Losses incurred, netwere $84.7 million, down 56%share compared to 2022 primarily reflects a decrease in adjusted net operating income, partially offset by a decrease in the number of diluted weighted shares outstanding.
Premiums earned for the six months ended June 30, 2023, were $484.8 million, compared with $510.9 million, for the same period last year. The decrease in premiums earned compared with the prior year is primarily due to an increase in ceded premiums that was the result of a decrease in the profit commission.
Net investment income in the six months ended June 30, 2023, was $101.6 million, compared with $78.6 million, in the prior year. NewThe increase in net investment income was due to an increase of 80 bps in the average investment yields.
Losses incurred, netfor the six months ended June 30, 2023 were $(11.2) million, compared with losses incurred of $(118.4) million for the prior year. While new delinquency notices added $89.5 million to losses incurred, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of $100.7 million. In the first six months of 2022, new delinquency notices added approximately $68.2 million to losses incurred, offset by re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of $186.6 million. The favorable development for both periods primarily resulted from a decrease in the first nine months of 2017 were 10% lower than the prior year and theexpected claim rate appliedon previously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the new notices was approximately 11%, down from approximately 13% insale of their property.
Underwriting and other expenses, net for the prior year.
Loss on debt extinguishmentsix months ended June 30, 2023, and 2022, were $124.1 million and $108.2 million, respectively. Underwriting and other expenses, net increased during the first half of 2023, compared with the same period in the prior year reflects the repurchasesprimarily due to an increase in pension expenses as a result of settlement accounting charges, an increase in performance based employee compensation, and an increase in postretirement benefit expenses, partially offset by a portiondecrease in expenses related to professional and consulting services.
We did not repurchased any of our outstanding 2% and 5% Notes at amounts above our carrying values. Thedebt obligations in the first half 2023. For the six months ended June 30, 2022, we recorded a loss on debt extinguishment from MGIC’s purchase of $28.5 million, related to the repurchase of a portion our 9% Debentures represents the difference between the fairin excess of their carrying value and carrying valuea repayment fee on the repayment of the liability component on the purchase date.FHLB Advance.
The increasedecrease in our provision for income taxes forin the first nine monthshalf of 20172023 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” to our consolidated financial statements. Excluding the additional provision and interest related to our IRS litigation, the effective tax rate was approximately 33.8% in the first nine months of 2017, compared to 33.2%same period in the prior year period.was primarily due to a decrease in income before tax.
MGIC dividend payments to our holding company
The ability of Operations”below for additional discussionMGIC to pay dividends is restricted by insurance regulation. Amounts in excess of our results forprescribed limits are deemed “extraordinary” and may not be paid if disapproved by the three and nineOCI. 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 2023, MGIC can pay $92 million of ordinary dividends without OCI approval, before taking into consideration dividends paid in the preceding twelve months. In the six months ended SeptemberJune 30, 2017 compared2023, and 2022, we made dividend payments to the respective prior year periods.holding company of $300 million and $400 million, respectively. Future dividend payments to the holding company will continue to be determined in consultation with the board.
CAPITALShare repurchase programs
The following debt transactions have been completed during 2017:
2% Notes -Repurchases may be made from time to time on the open market (including through 10b5-1 plans) or through privately negotiated transactions. In April, holders of approximately $202.5the six months ended June 30, 2023, we repurchased 10.8 million of the outstanding principal amount of the notes exercised their rights to convert their notes to shares of our common stock, and we issuedusing 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$150.9 million of holding company cash. The repaymentresources. As of June 30, 2023, we had $463 million of authorization remaining to repurchase our 5% Notes eliminatedcommon stock through July 1, 2025 under a $500 million share repurchase program approved by our Board of Directors in April of 2023. As of June 30, 2023, we had approximately 10.8283 million potentially dilutive shares. These shares were included in our calculation of diluted weighted averagecommon stock outstanding. We repurchased 15.7 million shares during the six months ended June 30, 2022, using approximately $222 million of holding company resources.
Dividends to shareholders
In the first and diluted EPS upsecond quarters of 2023, we paid quarterly cash dividends of $0.10 per share which totaled $58.8 million. On July 27, 2023, the Board of Directors declared a quarterly cash dividend to the dateholders of the notes repayment.company’s common stock of $0.115 per share to shareholders of record on August 10, 2023, payable on August 24, 2023.
MGIC Investment Corporation - Q2 2023 | 36
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 thea 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 transaction 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 interpretation of the PMIERs as of SeptemberJune 30, 2017,2023, MGIC’s Available Assets totaled $4.7$5.8 billion, anor $2.3 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 the PMIERs at any time. |
è
| The PMIERS may be changed in response to the final regulatory capital framework for the GSEs which was published 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 Minimum Required Assets willthan we would without them because they generally reduce the Minimum Required Assets, we must hold under PMIERs. However, reinsurance may not always be updated every two yearsavailable to us; or available on similar terms, and our reinsurance subjects us to counterparty credit risk. Our access to reinsurance may be updateddisrupted and the terms under which we are able to obtain reinsurance may be less attractive than in the past due to volatility stemming from circumstances such as higher interest rates, increased inflation, global events such as the Russia-Ukraine war, and other factors. Since 2022, execution of transactions for XOL reinsurance through the ILN market has been more frequentlychallenging, with increased pricing, transactions being down-sized, and generally fewer transactions being executed by mortgage insurers.
The calculated credit for XOL 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 given for the reinsured risk above the PMIERs requirement. Our existing reinsurance transactions are subject to reflect changes in macroeconomic conditions or loan performance. The GSEs have informed us that they currently do not expect any updates 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.
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• | 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.
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 Fannie Mae and Freddie Mac ("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 - Q2 2023 | 37
At SeptemberJune 30, 2017,2023, MGIC’s risk-to-capital ratio was 10.19.9 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $1.9$3.6 billion above the required MPP of $1.2$2.1 billion. In calculatingThe calculation of our 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.transactions. 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.under such transactions. 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, refer to our risk 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.
The NAIC previously announced 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 2016,2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and a risk-based capital framework to establish capital
requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisionsinsurers. Subsequent drafts and a final version released in May 2023 did not include changes to the capital requirements and certain items have not yet been completely addressed byof the framework, includingexisting Model Act. In July 2023, the treatmentNAIC working group voted to adopt the version of ceded risk, minimumthe Model Act released in May 2023, with some additional changes, but no changes to the capital floors, and action level triggers. Currently we believerequirements. It is expected that the PMIERs containfull NAIC will adopt 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,revised Model Act sometime during 2023, but it is uncertain what rolewhen the GSEs, FHArevised Model Act will be adopted in any jurisdiction and private capital, including privatewhether any changes will be made by state legislatures prior to such adoption.
Factors affecting our results
Our current and future business, results of operations and financial condition are impacted by macroeconomic conditions, such as rising interest rates, home prices, housing demand, level of employment, inflation, pandemics, restrictions and costs on mortgage insurance, will playcredit, and other factors. For additional information on how our business may be impacted see our Risk Factor titled “Downturns in the residential housing finance systemdomestic economy or declines in thehome prices may result in more homeowners defaulting and our losses increasing, with a corresponding decrease in our returns.”
The future or the impacteffects of any such changes on our business. In addition, the timing of the impact of any resulting changeschanging climatic conditions on our business isare uncertain. Most meaningful 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 possible effects, please refer to our Risk Factor titled “Pandemics, hurricanes and other natural disasters may impact our incurred losses, the business practicesamount and timing of the GSEs, see our risk factor titled “Changes in the 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.”
LOAN MODIFICATIONS AND OTHER SIMILAR PROGRAMS
The federal government, including through the U.S. Department of the Treasury 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.
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 numberinventory of modifications has decreased significantly. Nearly allnotices of the reported loan modifications were for loans insured in 2009default 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 RESULTSMinimum Required Assets under PMIERs.”
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.
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• | 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. |
•Premiums ceded, net of profit commission, under our QSR Transactions and premiums ceded under our XOL Transactions are primarily affected by the percentage of our IIF subject to our reinsurance transactions. The profit commission under our QSR Transactions also 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
MGIC Investment Corporation - Q2 2023 | 38
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 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 2022 10-K MD&A, except in the case of a premium deficiency reserve, we recognize an estimate of this expense only for delinquent loans. ThePrior to the COVID-19 pandemic, 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 pandemics, 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 on delinquent loans tending to increase losses incurred.incurred losses.
•The percentage of coverage on insured loans, with deeper average coverage on delinquent loans tending to increase incurred losses.
•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.
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• | 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 of NIW). 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 gainsGains (losses) on investments and other financial instruments
Realized•Fixed income securities. 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 “other than temporary”credit allowances and any impairments (“OTTI”) recognized in earnings.on securities we intend to sell prior to recovery of its amortized cost basis. 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. Investment gains and losses are accounted for as a function of the periodic change in fair value.
MGIC Investment Corporation - Q2 2023 | 39
•Financial instruments. Investment gains and losses on the embedded derivative on our Home Re Transactions reflect the present value impact of the variation in investment income on assets on the insurance-linked notes held by the reinsurance trusts and the contractual reference rate used to calculate the reinsurance premiums we estimate we will pay over the estimated remaining life.
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.
Cybersecurity
As part of our business, we maintain large amounts of confidential and proprietary information, including personal information of consumers and employees, on our servers and those of cloud computing services. Federal and state laws designed to promote the protection of such information require businesses that collect or maintain personal information to adopt information security programs, and to notify individuals, and in some jurisdictions, regulatory authorities, of security breaches involving personally identifiable information. All information technology systems are potentially vulnerable to damage or interruption from a variety of sources, including by cyber attacks, such as those involving ransomware. The Company discovers vulnerabilities and regularly blocks a high volume of attempts to gain unauthorized access to its systems. 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. Such attacks may also increase as a result of retaliation by Russia in response to actions taken by the U.S. and other countries in connection with Russia's military invasion of Ukraine. The Company operates under a hybrid workforce model and such model 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. Due to our reliance on information technology systems, including ours and those of our customers and third-party service providers, and to the sensitivity of the information that we maintain, unauthorized access to the systems or disclosure of the information could adversely affect our reputation, severely disrupt our operations, result in a loss of business and expose us to material claims for damages and may require that we provide free credit monitoring services to individuals affected by a security breach.
MGIC Investment Corporation - Q3 2017Q2 2023 |36 40
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) 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), 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.
| |
(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) | 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.
|
(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)Infrequent or unusual non-operating items. Items that are non-recurring in nature and are not part of our primary operating activities.
