of new defaults on insured loans. In recent periods, we have experienced improved cure rates and the overall mix of our default inventory, as represented by the number of missed payments, has improved compared to the prior years. As of September 30, 2017, the percentage of our default inventory that has 12 or more missed payments was 33% (YE 2016: 38%, September 30, 2016: 40%). Generally, a defaulted loan with fewer missed payments is less likely to result in a claim. We expect our default inventory to continue to decline; however, the pace of decline will be impacted by the rate our recent books naturally season, commutations of NPL’s, settlement agreements, and the recent hurricane activity discussed above.
The gross reserves at September 30, 2017, December 31, 2016 and September 30, 2016 appear in the table below.
|
| | | | | | | | | | | | | | | | | | | |
| Gross Reserves | | September 30, 2017 | December 31, 2016 | September 30, 2016 |
| Primary: | | | | | | | |
| Direct loss reserves (in millions) | | $ | 1,026 |
| | $ | 1,334 |
| | $ | 1,408 |
| |
| IBNR and LAE | | 64 |
| | 79 |
| | 85 |
| |
| Total primary loss reserves | | $ | 1,090 |
| | $ | 1,413 |
| | $ | 1,493 |
| |
| | | | | | | | |
| Ending default inventory | | | 41,235 |
| | 50,282 |
| | 51,433 |
|
| Percentage of loans delinquent (default rate) | | | 4.07 | % | | 5.04 | % | | 5.16 | % |
| Average total primary loss reserves per default | | | $ | 26,430 |
| | $ | 28,104 |
| | $ | 29,027 |
|
| Primary claims received inventory included in ending default inventory | | | 1,063 |
| | 1,385 |
| | 1,636 |
|
| | | | | | | | |
Pool(1): | | |
| | |
| | |
| |
| Direct loss reserves (in millions): | | |
| | | | | |
| With aggregate loss limits | | $ | 10 |
| | $ | 18 |
| | $ | 24 |
| |
| Without aggregate loss limits | | 5 |
| | 7 |
| | 8 |
| |
Reserve related to Freddie Mac Settlement(2) | | — |
| | — |
| | 10 |
| |
| Total pool direct loss reserves | | $ | 15 |
| | $ | 25 |
| | $ | 42 |
| |
| | | | | | | | |
| Ending default inventory: | | |
| | |
| | |
| |
| With aggregate loss limits | | | 1,057 |
| | 1,382 |
| | 1,456 |
|
| Without aggregate loss limits | | | 369 |
| | 501 |
| | 523 |
|
| Total pool ending default inventory | | | 1,426 |
| | 1,883 |
| | 1,979 |
|
| Pool claims received inventory included in ending default inventory | | | 42 |
| | 72 |
| | 87 |
|
| Other gross reserves (in millions) | | $ | — |
| | $ | 1 |
| | $ | — |
| |
| |
(1)
| Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct reserve per default for our pool business. |
| |
(2)
| See our Form 8-K filed with the Securities and Exchange Commission on November 30, 2012 for a discussion of our settlement with Freddie Mac regarding a pool policy. As of December 31, 2016, we had completed our obligation under this settlement agreement. |
47| MGIC Investment Corporation - Q3 2017
The primary default inventory for the top 15 jurisdictions (based on 2017 losses paid) at September 30, 2017, December 31, 2016 and September 30, 2016 appears in the following table.
| Primary Default Inventory by Jurisdiction |
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| New Jersey | 1,917 |
| | 2,586 |
| | 2,756 |
|
| Florida | 3,379 |
| | 4,150 |
| | 4,372 |
|
| New York | 2,519 |
| | 3,171 |
| | 3,269 |
|
| Illinois | 2,203 |
| | 2,649 |
| | 2,744 |
|
| Maryland | 1,067 |
| | 1,312 |
| | 1,328 |
|
| Pennsylvania | 2,478 |
| | 2,984 |
| | 2,997 |
|
| California | 1,394 |
| | 1,590 |
| | 1,592 |
|
| Puerto Rico | 1,558 |
| | 1,844 |
| | 1,974 |
|
| Ohio | 2,038 |
| | 2,614 |
| | 2,637 |
|
| Massachusetts | 840 |
| | 1,108 |
| | 1,158 |
|
| Connecticut | 589 |
| | 690 |
| | 678 |
|
| Georgia | 1,519 |
| | 1,853 |
| | 1,861 |
|
| Virginia | 729 |
| | 885 |
| | 896 |
|
| Indiana | 1,232 |
| | 1,532 |
| | 1,585 |
|
| Washington | 551 |
| | 754 |
| | 811 |
|
| All other jurisdictions | 17,222 |
| | 20,560 |
| | 20,775 |
|
| Total primary default inventory | 41,235 |
| | 50,282 |
| | 51,433 |
|
Note: Jurisdictions in italics in the table above are those that predominately use a judicial foreclosure process, which generally increases the amount of time it takes for a foreclosure to be completed.
The primary default inventory by policy year at September 30, 2017, December 31, 2016 and September 30, 2016 appears in the following table.
| Primary Default Inventory by Policy Year |
| | | | | | | | |
| | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Policy year: | | | | | |
| 2004 and prior | 8,859 |
| | 11,116 |
| | 11,753 |
|
| 2005 | 4,678 |
| | 5,826 |
| | 6,113 |
|
| 2006 | 7,289 |
| | 9,267 |
| | 9,698 |
|
| 2007 | 12,383 |
| | 15,816 |
| | 16,088 |
|
| 2008 | 3,179 |
| | 4,140 |
| | 4,236 |
|
| 2009 | 298 |
| | 421 |
| | 412 |
|
| 2010 | 176 |
| | 222 |
| | 213 |
|
| 2011 | 194 |
| | 246 |
| | 239 |
|
| 2012 | 339 |
| | 364 |
| | 357 |
|
| 2013 | 623 |
| | 686 |
| | 644 |
|
| 2014 | 1,179 |
| | 1,142 |
| | 1,008 |
|
| 2015 | 1,164 |
| | 814 |
| | 597 |
|
| 2016 | 745 |
| | 222 |
| | 75 |
|
| 2017 | 129 |
| | — |
| | — |
|
| Total primary default inventory | 41,235 |
| | 50,282 |
| | 51,433 |
|
Our results of operations continue to be negatively impacted by the mortgage insurance we wrote during 2005 through 2008 (see chart 16). Although uncertainty remains with respect to the ultimate losses we may experience on those books of business, as we continue to write new insurance on high-quality mortgages, those books have become a smaller percentage of our total portfolio, and we expect this trend to continue. Our 2005 through 2008 books of business represented approximately 21% and 25% of our total primary RIF at September 30, 2017 and December 31, 2016, respectively. Approximately 39% and 38% of the remaining primary RIF on our 2005 through 2008 books of business benefited from HARP as of September 30, 2017 and December 31, 2016, respectively.
|
| |
16 | DEFAULT INVENTORY MIX BY BOOK YEAR
% OF TOTAL INVENTORY
|
On our primary business, the highest claim frequency years have typically been the third and fourth year after the year of loan origination. However, the pattern of claim frequency can be affected by many factors, including persistency and deteriorating economic conditions. Low persistency can accelerate the period in the life of a book during which the highest claim frequency occurs. Deteriorating economic conditions, including the impacts of the COVID-19 pandemic, can result in increasing claims following a period of declining claims.As of September 30, 2017, 55%March 31, 2022, 73% of our primary RIF was written subsequent to December 31, 2014, 64%2019, 80% of our primary RIF was written subsequent to December 31, 2013,2018, and 70%84% of our primary RIF was written subsequent to December 31, 2012.2017.
UNDERWRITING AND OTHER EXPENSES, NET
Comparative quarterlyMGIC Investment Corporation - Q1 2022 | 51
COVID-19 Delinquency Activity
At March 31, 2020, before the COVID-19 pandemic impacted our delinquency inventory, our delinquency inventory was 27,384. As a result of the impacts of the COVID-19 pandemic, including the high level of unemployment and yeareconomic uncertainty resulting from measures to date resultsreduce the transmission of the COVID-19 in the second and third quarters of 2020, we experienced an increase in our delinquency inventory
Forbearance programs enacted by the GSEs provide for payment forbearance on mortgages to borrowers experiencing a hardship during the COVID-19 pandemic. As of March 31, 2022, December 31, 2021, and March 31, 2021, 29%, 33%, and 61%, respectively, of our delinquency inventory was reported as subject to a forbearance plan. We believe substantially all represent forbearances related to COVID-19. Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan delinquency will cure, including through modification, when forbearance ends will depend on the economic circumstances of the borrower at that time. The severity of losses associated with delinquencies that do not cure will depend on economic conditions at that time, including home prices
Underwriting and other expenses, net
Underwriting and other expenses includes items such as employee compensation costs, fees for professional and consulting services, depreciation and maintenance expense, and premium taxes, and are reported net of ceding commissions.
