Note 1 – Nature of Business and Basis of Presentation
MGIC Investment Corporation is a holding company which, through Mortgage Guaranty Insurance Corporation (“MGIC”) is principally engaged in the mortgage insurance business. We provide mortgage insurance to lenders throughout the United States and to government sponsored entities to protect against loss from defaults on low down payment residential mortgage loans.
The accompanying unaudited consolidated financial statements of MGIC Investment Corporation and its wholly-owned subsidiaries have been prepared in accordance with the instructions to Form 10-Q as prescribed by the Securities and Exchange Commission (“SEC”) for interim reporting and do not include all of the other information and disclosures required by accounting principles generally accepted in the United States of America (“GAAP”). These statements should be read in conjunction with the consolidated financial statements and notes thereto for the year ended
December 31, 2015
included in our Annual Report on Form 10-K. As used below, “we,” “our” and “us” refer to MGIC Investment Corporation’s consolidated operations or to MGIC Investment Corporation, as the context requires.
In the opinion of management the accompanying financial statements include all adjustments, consisting primarily of normal recurring accruals, necessary to fairly state our consolidated financial position and consolidated results of operations for the periods indicated. The consolidated results of operations for the interim period may not be indicative of the results that may be expected for the year ending
December 31, 2016
.
Reclassifications
Certain reclassifications have been made in the accompanying financial statements to 2015 amounts to conform to 2016 presentation. See Note 2 - “New Accounting Pronouncements” for a discussion of our adoption of accounting guidance related to the presentation of debt issuance costs in the first quarter of 2016, with retrospective application to prior periods.
Subsequent events
We have considered subsequent events through the date of this filing.
Note 2 – New Accounting Pronouncements
Adopted Accounting Standards
Presentation of Debt Issuance Costs
In April 2015, the Financial Accounting Standards Board (“FASB”) issued updated guidance related to the presentation of debt issuance costs. The new standard requires the presentation of debt issuance costs in the balance sheet as a deduction from the carrying amount of the related debt liability instead of a deferred charge, consistent with the treatment of debt discounts. The updated guidance was effective for reporting periods beginning after December 15, 2015. The adoption of this guidance as of March 31, 2016 has been applied retrospectively to prior periods. See Note 3 - “Debt” for the reclassification made to our consolidated balance sheet as of December 31, 2015. The adoption of this guidance had no impact on our statements of operations or retained earnings.
Accounting for Share-Based Compensation When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period
In June 2014, the FASB issued updated guidance to resolve diversity in practice concerning employee shared-based compensation that contains performance targets that could be achieved after the requisite service period. No explicit guidance on how to account for these types of performance share-based compensation awards existed prior to this update. The updated guidance requires that a performance target that affects vesting and that can be achieved after the requisite service period be treated as a performance condition. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the periods for which service has been rendered. If the performance target becomes probable of being achieved before the end of the service period, the remaining unrecognized compensation cost for which requisite service has not yet been rendered is recognized prospectively over the remaining service period. The total amount of compensation cost recognized during and after the service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The updated guidance was effective for reporting periods after December 15, 2015. The adoption of this guidance as of March 31, 2016, with application to awards granted during the first quarter of 2016, is not expected to have a material impact on our consolidated financial statements.
Prospective Accounting Standards
Improvements to Employee Share-Based Compensation Accounting
In March 2016, the FASB issued updated guidance that simplifies several aspects of the accounting for employee share-based compensation including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification of related amounts within the statement of cash flows. The updated guidance requires that, prospectively, all tax effects related to share-based compensation be made through the statement of operations at the time of settlement as opposed to excess tax benefits being recognized in paid-in capital under the current guidance. The updated guidance also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based compensation are to be reported as operating activities on the statement of cash flows, a change from the existing requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, for tax withholding purposes, entities will be allowed to withhold an amount of shares up to the employee’s maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach. The updated guidance is effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. We are currently evaluating the impacts the adoption of this guidance will have on our consolidated financial statements.
Recognition and Measurement of Financial Assets and Financial Liabilities
In January 2016, the FASB issued updated guidance to address the recognition, measurement, presentation, and disclosure of certain financial instruments. The updated guidance requires equity investments, except those accounted for under the equity method of accounting, that have a readily determinable fair value to be measured at fair value with changes in fair value recognized in net income. Equity investments that do not have readily determinable fair values may be remeasured at fair value either upon the occurrence of an observable price change or upon identification of an impairment. A qualitative assessment for impairment is required for equity investments without readily determinable fair values. The updated guidance also eliminates the requirement to disclose the method and significant assumptions used to estimate the fair value of financial instruments measured at amortized cost on the balance sheet. The updated guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods and will require recognition of a cumulative effect adjustment at adoption. We do not currently expect the adoption
of this guidance to impact our consolidated financial position or liquidity.
Disclosures about Short-Duration Contracts
In May 2015, the FASB issued updated guidance requiring expanded disclosures for insurance entities that issue short-duration contracts. The expanded disclosures are designed to provide additional insight into an insurance entity’s ability to underwrite and anticipate costs associated with claims. The disclosures include information about incurred and paid claims development, on a net of reinsurance basis, for the number of years claims incurred typically remain outstanding, not to exceed ten years. Each period presented in the disclosure about claims development that precedes the current reporting periods is considered supplementary information. The expanded disclosures also include more transparent information about significant changes in methodologies and assumptions used to estimate claims, and the timing, frequency, and severity of claims. The disclosures required by this update are effective for annual periods beginning after December 31, 2015, and interim periods within annual periods beginning after December 31, 2016, and is to be applied retrospectively. We are evaluating the applicability and impact, if any, of the new disclosure requirements.
Note 3 – Debt
2016 debt transactions
During the first quarter of 2016, market conditions allowed us to complete a series of transactions that repositioned the maturity profile of our debt and lowered our interest expense. These transactions, including the amounts and accounting impacts, are discussed below.
5% Convertible Senior Notes
During the first quarter of 2016, we purchased
$138.3 million
in par value of our 5% Convertible Senior Notes (the “5% Notes”) due in 2017 at a purchase price of
$143.4 million
, plus accrued interest using funds held at our holding company. The excess of the purchase price over par value is reflected as a loss on debt extinguishment and outstanding debt issuance costs on the purchased debt were recognized as interest expense on our consolidated statement of operations for the
three
months ended
March 31, 2016
. The purchases of the 5% Notes reduced our potentially dilutive shares by approximately
10.3 million
shares.
9% Convertible Junior Subordinated Debentures
In February 2016, MGIC purchased
$132.7 million
of par value of our 9% Convertible Junior Subordinated Debentures (the “9% Debentures”) due in 2063 at a purchase price of
$150.7 million
, plus accrued interest. The 9% Debentures include a conversion feature that allows us, at our option, to make a cash payment to converting holders in lieu of issuing shares of common stock upon conversion of the 9% Debentures. The accounting standards applicable to extinguishment of debt with a cash conversion feature require the consideration paid to be allocated between the extinguishment of the liability component and reacquisition of the equity component. The purchase of the 9% Debentures resulted in an
$8.3 million
loss on debt extinguishment on the consolidated statement of operations for the three months ended
March 31, 2016
, which represents the difference between the fair value and the carrying value of the liability component on the purchase date. In addition, our shareholders’ equity was separately reduced by
$9.8 million
related to the reacquisition of the equity component. For GAAP accounting purposes, the 9% Debentures owned by MGIC are considered retired and are eliminated in our consolidated financial statements and the underlying common stock equivalents, approximately
9.8 million
shares, are not included in the computation of diluted shares.
Federal Home Loan Bank Advance
In February 2016, MGIC borrowed
$155.0 million
in the form of a fixed rate advance from the Federal Home Loan Bank (“FHLB”) (the “Advance”) to provide funds used to purchase the 9% Debentures. Interest on the Advance is payable monthly at an annual rate, fixed for the term of the Advance, of
1.91%
. The principal of the Advance matures on February 10, 2023. MGIC may prepay the Advance at any time. Such prepayment would be below par if interest rates have risen after the Advance was originated, or above par if interest rates have declined. The Advance is secured by eligible collateral whose market value must be maintained at
102%
of the principal balance of the Advance. MGIC provided eligible collateral from its investment portfolio.
Accounting standard update
As of March 31, 2016 we adopted the accounting update related to the presentation of debt issuance costs in the financial statements. The change in accounting guidance has been applied retrospectively to prior periods. As a result, a reclassification of approximately
$11.2 million
of debt issuance costs was made on our December 31, 2015 balance sheet, resulting in a reduction to other assets and a reduction to long-term debt; there was no impact on our consolidated statement of operations or retained earnings.
