First Quarter 2022 Net Income of $175.0 million or $0.54 per Diluted Share
First Quarter 2022 Adjusted Net Operating
Income (Non-GAAP) of $192.9 million
or $0.60 per Diluted Share
MILWAUKEE, May 4, 2022
/PRNewswire/ -- MGIC Investment Corporation (NYSE: MTG) today
reported operating and financial results for the first quarter of
2022. Net income for the quarter was $175.0
million, or $0.54 per
diluted share, compared with net income of $150.0 million, or $0.43 per diluted share, for the first quarter of
2021.
Adjusted net operating income for the first quarter of 2022 was
$192.9 million, or $0.60 per diluted share, compared with
$148.0 million, or $0.42 per diluted share, for the first quarter of
2021. We present the non-GAAP financial measure "Adjusted net
operating income" to increase the comparability between periods of
our financial results. See "Use of Non-GAAP financial measures"
below.
Tim Mattke, CEO of MTG and
Mortgage Guaranty Insurance Corporation ("MGIC"), said, "I am
pleased to report another quarter of strong financial results that
reflect the size and credit performance of our insurance in force
and the continued resilience of the housing market. During the
quarter we continued to deliver on our business strategies, with a
goal of creating long-term value for all of our constituents,
including shareholders, customers and co-workers."
Mattke added, "We have deliberately constructed a strong and
durable capital base that we believe improves our ability to
deliver on our business strategies regardless of where we are in
the economic cycle. While the tragic geopolitical events
occurring in Ukraine have added
increased risks to a domestic economy that was contending with
higher inflation and interest rates, we believe that our financial
strength and capital flexibility, combined with our quality
offerings and superior customer experience, put us in the best
position to achieve success."
Mattke concluded. "We have continually adapted to the changing
needs of lenders and borrowers to help overcome the largest
obstacle to achieving homeownership, the down payment. We are
just as committed today to continuing this critical support of
homeownership as when we wrote our first policy 65 years ago."
First Quarter Summary
- New insurance written was $19.6
billion, compared to $27.1
billion in the fourth quarter of 2021 and $30.8 billion in the first quarter of 2021,
primarily reflecting a decrease in the refinance market.
- Persistency, or the percentage of insurance remaining in force
from one year prior, was 66.9% at March 31,
2022, compared with 62.6% at December
31, 2021, and 56.2% at March 31,
2021.
- Insurance in force of $277.3
billion at March 31, 2022
increased by 1.1% during the quarter and 10.2% compared to
March 31, 2021.
- Primary delinquency inventory of 30,462 loans at March 31, 2022 decreased from 33,290 loans at
December 31, 2021, and 52,775 loans
at March 31, 2021.
-
- The percentage of loans insured with primary insurance that
were delinquent at March 31, 2022 was
2.61%, compared to 2.84% at December 31,
2021, and 4.65% at March 31,
2021.
- The loss ratio for the first quarter of 2022 was (7.6)%,
compared to (9.9)% for the fourth quarter of 2021 and 15.5% for the
first quarter of 2021.
- The underwriting expense ratio associated with our insurance
operations for the first quarter of 2022 was 23.0%, compared to
18.2% for the fourth quarter of 2021 and 19.8% for the first
quarter of 2021.
- Net premium yield was 36.9 basis points in the first quarter of
2022, compared to 37.3 basis points for the fourth quarter of 2021
and 40.9 basis points for the first quarter of 2021.
- Book value per common share outstanding as of March 31, 2022 decreased to $14.75, or 3%, from $15.18 as of December 31,
2021 and increased by 6% from $13.95 as of March 31,
2021. (March 31, 2022 book
value per common share outstanding includes $(0.39) in net unrealized gains (losses) on
securities, compared to $0.47 at
December 31, 2021 and $0.53 at March 31,
2021).
-
- The decrease in the fair value of our investment portfolio is
primarily due to the increase in prevailing market rates. The
decrease is reflected in Accumulated Other Comprehensive Income and
resulted in a decrease in book value per share.
- We paid a dividend of $0.08 per
common share to shareholders during the first quarter of 2022.
- We repurchased 8.5 million shares of common stock at an average
cost of $14.99 per share.
- We reduced our debt outstanding by $212.0 million in the first quarter of 2022.
-
- We repurchased $57.0 million in
aggregate principal amount of our 9% Convertible Junior Debentures
due 2063, reducing potentially dilutive shares by 4.4 million.
- We prepaid MGIC's $155.0 million
Federal Home Loan Bank Advance.
- We executed a quota share transaction with a group of
unaffiliated reinsurers covering most of our new insurance written
in 2022 (with an additional 15% quota share) and 2023 (with a 15%
quota share).
_______________
Second Quarter 2022 Activities
- In April, we repurchased an additional 3.0 million shares of
our common stock outstanding totaling $39.7
million under the authorization that expires at the end of
2023.
- In April, we repurchased $10.0
million in aggregate principal amount of our 9% Convertible
Junior Debentures due 2063, reducing potentially dilutive shares by
0.8 million.
- We declared a dividend of $0.08
per common share to shareholders payable on May 26, 2022, to shareholders of record at the
close of business on May 12,
2022.
- We entered into a $473.6 million
excess of loss reinsurance agreement (executed through an insurance
linked notes transaction) that covers the vast majority of policies
issued May 29, 2021 through
December 31, 2021
- In April, MGIC obtained approval to pay a $400 million dividend to our holding
company.
Revenues
Total revenues for the first quarter of 2022 were $294.6 million, compared to $298.0 million in the first quarter last year.
The decrease primarily reflects a change in net realized investment
gains and losses related to the investment portfolio.
Premiums earned in the first quarter of 2021 were $255.2 million compared with $255.0 million for the same period last year. Net
premiums written for the quarter were $242.7
million, compared with $241.5
million for the same period last year. The increase in net
premiums written was due to an increase in insurance in force and a
decrease in ceded premiums from our quota share reinsurance
transactions, partially offset by lower new insurance written
and a decrease in our premium yield compared with the same period
last year.
Losses and expenses
Losses incurred
Net losses incurred in the first quarter of 2022 were
$(19.3) million, compared to
$39.6 million in the same period last
year. While new delinquency notices added approximately
$36.3 million to losses incurred in
the first quarter of 2022, our re-estimation of loss reserves
resulted in favorable development of approximately $55.7 million primarily related to a decrease in
the estimated claim rate on delinquencies received in the second
and third quarters of 2020 ("Peak COVID"). In the first
quarter of 2021, losses incurred were primarily related to reserves
established on new notices with insignificant development on
previously received delinquencies.
Underwriting and other expenses
Net underwriting and other expenses increased to $57.5 million in the first quarter of 2022 from
$50.7 million in the same period last
year primarily due to increases in expenses related to our
investments in technology and data and analytics
infrastructure.
Interest expense
Interest expense decreased to $14.9
million in the first quarter of 2022 from $18.0 million in the same period last year. The
decrease is due to the repurchase of a portion of our 9%
Convertible Junior Debentures.
Loss on debt extinguishment
The first quarter 2022 loss on debt extinguishment of
$22.1 million primarily reflects the
repurchase of $57.0 million in
aggregate principal amount of our 9% Convertible Junior Debentures
in excess of their carrying value.
Provision for income taxes
The effective income tax rate was 20.2% in the first quarters of
2022 and 20.9% in the first quarter of 2021.
Capital
- Total consolidated shareholders' equity was $4.6 billion as of March
31, 2022 and $4.7 billion as
of March 31, 2021.
- MGIC's PMIERs Available Assets totaled $6.0 billion, or $2.4
billion above its Minimum Required Assets as of March 31, 2022, compared to PMIERs Available
Assets of $5.5 billion, or
$2.3 billion above its Minimum
Required Assets as of March 31,
2021.
Other Balance Sheet and Liquidity
Metrics
- Total consolidated assets were $6.8
billion as of March 31, 2022,
compared to $7.3 billion as of
December 31, 2021 and $7.4 billion as of March
31, 2021.
- The fair value of our consolidated investment portfolio, cash
and cash equivalents was $6.4 billion
as of March 31, 2022, compared to
$6.9 billion as of December 31, 2021 and $7.0
billion as of March 31,
2021.
- The fair value of investments, cash and cash equivalents at the
holding company was $409 million as
of March 31, 2022, compared to
$663 million as of December 31, 2021 and $802
million as of March 31,
2021.
- Consolidated debt was $935
million as of March 31, 2022,
compared to $1.1 billion as of
December 31, 2021and $1.2 billion as of March
31, 2021.
Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call
May 5, 2022, at 10 a.m. ET to allow securities analysts and
shareholders the opportunity to hear management discuss the
company's quarterly results. The conference call number is
1-866-834-4126. The call is being webcast and can be accessed at
the company's website at http://mtg.mgic.com/. A replay of the
webcast will be available on the company's website through
June 5, 2022 under "Newsroom."
About MGIC
Mortgage Guaranty Insurance Corporation (MGIC) (www.mgic.com),
the principal subsidiary of MGIC Investment Corporation, serves
lenders throughout the United
States, Puerto Rico, and
other locations helping families achieve homeownership sooner by
making affordable low-down-payment mortgages a reality through the
use of private mortgage insurance. At March
31, 2022, MGIC had $277.3 billion of primary insurance in force
covering more than 1.1 million mortgages.
This press release, which includes certain additional
statistical and other information, including non-GAAP financial
information and a supplement that contains various portfolio
statistics, are all available on the Company's website at
https://mtg.mgic.com/ under "Newsroom."
From time to time
MGIC Investment Corporation releases important information via
postings on its corporate website, and via postings on MGIC's
website for information related to underwriting and pricing, and
intends to continue to do so in the future. Such postings include
corrections of previous disclosures, and may be made without any
other disclosure. Investors and other interested parties are
encouraged to enroll to receive automatic email alerts and Really
Simple Syndication (RSS) feeds regarding new postings. Enrollment
information for MGIC Investment Corporation alerts can be found at
https://mtg.mgic.com/shareholder-services/email-alerts. For
information about our underwriting and rates, see
https://www.mgic.com/underwriting.
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below.
These risk factors should be reviewed in connection with this press
release and our periodic reports to the Securities and Exchange
Commission ("SEC"). These risk factors may also cause actual
results to differ materially from the results contemplated by
forward looking statements that we may make. Forward looking
statements consist of statements which relate to matters other than
historical fact, including matters that inherently refer to future
events. Among others, statements that include words such as
"believe," "anticipate," "will" or "expect," or words of similar
import, are forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other
statements we may make even though these statements may be affected
by events or circumstances occurring after the forward looking
statements or other statements were made. No investor should rely
on the fact that such statements are current at any time other than
the time at which this press release was delivered for
dissemination to the public.
While we communicate with security analysts from time to time,
it is against our policy to disclose to them any material
non-public information or other confidential information.
Accordingly, investors should not assume that we agree with any
statement or report issued by any analyst irrespective of the
content of the statement or report, and such reports are not our
responsibility.
Use of Non-GAAP financial measures
We believe that use of the Non-GAAP measures of adjusted pre-tax
operating income (loss), adjusted net operating income (loss) and
adjusted net operating income (loss) per diluted share facilitate
the evaluation of the company's core financial performance thereby
providing relevant information to investors. These measures are not
recognized in accordance with accounting principles generally
accepted in the United States of
America (GAAP) and should not be viewed as alternatives to
GAAP measures of performance.
Adjusted pre-tax operating income (loss) is defined as
GAAP income (loss) before tax, excluding the effects of net
realized investment gains (losses), gain and losses on debt
extinguishment, net impairment losses recognized in earnings and
infrequent or unusual non-operating items where applicable.
Adjusted net operating income (loss) is defined as
GAAP net income (loss) excluding the after-tax effects of net
realized investment gains (losses), gain and losses on debt
extinguishment, net impairment losses recognized in earnings, and
infrequent or unusual non-operating items where applicable. The
amounts of adjustments to components of pre-tax operating income
(loss) are tax effected using a federal statutory tax rate of
21%.
Adjusted net operating income (loss) per diluted
share is calculated in a manner consistent with the
accounting standard regarding earnings per share by dividing (i)
adjusted net operating income (loss) after making adjustments for
interest expense on convertible debt, whenever the impact is
dilutive, by (ii) diluted weighted average common shares
outstanding, which reflects share dilution from unvested restricted
stock units and from convertible debt when dilutive under the
"if-converted" method.
