MGIC Investment Corporation
Annual Report
2016
Financial Summary
Net income ($ millions)
Diluted income per share ($)
Net operating income (1) ($ millions)
Net operating income per diluted share (1) ($)
2014
2015
2016
$
$
$
$
251.9
$ 1,172.0
0.64
162.8
0.43
$
$
$
2.60
306.1
0.75
$
$
$
$
342.5
0.86
395.6
0.99
(1) We believe that use of the Non-GAAP measures of net operating income (loss) and net operating income
(loss) per diluted share facilitate the evaluation of the company's core financial performance thereby providing
relevant information. See "Explanation and Reconciliation of our use of Non-GAAP Financial Measures" of
this Annual Report for further information.
(2)
Includes the impact of the 2015 reversal of the deferred tax asset valuation allowance.
MGIC Investment Corporation 2016 Annual Report | 1
Dear Fellow Shareholders:
In last year’ s letter I informed you that our efforts would be focused on the following
business strategies: 1) prudently growing insurance in force, 2) pursuing new business
opportunities that leverage our core competencies, 3) preserving and expanding our role
and that of the private mortgage insurance industry in housing finance policy,
4) managing and deploying capital to optimize creation of shareholder value and
5) developing and diversifying the talents of our co-workers. I am pleased to report that
in 2016 we executed exceptionally well and made great progress in furthering each of
the strategies. Specifically, in 2016 we:
•
•
•
•
•
Earned $342.5 million of GAAP Net Income and $395.6 million of Net Operating Income compared to
$1,172.0 of GAAP Net Income (which reflects a one-time benefit of $847.8 million associated with the
reversal of a valuation allowance against our deferred tax assets) and $306.1 million of Net Operating
Income for 2015. Net Operating Income is a non-GAAP measure of performance. For a description of
how we calculate this measure and for a reconciliation of this measure to its nearest comparable GAAP
measure, see "Explanation and Reconciliation of our use of Non-GAAP Financial Measures" in
Management’ s Discussion and Analysis of Financial Condition and Results of Operations.
Increased insurance in force by 4.3% despite persistency declining from 79.7% in 2015 to 76.9% in 2016.
Increased new insurance written by 11.4% from $43.0 billion in 2015 to $47.9 billion in 2016. The new
insurance written is consistent with the Company’ s risk and return goals.
Exceeded the Minimum Required Assets of the GSEs’ private mortgage insurer eligibility requirements,
or PMIERs, by $0.6 billion and the statutory capital requirement of the State of Wisconsin by $1.6 billion.
Improved our capital profile, including: 1) the elimination of 66 million potentially dilutive shares through
various capital market transactions, 2) the re-establishment of dividend payments ($64 million for 2016)
from our writing company, MGIC, to our holding company and 3) a return of investment grade rating for
our writing company.
• Maintained our industry low expense ratio while making additional investments in co-worker professional
development.
The growth in insurance in force reflects the expanding purchase mortgage market, our company’ s market
share and the hard work and dedication of my fellow co-workers to deliver stellar customer service. The
increasing size and quality of our insurance in force, the runoff of the older books, solid housing market
fundamentals such as household formations and home sales, and our improved capital structure, position
us well to provide credit enhancement and low down payment solutions to lenders, GSEs and borrowers.
The growth in insurance in force also reflects the value proposition we offer to both lenders (ease of execution
and ancillary services) and consumers (faster equity buildup and ability to cancel, when compared to FHA
execution). As reported by Inside Mortgage Finance, the private mortgage insurance industry’ s 2016 market
share of total originations increased to 13.1% from 12.5% in 2015, and MGIC’ s 2016 market share within the
PMI industry, excluding the U.S. Treasury’ s Home Affordable Refinance Program (HARP), was 17.9%.
In 2017, we are looking for an increase in home purchase activity and a decrease in refinance activity. This
would be a net positive for us and the industry, as we estimate that our industry’ s market share is approximately
3-4 times higher for purchase loans compared to refinances. Among the factors influencing increased
purchase activity are: 1) an improving economy, which typically leads consumers to have more confidence
in their future employment and increases their desire to purchase a home, 2) household formations continuing
to modestly increase as they return to long-term averages, 3) the national homeownership rate remaining
stable to marginally higher, and 4) mortgage interest rates remaining relatively affordable. And since the
majority of purchasers who need a mortgage do not have a 20% down payment, over the long term, we should
have a wonderful opportunity in front of us. Despite an expected smaller total mortgage origination market,
as the decrease in refinance transactions is expected to be greater than the increase in purchase transactions,
we expect to write approximately the same amount of new insurance in 2017 that we did in 2016. This
combined with increasing persistency should lead to a modest increase in our insurance in force.
2 | MGIC Investment Corporation 2016 Annual Report
Fellow Shareholders
As of December 31, 2016, the book years beginning in 2009 account for approximately 71% of our primary
risk in force. The portion of the 2005 - 2008 book years that have not been refinanced under HARP, which have
experienced higher incurred losses, now account for just 16% of our primary risk in force. The risk in force
associated with the total 2005 - 2008 books has decreased 19% from 2015. The quality and profitability of
the book years beginning in 2009 is best captured by the following statistics:
•
•
delinquencies from those book years represent approximately 8% of the total delinquent inventory
at year-end 2016, and
as of December 31, 2016, the ever-to-date incurred loss ratio of the 2009, 2010, 2011, 2012 and 2013,
books are 14.0%, 7.0%, 4.5%, 2.9% and 3.8%, respectively. The life-to-date development of the 2014
- 2016 books suggests that, as they season, they will also provide meaningful contributions to our
future success.
Net losses incurred were 30% lower in 2016 than 2015. The improvement was primarily due to a decrease in
losses and loss adjustment expenses incurred in respect to defaults reported in 2016, and more favorable
loss reserve development on prior-year defaults. In 2016, we received 9% fewer default notices than in 2015
and we applied a lower claim rate assumption to those new notices, primarily reflecting the underlying
improvements in the housing and labor markets and the ability of borrowers to cure their delinquencies. In
2016, favorable loss reserve development on prior-year defaults was primarily the result of a lower claim rate
assumption for those defaults. The lower claim rate assumption reflects that the actual cure rate experience
has outperformed our previous estimates. We expect to receive fewer new default notices and to see the
inventory decrease again in 2017 when compared to 2016.
Our capital management objectives include a continuation of our positive credit ratings trajectory of the last
several quarters, and the elimination of potentially dilutive shares that resulted from the capital raises during
the Great Recession.
In 2016, with our improved capital position, we accessed the non-convertible senior debt market when we
issued $425 million 7-year 5.75% Senior Notes. This is the first time since 2006 that we accessed the non-
convertible senior debt market and marked an important milestone for our company. We used the majority
of the proceeds to purchase $292.4 million of our 2% Convertible Senior Notes and the common shares that
were issued as part of that transaction. Earlier in the year, MGIC purchased $132.7 million of our 9% Convertible
Junior Debentures. Finally, we repurchased $188.5 million of our 5% Convertible Senior Notes. Combined,
these transactions eliminated 66 million potentially dilutive shares.
Further reflecting the improving financial condition of the company, during 2016, MGIC was returned to
investment grade by both Moody’ s and Standard and Poor’ s. While credit ratings are not inhibiting our ability
to write new primary business, we think that long-term, ratings will become more relevant. Therefore in the
future, when we analyze various options to improve our capital profile, as well as the ability to minimize
potentially dilutive shares, we need to consider the resulting leverage ratio, the impact on ratings, and the debt
service capability of the holding company.
Regarding housing reform, our initial reaction to the tone coming from the Administration and Congress is
generally positive. It is hard to predict the actions that may be taken and the timing of such actions, but the
message that private capital can play a greater role in housing policy is positive for MGIC and our industry.
As an individual company, and through various trade associations including USMI, we are actively engaged
in Washington with the goal of shaping a greater role for private mortgage insurance.
Regarding the FHA, we don’ t believe that it makes sense to change FHA pricing without first addressing the
larger question of the government’ s role in housing. Simply put, another FHA price reduction would likely shift
business away from private capital and expose the taxpayer to increased risk at a time when private capital,
primarily in the form of private mortgage insurance, is ready, willing, and able to take this risk. I want to be
clear: the FHA has played and continues to play a very important role in our country’ s housing market; however,
the discussion needs to be around a comprehensive housing policy that includes the proper role for the FHA,
the GSEs and private capital.
MGIC has a reputation of not only offering a compelling business proposition for its customers, but also
offering a compelling value proposition for its employees. This is one way we have been able to maintain a
low turnover rate and to keep our expense ratio the lowest in the industry. This is also why we invest in co-
worker development programs that promote accountability and a continuous-improvement culture, and that
MGIC Investment Corporation 2016 Annual Report | 3
Fellow Shareholders
address issues arising from the changing workforce, evolving work environment, and ever changing
competitive landscape.
2016 was indeed a good year. We achieved strong financial results and continued to position our company
for further success. 2017 marks the 60th anniversary of MGIC and the dream of Max Karl, our company’ s
and industry’ s founder, to allow private capital to help support the US housing market and help individuals
and families find a better way to homeownership. I am very excited and confident about the opportunities
MGIC has to continue to serve the housing market for another 60 years and keep Max’ s vision alive.
Much like last year, in 2017, our energies will be focused on the strategies outlined at the beginning of this
letter. I firmly believe that there is a greater opportunity for us to play in providing increased access to credit
for consumers and reducing GSE credit risk while generating good returns for shareholders. We are committed
to pursuing those opportunities.
I would like thank our shareholders and customers for their support and my fellow co-workers for their hard
work and dedication which has enabled our company to accomplish all that it did in 2016.
Respectfully,
Patrick Sinks
President and Chief Executive Officer
Standing from left: Sal Miosi, Executive Vice President - Business Strategies and Operations
Tim Mattke, Executive Vice President and Chief Financial Officer
Jeff Lane, Executive Vice President, General Counsel and Secretary
Seated from left: Jay Hughes, Executive Vice President - Sales and Business Development
Pat Sinks, President and Chief Executive Officer
Steve Mackey, Executive Vice President and Chief Risk Officer
4 | MGIC Investment Corporation 2016 Annual Report
Five-Year Summary of Financial Information
MGIC Investment Corporation & Subsidiaries
(In thousands, except per share data)
2016
2015
2014
2013
2012
As of and for the Years Ended December 31,
Summary of Operations
Revenues:
Net premiums written
Net premiums earned
Investment income, net
Realized investment gains, net including net
impairment losses
Other revenue
Total revenues
Losses and expenses:
Losses incurred, net
$ 975,091
$ 1,020,277
$
881,962
$
923,481
$ 1,017,832
925,226
110,666
8,932
17,659
896,222
103,741
28,361
12,964
844,371
87,647
943,051
1,033,170
80,739
121,640
1,357
9,259
5,731
9,914
195,409
28,145
1,062,483
1,041,288
942,634
1,039,435
1,378,364
240,157
343,547
496,077
838,726
2,067,253
Change in premium deficiency reserve
—
(23,751)
(24,710)
(25,320)
(61,036)
Underwriting and other expenses
Interest expense
Loss on debt extinguishment
Total losses and expenses
Income (loss) before tax
Provision for (benefit from) income taxes (1)
160,409
56,672
90,531
547,769
514,714
172,197
164,366
68,932
507
553,601
487,687
146,059
69,648
837
192,518
79,663
—
201,447
99,344
—
687,911
1,085,587
2,307,008
254,723
(46,152)
(928,644)
(684,313)
2,774
3,696
(1,565)
Net income (loss)
$ 342,517
$ 1,172,000
$
251,949
$
(49,848) $ (927,079)
Weighted average common shares outstanding (2)
431,992
468,039
413,547
311,754
201,892
Diluted income (loss) per share
Dividends per share
$
$
0.86
$
2.60
$
0.64
$
(0.16) $
(4.59)
— $
— $
— $
— $
—
Balance sheet data
Total investments
$ 4,692,350
$ 4,663,206
$ 4,612,669
$ 4,866,819
$ 4,230,275
Cash and cash equivalents
155,410
181,120
197,882
332,692
1,027,625
Total assets
Loss reserves
Premium deficiency reserve
Short- and long-term debt
Convertible senior notes
Convertible junior subordinated debentures
Shareholders' equity
Book value per share
5,734,529
5,868,343
5,251,414
5,582,579
5,566,894
1,438,813
1,893,402
2,396,807
3,061,401
4,056,843
—
572,406
349,461
256,872
—
—
822,301
389,522
23,751
61,883
830,015
389,522
2,548,842
2,236,140
1,036,903
7.48
6.58
3.06
48,461
82,662
826,300
389,522
744,538
2.20
73,781
99,700
338,419
378,970
196,940
0.97
(1)
(2)
In the third quarter of 2015 we reversed the valuation allowance against our deferred tax assets. See Note 12 – "Income
Taxes" to our consolidated financial statements for a discussion of the reversal of the valuation allowance and impact on
our consolidated financial statements.
Includes dilutive shares in years with net income. See Note 4 – "Earnings Per Share" to our consolidated financial statements
for a discussion of our Earnings Per Share.
MGIC Investment Corporation 2016 Annual Report | 5
Five-Year Summary of Financial Information
Other data
New primary insurance written ($ millions)
New primary risk written ($ millions)
$
$
47,875
11,831
$
$
43,031
10,824
$
$
33,439
8,530
$
$
29,796
7,541
$
$
24,125
5,949
Years Ended December 31,
2016
2015
2014
2013
2012
IIF (at year-end) ($ millions)
Direct primary IIF
RIF (at year-end) ($ millions)
Direct primary RIF
Direct pool RIF
With aggregate loss limits
Without aggregate loss limits
Primary loans in default ratios
Policies in force
Loans in default
$ 182,040
$ 174,514
$ 164,919
$ 158,723
$
162,082
$
47,195
$
45,462
$
42,946
$
41,060
$
41,735
244
303
271
388
303
505
376
636
439
879
998,294
50,282
992,188
62,633
968,748
79,901
960,163
103,328
1,006,346
139,845
Percentage of loans in default
5.04%
6.31%
8.25%
10.76%
13.90%
Insurance operating ratios (GAAP)
Loss ratio
Expense ratio
Risk-to-capital ratio (statutory)
Mortgage Guaranty Insurance Corporation
Combined insurance companies
26.0%
15.3%
38.3%
14.9%
58.8%
14.7%
88.9%
18.6%
200.1%
15.2%
10.7:1
12.0:1
12.1:1
13.6:1
14.6:1
16.4:1
15.8:1
18.4:1
44.7:1
47.8:1
6 | MGIC Investment Corporation 2016 Annual Report
Management's Discussion and Analysis of
Financial Condition and Results of Operations
We have reproduced below the “Management’ s Discussion and Analysis of Financial Condition and Results
for the year ended
of Operations” and “Risk Factors” that appeared in our Annual Report on Form
December 31, 2016, which was filed with the Securities and Exchange Commission on February 21, 2017.
Except for various cross-references, we have not changed what appears below from what was in our Form
10-K. As a result, the Management’ s Discussion and Analysis and Risk Factors are not updated to reflect any
events or changes in circumstances that have occurred since our Annual Report on Form 10-K was filed with
the SEC. Our Risk Factors are an integral part of Management’ s Discussion and Analysis and appear
immediately after it.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements and Risk Factors” in this Annual Report, actual results may
differ materially from the results contemplated by forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other statements we may make in the following
discussion or elsewhere in this document even though these statements may be affected by events or
circumstances occurring after the forward looking statements or other statements were made. Therefore no
reader of this document should rely on these statements being current as of any time other than the time at
which this document was filed with the SEC.
See the "Glossary of terms and acronyms" for definitions and descriptions of terms used throughout this
Annual Report.
Introduction
Through our subsidiary, MGIC, we are a leading provider of PMI in the United States, as measured by $182.0
billion of primary IIF on a consolidated basis at December 31, 2016.
As used below, “we” and “our” refer to MGIC Investment Corporation’ s consolidated operations or to MGIC
Investment Corporation, as a separate entity, as the context requires. References to "we" and "our" in the
context of debt obligations refer to MGIC Investment Corporation.
MGIC Investment Corporation 2016 Annual Report | 7
Management's Discussion and Analysis
Overview
This Overview of the MD&A highlights selected
information and may not contain all of the information
that is important to readers of this Annual Report.
Hence, this Overview is qualified by the information
that appears elsewhere
in this Annual Report,
including the other portions of the MD&A.
Summary Financial Results of MGIC Investment
Corporation
Year Ended
December 31,
2016
2015
Change
(In millions, except per
share data, unaudited)
Selected statement of
operations data
Total revenues
$1,062.5
$1,041.3
Losses incurred, net
240.2
343.5
Loss on debt
extinguishment
Income before tax
Provision for (benefit
from) income taxes
Net income
90.5
514.7
172.2
342.5
0.5
487.7
(684.3)
1,172.0
Diluted income per share
$
0.86
$
2.60
Non-GAAP Financial Measures (1)
Pretax operating income
$ 596.3
$ 459.8
Net operating income
395.6
306.1
2 %
(30)%
N/M
6 %
N/M
(71)%
(67)%
30 %
29 %
Net operating income per
diluted share
$
0.99
$
0.75
32 %
(1)
See "Explanation and Reconciliation of our use of Non-
GAAP Financial Measures".
SUMMARY OF 2016 RESULTS
Net operating income for 2016 was $395.6 million
(2015: $306.1 million) and net operating income per
diluted share was $0.99 (2015: $0.75). The 29%
increase in net operating income was driven primarily
by lower losses incurred, net.