Underwriting and other expenses, net for the three and nine months ended September 30, 2017March 31, 2022 were $39.9$54.7 million, and $119.2 million, respectively, upan increase from $37.9 million and $113.0$48.0 million in the respective prior year periods. The increases
MGIC Investment Corporation - Q3 2017|48
wereperiod. Underwriting and other expenses, net increased during the three months ended March 31, 2022 compared with the same period in the prior year primarily due to higher depreciationincreases in expenses related to our investments in technology and compensation expenses.data and analytics infrastructure.
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
| Underwriting expense ratio | | 23.0 | % | | 19.8 | % | | | | |
Underwriting expense ratio (see chart 17).
The underwriting expense ratio is the ratio, expressed as a percentage, of the underwriting and operating expenses, net and amortization of DAC of our combined insurance operations (which excludes underwriting and operating expenses of our non-insurance operations)subsidiaries) to NPW.net premiums written. The underwriting expense ratio in the each of the three and nine months ended September 30, 2017 increased compared to the respective prior year periods. The increase in the ratio in both periods was primarily due to higher depreciation and compensation expenses in the current year periods; offset in part by increases in NPW in both periods.
|
| |
17 | UNDERWRITING EXPENSE RATIO |
INTEREST EXPENSE
Comparative quarterly and year to date results
Interest expense for the three months ended September 30, 2017 was $13.3 million, down from $13.5 million in the prior year period. Interest expense for the nine months ended September 30, 2017 was $43.8 million up from $40.5 million in the same period of the prior yearMarch 31, 2022 increased due to interest expense incurred on our 5.75% Notesan increase in underwriting expenses.
Provision for income taxes and revolving credit facility, which offset the reduction in interest expense from the maturity of our 5% Notes and elimination of our 2% Notes through conversion and partial redemption during the period.effective tax rate
| | | | | | | | | | | | | | | | | | | | | |
| Income tax provision and effective tax rate | | | | |
| | Three Months Ended March 31, | | |
| (In millions, except rate) | | 2022 | | 2021 | | | | |
| Income before tax | | $ | 219.4 | | | $ | 189.6 | | | | | |
| Provision for income taxes | | $ | 44.4 | | | $ | 39.6 | | | | | |
| Effective tax rate | | 20.2 | % | | 20.9 | % | | | | |
See Note 3 - “Debt” for debt transaction activity impacting the comparability of our interest expense in 2017 relative to 2016.
LOSS ON DEBT EXTINGUISHMENT
Comparative quarterly and year to date results
Loss on debt extinguishment of $75.2 million for the three months ended September 30, 2016 reflects the repurchase of a portion of our 2% Notes at amounts above our carrying value. Loss on debt extinguishment of $90.5 million for the nine months ended September 30, 2016 primarily reflects the repurchase of our 2% Notes at an amount in excess of our carrying value in the third quarter. The amount also includes the repurchase of a portion of our 5% Notes at an amount in excess of our carrying value, and MGIC’s purchase of a portion of our 9% Debentures with the loss representing the difference between the fair value and carrying value of the liability component on the purchase date. These transactions repositioned the maturity profile of our debt and reduced potentially dilutive shares at the time of their execution.
PROVISION FOR INCOME TAXES AND EFFECTIVE TAX RATE
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | Three Months Ended September 30, | | Nine Months Ended September 30, |
| (In millions, except rate) | | 2017 | | 2016 | | % Change | | 2017 | | 2016 | | % Change |
| Income before tax | | $ | 184.5 |
| | $ | 83.7 |
| | 120 | % | | $ | 539.0 |
| | $ | 352.7 |
| | 53 | % |
| Provision for income taxes | | $ | 64.4 |
| | $ | 27.1 |
| | 138 | % | | $ | 210.6 |
| | $ | 117.6 |
| | 79 | % |
| Effective tax rate | | 34.9 | % | | 32.4 | % | | N/M |
| | 39.1 | % | | 33.3 | % | | N/M |
|
The difference between our statutory tax rate of 35%21% and our effective tax rate of 34.9%20.2% and 32.4%20.9% for the respective three months ended September 30, 2017March 31, 2022 and 2016 was primarily due to the benefits of tax preferenced securities. The difference between our statutory rate of 35% and our effective tax rate of 39.1% for the nine months ended September 30, 2017 is due to the $28.4 million additional provision recorded for the expected settlement of our IRS litigation more than offsetting benefits of tax preferenced securities. The difference between our statutory tax rate of 35% and our effective tax rate of 33.3% for the nine months ended September 30, 20162021, respectively, was primarily due to the benefits of tax preferenced securities.
49| MGIC Investment Corporation - Q3 2017Q1 2022 | 52
Balance Sheet Review
Total assets, liabilities, and total liabilitiesshareholders’ equity
As of September 30, 2017,March 31, 2022 and December 31, 2021, total assets were $5.7$6.8 billion and $7.3 billion, respectively, and total liabilities at each date were $2.2 billion and $2.5 billion. Compared to year-end 2016, this representedbillion, respectively. Shareholders’ equity was $4.6 billion as of March 31, 2022 and $4.9 billion as of December 31, 2021.
The decrease in shareholders’ equity represents a decrease in the fair value of $58.7 millionour investments portfolio, repurchases of our common stock and dividends paid, partially offset by net income in total assets andthe first three months of $640.0 million in total liabilities.2022.
The following sections mainly focus on our cash and cash equivalents, and deferred income taxes, net, as these reflect the major developments in our assets andinvestments, loss reserves and debt as these reflect the major developments in our assets and liabilities since December 31, 2016.2021.
ASSETSConsolidated balance sheets - Assets
as of March 31, 2022 (In thousands)
| | | | | | | | |
| ● | Cash and cash equivalents | $ | 489,897 | |
| ● | Investments | 5,951,957 | |
| ● | Premiums receivable | 57,338 | |
| ● | Reinsurance recoverable on loss reserves | 64,717 | |
| ● | Other assets | 280,892 | |
Cash and cash equivalents (including restricted) - Our cash and cash equivalents balance increased to $490 million as of March 31, 2022, from $305 million as of December 31, 2021, as net cash generated from operating activities was only partlypartially offset by net cash used in investing and financing activities.
Deferred income taxes, net
Consolidated balance sheets - The decrease in our deferred income taxes, net was primarily due to the utilization of federal net operating loss carryforwards as we generated net income during the first nine months of 2017.Liabilities and equity
As of September 30, 2017, our deferred tax asset was $416.2 million. A decrease in the federal statutory rate will result in a one-time reduction in the amount at which our deferred tax asset is recorded, thereby reducing our net income and book value; however, such a decrease will also reduce our effective tax rate in future periods, thereby increasing net income. We estimate that every 1 percentage point reduction in the federal statutory rate would result in a one-time reduction in our deferred tax asset of $11.5 million.
Investment portfolio
The average duration and imbedded pre-tax investment yield of our investment portfolio as of September 30, 2017, DecemberMarch 31, 2016, and September 30, 2016 is presented in the following table.
|
| |
18 | PORTFOLIO DURATION IN YEARS
IMBEDDED INVESTMENT YIELD (1)% OF AVERAGE INVESTMENT PORTFOLIO ASSETS
|
|
| | | | | | |
| | | September 30, 2017 | | December 31, 2016 | | September 30, 2016 |
| Duration | | 4.5 | | 4.6 | | 4.8 |
| Yield | | 2.7% | | 2.6% | | 2.5% |
| | | | | | | | |
(1)
● | Imbedded investment yield is calculated on a yield-to-worst basis.Loss reserves |
We increased our investment portfolio fixed income asset allocation of “A” rated securities since December 31, 2016 (see table 19). As of September 30, 2017, the amount of invested assets (as measured by amortized cost) is lower
compared to December 31, 2016, however the total fair value is 1% higher.
|
| 851,272 | |
19● | FIXED INCOME SECURITY RATINGS (1)
% OF FIXED INCOME SECURITIES AT FAIR VALUE
Unearned premiums |
|
| | | | |
| | Security Ratings |
| Period | AAA | AA | A | BBB |
| September 30, 2017 | 22% | 27% | 36% | 15% |
| December 31, 2016 | 25% | 28% | 32% | 15% |
| September 30, 2016 | 25% | 30% | 31% | 14% |
| 229,115 | |
(1)
● | Ratings are provided by one or more of: Moody's, Standard & Poor's and Fitch Ratings. If three ratings are available, the middle rating is utilized; otherwise the lowest rating is utilized.Long-term debt |
| 935,279 | |
| ● | Other liabilities | 218,780 | |
| ● | Shareholders’ equity | 4,610,355 | |
LIABILITIES
Loss reserves - Our loss reserves can be split into two parts: (1) reserves representinginclude estimates of losses and settlement expenses on known(1) loans in our delinquency inventory (known as case reserves), (2) IBNR delinquencies, and (2) IBNR.(3) LAE. Our gross liability for both isreserves are reduced by reinsurance recoverable on our estimated losses and settlement expenses to calculate a net reserve balance. The net reserve balanceLoss reserves decreased by 24%4% to $1.06 billion$851 million as of September 30, 2017,March 31, 2022, from $1.39 billion$884 million as of December 31, 2016.2021. Reinsurance recoverablerecoverables on our estimated losses and settlement expenses were $45.9$65 million and $50.5$67 million as of September 30, 2017March 31, 2022 and December 31, 2016,2021, respectively. The overall decrease in our loss reserves is primarily due to our re-estimation of loss reserves which resulted in favorable development of $56.7 million primarily related to a decrease in the estimated claim rate on Peak COVID-19 delinquencies, partially offset by reserves associated with new delinquency notices which added approximately $36.3 million to the reserves in the first quarter.