37| MGIC Investment Corporation - Q3 2017Q2 2023 | 41
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Non-GAAP reconciliations | |
| |
| Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | |
| | Three Months Ended June 30, | |
| | 2023 | | 2022 | |
| (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 | | $ | 242,382 | | | 51,328 | | | $ | 191,054 | | | $ | 315,891 | | | 66,623 | | | $ | 249,268 | | |
| Adjustments: | | | | | | | | | | | | | |
| Loss on debt extinguishment | | — | | | — | | | — | | | 6,391 | | | 1,342 | | | 5,049 | | |
| Net realized investment (gains) losses | | 6,314 | | | 1,326 | | | 4,988 | | | 69 | | | 14 | | | 55 | | |
| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 248,696 | | | $ | 52,654 | | | $ | 196,042 | | | $ | 322,351 | | | $ | 67,979 | | | $ | 254,372 | | |
| | | | | | | | | | | | | |
| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | |
| Weighted average diluted shares outstanding | | | | | | 289,566 | | | | | | | 313,545 | | |
| | | | | | | | | | | | | |
| Net income per diluted share | | | | | | $ | 0.66 | | | | | | | $ | 0.80 | | |
| Loss on debt extinguishment | | | | | | — | | | | | | | 0.02 | | |
| Net realized investment (gains) losses | | | | | | 0.02 | | | | | | | — | | |
| Adjusted net operating income per diluted share | | | | | | $ | 0.68 | | | | | | | $ | 0.81 | | (1) | |
| (1) Does not foot due to rounding. | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income | |
| | Six Months Ended June 30, | |
| | 2023 | | 2022 | |
| (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 | | $ | 437,986 | | | $ | 92,385 | | | $ | 345,601 | | | $ | 535,330 | | | $ | 111,049 | | | $ | 424,281 | | |
| Adjustments: | | | | | | | | | | | | | |
| Loss on debt extinguishment | | — | | | — | | | — | | | 28,498 | | | 5,985 | | | 22,513 | | |
| Net realized investment (gains) losses | | 10,382 | | | 2,180 | | | 8,202 | | | 581 | | | 122 | | | 459 | | |
| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 448,368 | | | $ | 94,565 | | | $ | 353,803 | | | $ | 564,409 | | | $ | 117,156 | | | $ | 447,253 | | |
| | | | | | | | | | | | | |
| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share | |
| | | | | | | | | | | | | |
| Weighted average diluted shares outstanding | | | | | | 292,125 | | | | | | | 319,012 | | |
| | | | | | | | | | | | | |
| Net income per diluted share | | | | | | $ | 1.19 | | | | | | | $ | 1.34 | | |
| Loss on debt extinguishment | | | | | | — | | | | | | | 0.07 | | |
| Net realized investment (gains) losses | | | | | | 0.03 | | | | | | | — | | |
| Adjusted net operating income per diluted share | | | | | | $ | 1.21 | | (1) | | | | | | $ | 1.41 | | |
| (1) Does not foot due to rounding. | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| 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 |
|
| Adjustments: | | | | | | | | | | | | |
| Additional income tax provision related to IRS litigation | | — |
| | (619 | ) | | 619 |
| | — |
| | (194 | ) | | 194 |
|
| Net realized investment losses (gains) | | 47 |
| | 16 |
| | 31 |
| | (5,092 | ) | | (1,782 | ) | | (3,310 | ) |
| Loss on debt extinguishment | | — |
| | — |
| | — |
| | 75,223 |
| | 26,328 |
| | 48,895 |
|
| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 184,514 |
| | $ | 63,837 |
| | $ | 120,677 |
| | $ | 153,880 |
| | $ | 51,483 |
| | $ | 102,397 |
|
| | | | | | | | | | | | | |
| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
| | | | | | | | | | | | | |
| Weighted average diluted shares outstanding | | | | | | 391,087 |
| | | | | | 406,050 |
|
| | | | | | | | | | | | | |
| Net income per diluted share | | | | | | $ | 0.32 |
| | | | | | $ | 0.14 |
|
| Additional income tax provision related to IRS litigation | | | | | | — |
| | | | | | — |
|
| Net realized investment losses (gains) | | | | | | — |
| | | | | | (0.01 | ) |
| Loss on debt extinguishment | | | | | | — |
| | | | | | 0.12 |
|
| Adjusted net operating income per diluted share | | | | | | $ | 0.32 |
| | | | | | $ | 0.25 |
|
| | | | | | | | | | | | | |
| 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 |
|
| Adjustments: | | | | | | | | | | | | |
| Additional income tax provision related to IRS litigation | | — |
| | (28,402 | ) | | 28,402 |
| | — |
| | (535 | ) | | 535 |
|
| 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 |
|
| Adjusted pre-tax operating income / Adjusted net operating income | | $ | 539,316 |
| | $ | 182,288 |
| | $ | 357,028 |
| | $ | 434,223 |
| | $ | 145,653 |
| | $ | 288,570 |
|
| | | | | | | | | | | | | |
| Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share |
| | | | | | | | | | | | | |
| Weighted average diluted shares outstanding | | | | 395,870 |
| | | | | | 421,423 |
|
| | | | | | | | | | | | | |
| Net income per diluted share | | | | | | $ | 0.86 |
| | | | | | $ | 0.58 |
|
| Additional income tax provision related to IRS litigation | | | | | | 0.07 |
| | | | | | — |
|
| Net realized investment losses (gains) | | | | | | — |
| | | | | | (0.01 | ) |
| Loss on debt extinguishment | | | | | | — |
| | | | | | 0.14 |
|
| Adjusted net operating income per diluted share | | | | | | $ | 0.93 |
| | | | | | $ | 0.71 |
|
| | | | | | | | | | | | | |
MGIC Investment Corporation - Q3 2017Q2 2023 |38 42
Mortgage Insurance Portfolio
Mortgage originations
NEW INSURANCE WRITTEN
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, interest rates, 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 thirdsecond quarter of 20172023 was $14.1$12.4 billion (Q3 2016: $14.2(Q2 2022: $24.3 billion) and for the first nine months of 2017 was $36.3 billion (YTD 2016: $35.1 billion) and continued to have what we believe are favorable risk characteristics (see tables 01 and 02). The percentage of purchase mortgages insured increased in the three and ninesix months ended September 30, 2017 compared towas $20.6 billion (YTD: $43.9 billion). We expect the same periodsdecrease is reflective of the prior year because the level of refinance transactions declined as mortgage interest ratesa smaller origination market and our market position in the current year were generally higher than those in 2016, particularlycompared with the same period in the third quarterprior year. For the remainder of 2016 whenthe year, we expect a smaller origination market to drive a decrease in our NIW compared to 2022.
The percentage of our NIW with DTI ratios over 45% and LTVs over 95% will fluctuate based on the mortgage conditions that could include the percentage of NIW from purchase transactions, changes in home prices, changes in mortgage rates, neared historic lows (see table 04).and GSE activities.
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| |
01 | PRIMARY NIW BY FICO SCORE % OF PRIMARY NIW
|
The following tables present characteristics of our primary NIW for the three and six months ended June 30, 2023 and 2022. |
| | | | | | | | | | | | |
| | | 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 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary NIW by FICO score | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | | 2023 | | 2022 | | 2023 | | 2022 |
| 760 and greater | | 51.0 | % | | 41.2 | % | | 48.5 | % | | 42.1 | % |
| 740 - 759 | | 18.3 | % | | 19.3 | % | | 18.6 | % | | 19.2 | % |
| 720 - 739 | | 12.7 | % | | 15.3 | % | | 13.5 | % | | 14.9 | % |
| 700 - 719 | | 8.8 | % | | 11.1 | % | | 9.4 | % | | 10.9 | % |
| 680 - 699 | | 5.0 | % | | 7.5 | % | | 5.4 | % | | 7.4 | % |
| 660 - 679 | | 2.9 | % | | 3.6 | % | | 2.9 | % | | 3.4 | % |
| 640 - 659 | | 0.8 | % | | 1.2 | % | | 1.2 | % | | 1.3 | % |
| 639 and less | | 0.5 | % | | 0.8 | % | | 0.5 | % | | 0.8 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary NIW by loan-to-value | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | | 2023 | | 2022 | | 2023 | | 2022 |
| 95.01% and above | | 11.4 | % | | 14.3 | % | | 11.8 | % | | 13.0 | % |
| 90.01% to 95.00% | | 47.1 | % | | 47.7 | % | | 47.0 | % | | 49.6 | % |
| 85.01% to 90.00% | | 30.4 | % | | 27.7 | % | | 30.0 | % | | 27.2 | % |
| 80.01% to 85.00% | | 11.1 | % | | 10.3 | % | | 11.2 | % | | 10.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary NIW by debt-to-income ratio | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | 2023 | | 2022 | | 2023 | | 2022 |
| 45.01% and above | 23.6 | % | | 21.0 | % | | 23.3 | % | | 19.3 | % |
| 38.01% to 45.00% | 31.2 | % | | 32.1 | % | | 32.1 | % | | 31.9 | % |
| 38.00% and below | 45.2 | % | | 46.9 | % | | 44.6 | % | | 48.8 | % |
|
| |
02 | LOAN-TO-VALUE % OF PRIMARY NIW
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary NIW by policy payment type | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | | 2023 | | 2022 | | 2023 | | 2022 |
| Monthly premiums | | 97.0 | % | | 96.1 | % | | 96.7 | % | | 94.9 | % |
| Single premiums | | 3.0 | % | | 3.9 | % | | 3.3 | % | | 5.1 | % |
| Annual premiums | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
| | | | | | | | |
| Primary NIW by type of mortgage | | | | |
| Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | 2023 | | 2022 | | 2023 | | 2022 |
| Purchases | 98.2 | % | | 98.2 | % | | 98.0 | % | | 96.4 | % |
| Refinances | 1.8 | % | | 1.8 | % | | 2.0 | % | | 3.6 | % |
|
| | | | | | | | | | | | |
| | | 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 | % |
|
| |
03 | POLICY PAYMENT TYPE % OF PRIMARY NIW
|
MGIC Investment Corporation - Q2 2023 | 43
We consider a variety of loan characteristics when assessing the risk of a loan. The following tables provides information about loans with one or more of the following characteristics associated with our NIW: LTV ratios greater than 95%, mortgages with borrowers having FICO scores below 680, including those with borrowers having FICO scores of 620-679, and mortgages with borrowers having DTI ratios greater than 45%, each attribute as determined at the time of loan origination. |
| | | | | | | | | | | | |
| | | 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 | % |
| | | | | | | | | | | | | | | | | | | | |
| Primary NIW by number of attributes discussed above |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (% of primary NIW) | | 2023 | 2022 | | 2023 | 2022 |
| One | | 31.6 | % | 32.7 | % | | 32.0 | % | 30.7 | % |
| Two or more | | 3.7 | % | 4.0 | % | | 3.8 | % | 3.5 | % |
|
| |
04 | TYPE OF MORTGAGE % OF PRIMARY NIW
|
|
| | | | | | | | | | | | |
| | | 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%83.5% at SeptemberJune 30, 20172023 compared to 76.9%79.8% at December 31, 20162022 and 78.3%71.5% at SeptemberJune 30, 2016.2022. 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. WithOur persistency rate is primarily affected by the current and expected level of current mortgage interest rates we expect a low levelcompared to the mortgage coupon rates on our IIF, which affects the vulnerability of refinance activitythe IIF to refinancing; and the current amount of equity that borrowers have in the homes underlying our persistency will increase gradually in subsequent periods.IIF.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| IIF and RIF | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In billions) | | 2023 | | 2022 | | 2023 | | 2022 |
| NIW | | $ | 12.4 | | | $ | 24.3 | | | $ | 20.6 | | | $ | 43.9 | |
| Cancellations | | (12.3) | | | (14.8) | | | (23.4) | | | (31.5) | |
| Increase (decrease) in primary IIF | | $ | 0.1 | | | $ | 9.5 | | | $ | (2.8) | | | $ | 12.4 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Direct primary IIF as of June 30, | | $ | 292.5 | | | $ | 286.8 | | | $ | 292.5 | | | $ | 286.8 | |
| Direct primary RIF as of June 30, | | $ | 76.4 | | | $ | 73.6 | | | $ | 76.4 | | | $ | 73.6 | |
|
| |
05 | INSURANCE AND RISK IN FORCE IN BILLIONS
|
|
| | | | | | | | | | | | | | | | |
| | | 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 |
|
| Cancellations | | (10.4 | ) | | (11.6 | ) | | (27.3 | ) | | (29.5 | ) |
| Increase in primary IIF | | $ | 3.7 |
| | $ | 2.6 |
| | $ | 9.0 |
| | $ | 5.6 |
|
| | | | | | | | | |
| | | | | | | | | |
| (In billions) | | 2017 | | 2016 |
| Direct primary IIF as of September 30, | | $ | 191.0 |
| | $ | 180.1 |
|
| Direct primary RIF as of September 30, | | $ | 49.4 |
| | $ | 46.8 |
|
| |
39| MGIC Investment Corporation - Q3 2017
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 ablewith the goal of reducing the number of foreclosures. As of June 30, 2023, loans associated with modification programs accounted for 3.9% of our total RIF, compared to refinance their loans under the current GSE underwriting standards, due to, for example, the current LTV exceeding 100%, to refinance and lower their note rate.4.2% at December 31, 2022. Loans associated with 97.6%87.9% of all of our HARP modifications were current as of SeptemberJune 30, 2017. The aggregate of our 2009-2017 book years and our HARP modifications accounted for approximately 85% of our total primary RIF at September 30, 2017 (see table 06).2023.
