MILWAUKEE, April 20, 2017 /PRNewswire/ -- MGIC Investment
Corporation (NYSE: MTG) today reported operating and financial
results for the quarter ended March 31, 2017. Net income for
the quarter ended March 31, 2017 was
$89.8 million, or $0.24 per diluted share. Net income for the
quarter ended March 31, 2016 was $69.2
million, or $0.17 per diluted
share.
Net income in the first quarter of 2017 includes an additional
$27.2 million tax provision that was
recorded for the anticipated settlement of the previously disclosed
IRS litigation and net income in the first quarter of 2016 includes
a pre-tax loss on debt extinguishment of $13.4 million that resulted from the repurchase
of $138.3 million par value of our 5%
Convertible Senior Notes due in 2017 and $132.7 million par value of the 9% Convertible
Junior Debentures due in 2063.
Net operating income for the quarter ended March 31, 2017
was $117.1 million or $0.31 per diluted share. Net operating income for
the quarter ended March 31, 2016 was $76.1 million or $0.19 per diluted share. We present the non-GAAP
financial measure "net operating income" to increase the
comparability between periods of our financial results. See "Use of
Non-GAAP Financial Measures" below.
Patrick Sinks, CEO of MTG and
Mortgage Guaranty Insurance Corporation ("MGIC"), said, "I am
pleased to report that our insurance in force continued to grow,
persistency has started to rise, and the new delinquent notices
declined as the newer books of business continue to generate low
levels of new delinquent notices and the legacy portfolio continues
to runoff. Additionally, the anticipated claim rate on existing
delinquencies declined and we maintained our traditionally low
expense ratio." Sinks also said, "During the quarter we
notified holders of our 2% Convertible Senior Notes due in 2020
that we would redeem all of the notes on April 21 which accelerates their decision to
convert their notes to shares of our common stock. Finally, in the
quarter the holding company received a $20
million dividend from MGIC."
Notable items for the quarter include:
|
|
Q1 2017
|
|
Q1 2016
|
|
Change
|
New Insurance Written
(billions)
|
|
$
|
9.3
|
|
|
$
|
8.3
|
|
|
12.0
|
%
|
Insurance in force
(billions) (1)
|
|
$
|
183.5
|
|
|
$
|
175.0
|
|
|
4.8
|
%
|
Primary Delinquent
Inventory (# loans) (1)
|
|
45,349
|
|
|
55,590
|
|
|
(18.4)
|
%
|
Annual Persistency
(1)
|
|
76.9
|
%
|
|
79.9
|
%
|
|
|
Consolidated
Risk-to-capital Ratio
|
|
11.6:1
|
|
(2)
|
13:8:1
|
|
(1)
|
|
GAAP Loss
Ratio
|
|
12.1
|
%
|
|
38.4
|
%
|
|
|
GAAP Underwriting
Expense Ratio (3)
|
|
17.0
|
%
|
|
16.9
|
%
|
|
|
Book value per share
(4)
|
|
$
|
7.75
|
|
|
$
|
6.89
|
|
|
12.5
|
%
|
1) As of March 31,
2) preliminary as of March 31, 2017, 3) insurance operations, 4)
based on shares outstanding
|
Total revenues for the first quarter of 2017 were $260.9 million, compared to $258.6 million in the first quarter last year.
Total revenues in the first quarter of 2017 included $0.1 million of net realized investment losses
compared to $3.1 million of net
realized investment gains in the first quarter of 2016. Net
premiums written for the quarter were $236.7
million, compared to $231.3
million for the same period last year. Net premiums earned
were $229.1 million compared to
$221.3 million for the same period
last year.
New insurance written in the first quarter was $9.3 billion, compared to $8.3 billion in the first quarter of
2016. Persistency, or the percentage of insurance remaining in
force from one year prior, was 76.9 percent at March 31, 2017,
compared to 76.9 percent at December 31, 2016, and 79.9
percent at March 31, 2016. As of March
31, 2017, MGIC's primary insurance in force was $183.5 billion, compared to $182.0 billion at December
31, 2016, and $175.0 billion
at March 31, 2016.
The fair value of MGIC Investment Corporation's investment
portfolio, cash and cash equivalents was $5.1 billion at March 31,
2017, compared with $4.8
billion at December 31, 2016, and $4.8 billion at March 31,
2016.
At March 31, 2017, the percentage
of loans that were delinquent, excluding bulk loans, was 3.62
percent, compared to 4.05 percent at December 31, 2016, and
4.51 percent at March 31, 2016. Including bulk loans, the
percentage of loans that were delinquent at March 31, 2017 was
4.55 percent, compared to 5.04 percent at December 31, 2016,
and 5.62 percent at March 31, 2016.
Losses incurred in the first quarter of 2017 were $27.6 million, compared to $85.0 million in the first quarter of
2016. During the first quarter of 2017 there was a
$49.0 million reduction in losses
incurred due to positive development on our primary loss reserves
compared to $5.0 million in the first
quarter of 2016. In addition to the positive development, losses
incurred in the quarter reflect a lower level of new delinquent
notices received and a lower claim rate when compared to the same
quarter last year.
Net underwriting and other expenses were $43.0 million in the first quarter of 2017,
compared to $41.7 million reported
for the same period last year. Excluding the $27.2 million provision that was recorded for the
expected settlement of the previously disclosed IRS litigation, the
effective statutory income tax rate was 32.7% in the first quarter
of 2017 compared to 33.3% in the first quarter of 2016.
On March 21, 2017, we issued an
irrevocable notice of redemption of our 2% Convertible Senior Notes
due in 2020 with a redemption date of April
21, 2017. As of April 18,
2017, however 89% of the holders have elected to convert
their notes to shares of our common stock. We expect that the
remainder will convert by the redemption date and as a result, in
April, we repaid the $150 million
that was previously drawn on our line of credit. We currently
have no plans to repurchase common stock but regularly consider
appropriate uses for resources of our holding company.
Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call today,
April 20, 2017, at 10 a.m. ET to
allow securities analysts and shareholders the opportunity to hear
management discuss the company's quarterly results. The conference
call number is 1-844-231-8825. The call is being webcast and can be
accessed at the company's website at http://mtg.mgic.com/. A replay
of the webcast will be available on the company's website through
May 20, 2017 under "Newsroom."
About MGIC
MGIC (www.mgic.com), the principal subsidiary of MGIC Investment
Corporation, serves lenders throughout the United States, Puerto Rico, and other locations helping
families achieve homeownership sooner by making affordable
low-down-payment mortgages a reality. At March 31, 2017, MGIC
had $183.5 billion of primary
insurance in force covering approximately one million
mortgages.
This press release, which includes certain additional
statistical and other information, including non-GAAP financial
information, and a supplement that contains various portfolio
statistics are both available on the Company's website at
https://mtg.mgic.com/ under "Newsroom."
From time to time MGIC Investment Corporation releases important
information via postings on its corporate website without making
any other disclosure and intends to continue to do so in the
future. Investors and other interested parties are encouraged to
enroll to receive automatic email alerts and Really Simple
Syndication (RSS) feeds regarding new postings. Enrollment
information can be found at https://mtg.mgic.com under
"Newsroom."
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below.
These risk factors should be reviewed in connection with this press
release and our periodic reports to the Securities and Exchange
Commission ("SEC"). These risk 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, including matters that inherently refer to future
events. Among others, statements that include words such as
"believe," "anticipate," "will" or "expect," or words of similar
import, are forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other
statements we may make even though these statements may be affected
by events or circumstances occurring after the forward looking
statements or other statements were made. No investor should rely
on the fact that such statements are current at any time other than
the time at which this press release was issued.
In addition, the current period financial results included in
this press release may be affected by additional information that
arises prior to the filing of our Form 10-Q for the quarter ended
March 31, 2017.
Use of Non-GAAP Financial Measures
We believe that use of the Non-GAAP measures of pretax operating
income (loss), net operating income (loss) and net operating income
(loss) per diluted share facilitate the evaluation of the company's
core financial performance thereby providing relevant information.
These measures are not recognized in accordance with accounting
principles generally accepted in the
United States of America (GAAP) and should not be viewed as
alternatives to GAAP measures of performance. The measures
described below have been established to increase transparency for
the purpose of evaluating our fundamental operating trends.
Pretax operating income (loss) is defined as GAAP income
(loss) before tax, excluding the effects of net realized investment
gains (losses), gain (loss) on debt extinguishment, net impairment
losses recognized in income (loss) and infrequent or unusual
non-operating items where applicable.
Net operating income (loss) is defined as GAAP net income
(loss) excluding the after-tax effects of net realized investment
gains (losses), gain (loss) on debt extinguishment, net impairment
losses recognized in income (loss), and infrequent or unusual
non-operating items where applicable. The amounts of adjustments to
net income (loss) are tax effected using a federal statutory tax
rate of 35%.
Net operating income (loss) per diluted share is
calculated by dividing (i) net operating income (loss) adjusted for
interest expense on convertible debt, share dilution from
convertible debt, and the impact of stock-based compensation
arrangements consistent with the accounting standard regarding
earnings per share, whenever the impact is dilutive, by (ii)
diluted weighted average common shares outstanding.
