NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2018
(Unaudited)
Note 1. Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”), is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans. MGIC Assurance Corporation (“MAC”), an insurance subsidiary of MGIC, provides insurance for certain mortgages under Fannie Mae and Freddie Mac (the “GSEs”) credit risk transfer programs and is a participant in the Fannie Mae Enterprise-Paid Mortgage Insurance pilot.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2017
included in our 2017 Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management, the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period may not be indicative of the results that may be expected for the year ending
December 31, 2018
.
Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. We operate under the Private Mortgage Insurer Eligibility Requirements ("PMIERs") of the GSEs that became effective December 31, 2015 and which have been amended from time to time. 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 of insurance in force, calculated from tables of factors with several risk dimensions and subject to a floor amount). Based on our interpretation of the PMIERs, as of
September 30, 2018
, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.
Reclassifications
Certain reclassifications to
2017
amounts have been made in the accompanying financial statements to conform to the
2018
presentation.
Subsequent events
We have considered subsequent events through the date of this filing. Refer to
Note 16 - “Subsequent Events”
for information regarding MGIC’s execution of a fully collateralized excess of loss reinsurance agreement.
MGIC Investment Corporation - Q3 2018 |
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Note 2. New Accounting Pronouncements
Accounting standards effective in 2018, or early adopted, and relevant to our financial statements
Table
2.1
shows the relevant amendments to accounting standards that we implemented for the year beginning January 1, 2018; none had a material impact on our consolidated financial statements or disclosures.
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Table
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2.1
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Standard / Interpretation
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Amended Standards
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Effective date
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ASC 718
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Compensation - Stock Compensation
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•
|
ASU 2017-09 - Scope of Modification Accounting
|
January 1, 2018
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ASC 310
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Receivables - Nonrefundable Fees and Other Costs
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•
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ASU 2017-08 - Premium Amortization on Purchased Callable Debt Securities
|
January 1, 2019
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ASC 715
|
Compensation - Retirement Benefits
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•
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ASU 2017-07 - Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
|
January 1, 2018
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ASC 825
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Financial Instruments - Overall
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•
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ASU 2016-01 - Recognition and Measurement of Financial Assets and Financial Liabilities
|
January 1, 2018
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Stock Compensation - Scope of Modification Accounting
In May 2017, the FASB issued updated guidance related to a change in the terms or conditions (modification) of a share-based award. The updated guidance provides that an entity should account for the effects of a modification unless the fair value and vesting conditions of the modified award and the classification of the award (equity or liability instrument) are the same as the original award immediately before the modification. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.
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◦
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Adoption impact: The adoption of this guidance had no impact on our consolidated financial statements or disclosures.
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Premium Amortization on Purchased Callable Debt Securities
In March 2017, the FASB issued updated guidance to amend the amortization period for certain purchased callable debt securities held at a premium, shortening the amortization period to the earliest call date. This updated guidance aligns with how callable debt securities, in the United States, are generally quoted, priced, and traded, which incorporates consideration of calls (also referred to as “yield-to-worst” pricing). The updated guidance is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, but allows for early adoption.
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◦
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Adoption impact: We adopted this guidance as of January 1, 2018 with no impact to our consolidated financial statements or disclosures as our accounting policy adhered to the updated guidance.
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Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance intended to improve the reporting of net benefit cost in the financial statements. The updated guidance requires that an employer report the service cost component of pension and post-retirement benefit costs in the same financial statement caption as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented in the statement of operations separately from the service cost component and outside a subtotal of income from operations, if one is presented. Previous guidance did not prescribe where the amount of net benefit cost should be presented in an employer’s statement of operations and did not require entities to disclose by line item the amount of net benefit cost that is included in the statement of operations. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods.
MGIC Investment Corporation - Q3 2018 |
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◦
|
Adoption impact: The adoption of this guidance had no impact on our consolidated financial statements or disclosures as the service cost component is reported in the same financial statement caption as other compensation costs and we do not present a subtotal of income outside of income from operations. The service cost component of our benefit plans is disclosed in
Note 10 - “Benefit Plans”
to our consolidated financial statements.
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Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. Further, the updated guidance clarifies that entities should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entities’ other deferred tax assets. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and requires recognition of a cumulative effect adjustment at adoption.
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◦
|
Adoption impact: The adoption of this guidance resulted in an immaterial cumulative effect adjustment to our 2018 beginning accumulated other comprehensive (loss) income and retained earnings to recognize unrealized gains on equity investments. At December 31, 2017, equity investments were classified as available-for-sale on the consolidated balance sheet. Upon adoption, the updated guidance eliminated the available-for-sale balance sheet classification for equity securities.
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In February 2018, the FASB issued a separate update for technical corrections and improvements to clarify certain aspects of the guidance described above. This update clarifies the presentation of investments in, among other things, Federal Home Loan Bank stock and prohibits those investments from being shown with equity securities.
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◦
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Adoption impact: At March 31, 2018, and periods subsequent, the value of our investment in Federal Home Loan Bank of Chicago (“FHLB”) stock, which is carried at cost, is presented within “Other invested assets” on our consolidated balance sheet.
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Prospective Accounting Standards
Table
2.2
shows the relevant new amendments to accounting standards, which are not yet effective or adopted.
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Table
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2.2
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Standard / Interpretation
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Effective date
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Amended Standards
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ASC 326
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Financial Instruments - Credit Losses
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•
|
ASU 2016-13 - Measurement of Credit Losses on Financial Instruments
|
January 1, 2020
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ASC 820
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Fair Value Measurement
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•
|
ASU 2018-13 - Changes to the Disclosure Requirements for Fair Value Measurements
|
January 1, 2020
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ASC 715
|
Compensation - Retirement Benefits
|
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•
|
ASU 2018-14 - Changes to the Disclosure Requirements for Defined Benefit Plans
|
January 1, 2021
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Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued updated guidance that requires immediate recognition of estimated credit losses expected to occur over the remaining life of many financial instruments. Entities will be required to utilize a current expected credit losses (“CECL”) methodology that incorporates their forecast of future
MGIC Investment Corporation - Q3 2018 |
14
economic conditions into their loss estimate unless such forecast is not reasonable and supportable, in which case the entity will revert to historical loss experience. Any allowance for CECL reduces the amortized cost basis of the financial instrument to the amount an entity expects to collect. Credit losses relating to available-for-sale fixed maturity securities are to be recorded through an allowance for credit losses, rather than a write-down of the asset, with the amount of the allowance limited to the amount by which fair value is less than amortized cost. In addition, the length of time a security has been in an unrealized loss position will no longer impact the determination of whether a credit loss exists. The updated guidance is not prescriptive about certain aspects of estimating expected credit losses, including the specific methodology to use, and therefore will require significant judgment in application. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption is permitted for annual and interim periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements, but do not expect it to have a material impact on our consolidated financial statements or disclosures.
Changes to the Disclosure Requirements for Fair Value Measurement
In August 2018, the FASB issued updated guidance that changes the disclosure requirements for fair value measurements. The updated guidance removed the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; the policy for timing of transfers between levels; and the valuation processes for Level 3 fair value measurements. The updated guidance clarifies that the measurement uncertainty disclosure is to communicate information about the uncertainty in measurements as of the reporting date. Further, the updated guidance will require disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The updated guidance is effective for annual periods beginning after December 15, 2019, including interim periods within those annual periods. Early adoption was permitted upon issuance of this update. An entity is permitted to early adopt any guidance that removed or modified disclosures upon issuance of this update and to delay adoption of the additional disclosures until its effective date. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
Changes to the Disclosure Requirements for Defined Benefit Plans
In August 2018, the FASB issued amendments to modify the disclosure requirements for defined benefit plans. The updated guidance removed the requirements to identify amounts that are expected to be reclassified out of accumulated other comprehensive income and recognized as components of net periodic benefit cost in the coming year and the effects of a one-percentage-point change in assumed health care cost trend rates on service and interest cost and on the postretirement benefit obligation. The updated guidance added disclosures for the weighted-average interest crediting rates for cash balance plans and other plans with interest crediting rates and explanations for significant gains and losses related to changes in the benefit obligation for the period. The updated guidance is effective for annual periods beginning after December 15, 2020. Early adoption is permitted. An entity should apply the amendments on a retrospective basis to all periods presented. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statement disclosures, but do not expect it to have a material impact.
MGIC Investment Corporation - Q3 2018 |
15
Note 3. Debt
Debt obligations
The par value of our long-term debt obligations and their aggregate carrying values as of
September 30, 2018
and
December 31, 2017
are presented in table
3.1
below.