We recorded full-year 2016 net income of $342.5
million, and diluted income per share of $0.86. Net
income decreased by $829.5 million compared with
net income of $1.2 billion in 2015, primarily due to the
$847.8 million of tax benefits realized during 2015
from changes in our deferred tax asset valuation
allowance, including its reversal in the third quarter
of 2015; and the $90.5 million
loss on debt
extinguishment resulting from our debt transactions
completed during 2016. The decline in net income
was partially offset primarily by a decrease in losses
incurred, net.
on prior year delinquencies and on our IBNR when
compared to the prior year.
The loss on debt extinguishment recorded during
2016 resulted from debt transactions in which we, or
MGIC, repurchased portions of our outstanding long-
term debt at amounts that in aggregate were in
excess of our carrying values. In addition, we wrote-
issuance costs on the
off unamortized debt
repurchased portions of some of our long-term debt.
See Note 7 - "Debt" to our consolidated financial
statements for further discussion of the accounting
for these transactions. We will continue to assess
opportunities to improve our debt profile and / or
reduce potential dilution
remaining
outstanding convertible debt, which could result in
additional debt extinguishment losses in the future.
from our
The provision for (benefit from) income taxes in our
2016 results reflects a tax provision at the statutory
rate while our prior year results reflect the impact of
the changes in our valuation allowance against our
deferred tax assets, including its reversal in that year.
Our operating results for 2016 reflect a larger
mortgage origination market compared to the prior
year and improved credit performance of our primary
RIF. We grew our IIF to $182.0 billion, or 4.3%, during
2016 and we wrote our highest annual level of new
insurance since 2008. Importantly, the NIW in 2016
in our view, strong underlying credit
has,
characteristics. Our 2009 and later books continued
to experience a low level of losses and accounted for
71% of our total primary RIF as of December 31, 2016.
Our legacy books, particularly those written in
2005-2008, continued to drive our new delinquent
notice and claim activity, but they have experienced
a continued decline in default inventory and paid
claims.
In 2016, we completed a series of financing
transactions that, in our view, improved our debt
profile and reduced potentially dilutive shares, while
maintaining strong levels of regulatory capital.
Specifically, we issued senior notes in the third
quarter, which allowed us to repurchase a significant
portion of our 2% Notes, and in the first half of the
year we repurchased a portion of our 5% Notes with
cash on hand and MGIC purchased a portion of our
9% Debentures.
transactions
total,
eliminated approximately 66 million potentially
dilutive shares and reduced our annual consolidated
interest expense.
these
In
Losses incurred, net were $240.2 million, down 30%
as new delinquent notice activity declined and we
experienced higher favorable reserve development
MGIC's capital position in relation to the PMIERs
requirements continued to strengthen as MGIC held
8 | MGIC Investment Corporation 2016 Annual Report
over $630 million of Available Assets in excess of the
Minimum Required Assets at December 31, 2016. Our
current strategy is to maintain an excess of 10%-15%
over the Minimum Required Assets. Our ability to
manage to this range is primarily subject to OCI
approval of dividends from MGIC to our holding
company (which would reduce MGIC's Available
Assets), the credit performance of our RIF (which
would increase or decrease its Minimum Required
Assets), and any changes made to the PMIERs
financial requirements (which could increase or
decrease Available Assets and/or Minimum Required
Assets). During 2016, MGIC distributed $64 million of
its excess Available Assets as dividends to our
holding company. These dividends were the first
dividends from MGIC since 2008.
the
to operating under
In the first half of 2016, the PMI industry broadly
adopted new premium rates, we believe, primarily in
response
financial
requirements of the PMIERs, which first became
effective on December 31, 2015. We revised both our
BPMI and LPMI premium rates effective in April,
which are competitively positioned within the
industry, and are structured to generate comparable
risk-adjusted returns across the spectrum of loans
we insure. Premium rates within the marketplace,
which includes PMI and government programs
offered by the FHA and VA, have an impact on the PMI
industry's total market share, as well as our share
within the PMI industry from period to period. In 2016,
PMI as an industry captured a greater share of
mortgage originations having insurance, but our
estimated market share within the PMI industry
declined to 17.8% from 19.9% in 2015.
OUTLOOK FOR 2017
Our outlook for 2017 should be viewed against the
backdrop of
the U.S. economy, competition,
mortgage origination levels, and regulatory and
legislative developments. Each of these interrelated
factors will affect our performance.
Our 2017 NIW is expected to be comparable to our
2016 NIW. Our NIW is affected by total mortgage
originations, the percentage of total mortgage
originations utilizing private mortgage insurance (the
"PMI penetration rate") and our market share within
the PMI industry. As of late January 2017, total
mortgage originations are forecasted to decline in
2017 from 2016 levels due to declines in refinancing
originations more than offsetting a small increase in
purchase originations. We expect
the PMI
penetration rate to increase because historically PMI
has captured a share of purchase originations that is
estimated to be 3-4 times greater than that of
refinancing originations. This increase in the PMI
penetration rate should serve to mitigate the decline
Management's Discussion and Analysis
in total mortgage originations. Although we cannot
predict our 2017 market share, recent industry
consolidation may have a positive influence if lenders
re-allocate the combined share of the consolidating
companies among the remaining companies in the
industry. Although our expectation is for our 2017
NIW to be comparable to that of 2016, this will be
highly dependent on the actual mortgage origination
market and competition. If pricing competition
intensifies and customers can obtain lower prices
elsewhere, our NIW may be lower than we expect.
Our book of IIF is the main driver of our revenues and
earnings and its growth is driven by our ability to
generate NIW and retain existing policies in force, as
measured by our persistency. Interest rates influence
both our NIW and persistency. Since the Presidential
election, mortgage rates, as reflected in the 30-year
fixed rate, have risen. In a rising rate environment, we
expect the level of cancellation activity to decelerate,
and in turn increase persistency, although the impact
generally lags the change in interest rates. Higher
interest
for
borrowers, which could slow housing activity, and of
particular importance to our industry, slow first time
home buyer purchase activity resulting in less NIW.
Historically however, purchase origination volume
has not been significantly impacted by interest rate
changes of less than 100 bps on a year-over-year
basis.
reduce affordability
rates could
We expect to face challenges growing our earned
premium revenues in 2017 from 2016 levels, even
with a larger book of IIF, as the impact of changing
premium rates on our IIF continues to adversely
impact our premium yield. Our premium yield is
expected to decline in 2017 from the 2016 level as a
greater percentage of our IIF will be from book years
2009 and later, which were generally written at lower
premium rates than the earlier books. In addition,
premium rates are resetting to lower rates on a
substantial portion of our monthly and annual
premium policies that have not been refinanced
under HARP and remain in force on their ten year
anniversary. The initial ten-year period is reset when
a loan is refinanced under HARP. As of December 31,
2016, the 2007 book year IIF that is subject to
premium rate resets during 2017 was approximately
4% of our total IIF. Counter to this trend, our net
premiums earned may continue to benefit from
cancellations on single premium policies in 2017,
which increases our premium yield when persistency
is less than was assumed when the policy was
written, as the premium is generally non-refundable
and becomes fully earned. Higher persistency on our
monthly and annual premium business would also
counteract the impact of lower premium rates.
MGIC Investment Corporation 2016 Annual Report | 9
Management's Discussion and Analysis
Credit trends on our RIF continue to improve and we
have experienced a declining level of new delinquent
notices, losses paid and total delinquent notice
inventory. We expect these trends to continue in 2017.
Significant favorable reserve development due to
lower claims rates on prior year delinquencies has
occurred over the past two years, but this may not
continue in 2017.
As of December 31, 2016, our PMIERs Available
Assets were 16% greater than our Minimum Required
Assets. We believe that maintaining Available Assets
at a level of 10-15% in excess of our Minimum
Required Assets is prudent to preserve our ability to
write new business, meet unexpected losses without
the need to access the capital markets, pursue new
business opportunities, and continually comply with
the PMIERs which are subject to change and the GSEs
could make them more onerous in future periods,
which could materially affect our Available Assets
and/or Minimum Required Assets. We expect the
GSEs to perform a comprehensive review of the
PMIERs financial requirements and to update them
in 2017 as the PMIERs provide that the tables of
factors that determine Minimum Required Assets will
be updated at least every two years. As part of the
GSEs' comprehensive review, changes may also be
made to provisions of the PMIERs that determine our
Available Assets. As of December 31, 2016, we
believe any reasonably foreseeable changes to the
PMIERs financial requirements would not result in our
failing to be
in compliance with those new
requirements.
In 2016, MGIC paid a total of $64 million in dividends
to our holding company, its first dividends since 2008,
and we expect MGIC to continue to pay quarterly
dividends. OCI authorization is sought before MGIC
pays dividends and MGIC will pay a dividend of $20
million to our holding company in the first quarter of
2017. Dividends from MGIC allow us to effectively
utilize excess capital at MGIC to manage liquidity at
our holding company, deploy capital to other business
opportunities, or repurchase debt or shares of our
common stock.
CAPITAL
GSEs
We must comply with the PMIERs to be eligible to
insure loans purchased by the GSEs. In addition to
their financial requirements, the PMIERs include
business, quality control and certain transaction
approval requirements. The financial requirements of
the PMIERs require a mortgage insurer’ s Available
Assets to equal or exceed its Minimum Required
Assets. Based on our interpretation of the PMIERs,
as of December 31, 2016, MGIC’ s Available Assets
are $4.7 billion and its Minimum Required Assets are
10 | MGIC Investment Corporation 2016 Annual Report
$4.1 billion; and MGIC is in compliance with the
requirements of the PMIERs and eligible to insure
loans purchased by the GSEs.
If MGIC ceases to be eligible to insure loans
purchased by one or both of the GSEs, it would
significantly reduce the volume of our NIW. Factors
that may negatively impact MGIC’ s ability to continue
to comply with the PMIERs include the following:
• The GSEs could make the PMIERs more onerous in
the future; in this regard, the PMIERs provide that
the tables of factors that determine Minimum
Required Assets will be updated every two years
and may be updated more frequently to reflect
changes in macroeconomic conditions or loan
performance. The GSEs will provide notice 180
days prior to the effective date of table updates. In
addition, the GSEs may otherwise amend the
PMIERs at any time.
• The GSEs may reduce the amount of credit they
allow under the PMIERs for the risk ceded under
our quota share reinsurance transaction. The GSEs’
ongoing approval of that transaction is subject to
several conditions and the transaction will be
reviewed under the PMIERs at least annually by the
GSEs. For more information about the transaction,
see our risk factor titled “The mix of business we
write affects our Minimum Required Assets under
the PMIERs, our premium yields and the likelihood
of losses occurring.”
• Our future operating results may be negatively
impacted by the matters discussed in our risk
factors. Such matters could decrease our revenues,
increase our losses or require the use of liquid
assets, thereby creating a shortfall in Available
Assets.
• Should capital be needed by MGIC in the future,
capital contributions from our holding company
may not be available due to competing demands
on holding company resources, including for
repayment of debt.
On an overall basis, the amount of Available Assets
MGIC must hold in order to continue to insure GSE
loans increased under the PMIERs over what state
regulation currently requires.
State Regulations
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 its RIF (or a similar measure) in
order for the mortgage insurer to continue to write
new business. We refer to these requirements as the
“State Capital Requirements.” 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 an MPP.
At December 31, 2016, MGIC’ s risk-to-capital ratio
was 10.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $1.6 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 transaction, without
penalty. At this time, we expect MGIC to continue to
comply with the current State Capital Requirements;
however, you should read our risk factors for
information about matters that could negatively
affect such compliance.
At December 31, 2016, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 12.0 to 1. Reinsurance
transactions with our affiliate permit MGIC to write
insurance with a higher coverage percentage than it
its own under certain state-specific
could on
requirements.
The NAIC previously announced that it plans to revise
the minimum capital and surplus requirements for
mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In May
2016, a working group of state regulators released an
exposure draft of a risk-based capital framework to
establish capital requirements for mortgage insurers,
although no date has been established by which the
NAIC must propose revisions
the capital
requirements. We continue to evaluate the impact of
the framework contained in the exposure draft,
including the potential impact of certain items that
have not yet been completely addressed by the
framework which include: the treatment of ceded risk,
minimum capital floors, and action level triggers.
Currently we believe that the PMIERs contain the
more restrictive capital requirements
in most
circumstances.
to
Management's Discussion and Analysis
increase the
GSE REFORM
The FHFA has been the conservator of the GSEs since
2008 and has the authority to control and direct their
operations. The increased role that the federal
government has assumed in the residential housing
finance system through the GSE conservatorship
may
likelihood that the business
practices of the GSEs change in ways that have a
material adverse effect on us and that the charters of
the GSEs are changed by new federal legislation. In
the past, members of Congress have introduced
several bills
intended to change the business
practices of the GSEs and the FHA; however, no
legislation has been enacted. The new Presidential
the
administration
conservatorship of the GSEs should end; however, it
is unclear whether and when that would occur and
how that would impact us. As a result of the matters
referred to above, it is uncertain what role the GSEs,
FHA and private capital, including PMI, will play in the
residential housing finance system in the future or the
impact of any such changes on our business. In
addition, the timing of the impact of any resulting
changes on our business
is uncertain. Most
meaningful changes would require Congressional
action to implement and it is difficult to estimate
when Congressional action would be final and how
long any associated phase-in period may last.
indicated
that
has
For additional
information about the business
practices of the GSEs, see our risk factor titled
“Changes in the business practices of the GSEs,
federal legislation that changes their charters or a
restructuring of the GSEs could reduce our revenues
or increase our losses.”
loans more affordable
LOAN MODIFICATIONS AND OTHER SIMILAR
PROGRAMS
The federal government, including through the U.S.
Department of the Treasury and the GSEs, and several
lenders have modification and refinance programs to
make outstanding
to
borrowers with the goal of reducing the number of
foreclosures. These programs included HAMP and
similar modification programs, and HARP. During
2015 and 2016, we were notified of modifications that
cured delinquencies that had they become paid
claims would have resulted in approximately $0.6
billion and $0.5 billion, respectively, of estimated
claim payments. These levels are down from a high
of $3.2 billion in 2010.
HAMP expired at the end of 2016 and although HARP
has been extended through September 2017, we
believe that we have realized the majority of the
benefits from that program because the number of
loans insured by us that we are aware are entering
MGIC Investment Corporation 2016 Annual Report | 11
Management's Discussion and Analysis
that program has decreased significantly. The GSEs
have introduced the "Flex Modification" program to
replace HAMP effective in October 2017. Until it
becomes effective, loan servicers must still evaluate
borrowers for other GSE modification programs.
We cannot determine the total benefit we may derive
from loan modification programs, particularly given
the uncertainty around the re-default rates for
defaulted loans that have been modified. Our loss
reserves do not account for potential re-defaults of
current loans whose defaults were cured through
modifications.
As shown in the following table, as of December 31,
2016 approximately 19% of our primary RIF has been
modified:
Policy Year
2003 and Prior
2004
2005
2006
2007
2008
2009
2010 - 2016
Total
HARP (1)
Modifications
HAMP & Other
Modifications
11.1%
18.1%
24.9%
27.8%
38.7%
53.0%
29.2%
—%
10.3%
36.0%
35.3%
35.7%
35.9%
29.5%
17.2%
3.5%
0.1%
8.8%
(1) Includes proprietary programs that are substantially the
same as HARP.
As of December 31, 2016 based on loan count, the
loans associated with 97.5% of all HARP
modifications and 75.3% of HAMP and other
modifications were current.
FACTORS AFFECTING OUR RESULTS
Our results of operations are affected by:
• Cancellations, which reduce IIF. Cancellations due
to refinancings are affected by the level of current
mortgage interest rates compared to the mortgage
coupon rates throughout the in force book, current
home values compared to values when the loans
in the in force book were insured and the terms on
which mortgage credit is available. Home price
appreciation can give homeowners the right to
cancel mortgage
insurance on their loans if
sufficient home equity is achieved. Cancellations
also result from policy rescissions, which require
us to return any premiums received on the
rescinded policies and claim payments, which
require us to return any premium received on the
related policies from the date of default on the
insured loans.
• Premium rates, which are affected by product type,
competitive pressures, the risk characteristics of
the insured loans and the percentage of coverage
on the insured loans. The substantial majority of
our monthly and annual mortgage
insurance
premiums are under premium plans for which, for
the first ten years of the policy, the amount of
premium is determined by multiplying the initial
loan balance;
premium rate by the original
thereafter, the premium resets and a
lower
premium rate is used for the remaining life of the
policy. However, for loans that have utilized HARP,
the initial ten-year period resets as of the date of
the HARP transaction. The remainder of our
monthly and annual premiums are under premium
plans for which premiums are determined by a fixed
percentage of the loan’ s amortizing balance over
the life of the policy.
• Premiums ceded, net of a profit commission, under
reinsurance agreements. See Note 9 –
“Reinsurance”
financial
statements for a discussion of our reinsurance
agreements.
to our consolidated
Premiums written and earned
Premiums written and earned in a year are influenced
by:
• NIW, which increases IIF, is the aggregate principal
amount of the mortgages that are insured during a
period. Many factors affect NIW, including the
volume of low down payment home mortgage
originations and competition to provide credit
enhancement on those mortgages,
including
competition from the FHA, the VA, other mortgage
insurers, GSE programs that may reduce or
eliminate the demand for mortgage insurance and
other alternatives to mortgage insurance. NIW
does not include loans previously insured by us that
are modified, such as loans modified under HARP.
Premiums are generated by the insurance that is in
force during all or a portion of the period. A change
in the average IIF in the current period compared to
an earlier period is a factor that will increase (when
the average in force is higher) or reduce (when it is
lower) premiums written and earned in the current
period, although this effect may be enhanced (or
mitigated) by differences in the average premium rate
between the two periods, as well as by premiums that
are returned or expected to be returned in connection
with claim payments and rescissions, and premiums
ceded under reinsurance agreements. Also, NIW and
cancellations during a period will generally have a
greater effect on premiums written and earned in
subsequent periods than in the period in which these
events occur.