Although pretax operating income (loss) and 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 factors and are not necessarily indicative of
operating trends, or both. These adjustments, along with the
reasons for their treatment, are described below. 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.
|
|
|
|
Trends in the
profitability of our fundamental operating activities can be more
clearly identified without the fluctuations of these realized
investment gains and losses.
|
|
|
(2)
|
Gains and losses
on debt extinguishment. Gains and losses on debt extinguishment
result from discretionary activities that are undertaken to enhance
our capital position, improve our debt profile, and/or reduce
potential dilution from our outstanding convertible
debt.
|
|
|
(3)
|
Net impairment
losses recognized in earnings. The recognition of net
impairment losses on investments can vary significantly in both
size and timing, depending on market credit cycles, individual
issuer performance, and general economic conditions.
|
|
|
(4)
|
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.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands,
except per share data)
|
|
2017
|
|
2016
|
|
|
|
|
|
Net premiums
written
|
|
$
|
236,702
|
|
|
$
|
231,281
|
|
Revenues
|
|
|
|
|
Net premiums
earned
|
|
$
|
229,103
|
|
|
$
|
221,341
|
|
Net investment
income
|
|
29,477
|
|
|
27,809
|
|
Net realized
investment (losses) gains
|
|
(122)
|
|
|
3,056
|
|
Other
revenue
|
|
2,422
|
|
|
6,373
|
|
Total
revenues
|
|
260,880
|
|
|
258,579
|
|
Losses and
expenses
|
|
|
|
|
Losses incurred,
net
|
|
27,619
|
|
|
85,012
|
|
Underwriting and
other expenses, net
|
|
42,995
|
|
|
41,738
|
|
Interest
expense
|
|
16,309
|
|
|
14,701
|
|
Loss on debt
extinguishment
|
|
—
|
|
|
13,440
|
|
Total losses and
expenses
|
|
86,923
|
|
|
154,891
|
|
Income before
tax
|
|
173,957
|
|
|
103,688
|
|
Provision for income
taxes
|
|
84,159
|
|
|
34,497
|
|
Net income
|
|
$
|
89,798
|
|
|
$
|
69,191
|
|
Diluted income per
share
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
EARNINGS PER SHARE
(UNAUDITED)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands,
except per share data)
|
|
2017
|
|
2016
|
Net income
|
|
$
|
89,798
|
|
|
$
|
69,191
|
|
Interest expense, net
of tax:
|
|
|
|
|
2%
Convertible Senior Notes due 2020
|
|
823
|
|
|
1,982
|
|
5%
Convertible Senior Notes due 2017
|
|
1,282
|
|
|
2,678
|
|
9%
Convertible Junior Subordinated Debentures due 2063
|
|
3,757
|
|
|
—
|
|
Diluted income
available to common shareholders
|
|
$
|
95,660
|
|
|
$
|
73,851
|
|
|
|
|
|
|
Weighted average
shares - basic
|
|
341,009
|
|
|
340,144
|
|
Effect of dilutive
securities:
|
|
|
|
|
Unvested
restricted stock units
|
|
1,488
|
|
|
1,679
|
|
2%
Convertible Senior Notes due 2020
|
|
29,859
|
|
|
71,917
|
|
5%
Convertible Senior Notes due 2017
|
|
10,791
|
|
|
17,625
|
|
9%
Convertible Junior Subordinated Debentures due 2063
|
|
19,028
|
|
|
—
|
|
Weighted average
common shares outstanding - diluted
|
|
402,175
|
|
|
431,365
|
|
Diluted income per
share
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
|
|
|
|
|
Non-GAAP
Reconciliations
|
|
Reconciliation of
Income before tax to pretax operating income and calculation of Net
operating income
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(In
thousands)
|
|
2017
|
|
2016
|
|
Income before tax per
Statement of Operations
|
|
$
|
173,957
|
|
|
$
|
103,688
|
|
|
Adjustments:
|
|
|
|
|
|
Net
realized investment losses (gains)
|
|
122
|
|
|
(3,056)
|
|
|
Loss on
debt extinguishment
|
|
—
|
|
|
13,440
|
|
|
Pretax operating
income
|
|
174,079
|
|
|
114,072
|
|
|
|
|
|
|
|
|
Income
taxes:
|
|
|
|
|
|
Provision for income taxes (1)
|
|
56,978
|
|
|
37,942
|
|
|
Net operating
income
|
|
$
|
117,101
|
|
|
$
|
76,130
|
|
|
|
|
|
|
|
|
(1) Income
before tax within operating income is tax effected at our effective
tax rate. The effective tax rate for the three months ended March
31, 2017 excludes the $27.2 million income tax provision recorded
for the expected settlement of our IRS litigation. Adjustments are
tax effected at the Federal Statutory Rate of 35%.
|
|
|
|
|
|
|
|
Reconciliation of
Net income to Net operating income
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
(In
thousands)
|
|
2017
|
|
2016
|
|
Net income
|
|
$
|
89,798
|
|
|
$
|
69,191
|
|
|
Additional income tax
provision related to our IRS litigation
|
|
27,224
|
|
|
189
|
|
|
Adjustments, net of
tax (1):
|
|
|
|
|
|
Net
realized investment losses (gains)
|
|
79
|
|
|
(1,986)
|
|
|
Loss on
debt extinguishment
|
|
—
|
|
|
8,736
|
|
|
Net operating
income
|
|
$
|
117,101
|
|
|
$
|
76,130
|
|
|
|
|
|
|
|
|
(1)
Adjustments are tax effected at the Federal Statutory Rate of
35%.
|
|
|
|
|
|
|
Reconciliation of
Net operating income per diluted share to Net income per diluted
share
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
2016
|
|
Net income per
diluted share
|
|
$
|
0.24
|
|
|
$
|
0.17
|
|
|
Additional income tax
provision related to our IRS litigation
|
|
0.07
|
|
|
—
|
|
|
Net realized
investment losses (gains)
|
|
—
|
|
|
—
|
|
|
Loss on debt
extinguishment
|
|
—
|
|
|
0.02
|
|
|
Net operating income
per diluted share
|
|
$
|
0.31
|
|
|
$
|
0.19
|
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
March
31,
|
|
December
31,
|
|
March 31,
|
(In thousands,
except per share data)
|
|
2017
|
|
2016
|
|
2016
|
ASSETS
|
|
|
|
|
|
|
Investments
(1)
|
|
$
|
4,649,281
|
|
|
$
|
4,692,350
|
|
|
$
|
4,564,203
|
|
Cash and cash
equivalents
|
|
427,074
|
|
|
155,410
|
|
|
249,898
|
|
Reinsurance
recoverable on loss reserves (2)
|
|
46,658
|
|
|
50,493
|
|
|
41,119
|
|
Home office and
equipment, net
|
|
38,314
|
|
|
36,088
|
|
|
31,047
|
|
Deferred insurance
policy acquisition costs
|
|
18,236
|
|
|
17,759
|
|
|
15,946
|
|
Deferred income
taxes, net
|
|
552,469
|
|
|
607,655
|
|
|
705,813
|
|
Other
assets
|
|
171,856
|
|
|
174,774
|
|
|
168,790
|
|
Total
assets
|
|
$
|
5,903,888
|
|
|
$
|
5,734,529
|
|
|
$
|
5,776,816
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Loss reserves
(2)
|
|
$
|
1,335,042
|
|
|
$
|
1,438,813
|
|
|
$
|
1,753,389
|
|
Unearned
premiums
|
|
337,322
|
|
|
329,737
|
|
|
289,879
|
|
Line of
credit
|
|
150,000
|
|
|
—
|
|
|
—
|
|
Senior
notes
|
|
417,695
|
|
|
417,406
|
|
|
—
|
|
Federal home loan
bank advance
|
|
155,000
|
|
|
155,000
|
|
|
155,000
|
|
Convertible senior
notes
|
|
349,848
|
|
|
349,461
|
|
|
685,624
|
|
Convertible junior
debentures
|
|
256,872
|
|
|
256,872
|
|
|
256,872
|
|
Other
liabilities
|
|
254,578
|
|
|
238,398
|
|
|
289,240
|
|
Total
liabilities
|
|
3,256,357
|
|
|
3,185,687
|
|
|
3,430,004
|
|
Shareholders'
equity
|
|
2,647,531
|
|
|
2,548,842
|
|
|
2,346,812
|
|
Total liabilities and
shareholders' equity
|
|
$
|
5,903,888
|
|
|
$
|
5,734,529
|
|
|
$
|
5,776,816
|
|
Book value per share
(3)
|
|
$
|
7.75
|
|
|
$
|
7.48
|
|
|
$
|
6.89
|
|
|
|
|
|
|
|
|
(1)
Investments include net unrealized (losses) gains on
securities
|
|
$
|
(13,337)
|
|
|
$
|
(32,006)
|
|
|
$
|
51,816
|
|
(2) Loss
reserves, net of reinsurance recoverable on loss
reserves
|
|
$
|
1,288,384
|
|
|
$
|
1,388,320
|
|
|
$
|
1,712,270
|
|
(3) Shares
outstanding
|
|
341,434
|
|
|
340,663
|
|
|
340,636
|
|
Additional
Information
|
|
Q1
2017
|
|
Q4
2016
|
|
Q3
2016
|
|
Q2
2016
|
|
Q1
2016
|
|
Q4
2015
|
|
New primary insurance
written (NIW) (billions)
|
$
|
9.3
|
|
|
$
|
12.8
|
|
|
$
|
14.2
|
|
|
$
|
12.6
|
|
|
$
|
8.3
|
|
|
$
|
9.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly premium plans
(1)
|
7.8
|
|
|
10.6
|
|
|
11.7
|
|
|
9.9
|
|
|
6.5
|
|
|
7.7
|
|
|
Single premium
plans
|
1.5
|
|
|
2.2
|
|
|
2.5
|
|
|
2.7
|
|
|
1.8
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct average
premium rate (bps) on NIW
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly
(1)
|
60.8
|
|
|
57.5
|
|
|
58.3
|
|
|
60.5
|
|
|
64.5
|
|
|
64.6
|
|
|
Singles
|
172.2
|
|
|
163.0
|
|
|
167.2
|
|
|
166.3
|
|
|
166.4
|
|
|