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Table
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3.1
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Long-term debt obligations
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(In millions)
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September 30,
2018
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December 31,
2017
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FHLB Advance
|
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$
|
155.0
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$
|
155.0
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5.75% Senior Notes
|
|
425.0
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425.0
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9% Convertible Junior Subordinated Debentures
(1)
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|
256.9
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256.9
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Long-term debt, par value
|
|
836.9
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836.9
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Debt issuance costs
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(5.6
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)
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|
(6.5
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)
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Long-term debt, carrying value
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$
|
831.3
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$
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830.4
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(1)
|
Convertible at any time prior to maturity at the holder’s option, at an initial conversion rate, which is subject to adjustment, of
74.0741
shares per
$1,000
principal amount, representing an initial conversion price of approximately
$13.50
per share. If a holder elects to convert its debentures, deferred interest owed on the debentures being converted is also converted into shares of our common stock. The conversion rate for any deferred interest is based on the average price that our shares traded at during a
5
-day period immediately prior to the election to convert. In lieu of issuing shares of common stock upon conversion of the debentures, we may, at our option, make a cash payment to converting holders for all or some of the shares of our common stock otherwise issuable upon conversion.
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The
5.75%
Senior Notes,
9%
Convertible Junior Subordinated Debentures, and any amounts drawn on our revolving credit facility, are obligations of our holding company, MGIC Investment Corporation, and not of its subsidiaries. In addition to interest on amounts drawn, the unused portion of our revolving credit facility is subject to recurring commitment fees, which are reflected in interest payments. The Federal Home Loan Bank Advance (the “FHLB Advance”) is an obligation of MGIC.
Table
3.2
below presents interest payments on our debt obligations.
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Table
|
3.2
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Interest payments on debt obligations
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Nine Months Ended September 30,
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(In millions)
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2018
|
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2017
|
|
Revolving credit facility
|
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$
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0.5
|
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|
$
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0.5
|
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|
FHLB Advance
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2.3
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2.2
|
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|
5% Convertible Senior Notes
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—
|
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3.6
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|
|
2% Convertible Senior Notes
|
|
—
|
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|
2.1
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|
5.75% Senior Notes
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|
24.4
|
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|
25.1
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|
|
9% Convertible Junior Subordinated Debentures
|
|
11.6
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11.6
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Total interest payments
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$
|
38.8
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|
$
|
45.1
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MGIC Investment Corporation - Q3 2018 |
16
Note 4. Reinsurance
The reinsurance agreements to which we are a party, excluding captive agreements (which were immaterial), are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table
4.1
below.
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Table
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4.1
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Effect of Reinsurance
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|
Three Months Ended September 30,
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|
Nine Months Ended September 30,
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(In thousands)
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2018
|
|
2017
|
|
2018
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2017
|
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Premiums earned:
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|
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|
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|
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Direct
|
|
$
|
275,044
|
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|
$
|
268,709
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|
|
$
|
808,531
|
|
|
$
|
789,317
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|
Assumed
|
|
709
|
|
|
312
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|
936
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|
|
472
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|
|
Ceded
|
|
(25,327
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)
|
|
(31,938
|
)
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|
(79,970
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)
|
|
(92,467
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)
|
|
|
Net premiums earned
|
|
$
|
250,426
|
|
|
$
|
237,083
|
|
|
$
|
729,497
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|
|
$
|
697,322
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Losses incurred:
|
|
|
|
|
|
|
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|
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|
Direct
|
|
$
|
(2,081
|
)
|
|
$
|
35,313
|
|
|
$
|
12,642
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|
|
$
|
99,122
|
|
|
|
Assumed
|
|
55
|
|
|
(97
|
)
|
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45
|
|
|
69
|
|
|
|
Ceded
|
|
508
|
|
|
(5,469
|
)
|
|
(3,810
|
)
|
|
(14,486
|
)
|
|
|
Losses incurred, net
|
|
$
|
(1,518
|
)
|
|
$
|
29,747
|
|
|
$
|
8,877
|
|
|
$
|
84,705
|
|
Quota share reinsurance
We utilize quota share reinsurance to manage our exposure to losses resulting from our mortgage guaranty insurance policies and to provide reinsurance capital credit under the PMIERs.
Each of the reinsurers under our QSR Transactions has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both.
2018 QSR Transaction.
We entered into a QSR transaction with a group of unaffiliated reinsurers with an effective date of January 1, 2018 (“2018 QSR Transaction”), which provides coverage on eligible new business written in 2018. Under the 2018 QSR Transaction, we will cede losses incurred and premiums on or after the effective date through December 31, 2029, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021, and annually thereafter, for a fee, or under specified scenarios for
no
fee upon prior written notice, including if we will receive less than
90%
of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
The structure of the 2018 QSR Transaction is a
30%
quota share for all policies covered, with a
20%
ceding commission as well as a profit commission. Generally, under the 2018 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below
62%
.
2017 and 2015 QSR Transactions.
Our 2017 quota share reinsurance agreement (“2017 QSR Transaction”) provides coverage on eligible new business written January 1, 2017 through December 29, 2017. Under the 2017 QSR Transaction we cede losses incurred and premiums on or after the effective date through December 31, 2028, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2021 for a fee, or under specified scenarios for
no
fee upon prior written notice, including if we will receive less than
90%
of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
Our 2015 quota share reinsurance agreement (“2015 QSR Transaction”) provides coverage on eligible business written before 2017. Under the 2015 QSR Transaction cedes losses incurred and premiums through December 31, 2024, at which time the agreement expires. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or bi-annually thereafter, or under specified scenarios for
no
fee upon prior written notice, including if we will receive less than
90%
of the full credit amount under the PMIERs for the risk ceded in any required calculation period.
MGIC Investment Corporation - Q3 2018 |
17
The structure of both the 2017 QSR Transaction and 2015 QSR Transaction is a
30%
quota share for all policies covered, with a
20%
ceding commission as well as a profit commission. Generally, under the 2017 and 2015 QSR Transactions, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below
60%
.
Table
4.2
below presents a summary of our quota share reinsurance agreements, excluding captive agreements (which were immaterial), for the
three and nine
months ended
September 30,
2018
and
2017
.
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Table
|
4.2
|
|
|
|
|
|
|
|
|
|
Quota share reinsurance
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Ceded premiums written and earned, net of profit commission
(1)
|
|
$
|
25,248
|
|
|
$
|
30,880
|
|
|
$
|
79,716
|
|
|
$
|
88,692
|
|
|
|
Ceded losses incurred
|
|
(522
|
)
|
|
5,879
|
|
|
3,531
|
|
|
14,990
|
|
|
|
Ceding commissions
(2)
|
|
12,983
|
|
|
12,500
|
|
|
38,268
|
|
|
36,751
|
|
|
|
Profit commission
|
|
39,664
|
|
|
31,621
|
|
|
111,622
|
|
|
95,063
|
|
|
|
|
|
(1)
|
Under our QSR Transactions, premiums are ceded on an earned and received basis as defined in the agreements.
|
|
|
|
|
(2)
|
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
|
Under the terms of the QSR Transactions, ceded premiums, ceding commission and profit commission are settled net on a quarterly basis. The ceded premiums due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our QSR Transactions was
$33.1 million
as of
September 30, 2018
and
$39.3 million
as of
December 31, 2017
. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.
Excess of Loss reinsurance
Refer to
Note 16 - “Subsequent Events,”
for further information about our excess of loss reinsurance agreement entered into in October 2018. The excess of loss reinsurance agreement covers losses beginning August 1, 2018, but had no material impact on our consolidated financial statements as of and for the three and nine months ended September 30, 2018.
Note 5. Litigation and Contingencies
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. We refer to insurance rescissions and denials of claims collectively as “rescissions” and variations of that term. In addition, our insurance policies generally provide that we can reduce or deny a claim if the servicer did not comply with its obligations under our insurance policy. We call 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 2017 and the first nine months of 2018, curtailments reduced our average claim paid by approximately
5.6%
and
6.3%
, respectively.
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 may be determined by legal proceedings.
MGIC Investment Corporation - Q3 2018 |
18
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.
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
$286 million
. This estimate of maximum exposure is based upon currently available information and is subject to significant judgment, numerous assumptions and known and unknown uncertainties. The matters underlying the estimate of maximum exposure will change from time to time. 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.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. The underwriting remedy expense for 2017 and the first nine months of 2018 was immaterial to our consolidated financial statements.
In addition to the matters described above, we are involved in other legal proceedings in the ordinary course of business. In our opinion, based on the facts known at this time, the ultimate resolution of these ordinary course legal proceedings will not have a material adverse effect on our financial position or consolidated results of operations.
