MILWAUKEE,
April 18, 2018 /PRNewswire/
-- MGIC Investment Corporation (NYSE: MTG) today reported
operating and financial results for the first quarter of 2018. Net
income for the quarter was $143.6
million, or $0.38 per diluted
share, compared with net income of $89.8
million, or $0.24 per diluted
share for the first quarter of 2017.
Adjusted net operating income for the first quarter 2018
was $144.6 million, or $0.38 per diluted share, compared with
$117.1 million, or $0.31 per diluted share for the first quarter of
2017. 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.
First Quarter Summary
- New Insurance Written of $10.6
billion compared to $9.3
billion in the first quarter of 2017.
- Insurance in force of $197.5
billion at March 31, 2018
increased by 1.3% during the quarter and 7.6% compared to
March 31, 2017.
- Primary delinquent inventory of 41,243 loans at
March 31, 2018 decreased from 46,556 loans at
December 31, 2017. Our primary delinquent inventory declined
9.1% year-over-year from 45,349 loans at March 31,
2017.
-
- As of March 31, 2018, the
primary delinquent inventory includes 10,198 loans from the areas
impacted by major hurricanes in 2017 compared to 12,446 loans as of
December 31, 2017 and 6,531 loans as
of March 31, 2017.
- The 2008 and prior books account for approximately 21% of
the primary risk in force but accounted for 73% of the new primary
delinquent notices received in the quarter.
- The percentage of primary loans that were delinquent at
March 31, 2018 was 4.02%, compared to 4.55% at December 31, 2017, and 4.55% at March 31, 2017. The percentage of flow primary
loans that were delinquent at March 31,
2018 was 3.25% compared to 3.70% at December 31, 2017, and 3.62% March 31, 2017.
- Persistency, or the percentage of insurance remaining in
force from one year prior, was 80.2% at March 31, 2018
compared with 80.1% at December 31, 2017 and 76.9% at
March 31, 2017.
- The loss ratio for the first quarter of 2018 was 10.3%
compared to (13.1%) for the fourth quarter of 2017 and 12.1% for
the first quarter of 2017.
- The underwriting expense ratio associated with our
insurance operations for the first quarter of 2018 was 19.5%
compared to 15.9% for the fourth quarter of 2017 and 17.0% for the
first quarter of 2017.
- Net premium yield was 47.3 basis points in the first
quarter of 2018 compared to 49.2 basis points for the fourth
quarter of 2017 and 50.1 basis points for the first quarter of
2017. The decrease from the fourth quarter was primarily a result
of the runoff of higher premium books, less accelerated single
premium recognition and a smaller change in premium refund
accruals.
- Book value per common share outstanding increased by 2.2%
during the quarter to $8.70. A
($64.5) million after-tax change in
net unrealized gains (losses), primarily due to rising interest
rates, lowered book value per common share outstanding by
$0.17.
_______________
Patrick
Sinks, CEO of MTG and Mortgage Guaranty Insurance
Corporation ("MGIC"), said, "We continue to benefit from the
current conditions of the employment and housing markets, favorable
demographics that are helping fuel the purchase mortgage market,
and a higher interest rate environment." Sinks also said, " While
the operating environment continues to be very dynamic, we saw our
insurance in force and investment income increase, and the primary
delinquent inventory continue to decline. Finally, in the
quarter the holding company received a $50
million dividend from MGIC."
_______________
Revenues
Total revenues for the first quarter of 2018 were
$265.8 million, compared to
$260.9 million in the first quarter
last year. Net premiums written for the quarter were $236.9 million, compared to $236.7 million for the same period last year. Net
premiums earned for the quarter were $232.1
million, compared to $229.1
million for the same period last year as a result of an
increase in insurance in force offset by a lower effective premium
yield. Investment income for the first quarter was $32.1 million, compared to $29.5 million for the same period last
year.
Losses and expenses
Losses incurred
Losses incurred in the first quarter of 2018 were
$23.9 million, compared to
$27.6 million in the first quarter of
2017. During the first quarter of 2018 there was a
$31 million reduction in losses
incurred due to positive development on our primary loss reserves
for previously received delinquencies, compared to a reduction of
$49 million in the first quarter of
2017. Losses incurred in the quarter associated with delinquent
notices received in the quarter reflect fewer delinquent new
notices received and a lower claim rate when compared to the same
quarter last year, including on notices in hurricane impacted areas
as we do not expect a material increase in claims from these
notices.
Underwriting and other expenses
Net underwriting and other expenses were $48.7 million in the first quarter of 2018,
compared to $43.0 million in the same
period last year. The increase in expenses was primarily due to
higher stock based compensation, which resulted from a higher stock
price at the grant date, non-executive compensation and employee
benefit plans. Interest expense was $13.2
million in the first quarter of 2018, compared to
$16.3 million in the same period last
year. The decrease was a result of the retirement of the 5% Senior
Notes and conversion of the 2% Convertible Senior Notes.
Provision for income taxes
The effective income tax rate was 20.2% in the first
quarter of 2018, compared to 32.7% in the first quarter of 2017,
excluding the $27.2 million tax
provision that was recorded in the first quarter of 2017 for the
anticipated settlement of our IRS litigation. The decrease reflects
the reduction to the statutory income tax rate.
Capital
- As of March 31, 2018, total shareholders' equity was
$3.23 billion and outstanding
principal on borrowings was $837
million.
- MGIC paid a dividend of $50
million to our holding company during the first quarter of
2018.
- Preliminary Consolidated Risk-to-Capital was 10.3:1 as of
March 31, 2018, compared to 11.6:1 as of March 31,
2017.
- MGIC's PMIERs Available Assets totaled $4.8 billion, or $0.9
billion above its Minimum Required Assets as of
March 31, 2018.
Other Balance Sheet and Liquidity
Metrics
- Total assets were $5.62
billion as of March 31, 2018, compared to $5.62 billion as of December 31, 2017, and $5.90 billion as of March 31,
2017.
- The fair value of our investment portfolio, cash and cash
equivalents was $5.1 billion as of
March 31, 2018 compared to $5.1
billion as of December 31,
2017, and $5.1 billion as of
March 31, 2017.
- Investments, cash and cash equivalents at the holding
company were $257 million as of
March 31, 2018 compared to $216
million as of December 31, 2017, and $451 million as of March 31,
2017.
Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call
today, April 18, 2018, at 10 a.m.
ET to allow securities analysts and shareholders the
opportunity to hear management discuss the company's quarterly
results. The conference call number is 1-844-231-8825. The call is
being webcast and can be accessed at the company's website at
http://mtg.mgic.com/.A replay of the webcast will be
available on the company's website through May 18, 2018 under "Newsroom."
About MGIC
MGIC (www.mgic.com), the principal subsidiary
of MGIC Investment Corporation, serves lenders throughout
the United States, Puerto Rico, and other locations helping
families achieve homeownership sooner by making affordable
low-down-payment mortgages a reality. At March 31, 2018, MGIC had $197.5 billion of primary insurance in force
covering approximately one million mortgages.
This press release, which includes certain additional
statistical and other information, including non-GAAP financial
information, and a supplement that contains various portfolio
statistics are both available on the Company's website at
https://mtg.mgic.com/ under
"Newsroom."
From time to time MGIC Investment Corporation releases
important information via postings on its corporate website without
making any other disclosure and intends to continue to do so in the
future. Investors and other interested parties are encouraged to
enroll to receive automatic email alerts and Really Simple
Syndication (RSS) feeds regarding new postings. Enrollment
information can be found at
https://mtg.mgic.com under "Newsroom."
Safe Harbor Statement
Forward Looking Statements and Risk
Factors:
Our actual results could be affected by the risk factors
below. These risk factors should be reviewed in connection with
this press release and our periodic reports to the Securities and
Exchange Commission ("SEC"). These risk factors may also cause
actual results to differ materially from the results contemplated
by forward looking statements that we may make. Forward looking
statements consist of statements which relate to matters other than
historical fact, including matters that inherently refer to future
events. Among others, statements that include words such as
"believe," "anticipate," "will" or "expect," or words of similar
import, are forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other
statements we may make even though these statements may be affected
by events or circumstances occurring after the forward looking
statements or other statements were made. No investor should rely
on the fact that such statements are current at any time other than
the time at which this press release was delivered for
dissemination to the public.
In addition, the current period financial results included
in this press release may be affected by additional information
that arises prior to the filing of our Form 10-Q for the quarter
ended March 31, 2018.
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 (loss) on
debt extinguishment, net impairment losses recognized in income
(loss) and infrequent or unusual non-operating items where
applicable.
Adjusted net operating income (loss)
is defined as GAAP net income (loss) excluding the after-tax
effects of net realized investment gains (losses), gain (loss) on
debt extinguishment, net impairment losses recognized in income
(loss), and infrequent or unusual non-operating items where
applicable. The amounts of adjustments to components of pre-tax
operating income (loss) are tax effected using a federal statutory
tax rate of 21% in 2018 and 35% in 2017.
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.
