MILWAUKEE, July 19, 2016 /PRNewswire/ -- MGIC
Investment Corporation (NYSE:MTG) today reported pretax income of
$165.2 million for the quarter ended
June 30, 2016 compared with
$115.0 million for the same period
last year. For the quarter ended June
30, 2016 net income was $109.2
million, compared with a net income of $113.7 million for the same quarter a year ago.
Diluted net income per share was $0.26 for the quarter ending June 30, 2016, compared to diluted net income per
share of $0.28 for the same quarter a
year ago.
Patrick Sinks, CEO of MTG and
Mortgage Guaranty Insurance Corporation ("MGIC"), said, "I am
pleased to report that our insurance in force continued to grow as
we added $12.6 billion of high
quality new insurance, the delinquent inventory continued to
decline while newer books of business continue to generate low
level of new delinquent notices, and we maintained our
traditionally low expense ratio." Sinks added, "As expected during
the quarter MGIC received approval for, and paid, another
$16 million dividend to the holding
company and I am optimistic that we will continue to receive
approval from our regulator to pay dividends of at least this
amount in subsequent quarters. Additionally we repurchased
$50.2 million of our 5% convertible
senior notes due in 2017."
Notable items for the quarter include:
|
|
Q2 2016
|
|
Q2 2015
|
|
Change
|
New Insurance Written
(billions)
|
|
$
|
12.6
|
|
|
$
|
11.8
|
|
|
6.7
|
%
|
Insurance in force
(billions) (1)
|
|
$
|
177.5
|
|
|
$
|
168.8
|
|
|
5.5
|
%
|
Primary Delinquent
Inventory (# loans) (1)
|
|
52,558
|
|
|
66,357
|
|
|
(20.8)
|
%
|
Annual Persistency
(1)
|
|
79.6
|
%
|
|
80.4
|
%
|
|
|
Consolidated
Risk-to-capital ratio
|
|
13.2:1
|
|
(2)
|
14.8:1
|
|
(1)
|
|
GAAP Loss
Ratio
|
|
20.1
|
%
|
|
42.3
|
%
|
|
|
GAAP Underwriting
Expense Ratio (3)
|
|
13.9
|
%
|
|
15.0
|
%
|
|
|
Provision for income
taxes (millions)
|
|
$
|
56.0
|
|
|
$
|
1.3
|
|
|
|
|
|
|
|
|
|
|
1) As of June 30,
2) preliminary as of June 30, 2016, 3) insurance
operations
|
Total revenues for the second quarter of 2016 were $263.5 million, compared to $243.1 million in the second quarter last year.
Total revenues in the second quarter of 2016 included $0.8 million of net realized investment gains
compared to $0.2 million in the
second quarter of 2015. Net premiums written for the quarter were
$250.0 million, compared to
$226.8 million for the same period
last year.
New insurance written in the second quarter was $12.6 billion, compared to $11.8 billion in the second quarter of 2015.
Persistency, or the percentage of insurance remaining in force from
one year prior, was 79.6 percent at June 30,
2016, compared to 79.7 percent at December 31, 2015, and 80.4 percent at
June 30, 2015.
As of June 30, 2016, MGIC's
primary insurance in force was $177.5
billion, compared to $174.5
billion at December 31, 2015,
and $168.8 billion at June 30, 2015. The fair value of MGIC Investment
Corporation's investment portfolio, cash and cash equivalents was
$4.9 billion at June 30, 2016, compared with $4.8 billion at December
31, 2015, and $4.8 billion at
June 30, 2015.
At June 30, 2016, the percentage
of loans that were delinquent, excluding bulk loans, was 4.2
percent, compared to 5.1 percent at December
31, 2015, and 5.5 percent at June
30, 2015. Including bulk loans, the percentage of
loans that were delinquent at June 30,
2016 was 5.3 percent, compared to 6.3 percent at
December 31, 2015, and 6.8 percent at
June 30, 2015.
Losses incurred in the second quarter of 2016 were $46.6 million, compared to $90.2 million in the second quarter of 2015.
During the second quarter of 2016 there was a $55 million reduction in losses incurred due to
positive development on our primary loss reserves; compared to
positive development of approximately $22
million in the second quarter of 2015. Absent the positive
development, losses incurred in the quarter reflect a lower level
of new delinquent notices received when compared to the same
quarter last year. Net underwriting and other expenses
were $37.6 million in the second
quarter, compared to $37.9 million
reported for the same period last year.
In the second quarter of 2016 a tax provision of $56.0 million was recorded compared to
$1.3 million for the same period last
year. The increase in the tax provision was a result of the
previously disclosed reversal of the company's deferred tax asset
valuation allowance in 2015.
During the second quarter of 2016, $50.2
million par value of our 5% convertible senior notes due in
2017 were repurchased at a price of $52.1
million plus accrued interest which reduced potentially
fully dilutive shares by 3.7 million, and resulted in a pre-tax
loss of $1.9 million.
Conference Call and Webcast Details
MGIC Investment Corporation will hold a conference call today,
July 19, 2016, at 10 a.m. ET to allow securities analysts and
shareholders the opportunity to hear management discuss the
company's quarterly results. The conference call number is
1-866-793-1343. The call is being webcast and can be accessed at
the company's website at http://mtg.mgic.com/ by clicking on the
"Investor Information" button. A replay of the webcast will be
available on the company's website through August 19, 2016 under "Investor Information".
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 June 30, 2016, MGIC had $177.5 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
http://mtg.mgic.com/ under Investor Information, Press
Releases or
Presentations/Webcasts.
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 http://mtg.mgic.com under Investor
Information.
Safe Harbor Statement
Forward Looking Statements and Risk Factors:
Our actual results could be affected by the risk factors below.
These risk factors should be reviewed in connection with this press
release and our periodic reports to the Securities and Exchange
Commission ("SEC"). These risk factors may also cause actual
results to differ materially from the results contemplated by
forward looking statements that we may make. Forward looking
statements consist of statements which relate to matters other than
historical fact, including matters that inherently refer to future
events. Among others, statements that include words such as
"believe," "anticipate," "will" or "expect," or words of similar
import, are forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other
statements we may make even though these statements may be affected
by events or circumstances occurring after the forward looking
statements or other statements were made. No investor should rely
on the fact that such statements are current at any time other than
the time at which this press release was issued.
In addition, the current period financial results included in
this press release may be affected by additional information that
arises prior to the filing of our Form 10-Q for the quarter ended
June 30, 2016.
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June
30,
|
(In thousands,
except per share data)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
|
|
|
|
|
|
Net premiums
written
|
|
$
|
250,015
|
|
|
$
|
226,775
|
|
|
$
|
481,296
|
|
|
$
|
461,231
|
|
Revenues
|
|
|
|
|
|
|
|
|
Net premiums
earned
|
|
$
|
231,456
|
|
|
$
|
213,508
|
|
|
$
|
452,797
|
|
|
$
|
430,796
|
|
Net investment
income
|
|
27,248
|
|
|
25,756
|
|
|
55,057
|
|
|
49,876
|
|
Net realized
investment gains
|
|
836
|
|
|
166
|
|
|
3,892
|
|
|
26,493
|
|
Other
revenue
|
|
3,994
|
|
|
3,699
|
|
|
10,367
|
|
|
6,179
|
|
Total
revenues
|
|
263,534
|
|
|
243,129
|
|
|
522,113
|
|
|
513,344
|
|
Losses and
expenses
|
|
|
|
|
|
|
|
|
Losses incurred,
net
|
|
46,590
|
|
|
90,238
|
|
|
131,602
|
|
|
172,023
|
|
Change in premium
deficiency reserve
|
|
—
|
|
|
(17,333)
|
|
|
—
|
|
|
(23,751)
|
|
Underwriting and
other expenses, net
|
|
37,593
|
|
|
37,875
|
|
|
79,331
|
|
|
78,900
|
|
Interest
expense
|
|
12,244
|
|
|
17,373
|
|
|
26,945
|
|
|
34,735
|
|
Loss on debt
extinguishment
|
|
1,868
|
|
|
—
|
|
|
15,308
|
|
|
—
|
|
Total losses and
expenses
|
|
98,295
|
|
|
128,153
|
|
|
253,186
|
|
|
261,907
|
|
Income before
tax
|
|
165,239
|
|
|
114,976
|
|
|
268,927
|
|
|
251,437
|
|
Provision for income
taxes
|
|
56,018
|
|
|
1,322
|
|
|
90,515
|
|
|
4,707
|
|
Net income
|
|
$
|
109,221
|
|
|
$
|
113,654
|
|
|
$
|
178,412
|
|
|
$
|
246,730
|
|
Diluted earnings per
share
|
|
$
|
0.26
|
|
|
$
|
0.28
|
|
|
$
|
0.43
|
|
|
$
|
0.60
|
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
EARNINGS PER SHARE
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
June 30,
|
|
Six Months Ended June
30,
|
(In thousands,
except per share data)
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Net income
|
|
$
|
109,221
|
|
|
$
|
113,654
|
|
|
$
|
178,412
|
|
|
$
|
246,730
|
|
Interest expense, net
of tax (1):
|
|
|
|
|
|
|
|
|
2% Convertible
Senior Notes due 2020
|
|
1,982
|
|
|
3,049
|
|
|
3,964
|
|
|
6,098
|
|
5% Convertible
Senior Notes due 2017
|
|
1,728
|
|
|
4,692
|
|
|
4,406
|
|
|
9,385
|
|
9% Convertible
Junior Subordinated Debentures due 2063
|
|
3,757
|
|
|
—
|
|
|
8,379
|
|
|
—
|
|
Diluted income
available to common shareholders
|
|
$
|
116,688
|
|
|
$
|
121,395
|
|
|
$
|
195,161
|
|
|
$
|
262,213
|
|
|
|
|
|
|
|
|
|
|
Weighted average
shares - basic
|
|
340,678
|
|
|
339,705
|
|
|
340,411
|
|
|
339,406
|
|
Effect of dilutive
securities:
|
|
|
|
|
|
|
|
|
Unvested
restricted stock units
|
|
1,209
|
|
|
1,831
|
|
|
1,444
|
|
|
2,203
|
|
2% Convertible
Senior Notes due 2020
|
|
71,917
|
|
|
71,917
|
|
|
71,917
|
|
|
71,917
|
|
5% Convertible
Senior Notes due 2017
|
|
13,307
|
|
|
25,674
|
|
|
15,449
|
|
|
25,674
|
|
9% Convertible
Junior Subordinated Debentures due 2063
|
|
19,028
|
|
|
—
|
|
|
21,133
|
|
|
—
|
|
Weighted average
common shares outstanding - diluted
|
|
446,139
|
|
|
439,127
|
|
|
450,354
|
|
|
439,200
|
|
Diluted income per
share
|
|
$
|
0.26
|
|
|
$
|
0.28
|
|
|
$
|
0.43
|
|
|
$
|
0.60
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Due to the valuation
allowance, the three and six months ended June 30, 2015 were not
tax effected. The three and six months ended June 30, 2016 have
been tax effected at a rate of 35%.