12 | MGIC Investment Corporation 2016 Annual Report
Management's Discussion and Analysis
Investment income
Our investment portfolio is composed principally of
investment grade fixed
income securities. The
principal factors that influence investment income
are the size of the portfolio and its yield. As measured
by amortized cost (which excludes changes in fair
value, such as from changes in interest rates), the size
of the investment portfolio is mainly a function of
cash generated from (or used in) operations, such as
NPW, investment income, net claim payments and
expenses, and cash provided by (or used for) non-
operating activities, such as debt or stock issuances
or repurchases.
• The distribution of claims over the life of a book.
Historically, the first few years after loans are
originated are a period of relatively low claims, with
claims increasing substantially for several years
then declining, although
subsequent and
the economy,
persistency, the condition of
including unemployment and housing prices, and
other factors can affect this pattern. For example,
a weak economy or housing value declines can lead
to claims from older books increasing, continuing
at stable levels or experiencing a lower rate of
decline. See further information under “Mortgage
Insurance Earnings and Cash Flow Cycle” below.
Losses incurred
Losses incurred are the current expense that reflects
estimated payments that will ultimately be made as
a result of delinquencies on insured loans. As
explained under “Critical Accounting Policies” below,
except in the case of a premium deficiency reserve,
we recognize an estimate of this expense only for
delinquent loans. The level of new delinquencies has
historically followed a seasonal pattern, with new
delinquencies in the first part of the year lower than
new delinquencies in the latter part of the year, though
this pattern can be affected by the state of the
economy and local housing markets. Losses incurred
are generally affected by:
• The state of the economy, including unemployment
and housing values, each of which affects the
likelihood that loans will become delinquent and
whether loans that are delinquent cure their
delinquency. Changes in housing values also affect
our ability to mitigate our losses through sales of
properties we acquire after paying a claim as well
as borrower willingness to continue to make
mortgage payments when the value of the home is
below the mortgage balance.
• The product mix of the in force book, with loans
risk characteristics generally
having higher
resulting in higher delinquencies and claims.
• The size of loans insured, with higher average loan
amounts tending to increase losses incurred.
• The percentage of coverage on insured loans, with
deeper average coverage tending to increase
incurred losses.
• The rate at which we rescind policies. Our
estimated loss reserves reflect mitigation from
rescissions of policies and denials of claims. We
collectively refer to such rescissions and denials as
“rescissions” and variations of this term.
• Losses ceded under reinsurance agreements. See
Note 9 – “Reinsurance” to our consolidated
financial statements for a discussion of our
reinsurance agreements.
Underwriting and other expenses
The majority of our operating expenses are fixed, with
some variability due to contract underwriting volume.
Contract underwriting generates fee income included
in “Other revenue.” Underwriting and other expenses
are net of any ceding commission associated with
reinsurance agreements. See Note 9 –
our
“Reinsurance”
financial
to our consolidated
statements for a discussion of our reinsurance
agreements.
Interest expense
Interest expense reflects the interest associated with
our outstanding debt obligations discussed in Note
7 – “Debt” to our consolidated financial statements
and under “Liquidity and Capital Resources” below.
Other
Certain activities that we do not consider to be part
of our fundamental operating activities may also
impact our results of operations and are described
below.
Net realized investment gains (losses)
Realized gains and losses are a function of the
difference between the amount received on the sale
of a security and the security’ s cost basis, as well as
any OTTI recognized in earnings. The amount
received on the sale of fixed income securities is
affected by the coupon rate of the security compared
to the yield of comparable securities at the time of
sale.
Loss on debt extinguishment
At times, we may undertake activities to improve our
debt profile and/or reduce potential dilution from our
outstanding convertible debt. Extinguishing our
MGIC Investment Corporation 2016 Annual Report | 13
Management's Discussion and Analysis
outstanding debt obligations early through these
discretionary activities may result in losses primarily
driven by the payment of consideration in excess of
our carrying value, and the write off of unamortized
debt issuance costs on the extinguished portion of
the long-term debt.
Refer to “Explanation and reconciliation of our use of
Non-GAAP financial measures” below to understand
how these items impact our evaluation of our
fundamental financial performance.
MORTGAGE INSURANCE EARNINGS AND CASH
FLOW CYCLE
In general, the majority of any underwriting profit that
a book generates occurs in the early years of the book,
with the largest portion of any underwriting profit
realized in the first year following the year the book
was written. Subsequent years of a book generally
result in either underwriting profit or underwriting
losses. This pattern of results typically occurs
because relatively few of the claims that a book will
ultimately experience typically occur in the first few
years of the book, when premium revenue is highest,
while subsequent years are affected by declining
premium revenues, as the number of insured loans
decreases (primarily due to loan prepayments) and
increasing losses. The typical pattern is also a
function of premium rates generally resetting to lower
levels after ten years.
14 | MGIC Investment Corporation 2016 Annual Report
Explanation and Reconciliation of our use of Non-GAAP
Financial Measures
Management's Discussion and Analysis
NON-GAAP FINANCIAL MEASURES
We believe that use of the Non-GAAP measures of
pretax operating income (loss), net operating income
(loss) and net operating income (loss) per diluted
share facilitate the evaluation of the company's core
financial performance thereby providing relevant
information. These measures are not recognized in
accordance with accounting principles generally
accepted in the United States of America (GAAP) and
should not be viewed as alternatives to GAAP
measures of performance. The measures described
below have been established
increase
transparency for the purpose of evaluating our
fundamental operating trends.
to
Pretax operating income (loss) is defined as GAAP
income (loss) before tax, excluding the effects of net
realized investment gains (losses), gain (loss) on
losses
debt extinguishment, net
recognized in income (loss) and infrequent or
unusual non-operating items, if any.
impairment
Net operating income (loss) is defined as GAAP net
income (loss) excluding the after-tax effects of net
realized investment gains (losses), gain (loss) on
debt extinguishment, net
losses
recognized in income (loss), and infrequent or
unusual non-operating items, and the effects of
changes in our deferred tax valuation allowance. The
amounts of adjustments to net income (loss) are tax
effected using a federal statutory tax rate of 35%.
impairment
Net operating income (loss) per diluted share is
calculated by dividing (i) net operating income (loss)
adjusted for interest expense on convertible debt,
share dilution from convertible debt, and the impact
of
arrangements
consistent with the accounting standard regarding
earnings per share, whenever the impact is dilutive,
by (ii) diluted weighted average common shares
outstanding.
compensation
stock-based
Although pretax operating income (loss) and net
operating income (loss) exclude certain items that
have occurred in the past and are expected to occur
in the future, the excluded items represent items that
are: (1) not viewed as part of the operating
performance of our primary activities; or (2) impacted
by both discretionary and other economic factors and
are not necessarily indicative of operating trends, or
both. These adjustments, along with the reasons for
treatment, are described below. Other
their
companies may
these measures
calculate
differently. Therefore, their measures may not be
comparable to those used by us.
(1) Net realized investment gains (losses). The
recognition of net realized investment gains or
losses can vary significantly across periods as
the timing of individual securities sales is highly
discretionary and is influenced by such factors
as market opportunities, our tax and capital
profile, and overall market cycles.
Trends in the profitability of our fundamental
operating activities can be more clearly identified
without the fluctuations of these realized
investment gains and losses.
(2) Gains and losses on debt extinguishment. Gains
and losses on debt extinguishment result from
discretionary activities that are undertaken to
enhance our capital position, improve our debt
profile, and/or reduce potential dilution from our
outstanding convertible debt.
(3) Net impairment losses recognized in earnings.
The recognition of net impairment losses on
investments can vary significantly in both size
and timing, depending on market credit cycles,
individual
issuer performance, and general
economic conditions.
(4) Deferred tax asset valuation allowance. The
recognition, or reversal, of a valuation allowance
against deferred tax assets
is subject to
significant management judgment and such
recognition or reversal may significantly impact
the discrete accounting period in which it is
recorded.
MGIC Investment Corporation 2016 Annual Report | 15
Management's Discussion and Analysis
Non-GAAP Reconciliations
Reconciliation of Income before tax to pretax operating income and calculation of Net operating income
(In thousands)
Years Ended December 31,
2016
2015
2014
Income before tax per Statement of Operations
$
514,714
$
487,687
$
254,723
Adjustments:
Net realized investment gains
Loss on debt extinguishment
Pretax operating income
Income taxes:
Provision for income taxes (1)
Net operating income
(8,932)
90,531
596,313
(28,361)
507
459,833
(1,357)
837
254,203
200,757
153,748
91,425
$
395,556
$
306,085
$
162,778
(1) Income before tax within operating income is tax effected at our effective tax rate. The effective tax rate for the years December
31, 2015 and 2014 exclude the effects of the change in our valuation allowance. Adjustments are tax effected at the federal
statutory rate of 35%.
Reconciliation of Net income to Net operating income
(In thousands)
Net income
Years Ended December 31,
2016
2015
2014
$
342,517
$
1,172,000
$
251,949
Effect of change in deferred tax asset valuation allowance
—
(847,810)
(88,833)
Adjustments, net of tax(1):
Net realized investment gains
Loss on debt extinguishment
Net operating income
(1) Adjustments are tax effected at the federal statutory rate of 35%.
(5,806)
58,845
(18,435)
330
(882)
544
$
395,556
$
306,085
$
162,778
Reconciliation of Net operating income per diluted share to Net income per diluted share
Net income per diluted share
Effect of change in deferred tax asset valuation allowance (1)
Net realized investment gains
Loss on debt extinguishment
Net operating income per diluted share
Years Ended December 31,
2016
2015
2014
$
$
0.86
$
2.60
$
—
(0.01)
0.14
(1.81)
(0.04)
—
0.64
(0.21)
—
—
0.99
$
0.75
$
0.43
(1) The change in our deferred tax asset valuation allowance includes a $686.7 million reduction to our tax provision for amounts
to be realized in future periods, or $1.47 per diluted share.
16 | MGIC Investment Corporation 2016 Annual Report
Mortgage Insurance Portfolio
MORTGAGE ORIGINATIONS GREW AGAIN IN
2016; FORECASTED TO DECLINE IN 2017 (see
chart 01)
lower
in 2017
In 2016, the primary mortgage insurance market
grew, driven by a larger mortgage origination market
as solid housing fundamentals, such as household
formations, an improved employment environment,
and low interest rates supported housing activity.
Mortgage origination estimates indicate that both
purchase and refinance volume increased in 2016
compared to the prior year. The expected decline in
is based upon
mortgage originations
significantly
refinancing originations as
mortgage interest rates are anticipated to trend
higher. Generally, the purchase origination market has
a greater impact on the PMI industry as historically
the industry's share is 3-4 times higher for purchase
originations than refinancing originations. While a
smaller mortgage origination market is expected to
result in lower NIW for the overall PMI industry in 2017
recent industry consolidation is expected to result in
lenders allocating NIW away from combining insurers
to other private mortgage insurers. Competition from
government mortgage
programs,
discussed below, will also continue to impact the
market share of PMI. In consideration of these
factors, our 2017 NIW is expected to be comparable
to that of 2016.
insurance
01 MORTGAGE ORIGINATIONS IN BILLIONS
Management's Discussion and Analysis
ESTIMATED TOTAL OF PMI, FHA, and VA
PRIMARY MORTGAGE INSURANCE IN BILLIONS
Primary mortgage insurance
2016
$744
2015
$628
2014
$438
Source: Inside Mortgage Finance - February 16, 2017 (excluding
USDA insured amounts), or SEC filings. Includes HARP NIW.
THE MORTGAGE
REMAINS INTENSELY COMPETITIVE
(see tables 02 and 03)
INSURANCE
INDUSTRY
team
pricing,
financial
strength,
including
We compete against five other private mortgage
insurers, as well as government mortgage insurance
programs such as the FHA and VA. There are various
ways in which we compete with other mortgage
underwriting
insurers,
requirements,
customer
relationships, reputation, and the strength of our
management
field organization.
and
Competition in 2016 primarily centered on pricing
practices in the market and included: (i) reductions in
standard filed rates on BPMI policies, (ii) use by
certain competitors of a spectrum of filed rates to
allow for formulaic, risk-based pricing (commonly
referred to as "black-box" pricing); and (iii) use of
customized rates (discounted from published rates)
on LPMI single premium policies. These pricing
practices were driven by both the implementation of
PMIERs at the end of 2015, as well as industry
competition to maintain or grow market share. The
result of
in which we
participated, generally decreased filed premium rates
on higher-FICO score loans and increased rates on
lower-FICO score loans. We also continue to use
authority set forth in our rate filings to provide
customized LPMI single premium policy rates on a
selective basis. We believe our current rates allow us
to compete effectively across many FICO scores;
however
that pricing
competition will not intensify further, which could
result in a decrease in our NIW and/or product-based
returns.
the pricing changes,
is no guarantee
there
Purchase originations
Refinance originations
Source: GSEs and MBA estimates/forecasts as of January
2017. Amounts represent the average of all sources.
The FHA offers fixed premium rates across all FICO
scores and often has lower monthly premium rates
across lower FICO business, which are effectively
cross-subsidized by higher-FICO score premium
rates. As a result, we have seen, and expect to
continue to see some lenders utilize FHA insurance
for the lower-FICO score business for which we
compete. However, not all lower-FICO score business
is migrating to the FHA because PMI may be
cancelable when FHA insurance is not, lenders value
our customer service, PMI continues to be an efficient
MGIC Investment Corporation 2016 Annual Report | 17
Management's Discussion and Analysis
and cost-effective alternative to the FHA for many
borrowers, and some lenders perceive greater legal
risks under FHA versus GSE programs. Any reduction
in premium rates by the FHA that create a larger
payment differential than at present could result in
more business utilizing FHA mortgage insurance.
Even though the PMI industry's pricing changes
raised premiums on lower-FICO score loans, the PMI
industry captured a greater share of the total PMI and
government insured volume in 2016. The increase in
PMI share was due in part to new 97% LTV loan
offerings from lenders that securitize loans with the
GSEs, which provided an alternative to similar FHA
loan programs for qualified borrowers, and some
lenders are shifting business away from the FHA due
to perceived legal risks.
While our market share in 2016 declined from 2015
levels due to the overall competitive environment, we
believe the decline is principally attributable to our
maintaining greater pricing discipline than certain
competitors in LPMI single premium policies. We plan
to continue to focus on writing new insurance that
meets our risk-adjusted return thresholds across the
spectrum of loans we insure and provide market-
leading customer service. Our market share in 2017
will again primarily be influenced by competitive
pricing practices, but
is also expected to be
influenced by customer service, and changes in
ownership of our competitors as lenders prefer to
allocate business across a spectrum of mortgage
insurers, with limitations on amounts allocated to any
individual mortgage insurer.
02 ESTIMATED PRIMARY MI MARKET SHARE
% OF TOTAL PRIMARY MI VOLUME
INSURANCE WRITTEN
NEW
INCREASED
11% WITH STRONG UNDERLYING CREDIT
CHARACTERISTICS
For the full-year 2016, NIW was higher than our initial
expectations due to a stronger than expected
mortgage origination market. From our perspective,
the 2016 NIW has strong underlying credit
characteristics as
lenders maintained high
underwriting standards and our pricing is competitive
for higher-FICO score business (see tables 04 and 05).
Our mix between policy payment types was relatively
stable from the prior year, and we maintained a high
mix of monthly premium business, which is almost
exclusively BPMI (see table 06). Refinances were a
larger percentage of our NIW in 2016 (see table 07)
driven by a significant increase in refinancing activity
in the second half of 2016 as average interest rates
on 30-year fixed rate loans fell to multi-year lows in
the third quarter following Britain's vote to exit the
European Union. Across the spectrum of loan-to-
value ratios, we had a greater increase in the
percentage of NIW from LTVs 95.01 and above, which
was largely a function of new 97% LTV loan programs
offered by lenders and a shift by lenders from the FHA
to PMI. The percentage of NIW from LTVs 80.01% to
85% also increased for a number of reasons: our
lowering of premiums in this LTV segment and for
borrowers with higher FICO scores, and a higher
amount of refinancing originations by borrowers
whose home values increased but still were required
to have PMI.
04 PRIMARY NIW BY FICO SCORE IN BILLIONS
Years Ended December 31,
2016
2015
2014
740 and greater
$
28.3
$
PMI
FHA
VA
2016
36.3%
36.4%
27.3%
2015
35.0%
40.4%
24.6%
2014
40.7%
33.9%
25.4%
700 - 739
660 - 699
659 and less
Total
12.2
5.9
1.5
24.8
10.8
5.8
1.6
$
18.8
8.6
4.8
1.2
$
47.9
$
43.0
$
33.4
Source: Inside Mortgage Finance - February 16, 2017 (excluding
USDA insured amounts). Includes HARP NIW.
05 LOAN-TO-VALUE % OF PRIMARY NIW
03 ESTIMATED MGIC MARKET SHARE
% OF TOTAL PRIMARY PRIVATE MI VOLUME
MGIC
2016
17.8%
2015
19.9%
2014
19.8%
Source: Inside Mortgage Finance - February 16, 2017 or SEC
filings. Excludes HARP NIW.