MGIC Investment Corporation - Q1 2016
|
12
Note 4 – Reinsurance
The effect of all reinsurance agreements on premiums earned and losses incurred is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Premiums earned:
|
|
|
|
|
Direct
|
|
$
|
255,387
|
|
|
$
|
245,748
|
|
Assumed
|
|
208
|
|
|
338
|
|
Ceded
|
|
(34,254
|
)
|
|
(28,798
|
)
|
Net premiums earned
|
|
$
|
221,341
|
|
|
$
|
217,288
|
|
|
|
|
|
|
Losses incurred:
|
|
|
|
|
Direct
|
|
$
|
92,432
|
|
|
$
|
88,036
|
|
Assumed
|
|
101
|
|
|
568
|
|
Ceded
|
|
(7,521
|
)
|
|
(6,819
|
)
|
Net losses incurred
|
|
$
|
85,012
|
|
|
$
|
81,785
|
|
Quota share reinsurance
Effective July 1, 2015, we entered into a quota share reinsurance agreement (“2015 QSR Transaction”) and commuted our prior 2013 quota share reinsurance agreement (“2013 QSR Transaction”). The group of unaffiliated reinsurers are the same under our 2015 QSR Transaction as our prior 2013 QSR Transaction and each has an insurer financial strength rating of A- or better by Standard and Poor’s Rating Services, A.M. Best or both. The 2015 QSR Transaction provides coverage on policies that were in the 2013 QSR Transaction; additional qualifying in force policies as of the agreement effective date which either had no history of defaults, or where a single default had been cured for twelve or more months at the agreement effective date; and all qualifying new insurance written through December 31, 2016. The agreement cedes losses incurred and premiums on or after the effective date through December 31, 2024, at which time the agreement expires.
The 2015 QSR Transaction increased the amount of our insurance in force covered by reinsurance and will result in an increase in the amount of premiums and losses ceded. A higher level of losses ceded will reduce our profit commission and in turn will reduce our premium yield. Early termination of the agreement can be elected by us effective December 31, 2018 for a fee, or under specified scenarios for
no
fee upon prior written notice, including if we will receive less than
90%
of the full credit amount under the private mortgage insurer eligibility requirements (“PMIERs”) of Fannie Mae and Freddie Mac (collectively, the “GSEs”) for the risk ceded in any required calculation period. The structure of the 2015 QSR Transaction is a
30%
quota share for all policies covered, with a
20%
ceding commission as well as a profit commission. Generally, under the 2015 QSR Transaction, we will receive a profit commission provided that the loss ratio on the loans covered under the agreement remains below
60%
.
A summary of our quota share reinsurance agreements, excluding captive agreements, for the
three
months ended
March 31,
2016
and
2015
appears as follows.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
2013 QSR Transaction
|
|
|
|
|
Ceded premiums written, net of profit commission
|
|
n/a
|
|
|
$
|
27,136
|
|
Ceded premiums earned, net of profit commission
|
|
n/a
|
|
|
24,613
|
|
Ceded losses incurred
|
|
n/a
|
|
|
4,873
|
|
Ceding commissions
(2)
|
|
n/a
|
|
|
10,122
|
|
Profit commission
|
|
n/a
|
|
|
23,474
|
|
|
|
|
|
|
2015 QSR Transaction (Effective July 1, 2015)
|
|
Ceded premiums written, net of profit commission
(1)
|
|
$
|
31,666
|
|
|
n/a
|
|
Ceded premiums earned, net of profit commission
(1)
|
|
31,666
|
|
|
n/a
|
|
Ceded losses incurred
|
|
8,513
|
|
|
n/a
|
|
Ceding commissions
(2)
|
|
11,576
|
|
|
n/a
|
|
Profit commission
|
|
26,215
|
|
|
n/a
|
|
|
|
(1)
|
Effective July 1, 2015 premiums are ceded on an earned and received basis as defined in our 2015 QSR Transaction.
|
|
|
(2)
|
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements of operations.
|
Under the terms of the 2015 QSR Transaction, reinsurance premiums, ceding commission and profit commission are settled net on a quarterly basis. The reinsurance premium due after deducting the related ceding commission and profit commission is reported within “Other liabilities” on the consolidated balance sheets.
The reinsurance recoverable on loss reserves related to our 2015 QSR Transaction was
$18 million
as of
March 31, 2016
and
$11 million
as of
December 31, 2015
. The reinsurance recoverable balance is secured by funds on deposit from the reinsurers which are based on the funding requirements of PMIERs that address ceded risk.
Captive reinsurance
In the past, MGIC also obtained captive reinsurance. In a captive reinsurance arrangement, the reinsurer is affiliated with the lender for whom MGIC provides mortgage insurance. As part of our settlement with the Consumer Financial Protection Bureau (“CFPB”) in 2013 and with the Minnesota Department of Commerce (the “MN Department”) in 2015, discussed in Note 5 – “Litigation and Contingencies,” MGIC has agreed to not enter
13
|
MGIC Investment Corporation - Q1 2016
into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of
ten years
subsequent to the respective settlements. In accordance with the CFPB settlement, all of our active captive arrangements were placed into run-off. In addition, the GSEs will not approve any future reinsurance or risk sharing transaction with a mortgage enterprise or an affiliate of a mortgage enterprise.
Captive agreements were generally written on an annual book of business and each captive reinsurer is required to maintain a separate trust account to support its combined reinsured risk on all annual books. MGIC is the sole beneficiary of the trusts, and the trust accounts are made up of capital deposits by the captive reinsurers, premium deposits by MGIC, and investment income earned. The reinsurance recoverable on loss reserves related to captive agreements was
$23 million
as of
March 31, 2016
which was supported by
$123 million
of trust assets, while as of
December 31, 2015
, the reinsurance recoverable on loss reserves related to captive agreements was
$34 million
, which was supported by
$137 million
of trust assets.
Note 5 – Litigation and Contingencies
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 quarter of 2016, curtailments reduced our average claim paid by approximately
6.7%
and
5.1%
, respectively. After we pay a claim, servicers and insureds sometimes object to our curtailments and other adjustments.
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.
If 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 a settlement agreement or litigation becomes probable and can be reasonably estimated, we consider our claim payment or rescission resolved for financial reporting purposes even though discussions and legal proceedings may have been initiated and are ongoing. 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. The estimated impact that we have recorded is our best estimate of our loss from these matters. 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 the probable settlements for which we have recorded a 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 we will ultimately resolve these matters for significantly less than this amount.
This estimate includes the maximum exposure for losses that we have determined are probable in excess of the provision we have recorded for such losses. The estimates of our maximum exposure referred to above do not include interest or consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved in litigation alleging 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. MGIC’s settlement of class action litigation against it under RESPA became final in 2003. MGIC settled the named plaintiffs’ claims in litigation against it under FCRA in 2004, following denial of class certification. Beginning in 2011, MGIC, together with various mortgage lenders and other mortgage insurers, was named as a defendant in
twelve
lawsuits, alleged to be class actions, filed in various U.S. District Courts. The complaints in all of the cases alleged various causes of action related to the captive mortgage reinsurance arrangements of the mortgage lenders, including that the lenders’ captive reinsurers received excessive premiums in relation to the risk assumed by those captives, thereby violating RESPA. As of 2015, MGIC had been dismissed from all
twelve
cases. There can be no assurance that we will not be subject to further litigation under RESPA (or FCRA) or that the outcome of any such litigation would not have a material adverse effect on us.
In 2013, we entered into a settlement with the CFPB that resolved a federal investigation of MGIC’s participation in captive reinsurance arrangements without the CFPB or a court making any findings of wrongdoing. As part of the settlement, MGIC agreed that it would not enter into any new captive reinsurance agreement or reinsure any new loans under any existing captive reinsurance agreement for a period of
ten years
. MGIC had voluntarily suspended most of its captive arrangements in 2008 in response to market conditions and GSE requests. In connection with the settlement, MGIC paid a civil penalty of
$2.65 million
MGIC Investment Corporation - Q1 2016
|
14
and the court issued an injunction prohibiting MGIC from violating any provisions of RESPA.
In 2015, MGIC executed a Consent Order with the MN Department that resolved that department’s investigation of captive reinsurance matters without making any findings of wrongdoing. The Consent Order provided, among other things, that MGIC is prohibited from entering into any new captive reinsurance agreement or reinsuring any new loans under any existing captive reinsurance agreement for a period of
ten years
.