Although adjusted pre-tax operating income (loss) and adjusted
net operating income (loss) exclude certain items that have
occurred in the past and are expected to occur in the future, the
excluded items represent items that are: (1) not viewed as part of
the operating performance of our primary activities; or (2)
impacted by both discretionary and other economic or regulatory
factors and are not necessarily indicative of operating trends, or
both. These adjustments, along with the reasons for their
treatment, are described below. Trends in the profitability of our
fundamental operating activities can be more clearly identified
without the fluctuations of these adjustments. Other companies may
calculate these measures differently. Therefore, their measures may
not be comparable to those used by us.
(1)
|
Net realized
investment gains (losses). The recognition of net realized
investment gains or losses can vary significantly across periods as
the timing of individual securities sales is highly discretionary
and is influenced by such factors as market opportunities, our tax
and capital profile, and overall market cycles.
|
(2)
|
Gains and losses on
debt extinguishment. Gains and losses on debt
extinguishment result from discretionary activities that are
undertaken to enhance our capital position, improve our debt
profile, and/or reduce potential dilution from our outstanding
convertible debt.
|
(3)
|
Net impairment
losses recognized in earnings. The recognition of net
impairment losses on investments can vary significantly in both
size and timing, depending on market credit cycles, individual
issuer performance, and general economic conditions.
|
(4)
|
Infrequent or
unusual non-operating items. Items that are non-recurring in
nature and are not part of our primary operating
activities.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
Three Months
Ended
March 31
|
(In thousands,
except per share data)
|
|
2022
|
|
2021
|
|
|
|
|
|
Net premiums
written
|
|
$
242,665
|
|
$
241,499
|
Revenues
|
|
|
|
|
Net premiums
earned
|
|
$
255,240
|
|
$
255,045
|
Net investment
income
|
|
38,262
|
|
37,893
|
Net realized investment
(losses) gains
|
|
(1,505)
|
|
2,215
|
Other
revenue
|
|
2,619
|
|
2,804
|
Total revenues
|
|
294,616
|
|
297,957
|
Losses and
expenses
|
|
|
|
|
Losses incurred,
net
|
|
(19,314)
|
|
39,636
|
Underwriting and other
expenses, net
|
|
57,472
|
|
50,719
|
Loss on debt
extinguishment
|
|
22,107
|
|
—
|
Interest
expense
|
|
14,912
|
|
17,985
|
Total losses and expenses
|
|
75,177
|
|
108,340
|
Income before
tax
|
|
219,439
|
|
189,617
|
Provision for income
taxes
|
|
44,426
|
|
39,596
|
Net income
|
|
$
175,013
|
|
$
150,021
|
Net income per diluted
share
|
|
$
0.54
|
|
$
0.43
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
EARNINGS PER SHARE
(UNAUDITED)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands, except per share
data)
|
|
2022
|
|
2021
|
Net income
|
|
$175,013
|
|
$150,021
|
Interest expense, net of tax:
|
|
|
|
|
9% Convertible Junior Subordinated Debentures due
2063
|
|
1,512
|
|
3,712
|
Diluted net income
available to common shareholders
|
|
$
176,525
|
|
$
153,733
|
|
|
|
|
|
Weighted average shares
- basic
|
|
315,975
|
|
338,904
|
Effect of dilutive securities:
|
|
|
|
|
Unvested restricted stock units
|
|
2,029
|
|
1,694
|
9% Convertible Junior
Subordinated Debentures due 2063
|
|
6,534
|
|
15,785
|
Weighted average shares
- diluted
|
|
324,538
|
|
356,383
|
Net income per diluted
share
|
|
$
0.54
|
|
$
0.43
|
NON-GAAP
RECONCILIATIONS
|
|
Reconciliation of
Income before tax / Net income to Adjusted pre-tax operating income
/ Adjusted net operating income
|
|
|
Three Months Ended
March 31,
|
|
|
2022
|
|
2021
|
(In thousands,
except per share amounts)
|
|
Pre-tax
|
|
Tax Effect
|
|
Net
(after-tax)
|
|
Pre-tax
|
|
Tax Effect
|
|
Net (after-tax)
|
Income before tax / Net
income
|
|
$
219,439
|
|
$ 44,426
|
|
$ 175,013
|
|
$
189,617
|
|
$
39,596
|
|
$ 150,021
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on debt extinguishment
|
|
22,107
|
|
4,642
|
|
17,465
|
|
—
|
|
—
|
|
—
|
Net
realized investment losses (gains)
|
|
511
|
|
107
|
|
404
|
|
(2,622)
|
|
(551)
|
|
(2,071)
|
Adjusted pre-tax
operating income / Adjusted net
operating income
|
|
$
242,057
|
|
$ 49,175
|
|
$ 192,882
|
|
$
186,995
|
|
$
39,045
|
|
$ 147,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of
Net income per diluted share to Adjusted net operating income per
diluted share
|
Weighted average shares
- diluted
|
|
|
|
|
|
324,538
|
|
|
|
|
|
356,383
|
Net income per diluted
share
|
|
|
|
|
|
$
0.54
|
|
|
|
|
|
$
0.43
|
Loss on debt extinguishment
|
|
|
|
|
|
0.05
|
|
|
|
|
|
—
|
Net
realized investment losses (gains)
|
|
|
|
|
|
—
|
|
|
|
|
|
(0.01)
|
Adjusted net operating
income per diluted share
|
|
|
|
|
|
$
0.60
|
(1)
|
|
|
|
|
$
0.42
|
(1) Does not foot due
to rounding.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
December
31,
|
|
March 31,
|
(In thousands, except per share
data)
|
|
2022
|
|
2021
|
|
2021
|
ASSETS
|
|
|
|
|
|
|
Investments (1)
|
|
$
5,951,957
|
|
$
6,606,749
|
|
$
6,829,737
|
Cash and cash equivalents
|
|
477,113
|
|
284,690
|
|
182,930
|
Restricted cash and cash equivalents
|
|
12,784
|
|
20,268
|
|
9,836
|
Reinsurance recoverable on loss reserves
(2)
|
|
64,717
|
|
66,905
|
|
102,901
|
Home office and equipment, net
|
|
45,184
|
|
45,614
|
|
46,024
|
Deferred insurance policy acquisition costs
|
|
21,538
|
|
21,671
|
|
22,335
|
Other assets
|
|
271,508
|
|
279,111
|
|
213,253
|
Total assets
|
|
$
6,844,801
|
|
$
7,325,008
|
|
$
7,407,016
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Loss reserves (2)
|
|
$
851,272
|
|
$
883,522
|
|
$
913,110
|
Unearned premiums
|
|
229,115
|
|
241,690
|
|
273,553
|
Federal home loan bank advance
|
|
—
|
|
155,000
|
|
155,000
|
Senior notes
|
|
882,040
|
|
881,508
|
|
879,911
|
Convertible junior debentures
|
|
53,239
|
|
110,204
|
|
208,814
|
Other liabilities
|
|
218,780
|
|
191,702
|
|
244,335
|
Total liabilities
|
|
2,234,446
|
|
2,463,626
|
|
2,674,723
|
Shareholders'
equity
|
|
4,610,355
|
|
4,861,382
|
|
4,732,293
|
Total liabilities and
shareholders' equity
|
|
$
6,844,801
|
|
$
7,325,008
|
|
$
7,407,016
|
Book value per share
(3)
|
|
$
14.75
|
|
$
15.18
|
|
$
13.95
|
|
|
|
|
|
|
|
(1) Investments include net unrealized
gains (losses) on securities
|
|
$
(153,807)
|
|
$
190,153
|
|
$
225,565
|
(2) Loss reserves, net of reinsurance
recoverable on loss reserves
|
|
$
786,555
|
|
$
816,617
|
|
$
810,209
|
(3) Shares outstanding
|
|
312,581
|
|
320,336
|
|
339,316
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL INFORMATION
- NEW INSURANCE WRITTEN
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
New primary insurance
written (NIW) (billions)
|
$
19.6
|
|
$
27.1
|
|
$
28.7
|
|
$
33.6
|
|
$
30.8
|
|
|
|
|
|
|
|
|
|
|
Monthly (including split premium plans) and annual premium
plans
|
18.3
|
|
25.5
|
|
26.5
|
|
31.4
|
|
27.9
|
Single premium plans
|
1.3
|
|
1.5
|
|
2.2
|
|
2.2
|
|
2.9
|
|
|
|
|
|
|
|
|
|
|
Product mix as a % of
primary NIW
|
|
|
|
|
|
|
|
|
|
FICO < 680
|
5 %
|
|
5 %
|
|
5 %
|
|
5 %
|
|
4 %
|
>95% LTVs
|
11
%
|
|
10 %
|
|
13 %
|
|
12 %
|
|
8 %
|
>45% DTI
|
17
%
|
|
15 %
|
|
14 %
|
|
13 %
|
|
12 %
|
Singles
|
7 %
|
|
6 %
|
|
8 %
|
|
7 %
|
|
9 %
|
Refinances
|
6 %
|
|
7 %
|
|
10 %
|
|
21 %
|
|
40 %
|
|
|
|
|
|
|
|
|
|
|
New primary risk
written (billions)
|
$
5.2
|
|
$
7.2
|
|
$
7.4
|
|
$
8.5
|
|
$
7.2
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL INFORMATION
- INSURANCE IN FORCE and RISK IN FORCE
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
Primary Insurance In
Force (IIF) (billions)
|
$
277.3
|
|
$
274.4
|
|
$
268.4
|
|
$
262.0
|
|
$
251.7
|
Total # of loans
|
1,158,521
|
|
1,164,984
|
|
1,161,907
|
|
1,151,692
|
|
1,130,362
|
Flow # of loans
|
1,129,509
|
|
1,134,414
|
|
1,130,056
|
|
1,118,713
|
|
1,096,132
|
|
|
|
|
|
|
|
|
|
|
Premium
Yield
|
|
|
|
|
|
|
|
|
|
In
force portfolio yield (1)
|
40.0
|
|
40.7
|
|
41.8
|
|
42.6
|
|
43.9
|
Premium refunds
|
(0.2)
|
|
(0.4)
|
|
(1.0)
|
|
(0.2)
|
|
(0.8)
|
Accelerated earnings on single premium
|
1.7
|
|
2.6
|
|
2.5
|
|
3.1
|
|
4.4
|
Total direct premium yield
|
41.5
|
|
42.9
|
|
43.3
|
|
45.5
|
|
47.5
|
Ceded premiums earned, net of profit commission and
assumed premiums (2)
|
(4.6)
|
|
(5.6)
|
|
(4.9)
|
|
(6.4)
|
|
(6.6)
|
Net
premium yield
|
36.9
|
|
37.3
|
|
38.4
|
|
39.1
|
|
40.9
|
|
|
|
|
|
|
|
|
|
|
Average Loan Size of
IIF (thousands)
|
$
239.3
|
|
$
235.5
|
|
$
231.0
|
|
$
227.5
|
|
$
222.7
|
Flow
only
|
$
242.0
|
|
$
238.2
|
|
$
233.6
|
|
$
230.1
|
|
$
225.2
|
|
|
|
|
|
|
|
|
|
|
Annual
Persistency
|
66.9
%
|
|
62.6 %
|
|
59.5 %
|
|
57.1 %
|
|
56.2 %
|
|
|
|
|
|
|
|
|
|
|
Primary Risk In Force
(RIF) (billions)
|
$
70.6
|
|
$
69.3
|
|
$
67.2
|
|
$
65.3
|
|
$
62.6
|
By FICO
(%) (3)
|
|
|
|
|
|
|
|
|
|
FICO 760 & >
|
42
%
|
|
42 %
|
|
42 %
|
|
41 %
|
|
41 %
|
FICO 740-759
|
18
%
|
|
17 %
|
|
17 %
|
|
17 %
|
|
17 %
|
FICO 720-739
|
14
%
|
|
14 %
|
|
14 %
|
|
14 %
|
|
14 %
|
FICO 700-719
|
11
%
|
|
11 %
|
|
11 %
|
|
11 %
|
|
11 %
|
FICO 680-699
|
8 %
|
|
8 %
|
|
8 %
|
|
8 %
|
|
8 %
|
FICO 660-679
|
3 %
|
|
3 %
|
|
3 %
|
|
4 %
|
|
4 %
|
FICO 640-659
|
2 %
|
|
2 %
|
|
2 %
|
|
2 %
|
|
2 %
|
FICO 639 & <
|
2 %
|
|
3 %
|
|
3 %
|
|
3 %
|
|
3 %
|
|
|
|
|
|
|
|
|
|
|
Average Coverage Ratio
(RIF/IIF)
|
25.5
%
|
|
25.3 %
|
|
25.1 %
|
|
24.9 %
|
|
24.9 %
|
|
|
|
|
|
|
|
|
|
|
Direct Pool RIF
(millions)
|
|
|
|
|
|
|
|
|
|
With aggregate loss limits
|
$
199
|
|
$
206
|
|
$
207
|
|
$
208
|
|
$
209
|
Without aggregate loss limits
|
$
94
|
|
$
99
|
|
$
106
|
|
$
114
|
|
$
122
|
|
|
(1)
|
Total direct premiums
earned, excluding accelerated premiums from premium refunds and
single premium policy cancellations divided by average primary
insurance in force.