MGIC Investment Corporation - Q3 2018 |
19
Note 6. Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. We calculate diluted EPS using the treasury stock method and if-converted method. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if unvested RSUs result in the issuance of common stock. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our convertible debt instruments result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. During the three and nine months ended
September 30, 2018
, we had
9%
Debentures outstanding that could result in potentially issuable shares.
Table
6.1
reconciles the numerators and denominators used to calculate basic and diluted EPS.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
6.1
|
|
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands, except per share data)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Basic earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
181,900
|
|
|
$
|
120,027
|
|
|
$
|
512,351
|
|
|
$
|
328,447
|
|
|
|
Weighted average common shares outstanding - basic
|
|
362,180
|
|
|
370,586
|
|
|
367,190
|
|
|
359,613
|
|
|
|
Basic earnings per share
|
|
$
|
0.50
|
|
|
$
|
0.32
|
|
|
$
|
1.40
|
|
|
$
|
0.91
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
181,900
|
|
|
$
|
120,027
|
|
|
$
|
512,351
|
|
|
$
|
328,447
|
|
|
|
Interest expense, net of tax
(1)
:
|
|
|
|
|
|
|
|
|
|
|
2% Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
907
|
|
|
|
5% Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,709
|
|
|
|
9% Convertible Junior Subordinated Debentures
|
|
4,566
|
|
|
3,757
|
|
|
13,698
|
|
|
11,270
|
|
|
|
Diluted income available to common shareholders
|
|
$
|
186,466
|
|
|
$
|
123,784
|
|
|
$
|
526,049
|
|
|
$
|
342,333
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
362,180
|
|
|
370,586
|
|
|
367,190
|
|
|
359,613
|
|
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
Unvested RSUs
|
|
1,697
|
|
|
1,473
|
|
|
1,547
|
|
|
1,367
|
|
|
|
2% Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11,119
|
|
|
|
5% Convertible Senior Notes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,743
|
|
|
|
9% Convertible Junior Subordinated Debentures
|
|
19,028
|
|
|
19,028
|
|
|
19,028
|
|
|
19,028
|
|
|
|
Weighted average common shares outstanding - diluted
|
|
382,905
|
|
|
391,087
|
|
|
387,765
|
|
|
395,870
|
|
|
|
Diluted earnings per share
|
|
$
|
0.49
|
|
|
$
|
0.32
|
|
|
$
|
1.36
|
|
|
$
|
0.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The periods ended
September 30,
2018
and
2017
were tax-effected at a rate of 21% and
35%
, respectively.
|
MGIC Investment Corporation - Q3 2018 |
20
Note 7. Investments
Fixed income securities
The amortized cost, gross unrealized gains and losses, and fair value of investments in fixed income securities classified as available-for-sale at
September 30, 2018
and
December 31, 2017
are shown in tables
7.1a
and
7.1b
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.1a
|
|
|
|
|
|
|
|
|
|
Details of fixed income securities by category - current year
|
|
|
|
September 30, 2018
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized (Losses)
(1)
|
|
Fair Value
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
179,395
|
|
|
$
|
174
|
|
|
$
|
(3,353
|
)
|
|
$
|
176,216
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
1,738,417
|
|
|
17,797
|
|
|
(21,608
|
)
|
|
1,734,606
|
|
|
|
Corporate debt securities
|
|
2,296,218
|
|
|
1,152
|
|
|
(42,305
|
)
|
|
2,255,065
|
|
|
|
Asset backed securities (“ABS”)
|
|
71,481
|
|
|
—
|
|
|
(546
|
)
|
|
70,935
|
|
|
|
Residential mortgage backed securities (“RMBS”)
|
|
166,522
|
|
|
35
|
|
|
(11,594
|
)
|
|
154,963
|
|
|
|
Commercial mortgage backed securities (“CMBS”)
|
|
281,980
|
|
|
214
|
|
|
(11,974
|
)
|
|
270,220
|
|
|
|
Collateralized loan obligations (“CLO”)
|
|
307,998
|
|
|
67
|
|
|
(458
|
)
|
|
307,607
|
|
|
|
Total fixed income securities
|
|
5,042,011
|
|
|
19,439
|
|
|
(91,838
|
)
|
|
4,969,612
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.1b
|
|
|
|
|
|
|
|
|
|
Details of fixed income securities by category - prior year-end
|
|
|
|
December 31, 2017
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized (Losses)
(1)
|
|
Fair Value
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
179,850
|
|
|
$
|
274
|
|
|
$
|
(1,278
|
)
|
|
$
|
178,846
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
2,105,063
|
|
|
56,210
|
|
|
(8,749
|
)
|
|
2,152,524
|
|
|
|
Corporate debt securities
|
|
2,065,475
|
|
|
10,532
|
|
|
(9,169
|
)
|
|
2,066,838
|
|
|
|
ABS
|
|
4,925
|
|
|
—
|
|
|
(2
|
)
|
|
4,923
|
|
|
|
RMBS
|
|
189,153
|
|
|
60
|
|
|
(7,364
|
)
|
|
181,849
|
|
|
|
CMBS
|
|
301,014
|
|
|
1,204
|
|
|
(4,906
|
)
|
|
297,312
|
|
|
|
CLOs
|
|
100,798
|
|
|
304
|
|
|
(79
|
)
|
|
101,023
|
|
|
|
Total fixed income securities
|
|
4,946,278
|
|
|
68,584
|
|
|
(31,547
|
)
|
|
4,983,315
|
|
|
|
|
|
(1)
|
At
September 30, 2018
and
December 31, 2017
, there were no other-than-temporary impairment losses recorded in other comprehensive income.
|
We had
$13.4 million
and
$13.6 million
of investments at fair value on deposit with various states as of September 30, 2018 and December 31, 2017, respectively, due to regulatory requirements of those state insurance departments.
MGIC Investment Corporation - Q3 2018 |
21
The amortized cost and fair values of fixed income securities at
September 30, 2018
, by contractual maturity, are shown in table
7.2
below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.2
|
|
|
|
|
|
Fixed income securities maturity schedule
|
|
|
September 30, 2018
|
|
(In thousands)
|
|
Amortized Cost
|
|
Fair Value
|
|
|
Due in one year or less
|
|
$
|
511,087
|
|
|
$
|
509,952
|
|
|
|
Due after one year through five years
|
|
1,552,123
|
|
|
1,526,802
|
|
|
|
Due after five years through ten years
|
|
940,185
|
|
|
918,757
|
|
|
|
Due after ten years
|
|
1,210,635
|
|
|
1,210,376
|
|
|
|
|
|
$
|
4,214,030
|
|
|
$
|
4,165,887
|
|
|
|
|
|
|
|
|
|
|
ABS
|
|
71,481
|
|
|
70,935
|
|
|
|
RMBS
|
|
166,522
|
|
|
154,963
|
|
|
|
CMBS
|
|
281,980
|
|
|
270,220
|
|
|
|
CLOs
|
|
307,998
|
|
|
307,607
|
|
|
|
Total as of September 30, 2018
|
|
$
|
5,042,011
|
|
|
$
|
4,969,612
|
|
Proceeds from sales of fixed income securities classified as available-for-sale were
$338.9 million
and
$233.2 million
during the nine months ended
September 30, 2018
and
2017
, respectively. Gross gains of
$0.4 million
and
$0.9 million
and gross losses of
$3.3 million
and
$1.1 million
were realized on those sales during the nine months ended
September 30, 2018
and
2017
, respectively.
During the three and nine months ended September 30, 2018, we recorded other-than-temporary impairment (“OTTI”) losses of
$0.5 million
and
$1.8 million
, respectively, due to our intent to sell certain investments. During each of the
three and nine
months ended
September 30,
2017
, there were no OTTI losses recognized.