Our income tax expense includes amounts related to our IRS dispute
and is related to past transactions which are non-recurring in
nature and are not part of our primary operating
activities.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands, except per share
data)
|
|
2018
|
|
2017
|
|
|
|
|
|
Net premiums
written
|
|
$
|
236,906
|
|
|
$
|
236,702
|
|
Revenues
|
|
|
|
|
Net premiums
earned
|
|
$
|
232,107
|
|
|
$
|
229,103
|
|
Net investment
income
|
|
32,054
|
|
|
29,477
|
|
Net realized
investment losses
|
|
(260)
|
|
|
(122)
|
|
Other
revenue
|
|
1,869
|
|
|
2,422
|
|
Total
revenues
|
|
265,770
|
|
|
260,880
|
|
Losses and expenses
|
|
|
|
|
Losses incurred,
net
|
|
23,850
|
|
|
27,619
|
|
Underwriting and
other expenses, net
|
|
48,662
|
|
|
42,995
|
|
Interest
expense
|
|
13,233
|
|
|
16,309
|
|
Total losses and
expenses
|
|
85,745
|
|
|
86,923
|
|
Income before
tax
|
|
180,025
|
|
|
173,957
|
|
Provision for income
taxes
|
|
36,388
|
|
|
84,159
|
|
Net income
|
|
$
|
143,637
|
|
|
$
|
89,798
|
|
Net income per
diluted share
|
|
$
|
0.38
|
|
|
$
|
0.24
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
EARNINGS PER SHARE
(UNAUDITED)
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands, except per share
data)
|
|
2018
|
|
2017
|
Net income
|
|
$
|
143,637
|
|
|
$
|
89,798
|
|
Interest expense, net
of tax (1):
|
|
|
|
|
2% Convertible
Senior Notes due 2020
|
|
—
|
|
|
823
|
|
5% Convertible
Senior Notes due 2017
|
|
—
|
|
|
1,282
|
|
9% Convertible
Junior Subordinated Debentures due 2063
|
|
4,566
|
|
|
3,757
|
|
Diluted net income
available to common shareholders
|
|
$
|
148,203
|
|
|
$
|
95,660
|
|
|
|
|
|
|
Weighted average
shares - basic
|
|
370,908
|
|
|
341,009
|
|
Effect of dilutive
securities:
|
|
|
|
|
Unvested restricted
stock units
|
|
1,626
|
|
|
1,488
|
|
2% Convertible
Senior Notes due 2020
|
|
—
|
|
|
29,859
|
|
5% Convertible
Senior Notes due 2017
|
|
—
|
|
|
10,791
|
|
9% Convertible
Junior Subordinated Debentures due 2063
|
|
19,028
|
|
|
19,028
|
|
Weighted average
shares - diluted
|
|
391,562
|
|
|
402,175
|
|
Net income per
diluted share
|
|
$
|
0.38
|
|
|
$
|
0.24
|
|
|
|
|
|
|
|
|
(1)
|
Interest expense for
the three months ended March 31, 2018 and 2017 has been tax
effected at a rate of 21% and 35%, respectively.
|
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,
|
|
|
2018
|
|
2017
|
(In thousands, except per share
amounts)
|
|
Pre-tax
|
|
Tax
provision
(benefit)
|
|
Net
(after-tax)
|
|
Pre-tax
|
|
Tax
provision
(benefit)
|
|
Net
(after-tax)
|
Income before tax /
Net income
|
|
$
|
180,025
|
|
|
$
|
36,388
|
|
|
$
|
143,637
|
|
|
$
|
173,957
|
|
|
$
|
84,159
|
|
|
$
|
89,798
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional income tax
provision related to IRS litigation
|
|
—
|
|
|
(708)
|
|
|
708
|
|
|
—
|
|
|
(27,224)
|
|
|
27,224
|
|
Net realized
investment losses
|
|
260
|
|
|
55
|
|
|
205
|
|
|
122
|
|
|
43
|
|
|
79
|
|
Adjusted pre-tax
operating income / Adjusted net operating income
|
|
$
|
180,285
|
|
|
$
|
35,735
|
|
|
$
|
144,550
|
|
|
$
|
174,079
|
|
|
$
|
56,978
|
|
|
$
|
117,101
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of Net income per diluted share to
Adjusted net operating income per diluted
share
|
Weighted average
shares - diluted
|
|
|
|
|
|
391,562
|
|
|
|
|
|
|
402,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per
diluted share
|
|
|
|
|
|
$
|
0.38
|
|
|
|
|
|
|
$
|
0.24
|
|
Additional income tax
provision related to IRS litigation
|
|
|
|
|
|
—
|
|
|
|
|
|
|
0.07
|
|
Net realized
investment losses
|
|
|
|
|
|
—
|
|
|
|
|
|
|
—
|
|
Adjusted net
operating income per diluted share
|
|
|
|
|
|
$
|
0.38
|
|
|
|
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
March
|
|
December
31,
|
|
March
|
(In thousands, except per share
data)
|
|
2018
|
|
2017
|
|
2017
|
ASSETS
|
|
|
|
|
|
|
Investments
(1)
|
|
$
|
4,937,262
|
|
|
$
|
4,990,561
|
|
|
$
|
4,649,281
|
|
Cash and cash
equivalents
|
|
177,488
|
|
|
99,851
|
|
|
427,074
|
|
Reinsurance
recoverable on loss reserves (2)
|
|
45,474
|
|
|
48,474
|
|
|
46,658
|
|
Home office and
equipment, net
|
|
48,382
|
|
|
44,936
|
|
|
38,314
|
|
Deferred insurance
policy acquisition costs
|
|
18,928
|
|
|
18,841
|
|
|
18,236
|
|
Deferred income
taxes, net
|
|
211,999
|
|
|
234,381
|
|
|
552,469
|
|
Other
assets
|
|
176,815
|
|
|
182,455
|
|
|
171,856
|
|
Total
assets
|
|
$
|
5,616,348
|
|
|
$
|
5,619,499
|
|
|
$
|
5,903,888
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS'
EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Loss reserves
(2)
|
|
$
|
924,171
|
|
|
$
|
985,635
|
|
|
$
|
1,335,042
|
|
Unearned
premiums
|
|
397,688
|
|
|
392,934
|
|
|
337,322
|
|
Revolving
credit facility
|
|
—
|
|
|
—
|
|
|
150,000
|
|
Federal home
loan bank advance
|
|
155,000
|
|
|
155,000
|
|
|
155,000
|
|
Senior
notes
|
|
418,848
|
|
|
418,560
|
|
|
417,695
|
|
Convertible
senior notes
|
|
—
|
|
|
—
|
|
|
349,848
|
|
Convertible
junior debentures
|
|
256,872
|
|
|
256,872
|
|
|
256,872
|
|
Other
liabilities
|
|
232,361
|
|
|
255,972
|
|
|
254,578
|
|
Total
liabilities
|
|
2,384,940
|
|
|
2,464,973
|
|
|
3,256,357
|
|
Shareholders'
equity
|
|
3,231,408
|
|
|
3,154,526
|
|
|
2,647,531
|
|
Total liabilities and
shareholders' equity
|
|
$
|
5,616,348
|
|
|
$
|
5,619,499
|
|
|
$
|
5,903,888
|
|
Book value per share
(3)
|
|
$
|
8.70
|
|
|
$
|
8.51
|
|
|
$
|
7.75
|
|
|
|
|
|
|
|
|
(1)Investments include net unrealized
(losses) gains on securities
|
|
$
|
(44,553)
|
|
|
$
|
37,058
|
|
|
$
|
(13,337)
|
|
(2)Loss reserves, net of reinsurance
recoverable on loss reserves
|
|
$
|
878,697
|
|
|
$
|
937,161
|
|
|
$
|
1,288,384
|
|
(3)Shares outstanding
|
|
371,348
|
|
|
370,567
|
|
|
341,434
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL
INFORMATION - NEW INSURANCE WRITTEN
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
New primary insurance
written (NIW) (billions)
|
$
|
10.6
|
|
|
$
|
12.8
|
|
|
$
|
14.1
|
|
|
$
|
12.9
|
|
|
$
|
9.3
|
|
|
|
|
|
|
|
|
|
|
|
Monthly (including
split premium plans) and annual premium plans
|
8.5
|
|
|
10.1
|
|
|
11.4
|
|
|
10.6
|
|
|
7.8
|
|
Single premium
plans
|
2.1
|
|
|
2.7
|
|
|
2.7
|
|
|
2.3
|
|
|
1.5
|
|
|
|
|
|
|
|
|
|
|
|
Direct average
premium rate (bps) on NIW
|
|
|
|
|
|
|
|
|
|
Monthly
(1)
|
55.8
|
|
|
56.3
|
|
|
55.5
|
|
|
55.1
|
|
|
53.6
|
|
Singles
|
167.4
|
|
|
170.5
|
|
|
176.8
|
|
|
177.4
|
|
|
172.2
|
|
|
|
|
|
|
|
|
|
|
|
Product mix as a % of
primary NIW
|
|
|
|
|
|
|
|
|
|
FICO <
680
|
7
|
%
|
|
8
|
%
|
|
7
|
%
|
|
7
|
%
|
|
7
|
%
|
>95%
LTVs
|
13
|
%
|
|
13
|
%
|
|
12
|
%
|
|
10
|
%
|
|
8
|
%
|
>45%
DTI
|
20
|
%
|
|
19
|
%
|
|
9
|
%
|
|
6
|
%
|
|
6
|
%
|
Singles
|
19
|
%
|
|
21
|
%
|
|
20
|
%
|
|
18
|
%
|
|
17
|
%
|
Refinances
|
12
|
%
|
|
13
|
%
|
|
9
|
%
|
|
9
|
%
|
|
17
|
%
|
|
|
|
|
|
|
|
|
|
|
New primary risk
written (billions)
|
$
|
2.6
|
|
|
$
|
3.2
|
|
|
$
|
3.5
|
|
|
$
|
3.2
|
|
|
$
|
2.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excludes loans with
split and annual payments
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL
INFORMATION - INSURANCE IN FORCE and RISK IN FORCE
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
Primary Insurance In
Force (IIF) (billions)
|
$
|
197.5
|
|
|
$
|
194.9
|
|
|
$
|
191.0
|
|
|
$
|