|
(2)
|
Ceded premiums earned,
net of profit commissions and assumed premiums. Assumed premiums
include our participation in GSE Credit Risk Transfer programs, of
which the impact on the net premium yield was 0.3 bps at March 31,
2022 and 0.4 bps in 2021.
|
(3)
|
The FICO credit score
at the time of origination for a loan with multiple borrowers is
the lowest of the borrowers' "decision FICO scores." A borrower's
"decision FICO score" is determined as follows: if there are three
FICO scores available, the middle FICO score is used; if two FICO
scores are available, the lower of the two is used; if only one
FICO score is available, it is used.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
|
ADDITIONAL INFORMATION
- DELINQUENCY STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Primary IIF -
Delinquent Roll Forward - # of Loans
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Delinquent Inventory
|
|
33,290
|
|
37,379
|
|
42,999
|
|
52,775
|
|
57,710
|
|
New
Notices
|
|
10,703
|
|
10,523
|
|
9,862
|
|
9,036
|
|
13,011
|
|
Cures
|
|
(13,200)
|
|
(13,995)
|
|
(14,813)
|
|
(18,460)
|
|
(17,628)
|
|
Paid claims
|
|
(322)
|
|
(267)
|
|
(298)
|
|
(346)
|
|
(312)
|
|
Rescissions and denials
|
|
(9)
|
|
(15)
|
|
(11)
|
|
(6)
|
|
(6)
|
|
Other items removed from inventory
(1)
|
|
—
|
|
(335)
|
|
(360)
|
|
—
|
|
—
|
|
Ending Delinquent Inventory (2)
|
|
30,462
|
|
33,290
|
|
37,379
|
|
42,999
|
|
52,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF Delinquency
Rate
|
|
2.61
%
|
|
2.84 %
|
|
3.20 %
|
|
3.71 %
|
|
4.65 %
|
|
Primary claim received
inventory included in ending delinquent inventory
|
|
217
|
|
211
|
|
154
|
|
159
|
|
151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
Delinquent Loans - Flow only
|
|
26,295
|
|
29,108
|
|
33,271
|
|
38,715
|
|
47,880
|
|
Primary IIF Delinquency
Rate - Flow only
|
|
2.31
%
|
|
2.55 %
|
|
2.93 %
|
|
3.44 %
|
|
4.35 %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Cures
|
|
|
|
|
|
|
|
|
|
|
|
Reported
delinquent and cured intraquarter
|
|
3,147
|
|
2,766
|
|
2,727
|
|
2,334
|
|
3,452
|
|
Number of
payments delinquent prior to cure
|
|
|
|
|
|
|
|
|
|
|
|
3
payments or less
|
|
4,187
|
|
3,939
|
|
3,346
|
|
5,378
|
|
5,547
|
|
4-11 payments
|
|
2,608
|
|
2,977
|
|
4,075
|
|
7,075
|
|
8,166
|
|
12
payments or more
|
|
3,258
|
|
4,313
|
|
4,665
|
|
3,673
|
|
463
|
|
Total Cures in
Quarter
|
|
13,200
|
|
13,995
|
|
14,813
|
|
18,460
|
|
17,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Paids
|
|
|
|
|
|
|
|
|
|
|
|
Number of
payments delinquent at time of claim payment
|
|
|
|
|
|
|
|
|
|
|
|
3
payments or less
|
|
1
|
|
—
|
|
2
|
|
—
|
|
—
|
|
4-11 payments
|
|
8
|
|
9
|
|
10
|
|
14
|
|
25
|
|
12
payments or more
|
|
313
|
|
258
|
|
286
|
|
332
|
|
287
|
|
Total Paids in
Quarter
|
|
322
|
|
267
|
|
298
|
|
346
|
|
312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Primary
Delinquent Inventory
|
|
|
|
|
|
|
|
|
|
|
|
Consecutive months
delinquent
|
|
|
|
|
|
|
|
|
|
|
|
3 months or
less
|
|
7,382
|
24 %
|
7,586
|
23%
|
6,948
|
19%
|
6,513
|
15 %
|
9,194
|
17 %
|
4-11 months
|
|
8,131
|
27 %
|
7,990
|
24%
|
9,371
|
25%
|
12,840
|
30 %
|
29,832
|
57 %
|
12 months or
more
|
|
14,949
|
49 %
|
17,714
|
53%
|
21,060
|
56%
|
23,646
|
55 %
|
13,749
|
26 %
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent
|
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
|
9,586
|
31 %
|
9,529
|
28%
|
8,911
|
24%
|
8,619
|
20 %
|
11,440
|
22 %
|
4-11
payments
|
|
8,803
|
29 %
|
9,208
|
28%
|
11,165
|
30%
|
14,894
|
35 %
|
25,016
|
47 %
|
12 payments or
more
|
|
12,073
|
40 %
|
14,553
|
44%
|
17,303
|
46%
|
19,486
|
45 %
|
16,319
|
31 %
|
|
|
(1)
|
Items removed from
inventory are associated with commutations of coverage on
non-performing policies.
|
(2)
|
As of March 31, 2022
29% of our delinquency inventory were reported to us as subject to
forbearance plan, down from a high of 67% at June 30, 2020. We
believe substantially all represent forbearances related to
COVID-19.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL INFORMATION
- RESERVES and CLAIMS PAID
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
Reserves
(millions)
|
|
|
|
|
|
|
|
|
|
Primary Direct Loss Reserves
|
$
845
|
|
$
877
|
|
$
926
|
|
$
928
|
|
$
905
|
Pool Direct loss reserves
|
6
|
|
6
|
|
7
|
|
7
|
|
7
|
Other Gross Reserves
|
—
|
|
1
|
|
—
|
|
1
|
|
1
|
Total Gross Loss
Reserves
|
$
851
|
|
$
884
|
|
$
933
|
|
$
936
|
|
$
913
|
|
|
|
|
|
|
|
|
|
|
Primary Average Direct Reserve Per Delinquency
|
$
27,538
|
|
$
26,156
|
|
$
24,597
|
|
$
21,147
|
|
$
17,147
|
|
|
|
|
|
|
|
|
|
|
Net Paid Claims
(millions) (1)
|
$
11
|
|
$
20
|
|
$
20
|
|
$
14
|
|
$
15
|
Total primary (excluding settlements)
|
9
|
|
9
|
|
11
|
|
11
|
|
12
|
Rescission and NPL settlements
|
—
|
|
7
|
|
7
|
|
—
|
|
—
|
Pool
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
Reinsurance
|
—
|
|
—
|
|
(1)
|
|
—
|
|
(1)
|
Other
|
2
|
|
4
|
|
3
|
|
3
|
|
4
|
Reinsurance Terminations (1)
|
—
|
|
(36)
|
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Primary Average Claim
Payment (thousands)
|
$
27.7
|
|
$
32.7
|
(2)
|
$
36.1
|
(2)
|
$
34.1
|
|
$
36.7
|
Flow only
|
$
22.8
|
|
$
29.8
|
(2)
|
$
32.0
|
(2)
|
$
34.8
|
|
$
32.3
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Net paid claims, as
presented, does not include amounts received in conjunction with
terminations or commutations of reinsurance agreements.
|
(2)
|
Excludes amounts paid
in settlement disputes for claims paying practices and/or
commutations of policies.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL INFORMATION
- REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
Quota Share
Reinsurance
|
|
|
|
|
|
|
|
|
|
%
NIW subject to reinsurance
|
87.5
%
|
|
88.2 %
|
|
85.0 %
|
|
81.6 %
|
|
73.7 %
|
Ceded premiums written and earned (millions)
|
$
22.4
|
|
$
28.2
|
(1)
|
$
22.9
|
|
$
34.0
|
|
$
33.4
|
Ceded losses incurred (millions)
|
$
(2.0)
|
|
$
(3.8)
|
|
$
(3.6)
|
|
$
8.9
|
|
$
8.4
|
Ceding commissions (millions) (included in underwriting and
other expenses)
|
$
12.3
|
|
$
13.8
|
|
$
13.7
|
|
$
12.9
|
|
$
13.1
|
Profit commission (millions) (included in ceded
premiums)
|
$
39.0
|
|
$
45.8
|
|
$
45.1
|
|
$
31.0
|
|
$
31.9
|
|
|
|
|
|
|
|
|
|
|
Excess-of-Loss
Reinsurance
|
|
|
|
|
|
|
|
|
|
Ceded premiums earned (millions)
|
$
11.8
|
|
$
12.1
|
|
$
12.1
|
|
$
10.0
|
|
$
10.3
|
|
|
(1)
|
Includes $5 million
termination fees paid to terminate our 2017 and 2018 QSR
Transactions.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL INFORMATION:
BULK STATISTICS AND MI RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
2022
|
|
2021
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
Bulk Primary Insurance
Statistics
|
|
|
|
|
|
|
|
|
|
Insurance in force (billions)
|
$4.0
|
|
$4.2
|
|
$4.4
|
|
$4.6
|
|
$4.8
|
Risk in force (billions)
|
$1.1
|
|
$1.2
|
|
$1.2
|
|
$1.3
|
|
$1.4
|
Average loan size (thousands)
|
$137.4
|
|
$138.4
|
|
$139.5
|
|
$140.4
|
|
$141.0
|
Number of delinquent loans
|
4,167
|
|
4,182
|
|
4,108
|
|
4,284
|
|
4,895
|
Delinquency rate
|
14.36%
|
|
13.68%
|
|
12.9%
|
|
12.99%
|
|
14.30%
|
Primary paid claims (excluding settlements)
(millions)
|
$4
|
|
$2
|
|
$3
|
|
$1
|
|
$4
|
Average claim payment (thousands)
|
$39.5
|
|
$44.1
|
|
$60.2
|
|
$29.8
|
|
$50.5
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty
Insurance Corporation - Risk to Capital
|
9.2:1
|
(1)
|
9.5:1
|
|
9.0:1
|
|
8.9:1
|
|
8.8:1
|
Combined Insurance
Companies - Risk to Capital
|
9.2:1
|
(1)
|
9.5:1
|
|
9.0:1
|
|
8.9:1
|
|
8.8:1
|
|
|
|
|
|
|
|
|
|
|
GAAP loss ratio
(insurance operations only)
|
(7.6)%
|
|
(9.9)%
|
|
8.1%
|
|
11.6%
|
|
15.5%
|
GAAP underwriting
expense ratio (insurance operations only)
|
23.0%
|
|
18.2%
|
|
21.9%
|
|
22.3%
|
|
19.8%
|
|
|
|
|
|
|
|
|
|
|
Risk Factors
As used below, "we," "our" and "us" refer to MGIC Investment
Corporation's consolidated operations or to MGIC Investment
Corporation, as the context requires; and "MGIC" refers to Mortgage
Guaranty Insurance Corporation.
Risk Factors Relating to Global Events
The COVID-19 pandemic may materially impact our future
financial results, business, liquidity and/or financial
condition.
The COVID-19 pandemic materially impacted our 2020 financial
results and, while uncertain, it may also materially impact our
future financial results, business, liquidity and/or financial
condition. The magnitude of the impact will be influenced by
various factors, including the length and severity of the pandemic
in the United States, efforts to
reduce the transmission of COVID-19, the level of unemployment,
government initiatives and actions taken by Fannie Mae and Freddie
Mac (the "GSEs") (including mortgage forbearance and modification
programs) to mitigate the economic harm caused by COVID-19.
The COVID-19 pandemic may impact our business in various ways,
including the following which are described in more detail in the
remainder of these risk factors:
- Our incurred losses will increase if loan delinquencies
increase. We establish reserves for insurance losses when
delinquency notices are received on loans that are two or more
payments past due and for loans we estimate are delinquent prior to
the close of the accounting period but for which delinquency
notices have not yet been received (which are included in what we
refer to as "IBNR"). In addition, our estimates of the number of
delinquencies for which we will ultimately receive claims, and the
amount, or severity, of each claim, may increase.
- We may be required to maintain more capital under the private
mortgage insurer eligibility requirements ("PMIERs") of the GSEs,
which generally require more capital to be held for delinquent
loans than for performing loans and require more capital to be held
as the number of payments missed on delinquent loans
increases.