|
MGIC INVESTMENT
CORPORATION AND SUBSIDIARIES
|
CONDENSED
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
|
|
|
|
|
|
|
|
|
|
June
30,
|
|
December
31,
|
|
June 30,
|
(In thousands,
except per share data)
|
|
2016
|
|
2015
|
|
2015
|
ASSETS
|
|
|
|
|
|
|
Investments
(1)
|
|
$
|
4,566,078
|
|
|
$
|
4,663,206
|
|
|
$
|
4,552,110
|
|
Cash and cash
equivalents
|
|
300,974
|
|
|
181,120
|
|
|
215,770
|
|
Prepaid reinsurance
premiums
|
|
118
|
|
|
166
|
|
|
58,085
|
|
Reinsurance
recoverable on loss reserves (2)
|
|
45,215
|
|
|
44,487
|
|
|
53,456
|
|
Home office and
equipment, net
|
|
30,800
|
|
|
30,095
|
|
|
28,925
|
|
Deferred insurance
policy acquisition costs
|
|
16,680
|
|
|
15,241
|
|
|
14,160
|
|
Deferred income
taxes, net
|
|
617,266
|
|
|
762,080
|
|
|
—
|
|
Other
assets
|
|
167,655
|
|
|
171,948
|
|
|
316,137
|
|
Total
assets
|
|
$
|
5,744,786
|
|
|
$
|
5,868,343
|
|
|
$
|
5,238,643
|
|
|
|
|
|
|
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
Loss reserves
(2)
|
|
$
|
1,632,333
|
|
|
$
|
1,893,402
|
|
|
$
|
2,110,761
|
|
Unearned
premiums
|
|
308,424
|
|
|
279,973
|
|
|
244,288
|
|
Senior
notes
|
|
—
|
|
|
—
|
|
|
61,929
|
|
Federal home
loan bank advance
|
|
155,000
|
|
|
—
|
|
|
—
|
|
Convertible
senior notes
|
|
636,324
|
|
|
822,301
|
|
|
831,873
|
|
Convertible
junior debentures
|
|
256,872
|
|
|
389,522
|
|
|
389,522
|
|
Other
liabilities
|
|
244,154
|
|
|
247,005
|
|
|
361,986
|
|
Total
liabilities
|
|
3,233,107
|
|
|
3,632,203
|
|
|
4,000,359
|
|
Shareholders'
equity
|
|
2,511,679
|
|
|
2,236,140
|
|
|
1,238,284
|
|
Total liabilities and
shareholders' equity
|
|
$
|
5,744,786
|
|
|
$
|
5,868,343
|
|
|
$
|
5,238,643
|
|
Book value per share
(3)
|
|
$
|
7.37
|
|
|
$
|
6.58
|
|
|
$
|
3.65
|
|
|
|
|
|
|
|
|
(1) Investments
include net unrealized gains (losses) on securities
|
|
$
|
138,488
|
|
|
$
|
(26,567)
|
|
|
$
|
(37,249)
|
|
(2) Loss reserves,
net of reinsurance recoverable on loss reserves
|
|
$
|
1,587,118
|
|
|
$
|
1,848,915
|
|
|
$
|
2,057,305
|
|
(3) Shares
outstanding
|
|
340,636
|
|
|
339,657
|
|
|
339,639
|
|
Additional
Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Q2 2016
|
|
|
Q1
2016
|
|
|
Q4
2015
|
|
|
Q3
2015
|
|
|
Q2
2015
|
|
|
Q1
2015
|
|
|
New primary insurance
written (NIW) (billions)
|
$
|
12.6
|
|
|
$
|
8.3
|
|
|
$
|
9.8
|
|
|
$
|
12.4
|
|
|
$
|
11.8
|
|
|
$
|
9.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly premium plans
(1)
|
9.9
|
|
|
6.5
|
|
|
7.7
|
|
|
10.2
|
|
|
9.5
|
|
|
6.9
|
|
|
Single premium
plans
|
2.7
|
|
|
1.8
|
|
|
2.1
|
|
|
2.2
|
|
|
2.3
|
|
|
2.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct average
premium rate (bps) on NIW
|
|
|
|
|
|
|
|
|
|
|
|
|
Monthly
(1)
|
60.5
|
|
|
64.5
|
|
|
64.6
|
|
|
63.0
|
|
|
63.1
|
|
|
63.6
|
|
|
Singles
|
166.3
|
|
|
166.4
|
|
|
159.8
|
|
|
176.1
|
|
|
168.5
|
|
|
168.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
New primary risk
written (billions)
|
$
|
3.1
|
|
|
$
|
2.1
|
|
|
$
|
2.5
|
|
|
$
|
3.2
|
|
|
$
|
3.0
|
|
|
$
|
2.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product mix as a % of
primary flow NIW
|
|
|
|
|
|
|
|
|
|
|
|
|
>95% LTVs
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
5
|
%
|
|
3
|
%
|
|
Singles
|
21
|
%
|
|
22
|
%
|
|
22
|
%
|
|
18
|
%
|
|
20
|
%
|
|
23
|
%
|
|
Refinances
|
17
|
%
|
|
18
|
%
|
|
17
|
%
|
|
12
|
%
|
|
20
|
%
|
|
29
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Insurance In
Force (IIF) (billions)
|
$
|
177.5
|
|
|
$
|
175.0
|
|
|
$
|
174.5
|
|
|
$
|
172.7
|
|
|
$
|
168.8
|
|
|
$
|
166.1
|
|
|
Flow only
|
$
|
167.5
|
|
|
$
|
164.8
|
|
|
$
|
164.0
|
|
|
$
|
161.8
|
|
|
$
|
157.5
|
|
|
$
|
154.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual
Persistency
|
79.6
|
%
|
|
79.9
|
%
|
|
79.7
|
%
|
|
80.0
|
%
|
|
80.4
|
%
|
|
81.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Risk In Force
(RIF) (billions)
|
$
|
46.2
|
|
|
$
|
45.6
|
|
|
$
|
45.5
|
|
|
$
|
45.0
|
|
|
$
|
44.0
|
|
|
$
|
43.2
|
|
|
Flow only
|
$
|
43.4
|
|
|
$
|
42.7
|
|
|
$
|
42.5
|
|
|
$
|
41.9
|
|
|
$
|
40.8
|
|
|
$
|
40.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Primary RIF by
FICO (%)
|
|
|
|
|
|
|
|
|
|
|
|
|
FICO 740 &
>
|
48
|
%
|
|
47
|
%
|
|
47
|
%
|
|
47
|
%
|
|
46
|
%
|
|
46
|
%
|
|
FICO
700-739
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
24
|
%
|
|
23
|
%
|
|
FICO
660-699
|
16
|
%
|
|
16
|
%
|
|
16
|
%
|
|
16
|
%
|
|
16
|
%
|
|
16
|
%
|
|
FICO 659 &
<
|
12
|
%
|
|
13
|
%
|
|
13
|
%
|
|
13
|
%
|
|
14
|
%
|
|
15
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Coverage
Ratio (RIF/IIF)
|
26.1
|
%
|
|
26.1
|
%
|
|
26.1
|
%
|
|
26.1
|
%
|
|
26.0
|
%
|
|
26.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Loan Size of
IIF (thousands)
|
$
|
178.89
|
|
|
$
|
177.08
|
|
|
$
|
175.89
|
|
|
$
|
174.58
|
|
|
$
|
172.37
|
|
|
$
|
171.05
|
|
|
Flow only
|
$
|
181.23
|
|
|
$
|
179.32
|
|
|
$
|
178.03
|
|
|
$
|
176.61
|
|
|
$
|
174.23
|
|
|
$
|
172.88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
loans
|
992,076
|
|
|
988,512
|
|
|
992,188
|
|
|
989,020
|
|
|
979,202
|
|
|
970,931
|
|
|
Flow only
|
924,474
|
|
|
919,229
|
|
|
921,166
|
|
|
916,230
|
|
|
904,055
|
|
|
893,461
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - Default
Roll Forward - # of Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning Default
Inventory
|
55,590
|
|
|
64,642
|
|
|
64,642
|
|
|
66,357
|
|
|
72,236
|
|
|
79,901
|
|
|
New
Notices
|
16,080
|
|
|
16,731
|
|
|
18,459
|
|
|
19,509
|
|
|
17,451
|
|
|
18,896
|
|
|
Cures
|
(15,640)
|
|
|
(19,053)
|
|
|
(16,910)
|
|
|
(17,036)
|
|
|
(17,897)
|
|
|
(21,767)
|
|
|
Paids (including
those charged to a deductible or captive)
|
(3,195)
|
|
|
(3,373)
|
|
|
(3,333)
|
|
|
(3,958)
|
|
|
(4,140)
|
|
|
(4,573)
|
|
|
Rescissions and
denials
|
(142)
|
|
|
(210)
|
|
|
(225)
|
|
|
(230)
|
|
|
(172)
|
|
|
(221)
|
|
|
Items removed from
inventory
|
(135)
|
|
(4)
|
|
(1,138)
|
|
|
—
|
|
|
—
|
|
|
(1,121)
|
|
|
—
|
|
|
Ending Default
Inventory
|
52,558
|
|
|
55,590
|
|
|
62,633
|
|
|
64,642
|
|
|
66,357
|
|
|
72,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary claim
received inventory included in ending default inventory
|
1,829
|
|
|
2,267
|
|
|
2,769
|
|
|
2,982
|
|
|
3,440
|
|
|
4,448
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Cures
|
|
|
|
|
|
|
|
|
|
|
|
|
Reported delinquent
and cured intraquarter
|
4,306
|
|
|
6,248
|
|
|
5,110
|
|
|
5,185
|
|
|
4,620
|
|
|
6,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent prior to cure
|
|
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
7,002
|
|
|
8,413
|
|
|
7,714
|
|
|
7,146
|
|
|
7,721
|
|
|
9,516
|
|
|
4-11
payments
|
3,099
|
|
|
3,077
|
|
|
2,836
|
|
|
3,005
|
|
|
3,789
|
|
|
3,688
