MGIC Investment Corporation - Q1 2022 | 13
Note 3. Debt
Debt obligations
The aggregate carrying values of our long-term debt obligations and their par values, if different, as of March 31, 2022 and December 31, 2021 are presented in table 3.1 below.
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Long-term debt obligations |
Table | 3.1 | | | | |
(In millions) | | March 31, 2022 | | December 31, 2021 |
FHLB Advance - 1.91%, due February 2023 | | $ | — | | | $ | 155.0 | |
5.75% Notes, due August 2023 (par value: $242.3 million) | | 241.4 | | | 241.3 | |
5.25% Notes, due August 2028 (par value: $650 million) | | 640.6 | | | 640.2 | |
9% Debentures, due April 2063 (1) | | 53.3 | | | 110.2 | |
Long-term debt, carrying value | | $ | 935.3 | | | $ | 1,146.7 | |
(1)Convertible at any time prior to maturity at the holder’s option, at a conversion rate, which is subject to adjustment, of 76.5496 shares per $1,000 principal amount, representing a conversion price of approximately $13.06 per share. The payment of dividends by our holding company results in adjustments to the conversion rate, with such adjustment generally deferred until the end of the year.
The 5.75% Senior Notes (“5.75% Notes”), 5.25% Senior Notes (5.25% Notes) and 9% Convertible Junior Subordinated Debentures (“9% Debentures”) are obligations of our holding company, MGIC Investment Corporation.
In the first quarter of 2022, we repurchased $57.0 million in aggregate principal amount of our 9% Debentures at a purchase price of $77.7 million plus accrued interest. The repurchase of 9% Debentures resulted in a $20.8 million loss on debt extinguishment on our consolidated statement of operations and a reduction of approximately 4.4 million shares in our potentially dilutive shares.
The Federal Home Loan Bank Advance (the “FHLB Advance”) was an obligation of MGIC. In the first quarter of 2022, we repaid the outstanding principal balance of the FHLB Advance at a prepayment price of $156.3 million, incurring a prepayment fee of $1.3 million.
See Note 7 “Debt” in our Annual Report on Form 10-K for the year ended December 31, 2021 for additional information pertaining to our debt obligations.. As of March 31, 2022 we are in compliance with all of our debt covenants.
Interest payments
Interest payments for the three months ended March 31, 2022 and 2021 were $26.7 million and $25.1 million, respectively.
MGIC Investment Corporation - Q1 2022 | 14
Note 4. Reinsurance
The reinsurance agreements to which we are a party, are discussed below. The effect of all of our reinsurance agreements on premiums earned and losses incurred is shown in table 4.1 below.
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Reinsurance | | | | |
Table | 4.1 | | | | | | | | |
| | | Three Months Ended March 31, | | |
(In thousands) | | 2022 | | 2021 | | | | |
Premiums earned: | | | | | | | | |
Direct | | $ | 287,273 | | | $ | 296,271 | | | | | |
Assumed | | 2,126 | | | 2,411 | | | | | |
Ceded (1) | | (34,159) | | | (43,637) | | | | | |
Net premiums earned | | $ | 255,240 | | | $ | 255,045 | | | | | |
| | | | | | | | |
Losses incurred: | | | | | | | | |
Direct | | $ | (21,092) | | | $ | 48,071 | | | | | |
Assumed | | (207) | | | (25) | | | | | |
Ceded | | 1,985 | | | (8,410) | | | | | |
Losses incurred, net | | $ | (19,314) | | | $ | 39,636 | | | | | |
(1)Ceded premiums earned net of profit commission.
Quota share reinsurance
We have entered into quota share reinsurance ("QSR") transactions with panels of third-party reinsurers to cede a fixed quota share percentage of premiums earned and received and losses incurred on insurance covered by the transactions. We receive the benefit of a ceding commission equal to 20% of premiums ceded before profit commission. We also receive the benefit of a profit commission through a reduction of premiums we cede. The profit commission varies inversely with the level of losses on a “dollar for dollar” basis and can be eliminated at annual loss ratios higher than we have experienced on our QSR Transactions.
Each of our QSR Transactions typically have annual loss ratio caps of 300% and lifetime loss ratios of 200%.
Table 4.2 below provides additional detail regarding our QSR Transactions.
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Quota Share Reinsurance |
Table | 4.2 | | | | | | | | |
| | |
Quota Share Contract | | Covered Policy Years | Quota Share % | | Annual Loss Ratio to Exhaust Profit Commission (1) | | Contractual Termination Date |
2015 QSR | | Prior to 2017 | 15.0 | % | | 68.0 | % | | December 31, 2031 |
2019 QSR | | 2019 | 30.0 | % | | 62.0 | % | | December 31, 2030 |
2020 QSR | | 2020 | 12.5 | % | | 62.0 | % | | December 31, 2031 |
2020 QSR and 2021 QSR | | 2020 | 17.5 | % | | 62.0 | % | | December 31, 2032 |
2020 QSR and 2021 QSR | | 2021 | 17.5 | % | | 61.9 | % | | December 31, 2032 |
2021 QSR and 2022 QSR | | 2021 | 12.5 | % | | 57.5 | % | | December 31, 2032 |
2021 QSR and 2022 QSR | | 2022 | 15.0 | % | | 57.5 | % | | December 31, 2033 |
2022 QSR and 2023 QSR | | 2022 | 15.0 | % | | 62.0 | % | | December 31, 2033 |
2022 QSR and 2023 QSR | | 2023 | 15.0 | % | | 62.0 | % | | December 31, 2034 |
Credit Union QSR (2) | | 2020-2025 | 65.0 | % | | 50.0 | % | | December 31, 2039 |
(1) We will receive a profit commission provided the annual loss ratio on policies covered under the transaction remains below this ratio.
(2) Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions.
We can elect to terminate the QSR Transactions under specified scenarios without penalty upon prior written notice, including if we will receive less than 90% (80% for the Credit Union QSR Transaction ) of the full credit amount under the PMIERs, full financial statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required calculation period.
Table 4.3 provides additional detail regarding optional termination dates and optional reductions to our quota share percentage which can, in each case, be elected by us for a fee. Under the optional reduction to the quota share percentage, we may reduce our quota share percentage from the original percentage shown in table 4.2 to the percentage shown in table 4.3.