MGIC Investment Corporation - Q2 2023 | 44
|
| |
06 | PRIMARY RIF $IN BILLIONS
|
The following table sets forth certain statistics associated with our primary IIF and RIF as of June 30, 2023: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Primary insurance in force and risk in force by policy year |
| (in billions) | Insurance in Force (1) | | Risk In Force (1) | | Weighted Avg. Interest Rate | | Delinquency Rate | | Cede Rate % (2) | | % of Original Remaining |
| Policy Year | Total | % of Total | | Total | % of Total | | | | |
| 2004 and prior | $ | 1.4 | | 0.5 | % | | $ | 0.4 | | 0.5 | % | | 7.2 | % | | 12.3 | % | | — | % | | NM |
| 2005-2008 | 10.7 | | 3.7 | % | | 2.9 | | 3.7 | % | | 6.9 | % | | 10.1 | % | | — | % | | 4.4 | % |
| 2009-2015 | 5.3 | | 1.8 | % | | 1.4 | | 1.9 | % | | 4.3 | % | | 4.5 | % | | — | % | | 3.0 | % |
| 2016 | 5.4 | | 1.8 | % | | 1.4 | | 1.9 | % | | 3.9 | % | | 2.9 | % | | — | % | | 11.2 | % |
| 2017 | 7.1 | | 2.4 | % | | 1.9 | | 2.4 | % | | 4.3 | % | | 3.4 | % | | — | % | | 14.4 | % |
| 2018 | 7.3 | | 2.5 | % | | 1.9 | | 2.5 | % | | 4.8 | % | | 4.0 | % | | — | % | | 14.7 | % |
| 2019 | 15.7 | | 5.4 | % | | 4.1 | | 5.4 | % | | 4.1 | % | | 1.9 | % | | 1.6 | % | | 24.2 | % |
| 2020 | 57.5 | | 19.6 | % | | 14.7 | | 19.2 | % | | 3.2 | % | | 0.9 | % | | 29.2 | % | | 50.3 | % |
| 2021 | 94.1 | | 32.2 | % | | 24.5 | | 32.1 | % | | 3.1 | % | | 1.0 | % | | 29.4 | % | | 79.8 | % |
| 2022 | 68.8 | | 23.5 | % | | 18.2 | | 23.9 | % | | 4.9 | % | | 0.8 | % | | 30.4 | % | | 92.7 | % |
| 2023 | 19.2 | | 6.6 | % | | 5.0 | | 6.5 | % | | 6.2 | % | | 0.1 | % | | 26.9 | % | | 98.2 | % |
| Total | $ | 292.5 | | | | $ | 76.4 | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | |
| | | 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 | % |
| | | | | | | | | | |
(2)Cede Rate % is calculated as the risk in force ceded to our QSR transactions divided by the total risk in force.
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$264 million ($238189 million on pool policies with aggregate loss limits and $251$75 million on pool policies without aggregate loss limits) at SeptemberJune 30, 20172023 compared to $547$276 million ($244196 million on pool policies with aggregate loss limits and $303$80 million on pool policies without aggregate loss limits) at December 31, 2016.2022. 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 $307 million and $226 million as of June 30, 2023 and December 31, 2022, respectively.
MGIC Investment Corporation - Q3 2017Q2 2023 |40 45
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 ninesix months ended SeptemberJune 30, 20172023 and 2016.2022.
| 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (in millions) | | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
| Net premiums written | | $ | 231.2 | | | $ | 244.3 | | | (5) | | | $ | 461.4 | | | $ | 487.0 | | | (5) | |
| | | | | | | | | | | | |
| Net premiums earned | | $ | 242.8 | | | $ | 255.7 | | | (5) | | | $ | 484.8 | | | $ | 510.9 | | | (5) | |
| Investment income, net of expenses | | 52.3 | | | 40.3 | | | 30 | | | 101.6 | | | 78.6 | | | 29 | |
| Net gains (losses) on investments and other financial instruments | | (5.0) | | | (4.7) | | | 6 | | | (12.7) | | | (5.5) | | | 131 | |
| Other revenue | | 0.5 | | | 1.9 | | | N/M | | 0.9 | | | 3.7 | | | N/M |
Total revenues (1) | | $ | 290.7 | | | $ | 293.1 | | | (1) | | | $ | 574.6 | | | $ | 587.7 | | | (2) | |
(1) May not foot due to rounding | | | | | | | | | | | | |
Net premiums written and earned
Comparative quarterly results
NPW increased 2% due to 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 declines in ceded premiums and premium refunds when compared to the prior year.
Comparative year to date results
NPW increased 1%Premiums earned for the three and six months ended June 30, 2023 were $242.8 million and $484.8 million, respectively, compared with $255.7 million and $510.9 million, respectively, for the same periods last year. Net premiums written for three and six months ended June 30, 2023 were $231.2 million and $461.4 million, respectively, compared with $244.3 million and $487.0 million, respectively for the same comparable period last year.
The decrease in premiums written and earned for the three and six months ended June 30, 2023, compared with the prior year period is primarily due to a declinean increase in premium refunds and lower ceded premiums due to a higher profit commission, offset in part bythat was the result of a decrease in premiums from our IIF during the period compared to the prior year. NPE increased 1% due to declines in premium refunds and ceded premiums, offset in part by a decrease in premiums from our IIF during the period compared to the prior year.profit commission.
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) and is influenced by a number ofperiod. 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 and six months ended June 30, 2023 and June 30, 2022.
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 June 30, | | Six Months Ended June 30, |
| (in basis points) | | 2023 | 2022 | | 2023 | 2022 |
| In force portfolio yield | (1) | 38.6 | | 39.4 | | | 38.6 | | 39.5 | |
| Premium refunds | | (0.1) | | 0.2 | | | (0.1) | | — | |
| Accelerated earnings on single premium policies | | 0.4 | | 1.1 | | | 0.3 | | 1.4 | |
| Total direct premium yield | | 38.9 | | 40.7 | | | 38.8 | | 40.9 | |
| Ceded premiums earned, net of profit commission and assumed premiums | (2) | (5.7) | | (4.5) | | | (5.8) | | (4.5) | |
| Net premium yield | | 33.2 | | 36.2 | | | 33.0 | | 36.4 | |
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 0.4 bps for the six months ended June 30, 2023 compared to lower claim activity.0.3 bps for the six months ended June 30, 2022.
The following table reconciles ourChanges in the net premium yield for the three and ninesix months ended SeptemberJune 30, 2017 from2023 compared to the respective prior year periods.three and six months ended June 30, 2022 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, an in force book with lower risk characteristics, lower required capital, the availability of reinsurance, and certain policies undergoing premium rate resets on their ten-year anniversaries. |
|
| | | | | | |
| | | 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 - Q2 2023 | 46
|
| | | | |
| Premium Refunds |
è
| Premium refunds 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. Our estimate of refundable premium on our delinquency inventory fluctuates with changes in our delinquency inventory and our estimate of the number of loans in our delinquency inventory that will result in a claim. |
| Accelerated earnings on single premium policies |
| è | The lower level of refinance transactions have reduced the benefit from accelerated earned premium from cancellation of single premium policies prior to their estimated policy life. |
| 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 XOL Transactions. Assumed premiums consists primarily of premiums from GSE CRT programs. See “Reinsurance Transactions“ below for further discussion on our reinsurance transactions. |
As 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,” the private mortgage insurance industry is highly competitive and premium rates have declined over the past several years. With the smaller origination market, higher persistency rate, and continued high credit quality for NIW expected in 2023, we expect our in force portfolio premium yield to remain relatively flat during 2023.
Reinsurance agreements (see tables 08 and 09)Transactions
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 incurred 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 incurred result in less benefit from ceded losses incurred and a higher profit commission; higher levels of ceded 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). |
| 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 QSR Transactions for each of the three and six months ended June 30, 2023 and June 30, 2022.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (Dollars in thousands) | | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
| Ceded premiums written and earned, net of profit commission | | $27,442 | | $14,995 | | $57,319 | | $37,373 |
| % of direct premiums written | | 10% | | 5% | | 10% | | 7% |
| % of direct premiums earned | | 10% | | 5% | | 10% | | 6% |
| Profit commission | | $34,809 | | $48,814 | | $66,520 | | $87,794 |
| Ceding commissions | | $12,450 | | $12,762 | | $24,768 | | $25,034 |
| Ceded losses incurred | | $1,954 | | $(10,430) | | $6,635 | | $(12,415) |
| | | | | | | | |
| Mortgage insurance portfolio: | | | | | | | | |
| Ceded RIF (Dollars in millions) | | | | | | | | |
| 2015 QSR | | | | | | $— | | $694 |
| 2019 QSR | | | | | | — | | 1,302 |
| 2020 QSR | | | | | | 3,605 | | 4,311 |
| 2021 QSR | | | | | | 6,462 | | 7,101 |
| 2022 QSR | | | | | | 4,853 | | 3,019 |
| 2023 QSR | | | | | | 1,093 | | — |
| Credit Union QSR | | | | | | 2,446 | | 1,941 |
| Total ceded RIF | | | | | | $18,459 | | $18,368 |
Ceded premiums written, and earned net of profit commission increased in the three and six months ended June 30, 2023 when compared with the prior year primarily due to a decrease in the profit commission, which increases ceded premiums written and earned. The decrease in profit commission was driven by the agreements.
We receive the benefit of a profit commission through a reductionincrease 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
incurred.
41| MGIC Investment Corporation - Q3 2017Q2 2023 | 47
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).terminated our 2015 and 2019 QSR Transactions effective December 31, 2022.
We cede a fixed percentage of losses incurred on insurance covered by the agreements.
Covered risk
The effects described above resultpercentages of our NIW, new risk written, IIF, and RIF subject to our QSR Transactions as shown 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.period and the number of active QSR Transactions.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quota Share Reinsurance |
| | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| NIW subject to QSR Transactions | | 87.5 | % | | 87.7 | % | | 87.0 | % | | 87.6 | % |
| New Risk Written subject to QSR Transactions | | 93.1 | % | | 93.3 | % | | 92.9 | % | | 93.2 | % |
| IIF subject to QSR Transactions | | 70.9 | % | | 75.5 | % | | 70.9 | % | | 75.5 | % |
| RIF subject to QSR Transactions | | 75.6 | % | | 81.4 | % | | 75.6 | % | | 81.4 | % |
The following tablesdecrease in IIF and RIF subject to quota share reinsurance for the three and six months ended June 30, 2023, compared to June 30, 2022, is primarily due to the termination of our 2015 and 2019 QSR Transactions at December 31, 2022.