|
|
|
12 payments or
more
|
1,233
|
|
|
1,315
|
|
|
1,250
|
|
|
1,700
|
|
|
1,767
|
|
|
1,676
|
|
|
Total Cures in
Quarter
|
15,640
|
|
|
19,053
|
|
|
16,910
|
|
|
17,036
|
|
|
17,897
|
|
|
21,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Composition of
Paids
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of payments
delinquent at time of claim payment
|
|
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
18
|
|
|
25
|
|
|
18
|
|
|
20
|
|
|
16
|
|
|
12
|
|
|
4-11
payments
|
320
|
|
|
389
|
|
|
304
|
|
|
374
|
|
|
435
|
|
|
550
|
|
|
12 payments
or more
|
2,857
|
|
|
2,959
|
|
|
3,011
|
|
|
3,564
|
|
|
3,689
|
|
|
4,011
|
|
|
Total Paids in
Quarter
|
3,195
|
|
|
3,373
|
|
|
3,333
|
|
|
3,958
|
|
|
4,140
|
|
|
4,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging of Primary
Default Inventory
|
|
|
|
|
|
|
|
|
|
|
|
|
Consecutive
months in default
|
|
|
|
|
|
|
|
|
|
|
|
|
3 months or
less
|
11,547
|
|
22
|
%
|
10,120
|
|
18
|
%
|
13,053
|
|
21
|
%
|
13,991
|
|
22
|
%
|
12,545
|
|
19
|
%
|
11,604
|
|
16
|
%
|
4-11 months
|
12,680
|
|
24
|
%
|
15,319
|
|
28
|
%
|
15,763
|
|
25
|
%
|
14,703
|
|
23
|
%
|
15,487
|
|
23
|
%
|
18,940
|
|
26
|
%
|
12 months or
more
|
28,331
|
|
54
|
%
|
30,151
|
|
54
|
%
|
33,817
|
|
54
|
%
|
35,948
|
|
55
|
%
|
38,325
|
|
58
|
%
|
41,692
|
|
58
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
payments delinquent
|
|
|
|
|
|
|
|
|
|
|
|
|
3 payments or
less
|
17,299
|
|
33
|
%
|
16,864
|
|
30
|
%
|
20,360
|
|
33
|
%
|
20,637
|
|
32
|
%
|
19,274
|
|
29
|
%
|
19,159
|
|
27
|
%
|
4-11
payments
|
12,746
|
|
24
|
%
|
14,595
|
|
26
|
%
|
15,092
|
|
24
|
%
|
14,890
|
|
23
|
%
|
15,710
|
|
24
|
%
|
18,372
|
|
25
|
%
|
12 payments or
more
|
22,513
|
|
43
|
%
|
24,131
|
|
44
|
%
|
27,181
|
|
43
|
%
|
29,115
|
|
45
|
%
|
31,373
|
|
47
|
%
|
34,705
|
|
48
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF - # of
Delinquent Loans
|
52,558
|
|
|
55,590
|
|
|
62,633
|
|
|
64,642
|
|
|
66,357
|
|
|
72,236
|
|
|
Flow only
|
39,177
|
|
|
41,440
|
|
|
47,088
|
|
|
48,436
|
|
|
49,507
|
|
|
53,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary IIF Default
Rates
|
5.30
|
%
|
|
5.62
|
%
|
|
6.31
|
%
|
|
6.54
|
%
|
|
6.78
|
%
|
|
7.44
|
%
|
|
Flow only
|
4.24
|
%
|
|
4.51
|
%
|
|
5.11
|
%
|
|
5.29
|
%
|
|
5.48
|
%
|
|
5.98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reserves
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Loss Reserves
(millions)
|
$
|
1,574
|
|
|
$
|
1,683
|
|
|
$
|
1,807
|
|
|
$
|
1,877
|
|
|
$
|
1,993
|
|
|
$
|
2,112
|
|
|
Average Direct Reserve Per Default
|
$
|
29,939
|
|
|
$
|
30,268
|
|
|
$
|
28,859
|
|
|
$
|
29,032
|
|
|
$
|
30,033
|
|
|
$
|
29,233
|
|
|
Pool
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct loss reserves
(millions)
|
$
|
37
|
|
|
$
|
38
|
|
|
$
|
43
|
|
|
$
|
49
|
|
|
$
|
52
|
|
|
$
|
57
|
|
|
Ending default
inventory
|
2,024
|
|
|
2,247
|
|
|
2,739
|
|
|
2,950
|
|
|
3,129
|
|
|
3,350
|
|
|
Pool
claim received inventory included in ending default
inventory
|
95
|
|
|
72
|
|
|
60
|
|
|
75
|
|
|
97
|
|
|
88
|
|
|
Reserves related to
Freddie Mac settlement (millions)
|
$
|
21
|
|
|
$
|
31
|
|
|
$
|
42
|
|
|
$
|
52
|
|
|
$
|
63
|
|
|
$
|
73
|
|
|
Other Gross
Reserves (millions) (3)
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Paid Claims
(millions) (6)
|
$
|
172
|
|
|
$
|
222
|
|
|
$
|
188
|
|
|
$
|
207
|
|
|
$
|
222
|
|
|
$
|
232
|
|
|
Total primary (excluding
settlements)
|
$
|
153
|
|
|
$
|
166
|
|
|
$
|
164
|
|
|
$
|
190
|
|
|
$
|
196
|
|
|
$
|
217
|
|
|
Settlements
|
$
|
4
|
|
(4)
|
|
$
|
47
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
|
—
|
|
|
Pool - with aggregate loss
limits
|
$
|
2
|
|
|
$
|
1
|
|
|
$
|
4
|
|
|
$
|
3
|
|
|
$
|
5
|
|
|
$
|
4
|
|
|
Pool - without aggregate
loss
limits
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
3
|
|
|
$
|
3
|
|
|
$
|
2
|
|
|
Pool - Freddie Mac
settlement
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
$
|
10
|
|
|
$
|
11
|
|
|
Reinsurance
|
$
|
(4)
|
|
|
$
|
(10)
|
|
|
$
|
(2)
|
|
|
$
|
(5)
|
|
|
$
|
(8)
|
|
|
$
|
(8)
|
|
|
Other (3)
|
$
|
5
|
|
|
$
|
5
|
|
|
$
|
10
|
|
|
$
|
5
|
|
|
$
|
6
|
|
|
$
|
6
|
|
|
Reinsurance terminations
(6)
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(15)
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Primary Average Claim
Payment (thousands)
|
$
|
48.0
|
|
(5)
|
|
$
|
49.3
|
|
(5)
|
|
$
|
49.1
|
|
|
$
|
48.2
|
|
|
$
|
48.6
|
|
|
$
|
47.4
|
|
|
Flow only
|
$
|
45.9
|
|
(5)
|
|
$
|
45.4
|
|
(5)
|
|
$
|
45.6
|
|
|
$
|
44.8
|
|
|
$
|
45.1
|
|
|
$
|
44.2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance excluding
captives
|
|
|
|
|
|
|
|
|
|
|
|
|
% insurance inforce
subject to reinsurance
|
74.7
|
%
|
|
73.7
|
%
|
|
72.9
|
%
|
|
71.9
|
%
|
|
59.5
|
%
|
|
57.1
|
%
|
|
% Quarterly NIW
subject to reinsurance
|
90.2
|
%
|
|
89.1
|
%
|
|
89.5
|
%
|
|
90.6
|
%
|
|
97.9
|
%
|
|
85.2
|
%
|
|
Ceded premium written
(millions)
|
$
|
30.0
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
$
|
(46.8)
|
|
(8)
|
|
$
|
30.9
|
|
|
$
|
27.1
|
|
|
Ceded premium earned
(millions)
|
$
|
30.0
|
|
|
$
|
31.7
|
|
|
$
|
30.0
|
|
|
$
|
11.0
|
|
(8)
|
|
$
|
23.0
|
|
|
$
|
24.6
|
|
|
Ceded losses incurred
(millions)
|
$
|
6.1
|
|
|
$
|
8.5
|
|
|
$
|
7.2
|
|
|
$
|
4.2
|
|
|
$
|
1.2
|
|
|
$
|
4.9
|
|
|
Ceding commissions
(millions) (included in underwriting and other expenses)
|
$
|
11.9
|
|
|
$
|
11.6
|
|
|
$
|
11.4
|
|
|
$
|
(2.4)
|
|
(8)
|
|
$
|
11.7
|
|
|
$
|
10.1
|
|
|
Profit commission
(millions) (included in ceded premiums)
|
$
|
29.8
|
|
|
$
|
26.2
|
|
|
$
|
27.0
|
|
|
$
|
34.9
|
|
(8)
|
|
$
|
27.5
|
|
|
$
|
23.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct Pool RIF
(millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
With aggregate loss limits
|
$
|
249
|
|
|
$
|
251
|
|
|
$
|
271
|
|
|
$
|
279
|
|
|
$
|
282
|
|
|
$
|
287
|
|
|
Without aggregate loss limits
|
$
|
343
|
|
|
$
|
365
|
|
|
$
|
388
|
|
|
$
|
418
|
|
|
$
|
456
|
|
|
$
|
479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Primary
Insurance Statistics
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance in force
(billions)
|
$
|
10.0
|
|
|
$
|
10.2
|
|
|
$
|
10.5
|
|
|
$
|
10.9
|
|
|
$
|
11.3
|
|
|
$
|
11.6
|
|
|
Risk in force
(billions)
|
$
|
2.8
|
|
|
$
|
2.9
|
|
|
$
|
3.0
|
|
|
$
|
3.1
|
|
|
$
|
3.2
|
|
|
$
|
3.2
|
|
|
Average loan size
(thousands)
|
$
|
146.84
|
|
|
$
|
147.42
|
|
|
$
|
148.15
|
|
|
$
|
149.00
|
|
|
$
|
149.93
|
|
|
$
|
149.90
|
|
|
Number of delinquent
loans
|
13,381
|
|
|
14,150
|
|
|
15,545
|
|
|
16,206
|
|
|
16,850
|
|
|
18,846
|
|
|
Default rate
|
19.79
|
%
|
|
20.42
|
%
|
|
21.89
|
%
|
|
22.26
|
%
|
|
22.42
|
%
|
|
24.33
|
%
|
|
Primary paid claims