Income Taxes - Our current income tax liability was $41.7 million and $3.3 million at March 31, 2022 and December 31, 2021, respectively and is included as a component of other liabilities in our consolidated balance sheets. The first quarter estimated income tax payment is not due until the second quarter of 2022, resulting in an increase in our current income tax liability. Our deferred tax asset was $26.6 million at March 31, 2022 and is included as a component of other assets in our consolidated
MGIC Investment Corporation - Q1 2022 | 53
balance sheets. Our deferred income tax liability was $39.4 million at December 31, 2021 and is included as a component of other liabilities in our consolidated balance sheets. The change in our deferred income tax was primarily due to the tax effect of unrealized losses generated by the investment portfolio during the first ninethree months of 2017 was2022. At March 31, 2022 and December 31, 2021, we owned $426.3 million of tax and loss bonds.
Long-term debt
Our long-term debt decreased to $935.3 million as of March 31, 2022 from $1,146.7 million as of December 31, 2021. In the first quarter of 2022 we repurchased $57.0 million in aggregate principal amount of our 9% Debentures and repaid the outstanding balance of the FHLB Advance of $155.0 million.
Investment portfolio
Our investment portfolio decreased to $6.0 billion as of March 31, 2022 from $6.6 billion as of December 31, 2021. The decrease is primarily due to a higher level of losses paid ($413.8 million) relative to losses incurred ($84.7 million).
Debt- The decrease in our consolidated debt was due to the elimination of our 2% Notes in April through a combination of conversions and cash redemptions and repayment of our 5% Notes on May 1, 2017 with holding company cash. See Note 3 - “Debt” for further information on our 2017 debt transactions and remaining outstanding obligations.
Total shareholders’ equity
As of September 30, 2017, total shareholders’ equity amounted to $3.1 billion, an increase of $581.3 million compared to December 31, 2016. The increase in our total shareholders’ equity was due to net income in the first nine months of 2017, issuance of common stock to holders of our 2% Notes that elected to convert their notes during the second quarter, and an increase in the fair value of our investment portfolio duringdue to the first nine monthsincrease in the prevailing interest rates and the use of 2017.our investment portfolio to reduce debt outstanding and return capital to shareholders.
As describedThe average duration and investment yield of our investment portfolio as of March 31, 2022, December 31, 2021, and March 31, 2021 are shown in Note 3 - “Debt”, approximately $202.5 millionthe table below. | | | | | | | | | | | | | | | | | | | | | | | |
| Portfolio duration and embedded investment yield |
| | March 31, 2022 | | December 31, 2020 | | March 31, 2021 |
| Duration (in years) | | 4.6 | | 4.5 | | 4.5 |
Pre-tax yield (1) | | 2.6% | | 2.5% | | 2.5% |
After-tax yield (1) | | 2.1% | | 2.1% | | 2.1% |
(1)Embedded investment yield is calculated on a yield-to-worst basis.
The security ratings of principal outstanding on our 2% Notes was converted to sharesfixed income investments as of common stockMarch 31, 2022, December 31, 2021, and March 31, 2021 are shown in April which resulted in an increase to our shareholders’ equity for the carrying value offollowing table.
| | | | | | | | | | | | | | | | | |
| Fixed income security ratings |
| Security Ratings (1) |
| Period | AAA | AA | A | BBB |
| March 31, 2022 | 17% | 27% | 35% | 21% |
| December 31, 2021 | 18% | 26% | 36% | 20% |
| March 31, 2021 | 21% | 24% | 35% | 20% |
(1)Ratings are provided by one or more of: Moody's, Standard & Poor's and Fitch Ratings. If three ratings are available, the notes atmiddle rating is utilized; otherwise the time of conversion.lowest rating is utilized.
MGIC Investment Corporation - Q3 2017Q1 2022 |50 54
Liquidity and Capital Resources
Consolidated Cash Flow Analysis
We have three primary types of cash flows: (1) operating cash flows, which consist mainly of cash generated by our insurance operations and income earned on our investment portfolio, less amounts paid for claims, interest expense and operating expenses, (2) investing cash flows related to the purchase, sale and maturity of investments and purchases of property and equipment and (3) financing cash flows generally from activities that impact our capital structure, such as changes in debt and shares outstanding.outstanding, and dividend payments. The following table summarizes our consolidated cash flows from operating, investing and financing activities:
| | | Summary of consolidated cash flows | | Summary of consolidated cash flows |
| | | Nine Months Ended September 30, | | | Three Months Ended March 31, |
| (In thousands) | | 2017 | | 2016 | (In thousands) | | 2022 | | 2021 |
| Total cash provided by (used in): | | | | | Total cash provided by (used in): | |
| Operating activities | | 256,356 |
| | 148,986 |
| Operating activities | | $ | 228,011 | | | $ | 198,033 | |
| Investing activities | | (2,529 | ) | | 45,973 |
| Investing activities | | 349,440 | | | (274,499) | |
| Financing activities | | (158,536 | ) | | (101,336 | ) | Financing activities | | (392,512) | | | (27,448) | |
| Increase in cash and cash equivalents | | $ | 95,291 |
| | $ | 93,623 |
| |
| Increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | | Increase (decrease) in cash and cash equivalents and restricted cash and cash equivalents | | $ | 184,939 | | | $ | (103,914) | |
Net cash provided by operating activities for the ninethree months ended September 30, 2017March 31, 2022 increased compared to the same period of 20162021 primarily due to a lower level ofdecreases in losses paid net,and the reinsurance recoverable on paid losses, partially offset in part by increases in paymentsunderwriting and operating expenses and a decrease in premiums received.
We also have purchase obligations totaling approximately $61 million which consist primarily of contracts related to our continued investment in our information technology infrastructure in the normal course of business. The majority of these obligations are under contracts that give us cancellation rights with notice. In the next twelve months we anticipate we will pay approximately $37 million for interest and other expenses.our purchase obligations.
Net cash fromprovided by investing activities for the ninethree months ended September 30, 2017 decreased when compared to the same period of 2016,March 31, 2022 primarily due to an increase in the percentage of proceeds from the maturityreflects sales and salesmaturities of fixed income and equity securities during the period that exceeded purchases as proceeds were reinvested,used in financing activities. Net cash used in investing activities for the three months ended March 31, 2021 primarily reflects purchases of fixed income and an increase in amounts invested in propertyequity securities during the period that exceeded sales and equipment.maturities of fixed income and equity securities during the period as cash from operations was available for additional investment.
Net cash used in financing activities for the ninethree months ended September 30, 2017 included theMarch 31, 2022 primarily reflects repayment at maturity of our 5% Notes and redemptionFHLB Advance, repurchases of our common stock, the repurchase of a portion of our 2% Notes, as well as, expenses paid9% Debentures and dividends to establish the revolving credit facility and cash remittance of withholding taxes paid by employees through shares withheld upon vesting of restricted stock units.
shareholders. Net cash used in financing activities for the ninethree months ended September 30, 2016 includes the net proceeds from the issuance of our 5.75% NotesMarch 31, 2021 primarily reflects dividends to shareholders and the Advance from the FHLB, less amounts paid to purchase portions of our outstanding 5% and 2% Notes, and our 9% Debentures, and to repurchase common stock issued as partial consideration of our 2% Notes repurchases. Cash used in financing activities also included expenses associated with our 5.75% Notes issuance and cash remittancepayment of withholding taxes paid by employees through shares withheld upon vesting of restricted stock units.related to share-based compensation net share settlement.