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
80.01% to 85%
Years Ended December 31,
2016
2015
2014
5.8%
47.8%
31.7%
14.7%
4.4%
50.1%
33.1%
12.4%
1.8%
55.5%
31.5%
11.2%
18 | MGIC Investment Corporation 2016 Annual Report
06 POLICY PAYMENT TYPE % OF PRIMARY NIW
08 INSURANCE AND RISK IN FORCE
IN BILLIONS
Management's Discussion and Analysis
Monthly premiums
Single premiums
Annual Premiums
Years Ended December 31,
2016
2015
2014
80.6%
19.1%
0.3%
79.3%
20.4%
0.3%
84.8%
14.9%
0.3%
07 TYPE OF MORTGAGE % OF PRIMARY NIW
Purchases
Refinances
Years Ended December 31,
2016
2015
2014
80.4%
19.6%
81.3%
18.7%
86.6%
13.4%
IIF INCREASED 4% TO $182B; RIF INCREASED 4%
TO $47.2B (see table 08)
The amount of our IIF and RIF is impacted by the
amount of NIW and cancellations of primary IIF
during the year. Although we wrote $47.9 billion of
new insurance in 2016, we experienced an increasing
level of cancellation volume, which hindered our IIF
growth from the prior year. Cancellation activity is
primarily due to refinancing activity, but is also
impacted by rescissions, cancellations due to claim
payment, and policies cancelled when borrowers
achieve the required amount of home equity.
Refinancing activity has historically been affected by
the level of mortgage interest rates and the level of
home price appreciation. Cancellations generally
move inversely to the change in the direction of
interest rates, although they generally lag a change in
direction.
Persistency
Our persistency at December 31, 2016 was 76.9%
compared to 79.7% at December 31, 2015. Since
2000, our year-end persistency ranged from a high of
84.7% at December 31, 2009 to a low of 47.1% at
December 31, 2003. We expect our persistency to
trend higher during 2017 from the level experienced
at the end of 2016 because interest rates are
forecasted to increase during 2017.
Years Ended December 31,
2016
2015
2014
NIW
$
47.9
$
43.0
$
33.4
Cancellations
(40.4)
(33.4)
(27.2)
Increase in primary
IIF
Direct primary IIF as
of December 31,
Direct primary RIF as
of December 31,
$
7.5
$
9.6
$
6.2
$ 182.0
$
174.5
$
164.9
$
47.2
$
45.5
$
42.9
CREDIT PROFILE OF OUR PRIMARY RIF IS
IMPROVING (see table 09)
The proportion of our total primary RIF written after
2008 has been steadily increasing in proportion to our
total primary RIF. Our 2009 and later books possess
significantly improved credit characteristics when
compared to our 2005-2008 origination years. The
loans we insured beginning in 2009, on average, have
substantially higher FICO scores and lower LTVs than
those insured in 2005-2008. The credit profile of our
RIF has also benefited from programs such as HARP.
HARP allows borrowers who are not delinquent, but
who may not otherwise be able to refinance their
loans under the current GSE underwriting standards
due to, for example, the current LTV exceeding 100%,
to refinance and lower their note rate. Loans
associated with 97.5% of all of our HARP
modifications were current as of December 31,
2016. The following chart shows the composition of
our primary RIF as of December 31, 2016. As shown
in the chart below, the aggregate of our 2009-2016
books and our HARP modifications accounted for
approximately 81% of our
total primary RIF
at December 31, 2016.
MGIC Investment Corporation 2016 Annual Report | 19
reasons,
POOL AND OTHER INSURANCE
MGIC has written no new pool insurance since 2009,
however, for a variety of
including
responding to capital market alternatives to private
mortgage insurance and customer demands, MGIC
may write pool risk in the future. Our direct pool RIF
was $547 million ($244 million on pool policies with
limits and $303 million on pool
aggregate loss
policies without aggregate
limits) at
loss
December 31, 2016 compared to $659 million ($271
million on pool policies with aggregate loss limits and
$388 million on pool policies without aggregate loss
limits) at December 31, 2015. If claim payments
associated with a specific pool reach the aggregate
loss limit, the remaining IIF within the pool would be
cancelled and any remaining defaults under the pool
would be removed from our default inventory.
In the second half of 2016 we participated in GSE
credit risk transfer transactions through an affiliate
of MGIC. Each GSE launched a new credit risk transfer
offering that involved credit insurance policies with a
pool structure that primarily covered loans to be
delivered to the GSE in the future. The policies provide
additional coverage beyond primary mortgage
insurance on 30-year fixed-rate mortgages with
80.01-95% LTVs. These transactions were immaterial
to our financial statements in 2016 and given the risk
insured will remain immaterial to our financial
statements in future periods. Future participation in
GSE credit risk transfer transactions will need to be
evaluated based upon the terms offered and
expected returns.
Management's Discussion and Analysis
09 PRIMARY RISK IN FORCE IN BILLIONS
December 31,
2016
December 31,
2015
December 31,
2014
RIF
% of
RIF
RIF
% of
RIF
RIF
% of
RIF
$33,368
71% $28,339
62% $22,590
53%
4,489
9%
5,237
12%
5,758
13%
396
1%
509
1%
591
1%
2009+
2005 -
2008
(HARP)
Other
years
(HARP)
Subtotal
38,253
81% 34,085
75% 28,939
67%
1,475
3%
1,933
4%
2,488
6%
Other
years
(Non-
HARP)
2005-
2008
(Non-
HARP)
7,467
16%
9,444
21% 11,520
Subtotal
8,942
19% 11,377
25% 14,008
27%
33%
Total
Primary
RIF
$47,195 100% $45,462 100% $42,947 100%
20 | MGIC Investment Corporation 2016 Annual Report
Consolidated Results of Operations
Management's Discussion and Analysis
The following section of the MD&A provides a
comparative discussion of our Consolidated Results
of Operations for the three-year period ended
December 31, 2016. For a discussion of the Critical
Accounting Policies used by us that affect the
Consolidated Results of Operations, see "Critical
Accounting Policies" below.
Revenues
Year Ended December 31,
(In millions)
2016
2015
2014
Net premiums written
$ 975.1
$ 1,020.3
$ 882.0
Net premiums earned
$ 925.2
$ 896.2
$ 844.4
Investment income, net
of expenses
Net realized investment
gains
Other revenue
110.7
103.7
87.6
8.9
17.7
28.4
13.0
1.4
9.3
Total revenues
$1,062.5
$ 1,041.3
$ 942.6
transaction. As part of
NPE INCREASED 3.2% IN 2016 AND 6.1% IN 2015
2016 compared to 2015. NPW declined 4.4% from
the prior year, primarily because ceded premiums
were lower in 2015 due to the commutation of our
2013 QSR Transaction in the third quarter, which was
a non-recurring
the
commutation, unearned ceded premiums were
remitted back to us from the reinsurers, and we
returned the related ceding commissions, which had
the effect of increasing our profit commission.
Partially offsetting the higher 2016 ceded premiums
was an increase in new business premiums in 2016
and a reduction in premium refunds, and our related
accrual, due to lower claim activity.
NPE increased 3.2% from the prior year reflecting
higher earned premiums from single premium
policies and lower premium refunds and accruals.
The increase in earned premiums on single premium
policies was driven by refinance activity as single
premium policies are generally non-refundable. The
decrease in premium refund accruals was due to
lower claim activity. The increase in net premiums
earned was offset in part by the effects of our 2013
in 2015, which
QSR Transaction commutation
resulted in a non-recurring increase in our profit
commission. See "Overview – Factors Affecting Our
Results" above for additional factors that also
influence the amount of net premiums written and
earned in a year.
2015 compared to 2014. NPW increased 15.7% from
the prior year. The increase reflects higher premiums
refund accruals.
from new business, as well as a reduction to our
In addition, ceded
premium
the
premiums were
commutation of our 2013 QSR Transaction in the third
quarter.
in 2015 due
lower
to
NPE increased 6.1% from the prior year reflecting
higher profit commission and higher earned
premiums on single premium policies. The higher
profit commission was the result of the 2015 return
of ceding commissions to reinsurers as part of the
commutation of our 2013 QSR Transaction. The
increase in earned premiums from single premium
policies was driven by refinance activity as singles
are generally non-refundable.
Premium Yield (see table 10)
Premium yield decreased to 51.9 basis points for
2016 (2015: 52.8, 2014: 52.2)
The amount of premiums earned from our average
IIF during the year is important to understanding our
consolidated results of operations and is influenced
by a number of key drivers, which are described below.
The impact each driver has from period to period will
vary.
Change in premium rates
Changing premium rates have decreased our
premium yield in 2016 primarily due to the following
factors.
• The books we wrote in 2009 and after were 72% of
our IIF as of December 31, 2016, compared to 64%
as of December 31, 2015 and these book years have
a lower average premium rate than prior books due
to several
risk
characteristics.
including,
factors,
lower
• The monthly premium program used for the
substantial majority of loans we insured provides
for a set premium rate for the first ten years of the
policy and a lower premium rate thereafter. The
initial ten-year period is reset when the loan is
refinanced under HARP.
As of December 31, 2016 approximately 4% and
2% of our total primary IIF was written in 2007
and 2008; respectively, was not refinanced under
HARP and is subject to reset after ten years.
Change in premium refunds and premium refund
accruals (excluding most single premium policies)
• Premium
refunds upon claim payment or
rescission decrease our premium yield. Generally,
the level of premiums we refund and our premium
MGIC Investment Corporation 2016 Annual Report | 21
commutation of our 2013 QSR Transaction in 2015
that resulted in a non-recurring increase in our profit
commission and in turn reduced ceded premiums.
These reductions were partially negated by a lower
amount of premium refunds and a higher amount of
earned premiums from single premium policies due
to refinancings.
2015 compared to 2014. Our 2015 full-year premium
yield increased when compared to full-year 2014 (see
table 10). As shown in the chart the increase in our
premium yield was due to lower premium refunds,
higher earned premiums from single premium
policies due to refinancings, and a less adverse
impact from reinsurance due to the commutation of
our 2013 QSR Transaction in 2015. These increases
were offset in part by a lower average premium rate
on the 2015 average IIF.
10
PREMIUM YIELD IN BASIS POINTS
2016
2015
Prior year premium yield
52.8
52.2
Reconciliation:
change in premium rates
(3.0)
(2.9)
change in premium refunds and
accruals
single premium policy persistency
reinsurance
End of year premium yield
2.6
1.0
(1.5)
51.9
2.2
0.7
0.6
52.8
Management's Discussion and Analysis
refund accrual are highly variable from period to
period.
• When a policy is cancelled for a reason other than
rescission or claim payment, all premium that is
non-refundable is immediately earned and any
refundable premium from the cancellation date is
returned to the servicer or borrower. Non-
refundable premium is primarily associated with
our single premium policies, which are discussed
below.
When a policy
is rescinded, all previously
collected premium is returned to the servicer.
When a policy is cancelled due to claim payment,
we return any premium received since the date
of default.
Single premium policy persistency
• The recent decrease in single premium policy
persistency has increased our premium yield, with
an increasing impact in recent periods as single
premium policies have become a larger portion of
our IIF and mortgage interest rates have remained
low resulting in greater cancellations of policies.
• Generally, the premium on a single premium policy
is not refundable and is earned over the estimated
policy life. Therefore, if persistency is less than was
assumed when the policy was written, the effective
premium yield will increase.
Reinsurance
• The use of reinsurance lowers our premium yield,
however the magnitude of the impact varies from
period
following
considerations.
to period due
the
to
The 2015 QSR Transaction increased the amount
of our IIF covered by reinsurance and results in
an increase in the amount of premiums and
losses ceded. We cede 30% of earned and
received premiums and losses incurred. The
premiums we cede are reduced by a profit
commission, which primarily varies by the level
of losses we cede.
Our reinsurance affects premiums, underwriting
expenses and losses incurred and should be analyzed
by reviewing its total effect on our statements of
operations, as discussed below under “Reinsurance
agreements.”
2016 compared to 2015. Our 2016 full-year premium
yield declined when compared to full-year 2015 (see
table 10). As shown in the chart the decline in our
premium yield was primarily due to a lower average
premium rate on the 2016 average IIF. Our reinsurance
reduced our premium yield an additional 1.5 basis
points from 2015, which was in part due the
22 | MGIC Investment Corporation 2016 Annual Report
Reinsurance agreements
Our quota share reinsurance affects various lines of
our statements of operations and therefore we
believe it should be analyzed by reviewing its effect
on our pre-tax net income, as described below.
• We cede a fixed percentage of premiums earned
insurance covered by the
and received on
agreement.
• We receive the benefit of a profit commission
through a reduction in the premiums we cede. The
profit commission varies directly and inversely with
the level of losses on a "dollar for dollar" basis and
is eliminated at levels of losses that we do not
expect to occur. This means that lower levels of
losses result in a higher profit commission and less
benefit from ceded losses; higher levels of losses
result in more benefit from ceded losses and a
lower profit commission (or for levels of losses we
do not expect, its elimination).
• We receive the benefit of a ceding commission
through a reduction in underwriting expenses equal
to 20% of premiums ceded (before the effect of the
profit commission).
• We cede a fixed percentage of losses incurred on
insurance covered by the agreement.
The effects described above result in a net cost of the
reinsurance, with respect to a covered loan, of 6% (but
can be lower if losses are materially higher than we
expect). This cost is derived by dividing the reduction
in our pre-tax net income from such loans with
reinsurance by our direct (that is, without reinsurance)
premiums from such loans. Although the net cost of
the reinsurance is generally constant at 6%, the effect
of the reinsurance on the various components of pre-
tax income discussed above will vary from period to
period, depending on the level of ceded losses.
Because more of our IIF is covered under the 2015
QSR Transaction than was covered under the
commuted 2013 QSR Transaction, the absolute dollar
cost of the 2015 QSR Transaction will be higher than
the cost of the 2013 QSR Transaction. Although the
use of reinsurance reduces our pre-tax net income,
we receive credit under the PMIERs for risk ceded
under our 2015 QSR Transaction, which mitigates the
negative effect of the PMIERs on our returns.
Management's Discussion and Analysis
The following table provides additional information
related to our premiums written and earned and RIF
subject to reinsurance agreements for 2016, 2015,
and 2014.
(Dollars in
thousands)
NIW subject to
quota share
reinsurance
agreements
IIF subject to quota
share reinsurance
agreements
IIF subject to
captive reinsurance
agreements
As of and For the Years Ended December
31,
2016
2015
2014
89%
91 %
90%
76%
73 %
56%
2%
3 %
5%
2015 QSR Transaction (1)
Ceded premiums
written, net of profit
commission
% of direct
premiums written
Ceded premiums
earned, net of profit
commission
% of direct
premiums earned
Ceding
commissions
Ceded RIF
$
125,460
$
52,588
11%
5 %
$
125,460
$
52,588
12%
5 %
$
47,629
$
20,582
$10,763,637
$9,886,952
2013 QSR Transaction (1)
n/a
n/a
n/a
n/a
n/a
n/a
Ceded premiums
written, net of profit
commission
% of direct
premiums written
Ceded premiums
earned, net of profit
commission
% of direct
premiums earned
Ceding
commissions
Ceded RIF
Captives
Ceded premiums
written
% of direct
premiums written
Ceded premiums
earned
% of direct
premiums earned
n/a
$ (11,355)
$ 100,031
n/a
(1)%
10%
n/a
$
35,999
$
88,528
n/a
n/a
n/a
$
$
4 %
9%
10,234
$
37,833
—
$8,229,173
$
$
7,987
$
13,547
$
18,794
1.0%
1.3 %
1.9%
8,090
$
13,650
$
18,917
1.0%
1.4 %
2.0%
(1) As discussed in Note 9 - "Reinsurance" to our consolidated financial
statements, the 2013 QSR Transaction was commuted on July 1, 2015
and replaced with our 2015 QSR Transaction, which increased the IIF
and corresponding RIF covered by reinsurance. Premiums are ceded
on an earned and received basis under the 2015 QSR Transaction.
MGIC Investment Corporation 2016 Annual Report | 23
Management's Discussion and Analysis
INVESTMENT INCOME INCREASED IN 2016 AND
INVESTMENT YIELDS
2015 AS AVERAGE
INCREASED (see chart 11)
The net unrealized (losses) gains position of our
investment portfolio (see chart 12) as of December
31, 2016, 2015, and 2014 is as follows.
2016 compared to 2015. Net investment income
increased 6.7% to $111 million in 2016 compared to
$104 million in 2015. The increase in investment
income was due to higher average investment yields,
as well as a higher average investment portfolio
balance.
2015 compared to 2014. Net investment income
increased 18.4% to $104M in 2015 compared to
$88M in 2014. The increase in investment income
was due to higher average investment yields.
See "Balance Sheet Analysis" in this MD&A for further
discussion regarding our investment portfolio.
11 PORTFOLIO DURATION IN YEARS
INVESTMENT YIELD % OF AVERAGE
INVESTMENT PORTFOLIO ASSETS
NET REALIZED INVESTMENT GAINS LOWER IN
2016; 2015 GAINS REFLECT OPPORTUNISTIC
SALES ACTIVITY
Net realized gains were $9 million in 2016 compared
to $28 million in 2015 and $1M in 2014. Net realized
gains in 2015 were primarily taken from our fixed
income portfolio as we sold securities to realize gains
under favorable market conditions.
12 NET UNREALIZED INVESTMENT (LOSSES)
GAINS IN MILLIONS
The net unrealized losses (gains) position of our
investments as of December 31, 2016, 2015, 2014
was primarily caused by changes in interest rates
between the time of purchase and the respective year
end. See Note 5 - "Investments" for additional
information on our investment portfolio.
OTHER REVENUE
IN 2016 ON
FOREIGN CURRENCY GAINS AND 2015 ON
CONTRACT UNDERWRITING ACTIVITY
INCREASED
2016 compared to 2015. Other revenue increased to
$18M in 2016 from $13M in 2015, primarily due to the
substantial liquidation of our Australian operations
for which we recognized approximately $4 million of
gains related to changes
in foreign currency
exchange rates in the first quarter of 2016. Other
revenue also increased compared to the prior year
due to an increase in contract underwriting fees
attributable to higher mortgage origination volumes.
2015 compared to 2014. Other revenue increased to
$13M in 2015 from $9 million in 2014 primarily due
to an increase in our contract underwriting fees
attributable to higher mortgage origination volumes.