159.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New primary risk
written (billions)
|
$
|
2.3
|
|
|
$
|
3.1
|
|
|
$
|
3.5
|
|
|
$
|
3.1
|
|
|
$
|
2.1
|
|
|
$
|
2.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product mix as a % of
primary flow NIW
|
|
|
|
|
|
|
|
|
|
|
|
|
>95%
LTVs
|
8
|
%
|
|
7
|
%
|
|
6
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
Singles
|
17
|
%
|
|
17
|
%
|
|
18
|
%
|
|
21
|
%
|
|
22
|
%
|
|
22
|
%
|
|
Refinances
|
17
|
%
|
|
24
|
%
|
|
19
|
%
|
|
17
|
%
|
|
18
|
%
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Insurance In
Force (IIF) (billions)
|
$
|
183.5
|
|
|
$
|
182.0
|
|
|
$
|
180.1
|
|
|
$
|
177.5
|
|
|
$
|
175.0
|
|
|
$
|
174.5
|
|
|
Flow only
|
$
|
174.5
|
|
|
$
|
172.8
|
|
|
$
|
170.5
|
|
|
$
|
167.5
|
|
|
$
|
164.8
|
|
|
$
|
164.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Persistency
|
76.9
|
%
|
|
76.9
|
%
|
|
78.3
|
%
|
|
79.6
|
%
|
|
79.9
|
%
|
|
79.7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Risk In Force
(RIF) (billions)
|
$
|
47.5
|
|
|
$
|
47.2
|
|
|
$
|
46.8
|
|
|
$
|
46.2
|
|
|
$
|
45.6
|
|
|
$
|
45.5
|
|
|
Flow only
|
$
|
45.0
|
|
|
$
|
44.6
|
|
|
$
|
44.1
|
|
|
$
|
43.4
|
|
|
$
|
42.7
|
|
|
$
|
42.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary RIF by
FICO (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
FICO 740 &
>
|
50
|
%
|
|
49
|
%
|
|
49
|
%
|
|
48
|
%
|
|
47
|
%
|
|
47
|
%
|
|
FICO
700-739
|
24
|
%
|
|
25
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
FICO
660-699
|
15
|
%
|
|
15
|
%
|
|
15
|
%
|
|
16
|
%
|
|
16
|
%
|
|
16
|
%
|
|
FICO 659 &
<
|
11
|
%
|
|
11
|
%
|
|
12
|
%
|
|
12
|
%
|
|
13
|
%
|
|
13
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Coverage
Ratio (RIF/IIF)
|
25.9
|
%
|
|
25.9
|
%
|
|
26.0
|
%
|
|
26.1
|
%
|
|
26.1
|
%
|
|
26.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan Size of
IIF (thousands)
|
$
|
183.91
|
|
|
$
|
182.35
|
|
|
$
|
180.71
|
|
|
$
|
178.89
|
|
|
$
|
177.08
|
|
|
$
|
175.89
|
|
|
Flow only
|
$
|
186.52
|
|
|
$
|
184.90
|
|
|
$
|
183.18
|
|
|
$
|
181.23
|
|
|
$
|
179.32
|
|
|
$
|
178.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
loans
|
997,650
|
|
|
998,294
|
|
|
996,816
|
|
|
992,076
|
|
|
988,512
|
|
|
992,188
|
|
|
Flow only
|
935,470
|
|
|
934,350
|
|
|
931,047
|
|
|
924,474
|
|
|
919,229
|
|
|
921,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - Default
Roll Forward - # of Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Default
Inventory
|
50,282
|
|
|
51,433
|
|
|
52,558
|
|
|
55,590
|
|
|
62,633
|
|
|
64,642
|
|
|
New
Notices
|
14,939
|
|
|
17,016
|
|
|
17,607
|
|
|
16,080
|
|
|
16,731
|
|
|
18,459
|
|
|
Cures
|
(17,128)
|
|
|
(15,267)
|
|
|
(15,556)
|
|
|
(15,640)
|
|
|
(19,053)
|
|
|
(16,910)
|
|
|
Paids (including
those charged to a deductible or captive)
|
(2,635)
|
|
|
(2,748)
|
|
|
(3,051)
|
|
|
(3,195)
|
|
|
(3,373)
|
|
|
(3,333)
|
|
|
Rescissions and
denials
|
(95)
|
|
|
(152)
|
|
|
(125)
|
|
|
(142)
|
|
|
(210)
|
|
|
(225)
|
|
|
Items removed from
inventory
|
(14)
|
|
|
—
|
|
|
—
|
|
|
(135)
|
|
|
(1,138)
|
|
|
—
|
|
|
Ending Default
Inventory
|
45,349
|
|
|
50,282
|
|
|
51,433
|
|
|
52,558
|
|
|
55,590
|
|
|
62,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary claim
received inventory included in ending default inventory
|
1,390
|
|
|
1,385
|
|
|
1,636
|
|
|
1,829
|
|
|
2,267
|
|
|
2,769
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Cures
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported delinquent
and cured intraquarter
|
5,476
|
|
|
4,543
|
|
|
4,986
|
|
|
4,306
|
|
|
6,248
|
|
|
5,110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent prior to cure
|
|
|
|
|
|
|
|
|
|
|
|
|
3
payments or less
|
7,585
|
|
|
7,006
|
|
|
6,455
|
|
|
7,002
|
|
|
8,413
|
|
|
7,714
|
|
|
4-11
payments
|
3,036
|
|
|
2,580
|
|
|
2,786
|
|
|
3,099
|
|
|
3,077
|
|
|
2,836
|
|
|
12
payments or more
|
1,031
|
|
|
1,138
|
|
|
1,329
|
|
|
1,233
|
|
|
1,315
|
|
|
1,250
|
|
|
Total Cures in
Quarter
|
17,128
|
|
|
15,267
|
|
|
15,556
|
|
|
15,640
|
|
|
19,053
|
|
|
16,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Paids
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent at time of claim payment
|
|
|
|
|
|
|
|
|
|
|
|
|
3
payments or less
|
13
|
|
|
6
|
|
|
16
|
|
|
18
|
|
|
25
|
|
|
18
|
|
|
4-11
payments
|
306
|
|
|
273
|
|
|
325
|
|
|
320
|
|
|
389
|
|
|
304
|
|
|
12
payments or more
|
2,316
|
|
|
2,469
|
|
|
2,710
|
|
|
2,857
|
|
|
2,959
|
|
|
3,011
|
|
|
Total Paids in
Quarter
|
2,635
|
|
|
2,748
|
|
|
3,051
|
|
|
3,195
|
|
|
3,373
|
|
|
3,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Primary
Default Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Consecutive months in
default
|
|
|
|
|
|
|
|
|
|
|
|
|
3 months or
less
|
9,184
|
|
20
|
%
|
12,194
|
|
24
|
%
|
12,333
|
|
24
|
%
|
11,547
|
|
22
|
%
|
10,120
|
|
18
|
%
|
13,053
|
|
21
|
%
|
4-11 months
|
13,617
|
|
30
|
%
|
13,450
|
|
27
|
%
|
12,648
|
|
25
|
%
|
12,680
|
|
24
|
%
|
15,319
|
|
28
|
%
|
15,763
|
|
25
|
%
|
12 months or
more
|
22,548
|
|
50
|
%
|
24,638
|
|
49
|
%
|
26,452
|
|
51
|
%
|
28,331
|
|
54
|
%
|
30,151
|
|
54
|
%
|
33,817
|
|
54
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
15,692
|
|
35
|
%
|
18,419
|
|
36
|
%
|
18,374
|
|
36
|
%
|
17,299
|
|
33
|
%
|
16,864
|
|
30
|
%
|
20,360
|
|
33
|
%
|
4-11
payments
|
12,275
|
|
27
|
%
|
12,892
|
|
26
|
%
|
12,282
|
|
24
|
%
|
12,746
|
|
24
|
%
|
14,595
|
|
26
|
%
|
15,092
|
|
24
|
%
|
12 payments or
more
|
17,382
|
|
38
|
%
|
18,971
|
|
38
|
%
|
20,777
|
|
40
|
%
|
22,513
|
|
43
|
%
|
24,131
|
|
44
|
%
|
27,181
|
|
43
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
Delinquent Loans
|
45,349
|
|
|
50,282
|
|
|
51,433
|
|
|
52,558
|
|
|
55,590
|
|
|
62,633
|
|
|
Flow only
|
33,850
|
|
|
37,829
|
|
|
38,552
|
|
|
39,177
|
|
|
41,440
|
|
|
47,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF Default
Rates
|
4.55
|
%
|
|
5.04
|
%
|
|
5.16
|
%
|
|
5.30
|
%
|
|
5.62
|
%
|
|
6.31
|
%
|
|
Flow only
|
3.62
|
%
|
|
4.05
|
%
|
|
4.14
|
%
|
|
4.24
|
%
|
|
4.51
|
%
|
|
5.11
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
Loss Reserves (millions)
|
$
|
1,311
|
|
|
$
|
1,413
|
|
|
$
|
1,493
|
|
|
$
|
1,574
|
|
|
$
|
1,683
|
|
|
$
|
1,807
|
|
|
Average
Direct Reserve Per Default
|
$
|
28,911
|
|
|
$
|
28,104
|
|
|
$
|
29,027
|
|
|
$
|
29,939
|
|
|
$
|
30,268
|
|
|
$
|
28,859
|
|
|
Pool
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
loss reserves (millions)
|
$
|
23
|
|
|
$
|
25
|
|
|
$
|
32
|
|
|
$
|
37
|
|
|
$
|
38
|
|
|
$
|
43
|
|
|
Ending
default inventory
|
1,714
|
|
|
1,883
|
|
|
1,979
|
|
|
2,024
|
|
|
2,247
|
|
|
2,739
|
|
|
Pool
claim received inventory included in ending default
inventory
|
64
|
|
|
72
|
|
|
87
|
|
|
95
|
|
|
72
|
|
|
60
|
|
|
Reserves
related to Freddie Mac settlement (millions)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
$
|
21
|
|
|
$
|
31
|
|
|
$
|
42
|
|
|
Other
Gross Reserves (millions)
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Paid Claims
(millions) (4)
|
$
|
128
|
|
|
$
|
149
|
|
|
$
|
161
|
|
|
$
|
172
|
|
|
$
|
222
|
|
|
$
|
188
|
|
|
Total primary
(excluding settlements)
|
130
|
|
|
133
|
|
|
147
|
|
|
153
|
|
|
166
|
|
|
164
|
|
|
Rescission and NPL
settlements
|
—
|
|
|
1
|
|
|
1
|
|
|
4
|
|
|
47
|
|
|
—
|
|
|
Pool - with aggregate
loss limits
|
1
|
|
|
2
|
|
|
1
|
|
|
2
|
|
|
1
|
|
|
4
|
|
|
Pool - without
aggregate loss limits
|
1
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
2
|
|
|
Pool - Freddie Mac
settlement
|
—
|
|
|
10
|
|
|
11
|
|
|
10
|
|
|
11
|
|
|
10
|
|
|
Reinsurance
|
(9)
|
|
|
(4)
|
|
|
(5)
|
|
|
(4)
|
|
|
(10)
|
|
|
(2)
|
|
|
Other (2)
|
5
|
|
|
5
|
|
|
4
|
|
|
5
|
|
|
5
|
|
|
10
|
|
|
Reinsurance
terminations (4)
|
—
|
|
|
—
|
|
|
(3)
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Primary Average Claim
Payment (thousands)
|
$
|
49.1
|
|
(3)
|
|
$
|
48.3
|
|
(3)
|
|
$
|
48.1
|
|
(3)
|
|
$
|
48.0
|
|
(3)
|
|
$
|
49.3
|
|
(3)
|
|
$
|
49.1
|
|
|
Flow only
|
$
|
45.2
|
|
(3)
|