Capitalization
DEBT AT OUR HOLDING COMPANY AND HOLDING COMPANY LIQUIDITY
Debt - holding company(see charts20 and 21)
The 5.75% Notes and 9% Debentures are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. As of September 30, 2017,March 31, 2022, our holding company’s debt obligations were $814.5$0.9 billion in aggregate principal amount consisting of our 5.75% Notes, 5.25% Notes, and 9% Debentures. In the first quarter of 2022 we repurchased $57.0 million in aggregate principal. In April 2017, prior to the redemption date of the 2% Notes, holders of approximately $202.5 million of the outstanding principal exercised their rights to convert their notes into sharesamount of our common stock9% Debentures at a purchase price of $77.7 million plus accrued interest. The repurchase of 9% Debentures resulted in a $20.8 million loss on debt extinguishment on our consolidated statement of operations and we repaid the outstanding amount borrowed undera reduction in our credit facility plus interest incurred. The remaining $5.1potentially dilutive shares by approximately 4.4 million of our 2% Notes that did not convert were redeemed with holding company cash. The conversion of our 2% Notes into shares of our common stock, along with the cash redemption, eliminated our debt obligation. Our 5% Notes matured on May 1, 2017 and we repaid the $145 million of outstanding principal with holding company cash.shares.
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20 | HOLDING COMPANY DEBTIN MILLIONS
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| | | | | |
| | September 30, 2017 | | December 31, 2016 | |
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* | MGIC owns approximately $132.7 million of our 9% Debentures, which are eliminated in consolidation, but they remain outstanding obligations owed by our holding company to MGIC. |
51| MGIC Investment Corporation - Q3 2017
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21 | REMAINING TIME TO MATURITY OF HOLDING COMPANY DEBT IN MILLIONS
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| | September 30, 2017 | | December 31, 2016 | |
Liquidity analysis - holding company
As of September 30, 2017,March 31, 2022, we had approximately $182$409 million in cash and investments at our holding company. These resources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase outstandingshares, repurchase debt, obligations from timepay dividends to time,shareholders, and to settle intercompany obligations. We may also use available holding company cash to repurchase shares of our common stock. While these assets are held, we generate investment income that serves to offset a portion of our interest expense. In addition to investmentcash requirements. Investment income and the payment of dividends from our insurance subsidiaries and/or raising capital in the public markets are the principal sources of holding company cash inflow. MGIC is the principal source of dividend-paying capacity, whichdividends, and their payment is restricted by insurance regulation. See Note 14 - “Statutory Information” to our consolidated financial statement for additional information about MGIC’s dividend restrictions. The payment of dividends from MGIC is also influenced by our view of the appropriate level of PMIERs Available Assets to maintain in excess of Minimum Required Assets. Other sources of holding company liquidity include raising capital in the public markets. The ability to raise capital in the public markets is subject to prevailing market conditions, investor demand for the securities to be issued, and our deemed creditworthiness.
In the thirdfirst quarter of 2017,2022 we paid $25.8 million in dividends to shareholders. On April 28, 2022, our Board of Directors declared a quarterly cash dividend of $0.08 per common share to shareholders of record on May 12, 2022, payable on May 26, 2022.
In the first three months of 2022, our holding company cash and investments increaseddecreased by $33$254 million to $182$409 million as of September 30, 2017. Cash March 31, 2022.
Significant cash and investments inflows during the quarter included $40first three months:
•$1.6 million of dividends received from MGIC and other inflows of $5 million. Cash investment income.
Significant cash outflows during the quarter at our holding company included $12first three months:
•$123.6 million of share repurchase transactions,
•$77.7 million for 9% Debenture repurchases,
•$26.1 million in cash dividends paid to shareholders, and
•$26.0 million of interest payments on our 5.75% Notes. We expectNotes, 5.25% Notes, and 9% Debentures.
MGIC Investment Corporation - Q1 2022 | 55
In the first quarter of 2022, we repurchased 8.5 million shares of our common stock using $127.6 million of holding company cash. As of March 31, 2022 we had remaining authorization to repurchase $372.4 million of our common stock through the end of 2023 under a share repurchase program approved by our Board of Directors in October 2021. Also in April 2022, we repurchased an additional 3.0 million shares totaling $39.7 million under the remaining authorization that expires at year end 2023.
MGIC did not pay cash dividends to our holding company in the three months ended March 31, 2022 or March 31, 2021. Future dividend payments from MGIC to continue to pay quarterly dividends.the holding company will be determined in consultation with the board, and after considering any updated estimates about the economic impacts of the COVID-19 pandemic and other factors on our business. We ask the Wisconsin OCI not to object before MGIC pays dividends.dividends to the holding company. In April 2022, MGIC obtained approval to pay a $400 million dividend to our holding company.
The net unrealized losses on our holding company investment portfolio were approximately $1$9.8 million at September 30, 2017March 31, 2022 and the portfolio had a modified duration of approximately 2.61.7 years.
Over the next twelve months the principal demand on holding company resources will be interest payments on our 5.75% Notes, 5.25% Notes, and 9% Debentures approximating $53 million, based on the debt outstanding at March 31, 2022. We believe our holding company has sufficient sources of liquidity to meet its payment obligations for the foreseeable future.
We may from timealso use additional holding company cash to time continuerepurchase additional shares or to seek to acquirerepurchase our outstanding debt obligations throughobligations. Such repurchases may be material, may be made for cash purchases(funded by debt) and/or exchanges for other securities. Wesecurities, and may also from time to time seek to acquire our common stock through cash purchases,
including with funds provided by debt. We may make such acquisitionsbe made in open market purchases
(including through 10b5-1 plans), privately negotiated acquisitions or other transactions.
The amounts involved may be material.See "Overview-Capital" of this MD&A for a discussion for a discussion of our share repurchase programs.
Scheduled debt maturities beyond the next twelve months include $242.3 million of our 5.75% Notes in 2023, $650 of our 5.25% Notes in 2028, and $53.2 million of our 9% Debentures in 2063. Subject to certain limitations and restrictions, holders of each of the 9% Debentures may convert their notes into shares of our common stock at their option prior to certain dates under the terms of their issuance, in which case our corresponding obligation will be eliminated.
See Note 7 – “Debt” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 20162021 for additional information about the conversion terms of our convertible debt,9% Debentures and the terms of our indebtedness, including our conditional right to redeem, and our option to defer interest on our 9% Debentures. Any deferred interest compounds at the stated rate of 9%. The description in Note 7 - “Debt” to our consolidated financial statements in our Annual Report on Form 10-K is qualified in its entirety by the terms of the notes and debentures.
Although not anticipated in the near term, we may also contribute funds to our insurance operations to comply with the PMIERs or the State Capital Requirements. See “Overview - Capital” above for a discussion of these requirements. See discussion of our non-insurance contract underwriting services in Note 5 – “Litigation and Contingencies” to our consolidated financial statements.
DEBT AT SUBSIDIARIESDebt at subsidiaries
MGIC is a member of the FHLB, which provides MGIC access to an additional source of liquidity via a secured lending facility. MGIC has $155.0 millionIn the first quarter of debt outstanding in the form of a fixed rate advance from the FHLB. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of 1.91%. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose fair value must be maintained at 102% of2022, we prepaid the outstanding principal balance. MGIC provided eligible collateral from its investment portfolio.balance of $155 million on the FHLB Advance at a prepayment
price of $156.3 million, incurring a prepayment fee of $1.3 million.
Capital Adequacy
PMIERs
We operate under the PMIERs of the GSEs that became effective December 31, 2015. The revisions to the PMIERS since then have had no impact on our calculation of Available Assets or Minimum Required Assets, or our operations. The GSEs may further amend the PMIERs at any time, and they have broad discretion to interpret the requirements, which could impact the calculation of our Available Assets and/or Minimum Required Assets. The PMIERS provide that the factors that determine Minimum Required Assets will be updated every two years and may be updated more frequently to reflect changes in macroeconomic conditions or loan performance. The GSEs have informed us that they currently
MGIC Investment Corporation - Q3 2017|52
do not expect any updates to such factors to be effective before the fourth quarter of 2018 and we expect the GSEs will provide notice 180 days prior to the effective date of such updates.
As of September 30, 2017,March 31, 2022, MGIC’s Available Assets under the PMIERs totaled $4.7approximately $6.0 billion, an excess of $0.8approximately $2.4 billion over its Minimum Required Assets; and MGIC is in compliance with the requirements of the PMIERs and eligible to insure loans delivered to or purchased by the GSEs. Beginning in October 2017, we have begunOur reinsurance transactions provided an aggregate of approximately $1.9 billion of capital credit under the PMIERs as of March 31, 2022. Refer to receive an increased number of new default notices relatedNote 4 - “Reinsurance” to loans in locations that FEMA has declared IADAs in connection with recent hurricane activity primarily impacting Texas, Florida, and Puerto Rico. As a result, our excess Available Assets may decline as theconsolidated financial statements for additional information on our reinsurance Transactions.
The PMIERS generally require us to maintainhold significantly more Minimum Required Assets for delinquent loans than for performing loans. Our excess Availableloans and the Minimum Required Assets required to be held increases as the number of payments missed on a delinquent loan increases.