- If the number of delinquencies increases, the number of claims
we must pay over time will generally increase.
- Our access to the reinsurance and capital markets may be
limited and the terms under which we are able to access such
markets may be negatively impacted.
The Russia-Ukraine war and/or other global events may
adversely affect the U.S. economy and our business.
Russia's invasion of
Ukraine has increased the
already-elevated inflation rate, added more pressure to strained
supply chains, and has increased volatility in the domestic and
global financial markets. The war has impacted, and may impact, our
business in various ways, including the following which are
described in more detail in the remainder of these risk
factors:
- The terms under which we are able to obtain excess-of-loss
("XOL") reinsurance through the insurance-linked notes ("ILN")
market have been negatively impacted.
- The risk of a cybersecurity incident that affects our company
may have increased.
- An extended or broadened war may negatively impact the domestic
economy, which may increase unemployment and inflation, or decrease
home prices, in each case leading to an increase in loan
delinquencies.
- The volatility in the financial markets may impact the
performance of our investment portfolio and our investment
portfolio may include investments in companies or securities that
are negatively impacted by the war.
Risk Factors Relating to the Mortgage Insurance Industry and
its Regulation
Downturns in the domestic economy or declines in home
prices may result in more homeowners defaulting and our losses
increasing, with a corresponding decrease in our
returns.
Losses result from events that reduce a borrower's ability or
willingness to make mortgage payments, such as unemployment, health
issues, changes in family status, and decreases in home prices that
result in the borrower's mortgage balance exceeding the net value
of the home. A deterioration in economic conditions, including an
increase in unemployment, generally increases the likelihood that
borrowers will not have sufficient income to pay their mortgages
and can also adversely affect home prices, which in turn can
influence the willingness of borrowers with sufficient resources to
make mortgage payments when the mortgage balance exceeds the net
value of the home.
High levels of unemployment may result in an increasing number
of loan delinquencies and an increasing number of insurance claims;
however, unemployment is difficult to predict given the uncertainty
in the current market environment, including as a result of global
events such as the COVID-19 pandemic, the Russia-Ukraine war, and the possibility of an
economic recession. Inflation has increased dramatically in the
past twelve months. The impact that higher inflation rates will
have on loan delinquencies is unknown.
The seasonally-adjusted Purchase-Only U.S. Home Price Index of
the Federal Housing Finance Agency (the "FHFA"), which is based on
single-family properties whose mortgages have been purchased or
securitized by Fannie Mae or Freddie Mac, indicates that home
prices increased by 3.7% in the first two months of 2022, after
increasing by 17.8%, 11.8%, and 5.9% in 2021, 2020 and 2019,
respectively. The price-to-income ratio in some markets exceeds its
historical average, in part as a result of recent home price
appreciation outpacing increases in income. Home prices may decline
even absent a deterioration in economic conditions due to declines
in demand for homes, which in turn may result from changes in
buyers' perceptions of the potential for future appreciation,
restrictions on and the cost of mortgage credit due to more
stringent underwriting standards, higher interest rates, changes to
the tax deductibility of mortgage interest, decreases in the rate
of household formations, or other factors. The significant increase
in interest rates in recent months may put downward pressure on
home prices.
The future impact of COVID-19-related forbearance and
foreclosure mitigation activities is unknown.
Forbearance for federally-insured mortgages (including those
delivered to or purchased by the GSEs) whose borrowers were
affected by COVID-19 allows mortgage payments to be suspended for a
period generally ranging from 6 to 18 months. Historically,
forbearance plans have reduced the incidence of our losses on
affected loans. However, given the uncertainty surrounding the
long-term economic impact of COVID-19, it is difficult to predict
the ultimate effect of COVID-19 related forbearances on our loss
incidence. Whether a loan delinquency will cure, including through
modification, when forbearance ends will depend on the economic
circumstances of the borrower at that time. The severity of losses
associated with delinquencies that do not cure will depend on
economic conditions at that time, including home prices.
Foreclosures on mortgages purchased or securitized by the GSEs
were suspended through July 31, 2021.
Under a CFPB rule that was effective through December 31, 2021, with limited exceptions,
servicers were required to ensure that at least one temporary
procedural safeguard had been met before referring 120-day
delinquent loans for foreclosure. With the expiration of the CFPB
rule, it is likely that foreclosures and claims will increase.
We may not continue to meet the GSEs' private mortgage
insurer eligibility requirements and our returns may decrease if we
are required to maintain more capital in order to maintain our
eligibility.
We must comply with a GSE's PMIERs to be eligible to insure
loans delivered to or purchased by that GSE. The PMIERs include
financial requirements, as well as business, quality control and
certain transaction approval requirements. The financial
requirements of the PMIERs require a mortgage insurer's "Available
Assets" (generally only the most liquid assets of an insurer) to
equal or exceed its "Minimum Required Assets" (which are generally
based on an insurer's book of risk in force and calculated from
tables of factors with several risk dimensions, reduced for credit
given for risk ceded under reinsurance agreements).
Based on our interpretation of the PMIERs, as of March 31, 2022, MGIC's Available Assets totaled
$6.0 billion, or $2.4 billion in excess of its Minimum Required
Assets. MGIC is in compliance with the PMIERs and eligible to
insure loans purchased by the GSEs. Our "Minimum Required Assets"
reflect a credit for risk ceded under our quota share reinsurance
("QSR") and XOL reinsurance transactions, which are discussed in
our risk factor titled "The mix of business we write affects our
Minimum Required Assets under the PMIERs, our premium yields and
the likelihood of losses occurring." The calculated credit for
XOL reinsurance transactions under PMIERs is generally based on the
PMIERs requirement of the covered loans and the attachment and
detachment points of the coverage, all of which fluctuate over
time. PMIERs credit is generally not given for the reinsured risk
above the PMIERs requirement. The GSEs have discretion to further
limit reinsurance credit under the PMIERs. Refer to our Quarterly
Supplements, which are posted on our investor website, for the
calculated PMIERs credit for each of our XOL reinsurance
transactions. We are not including the information contained in
those Supplements or on our investor website as a part of, or
incorporating it by reference into, this report. There is a risk we
will not receive our current level of credit in future periods for
ceded risk. In addition, we may not receive the same level of
credit under future reinsurance transactions that we receive under
existing transactions. If MGIC is not allowed certain levels of
credit under the PMIERs, under certain circumstances, MGIC may
terminate the reinsurance transactions without penalty.
The PMIERs generally require us to hold significantly more
Minimum Required Assets for delinquent loans than for performing
loans and the Minimum Required Assets required to be held increases
as the number of payments missed on a delinquent loan increases. If
the number of loan delinquencies increases for reasons discussed in
these risk factors, or otherwise, it may cause our Minimum Required
Assets to exceed our Available Assets. We are unable to predict the
ultimate number of loans that will become delinquent.
If our Available Assets fall below our Minimum Required Assets,
we would not be in compliance with the PMIERs. The PMIERs provide a
list of remediation actions for a mortgage insurer's
non-compliance, with additional actions possible in the GSEs'
discretion. At the extreme, the GSEs may suspend or terminate our
eligibility to insure loans purchased by them. Such suspension or
termination would significantly reduce the volume of our new
insurance written ("NIW"), the substantial majority of which is for
loans delivered to or purchased by the GSEs. In addition to the
increase in Minimum Required Assets associated with delinquent
loans, factors that may negatively impact MGIC's ability to
continue to comply with the financial requirements of the PMIERs
include the following:
- The GSEs may make the PMIERs more onerous in the future. The
PMIERs provide that the factors that determine Minimum Required
Assets will be updated periodically, or as needed if there is a
significant change in macroeconomic conditions or loan performance.
We do not anticipate that the regular periodic updates will occur
more frequently than once every two years. The PMIERs state that
the GSEs will provide notice 180 days prior to the effective date
of updates to the factors; however, the GSEs may amend the PMIERs
at any time, including by imposing restrictions specific to our
company.
- The PMIERs may be changed in response to the final regulatory
capital framework for the GSEs that was published in February 2022.
- Our future operating results may be negatively impacted by the
matters discussed in the rest of these risk factors. Such matters
could decrease our revenues, increase our losses or require the use
of assets, thereby creating a shortfall in Available Assets.
Should capital be needed by MGIC in the future, capital
contributions from our holding company may not be available due to
competing demands on holding company resources, including for
repayment of debt.
Because we establish loss reserves only upon a loan
delinquency rather than based on estimates of our ultimate losses
on risk in force, losses may have a disproportionate adverse effect
on our earnings in certain periods.
In accordance with accounting principles generally accepted in
the United States, we establish
case reserves for insurance losses and loss adjustment expenses
only when delinquency notices are received for insured loans that
are two or more payments past due and for loans we estimate are
delinquent but for which delinquency notices have not yet been
received (which we include in "IBNR"). Losses that may occur from
loans that are not delinquent are not reflected in our financial
statements, except when a "premium deficiency" is recorded. A
premium deficiency would be recorded if the present value of
expected future losses and expenses exceeds the present value of
expected future premiums and already established loss reserves on
the applicable loans. As a result, future losses incurred on loans
that are not currently delinquent may have a material impact on
future results as delinquencies emerge. As of March 31, 2022, we had established case reserves
and reported losses incurred for 30,462 loans in our delinquency
inventory and our IBNR reserve totaled $27
million. The number of loans in our delinquency inventory
may increase from that level as a result of economic conditions
relating to current global events or other factors and our losses
incurred may increase.
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially different than our
loss reserves.
When we establish case reserves, we estimate our ultimate loss
on delinquent loans by estimating the number of such loans that
will result in a claim payment (the "claim rate"), and further
estimating the amount of the claim payment (the "claim severity").
Changes to our claim rate and claim severity estimates could have a
material impact on our future results, even in a stable economic
environment. Our estimates incorporate anticipated cures, loss
mitigation activity, rescissions and curtailments. The
establishment of loss reserves is subject to inherent uncertainty
and requires significant judgment by management. Our actual claim
payments may differ substantially from our loss reserve estimates.
Our estimates could be affected by several factors, including a
change in regional or national economic conditions as discussed in
these risk factors, the impact of government and GSE actions taken
to mitigate the economic harm caused by the COVID-19 pandemic
(including foreclosure moratoriums and mortgage forbearance and
modification programs); efforts to reduce the transmission of
COVID-19; and a change in the length of time loans are delinquent
before claims are received. All else being equal, the longer a loan
is delinquent before a claim is received, the greater the severity.
As a result of foreclosure moratoriums and forbearance programs,
the average time it takes to receive claims has increased. Economic
conditions may differ from region to region.. Information about the
geographic dispersion of our insurance in force can be found in our
Annual Reports on Form 10-K and our Quarterly Reports on Form 10-Q.
Losses incurred generally have followed a seasonal trend in which
the second half of the year has weaker credit performance than the
first half, with higher new default notice activity and a lower
cure rate; however, the effects of the COVID-19 pandemic affected
this pattern in 2020 and 2021.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance.
Alternatives to private mortgage insurance include:
- investors using risk mitigation and credit risk transfer
techniques other than private mortgage insurance, or accepting
credit risk without credit enhancement,
- lenders and other investors holding mortgages in portfolio and
self-insuring,
- lenders using Federal Housing Administration ("FHA"), U.S.
Department of Veterans Affairs ("VA") and other government mortgage
insurance programs, and
- lenders originating mortgages using piggyback structures to
avoid private mortgage insurance, such as a first mortgage with an
80% LTV ratio and a second mortgage with a 10%, 15% or 20% LTV
ratio rather than a first mortgage with a 90%, 95% or 100% LTV
ratio that has private mortgage insurance.
The GSEs' charters generally require credit enhancement for a
low down payment mortgage loan (a loan in an amount that exceeds
80% of a home's value) in order for such loan to be eligible for
purchase by the GSEs. Private mortgage insurance generally has been
purchased by lenders in primary mortgage market transactions to
satisfy this credit enhancement requirement. In 2018, the GSEs
initiated secondary mortgage market programs with loan level
mortgage default coverage provided by various (re)insurers that are
not mortgage insurers governed by PMIERs, and that are not selected
by the lenders. These programs, which currently account for a small
percentage of the low down payment market, compete with traditional
private mortgage insurance and, due to differences in policy terms,
they may offer premium rates that are below prevalent single
premium lender-paid mortgage insurance ("LPMI") rates. We
participate in these programs from time to time. See our risk
factor titled "Changes in the business practices of the GSEs,
federal legislation that changes their charters or a restructuring
of the GSEs could reduce our revenues or increase our losses"
for a discussion of various business practices of the GSEs that may
be changed, including through expansion or modification of these
programs.