187.3
|
|
|
$
|
183.5
|
|
Total # of
loans
|
1,026,797
|
|
|
1,023,951
|
|
|
1,014,092
|
|
|
1,006,392
|
|
|
997,650
|
|
Flow # of
loans
|
973,187
|
|
|
968,649
|
|
|
956,772
|
|
|
946,435
|
|
|
935,470
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan Size of
IIF (thousands)
|
$
|
192.31
|
|
|
$
|
190.38
|
|
|
$
|
188.36
|
|
|
$
|
186.09
|
|
|
$
|
183.91
|
|
Flow only
|
$
|
194.98
|
|
|
$
|
192.99
|
|
|
$
|
190.94
|
|
|
$
|
188.70
|
|
|
$
|
186.52
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Persistency
|
80.2
|
%
|
|
80.1
|
%
|
|
78.8
|
%
|
|
77.8
|
%
|
|
76.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Primary Risk In Force
(RIF) (billions)
|
$
|
50.9
|
|
|
$
|
50.3
|
|
|
$
|
49.4
|
|
|
$
|
48.5
|
|
|
$
|
47.5
|
|
By FICO
(%)
|
|
|
|
|
|
|
|
|
|
FICO 760 &
>
|
37
|
%
|
|
36
|
%
|
|
36
|
%
|
|
36
|
%
|
|
35
|
%
|
FICO
740-759
|
15
|
%
|
|
15
|
%
|
|
15
|
%
|
|
15
|
%
|
|
14
|
%
|
FICO
720-739
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
|
14
|
%
|
FICO
700-719
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
|
11
|
%
|
FICO
680-699
|
9
|
%
|
|
9
|
%
|
|
9
|
%
|
|
9
|
%
|
|
9
|
%
|
FICO
660-679
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
6
|
%
|
FICO
640-659
|
3
|
%
|
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
|
4
|
%
|
FICO 639 &
<
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
6
|
%
|
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
Average Coverage
Ratio (RIF/IIF)
|
25.8
|
%
|
|
25.8
|
%
|
|
25.9
|
%
|
|
25.9
|
%
|
|
25.9
|
%
|
|
|
|
|
|
|
|
|
|
|
Direct Pool RIF
(millions)
|
|
|
|
|
|
|
|
|
|
With aggregate loss
limits
|
$
|
233
|
|
|
$
|
236
|
|
|
$
|
238
|
|
|
$
|
239
|
|
|
$
|
242
|
|
Without aggregate
loss limits
|
$
|
222
|
|
|
$
|
235
|
|
|
$
|
251
|
|
|
$
|
267
|
|
|
$
|
284
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note:
|
The FICO credit score
for a loan with multiple borrowers is the lowest of the borrowers'
"decision FICO scores." A borrower's "decision FICO score" is
determined as follows: if there are three FICO scores available,
the middle FICO score is used; if two FICO scores are available,
the lower of the two is used; if only one FICO score is available,
it is used.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
|
ADDITIONAL
INFORMATION - DEFAULT STATISTICS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Primary IIF -
Delinquent Roll Forward - # of Loans
|
|
|
|
|
|
|
|
|
|
|
Beginning Delinquent
Inventory
|
46,556
|
|
|
41,235
|
|
|
41,317
|
|
|
45,349
|
|
|
50,282
|
|
|
New
Notices
|
14,623
|
|
|
22,916
|
|
|
15,950
|
|
|
14,463
|
|
|
14,939
|
|
|
Cures
|
(18,073)
|
|
|
(15,712)
|
|
|
(13,546)
|
|
|
(14,708)
|
|
|
(17,128)
|
|
|
Paids (including
those charged to a deductible or captive)
|
(1,571)
|
|
|
(1,803)
|
|
|
(2,195)
|
|
|
(2,573)
|
|
|
(2,635)
|
|
|
Rescissions and
denials
|
(68)
|
|
|
(80)
|
|
|
(82)
|
|
|
(100)
|
|
|
(95)
|
|
|
Items removed from
inventory
|
(224)
|
|
|
—
|
|
|
(209)
|
|
|
(1,114)
|
|
|
(14)
|
|
|
Ending Delinquent
Inventory
|
41,243
|
|
|
46,556
|
|
|
41,235
|
|
|
41,317
|
|
|
45,349
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF
Delinquency Rate
|
4.02
|
%
|
|
4.55
|
%
|
|
4.07
|
%
|
|
4.11
|
%
|
|
4.55
|
%
|
|
Primary claim
received inventory included in ending delinquent
inventory
|
819
|
|
|
954
|
|
|
1,063
|
|
|
1,258
|
|
|
1,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
Delinquent Loans - Flow only
|
31,621
|
|
|
35,791
|
|
|
30,501
|
|
|
30,571
|
|
|
33,850
|
|
|
Primary IIF
Delinquency Rate - Flow only
|
3.25
|
%
|
|
3.70
|
%
|
|
3.19
|
%
|
|
3.23
|
%
|
|
3.62
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Cures
|
|
|
|
|
|
|
|
|
|
|
Reported delinquent
and cured intraquarter
|
5,530
|
|
|
5,520
|
|
|
4,347
|
|
|
3,854
|
|
|
5,476
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent prior to cure
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
8,285
|
|
|
6,324
|
|
|
6,011
|
|
|
6,803
|
|
|
7,585
|
|
|
4-11
payments
|
3,501
|
|
|
2,758
|
|
|
2,374
|
|
|
2,964
|
|
|
3,036
|
|
|
12 payments or
more
|
757
|
|
|
1,110
|
|
|
814
|
|
|
1,087
|
|
|
1,031
|
|
|
Total Cures in
Quarter
|
18,073
|
|
|
15,712
|
|
|
13,546
|
|
|
14,708
|
|
|
17,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Paids
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent at time of claim payment
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
2
|
|
|
6
|
|
|
13
|
|
|
8
|
|
|
13
|
|
|
4-11
payments
|
184
|
|
|
181
|
|
|
222
|
|
|
279
|
|
|
306
|
|
|
12 payments or
more
|
1,385
|
|
|
1,616
|
|
|
1,960
|
|
|
2,286
|
|
|
2,316
|
|
|
Total Paids in
Quarter
|
1,571
|
|
|
1,803
|
|
|
2,195
|
|
|
2,573
|
|
|
2,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Primary
Delinquent Inventory
|
|
|
|
|
|
|
|
|
|
|
Consecutive months
delinquent
|
|
|
|
|
|
|
|
|
|
|
3 months or less
|
8,770
|
|
21
|
%
|
17,119
|
|
37
|
%
|
11,331
|
|
27
|
%
|
10,299
|
|
25
|
%
|
9,184
|
|
20
|
%
|
4-11
months
|
16,429
|
|
40
|
%
|
12,050
|
|
26
|
%
|
11,092
|
|
27
|
%
|
11,018
|
|
27
|
%
|
13,617
|
|
30
|
%
|
12 months or more
|
16,044
|
|
39
|
%
|
17,387
|
|
37
|
%
|
18,812
|
|
46
|
%
|
20,000
|
|
48
|
%
|
22,548
|
|
50
|
%
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent
|
|
|
|
|
|
|
|
|
|
|
3 payments or less
|
16,023
|
|
39
|
%
|
21,678
|
|
46
|
%
|
16,916
|
|
41
|
%
|
15,858
|
|
38
|
%
|
15,692
|
|
35
|
%
|
4-11 payments
|
13,734
|
|
33
|
%
|
12,446
|
|
27
|
%
|
10,583
|
|
26
|
%
|
10,560
|
|
26
|
%
|
12,275
|
|
27
|
%
|
12 payments or more
|
11,486
|
|
28
|
%
|
12,432
|
|
27
|
%
|
13,736
|
|
33
|
%
|
14,899
|
|
36
|
%
|
17,382
|
|
38
|
%
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
ADDITIONAL
INFORMATION - RESERVES and CLAIMS PAID
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Reserves
(millions)
|
|
|
|
|
|
|
|
|
|
|
Primary Direct Loss
Reserves
|
$
|
910
|
|
|
$
|
971
|
|
|
$
|
1,090
|
|
|
$
|
1,165
|
|
|
$
|
1,311
|
|
|
Pool Direct loss
reserves
|
14
|
|
|
14
|
|
|
15
|
|
|
21
|
|
|
23
|
|
|
Other Gross
Reserves
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Total Gross
Loss Reserves
|
$
|
924
|
|
|
$
|
986
|
|
|
$
|
1,105
|
|
|
$
|
1,187
|
|
|
$
|
1,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Average
Direct Reserve Per Delinquency
|
$22,060
|
(1)
|
$20,851
|
(1)
|
$26,430
|
|
$28,206
|
|
$28,911
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Paid Claims
(millions)
|
$
|
82
|
|
|
$
|
91
|
|
|
$
|
113
|
|
|
$
|
173
|
|
|
$
|
128
|
|
|
Total primary
(excluding settlements)
|
80
|
|
|
89
|
|
|
101
|
|
|
126
|
|
|
130
|
|
|
Rescission and NPL
settlements
|
7
|
|
|
—
|
|
|
9
|
|
|
45
|
|
|
—
|
|
|
Pool
|
2
|
|
|
2
|
|
|
2
|
|
|
4
|
|
|
2
|
|
|
Reinsurance
|
(11)
|
|
|
(5)
|
|
|
(3)
|
|
|
(6)
|
|
|
(9)
|
|
|
Other
|
4
|
|
|
5
|
|
|
4
|
|
|
4
|
|
|
5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Average Claim
Payment (thousands)
|
$
|
51.1
|
|
(2)
|
$
|
49.2
|
|
|
$
|
46.4
|
|
(2)
|
$
|
49.1
|
|
(2)
|
$
|
49.1
|
|
(2)
|
Flow only
|
$
|
45.2
|
|
(2)
|
$
|
45.1
|
|
|
$
|
43.7
|
|
(2)
|
$
|
45.0
|
|
(2)
|
$
|
45.2
|
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Excluding our
estimate of delinquencies resulting from hurricane activity and
their associated loss reserves, the average direct reserve per
delinquency was approximately $24,000.