Refer to “Overview - Capital - GSEs” of this MD&A and our risk factor titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease if we are required to maintain more capital in order to maintain our eligibility” for further discussion of PMIERs.
Risk-to-capital
The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. While they vary among jurisdictions, the most common State Capital Requirements allow MGICfor a maximum risk-to-capital ratio of 25 to remain in compliance with the PMIERs financial requirements, including, we believe, to the extent they are modified further in the next review; and will also allow us flexibility to participate in additional business opportunities as they may arise. Our QSR Transactions provided an aggregate of $0.8 billion of PMIERs capital credit as of September 30, 2017.1.
We plan to continuously comply with the PMIERs through our operational activities or through the contribution of funds from our holding company, subject to demands on the holding company's resources, as outlined above.
RISK-TO-CAPITAL
We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operation basis. The risk-to-capital ratio is our net RIF divided by our policyholders’ position. Our net RIF includes both primary and pool risk in force, net of reinsurance and excludes risk on policies that are currently in default and for which loss reserves have been established, and those covered by reinsurance.established. The risk amount includes pools of loans with contractual aggregate loss limits and without these limits. Policyholders’MGIC’s policyholders’ position consists primarily of statutory policyholders’ surplus (which increases as a result of statutory net income and decreases as a result of statutory net loss and dividends paid), plus the statutory contingency reserve, and a portion of the reserves for unearned premiums.reserve. The statutory contingency reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to the contingency reserve of approximately 50% of net earned premiums. These contributions must generally be maintained for a period of ten years. However, with regulatory approval a mortgage insurance company may make early withdrawals from the contingency reserve when incurred losses exceed 35% of net earned premiums in a calendar year.
MGIC Investment Corporation - Q1 2022 | 56
MGIC’s separate company risk-to-capital calculation appears in theThe table below.
|
| | | | | | | | |
| (In millions, except ratio) | | September 30, 2017 | | December 31, 2016 |
RIF - net (1) | | $ | 30,561 |
| | $ | 28,668 |
|
| Statutory policyholders’ surplus | | 1,501 |
| | 1,505 |
|
| Statutory contingency reserve | | 1,533 |
| | 1,181 |
|
| Statutory policyholders’ position | | $ | 3,034 |
| | $ | 2,686 |
|
| Risk-to-capital | | 10.1:1 |
| | 10.7:1 |
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(1)
| RIF – net, as shown in the table above is net of reinsurance and exposure on policies currently in default for which loss reserves have been established. |
Ourbelow presents our combined insurance companies’ risk-to-capital calculation appears(which includes a reinsurance affiliate).
| | | | | | | | | | | | | | | | | |
| Risk-to-capital - Combined insurance companies |
| (In millions, except ratio) | | March 31, 2022 | | December 31, 2021 |
RIF - net (1) | | $ | 51,382 | | | $ | 50,748 | |
| Statutory policyholders’ surplus | | 1,320 | | | 1,221 | |
| Statutory contingency reserve | | 4,264 | | | 4,127 | |
| Statutory policyholders’ position | | $ | 5,584 | | | $ | 5,348 | |
| Risk-to-capital | | 9.2:1 | | 9.5:1 |
(1)RIF – net, as shown in the table below.above is net of reinsurance and exposure on policies currently delinquent ($1.7 billion at March 31, 2022 and $1.8 billion December 31, 2021) for which loss reserves have been established.
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| | | | | | | | |
| (In millions, except ratio) | | September 30, 2017 | | December 31, 2016 |
RIF - net (1) | | $ | 36,243 |
| | $ | 34,465 |
|
| Statutory policyholders’ surplus | | 1,503 |
| | 1,507 |
|
| Statutory contingency reserve | | 1,760 |
| | 1,360 |
|
| Statutory policyholders’ position | | $ | 3,263 |
| | $ | 2,867 |
|
| Risk-to-capital | | 11.1:1 |
| | 12.0:1 |
|
| |
(1)
| RIF – net, as shown in the table above, is net of reinsurance and exposure on policies currently in default ($2.1 billion at September 30, 2017 and $2.6 billion at December 31, 2016) for which loss reserves have been established.
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The reductionsdecrease in MGIC's risk-to-capital and our combined insurance companies’ risk-to-capitalrisk to capital in the first ninethree months of 2017 were primarily2022 was due to an increase in statutory policyholders’ position, due to an increase in statutory contingency reserves, partially offset by an increase in net RIF, in both calculations. Our RIF, net of reinsurance, increased in the first nine months of 2017, due to an increase in our IIF. Our risk-to-capital ratio will decrease if the percentage increase in capital exceeds the percentage increase in insured risk.net.
For additional information regarding regulatory capital see Note 1514 – “Statutory Information” to our consolidated financial statements as well as our risk factorRisk Factor titled “State Capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.”
Financial Strength Ratings
The financial strength of MGIC, our principal mortgage insurance subsidiary, is as follows:
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Rating Agency | | Rating | | OutlookMGIC financial strength ratings |
| Rating Agency | | Rating | | Outlook |
| Moody’s Investor Services | | Baa2Baa1 | | Stable |
Standard and Poor’s Rating Services’Services | | BBB+ | | Stable |
| A.M. Best | | A- | | Stable |
| | | | | | | | | | | | | | |
| MAC financial strength ratings |
| Rating Agency | | Rating | | Outlook |
| A.M. Best | | A- | | Stable |
For further information about the importance of MGIC’s ratings, see our risk factorRisk Factor titled “Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.”
53| MGIC Investment Corporation - Q3 2017Q1 2022 | 57
Contractual Obligations
At September 30, 2017, the approximate future payments under our contractual obligations of the type described in the table below are as follows:
| Contractual Obligations |
| | | | | | | | | | | | | | | | | | | | |
| | | Payments due by period |
| (In millions) | | Total | | Less than 1 year | | 1-3 years | | 3-5 years | | More than 5 years |
| Long-term debt obligations | | $ | 2,065.0 |
| | $ | 51.5 |
| | $ | 102.2 |
| | $ | 101.1 |
| | $ | 1,810.2 |
|
| Operating lease obligations | | 2.6 |
| | 0.7 |
| | 1.4 |
| | 0.5 |
| | — |
|
| Tax obligations | | 54.0 |
| | 54.0 |
| | — |
| | — |
| | — |
|
| Purchase obligations | | 17.0 |
| | 14.0 |
| | 3.0 |
| | — |
| | — |
|
| Pension, SERP and other post-retirement plans | | 287.1 |
| | 22.7 |
| | 52.4 |
| | 57.0 |
| | 155.0 |
|
| Other long-term liabilities | | 1,105.1 |
| | 513.9 |
| | 502.8 |
| | 88.4 |
| | — |
|
| Total | | $ | 3,530.8 |
| | $ | 656.8 |
| | $ | 661.8 |
| | $ | 247.0 |
| | $ | 1,965.2 |
|
Our long-term debt obligations as of September 30, 2017 include their related interest and are discussed in Note 3 - “Debt” to our consolidated financial statements and under “Liquidity and Capital Resources” above. Our operating lease obligations include operating leases on certain office space, data processing equipment and autos, as discussed in Note 16 – “Leases” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016. Tax obligations primarily relate to our current dispute with the IRS, as discussed in Note 11 – “Income Taxes.” Purchase obligations consist primarily of agreements to purchase items related to our ongoing infrastructure projects and information technology investments in the normal course of business. See Note 11 – “Benefit Plans” to our consolidated financial statements in our Annual Report on Form 10-K for the year ended December 31, 2016 for a discussion of expected benefit payments under our benefit plans.
Our other long-term liabilities represent the loss reserves established to recognize the liability for losses and LAE related to existing defaults on insured mortgage loans. The timing of the future claim payments associated with the established loss reserves was determined primarily based on two key assumptions: the length of time it takes for a notice of default to develop into a received claim and the length of time it takes for a received claim to be ultimately paid. The future claim payment periods are estimated based on historical experience, and could emerge significantly different than this estimate, in part, due to the uncertainty regarding how certain factors, such as loss mitigation protocols established by servicers and changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation process, which will continue to affect our future paid claims. See Note 12 – “Loss Reserves” to our consolidated financial statements. In accordance with GAAP for the mortgage insurance industry, we establish loss reserves only for loans in default. Because our reserving method does not take account of the impact of future losses that could occur from loans that are not delinquent, our obligation for ultimate losses that we expect to occur under our policies in force at any period end is not reflected in our consolidated financial statements or in the table above.
MGIC Investment Corporation - Q3 2017|54
Forward Looking Statements and Risk Factors
General: Our business, results of operations, and financial condition could be affected by the risk factorsRisk Factors referred to under “Location of Risk Factors” below. These risk factorsRisk Factors are an integral part of Management’s Discussion and Analysis.