Equity securities
The cost and fair value of investments in equity securities at
September 30, 2018
and
December 31, 2017
are shown in tables
7.3a
and
7.3b
below. As described in
Note 2 - “New Accounting Pronouncements,”
under updated guidance regarding the “
Recognition and Measurement of Financial Assets and Financial Liabilities”
which
became effective on January 1, 2018, the
amount of our FHLB stock investment has been reclassified and presented in
“Other invested assets”
on our consolidated balance sheet as of September 30, 2018.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.3a
|
|
|
|
|
|
|
|
|
|
Details of equity security investments - current year
|
|
|
|
September 30, 2018
|
|
(In thousands)
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
|
Equity securities
|
|
$
|
4,134
|
|
|
$
|
3,667
|
|
|
$
|
(81
|
)
|
|
$
|
7,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.3b
|
|
|
|
|
|
|
|
|
|
Details of equity security investments - prior year-end
|
|
|
|
December 31, 2017
|
|
(In thousands)
|
|
Cost
|
|
Gross Gains
|
|
Gross Losses
|
|
Fair Value
|
|
Equity securities
|
|
$
|
7,223
|
|
|
$
|
39
|
|
|
$
|
(16
|
)
|
|
$
|
7,246
|
|
For the nine months ended
September 30, 2018
, we recognized
$3.6 million
of net gains on equity securities still held as of
September 30, 2018
. The net gains reflect the fair value increase in certain equity securities of a privately held entity that were re-valued in the third quarter by independent parties and subsequently sold in a transaction completed in October 2018. The net gains are reported in Net realized investment gains (losses) on our consolidated statement of operations for the three and nine months ended September 30, 2018.
MGIC Investment Corporation - Q3 2018 |
22
Other invested assets
Other invested assets include an investment in FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current FHLB Advance amount is secured by eligible collateral whose fair value is maintained at a minimum of
102%
of the outstanding principal balance. As of
September 30, 2018
, that collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair value of
$166.1 million
.
Unrealized investment losses
Tables
7.4a
and
7.4b
below summarize, for all available-for-sale investments in an unrealized loss position at
September 30, 2018
and
December 31, 2017
, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables
7.4a
and
7.4b
are estimated using the process described in
Note 8 - “Fair Value Measurements”
to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.4a
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments unrealized losses - current year
|
|
|
|
September 30, 2018
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
(In thousands)
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
89,759
|
|
|
$
|
(583
|
)
|
|
$
|
78,769
|
|
|
$
|
(2,770
|
)
|
|
$
|
168,528
|
|
|
$
|
(3,353
|
)
|
|
|
Obligations of U.S. states and political subdivisions
|
|
643,147
|
|
|
(12,356
|
)
|
|
245,763
|
|
|
(9,252
|
)
|
|
888,910
|
|
|
(21,608
|
)
|
|
|
Corporate debt securities
|
|
1,782,640
|
|
|
(29,184
|
)
|
|
299,549
|
|
|
(13,121
|
)
|
|
2,082,189
|
|
|
(42,305
|
)
|
|
|
ABS
|
|
70,935
|
|
|
(546
|
)
|
|
—
|
|
|
—
|
|
|
70,935
|
|
|
(546
|
)
|
|
|
RMBS
|
|
4,930
|
|
|
(183
|
)
|
|
149,648
|
|
|
(11,411
|
)
|
|
154,578
|
|
|
(11,594
|
)
|
|
|
CMBS
|
|
81,972
|
|
|
(1,763
|
)
|
|
160,039
|
|
|
(10,211
|
)
|
|
242,011
|
|
|
(11,974
|
)
|
|
|
CLOs
|
|
201,700
|
|
|
(458
|
)
|
|
—
|
|
|
—
|
|
|
201,700
|
|
|
(458
|
)
|
|
|
Total
|
|
$
|
2,875,083
|
|
|
$
|
(45,073
|
)
|
|
$
|
933,768
|
|
|
$
|
(46,765
|
)
|
|
$
|
3,808,851
|
|
|
$
|
(91,838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
7.4b
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments unrealized losses - prior year-end
|
|
|
|
December 31, 2017
|
|
|
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
|
(In thousands)
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
144,042
|
|
|
$
|
(796
|
)
|
|
$
|
31,196
|
|
|
$
|
(482
|
)
|
|
$
|
175,238
|
|
|
$
|
(1,278
|
)
|
|
|
Obligations of U.S. states and political subdivisions
|
|
505,311
|
|
|
(3,624
|
)
|
|
211,684
|
|
|
(5,125
|
)
|
|
716,995
|
|
|
(8,749
|
)
|
|
|
Corporate debt securities
|
|
932,350
|
|
|
(4,288
|
)
|
|
200,716
|
|
|
(4,881
|
)
|
|
1,133,066
|
|
|
(9,169
|
)
|
|
|
ABS
|
|
4,923
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
4,923
|
|
|
(2
|
)
|
|
|
RMBS
|
|
14,979
|
|
|
(280
|
)
|
|
166,329
|
|
|
(7,084
|
)
|
|
181,308
|
|
|
(7,364
|
)
|
|
|
CMBS
|
|
51,096
|
|
|
(358
|
)
|
|
138,769
|
|
|
(4,548
|
)
|
|
189,865
|
|
|
(4,906
|
)
|
|
|
CLOs
|
|
14,243
|
|
|
(7
|
)
|
|
3,568
|
|
|
(72
|
)
|
|
17,811
|
|
|
(79
|
)
|
|
|
Equity securities
|
|
226
|
|
|
(2
|
)
|
|
431
|
|
|
(14
|
)
|
|
657
|
|
|
(16
|
)
|
|
|
Total
|
|
$
|
1,667,170
|
|
|
$
|
(9,357
|
)
|
|
$
|
752,693
|
|
|
$
|
(22,206
|
)
|
|
$
|
2,419,863
|
|
|
$
|
(31,563
|
)
|
The unrealized losses in all categories of our investments at
September 30, 2018
and
December 31, 2017
were primarily caused by changes in interest rates between the time of purchase and the respective fair value measurement date. There were
810
and
586
securities in an unrealized loss position at
September 30, 2018
and
December 31, 2017
, respectively.
MGIC Investment Corporation - Q3 2018 |
23
Note 8. Fair Value Measurements
Recurring fair value measurements
In accordance with fair value accounting guidance, we applied the following fair value hierarchy to measure fair value for assets and liabilities:
Level 1 - Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities and equity securities.
Level 2 - Quoted prices for similar instruments in active markets that we can access; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the instrument. The observable inputs are used in valuation models to calculate the fair value based on the type of instrument. Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, asset-backed securities, and most municipal bonds.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable. The inputs used to derive the fair value of Level 3 securities reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability, or for certain of our equity securities, independent fair market valuations provided to us. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
Assets measured at fair value, by hierarchy level, as of
September 30, 2018
and
December 31, 2017
are shown in tables
8.1a
and
8.1b
below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” of the notes to the consolidated financial statements in our 2017 Annual Report on Form 10-K.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.1a
|
|
|
|
|
|
|
|
|
|
Fair value hierarchy - current year
|
|
|
September 30, 2018
|
|
(In thousands)
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
176,216
|
|
|
$
|
29,584
|
|
|
$
|
146,632
|
|
|
$
|
—
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
1,734,606
|
|
|
—
|
|
|
1,734,529
|
|
|
77
|
|
|
|
Corporate debt securities
|
|
2,255,065
|
|
|
—
|
|
|
2,255,065
|
|
|
—
|
|
|
|
ABS
|
|
70,935
|
|
|
—
|
|
|
70,935
|
|
|
—
|
|
|
|
RMBS
|
|
154,963
|
|
|
—
|
|
|
154,963
|
|
|
—
|
|
|
|
CMBS
|
|
270,220
|
|
|
—
|
|
|
270,220
|
|
|
—
|
|
|
|
CLOs
|
|
307,607
|
|
|
—
|
|
|
307,607
|
|
|
—
|
|
|
|
Total fixed income securities
|
|
4,969,612
|
|
|
29,584
|
|
|
4,939,951
|
|
|
77
|
|
|
|
Equity securities
|
|
7,720
|
|
|
2,889
|
|
|
—
|
|
|
4,831
|
|
|
|
Total investments at fair value
|
|
$
|
4,977,332
|
|
|
$
|
32,473
|
|
|
$
|
4,939,951
|
|
|
$
|
4,908
|
|
|
|
Real estate acquired
(1)
|
|
$
|
12,339
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,339
|
|
MGIC Investment Corporation - Q3 2018 |
24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.1b
|
|
|
|
|
|
|
|
|
|
Fair value hierarchy - prior year-end
|
|
|
December 31, 2017
|
|
(In thousands)
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
|
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
178,846
|
|
|
$
|
81,598
|
|
|
$
|
97,248
|
|
|
$
|
—
|
|
|
|
Obligations of U.S. states and political subdivisions
|
|
2,152,524
|
|
|
—
|
|
|
2,152,253
|
|
|
271
|
|
|
|
Corporate debt securities
|
|
2,066,838
|
|
|
—
|
|
|
2,066,838
|
|
|
—
|
|
|
|
ABS
|
|
4,923
|
|
|
—
|
|
|
4,923
|
|
|
—
|
|
|
|
RMBS
|
|
181,849
|
|
|
—
|
|
|
181,849
|
|
|
—
|
|
|
|
CMBS
|
|
297,312
|
|
|
—
|
|
|
297,312
|
|
|
—
|
|
|
|
CLOs
|
|
101,023
|
|
|
—
|
|
|
101,023
|
|
|
—
|
|
|
|
Total fixed income securities
|
|
4,983,315
|
|
|
81,598
|
|
|
4,901,446
|
|
|
271
|
|
|
|
Equity securities
(2)
|
|
7,246
|
|
|
2,978
|
|
|
—
|
|
|
4,268
|
|
|
|
Total investments at fair value
|
|
$
|
4,990,561
|
|
|
$
|
84,576
|
|
|
$
|
4,901,446
|
|
|
$
|
4,539
|
|
|
|
Real estate acquired
(1)
|
|
$
|
12,713
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,713
|
|
|
|
|
|
(1)
|
Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.