24 | MGIC Investment Corporation 2016 Annual Report
Losses and expenses
(In millions)
2016
2015
2014
Year Ended December 31,
Losses incurred, net
$ 240.2
$ 343.5
$ 496.1
Change in premium
deficiency reserve
Amortization of deferred
policy acquisition costs
Other underwriting and
operating expenses, net
Interest expense
Loss on debt
extinguishment
Total losses and
expenses
—
(23.8)
(24.7)
9.6
8.8
7.6
150.8
56.7
155.6
68.9
138.4
69.6
90.5
0.5
0.8
$ 547.8
$ 553.6
$ 687.9
LOSSES
INCURRED, NET CONTINUED TO
DECLINE AS CREDIT QUALITY CONTINUED TO
IMPROVE
and
“default”
As discussed in “Critical Accounting Policies”
below and consistent with industry practices, we
establish loss reserves for future claims only for
loans that are currently delinquent. The terms
“delinquent”
used
interchangeably by us. We consider a loan in
default when it is two or more payments past due.
Loss reserves are established based on estimating
the number of loans in our default inventory that
will result in a claim payment, which is referred to
as the claim rate, and further estimating the
amount of the claim payment, which is referred to
as claim severity.
are
factors,
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. The actual amount of the claim payments
may be substantially different than our loss reserve
estimates. Our estimates could be adversely
affected by several
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, that could result in, among other things,
greater losses on loans, and may affect borrower
willingness to continue to make mortgage
payments when the value of the home is below the
mortgage balance. Historically, losses incurred have
followed a seasonal trend in which the second half of
the year has weaker credit performance than the first
half, with higher new notice activity and a lower cure
rate. Our estimates are also affected by any
Management's Discussion and Analysis
agreements we enter into regarding our claims
the settlement
paying practices, such as
agreements discussed in Note 17 – “Litigation and
Contingencies” to our consolidated financial
statements. Changes to our estimates could result
in a material impact to our consolidated results of
operations and capital position, even in a stable
economic environment.
Losses incurred, net
2016 compared to 2015. Losses incurred, net
decreased 30% to $240 million compared to $344
million in 2015. The decrease was primarily due to a
decrease in losses and LAE incurred in respect to
defaults reported in the current year and favorable
development on defaults that occurred in prior years.
Current year losses declined due to a 9% reduction in
new notices received and a lower claim rate applied
to the new notices. The claim rate applied to new
notices in each quarter of 2016 and 2015 generally
ranged from 12% to 13% with the full-year 2016 claim
rate on new notices declining by approximately 0.5
percentage points compared to the full-year 2015
claim rate. Favorable development on prior year
defaults occurred in 2016 and 2015 due to a lower
claim rate on previously reported defaults. In 2015,
the amount of development was also favorably
impacted by $21 million due to re-estimation of
previously recorded reserves related to disputes on
our claims paying practices and IBNR. The favorable
development recognized in both 2016 and 2015 due
to lower claim rates on prior year defaults was
partially offset by increases in our expected severity
assumption on prior year defaults. The increases in
our severity assumption reflected a rising trend,
following periods of relative stability, in our average
claim paid, expressed as a percentage of our
exposure (the unpaid principal balance of the loan
times our insurance coverage percentage), from the
first quarter of 2015 through the first quarter of 2016
(see table 17). Our loss reserves estimates take into
consideration
the
development of the delinquencies may vary from
period to period without establishing a meaningful
trend.
time, because
trends over
2015 compared to 2014. Losses incurred, net
decreased 31% to $344 million compared to $496
million in 2014. The decrease was primarily due to a
decrease in losses and LAE incurred in respect to
defaults reported in 2015 and favorable development
on defaults that occurred in prior years. The 2015
current year losses declined due to a 16% reduction
in new notices received and a lower claim rate applied
to the new notices. The claim rate applied to new
notices in each quarter of 2015 and 2014 generally
ranged from 12% to 16%, with the full-year 2015 claim
MGIC Investment Corporation 2016 Annual Report | 25
Management's Discussion and Analysis
rate on new notices declining by approximately 2
percentage points compared to the full-year 2014
claim rate. The claim rate declined due to improved
housing and economic conditions. The favorable
development recognized in 2015 resulting from lower
claim rates on prior year defaults was partially offset
by increases in our expected severity assumption on
prior year's defaults. The increases in our severity
assumption reflected a rising trend, following periods
of relative stability, in our average paid claim
expressed as a percentage of our exposure,
throughout 2015 (see table 17). In 2014, the favorable
development reflected a lower claim rate and a lower
severity assumption on prior years defaults.
13 COMPOSITION OF LOSSES INCURRED
IN MILLIONS
Loss Ratio (see chart 14)
The loss ratio is the ratio, expressed as a percentage,
of the sum of incurred losses and LAE, net to net
premiums earned. The decline in the loss ratio in 2016
when compared to 2015, and in 2015 when compared
to 2014 was primarily due to a lower level of losses
incurred, net.
14 LOSS RATIO
Claim Rate (see chart 15)
Loans insured in 2008 and prior continue to represent
a substantial portion of our new default notices
received each quarter, with many new default notices
relating to loans that previously had been reported
delinquent (see chart 16). For 2016, loans insured in
2008 and prior represented approximately 87% of the
new notices received and 90% of those notices
related to loans that were previously delinquent. For
2015, loans insured in 2008 and prior represented
approximately 92% of the new notices received and
88% of those notices related to loans that were
previously delinquent. For 2014, loans insured in 2008
and prior represented approximately 96% of new
notices received and 86% of those notices related to
loans that were previously delinquent (see chart 16).
As a result of this cycle (in which loans default, cure,
and re-default, along with the duration that defaults
may ultimately remain in our notice inventory),
significant judgment is required in establishing the
claim rate.
26 | MGIC Investment Corporation 2016 Annual Report
15 PRIMARY NEW NOTICES IN VOLUME
NEW NOTICE CLAIM RATE (1) %
17 CLAIMS SEVERITY TREND
Note: Table excludes material settlements (1).
Management's Discussion and Analysis
(1) Claim rate is the respective full year weighted average
rate and is rounded to nearest whole percent.
16 NEW NOTICES FROM BOOK YEARS 2008
AND PRIOR IN VOLUME
PREVIOUSLY DELINQUENT %
Claims Severity (see table 17)
Factors that impact claim severity include the
exposure on the loan, the amount of time between
default and claim filing (which impacts the amount
of interest and expenses) and curtailments. All else
being equal, the longer the period between default
and claim filing, the greater the severity. The majority
of loans from 2005-2008 (which represent the
majority of loans in the delinquent inventory) are
covered by master policy terms that, except under
certain circumstances, do not limit the number of
years that an insured can include interest when filing
a claim if they comply with their obligations under the
terms of the master policy.
Average
exposure
on claim
paid
Average
claim
paid
% Paid to
exposure
Period
Q4 2016
$ 43,200
$ 48,297
Q3 2016
$ 43,747
$ 48,050
Q2 2016
Q1 2016
Q4 2015
Q3 2015
Q2 2015
Q1 2015
Q4 2014
Q3 2014
Q2 2014
Q1 2014
43,709
44,094
44,342
44,159
44,683
44,403
44,321
43,769
43,402
43,711
47,953
49,281
49,134
48,156
48,587
47,366
46,714
45,849
45,531
45,897
111.8%
109.8%
109.7%
111.8%
110.8%
109.1%
108.7%
106.7%
105.4%
104.8%
104.9%
105.0%
Average
number of
missed
payments
at claim
received
date
35
34
35
34
35
33
34
33
32
30
30
28
(1) Settlements include amounts paid in settlement disputes
for claims paying practices and NPL settlements.
See Note 8 – “Loss Reserves” to our consolidated
financial statements and
“Critical Accounting
Policies” below for a discussion of our losses
incurred and claims paying practices (including
curtailments).
MGIC Investment Corporation 2016 Annual Report | 27
Management's Discussion and Analysis
NET LOSSES AND LAE PAID CONTINUED TO
IMPROVED ON OUR
DECLINE AS CREDIT
PRIMARY RIF
This section provides information on our claim
payment trends and exposure on our outstanding RIF
for the three years ending December 31, 2016.
Net losses and LAE paid decreased 16% in 2016
compared to 2015 driven by lower claim activity on
our primary business as the credit profile of our RIF
continued to improve and our delinquent inventory
declined. This
is a continuation of the trend
experienced in 2015 as net losses and LAE paid
decreased 28% compared to 2014. During 2016, there
was an increase in loss payments from settlements
of disputes for claims paying practices and NPL
settlements
to NPL
settlements with the GSEs to resolve legacy defaults.
Pool losses paid included our 2011 settlement with
Freddie Mac; our final payment under this settlement
was made on December 1, 2016. We believe paid
claims will continue to decline in 2017.
increased, primarily due
The following table presents our net losses and LAE
paid for the years ended December 31, 2016, 2015
and 2014.
Net Losses and LAE Paid
(In millions)
2016
2015
2014
Total primary (excluding
settlements)
Claims paying practices
and NPL settlements(1)
Pool (2)
Other
Direct losses paid
Reinsurance
Net losses paid
LAE
Net losses and LAE paid
before terminations
Reinsurance terminations
Net losses and LAE
paid
$ 599
$ 767
$ 1,082
53
56
(1)
707
(23)
684
20
704
(3)
10
68
5
850
(23)
827
22
849
(15)
(8)
84
1
1,159
(34)
1,125
29
1,154
—
Primary losses paid for the top 15 jurisdictions (based
on 2016 losses paid, excluding settlement amounts)
and all other jurisdictions for the years ended
December 31, 2016, 2015 and 2014 appears in the
following table.
Paid Losses by Jurisdiction
(In millions)
Florida
New Jersey
Illinois
New York
Maryland
California
Pennsylvania
Ohio
Puerto Rico
Washington
Virginia
Michigan
Massachusetts
Connecticut
Georgia
2016
2015
2014
$
85
60
43
35
29
27
26
21
17
15
15
14
14
14
13
$
154
$
256
44
60
31
45
38
33
26
14
24
16
17
15
18
19
38
91
27
49
55
42
41
16
38
18
29
12
18
29
All other jurisdictions
171
213
323
Total primary
(excluding
settlements)
$
599
$
767
$
1,082
Note: Jurisdictions in italics in the table above are those that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure
to be completed.
The primary average claim paid for the top 5
jurisdictions (based on 2016 losses paid, excluding
settlement amounts) for the years ended December
31, 2016, 2015 and 2014 appears in the table below.
The primary average claim paid can vary materially
from period to period based upon a variety of factors,
including the local market conditions, average loan
amount, average coverage percentage, and loss
mitigation efforts on loans for which claims are paid.
$ 701
$ 834
$ 1,154
Primary average claim paid
(1)
(2)
See Note 8 - "Loss Reserves" for additional information on
our settlements of disputes for claims paying practices
and NPL settlements.
2016, 2015 and 2014 each include $42 million paid
under the terms of our settlement with Freddie Mac as
discussed in Note 8 - "Loss Reserves" to our consolidated
financial statements.
Florida
New Jersey
Illinois
New York
Maryland
All other jurisdictions
2016
2015
2014
$ 60,737
$ 58,709
$ 55,537
81,955
50,047
70,869
72,396
40,828
74,160
49,673
68,341
77,404
41,065
74,477
48,278
68,377
66,270
40,419
All jurisdictions
$ 48,416
$ 47,931
$ 46,039
Note: Jurisdictions in italics in the table above are those that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure
to be completed.
28 | MGIC Investment Corporation 2016 Annual Report
The primary average exposure for the top 5
jurisdictions (based on 2016 losses paid, excluding
settlement amounts) for the years ended December
31, 2016, 2015 and 2014 appears in the table below.
Primary average exposure
Florida
New Jersey
Illinois
New York
Maryland
All other jurisdictions
2016
2015
2014
$ 49,908
$ 49,095
$ 47,487
63,351
40,696
52,006
63,812
46,481
62,496
40,368
50,964
62,912
44,887
61,484
39,888
50,042
62,630
43,301
All jurisdictions
47,276
45,820
44,332
Management's Discussion and Analysis
LOSS RESERVES CONTINUED TO DECLINE ON
LOWER DEFAULT INVENTORY
Our primary default rate at December 31, 2016 was
5.04% (2015: 6.31%, 2014: 8.25%). Our primary
default inventory was 50,282 loans at December 31,
2016, representing a decrease of 20% from 2015 and
37% from 2014. The reduction in our primary default
inventory is the result of the total number of defaulted
loans: (1) that have cured; (2) for which claim
payments have been made; or (3) that have resulted
in rescission, claim denial, or removal from inventory
due to NPL settlements, collectively exceeding the
total number of new defaults on insured loans. In
recent periods we have experienced improved cure
rates and the overall mix of our default inventory, as
represented by the number of missed payments, has
improved compared to the prior years. As of
December 31, 2016, the percentage of our default
inventory that has 12 or more missed payments was
38% (2015: 43%, 2014: 47%). Generally, the fewer
missed payments a defaulted loan has the lower the
likelihood it will result in a claim. The NPL settlements
were each completed at amounts approximating the
loss reserves previously established on the defaulted
loans. We expect our default inventory to continue to
decline in 2017 from 2016 levels; however, the pace
of decline is expected to moderate as our more recent
book years naturally season.
The primary and pool loss reserves as of December
31, 2016, 2015 and 2014 appear in the table below.
MGIC Investment Corporation 2016 Annual Report | 29
Management's Discussion and Analysis
Gross Reserves
Primary:
Direct loss reserves (in millions)
IBNR and LAE
Total primary loss reserves
Ending default inventory
Percentage of loans delinquent (default rate)
Average direct reserve per default
Primary claims received inventory included in ending
default inventory
Pool (1):
Direct loss reserves (in millions):
With aggregate loss limits
Without aggregate loss limits
Reserves related to Freddie Mac settlement (2)
Total pool direct loss reserves
Ending default inventory:
With aggregate loss limits
Without aggregate loss limits
Total pool ending default inventory
Pool claims received inventory included in ending default
inventory
2016
December 31,
2015
2014
$ 1,334
79
1,413
$ 1,681
126
1,807
$ 2,114
132
2,246
50,282
5.04%
$ 28,104
62,633
6.31%
$ 28,859
79,901
8.25%
$ 28,107
1,385
2,769
4,746
18
7
—
25
34
9
42
85
53
12
84
149
1,382
501
1,883
72
2,126
613
2,739
60
3,020
777
3,797
99
Other gross reserves (in millions)
1
1
2
(1)
(2)
Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct
reserve per default for our pool business.
See our Form 8-K filed with the Securities and Exchange Commission on November 30, 2012 for a discussion of our settlement
with Freddie Mac regarding a pool policy. As of December 31, 2016 we had completed our obligation under this settlement
agreement.
30 | MGIC Investment Corporation 2016 Annual Report
The primary default
inventory for the top 15
jurisdictions (based on 2016 losses paid, excluding
settlement amounts) at December 31, 2016, 2015
and 2014 appears in the table below.
Primary Default Inventory by Jurisdiction
2016
2015
2014
Florida
New Jersey
Illinois
New York
Maryland
California
Pennsylvania
Ohio
Puerto Rico
Washington
Virginia
Michigan
Massachusetts
Connecticut
Georgia
4,150
2,586
2,649
3,171
1,312
1,590
2,984
2,614
1,844
754
885
1,482
1,108
690
1,853
5,903
3,498
3,301
3,901
1,609
2,019
3,574
3,209
2,221
1,049
1,109
1,877
1,390
832
2,225
9,442
4,077
4,481
4,595
2,119
2,777
4,480
3,908
2,453
1,415
1,355
2,447
1,631
1,095
2,726
All other jurisdictions
Total
20,610
50,282
24,916
62,633
30,900
79,901
Note: Jurisdictions in italics in the table above are those that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a foreclosure
to be completed.
The primary default inventory by policy year at
December 31, 2016, 2015 and 2014 appears in the
table below.
Primary Default Inventory by Policy Year
2016
2015
2014
2004 and prior
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
11,116
5,826
9,267
15,816
4,140
421
222
246
364
686
1,142
814
222
14,599
7,890
11,853
20,000
5,418
515
274
246
388
615
672
163
—
19,797
10,630
15,529
25,232
6,721
648
300
260
316
335
133
—
—
Total
50,282
62,633
79,901
Our results of operations continue to be negatively
impacted by the mortgage insurance we wrote during
Management's Discussion and Analysis
2005 through 2008 (see chart 18). Although
uncertainty remains with respect to the ultimate
losses we will experience on these books of business,
as we continue to write new insurance on mortgages,
those books have become a smaller percentage of
our total mortgage insurance portfolio. Our 2005
through 2008 books of business represented
approximately 25% and 32% of our total primary RIF
at December 31, 2016 and 2015, respectively.
Approximately 38% of the remaining primary RIF on
our 2005-2008 books of business benefited from
HARP as of December 31, 2016, compared to 36% as
of December 31, 2015.
18 DEFAULT INVENTORY MIX BY BOOK YEAR
% OF TOTAL INVENTORY
On our primary business, the highest claim frequency
years have typically been the third and fourth year
after the year of loan origination. However, the pattern
of claims frequency can be affected by many factors,
including persistency and deteriorating economic
conditions. Low persistency can accelerate the
period in the life of a book during which the highest
claim frequency occurs. Deteriorating economic
conditions can result in increasing claims following
a period of declining claims. As of December 31,
2016, 54% of our primary RIF was written subsequent
to December 31, 2013, 62% of our primary RIF was
written subsequent to December 31, 2012, and 67%
of our primary RIF was written subsequent to
December 31, 2011.