(millions)
|
$
|
35
|
|
|
$
|
43
|
|
(5)
|
|
$
|
39
|
|
|
$
|
47
|
|
|
$
|
46
|
|
|
$
|
50
|
|
|
Average claim
payment
(thousands)
|
$
|
56.8
|
|
|
$
|
65.1
|
|
(5)
|
|
$
|
65.7
|
|
|
$
|
62.2
|
|
|
$
|
63.3
|
|
|
$
|
61.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage Guaranty
Insurance Corporation - Risk to Capital
|
11.6:1
|
|
(7)
|
|
12.3:1
|
|
|
12.1:1
|
|
|
12.3:1
|
|
|
13.2:1
|
|
|
13.7:1
|
|
|
Combined Insurance
Companies -
Risk to
Capital
|
13.2:1
|
|
(7)
|
|
13.8:1
|
|
|
13.6:1
|
|
|
13.6:1
|
|
|
14.8:1
|
|
|
15.4:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GAAP loss
ratio
(insurance operations
only)
|
20.1
|
%
|
|
38.4
|
%
|
|
42.0
|
%
|
|
32.0
|
%
|
(2)
|
|
42.3
|
%
|
(2)
|
|
37.6
|
%
|
(2)
|
|
GAAP underwriting
expense ratio (insurance operations only)
|
13.9
|
%
|
|
16.9
|
%
|
|
13.9
|
%
|
|
14.4
|
%
|
|
15.0
|
%
|
|
16.4
|
%
|
|
Note: The FICO
credit score for a loan with multiple borrowers is the lowest of
the borrowers' "decision FICO scores." A borrower's "decision
FICO score" is determined as follows: if there are three FICO
scores available, the middle FICO score is used; if two FICO scores
are available, the lower of the two is used; if only one FICO score
is available, it is used.
|
|
Note: Average claim
paid may vary from period to period due to amounts associated with
mitigation efforts.
|
|
(1) Includes
loans with annual and split payments.
|
|
(2) As
calculated, does not reflect any effects due to premium
deficiency.
|
|
(3) Includes
Australian operations through Q4 2015.
|
|
(4) Q2 2016
includes the impact of an agreement to settle coverage on certain
non-performing loans. The agreement became effective in the second
quarter of 2016 and did not have a material financial impact in the
quarter.
|
|
(5) Excludes claim
settlements
|
|
(6) Net paid claims,
as presented, does not include amounts received in conjunction with
terminations or commutations of reinsurance agreements.
|
|
(7)
Preliminary
|
|
(8) In the third
quarter of 2015, the April 2013 quota share reinsurance agreement
was restructured via a commutation and new agreement. The
effects of the new agreement for the third quarter of 2015 were as
follows (in millions):
|
|
|
|
|
Ceded premium
written
|
$
|
22.6
|
|
Ceded premium
earned
|
$
|
22.6
|
|
Ceding
commissions
|
$
|
9.2
|
|
Profit
commissions
|
$
|
23.3
|
|
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; "MGIC" refers to Mortgage
Guaranty Insurance Corporation; and "MIC" refers to MGIC Indemnity
Corporation.
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our premium yields
and / or increase our losses.
Our private mortgage insurance competitors include:
- Arch Mortgage Insurance Company,
- Essent Guaranty, Inc.,
- Genworth Mortgage Insurance Corporation,
- National Mortgage Insurance Corporation,
- Radian Guaranty Inc., and
- United Guaranty Residential Insurance Company.
The level of competition within the private mortgage insurance
industry has intensified over the past several years and is not
expected to diminish. We believe that we currently compete with
other private mortgage insurers based on pricing, underwriting
requirements, financial strength, customer relationships, name
recognition, reputation, the strength of our management team and
field organization, the ancillary products and services provided to
lenders (including contract underwriting services), the depth of
our databases covering insured loans and the effective use of
technology and innovation in the delivery and servicing of our
mortgage insurance products.
Recent competitive pricing practices in the market have
included: (i) reductions in standard filed rates on
borrower-paid policies, (ii) use by certain competitors of a
spectrum of filed rates to allow for formulaic, risk-based pricing
(commonly referred to as "black-box" pricing); and (iii) use
of customized rates (discounted from published rates) on
lender-paid, single premium policies. The willingness of mortgage
insurers to offer reduced pricing (through filed or customized
rates) has been met with an increased demand from various lenders
for reduced rate products. This has further intensified pricing
competition.
We announced changes to our premium rates in January 2016 and March
2016, which became effective in April
2016. In general, the revisions decreased our filed premium
rates on some higher-FICO score loans and increased our filed
premium rates on some lower-FICO score loans. In addition to the
revisions to our filed rates, we continue to use the authority set
forth in our rate filings to negotiate customized lender-paid
single premium policy rates on a selective basis. We expect that
our current premium rates will put downward pressure on our new
insurance written from lower-FICO score loans. We believe our
pricing revisions will allow us to compete more effectively;
however, there can be no assurance that pricing competition will
not intensify further, which could result in a decrease in new
insurance written and/or returns.
In each of 2015 and the first half of 2016, approximately 5% 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 premium rates
higher than can be obtained from competitors, tightening of and
adherence to our underwriting requirements, which may result in our
declining to insure some of the loans originated by our customers,
and insurance rescissions and curtailments that affect the
customer. We have ongoing discussions with lenders who are
significant customers regarding their objections to our claims
paying practices.
Substantially all of our insurance written since 2008 has been
for loans purchased by Fannie Mae and Freddie Mac (the "GSEs"). The
current private mortgage insurer eligibility requirements (the
"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, a
downgrade in our financial strength ratings could have an adverse
effect on us in many ways, including increased scrutiny of our
financial condition by our customers, potentially resulting in a
decrease in the amount of our new insurance written. In addition,
we believe that financial strength ratings may be a significant
consideration for participants seeking to secure credit enhancement
in the non-GSE mortgage market. While this market has been
limited since the financial crisis, it may grow in the future. Our
ability to participate in the non-GSE mortgage market 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. For each of MGIC and MIC, the financial
strength rating from Moody's is Baa3 (with a stable outlook) and
from Standard & Poor's is BBB (with a stable outlook). It is
possible that MGIC's and MIC's financial strength ratings could
decline from these levels.