These factors may also cause actual results to differ materially from the results contemplated by forward looking statements that we may make. Forward looking statements consist of statements which relate to matters other than historical fact. Among others, statements that include words such as we “believe,” “anticipate” or “expect,” or words of similar import, are forward looking statements. These Risk Factors speak only as of the date of this filing and are subject to change without notice as the Company cannot predict all risks relating to this evolving set of events. We are not undertaking any obligation to update any forward looking statements we may make even though these statements may be affected by events or circumstances occurring after the forward looking statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the time at which this document was filed with the Securities and Exchange Commission.
While we communicate with security analysts from time to time, it is against our policy to disclose to them any material non-public information or other confidential information. Accordingly, investors should not assume that we agree with any statement or report issued by any analyst irrespective of the content of the statement or report, and such reports are not our responsibility.
Location of Risk Factors: The risk factorsRisk Factors are in Item 1 A of our Annual Report on Form 10-K for the year ended December 31, 2016,2021, as supplemented by Part II, Item 1 A of our Quarterly Reports on Form 10-Q for the Quarters ended March 31, 2017 and June 30, 2017, and by Part II, Item 1 A of this Quarterly Report on Form 10-Q. The risk factorsRisk Factors in the 10-K, as supplemented by thesethis 10‑QsQ and through updating of various statistical and other information, are reproduced in Exhibit 99 to this Quarterly Report on Form 10-Q.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Our investment portfolio is essentially a fixed income portfolio and is exposed to market risk. Important drivers of the market risk are credit spread risk and interest rate risk.
Credit spread risk is the risk that we will incur a loss due to adverse changes in credit spreads. Credit spread is the additional yield on fixed income securities above the risk-free rate (typically referenced as the yield on U.S. Treasury securities) that market participants require to compensate them for assuming credit, liquidity and/or prepayment risks.
We manage credit risk via our investment policy guidelines which primarily place our investments in investment grade securities and limit the amount of our credit exposure to any one issue, issuer and type of instrument. Guideline and investment portfolio detail is available in "Business – Section C, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016.2021.
Interest rate risk is the risk that we will incur a loss due to adverse changes in interest rates relative to the characteristics of our interest bearing assets.
One of the measures used to quantify this exposure is modified duration. Modified duration measures the price sensitivity of the assets to the changes in spreads. At September 30, 2017,March 31, 2022, the modified duration of our fixed income investment portfolio was 4.54.6 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.5%4.6% in the fair value of our fixed income portfolio. For an upward shift in the yield curve, the fair value of our portfolio would decrease and for a downward shift in the yield curve, the fair value would increase. See Note 7 – “Investments” to our consolidated financial statements for additional disclosure surrounding our investment portfolio.
Item 4. Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, has evaluated our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our principal executive officer and principal financial officer concluded that such controls and procedures were effective as of the end of such period. There was no change in our internal control over financial reporting that occurred during the thirdfirst quarter of 20172022 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
55| MGIC Investment Corporation - Q3 2017Q1 2022 | 58
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
While we do not view the following as a material development, the parties in our previously disclosed U.S. Tax Court case with the Internal Revenue Service informed the Court in August 2017 that they had reached agreement in principle on all issuesCertain legal proceedings arising in the caseordinary course of business may be filed or pending against us from time to time. For information about such legal proceedings, you should review Note 5 - “Litigation and were preparing the documentation reflecting the terms of their agreement. The agreed settlement terms will beContingencies” to our consolidated financial statements and our Risk Factor titled “We are subject to review by the Joint Committee on Taxation (“JCT”) before a settlement can be completed and there is no assurance that a settlement will be completed.risk of legal proceedings in the future” in Exhibit 99.
Item 1 A. Risk Factors
With the exception of the changes described and set forth below, there have been no material changes in our risk factorsRisk Factors from the risk factors disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by Part II, Item I A of our Quarterly Report on Form 10-Q for the Quarters ended March 31, 2017 and June 30, 2017.2021. The risk factors in the 10-K, as supplemented by those 10-Qs and this 10-Q and through updating of various statistical and other information, are reproduced in their entirety in Exhibit 99 to this Quarterly Report on Form 10-Q.10‑Q.
ResolutionRisk Factors Relating to Global Events
The Russia-Ukraine war and/or other global events may adversely affect the U.S. economy and our business.
Russia's invasion of Ukraine has increased the already-elevated inflation rate, added more pressure to strained supply chains, and has increased volatility in the domestic and global financial markets. The war has impacted, and may impact, our business in various ways, including the following which are described in more detail in the remainder of these risk factors:
•The terms under which we are able to obtain excess-of-loss ("XOL") reinsurance through the insurance-linked notes ("ILN") market have been negatively impacted.
•The risk of a cybersecurity incident that affects our company may have increased.
•An extended or broadened war may negatively impact the domestic economy, which may increase unemployment and inflation, or decrease home prices, in each case leading to an increase in loan delinquencies.
•The volatility in the financial markets may impact the performance of our disputeinvestment portfolio and our investment portfolio may include investments in companies or securities that are negatively impacted by the war.
Risk Factors Relating to the Mortgage Insurance Industry and its Regulation
Downturns in the domestic economy or declines in home prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.
Losses result from events that reduce a borrower’s ability or willingness to make mortgage payments, such as unemployment, health issues, changes in family status, and decreases in home prices that result in the Internal Revenue Service couldborrower's mortgage balance exceeding the net value of the home. A deterioration in economic conditions, including an increase in unemployment, generally increases the likelihood that borrowers will not have sufficient income to pay their mortgages and can also adversely affect us.home prices, which in turn can influence the willingness of
borrowers with sufficient resources to make mortgage payments when the mortgage balance exceeds the net value of the home.
High levels of unemployment may result in an increasing number of loan delinquencies and an increasing number of insurance claims; however, unemployment is difficult to predict given the uncertainty in the current market environment, including as a result of global events such as the COVID-19 pandemic, the Russia-Ukraine war, and the possibility of an economic recession. Inflation has increased dramatically in the past twelve months. The impact that higher inflation rates will have on loan delinquencies is unknown.
The Internal Revenue Service (“IRS”seasonally-adjusted Purchase-Only U.S. Home Price Index of the Federal Housing Finance Agency (the “FHFA”) completed examinations, which is based on single-family properties whose mortgages have been purchased or securitized by Fannie Mae or Freddie Mac, indicates that home prices increased by 3.7% in the first two months of 2022, after increasing by 17.8%, 11.8%, and 5.9% in 2021, 2020 and 2019, respectively. The price-to-income ratio in some markets exceeds its historical average, in part as a result of recent home price appreciation outpacing increases in income. Home prices may decline even absent a deterioration in economic conditions due to declines in demand for homes, which in turn may result from changes in buyers’ perceptions of the potential for future appreciation, restrictions on and the cost of mortgage credit due to more stringent underwriting standards, higher interest rates, changes to the tax deductibility of mortgage interest, decreases in the rate of household formations, or other factors. The significant increase in interest rates in recent months may put downward pressure on home prices.
Reinsurance may not always be available or affordable.
We have in place QSR and XOL reinsurance transactions providing various amounts of coverage on 92% of our federal income tax returnsrisk in force as of March 31, 2022. As of March 31, 2022, our QSR transactions with unaffiliated reinsurers cover most of our insurance written from 2013 through 2016 and 2019 through 2023, and smaller portions of our insurance written prior to 2013 and from 2024 through 2025. The weighted average coverage percentage of our QSR transactions was 30%, based on risk in force as of March 31, 2022. Our XOL transactions in place as of March 31, 2022 provided XOL reinsurance coverage for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatmenta portion of the flow-through incomerisk associated with certain mortgage insurance policies having insurance coverage in force dates from July 1, 2016 through March 31, 2019 and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“REMICs”January 1, 2020 through May 28, 2021, all dates inclusive. The XOL transactions were entered into with special purpose insurers that issued notes linked to the reinsurance coverage ("Insurance Linked Notes" or "ILNs"). The IRS indicatedreinsurance transactions reduce the tail-risk associated with stress scenarios. As a result, they reduce the capital that it didwe are required to hold to support the risk and they allow us to earn higher returns on our business than we would without them. However, reinsurance may not believealways be available to us or available on similar terms, the quota share reinsurance transactions subject us to counterparty credit risk, and the GSEs may change the credit they allow under the PMIERs for risk ceded under our reinsurance transactions. In the first quarter of 2022, our access to XOL reinsurance through the ILN market was temporarily disrupted and the terms under which we were able to access that for various reasons, we had established sufficient tax basismarket were less attractive than in the REMIC residual interestspast due to deduct the lossesvolatility stemming from taxable income. We appealed these assessments within the IRScircumstances such as higher
MGIC Investment Corporation - Q1 2022 | 59
interest rates, increased inflation and in August 2010,Russia's invasion of Ukraine. In April 2022 we reached a tentative settlement agreement with the IRS which was not finalized.