|
|
|
(2)
|
Excludes amounts paid
in settlement disputes for claims paying practices and/or
commutations of non-performing loans.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
|
ADDITIONAL
INFORMATION - REINSURANCE, BULK STATISTICS and MI RATIOS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
|
Q1
|
|
Q4
|
|
Q3
|
|
Q2
|
|
Q1
|
|
Quota Share
Reinsurance
|
|
|
|
|
|
|
|
|
|
|
% insurance inforce
subject to reinsurance
|
77.9
|
%
|
|
78.2
|
%
|
|
78.3
|
%
|
|
77.6
|
%
|
|
76.8
|
%
|
|
% quarterly NIW
subject to reinsurance
|
73.3
|
%
|
|
77.0
|
%
|
|
86.1
|
%
|
|
88.2
|
%
|
|
85.9
|
%
|
|
Ceded premiums
written and earned (millions)
|
$
|
33.0
|
|
|
$
|
32.3
|
|
|
$
|
30.9
|
|
|
$
|
28.9
|
|
|
$
|
28.9
|
|
|
Ceded losses incurred
(millions)
|
$
|
7.8
|
|
|
$
|
7.3
|
|
|
$
|
5.9
|
|
|
$
|
4.4
|
|
|
$
|
4.7
|
|
|
Ceding commissions
(millions) (included in underwriting and other expenses)
|
$
|
12.6
|
|
|
$
|
12.6
|
|
|
$
|
12.5
|
|
|
$
|
12.2
|
|
|
$
|
12.0
|
|
|
Profit commission
(millions) (included in ceded premiums)
|
$
|
30.2
|
|
|
$
|
30.6
|
|
|
$
|
31.6
|
|
|
$
|
32.3
|
|
|
$
|
31.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Primary
Insurance Statistics
|
|
|
|
|
|
|
|
|
|
|
Insurance in force
(billions)
|
$
|
7.7
|
|
|
$
|
8.0
|
|
|
$
|
8.3
|
|
|
$
|
8.7
|
|
|
$
|
9.0
|
|
|
Risk in force
(billions)
|
$
|
2.2
|
|
|
$
|
2.2
|
|
|
$
|
2.4
|
|
|
$
|
2.5
|
|
|
$
|
2.5
|
|
|
Average loan size
(thousands)
|
$
|
143.79
|
|
|
$
|
144.61
|
|
|
$
|
145.37
|
|
|
$
|
144.93
|
|
|
$
|
144.68
|
|
|
Number of delinquent
loans
|
9,622
|
|
|
10,765
|
|
|
10,734
|
|
|
10,746
|
|
|
11,499
|
|
|
Delinquency
rate
|
17.95
|
%
|
|
19.47
|
%
|
|
18.73
|
%
|
|
17.92
|
%
|
|
18.49
|
%
|
|
Primary paid claims
(millions)
|
$
|
24
|
|
|
$
|
25
|
|
|
$
|
26
|
|
|
$
|
31
|
|
|
$
|
33
|
|
|
Average claim payment
(thousands)
|
$
|
72.8
|
|
|
$
|
64.4
|
|
|
$
|
56.1
|
|
|
$
|
67.7
|
|
|
$
|
66.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty
Insurance Corporation - Risk to Capital
|
9.4:1
|
(1)
|
9.5:1
|
|
10.1:1
|
|
10.2:1
|
|
10.4:1
|
|
Combined Insurance
Companies - Risk to Capital
|
10.3:1
|
(1)
|
10.5:1
|
|
11.1:1
|
|
11.3:1
|
|
11.6:1
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loss ratio
(insurance operations only)
|
10.3
|
%
|
|
(13.1)
|
%
|
|
12.5
|
%
|
|
11.8
|
%
|
|
12.1
|
%
|
|
GAAP underwriting
expense ratio (insurance operations only)
|
19.5
|
%
|
|
15.9
|
%
|
|
15.7
|
%
|
|
15.6
|
%
|
|
17.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
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.
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, including forward
looking statements in these risk factors. 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.
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our premium yields
and / or increase our losses.
Our private mortgage insurance competitors
include:
- Arch Mortgage Insurance Company,
- Essent Guaranty, Inc.,
- Genworth Mortgage Insurance Corporation,
- National Mortgage Insurance Corporation, and
- Radian Guaranty Inc.
The private mortgage insurance industry is highly
competitive and is expected to remain so. We believe that we
currently compete with other private mortgage insurers based on
pricing, underwriting requirements, financial strength (including
based on credit or financial strength ratings), customer
relationships, name recognition, reputation, the strength of our
management team and field organization, the ancillary products and
services provided to lenders and the effective use of technology
and innovation in the delivery and servicing of our mortgage
insurance products.
Much of the competition in the industry in the last few
years has centered on pricing practices which have included:
(i) reductions in standard filed rates for borrower-paid
mortgage insurance policies ("BPMI"); (ii) use by certain
competitors of a spectrum of filed rates to allow for formulaic,
risk-based pricing (commonly referred to as "black-box" pricing);
and (iii) use of customized rates (discounted from published
rates) that are made available to many, but not all, lenders.
On April 9, 2018, we announced we
will be reducing our BPMI premium rates effective June 4, 2018, to enable all lenders and borrowers
to benefit from lower premium rates. There can be no assurance that
our competitors will not offer BPMI premium rates lower than our
new rates. In addition, the Freddie Mac pilot program 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" could lead to reductions in LPMI
premium rates.
In each of 2017 and the first quarter of 2018,
approximately 4%, of our new insurance written was for loans for
which one lender was the original insured. Our relationships with
our customers could be adversely affected by a variety of factors,
including if our premium rates are higher than those of our
competitors, our underwriting requirements result in our declining
to insure some of the loans originated by our customers, or our
insurance policy rescissions and claim curtailments affect the
customer.
Certain of our competitors have access to capital at a
lower cost of capital than we do (including, as a result of
off-shore reinsurance vehicles, which are also tax-advantaged). As
a result, they may be better positioned to compete outside of
traditional mortgage insurance, including by participating in the
pilot program referred to above and other alternative forms of
credit enhancement pursued by the GSEs. In addition, because of
their tax advantages, certain competitors may be able to achieve
higher after-tax rates of return on their NIW compared to us, which
could allow them to leverage reduced pricing to gain market
share.
Substantially all of our insurance written since 2008 has
been for loans purchased by the GSEs. The current PMIERs of the
GSEs require a mortgage insurer to maintain a minimum amount of
assets to support its insured risk, as discussed in our risk factor
titled "We may not continue to meet the GSEs' private mortgage
insurer eligibility requirements and our returns may decrease as we
are required to maintain more capital in order to maintain our
eligibility." The PMIERs do not require an insurer to maintain
minimum financial strength ratings; however, our financial strength
ratings can affect us in the following ways:
- A downgrade in our financial strength ratings could
result in increased scrutiny of our financial condition by the GSEs
and/or our customers, potentially resulting in a decrease in the
amount of our new insurance written.
- Our ability to participate in the non-GSE mortgage market
(which has been limited since 2008, but may grow in the future),
could depend on our ability to maintain and improve our investment
grade ratings for our mortgage insurance subsidiaries. We could be
competitively disadvantaged with some market participants because
the financial strength ratings of our insurance subsidiaries are
lower than those of some competitors. MGIC's financial strength
rating from Moody's is Baa2 (with
a stable outlook) and from Standard &
Poor's is BBB+ (with a
stable outlook).
- Financial strength ratings may also play a greater role
if the GSEs no longer operate in their current capacities, for
example, due to legislative or regulatory action. In addition,
although the PMIERs do not require minimum financial strength
ratings, the GSEs consider financial strength ratings to be
important when utilizing forms of credit enhancement other than
traditional mortgage insurance, including the pilot program
referred to above, and 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."
If we are unable to compete effectively in the current or
any future markets as a result of the financial strength ratings
assigned to our insurance subsidiaries, our future new insurance
written could be negatively affected.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance.
Alternatives to private mortgage insurance
include:
- lenders using FHA, VA and other government mortgage
insurance programs,
- investors using risk mitigation and credit risk transfer
techniques other than private mortgage insurance,
- lenders and other investors holding mortgages in
portfolio and self-insuring, and
- lenders originating mortgages using piggyback structures
to avoid private mortgage insurance, such as a first mortgage with
an 80% loan-to-value ratio and a second mortgage with a 10%, 15% or
20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20
loans, respectively) rather than a first mortgage with a 90%, 95%
or 100% loan-to-value ratio that has private mortgage
insurance.
In the first quarter of 2018, Freddie Mac began marketing
a pilot program to lenders that would have loan level mortgage
default coverage provided by various (re)insurers that are not
mortgage insurers and that are not selected by the lenders. We view
the pilot program as competing with traditional LPMI. The pilot
offers pricing below prevalent LPMI rates. Inside Mortgage
Finance reported that sources told it Fannie Mae is working on
a similar initiative.
The GSEs (and other investors) have used other forms of
credit enhancement other than 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; 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 35.6% in 2017, 35.5% in 2016, and 39.3% in
2015. In the past ten years, the FHA's share has been as low as
17.1% in 2007 and as high as 68.7% in 2009. Factors that influence
the FHA's market share include relative rates and fees,
underwriting guidelines and loan limits of the FHA, VA, private
mortgage insurers and the GSEs; lenders' perceptions of legal risks
under FHA versus GSE programs; flexibility for the FHA to establish
new products as a result of federal legislation and programs;
returns expected to be obtained by lenders for Ginnie Mae securitization of FHA-insured loans
compared to those obtained from selling loans to Fannie Mae or
Freddie Mac for securitization; and differences in policy terms,
such as the ability of a borrower to cancel insurance coverage
under certain circumstances. We cannot predict how the factors that
affect the FHA's share of new insurance written will change in the
future.
The VA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or primary private
mortgage insurance was 24.1% in 2017, 26.6% in 2016, and 23.9% in
2015. In the past ten years, the VA's share has been as low as 5.4%
in 2007 and as high as 26.6% in 2016. We believe that the VA's
market share has generally been increasing because of an
increase in the number of borrowers that are eligible for the VA's
program, which offers 100% loan-to-value ratio ("LTV") 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 GSEs' charters generally require credit enhancement
for a low down payment mortgage loan (a loan amount that exceeds
80% of a home's value) in order for such loan to be eligible for
purchase by the GSEs. Lenders generally have used private mortgage
insurance to satisfy this credit enhancement requirement. (For
information about a GSE pilot program initiated in the first
quarter of 2018 that provides loan level default coverage by
various (re)insurers that are not mortgage insurers, 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.") Because low down payment
mortgages purchased by the GSEs have generally been insured with
private mortgage insurance, the business practices of the GSEs
greatly impact our business and include:
- private mortgage insurer eligibility requirements of the
GSEs (for information about the financial requirements included in
the PMIERs, see our risk factor titled "We may not continue to
meet the GSEs' private mortgage insurer eligibility requirements
and our returns may decrease as we are required to maintain more
capital in order to maintain our eligibility"),
- the 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 (which may be changed by
federal legislation), when private mortgage insurance is used as
the required credit enhancement on low down payment
mortgages,
- the amount of loan level price adjustments and guaranty
fees (which result in higher costs to borrowers) that the GSEs
assess on loans that require private mortgage
insurance,
- whether the GSEs influence the mortgage lender's
selection of the mortgage insurer providing coverage and, if so,
any transactions that are related to that selection,
- the underwriting standards that determine which loans are
eligible for purchase by the GSEs, which can affect the quality of
the risk insured by the mortgage insurer and the availability of
mortgage loans,
- the terms on which mortgage insurance coverage can be
canceled before reaching the cancellation thresholds established by
law,
- the programs established by the GSEs intended to avoid or
mitigate loss on insured mortgages and the circumstances in which
mortgage servicers must implement such programs,
- the terms that the GSEs require to be included in
mortgage insurance policies for loans that they
purchase,
- the terms on which the GSEs offer lenders relief on their
representations and warranties made at the time of sale of a loan
to the GSEs, which creates pressure on mortgage insurers to limit
their rescission rights to conform to such relief, and the extent
to which the GSEs intervene in mortgage insurers' claims paying
practices, rescission practices or rescission settlement practices
with lenders, and
- the maximum loan limits of the GSEs compared to those of
the FHA and other investors.