MGIC Investment Corporation - Q1 2022 | 15
| | | | | | | | | | | | | | | | | | | | | | | |
Quota Share Reinsurance |
Table | 4.3 | | | | | | |
| | |
Quota Share Contract | | Optional Termination Date (1) | Optional Quota Share % Reduction Date (2) | | Optional Reduced Quota Share % |
2015 QSR | | June 30, 2021 | NA | | NA |
2019 QSR | | July 1, 2022 | July 1, 2022 | | 25% or 20% |
2020 QSR | | December 31, 2022 | July 1, 2022 | | 10.5% or 8% |
2020 QSR and 2021 QSR, 2020 Policy year | | December 31, 2022 | July 1, 2022 | | 14.5% or 12% |
2020 QSR and 2021 QSR, 2021 Policy year | | December 31, 2023 | July 1, 2022 | | 14.5% or 12% |
2021 QSR and 2022 QSR. 2021 Policy Year | | December 31, 2023 | July 1, 2022 | | 10.5% or 8% |
2021 QSR and 2022 QSR, 2022 Policy Year | | December 31, 2024 | July 1, 2023 | | 12.5% or 10% |
2022 QSR and 2023 QSR, 2022 Policy Year | | December 31, 2024 | July 1, 2023 | | 12.5% or 10% |
2022 QSR and 2023 QSR, 2023 Policy Year | | December 31, 2025 | July 1, 2024 | | 12.5% or 10% |
(1) We can elect early termination of the QSR Transaction beginning on this date, and bi-annually thereafter.
(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.
See Note 9 “Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2021 for information about the termination of our 2017 and 2018 QSR Transactions, which resulted in a reinsurance recoverable on paid losses of $36 million for loss and loss adjustment expenses (“LAE”) reserves incurred at the time of termination.
Table 4.4 below provides a summary of our QSR Transactions, for the three months ended March 31, 2022 and 2021.
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Quota Share Reinsurance | | | | |
Table | 4.4 | | | | | | | | |
| | | Three Months Ended March 31, | | |
(In thousands) | | 2022 | | 2021 | | | | |
Ceded premiums written and earned, net of profit commission | | $ | 22,378 | | | $ | 33,390 | | | | | |
Ceded losses incurred | | (1,985) | | | 8,405 | | | | | |
Ceding commissions (1) | 12,272 | | | 13,067 | | | | | |
Profit commission | | 38,980 | | | 31,944 | | | | | |
(1) Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
Ceded losses incurred for the three months ended March 31, 2022 reflect favorable loss reserve development primarily related to delinquencies received in the second and third quarters of 2020 (“Peak COVID-19” delinquencies). See Note 11 - “Loss Reserves” for discussion of our loss reserves.
Under the terms of our QSR Transactions, ceded premiums, ceding commissions, profit commission, and ceded paid loss and LAE are settled net on a quarterly basis. The ceded premiums due after deducting the related ceding commission and profit commission is reported within Other liabilities on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our QSR Transactions was $64.7 million as of March 31, 2022 and $66.9 million as of December 31, 2021. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers, the minimum amount of which is based on the greater of 1) a reinsurer's funding requirements under PMIERs or 2) ceded reserves and unpaid losses. Each of the reinsurers under our quota share reinsurance agreements described above has an insurer financial strength rating of A- or better (or a comparable rating) by Standard and Poor's Rating Services, A.M. Best, Moody's, or a combination of the three..
Excess of loss reinsurance
We have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special purpose insurers (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding reinsurance coverage amount. Subject to certain conditions, the reinsurance coverage decreases over a period of either 10 or 12.5 years, depending on the transaction, as the underlying covered mortgages amortize or are repaid, or mortgage insurance losses are paid.
The Home Re Entities financed the coverages by issuing mortgage insurance-linked notes (“ILNs”) to unaffiliated investors in an aggregate amount equal to the initial reinsurance coverage amounts. Each ILN is non-recourse to any assets of MGIC or affiliates. The proceeds of the ILNs, which were deposited into reinsurance trusts for the benefit of MGIC, will be the source of reinsurance claim payments to MGIC and principal repayments on the ILNs.
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When a “Trigger Event” is in effect, payment of principal on the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will not be reduced by such principal payments. As of March 31, 2022 a "Trigger Event" has occurred on our Home Re 2018-1 and Home Re 2019-1 ILN transactions because the reinsured principal balance of loans that were reported 60 or more days delinquent exceeded a percentage of the total reinsured principal balance of loans specified under each transaction. A “Trigger Event” has also occurred on the Home Re 2021-2 ILN transaction because the credit enhancement of the most senior tranche is less than the target credit enhancement.
Table 4.5 provides a summary of our Home Re Transactions as of March 31, 2022 and December 31, 2021.
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Excess of Loss Reinsurance | | | | | |
Table 4.5 | | | | | |
($ in thousands) | Home Re 2021-2, Ltd. | Home Re 2021-1, Ltd. | Home Re 2020-1, Ltd. | Home Re 2019-1, Ltd. | Home Re 2018-1, Ltd. |
Issue Date | August 3, 2021 | February 2, 2021 | October 29, 2020 | May 25, 2019 | October 30, 2018 |
Policy Inforce Dates | January 1, 2021 - May 28, 2021 | August 1, 2020 - December 31, 2020 | January 1, 2020 - July 31, 2020 | January 1, 2018 - March 31, 2019 | July 1, 2016 - December 31, 2017 |
Optional Call Date (1) | July 25, 2028 | January 25, 2028 | October 25, 2027 | May 25, 2026 | October 25, 2025 |
Legal Maturity | 12.5 years | 12.5 years | 10 years | 10 years | 10 years |
Initial First Layer Retention | 190,159 | 211,159 | 275,283 | 185,730 | 168,691 |
Initial Excess of Loss Reinsurance Coverage | 398,429 | 398,848 | 412,917 | 315,739 | 318,636 |
March 31, 2022 | | | | | |
Remaining First Layer Retention | 190,159 | 211,142 | 275,172 | 183,807 | 165,179 |
Remaining Excess of Loss Reinsurance Coverage | 398,429 | 361,362 | 196,552 | 208,146 | 218,343 |
December 31, 2021 | | | | | |
Remaining First Layer Retention | 190,159 | 211,142 | 275,204 | 183,917 | 165,365 |
Remaining Excess of Loss Reinsurance Coverage | 398,429 | 387,830 | 234,312 | 208,146 | 218,343 |
(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after the respective Optional Call Date.
In April 2022, MGIC entered into a $473.6 million excess-of-loss reinsurance agreement (executed through an insurance linked note transaction) that covers policies with inforce dates from May 29, 2021 through December 31, 2021.
MGIC Investment Corporation - Q1 2022 | 17
The reinsurance premiums ceded to each Home Re Entity are composed of coverage, initial expense and supplemental premiums. The coverage premiums are generally calculated as the difference between the amount of interest payable by the Home Re Entity on the remaining reinsurance coverage levels, and the investment income collected on the collateral assets held in a reinsurance trust account and used to collateralize the Home Re Entity’s reinsurance obligation to MGIC. The amount of monthly reinsurance coverage premium ceded will fluctuate due to changes in the reference rate and changes in money market rates that affect investment income collected on the assets in the reinsurance trust. The Home Re 2021-2 Transaction references SOFR, while the remaining Home Re Transactions reference one-month LIBOR. As a result, we concluded that each Home Re transaction contains an embedded derivative that is accounted for separately as a freestanding derivative. The fair values of the derivatives at March 31, 2022, were not material to our consolidated balance sheet, and the change in fair value during the three months ended March 31, 2022 was not material to our consolidated statements of operations. Total ceded premiums under the Home Re transaction were $11.8 million for the three months ended March 31, 2022, and $10.3 million for the three months ended March 31, 2021.