|
$
|
44.0
|
|
(3)
|
|
$
|
44.8
|
|
(3)
|
|
$
|
45.9
|
|
(3)
|
|
$
|
45.4
|
|
(3)
|
|
$
|
45.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance excluding
captives
|
|
|
|
|
|
|
|
|
|
|
|
|
% insurance inforce
subject to reinsurance
|
76.8
|
%
|
|
76.3
|
%
|
|
75.3
|
%
|
|
74.7
|
%
|
|
73.7
|
%
|
|
72.9
|
%
|
|
% quarterly NIW
subject to reinsurance
|
86.7
|
%
|
|
89.3
|
%
|
|
88.4
|
%
|
|
90.2
|
%
|
|
89.1
|
%
|
|
89.5
|
%
|
|
Ceded premium written
(millions)
|
$
|
28.5
|
|
|
$
|
32.1
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
Ceded premium earned
(millions)
|
$
|
28.5
|
|
|
$
|
32.1
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
Ceded losses incurred
(millions)
|
$
|
4.7
|
|
|
$
|
8.2
|
|
|
$
|
7.4
|
|
|
$
|
6.1
|
|
|
$
|
8.5
|
|
|
$
|
7.2
|
|
|
Ceding commissions
(millions) (included in underwriting and other expenses)
|
$
|
12.0
|
|
|
$
|
12.0
|
|
|
$
|
12.1
|
|
|
$
|
11.9
|
|
|
$
|
11.6
|
|
|
$
|
11.4
|
|
|
Profit commission
(millions) (included in ceded premiums)
|
$
|
31.5
|
|
|
$
|
27.7
|
|
|
$
|
29.0
|
|
|
$
|
29.8
|
|
|
$
|
26.2
|
|
|
$
|
27.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Pool RIF
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
With aggregate loss
limits
|
$
|
242
|
|
|
$
|
244
|
|
|
$
|
247
|
|
|
$
|
249
|
|
|
$
|
251
|
|
|
$
|
271
|
|
|
Without aggregate
loss limits
|
$
|
284
|
|
|
$
|
303
|
|
|
$
|
321
|
|
|
$
|
343
|
|
|
$
|
365
|
|
|
$
|
388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Primary
Insurance Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force
(billions)
|
$
|
9.0
|
|
|
$
|
9.2
|
|
|
$
|
9.6
|
|
|
$
|
10.0
|
|
|
$
|
10.2
|
|
|
$
|
10.5
|
|
|
Risk in force
(billions)
|
$
|
2.5
|
|
|
$
|
2.6
|
|
|
$
|
2.7
|
|
|
$
|
2.8
|
|
|
$
|
2.9
|
|
|
$
|
3.0
|
|
|
Average loan size
(thousands)
|
$
|
144.68
|
|
|
$
|
145.05
|
|
|
$
|
145.73
|
|
|
$
|
146.84
|
|
|
$
|
147.42
|
|
|
$
|
148.15
|
|
|
Number of delinquent
loans
|
11,499
|
|
|
12,453
|
|
|
12,881
|
|
|
13,381
|
|
|
14,150
|
|
|
15,545
|
|
|
Default
rate
|
18.49
|
%
|
|
19.48
|
%
|
|
19.59
|
%
|
|
19.79
|
%
|
|
20.42
|
%
|
|
21.89
|
%
|
|
Primary paid claims
(millions)
|
$
|
33
|
|
|
$
|
35
|
|
(3)
|
|
$
|
37
|
|
(3)
|
|
$
|
35
|
|
|
$
|
43
|
|
(3)
|
|
$
|
39
|
|
|
Average claim payment
(thousands)
|
$
|
66.6
|
|
|
$
|
65.8
|
|
(3)
|
|
$
|
61.4
|
|
(3)
|
|
$
|
56.8
|
|
|
$
|
65.1
|
|
(3)
|
|
$
|
65.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty
Insurance Corporation - Risk to Capital
|
9.9:1
|
|
(5)
|
|
10.7:1
|
|
|
11.1:1
|
|
|
11.6:1
|
|
|
12.3:1
|
|
|
12.1:1
|
|
|
Combined Insurance
Companies - Risk to Capital
|
11.6:1
|
|
(5)
|
|
12.0:1
|
|
|
12.6:1
|
|
|
13.2:1
|
|
|
13.8:1
|
|
|
13.6:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loss ratio
(insurance operations only)
|
12.1
|
%
|
|
20.3
|
%
|
|
25.7
|
%
|
|
20.1
|
%
|
|
38.4
|
%
|
|
42.0
|
%
|
|
GAAP underwriting
expense ratio (insurance operations only)
|
17.0
|
%
|
|
15.8
|
%
|
|
14.7
|
%
|
|
13.9
|
%
|
|
16.9
|
%
|
|
13.9
|
%
|
|
Note: The FICO
credit score for a loan with multiple borrowers is the lowest of
the borrowers' "decision FICO scores." A borrower's "decision
FICO score" is determined as follows: if there are three FICO
scores available, the middle FICO score 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.
|
|
Note: Average claim
paid may vary from period to period due to amounts associated with
mitigation efforts.
|
|
(1) Includes
loans with annual and split payments.
|
|
(2) Includes
Australian operations.
|
|
(3) Excludes
claims paying practices and non-performing loan
settlements
|
|
(4) Net paid
claims, as presented, does not include amounts received in
conjunction with terminations or commutations of reinsurance
agreements.
|
|
(5)
Preliminary
|
Risk Factors
As used below, "we," "our" and "us" refer to MGIC Investment
Corporation's consolidated operations or to MGIC Investment
Corporation, as the context requires, and "MGIC" refers to Mortgage
Guaranty Insurance Corporation.
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our premium yields
and / or increase our losses.
Our private mortgage insurance competitors include:
- Arch Mortgage Insurance Company, which completed its
acquisition of United Guaranty Residential Insurance Company in the
fourth quarter of 2016,
- Essent Guaranty, Inc.,
- Genworth Mortgage Insurance Corporation,
- National Mortgage Insurance Corporation, and
- Radian Guaranty Inc.
The private mortgage insurance industry is highly competitive
and is expected to remain so. We believe that we currently compete
with other private mortgage insurers based on pricing, underwriting
requirements, financial strength (including based on credit or
financial strength ratings), customer relationships, name
recognition, reputation, the strength of our management team and
field organization, the ancillary products and services provided to
lenders (including contract underwriting services), the depth of
our databases covering insured loans and the effective use of
technology and innovation in the delivery and servicing of our
mortgage insurance products.
Much of the competition in the industry has centered on pricing
practices which, in the last few years included:
(i) reductions in standard filed rates on borrower-paid
policies, (ii) use by certain competitors of a spectrum of filed
rates to allow for formulaic, risk-based pricing (commonly referred
to as "black-box" pricing); and (iii) use of customized rates
(discounted from published rates) on lender-paid, single premium
policies. The willingness of mortgage insurers to offer reduced
pricing (through filed or customized rates) has been met with an
increased demand from various lenders for reduced rate
products. There can be no assurance that pricing competition
will not intensify further, which could result in a decrease in our
new insurance written and/or returns.
In 2016 and the first quarter of 2017, approximately 5% and 4%,
respectively, of our new insurance written was for loans for which
one lender was the original insured. Our relationships with our
customers could be adversely affected by a variety of factors,
including if our premium rates are higher than those of our
competitors, our underwriting requirements result in our declining
to insure some of the loans originated by our customers, or our
insurance rescissions and curtailments affect the customer.
Substantially all of our insurance written since 2008 has been
for loans purchased by Fannie Mae and Freddie Mac (the "GSEs"). The
current private mortgage insurer eligibility requirements
("PMIERs") of the GSEs require a mortgage insurer to maintain a
minimum amount of assets to support its insured risk, as discussed
in our risk factor 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." The PMIERs do not require an
insurer to maintain minimum financial strength ratings; however,
our financial strength ratings can affect us in the following
ways:
- A downgrade in our financial strength ratings could result in
increased scrutiny of our financial condition by our customers,
potentially resulting in a decrease in the amount of our new
insurance written.
- Our ability to participate in the non-GSE mortgage market
(which has been limited since the financial crisis, but may grow in
the future), could depend on our ability to maintain and improve
our investment grade ratings for our mortgage 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 Moody's is Baa3 (with a
stable outlook) and from Standard & Poor's is BBB+ (with a
stable outlook).
- 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 utilizing
forms of credit enhancement other than traditional mortgage
insurance, including in the credit risk transfer offering 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." If we are unable
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 new insurance written could be negatively
affected.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance.