In 2014, we received Notices of Deficiency (commonly referred to as “90 day letters”) covering the 2000-2007 tax years. The Notices of Deficiency reflect taxes and penalties related to the REMIC matters of $197.5 million and at September 30, 2017, there would also be interest related to these matters of approximately $200.3 million. In 2007, we made a payment of $65.2 million to the United States Department of the Treasury which will reduce any amounts we would ultimately owe. The Notices of Deficiency also reflect additional amounts due of $261.4 million, which are primarily associated with the disallowance of the carryback of the 2009 net operating loss to the 2004-2007 tax years. We believe the IRS included the carryback adjustments as a
precaution to keep open the statute of limitations on collection of the tax that was refunded when this loss was carried back, and not because the IRS actually intends to disallow the carryback permanently. Depending on the outcome of this matter, additional state income taxes and state interest may become due when a final resolution is reached. As of September 30, 2017, those state taxes and interest would approximate $84.1 million. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of September 30, 2017 is $141.8 million, which represents the tax benefits generated by the REMIC portfolio included in our tax returns that we have not taken benefit for in our financial statements, including any related interest.
We filed a petition with the U.S. Tax Court contesting most of the IRS’ proposed adjustments reflectedcompleted an XOL transaction in the Notices of Deficiency andILN market. If we are unable to obtain reinsurance for NIW, the IRS filed an answercapital required to support our petition which continued to assert their claim. The case has twice been scheduled for trial and in each instance, the parties jointly filed, and the U.S. Tax Court approved (most recently in February 2016), motions for continuance to postpone the trial date. Also in February 2016, the U.S. Tax Court approved a joint motion to consolidate for trial, briefing, and opinion, our case with similar cases of Radian Group, Inc., as successor to Enhance Financial Services Group, Inc., et al. The parties informed the Tax Court in August 2017 that they had reached agreement in principle on all issues in the case and were preparing the documentation reflecting the terms of their agreement. The agreed settlement termsNIW will be subject to review by the Joint Committee on Taxation (“JCT”) before a settlement can be completed and there is no assurance that a settlement will be completed. Based on information that we currently have regarding the status of our ongoing dispute, we recorded a provision for additional taxes and interest of $28.4 million in 2017.
Should a settlement not be completed, ongoing litigation to resolve our dispute with the IRS could be lengthy and costly in terms of legal fees and related expenses. We would need to make further adjustments, which could be material, to our tax provision and liabilities if our view of the probability of success in this matter changes, and the ultimate resolution of this matter could have a material negative impact on our effective tax rate, results of operations, cash flows, available assets and statutory capital. In this regard, see our risk factors titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirementsincrease and our returns may decrease asabsent an increase in our premium rates. An increase in our premium rates may lead to a decrease in our NIW.
Risk Factors Relating to Our Business Generally
The mix of business we are required to maintain more capital in order to maintain our eligibility” and “State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.”
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Recent hurricanes may impact our incurred losses, the amount and timing of paid claims, our inventory of notices of default andaffects our Minimum Required Assets under PMIERs.the PMIERs, our premium yields and the likelihood of losses occurring.
We expect an increaseThe Minimum Required Assets under the PMIERs are, in part, a function of the direct risk-in-force and the risk profile of the loans we insure, considering LTV ratio, credit score, vintage, Home Affordable Refinance Program ("HARP") status and delinquency status; and whether the loans were insured under lender-paid mortgage insurance policies or other policies that are not subject to automatic termination consistent with the Homeowners Protection Act requirements for borrower-paid mortgage insurance. Therefore, if our direct risk-in-force increases through increases in NIW, or if our mix of business changes to include loans with higher LTV ratios or lower FICO scores, for example, all other things equal, we will be required to hold more Available Assets in order to maintain GSE eligibility.
The minimum capital required by the risk-based capital framework contained in the numberexposure draft released by the NAIC in December 2019 would be, in part, a function of borrowers missing their mortgage paymentscertain loan and economic factors, including property location, LTV ratio and credit score, general underwriting quality in the areas affected by recent hurricanes in Texas, Florida and Puerto Rico. Despite the associated increase in our inventory of notices of default, based on our analysis and past experience, we do not expect the recent hurricane activity to result in a material increase in our incurred losses or paid claims. However, the following factors could cause our actual results to differ from our expectation in the forward looking statement in the preceding sentence:
Third party reports that indicate the extent of flooding in the hurricane-affected areas may be understated.
Home values in hurricane-affected areas may decreasemarket at the time claimsof loan origination, the age of the loan, and the premium rate we charge. Depending on the provisions of the capital requirements when they are filedreleased in final form and become effective, our mix of business may affect the minimum capital we are required to hold under the new framework.
The percentage of our NIW from their current levels thereby adversely affecting our ability to mitigate loss.
Hurricane-affected areas may experience deteriorating economic conditions resulting in more borrowers defaulting on their loansall single-premium policies was 6.6% in the future (or failingfirst quarter of 2022 and 7.4% in full year 2021, and has ranged from 6.6% in 2022 to cure existing defaults)19.0% in 2017. Depending on the actual life of a single premium policy and its premium rate relative to that of a monthly premium policy, a single premium policy may generate more or less premium than we currently expect.a monthly premium policy over its life.
If an insured contests our claim denial or curtailment, there can be no assurance we will prevail. We describe how claims under our policy are affected by damage to the borrower’s home in our Current Report on Form 8-K filed with the SEC on September 14, 2017.
Due to the suspension of certain foreclosures by the GSEs, our receipt of claims associated with foreclosed mortgages in the hurricane-affected areas may be delayed.
The PMIERs require us to maintain significantly more "Minimum Required Assets" for delinquent loans than for performing loans. An increase in default notices may result in an increase in "Minimum Required Assets" and a decrease in the level of our excess "Available Assets" which isAs discussed in our risk factor titled "Reinsurance may not always be available or affordable," we have in place various QSR transactions. Although the transactions reduce our premiums, they have a lesser impact on our overall results, as losses ceded under the transactions reduce our losses incurred and the ceding commissions we receive reduce our underwriting expenses. The effect of the QSR transactions on the various components of pre-tax income will vary from period to period, depending on the level of ceded losses incurred. We also have in place various XOL reinsurance transactions, under which we cede premiums. Under the XOL reinsurance transactions, for the respective reinsurance coverage periods, we retain the first layer of aggregate losses, and special purpose insurers provide second layer coverage up to the outstanding reinsurance coverage amount.
In addition to the effect of reinsurance on our premiums, we expect a decline in our premium yield because an increasing
percentage of our insurance in force is from recent book years whose premium rates had been trending lower.
Our ability to rescind insurance coverage became more limited for new insurance written beginning in mid-2012, and it became further limited for new insurance written under our revised master policy that became effective March 1, 2020. These limitations may result in higher losses paid than would be the case under our previous master policies. In addition, our rescission rights temporarily have become more limited due to accommodations we have made in connection with the COVID-19 pandemic. We have waived our rescission rights in certain circumstances where the failure to make payments was associated with a COVID-19 pandemic-related forbearance.
From time to time, in response to market conditions, we change the types of loans that we insure. We also may change our underwriting guidelines, in part by agreeing with certain approval recommendations from a GSE automated underwriting system. In the third quarter of 2021, Fannie Mae indicated that it was easing its credit assessments and guidelines to help increase homeownership opportunities for borrowers. We have aligned with these changes, which will result in our insuring some loans with FICO scores lower than 620. We also make exceptions to our underwriting requirements on a loan-by-loan basis and for certain customer programs. Our underwriting requirements are available on our website at http://www.mgic.com/underwriting/index.html.
Even when home prices are stable or rising, mortgages with certain characteristics have higher probabilities of claims. As of March 31, 2022, mortgages with these characteristics in our primary risk in force included mortgages with LTV ratios greater than 95% (14.7%), mortgages with borrowers having FICO scores below 680 (7.6%), including those with borrowers having FICO scores of 620-679 (6.6%), mortgages with limited underwriting, including limited borrower documentation (0.9%), and mortgages with borrowers having DTI ratios greater than 45% (or where no ratio is available) (13.8%), each attribute as determined at the time of loan origination. Loans with more than one of these attributes accounted for 2% of our primary risk in force as of March 31, 2022, and less than one percent of our NIW in the first quarter of 2022 and in 2021. When home prices increase, interest rates increase and/or the percentage of our NIW from purchase transactions increases, our NIW on mortgages with higher LTV ratios and higher DTI ratios may increase. Our NIW on mortgages with LTV ratios greater than 95% increased from 8% in the first quarter of 2021 to 11% in the first quarter of 2022 and our NIW on mortgages with DTI ratios greater than 45% increased from 12% in the first quarter of 2021 to 17% in the first quarter of 2022.