Various regulators, including the CFPB, state insurance commissioners and state attorneys general may bring other actions seeking various forms of relief in connection with alleged violations of RESPA. The insurance law provisions of many states prohibit paying for the referral of insurance business and provide various mechanisms to enforce this prohibition. While we believe our practices are in conformity with applicable laws and regulations, it is not possible to predict the eventual scope, duration or outcome of any such reviews or investigations nor is it possible to predict their effect on us or the mortgage insurance industry.
Through a non-insurance subsidiary, we utilize our underwriting skills to provide an outsourced underwriting service to our customers known as contract underwriting. As part of the contract underwriting activities, that subsidiary is responsible for the quality of the underwriting decisions in accordance with the terms of the contract underwriting agreements with customers. That subsidiary may be required to provide certain remedies to its customers if certain standards relating to the quality of our underwriting work are not met, and we have an established reserve for such future obligations. Claims for remedies may be made a number of years after the underwriting work was performed. Beginning in the second half of 2009, our subsidiary experienced an increase in claims for contract underwriting remedies, which continued throughout 2012. The underwriting remedy expense for 2015 was approximately
$1 million
, but may increase in the future.
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.
See Note 11 – “Income Taxes” for a description of federal income tax contingencies.
Note 6 – Earnings per Share
Basic earnings per share (“EPS”) is calculated by dividing net income by the weighted average number of common shares outstanding during the reporting period. Diluted EPS includes the components of basic EPS and also gives effect to dilutive common equivalent shares outstanding during the reporting period. We calculate diluted EPS using the treasury stock method for unvested restricted stock, and the if-converted method for convertible debt instruments. For unvested restricted stock, assumed proceeds under the treasury stock method would include unamortized compensation expense and windfall tax benefits or shortfalls. The determination of potentially issuable shares from our convertible debt instruments does not consider satisfaction of the conversion requirements and the shares are included in the determination of diluted EPS as of the beginning of the period, if dilutive. In addition, interest expense, net of tax, related to dilutive convertible debt instruments is added back to earnings in calculating diluted EPS.
15
|
MGIC Investment Corporation - Q1 2016
The following table reconciles the numerators and denominators used to calculate basic and diluted EPS and also indicates the number of antidilutive securities.
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands, except per share data)
|
|
2016
|
|
2015
|
Basic earnings per share:
|
|
|
|
|
Net income
|
|
$
|
69,191
|
|
|
$
|
133,076
|
|
Weighted average common shares outstanding
|
|
340,144
|
|
|
339,107
|
|
Basic income per share
|
|
$
|
0.20
|
|
|
$
|
0.39
|
|
|
|
|
|
|
Diluted earnings per share:
|
|
|
|
|
Net income
|
|
$
|
69,191
|
|
|
$
|
133,076
|
|
Interest expense, net of tax
(1)
:
|
|
|
|
|
2% Convertible Senior Notes due 2020
|
|
1,982
|
|
|
3,049
|
|
5% Convertible Senior Notes due 2017
|
|
2,678
|
|
|
4,692
|
|
9% Convertible Junior Subordinated Debentures due 2063
|
|
—
|
|
|
8,765
|
|
Diluted income available to common shareholders
|
|
$
|
73,851
|
|
|
$
|
149,582
|
|
|
|
|
|
|
Weighted average shares - basic
|
|
340,144
|
|
|
339,107
|
|
Effect of dilutive securities:
|
|
|
|
|
Unvested restricted stock units
|
|
1,679
|
|
|
2,569
|
|
2% Convertible Senior Notes due 2020
|
|
71,917
|
|
|
71,917
|
|
5% Convertible Senior Notes due 2017
|
|
17,625
|
|
|
25,674
|
|
9% Convertible Junior Subordinated Debentures due 2063
|
|
—
|
|
|
28,854
|
|
Weighted average shares - diluted
|
|
431,365
|
|
|
468,121
|
|
Diluted income per share
|
|
$
|
0.17
|
|
|
$
|
0.32
|
|
|
|
|
|
|
Antidilutive securities (in millions)
|
|
23.3
|
|
|
—
|
|
|
|
(1)
|
Due to the valuation allowance recorded against deferred tax assets, the three months ended March 31, 2015 were not tax effected. The three months ended March 31, 2016 have been tax effected at a rate of 35%.
|
MGIC Investment Corporation - Q1 2016
|
16
Note 7 – Investments
The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio at
March 31, 2016
and
December 31, 2015
are shown below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
(1)
|
|
Fair Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
147,189
|
|
|
$
|
2,474
|
|
|
$
|
(1,135
|
)
|
|
$
|
148,528
|
|
Obligations of U.S. states and political subdivisions
|
|
1,854,959
|
|
|
60,677
|
|
|
(2,506
|
)
|
|
1,913,130
|
|
Corporate debt securities
|
|
1,856,376
|
|
|
16,315
|
|
|
(18,484
|
)
|
|
1,854,207
|
|
Asset-backed securities
|
|
110,241
|
|
|
176
|
|
|
(89
|
)
|
|
110,328
|
|
Residential mortgage-backed securities
|
|
255,344
|
|
|
452
|
|
|
(5,155
|
)
|
|
250,641
|
|
Commercial mortgage-backed securities
|
|
220,719
|
|
|
1,678
|
|
|
(1,701
|
)
|
|
220,696
|
|
Collateralized loan obligations
|
|
61,350
|
|
|
25
|
|
|
(991
|
)
|
|
60,384
|
|
Total debt securities
|
|
4,506,178
|
|
|
81,797
|
|
|
(30,061
|
)
|
|
4,557,914
|
|
Equity securities
|
|
6,209
|
|
|
87
|
|
|
(7
|
)
|
|
6,289
|
|
Total investment portfolio
|
|
$
|
4,512,387
|
|
|
$
|
81,884
|
|
|
$
|
(30,068
|
)
|
|
$
|
4,564,203
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Amortized Cost
|
|
Gross Unrealized Gains
|
|
Gross Unrealized Losses
(1)
|
|
Fair Value
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
160,393
|
|
|
$
|
2,133
|
|
|
$
|
(1,942
|
)
|
|
$
|
160,584
|
|
Obligations of U.S. states and political subdivisions
|
|
1,766,407
|
|
|
33,410
|
|
|
(7,290
|
)
|
|
1,792,527
|
|
Corporate debt securities
|
|
2,046,697
|
|
|
2,836
|
|
|
(44,770
|
)
|
|
2,004,763
|
|
Asset-backed securities
|
|
116,764
|
|
|
56
|
|
|
(203
|
)
|
|
116,617
|
|
Residential mortgage-backed securities
|
|
265,879
|
|
|
161
|
|
|
(8,392
|
)
|
|
257,648
|
|
Commercial mortgage-backed securities
|
|
237,304
|
|
|
162
|
|
|
(3,975
|
)
|
|
233,491
|
|
Collateralized loan obligations
|
|
61,345
|
|
|
3
|
|
|
(1,148
|
)
|
|
60,200
|
|
Debt securities issued by foreign sovereign governments
|
|
29,359
|
|
|
2,474
|
|
|
(102
|
)
|
|
31,731
|
|
Total debt securities
|
|
4,684,148
|
|
|
41,235
|
|
|
(67,822
|
)
|
|
4,657,561
|
|
Equity securities
|
|
5,625
|
|
|
38
|
|
|
(18
|
)
|
|
5,645
|
|
Total investment portfolio
|
|
$
|
4,689,773
|
|
|
$
|
41,273
|
|
|
$
|
(67,840
|
)
|
|
$
|
4,663,206
|
|
|
|
(1)
|
At
March 31, 2016
and
December 31, 2015
, there were no other-than-temporary impairment losses recorded in other comprehensive income.
|
During the first quarter of 2016, we substantially liquidated our Australian entities and repatriated most assets, including proceeds from the monetization of our Australian investment portfolio. As of
March 31, 2016
we held no investments in foreign sovereign governments.
As discussed in Note 3 - “Debt” we are required to maintain collateral of at least
102%
of the outstanding principal balance of the Advance. As of March 31, 2016 we pledged eligible collateral with a total fair value of
$164.6 million
.
17
|
MGIC Investment Corporation - Q1 2016
The amortized cost and fair values of debt securities at
March 31, 2016
, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Because most asset-backed and mortgage-backed securities and collateralized loan obligations provide for periodic payments throughout their lives, they are listed below in separate categories.