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. 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 mortgage insurance subsidiaries, our future new
insurance written could be negatively affected.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to private
mortgage insurance.
Alternatives to private mortgage insurance include:
- lenders using FHA, VA and other government mortgage insurance
programs,
- lenders and other investors holding mortgages in portfolio and
self-insuring,
- investors using risk mitigation and credit risk transfer
techniques other than private mortgage insurance, and
- lenders originating mortgages using piggyback structures to
avoid private mortgage insurance, such as a first mortgage with an
80% loan-to-value ratio and a second mortgage with a 10%, 15% or
20% loan-to-value ratio (referred to as 80-10-10, 80-15-5 or 80-20
loans, respectively) rather than a first mortgage with a 90%, 95%
or 100% loan-to-value ratio that has private mortgage
insurance.
Investors (including the GSEs) have used risk mitigation and
credit risk transfer techniques other than private mortgage
insurance, such as obtaining insurance from non-mortgage insurers,
engaging in credit-linked note transactions executed in the capital
markets, or using other forms of debt issuances or securitizations
that transfer credit risk directly to other investors; using other
risk mitigation techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting credit risk
without credit enhancement. Although the risk mitigation and credit
risk transfer techniques used by the GSEs in the past several years
have not displaced primary mortgage insurance, we cannot predict
the impact of future transactions.
The FHA's share of the low down payment residential mortgages
that were subject to FHA, VA or primary private mortgage insurance
increased to an estimated 41.0% in the first quarter of 2016, up
from 40.2% in 2015 and 33.9% in 2014. In the past ten years, the
FHA's share has been as low as 15.5% in 2006 and as high as 70.8%
in 2009. Factors that influence the FHA's market share include
relative rates and fees, underwriting guidelines and loan limits of
the FHA, VA, private mortgage insurers and the GSEs; flexibility
for the FHA to establish new products as a result of federal
legislation and programs; returns 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 these
factors or the FHA's share of new insurance written will change in
the future.
The VA's share of the low down payment residential mortgages
that were subject to FHA, VA or primary private mortgage insurance
increased to an estimated 26.3% in the first quarter of 2016, up
from 24.7% in 2015 and 25.4% in 2014 (which had been its highest
annual market share in ten years). The VA's lowest market share in
the past ten years was 5.4% in 2007. We believe that the VA's
market share has generally been increasing because the VA offers
100% LTV loans and charges a one-time funding fee that can be
included in the loan amount but no additional monthly expense, and
because of an increase in the number of borrowers that are eligible
for the VA's program.
Changes in the business practices of the GSEs, federal
legislation that changes their charters or a restructuring of the
GSEs could reduce our revenues or increase our losses.
The GSEs' charters generally require credit enhancement for a
low down payment mortgage loan (a loan amount that exceeds 80% of a
home's value) in order for such loan to be eligible for purchase by
the GSEs. Lenders generally have used private mortgage insurance to
satisfy this credit enhancement requirement and low down payment
mortgages purchased by the GSEs generally are insured with private
mortgage insurance. As a result, the business practices of the GSEs
greatly impact our business and include:
- private mortgage insurer eligibility requirements of the GSEs
(for information about the financial requirements included in the
PMIERs, see our risk factor titled "We may not continue to meet
the GSEs' private mortgage insurer eligibility requirements and our
returns may decrease as we are required to maintain more capital in
order to maintain our eligibility"),
- the level of private mortgage insurance coverage, subject to
the limitations of the GSEs' charters (which may be changed by
federal legislation), when private mortgage insurance is used as
the required credit enhancement on low down payment mortgages,
- the amount of loan level price adjustments and guaranty fees
(which result in higher costs to borrowers) that the GSEs assess on
loans that require private mortgage insurance,
- whether the GSEs influence the mortgage lender's selection of
the mortgage insurer providing coverage and, if so, any
transactions that are related to that selection,
- the underwriting standards that determine which loans are
eligible for purchase by the GSEs, which can affect the quality of
the risk insured by the mortgage insurer and the availability of
mortgage loans,
- the terms on which mortgage insurance coverage can be canceled
before reaching the cancellation thresholds established by
law,
- the programs established by the GSEs intended to avoid or
mitigate loss on insured mortgages and the circumstances in which
mortgage servicers must implement such programs,
- the terms that the GSEs require to be included in mortgage
insurance policies for loans that they purchase,
- the extent to which the GSEs intervene in mortgage insurers'
rescission practices or rescission settlement practices with
lenders, and
- the maximum loan limits of the GSEs in comparison to those of
the FHA and other investors.
The Federal Housing Finance Agency ("FHFA") is the conservator
of the GSEs 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. The financial reform legislation that was
passed in July 2010 (the "Dodd-Frank
Act") required the U.S. Department of the Treasury to report its
recommendations regarding options for ending the conservatorship of
the GSEs. This report did not provide any definitive timeline for
GSE reform; however, it did recommend using a combination of
federal housing policy changes to wind down the GSEs, shrink the
government's footprint in housing finance (including FHA
insurance), and help bring private capital back to the mortgage
market. Since then, members of Congress introduced several bills
intended to change the business practices of the GSEs and the FHA;
however, no legislation has been enacted. As a result of the
matters referred to above, it is uncertain what role the GSEs, FHA
and private capital, including private mortgage insurance, will
play in the residential housing finance system in the future or the
impact of any such changes on our business. In addition, the timing
of the impact of any resulting changes on our business is
uncertain. Most meaningful changes would require Congressional
action to implement and it is difficult to estimate when
Congressional action would be final and how long any associated
phase-in period may last.
We may not continue to meet the GSEs' private mortgage
insurer eligibility requirements and our returns may decrease as we
are required to maintain more capital in order to maintain our
eligibility.
We must comply with the PMIERs to be eligible to insure loans
purchased by the GSEs. The PMIERs include financial requirements,
as well as business, quality control and certain transaction
approval requirements. The financial requirements of the PMIERs
require a mortgage insurer's "Available Assets" (generally only the
most liquid assets of an insurer) to equal or exceed its "Minimum
Required Assets" (which are based on an insurer's book and are
calculated from tables of factors with several risk dimensions and
are subject to a floor amount). Based on our interpretation of the
PMIERs, as of June 30, 2016, MGIC's
Available Assets are $4.7 billion and
its Minimum Required Assets are $4.2
billion. MGIC is in compliance with the PMIERs and eligible
to insure loans purchased by the GSEs.
If MGIC ceases to be eligible to insure loans purchased by one
or both of the GSEs, it would significantly reduce the volume of
our new business writings. Factors that may negatively impact
MGIC's ability to continue to comply with the financial
requirements of the PMIERs include the following:
- The GSEs may reduce the amount of credit they allow under the
PMIERs for the risk ceded under our quota share reinsurance
transaction. The GSEs' ongoing approval of that transaction is
subject to several conditions and the transaction will be reviewed
under the PMIERs at least annually by the GSEs. For more
information about the transaction, see our risk factor titled
"The mix of business we write affects our Minimum Required
Assets under the PMIERs, our premium yields and the likelihood of
losses occurring."
- The GSEs could make the PMIERs more onerous in the future; in
this regard, the PMIERs provide that the tables of factors that
determine Minimum Required Assets will be updated every two years
and may be updated more frequently to reflect changes in
macroeconomic conditions or loan performance. The GSEs will provide
notice 180 days prior to the effective date of table updates. In
addition, the GSEs may amend the PMIERs at any time.
- 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 additional capital be needed by MGIC in the future,
additional 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 transaction mitigates the negative effect of the PMIERs
on our returns. In this regard, see the first bullet point
above.
The benefit of our net operating loss carryforwards may
become substantially limited.
As of June 30, 2016, we had
approximately $1.7 billion of net
operating losses for tax purposes that we can use in certain
circumstances to offset future taxable income and thus reduce our
federal income tax liability. 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 a claim, we review the loan and servicing files to
determine the appropriateness of the claim amount. All of our
insurance policies provide that we can reduce or deny a claim if
the servicer did not comply with its obligations under our
insurance policy. We call such reduction of claims "curtailments."
In 2015 and the first half of 2016, curtailments reduced our
average claim paid by approximately 6.7% and 5.5%,
respectively.
When reviewing the loan file associated with a claim, 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 recent quarters, approximately 5% of claims received in a
quarter have been resolved by rescissions, down from the peak of
approximately 28% in the first half of 2009. 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 curtail claims or rescind
coverage, 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.
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 . Under ASC 450-20, an estimated loss from such
discussions and proceedings is accrued for only if we determine
that the loss is probable and can be reasonably estimated. In such
cases, 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 $193 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. For MGIC, while these proceedings in the
aggregate have not resulted in material liability, were there to be
future proceedings under these laws, there can be no assurance that
the outcome 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." For more
details about the various ways in which our subsidiaries are
regulated, see "Regulation" in Item 1 of our Annual Report on Form
10-K filed with the SEC on February 26,
2016. In addition to regulation by state insurance
regulators, the CFPB may issue additional rules or regulations,
which may materially affect our business.
In December 2013, the U.S.