Alternatives to private mortgage insurance include:
- lenders using FHA, VA and other government mortgage insurance
programs,
- lenders and other investors holding mortgages in portfolio and
self-insuring,
- investors using risk mitigation and credit risk transfer
techniques other than private mortgage insurance, and
- lenders originating mortgages using piggyback structures to
avoid private mortgage insurance, such as a first mortgage with an
80% loan-to-value ratio and a second mortgage with a 10%, 15% or
20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20
loans, respectively) rather than a first mortgage with a 90%, 95%
or 100% loan-to-value ratio that has private mortgage
insurance.
Investors (including the GSEs) have used risk mitigation and
credit risk transfer techniques other than private mortgage
insurance, such as obtaining insurance from non-mortgage insurers,
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; using other
risk mitigation techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting credit risk
without credit enhancement. Although the risk mitigation and credit
risk transfer techniques used by the GSEs in the past several years
have not displaced primary mortgage insurance, we cannot predict
the impact of future transactions. In the second half of 2016, the
GSEs each launched a new credit risk transfer offering that
involved forward credit insurance policies written by a panel of
mortgage insurance company affiliates, including an affiliate of
MGIC. The policies provide additional coverage beyond the primary
mortgage insurance on 30-year fixed-rate mortgages. It is difficult
to predict the amount of risk that will be insured under such
transactions in the future. The amount of capital we have allocated
to this pilot program and the associated premiums are immaterial.
Future participation in credit risk transfers will need to be
evaluated based upon the terms offered and expected returns.
The FHA's share of the low down payment residential mortgages
that were subject to FHA, VA or primary private mortgage insurance
was an estimated 36.4% in 2016, compared to 40.4% in 2015 and 33.9%
in 2014. In the past ten years, the FHA's share has been as low as
17.2% in 2007 and as high as 70.8% in 2009. 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; 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 Fannie Mae or
Freddie Mac for securitization; and differences in policy terms,
such as the ability of a borrower to cancel insurance coverage
under certain circumstances. We cannot predict how the factors that
affect the FHA's share of new insurance written will change in the
future.
The VA's share of the low down payment residential mortgages
that were subject to FHA, VA or primary private mortgage insurance
was an estimated 27.3% in 2016, compared to 24.6% in 2015 and 25.4%
in 2014. The VA's 2016 market share was its highest in the past ten
years and its lowest market share in the past ten years was 5.4% in
2007. We believe that the VA's market share has generally been
increasing because the VA offers 100% LTV loans and charges a
one-time funding fee that can be included in the loan amount but no
additional monthly expense, and because of an increase in the
number of borrowers who are eligible for the VA's program.
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.
The GSEs' charters generally require credit enhancement for a
low down payment mortgage loan (a loan amount that exceeds 80% of a
home's value) in order for such loan to be eligible for purchase by
the GSEs. Lenders generally have used private mortgage insurance to
satisfy this credit enhancement requirement and low down payment
mortgages purchased by the GSEs generally are insured with private
mortgage insurance. As a result, the business practices of the GSEs
greatly impact our business and include:
- private mortgage insurer eligibility requirements of the GSEs
(for information about the financial requirements included in the
PMIERs, see our risk factor 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"),
- the level of private mortgage insurance coverage, subject to
the limitations of the GSEs' charters (which may be changed by
federal legislation), when private mortgage insurance is used as
the required credit enhancement on low down payment mortgages,
- the amount of loan level price adjustments and guaranty fees
(which result in higher costs to borrowers) that the GSEs assess on
loans that require private mortgage insurance,
- whether the GSEs influence the mortgage lender's selection of
the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection,
- the underwriting standards that determine which loans are
eligible for purchase by the GSEs, which can affect the quality of
the risk insured by the mortgage insurer and the availability of
mortgage loans,
- the terms on which mortgage insurance coverage can be canceled
before reaching the cancellation thresholds established by
law,
- the programs established by the GSEs intended to avoid or
mitigate loss on insured mortgages and the circumstances in which
mortgage servicers must implement such programs,
- the terms that the GSEs require to be included in mortgage
insurance policies for loans that they purchase,
- the terms on which the GSEs offer lenders relief on their
representations and warranties made at the time of sale of a loan
to the GSEs, which creates pressure on mortgage insurers to limit
their rescission rights to conform to such relief, and the extent
to which the GSEs intervene in mortgage insurers' rescission
practices or rescission settlement practices with lenders, and
- the maximum loan limits of the GSEs in comparison to those of
the FHA and other investors.
The Federal Housing Finance Agency ("FHFA") has been the
conservator of the GSEs since 2008 and has the authority to control
and direct their operations. The increased role that the federal
government has assumed in the residential housing finance system
through the GSE conservatorship may increase the likelihood that
the business practices of the GSEs change in ways that have a
material adverse effect on us and that the charters of the GSEs are
changed by new federal legislation. In the past, members of
Congress have introduced several bills intended to change the
business practices of the GSEs and the FHA; however, no legislation
has been enacted. The Administration has indicated that the
conservatorship of the GSEs should end; however, it is unclear
whether and when that would occur and how that would impact us. As
a result of the matters referred to above, it 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 or the impact of any such changes on our business. In
addition, the timing of the impact of any resulting changes on our
business is 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.
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.
We must comply with the PMIERs to be eligible to insure loans
purchased by the GSEs. 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" (generally only the
most liquid assets of an insurer) to equal or exceed its "Minimum
Required Assets" (which are based on an insurer's book and are
calculated from tables of factors with several risk dimensions and
are subject to a floor amount). Based on our interpretation of the
PMIERs, as of March 31, 2017, MGIC's Available Assets
totaled $4.7 billion, or $0.7 billion in excess of its Minimum Required
Assets. MGIC is in compliance with the PMIERs and eligible to
insure loans purchased by the GSEs.
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. Factors that may negatively impact
MGIC's ability to continue to comply with the financial
requirements of the PMIERs include the following:
- The GSEs could make the PMIERs more onerous in the future; in
this regard, the PMIERs provide that the tables of 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 will provide
notice 180 days prior to the effective date of table updates. In
addition, the GSEs may amend the PMIERs at any time.
- The GSEs may reduce the amount 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 our risk factor titled
"The mix of business we write affects our Minimum Required
Assets under the PMIERs, our premium yields and the likelihood of
losses occurring."
- Our future operating results may be negatively impacted by the
matters discussed in the rest of these 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, our
reinsurance transactions mitigate the negative effect of the PMIERs
on our returns. In this regard, see the second bullet point
above.
The benefit of our net operating loss carryforwards may
become substantially limited.
As of March 31, 2017, we had
approximately $1.3 billion of net
operating losses for tax purposes that we can use in certain
circumstances to offset future taxable income and thus reduce our
federal income tax liability. Any unutilized carryforwards are
scheduled to expire at the end of tax years 2030 through 2033. Our
ability to utilize these net operating losses to offset future
taxable income may be significantly limited if we experience an
"ownership change" as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). In general, an
ownership change will occur if there is a cumulative change in our
ownership by "5-percent shareholders" (as defined in the Code) that
exceeds 50 percentage points over a rolling three-year period. A
corporation that experiences an ownership change will generally be
subject to an annual limitation on the corporation's subsequent use
of net operating loss carryovers that arose from pre-ownership
change periods and use of losses that are subsequently recognized
with respect to assets that had a built-in-loss on the date of the
ownership change. The amount of the annual limitation generally
equals the fair value of the corporation immediately before the
ownership change multiplied by the long-term tax-exempt interest
rate (subject to certain adjustments). To the extent that the
limitation in a post-ownership-change year is not fully utilized,
the amount of the limitation for the succeeding year will be
increased.
While we have adopted our Amended and Restated Rights Agreement
to minimize the likelihood of transactions in our stock resulting
in an ownership change, future issuances of equity-linked
securities or transactions in our stock and equity-linked
securities that may not be within our control may cause us to
experience an ownership change. If we experience an ownership
change, we may not be able to fully utilize our net operating
losses, resulting in additional income taxes and a reduction in our
shareholders' equity.
As of March 31, 2017, our deferred
tax asset is recorded at $552.5
million, which relates primarily to the future tax effects
of our prior year net operating losses expected to be carried
forward to offset future taxable income. A decrease in the federal
statutory income tax rate will result in a one-time reduction in
the amount at which our deferred tax asset is recorded, thereby
reducing our net income and book value in that period; however,
such a decrease will also reduce our effective income tax rate,
thereby increasing net income in future periods.
We are involved in legal proceedings and are subject to
the risk of additional legal proceedings in the future.
Before paying an insurance claim, we review the loan and
servicing files to determine the appropriateness of the claim
amount. When reviewing the files, we may determine that we have the
right to rescind coverage on the loan. In our SEC reports, we refer
to insurance rescissions and denials of claims collectively as
"rescissions" and variations of that term. In addition, all of our
insurance policies provide that we can reduce or deny a claim if
the servicer did not comply with its obligations under our
insurance policy. We call such reduction of claims "curtailments."
In recent quarters, an immaterial percentage of claims received in
a quarter have been resolved by rescissions. In each of 2016
and the first quarter of 2017, curtailments reduced our average
claim paid by approximately 5.5%.
Our loss reserving methodology incorporates our estimates of
future rescissions, curtailments, and reversals of rescissions and
curtailments. A variance between ultimate actual rescission,
curtailment and reversal rates and our estimates, as a result of
the outcome of litigation, settlements or other factors, could
materially affect our losses.
When the insured disputes our right to rescind coverage or
curtail claims, we generally engage in discussions in an attempt to
settle the dispute. If we are unable to reach a settlement,
the outcome of a dispute ultimately would be determined by legal
proceedings.
Under ASC 450-20, until a liability associated with settlement
discussions or legal proceedings becomes probable and can be
reasonably estimated, we consider our claim payment or rescission
resolved for financial reporting purposes and do not accrue an
estimated loss. Where we have determined that a loss is probable
and can be reasonably estimated, we have recorded our best estimate
of our probable loss. If we are not able to implement settlements
we consider probable, we intend to defend MGIC vigorously against
any related legal proceedings.