|
|
|
|
|
(2)
|
Equity securities in Level 3 are carried at cost, which approximates fair value. See
“Reconciliations of Level 3 assets”
below for information regarding a change in presentation of amounts previously included in Level 3 Equity securities.
|
Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the
three and nine
months ended
September 30, 2018
and
2017
is shown in tables
8.2a
and
8.2b
and
8.3a
and
8.3b
below. As described in Note 2 - “New Accounting Pronouncements,” under updated guidance regarding the
Recognition and Measurement of Financial Assets and Financial Liabilities
which became effective on January 1, 2018, our investment in FHLB stock is no longer presented with
equity securities. Prior to the updated guidance, our FHLB stock was included in our Level 3 equity securities. As shown in table
8.3a
below, for the
nine
months ended
September 30, 2018
, we have transferred our FHLB stock out of Level 3 assets, and it is carried at cost, which approximates fair value, on our consolidated balance sheet in
“Other invested assets”
as of
September 30, 2018
. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.2a
|
|
|
|
|
|
|
|
|
|
Development of assets and liabilities classified within level 3 - current year quarter
|
|
|
Three Months Ended September 30, 2018
|
|
(In thousands)
|
|
Debt Securities
|
|
Equity Securities
|
|
Total Investments
|
|
Real Estate Acquired
|
|
Balance at June 30, 2018
|
|
$
|
192
|
|
|
$
|
1,168
|
|
|
$
|
1,360
|
|
|
$
|
13,321
|
|
|
Total realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as net realized investment gains
|
|
—
|
|
|
3,663
|
|
|
3,663
|
|
|
—
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(450
|
)
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
7,979
|
|
|
|
Sales
|
|
(115
|
)
|
|
—
|
|
|
(115
|
)
|
|
(8,511
|
)
|
|
|
Balance at September 30, 2018
|
|
$
|
77
|
|
|
$
|
4,831
|
|
|
$
|
4,908
|
|
|
$
|
12,339
|
|
MGIC Investment Corporation - Q3 2018 |
25
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.2b
|
|
|
|
|
|
|
|
|
|
Development of assets and liabilities classified within level 3 - prior year quarter
|
|
|
Three Months Ended September 30, 2017
|
|
(In thousands)
|
|
Debt
Securities
|
|
Equity
Securities
|
|
Total
Investments
|
|
Real Estate
Acquired
|
|
Balance at June 30, 2017
|
|
$
|
577
|
|
|
$
|
4,268
|
|
|
$
|
4,845
|
|
|
$
|
10,271
|
|
|
Total realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(592
|
)
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
8,881
|
|
|
|
Sales
|
|
(197
|
)
|
|
—
|
|
|
(197
|
)
|
|
(6,832
|
)
|
|
|
Balance at September 30, 2017
|
|
$
|
380
|
|
|
$
|
4,268
|
|
|
$
|
4,648
|
|
|
$
|
11,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.3a
|
|
|
|
|
|
|
|
|
|
Development of assets and liabilities classified within level 3 - current year to date
|
|
|
Nine Months Ended September 30, 2018
|
|
(In thousands)
|
|
Debt Securities
|
|
Equity Securities
|
|
Total Investments
|
|
Real Estate Acquired
|
|
Balance at December 31, 2017
|
|
$
|
271
|
|
|
$
|
4,268
|
|
|
$
|
4,539
|
|
|
$
|
12,713
|
|
|
Transfers out of Level 3
|
|
—
|
|
|
(3,100
|
)
|
|
(3,100
|
)
|
|
—
|
|
|
|
Total realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as net realized investment gains
|
|
—
|
|
|
3,663
|
|
|
3,663
|
|
|
—
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(1,104
|
)
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
24,742
|
|
|
|
Sales
|
|
(194
|
)
|
|
—
|
|
|
(194
|
)
|
|
(24,012
|
)
|
|
|
Balance at September 30, 2018
|
|
$
|
77
|
|
|
$
|
4,831
|
|
|
$
|
4,908
|
|
|
$
|
12,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.3b
|
|
|
|
|
|
|
|
|
|
Development of assets and liabilities classified within level 3 - prior year to date
|
|
|
Nine Months Ended September 30, 2017
|
|
(In thousands)
|
|
Debt
Securities
|
|
Equity
Securities
|
|
Total
Investments
|
|
Real Estate
Acquired
|
|
Balance at December 31, 2016
|
|
$
|
691
|
|
|
$
|
4,268
|
|
|
$
|
4,959
|
|
|
$
|
11,748
|
|
|
Total realized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(818
|
)
|
|
|
Purchases
|
|
—
|
|
|
—
|
|
|
—
|
|
|
26,985
|
|
|
|
Sales
|
|
(311
|
)
|
|
—
|
|
|
(311
|
)
|
|
(26,187
|
)
|
|
|
Balance at September 30, 2017
|
|
$
|
380
|
|
|
$
|
4,268
|
|
|
$
|
4,648
|
|
|
$
|
11,728
|
|
Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in
Note 7 – “Investments.”
Financial liabilities not measured at fair value
We incur financial liabilities in the normal course of our business. Table
8.4
presents the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at
September 30, 2018
and
December 31, 2017
. The fair values of our
5.75%
Senior Notes and
9%
Convertible Junior Subordinated Debentures were based on observable market prices. The fair value of the FHLB Advance was estimated using cash flows discounted at current incremental borrowing rates for similar borrowing arrangements. In all cases the fair values of the financial liabilities below are categorized as Level 2.