As of June 30, 2023, the weighted average coverage percentage of our QSR transactions was 32% based on RIF.
Excess of loss reinsurance
We have Excess-of-loss transactions (“XOL Transactions”) with panels of unaffiliated reinsurers executed through the traditional reinsurance market (“Traditional XOL Transaction”) and with unaffiliated special purpose insurers (“Home Re Transactions”).
We have Traditional XOL Transactions with panels of third-party reinsurers. For the covered policies, we retain the first layer of the aggregate losses paid, and the reinsurers will then provide additional information relatedsecond layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. The reinsurance coverage is subject to adjustment based on the risk characteristics of the covered loans. The 2022 Traditional XOL Transaction provides $142.6 million of reinsurance coverage on eligible NIW in 2022. The 2023 Traditional XOL Transaction provides up to $116.0 million of reinsurance coverage on eligible NIW in 2023.
The Home Re Transactions are executed with unaffiliated special purpose entities (“Home Re Entities”) through the issuance of insurance linked notes (“ILNs”). As of June 30, 2023 our Home Re Transactions provided $1.4 billion of loss coverage on a portfolio of policies having an in force date from July 1, 2016 through March 31, 2019, and from January 1, 2020 through December 31, 2021; all dates inclusive. For this reinsurance coverage, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding reinsurance amount.
As of June 30, 2023 the premiums under most of our Home Re Transactions from 2018 through 2021 reference the one-month LIBOR rate. The ICE Benchmark Administration, the administrator of LIBOR, ceased publishing all USD LIBOR tenors on June 30, 2023. These Home Re Transactions transitioned to SOFR when the one-month LIBOR rate was no longer published.
The current attachment, current detachment, and PMIERs required asset credit for each of our XOL Transactions, excluding the 2023 Traditional XOL which is still in its fill up period, as of June 30, 2023, are as follows.
| | | | | | | | | | | | | | | | | | | | |
| ($ In thousands) | | Initial Attachment % (1) | Initial Detachment % (2) | Current Attachment % (1) | Current Detachment % (2) | PMIERs Required Asset Credit |
| Home Re 2018-1 | | 2.25% | 6.50% | 13.34% | 21.64% | $ | — | |
| Home Re 2019-1 | | 2.50% | 6.75% | 16.30% | 34.81% | — | |
| Home Re 2020-1 | | 3.00% | 7.50% | 6.94% | 8.76% | — | |
| Home Re 2021-1 | | 2.25% | 6.50% | 3.63% | 7.58% | 140,992 | |
| Home Re 2021-2 | | 2.10% | 6.50% | 2.84% | 7.31% | 223,437 | |
| Home Re 2022-1 | | 2.75% | 6.75% | 3.08% | 7.56% | 435,384 | |
| 2022 Traditional XOL | | 2.60% | 7.10% | 2.70% | 7.36% | 137,493 | |
(1) The percentage represents the cumulative losses as a percentage of adjusted risk in force that MGIC retains prior to the XOL taking losses.(2) The percentage represents the cumulative losses as a percentage of adjusted risk in force that must be reached before MGIC begins absorbing losses after the XOL layer.
Ceded premiums on our XOL Transactions were $17.4 million and $34.4 million, respectively, for the three and six months ended June 30, 2023, and $19.3 million and $31.1 million, respectively, for the three and six months ended June 30, 2022.
MGIC Investment Corporation - Q2 2023 | 48
See Note 4 - “Reinsurance" to our reinsurance agreementsconsolidated financial statements for 2017additional discussion of our QSR and 2016.XOL Transactions. |
| |
08 | QUOTA SHARE REINSURANCE |
|
| | | | | | | | |
| | | As of and For the Nine Months Ended September 30, |
| ($ 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 and six months ended June 30, 2023 was $30.4$52.3 million up from $27.5and $101.6 million, respectively, compared with $40.3 million and $78.6 million, in comparison to the corresponding periods in the prior year period. Net investment income in the first nine months of 2017 was $89.6 million, up from $82.6 million in the prior year period.year. The increase in net investment income in both periods was primarily due to an increase of 80 basis points in the average balance of the investment portfolio along with higher investment yields over the periods.yields.
NET REALIZED INVESTMENT (LOSSES) GAINSLosses and expenses
Comparative quarterly and year to date results | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In millions) | | 2023 | | 2022 | | % Change | | 2023 | | 2022 | | % Change |
| Losses incurred, net | | $ | (17.7) | | | $ | (99.1) | | | 82 | | | $ | (11.2) | | | $ | (118.4) | | | (91) | |
| Amortization of deferred policy acquisition costs | | 2.6 | | | 3.0 | | | (13) | | | 5.1 | | | 5.7 | | | (11) | |
| Other underwriting and operating expenses, net | | 54.0 | | | 53.4 | | | 1 | | | 124.1 | | | 108.2 | | | 15 | |
| Loss on debt extinguishment | | — | | | 6.4 | | | N/M | | — | | | 28.5 | | | N/M |
| Interest expense | | 9.4 | | | 13.5 | | | (30) | | | 18.8 | | | 28.4 | | | (34) | |
| Total losses and expenses | | $ | 48.3 | | | $ | (22.8) | | | (312) | | | $ | 136.7 | | | $ | 52.4 | | | 161 | |
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
Losses incurred, 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 presented in the following chart (10).
|
| |
10 | NET UNREALIZED INVESTMENT GAINS (LOSSES)
IN MILLIONS
|
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, NET
As discussed in “Critical Accounting Policies”Estimates” in our 2022 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 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. Even in a stable environment, changes to our estimates could result in a material impact to our consolidated results of operations and financial position. 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 (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, 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, andwhich may affect borrower willingness to continue to make mortgage payments when the value of the home is
below the mortgage balance. Historically,Loss reserves in future periods will also be dependent on the number of loans reported to us as delinquent.
Prior to the COVID-19 pandemic, 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. The state of the economy, local housing markets and various other factors may result in delinquencies not following the typical pattern.
For information on how pandemics and other natural disasters could affect losses incurred, net see our Risk Factors titled “Pandemics, hurricanes and other 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". 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 June 30, 2023 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)
MGIC Investment Corporation - Q2 2023 | 49
Comparative quarterly results
Losses incurred, net infor the thirdsecond quarter of 2017 decreased 51% to $302023 were $(17.7) million, an increase of $81.4 million compared to $61the second quarter of 2022 losses incurred, net of $(99.1) million. While new delinquency notices added approximately $42.2 million for the three months ended June 30, 2023, our re-estimation of loss reserves on previously received delinquency notices resulted in favorable development of approximately $59.9 million. For the prior year.three months ended June 30, 2022, new delinquency notices added approximately $31.8 million, offset by our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $130.9 million. The decrease was due tofavorable development for both periods primarily resulted from 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 lowerexpected claim rate on new notices (see chart 13). Favorable development on prior year defaults occurredpreviously received delinquencies. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the third quartersale of 2017 and 2016 primarily due to a lower claim rate.their property.
Comparative year to date results
Losses incurred, net infor the first ninesix months ended June 30, 2023 were $(11.2) million, an increase of 2017 decreased 56% to $85$107.2 million compared to $192with losses incurred of $(118.4) million. While new delinquency notices added approximately $89.5 million for the six months ended June 30, 2023, our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $100.7 million. For the prior year.six months ended June 30, 2022, new delinquency notices added approximately $68.2 million, offset by our re-estimation of loss reserves on previously received delinquency notices resulting in favorable development of approximately $186.6 million. The decrease was due tofavorable development for both periods primarily resulted from 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 lowerexpected claim rate on new notices (see chart 13). Favorable development on prior year defaults occurredpreviously received delinquencies. Home price appreciation experienced in bothrecent years has allowed some borrowers to cure their delinquencies through 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).sale of their property.
|
| |
11 | COMPOSITION OF LOSSES INCURRED
$ IN MILLIONS
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Composition of losses incurred |
| Three Months Ended June 30, | Six Months Ended June 30, |
| (in millions) | 2023 | | 2022 | | 2023 | | 2022 |
| Current year / New notices | $42.2 | | $31.8 | | $89.5 | | $68.2 |
| Prior year reserve development | (59.9) | | (130.9) | | (100.7) | | (186.6) |
| Losses incurred, net | $(17.7) | | $(99.1) | | $(11.2) | | $(118.4) |
|
| | | | | | | | | | | | | | | | | | | | | | |
| | | 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 2017
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 (7.3)% and (2.3)% for the three and six months ended June 30, 2023, compared with (38.7%) and (23.2%), respectively, for the corresponding periods in the prior year. The increase in the loss ratio infor the three and ninesix months ended SeptemberJune 30, 20172023 compared to the respective prior year periodsperiod was primarily due to a lower level ofthe increase 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 from the same prior year period in which the new notice claim rate generally ranged from 12% to 13%. We expect our new notice claim rates for the remainder of 2017 to be lower than the comparable 2016 rates.
New notice activity continues to be primarily driven by loans insured in 2008 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 2017Q2 2023 |44 50
New notice claim rate
Claims Severity (seeThe table 15)
Factors that impact claim severity include the exposure on the loan (the unpaid principal balance of the loan timesbelow presents our insurance coverage percentage), the amount of time between defaultnew delinquency notices received, delinquency inventory, 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 and six months ended and as of: |
| June 30, 2023 |
| Policy Year | New Notices for the Three Months Ended | New Notices for the Six Months Ended | Delinquency Inventory | Avg. Number of Missed Payments of Delinquency Inventory |
| 2004 and prior | 817 | | 1,660 | | 2,166 | | 19 |
| 2005-2008 | 2,569 | | 5,269 | | 7,209 | | 19 |
| 2009-2015 | 678 | | 1,378 | | 1,620 | | 12 |
| 2016 | 403 | | 895 | | 955 | | 10 |
| 2017 | 568 | | 1,196 | | 1,390 | | 10 |
| 2018 | 714 | | 1,500 | | 1,717 | | 9 |
| 2019 | 677 | | 1,464 | | 1,515 | | 9 |
| 2020 | 1,085 | | 2,352 | | 2,137 | | 7 |
| 2021 | 1,948 | | 4,004 | | 3,474 | | 6 |
| 2022 | 1,079 | | 2,117 | | 1,614 | | 4 |
| 2023 | 42 | | 42 | | 26 | | 2 |
| Total | 10,580 | | 21,877 | | 23,823 | | 12 |
Claim rate on new notices (1) | 8 | % | | | |
| | | | |
| June 30, 2022 |
| Policy Year | New Notices for the Three Months Ended | New Notices for the Six Months Ended | Delinquency Inventory | Avg. Number of Missed Payments of Delinquency Inventory |
| 2004 and prior | 832 | | 1,834 | | 2,526 | | 20 |
| 2005-2008 | 2,728 | | 5,855 | | 9,158 | | 20 |
| 2009-2015 | 690 | | 1,550 | | 2,391 | | 13 |
| 2016 | 475 | | 1,030 | | 1,450 | | 12 |
| 2017 | 637 | | 1,356 | | 1,966 | | 12 |
| 2018 | 738 | | 1,553 | | 2,314 | | 11 |
| 2019 | 682 | | 1,544 | | 2,146 | | 11 |
| 2020 | 1,113 | | 2,428 | | 2,643 | | 8 |
| 2021 | 1,364 | | 2,812 | | 2,156 | | 5 |
| 2022 | 137 | | 137 | | 105 | | 2 |
| Total | 9,396 | | 20,099 | | 26,855 | | 14 |
Claim rate on new notices (1) | 8 | % | | | |
| | | | |
| (1) Claim rate is the respective quarter to date weighted average rate and is rounded to the nearest whole percent. |
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 trends over time, because the development of the delinquencies may vary from period to period without establishing a meaningful trend. An increase in third party property sales prior to claim settlement has resulted in a decrease in the average claim paid and the average claim paid as a percentage of exposure in recent years. At the start of the COVID-19 pandemic, the level of claims received decreased. Claim activity and the average claims paid as a percentage of exposure has not yet returned to pre-COVID-19 levels. The magnitude and timing of the increases are uncertain.