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
(In thousands)
|
|
Amortized Cost
|
|
Fair Value
|
Due in one year or less
|
|
$
|
310,484
|
|
|
$
|
311,202
|
|
Due after one year through five years
|
|
1,265,465
|
|
|
1,278,045
|
|
Due after five years through ten years
|
|
1,120,853
|
|
|
1,122,243
|
|
Due after ten years
|
|
1,161,722
|
|
|
1,204,375
|
|
|
|
$
|
3,858,524
|
|
|
$
|
3,915,865
|
|
|
|
|
|
|
Asset-backed securities
|
|
110,241
|
|
|
110,328
|
|
Residential mortgage-backed securities
|
|
255,344
|
|
|
250,641
|
|
Commercial mortgage-backed securities
|
|
220,719
|
|
|
220,696
|
|
Collateralized loan obligations
|
|
61,350
|
|
|
60,384
|
|
Total as of March 31, 2016
|
|
$
|
4,506,178
|
|
|
$
|
4,557,914
|
|
At
March 31, 2016
and
December 31, 2015
, the investment portfolio had gross unrealized losses of
$30.1 million
and
$67.8 million
, respectively. For those securities in an unrealized loss position, the length of time the securities were in such a position, as measured by their month-end fair values, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
(In thousands)
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
|
Fair Value
|
|
Unrealized Losses
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
26,586
|
|
|
$
|
(1,094
|
)
|
|
$
|
2,998
|
|
|
$
|
(41
|
)
|
|
$
|
29,584
|
|
|
$
|
(1,135
|
)
|
Obligations of U.S. states and political subdivisions
|
|
105,443
|
|
|
(763
|
)
|
|
60,616
|
|
|
(1,743
|
)
|
|
166,059
|
|
|
(2,506
|
)
|
Corporate debt securities
|
|
350,566
|
|
|
(7,932
|
)
|
|
348,277
|
|
|
(10,552
|
)
|
|
698,843
|
|
|
(18,484
|
)
|
Asset-backed securities
|
|
29,107
|
|
|
(42
|
)
|
|
11,019
|
|
|
(47
|
)
|
|
40,126
|
|
|
(89
|
)
|
Residential mortgage-backed securities
|
|
14,548
|
|
|
(103
|
)
|
|
204,585
|
|
|
(5,052
|
)
|
|
219,133
|
|
|
(5,155
|
)
|
Commercial mortgage-backed securities
|
|
60,778
|
|
|
(925
|
)
|
|
56,126
|
|
|
(776
|
)
|
|
116,904
|
|
|
(1,701
|
)
|
Collateralized loan obligations
|
|
—
|
|
|
—
|
|
|
51,907
|
|
|
(991
|
)
|
|
51,907
|
|
|
(991
|
)
|
Equity securities
|
|
91
|
|
|
—
|
|
|
209
|
|
|
(7
|
)
|
|
300
|
|
|
(7
|
)
|
Total
|
|
$
|
587,119
|
|
|
$
|
(10,859
|
)
|
|
$
|
735,737
|
|
|
$
|
(19,209
|
)
|
|
$
|
1,322,856
|
|
|
$
|
(30,068
|
)
|
MGIC Investment Corporation - Q1 2016
|
18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Less Than 12 Months
|
|
12 Months or Greater
|
|
Total
|
(In thousands)
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
Fair Value
|
|
Unrealized
Losses
|
|
|
(In thousands)
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
60,548
|
|
|
$
|
(1,467
|
)
|
|
$
|
1,923
|
|
|
$
|
(475
|
)
|
|
$
|
62,471
|
|
|
$
|
(1,942
|
)
|
Obligations of U.S. states and political subdivisions
|
|
417,615
|
|
|
(6,404
|
)
|
|
37,014
|
|
|
(886
|
)
|
|
454,629
|
|
|
(7,290
|
)
|
Corporate debt securities
|
|
1,470,628
|
|
|
(38,519
|
)
|
|
114,982
|
|
|
(6,251
|
)
|
|
1,585,610
|
|
|
(44,770
|
)
|
Asset-backed securities
|
|
86,604
|
|
|
(173
|
)
|
|
5,546
|
|
|
(30
|
)
|
|
92,150
|
|
|
(203
|
)
|
Residential mortgage-backed securities
|
|
35,064
|
|
|
(312
|
)
|
|
209,882
|
|
|
(8,080
|
)
|
|
244,946
|
|
|
(8,392
|
)
|
Commercial mortgage-backed securities
|
|
134,488
|
|
|
(2,361
|
)
|
|
69,927
|
|
|
(1,614
|
)
|
|
204,415
|
|
|
(3,975
|
)
|
Collateralized loan obligations
|
|
—
|
|
|
—
|
|
|
51,750
|
|
|
(1,148
|
)
|
|
51,750
|
|
|
(1,148
|
)
|
Debt securities issued by foreign sovereign governments
|
|
4,463
|
|
|
(102
|
)
|
|
—
|
|
|
—
|
|
|
4,463
|
|
|
(102
|
)
|
Equity securities
|
|
355
|
|
|
(8
|
)
|
|
171
|
|
|
(10
|
)
|
|
526
|
|
|
(18
|
)
|
Total
|
|
$
|
2,209,765
|
|
|
$
|
(49,346
|
)
|
|
$
|
491,195
|
|
|
$
|
(18,494
|
)
|
|
$
|
2,700,960
|
|
|
$
|
(67,840
|
)
|
The unrealized losses in all categories of our investments at
March 31, 2016
and
December 31, 2015
were primarily caused by the difference in interest rates at each respective period, compared to interest rates at the time of purchase. There were
316
and
303
securities in an unrealized loss position at
March 31, 2016
and
December 31, 2015
, respectively.
During each of the
three
months ended
March 31, 2016
and
2015
there were no other-than-temporary impairments (“OTTI”) recognized.
The net realized investment gains on the investment portfolio are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Realized investment gains (losses) on investments:
|
|
|
|
|
Fixed maturities
|
|
$
|
3,054
|
|
|
$
|
26,324
|
|
Equity securities
|
|
2
|
|
|
3
|
|
Net realized investment gains
|
|
$
|
3,056
|
|
|
$
|
26,327
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Realized investment gains (losses) on investments:
|
|
|
|
|
Gains on sales
|
|
$
|
4,104
|
|
|
$
|
27,206
|
|
Losses on sales
|
|
(1,048
|
)
|
|
(879
|
)
|
Net realized investment gains
|
|
$
|
3,056
|
|
|
$
|
26,327
|
|
19
|
MGIC Investment Corporation - Q1 2016
Note 8 – Fair Value Measurements
Our estimates of fair value for financial assets and financial liabilities are based on the framework established in the fair value accounting guidance. The framework is based on the inputs used in valuation, gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations when available.
To determine the fair value of securities available-for-sale in Level 1 and Level 2 of the fair value hierarchy, independent pricing sources have been utilized. One price is provided per security based on observable market data. To ensure securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and methodologies of the independent pricing sources and believe that their policies adequately consider market activity, either based on specific transactions for the issue valued or based on modeling of securities with similar credit quality, duration, yield and structure that were recently traded. A variety of inputs are utilized by the independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes, issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including data published in market research publications. Inputs may be weighted differently for any security, and not all inputs are used for each security evaluation.
Market indicators, industry and economic events are also considered. This information is evaluated using a multidimensional pricing model. This model combines all inputs to arrive at a value assigned to each security. Quality controls are performed by the independent pricing sources throughout this process, which include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. In addition, on a quarterly basis, we perform quality controls over values received from the pricing sources which also include reviewing tolerance reports, trading information, data changes, and directional moves compared to market moves. We have not made any adjustments to the prices obtained from the independent pricing sources.
In accordance with fair value guidance, we applied the following fair value hierarchy in order to measure fair value for assets
and liabilities:
Level 1 - Quoted prices for identical instruments in active markets that we can access. Financial assets utilizing Level 1 inputs primarily include U.S. Treasury securities, equity securities, and Australian government and semi government securities.
Level 2 - Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace for the financial instrument. The observable inputs are used in valuation models to calculate the fair value of the financial instruments.
Financial assets utilizing Level 2 inputs primarily include obligations of U.S. government corporations and agencies, corporate bonds, mortgage-backed securities, and most municipal bonds.
The independent pricing sources utilize these approaches to determine the fair value of the securities in Level 2 of the fair value hierarchy based on type of investment:
Corporate Debt & U.S. Government and Agency Bonds
are evaluated by surveying the dealer community, obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the evaluation process.
Obligations of U.S. States & Political Subdivisions
are evaluated by tracking, capturing, and analyzing quotes for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities
are evaluated by monitoring interest rate movements, and other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as appropriate, enabling known data points to be extrapolated for valuation application across a range of related securities.