The Federal Housing Finance Agency ("FHFA") has been the
conservator of the GSEs since 2008 and has the authority to control
and direct their operations. The increased role that the federal
government has assumed in the residential housing finance system
through the GSE conservatorship may increase the likelihood that
the business practices of the GSEs change in ways that have a
material adverse effect on us and that the charters of the GSEs are
changed by new federal legislation. In the past, members of
Congress have introduced several bills intended to change the
business practices of the GSEs and the FHA; however, no legislation
has been enacted. The Administration has indicated that the
conservatorship of the GSEs should end; however, it is unclear
whether and when that would occur and how that would impact us. As
a result of the matters referred to above, it is uncertain what
role the GSEs, FHA and private capital, including private mortgage
insurance, will play in the residential housing finance system in
the future or the impact of any such changes on our business. In
addition, the timing of the impact of any resulting changes on our
business is uncertain. Most meaningful changes would require
Congressional action to implement and it is difficult to estimate
when Congressional action would be final and how long any
associated phase-in period may last.
We may not continue to meet the GSEs' private
mortgage insurer eligibility requirements and our returns may
decrease as we are required to maintain more capital in order to
maintain our eligibility.
We must comply with the PMIERs to be eligible to insure
loans purchased by the GSEs. The PMIERs include financial
requirements, as well as business, quality control and certain
transaction approval requirements. The financial requirements of
the PMIERs require a mortgage insurer's "Available Assets"
(generally only the most liquid assets of an insurer) to equal or
exceed its "Minimum Required Assets" (which are based on an
insurer's book of business and are calculated from tables of
factors with several risk dimensions and are subject to a floor
amount). Based on our interpretation of the PMIERs, as of March
31, 2018, MGIC's Available Assets totaled $4.8 billion, or $0.9
billion in excess of its Minimum Required Assets. MGIC is in
compliance with the PMIERs and eligible to insure loans purchased
by the GSEs.
If MGIC ceases to be eligible to insure loans purchased by
one or both of the GSEs, it would significantly reduce the volume
of our new business writings. Factors that may negatively impact
MGIC's ability to continue to comply with the financial
requirements of the PMIERs include the following:
- On December 18, 2017, we
received a summary of proposed changes to the PMIERs that are being
recommended to the FHFA by the GSEs. Once the PMIERs are finalized,
we expect a six-month implementation period before the revised
PMIERs are effective. We expect that effectiveness will not be
earlier than the fourth quarter of 2018. If the GSE-recommended
changes are adopted with an effective date in the fourth quarter of
2018, we expect that at the effective date, MGIC would continue to
have an excess of Available Assets over Minimum Required Assets,
although this excess would be materially lower than it was at
March 31, 2018 under the existing
PMIERs, and that MGIC would continue to be able to pay quarterly
dividends to our holding company at the $50
million quarterly rate at which they were paid in the first
quarter of 2018. As a result, we expect cash at our holding company
at December 31, 2018 would increase
over its March 31, 2018
level.
We have non-disclosure
obligations to each of the GSEs and cannot provide further comment
on the specific provisions of the GSE-recommended changes other
than as described above. Until the GSEs and/or FHFA provide public
disclosure of proposed or final changes to the existing PMIERs, we
do not plan to update or correct any of the disclosure above or
provide any additional disclosure regarding any modifications that
may occur in the GSE-recommended changes to PMIERs.
- Our future operating results may be negatively impacted
by the matters discussed in the rest of these risk factors. Such
matters could decrease our revenues, increase our losses or require
the use of assets, thereby creating a shortfall in Available
Assets.
- Should capital be needed by MGIC in the future, capital
contributions from our holding company may not be available due to
competing demands on holding company resources, including for
repayment of debt.
While on an overall basis, the amount of Available Assets
MGIC must hold in order to continue to insure GSE loans increased
under the PMIERs over what state regulation currently requires, our
reinsurance transactions mitigate the negative effect of the PMIERs
on our returns. In this regard, see the first bullet point above.
In addition, reinsurance may not always be available to us or
available on similar terms, and it subjects us to counterparty
credit risk.
The benefit of our net operating loss carryforwards
may become substantially limited.
As of March 31, 2018, we had
approximately $585.7 million of net
operating losses for tax purposes that we can use in certain
circumstances to offset future taxable income and thus reduce our
federal income tax liability. Any unutilized carryforwards are
scheduled to expire at the end of tax years 2032 through 2033. Our
ability to utilize these net operating losses to offset future
taxable income may be significantly limited if we experience an
"ownership change" as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the "Code"). In general, an
ownership change will occur if there is a cumulative change in our
ownership by "5-percent shareholders" (as defined in the Code) that
exceeds 50 percentage points over a rolling three-year period. A
corporation that experiences an ownership change will generally be
subject to an annual limitation on the corporation's subsequent use
of net operating loss carryovers that arose from pre-ownership
change periods and use of losses that are subsequently recognized
with respect to assets that had a built-in-loss on the date of the
ownership change. The amount of the annual limitation generally
equals the fair value of the corporation immediately before the
ownership change multiplied by the long-term tax-exempt interest
rate (subject to certain adjustments). To the extent that the
limitation in a post-ownership-change year is not fully utilized,
the amount of the limitation for the succeeding year will be
increased.
While we have adopted our Amended and Restated Rights
Agreement to minimize the likelihood of transactions in our stock
resulting in an ownership change, future issuances of equity-linked
securities or transactions in our stock and equity-linked
securities that may not be within our control may cause us to
experience an ownership change. If we experience an ownership
change, we may not be able to fully utilize our net operating
losses, resulting in additional income taxes and a reduction in our
shareholders' equity.
We are involved in legal proceedings and are subject
to the risk of additional legal proceedings in the
future.
Before paying an insurance claim, we review the loan and
servicing files to determine the appropriateness of the claim
amount. When reviewing the files, we may determine that we have the
right to rescind coverage on the loan. In our SEC reports, we refer
to insurance rescissions and denials of claims collectively as
"rescissions" and variations of that term. In addition, our
insurance policies generally provide that we can reduce or deny a
claim if the servicer did not comply with its obligations under our
insurance policy. We call such reduction of claims "curtailments."
In recent quarters, an immaterial percentage of claims received in
a quarter have been resolved by rescissions. In each of 2017
and the first quarter of 2018, curtailments reduced our average
claim paid by approximately 5.6% and 7.3%,
respectively.
Our loss reserving methodology incorporates our estimates
of future rescissions, curtailments, and reversals of rescissions
and curtailments. A variance between ultimate actual rescission,
curtailment and reversal rates and our estimates, as a result of
the outcome of litigation, settlements or other factors, could
materially affect our losses.
When the insured disputes our right to rescind coverage or
curtail claims, we generally engage in discussions in an attempt to
settle the dispute. If we are unable to reach a settlement,
the outcome of a dispute ultimately would be determined by legal
proceedings.
Under ASC 450-20, until a liability associated with
settlement discussions or legal proceedings becomes probable and
can be reasonably estimated, we consider our claim payment or
rescission resolved for financial reporting purposes and do not
accrue an estimated loss. Where we have determined that a loss is
probable and can be reasonably estimated, we have recorded our best
estimate of our probable loss. If we are not able to implement
settlements we consider probable, we intend to defend MGIC
vigorously against any related legal proceedings.
In addition to matters for which we have recorded a
probable loss, we are involved in other discussions and/or
proceedings with insureds with respect to our claims paying
practices. Although it is reasonably possible that when these
matters are resolved we will not prevail in all cases, we are
unable to make a reasonable estimate or range of estimates of the
potential liability. We estimate the maximum exposure associated
with matters where a loss is reasonably possible to be
approximately $282 million, although
we believe (but can give no assurance that) we will ultimately
resolve these matters for significantly less than this amount. This
estimate of our maximum exposure does not include interest or
consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in
litigation and regulatory actions related to alleged violations of
the anti-referral fee provisions of the Real Estate Settlement
Procedures Act, which is commonly known as RESPA, and the notice
provisions of the Fair Credit Reporting Act, which is commonly
known as FCRA. While these proceedings in the aggregate have
not resulted in material liability for MGIC, there can be no
assurance that the outcome of future proceedings, if any, under
these laws would not have a material adverse affect on us. In
addition, various regulators, including the CFPB, state insurance
commissioners and state attorneys general may bring other actions
seeking various forms of relief in connection with alleged
violations of RESPA. The insurance law provisions of many states
prohibit paying for the referral of insurance business and provide
various mechanisms to enforce this prohibition. While we believe
our practices are in conformity with applicable laws and
regulations, it is not possible to predict the eventual scope,
duration or outcome of any such reviews or investigations nor is it
possible to predict their effect on us or the mortgage insurance
industry.