MGIC Investment Corporation - Q3 2018 |
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
8.4
|
|
|
|
|
|
|
|
|
|
Fair value measurements - liabilities
|
|
|
September 30, 2018
|
|
December 31, 2017
|
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
|
FHLB Advance
|
|
$
|
155,000
|
|
|
$
|
148,288
|
|
|
$
|
155,000
|
|
|
$
|
152,124
|
|
|
|
5.75% Senior Notes
|
|
419,425
|
|
|
445,430
|
|
|
418,560
|
|
|
465,473
|
|
|
|
9% Convertible Junior Subordinated Debentures
|
|
256,872
|
|
|
347,458
|
|
|
256,872
|
|
|
353,507
|
|
|
|
Total financial liabilities
|
|
$
|
831,297
|
|
|
$
|
941,176
|
|
|
$
|
830,432
|
|
|
$
|
971,104
|
|
Note 9. Other Comprehensive Income
The pretax and related income tax (expense) benefit components of our other comprehensive income (loss) for the
three and nine
months ended
September 30, 2018
and
2017
are included in table
9.1
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
9.1
|
|
|
|
|
|
|
|
|
|
Components of other comprehensive (loss) income
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Net unrealized investment (losses) gains arising during the period
|
|
$
|
(15,288
|
)
|
|
$
|
17,761
|
|
|
$
|
(109,433
|
)
|
|
$
|
76,022
|
|
|
|
Income tax benefit (expense)
|
|
3,211
|
|
|
(6,217
|
)
|
|
22,981
|
|
|
(26,608
|
)
|
|
|
Net of taxes
|
|
(12,077
|
)
|
|
11,544
|
|
|
(86,452
|
)
|
|
49,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in benefit plan assets and obligations
|
|
558
|
|
|
(226
|
)
|
|
1,674
|
|
|
(680
|
)
|
|
|
Income tax (expense) benefit
|
|
(118
|
)
|
|
79
|
|
|
(352
|
)
|
|
238
|
|
|
|
Net of taxes
|
|
440
|
|
|
(147
|
)
|
|
1,322
|
|
|
(442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net changes in unrealized foreign currency translation adjustment
|
|
—
|
|
|
—
|
|
|
—
|
|
|
45
|
|
|
|
Income tax (expense)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
|
Net of taxes
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive (loss) income
|
|
(14,730
|
)
|
|
17,535
|
|
|
(107,759
|
)
|
|
75,387
|
|
|
|
Total income tax benefit (expense)
|
|
3,093
|
|
|
(6,138
|
)
|
|
22,629
|
|
|
(26,384
|
)
|
|
|
Total other comprehensive (loss) income, net of tax
|
|
$
|
(11,637
|
)
|
|
$
|
11,397
|
|
|
$
|
(85,130
|
)
|
|
$
|
49,003
|
|
MGIC Investment Corporation - Q3 2018 |
27
The pretax and related income tax benefit (expense) components of the amounts reclassified from our accumulated other comprehensive loss (“AOCL”) to our consolidated statements of operations for the
three and nine
months ended
September 30, 2018
and
2017
are included in table
9.2
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
9.2
|
|
|
|
|
|
|
|
|
|
Reclassifications from AOCL
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Reclassification adjustment for net realized (losses)
(1)
|
|
$
|
(2,567
|
)
|
|
$
|
(427
|
)
|
|
$
|
(6,279
|
)
|
|
$
|
(2,566
|
)
|
|
|
Income tax benefit
|
|
539
|
|
|
150
|
|
|
1,318
|
|
|
898
|
|
|
|
Net of taxes
|
|
(2,028
|
)
|
|
(277
|
)
|
|
(4,961
|
)
|
|
(1,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment related to benefit plan assets and obligations
(2)
|
|
(558
|
)
|
|
226
|
|
|
(1,674
|
)
|
|
680
|
|
|
|
Income tax benefit (expense)
|
|
118
|
|
|
(79
|
)
|
|
352
|
|
|
(238
|
)
|
|
|
Net of taxes
|
|
(440
|
)
|
|
147
|
|
|
(1,322
|
)
|
|
442
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total reclassifications
|
|
(3,125
|
)
|
|
(201
|
)
|
|
(7,953
|
)
|
|
(1,886
|
)
|
|
|
Total income tax benefit
|
|
657
|
|
|
71
|
|
|
1,670
|
|
|
660
|
|
|
|
Total reclassifications, net of tax
|
|
$
|
(2,468
|
)
|
|
$
|
(130
|
)
|
|
$
|
(6,283
|
)
|
|
$
|
(1,226
|
)
|
|
|
|
|
(1)
|
Increases (decreases) Net realized investment (losses) gains on the consolidated statements of operations.
|
|
|
|
|
(2)
|
Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
|
A rollforward of AOCL for the
nine
months ended
September 30, 2018
, including amounts reclassified from AOCL, are included in table
9.3
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
9.3
|
|
|
|
|
|
|
|
Rollforward of AOCL
|
|
|
|
Nine Months Ended September 30, 2018
|
|
(In thousands)
|
|
Net unrealized gains and losses on available-for-sale securities
|
|
Net benefit plan assets and obligations recognized in shareholders' equity
|
|
Total AOCL
|
|
|
Balance, December 31, 2017, net of tax
|
|
$
|
29,257
|
|
|
$
|
(73,058
|
)
|
|
$
|
(43,801
|
)
|
|
|
Other comprehensive income before reclassifications
|
|
(91,413
|
)
|
|
—
|
|
|
(91,413
|
)
|
|
|
Less: Amounts reclassified from AOCL
|
|
(4,961
|
)
|
|
(1,322
|
)
|
|
(6,283
|
)
|
|
|
Balance, September 30, 2018, net of tax
|
$
|
(57,195
|
)
|
|
$
|
(71,736
|
)
|
|
$
|
(128,931
|
)
|
MGIC Investment Corporation - Q3 2018 |
28
Note 10. Benefit Plans
Tables
10.1
and 10.2 provide the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the
three and nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
10.1
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
Three Months Ended September 30,
|
|
|
|
Pension and Supplemental Executive Retirement Plans
|
|
Other Postretirement Benefit Plans
|
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Service cost
|
|
$
|
2,633
|
|
|
$
|
2,389
|
|
|
$
|
290
|
|
|
$
|
203
|
|
|
|
Interest cost
|
|
3,774
|
|
|
3,869
|
|
|
208
|
|
|
176
|
|
|
|
Expected return on plan assets
|
|
(5,563
|
)
|
|
(5,025
|
)
|
|
(1,590
|
)
|
|
(1,312
|
)
|
|
|
Amortization of net actuarial losses/(gains)
|
|
1,734
|
|
|
1,543
|
|
|
(62
|
)
|
|
—
|
|
|
|
Amortization of prior service cost/(credit)
|
|
(88
|
)
|
|
(107
|
)
|
|
(1,026
|
)
|
|
(1,662
|
)
|
|
|
Net periodic benefit cost (benefit)
|
|
$
|
2,490
|
|
|
$
|
2,669
|
|
|
$
|
(2,180
|
)
|
|
$
|
(2,595
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
10.2
|
|
|
|
|
|
|
|
|
|
Components of net periodic benefit cost
|
|
|
Nine Months Ended September 30,
|
|
|
|
Pension and Supplemental Executive Retirement Plans
|
|
Other Postretirement Benefit Plans
|
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
|
Service cost
|
|
$
|
7,898
|
|
|
$
|
7,167
|
|
|
$
|
870
|
|
|
$
|
610
|
|
|
|
Interest cost
|
|
11,321
|
|
|
11,606
|
|
|
625
|
|
|
529
|
|
|
|
Expected return on plan assets
|
|
(16,688
|
)
|
|
(15,074
|
)
|
|
(4,769
|
)
|
|
(3,936
|
)
|
|
|
Amortization of net actuarial losses/(gains)
|
|
5,203
|
|
|
4,627
|
|
|
(187
|
)
|
|
—
|
|
|
|
Amortization of prior service cost/(credit)
|
|
(263
|
)
|
|
(320
|
)
|
|
(3,078
|
)
|
|
(4,987
|
)
|
|
|
Net periodic benefit cost (benefit)
|
|
$
|
7,471
|
|
|
$
|
8,006
|
|
|
$
|
(6,539
|
)
|
|
$
|
(7,784
|
)
|
We currently intend to make contributions totaling
$11 million
to our qualified pension plan and supplemental executive retirement plan in 2018.
MGIC Investment Corporation - Q3 2018 |
29
Note 11. Income Taxes
We have approximately
$153.5 million
of net operating loss (“NOL”) carryforwards as of
September 30, 2018
. Any unutilized carryforwards are scheduled to expire at the end of tax years 2032 through 2033.
We evaluate the realizability of our deferred tax assets including our NOL carryforwards on a quarterly basis. Based on our analysis, we have concluded that all of our deferred tax assets are fully realizable and therefore no valuation allowance existed at September 30, 2018 and December 31, 2017.
Tax Contingencies
As previously disclosed, the Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits.
In July 2018, we finalized an agreement with the IRS to settle all issues in the examination and related U.S. Tax Court case; the settlement has been approved by the U.S. Tax Court. The expected impact of the agreed upon settlement was previously reflected in our consolidated statements of operations
.
With the approval of our settlement by the U.S. Tax Court, our unrecognized tax benefits have been reduced by
$144.9 million
in the third quarter of 2018. As of September 30, 2018, we have no unrecognized tax benefits.
Note 12. Loss Reserves
We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of loans in our inventory of delinquent loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between default and claim filing; and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment.
The “Losses incurred” section of table
12.1
below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on delinquencies continuing from the end of the prior year. This re-estimation of the claim rate and severity is the result of our review of current trends in the delinquent inventory, such as percentages of delinquencies that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of delinquencies by geography and changes in average loan exposure.
Losses incurred on delinquencies that occurred in the current year decreased in the first
nine
months of
2018
compared to the same period in
2017
, primarily due to a decrease in the number of new delinquencies, net of related cures and a decrease in the estimated claim rate on delinquencies that occurred in the current year.
For the
nine
months ended
September 30, 2018
and
2017
, we experienced favorable loss reserve development on previously received delinquencies. This was, in large part, due to the resolution of approximately
65%
and
MGIC Investment Corporation - Q3 2018 |
30
59%
, respectively, of the prior year delinquent inventory, with lower claim rates due to improved cure rates. The favorable loss reserve development resulting from a reduction in the estimated claim rate was partially offset in the nine months ended
September 30, 2018
by an increase in our severity assumption on previously received delinquencies.