Commercial Mortgage-Backed Securities
are evaluated using valuation techniques that reflect market participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for similar assets, benchmark yield curves and market corroborated inputs. Evaluation utilizes regular reviews of the inputs for securities covered, including executed trades, broker quotes, credit information, collateral attributes and/or cash flow waterfall as applicable.
Asset-Backed Securities
are evaluated using spreads and other information solicited from market buy- and sell-side sources, including primary and secondary dealers, portfolio managers, and research analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral performance and tranche level attributes including market color as available are used, resulting in tranche-specific spreads.
Level 3 - Valuations derived from valuation techniques in which one or more significant inputs or value drivers are unobservable or from par values for equity securities restricted in their ability to be redeemed or sold. The inputs used to derive the fair value of Level 3 securities reflect our own assumptions about the assumptions a market participant would use in pricing an asset or liability. Financial assets
MGIC Investment Corporation - Q1 2016
|
20
utilizing Level 3 inputs primarily include equity securities that can only be redeemed or sold at their par value and only to the security issuer and certain state premium tax credit investments. The state premium tax credit investments have an average maturity of less than
2 years
, credit ratings of
AA+
or higher, and their balance reflects their remaining scheduled payments discounted at an average annual rate of
7.2%
. Our non-financial assets that are classified as Level 3 securities consist of real estate acquired through claim settlement. The fair value of real estate acquired is the lower of our acquisition cost or a percentage of the appraised value. The percentage applied to the appraised value is based upon our historical sales experience adjusted for current trends.
Fair value measurements for assets measured at fair value included the following as of
March 31, 2016
and
December 31, 2015
:
March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
148,528
|
|
|
$
|
51,448
|
|
|
$
|
97,080
|
|
|
$
|
—
|
|
Obligations of U.S. states and political subdivisions
|
|
1,913,130
|
|
|
—
|
|
|
1,911,938
|
|
|
1,192
|
|
Corporate debt securities
|
|
1,854,207
|
|
|
—
|
|
|
1,854,207
|
|
|
—
|
|
Asset-backed securities
|
|
110,328
|
|
|
—
|
|
|
110,328
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
250,641
|
|
|
—
|
|
|
250,641
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
220,696
|
|
|
—
|
|
|
220,696
|
|
|
—
|
|
Collateralized loan obligations
|
|
60,384
|
|
|
—
|
|
|
60,384
|
|
|
—
|
|
Total debt securities
|
|
4,557,914
|
|
|
51,448
|
|
|
4,505,274
|
|
|
1,192
|
|
Equity securities
(1)
|
|
6,289
|
|
|
2,868
|
|
|
—
|
|
|
3,421
|
|
Total investment portfolio
|
|
$
|
4,564,203
|
|
|
$
|
54,316
|
|
|
$
|
4,505,274
|
|
|
$
|
4,613
|
|
Real estate acquired
(2)
|
|
$
|
12,849
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,849
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Total Fair Value
|
|
Quoted Prices in Active Markets for Identical Assets
(Level 1)
|
|
Significant Other Observable Inputs
(Level 2)
|
|
Significant Unobservable Inputs
(Level 3)
|
U.S. Treasury securities and obligations of U.S. government corporations and agencies
|
|
$
|
160,584
|
|
|
$
|
46,197
|
|
|
$
|
114,387
|
|
|
$
|
—
|
|
Obligations of U.S. states and political subdivisions
|
|
1,792,527
|
|
|
—
|
|
|
1,791,299
|
|
|
1,228
|
|
Corporate debt securities
|
|
2,004,763
|
|
|
—
|
|
|
2,004,763
|
|
|
—
|
|
Asset-backed securities
|
|
116,617
|
|
|
—
|
|
|
116,617
|
|
|
—
|
|
Residential mortgage-backed securities
|
|
257,648
|
|
|
—
|
|
|
257,648
|
|
|
—
|
|
Commercial mortgage-backed securities
|
|
233,491
|
|
|
—
|
|
|
233,491
|
|
|
—
|
|
Collateralized loan obligations
|
|
60,200
|
|
|
—
|
|
|
60,200
|
|
|
—
|
|
Debt securities issued by foreign sovereign governments
|
|
31,731
|
|
|
31,731
|
|
|
—
|
|
|
—
|
|
Total debt securities
|
|
4,657,561
|
|
|
77,928
|
|
|
4,578,405
|
|
|
1,228
|
|
Equity securities
(1)
|
|
5,645
|
|
|
2,790
|
|
|
—
|
|
|
2,855
|
|
Total investment portfolio
|
|
$
|
4,663,206
|
|
|
$
|
80,718
|
|
|
$
|
4,578,405
|
|
|
$
|
4,083
|
|
Real estate acquired
(2)
|
|
$
|
12,149
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
12,149
|
|
|
|
(1)
|
Equity securities in Level 3 are carried at cost, which approximates fair value.
|
|
|
(2)
|
Real estate acquired through claim settlement, which is held for sale, is reported in Other assets on the consolidated balance sheets.
|
21
|
MGIC Investment Corporation - Q1 2016
There were no transfers of securities between Level 1 and Level 2 during the first
three
months of 2016.
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the beginning and ending balances for the
three
months ended
March 31, 2016
and
2015
is shown in the following tables. There were no transfers into or out of Level 3 in those periods and there were no losses included in earnings for those periods attributable to the change in unrealized losses on assets still held at the end of the applicable period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Debt Securities
|
|
Equity Securities
|
|
Total Investments
|
|
Real Estate Acquired
|
Balance at December 31, 2015
|
|
$
|
1,228
|
|
|
$
|
2,855
|
|
|
$
|
4,083
|
|
|
$
|
12,149
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(293
|
)
|
Purchases
|
|
—
|
|
|
3,091
|
|
|
3,091
|
|
|
12,267
|
|
Sales
|
|
(36
|
)
|
|
(2,525
|
)
|
|
(2,561
|
)
|
|
(11,274
|
)
|
Balance at March 31, 2016
|
|
$
|
1,192
|
|
|
$
|
3,421
|
|
|
$
|
4,613
|
|
|
$
|
12,849
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
Debt Securities
|
|
Equity Securities
|
|
Total Investments
|
|
Real Estate Acquired
|
Balance at December 31, 2014
|
|
$
|
1,846
|
|
|
$
|
321
|
|
|
$
|
2,167
|
|
|
$
|
12,658
|
|
Total realized/unrealized gains (losses):
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in earnings and reported as losses incurred, net
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(503
|
)
|
Purchases
|
|
7
|
|
|
—
|
|
|
7
|
|
|
10,797
|
|
Sales
|
|
(62
|
)
|
|
—
|
|
|
(62
|
)
|
|
(12,055
|
)
|
Balance at March 31, 2015
|
|
$
|
1,791
|
|
|
$
|
321
|
|
|
$
|
2,112
|
|
|
$
|
10,897
|
|
Authoritative guidance over disclosures about the fair value of financial instruments requires additional disclosure for financial instruments not measured at fair value. Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level 2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are included in Note 7 – “Investments.”
Financial Liabilities Not Measured at Fair Value
We incur financial liabilities in the normal course of our business. The following tables present the carrying value and fair value of our financial liabilities disclosed, but not carried, at fair value at
March 31, 2016
and
December 31, 2015
. The fair values of our Convertible Senior Notes and Convertible Junior Subordinated Debentures were based on observable market prices and the fair value of the Federal Home Loan Bank Advance was estimated using discounted cash flows on current incremental borrowing rates for similar borrowing arrangements, and in all cases they are categorized as Level 2.