The GSEs (and other investors) have also used other forms of
credit enhancement that did not involve traditional private
mortgage insurance, such as engaging in credit-linked note
transactions executed in the capital markets, or using other forms
of debt issuances or securitizations that transfer credit risk
directly to other investors, including competitors and an affiliate
of MGIC; using other risk mitigation techniques in conjunction with
reduced levels of private mortgage insurance coverage; or accepting
credit risk without credit enhancement.
The FHA's share of the low down payment residential mortgages
that were subject to FHA, VA, USDA or primary private mortgage
insurance was 24.7% in 2021, 23.4% in 2020 and 28.2% in 2019.
Beginning in 2012, the FHA's share has been as low as 23.4% (in
2020) and as high as 42.1% (in 2012). Factors that influence the
FHA's market share include relative rates and fees, underwriting
guidelines and loan limits of the FHA, VA, private mortgage
insurers and the GSEs; lenders' perceptions of legal risks under
FHA versus GSE programs; flexibility for the FHA to establish new
products as a result of federal legislation and programs; returns
expected to be obtained by lenders for Ginnie Mae securitization of FHA-insured loans
compared to those obtained from selling loans to the GSEs for
securitization; and differences in policy terms, such as the
ability of a borrower to cancel insurance coverage under certain
circumstances. The focus of the Presidential Administration on
equitable housing finance and sustainable housing opportunities
increases the likelihood of a reduction in the FHA's mortgage
insurance premium rates. Such a rate reduction would negatively
impact our NIW; however, given the many factors that influence the
FHA's market share, it is difficult to predict the impact. In
addition, we cannot predict how the factors that affect the FHA's
share of new insurance written will change in the future.
The VA's share of the low down payment residential mortgages
that were subject to FHA, VA, USDA or primary private mortgage
insurance was 30.2% in 2021, 30.9% in 2020 and 25.2% in 2019.
Beginning in 2012, the VA's share has been as low as 22.8% (in
2013) and as high as 30.9% (in 2020). We believe that the VA's
market share has generally been elevated in recent years because of
an increase in the number of borrowers that are eligible for the
VA's program, which offers 100% LTV ratio loans and charges a
one-time funding fee that can be included in the loan amount, and
because eligible borrowers have opted to use the VA program when
refinancing their mortgages.
Changes in the business practices of the GSEs, federal
legislation that changes their charters or a restructuring of the
GSEs could reduce our revenues or increase our losses.
The substantial majority of our NIW is for loans purchased by
the GSEs; therefore, the business practices of the GSEs greatly
impact our business. The GSEs have been requested to submit
Equitable Housing Finance Plans to the FHFA. The plans are to
identify and address barriers to sustainable housing opportunities,
including the GSEs' goals and action plans to advance equity in
housing finance for the next three years. The action plans, when
finalized, may include methods to reduce mortgage costs for
historically underserved borrowers, including mortgage insurance
costs. The GSEs' action plans will likely change certain of the
GSEs' business practices and those changes may affect the mortgage
insurance industry. The GSEs' business practices that currently
affect the mortgage insurance industry include:
- The GSEs' PMIERs, the financial requirements of which are
discussed in our risk factor titled "We may not continue to meet
the GSEs' private mortgage insurer eligibility requirements and our
returns may decrease if we are required to maintain more capital in
order to maintain our eligibility."
- The capital and collateral requirements for participants in the
GSEs' alternative forms of credit enhancement discussed in our risk
factor titled "The amount of insurance we write could be
adversely affected if lenders and investors select alternatives to
private mortgage insurance."
- The level of private mortgage insurance coverage, subject to
the limitations of the GSEs' charters, when private mortgage
insurance is used as the required credit enhancement on low down
payment mortgages (the GSEs generally require a level of mortgage
insurance coverage that is higher than the level of coverage
required by their charters; any change in the required level of
coverage will impact our new risk written).
- The amount of loan level price adjustments and guaranty fees
(which result in higher costs to borrowers) that the GSEs assess on
loans that require private mortgage insurance. The requirements of
the new GSE capital framework may lead the GSEs to increase their
guaranty fees. In addition, the FHFA has indicated that it is
reviewing the GSEs' pricing in connection with preparing them to
exit conservatorship and to ensure that pricing subsidies benefit
only affordable housing activities.
- Whether the GSEs select or influence the mortgage lender's
selection of the mortgage insurer providing coverage.
- The underwriting standards that determine which loans are
eligible for purchase by the GSEs, which can affect the quality of
the risk insured by the mortgage insurer and the availability of
mortgage loans.
- The terms on which mortgage insurance coverage can be canceled
before reaching the cancellation thresholds established by law and
the business practices associated with such cancellations. For more
information, see our risk factor titled "Changes in interest
rates, house prices or mortgage insurance cancellation requirements
may change the length of time that our policies remain in
force."
- The programs established by the GSEs intended to avoid or
mitigate loss on insured mortgages and the circumstances in which
mortgage servicers must implement such programs.
- The terms that the GSEs require to be included in mortgage
insurance policies for loans that they purchase, including
limitations on the rescission rights of mortgage insurers.
- The extent to which the GSEs intervene in mortgage insurers'
claims paying practices, rescission practices or rescission
settlement practices with lenders.
- The maximum loan limits of the GSEs compared to those of the
FHA and other investors.
- The benchmarks established by the FHFA for loans to be
purchased by the GSEs, which can affect the loans available to be
insured. In December 2021, the FHFA
established the benchmark levels for 2022-2024 purchases of
low-income home mortgages, very low-income home mortgages and
low-income refinance mortgages, each of which exceeded the 2021
benchmarks. The FHFA also established two new sub-goals: one
targeting minority communities and the other targeting low-income
neighborhoods.
The FHFA has been the conservator of the GSEs since 2008 and has
the authority to control and direct their operations. The increased
role that the federal government has assumed in the residential
housing finance system through the GSE conservatorship may increase
the likelihood that the business practices of the GSEs change,
including through administrative action, in ways that have a
material adverse effect on us and that the charters of the GSEs are
changed by new federal legislation.
As a result of the 2021 change in the Presidential
Administration, the June 2021
appointment of a new Acting Director of the FHFA who has also been
nominated to become the full-time Director, and the 2021 U.S.
Supreme Court decision that allows the President to remove the FHFA
Director at will, it is uncertain what role the GSEs, FHA and
private capital, including private mortgage insurance, will play in
the residential housing finance system in the future. The timing
and impact on our business of any resulting changes are uncertain.
Many of the proposed changes would require Congressional action to
implement and it is difficult to estimate when Congressional action
would be final and how long any associated phase-in period may
last.
Reinsurance may not always be available or
affordable.
We have in place QSR and XOL reinsurance transactions providing
various amounts of coverage on 92% of our risk in force as of
March 31, 2022. As of March 31, 2022, our QSR transactions with
unaffiliated reinsurers cover most of our insurance written from
2013 through 2016 and 2019 through 2023, and smaller portions of
our insurance written prior to 2013 and from 2024 through 2025. The
weighted average coverage percentage of our QSR transactions was
30%, based on risk in force as of March 31,
2022. Our XOL transactions in place as of March 31, 2022 provided XOL reinsurance coverage
for a portion of the risk associated with certain mortgage
insurance policies having insurance coverage in force dates from
July 1, 2016 through March 31, 2019 and January
1, 2020 through May 28, 2021,
all dates inclusive. The XOL transactions were entered into with
special purpose insurers that issued notes linked to the
reinsurance coverage ("Insurance Linked Notes" or "ILNs"). The
reinsurance transactions reduce the tail-risk associated with
stress scenarios. As a result, they reduce the capital that we are
required to hold to support the risk and they allow us to earn
higher returns on our business than we would without them. However,
reinsurance may not always be available to us or available on
similar terms, the quota share reinsurance transactions subject us
to counterparty credit risk, and the GSEs may change the credit
they allow under the PMIERs for risk ceded under our reinsurance
transactions. In the first quarter of 2022, our access to XOL
reinsurance through the ILN market was temporarily disrupted and
the terms under which we were able to access that market were less
attractive than in the past due to volatility stemming from
circumstances such as higher interest rates, increased inflation
and Russia's invasion of
Ukraine. In April 2022 we completed an XOL transaction in the
ILN market. If we are unable to obtain reinsurance for NIW, the
capital required to support our NIW will increase and our returns
may decrease absent an increase in our premium rates. An increase
in our premium rates may lead to a decrease in our NIW.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive regulation, including by state
insurance departments. Many regulations are designed for the
protection of our insured policyholders and consumers, rather than
for the benefit of investors. Mortgage insurers, including MGIC,
have in the past been involved in litigation and regulatory actions
related to alleged violations of the anti-referral fee provisions
of the Real Estate Settlement Procedures Act ("RESPA"), and the
notice provisions of the Fair Credit Reporting Act ("FCRA"). While
these proceedings in the aggregate did not result 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 effect on us. To the extent that we are construed
to make independent credit decisions in connection with our
contract underwriting activities, we also could be subject to
increased regulatory requirements under the Equal Credit
Opportunity Act ("ECOA"), FCRA, and other laws. Under relevant
laws, examination may also be made of whether a mortgage insurer's
underwriting decisions have a disparate impact on persons belonging
to a protected class in violation of the law.
Although their scope varies, state insurance laws generally
grant broad supervisory powers to agencies or officials to examine
insurance companies and enforce rules or exercise discretion
affecting almost every significant aspect of the insurance
business, including payment for the referral of insurance business,
premium rates and discrimination in pricing, and minimum capital
requirements. The increased use, by the private mortgage insurance
industry, of risk-based pricing systems that establish premium
rates based on more attributes than previously considered, and of
algorithms, artificial intelligence and data and analytics, may
lead to additional regulatory scrutiny of premium rates and of
other matters such as discrimination in pricing and underwriting,
data privacy and access to insurance. For more information about
state capital requirements, see our risk factor titled "State
capital requirements may prevent us from continuing to write new
insurance on an uninterrupted basis." For information about
regulation of data privacy, see our risk factor titled "We could
be adversely affected if personal information on consumers that we
maintain is improperly disclosed; our information technology
systems are damaged or their operations are interrupted; or our
automated processes do not operate as expected." For more
details about the various ways in which our subsidiaries are
regulated, see "Business - Regulation" in Item 1 of our Annual
Report on Form 10-K for the year ended December 31, 2021.
While we have established policies and procedures to comply with
applicable laws and regulations, many such laws and regulations are
complex and it is not possible to predict the eventual scope,
duration or outcome of any reviews or investigations nor is it
possible to predict their effect on us or the mortgage insurance
industry.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that we write could
decline.
The factors that may affect the volume of low down payment
mortgage originations include the health of the U.S. economy,
conditions in regional and local economies and the level of
consumer confidence; restrictions on mortgage credit due to more
stringent underwriting standards, liquidity issues or
risk-retention and/or capital requirements affecting lenders; the
level of home mortgage interest rates; housing affordability; new
and existing housing availability; the rate of household formation,
which is influenced, in part, by population and immigration trends;
homeownership rates; the rate of home price appreciation, which in
times of heavy refinancing can affect whether refinanced loans have
LTV ratios that require private mortgage insurance; and government
housing policy encouraging loans to first-time homebuyers. A
decline in the volume of low down payment home mortgage
originations could decrease demand for mortgage insurance and limit
our NIW. For other factors that could decrease the demand for
mortgage insurance, see our risk factor titled "The amount of
insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage
insurance."
State capital requirements may prevent us from continuing
to write new insurance on an uninterrupted basis.
The insurance laws of 16 jurisdictions, including Wisconsin, MGIC's domiciliary state, require a
mortgage insurer to maintain a minimum amount of statutory capital
relative to its risk in force (or a similar measure) in order for
the mortgage insurer to continue to write new business. We refer to
these requirements as the "State Capital Requirements." While they
vary among jurisdictions, the most common State Capital
Requirements allow for a maximum risk-to-capital ratio of 25 to 1.
A risk-to-capital ratio will increase if (i) the percentage
decrease in capital exceeds the percentage decrease in insured
risk, or (ii) the percentage increase in capital is less than the
percentage increase in insured risk. Wisconsin does not regulate capital by using a
risk-to-capital measure but instead requires a minimum policyholder
position ("MPP"). MGIC's "policyholder position" includes its net
worth or surplus, and its contingency reserve.