In addition to the matters described above, we are
involved in other legal proceedings in the ordinary course of
business. In our opinion, based on the facts known at this time,
the ultimate resolution of these ordinary course legal proceedings
will not have a material adverse effect on our financial position
or results of operations.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive, detailed regulation by
state insurance departments. These regulations are principally
designed for the protection of our insured policyholders, rather
than for the benefit of investors. Although their scope varies,
state insurance laws generally grant broad supervisory powers to
agencies or officials to examine insurance companies and enforce
rules or exercise discretion affecting almost every significant
aspect of the insurance business. State insurance regulatory
authorities could take actions, including changes in capital
requirements, that could have a material adverse effect on us. For
more information about state capital requirements, see our risk
factor titled "State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted basis."
To the extent that we are construed to make independent credit
decisions in connection with our contract underwriting activities,
we also could be subject to increased regulatory requirements under
the Equal Credit Opportunity Act, commonly known as ECOA, FCRA, and
other laws. For more details about the various ways in which our
subsidiaries are regulated, see "Regulation" in Item 1 of this
Annual Report. In addition to regulation by state insurance
regulators, the CFPB may issue additional rules or regulations,
which may materially affect our business.
In December 2013, the U.S.
Treasury Department's Federal Insurance Office released a report
that calls for federal standards and oversight for mortgage
insurers to be developed and implemented. It is uncertain if and
when the standards and oversight will become effective and what
form they will take.
Resolution of our dispute with the Internal Revenue
Service could adversely affect us.
The Internal Revenue Service ("IRS") completed
examinations of our federal income tax returns for the years 2000
through 2007 and issued proposed assessments for taxes, interest
and penalties related to our treatment of the flow-through income
and loss from an investment in a portfolio of residual interests of
Real Estate Mortgage Investment Conduits ("REMICs"). We appealed
these assessments within the IRS and in August 2010, we reached a tentative settlement
agreement with the IRS which was not finalized.
In 2014, we received Notices of Deficiency (commonly
referred to as "90 day letters") covering the 2000-2007 tax years.
The Notices of Deficiency reflect taxes and penalties related to
the REMIC matters of $197.5 million
and at March 31, 2018, there would
also be interest related to these matters of approximately
$209.7 million. In 2007, we made a
payment of $65.2 million to the
United States Department of the Treasury which will reduce any
amounts we would ultimately owe. The Notices of Deficiency also
reflect additional amounts due of $261.4
million, which are primarily associated with the
disallowance of the carryback of the 2009 net operating loss to the
2004-2007 tax years. We believe the IRS included the carryback
adjustments as a precaution to keep open the statute of limitations
on collection of the tax that was refunded when this loss was
carried back, and not because the IRS actually intends to disallow
the carryback permanently. Depending on the outcome of this matter,
additional state income taxes and state interest may become due
when a final resolution is reached. As of March 31, 2018, those state taxes and interest
would approximate $87.4 million. In
addition, there could also be state tax penalties. Our total amount
of unrecognized tax benefits as of March 31,
2018 is $143.7 million, which
represents the tax benefits generated by the REMIC portfolio
included in our tax returns that we have not taken benefit for in
our financial statements, including any related
interest.
We reached agreement with the IRS to settle all issues in
the case and the IRS subsequently submitted documentation
reflecting the terms of the agreement to the Joint Committee on
Taxation ("JCT") for its review, which must be performed before a
settlement can be completed. In the second quarter of 2018, we were
notified that the JCT had no objection to the terms of the
agreement and that the IRS was working toward finalizing the
matter. The expected impact of the agreed upon settlement was
previously reflected in our consolidated financial
statements.
Although we expect the settlement to be completed, should
it not be completed, ongoing litigation to resolve our dispute with
the IRS could be lengthy and costly in terms of legal fees and
related expenses. We would need to make further adjustments, which
could be material, to our tax provision and liabilities if our view
of the probability of success in this matter changes, and the
ultimate resolution of this matter could have a material negative
impact on our effective tax rate, results of operations, cash
flows, available assets and statutory capital. In this regard, see
our risk factors titled "We may not continue to meet the GSEs'
private mortgage insurer eligibility requirements and our returns
may decrease as we are required to maintain more capital in order
to maintain our eligibility" and "State capital requirements may
prevent us from continuing to write new insurance on an
uninterrupted basis."
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 filed with the SEC on
February 23, 2018, 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, calculate 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. In addition, from time
to time we seek to improve certain models, and the conversion
process may result in material changes to assumptions, including
those about 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, 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.
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,
commonly referred to as GAAP, we establish reserves for insurance
losses and loss adjustment expenses only when notices of default on
insured mortgage loans are received and for loans we estimate are
in default but for which notices of default have not yet been
reported to us by the servicers (this is often referred to as
"IBNR"). Because our reserving method does not take account of
losses that could occur from loans that are not delinquent, such
losses are not reflected in our financial statements, except in the
case where a premium deficiency exists. As a result, future losses
on loans that are not currently delinquent may have a material
impact on future results as such losses emerge.
Recent hurricanes may impact our incurred losses,
the amount and timing of paid claims, our inventory of notices of
default and our Minimum Required Assets under
PMIERs.
The number of borrowers in the areas affected by 2017
hurricanes in Texas, Florida and Puerto
Rico whose mortgages were reported delinquent has decreased
throughout the first quarter of 2018. Despite the associated
increase in our inventory of notices of default, based on our
analysis and past experience, we do not expect the recent hurricane
activity to result in a material increase in our incurred losses or
paid claims. However, the following factors could cause our actual
results to differ from our expectation in the forward looking
statement in the preceding sentence:
- Third party reports that indicate the extent of flooding
in the hurricane-affected areas may be understated.
- Home values in hurricane-affected areas may decrease at
the time claims are filed from their current levels thereby
adversely affecting our ability to mitigate loss.
- Hurricane-affected areas may experience deteriorating
economic conditions resulting in more borrowers defaulting on their
loans in the future (or failing to cure existing defaults) than we
currently expect.
- If an insured contests our claim denial or curtailment,
there can be no assurance we will prevail. We describe how claims
under our policy are affected by damage to the borrower's home in
our Current Report on Form 8-K filed with the SEC on September 14, 2017.
Due to the suspension of certain foreclosures by the GSEs,
our receipt of claims associated with foreclosed mortgages in the
hurricane-affected areas may be delayed.
The PMIERs require us to maintain significantly more
"Minimum Required Assets" for delinquent loans than for performing
loans. An increase in default notices may result in an increase in
"Minimum Required Assets" and a decrease in the level of our excess
"Available Assets" which is discussed in our risk factor titled
"We may not continue to meet the GSEs' private mortgage insurer
eligibility requirements and our returns may decrease as we are
required to maintain more capital in order to maintain our
eligibility."
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially different than our
loss reserves.
When we establish reserves, we estimate the ultimate loss
on delinquent loans using estimated claim rates and claim amounts.
The estimated claim rates and claim amounts represent our best
estimates of what we will actually pay on the loans in default as
of the reserve date and incorporate anticipated mitigation from
rescissions and curtailments. The establishment of loss reserves is
subject to inherent uncertainty and requires judgment by
management. The actual amount of the claim payments may be
substantially different than our loss reserve estimates. Our
estimates could be affected by several factors, including a change
in regional or national economic conditions, and a change in the
length of time loans are delinquent before claims are received. The
change in conditions may include changes in unemployment, affecting
borrowers' income and thus their ability to make mortgage payments,
and changes in home prices, which may affect borrower willingness
to continue to make mortgage payments when the value of the home is
below the mortgage balance. Changes to our estimates could have a
material impact on our future results, even in a stable economic
environment. In addition, historically, losses incurred have
followed a seasonal trend in which the second half of the year has
weaker credit performance than the first half, with higher new
default notice activity and a lower cure rate.
We rely on our management team and our business
could be harmed if we are unable to retain qualified personnel or
successfully develop and/or recruit their
replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our management team and
other key personnel. The unexpected departure of key personnel
could adversely affect the conduct of our business. In such event,
we would be required to obtain other personnel to manage and
operate our business. In addition, we will be required to replace
the knowledge and expertise of our aging workforce as our workers
retire. In either case, there can be no assurance that we would be
able to develop or recruit suitable replacements for the departing
individuals; that replacements could be hired, if necessary, on
terms that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We currently have
not entered into any employment agreements with our officers or key
personnel. Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a properly
skilled and experienced workforce, our costs, including
productivity costs and costs to replace employees may increase, and
this could negatively impact our earnings.
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:
- 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,
- the health of the domestic economy as well as conditions
in regional and local economies and the level of consumer
confidence,
- housing affordability,
- new and existing housing availability,
- the rate of household formation, which is influenced, in
part, by population and immigration trends,
- the rate of home price appreciation, which in times of
heavy refinancing can affect whether refinanced loans have
loan-to-value ratios that require private mortgage insurance,
and
- government housing policy encouraging loans to first-time
homebuyers.
A decline in the volume of low down payment home mortgage
originations could decrease demand for mortgage insurance and
decrease our new insurance written. For other factors that could
decrease the demand for mortgage insurance, see our risk factor
titled "The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance."
State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis.
The insurance laws of 16 jurisdictions, including
Wisconsin, MGIC's domiciliary
state, require a mortgage insurer to maintain a minimum amount of
statutory capital relative to its risk in force (or a similar
measure) in order for the mortgage insurer to continue to write new
business. We refer to these requirements as the "State Capital
Requirements." While they vary among jurisdictions, the most common
State Capital Requirements allow for a maximum risk-to-capital
ratio of 25 to 1. A risk-to-capital ratio will increase if
(i) the percentage decrease in capital exceeds the percentage
decrease in insured risk, or (ii) the percentage increase in
capital is less than the percentage increase in insured risk.
Wisconsin does not regulate
capital by using a risk-to-capital measure but instead requires a
minimum policyholder position ("MPP"). The "policyholder position"
of a mortgage insurer is its net worth or surplus, contingency
reserve and a portion of the reserves for unearned
premiums.
At March 31, 2018, MGIC's
risk-to-capital ratio was 9.4 to 1, below the maximum allowed by
the jurisdictions with State Capital Requirements, and its
policyholder position was $2.2
billion above the required MPP of $1.2 billion. In calculating our risk-to-capital
ratio and MPP, we are allowed full credit for the risk ceded under
our reinsurance transactions with a group of unaffiliated
reinsurers. It is possible that under the revised State Capital
Requirements discussed below, MGIC will not be allowed full credit
for the risk ceded to the reinsurers. If MGIC is not allowed an
agreed level of credit under either the State Capital Requirements
or the PMIERs, MGIC may terminate the reinsurance transactions,
without penalty. At this time, we expect MGIC to continue to comply
with the current State Capital Requirements; however, you should
read the rest of these risk factors for information about matters
that could negatively affect such compliance.