In addition to matters for which we have recorded a probable
loss, we are involved in other discussions and/or proceedings with
insureds with respect to our claims paying practices. Although it
is reasonably possible that when these matters are resolved we will
not prevail in all cases, we are unable to make a reasonable
estimate or range of estimates of the potential liability. We
estimate the maximum exposure associated with matters where a loss
is reasonably possible to be approximately $306 million, although we believe (but can give
no assurance that) we will ultimately resolve these matters for
significantly less than this amount. This estimate of our maximum
exposure does not include interest or consequential or exemplary
damages.
Mortgage insurers, including MGIC, have been involved in
litigation and regulatory actions related to alleged violations of
the anti-referral fee provisions of the Real Estate Settlement
Procedures Act, which is commonly known as RESPA, and the notice
provisions of the Fair Credit Reporting Act, which is commonly
known as FCRA. While these proceedings in the aggregate have
not resulted in material liability for MGIC, there can be no
assurance that the outcome of future proceedings, if any, under
these laws would not have a material adverse affect on us. In
addition, various regulators, including the CFPB, state insurance
commissioners and state attorneys general may bring other actions
seeking various forms of relief in connection with alleged
violations of RESPA. The insurance law provisions of many states
prohibit paying for the referral of insurance business and provide
various mechanisms to enforce this prohibition. While we believe
our practices are in conformity with applicable laws and
regulations, it is not possible to predict the eventual scope,
duration or outcome of any such reviews or investigations nor is it
possible to predict their effect on us or the mortgage insurance
industry.
In addition to the matters described above, we are involved in
other legal proceedings in the ordinary course of business. In our
opinion, based on the facts known at this time, the ultimate
resolution of these ordinary course legal proceedings will not have
a material adverse effect on our financial position or results of
operations.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive, detailed regulation by state
insurance departments. These regulations are principally designed
for the protection of our insured policyholders, rather than for
the benefit of investors. Although their scope varies, state
insurance laws generally grant broad supervisory powers to agencies
or officials to examine insurance companies and enforce rules or
exercise discretion affecting almost every significant aspect of
the insurance business. State insurance regulatory authorities
could take actions, including changes in capital requirements, that
could have a material adverse effect on us. For more information
about state capital requirements, see our risk factor titled
"State capital requirements may prevent us from continuing to
write new insurance on an uninterrupted basis." To the
extent that we are construed to make independent credit decisions
in connection with our contract underwriting activities, we also
could be subject to increased regulatory requirements under the
Equal Credit Opportunity Act, commonly known as ECOA, the FCRA, and
other laws. For more details about the various ways in which our
subsidiaries are regulated, see "Regulation" in Item 1 of our
Annual Report on Form 10-K filed with the SEC on February 21, 2017. In addition to regulation by
state insurance regulators, the CFPB may issue additional rules or
regulations, which may materially affect our business.
In December 2013, the U.S.
Treasury Department's Federal Insurance Office released a report
that calls for federal standards and oversight for mortgage
insurers to be developed and implemented. It is uncertain what form
the standards and oversight will take and when they will become
effective.
Resolution of our dispute with the Internal Revenue
Service could adversely affect us.
The Internal Revenue Service ("IRS") completed examinations of
our federal income tax returns for the years 2000 through 2007 and
issued proposed assessments for taxes, interest and penalties
related to our treatment of the flow-through income and loss from
an investment in a portfolio of residual interests of Real Estate
Mortgage Investment Conduits ("REMICs"). The IRS indicated that it
did not believe that, for various reasons, we had established
sufficient tax basis in the REMIC residual interests to deduct the
losses from taxable income. We appealed these assessments within
the IRS and in August 2010, we
reached a tentative settlement agreement with the IRS which was not
finalized.
In 2014, we received Notices of Deficiency (commonly referred to
as "90 day letters") covering the 2000-2007 tax years. The Notices
of Deficiency reflect taxes and penalties related to the REMIC
matters of $197.5 million and at
March 31, 2017, there would also be
interest related to these matters of approximately $191.2 million. In 2007, we made a payment of
$65.2 million to the United States
Department of the Treasury which will reduce any amounts we would
ultimately owe. The Notices of Deficiency also reflect additional
amounts due of $261.4 million, which
are primarily associated with the disallowance of the carryback of
the 2009 net operating loss to the 2004-2007 tax years. We believe
the IRS included the carryback adjustments as a precaution to keep
open the statute of limitations on collection of the tax that was
refunded when this loss was carried back, and not because the IRS
actually intends to disallow the carryback permanently. Depending
on the outcome of this matter, additional state income taxes and
state interest may become due when a final resolution is reached.
As of March 31, 2017, those state
taxes and interest would approximate $80.9
million. In addition, there could also be state tax
penalties. Our total amount of unrecognized tax benefits as of
March 31, 2017 is $139.9 million, which represents the tax benefits
generated by the REMIC portfolio included in our tax returns that
we have not taken benefit for in our financial statements,
including any related interest.
We filed a petition with the U.S. Tax Court contesting most of
the IRS' proposed adjustments 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. In January
2017, the parties informed the Tax Court that they had
reached a basis for settlement of the major issues in the case. Any
agreed settlement terms will ultimately 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 $27.2
million in the first quarter of 2017.
Should a settlement not be completed, ongoing litigation to
resolve our dispute with the IRS could be lengthy and costly in
terms of legal fees and related expenses. We would need to make
further adjustments, which could be material, to our tax provision
and liabilities if our view of the probability of success in this
matter changes, and the ultimate resolution of this matter could
have a material negative impact on our effective tax rate, results
of operations, cash flows, available assets and statutory capital.
In this regard, see 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 "State
capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis."
Because we establish loss reserves only upon a loan
default 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.
In accordance with accounting principles generally accepted in
the United States, commonly
referred to as GAAP, we establish reserves for insurance losses and
loss adjustment expenses only when notices of default on insured
mortgage loans are received and for loans we estimate are in
default but for which notices of default have not yet been reported
to us by the servicers (this is often referred to as "IBNR").
Because our reserving method does not take account of losses that
could occur from loans that are not delinquent, such losses are not
reflected in our financial statements, except in the case where a
premium deficiency exists. As a result, future losses on loans that
are not currently delinquent may have a material impact on future
results as such losses emerge.
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially different than our
loss reserves.
When we establish reserves, we estimate the ultimate loss on
delinquent loans using estimated claim rates and claim amounts. The
estimated claim rates and claim amounts represent our best
estimates of what we will actually pay on the loans in default as
of the reserve date and incorporate anticipated mitigation from
rescissions and curtailments. The establishment of loss reserves is
subject to inherent uncertainty and requires judgment by
management. The actual amount of the claim payments may be
substantially different than our loss reserve estimates. Our
estimates could be affected by several factors, including a change
in regional or national economic conditions, and a change in the
length of time loans are delinquent before claims are received. The
change in conditions may include changes in unemployment, affecting
borrowers' income and thus their ability to make mortgage payments,
and changes in housing values, which may affect borrower
willingness to continue to make mortgage payments when the value of
the home is below the mortgage balance. Changes to our estimates
could have a material impact on our future results, even in a
stable economic environment. In addition, historically, losses
incurred have followed a seasonal trend in which the second half of
the year has weaker credit performance than the first half, with
higher new default notice activity and a lower cure rate.
We rely on our management team and our business could be
harmed if we are unable to retain qualified personnel or
successfully develop and/or recruit their replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our management team and
other key personnel. The unexpected departure of key personnel
could adversely affect the conduct of our business. In such event,
we would be required to obtain other personnel to manage and
operate our business. In addition, we will be required to replace
the knowledge and expertise of our aging workforce as our workers
retire. In either case, there can be no assurance that we would be
able to develop or recruit suitable replacements for the departing
individuals; that replacements could be hired, if necessary, on
terms that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We currently have
not entered into any employment agreements with our officers or key
personnel. Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a properly
skilled and experienced workforce, our costs, including
productivity costs and costs to replace employees may increase, and
this could negatively impact our earnings.
Loan modification and other similar programs may not
continue to provide substantial benefits to us.
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 the Home Affordable Modification Program
("HAMP"), which expired at the end of 2016, and the Home Affordable
Refinance Program ("HARP"), which is scheduled to expire at the end
of September 2017. The GSEs have
introduced the "Flex Modification" program to replace HAMP
effective in October 2017. Until it
becomes effective, loan servicers must still evaluate borrowers for
other GSE modification programs.
During 2016 and the first quarter of 2017, we were notified of
modifications that cured delinquencies that had they become paid
claims would have resulted in approximately $0.5 billion and $0.1
billion, respectively, of estimated claim payments. These
levels are down from a high of $3.2
billion in 2010.
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.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that we write could
decline.
The factors that affect the volume of low down payment mortgage
originations include:
- restrictions on mortgage credit due to more stringent
underwriting standards, liquidity issues or risk-retention and/or
capital requirements affecting lenders,
- the level of home mortgage interest rates and the deductibility
of mortgage interest or mortgage insurance premiums for income tax
purposes,
- the health of the domestic economy as well as conditions in
regional and local economies and the level of consumer
confidence,
- housing affordability,
- new and existing housing availability,
- the rate of household formation, which is influenced, in part,
by population and immigration trends,
- the rate of home price appreciation, which in times of heavy
refinancing can affect whether refinanced loans have loan-to-value
ratios that require private mortgage insurance, and
- government housing policy encouraging loans to first-time
homebuyers.
A decline in the volume of low down payment home mortgage
originations could decrease demand for mortgage insurance and
decrease our new insurance written. For other factors that could
decrease the demand for mortgage insurance, see our risk factor
titled "The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance."
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"). The "policyholder position" of a mortgage insurer
is its net worth or surplus, contingency reserve and a portion of
the reserves for unearned premiums.