From time to time, we change the processes we use to underwrite loans. For example: we rely on information provided to us by lenders that was obtained from certain of the GSEs’ automated appraisal and income verification tools, which may produce results that differ from the results that would have been determined using different methods; we accept GSE appraisal waivers for certain refinance loans, the numbers of which have increased significantly beginning in 2020 and remain elevated; and we accept GSE appraisal flexibilities that allow property valuations in certain transactions to be based on appraisals that do not involve an onsite or interior inspection of the property. Our acceptance of automated GSE appraisal and income verification tools, GSE appraisal waivers and GSE appraisal flexibilities may affect our pricing and risk assessment. We also continue to
MGIC Investment Corporation - Q1 2022 | 60
further automate our underwriting processes and it is possible that our automated processes result in our insuring loans that we would not otherwise have insured under our prior processes.
Approximately 75% of our first quarter 2022 and 72% of our 2021 NIW (by risk written) was originated under delegated underwriting programs pursuant to which the loan originators had authority on our behalf to underwrite the loans for our mortgage insurance. For loans originated through a delegated underwriting program, we depend on the originators' compliance with our guidelines and rely on the originators' representations that the loans being insured satisfy the underwriting guidelines, eligibility criteria and other requirements. While we have established systems and processes to monitor whether certain aspects of our underwriting guidelines were being followed by the originators, such systems may not ensure that the guidelines were being strictly followed at the time the loans were originated.
The widespread use of risk-based pricing systems by the private mortgage insurance industry (discussed in our risk factor titled "Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses") makes it more difficult to compare our premium rates to those offered by our competitors. We may not continuebe aware of industry rate changes until we observe that our mix of new insurance written has changed and our mix may fluctuate more as a result.
If state or federal regulations or statutes are changed in ways that ease mortgage lending standards and/or requirements, or if lenders seek ways to replace business in times of lower mortgage originations, it is possible that more mortgage loans could be originated with higher risk characteristics than are currently being originated, such as loans with lower FICO scores and higher DTI ratios. The focus of the new FHFA leadership on increasing homeownership opportunities for borrowers is likely to have this effect. Lenders could pressure mortgage insurers to insure such loans, which are expected to experience higher claim rates. Although we attempt to incorporate these higher expected claim rates into our underwriting and pricing models, there can be no assurance that the premiums earned and the associated investment income will be adequate to compensate for actual losses paid even under our current underwriting requirements.
Our success depends, in part, on our ability to manage risks in our investment portfolio.
Our investment portfolio is an important source of revenue and is our primary source of claims paying resources. Although our investment portfolio consists mostly of highly-rated fixed income investments, our investment portfolio is affected by general economic conditions and tax policy, which may adversely affect the markets for credit and interest-rate-sensitive securities, including the extent and timing of investor participation in these markets, the level and volatility of interest rates and credit spreads and, consequently, the value of our fixed income securities. Prevailing market rates have increased for various reasons, including inflationary pressures, which has reduced the fair value of our investment portfolio. The value of our investment portfolio may also be adversely affected by ratings downgrades, increased bankruptcies and credit spreads widening in distressed industries. In addition, the collectability and valuation of our municipal bond portfolio may be adversely affected if state and local municipalities incur increased costs to respond to COVID-19 and receive fewer tax revenues due to
adverse economic conditions. Our investment portfolio also includes commercial mortgage-backed securities, collateralized loan obligations, and asset-backed securities, which could be adversely affected by declines in real estate valuations, increases in unemployment geopolitical risks and/or financial market disruption, including a heightened collection risk on the underlying loans. As a result of these matters, we may not achieve our investment objectives and a reduction in the market value of our investments could have an adverse effect on our liquidity, financial condition and results of operations.
For the significant portion of our investment portfolio that is held by MGIC, to receive full capital credit under insurance regulatory requirements and under the PMIERs, we generally are limited to investing in investment grade fixed income securities whose yields reflect their lower credit risk profile. Our investment income depends upon the size of the portfolio and its reinvestment at prevailing interest rates. A prolonged period of low investment yields would have an adverse impact on our investment income as would a decrease in the size of the portfolio.
We structure our investment portfolio to satisfy our expected liabilities, including claim payments in our mortgage insurance business. If we underestimate our liabilities or improperly structure our investments to meet these liabilities, we could have unexpected losses resulting from the GSEs’ private mortgage insurer eligibility requirementsforced liquidation of fixed income investments before their maturity, which could adversely affect our results of operations.
MGIC Investment Corporation - Q1 2022 | 61
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities
The following table provides information about purchases of MGIC Investment Corporation common stock by us during the three months ended March 31, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Share repurchases |
| Period Beginning | | Period Ending | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced plans or programs | | Approximate dollar value of shares that may yet be purchased under the programs (1) |
| January 1, 2022 | | January 31, 2022 | | 3,887,863 | | | $ | 15.43 | | | 3,887,863 | | | $ | 440,000,014 | |
| February 1, 2022 | | February 28, 2022 | | 1,536,302 | | | $ | 15.54 | | | 1,536,302 | | | $ | 416,125,126 | |
| March 1, 2022 | | March 31, 2022 | | 3,089,229 | | | $ | 14.16 | | | 3,089,229 | | | $ | 372,390,059 | |
| | | | 8,513,394 | | | $ | 14.99 | | | 8,513,394 | | | |
(1)In October 2021, our returnsBoard of Directors authorized a share repurchase program under which we may decrease as we are requiredrepurchase up to maintain more capital in orderan additional $372 million of our common stock through the end of 2023. Repurchases may be made from time to maintain our eligibility."time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.
MGIC Investment Corporation - Q1 2022 | 62
Item 5. Other Information
Item 6. Exhibits
The accompanying Index to Exhibits is incorporated by reference in answer to this portion of this Item, and except as otherwise indicated in the next sentence, the Exhibits listed in such Index are filed as part of this Form 10-Q. Exhibit 32 is not filed as part of this Form 10-Q but accompanies this Form 10-Q.
(Part II, Item 6)
Index to exhibits
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | |
| Exhibit Number | | Description of Exhibit | Form | Exhibit(s) | Filing Date | | | | |
| | Form of Restricted Stock Unit Agreement (for Directors) under 2020 Omnibus Incentive Plan (Adopted February 2022) * † | | | | | | | |
| | Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 † | | | | | | | |
| | Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 † | | | | | | | |
| | Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”) †† | | | | | | | |
| | Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarter ended March 31, 2022 and through updating of various statistical and other information † | | | | | | | |
| 101.INS | | Inline XBRL Instance Document | | | | | | | |
| 101.SCH | | Inline XBRL Taxonomy Extension Schema Document | | | | | | | |
| 101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | | | | | | |
| 101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document | | | | | | | |
| 101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document | | | | | | | |
| 101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | | | | | | |
| 104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | | | | | | | |
* Denotes a management contract or compensatory plan.
† Filed herewith.
†† Furnished herewith.
57| MGIC Investment Corporation - Q3 2017Q1 2022 | 63
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized, on November 6, 2017.May 4, 2022.
| | | | | |
| |
| MGIC INVESTMENT CORPORATION |
| |
| /s/ Timothy J. MattkeNathaniel H. Colson |
| Timothy J. MattkeNathaniel H. Colson |
| Executive Vice President and |
| Chief Financial Officer |
| |
| /s/ Julie K. Sperber |
| Julie K. Sperber |
| Vice President, Controller and Chief Accounting Officer |
MGIC Investment Corporation - Q3 2017Q1 2022 |58 64
INDEX TO EXHIBITS
(Part II, Item 6)
|
| |
Exhibit Number | Description of Exhibit |
| Amended and Restated Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s Form 8-K filed July 28, 2017) |
| Ratio of Earnings to Fixed Charges |
| Certification of CEO under Section 302 of Sarbanes-Oxley Act of 2002 |
| Certification of CFO under Section 302 of Sarbanes-Oxley Act of 2002 |
| Certification of CEO and CFO under Section 906 of Sarbanes-Oxley Act of 2002 (as indicated in Item 6 of Part II, this Exhibit is not being “filed”) |
| Risk Factors included in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016, as supplemented by Part II, Item 1A of our Quarterly Report on Form 10-Q for the quarters ended March 31, 2017, June 30, 2017, and September 30, 2017, and through updating of various statistical and other information |
| XBRL Instance Document |
101.SCH | XBRL Taxonomy Extension Schema Document |
| XBRL Taxonomy Extension Calculation Linkbase Document |
| XBRL Taxonomy Extension Definition Linkbase Document |
| XBRL Taxonomy Extension Label Linkbase Document |
| XBRL Taxonomy Extension Presentation Linkbase Document |
59| MGIC Investment Corporation - Q3 2017