At March 31, 2022 MGIC's
risk-to-capital ratio was 9.2 to 1, below the maximum allowed by
the jurisdictions with State Capital Requirements, and its
policyholder position was $3.7
billion above the required MPP of $1.9 billion. At March 31,
2022, the risk-to-capital ratio of our combined insurance
operations was 9.2 to 1. Our risk-to-capital ratio and MPP reflect
full credit for the risk ceded under our quota share reinsurance
and excess of loss transactions with 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 under such transactions. If MGIC is not
allowed an agreed level of credit under the State Capital
Requirements, MGIC may terminate the reinsurance transactions,
without penalty.
The NAIC previously announced plans to revise the State Capital
Requirements that are provided for in its Mortgage Guaranty
Insurance Model Act. In December
2019, a working group of state regulators released an
exposure draft of a revised Mortgage Guaranty Insurance Model Act
and a risk-based capital framework to establish capital
requirements for mortgage insurers, 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
and minimum capital floors.
While MGIC currently meets the State Capital Requirements of
Wisconsin and all other
jurisdictions, it could be prevented from writing new business in
the future in all jurisdictions if it fails to meet the State
Capital Requirements of Wisconsin,
or it could be prevented from writing new business in a particular
jurisdiction if it fails to meet the State Capital Requirements of
that jurisdiction, and in each case if MGIC does not obtain a
waiver of such requirements. It is possible that regulatory action
by one or more jurisdictions, including those that do not have
specific State Capital Requirements, may prevent MGIC from
continuing to write new insurance in such jurisdictions. If we are
unable to write business in a particular jurisdiction, lenders may
be unwilling to procure insurance from us anywhere. In addition, a
lender's assessment of the future ability of our insurance
operations to meet the State Capital Requirements or the PMIERs may
affect its willingness to procure insurance from us. In this
regard, see our risk factor titled "Competition or changes in
our relationships with our customers could reduce our revenues,
reduce our premium yields and/or increase our losses." A
possible future failure by MGIC to meet the State Capital
Requirements or the PMIERs will not necessarily mean that MGIC
lacks sufficient resources to pay claims on its insurance
liabilities. You should read the rest of these risk factors for
information about matters that could negatively affect MGIC's
compliance with State Capital Requirements and its claims paying
resources, including the effects of the COVID-19 pandemic.
We are susceptible to disruptions in the servicing of
mortgage loans that we insure and we rely on third-party reporting
for information regarding the mortgage loans we insure.
We depend on reliable, consistent third-party servicing of the
loans that we insure. An increase in delinquent loans may result in
liquidity issues for servicers. When a mortgage loan that is
collateral for a mortgage backed security ("MBS") becomes
delinquent, the servicer is usually required to continue to pay
principal and interest to the MBS investors, generally for four
months, even though the servicer is not receiving payments from
borrowers. This may cause liquidity issues for especially non-bank
servicers (who service approximately 47% of the loans underlying
our insurance in force as of March 31,
2022) because they do not have the same sources of liquidity
that bank servicers have.
While there has been no disruption in our premium receipts
through the end of March 2022,
servicers who experience future liquidity issues may be less likely
to advance premiums to us on policies covering delinquent loans or
to remit premiums on policies covering loans that are not
delinquent. Our policies generally allow us to cancel coverage on
loans that are not delinquent if the premiums are not paid within a
grace period.
An increase in delinquent loans or a transfer of servicing
resulting from liquidity issues, may increase the operational
burden on servicers, cause a disruption in the servicing of
delinquent loans and reduce servicers' abilities to undertake
mitigation efforts that could help limit our losses.
The information presented in this report and on our website with
respect to the mortgage loans we insure is based on information
reported to us by third parties, including the servicers and
originators of the mortgage loans, and information presented may be
subject to lapses or inaccuracies in reporting from such third
parties. In many cases, we may not be aware that information
reported to us is incorrect until such time as a claim is made
against us under the relevant insurance policy. We do not receive
monthly policy status information from servicers for single premium
policies, and may not be aware that the mortgage loans insured by
such policies have been repaid. We periodically attempt to
determine if coverage is still in force on such policies by asking
the last servicer of record or through the periodic reconciliation
of loan information with certain servicers. It may be possible that
our reports continue to reflect, as active, policies on mortgage
loans that have been repaid.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the length of time
that our policies remain in force.
The premium from a single premium policy is collected upfront
and generally earned over the estimated life of the policy. In
contrast, premiums from monthly and annual premium policies are
received each month or year, as applicable, and earned each month
over the life of the policy. In each year, most of our premiums
earned are from insurance that has been written in prior years. As
a result, the length of time insurance remains in force, which is
generally measured by persistency (the percentage of our insurance
remaining in force from one year prior), is a significant
determinant of our revenues. A higher than expected persistency
rate may decrease the profitability from single premium policies
because they will remain in force longer and may increase the
incidence of claims than was estimated when the policies were
written. A low persistency rate on monthly and annual premium
policies will reduce future premiums but may also reduce the
incidence of claims, while a high persistency on those policies
will increase future premiums but may increase the incidence of
claims.
Our persistency rate was 66.9% at March
31, 2022, 62.6% at December 31,
2021, and 60.5% at December 31,
2020. Since 2000, our year-end persistency ranged from a
high of 84.7% at December 31, 2009 to
a low of 47.1% at December 31, 2003.
Our persistency rate is primarily affected by the level of current
mortgage interest rates compared to the mortgage coupon rates on
our insurance in force, which affects the vulnerability of the
insurance in force to refinancing; and the current amount of equity
that borrowers have in the homes underlying our insurance in force.
The amount of equity affects persistency in the following ways:
- Borrowers with significant equity may be able to refinance
their loans without requiring mortgage insurance.
- The Homeowners Protection Act ("HOPA") requires servicers to
cancel mortgage insurance when a borrower's LTV ratio meets or is
scheduled to meet certain levels, generally based on the original
value of the home and subject to various conditions.
- The GSEs' mortgage insurance cancellation guidelines apply more
broadly than HOPA and also consider a home's current value. For
example, borrowers may request cancellation of mortgage insurance
based on the home's current value if certain LTV and seasoning
requirements are met and the borrowers have an acceptable payment
history. For loans seasoned between two and five years, the LTV
ratio must be 75% or less, and for loans seasoned more than five
years the LTV ratio must be 80% or less. For more information about
the GSEs guidelines and business practices, and how they may
change, see our risk factor titled "Changes in the business
practices of the GSEs, federal legislation that changes their
charters or a restructuring of the GSEs could reduce our revenues
or increase our losses."
Pandemics, hurricanes and other natural disasters may
impact our incurred losses, the amount and timing of paid claims,
our inventory of notices of default and our Minimum Required Assets
under PMIERs.
Pandemics and other natural disasters, such as hurricanes,
tornadoes, earthquakes, wildfires and floods, or other events
related to changing climatic conditions, could trigger an economic
downturn in the affected areas, or in areas with similar risks,
which could result in a decline in our business and an increased
claim rate on policies in those areas. Natural disasters, rising
sea levels and/or fresh water shortages could lead to a decrease in
home prices in the affected areas, or in areas with similar risks,
which could result in an increase in claim severity on policies in
those areas. In addition, the inability of a borrower to obtain
hazard and/or flood insurance, or the increased cost of such
insurance, could lead to an increase in delinquencies or a decrease
in home prices in the affected areas. If we were to attempt to
limit our new insurance written in affected areas, lenders may be
unwilling to procure insurance from us anywhere.
Pandemics and other natural disasters could also lead to
increased reinsurance rates or reduced availability of reinsurance.
This may cause us to retain more risk than we otherwise would
retain and could negatively affect our compliance with the
financial requirements of the PMIERs.
The PMIERs require us to maintain significantly more "Minimum
Required Assets" for delinquent loans than for performing loans;
however, the increase in Minimum Required Assets is not as great
for certain delinquent loans in areas that the Federal Emergency
Management Agency has declared major disaster areas and for certain
loans whose borrowers have been affected by COVID-19. See our risk
factor titled "We may not continue to meet the GSEs' private
mortgage insurer eligibility requirements and our returns may
decrease if we are required to maintain more capital in order to
maintain our eligibility."
In January 2021, the FHFA issued a
Request for Input ("RFI") regarding Climate and Natural Disaster
Risk Management at the Regulated Entities (i.e., the GSEs and the
Federal Home Loan Banks). The FHFA has instructed the GSEs to
designate climate change as a priority concern and actively
consider its effects in their decision making. It is possible that
efforts to manage this risk by the FHFA, GSEs (including through
GSE guideline or mortgage insurance policy changes) or others could
materially impact the volume and characteristics of our NIW
(including its policy terms), home prices in certain areas and
defaults by borrowers in certain areas.
Risk Factors Relating to Our Business Generally
The premiums we charge may not be adequate to compensate
us for our liabilities for losses and as a result any inadequacy
could materially affect our financial condition and results of
operations.
When we set our premiums at policy issuance, we have
expectations regarding likely performance of the insured risks over
the long term. Generally, we cannot cancel mortgage insurance
coverage or adjust renewal premiums during the life of a policy. As
a result, higher than anticipated claims generally cannot be offset
by premium increases on policies in force or mitigated by our
non-renewal or cancellation of insurance coverage. Our premiums are
subject to approval by state regulatory agencies, which can delay
or limit our ability to increase premiums on future policies. In
addition, our customized rate plans may delay our ability to
increase premiums on future policies covered by such plans. The
premiums we charge, the investment income we earn and the amount of
reinsurance we carry may not be adequate to compensate us for the
risks and costs associated with the insurance coverage provided to
customers. An increase in the number or size of claims, compared to
what we anticipated when we set the premiums, could adversely
affect our results of operations or financial condition. Our
premium rates are also based in part on the amount of capital we
are required to hold against the insured risk. If the amount of
capital we are required to hold increases from the amount we were
required to hold when we set the premiums, our returns may be lower
than we assumed. For a discussion of the amount of capital we are
required to hold, see our risk factor titled "We may not
continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to
maintain more capital in order to maintain our
eligibility."
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our premium yields
and / or increase our losses.
The private mortgage insurance industry is highly competitive
and is expected to remain so. We believe we currently compete with
other private mortgage insurers based on premium rates,
underwriting requirements, financial strength (including based on
credit or financial strength ratings), customer relationships, name
recognition, reputation, strength of management teams and field
organizations, the ancillary products and services provided to
lenders and the effective use of technology and innovation in the
delivery and servicing of our mortgage insurance products.
Our relationships with our customers, which may affect the
amount of our NIW, could be adversely affected by a variety of
factors, including if our premium rates are higher than those of
our competitors, our underwriting requirements are more restrictive
than those of our competitors, or our customers are dissatisfied
with our claims-paying practices (including insurance policy
rescissions and claim curtailments).
In recent years, the industry has materially reduced its use of
standard rate cards, which were fairly consistent among
competitors, and correspondingly increased its use of (i)
"risk-based pricing systems" that use a spectrum of filed rates to
allow for formulaic, risk-based pricing based on multiple
attributes that may be quickly adjusted within certain
parameters, and (ii) customized rate plans, both of which
typically have rates lower than the standard rate card. Our
increased use of reinsurance over the past several years, and the
improved credit profile and reduced loss expectations associated
with loans insured after 2008, have helped to mitigate the negative
effect of declining premium rates on our expected returns. However,
refer to our risk factor titled "Reinsurance may not always be
available or affordable" for a discussion of the risks
associated with the availability of reinsurance, and our risk
factors titled "Downturns in the domestic economy or declines in
home prices may result in more homeowners defaulting and our losses
increasing, with a corresponding decrease in our returns," and
"Pandemics, hurricanes and other natural disasters may impact
our incurred losses, the amount and timing of paid claims, our
inventory of notices of default and our Minimum Required Assets
under PMIERs" for a discussion about risks associated with our
NIW.
The widespread use of risk-based pricing systems by the private
mortgage insurance industry makes it more difficult to compare our
rates to those offered by our competitors. We may not be aware of
industry rate changes until we observe that our volume of NIW has
changed. In addition, business under customized rate plans is
awarded by certain customers for only limited periods of time. As a
result, our NIW may fluctuate more than it had in the past.
Regarding the concentration of our new business, our top ten
customers accounted for approximately 34% and 41% in the twelve
months ended March 31, 2022 and
March 31, 2021, respectively.
We monitor various competitive and economic factors while
seeking to balance both profitability and market share
considerations in developing our pricing strategies. Premium rates
on NIW will change our premium yield (net premiums earned divided
by the average insurance in force) over time as older insurance
policies run off and new insurance policies with premium rates that
are generally lower are written.