At March 31, 2017, MGIC's
preliminary risk-to-capital ratio was 9.9 to 1, below the maximum
allowed by the jurisdictions with State Capital Requirements, and
its preliminary policyholder position was $1.7 billion above the required MPP of
$1.1 billion. In calculating our
risk-to-capital ratio and MPP, we are allowed full credit for the
risk ceded under our reinsurance transactions with a group of
unaffiliated reinsurers. It is possible that under the revised
State Capital Requirements discussed below, MGIC will not be
allowed full credit for the risk ceded to the reinsurers. If MGIC
is not allowed an agreed level of credit under either the State
Capital Requirements or the PMIERs, MGIC may terminate the
reinsurance transactions, without penalty. At this time, we expect
MGIC to continue to comply with the current State Capital
Requirements; however, you should read the rest of these risk
factors for information about matters that could negatively affect
such compliance.
At March 31, 2017, the preliminary
risk-to-capital ratio of our combined insurance operations (which
includes a reinsurance affiliate) was 11.6 to 1. Reinsurance
transactions with our affiliate permit MGIC to write insurance with
a higher coverage percentage than it could on its own under certain
state-specific requirements. A higher risk-to-capital ratio on a
combined basis may indicate that, in order for MGIC to continue to
utilize reinsurance arrangements with its reinsurance affiliate,
additional capital contributions to the affiliate could be
needed.
The NAIC plans to revise the minimum capital and surplus
requirements for mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators
released an exposure draft of a risk-based capital framework to
establish capital requirements for mortgage insurers, although no
date has been established by which the NAIC must propose revisions
to the capital requirements. We continue to evaluate the impact of
the framework contained in the exposure draft, including the
potential impact of certain items that have not yet been completely
addressed by the framework which include: the treatment of ceded
risk, minimum capital floors, and action level triggers. Currently
we believe that the PMIERs contain the more restrictive capital
requirements in most circumstances.
While MGIC currently meets the State Capital Requirements of
Wisconsin and all other
jurisdictions, it could be prevented from writing new business in
the future in all jurisdictions if it fails to meet the State
Capital Requirements of Wisconsin,
or it could be prevented from writing new business in a particular
jurisdiction if it fails to meet the State Capital Requirements of
that jurisdiction, and in each case MGIC does not obtain a waiver
of such requirements. It is possible that regulatory action by one
or more jurisdictions, including those that do not have specific
State Capital Requirements, may prevent MGIC from continuing to
write new insurance in such jurisdictions. If we are unable to
write business in all jurisdictions, lenders may be unwilling to
procure insurance from us anywhere. In addition, a lender's
assessment of the future 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. While we believe MGIC has
sufficient claims paying resources to meet its claim obligations on
its insurance in force on a timely basis, you should read the rest
of these risk factors for information about matters that could
negatively affect MGIC's claims paying resources.
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.
Losses result from events that reduce a borrower's ability or
willingness to continue to make mortgage payments, such as
unemployment, health issues, family status, and whether the home of
a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of
the sale. In general, favorable economic conditions reduce the
likelihood that borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of homes, thereby
reducing and in some cases even eliminating a loss from a mortgage
default. A deterioration in economic conditions, including an
increase in unemployment, generally increases the likelihood that
borrowers will not have sufficient income to pay their mortgages
and can also adversely affect housing values, which in turn can
influence the willingness of borrowers with sufficient resources to
make mortgage payments to do so when the mortgage balance exceeds
the value of the home. Housing values may decline even absent a
deterioration in economic conditions due to declines in demand for
homes, which in turn may result from changes in buyers' perceptions
of the potential for future appreciation, restrictions on and the
cost of mortgage credit due to more stringent underwriting
standards, higher interest rates generally, changes to the
deductibility of mortgage interest or mortgage insurance premiums
for income tax purposes, decreases in the rate of household
formations, or other factors. Changes in housing values and
unemployment levels are inherently difficult to forecast given the
uncertainty in the current market environment, including
uncertainty about the effect of actions the federal government has
taken and may take with respect to tax policies, mortgage finance
programs and policies, and housing finance reform.
The mix of business we write affects our Minimum Required
Assets under the PMIERs, our premium yields and the likelihood of
losses occurring.
The 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 loan-to-value ratio, credit score,
vintage, 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 new insurance written, or if our mix
of business changes to include loans with higher loan-to-value
ratios or lower FICO scores, for example, or if we insure a higher
percentage of loans under lender-paid mortgage insurance policies,
all other things equal, we will be required to hold more Available
Assets in order to maintain GSE eligibility.
The minimum capital required by the risk-based capital framework
contained in the exposure draft released by the NAIC in
May 2016 would be, in part, a
function of certain loan and economic factors, including property
location, loan-to-value ratio and credit score; general
underwriting quality in the market at the time of loan origination;
the age of the loan; and the premium rate we charge. Depending on
the provisions of the capital requirements when they are released
in final form and become effective, our mix of business may affect
the minimum capital we are required to hold under the new
framework.
Beginning in 2014, we have increased the percentage of our
business from lender-paid single premium policies. 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.
We have in place quota share reinsurance transactions with a
group of unaffiliated reinsurers that cover most of our insurance
written from 2013 through 2017, and a portion of our insurance
written prior to 2013. 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 net cost of reinsurance, with respect to a covered loan, is 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 loan 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 will vary
from period to period, depending on the level of ceded losses.
In addition to the effect of reinsurance on our premiums, we
expect a modest decline in our premium yield resulting from the
premium rates themselves: the books we wrote before 2009, which
have a higher average premium rate than subsequent books, are
expected to continue to decline as a percentage of the insurance in
force; and the average premium rate on these books is also expected
to decline as the premium rates reset to lower levels at the time
the loans reach the ten-year anniversary of their initial coverage
date. However, for loans that have utilized HARP, the initial
ten-year period was reset to begin as of the date of the HARP
transaction. As of March 31, 2017,
approximately 4% and 1% of our total primary insurance in force was
written in 2007 and 2008, respectively, has not been refinanced
under HARP and is subject to a reset after ten years.
The circumstances in which we are entitled to rescind coverage
have narrowed for insurance we have written in recent years. During
the second quarter of 2012, we began writing a portion of our new
insurance under an endorsement to our then existing master policy
(the "Gold Cert Endorsement"), which limited our ability to rescind
coverage compared to that master policy. To comply with
requirements of the GSEs, we introduced our current master policy
in 2014. Our rescission rights under our current master policy are
comparable to those under our previous master policy, as modified
by the Gold Cert Endorsement, but may be further narrowed if the
GSEs permit modifications to them. Our current master policy is
filed as Exhibit 99.19 to our quarterly report on Form 10-Q for the
quarter ended September 30, 2014
(filed with the SEC on November 7,
2014). All of our primary new insurance on loans with
mortgage insurance application dates on or after October 1, 2014, was written under our current
master policy. As of March 31, 2017,
approximately 65% of our flow, primary insurance in force was
written under our Gold Cert Endorsement or our current master
policy.
From time to time, in response to market conditions, we change
the types of loans that we insure and the requirements under which
we insure them. We also change our underwriting guidelines, in part
through aligning some of them with Fannie Mae and Freddie Mac for
loans that receive and are processed in accordance with certain
approval recommendations from a GSE automated underwriting system.
As a result of changes to our underwriting guidelines and
requirements and other factors, our business written beginning in
the second half of 2013 is expected to have a somewhat higher claim
incidence than business written in 2009 through the first half of
2013. However, we believe this business presents an acceptable
level of risk. Our underwriting requirements are available on our
website at http://www.mgic.com/underwriting/index.html. We monitor
the competitive landscape and will make adjustments to our pricing
and underwriting guidelines as warranted. We also make exceptions
to our underwriting requirements on a loan-by-loan basis and for
certain customer programs. Together, the number of loans for which
exceptions were made accounted for fewer than 2% of the loans we
insured in each of 2016 and the first quarter of 2017.
Even when housing values are stable or rising, mortgages with
certain characteristics have higher probabilities of claims. These
characteristics include loans with higher loan-to-value ratios,
lower FICO scores, limited underwriting, including limited borrower
documentation, or higher total debt-to-income ratios, as well as
loans having combinations of higher risk factors. As of
March 31, 2017, approximately 14.2%
of our primary risk in force consisted of loans with loan-to-value
ratios greater than 95%, 3.6% had FICO scores below 620, and 3.5%
had limited underwriting, including limited borrower documentation,
each attribute as determined at the time of loan origination. A
material number of these loans were originated in 2005 - 2007 or
the first half of 2008. For information about our classification of
loans by FICO score and documentation, see footnotes (6) and (7) to
the Characteristics of Primary Risk in Force table under "Business
- Our Products and Services" in Item 1 of our Annual Report on
Form 10-K filed with the SEC on February 21,
2017.
As of March 31, 2017,
approximately 2% of our primary risk in force consisted of
adjustable rate mortgages in which the initial interest rate may be
adjusted during the five years after the mortgage closing ("ARMs").
We classify as fixed rate loans adjustable rate mortgages in which
the initial interest rate is fixed during the five years after the
mortgage closing. If interest rates should rise between the time of
origination of such loans and when their interest rates may be
reset, claims on ARMs and adjustable rate mortgages whose interest
rates may only be adjusted after five years would be substantially
higher than for fixed rate loans. In addition, we have insured
"interest-only" loans, which may also be ARMs, and loans with
negative amortization features, such as pay option ARMs. We believe
claim rates on these loans will be substantially higher than on
loans without scheduled payment increases that are made to
borrowers of comparable credit quality.
If state or federal regulations or statutes are changed in ways
that ease mortgage lending standards and/or requirements, 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 debt to income ratios.
Lenders could pressure mortgage insurers to insure such loans.
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 even under
our current underwriting requirements. We do, however, believe that
our insurance written beginning in the second half of 2008 will
generate underwriting profits.
The premiums we charge may not be adequate to compensate
us for our liabilities for losses and as a result any inadequacy
could materially affect our financial condition and results of
operations.