The majority of loans from 2005-2008insured prior to 2009 (which represent 39% 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.
MGIC Investment Corporation - Q2 2023 | 51
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 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Q2 2023 | | 40,013 | | | 29,803 | | | 74.5 | % | | 43 | |
| Q1 2023 | | 37,412 | | | 28,227 | | | 75.4 | % | | 42 | |
| Q4 2022 | | 38,903 | | | 28,492 | | | 73.2 | % | | 41 | |
| Q3 2022 | | 37,625 | | | 23,461 | | | 62.4 | % | | 46 | |
| Q2 2022 | | 44,106 | | | 27,374 | | | 62.1 | % | | 41 | |
| Q1 2022 | | 38,009 | | | 27,662 | | | 72.8 | % | | 45 | |
| | | | | | | | |
| Note: Table excludes material settlements. Settlements include amounts paid in settlement disputes for claims paying practices and/or commutations of policies. |
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. Generally, a defaulted loan with more missed payments is more likely to result in a claim. The number of payments that a borrower is delinquent is shown in the following table. |
| | | | | | | | | | | | | | |
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. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Delinquency inventory - number of payments delinquent |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| 3 payments or less | | 10,694 | | | 11,484 | | | 9,198 | |
| 4-11 payments | | 7,437 | | | 8,026 | | | 8,138 | |
12 payments or more (1) | | 5,692 | | | 6,877 | | | 9,519 | |
| Total | | 23,823 | | | 26,387 | | | 26,855 | |
| | | | | | |
| 3 payments or less | | 45 | % | | 44 | % | | 35 | % |
| 4-11 payments | | 31 | % | | 30 | % | | 30 | % |
| 12 payments or more | | 24 | % | | 26 | % | | 35 | % |
| Total | | 100 | % | | 100 | % | | 100 | % |
In considering the potential sensitivity(1)Approximately 34%, 28%, and 21% of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rateprimary delinquency inventory with 12 payments or severity could have a material impact on reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example,more delinquent has at least 36 payments delinquent as of SeptemberJune 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 change the reserve amount by approximately +/- $23 million.2023, December 31, 2022, and June 30, 2022, respectively.
See Note 12 – “Loss Reserves” to our consolidated financial statements for a discussion of our losses incurred and claims paying practices (including curtailments).
Net losses and LAE paid
Net losses and LAE paid in the three and ninesix months ended SeptemberJune 30, 2017 declined 30% and 25%, respectively, compared to2023 were consistent with the same periodsperiod in the prior yearyear. Our claims paid activity slowed at the start of the COVID-19 pandemic primarily due to lowerforbearance and foreclosure moratoriums put in place, and it has not yet appreciably increased from those suppressed levels. Home price appreciation experienced in recent years has allowed some borrowers to cure their delinquencies through the sale of their property. In addition, an increase in third party property sales prior to claim activitysettlement, has resulted in a decrease in the average claim paid on our primary and pool business and a reduction in losses paid under settlement agreements.the claims we do receive. We believeexpect net losses and LAE paid will continue to decline asincrease, however, the credit profilemagnitude and timing of our RIF continues to improve and our delinquent inventory declines.the increases are uncertain.
MGIC Investment Corporation - Q2 2023 | 52
The following table presents our net losses and LAE paid for the three and ninesix months ended SeptemberJune 30, 20172023 and 2016.2022.
| 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 claims paid for the top 15 jurisdictions (based on 2017 losses paid) and all other jurisdictions for the three and nine months ended September 30, 2017 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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net losses and LAE paid | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In millions) | | 2023 | | 2022 | | 2023 | | 2022 |
| Total primary (excluding settlements) | | $ | 10 | | | $ | 9 | | | $ | 19 | | | $ | 18 | |
| Claims paying practices and NPL settlements | | — | | | 4 | | | — | | | 4 | |
| | | | | | | | |
| Direct losses paid | | 10 | | | 13 | | | 19 | | | 22 | |
| Reinsurance | | — | | | (1) | | | — | | | (1) | |
| Net losses paid | | 10 | | | 12 | | | 19 | | | 21 | |
| LAE | | 2 | | | 2 | | | 3 | | | 4 | |
| | | | | | | | |
| | | | | | | | |
| Net losses and LAE paid | | $ | 12 | | | $ | 14 | | | $ | 22 | | | $ | 25 | |
| | | | | | | | | |
| Average Claim Paid | | $ | 29,803 | | | $ | 27,374 | | | $ | 29,059 | | | $ | 27,519 | |
| | | | | | | | | |
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 June 30, 2023, December 31, 2022 and June 30, 2022 for the top 5 statesjurisdictions (based on 2017 losses paid) for the three and nine months ended SeptemberJune 30, 2017 and 20162023 delinquency inventory) appears in the following table.
| 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 |
|
| | | | | | | | | | | | | | | | | | | | |
| Primary average RIF - delinquent loans |
| | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| Florida | $ | 60,930 | | | $ | 59,515 | | | $ | 56,308 | |
| Texas | 56,151 | | | 53,364 | | | 50,900 | |
| Illinois | 42,163 | | | 41,640 | | | 41,193 | |
| Pennsylvania | 42,371 | | | 40,993 | | | 39,408 | |
| New York | 75,897 | | | 74,760 | | | 74,784 | |
| All other jurisdictions | 54,079 | | | 51,693 | | | 50,603 | |
| All jurisdictions | $ | 54,591 | | | $ | 52,511 | | | $ | 51,197 | |
The primary average RIF on all loans was $66,099, $64,784, and $62,735 at June 30, 2023, December 31, 2022, and June 30, 2022, respectively.
Note: Jurisdictions in italics
Loss reserves
The gross reserves at June 30, 2023, December 31, 2022, and June 30, 2022 appear in the table abovebelow.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gross reserves |
| | June 30, 2023 | December 31, 2022 | June 30, 2022 |
| Primary: | | | | | | | |
| Direct case loss reserves (in millions) | | $ | 472 | | | $ | 498 | | | $ | 656 | | |
| Direct IBNR and LAE reserves | | 55 | | | 56 | | | 66 | | |
| Total primary direct loss reserves | | $ | 527 | | | $ | 554 | | | $ | 722 | | |
| | | | | | | |
| Ending delinquent inventory | | | 23,823 | | | 26,387 | | | 26,855 | |
| Percentage of loans delinquent (delinquency rate) | | | 2.05 | % | | 2.22 | % | | 2.28 | % |
| Average total primary loss reserves per delinquency | | | $ | 22,123 | | | $ | 20,994 | | | $ | 26,890 | |
| Primary claims received inventory included in ending delinquent inventory | | | 291 | | | 267 | | | 254 | |
| | | | | | | |
Other gross reserves (1) (in millions) | | $ | 4 | | | $ | 4 | | | $ | 5 | | |
(1)Other Gross Reserves includes direct and assumed reserves that are thosenot included within our primary loss reserves.
MGIC Investment Corporation - Q2 2023 | 53
The primary delinquency inventory for the top 15 jurisdictions (based on June 30, 2023 delinquency inventory) at June 30, 2023, December 31, 2022 and June 30, 2022 appears in the following table.
| | | | | | | | | | | | | | | | | | | | | | | | |
| Primary delinquency inventory by jurisdiction |
| | | | | | June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| Florida * | | | | | | 1,940 | | | 2,414 | | | 2,155 | |
| Texas | | | | | | 1,808 | | | 1,935 | | | 2,004 | |
| Illinois * | | | | | | 1,483 | | | 1,640 | | | 1,756 | |
| Pennsylvania * | | | | | | 1,386 | | | 1,525 | | | 1,488 | |
| New York * | | | | | | 1,332 | | | 1,399 | | | 1,499 | |
| California | | | | | | 1,267 | | | 1,336 | | | 1,370 | |
| Ohio * | | | | | | 1,171 | | | 1,322 | | | 1,201 | |
| Michigan | | | | | | 990 | | | 965 | | | 932 | |
| Georgia | | | | | | 896 | | | 954 | | | 983 | |
| New Jersey * | | | | | | 736 | | | 841 | | | 916 | |
| Maryland | | | | | | 672 | | | 719 | | | 782 | |
| North Carolina | | | | | | 610 | | | 753 | | | 788 | |
| Indiana | | | | | | 599 | | | 622 | | | 612 | |
| Minnesota | | | | | | 530 | | | 573 | | | 600 | |
| Wisconsin | | | | | | 499 | | | 542 | | | 570 | |
| All other jurisdictions | | | | | | 7,904 | | | 8,847 | | | 9,199 | |
| Total | | | | | | 23,823 | | | 26,387 | | | 26,855 | |
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 SeptemberJune 30, 2017,2023, December 31, 20162022 and SeptemberJune 30, 2016 and for the top 5 jurisdictions (based on 2017 losses paid)2022 appears in the following table. | | | | | | | | | | | | | | | | | | | | |
| Primary delinquency inventory by policy year |
| June 30, 2023 | | December 31, 2022 | | June 30, 2022 |
| Policy year: | | | | | |
| 2004 and prior | 2,166 | | | 2,471 | | | 2,526 | |
| 2004 and prior % | 9 | % | | 9 | % | | 9 | % |
| 2005 | 1,257 | | | 1,438 | | | 1,512 | |
| 2006 | 2,117 | | | 2,388 | | | 2,504 | |
| 2007 | 3,125 | | | 3,680 | | | 4,140 | |
| 2008 | 710 | | | 811 | | | 1,002 | |
| 2005 - 2008 % | 30 | % | | 32 | % | | 34 | % |
| 2009 | 54 | | | 51 | | | 65 | |
| 2010 | 32 | | | 31 | | | 47 | |
| 2011 | 23 | | | 43 | | | 58 | |
| 2012 | 65 | | | 72 | | | 89 | |
| 2013 | 180 | | | 243 | | | 323 | |
| 2014 | 498 | | | 633 | | | 751 | |
| 2015 | 768 | | | 944 | | | 1,058 | |
| 2009 - 2015 % | 7 | % | | 8 | % | | 9 | % |
| 2016 | 955 | | | 1,249 | | | 1,450 | |
| 2017 | 1,390 | | | 1,719 | | | 1,966 | |
| 2018 | 1,717 | | | 2,060 | | | 2,314 | |
| 2019 | 1,515 | | | 1,823 | | | 2,146 | |
| 2020 | 2,137 | | | 2,558 | | | 2,643 | |
| 2021 | 3,474 | | | 3,307 | | | 2,156 | |
| 2022 | 1,614 | | | 866 | | | 105 | |
| 2023 | 26 | | | — | | | — | |
| 2016 and later % | 54 | % | | 51 | % | | 48 | % |
| | | | | |
| Total | 23,823 | | | 26,387 | | | 26,855 | |
| 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 2017Q2 2023 |46 54
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 can result in increasing claims following a period of declining claims.As of SeptemberJune 30, 2017, 55%2023, 63% of our primary RIF was written subsequent to December 31, 2014, 64%2020, 82% of our primary RIF was written subsequent to December 31, 2013,2019, and 70%87% of our primary RIF was written subsequent to December 31, 2012.2018.