Certain of our competitors have access to capital at a lower
cost than we do (including, through off-shore intercompany
reinsurance vehicles, which have tax advantages that may increase
if U.S. corporate income taxes increase). As a result, they may be
able to achieve higher after-tax rates of return on their NIW
compared to us, which could allow them to leverage reduced premium
rates to gain market share, and they may be better positioned to
compete outside of traditional mortgage insurance, including by
participating in alternative forms of credit enhancement pursued by
the GSEs discussed in our risk factor titled "The amount of
insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage
insurance."
Although the current PMIERs of the GSEs do not require an
insurer to maintain minimum financial strength ratings, our
financial strength ratings can affect us in the ways set forth
below. If we are unable to compete effectively in the current or
any future markets as a result of the financial strength ratings
assigned to our insurance subsidiaries, our future NIW could be
negatively affected.
- A downgrade in our financial strength ratings could result in
increased scrutiny of our financial condition by the GSEs and/or
our customers, potentially resulting in a decrease in the amount of
our NIW.
- Our ability to participate in the non-GSE residential
mortgage-backed securities market (the size of which has been
limited since 2008, but may grow in the future), could depend on
our ability to maintain and improve our investment grade ratings
for our insurance subsidiaries. We could be competitively
disadvantaged with some market participants because the financial
strength ratings of our insurance subsidiaries are lower than those
of some competitors. MGIC's financial strength rating from A.M.
Best is A- (with a stable outlook), from Moody's is Baa1 (with a
stable outlook) and from Standard & Poor's is BBB+ (with a
stable outlook).
- Financial strength ratings may also play a greater role if the
GSEs no longer operate in their current capacities, for example,
due to legislative or regulatory action. In addition, although the
PMIERs do not require minimum financial strength ratings, the GSEs
consider financial strength ratings to be important when using
forms of credit enhancement other than traditional mortgage
insurance, as discussed in our risk factor titled "The amount of
insurance we write could be adversely affected if lenders and
investors select alternatives to private mortgage insurance."
The final GSE capital framework provides more capital credit for
transactions with higher rated counterparties, as well as those who
are diversified. Although we are currently unaware of a direct
impact on MGIC, this could potentially become a competitive
disadvantage in the future.
In December 2021, Standard &
Poor's announced a proposed change to their rating methodologies
for insurers, including mortgage insurers. It is uncertain what
impact the proposed change would have, whether it will be adopted
in its current form, whether it will prompt similar moves at other
rating agencies, or the extent to which it will impact how external
parties evaluate the different rating levels.
We are subject to the risk of legal
proceedings.
Before paying an insurance claim, generally we review the loan
and servicing files to determine the appropriateness of the claim
amount. When reviewing the files, we may determine that we have the
right to rescind coverage or deny a claim on the loan (both
referred to as "rescissions"). In addition, our insurance policies
generally provide that we can reduce a claim if the servicer did
not comply with its obligations under our insurance policy (such
reduction referred to as a "curtailment"). In recent years, an
immaterial percentage of claims received have been resolved by
rescissions. In the first quarter of 2022 and in 2021, curtailments
reduced our average claim paid by approximately 5.3% and 4.4%,
respectively. The COVID-19-related foreclosure moratoriums and
forbearance plans decreased our claims paid activity beginning in
the second quarter of 2020. It is difficult to predict the level of
curtailments once foreclosure activity returns to a more typical
level. Our loss reserving methodology incorporates our estimates of
future rescissions, curtailments, and reversals of rescissions and
curtailments. A variance between ultimate actual rescission,
curtailment and reversal rates and our estimates, as a result of
the outcome of litigation, settlements or other factors, could
materially affect our losses.
When the insured disputes our right to rescind coverage or
curtail claims, we generally engage in discussions in an attempt to
settle the dispute. If we are unable to reach a settlement, the
outcome of a dispute ultimately may be determined by legal
proceedings. Under ASC 450-20, until a loss 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. When we determine that a loss is probable
and can be reasonably estimated, we record our best estimate of our
probable loss. In those cases, until settlement negotiations or
legal proceedings are concluded (including the receipt of any
necessary GSE approvals), it is possible that we will record an
additional loss.
In addition, from time to time, we are involved in other
disputes and legal proceedings in the ordinary course of business.
In our opinion, based on the facts known at this time, the ultimate
resolution of these ordinary course disputes and legal proceedings
will not have a material adverse effect on our financial position
or results of operations.
If our risk management programs are not effective in
identifying, or adequate in controlling or mitigating, the risks we
face, or if the models used in our businesses are inaccurate, it
could have a material adverse impact on our business, results of
operations and financial condition.
Our enterprise risk management program, described in "Business -
Our Products and Services - Risk Management" in Item 1 of our
Annual Report on Form 10-K for the year ended December 31, 2021, may not be effective in
identifying, or adequate in controlling or mitigating, the risks we
face in our business.
We employ proprietary and third party models to project returns,
price products (including through our risk-based pricing system),
determine the techniques used to underwrite insurance, estimate
reserves, generate projections used to estimate future pre-tax
income and to evaluate loss recognition testing, evaluate risk,
determine internal capital requirements, perform stress testing,
and for other uses. These models rely on estimates and projections
that are inherently uncertain and may not operate as intended,
especially under less-frequent circumstances such as those
surrounding the COVID-19 pandemic, the Russia-Ukraine war, and high levels of inflation, or
with respect to emerging risks, such as changing climatic
conditions. In addition, from time to time we seek to improve
certain models, and the conversion process may result in material
changes to certain assumptions, which could impact our expectations
about future returns and financial results. The models we employ
are complex, which increases our risk of error in their design,
implementation or use. Also, the associated input data, assumptions
and calculations may not be correct or accurate, and the controls
we have in place to mitigate that risk may not be effective in all
cases. The risks related to our models may increase when we change
assumptions and/or methodologies, or when we add or change modeling
platforms. We have enhanced, and we intend to continue to enhance,
our modeling capabilities. Moreover, we may use information we
receive through enhancements to refine or otherwise change existing
assumptions and/or methodologies.
We rely on our management team and our business could be
harmed if we are unable to retain qualified personnel or
successfully develop and/or recruit their replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our management team and
other key personnel. The unexpected departure of key personnel
could adversely affect the conduct of our business. In such event,
we would be required to obtain other personnel to manage and
operate our business. In addition, we will be required to replace
the knowledge and expertise of our aging workforce as our workers
retire. In either case, there can be no assurance that we would be
able to develop or recruit suitable replacements for the departing
individuals; that replacements could be hired, if necessary, on
terms that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We currently have
not entered into any employment agreements with our officers or key
personnel. Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a properly
skilled and experienced workforce, our costs, including
productivity costs and costs to replace employees may increase, and
this could negatively impact our earnings.
At the onset of the COVID-19 pandemic, the Company transitioned
to a virtual workforce model with certain essential activities
supported by limited staff in controlled office environments. We
are currently operating under a hybrid model, with most employees
working in the office for a portion of time. While the employees
are in our office, they may be exposed to health risks, which may
expose us to potential liability. We have established an interim
succession plan for each of our key executives, should an executive
be unable to perform his or her duties.
The mix of business we write affects our Minimum Required
Assets under the PMIERs, our premium yields and the likelihood of
losses occurring.
The Minimum Required Assets under the PMIERs are, in part, a
function of the direct risk-in-force and the risk profile of the
loans we insure, considering LTV ratio, credit score, vintage, Home
Affordable Refinance Program ("HARP") status and delinquency
status; and whether the loans were insured under lender-paid
mortgage insurance policies or other policies that are not subject
to automatic termination consistent with the Homeowners Protection
Act requirements for borrower-paid mortgage insurance. Therefore,
if our direct risk-in-force increases through increases in NIW, or
if our mix of business changes to include loans with higher LTV
ratios or lower FICO scores, for example, all other things equal,
we will be required to hold more Available Assets in order to
maintain GSE eligibility.
The minimum capital required by the risk-based capital framework
contained in the exposure draft released by the NAIC in
December 2019 would be, in part, a
function of certain loan and economic factors, including property
location, LTV ratio and credit score, general underwriting quality
in the market at the time of loan origination, the age of the loan,
and the premium rate we charge. Depending on the provisions of the
capital requirements when they are released in final form and
become effective, our mix of business may affect the minimum
capital we are required to hold under the new framework.
The percentage of our NIW from all single-premium policies was
6.6% in the first quarter of 2022 and 7.4% in full year 2021, and
has ranged from 6.6% in 2022 to 19.0% in 2017. Depending on the
actual life of a single premium policy and its premium rate
relative to that of a monthly premium policy, a single premium
policy may generate more or less premium than a monthly premium
policy over its life.
As discussed in our risk factor titled "Reinsurance may not
always be available or affordable," we have in place various
QSR transactions. Although the transactions reduce our premiums,
they have a lesser impact on our overall results, as losses ceded
under the transactions reduce our losses incurred and the ceding
commissions we receive reduce our underwriting expenses. The effect
of the QSR transactions on the various components of pre-tax income
will vary from period to period, depending on the level of ceded
losses incurred. We also have in place various XOL reinsurance
transactions, under which we cede premiums. Under the XOL
reinsurance transactions, for the respective reinsurance coverage
periods, we retain the first layer of aggregate losses, and special
purpose insurers provide second layer coverage up to the
outstanding reinsurance coverage amount.
In addition to the effect of reinsurance on our premiums, we
expect a decline in our premium yield because an increasing
percentage of our insurance in force is from recent book years
whose premium rates had been trending lower.
Our ability to rescind insurance coverage became more limited
for new insurance written beginning in mid-2012, and it became
further limited for new insurance written under our revised master
policy that became effective March 1,
2020. These limitations may result in higher losses paid
than would be the case under our previous master policies. In
addition, our rescission rights temporarily have become more
limited due to accommodations we have made in connection with the
COVID-19 pandemic. We have waived our rescission rights in certain
circumstances where the failure to make payments was associated
with a COVID-19 pandemic-related forbearance.
From time to time, in response to market conditions, we change
the types of loans that we insure. We also may change our
underwriting guidelines, in part by agreeing with certain approval
recommendations from a GSE automated underwriting system. In the
third quarter of 2021, Fannie Mae indicated that it was easing its
credit assessments and guidelines to help increase homeownership
opportunities for borrowers. We have aligned with these changes,
which will result in our insuring some loans with FICO scores lower
than 620. We also make exceptions to our underwriting requirements
on a loan-by-loan basis and for certain customer programs. Our
underwriting requirements are available on our website at
http://www.mgic.com/underwriting/index.html.
Even when home prices are stable or rising, mortgages with
certain characteristics have higher probabilities of claims. As of
March 31, 2022, mortgages with these
characteristics in our primary risk in force included mortgages
with LTV ratios greater than 95% (14.7%), mortgages with borrowers
having FICO scores below 680 (7.6%), including those with borrowers
having FICO scores of 620-679 (6.6%), mortgages with limited
underwriting, including limited borrower documentation (0.9%), and
mortgages with borrowers having DTI ratios greater than 45% (or
where no ratio is available) (13.8%), each attribute as determined
at the time of loan origination. Loans with more than one of these
attributes accounted for 2% of our primary risk in force as of
March 31, 2022, and less than one
percent of our NIW in the first quarter of 2022 and in 2021. When
home prices increase, interest rates increase and/or the percentage
of our NIW from purchase transactions increases, our NIW on
mortgages with higher LTV ratios and higher DTI ratios may
increase. Our NIW on mortgages with LTV ratios greater than 95%
increased from 8% in the first quarter of 2021 to 11% in the first
quarter of 2022 and our NIW on mortgages with DTI ratios greater
than 45% increased from 12% in the first quarter of 2021 to 17% in
the first quarter of 2022.
From time to time, we change the processes we use to underwrite
loans. For example: we rely on information provided to us by
lenders that was obtained from certain of the GSEs' automated
appraisal and income verification tools, which may produce results
that differ from the results that would have been determined using
different methods; we accept GSE appraisal waivers for certain
refinance loans, the numbers of which have increased significantly
beginning in 2020 and remain elevated; and we accept GSE appraisal
flexibilities that allow property valuations in certain
transactions to be based on appraisals that do not involve an
onsite or interior inspection of the property. Our acceptance of
automated GSE appraisal and income verification tools, GSE
appraisal waivers and GSE appraisal flexibilities may affect our
pricing and risk assessment. We also continue to further automate
our underwriting processes and it is possible that our automated
processes result in our insuring loans that we would not otherwise
have insured under our prior processes.