UNDERWRITING AND OTHER EXPENSES, NET AS
A PERCENTAGE OF NPW REMAIN LOW
includes
2016 compared to 2015. Underwriting and other
expenses
items such as employee
compensation costs, fees for professional services,
and premium taxes, and are reported net of ceding
commissions. Underwriting and other expenses for
2016 decreased when compared to 2015 due to an
increase in ceding commissions from reinsurers,
MGIC Investment Corporation 2016 Annual Report | 31
Management's Discussion and Analysis
offset by
increases
professional services.
in employee costs and
2015 compared to 2014. Underwriting and other
expenses for 2015 increased when compared to
2014. The increase was primarily due to a return of
ceding commissions to reinsurers as a result of
commuting our 2013 QSR Transaction and an
increase in employee costs.
Underwriting expense ratio (see chart 19). The
underwriting expense ratio is the ratio, expressed as
a percentage, of the underwriting and operating
expenses, net and amortization of DAC of our
combined insurance operations (which excludes
underwriting and operating expenses of our non-
insurance operations) to NPW. The increase in the
underwriting expense ratio in 2016 when compared
to 2015 was primarily due to a decrease in NPW. The
increase in the underwriting expense ratio in 2015
when compared to 2014 was due to an increase in
employee compensation expense and a decrease in
ceding commissions, offset in part by an increase in
NPW.
19 UNDERWRITING EXPENSE RATIO
INTEREST EXPENSE IN 2016 DECLINED FROM
2015 AND 2014 LEVELS ON DEBT TRANSACTION
ACTIVITY, WHICH ALSO RESULTED IN DEBT
EXTINGUISHMENT LOSSES
2016 compared to 2015. Interest expense for 2016
decreased when compared to 2015 reflecting the
following activities.
Reductions to interest expense:
• maturity of our 5.375% Notes;
• repurchase of $188.5 million in par value of our 5%
Notes in the first half of 2016;
• purchase by MGIC of $132.7 million in par value of
our 9% Debentures, which are eliminated
in
consolidation, in the first quarter of 2016;
• repurchase of $292.4 million in par value of our 2%
Notes in the third quarter of 2016.
32 | MGIC Investment Corporation 2016 Annual Report
Increases to interest expense:
• MGIC borrowed $155 million in the form of a 1.91%
fixed rate advance from the FHLB in the first quarter
of 2016; and
• we issued $425 million of 5.75% Senior Notes in
the third quarter of 2016.
2015 compared to 2014. Interest expense for 2015
decreased when compared to 2014 due to the
maturity of our 5.375% Notes on November 1, 2015,
which were repaid with holding company cash on
hand.
Loss on debt extinguishment
Loss on debt extinguishment in 2016 reflects our
repurchases of a portion of our 2% Notes, 5% Notes,
and MGIC's purchase of a portion of our 9%
Debentures, which were all completed at amounts
that were in excess of the purchased debt's carrying
value. The loss also includes the write-off of debt
issuance costs on the extinguished portion of the
outstanding 2% Notes. The 9% Debentures held by
MGIC are eliminated in consolidation.
INCOME TAX EXPENSE (BENEFIT) REFLECTS THE
CHANGE IN OUR TAX STATUS AND VALUATION
ALLOWANCE REVERSAL
(In millions, except
rate)
2016
2015
2014
Income before tax
$ 514,714
$ 487,687
$ 254,723
Provision for
(benefit from)
income taxes
Effective tax
provision (benefit)
rate
172,197
(684,313)
2,774
33.5%
(140.3)%
1.1%
2016 compared to 2015. Income tax expense for
2016 increased compared to 2015. This change is
primarily due to the reversal of our deferred tax
valuation allowance in 2015 and because we were
required to establish a full tax provision for 2016. The
difference between our statutory tax rate of 35% and
our effective tax provision rate of 33.5% in 2016 was
primarily due to the benefits of tax preferenced
securities. The difference between our statutory tax
rate of 35% and our effective tax (benefit) rate on our
pre-tax income of (140.3%) in 2015 was primarily due
to the impact of the changes in our valuation
allowance against our deferred tax assets.
2015 compared to 2014. Income tax (benefit) for
2015 increased compared to 2014. This change is
primarily due to the reversal of our deferred tax
valuation allowance in 2015. During 2014, our
effective tax rate provision was reduced by the
change in the deferred tax asset valuation allowance.
Management's Discussion and Analysis
During 2015 and 2014, the difference between our
statutory tax rate of 35% and our effective tax
(benefit) provision rate was primarily due to the
impact of the changes in our overall valuation
allowance against our deferred tax assets.
See Note 12 – “Income Taxes” to our consolidated
financial statements for a discussion of our tax
position.
MGIC Investment Corporation 2016 Annual Report | 33
Management's Discussion and Analysis
Balance Sheet Analysis
Assets
As of December 31, 2016 total assets were $5,735
million compared to $5,868 million in the prior year.
The investment portfolio increased to $4,692 million
as of December 31, 2016 (2015: $4,663 million).
Deferred income tax assets decreased 20% to $607.7
million at the end of December 31, 2016 (2015:
$762.1 million) as our net income utilized a portion
of our net operating
loss carryforwards. The
combined other assets increased to $279 million as
of December 31, 2016 (2015: $262 million), primarily
due to increases in accrued investment income,
reinsurance recoverables, and home office and
equipment, net. These increases were offset in part
by a decrease in the funded status of our defined
pension plan resulting from an increase in the
projected benefit obligation as the discount rate
decreased from the prior year.
STRUCTURE OF BALANCE SHEET
% OF TOTAL ASSETS
(in thousands)
Assets
December 31,
2016
December 31,
2015
$
5,734,529
$
5,868,343
2016
2015
Investments Analysis
The return we generate on our investment portfolio,
which primarily consists of investment income, is an
important component of our consolidated financial
results and the protection of principal is an important
component of our portfolio objectives. Our
investment portfolio primarily consists of a diverse
mix of highly rated fixed income securities (see chart
20) and targets an intermediate 4 to 6 year duration
that is designed to achieve the following main
portfolio objectives:
• protect principal;
• preserve statutory capital;
• minimize realized losses;
• meet projected liabilities; and
• maximize yield.
To achieve our portfolio objectives, we employ a
strategic asset allocation approach which considers
the risk and return parameters of the various asset
classes in which we invest. This asset allocation is
informed by, and based on the following factors:
• our economic and market outlooks;
• diversification effects;
• security duration;
•
liquidity; and
• capital considerations.
The credit risk of specific securities is evaluated
through analysis of the underlying fundamentals that
includes consideration of the issuer's sector, scale,
profitability, debt coverage, and
ratings. The
investment policy guidelines limit the amount of our
credit exposure to any one issue, issuer and type of
instrument.
34 | MGIC Investment Corporation 2016 Annual Report
20 FIXED INCOME SECURITY RATINGS (1)
% OF FIXED INCOME SECURITIES AT FAIR
VALUE
December 31, 2016
December 31, 2015
(1) Ratings are provided by one or more of: Moody's, Standard
& Poor's and Fitch Ratings. If three ratings are available, the
middle rating is utilized; otherwise the lowest rating is
utilized.
See Note 5 – “Investments” to our consolidated
financial statements for additional disclosure on our
investment portfolio.
Investments outlook
In the fourth quarter of 2016, the FOMC increased its
benchmark interest rate 25 basis points, which was
a highly anticipated move that had been signaled for
months. At the time, the FOMC cited strong
employment gains and other economic indicators as
the reason for the increase. In conjunction with the
most recent rate increase the FOMC indicated that
increases will continue at a gradual pace. It is widely
expected that further interest rate increases will take
place in 2017 as the economy continues to add jobs
and expand. Our investment portfolio of fixed income
securities is subject to interest rate risk and fair
values of fixed rate securities are likely to decline in
a rising rate environment. We seek to manage our
exposure to interest rate risk and volatility by
maintaining a diverse mix of high quality securities
that have an intermediate duration profile. While
Management's Discussion and Analysis
higher interest rates may adversely impact the fair
values of our fixed income securities from current
levels, they present an opportunity to reinvest
investment income and proceeds from security
maturities into higher yielding securities.
In addition to our interest rate exposure, the new
Presidential administration could make policy
changes that affect both economic and market
conditions. A federal statutory tax rate reduction has
been discussed, which could impact the relative value
between taxable and tax-exempt fixed
income
securities, but we do not expect this to have a material
impact on our investment portfolio if enacted. Other
policy changes, which are uncertain at this time, could
result in both market volatility and/or opportunity
which we will monitor.
DEFERRED INCOME TAXES
Deferred income taxes primarily consist of net
operating loss carryforwards from operating losses
experienced in prior years that we expect to realize in
future periods. During 2015, we reversed the
valuation allowance that had been recorded against
our deferred tax assets since 2009. The reversal of
the valuation allowance was based on analysis that
it was more likely than not that our deferred tax assets
would be fully realizable.
The reversal of our valuation allowance against our
deferred tax assets was a discrete period item and
was recognized as a component of our tax provision
in continuing operations during 2015. As a result, we
received a benefit
tax provision of
approximately $687 million for the year ended
December 31, 2015. As this benefit increased our net
income, the benefit had the effect of substantially
increasing our retained earnings as of December 31,
2015.
in our
As of December 31, 2016, our deferred tax asset is
recorded at $607.7 million. A decrease in the federal
statutory rate will result in a one-time reduction in the
amount at which our deferred tax asset is recorded,
thereby reducing our net income and book value;
however, such a decrease will also reduce our
effective tax rate in future periods, thereby increasing
net income. We estimate that every 1 percentage
point reduction in the federal statutory rate would
result in a one-time reduction in our deferred tax asset
of $17.2 million.
Other tax matters
We continue to have unresolved tax matters primarily
related to reviews of our 2000-2007 federal income
tax returns by the IRS. In January 2017, we and the
IRS informed the Tax Court that we had reached a
basis for settlement of the major unresolved tax
MGIC Investment Corporation 2016 Annual Report | 35
Management's Discussion and Analysis
matters. Any agreed settlement terms will ultimately
be subject to review by the Joint Committee on
Taxation before a settlement can be completed and
there is no assurance that a settlement will be
completed. Our consolidated financial statements
reflect our estimates of the tax contingencies
discussed more fully in Note 12 - "Income Taxes" to
our consolidated financial statements. Based on
information we have regarding the status of the
dispute, we expect to record a provision for additional
taxes and interest of $15-$25 million in the first
quarter of 2017.
Liabilities and Shareholders' Equity
Total liabilities decreased 12% to $3,186 million as of
December 31, 2016 from $3,632 million in the prior
year. Loss reserves, which represent our estimated
liability for losses and settlement expenses under
MGIC's mortgage guaranty insurance policies, net of
reinsurance balances recoverable on our estimated
losses and settlement expenses decreased, 25% to
$1,388 million as of December 31, 2016 versus
$1,849 million as of December 31, 2015. This
decrease was driven by the payment of losses during
2016 and favorable development on delinquencies
received in prior years, offset in part by losses
incurred on new delinquency notices received in
2016. Unearned premiums increased 18% to $330
million as of December 31, 2016 (2015: $280 million),
primarily due to an increase in the amount of NIW
from LPMI single premium policies. Long-term debt
is down 3% to $1,179 million as of December 31, 2016
versus $1,212 million as of December 31, 2015 due
to a net repayment of borrowings during 2016 through
our various debt transactions, which also extended
the maturity profile of our debt. See Note 7 - "Debt"
for further discussion of these transactions. Other
liabilities decreased 3% to $238 million as of
December 31, 2016 (2015: $247 million), primarily
due to a decline in our premium refund accrual, offset
in part by an increase in our interest payable.
Total equity increased 14% to $2,549 million as of
December 31, 2016 from $2,236 million as of
December 31, 2015. This increase from the prior year
was driven by net income generated during 2016.
36 | MGIC Investment Corporation 2016 Annual Report
STRUCTURE OF BALANCE SHEET
% OF TOTAL LIABILITIES AND EQUITY
(in thousands)
December 31,
2016
December 31,
2015
Liabilities and equity
$
5,734,529
$
5,868,343
2016
2015
BENEFIT PLANS
We have a non-contributory defined benefit pension
plan covering substantially all domestic employees,
as well as a supplemental executive retirement plan.
Retirement benefits are based on compensation and
years of service. We maintain plan assets to fund our
benefit obligations. As of December 31, 2016 and
2015 our pension and post-retirement benefit plans
have plan assets in excess of their projected
obligations. The supplemental executive retirement
plan benefits are paid from MGIC assets following
retirements. Our projected benefit
employee
obligations under these plans are subject to
numerous actuarial assumptions that may change in
the future and as a result could substantially increase
or decrease our obligations. Plan assets held to pay
our obligations are primarily invested in a portfolio of
debt securities to preserve capital and to provide
monthly cash flows aligned with the
liability
component of our obligations, with a lesser allocation
to a mix of equity securities. If the performance of our
invested plan assets differs from our expectations,
the funded status of the benefit plans may decline,
even with no significant change in the obligations.
See Note 11 - "Benefit Plans" to our consolidated
financial statements for a complete discussion of
these plans and their effect on the consolidated
financial statements.
Liquidity and Capital Resources
Consolidated Cash Flow Analysis
We have three primary types of cash flows:
(1) operating cash flows, which consist mainly of
cash generated by our insurance operations and
income earned on our investment portfolio, less
amounts paid for claims, interest expense and
operating expenses, (2) investing cash flows related
to the purchase, sale and maturity of investments and
(3) financing cash flows generally from activities that
impact our capital structure, such as changes in debt
table
and shares outstanding. The
summarizes
flows on a
these
consolidated basis for the last three years.
three cash
following
(In thousands)
2016
2015
2014
Years ended December 31,
Net cash and cash
equivalents provided
by (used in):
Operating activities
$ 219,663
$ 152,036
$(405,277)
Investing activities
(93,392)
(96,958)
292,234
Financing activities
(151,981)
(71,840)
(21,767)
Decrease in cash
and cash
equivalents
$ (25,710) $ (16,762) $(134,810)
Operating activities
The following list highlights the major sources and
uses of cash flow from operating activities:
Sources
+ Premiums received
+ Loss payments from reinsurers
+ Investment income
Uses
- Claim payments
- Ceded premium to reinsurers
-
Interest expense
- Operating expenses
installment basis
Our largest source of cash is from premiums received
from our insurance policies, which we receive on a
monthly
for most policies.
Premiums are received at the beginning of the
coverage period for single premium and annual
premium policies. Our largest cash outflow is for
claims that arise when a default results in an insured
loss. Because the payment of claims occurs after the
receipt of the premium, often years later, we invest
the cash in various investment securities that earn
interest. We also use cash to pay for our ongoing
expenses such as salaries, debt interest, and rent. We
also utilize reinsurance to manage the risk we take
Management's Discussion and Analysis
on our insurance policies. We cede, or pay out, part
of the premiums we receive to our reinsurers and
collect cash back when losses subject to our
reinsurance coverage are paid.
Net cash provided by operating activities in 2016
increased compared to 2015 primarily due to a lower
level of losses paid. The increase was offset in part
by the commutation of our 2013 QSR Transaction in
2015, which resulted in a return to us of unearned
ceded premiums written and settlement of our profit
commission accrued during the term of the
agreement.
The increase in net cash from operating activities in
2015 compared to 2014 was primarily due to a lower
level of losses paid and the result of commuting our
2013 QSR Transaction. Cash flows from operations
in 2015 also increased compared to 2014 due to an
increase in premiums collected as our mix of single
premium policies written and our IIF increased, and
also from a higher level of investment income.
Investing activities
The following list highlights the major sources and
uses of cash flow from investing activities:
Sources
+
Proceeds from fixed income securities sold, called or
matured
+ Decreases in restricted cash
Uses
- Purchases of fixed income securities
- Purchases of property and equipment
We maintain an investment portfolio that is primarily
invested in a diverse mix of fixed income securities.
As of December 31, 2016, our portfolio had a fair
value of $4.7 billion. As of December 31, 2016 the
value of our investment portfolio increased by $29.1
million, or 0.6% from December 31, 2015. In addition
to investment portfolio activities, our
investing
activities
to property and
included additions
equipment. In 2016, we began an initiative to update
our corporate headquarters building and continued
to invest in our technology infrastructure to enhance
our ability to conduct business and execute our
strategies.
Net cash flows used in investing activities in 2016
primarily reflect purchasing fixed income securities
in an amount that exceeded our proceeds from sales
MGIC Investment Corporation 2016 Annual Report | 37
Management's Discussion and Analysis
and maturities of fixed income securities during the
year. Investing cash flows also include an increase in
amounts spent on property and equipment.
Net cash flows used in investing activities in 2015
primarily reflect purchasing investment securities in
an amount that exceeded our proceeds from sales
and maturities of fixed income securities during the
year. This outflow was offset in part by a reduction of
cash restricted in its use.
In 2014, net cash flows provided by investing
activities primarily reflect proceeds from sales and
maturities of our fixed income securities exceeding
our investment purchases.
Financing activities
The following list highlights the major sources and
uses of cash flow from financing activities:
Sources
For a further discussion of matters affecting our cash
flows, see "Balance Sheet Analysis" and "Debt at our
Holding Company" and Holding Company Liquidity"
below.
Capitalization
Capital Risk
Capital risk is the risk that we have an insufficient
level and composition of capital to comply with
applicable requirements and to support our business
activities and associated risks during normal
economic environments and stressed conditions.