The “Losses paid” section of table
12.1
below shows the amount of losses paid on delinquencies that occurred in the current year and losses paid on delinquencies that occurred in prior years. For several years, the average time it took to receive a claim associated with a delinquency had increased significantly from our historical experience of approximately
twelve
months. This was, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. In recent quarters, we have experienced a decline in the average time servicers are utilizing to process foreclosures, which has reduced the average time to receive a claim associated with new delinquent notices that do not cure. All else being equal, the longer the period between delinquency and claim filing, the greater the severity.
During the first nine months of 2018 and 2017, our losses paid included amounts paid upon commutation of coverage of pools of non-performing loans (“NPLs”) and/or amounts paid in connection with disputes concerning our claims paying practices. The impacts of these payments were as follows:
|
|
|
|
•
|
2018 -
1,243
items were removed from the delinquent inventory with an amount paid of
$40 million
.
|
|
|
|
|
•
|
2017 -
1,337
items were removed from the delinquent inventory with amount paid of
$54 million
.
|
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated
$44 million
and
$61 million
at
September 30, 2018
and
December 31, 2017
, respectively.
Table
12.1
provides a reconciliation of beginning and ending loss reserves as of and for the
nine
months ended
September 30, 2018
and
2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
12.1
|
|
|
|
|
|
Development of reserves for losses and loss adjustment expenses
|
|
|
|
Nine months ended September 30,
|
|
(In thousands)
|
|
2018
|
|
2017
|
|
Reserve at beginning of period
|
|
$
|
985,635
|
|
|
$
|
1,438,813
|
|
|
Less reinsurance recoverable
|
|
48,474
|
|
|
50,493
|
|
|
|
Net reserve at beginning of period
|
|
937,161
|
|
|
1,388,320
|
|
|
|
|
|
|
|
|
|
|
Losses incurred:
|
|
|
|
|
|
|
Losses and LAE incurred in respect of delinquency notices received in:
|
|
|
|
|
|
|
Current year
|
|
155,808
|
|
|
219,485
|
|
|
|
Prior years
(1)
|
|
(146,931
|
)
|
|
(134,780
|
)
|
|
|
Total losses incurred
|
|
8,877
|
|
|
84,705
|
|
|
|
|
|
|
|
|
|
|
Losses paid:
|
|
|
|
|
|
|
Losses and LAE paid in respect of delinquency notices received in:
|
|
|
|
|
|
|
Current year
|
|
2,449
|
|
|
5,474
|
|
|
|
Prior years
|
|
257,808
|
|
|
407,977
|
|
|
|
Reinsurance terminations
|
|
(1,984
|
)
|
|
301
|
|
|
|
Total losses paid
|
|
258,273
|
|
|
413,752
|
|
|
|
Net reserve at end of period
|
|
687,765
|
|
|
1,059,273
|
|
|
|
Plus reinsurance recoverables
|
|
33,281
|
|
|
45,878
|
|
|
|
Reserve at end of period
|
|
$
|
721,046
|
|
|
$
|
1,105,151
|
|
|
|
|
|
(1)
|
A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss development.
|
MGIC Investment Corporation - Q3 2018 |
31
The prior year development of the reserves in the first
nine
months of
2018
and
2017
is reflected in table
12.2
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
12.2
|
|
|
|
|
|
Reserve development on previously received delinquencies
|
|
|
|
Nine months ended September 30,
|
|
(in millions)
|
|
2018
|
|
2017
|
|
Decrease in estimated claim rate on primary defaults
|
|
$
|
(184
|
)
|
|
$
|
(138
|
)
|
|
Increase in estimated severity on primary defaults
|
|
22
|
|
|
(2
|
)
|
|
|
Change in estimates related to pool reserves, LAE reserves and reinsurance
|
|
15
|
|
|
5
|
|
|
|
Total prior year loss development
(1)
|
|
$
|
(147
|
)
|
|
$
|
(135
|
)
|
|
|
|
|
(1)
|
A negative number for prior year loss development indicates a redundancy of prior year loss reserves.
|
Delinquent inventory
A rollforward of our primary delinquent inventory for the
three and nine
months ended
September 30, 2018
and
2017
appears in table
12.3
below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the accuracy of the data provided by servicers, the number of business days in a month, transfers of servicing between loan servicers and whether all servicers have provided the reports in a given month.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
12.3
|
|
|
|
|
|
|
|
|
|
Delinquent inventory rollforward
|
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
Delinquent inventory at beginning of period
|
|
36,037
|
|
|
41,317
|
|
|
46,556
|
|
|
50,282
|
|
|
|
New notices
|
|
13,569
|
|
|
15,950
|
|
|
40,351
|
|
|
45,352
|
|
|
|
Cures
|
|
(14,197
|
)
|
|
(13,546
|
)
|
|
(47,620
|
)
|
|
(45,382
|
)
|
|
|
Paids (including those charged to a deductible or captive)
|
|
(1,374
|
)
|
|
(2,195
|
)
|
|
(4,446
|
)
|
|
(7,403
|
)
|
|
|
Rescissions and denials
|
|
(56
|
)
|
|
(82
|
)
|
|
(200
|
)
|
|
(277
|
)
|
|
|
Other items removed from inventory
|
|
(581
|
)
|
|
(209
|
)
|
|
(1,243
|
)
|
|
(1,337
|
)
|
|
|
Delinquent inventory at end of period
|
|
33,398
|
|
|
41,235
|
|
|
33,398
|
|
|
41,235
|
|
The decrease in the primary delinquent inventory experienced during
2018
and
2017
was generally across all markets and primarily in book years 2008 and prior. Historically as a default ages it becomes more likely to result in a claim.
Hurricane activity
New delinquent notice activity increased in the fourth quarter of 2017 because of hurricane activity that primarily impacted Puerto Rico, Texas, and Florida in the third quarter of 2017. As a result, the number of loans delinquent three months or less was a higher percentage of our total inventory as of December 31, 2017 than it had been as of
September 30, 2017
.
MGIC Investment Corporation - Q3 2018 |
32
Table
12.4
below shows the number of consecutive months a borrower is delinquent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
12.4
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent inventory - consecutive months in default
|
|
September 30, 2018
|
|
December 31, 2017
|
|
September 30, 2017
|
|
3 months or less
|
9,484
|
|
|
28
|
%
|
|
17,119
|
|
|
37
|
%
|
|
11,331
|
|
|
27
|
%
|
|
4-11 months
|
9,564
|
|
|
29
|
%
|
|
12,050
|
|
|
26
|
%
|
|
11,092
|
|
|
27
|
%
|
|
|
12 months or more
(1) (2)
|
14,350
|
|
|
43
|
%
|
|
17,387
|
|
|
37
|
%
|
|
18,812
|
|
|
46
|
%
|
|
|
Total primary delinquent inventory
|
33,398
|
|
|
100
|
%
|
|
46,556
|
|
|
100
|
%
|
|
41,235
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary claims received inventory included in ending delinquent inventory:
|
766
|
|
|
2
|
%
|
|
954
|
|
|
2
|
%
|
|
1,063
|
|
|
3
|
%
|
|
|
|
|
(1)
|
Approximately
39%
,
45%
, and
45%
of the primary delinquent inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of
September 30, 2018
,
December 31, 2017
, and
September 30, 2017
, respectively.
|
|
|
|
|
(2)
|
The majority of items removed from our delinquent inventory due to commutations of NPLs during the nine months ended
September 30, 2018
were delinquent for 12 consecutive months or more as of December 31, 2017.
|
The number of months a loan is in the delinquent inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. Table
12.5
below shows the number of payments that a borrower is delinquent.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
12.5
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquent inventory - number of payments delinquent
|
|
September 30, 2018
|
|
December 31, 2017
|
|
September 30, 2017
|
|
3 payments or less
|
14,813
|
|
|
44
|
%
|
|
21,678
|
|
|
46
|
%
|
|
16,916
|
|
|
41
|
%
|
|
4-11 payments
|
9,156
|
|
|
28
|
%
|
|
12,446
|
|
|
27
|
%
|
|
10,583
|
|
|
26
|
%
|
|
12 payments or more
(1) (2)
|
9,429
|
|
|
28
|
%
|
|
12,432
|
|
|
27
|
%
|
|
13,736
|
|
|
33
|
%
|
|
|
Total primary delinquent inventory
|
33,398
|
|
|
100
|
%
|
|
46,556
|
|
|
100
|
%
|
|
41,235
|
|
|
100
|
%
|
|
|
|
|
(1)
|
Approximately
39%
,
43%
, and
43%
of the primary delinquent inventory with 12 payments or more delinquent has at least 36 payments delinquent as of
September 30, 2018
,
December 31, 2017
, and
September 30, 2017
, respectively.
|
|
|
|
|
(2)
|
The majority of items removed from our delinquent inventory due to commutations of NPLs during the nine months ended
September 30, 2018
had 12 or more payments delinquent as of December 31, 2017.
|
Pool insurance delinquent inventory decreased to
1,032
at
September 30, 2018
from
1,309
at
December 31, 2017
, and
1,426
at
September 30, 2017
.