Treasury Department's Federal Insurance Office released a report
that calls for federal standards and oversight for mortgage
insurers to be developed and implemented. It is uncertain what form
the standards and oversight will take and when they will become
effective.
Resolution of our dispute with the Internal Revenue
Service could adversely affect us.
As previously disclosed, the Internal Revenue Service ("IRS")
completed examinations of our federal income tax returns for the
years 2000 through 2007 and issued proposed assessments for taxes,
interest and penalties related to our treatment of the flow-through
income and loss from an investment in a portfolio of residual
interests of Real Estate Mortgage Investment Conduits ("REMICs").
The IRS indicated that it did not believe that, for various
reasons, we had established sufficient tax basis in the REMIC
residual interests to deduct the losses from taxable income. We
appealed these assessments within the IRS and in August 2010, we reached a tentative settlement
agreement with the IRS which was not finalized.
In 2014, we received Notices of Deficiency (commonly referred to
as "90 day letters") covering the 2000-2007 tax years. The Notices
of Deficiency reflect taxes and penalties related to the REMIC
matters of $197.5 million and at
June 30, 2016, there would also be
interest related to these matters of approximately $191.2 million. In 2007, we made a payment of
$65.2 million to the United States
Department of the Treasury which will reduce any amounts we would
ultimately owe. The Notices of Deficiency also reflect additional
amounts due of $261.4 million, which
are primarily associated with the disallowance of the carryback of
the 2009 net operating loss to the 2004-2007 tax years. We believe
the IRS included the carryback adjustments as a precaution to keep
open the statute of limitations on collection of the tax that was
refunded when this loss was carried back, and not because the IRS
actually intends to disallow the carryback permanently.
We filed a petition with the U.S. Tax Court contesting most of
the IRS' proposed adjustments reflected in the Notices of
Deficiency and the IRS filed an answer to our petition which
continues to assert their claim. The case has twice been scheduled
for trial and in each instance, the parties jointly filed, and the
U.S. Tax Court approved (most recently in February 2016), motions for continuance to
postpone the trial date. Also in February
2016, the U.S. Tax Court approved a joint motion to
consolidate for trial, briefing, and opinion, our case with similar
cases of Radian Group, Inc., as successor to Enhance Financial
Services Group, Inc., et al. Litigation to resolve our dispute with
the IRS could be lengthy and costly in terms of legal fees and
related expenses. We can provide no assurance regarding the outcome
of any such litigation or whether a compromised settlement with the
IRS will ultimately be reached and finalized. 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
June 30, 2016, those state taxes and
interest would approximate $49.7
million. In addition, there could also be state tax
penalties. Our total amount of unrecognized tax benefits as of
June 30, 2016 is $107.6 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 continue to believe that our
previously recorded tax provisions and liabilities are appropriate.
However, we would need to make appropriate adjustments, which could
be material, to our tax provision and liabilities if our view of
the probability of success in this matter changes, and the ultimate
resolution of this matter could have a material negative impact on
our effective tax rate, results of operations, cash flows,
available assets and statutory capital. In this regard, see our
risk factors titled "We may not continue to meet the GSEs'
private mortgage insurer eligibility requirements and our returns
may decrease as we are required to maintain more capital in order
to maintain our eligibility" and "State capital requirements
may prevent us from continuing to write new insurance on an
uninterrupted basis."
Because we establish loss reserves only upon a loan
default rather than based on estimates of our ultimate losses on
risk in force, losses may have a disproportionate adverse effect on
our earnings in certain periods.
In accordance with accounting principles generally accepted in
the United States, commonly
referred to as GAAP, we establish reserves for insurance losses and
loss adjustment expenses only when notices of default on insured
mortgage loans are received and for loans we estimate are in
default but for which notices of default have not yet been reported
to us by the servicers (this is often referred to as "IBNR").
Because our reserving method does not take account of losses that
could occur from loans that are not delinquent, such losses are not
reflected in our financial statements, except in the case where a
premium deficiency exists. As a result, future losses on loans that
are not currently delinquent may have a material impact on future
results as such losses emerge.
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially different than our
loss reserves.
When we establish reserves, we estimate the ultimate loss on
delinquent loans using estimated claim rates and claim amounts. The
estimated claim rates and claim amounts represent our best
estimates of what we will actually pay on the loans in default as
of the reserve date and incorporate anticipated mitigation from
rescissions and curtailments. The establishment of loss reserves is
subject to inherent uncertainty and requires judgment by
management. The actual amount of the claim payments may be
substantially different than our loss reserve estimates. Our
estimates could be adversely affected by several factors, including
a deterioration of regional or national economic conditions, and an
increase in the length of time a loan has been delinquent before a
claim is received. The deterioration in conditions may include an
increase in unemployment, reducing borrowers' income and thus their
ability to make mortgage payments, and a decrease in housing
values, which may affect borrower willingness to continue to make
mortgage payments when the value of the home is below the mortgage
balance. Changes to our estimates could have a material impact on
our future results, even in a stable economic environment. In
addition, historically, losses incurred have followed a seasonal
trend in which the second half of the year has weaker credit
performance than the first half, with higher new default notice
activity and a lower cure rate.
We rely on our management team and our business could be
harmed if we are unable to retain qualified personnel or
successfully develop and/or recruit their replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our management team and
other key personnel. The unexpected departure of key personnel
could adversely affect the conduct of our business. In such event,
we would be required to obtain other personnel to manage and
operate our business. In addition, we will be required to replace
the knowledge and expertise of our aging workforce as our workers
retire. In either case, there can be no assurance that we would be
able to develop or recruit suitable replacements for the departing
individuals; that replacements could be hired, if necessary, on
terms that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We currently have
not entered into any employment agreements with our officers or key
personnel. Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a properly
skilled and experienced workforce, our costs, including
productivity costs and costs to replace employees may increase, and
this could negatively impact our earnings.
Loan modification and other similar programs may not
continue to provide substantial benefits to us.
The federal government, including through the U.S. Department of
the Treasury and the GSEs, and several lenders have modification
and refinance programs to make loans more affordable to borrowers
with the goal of reducing the number of foreclosures. These
programs include the Home Affordable Modification Program ("HAMP")
and the Home Affordable Refinance Program ("HARP"). During 2015 and
the first half of 2016, we were notified of modifications that
cured delinquencies that had they become paid claims would have
resulted in approximately $0.6
billion and $0.3 billion,
respectively, of estimated claim payments. These levels are down
from a high of $3.2 billion in
2010.
In 2015 and the first half of 2016, approximately 16% and 14%,
respectively, of our primary cures were the result of
modifications, with HAMP accounting for approximately 66% and 64%
of the modifications in each of those periods, respectively.
Although the HAMP and HARP programs have been extended through
December 2016, we believe that we
have realized the majority of the benefits from them because the
number of loans insured by us that we are aware are entering those
programs has decreased significantly.
We cannot determine the total benefit we may derive from loan
modification programs, particularly given the uncertainty around
the re-default rates for defaulted loans that have been modified.
Our loss reserves do not account for potential re-defaults of
current loans.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that we write could
decline, which would reduce our revenues.
The factors that affect the volume of low down payment mortgage
originations include:
- restrictions on mortgage credit due to more stringent
underwriting standards, liquidity issues or risk-retention and/or
capital requirements affecting lenders ,
- the level of home mortgage interest rates and the deductibility
of mortgage interest for income tax purposes,
- the health of the domestic economy as well as conditions in
regional and local economies and the level of consumer
confidence,
- housing affordability,
- population trends, including the rate of household
formation,
- 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, decrease
our new insurance written and reduce our revenues. 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, our domiciliary state, require a
mortgage insurer to maintain a minimum amount of statutory capital
relative to the risk in force (or a similar measure) in order for
the mortgage insurer to continue to write new business. We refer to
these requirements as the "State Capital Requirements." While they
vary among jurisdictions, the most common State Capital
Requirements allow for a maximum risk-to-capital ratio of 25 to 1.
A risk-to-capital ratio will increase if (i) the percentage
decrease in capital exceeds the percentage decrease in insured
risk, or (ii) the percentage increase in capital is less than the
percentage increase in insured risk. Wisconsin does not regulate capital by using a
risk-to-capital measure but instead requires a minimum policyholder
position ("MPP"). The "policyholder position" of a mortgage insurer
is its net worth or surplus, contingency reserve and a portion of
the reserves for unearned premiums.
At June 30, 2016, MGIC's
preliminary risk-to-capital ratio was 11.6 to 1, below the maximum
allowed by the jurisdictions with State Capital Requirements, and
its preliminary policyholder position was $1.3 billion above the required MPP of
$1.1 billion. In calculating our
risk-to-capital ratio and MPP, we are allowed full credit for the
risk ceded under our reinsurance transaction 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 agreement, 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 June 30, 2016, the preliminary
risk-to-capital ratio of our combined insurance operations (which
includes reinsurance affiliates) was 13.2 to 1. Reinsurance
transactions with affiliates 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 affiliates, additional
capital contributions to the reinsurance affiliates could be
needed.
The NAIC previously announced that it plans to revise the
minimum capital and surplus requirements for mortgage insurers that
are provided for in its Mortgage Guaranty Insurance Model Act. In
May 2016, a working group of state
regulators released an exposure draft of a risk-based capital
framework to establish capital requirements for mortgage insurers,
although no date has been established by which the NAIC must
propose revisions to the capital requirements. We are currently
evaluating the impact of the framework contained in the exposure
draft, including the potential impact of certain items that have
not yet been completely addressed by the framework which include:
the treatment of ceded risk, minimum capital floors, and action
level triggers.