A strong capital position is essential to our business
strategy and is important to maintain a competitive
position in our industry. Our capital strategy focuses
on long-term stability, which enables us to build and
in a stressed
invest
environment.
in our business, even
+ Proceeds from debt and/or common stock issuances
Our capital management objectives are to:
• Cover claim obligations arising from our underlying
mortgage insurance activities;
• Maintain
compliance with
financial
requirements of PMIERs, and regulatory capital,
and sizing the
level of capital to balance
competitive needs, handle contingencies, and
create shareholder value;
the
• Position our mix of debt, equity and/or reinsurance
to support our business strategy while considering
the competing needs of credit ratings, regulators,
and shareholders;
• Retain
flexibility
to pursue new business
opportunities;
• Provide additional holding company liquidity; and
• Achieve our target leverage ratio over time.
These objectives are achieved through ongoing
monitoring and management of our capital position,
mortgage insurance portfolio stress modeling, and a
capital governance framework. Capital management
is intended to be flexible in order to react to a range
of potential events.
Uses
- Repayment/repurchase of debt
- Repurchases of common stock
- Payment of debt issuance costs
Net cash flows used in financing activities for 2016
primarily reflect the transactions
in which we
repurchased a portion of the outstanding principal on
our 5% Notes and 2% Notes, and in which MGIC
purchased a portion of the outstanding principal on
our 9% Debentures. MGIC's ownership of our 9%
Debentures by MGIC is eliminated in consolidation.
These transactions were completed at amounts in
excess of the carrying value of the debt obligations
and the excess amount settled in cash is reflected in
our financing activities. These transactions were
offset in part by the issuance of long-term debt that
included an FHLB borrowing and our 5.75% Notes
offering, net of related issuance fees.
Net cash flows used in financing activities for 2015
reflect the repayment of our Senior Notes that
matured on November 1, 2015 and repurchases of
$11.5 million par value of our Convertible Senior
Notes due in May 2017, offset in part by tax benefits
related to share-based compensation.
Net cash flows used in financing activities for 2014
reflect the repurchase of $20.9 million of our Senior
Notes due in November 2015.
* * *
38 | MGIC Investment Corporation 2016 Annual Report
Capital Structure
The following table summarizes our capital structure
as of December 31, 2016, 2015, and 2014.
21 HOLDING COMPANY LONG-TERM DEBT
IN MILLIONS
Management's Discussion and Analysis
(In thousands, except
ratio)
Common stock, paid-
in capital, retained
earnings (deficit), less
treasury stock
Accumulated other
comprehensive loss,
net of tax
Total shareholders'
equity
Long-term debt, par
value
Total capital
resources
Ratio of long-term
debt to shareholders'
equity
2016
2015
2014
$2,623,942
$2,297,020
$1,118,244
(75,100)
(60,880)
(81,341)
2,548,842
2,236,140
1,036,903
1,189,472
1,223,025
1,296,475
$3,738,314
$3,459,165
$2,333,378
46.7%
54.7%
125.0%
2016
2015
Net income in 2016 increased our total shareholders'
equity from 2015. The increase was offset in part by
the cost of repurchasing the shares issued in our 2%
Notes repurchases and an increase in accumulated
other comprehensive losses.
Net income and a decrease in accumulated other
comprehensive losses in 2015 increased our total
shareholders' equity from 2014. The net income
generated in 2015 included a substantial tax benefit
from the reversal of our valuation allowance on
deferred tax assets.
DEBT AT OUR HOLDING COMPANY AND HOLDING
COMPANY LIQUIDITY
Investment Corporation, and not of
Debt - holding company (see charts 21 and 22)
The 5.75% Notes, 2% Notes, 5% Notes, and 9%
Debentures are obligations of our holding company,
MGIC
its
subsidiaries. In 2016, we accessed the senior debt
market and issued $425.0 million aggregate principal
amount of 5.75% Notes due in 2023 to simplify and
lengthen our debt structure. The proceeds received
were primarily used as (i) cash consideration to
repurchase a portion of our 2% Notes, and (ii) to
repurchase the shares issued as partial consideration
in the repurchases of our 2% Notes. In total, we
purchased $292.4 million
in par value of our
outstanding 2% Notes. In addition, during 2016 we
repurchased $188.5 million of our 5% Notes with
funds held at our holding company. MGIC's ownership
of $132.7 million of our 9% Debentures is eliminated
in consolidation, but they remain outstanding
obligations owed by us to MGIC. The result of these
transactions
reduced our holding company's
outstanding debt obligations by 5% from the prior
year to $1,167.1 million.
22 REMAINING TIME TO MATURITY OF
HOLDING COMPANY LONG-TERM DEBT
IN MILLIONS
2016
2015
Liquidity analysis - holding company
As of December 31, 2016, we had approximately
$283 million in cash and investments at our holding
company. These resources are maintained primarily
to service our debt interest expense, pay debt
maturities, repurchase outstanding debt obligations
as opportunities arise, and to settle intercompany
obligations. We may also use available holding
company cash to repurchase shares of our common
stock. While these assets are held, we generate
investment income that serves to offset a portion of
our interest expense. In addition to investment
income, the payment of dividends from our insurance
subsidiaries and/or raising capital in the public
MGIC Investment Corporation 2016 Annual Report | 39
Management's Discussion and Analysis
markets are the principal sources of holding company
cash inflow. MGIC is the principal source of dividend-
paying capacity, which is restricted by insurance
regulation. The ability to raise capital in the public
markets is subject to prevailing market conditions,
investor demand for the securities to be issued, and
our deemed creditworthiness.
In 2016, our holding company cash and investments
decreased by $119 million, to $283 million as of
December 31, 2016. Our holding company received
$418 million in net proceeds from the issuance of our
5.75% Notes. The net proceeds were primarily used
in the repurchases of our 2% Notes; this use consisted
of approximately $231 million in cash consideration
and $147 million for the repurchase of shares issued
as consideration in the 2% Notes repurchases. Cash
on hand at our holding company was used to
repurchase a portion of our 5% Notes at a cost of $196
million. Our holding company made
interest
payments of approximately $55 million, of which
approximately $12 million was paid to MGIC for the
portion of our 9% Debentures owned by MGIC. Cash
included an
inflows to our holding company
aggregate of $64 million of dividends received from
MGIC, and we dissolved other insurance subsidiaries
resulting in a net cash infusion to the holding
company of approximately $16 million. Investment
income was approximately $7 million and other net
cash inflows were approximately $5 million.
The net unrealized losses on our holding company
investment portfolio were approximately $2.0 million
at December 31, 2016 and the portfolio has a
modified duration of approximately 1.5 years.
The dividends paid by MGIC to our holding company
were the first since 2008. We expect MGIC to continue
to pay quarterly dividends. OCI authorization is
sought before MGIC pays dividends and MGIC will pay
a dividend of $20 million to our holding company in
the first quarter of 2017.
Over the next twelve months the principal demand on
holding company resources will be the maturity of the
remaining $145 million of 5% Notes outstanding that
mature in May 2017. We currently hold sufficient cash
and investments to repay the outstanding obligations
at their maturity. Based on our holding company debt
obligations at December 31, 2016, interest payments
for 2017 are expected to approximate $68 million.
Dividends from MGIC provide additional quarterly
liquidity. We believe our holding company has
sufficient liquidity to meet its payment obligations for
the foreseeable future.
Scheduled debt maturities beyond the next twelve
months include $207.6 million of our 2% Notes in
40 | MGIC Investment Corporation 2016 Annual Report
2020, $425 million of our 5.75% Notes in 2023, and
$389.5 million of our 9% Debentures in 2063, of which
MGIC owns $132.7 million. Both the 2% Notes and 9%
Debentures are convertible debt issues. Subject to
certain limitations and restrictions, holders of each
of the convertible debt issues may convert their notes
into shares of our common stock at their option prior
to certain dates prescribed under the terms of their
issuance, in which case our corresponding obligation
will be eliminated. The holders of the 2% Notes may
convert all or part of their notes into shares of our
common stock, at a rate of 143.8332 shares per
$1,000 of notes, in any quarter following a quarter in
which the closing price our common stock was at
least $9.04 for at least 20 of the last 30 trading days
of that quarter (the “Conversion Stock Price
Condition”). The Conversion Stock Price Condition
was met for the quarter ended December 31, 2016,
therefore, the 2% Notes are convertible in the first
quarter of 2017. They will also be convertible in later
quarters
in which the Conversion Stock Price
Condition was met for the prior quarter.
We may redeem all or part of the 2% Notes if the
closing price our common stock was at least $9.04
for at least 20 of the last 30 trading days (including
on the last trading day) preceding the date notice is
provided to the holders of the notes that we intend to
redeem the notes (the “Redemption Notice”). The
Redemption Notice is irrevocable and must be given
not less than 30 days and not more than 60 calendar
days prior to the redemption date, which cannot be
before April 10, 2017. Once the Redemption Notice is
given, holders may convert their notes at any time
before the redemption date specified
in the
Redemption Notice and we expect they will do so if
the price of our common stock remains above the
conversion price of $6.95
In 2015, we purchased $11.5 million in aggregate
principal of our 5% Notes at a purchase price of $12.0
million, plus accrued interest using funds held at our
holding company.
See Note 7 – “Debt” to our consolidated financial
statements for additional information about the
conversion terms of these issuances and the terms
of our indebtedness, including our option to defer
interest on our 9% Debentures. Any deferred interest
compounds at the stated rate of 9%. The description
in Note 7 - “Debt" to our consolidated financial
statements is qualified in its entirety by the terms of
the notes and debentures. The terms of our 5% Notes
are contained in a Supplemental Indenture, dated as
of April 26, 2010, between us and U.S. Bank National
Association, as trustee, which is included as an
exhibit to our 8-K filed with the SEC on April 30, 2010,
and in the Indenture dated as of October 15, 2000,
between us and the trustee ("2000 Indenture"). The
terms of our 2% Notes are contained in a Second
Supplemental Indenture, dated as of March 12, 2013,
between us and U.S. Bank National Association, as
trustee, which is included as an exhibit to our 8-K filed
with the SEC on March 15, 2013, and the 2000
Indenture. The terms of our 9% Debentures are
contained in the Indenture dated as of March 28,
2008, between us and U.S. Bank National Association
filed as an exhibit to our Form 10-Q filed with the SEC
on May 12, 2008.
Although not anticipated in the near term, we may
also contribute funds to our insurance operations to
comply with the PMIERs or the State Capital
Requirements. See “Overview – Capital” above for a
discussion of these requirements. See the discussion
of our non-insurance contract underwriting services
in Note 17 – “Litigation and Contingencies” to our
consolidated financial statements for other possible
uses of holding company resources.
We may from time to time continue to seek to acquire
our debt obligations through cash purchases and/or
exchanges for other securities. We may also from
time to time seek to acquire our common stock
through cash purchases,
including with funds
provided by debt. We may make such acquisitions in
open market purchases, privately negotiated
acquisitions or other transactions. The amounts
involved may be material.
DEBT AT SUBSIDIARIES
During the third quarter of 2015, MGIC became a
member of the FHLB. Membership in the FHLB
provides MGIC access to an additional source of
liquidity via a secured lending facility. In February
2016, MGIC borrowed $155.0 million in the form of a
fixed rate advance from the FHLB. 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.
Capital Adequacy
PMIERs
We operate under the PMIERs of the GSEs that
became effective December 31, 2015. The PMIERS
were most recently revised in December 2016, which
had had no impact on our calculation of Available
Management's Discussion and Analysis
Assets or Minimum Required Assets, and did not
impact our operations. The GSEs may further amend
the PMIERs at any time, and they have broad
discretion to interpret the requirements, which could
impact the calculation of our Available Assets and/
or Minimum Required Assets. The PMIERS
specifically provided that the tables of factors used
to determine Minimum Required Assets will be
updated every two years following a minimum of 180
days' notice and may be updated more frequently to
reflect changes in macroeconomic conditions or loan
performance. We expect the GSEs to perform a more
comprehensive review of the PMIERs, including their
financial requirements, in 2017.
is
As of December 31, 2016, MGIC’ s Available Assets
under PMIERs totaled approximately $4.7 billion, an
in excess of approximately $630 million over its
Minimum Required Assets of approximately $4.1
billion; and MGIC
in compliance with the
requirements of the PMIERs and eligible to insure
loans purchased by the GSEs. Maintaining a sufficient
level of excess Available Assets will allow MGIC to
remain in compliance with the PMIERs financial
requirements, including , we believe, to the extent they
are modified further in the next scheduled review; and
will also allow us flexibility to participate in additional
business opportunities as they may arise. The 2015
QSR Transaction provided an aggregate of
approximately $730 million of PMIERs capital credit
as of December 31, 2016. Our 2017 QSR transaction
terms are similar to our 2015 QSR transaction and will
also provide PMIERs capital credit.
We plan to continuously comply with the PMIERs
through our operational activities or through the
contribution of funds from our holding company,
subject to demands on the holding company's
resources, as outlined above.
RISK-TO-CAPITAL
We compute our risk-to-capital ratio on a separate
company statutory basis, as well as on a combined
insurance operations basis. The risk-to-capital ratio
is our net RIF divided by our policyholders’ position.
Our net RIF includes both primary and pool RIF, and
excludes risk on policies that are currently in default
and for which loss reserves have been established
and those covered by reinsurance. The risk amount
includes pools of loans with contractual aggregate
loss limits and without these limits. Policyholders’
position consists primarily of statutory policyholders’
surplus (which increases as a result of statutory net
income and decreases as a result of statutory net loss
and dividends paid), plus the statutory contingency
reserve and a portion of the reserves for unearned
premiums. The statutory contingency reserve is
MGIC Investment Corporation 2016 Annual Report | 41
factor titled “State capital requirements may prevent
us from continuing to write new insurance on an
uninterrupted basis.”
Financial Strength Ratings
The financial strength of MGIC, is as follows:
Rating Agency
Moody's Investor Services
Standard and Poor's Rating Services'
Rating
Outlook
Baa3
BBB+
Stable
Stable
For further information about the importance of
MGIC’ s ratings, see our risks factor titled “We may not
continue to meet the GSEs’ private mortgage insurer
eligibility requirements and our returns may decrease
as we are required to maintain more capital in order
to maintain our eligibility” and “Competition or
changes in our relationships with our customers
could reduce our revenues, reduce our premium
yields and/or increase our losses.”
Management's Discussion and Analysis
reported as a liability on the statutory balance sheet.
A mortgage insurance company is required to make
annual additions to the contingency reserve of
approximately 50% of net earned premiums. These
contributions must generally be maintained for a
period of ten years. However, with regulatory
approval a mortgage insurance company may make
early withdrawals from the contingency reserve when
incurred losses exceed 35% of net earned premiums
in a calendar year.
MGIC’ s separate company risk-to-capital calculation
appears in the table below.
(In millions, except ratio)
RIF - net (1)
December 31,
2016
2015
$ 28,668
$ 27,301
Statutory policyholders' surplus
$ 1,505
$
1,574
Statutory contingency reserve
1,181
691
Statutory policyholders' position
$ 2,686
$
2,265
Risk-to-capital
10.7:1
12.1:1
(1)
RIF – net, as shown in the table above, is net of reinsurance
and exposure on policies currently in default and for which
loss reserves have been established.
Our combined insurance companies’ risk-to-capital
calculation appears in the table below.
(In millions, except ratio)
RIF - net (1)
December 31,
2016
2015
$ 34,465
$ 33,072
Statutory policyholders' surplus
$ 1,507
$
1,608
Statutory contingency reserve
1,360
827
Statutory policyholders' position
$ 2,867
$
2,435
Risk-to-capital
12.0:1
13.6:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently in default
($2.6 billion at December 31, 2016 and $3.2 billion at
December 31, 2015) and for which loss reserves have
been established.
to an
increase
The reductions
in MGIC's and our combined
insurance companies risk-to-capital in 2016 were
primarily due
in statutory
policyholders' position due to an increase in statutory
contingency reserves, partially offset by an increase
in net RIF in both calculations. Our RIF, net of
reinsurance, increased in 2016, due to an increase in
our IIF. Our risk-to-capital ratio will decrease if the
percentage
the
increase
percentage increase in insured risk.
in capital exceeds
For additional
information regarding regulatory
capital see Note 14 – “Statutory Information” to our
consolidated financial statements as well as our risk
42 | MGIC Investment Corporation 2016 Annual Report
Management's Discussion and Analysis
Contractual Obligations
As of December 31, 2016, the approximate future payments under our contractual obligations of the type
described in the table below are as follows:
Contractual Obligations:
Payments due by period
(In millions)
Long-term debt obligations
Operating lease obligations
Tax obligations
Purchase obligations
Pension, SERP and other post-retirement benefit
plans
Other long-term liabilities
Total
Less than
More than
Total
1 year
1-3 years
3-5 years
5 years
$
2,472.7
$
204.0
$
109.4
$
310.8
$
1,848.5
2.6
44.0
11.6
287.1
1,438.8
0.7
44.0
10.4
22.7
676.2
1.4
—
1.2
52.4
575.5
0.5
—
—
57.0
187.1
—
—
—
155.0
—
$
4,256.8
958.0
$
739.9
$
555.4
$
2,003.5
Note 8 – “Loss Reserves” to our consolidated
financial statements and “Critical Accounting
Policies” below. In accordance with GAAP for the
mortgage insurance industry, we establish loss
reserves only for loans in default. Because our
reserving method does not take account of the
impact of future losses that could occur from loans
that are not delinquent, our obligation for ultimate
losses that we expect to occur under our policies in
force at any period end is not reflected in our
consolidated financial statements or in the table
above.
Our long-term debt obligations as of December 31,
2016 include their related interest and are discussed
in Note 7 – “Debt” to our consolidated financial
statements and under “Liquidity and Capital
Resources” above. Our operating lease obligations
include operating leases on certain office space,
data processing equipment and autos, as discussed
in Note 16 – “Leases” to our consolidated financial
statements. Tax obligations consist primarily of
amounts related to our current dispute with the IRS,
as discussed in Note 12 – “Income Taxes” to our
consolidated
financial statements. Purchase
obligations consist primarily of agreements to
purchase items related to our ongoing infrastructure
projects and information technology investments in
the normal course of business. See Note 11 - “Benefit
Plans” to our consolidated financial statements for
discussion of expected benefit payments under our
benefit plans.