At March 31, 2018, the
risk-to-capital ratio of our combined insurance operations (which
includes a reinsurance affiliate) was 10.3 to 1. Reinsurance
transactions with our affiliate permit MGIC to write insurance with
a higher coverage percentage than it could on its own under certain
state-specific requirements. A higher risk-to-capital ratio on a
combined basis may indicate that, in order for MGIC to continue to
utilize reinsurance arrangements with its reinsurance affiliate,
additional capital contributions to the affiliate could be
needed.
The NAIC plans to revise the minimum capital and surplus
requirements for mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In May 2016, a working group of state regulators
released an exposure draft of a risk-based capital framework to
establish capital requirements for mortgage insurers, although no
date has been established by which the NAIC must propose revisions
to the capital requirements and certain items have not yet been
completely addressed by the framework, including the treatment of
ceded risk, minimum capital floors, and action level triggers.
Currently we believe that the PMIERs contain the more restrictive
capital requirements in most circumstances.
While MGIC currently meets the State Capital Requirements
of Wisconsin and all other
jurisdictions, it could be prevented from writing new business in
the future in all jurisdictions if it fails to meet the State
Capital Requirements of Wisconsin,
or it could be prevented from writing new business in a particular
jurisdiction if it fails to meet the State Capital Requirements of
that jurisdiction, and in each case MGIC does not obtain a waiver
of such requirements. It is possible that regulatory action by one
or more jurisdictions, including those that do not have specific
State Capital Requirements, may prevent MGIC from continuing to
write new insurance in such jurisdictions. If we are unable to
write business in all jurisdictions, lenders may be unwilling to
procure insurance from us anywhere. In addition, a lender's
assessment of the future ability of our insurance operations to
meet the State Capital Requirements or the PMIERs may affect its
willingness to procure insurance from us. In this regard, see our
risk factor titled "Competition or changes in our relationships
with our customers could reduce our revenues, reduce our premium
yields and/or increase our losses." A possible future failure
by MGIC to meet the State Capital Requirements or the PMIERs will
not necessarily mean that MGIC lacks sufficient resources to pay
claims on its insurance liabilities. While we believe MGIC has
sufficient claims paying resources to meet its claim obligations on
its insurance in force on a timely basis, you should read the rest
of these risk factors for information about matters that could
negatively affect MGIC's claims paying resources.
Downturns in the domestic economy or declines in the
value of borrowers' homes from their value at the time their loans
closed may result in more homeowners defaulting and our losses
increasing, with a corresponding decrease in our
returns.
Losses result from events that reduce a borrower's ability
or willingness to continue to make mortgage payments, such as
unemployment, health issues, family status, and whether the home of
a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of
the sale. In general, favorable economic conditions reduce the
likelihood that borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of homes, thereby
reducing and in some cases even eliminating a loss from a mortgage
default. A deterioration in economic conditions, including an
increase in unemployment, generally increases the likelihood that
borrowers will not have sufficient income to pay their mortgages
and can also adversely affect home prices, which in turn can
influence the willingness of borrowers with sufficient resources to
make mortgage payments to do so when the mortgage balance exceeds
the value of the home. 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 generally, changes to the
deductibility of mortgage interest or mortgage insurance premiums
for income tax purposes, decreases in the rate of household
formations, or other factors. Recently enacted tax legislation
could have some negative impact on home prices especially on higher
priced homes, but we cannot predict the magnitude of the impact, if
any, on the values of the homes we insure. Changes in home prices
and unemployment levels are inherently difficult to forecast given
the uncertainty in the current market environment, including
uncertainty about the effect of actions the federal government has
taken and may take with respect to tax policies, mortgage finance
programs and policies, and housing finance reform.
The mix of business we write affects our Minimum
Required Assets under the PMIERs, our premium yields and the
likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are, in part,
a function of the direct risk-in-force and the risk profile of the
loans we insure, considering loan-to-value ratio, credit score,
vintage, 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 new insurance written, or if our mix of business changes to
include loans with higher loan-to-value ratios or lower FICO
scores, for example, or if we insure a higher percentage of loans
under lender-paid mortgage insurance policies, all other things
equal, we will be required to hold more Available Assets in order
to maintain GSE eligibility.
The minimum capital required by the risk-based capital
framework contained in the exposure draft released by the NAIC in
May 2016 would be, in part, a
function of certain loan and economic factors, including property
location, loan-to-value ratio and credit score; general
underwriting quality in the market at the time of loan origination;
the age of the loan; and the premium rate we charge. Depending on
the provisions of the capital requirements when they are released
in final form and become effective, our mix of business may affect
the minimum capital we are required to hold under the new
framework.
Beginning in 2014, we have increased the percentage of our
business from LPMI policies. Depending on the actual life of a
single premium policy and its premium rate relative to that of a
monthly premium policy, a single premium policy may generate more
or less premium than a monthly premium policy over its
life.
We have in place quota share reinsurance ("QSR")
transactions with a group of unaffiliated reinsurers that cover
most of our insurance written from 2013 through 2018, and a portion
of our insurance written prior to 2013. Although the transactions
reduce our premiums, they have a lesser impact on our overall
results, as losses ceded under the transactions reduce our losses
incurred and the ceding commissions we receive reduce our
underwriting expenses. The blended pre-tax cost of reinsurance
under our different transactions is less than 6% (but will decrease
if losses are materially higher than we expect). This blended
pre-tax cost is derived by dividing the reduction in our pre-tax
income on loans covered by reinsurance by our direct (that is,
without reinsurance) premiums from such loans. Although the pre-tax
cost of the reinsurance under each transaction is generally
constant, the effect of the reinsurance on the various components
of pre-tax income will vary from period to period, depending on the
level of ceded losses. Although the GSEs have approved the terms of
our QSR transactions, they will be reviewed under the PMIERs at
least annually. We may not receive full credit under the PMIERs in
future periods for the risk ceded under our QSR
transactions.
In addition to the effect of reinsurance on our premiums,
we expect a modest decline in our premium yield resulting from the
premium rates themselves: the books of business we wrote before
2009, which have a higher average premium rate than subsequent
books of business, are expected to continue to decline as a
percentage of the insurance in force; and the average premium rate
on these books of business is also expected to decline as the
premium rates reset to lower levels at the time the loans reach the
ten-year anniversary of their initial coverage date. However, for
loans that have utilized HARP, the initial ten-year period was
reset to begin as of the date of the HARP transaction. As of
March 31, 2018, approximately 1% of
our total primary insurance in force was written in 2008, has not
been refinanced under HARP and is subject to a reset after ten
years.
The circumstances in which we are entitled to rescind
coverage have narrowed for insurance we have written in recent
years. During the second quarter of 2012, we began writing a
portion of our new insurance under an endorsement to our then
existing master policy (the "Gold Cert Endorsement"), which limited
our ability to rescind coverage compared to that master policy. To
comply with requirements of the GSEs, we introduced our current
master policy in 2014. Our rescission rights under our current
master policy are comparable to those under our previous master
policy, as modified by the Gold Cert Endorsement, but may be
further narrowed if the GSEs permit modifications to them. Our
current master policy is filed as Exhibit 99.19 to our quarterly
report on Form 10-Q for the quarter ended September 30, 2014 (filed with the SEC on
November 7, 2014). All of our primary
new insurance on loans with mortgage insurance application dates on
or after October 1, 2014, was written
under our current master policy. As of March
31, 2018, approximately 76% of our flow, primary insurance
in force was written under our Gold Cert Endorsement or our current
master policy. The FHFA and the GSEs have proposed revised GSE
rescission relief principles to, among other things, further limit
the circumstances under which mortgage insurers may rescind
coverage. It has been proposed that these principles be
incorporated into new master policies which the GSEs have indicated
should be effective for new business written in 2019, subject to
state regulatory approvals. These proposed principles, if adopted,
are likely to further reduce our ability to rescind insurance
coverage in the future, potentially resulting in higher losses than
would be the case under our existing master insurance
policies.
From time to time, in response to market conditions, we
change the types of loans that we insure and the requirements under
which we insure them. We also change our underwriting guidelines,
in part through aligning some of them with Fannie Mae and Freddie
Mac for loans that receive and are processed in accordance with
certain approval recommendations from a GSE automated underwriting
system. We also make exceptions to our underwriting requirements on
a loan-by-loan basis and for certain customer programs. As a result
of changes to our underwriting guidelines and requirements
(including those related to debt to income ("DTI") ratios, credit
scores, and the manner in which income levels and property values
are determined) and other factors, our business written beginning
in the second half of 2013 is expected to have a somewhat higher
claim incidence than business written in 2009 through the first
half of 2013, but materially below that on business written in
2005-2008. However, we believe this business presents an acceptable
level of risk. Our underwriting requirements are available on our
website at
http://www.mgic.com/underwriting/index.html.
Even when home prices are stable or rising, mortgages with
certain characteristics have higher probabilities of claims. These
characteristics include higher LTV ratios, lower FICO scores,
limited underwriting, including limited borrower documentation, or
higher DTI ratios, as well as loans having combinations of higher
risk factors. As of March 31, 2018,
mortgages with these characteristics in our primary risk in force
included mortgages with LTV ratios greater than 95% (13.9%), loans
with borrowers having FICO scores below 620 (2.9%), mortgages with
borrowers having FICO scores of 620-679 (11.2%), mortgages with
limited underwriting, including limited borrower documentation
(2.7%), and mortgages with borrowers having DTI ratios greater than
45% (or where no ratio is available) (13.7%), each attribute as
determined at the time of loan origination. An individual loan may
have more than one of these attributes. A material number of these
loans were originated in 2005 - 2007 or the first half of 2008. For
information about our classification of loans by FICO score and
documentation, see footnotes (5) and (6) to the Characteristics of
Primary Risk in Force table under "Business - Our Products and
Services" in Item 1 of our Annual Report on Form 10-K filed
with the SEC on February 23,
2018.