We set premiums at the time a policy is issued based on our
expectations regarding likely performance of the insured risks over
the long-term. Our premiums are subject to approval by state
regulatory agencies, which can delay or limit our ability to
increase our premiums. Generally, we cannot cancel mortgage
insurance coverage or adjust renewal premiums during the life of a
mortgage insurance policy. As a result, higher than anticipated
claims generally cannot be offset by premium increases on policies
in force or mitigated by our non-renewal or cancellation of
insurance coverage. The premiums we charge, and the associated
investment income, may not be adequate to compensate us for the
risks and costs associated with the insurance coverage provided to
customers. An increase in the number or size of claims, compared to
what we anticipate, could adversely affect our results of
operations or financial condition. Our premium rates are also based
in part on the amount of capital we are required to hold against
the insured risk. If the amount of capital we are required to hold
increases from the amount we were required to hold when a policy
was written, we cannot adjust premiums to compensate for this and
our returns may be lower than we assumed.
The losses we have incurred on our 2005-2008 books have exceeded
our premiums from those books. Our current expectation is that the
incurred losses from those books, although declining, will continue
to generate a material portion of our total incurred losses for a
number of years. The ultimate amount of these losses will depend in
part on general economic conditions, including unemployment, and
the direction of home prices.
We are susceptible to disruptions in the servicing of
mortgage loans that we insure.
We depend on reliable, consistent third-party servicing of the
loans that we insure. Over the last several years, the mortgage
loan servicing industry has experienced consolidation and an
increase in the number of specialty servicers servicing delinquent
loans. The resulting change in the composition of servicers could
lead to disruptions in the servicing of mortgage loans covered by
our insurance policies. Further changes in the servicing industry
resulting in the transfer of servicing could cause a disruption in
the servicing of delinquent loans which could reduce servicers'
ability to undertake mitigation efforts that could help limit our
losses. Future housing market conditions could lead to additional
increases in delinquencies and transfers of servicing.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the length of time
that our policies remain in force.
The premium from a single premium policy is collected upfront
and generally earned over the estimated life of the policy. In
contrast, premiums from a monthly premium policy are received and
earned each month over the life of the policy. In each year, most
of our premiums received are from insurance that has been written
in prior years. As a result, the length of time insurance remains
in force, which is also generally referred to as persistency, is a
significant determinant of our revenues. Future premiums on our
monthly premium policies in force represent a material portion of
our claims paying resources and a low persistency rate will reduce
those future premiums. In contrast, a higher than expected
persistency rate will decrease the profitability from single
premium policies because they will remain in force longer than was
estimated when the policies were written.
The monthly premium policies for the substantial majority of
loans we insured provides that, for the first ten years of the
policy, the premium is determined by the product of the premium
rate and the initial loan balance; thereafter, a lower premium rate
is applied to the initial loan balance. The initial ten-year period
is reset when the loan is refinanced under HARP. The premiums on
many of the policies in our 2006 book that were not refinanced
under HARP reset in 2016. As of March 31,
2017, approximately 4% and 1% of our total primary insurance
in force was written in 2007 and 2008, respectively, has not been
refinanced under HARP, and is subject to a rate reset after ten
years.
Our persistency rate was 76.9% at March
31, 2017, 76.9% at December 31,
2016 and 79.7% at December 31,
2015. 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.
Our persistency rate is primarily affected by the level of
current mortgage interest rates compared to the mortgage coupon
rates on our insurance in force, which affects the vulnerability of
the insurance in force to refinancing. Our persistency rate is also
affected by mortgage insurance cancellation policies of mortgage
investors along with the current value of the homes underlying the
mortgages in the insurance in force.
Your ownership in our company may be diluted by additional
capital that we raise or if the holders of our outstanding
convertible debt convert that debt into shares of our common
stock.
As noted above under our risk factor 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,"
although we are currently in compliance with the requirements of
the PMIERs, there can be no assurance that we would not seek to
issue non-dilutive debt capital or to raise additional equity
capital to manage our capital position under the PMIERs or for
other purposes. Any future issuance of equity securities may dilute
your ownership interest in our company. In addition, the market
price of our common stock could decline as a result of sales of a
large number of shares or similar securities in the market or the
perception that such sales could occur.
At March 31, 2017, we had
outstanding $390 million principal
amount of 9% Convertible Junior Subordinated Debentures due in 2063
("9% Debentures") (of which approximately $133 million was purchased by and is held by
MGIC, and is eliminated on the consolidated balance sheet),
$145 million principal amount of 5%
Convertible Senior Notes due in 2017 ("5% Notes") and $208 million principal amount of 2% Convertible
Senior Notes due in 2020 ("2% Notes").
On March 21, 2017, the Company
issued an irrevocable redemption notice for all of the 2% Notes,
with a redemption date of April 21,
2017. Holders may convert their 2% Notes into shares of our
common stock at any time before the close of business on
April 20, 2017. Through April 18, 2017, holders of approximately
$185 million principal amount of the 2% Notes have elected to
convert their 2% Notes and no holders surrendered their notes for
redemption. Each $1,000 of 2% Notes
converted will result in a second quarter 2017 decrease in
liabilities and an increase in shareholders' equity of
approximately $987 (the carrying
value of those 2% Notes). There will be no gain or loss on the
conversions. Each $1,000 of 2%
Notes converted will result in the issuance of 143.8332 shares of
our common stock. Those shares were previously considered dilutive
securities in the Company's calculation of diluted share count and
their issuance will result in their being considered shares
outstanding.
The principal amount of the 9% Debentures is currently
convertible, at the holder's option, at an initial conversion rate,
which is subject to adjustment, of 74.0741 common shares per
$1,000 principal amount of
debentures. This represents an initial conversion price of
approximately $13.50 per share. We
have the right, and may elect, to defer interest payable under the
debentures in the future. If a holder elects to convert its
debentures, the interest that has been deferred on the debentures
being converted is also convertible into shares of our common
stock. The conversion rate for such deferred interest is based on
the average price that our shares traded at during a 5-day period
immediately prior to the election to convert the associated
debentures. We may elect to pay cash for some or all of the shares
issuable upon a conversion of the debentures.
The 5% Notes are convertible, at the holder's option, at an
initial conversion rate, which is subject to adjustment, of 74.4186
shares per $1,000 principal amount at
any time prior to the maturity date. This represents an initial
conversion price of approximately $13.44 per share. We do not have the right to
defer interest on our 5% Notes.
On March 21, 2017, we entered into
a credit agreement with various lenders which provides for a
$175 million unsecured revolving
credit facility maturing on March 21,
2020. We borrowed $150 million under the facility to
fund a portion of the redemption price of the 2% Notes if holders
did not elect to convert their 2% Notes. As of April 17, 2017, we repaid the loan because most
of the holders had already elected to convert their notes.
For a discussion of the dilutive effects of our convertible
securities on our earnings per share, see Note 4 – "Earnings Per
Share" to our consolidated financial statements in our Annual
Report on Form 10-K filed with the SEC on February 21, 2017. We currently have no plans to
repurchase common stock but regularly consider appropriate uses for
resources of our holding company. In addition, we have in the past,
and may in the future , purchase our debt securities.
Our holding company debt obligations materially exceed our
holding company cash and investments.
At March 31, 2017, we had
approximately $451 million in cash
and investments at our holding company and our holding company's
debt obligations were $1,318 million
in aggregate principal amount, consisting of $145 million of 5% Notes, $208 million of 2% Notes, $425 million of 5.75% Senior Notes due in 2023
("5.75% Notes"), $390 million of 9%
Debentures (of which approximately $133
million was purchased by and is held by MGIC, and is
eliminated on the consolidated balance sheet) and $150 million
under the revolving credit agreement. As noted above, as of
April 17, 2017, we repaid the
borrowing under the revolving credit agreement, using approximately
$150 million of holding company cash
and investments, and through April 18,
2017, holders of approximately $185
million of the 2% Notes have elected to convert their notes
into our common stock. On May 1,
2017, we expect to repay our 5% Notes and pay interest due,
using approximately $149 million of
holding company cash and investments. Annual debt service on the
5.75% Notes and 9% Debentures outstanding as of March 31, 2017, is approximately $60 million (of which approximately $12 million will be paid to MGIC and will be
eliminated on the consolidated statement of operations).
The Convertible Senior Notes, Senior Notes, Convertible Junior
Subordinated Debentures and borrowings under the revolving credit
agreement are obligations of our holding company, MGIC Investment
Corporation, and not of its subsidiaries. The payment of dividends
from our insurance subsidiaries which, other than investment income
and raising capital in the public markets, is the principal source
of our holding company cash inflow, is restricted by insurance
regulation. MGIC is the principal source of dividend-paying
capacity. In 2016, MGIC paid a total of $64 million in dividends to our holding company,
its first dividends since 2008, and we expect MGIC to continue to
pay quarterly dividends. OCI authorization is sought before MGIC
pays dividends and MGIC paid a dividend of $20 million to our holding company in the first
quarter of 2017. If any additional capital contributions to our
subsidiaries were required, such contributions would decrease our
holding company cash and investments. As described in our Current
Report on Form 8-K filed on February 11,
2016, MGIC borrowed $155
million from the Federal Home Loan Bank of Chicago. This is an obligation of MGIC and not
of our holding company.
We could be adversely affected if personal information on
consumers that we maintain is improperly disclosed and our
information technology systems may become outdated and we may not
be able to make timely modifications to support our products and
services.
We rely on the efficient and uninterrupted operation of complex
information technology systems. All information technology systems
are potentially vulnerable to damage or interruption from a variety
of sources, including through the actions of third parties. Due to
our reliance on our information technology systems, their damage or
interruption could severely disrupt our operations, which could
have a material adverse effect on our business, business prospects
and results of operations. As part of our business, we maintain
large amounts of personal information on consumers. While we
believe we have appropriate information security policies and
systems to prevent unauthorized disclosure, there can be no
assurance that unauthorized disclosure, either through the actions
of third parties or employees, will not occur. Unauthorized
disclosure could adversely affect our reputation and expose us to
material claims for damages.
In addition, we are in the process of upgrading certain of our
information systems that have been in place for a number of years.
The implementation of these technological improvements is complex,
expensive and time consuming. If we fail to timely and successfully
implement the new technology systems, or if the systems do not
operate as expected, it could have an adverse impact on our
business, business prospects and results of operations.
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SOURCE MGIC Investment Corporation