Approximately 75% of our first quarter 2022 and 72% of our 2021
NIW (by risk written) was originated under delegated underwriting
programs pursuant to which the loan originators had authority on
our behalf to underwrite the loans for our mortgage insurance. For
loans originated through a delegated underwriting program, we
depend on the originators' compliance with our guidelines and rely
on the originators' representations that the loans being insured
satisfy the underwriting guidelines, eligibility criteria and other
requirements. While we have established systems and processes to
monitor whether certain aspects of our underwriting guidelines were
being followed by the originators, such systems may not ensure that
the guidelines were being strictly followed at the time the loans
were originated.
The widespread use of risk-based pricing systems by the private
mortgage insurance industry (discussed in our risk factor titled
"Competition or changes in our relationships with our customers
could reduce our revenues, reduce our premium yields
and / or increase our losses") makes it more
difficult to compare our premium rates to those offered by our
competitors. We may not be aware of industry rate changes until we
observe that our mix of new insurance written has changed and our
mix may fluctuate more as a result.
If state or federal regulations or statutes are changed in ways
that ease mortgage lending standards and/or requirements, or if
lenders seek ways to replace business in times of lower mortgage
originations, it is possible that more mortgage loans could be
originated with higher risk characteristics than are currently
being originated, such as loans with lower FICO scores and higher
DTI ratios. The focus of the new FHFA leadership on increasing
homeownership opportunities for borrowers is likely to have this
effect. Lenders could pressure mortgage insurers to insure such
loans, which are expected to experience higher claim rates.
Although we attempt to incorporate these higher expected claim
rates into our underwriting and pricing models, there can be no
assurance that the premiums earned and the associated investment
income will be adequate to compensate for actual losses paid even
under our current underwriting requirements.
Our holding company debt obligations materially exceed our
holding company cash and investments.
At March 31, 2022, we had
approximately $409 million in cash
and investments at our holding company and our holding company's
long-term debt obligations were $0.9
billion in aggregate principal amount, including
$242 million due in 2023. Annual debt
service on the long-term debt obligations outstanding as of
March 31, 2022, is approximately
$53 million.
The long-term debt obligations are owed by our holding company,
MGIC Investment Corporation, and not its subsidiaries. The payment
of dividends from our insurance subsidiaries (primarily MGIC)
which, other than investment income and raising capital in the
public markets, is the principal source of our holding company cash
inflow. Although MGIC holds assets in excess of its minimum
statutory capital requirements and its PMIERs financial
requirements, the ability of MGIC to pay dividends is restricted by
insurance regulation. In general, dividends in excess of prescribed
limits are deemed "extraordinary" and may not be paid if
disapproved by the OCI. The level of ordinary dividends that may be
paid without OCI approval is determined on an annual basis and it
is $122 million in 2022, before
considering dividends paid in the previous twelve months. A
dividend is extraordinary when the proposed dividend amount plus
dividends paid in the last twelve months from the dividend payment
date exceed the ordinary dividend level. In the twelve months ended
March 31, 2022, MGIC paid
$400 million in dividends of cash and
investments to the holding company. Future dividend payments from
MGIC to the holding company will be determined in consultation with
the board of directors, and after considering any updated estimates
about our business.
In the first quarter of 2022, we repurchased $57.0 million in aggregate principal amount of
our 9% Convertible Junior Subordinated Debentures, using
$77.7 million of holding company
resources, eliminating 4.4 million potentially dilutive common
shares, reducing annual interest expense by $5.1 million and resulting in a $20.8 million loss on debt extinguishment. We may
continue to repurchase our debt obligations on the open market
(including through 10b5-1 plans) or through privately negotiated
transactions. In addition, we may redeem our 9% Debentures as
discussed in our risk factor titled "Your ownership in our
company may be diluted by additional capital that we
raise."
Repurchases of our common stock may be made from time to time on
the open market (including through 10b5-1 plans) or through
privately negotiated transactions. In the first quarter of 2022, we
repurchased approximately 8.5 million shares, using approximately
$128 million of holding company
resources. As of March 31, 2022, we
had $372 million of authorization
remaining to repurchase our common stock through the end of 2023
under a share repurchase program approved by our Board of Directors
in October 2021. If any capital
contributions to our subsidiaries are required, such contributions
would decrease our holding company cash and investments. In
the first quarter of 2022, MGIC repaid its $155 million obligation to the Federal Home Loan
Bank of Chicago.
Your ownership in our company may be diluted by additional
capital that we raise.
As noted above under our risk factor titled "We may not
continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease if we are required to
maintain more capital in order to maintain our eligibility,"
although we are currently in compliance with the requirements of
the PMIERs, there can be no assurance that we would not seek to
issue additional debt capital or to raise additional equity or
equity-linked capital to manage our capital position under the
PMIERs or for other purposes. Any future issuance of equity
securities may dilute your ownership interest in our company. In
addition, the market price of our common stock could decline as a
result of sales of a large number of shares or similar securities
in the market or the perception that such sales could occur.
The price of our common stock may fluctuate significantly,
which may make it difficult for holders to resell common stock when
they want or at a price they find attractive.
The market price for our common stock may fluctuate
significantly. In addition to the risk factors described herein,
the following factors may have an adverse impact on the market
price for our common stock: changes in general conditions in the
economy, the mortgage insurance industry or the financial markets;
announcements by us or our competitors of acquisitions or strategic
initiatives; our actual or anticipated quarterly and annual
operating results; changes in expectations of future financial
performance (including incurred losses on our insurance in force);
changes in estimates of securities analysts or rating agencies;
actual or anticipated changes in our share repurchase program or
dividends; changes in operating performance or market valuation of
companies in the mortgage insurance industry; the addition or
departure of key personnel; changes in tax law; and adverse press
or news announcements affecting us or the industry. In addition,
ownership by certain types of investors may affect the market price
and trading volume of our common stock. For example, ownership in
our common stock by investors such as index funds and
exchange-traded funds can affect the stock's price when those
investors must purchase or sell our common stock because the
investors have experienced significant cash inflows or outflows,
the index to which our common stock belongs has been rebalanced, or
our common stock is added to and/or removed from an index (due to
changes in our market capitalization, for example).
We could be adversely affected if personal information on
consumers that we maintain is improperly disclosed, our information
technology systems are damaged or their operations are interrupted,
or our automated processes do not operate as expected.
As part of our business, we maintain large amounts of personal
information of consumers, including on our servers and those of
cloud computing services. Federal and state laws designed to
promote the protection of such information require businesses that
collect or maintain consumer information to adopt information
security programs, and to notify individuals, and in some
jurisdictions, regulatory authorities, of security breaches
involving personally identifiable information.
We are increasingly reliant on the efficient and uninterrupted
operation of complex information technology systems. All
information technology systems are potentially vulnerable to damage
or interruption from a variety of sources, including by third-party
cyber attacks, including those involving ransomware. The Company
discovers vulnerabilities and experiences malicious attacks and
other attempts to gain unauthorized access to its systems on a
regular basis. Globally, attacks are expected to continue
accelerating in both frequency and sophistication with increasing
use by actors of tools and techniques that will hinder the
Company's ability to identify, investigate and recover from
incidents. Such attacks may also increase as a result of
retaliation by Russia in response
to actions taken by the U.S. and other countries in connection with
Russia's military invasion of
Ukraine. In response to the
COVID-19 pandemic, the Company transitioned to a primarily virtual
workforce model and will likely continue to operate under a hybrid
model in the future. Virtual and hybrid workforce models may be
more vulnerable to security breaches.
While we have information security policies and systems in place
to secure our information technology systems and to prevent
unauthorized access to or disclosure of sensitive information,
there can be no assurance with respect to our systems and those of
our third-party vendors that unauthorized access to the systems or
disclosure of the sensitive information, either through the actions
of third parties or employees, will not occur. Due to our reliance
on information technology systems, including ours and those of our
customers and third-party service providers, and to the sensitivity
of the information that we maintain, unauthorized access to the
systems or disclosure of the information could adversely affect our
reputation, severely disrupt our operations, result in a loss of
business and expose us to material claims for damages and may
require that we provide free credit monitoring services to
individuals affected by a security breach.
Should we experience an unauthorized disclosure of information
or a cyber attack, including those involving ransomware, some of
the costs we incur may not be recoverable through insurance, or
legal or other processes, and this may have a material adverse
effect on our results of operations.
We are in the process of upgrading certain information systems,
and transforming and automating certain business processes, and we
continue to enhance our risk-based pricing system and our system
for evaluating risk. Certain information systems have been in place
for a number of years and it has become increasingly difficult to
support their operation. The implementation of technological and
business process improvements, as well as their integration with
customer and third-party systems when applicable, is complex,
expensive and time consuming. If we fail to timely and successfully
implement and integrate the new technology systems, if the third
party providers to which we are becoming increasingly reliant do
not perform as expected, if our legacy systems fail to operate as
required, or if the upgraded systems and/or transformed and
automated business processes do not operate as expected, it could
have a material adverse impact on our business, business prospects
and results of operations.
Our success depends, in part, on our ability to manage
risks in our investment portfolio.
Our investment portfolio is an important source of revenue and
is our primary source of claims paying resources. Although our
investment portfolio consists mostly of highly-rated fixed income
investments, our investment portfolio is affected by general
economic conditions and tax policy, which may adversely affect the
markets for credit and interest-rate-sensitive securities,
including the extent and timing of investor participation in these
markets, the level and volatility of interest rates and credit
spreads and, consequently, the value of our fixed income
securities. Prevailing market rates have increased for various
reasons, including inflationary pressures, which has reduced the
fair value of our investment portfolio. The value of our investment
portfolio may also be adversely affected by ratings downgrades,
increased bankruptcies and credit spreads widening in distressed
industries. In addition, the collectability and valuation of our
municipal bond portfolio may be adversely affected if state and
local municipalities incur increased costs to respond to COVID-19
and receive fewer tax revenues due to adverse economic conditions.
Our investment portfolio also includes commercial mortgage-backed
securities, collateralized loan obligations, and asset-backed
securities, which could be adversely affected by declines in real
estate valuations, increases in unemployment geopolitical risks
and/or financial market disruption, including a heightened
collection risk on the underlying loans. As a result of these
matters, we may not achieve our investment objectives and a
reduction in the market value of our investments could have an
adverse effect on our liquidity, financial condition and results of
operations.
For the significant portion of our investment portfolio that is
held by MGIC, to receive full capital credit under insurance
regulatory requirements and under the PMIERs, we generally are
limited to investing in investment grade fixed income securities
whose yields reflect their lower credit risk profile. Our
investment income depends upon the size of the portfolio and its
reinvestment at prevailing interest rates. A prolonged period of
low investment yields would have an adverse impact on our
investment income as would a decrease in the size of the
portfolio.
We structure our investment portfolio to satisfy our expected
liabilities, including claim payments in our mortgage insurance
business. If we underestimate our liabilities or improperly
structure our investments to meet these liabilities, we could have
unexpected losses resulting from the forced liquidation of fixed
income investments before their maturity, which could adversely
affect our results of operations.
The Company may be adversely impacted by the transition
from LIBOR as a reference rate.
The United Kingdom's Financial
Conduct Authority, which regulates LIBOR, announced that after 2021
it would no longer publish one-week and two-month tenor USD LIBOR
and that after June 30, 2023, it
would no longer publish all other USD LIBOR tenors. Efforts are
underway to identify and transition to a set of alternative
reference rates. The set of alternative rates includes the
Secured Overnight Financing Rate ("SOFR"), which the Federal
Reserve Bank of New York began
publishing in 2018. Because SOFR is calculated based on different
criteria than LIBOR, SOFR and LIBOR may diverge.
While it is not currently possible to determine precisely
whether, or to what extent, the replacement of LIBOR would affect
us, the implementation of alternative benchmark rates to LIBOR may
have an adverse effect on our business, results of operations or
financial condition. We have three primary types of transactions
that involve financial instruments referencing LIBOR. First, as of
March 31, 2022, approximately 5% of
the fair value of our investment portfolio consisted of securities
referencing LIBOR. Second, as of March 31,
2022, approximately $0.5 billion of our risk in force was on
adjustable rate mortgages whose interest is referenced to one-month
USD LIBOR. A change in reference rate associated with these loans
may affect their principal balance, which may affect our
risk-in-force and the amount of Minimum Required Assets we are
required to maintain under PMIERs. A change in reference rate may
also affect the amount of principal and/or accrued interest we are
required to pay in the event of a claim payment. Third, the
premiums under most of our 2018-2021 excess-of-loss reinsurance
agreements are determined, in part, by the difference between
interest payable on the reinsurers' notes which reference one-month
USD LIBOR and earnings from a pool of securities receiving interest
that may reference LIBOR (in the first quarter of 2022, our total
premiums on such transactions were approximately $9.2 million).
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SOURCE MGIC Investment Corporation