|
|
|
|
|
|
|
|
|
|
March 31, 2016
|
|
|
|
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
Financial liabilities:
|
|
|
|
|
FHLB Advance due 2023
|
|
$
|
155,000
|
|
|
$
|
156,831
|
|
Convertible Senior Notes due 2017
|
|
194,319
|
|
|
203,771
|
|
Convertible Senior Notes due 2020
|
|
491,305
|
|
|
630,310
|
|
Convertible Junior Subordinated Debentures due 2063
|
|
256,872
|
|
|
292,754
|
|
Total Debt
|
|
$
|
1,097,496
|
|
|
$
|
1,283,666
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
(In thousands)
|
|
Carrying Value
|
|
Fair Value
|
Financial liabilities:
|
|
|
|
|
|
|
|
|
|
Convertible Senior Notes due 2017
|
|
$
|
331,546
|
|
|
$
|
345,616
|
|
Convertible Senior Notes due 2020
|
|
490,755
|
|
|
701,955
|
|
Convertible Junior Subordinated Debentures due 2063
|
|
389,522
|
|
|
455,067
|
|
Total Debt
|
|
$
|
1,211,823
|
|
|
$
|
1,502,638
|
|
MGIC Investment Corporation - Q1 2016
|
22
Note 9 – Other Comprehensive Income
The pretax components of our other comprehensive income (loss) and the related income tax (expense) benefit for the
three
months ended
March 31, 2016
and
2015
are included in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Net unrealized holding gains arising during the period
|
|
$
|
78,383
|
|
|
$
|
19,721
|
|
Income tax expense
|
|
(27,556
|
)
|
|
(6,876
|
)
|
Valuation allowance
(1)
|
|
—
|
|
|
6,718
|
|
Net of taxes
|
|
50,827
|
|
|
19,563
|
|
|
|
|
|
|
Net changes in benefit plan assets and obligations
|
|
(474
|
)
|
|
(700
|
)
|
Income tax benefit
|
|
166
|
|
|
245
|
|
Valuation allowance
(1)
|
|
—
|
|
|
(245
|
)
|
Net of taxes
|
|
(308
|
)
|
|
(700
|
)
|
|
|
|
|
|
Net changes in unrealized foreign currency translation adjustment
|
|
(1,496
|
)
|
|
(3,102
|
)
|
Income tax benefit
|
|
521
|
|
|
1,088
|
|
Net of taxes
|
|
(975
|
)
|
|
(2,014
|
)
|
|
|
|
|
|
Total other comprehensive income
|
|
76,413
|
|
|
15,919
|
|
Total income tax (expense) benefit, net of valuation allowance
|
|
(26,869
|
)
|
|
930
|
|
Total other comprehensive income, net of tax
|
|
$
|
49,544
|
|
|
$
|
16,849
|
|
|
|
(1)
|
See Note 11 – “Income Taxes” for a discussion of the valuation allowance recorded against deferred tax assets.
|
The pretax and related income tax (expense) benefit components of the amounts reclassified from our accumulated other comprehensive loss to our consolidated statements of operations for the
three
months ended
March 31, 2016
and
2015
are included in the following table.
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Reclassification adjustment for net realized gains (losses) included in net income
(1)
|
|
$
|
612
|
|
|
$
|
11,234
|
|
Income tax expense
|
|
(92
|
)
|
|
(3,931
|
)
|
Valuation allowance
(2)
|
|
—
|
|
|
3,926
|
|
Net of taxes
|
|
520
|
|
|
11,229
|
|
|
|
|
|
|
Reclassification adjustment related to benefit plan assets and obligations
(3)
|
|
474
|
|
|
700
|
|
Income tax expense
|
|
(166
|
)
|
|
(245
|
)
|
Valuation allowance
(2)
|
|
—
|
|
|
245
|
|
Net of taxes
|
|
308
|
|
|
700
|
|
|
|
|
|
|
Total reclassifications
|
|
1,086
|
|
|
11,934
|
|
Total income tax expense, net of valuation allowance
|
|
(258
|
)
|
|
(5
|
)
|
Total reclassifications, net of tax
|
|
$
|
828
|
|
|
$
|
11,929
|
|
|
|
(1)
|
Increases (decreases) Net realized investment gains on the consolidated statements of operations.
|
|
|
(2)
|
See Note 11 – “Income Taxes” for a discussion of the valuation allowance recorded against deferred tax assets.
|
|
|
(3)
|
Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
|
Changes in our accumulated other comprehensive loss, including amounts reclassified from other comprehensive income (loss), for the
three
months ended
March 31, 2016
are included in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
(In thousands)
|
|
Net unrealized gains and losses on available-for-sale securities
|
|
Net benefit plan assets and obligations recognized in shareholders' equity
|
|
Net unrealized foreign currency translation
|
|
Total accumulated other comprehensive loss
|
Balance at December 31, 2015, net of tax
|
|
$
|
(17,148
|
)
|
|
$
|
(44,652
|
)
|
|
$
|
920
|
|
|
$
|
(60,880
|
)
|
Other comprehensive income (loss) before reclassifications
|
|
51,347
|
|
|
—
|
|
|
(975
|
)
|
|
50,372
|
|
Less: Amounts reclassified from accumulated other comprehensive income (loss)
|
|
520
|
|
|
308
|
|
|
—
|
|
|
828
|
|
Balance at March 31, 2016, net of tax
|
|
$
|
33,679
|
|
|
$
|
(44,960
|
)
|
|
$
|
(55
|
)
|
|
$
|
(11,336
|
)
|
23
|
MGIC Investment Corporation - Q1 2016
Note 10 – Benefit Plans
The following table provides the components of net periodic benefit cost for the pension, supplemental executive retirement and other postretirement benefit plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
(In thousands)
|
|
Pension and Supplemental Executive Retirement Plans
|
|
Other Postretirement Benefits
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Service cost
|
|
$
|
2,163
|
|
|
$
|
2,448
|
|
|
$
|
175
|
|
|
$
|
202
|
|
Interest cost
|
|
3,929
|
|
|
3,908
|
|
|
172
|
|
|
178
|
|
Expected return on plan assets
|
|
(4,889
|
)
|
|
(5,295
|
)
|
|
(1,222
|
)
|
|
(1,248
|
)
|
Recognized net actuarial loss (gain)
|
|
1,361
|
|
|
1,209
|
|
|
—
|
|
|
(35
|
)
|
Amortization of prior service cost
|
|
(172
|
)
|
|
(211
|
)
|
|
(1,662
|
)
|
|
(1,662
|
)
|
Net periodic benefit cost (benefit)
|
|
$
|
2,392
|
|
|
$
|
2,059
|
|
|
$
|
(2,537
|
)
|
|
$
|
(2,565
|
)
|
We currently intend to make a contribution of
$11.4 million
to our qualified pension plan and supplemental executive retirement plan in 2016.
Note 11 – Income Taxes
Valuation Allowance
We review the need to maintain a deferred tax asset valuation allowance on a quarterly basis. We analyze many factors, among which are the severity and frequency of operating losses, our capacity for the carryback or carryforward of any losses, the existence and current level of taxable operating income, operating results on a
three
year cumulative basis, the expected occurrence of future income or loss, the expiration dates of the loss carryforwards, the cyclical nature of our operating results, and available tax planning strategies. Based on our analysis, we reduced our benefit from income tax through the recognition of a valuation allowance from the first quarter of 2009 through the second quarter of 2015. In the third quarter of 2015, based on our analysis, we concluded that it was more likely than not that our deferred tax assets would be fully realizable and that the valuation allowance was no longer necessary. Therefore, we reversed the valuation allowance.
The effect of the change in valuation allowance on the provision for income taxes was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Provision for income tax
|
|
$
|
34,497
|
|
|
$
|
47,883
|
|
Change in valuation allowance
|
|
—
|
|
|
(44,498
|
)
|
Provision for income taxes
|
|
$
|
34,497
|
|
|
$
|
3,385
|
|
The change in the valuation allowance that was included in other comprehensive income for the three months ended
March 31, 2015
was a decrease of
$6.5 million
.
We have approximately
$1.9 billion
of net operating loss (“NOL”) carryforwards on a regular tax basis and
$1.0 billion
of NOL carryforwards for computing the alternative minimum tax as of
March 31, 2016
. Any unutilized carryforwards are scheduled to expire at the end of tax years 2029 through 2033.
Tax Contingencies
As previously disclosed, the Internal Revenue Service (“IRS”) completed examinations of our federal income tax returns for the years 2000 through 2007 and issued proposed assessments for taxes, interest and penalties related to our treatment of the flow-through income and loss from an investment in a portfolio of residual interests of Real Estate Mortgage Investment Conduits (“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
March 31, 2016
, there would also be interest related to these matters of approximately
$187.4 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 has 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
MGIC Investment Corporation - Q1 2016
|
24
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
March 31, 2016
, those state taxes and interest would approximate
$49.3 million
. In addition, there could also be state tax penalties. Our total amount of unrecognized tax benefits as of
March 31, 2016
is
$107.4 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 Note 15 – “Capital Requirements.”
The total amount of the unrecognized tax benefits, related to our aforementioned REMIC issue that would affect our effective tax rate is
$94.1 million
. We recognize interest accrued and penalties related to unrecognized tax benefits in income taxes. As of
March 31, 2016
and
December 31, 2015
, we had accrued
$28.1 million
and
$27.8 million
, respectively, for the payment of interest.
Note 12 – Loss Reserves
We establish reserves to recognize the estimated liability for losses and loss adjustment expenses (“LAE”) related to defaults on insured mortgage loans. Loss reserves are established by estimating the number of defaulted loans that will result in a claim payment, which is referred to as the claim rate, and further estimating the amount of the claim payment, which is referred to as claim severity.