While MGIC currently meets the State Capital Requirements of
Wisconsin and all other
jurisdictions, it could be prevented from writing new business in
the future in all jurisdictions if it fails to meet the State
Capital Requirements of Wisconsin,
or it could be prevented from writing new business in a particular
jurisdiction if it fails to meet the State Capital Requirements of
that jurisdiction, and in each case MGIC does not obtain a waiver
of such requirements. It is possible that regulatory action by one
or more jurisdictions, including those that do not have specific
State Capital Requirements, may prevent MGIC from continuing to
write new insurance in such jurisdictions. If we are unable to
write business in all jurisdictions, lenders may be unwilling to
procure insurance from us anywhere. In addition, a lender's
assessment of the future ability of our insurance operations to
meet the State Capital Requirements or the PMIERs may affect its
willingness to procure insurance from us. In this regard, see our
risk factor titled "Competition or changes in our relationships
with our customers could reduce our revenues, reduce our premium
yields and/or increase our losses." A possible future failure
by MGIC to meet the State Capital Requirements or the PMIERs will
not necessarily mean that MGIC lacks sufficient resources to pay
claims on its insurance liabilities. While we believe MGIC has
sufficient claims paying resources to meet its claim obligations on
its insurance in force on a timely basis, you should read the rest
of these risk factors for information about matters that could
negatively affect MGIC's claims paying resources.
Downturns in the domestic economy or declines in the value
of borrowers' homes from their value at the time their loans closed
may result in more homeowners defaulting and our losses increasing,
with a corresponding decrease in our returns.
Losses result from events that reduce a borrower's ability or
willingness to continue to make mortgage payments, such as
unemployment, health issues, family status, and whether the home of
a borrower who defaults on his mortgage can be sold for an amount
that will cover unpaid principal and interest and the expenses of
the sale. In general, favorable economic conditions reduce the
likelihood that borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of homes, thereby
reducing and in some cases even eliminating a loss from a mortgage
default. A deterioration in economic conditions, including an
increase in unemployment, generally increases the likelihood that
borrowers will not have sufficient income to pay their mortgages
and can also adversely affect housing values, which in turn can
influence the willingness of borrowers with sufficient resources to
make mortgage payments to do so when the mortgage balance exceeds
the value of the home. Housing values may decline even absent a
deterioration in economic conditions due to declines in demand for
homes, which in turn may result from changes in buyers' perceptions
of the potential for future appreciation, restrictions on and the
cost of mortgage credit due to more stringent underwriting
standards, higher interest rates generally, changes to the
deductibility of mortgage interest for income tax purposes, or
other factors. Changes in housing values and unemployment levels
are inherently difficult to forecast given the uncertainty in the
current market environment, including uncertainty about the effect
of actions the federal government has taken and may take with
respect to tax policies, mortgage finance programs and policies,
and housing finance reform.
The mix of business we write affects our Minimum Required
Assets under the PMIERs, our premium yields and the likelihood of
losses occurring.
The Minimum Required Assets under the PMIERs are, in part, a
function of the direct risk-in-force and the risk profile of the
loans we insure, considering loan-to-value ratio, credit score,
vintage, HARP status and delinquency status; and whether the loans
were insured under lender-paid mortgage insurance policies or other
policies that are not subject to automatic termination consistent
with the Homeowners Protection Act requirements for borrower paid
mortgage insurance. Therefore, if our direct risk-in-force
increases through increases in new insurance written, or if our mix
of business changes to include loans with higher loan-to-value
ratios or lower FICO scores, for example, or if we insure more
loans under lender-paid mortgage insurance policies, 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 factors, including property location,
loan-to-value ratio and credit score; general underwriting quality
in the market at the time of loan origination; the age of the loan;
and the premium rate we charge. Depending on the provisions of the
capital requirements when they are released in final form and
become effective, our mix of business may affect the minimum
capital we are required to hold under the new framework.
Beginning in 2014, we have increased the percentage of our
business from lender-paid single premium policies. Depending on the
actual life of a single premium policy and its premium rate
relative to that of a monthly premium policy, a single premium
policy may generate more or less premium than a monthly premium
policy over its life. Currently, we expect to receive less lifetime
premium from a new lender-paid single premium policy than we would
from a new borrower-paid monthly premium policy.
We entered into a quota share reinsurance transaction with a
group of unaffiliated reinsurers that was restructured effective
July 1, 2015. Although the
transaction reduces our premiums, it has a lesser impact on our
overall results, as losses ceded under the transaction reduce our
losses incurred and the ceding commission we receive reduces our
underwriting expenses. The net cost of reinsurance, with respect to
a covered loan, is 6% (but can be lower if losses are materially
higher than we expect). This cost is derived by dividing the
reduction in our pre-tax net income from such loan with reinsurance
by our direct (that is, without reinsurance) premiums from such
loan. Although the net cost of the reinsurance is generally
constant at 6%, the effect of the reinsurance on the various
components of pre-tax income will vary from period to period,
depending on the level of ceded losses. The 2015 restructuring of
the reinsurance transaction caused volatility in our 2015 premium
yield and we expect it to modestly reduce our premium yield in
2016.
In addition to the effect of reinsurance on our premium yield,
we expect a modest decline in premium yield resulting from the
premium rates themselves: the books we wrote before 2009, which
have a higher average premium rate than subsequent books, are
expected to continue to decline as a percentage of the insurance in
force; and the average premium rate on these books is also expected
to decline as the premium rates reset to lower levels at the time
the loans reach the ten-year anniversary of their initial coverage
date. However, for loans that have utilized HARP, the initial
ten-year period was reset to begin as of the date of the HARP
transaction. As of June 30, 2016,
approximately 4%, 8% and 3% of our primary risk in force was
written in 2006, 2007, and 2008, respectively, was not 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. The Gold Cert Endorsement
is filed as Exhibit 99.7 to our quarterly report on Form 10-Q for
the quarter ended March 31, 2012
(filed with the SEC on May 10,
2012).
To comply with requirements of the GSEs, in 2014 we introduced a
new master policy. Our rescission rights under our new 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 new 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 new master
policy. As of June 30, 2016,
approximately 55% of our flow, primary insurance in force was
written under our Gold Cert Endorsement or our new master
policy.
From time to time, in response to market conditions, we change
the types of loans that we insure and the requirements under which
we insure them. We also change our underwriting guidelines, in part
through aligning some of them with Fannie Mae and Freddie Mac for
loans that receive and are processed in accordance with certain
approval recommendations from a GSE automated underwriting system.
As a result of changes to our underwriting guidelines and
requirements and other factors, our business written beginning in
the second half of 2013 is expected to have a somewhat higher claim
incidence than business written in 2009 through the first half of
2013. However, we believe this business presents an acceptable
level of risk. Our underwriting requirements are available on our
website at http://www.mgic.com/underwriting/ index.html. We
monitor the competitive landscape and will make adjustments to our
pricing and underwriting guidelines as warranted. We also make
exceptions to our underwriting requirements on a loan-by-loan basis
and for certain customer programs. Together, the number of loans
for which exceptions were made accounted for fewer than 2% of the
loans we insured in each of 2015 and the first half of 2016.
Even when housing values are stable or rising, mortgages with
certain characteristics have higher probabilities of claims. These
characteristics include loans with higher loan-to-value ratios,
lower FICO scores, limited underwriting, including limited borrower
documentation, or higher total debt-to-income ratios, as well as
loans having combinations of higher risk factors. As of
June 30, 2016, approximately 15.2% of
our primary risk in force consisted of loans with loan-to-value
ratios greater than 95%, 4.2% had FICO scores below 620, and 4.2%
had limited underwriting, including limited borrower documentation,
each attribute as determined at the time of loan origination. A
material number of these loans were originated in 2005 - 2007 or
the first half of 2008. For information about our classification of
loans by FICO score and documentation, see footnotes (1) and (2) to
the composition of primary default inventory table under "Results
of Consolidated Operations – Losses – Losses incurred" in
Management's Discussion and Analysis of Financial Condition and
Results of Operations in our Annual Report on Form 10-K filed with
the SEC on February 26, 2016.
As of June 30, 2016, approximately
2% of our primary risk in force consisted of adjustable rate
mortgages in which the initial interest rate may be adjusted during
the five years after the mortgage closing ("ARMs"). We classify as
fixed rate loans adjustable rate mortgages in which the initial
interest rate is fixed during the five years after the mortgage
closing. If interest rates should rise between the time of
origination of such loans and when their interest rates may be
reset, claims on ARMs and adjustable rate mortgages whose interest
rates may only be adjusted after five years would be substantially
higher than for fixed rate loans. In addition, we have insured
"interest-only" loans, which may also be ARMs, and loans with
negative amortization features, such as pay option ARMs. We believe
claim rates on these loans will be substantially higher than on
loans without scheduled payment increases that are made to
borrowers of comparable credit quality.
Although we attempt to incorporate these higher expected claim
rates into our underwriting and pricing models, there can be no
assurance that the premiums earned and the associated investment
income will be adequate to compensate for actual losses even under
our current underwriting requirements. We do, however, believe that
our insurance written beginning in the second half of 2008 will
generate underwriting profits.