At the time the Home Re Transactions were entered into, we concluded that each Home Re Entity is a variable interest entity (“VIE”). A VIE is a legal entity that does not have sufficient equity at risk to finance its activities without additional subordinated financial support or is structured such that equity investors lack the ability to make sufficient decisions relating to the entity’s operations through voting rights or do not substantively participate in gains and losses of the entity. Given that MGIC (1) does not have the unilateral power to direct the activities that most significantly affect each Home Re Entity’s economic performance and (2) does not have the obligation to absorb losses or the right to receive benefits of each Home Re Entity that could be significant to the Home Re Entity, consolidation of the Home Re Entities is not required.
We are required to disclose our maximum exposure to loss, which we consider to be an amount that we could be required to record in our statements of operations, as a result of our involvement with the VIEs under our Home Re Transactions. As of March 31, 2022, and December 31, 2021, we did not have material exposure to the VIEs as we have no investment in the VIEs and had no reinsurance claim payments due from the VIEs under our reinsurance transactions. We are unable to determine the timing or extent of claims from losses that are ceded under the reinsurance transactions. The VIE assets are deposited in reinsurance trusts for the benefit of MGIC that will be the source of reinsurance claim payments to MGIC. The purpose of the reinsurance trusts is to provide security to MGIC for the obligations of the VIEs under the reinsurance transactions. The trustee of the reinsurance trusts, a recognized provider of corporate trust services, has established segregated accounts within the reinsurance trusts for the benefit of MGIC, pursuant to the trust agreements. The trust agreements are governed by, and construed in accordance with, the laws of the State of New York. If the trustee of the reinsurance trusts failed to distribute claim payments to us as provided in the reinsurance trusts, we would incur a loss related to our losses ceded under the reinsurance transactions and deemed unrecoverable. We are also unable to determine the impact such possible failure by the trustee to perform pursuant to the reinsurance trust agreements may have on our consolidated financial statements. As a result, we are
unable to quantify our maximum exposure to loss related to our involvement with the VIEs. MGIC has certain termination rights under the reinsurance transactions should its claims not be paid. We consider our exposure to loss from our reinsurance transactions with the VIEs to be remote.
Table 4.6 presents the total assets of the Home Re Entities as of March 31, 2022 and December 31, 2021.
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Home Re total assets |
Table | 4.6 | | |
(In thousands) | | |
Home Re Entity | | Total VIE Assets |
March 31, 2022 | | |
Home Re 2018-1 Ltd. | | $ | 218,343 | |
Home Re 2019-1 Ltd. | | 208,146 | |
Home Re 2020-1 Ltd. | | 209,686 | |
Home Re 2021-1 Ltd. | | 370,621 | |
Home Re 2021-2 Ltd. | | 398,429 | |
| |
December 31, 2021 | | |
Home Re 2018-1 Ltd. | | $ | 218,343 | |
Home Re 2019-1 Ltd. | | 208,146 | |
Home Re 2020-1 Ltd. | | 251,387 | |
Home Re 2021-1 Ltd. | | 398,848 | |
Home Re 2021-2 Ltd. | | 398,429 | |
| |
The reinsurance trust agreements provide that the trust assets may generally only be invested in certain money market funds that (i) invest at least 99.5% of their total assets in cash or direct U.S. federal government obligations, such as U.S. Treasury bills, as well as other short-term securities backed by the full faith and credit of the U.S. federal government or issued by an agency of the U.S. federal government, (ii) have a principal stability fund rating of “AAAm” by S&P or a money market fund rating of “Aaamf” by Moody’s as of the Closing Date and thereafter maintain any rating with either S&P or Moody’s, and (iii) are permitted investments under the applicable credit for reinsurance laws and applicable PMIERs credit for reinsurance requirements.
The total calculated PMIERs credit for risk ceded under our Home Re Transactions is generally based on the PMIERs requirement of the covered policies and the attachment and detachment points of the coverage, all of which fluctuate over time. (see Note 1 - “Nature of Business and Basis of Presentation”).
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Note 5. Litigation and Contingencies
Before paying an insurance claim, generally we review the loan and servicing files to determine the appropriateness of the claim amount. When reviewing the files, we may determine that we have the right to rescind coverage or deny a claim on the loan (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 in a quarter 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.
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Note 6. Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of shares of common stock outstanding. For purposes of calculating basic EPS, vested restricted stock and restricted stock units (“RSUs”) are considered outstanding. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common stock equivalents. The determination of whether components are dilutive is calculated independently for each period. We calculate diluted EPS using the treasury stock method and if-converted method. Under the treasury stock method, diluted EPS reflects the potential dilution that could occur if unvested RSUs result in the issuance of common stock. Under the if-converted method, diluted EPS reflects the potential dilution that could occur if our 9% Debentures result in the issuance of common stock. The determination of potentially issuable shares does not consider the satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive.
Table 6.1 reconciles the numerators and denominators used to calculate basic and diluted EPS.
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Earnings per share | | | | |
Table | 6.1 | | | | | | | | |
| | | Three Months Ended March 31, | | |
(In thousands, except per share data) | | 2022 | | 2021 | | | | |
Basic earnings per share: | | | | | | | | |
Net income | | $ | 175,013 | | | $ | 150,021 | | | | | |
Weighted average common shares outstanding - basic | | 315,975 | | | 338,904 | | | | | |
Basic earnings per share | | $ | 0.55 | | | $ | 0.44 | | | | | |
| | | | | | | | |
Diluted earnings per share: | | | | | | | |
Net income | | $ | 175,013 | | | $ | 150,021 | | | | | |
Interest expense, net of tax (1): | | | | | | | | |
9% Debentures | | 1,512 | | | 3,712 | | | | | |
Diluted income available to common shareholders | | $ | 176,525 | | | $ | 153,733 | | | | | |
| | | | | | | | |
Weighted average common shares outstanding - basic | | 315,975 | | | 338,904 | | | | | |
Effect of dilutive securities: | | | | | | | | |
Unvested RSUs | | 2,029 | | | 1,694 | | | | | |
9% Debentures | | 6,534 | | | 15,785 | | | | | |
Weighted average common shares outstanding - diluted | | 324,538 | | | 356,383 | | | | | |
Diluted earnings per share | | $ | 0.54 | | | $ | 0.43 | | | | | |
| | | | | | | | | |
| | | | | | | | | |
(1) Interest expense for the three months ended March 31, 2022 and 2021, respectively, has been tax effected at a rate of 21%.
MGIC Investment Corporation - Q1 2022 | 20
Note 7. Investments
Fixed income securities
Our fixed income securities classified as available-for-sale at March 31, 2022 and December 31, 2021 are shown in tables 7.1a and 7.1b below.