Estimation of losses is inherently judgmental. The conditions that affect the claim rate and claim severity include the current and future state of the domestic economy, including unemployment, and the current and future strength of local housing markets; exposure on insured loans; the amount of time between default and claim filing; and curtailments. The actual amount of the claim payments may be substantially different than our loss reserve estimates. Our estimates could be adversely affected by several factors, including a deterioration of regional or national economic conditions, including unemployment, leading to a reduction in borrower income and thus their ability to make mortgage payments, and a drop in housing values which may affect borrower willingness to continue to make mortgage payments
when the value of the home is below the mortgage balance. Changes to our estimates could result in a material impact to our results of operations and capital position, even in a stable economic environment.
The following table provides a reconciliation of beginning and ending loss reserves for the
three
months ended
March 31, 2016
and
2015
:
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31,
|
(In thousands)
|
|
2016
|
|
2015
|
Reserve at beginning of period
|
|
$
|
1,893,402
|
|
|
$
|
2,396,807
|
|
Less reinsurance recoverable
|
|
44,487
|
|
|
57,841
|
|
Net reserve at beginning of period
|
|
1,848,915
|
|
|
2,338,966
|
|
|
|
|
|
|
Losses incurred:
|
|
|
|
|
Losses and LAE incurred in respect of defaults related to:
|
|
|
|
|
Current year
|
|
92,479
|
|
|
109,381
|
|
Prior years
(1)
|
|
(7,467
|
)
|
|
(27,596
|
)
|
Subtotal
|
|
85,012
|
|
|
81,785
|
|
|
|
|
|
|
Losses paid:
|
|
|
|
|
Losses and LAE paid in respect of defaults related to:
|
|
|
|
|
Current year
|
|
204
|
|
|
312
|
|
Prior years
|
|
221,457
|
|
|
231,230
|
|
Reinsurance terminations
(2)
|
|
(4
|
)
|
|
—
|
|
Subtotal
|
|
221,657
|
|
|
231,542
|
|
|
|
|
|
|
Net reserve at end of period
|
|
1,712,270
|
|
|
2,189,209
|
|
Plus reinsurance recoverables
|
|
41,119
|
|
|
55,415
|
|
|
|
|
|
|
Reserve at end of period
|
|
$
|
1,753,389
|
|
|
$
|
2,244,624
|
|
|
|
(1)
|
A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves.
|
|
|
(2)
|
In a termination or commutation, the reinsurance agreement is cancelled, with no future premium ceded and funds for any incurred but unpaid losses transferred to us. The transferred funds result in an increase in our investment portfolio (including cash and cash equivalents) and a decrease in net losses paid (reduction in losses incurred). In addition, there is an offsetting decrease in the reinsurance recoverable (increase in losses incurred), and thus there is no net impact to losses incurred.
|
25
|
MGIC Investment Corporation - Q1 2016
The “Losses incurred” section of the table above shows losses incurred on defaults that occurred in the current year and in prior years. The amount of losses incurred relating to defaults that occurred in the current year represents the estimated amount to be ultimately paid on such defaults. The amount of losses incurred relating to defaults received in prior years represents the actual claim rate and severity associated with those defaults resolved in the current year differing from the estimated liability at the prior year-end, as well as a re-estimation of amounts to be ultimately paid on defaults continuing from the end of the prior year. This re-estimation of the estimated claim rate and estimated severity is the result of our review of current trends in the default inventory, such as percentages of defaults that have resulted in a claim, the amount of the claims relative to the average loan exposure, changes in the relative level of defaults by geography and changes in average loan exposure.
Losses incurred on defaults received in the current year decreased in the first
three
months of
2016
compared to the same period in
2015
, primarily due to a decrease in the number of new defaults, net of related cures.
The prior year development of the reserves in the first
three
months of
2016
and
2015
is reflected in the following table.
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Three months ended March 31,
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(In millions)
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2016
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2015
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Decrease in estimated claim rate on primary defaults
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$
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(26
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)
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$
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(39
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)
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Increase in estimated severity on primary defaults
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22
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17
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Change in estimates related to pool reserves, LAE reserves and reinsurance
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(3
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)
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(6
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)
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Total prior year loss development
(1)
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$
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(7
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)
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$
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(28
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)
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(1)
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A negative number for prior year loss development indicates a redundancy of prior year loss reserves, and a positive number indicates a deficiency of prior year loss reserves.
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For the
three
months ended
March 31, 2016
and
2015
we experienced favorable prior year loss reserve development. This development was, in part, due to the resolution of approximately
28%
and
24%
of the prior year default inventory during the
three
months ended
March 31, 2016
and
2015
, respectively. During the first
three
months of 2016, we experienced improved cure rates on prior year defaults, which was offset in part by an increase in severity on the prior year defaults. In addition to the resolution of defaults, the first
three
months of 2015 were also favorably impacted by
$20 million
due to re-estimation of previously recorded reserves relating to disputes on our claims paying practices and adjustments to incurred but not reported losses (IBNR). The favorable development in the first quarter of 2015 was offset, in part, by an increase in the severity on prior year defaults remaining in the delinquent inventory.
The “Losses paid” section of the table above shows the breakdown between claims paid on new default notices in the current year and claims paid on defaults from prior years. Until a few years ago, it took, on average, approximately
twelve
months for a default that is not cured to develop into a paid claim. Over the past several years, the average time it takes to receive a claim associated with a default has increased. This is, in part, due to new loss mitigation protocols established by servicers and to changes in some state foreclosure laws that may include, for example, a requirement for additional review and/or mediation processes. It is difficult to estimate how long it may take for current and future defaults that do not cure to develop into paid claims.
During the first quarter of 2016, our losses paid included
$47 million
associated with settlements for claims paying practices and a nonperforming loan sale. These settlements reduced our delinquent inventory by
1,138
notices. These settlements had no material impact on our losses incurred, net.
The liability associated with our estimate of premiums to be refunded on expected claim payments is accrued for separately at
March 31, 2016
and
December 31, 2015
and approximated
$99 million
and
$102 million
, respectively. This liability was included in “Other liabilities” on our consolidated balance sheets.
MGIC Investment Corporation - Q1 2016
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26
A rollforward of our primary default inventory for the
three
months ended
March 31, 2016
and
2015
appears in the following table. The information concerning new notices and cures is compiled from monthly reports received from loan servicers. The level of new notice and cure activity reported in a particular month can be influenced by, among other things, the date on which a servicer generates its report, the number of business days in a month and transfers of servicing between loan servicers.
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Three months ended March 31,
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2016
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2015
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Default inventory at beginning of period
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62,633
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79,901
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New notices
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16,731
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18,896
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Cures
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(19,053
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)
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(21,767
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)
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Paids (including those charged to a deductible or captive)
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(3,373
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)
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(4,573
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)
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Rescissions and denials
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(210
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)
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(221
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)
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Items removed from inventory resulting from settlements
(1)
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(1,138
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)
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—
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Default inventory at end of period
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55,590
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72,236
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(1)
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Includes
732
loans whose insurance was terminated by agreement to settle coverage on certain non-performing loans, and
406
loans for which we had previously suspended rescissions and that were included in a rescission settlement agreement. Both agreements became effective in the first quarter of 2016 and neither had a material financial impact in the quarter.
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The decrease in the primary default inventory experienced during
2016
and
2015
was generally across all markets and primarily in book years 2008 and prior. As of
March 31, 2016
the percentage of loans in the inventory that have been in default for 12 or more consecutive months remained consistent compared with the prior year end and declined compared to one year prior, as shown in the following table. Historically as a default ages it becomes more likely to result in a claim. The percentage of loans that have been in default for
12
or more consecutive months and the number of loans in our primary claims received inventory have been affected by our suspended rescissions and the resolution of certain of those rescissions discussed below and in Note 5 – “Litigation and Contingencies.”
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March 31, 2016
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|
December 31, 2015
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|
March 31, 2015
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Consecutive months in default
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3 months or less
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10,120
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18
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%
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13,053
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21
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%
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11,604
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16
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%
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4 - 11 months
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15,319
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28
|
%
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15,763
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|
25
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%
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18,940
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26
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%
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12 months or more
(1)
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30,151
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|
54
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%
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33,817
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54
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%
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41,692
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58
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%
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Total primary default inventory
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55,590
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|
100
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%
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62,633
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|
100
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%
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72,236
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|
100
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%
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|
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Primary claims received inventory included in ending default inventory
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2,267
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4
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%
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2,769
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4
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%
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4,448
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6
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%
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(1)
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Approximately
49%
,
50%
, and
53%
of the primary default inventory in default for 12 consecutive months or more has been in default for at least 36 consecutive months as of
March 31, 2016
,
December 31, 2015
, and
March 31, 2015
, respectively.