As of March 31, 2018,
approximately 1% of our primary risk in force consisted of
adjustable rate mortgages which allow for adjustment of the initial
interest rate during the five years after the mortgage closing
("ARMs"). We classify as fixed rate loans adjustable rate mortgages
with an initial interest rate that is fixed during the five years
after the mortgage closing and loans with temporary interest rate
adjustments during the initial five years, commonly referred to as
"buydowns," that convert to a fixed rate for the duration of the
loan term. If interest rates should rise between the time of
origination of such loans and when their interest rates may be
reset, claim rates on such loans may be substantially higher than
for loans without variable interest rate features. In addition, we
have insured "interest-only" loans, which may also be ARMs, and
loans with negative amortization features, such as pay option ARMs.
We believe claim rates on these loans will be substantially higher
than on loans without scheduled payment increases that are made to
borrowers of comparable credit quality.
If state or federal regulations or statutes are changed in
ways that ease mortgage lending standards and/or requirements, 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
DTIs. 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 even under
our current underwriting requirements. We do, however, believe that
our insurance written beginning in the second half of 2008 will
generate underwriting profits.
The premiums we charge may not be adequate to
compensate us for our liabilities for losses and as a result any
inadequacy could materially affect our financial condition and
results of operations.
We set premiums at the time a policy is issued based on
our expectations regarding likely performance of the insured risks
over the long term. Our premiums are subject to approval by state
regulatory agencies, which can delay or limit our ability to
increase our premiums. Generally, we cannot cancel mortgage
insurance coverage or adjust renewal premiums during the life of a
mortgage insurance policy. As a result, higher than anticipated
claims generally cannot be offset by premium increases on policies
in force or mitigated by our non-renewal or cancellation of
insurance coverage. The premiums we charge, and the associated
investment income, may not be adequate to compensate us for the
risks and costs associated with the insurance coverage provided to
customers. An increase in the number or size of claims, compared to
what we anticipate, could adversely affect our results of
operations or financial condition. Our premium rates are also based
in part on the amount of capital we are required to hold against
the insured risk. If the amount of capital we are required to hold
increases from the amount we were required to hold when a policy
was written, we cannot adjust premiums to compensate for this and
our returns may be lower than we assumed.
The losses we have incurred on our 2005-2008 books of
business have exceeded our premiums from those books. Our current
expectation is that the incurred losses from those books, although
declining, will continue to generate a material portion of our
total incurred losses for a number of years. The ultimate amount of
these losses will depend in part on general economic conditions,
including unemployment, and the direction of home
prices.
We are susceptible to disruptions in the servicing
of mortgage loans that we insure.
We depend on reliable, consistent third-party servicing of
the loans that we insure. Over the last several years, the mortgage
loan servicing industry has experienced consolidation and an
increase in the number of specialty servicers servicing delinquent
loans. The resulting change in the composition of servicers could
lead to disruptions in the servicing of mortgage loans covered by
our insurance policies. Further changes in the servicing industry
resulting in the transfer of servicing could cause a disruption in
the servicing of delinquent loans which could reduce servicers'
ability to undertake mitigation efforts that could help limit our
losses. Future housing market conditions could lead to additional
increases in delinquencies and transfers of servicing.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the length of time
that our policies remain in force.
The premium from a single premium policy is collected
upfront and generally earned over the estimated life of the policy.
In contrast, premiums from a monthly premium policy are received
and earned each month over the life of the policy. In each year,
most of our premiums 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. Future
premiums on our monthly premium policies in force represent a
material portion of our claims paying resources and a low
persistency rate will reduce those future premiums. In contrast, a
higher than expected persistency rate will decrease the
profitability from single premium policies because they will remain
in force longer than was estimated when the policies were
written.
The monthly premium policies for the substantial majority
of loans we insured provides that, for the first ten years of the
policy, the premium is determined by the product of the premium
rate and the initial loan balance; thereafter, a lower premium rate
is applied to the initial loan balance. The initial ten-year period
is reset when the loan is refinanced under HARP. The premiums on
many of the policies in our 2007 book of business that were not
refinanced under HARP reset in 2017. As of March 31, 2018, approximately 1% of our total
primary insurance in force was written in 2008, has not been
refinanced under HARP, and is subject to a rate reset after ten
years.
Our persistency rate was 80.2% at March 31, 2018, 80.1% at December 31, 2017 and 76.9% at December 31, 2016. Since 2000, our year-end
persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at
December 31, 2003.
Our persistency rate is primarily affected by the level of
current mortgage interest rates compared to the mortgage coupon
rates on our insurance in force, which affects the vulnerability of
the insurance in force to refinancing. Our persistency rate is also
affected by the mortgage insurance cancellation policies of
mortgage investors along with the current value of the homes
underlying the mortgages in the insurance in force.
Your ownership in our company may be diluted by
additional capital that we raise or if the holders of our
outstanding convertible debt convert that debt into shares of our
common stock.
As noted above under our risk factor titled "We may not
continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease as we are required to
maintain more capital in order to maintain our eligibility,"
although we are currently in compliance with the requirements of
the PMIERs, there can be no assurance that we would not seek to
issue non-dilutive debt capital or to raise additional equity
capital to manage our capital position under the PMIERs or for
other purposes. Any future issuance of equity securities may dilute
your ownership interest in our company. In addition, the market
price of our common stock could decline as a result of sales of a
large number of shares or similar securities in the market or the
perception that such sales could occur.
At March 31, 2018, we had
outstanding $390 million principal
amount of 9% Convertible Junior Subordinated Debentures due in 2063
("9% Debentures") (of which approximately $133 million was purchased, and is held, by MGIC,
and is eliminated on the consolidated balance sheet). The principal
amount of the 9% Debentures is currently convertible, at the
holder's option, at an initial conversion rate, which is subject to
adjustment, of 74.0741 common shares per $1,000 principal amount of debentures. This
represents an initial conversion price of approximately
$13.50 per share. We may redeem the
9% Debentures in whole or in part from time to time, at our option,
at a redemption price equal to 100% of the principal amount of the
9% Debentures being redeemed, plus any accrued and unpaid interest,
if the closing sale price of our common stock exceeds $17.55 for at least 20 of the 30 trading days
preceding notice of the redemption.
We have the right, and may elect, to defer interest
payable under the debentures in the future. If a holder elects to
convert its debentures, the interest that has been deferred on the
debentures being converted is also convertible into shares of our
common stock. The conversion rate for such deferred interest is
based on the average price that our shares traded at during a 5-day
period immediately prior to the election to convert the associated
debentures. We may elect to pay cash for some or all of the shares
issuable upon a conversion of the debentures.
For a discussion of the dilutive effects of our
convertible securities on our earnings per share, see Note 4 –
"Earnings Per Share" to our consolidated financial statements in
our Annual Report filed with the SEC February 23, 2018. We currently have no plans to
repurchase common stock but regularly consider appropriate uses for
resources of our holding company. In addition, we have in the past,
and may in the future, purchase our debt securities.
Our holding company debt obligations materially
exceed our holding company cash and investments.
At March 31, 2018, we had
approximately $257 million in cash
and investments at our holding company and our holding company's
debt obligations were $815 million in
aggregate principal amount, consisting of $425 million of 5.75% Senior Notes due in 2023
("5.75% Notes") and $390 million of
9% Debentures (of which approximately $133
million was purchased, and is held, by MGIC, and is
eliminated on the consolidated balance sheet). Annual debt service
on the 5.75% Notes and 9% Debentures outstanding as of March 31, 2018, is approximately $60 million (of which approximately $12 million will be paid to MGIC and will be
eliminated on the consolidated statement of operations).
The 5.75% Senior Notes and 9% Debentures are obligations
of our holding company, MGIC Investment Corporation, and not of its
subsidiaries. The payment of dividends from our insurance
subsidiaries which, other than investment income and raising
capital in the public markets, is the principal source of our
holding company cash inflow, is restricted by insurance regulation.
MGIC is the principal source of dividend-paying capacity. In
the first quarter of 2018 and in 2017, MGIC paid a total of
$50 million and $140 million, respectively, in dividends to our
holding company. We expect MGIC to continue to pay quarterly
dividends. We ask the OCI not to object before MGIC pays dividends.
If any additional capital contributions to our subsidiaries were
required, such contributions would decrease our holding company
cash and investments. As described in our Current Report on Form
8-K filed on February 11, 2016, MGIC
borrowed $155 million from the
Federal Home Loan Bank of Chicago.
This is an obligation of MGIC and not of our holding
company.
We could be adversely affected if personal
information on consumers that we maintain is improperly disclosed
and our information technology systems may become outdated and we
may not be able to make timely modifications to support our
products and services.
As part of our business, we maintain large amounts of
personal information on consumers. While we believe we have
appropriate information security policies and systems to prevent
unauthorized disclosure, there can be no assurance that
unauthorized disclosure, either through the actions of third
parties or employees, will not occur. Unauthorized disclosure could
adversely affect our reputation, result in a loss of business and
expose us to material claims for damages.
We rely on the efficient and uninterrupted operation of
complex information technology systems. All information technology
systems are potentially vulnerable to damage or interruption from a
variety of sources, including through the actions of third parties.
Due to our reliance on our information technology systems, their
damage or interruption could severely disrupt our operations, which
could have a material adverse effect on our business, business
prospects and results of operations.
In addition, we are in the process of upgrading certain of
our information systems that have been in place for a number of
years. The implementation of these technological improvements is
complex, expensive and time consuming. If we fail to timely and
successfully implement the new technology systems, or if the
systems do not operate as expected, it could have an adverse impact
on our business, business prospects and results of
operations.
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, and as such, we may not achieve our investment
objectives. Volatility or lack of liquidity in the markets in which
we hold securities has at times reduced the market value of some of
our investments, and if this worsens substantially it could have a
material 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 is dependent 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.
Further, the PMIERs impact our investment choices; changes could
negatively impact our investment income and could reduce our
Available Assets through mark-to-market adjustments.
In addition, 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.
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SOURCE MGIC Investment Corporation