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Details of fixed income securities by category as of March 31, 2022 |
Table | 7.1a | | | | | | | | | | |
(In thousands) | | Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized (Losses) | | Fair Value |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 120,223 | | | | | $ | 70 | | | $ | (4,712) | | | $ | 115,581 | |
Obligations of U.S. states and political subdivisions | | 2,383,899 | | | | | 38,260 | | | (90,246) | | | 2,331,913 | |
Corporate debt securities | | 2,572,570 | | | | | 14,382 | | | (84,660) | | | 2,502,292 | |
ABS | | 117,517 | | | | | 91 | | | (3,464) | | | 114,144 | |
RMBS | | 259,849 | | | | | 56 | | | (11,594) | | | 248,311 | |
CMBS | | 298,490 | | | | | 267 | | | (9,440) | | | 289,317 | |
CLOs | | 331,914 | | | | | 5 | | | (1,670) | | | 330,249 | |
Foreign government debt | | 4,486 | | | | | — | | | (377) | | | 4,109 | |
| | | | | | | | | | |
Total fixed income securities | | $ | 6,088,948 | | | | | $ | 53,131 | | | $ | (206,163) | | | $ | 5,935,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details of fixed income securities by category as of December 31, 2021 |
Table | 7.1b | | | | | | | | | | |
| | | |
(In thousands) | | Amortized Cost | | | | Gross Unrealized Gains | | Gross Unrealized (Losses) (1) | | Fair Value |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 133,990 | | | | | $ | 285 | | | $ | (868) | | | $ | 133,407 | |
Obligations of U.S. states and political subdivisions | | 2,408,688 | | | | | 133,361 | | | (7,396) | | | 2,534,653 | |
Corporate debt securities | | 2,704,586 | | | | | 75,172 | | | (13,776) | | | 2,765,982 | |
ABS | | 150,888 | | | | | 830 | | | (1,008) | | | 150,710 | |
RMBS | | 309,991 | | | | | 2,397 | | | (3,278) | | | 309,110 | |
CMBS | | 315,330 | | | | | 5,736 | | | (1,936) | | | 319,130 | |
CLOs | | 360,436 | | | | | 609 | | | (106) | | | 360,939 | |
Foreign government debt | | 13,749 | | | | | — | | | (99) | | | 13,650 | |
Total fixed income securities | | $ | 6,397,658 | | | | | $ | 218,390 | | | $ | (28,467) | | | $ | 6,587,581 | |
We had $12.8 million and $13.4 million of investments at fair value on deposit with various states as of March 31, 2022 and December 31, 2021, respectively, due to regulatory requirements of those state insurance departments. In connection with our insurance and reinsurance activities within MAC and MIC, insurance subsidiaries of MGIC, we are required to maintain assets in trusts for the benefit of contractual counterparties, which had investments at fair value of $183.4 million and $189.8 million at March 31, 2022 and December 31, 2021, respectively.
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The amortized cost and fair values of fixed income securities at March 31, 2022, by contractual maturity, are shown in table 7.2 below. Actual maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most ABS, RMBS, CMBS, and CLOs provide for periodic payments throughout their lives, they are listed in separate categories.
| | | | | | | | | | | | | | | | | |
Fixed income securities maturity schedule |
Table | 7.2 | | | | |
| | March 31, 2022 |
(In thousands) | | Amortized cost | | Fair Value |
Due in one year or less | | $ | 319,247 | | | $ | 320,108 | |
Due after one year through five years | | 1,575,075 | | | 1,557,833 | |
Due after five years through ten years | | 1,747,456 | | | 1,703,148 | |
Due after ten years | | 1,439,400 | | | 1,372,806 | |
| | 5,081,178 | | | 4,953,895 | |
| | | | |
ABS | | 117,517 | | | 114,144 | |
RMBS | | 259,849 | | | 248,311 | |
CMBS | | 298,490 | | | 289,317 | |
CLOs | | 331,914 | | | 330,249 | |
Total as of March 31, 2022 | | $ | 6,088,948 | | | $ | 5,935,916 | |
The proceeds from the sale of fixed income securities classified as available-for-sale along with gross gains (losses) associated with such sales are shown in table 7.3 below.
| | | | | | | | | | | | | | | | | | |
Details of fixed income securities gains (losses) | | | | |
Table | 7.3 | Three Months Ended March 31, | | |
(in thousands) | 2022 | | 2021 | | | | |
| | | | | | | | |
Gains on sales | 4,134 | | | 3,016 | | | | | |
Losses on sales | (4,657) | | | (392) | | | | | |
Change in credit allowance | — | | | 18 | | | | | |
| | | | | | | | |
Proceeds from sales of fixed income securities | 216,824 | | | 56,827 | | | | | |
Equity securities
The cost and fair value of investments in equity securities at March 31, 2022 and December 31, 2021 are shown in tables 7.4a and 7.4b below.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details of equity security investments as of March 31, 2022 |
Table | 7.4a | | | | | | | | |
| | | |
(In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
Equity securities | | $ | 15,966 | | | $ | 6 | | | $ | (781) | | | $ | 15,191 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Details of equity security investments as of December 31, 2021 |
Table | 7.4b | | | | | | | | |
| | | |
(In thousands) | | Cost | | Gross Gains | | Gross Losses | | Fair Value |
Equity securities | | $ | 15,838 | | | $ | 264 | | | $ | (34) | | | $ | 16,068 | |
For the three months ended March 31, 2022, we recognized $1.0 million of net losses on equity securities still held as of March 31, 2022. For the three months ended March 31, 2021, we recognized $0.4 million of net losses, on equity securities still held as of March 31, 2021.
MGIC Investment Corporation - Q1 2022 | 22
Other invested assets
At December 31, 2021, the FHLB Advance amount was secured by $167.2 million of eligible collateral. As a result of the prepayment of the outstanding principal balance on the FHLB Advance we are no longer required to maintain collateral Our other invested assets balance includes an investment in FHLB stock that is carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a secured lending facility.