Claims paying practices
Our loss reserving methodology incorporates our estimates of future rescissions and curtailments. A variance between ultimate actual rescission and curtailment rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses. Our estimate of premiums to be refunded on expected future rescissions is accrued for separately and is included in “Other liabilities” on our consolidated balance sheets. For information about discussions and legal proceedings with customers with respect to our claims paying practices see
Note 5 – “Litigation and Contingencies.”
MGIC Investment Corporation - Q3 2018 |
33
Note 13. Shareholders’ Equity
Share repurchase program
On April 26, 2018, our Board of Directors authorized a share repurchase program under which we may repurchase up to
$200 million
of our common stock through the end of 2019. Repurchases may be made from time to time on the open market or through privately negotiated transactions. The repurchase program may be suspended for periods or discontinued at any time.
During the second quarter of 2018, we repurchased approximately
9.2 million
shares of our common stock at a weighted average price per share of
$10.88
, which included commissions.
Change in accounting principle
As described in
Note 2 - “New Accounting Pronouncements,”
during the first quarter of 2018 the updated guidance of
“Recognition and Measurement of Financial Assets and Financial Liabilities”
became effective. The application of this guidance resulted in an immaterial cumulative effect adjustment to our 2018 beginning accumulated other comprehensive (loss) income and retained earnings to recognize unrealized gains on equity securities.
Shareholders Rights Agreement
Our Amended and Restated Rights Agreement dated August 1, 2018 (“the 2018 Agreement”) seeks to diminish the risk that our ability to use our NOLs to reduce potential future federal income tax obligations may become substantially limited and to deter certain abusive takeover practices. The benefit of the NOLs would be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, if we were to experience an “ownership change” as defined by Section 382 of the Internal Revenue Code.
Under the 2018 Agreement, each outstanding share of our Common Stock is accompanied by
one
Right. The “Distribution Date” occurs on the earlier of
ten days
after a public announcement that a person has become an “Acquiring Person,” or
ten
business days after a person announces or begins a tender offer in which consummation of such offer would result in a person becoming an “Acquiring Person.” An “Acquiring Person” is any person that becomes, by itself or together with its affiliates and associates, a beneficial owner of
5%
or more of the shares of our Common Stock then outstanding, but excludes, among others, certain exempt and grandfathered persons as defined in the Agreement. The Rights are not exercisable until the Distribution Date. Each Right will initially entitle shareholders to buy
one-tenth
of
one
share of our Common Stock at a Purchase Price of
$45
per full share (equivalent to
$4.50
for each one-tenth share), subject to adjustment. Each exercisable Right (subject to certain limitations) will entitle its holder to purchase, at the Rights’ then-current Purchase Price, a number of our shares of Common Stock (or if after the Shares Acquisition Date, we are acquired in a business combination, common shares of the acquiror) having a market value at the time equal to twice the Purchase Price. The Rights will expire on March 1, 2020, or earlier as described in the 2018 Agreement. The Rights are redeemable at a price of
$0.001
per Right at any time prior to the time a person becomes an Acquiring Person. Other than certain amendments, the Board of Directors may amend the Rights in any respect without the consent of the holders of the Rights.
MGIC Investment Corporation - Q3 2018 |
34
Note 14. Share-Based Compensation
We have certain share-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under our plans generally vest over periods ranging from
one
to
three years
.
Table
14.1
shows the number of shares granted to employees and the weighted average fair value per share during the periods presented (shares in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Table
|
14.1
|
|
|
|
|
|
|
|
|
Restricted stock grants
|
|
|
Nine months ended September 30,
|
|
|
|
2018
|
|
2017
|
|
|
|
|
Shares
Granted
|
|
Weighted Average Share Fair Value
|
|
Shares
Granted
|
|
Weighted Average Share Fair Value
|
|
|
RSUs subject to performance conditions
|
1,239
|
|
|
$
|
15.80
|
|
|
1,237
|
|
|
$
|
10.41
|
|
|
|
RSUs subject only to service conditions
|
447
|
|
|
15.39
|
|
|
395
|
|
|
10.41
|
|
Note 15. Statutory Information
Statutory Capital Requirements
The insurance laws of
16
jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in 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
September 30, 2018
, MGIC’s risk-to-capital ratio was
9.0 to 1
, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was
$2.5 billion
above the required MPP of
$1.3 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 financial requirements of 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, matters that could negatively affect such compliance are discussed in the rest of these consolidated financial statement footnotes.
At
September 30, 2018
, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was
9.8 to 1
. Reinsurance agreements with an affiliate permit MGIC to write insurance with a higher coverage percentage than it could on its own under certain state-specific requirements. A higher risk-to-capital ratio on a combined basis may indicate that, in order for MGIC to continue to utilize reinsurance agreements with its affiliate, additional capital contributions to the reinsurance affiliate could be needed.
The NAIC plans to revise the minimum capital and surplus requirements for mortgage insurers that are provided for in its Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators released an exposure draft of a risk-based capital framework to establish capital requirements for mortgage insurers, although no date has been established by which the NAIC must propose revisions to the capital requirements and certain items have not yet been completely addressed by the framework, including the treatment of ceded risk, minimum capital floors, and action level triggers. Currently, we believe that the
MGIC Investment Corporation - Q3 2018 |
35
PMIERs contain more restrictive capital requirements than the draft Mortgage Guaranty Insurance Model Act 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 a particular jurisdiction, lenders may be unwilling to procure insurance from us anywhere. In addition, a lender’s assessment of the future ability of our insurance operations to meet the State Capital Requirements or the PMIERs may affect its willingness to procure insurance from us. 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, matters that could negatively affect MGIC’s claims paying resources are discussed in the rest of these consolidated financial statement footnotes.
Dividend restrictions
In the third quarter of 2018, MGIC paid a
$60 million
dividend to our holding company. MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without such dividends being subject to regulatory disapproval by the OCI is the lesser of adjusted statutory net income or
10%
of statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the
three
calendar years preceding the date of the dividend less dividends paid within the first
two
of the preceding three calendar years. The OCI recognizes only statutory accounting principles prescribed, or practices permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in their contingency reserves through their income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency reserves, statutory net income is lowered. For the year ended
December 31, 2017
, MGIC’s increase in contingency reserves was
$473 million
and statutory net income was
$272 million
.
Note 16. Subsequent Events
On October 30, 2018, MGIC entered into a fully collateralized reinsurance agreement with Home Re 2018-1 Ltd. (“Home Re”), an unaffiliated special purpose insurer domiciled in Bermuda, that provides for up to
$318.6 million
of aggregate excess-of-loss reinsurance coverage as of August 1, 2018 on a portfolio of mortgage insurance policies having an insurance coverage in force date on or after July 1, 2016 and before January 1, 2018. For the reinsurance coverage period, MGIC will retain the first layer of
$168.7 million
of aggregate losses, and Home Re will then provide second layer coverage up to the outstanding reinsurance coverage amount. The reinsurance coverage premium due to Home Re is calculated by multiplying the outstanding reinsurance coverage amount at the beginning of a period by a coupon rate, which is the sum of one-month LIBOR plus a spread for each class of notes, and then subtracting actual investment income collected on the assets in the reinsurance trust during that period. The aggregate excess of loss reinsurance coverage decreases over a ten-year period, subject to certain conditions, as the underlying covered mortgages amortize, principal is prepaid, or mortgage insurance losses are paid. MGIC has rights to terminate the reinsurance agreement, which includes an option to terminate after seven years from the closing date. Home Re financed the coverage by issuing mortgage insurance-linked notes in an aggregate amount of
$318.6 million
to unaffiliated investors. The notes have ten-year legal maturities and are non-recourse to any assets of MGIC or its affiliates. The proceeds of the notes were deposited into a reinsurance trust for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC and principal repayments on the mortgage insurance-linked notes.
MGIC Investment Corporation - Q3 2018 |
36
In connection with entering into the reinsurance agreement with Home Re, we concluded that the risk transfer requirements for reinsurance accounting were met as Home Re is assuming significant insurance risk and a reasonable possibility of significant loss. In addition, we assessed whether Home Re was a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. We concluded that Home Re is a VIE. However, given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect Home Re’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits that could be potentially significant to Home Re, consolidation of Home Re is not required.
MGIC Investment Corporation - Q3 2018 |
37