UNDERWRITING AND OTHER EXPENSES, NET
Comparative quarterlyUnderwriting and year to date resultsother 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 ninesix months ended SeptemberJune 30, 20172023, were $39.9$54.0 million and $119.2$124.1 million, respectively, up from $37.9compared with $53.4 million and $113.0$108.2 million, for the corresponding periods in the respectiveprior year. Underwriting and other expenses, net increased during the six months ended June 30, 2023 compared with the same period in the prior year periods. The increases
MGIC Investment Corporation - Q3 2017|48
were primarily due to higher depreciationan increase in pension expenses as a result of settlement accounting charges, an increase in performance based employee compensation, and compensation expenses.an increase in postretirement benefit expenses, offset partially by a decrease in expenses related to professional and consulting services. We will incur additional settlement accounting charges during the remainder of 2023; however, the magnitude and timing is uncertain.
Underwriting expense ratio (see chart 17). | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| Underwriting expense ratio | | 24.1 | % | | 22.4 | % | | 27.6 | % | | 22.7 | % |
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 SeptemberJune 30, 2017 was $13.3 million, down from $13.5 million2023, increased compared with the same period in the prior year period. Interestprimarily due to a decrease in net premiums written. The underwriting expense ratio for the ninesix months ended SeptemberJune 30, 2017 was $43.8 million up from $40.5 million in2023 increased compared with the same period ofin the prior year primarily due to interest expense incurred on our 5.75% Notesan increase in underwriting expenses and revolving credit facility, which offset the reductiona decrease in interest expense from the maturity of our 5% Notes and elimination of our 2% Notes through conversion and partial redemption during the period.net premiums written.
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
We have not repurchased any of $75.2 million forour outstanding debt obligations in 2023. For the threesix months ended SeptemberJune 30, 2016 reflects2022, we recorded a loss on debt extinguishment of $27.2 million, related to the repurchase of a portion of our 2% Notes9% Debenture, 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 amountcosts 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 ourtheir carrying value and MGIC’s purchasea prepayment fee of a portion of our 9% Debentures with$1.3 million on the loss representing the difference between the fair value and carrying valueoutstanding principal balance of the liability component onFHLB Advance.
Provision for income taxes and effective tax rate
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Income tax provision and effective tax rate | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, |
| (In millions, except rate) | | 2023 | | 2022 | | 2023 | | 2022 |
| Income before tax | | $ | 242.4 | | | $ | 315.9 | | | $ | 438.0 | | | $ | 535.3 | |
| Provision for income taxes | | $ | 51.3 | | | $ | 66.6 | | | $ | 92.4 | | | $ | 111.0 | |
| Effective tax rate | | 21.2 | % | | 21.1 | % | | 21.1 | % | | 20.7 | % |
Our effective tax rate for the purchase date. These transactions repositionedthree and six months ended June 30, 2023 and 2022 approximated 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% and our effective tax rate of 34.9% and 32.4% for the respective three months ended September 30, 2017 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, 2016 was primarily due to the benefits of tax preferenced securities.21%.
49| MGIC Investment Corporation - Q3 2017Q2 2023 | 55
Balance Sheet Review
Total assets and total liabilities
As of September 30, 2017, total assets were $5.7 billion and total liabilities were $2.5 billion. Compared to year-end 2016, this represented a decrease of $58.7 million in total assets and of $640.0 million in total liabilities.
The following sections mainly focus on the major developments on our cashConsolidated Balance Sheet since December 31, 2022.
Consolidated balance sheets - Assets
| | | | | | | | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | December 31, 2022 | | % Change |
| Investments | $ | 5,618,272 | | | $ | 5,424,688 | | | 4 | |
| Cash and cash equivalents | 310,720 | | | 327,384 | | | (5) | |
| Premiums receivable | 57,066 | | | 58,000 | | | (2) | |
| Reinsurance recoverable on loss reserves | 34,475 | | | 28,240 | | | 22 | |
| Reinsurance recoverable on paid losses | 240 | | | 18,081 | | | (99) | |
| Deferred incomes taxes, net | 110,782 | | | 124,769 | | | (11) | |
| Other assets | 221,892 | | | 232,631 | | | (5) | |
| Total Assets | $ | 6,353,447 | | | $ | 6,213,793 | | | 2 | |
Investments - Our investments increased to $5.6 billion as of June 30, 2023 from $5.4 billion as of December 31, 2022. The increase is primarily due to net investment purchases and an improvement in the unrealized loss on our investment portfolio in 2023.
The average duration and investment yield of our investment portfolio as of June 30, 2023 and December 31, 2022 are shown in the table below.
| | | | | | | | | | | | | | | | | |
| Portfolio duration and embedded investment yield |
| | June 30, 2023 | | December 31, 2022 |
| Duration (in years) | | 4.2 | | 4.3 |
Pre-tax yield (1) | | 3.4% | | 3.0% |
After-tax yield (1) | | 2.8% | | 2.5% |
(1)Embedded investment yield is calculated on a yield-to-worst basis.
The security ratings of our fixed income investments as of June 30, 2023 and December 31, 2022 are shown in the following table.
| | | | | | | | | | | | | | | | | |
| Fixed income security ratings |
| Security Ratings (1) |
| Period | AAA | AA | A | BBB |
| June 30, 2023 | 21% | 25% | 35% | 19% |
| December 31, 2022 | 18% | 28% | 34% | 20% |
(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 used; if two FICO scores are available, the lower of the two is used; if only one FICO score is available, it is used.
Cash and cash equivalents and deferred income taxes, net, as these reflect the major developments in our assets and loss reserves and debt as these reflect the major developments in our liabilities since December 31, 2016.
ASSETS
Cash and cash equivalents- Our cash and cash equivalents balance increaseddecreased to $310.7 million as of June 30, 2023, from $327.4 million as of December 31, 2022, as net cash generated from operating activities was only partly offset by net cash used in investing and financing activities.
DeferredReinsurance recoverable on paid losses - Reinsurance recoverable on paid losses decreased to $0.2 million at June 30, 2023, from $18.1 million at December 31, 2022. At December 31, 2022 the reinsurance recoverable on paid losses is primarily composed of losses recoverable from reinsurers at the time of termination of the 2015 and 2019 QSR Transactions. In a reinsurance termination, amounts for any incurred but unpaid losses are due to us from the reinsurers.
Income Taxes - Our current income taxes, net - tax liability was $2.6 million at June 30, 2023 and is included as a component of other liabilities in our consolidated balance sheets. Our current income tax receivable was $5.3 million at December 31, 2022 and is included as a component of other assets in our consolidated balance sheets. Our deferred tax asset was $110.8 million and $124.8 million at June 30, 2023 and December 31, 2022, respectively. The decreasechange in our deferred income taxes, nettax asset was primarily due to the utilizationtax effect of federal net operating loss carryforwards as weunrealized gains generated net incomeby the investment portfolio during the first ninesix months of 2017.
As2023. We owned $744.2 million and $661.7 million of Septembertax and loss bonds at June 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 income2023 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, December 31, 2016,2022, respectively.
MGIC Investment Corporation - Q2 2023 | 56
Consolidated balance sheets - Liabilities and September 30, 2016 is presented in the following table.equity
| | | | | | | | | | | | | | | | | |
| (in thousands) | June 30, 2023 | | December 31, 2022 | | % Change |
| Loss reserves | $ | 530,681 | | | $ | 557,988 | | | (5) | |
| Unearned premiums | 171,879 | | | 195,289 | | | (12) | |
| Long-term debt | 663,546 | | | 662,810 | | | — | |
| Other liabilities | 143,079 | | | 154,966 | | | (8) | |
| Total Liabilities | $ | 1,509,185 | | | $ | 1,571,053 | | | (4) | |
| Common stock | 371,353 | | | 371,353 | | | — | |
| Paid-in capital | 1,799,444 | | | 1,798,842 | | | — | |
| Treasury stock | (1,192,783) | | | (1,050,238) | | | 14 | |
| Accumulated other comprehensive income (loss), net of tax | (424,887) | | | (481,511) | | | 12 | |
| Retained earnings | 4,291,135 | | | 4,004,294 | | | 7 | |
| Shareholders’ equity | $ | 4,844,262 | | | $ | 4,642,740 | | | 4 | |
|
| |
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. |
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.
|
| |
19 | FIXED INCOME SECURITY RATINGS (1)
% OF FIXED INCOME SECURITIES AT FAIR VALUE
|
|
| | | | |
| | 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% |
| |
(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. |
LIABILITIES
Loss reserves and Reinsurance recoverable on 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 expensesloss reserves to calculate a net reserve balance. The net reserve balanceLoss reserves decreased by 24% to $1.06 billion$530.7 million as of SeptemberJune 30, 2017,2023, from $1.39 billion$558.0 million as of December 31, 2016.2022. The decrease in loss reserves is primarily from favorable development of $100.7 million on previously received delinquency notices, partially offset by loss reserves established on new notices. Reinsurance recoverablerecoverables on our estimated losses and settlement expensesloss reserves were $45.9$34.5 million and $50.5$28.2 million as of SeptemberJune 30, 20172023 and December 31, 2016,2022, respectively. The overall decrease in our loss reserves during the first nine months
Unearned premiums - Our unearned premium decreased to $171.9 million as of 2017 was due to a higher levelJune 30, 2023 from $195.3 million as of losses paid ($413.8 million) relative to losses incurred ($84.7 million).
Debt- The decrease in our consolidated debt wasDecember 31, 2022 primarily due to the eliminationrun-off of our 2% Notes in April through a combinationexisting portfolio of conversions and cash redemptions and repaymentsingle premium policies outpacing the level of our 5% Notes on May 1, 2017 with holding company cash. See Note 3NIW from single premium policies.
Shareholder’s equity - “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 torepresents an improvement in the unrealized loss on our investment portfolio and net income, partially offset by repurchases of our common stock and dividends paid in the first ninesix 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 during the first nine months of 2017.
As described in Note 3 - “Debt”, approximately $202.5 million of principal outstanding on our 2% Notes was converted to shares of common stock in April which resulted in an increase to our shareholders’ equity for the carrying value of the notes at the time of conversion.
2023.
MGIC Investment Corporation - Q3 2017Q2 2023 |50 57
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, | | | Six Months Ended June 30, |
| (In thousands) | | 2017 | | 2016 | (In thousands) | | 2023 | | 2022 |
| Total cash provided by (used in): | | | | | Total cash provided by (used in): | |
| Operating activities | | 256,356 |
| | 148,986 |
| Operating activities | | $ | 356,948 | | | $ | 361,679 | |
| Investing activities | | (2,529 | ) | | 45,973 |
| Investing activities | | (157,028) | | | 289,586 | |
| Financing activities | | (158,536 | ) | | (101,336 | ) | Financing activities | | (216,109) | | | (536,962) | |
| 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 | | $ | (16,189) | | | $ | 114,303 | |
Net cash provided by operating activities for the ninesix months ended SeptemberJune 30, 2017 increased2023 decreased when compared towith the same period of 2016 primarily due to a lower level of losses paid, net, offset in part by increases in payments for interest and other expenses.
Net cash from investing activities for the nine months ended September 30, 2017 decreased when compared to the same period of 2016,2022 primarily due to an increase in losses paid, net of the reinsurance recoverable on paid losses and a decrease in net premiums received, offset by a decrease in interest expense paid on our outstanding debt obligations.