The premiums we charge may not be adequate to compensate
us for our liabilities for losses and as a result any inadequacy
could materially affect our financial condition and results of
operations.
We set premiums at the time a policy is issued based on our
expectations regarding likely performance of the insured risks over
the long-term. Our premiums are subject to approval by state
regulatory agencies, which can delay or limit our ability to
increase our premiums. Generally, we cannot cancel mortgage
insurance coverage or adjust renewal premiums during the life of a
mortgage insurance policy. As a result, higher than anticipated
claims generally cannot be offset by premium increases on policies
in force or mitigated by our non-renewal or cancellation of
insurance coverage. The premiums we charge, and the associated
investment income, may not be adequate to compensate us for the
risks and costs associated with the insurance coverage provided to
customers. An increase in the number or size of claims, compared to
what we anticipate, could adversely affect our results of
operations or financial condition. Our premium rates are also based
in part on the amount of capital we are required to hold against
the insured risk. If the amount of capital we are required to hold
increases from the amount we were required to hold when a policy
was written, we cannot adjust premiums to compensate for this and
our returns may be lower than we assumed.
The losses we have incurred on our 2005-2008 books have exceeded
our premiums from those books. Our current expectation is that the
incurred losses from those books, although declining, will continue
to generate a material portion of our total incurred losses for a
number of years. The ultimate amount of these losses will depend in
part on general economic conditions, including unemployment, and
the direction of home prices.
We are susceptible to disruptions in the servicing of
mortgage loans that we insure.
We depend on reliable, consistent third-party servicing of the
loans that we insure. Over the last several years, the mortgage
loan servicing industry has experienced consolidation and an
increase in the number of specialty servicers servicing delinquent
loans. The resulting change in the composition of servicers could
lead to disruptions in the servicing of mortgage loans covered by
our insurance policies. Further changes in the servicing industry
resulting in the transfer of servicing could cause a disruption in
the servicing of delinquent loans which could reduce servicers'
ability to undertake mitigation efforts that could help limit our
losses. Future housing market conditions could lead to additional
increases in delinquencies and transfers of servicing.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the length of time
that our policies remain in force.
The premium from a single premium policy is collected upfront
and generally earned over the estimated life of the policy. In
contrast, premiums from a monthly premium policy are received and
earned each month over the life of the policy. In each year, most
of our premiums received are from insurance that has been written
in prior years. As a result, the length of time insurance remains
in force, which is also generally referred to as persistency, is a
significant determinant of our revenues. Future premiums on our
monthly premium policies in force represent a material portion of
our claims paying resources and a low persistency rate will reduce
those future premiums. In contrast, a higher than expected
persistency rate will decrease the profitability from single
premium policies because they will remain in force longer than was
estimated when the policies were written.
The monthly premium policies for the substantial majority of
loans we insured provides that, for the first ten years of the
policy, the premium is determined by the product of the premium
rate and the initial loan balance; thereafter, a lower premium rate
is applied to the initial loan balance. The initial ten-year period
is reset when the loan is refinanced under HARP. The premiums on
many of the policies in our 2005 book that were not refinanced
under HARP reset in 2015 and the premiums on many of the policies
in our 2006 book that were not refinanced under HARP will reset in
2016. As of June 30, 2016,
approximately 4%, 8% and 3% of our primary risk-in-force was
written in 2006, 2007 and 2008, respectively, was not refinanced
under HARP, and is subject to a rate reset after ten years.
Our persistency rate was 79.6% at June
30, 2016, compared to 79.7% at December 31, 2015 and 82.8% at December 31, 2014. Since 2000, our year-end
persistency ranged from a high of 84.7% at December 31, 2009 to a low of 47.1% at
December 31, 2003.
Our persistency rate is primarily affected by the level of
current mortgage interest rates compared to the mortgage coupon
rates on our insurance in force, which affects the vulnerability of
the insurance in force to refinancing. Our persistency rate is also
affected by mortgage insurance cancellation policies of mortgage
investors along with the current value of the homes underlying the
mortgages in the insurance in force.
Your ownership in our company may be diluted by additional
capital that we raise or if the holders of our outstanding
convertible debt convert that debt into shares of our common
stock.
As noted above under our risk factor titled "We may not
continue to meet the GSEs' private mortgage insurer eligibility
requirements and our returns may decrease as we are required to
maintain more capital in order to maintain our eligibility,"
although we are currently in compliance with the requirements of
the PMIERs, there can be no assurance that we would not seek to
issue non-dilutive debt capital or to raise additional equity
capital to manage our capital position under the PMIERs or for
other purposes. Any future issuance of equity securities may dilute
your ownership interest in our company. In addition, the market
price of our common stock could decline as a result of sales of a
large number of shares or similar securities in the market or the
perception that such sales could occur.
At June 30, 2016, we had
$257 million principal amount of 9%
Convertible Junior Subordinated Debentures outstanding. The
principal amount of the debentures is currently convertible, at the
holder's option, at an initial conversion rate, which is subject to
adjustment, of 74.0741 common shares per $1,000 principal amount of debentures. This
represents an initial conversion price of approximately
$13.50 per share. We have the right,
and may elect, to defer interest payable under the debentures in
the future. If a holder elects to convert its debentures, the
interest that has been deferred on the debentures being converted
is also convertible into shares of our common stock. The conversion
rate for such deferred interest is based on the average price that
our shares traded at during a 5-day period immediately prior to the
election to convert the associated debentures. We may elect to pay
cash for some or all of the shares issuable upon a conversion of
the debentures.
At June 30, 2016, we also had
$145 million principal amount of 5%
Convertible Senior Notes and $500
million principal amount of 2% Convertible Senior Notes
outstanding. The 5% Convertible Senior Notes are convertible, at
the holder's option, at an initial conversion rate, which is
subject to adjustment, of 74.4186 shares per $1,000 principal amount at any time prior to the
maturity date. This represents an initial conversion price of
approximately $13.44 per share. Prior
to January 1, 2020, the 2%
Convertible Senior Notes are convertible only upon satisfaction of
one or more conditions. One such condition is that conversion may
occur during any calendar quarter commencing after March 31, 2014, if the last reported sale price
of our common stock for each of at least 20 trading days during the
30 consecutive trading days ending on, and including, the last
trading day of the immediately preceding calendar quarter is
greater than or equal to 130% of the applicable conversion price on
each applicable trading day. The notes are convertible at an
initial conversion rate, which is subject to adjustment, of
143.8332 shares per $1,000 principal
amount. This represents an initial conversion price of
approximately $6.95 per share. 130%
of such conversion price is $9.03. On
or after January 1, 2020, holders may
convert their notes irrespective of satisfaction of the conditions.
We do not have the right to defer interest on our Convertible
Senior Notes. For a discussion of the dilutive effects of our
convertible securities on our earnings per share, see Note 6 –
"Summary of Significant Accounting Policies Earnings per Share" to
our consolidated financial statements in our Quarterly Report on
Form 10-Q filed with the SEC on May 6,
2016.
Our holding company debt obligations materially exceed our
holding company cash and investments.
At June 30, 2016, we had
approximately $217 million in cash
and investments at our holding company and our holding company's
debt obligations were $1,035 million
in aggregate principal amount, consisting of $145 million of 5% Convertible Senior Notes due
in 2017, $500 million of 2%
Convertible Senior Notes due in 2020 and $390 million of 9% Convertible Junior
Subordinated Debentures due in 2063 (of which approximately
$133 million was purchased by and is
held by MGIC, and is eliminated on the consolidated balance sheet).
Annual debt service on the outstanding holding company debt as of
June 30, 2016, is approximately
$52 million (of which approximately
$12 million will be paid to MGIC and
will be eliminated on the consolidated income statement). For more
information about the purchase by MGIC of a portion of our
outstanding 9% Convertible Junior Subordinated Debentures, see
"Management's Discussion and Analysis – Debt at Our Holding Company
and Holding Company Capital Resources" in our Annual Report on Form
10-K filed with the SEC on February 26,
2016. We have from time to time purchased our debt
securities, including as recently as June of 2016, and may continue
to do so in the future. 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.
The Convertible Senior Notes and Convertible Junior Subordinated
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 and OCI authorization is required for MGIC to pay
dividends. In each of April and June of 2016, MGIC paid
$16 million dividends to our holding
company, its first dividends since 2008, and we expect to continue
to receive quarterly dividends. If any additional capital
contributions to our subsidiaries were required, such contributions
would decrease our holding company cash and investments.
We could be adversely affected if personal information on
consumers that we maintain is improperly disclosed and our
information technology systems may become outdated and we may not
be able to make timely modifications to support our products and
services.
We rely on the efficient and uninterrupted operation of complex
information technology systems. All information technology systems
are potentially vulnerable to damage or interruption from a variety
of sources. As part of our business, we maintain large amounts of
personal information on consumers. While we believe we have
appropriate information security policies and systems to prevent
unauthorized disclosure, there can be no assurance that
unauthorized disclosure, either through the actions of third
parties or employees, will not occur. Unauthorized disclosure could
adversely affect our reputation and expose us to material claims
for damages.
In addition, we are in the process of upgrading certain of our
information systems that have been in place for a number of years.
The implementation of these technological improvements is complex,
expensive and time consuming. If we fail to timely and successfully
implement the new technology systems, or if the systems do not
operate as expected, it could have an adverse impact on our
business, business prospects and results of operations.
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SOURCE MGIC Investment Corporation