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The number of months a loan is in the default inventory can differ from the number of payments that the borrower has not made or is considered delinquent. These differences typically result from a borrower making monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower is delinquent is shown in the table below.
27
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MGIC Investment Corporation - Q1 2016
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March 31, 2016
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December 31, 2015
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March 31, 2015
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Number of payments delinquent
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3 payments or less
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16,864
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30
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%
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20,360
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33
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%
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19,159
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|
27
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%
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4 - 11 payments
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14,595
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26
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%
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15,092
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|
24
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%
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18,372
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25
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%
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12 payments or more
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24,131
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44
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%
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27,181
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|
43
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%
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34,705
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48
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%
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Total primary default inventory
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55,590
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|
100
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%
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62,633
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|
100
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%
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72,236
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|
100
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%
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Pool insurance default inventory decreased to
2,247
at
March 31, 2016
from
2,739
at
December 31, 2015
. The pool insurance default inventory was
3,350
at
March 31, 2015
.
Claims paying practices
Our loss reserving methodology incorporates our estimates of future rescissions. A variance between ultimate actual rescission rates and our estimates, as a result of the outcome of litigation, settlements or other factors, could materially affect our losses.
The liability associated with our estimate of premiums to be refunded on expected future rescissions is accrued for separately. At
March 31, 2016
and
December 31, 2015
the estimate of this liability totaled
$5 million
and
$7 million
, respectively. This liability was included in “Other liabilities” on our consolidated balance sheets.
For information about discussions and legal proceedings with customers with respect to our claims paying practices, including settlements that we believe are probable, as defined in ASC 450-20, see Note 5 – “Litigation and Contingencies.”
Note 13 – Shareholders’ Equity
Capital transactions
As described in Note 3 - “Debt” the purchase of a portion of our 9% Debentures by MGIC, and corresponding elimination of the purchased 9% Debentures in consolidation, resulted in a reduction to our consolidated shareholders’ equity of approximately
$9.8 million
as of
March 31, 2016
. This reduction represents the allocated portion of the consideration paid to reacquire the equity component of the 9% Debentures. The reduction was recognized in paid-in capital and was less than the amount ascribed to paid-in capital at original issuance of the 9% Debentures.
Shareholders Rights Agreement
Our Amended and Restated Shareholders Rights Agreement dated July 23, 2015, which was approved by shareholders, (the “Agreement”) seeks to diminish the risk that our ability to use our NOLs to reduce potential future federal income tax obligations may become substantially limited and to deter certain abusive takeover practices. The benefit of the NOLs would be substantially limited, and the timing of the usage of the NOLs could be substantially delayed, if we were to experience an “ownership change” as defined by Section 382 of the Internal Revenue Code.
Under the Agreement each outstanding share of our Common Stock is accompanied by
one
Right. The “Distribution Date” occurs on the earlier of
ten days
after a public announcement that a person has become an “Acquiring Person”, or
ten
business days after a person announces or begins a tender offer in which consummation of such offer would result in a person becoming an “Acquiring Person”. An “Acquiring Person” is any person that becomes, by itself or together with its affiliates and associates, a beneficial owner of
5%
or more of the shares of our Common Stock then outstanding, but excludes, among others, certain exempt and grandfathered persons as defined in the Agreement. The Rights are not exercisable until the Distribution Date. Each Right will initially entitle shareholders to buy
one-tenth
of
one
share of our Common Stock at a Purchase Price of
$45
per full share (equivalent to
$4.50
for each one-tenth share), subject to adjustment. Each exercisable Right (subject to certain limitations) will entitle its holder to purchase, at the Rights’ then-current Purchase Price, a number of our shares of Common Stock (or if after the Shares Acquisition Date, we are acquired in a business combination, common shares of the acquiror) having a market value at the time equal to twice the Purchase Price. The Rights will expire on August 1, 2018, or earlier as described in
MGIC Investment Corporation - Q1 2016
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28
the Agreement. The Rights are redeemable at a price of
$0.001
per Right at any time prior to the time a person becomes an Acquiring Person. Other than certain amendments, the Board of Directors may amend the Rights in any respect without the consent of the holders of the Rights.
Note 14 – Stock-Based Compensation
We have incentive stock plans under which restricted stock units (“RSUs”) were granted to employees. Our annual grant of share-based compensation to employees takes place during the first quarter of each fiscal year. Under the fair value method, compensation cost is measured at the grant date based on the fair value of the award and is recognized over the service period which generally corresponds to the vesting period. Awards under our incentive plans generally vest over periods ranging from
one
to
three years
.
The number of shares granted to employees and the weighted average fair value per share during the periods presented were (shares in thousands):
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Three months ended March 31,
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2016
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2015
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Shares
Granted
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Weighted Average Share Fair Value
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Shares
Granted
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Weighted Average Share Fair Value
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RSUs subject to performance conditions
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1,257
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$
|
5.66
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|
|
1,110
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$
|
8.98
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RSUs subject only to service conditions
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433
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|
5.67
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|
408
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|
8.98
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Note 15 – Capital Requirements
Capital - GSEs
Substantially all of our insurance written since 2008 has been for loans purchased by the GSEs. The PMIERs of the GSEs include financial requirements that 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
March 31, 2016
, MGIC’s Available Assets are in excess of its Minimum Required Assets; and MGIC is in compliance with the financial requirements of the PMIERs and eligible to insure loans purchased by the GSEs.
Statutory Capital Requirements
The insurance laws of
16
jurisdictions, including Wisconsin, our domiciliary state, require a mortgage insurer to maintain a minimum amount of statutory capital relative to the risk in force (or a similar measure) in order for the mortgage insurer to continue to write new business. We refer to these requirements as the “State Capital Requirements” and, together with the GSE Financial Requirements, the “Financial Requirements.” While they vary among jurisdictions, the most common State Capital Requirements allow for a maximum risk-to-capital ratio of
25 to 1
. A risk-to-capital ratio will increase if (i) the percentage decrease in capital exceeds the percentage decrease in insured risk, or (ii) the percentage increase in capital is less than the percentage increase in insured risk. Wisconsin does not regulate capital by using a risk-to-capital measure but instead requires a minimum policyholder position (“MPP”). 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, 2016
, MGIC’s risk-to-capital ratio was
12.3 to 1
, below the maximum allowed by the jurisdictions with State Capital Requirements, and its policyholder position was
$1.1 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 financial statement footnotes for information about matters that could negatively affect such compliance.
At
March 31, 2016
, the risk-to-capital ratio of our combined insurance operations (which includes reinsurance affiliates) was
13.8 to 1
. Reinsurance agreements 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 agreements with its affiliates, additional capital contributions to the reinsurance affiliates could be needed.
During the first quarter of 2016 MGIC received approval from the OCI to pay a
$16 million
dividend to our holding company, which was paid in April, its first dividend since 2008. Any additional dividends paid by MGIC to our holding company in 2016 would require OCI approval under the adjusted statutory net income regulations discussed below.
MGIC is subject to statutory regulations as to payment of dividends. The maximum amount of dividends that MGIC may pay in any twelve-month period without regulatory approval by the OCI is the lesser of adjusted statutory net income or
10%
of
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MGIC Investment Corporation - Q1 2016
statutory policyholders’ surplus as of the preceding calendar year end. Adjusted statutory net income is defined for this purpose to be the greater of statutory net income, net of realized investment gains, for the calendar year preceding the date of the dividend or statutory net income, net of realized investment gains, for the
three
calendar years preceding the date of the dividend less dividends paid within the first
two
of the preceding three calendar years. The OCI recognizes only statutory accounting practices prescribed or permitted by the State of Wisconsin for determining and reporting the financial condition and results of operations of an insurance company. The OCI has adopted certain prescribed accounting practices that differ from those found in other states. Specifically, Wisconsin domiciled companies record changes in the contingency reserves through the income statement as a change in underwriting deduction. As a result, in periods in which MGIC is increasing contingency reserves statutory net income is lowered. For the year ended December 31, 2015, MGIC’s statutory net income was reduced by
$444 million
to account for the increase in contingency reserves.
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. A working group of state regulators is drafting the revisions, although no date has been established by which the NAIC must propose revisions to such requirements. Depending on the scope of revisions made by the NAIC, MGIC may be prevented from writing new business in the jurisdictions adopting such revisions.
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 another 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. 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 financial statement footnotes for information about matters that could negatively affect MGIC’s claims paying resources.
MGIC Investment Corporation - Q1 2016
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