We also have purchase obligations totaling approximately $12.9 million which consist primarily of contracts related to our continued investment in our information technology infrastructure in the percentagenormal course of proceeds frombusiness. The majority of these obligations are under contracts that give us cancellation rights with notice. In the maturity and salesnext twelve months we anticipate we will pay approximately $5.3 million for our purchase obligations.
Net cash used in investing activities for the six months ended June 30, 2023 primarily reflects purchases of fixed income and equity securities during the period that exceeded sales and maturities of fixed income and equity securities during the period as cash from operations was available for additional investment. Net cash provided by investing activities for the six months ended June 30, 2022 primarily reflects sales and maturities of fixed income and equity securities during the period that exceeded purchases as proceeds were reinvested, and an increaseused in amounts invested in property and equipment.financing activities.
Net cash used in financing activities for the ninesix months ended SeptemberJune 30, 2017 included2023 primarily reflects the repayment at maturityrepurchases of our 5% Notescommon stock and redemption of a portion of our 2% Notes, as well as, expenses paiddividends 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 ninesix months ended SeptemberJune 30, 2016 includes2022 primarily reflects the net proceeds from the issuancerepurchase of our 5.75% Notes and the Advance from the FHLB, less amounts paid to purchase portionscommon stock, repayment of our outstanding 5% and 2% Notes, andFHLB Advance, the repurchase of a portion of our 9% Debentures and dividends 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 remittance of withholding taxes paid by employees through shares withheld upon vesting of restricted stock units.shareholders.
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 SeptemberJune 30, 2017,2023, our holding company’s debt obligations were $814.5$671.0 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 consisting of our common stock5.25% Notes and we repaid the outstanding amount borrowed under our credit facility plus interest incurred. The remaining $5.1 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.9% Debentures.
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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 SeptemberJune 30, 2017,2023, we had approximately $182$816.5 million in cash and investments at our holding company. These resourcesResources are maintained primarily to service our debt interest expense, pay debt maturities, repurchase outstanding debt, obligations from time to time, and to settle intercompany obligations. We may also use available holding company cashresources to repurchase shares of our common stock.and pay dividends to shareholders. While these assets are held, we generate investment income that serves to offset a portion of our interest expense. In addition to investment income, thecash requirements. The payment of dividends from our insurance subsidiaries and/or raising capital in the public marketsMGIC are the principal sources of holding company cash inflow. MGIC is the principal source of dividend-paying capacity, whichinflow 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 third quarterfirst half of 2017,2023, we paid $58.8 million in dividends to shareholders. On July 27, 2023, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.115 per share to shareholders of record on August 10, 2023, payable on August 24, 2023.
In the first six months of 2023, our holding company cash and investments increased by $33 million, to $182 million as of September 30, 2017. Cash inflows during the quarter included $40 million of dividends received from MGIC and other inflows of $5$170.0 million. Cash outflows during the quarter at our holding company included $12 million of interest payments on our 5.75% Notes. We expect MGIC to continue to pay quarterly dividends. We ask the OCI not to object before MGIC pays dividends.
The net unrealized losses on our holding company investment portfolio were approximately $1$9.5 million at SeptemberJune 30, 20172023, and the portfolio had a modified duration of approximately 2.61.1 years.
MGIC Investment Corporation - Q2 2023 | 58
Significant cash and investments inflows at our holding company during the first six months:
•$300.0 million dividend received from MGIC
•$73.5 million intercompany tax receipts, and
•$8.5 million of investment income.
Significant cash outflowsat our holding company during the first six months:
•$148.8 million of net share repurchase transactions,
•$58.8 million of cash dividends paid to shareholders, and
•$18.0 million of interest payments on our outstanding debt obligations.
MGIC paid $300.0 million in dividends to our holding company in the six months ended June 30, 2023. Future dividend payments from MGIC to the holding company will be determined in consultation with the board, and after considering any updated estimates about our business. We may from timeask the Wisconsin OCI not to time continueobject before MGIC pays dividends to seekthe holding company.
In the first six months of 2023, we repurchased 10.8 million shares of our common stock using $150.9 million of holding company cash. As of June 30, 2023 we had remaining authorization to acquire our debt obligations through cash purchases and/or exchanges for other securities. We may also from time to time seek to acquirerepurchase $463.0 million of our common stock through cash purchases,
July 1, 2025 under a share repurchase program approved by our Board of Directors in April 2023. In July 2023, we repurchased an additional 1.1 million shares totaling $18.5 million under the remaining authorization.
including with funds provided by debt. We may make such acquisitionsScheduled debt maturities beyond the next twelve months include $650.0 million of our 5.25% Notes due in open market purchases, privately negotiated acquisitions or other transactions. The amounts involved may be material.
2028, and $21.1 million of our 9% Debentures due 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, 20162022 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 inOver the near term, wenext twelve months the principal demand on our holding company resources will be interest payments on our 5.25% Notes and 9% Debentures approximating $36.0 million and dividends to shareholders. We believe our holding company has sufficient sources of liquidity to meet its payment obligations for the foreseeable future.
We may also contribute fundsuse additional holding company cash to repurchase additional shares or to repurchase our insurance operations to comply with the PMIERs outstanding debt obligations. Such repurchases may be material, may be made for cash (funded by debt) and/or the State Capital Requirements.exchanges for other securities, and may be made in open market purchases (including through 10b5-1 plans), privately negotiated acquisitions or other transactions. See “Overview - Capital” above"Overview-Capital" of this MD&A 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.share repurchase programs.
DEBT AT SUBSIDIARIESDebt at subsidiaries
MGIC did not have any outstanding debt obligations at June 30, 2023. 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 million of debt outstanding in the form of a fixed rate advanceWe may borrow 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 AdvanceFHLB 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% of the outstanding principal balance. MGIC provided eligible collateral from its investment portfolio.
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 SeptemberJune 30, 2017,2023, MGIC’s Available Assets under the PMIERs totaled $4.7approximately $5.8 billion, an excess of $0.8approximately $2.3 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 $2.2 billion of capital credit under the PMIERs as of June 30, 2023. 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 the PMIERSconsolidated 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 allow MGICrequired to remainbe 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 compliance with the PMIERs financial requirements, including, we believe,order to the extent they are modifiedmaintain our eligibility” for 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 aggregatediscussion of $0.8 billion of PMIERs capital credit as of September 30, 2017.PMIERs.
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-CAPITALRisk-to-capital
We compute our risk-to-capital ratio on a separate company statutory basis, as well as on a combined insurance operationoperations 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 case loss reserves have been established and thosethe
MGIC Investment Corporation - Q2 2023 | 59
risk covered by reinsurance. 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.loss reserve. The statutory contingency loss reserve is reported as a liability on the statutory balance sheet. A mortgage insurance company is required to make annual additions to thea contingency loss 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 loss reserve when incurred losses exceed 35% of net earned premiums in a calendar year.
The table below presents our risk-to-capital calculation:
| | | | | | | | | | | | | | | | | |
| Risk-to-capital - MGIC |
| (In millions, except ratio) | | June 30, 2023 | | December 31, 2022 |
RIF - net (1) | | 55,738 | | | $ | 56,292 | |
| Statutory policyholders’ surplus | | 775 | | | 921 | |
| Statutory contingency loss reserve | | 4,866 | | | 4,597 | |
| Statutory policyholders’ position | | $ | 5,641 | | | $ | 5,518 | |
| Risk-to-capital | | 9.9:1 | | 10.2:1 |
MGIC’s separate company risk-to-capital calculation appears(1)RIF – net, as shown in the table below.
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| | | | | | | | |
| (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. |
Our combined insurance companies’ risk-to-capital calculation appears in the table below.
|
| | | | | | | | |
| (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 reductions in MGIC's and our combined insurance companies’ risk-to-capital in the first nine months of 2017 were primarily 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.and exposure on policies currently delinquent ($1.4 billion at both June 30, 2023 and December 31, 2022) for which loss reserves have been established.
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 | | Baa2A3 | | 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 2017Q2 2023 | 60
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, 2016,2022, as supplemented by Part II, Item 1 A of our Quarterly Reportsquarterly report on Form 10-Q10Q for the Quartersquarter ended March 31, 20172023, 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‑Qs 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,E, Investment Portfolio" in Item 1 of our Annual Report on Form 10-K for the year ended December 31, 2016.2022.
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 SeptemberJune 30, 2017,2023, the modified duration of our fixed income investment portfolio was 4.54.2 years, which means that an instantaneous parallel shift in the yield curve of 100 basis points would result in a change of 4.5%4.2% 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 thirdsecond quarter of 20172023 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
55| MGIC Investment Corporation - Q3 2017Q2 2023 | 61
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, 2017.2022. 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.
Resolution of our dispute with the Internal Revenue Service could adversely affect us.10‑Q.
The Internal Revenue Service (“IRS”) completed examinationsICE Benchmark Administration, the administrator of our federal income tax returns forLIBOR, ceased publishing all USD LIBOR tenors on June 30, 2023. We have evaluated the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatmentimpact of the flow-through income and loss from an investment in a portfoliodiscontinuance 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 limitationsLIBOR 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 ourconsolidated 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 termshave determined it 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 assetsimpact. As such, the risk factor titled “The Company may be adversely impacted by the transition from LIBOR as a reference rate“ has been deleted.
Risk Factors Relating to the Mortgage Insurance Industry and statutory capital. In this regard, see our risk factors titled “We may not continue to meet the GSEs’ private mortgage insurer eligibility requirements and our returns may decrease as we are required to maintain more capital in order to maintain our eligibility” and “Stateits Regulation
State capital requirements may prevent us from continuing to write new insurance on an uninterrupted basis.”
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC's domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to its risk in force (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 a minimum policyholder position (“MPP”). MGIC's “policyholder position” includes its net worth, or surplus, and its contingency reserve.
At June 30, 2023, MGIC’s risk-to-capital ratio was 9.9 to 1, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was $3.6 billion above the required MPP of $2.1 billion. Our risk-to-capital ratio and MPP reflect credit for the risk ceded under our quota share reinsurance and excess of loss transactions in the traditional reinsurance and ILN markets with unaffiliated reinsurers. If MGIC is not allowed an agreed level of credit under the State Capital Requirements, MGIC may terminate the reinsurance transactions, without penalty.
The NAIC previously announced plans to revise the State Capital Requirements that are provided for in its Mortgage Guaranty Insurance Model Act. In December 2019, a working group of state regulators released an exposure draft of a revised Mortgage Guaranty Insurance Model Act and a risk-based capital framework to establish capital requirements for mortgage insurers. Subsequent drafts and a final version released in May 2023 did not include changes to the capital requirements of the existing Model Act. In July 2023, the NAIC working group voted to adopt the version of the Model Act released in May 2023, with some additional changes, but no changes to the capital requirements. It is expected that the full NAIC will adopt the revised Model Act sometime during 2023, but it is uncertain when the revised Model Act will be adopted in any jurisdiction and whether any changes will be made by state legislatures prior to such adoption.
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 a particular jurisdiction if it fails to meet the State Capital Requirements of that jurisdiction, and in each case if 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 a particular jurisdiction, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future ability of our insurance operations to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. In this regard, see 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.” 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. You should read the rest of these risk factors for information about matters that could negatively affect MGIC’s compliance with State Capital Requirements and its claims paying resources.
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The amount of contents
insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance or are unable to obtain capital relief for mortgage insurance.