Unrealized investment losses
Tables 7.5a and 7.5b below summarize, for all available-for-sale investments in an unrealized loss position at March 31, 2022 and December 31, 2021, the aggregate fair value and gross unrealized loss by the length of time those securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 7.5a and 7.5b are estimated using the process described in Note 8 - “Fair Value Measurements” to these consolidated financial statements and in Note 3 - “Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report on Form 10-K. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss aging for securities by type and length of time as of March 31, 2022 |
Table | 7.5a | | | | | | | | | | | | |
| | | |
| | Less Than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 89,952 | | | $ | (4,508) | | | $ | 2,589 | | | $ | (204) | | | $ | 92,541 | | | $ | (4,712) | |
Obligations of U.S. states and political subdivisions | | 1,033,010 | | | (86,569) | | | 36,513 | | | (3,677) | | | 1,069,523 | | | (90,246) | |
Corporate debt securities | | 1,305,092 | | | (66,461) | | | 168,499 | | | (18,199) | | | 1,473,591 | | | (84,660) | |
ABS | | 82,000 | | | (3,066) | | | 8,660 | | | (398) | | | 90,660 | | | (3,464) | |
RMBS | | 204,868 | | | (8,805) | | | 39,473 | | | (2,789) | | | 244,341 | | | (11,594) | |
CMBS | | 222,998 | | | (7,773) | | | 25,201 | | | (1,667) | | | 248,199 | | | (9,440) | |
CLOs | | 277,052 | | | (1,238) | | | 41,840 | | | (432) | | | 318,892 | | | (1,670) | |
Foreign government debt | | 4,108 | | | (377) | | | — | | | — | | | 4,108 | | | (377) | |
Total | | $ | 3,219,080 | | | $ | (178,797) | | | $ | 322,775 | | | $ | (27,366) | | | $ | 3,541,855 | | | $ | (206,163) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Unrealized loss aging for securities by type and length of time as of December 31, 2021 |
Table | 7.5b | | | | | | | | | | | | |
| | | |
| | | Less Than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 91,154 | | | $ | (790) | | | $ | 2,616 | | | $ | (78) | | | $ | 93,770 | | | $ | (868) | |
Obligations of U.S. states and political subdivisions | | 452,021 | | | (7,189) | | | 15,540 | | | (207) | | | 467,561 | | | (7,396) | |
Corporate debt securities | | 865,085 | | | (13,260) | | | 10,997 | | | (516) | | | 876,082 | | | (13,776) | |
ABS | | 100,064 | | | (998) | | | 1,552 | | | (10) | | | 101,616 | | | (1,008) | |
RMBS | | 180,586 | | | (2,548) | | | 31,641 | | | (730) | | | 212,227 | | | (3,278) | |
CMBS | | 89,889 | | | (1,887) | | | 1,511 | | | (49) | | | 91,400 | | | (1,936) | |
CLOs | | 177,663 | | | (71) | | | 21,973 | | | (35) | | | 199,636 | | | (106) | |
Foreign government debt | | 13,649 | | | (99) | | | — | | | — | | | 13,649 | | | (99) | |
Total | | $ | 1,970,111 | | | $ | (26,842) | | | $ | 85,830 | | | $ | (1,625) | | | $ | 2,055,941 | | | $ | (28,467) | |
Based on current facts and circumstances, we believe the unrealized losses as of March 31, 2022 presented in table 7.5a above are not indicative of the ultimate collectability of the current amortized cost of the securities. The unrealized losses in all categories of our investments at March 31, 2022 were primarily caused by an increase in prevailing interest rates. We also rely upon estimates of several credit and non-credit factors in our review and evaluation of individual investments to determine whether a credit impairment exists. All of the securities in an unrealized loss position are current with respect to their interest obligations.
There were 909 and 610 securities in an unrealized loss position at March 31, 2022 and December 31, 2021, respectively.
We report accrued investment income separately from fixed income, available-for-sale, securities.
MGIC Investment Corporation - Q1 2022 | 23
Note 8. Fair Value Measurements
Recurring fair value measurements
The following describes the valuation methodologies generally used by the independent pricing sources, or by us, to measure financial instruments at fair value, including the general classification of such financial instruments pursuant to the valuation hierarchy.
•Fixed income securities:
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies: Securities with valuations derived from quoted prices for identical instruments in active markets that we can access are categorized in Level 1 of the fair value hierarchy. Securities valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information in the valuation process are categorized as Level 2 of the fair value hierarchy.
Corporate Debt Bonds are valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy.
Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation. These securities are generally categorized in Level 2 of the fair value hierarchy.
Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities. These securities are generally categorized in Level 2 of the fair value hierarchy.
Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable. These securities are generally categorized in Level 2 of the fair value hierarchy.
Asset-Backed Securities ("ABS") are valued using spreads and other information solicited from market buy-and-sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in tranche specific prices. These securities are generally categorized in Level 2 of the fair value hierarchy.
Collateralized loan obligations ("CLOs") are valued by evaluating manager rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches and as a final step prices are checked against available recent trade activity. These securities are generally categorized in Level 2 of the fair value hierarchy.
Foreign government debt is valued by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the valuation process. These securities are generally categorized in Level 2 of the fair value hierarchy.
Commercial Paper, which has an original maturity greater than 90 days, is valued using market data for comparable instruments of similar maturity and average yields. These securities are generally categorized in Level 2 of the fair value hierarchy.
•Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded funds (“ETFs”) and Bond Mutual Funds, with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in Level 1 of the fair value hierarchy.
•Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted prices for identical assets in active markets that we can access. These securities are valued in level 1 of the fair value hierarchy. Instruments in this category valued using market data for comparable instruments are classified as level 2 in the fair value hierarchy.
•Real estate acquired is valued at the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends. These securities are categorized in level 3 of the fair value hierarchy.
MGIC Investment Corporation - Q1 2022 | 24
Assets measured at fair value, by hierarchy level, as of March 31, 2022 and December 31, 2021 are shown in tables 8.1a and 8.1b below. The fair value of the assets is estimated using the process described above, and more fully in Note 3 - “Significant Accounting Policies” to the consolidated financial statements in our 2021 Annual Report on Form 10-K.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets carried at fair value by hierarchy level as of March 31, 2022 |
Table | 8.1a | | | | | | | | |
(In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 115,581 | | | $ | 90,816 | | | $ | 24,765 | | | $ | — | |
Obligations of U.S. states and political subdivisions | | 2,331,913 | | | — | | | 2,331,913 | | | — | |
Corporate debt securities | | 2,502,292 | | | — | | | 2,502,292 | | | — | |
ABS | | 114,144 | | | — | | | 114,144 | | | — | |
RMBS | | 248,311 | | | — | | | 248,311 | | | — | |
CMBS | | 289,317 | | | — | | | 289,317 | | | — | |
CLOs | | 330,249 | | | — | | | 330,249 | | | — | |
Foreign government debt | | 4,109 | | | — | | | 4,109 | | | — | |
| | | | | | | | |
Total fixed income securities | | 5,935,916 | | | 90,816 | | | 5,845,100 | | | — | |
Equity securities | | 15,191 | | | 15,191 | | | — | | | — | |
Cash Equivalents | | 473,712 | | | 473,712 | | | — | | | — | |
Real estate acquired (1) | | 1,052 | | | — | | | — | | | 1,052 | |
Total | | $ | 6,425,871 | | | $ | 579,719 | | | $ | 5,845,100 | | | $ | 1,052 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assets carried at fair value by hierarchy level as of December 31, 2021 |
Table | 8.1b | | | | | | | | |
(In thousands) | | Total Fair Value | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) |
U.S. Treasury securities and obligations of U.S. government corporations and agencies | | $ | 133,407 | | | $ | 102,153 | | | $ | 31,254 | | | $ | — | |
Obligations of U.S. states and political subdivisions | | 2,534,653 | | | — | | | 2,534,653 | | | — | |
Corporate debt securities | | 2,765,982 | | | — | | | 2,765,982 | | | — | |
ABS | | 150,710 | | | — | | | 150,710 | | | — | |
RMBS | | 309,110 | | | — | | | 309,110 | | | — | |
CMBS | | 319,130 | | | — | | | 319,130 | | | — | |
CLOs | | 360,939 | | | — | | | 360,939 | | | — | |
Foreign government debt | | 13,650 | | | — | | | 13,650 | | | — | |
Total fixed income securities | | 6,587,581 | | | 102,153 | | | 6,485,428 | | | — | |
Equity securities | | 16,068 | | | 16,068 | | | — | | | — | |
Cash Equivalents | | 254,230 | | | 254,230 | | | — | | | — | |
Real estate acquired (1) | | 1,507 | | | — | | | — | | | 1,507 | |
Total | | $ | 6,859,386 | | | $ | 372,451 | | | $ | 6,485,428 | | | $ | 1,507 | |
(1)Real estate acquired through claim settlement, which is held for sale, is reported in “Other assets” on the consolidated balance sheets.
Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”
MGIC Investment Corporation - Q1 2022 | 25
Reconciliations of Level 3 assets
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the three months ended March 31, 2022 and 2021 is shown in table 8.2 below. There were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
| | | | | | | | | | | | | | | | | |
Fair value roll-forward for financial instruments classified as Level 3 for the three months ended March 31, |
Table | 8.2 | | | | |
| Real Estate Acquired |
(In thousands) | | 2022 | | 2021 |
Balance at December 31, | | $ | 1,507 | | | $ | 1,092 | |
Purchases | | 502 | | | 2,008 | |
Sales | | (1,026) | | | (1,431) | |
Included in earnings and reported as losses incurred, net | | 69 | | | 125 | |
Balance at March 31, | | $ | 1,052 | | | $ | 1,794 | |
| | | | | |
|
| | | | | |
| |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
| | | | |
Financial assets and liabilities not measured at fair value
Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of other invested assets is categorized as Level 2.
Financial liabilities include our outstanding debt obligations. The fair values of our 5.75% and 5.25% Notes and 9% Debentures were based on observable market prices. In all cases the fair values of the financial liabilities below are categorized as Level 2.
Table 8.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not carried, at fair value at March 31, 2022 and December 31, 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Financial assets and liabilities not measured at fair value |
Table | 8.3 | | | | | | | | |
| | March 31, 2022 | | December 31, 2021 |
(In thousands) | | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Financial assets | | | | | | | | |
Other invested assets | | $ | 850 | | | $ | 850 | | | $ | 3,100 | | | $ | 3,100 | |
| | | | | | | | |
Financial liabilities | | | | | | | | |
FHLB Advance | | — | | | — | | | 155,000 | | | 157,585 | |
5.75% Senior Notes | | 241,419 | | | 251,009 | | | 241,255 | | | 256,213 | |
5.25% Senior Notes | | 640,621 | | | 642,941 | | | 640,253 | | | 686,875 | |
9% Convertible Junior Subordinated Debentures | | 53,239 | | | 71,597 | | | 110,204 | | | 151,000 | |
Total financial liabilities | | $ | 935,279 | | | $ | 965,547 | | | $ | 1,146,712 | | | $ | 1,251,673 | |
MGIC Investment Corporation - Q1 2022 | 26
Note 9. Other Comprehensive Income
The pretax and related income tax benefit (expense) components of our other comprehensive income (loss) for the three months ended March 31, 2022 and 2021 are included in table 9.1 below.
| | | | | | | | | | | | | | | | | | | | | |
Components of other comprehensive income (loss) | | | | |
Table | 9.1 | | | | | | | | |
| | Three Months Ended March 31, | | |
(In thousands) | | 2022 | | 2021 | | | | |
Net unrealized investment gains (losses) arising during the period | | $ | (342,960) | | | $ | (119,150) | | | | | |
Total income tax benefit (expense) | | 72,022 | | | 25,021 | | | | | |
Net of taxes | | (270,938) | | | (94,129) | | | | | |
| | | | | | | | |
Net changes in benefit plan assets and obligations | | 498 | | | 1,105 | | | | | |
Total income tax benefit (expense) | | (105) | | | (232) | | | | | |
Net of taxes | | 393 | | | 873 | | | | | |
| | | | | | | | |
Total other comprehensive income (loss) | | (342,462) | | | (118,045) | | | | | |
Total income tax benefit (expense) | | 71,917 | | | 24,789 | | | | | |
Total other comprehensive income (loss), net of tax | | $ | (270,545) | | | $ | (93,256) | | | | | |
The pretax and related income tax benefit (expense) components of the amounts reclassified from our accumulated other comprehensive income (loss) (“AOCI”) to our consolidated statements of operations for the three months ended March 31, 2022 and 2021 are included in table 9.2 below.
| | | | | | | | | | | | | | | | | | | | | |
Reclassifications from AOCI | | | | |
Table | 9.2 | | | | | | | | |
| | Three Months Ended March 31, | | |
(In thousands) | | 2022 | | 2021 | | | | |
Reclassification adjustment for net realized (losses) gains(1) | | $ | 4,841 | | | $ | 3,940 | | | | | |
Income tax benefit (expense) | | (1,017) | | | (827) | | | | | |
Net of taxes | | 3,824 | | | 3,113 | | | | | |
| | | | | | | | |
Reclassification adjustment related to benefit plan assets and obligations (2) | | (498) | | | (1,105) | | | | | |
Income tax benefit (expense) | | 105 | | | 232 | | | | | |
Net of taxes | | (393) | | | (873) | | | | | |
| | | | | | | | |
Total reclassifications | | 4,343 | | | 2,835 | | | | | |
Income tax benefit (expense) | | (912) | | | (595) | | | | | |
Total reclassifications, net of tax | | $ | 3,431 | | | $ | 2,240 | | | | | |
(1)Increases (decreases) Net realized investment gains (losses) on the consolidated statements of operations.