Alternatives to private mortgage insurance include:
•investors using risk mitigation and credit risk transfer techniques other than private mortgage insurance, or accepting credit risk without credit enhancement,
•lenders and other investors holding mortgages in portfolio and self-insuring,
•lenders using FHA, U.S. Department of Veterans Affairs ("VA") and other government mortgage insurance programs, and
•lenders originating mortgages using piggyback structures to avoid private mortgage insurance, such as a first mortgage with an 80% loan-to-value ("LTV") ratio and a second mortgage with a 10%, 15% or 20% LTV ratio rather than a first mortgage with a 90%, 95% or 100% LTV ratio that has private mortgage insurance.
The GSEs’ charters generally require credit enhancement for a low down payment mortgage loan (a loan in an amount that exceeds 80% of a home’s value) in order for such loan to be eligible for purchase by the GSEs. Private mortgage insurance generally has been purchased by lenders in primary mortgage market transactions to satisfy this credit enhancement requirement. In 2018, the GSEs initiated secondary mortgage market programs with loan level mortgage default coverage provided by various (re)insurers that are not mortgage insurers governed by PMIERs, and that are not selected by the lenders. These programs, which currently account for a small percentage of the low down payment market, compete with traditional private mortgage insurance and, due to differences in policy terms, they may offer premium rates that are below prevalent single premium lender-paid mortgage insurance ("LPMI") rates. We participate in these programs from time to time. See our risk factor titled “Changes in the business practices of Fannie Mae and Freddie Mac's ("the GSEs"), federal legislation that changes their charters or a restructuring of the GSEs could reduce our revenues or increase our losses” for a discussion of various business practices of the GSEs that may be changed, including through expansion or modification of these programs.
The GSEs (and other investors) have also used other forms of credit enhancement that did not involve traditional private mortgage insurance, such as engaging in credit-linked note transactions executed in the capital markets, or using other forms of debt issuances or securitizations that transfer credit risk directly to other investors, including competitors and an affiliate of MGIC; using other risk mitigation techniques in conjunction with reduced levels of private mortgage insurance coverage; or accepting credit risk without credit enhancement.
The FHA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was 26.7% in 2022, 24.7% in 2021, and 23.4% in 2020. Beginning in 2012, the FHA’s share has been as low as 23.4% (in 2020) and as high as 42.1% (in 2012). Factors that influence the FHA’s market share include relative rates and fees, underwriting guidelines and loan limits of the FHA, VA, private mortgage insurers and the GSEs; changes to the GSEs' business practices; lenders' perceptions of legal risks under FHA versus GSE programs; flexibility for the FHA to establish new products as a result of federal legislation and programs; returns expected to be obtained by lenders for Ginnie Mae securitization of FHA-insured loans compared to those obtained from selling loans to the GSEs for securitization; and differences in policy terms, such as the ability of a borrower to cancel insurance coverage under certain circumstances. On February 22, 2023, the FHA announced a 30-basis point decrease in its mortgage insurance premium rates. This rate reduction will negatively impact our NIW; however, given the many factors that influence the FHA's market share, it is difficult to predict the extent of the impact. In addition, we cannot predict how the factors that affect the FHA's share of NIW will change in the future.
The VA's share of the low down payment residential mortgages that were subject to FHA, VA, USDA or primary private mortgage insurance was 24.5% in 2022, 30.2% in 2021, and 30.9% in 2020. Beginning in 2012, the VA’s share has been as low as 22.8% (in 2013) and as high as 30.9% (in 2020). We believe that the VA’s market share grows as the number of borrowers that are eligible for the VA’s program increases, and when eligible borrowers opt to use the VA program when refinancing their mortgages. The VA program offers 100% LTV ratio loans and charges a one-time funding fee that can be included in the loan amount.
In July 2023, the Federal Reserve Board, Federal Deposit Insurance Corporation, and the Office of the Comptroller of the Currency proposed a revised regulatory capital rule that would impose higher capital standards on large U.S. banks. Under the proposed regulation, affected banks would no longer receive capital relief from mortgage insurance on loans held in their portfolios. If adopted as proposed, the regulation is expected to have a negative effect on our NIW; however, at this time it is difficult to predict the extent of the impact.
Recent hurricanes may impact our incurred losses, the amount and timing
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Risk Factors Relating to Our Business Generally
The mix of paid claims, our inventory of notices of default andbusiness we write affects 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 percentage of our NIW from all single premium policies was 3.3% in the numberfirst half of borrowers missing their mortgage payments2023. Beginning in 2012, 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 decrease at the time claims are filed 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 loans in the future (or failing to cure existing defaults) than we currently expect.
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 levelannual percentage of our excess "Available Assets" which isNIW from single policies has been as low as 4.3% in 2022 and as high as 20.4% in 2015. 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 a monthly premium policy over its life.
As discussed in our risk factor titled "Reinsurance may not always be available or its cost may increase," 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 the reinsurers 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 (net premiums earned divided by the average insurance in force) over time as a large percentage of our current IIF is from book years with lower premium rates due a decline in premium rates in recent years resulting from pricing competition, insuring mortgages with lower risk characteristics, lower required capital, and certain policies undergoing premium rate resets on their ten-year anniversaries. Refinance transactions on single premium policies benefit our premium yield due to the impact of accelerated earned premium from cancellation prior to their estimated life. Recent low levels of refinance transactions have reduced that benefit.
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.
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, including by agreeing with certain approval recommendations from a GSE automated underwriting system. 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 June 30, 2023, mortgages with these characteristics in our primary risk in force included mortgages with LTV ratios greater than 95% (15%), mortgages with borrowers having FICO scores below 680 (7%), including those with borrowers having FICO scores of 620-679 (6%), mortgages with limited underwriting, including limited borrower documentation (1%), and mortgages with borrowers having DTI ratios greater than 45% (or where no ratio is available) (16%), each attribute as determined at the time of loan origination. Loans with more than one of these attributes accounted for 4% of our primary risk in force as of June 30, 2023, and 4% of our primary risk in force as of December 31, 2022 and December 31, 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% was 12% in the first half of 2023, 13% in the first half of 2022, and 12% for the full year of 2022. Our NIW on mortgages with DTI ratios greater than 45% was 23% in the first half of 2023, 19% for the first half of 2022, and 21% for the full year 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; 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 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 72% of our first half 2023 and 72% of our 2022 NIW 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'
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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 meetreplace 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 GSEs’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.
Competition or changes in our relationships with our customers could reduce our revenues, reduce our premium yields and / or increase our losses.
The private mortgage insurance industry is highly competitive and is expected to remain so. We believe we currently compete with other private mortgage insurers based on premium rates, underwriting requirements, financial strength (including based on credit or financial strength ratings), customer relationships, name recognition, reputation, strength of management teams and field organizations, the ancillary products and services provided to lenders, and the effective use of technology and innovation in the delivery and servicing of our mortgage insurance products.
Our relationships with our customers, which may affect the amount of our NIW, could be adversely affected by a variety of factors, including if our premium rates are higher than those of our competitors, our underwriting requirements are more restrictive than those of our competitors, or our customers are dissatisfied with our claims-paying practices (including insurance policy rescissions and claim curtailments).
In recent years, the industry has materially reduced its use of standard rate cards, which were fairly consistent among competitors, and correspondingly increased its use of (i) pricing systems that use a spectrum of filed rates to allow for formulaic, risk-based pricing based on multiple attributes that may be quickly adjusted within certain parameters, and (ii) customized rate plans. The widespread use of risk-based pricing systems by the private mortgage insurance industry makes it more difficult to compare our rates to those offered by our competitors. We may not be aware of industry rate changes until we observe that our volume of NIW has changed. In addition, business under customized rate plans is awarded by certain customers for only limited periods of time. As a result, our NIW may fluctuate more than it had in the past. Regarding the concentration of our new business, our top ten customers accounted for approximately 36% and 33% in the twelve months ended June 30, 2023 and June 30, 2022, respectively.
We monitor various competitive and economic factors while seeking to balance both profitability and market share considerations in developing our pricing strategies. Our premium yield is expected to decline over time as older insurance policies with premium rates that are generally higher run off and new insurance policies with premium rates that are generally lower remain on our books.
Certain of our competitors have access to capital at a lower cost than we do (including, through off-shore intercompany reinsurance vehicles, which have tax advantages that may increase if U.S. corporate income taxes increase). As a result, they may be able to achieve higher after-tax rates of return on their NIW compared to us, which could allow them to leverage reduced premium rates to gain market share, and they may be better positioned to compete outside of traditional mortgage insurance, including by participating in alternative forms of credit enhancement pursued by the GSEs discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance or are unable to obtain capital relief for mortgage insurance."
Although the current PMIERs of the GSEs do not require an insurer eligibility requirements andto maintain minimum financial strength ratings, our returns may decrease asfinancial strength ratings can affect us in the ways set forth below. If we are requiredunable to compete effectively in the current or any future markets as a result of the financial strength ratings assigned to our insurance subsidiaries, our future NIW could be negatively affected.
•A downgrade in our financial strength ratings could result in increased scrutiny of our financial condition by the GSEs and/or our customers, potentially resulting in a decrease in the amount of our NIW.
•Our ability to participate in the non-GSE residential mortgage-backed securities market (the size of which has been limited since 2008, but may grow in the future), could depend on our ability to maintain and improve our investment grade ratings for our insurance subsidiaries. We could be competitively disadvantaged with some market participants because the financial strength ratings of our insurance subsidiaries are lower than those of some competitors. MGIC's financial strength rating from A.M. Best is A- (with a stable outlook), from Moody’s is A3 (with a stable outlook) and from Standard & Poor’s is BBB+ (with a stable outlook).
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•Financial strength ratings may also play a greater role if the GSEs no longer operate in their current capacities, for example, due to legislative or regulatory action. In addition, although the PMIERs do not require minimum financial strength ratings, the GSEs consider financial strength ratings to be important when using forms of credit enhancement other than traditional mortgage insurance, as discussed in our risk factor titled "The amount of insurance we write could be adversely affected if lenders and investors select alternatives to private mortgage insurance or are unable to obtain capital relief for mortgage insurance." The final GSE capital framework provides more capital credit for transactions with higher rated counterparties, as well as those who are diversified. Although we are currently unaware of a direct impact on MGIC, this could potentially become a competitive disadvantage in orderthe future.
Standard & Poor’s is considering changes to maintainits rating methodologies for insurers, including mortgage insurers. It is uncertain what impact the changes will have, whether they will prompt similar moves at other rating agencies, or the extent to which they will impact how external parties evaluate the different rating levels.
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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 June 30, 2023.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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) |
| April 1, 2023 | | April 30, 2023 | | 1,748,720 | | | $ | 13.98 | | | 1,748,720 | | | $ | 511,991,953 | |
| May 1, 2023 | | May 31, 2023 | | 1,745,824 | | | 14.89 | | | 1,745,824 | | | 485,998,066 | |
| June 1, 2023 | | June 30, 2023 | | 1,456,403 | | | 15.49 | | | 1,456,403 | | | $ | 463,434,664 | |
| | | | 4,950,947 | | | $ | 14.75 | | | 4,950,947 | | | |
(1)In April 2023, our eligibility."Board of Directors authorized a share repurchase program under which as of June 30, 2023, we may repurchase up to an additional $463 million of our common stock through July 1, 2025. Repurchases may be made from time to 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.
Item 5. Other Information
During the three months ended June 30, 2023, none of our officers or directors adopted, modified or terminated any contract, instruction or written plan for the purchase or sale of our securities that was intended to satisfy the affirmative defense conditions of Rule 10b5-1(c) or any “non-Rule 10b5-1 trading arrangement.”
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.