(2)Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
A rollforward of AOCI for the three months ended March 31, 2022, including amounts reclassified from AOCI, are included in table 9.3 below.
| | | | | | | | | | | | | | | | | | | | | | | |
Rollforward of AOCI |
Table | 9.3 | | | | | | |
| | | Three Months Ended March 31, 2022 |
(In thousands) | | Net unrealized gains and (losses) on available-for-sale securities | | Net benefit plan assets and (obligations) recognized in shareholders' equity | | Total accumulated other comprehensive income (loss) |
Balance at December 31, 2021, net of tax | | $ | 150,038 | | | $ | (30,341) | | | $ | 119,697 | |
Other comprehensive income before reclassifications | | (267,114) | | | — | | | (267,114) | |
Less: Amounts reclassified from AOCI | | 3,824 | | | (393) | | | 3,431 | |
Balance, March 31, 2022, net of tax | | $ | (120,900) | | | $ | (29,948) | | | $ | (150,848) | |
MGIC Investment Corporation - Q1 2022 | 27
Note 10. Benefit Plans
Tables 10.1 provides the components of net periodic benefit cost for our pension, supplemental executive retirement and other postretirement benefit plans for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Components of net periodic benefit cost |
Table | 10.1 | | | | | | | | |
| | Three Months Ended March 31, |
| | Pension and Supplemental Executive Retirement Plans | | Other Postretirement Benefit Plans |
(In thousands) | | 2022 | | 2021 | | 2022 | | 2021 |
Service cost | | $ | 1,757 | | | $ | 1,664 | | | $ | 348 | | | $ | 364 | |
Interest cost | | 2,877 | | | 2,810 | | | 177 | | | 164 | |
Expected return on plan assets | | (4,952) | | | (5,202) | | | (2,625) | | | (2,215) | |
Amortization of net actuarial losses (gains) | | 1,183 | | | 1,550 | | | (754) | | | (439) | |
Amortization of prior service cost (credit) | | (53) | | | (60) | | | 122 | | | 53 | |
| | | | | | | | |
Net periodic benefit cost (benefit) | | $ | 812 | | | $ | 762 | | | $ | (2,732) | | | $ | (2,073) | |
We currently intend to make contributions totaling $6.5 million to our qualified pension and supplemental executive retirement plan in 2022.
MGIC Investment Corporation - Q1 2022 | 28
Note 11. Loss Reserves
We establish case reserves and LAE reserves on delinquent loans that were reported to us as two or more payments past due and have not become current or resulted in a claim payment. Such loans are referred to as being in our delinquency inventory. Case reserves are established by estimating the number of loans in our delinquency inventory that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
IBNR reserves are established for estimated losses from delinquencies we estimate have occurred prior to the close of an accounting period, but have not yet been reported to us. IBNR reserves are also established using estimated claim rates and claim severities.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment and the current and future strength of local housing markets; exposure on insured loans; the amount of time between delinquency and claim filing (all else being equal, the longer the period between delinquency and claim filing, the greater the severity); and curtailments and rescissions. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment and the continued impact of the COVID-19 pandemic, leading to a reduction in borrowers’ income and thus their ability to make mortgage payments, the impact of past and future government initiatives and actions taken by the GSEs (including mortgage forbearance programs and foreclosure moratoriums), and a drop in housing values which may affect borrower willingness to continue to make mortgage payments when the value of the home is below the mortgage balance. Loss reserves in future periods will also be dependent on the number of loans reported to us as delinquent.
Changes to our estimates could result in a material impact to our consolidated results of operations and financial position, even in a stable economic environment. Given the uncertainty surrounding the long-term impact of COVID-19, it is difficult to predict the ultimate effect of the COVID-19 related delinquencies and forbearances on our loss incidence.
In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that even a relatively small change in our estimated claim rate or claim severity could have a material impact on loss reserves and, correspondingly, on our consolidated results of operations even in a stable economic environment. For example, as of March 31, 2022, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately +/- $15 million. A one percentage point increase/decrease in the average claim rate reserve factor would change the loss reserve amount by approximately +/- $18 million.
The “Losses incurred” section of table 11.1 below shows losses incurred on delinquencies that occurred in the current year and in prior years. The amount of losses incurred relating to delinquencies that occurred in the current year represents the
estimated amount to be ultimately paid on such delinquencies. The amount of losses incurred relating to delinquencies that occurred in prior years represents the difference between the actual claim rate and claim severity associated with those delinquencies resolved in the current year compared to the estimated claim rate and claim severity at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on delinquencies continuing from the end of the prior year. This re-estimation of the claim rate and claim severity is the result of our review of current trends in the delinquency inventory, such as percentages of delinquencies that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of delinquencies by geography and changes in average loan exposure.
Losses incurred on delinquencies that occurred in the current year decreased in the first quarter of 2022 compared to the same period last year primarily due to a decrease in new delinquency notices reported.
For the three months ended March 31, 2022 we experienced favorable loss development of $55.7 million on previously received notices primarily related to a decrease in estimated claim rate on Peak COVID-19 delinquencies. For the three months ended March 31, 2021 we experienced favorable loss development of $1.8 million.
MGIC Investment Corporation - Q1 2022 | 29
The “Losses paid” section of table 11.1 below shows the amount of losses paid on delinquencies that occurred in the current year and losses paid on delinquencies that occurred in prior years. In light of the uncertainty caused by the COVID-19 pandemic, specifically the foreclosure moratoriums and forbearance plans, the average time it takes to receive a claim has increased.
Table 11.1 provides a reconciliation of beginning and ending loss reserves as of and for the three months ended March 31, 2022 and 2021.
| | | | | | | | | | | | | | | | | |
Development of reserves for losses and loss adjustment expenses |
Table | 11.1 | | | | |
| | | Three Months Ended March 31, |
(In thousands) | | 2022 | | 2021 |
Reserve at beginning of period | | $ | 883,522 | | | $ | 880,537 | |
Less reinsurance recoverable | | 66,905 | | | 95,042 | |
Net reserve at beginning of period | | 816,617 | | | 785,495 | |
| | | | |
Losses incurred: | | | | |
Losses and LAE incurred in respect of delinquency notices received in: | | | | |
Current year | | 36,344 | | | 41,425 | |
Prior years (1) | | (55,658) | | | (1,789) | |
Total losses incurred | | (19,314) | | | 39,636 | |
| | | | |
Losses paid: | | | | |
Losses and LAE paid in respect of delinquency notices received in: | | | | |
Current year | | — | | | — | |
Prior years | | 10,748 | | | 14,922 | |
| | | | |
Total losses paid | | 10,748 | | | 14,922 | |
Net reserve at end of period | | 786,555 | | | 810,209 | |
Plus reinsurance recoverable | | 64,717 | | | 102,901 | |
Reserve at end of period | | $ | 851,272 | | | $ | 913,110 | |
(1)A positive number for prior year loss reserve development indicates a deficiency of prior year reserves. A negative number for prior year loss reserve development indicates a redundancy of prior year loss reserves. See the following table for more information about prior year loss reserve development.
The prior year loss reserve development in the first three months of 2022 and 2021 is reflected in table 11.2 below.
| | | | | | | | | | | | | | | | | |
Reserve development on previously received delinquencies |
Table | 11.2 | | | | |
| | | Three Months Ended March 31, |
(In thousands) | | 2022 | | 2021 |
Increase (decrease) in estimated claim rate on primary defaults | | $ | (55,777) | | | $ | 87 | |
Increase (decrease) in estimated severity on primary defaults | | (2,172) | | | 59 | |
Change in estimates related to pool reserves, LAE reserves, reinsurance, and other | | 2,291 | | | (1,935) | |
Total prior year loss development (1) | | $ | (55,658) | | | $ | (1,789) | |
(1)A positive number for prior year loss reserve development indicates a deficiency of prior year loss reserves. A negative number for prior year loss reserve development indicates a redundancy of prior year loss reserves.
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Delinquency inventory
A rollforward of our primary delinquency inventory for the three months ended March 31, 2022 and 2021 appears in table 11.3 below. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.
| | | | | | | | | | | | | | | | | | | | | |
Delinquency inventory rollforward | | | | |
Table | 11.3 | | | | | | | | |
| | Three Months Ended March 31, | | |
| | 2022 | | 2021 | | | | |
Delinquency inventory at beginning of period | | 33,290 | | | 57,710 | | | | | |
New notices | | 10,703 | | | 13,011 | | | | | |
Cures | | (13,200) | | | (17,628) | | | | | |
Paid claims | | (322) | | | (312) | | | | | |
Rescissions and denials | | (9) | | | (6) | | | | | |
| | | | | | | | |
Delinquency inventory at end of period | | 30,462 | | 52,775 | | | | |
COVID-19 Pandemic Delinquencies
Our delinquency notices increased beginning in the second quarter of 2020 because of the impacts of the COVID-19 pandemic, including the high level of unemployment and economic uncertainty resulting from measures to reduce the transmission of COVID-19. Starting in the third quarter of 2020, we experienced an increase in cures associated with our COVID-19 new delinquency notices. Government initiatives and actions taken by the GSEs provided for payment forbearance on mortgages to borrowers experiencing hardship during the COVID-19 pandemic, allowing mortgage payments to be suspended for a period generally ranging from six to eighteen months.
Table 11.4 below shows the number of consecutive months a borrower is delinquent. Historically as a delinquency ages it is more likely to result in a claim.
| | | | | | | | | | | | | | |
Primary delinquency inventory - consecutive months delinquent |
Table | 11.4 | | | |
| March 31, 2022 | December 31, 2021 | March 31, 2021 |
3 months or less | 7,382 | | 7,586 | | 9,194 | |
4-11 months | 8,131 | | 7,990 | | 29,832 | |
12 months or more (1) | 14,949 | | 17,714 | | 13,749 | |
Total | 30,462 | | 33,290 | | 52,775 | |
3 months or less | 24 | % | 23 | % | 17 | % |
4-11 months | 27 | % | 24 | % | 57 | % |
12 months or more | 49 | % | 53 | % | 26 | % |
Total | 100 | % | 100 | % | 100 | % |
Primary claims received inventory included in ending delinquent inventory | 217 | | 211 | | 151 | |
(1)Approximately 23%, 20%, and 26% of the primary delinquency inventory delinquent for 12 consecutive months or more has been delinquent for at least 36 consecutive months as of March 31, 2022, December 31, 2021, and March 31, 2021, respectively.
Premium refunds
Our estimate of premiums to be refunded on expected claim payments is accrued for separately in “Other Liabilities” on our consolidated balance sheets and approximated $36.4 million and $37.3 million at March 31, 2022 and December 31, 2021, respectively.
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Note 12. Shareholders’ Equity
Change in Accounting Policy
As of January 1, 2021, we adopted the updated guidance for "Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity”. The application of this guidance resulted in a $68.3 million cumulative effect adjustment to our 2021 beginning retained earnings and paid in capital to reflect the 9% Debenture as if we had always accounted for the debt as a liability in its entirety.
Share repurchase programs
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 8.5 million shares at an average cost of $14.99 per share, which included commissions. In 2021, we repurchased approximately 19.0 million shares of our common stock, at an average cost of $15.30 per share, which included commissions. At March 31, 2022 we had $372 million remaining under a share repurchase program approved by our Board of Directors in 2021. In April 2022, we repurchased an additional 3.0 million shares totaling $39.7 million under the remaining authorization that expires at year end 2023.
Cash dividends
In March 2022, we paid quarterly cash dividends of $0.08 per share to shareholders which totaled $25.8 million. On April 28, 2022, the Board of Directors declared a quarterly cash dividend to holders of the company’s common stock of $0.08 per share payable on May 26, 2022, to shareholders of record at the close of business on May 12, 2022.
Note 13. Share-Based Compensation
We have certain share-based compensation plans. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under our plans generally vest over periods ranging from one to three years, although awards to our non-employee directors vest immediately.
Table 13.1 shows the number of restricted stock units (RSUs) granted to employees and the weighted average fair value per share during the periods presented (shares in thousands).
| | | | | | | | | | | | | | | | | | | | | | | |
Restricted stock unit grants |
Table | 13.1 | | | | | | |
| | | Three months ended March 31, |
| | | 2022 | | 2021 |
| | | RSUs Granted (in thousands) | Weighted Average Share Fair Value | | RSUs Granted (in thousands) | Weighted Average Share Fair Value |
RSUs subject to performance conditions | (1) | 848 | | $ | 15.46 | | | 966 | | $ | 12.82 | |
RSUs subject only to service conditions | | 413 | | 15.46 | | | 398 | | 12.82 | |
(1)Shares granted are subject to performance conditions under which the target number of shares granted may vest up to 200%.
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Note 14. Statutory Information
Statutory Capital Requirements
The insurance laws of 16 jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the RIF (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements” and, together with the GSE Financial Requirements, the “Financial Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of 25 to 1. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires a minimum policyholder position (“MPP”). MGIC’s “policyholder position” includes its net worth or surplus, and its contingency loss 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. The calculation of our risk-to-capital ratio and MPP reflect credit for the risk ceded under our reinsurance transactions. If MGIC is not allowed an agreed level of credit under either the State Capital Requirements or the financial requirements of the PMIERs, MGIC may terminate the reinsurance agreements, without penalty.
At March 31, 2022, the risk-to-capital ratio of our combined insurance operations (which includes a reinsurance affiliate) was 9.2 to 1.
Dividend restrictions
MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without regulatory approval by the OCI is the lesser of adjusted statutory net income or 10% of statutory ‘policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the three calendar years preceding the date of the dividend less dividends paid within the first two of the preceding three calendar years. The maximum dividend that could be paid is reduced by dividends paid in the twelve months preceding the dividend payment date. Before making any dividend payments, we will notify the OCI to ensure it does not object. In April 2022, MGIC obtained approval to pay a $400 million dividend to our holding company.
The OCI recognizes only statutory accounting principles prescribed, or practices permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in the contingency loss reserves through their income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency loss reserves, statutory net income is reduced.
Statutory Financial Information
The statutory net income, policyholders’ surplus, and contingency reserve liability of our insurance subsidiaries, which agrees to amounts utilized in our risk-to-capital calculations, are shown in table 14.1.
| | | | | | | | | | | | | | |
Financial information of our insurance subsidiaries |
Table 14.1 | | | | |
| | As of and for the Three Months Ended March 31, |
(In thousands) | | 2022 | | 2021 |
Statutory net income | | $ | 96,018 | | | $ | 47,775 | |
Statutory policyholders' surplus | | 1,319,633 | | | 1,383,114 | |
Contingency reserve | | 4,263,599 | | | 3,733,126 | |
| | | | |
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