Our other long-term liabilities represent the loss
reserves established to recognize the liability for
losses and LAE related to existing defaults on
insured mortgage loans. The timing of the future
claim payments associated with the established loss
reserves was determined primarily based on two key
assumptions: the length of time it takes for a notice
of default to develop into a received claim and the
length of time it takes for a received claim to be
ultimately paid. The future claim payment periods are
estimated based on historical experience, and could
emerge significantly different than this estimate. Due
to the uncertainty regarding how certain factors,
such as loss mitigation protocols established by
servicers and changes in some state foreclosure
laws that may include, for example, a requirement for
additional review and/or mediation process, will
affect our future paid claims it is difficult to estimate
the amount and timing of future claim payments. See
MGIC Investment Corporation 2016 Annual Report | 43
rate,
interest
The claim rates and claim severities are likely to be
including actual
affected by external events,
in
economic conditions such as changes
unemployment
rate or housing
values. Our estimation process does not include a
correlation between claim rates and claim amounts
to projected economic conditions such as changes
in unemployment rate, interest rate or housing
values. Our experience is that analysis of that nature
would not produce reliable results. The results would
not be reliable as the change in one economic
condition cannot be isolated to determine its sole
effect on our ultimate paid losses as our ultimate paid
losses are also influenced at the same time by other
economic conditions. Additionally, the changes and
interaction of these economic conditions are not
likely homogeneous throughout the regions in which
we conduct business. Each economic environment
influences our ultimate paid losses differently, even
if apparently similar in nature. Furthermore, changes
in economic conditions may not necessarily be
reflected in our loss development in the quarter or
year in which the changes occur. Actual claim results
often lag changes in economic conditions by at least
nine to twelve months.
In considering the potential sensitivity of the factors
underlying our estimate of loss reserves, it is possible
that even a relatively small change in our estimated
claim rate or severity could have a material impact
on
reserves and, correspondingly, on our
consolidated results of operations even in a stable
economic environment. For example, assuming all
other factors remain constant, a $1,000 increase/
decrease in the average severity reserve factor would
change the reserve amount by approximately +/- $27
million. A 1 percentage point increase/decrease in
the average claim rate reserve factor would change
the reserve amount by approximately +/- $28 million
as of December 31, 2016. Historically, it has not been
uncommon for us to experience variability in the
development of the loss reserves through the end of
the following year at this level or higher, as shown by
the historical development of our loss reserves in the
table below:
Management's Discussion and Analysis
Critical Accounting Policies
The accounting policies described below require
significant
the
preparation of our consolidated financial statements.
judgments and estimates
in
Loss reserves
Reserves are established for reported insurance
losses and LAE based on when notices of default on
insured mortgage loans are received. For reporting
purposes, we consider a loan in default when it is two
or more payments past due. Even though the
accounting standard, ASC 944, regarding accounting
and reporting by insurance entities specifically
excluded mortgage insurance from its guidance
relating to loss reserves, we establish loss reserves
using the general principles contained
in the
insurance standard. However, consistent with
industry standards for mortgage insurers, we do not
establish loss reserves for future claims on insured
loans which are not currently in default.
We establish reserves using estimated claim rates
and claim severities in estimating the ultimate loss.
The liability for reinsurance assumed is based on
information provided by the ceding companies.
The estimated claim rates and claim severities
represent what we estimate will actually be paid on
the loans in default as of the reserve date. If a policy
is rescinded we do not expect that it will result in a
claim payment and thus the rescission generally
reduces the historical claim rate used in establishing
reserves. In addition, if a loan cures its delinquency,
including successful loan modifications that result in
a cure being reported to us, the cure reduces the
historical claim rate used in establishing reserves.
Our methodology to estimate claim rates and claim
amounts is based on our review of recent trends in
the default inventory. To establish reserves we utilize
a reserving model that continually incorporates
historical data into the estimated claim rate. The
model also incorporates an estimate for the amount
of the claim we will pay, or severity. The severity is
estimated using the historical percentage of our
claim paid compared to our loan exposure, as well as
the RIF of the loans currently in default. We do not
utilize an explicit rescission rate in our reserving
methodology, but rather our reserving methodology
incorporates the effects rescission activity has had
on our historical claim rate and claim severities. We
review recent trends in the claim rate, severity, levels
of defaults by geography and average loan exposure.
As a result, the process to determine reserves does
not include quantitative ranges of outcomes that are
reasonably likely to occur.
44 | MGIC Investment Corporation 2016 Annual Report
(In
thousands)
Losses incurred
related to prior years (1)
Reserve at end of
prior year
2016
2015
2014
2013
2012
$
(147,658) $
(110,302)
(100,359)
(59,687)
573,120
1,893,402
2,396,807
3,061,401
4,056,843
4,557,512
(1) A negative number for a prior year indicates a redundancy
of loss reserves, and a positive number for a prior year
indicates a deficiency of loss reserves.
See Note 8 – “Loss Reserves” to our consolidated
financial statements for a discussion of recent loss
development.
IBNR Reserves
Reserves are also established for estimated IBNR,
which results from defaults occurring prior to the
close of an accounting period, but which have not
been reported to us. Consistent with reserves for
reported defaults, IBNR reserves are established
using estimated claim rates and claim severities for
the estimated number of defaults not reported. As of
December 31, 2016 and 2015, we had IBNR reserves
of approximately $54 million and $98 million,
respectively.
LAE
Reserves also provide for the estimated costs of
settling claims, including legal and other expenses
and general expenses of administering the claims
settlement process.
loss
than our
The actual amount of the claim payments may be
reserve
substantially different
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, that could
result in, among other things, greater losses on loans,
and may affect borrower willingness to continue to
make mortgage payments when the value of the
home is below the mortgage balance. Our estimates
are also affected by any agreements we enter into
regarding our claims paying practices, such as the
settlement agreements discussed in Note 17 –
“Litigation and Contingencies” to our consolidated
financial statements.
Revenue recognition
When a policy term ends, the primary mortgage
insurance written by us is renewable at the insured’ s
option through continued payment of the premium in
accordance with the schedule established at the
Management's Discussion and Analysis
inception of the policy life. We have no ability to
reunderwrite or reprice these policies after issuance.
Premiums written under policies having single and
annual premium payments are initially deferred as
unearned premium reserve and earned over the policy
life. Premiums written on policies covering more than
one year are amortized over the policy life in
relationship to the anticipated incurred loss pattern
based on historical experience. Premiums written on
annual policies are earned on a monthly pro rata
basis. Premiums written on monthly policies are
earned as the monthly coverage is provided. When a
policy is cancelled, all premium that is non-refundable
is immediately earned. Any refundable premium is
returned to the servicer or borrower. Cancellations
also include rescissions and policies cancelled due
to claim payment. When a policy is rescinded, all
previously collected premium is returned to the
servicer and when a claim is paid we return any
premium received since the date of default. The
liability associated with our estimate of premium to
be returned is accrued for separately and this liability
is included in “Other liabilities” on our consolidated
balance sheets. Changes in these liabilities affect
premiums written and earned and change in premium
deficiency reserve, respectively. The actual return of
premium affects premium written and earned. Policy
cancellations also lower the persistency rate which
is a variable used
in calculating the rate of
amortization of deferred policy acquisition costs
discussed below.
Fee income of our non-insurance subsidiaries is
earned and recognized as the services are provided
and the customer is obligated to pay.
Deferred insurance policy acquisition costs
Costs directly associated with the successful
acquisition of mortgage
insurance business,
consisting of employee compensation and other
policy issuance and underwriting expenses, are
initially deferred and reported as deferred insurance
policy acquisition costs ("DAC"). The deferred costs
are net of any ceding commissions received
associated with our reinsurance agreements. For
each underwriting year of business, these costs are
amortized to income in proportion to estimated gross
profits over the estimated life of the policies. We
utilize anticipated
in our
calculation. This includes accruing interest on the
unamortized balance of DAC. The estimates for each
underwriting year are reviewed quarterly and updated
when necessary to reflect actual experience and any
changes to key variables such as persistency or loss
development.
investment
income
Because our insurance premiums are earned over
time, changes in persistency result in DAC being
MGIC Investment Corporation 2016 Annual Report | 45
Management's Discussion and Analysis
amortized against revenue over a comparable period
of time. At December 31, 2016, the persistency rate
of our primary mortgage insurance was 76.9%,
compared to 79.7% at December 31, 2015. This
change did not significantly affect the amortization
of deferred insurance policy acquisition costs for the
period ended December 31, 2016. A 10% change in
persistency would not have a material effect on the
amortization of DAC in the subsequent year.
Fair Value Measurements
Investment Portfolio
Our entire investment portfolio is classified as
available-for-sale and is reported at fair value or, for
certain equity securities carried at cost, amounts that
approximate fair value. The related unrealized
investment gains or losses are, after considering the
related tax expense or benefit, recognized as a
component of accumulated other comprehensive
income in shareholders' equity. Realized investment
gains and losses on investments are recognized in
income based upon specific
identification of
securities sold.
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,
two sided markets,
benchmark securities, bids, offers and reference data
including data published
research
publications. Inputs may be weighted differently for
any security, and not all inputs are used for each
security evaluation.
issuer spreads,
in market
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
trading
tolerance
include
reviewing
reports,
46 | MGIC Investment Corporation 2016 Annual Report
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 certain municipal bonds.
The independent pricing sources used for our Level
2 investments varies by type of investment See Note
3 - "Significant Accounting Policies" for further
information on the independent pricing sources used.
- Valuations derived from valuation
Level 3
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. Level 3 inputs reflect our own
assumptions about the assumptions a market
participant would use in pricing an asset or liability.
Financial assets 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.
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.
Unrealized losses and other-than-temporary
impairment ("OTTI")
Each quarter we perform reviews of our investments
in order to determine whether declines in fair value
below amortized cost were considered other-than-
temporary. In evaluating whether a decline in fair
Management's Discussion and Analysis
value is other-than-temporary, we consider several
factors including, but not limited to:
our intent to sell the security or whether it is
more likely than not that we will be required to
its
sell the security before recovery of
amortized cost basis;
the present value of the discounted cash flows
we expect to collect compared to the
amortized cost basis of the security;
extent and duration of the decline;
failure of the issuer to make scheduled interest
or principal payments;
change in rating below investment grade; and
adverse conditions specifically related to the
security, an industry, or a geographic area.
Based on our evaluation, we will record an OTTI
adjustment on a security if we intend to sell the
impaired security, if it is more likely than not that we
will be required to sell the impaired security prior to
recovery of its amortized cost basis, or if the present
value of the discounted cash flows we expect to
collect is less than the amortized costs basis of the
security. If the fair value of a security is below its
amortized cost at the time of our intent to sell, the
is classified as other-than-temporarily
security
impaired and the full amount of the impairment is
recognized as a loss in the statement of operations.
Otherwise, when a security is considered to be other-
than-temporarily impaired, the losses are separated
into the portion of the loss that represents the credit
loss; and the portion that is due to other factors. The
credit loss portion is recognized as a loss in the
statement of operations, while the loss due to other
in accumulated other
factors
comprehensive income (loss), net of taxes. A credit
loss is determined to exist if the present value of the
discounted cash flows, using the security’ s original
yield, expected to be collected from the security is
less than the cost basis of the security.
recognized
is
Fair Value Option
For the years ended December 31, 2016, 2015, and
2014, we did not elect the fair value option for any
financial instruments acquired, or issued, such as our
outstanding debt obligations, for which the primary
basis of accounting is not fair value.
MGIC Investment Corporation 2016 Annual Report | 47
GLOSSARY OF TERMS AND ACRONYMS
/ A
ARMs
Adjustable rate mortgages
ABS
Asset-backed securities
ASC
Accounting Standards Codification
Available Assets
Assets, as designated under the PMIERs, that are
readily available to pay claims, and include the
most liquid investments
/ B
operations
(which excludes underwriting and
operating expenses of our non-insurance operations)
to NPW
/ F
Fannie Mae
Federal National Mortgage Association
FCRA
Fair Credit Reporting Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
Book or book year
A group of loans insured in a particular calendar year
FHLB
Federal Home Loan Bank of Chicago, of which MGIC
is a member
BPMI
Borrower-paid mortgage insurance
/ C
CECL
Current expected credit losses
CFPB
Consumer Financial Protection Bureau
CLO
Collateralized loan obligations
CMBS
Commercial mortgage-backed securities
/ D
FICO score
A measure of consumer credit risk provided by
credit bureaus, typically produced from statistical
models by Fair Isaac Corporation utilizing data
collected by the credit bureaus
FOMC
Federal Open Market Committee
Freddie Mac
Federal Home Loan Mortgage Corporation
/ G
GAAP
Generally Accepted Accounting Principles in the
United States
DAC
Deferred insurance policy acquisition costs
GSEs
Collectively, Fannie Mae and Freddie Mac
/ E
ETFs
Exchange traded funds
Expense ratio
The ratio, expressed as a percentage, of the
underwriting and operating expenses, net and
amortization of DAC of our combined insurance
48 | MGIC Investment Corporation 2016 Annual Report
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
HOPA
Homeowners Protection Act
/ I
IBNR
Losses incurred but not reported
IIF
Insurance in force, which for loans insured by us, is
equal to the unpaid principal balance, as reported to
us
/ J
JCT
Joint Committee on Taxation
/ L
LAE
Loss adjustment expenses
Legacy book
Mortgage insurance policies written prior to 2009
Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar
amount of the first mortgage loan to the value of the
property at the time the loan became insured and
reflect subsequent housing price
does not
appreciation or depreciation. Subordinate mortgages
may also be present.
Long-term debt:
5.375% Notes
5.375% Senior Notes due on November 2, 2015, with
interest payable semi-annually on May 1 and
November 1 of each year.
5% Notes
5% Convertible Senior Notes due May 1, 2017, with
interest payable semi-annually on May 1 and
November 1 of each year
2% Notes
2% Convertible Senior Notes due on April 1, 2020, with
interest payable semi-annually on April 1 and October
1 of each year
5.75% Notes
5.75% Senior Notes due on August 15, 2023, with
interest payable semi-annually on February 15 and
August 15 of each year
Glossary
9% Debentures
9% Convertible Junior Subordinated Debentures due
on April 1, 2063, with interest payable semi-annually
on April 1 and October 1 of each year
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on
February 10, 2023, with interest payable monthly
Loss ratio
The ratio, expressed as a percentage, of the sum of
incurred losses and loss adjustment expenses to NPE
Low down payment loans or mortgages
Loans with less than 20% down payments
LPMI
Lender-paid mortgage insurance
/ M
MBA
Mortgage Bankers Association
MBS
Mortgage-backed securities
MD&A
Management's discussion and analysis
MGIC
Mortgage Guaranty
subsidiary of MGIC Investment Corporation
Insurance Corporation, a
MIC
MGIC Indemnity Corporation
Minimum Required Assets
The greater of $400 million or the total of the
minimum amount of Available Assets that must be
held under the PMIERs based upon a percentage of
RIF weighted by certain risk attributes
MPP
Minimum Policyholder Position, as required under
“policyholder
requirements. The
certain state
position” of a mortgage insurer is its net worth or
surplus, contingency reserve and a portion of the
reserves for unearned premiums
/ N
N/A
Not applicable for the period presented
MGIC Investment Corporation 2016 Annual Report | 49
Glossary
NAIC
National
The
Commissioners
Association
of
Insurance
NIW
New Insurance Written
/ R
REMIC
Real Estate Mortgage Investment Conduit
RESPA
Real Estate Settlement Procedures Act
N/M
Data, or calculation, deemed not meaningful for the
period presented
NPE
The amount of premiums earned, net of premiums
assumed and ceded under reinsurance agreements
NPL
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
RIF
Risk in force, which for an individual loan insured by
us, is equal to the unpaid loan principal balance, as
reported to us, multiplied by the insurance coverage
percentage. RIF is sometimes referred to as exposure
Risk-to-capital
Under certain state regulations, the ratio of RIF, net of
reinsurance and exposure on policies currently in
default and for which loss reserves have been
established, to the level of statutory capital
NPW
The amount of premiums written, net of premiums
assumed and ceded under reinsurance agreements
RMBS
Residential mortgage-backed securities
/ O
OCI
Office of the Commissioner of Insurance of the State
of Wisconsin
/ S
SAP
Statutory accounting practices
/ U
/ P
Persistency
The percentage of our insurance remaining in force
from one year prior
PMI
Private Mortgage Insurance (as an industry or
product type)
PMIERs
Private Mortgage Insurer Eligibility Requirements
issued by the GSEs
Underwriting Expense Ratio
The ratio, expressed as a percentage, of the
underwriting and operating expenses, net and
amortization of DAC of our combined insurance
(which excludes underwriting and
operations
operating
non-insurance
our
expenses
subsidiaries) to NPW
of
Underwriting profit
NPE minus incurred losses
USDA
U.S. Department of Agriculture
Premium Yield
The ratio of NPE divided by the average IIF
outstanding for the period measured
/ V
VA
U.S. Department of Veterans Affairs
/ Q
QSR Transaction
Quota share reinsurance transaction
50 | MGIC Investment Corporation 2016 Annual Report
Quantitative and Qualitative
Disclosures About Market
Risk
Our investment portfolio is essentially a fixed income
portfolio and is exposed to market risk. Important
drivers of the market risk are credit spread risk and
interest rate risk.
Credit spread risk is the risk that we will incur a loss
due to adverse changes in credit spreads. Credit
spread is the additional yield on fixed income
(typically
securities above
referenced as the yield on U.S. Treasury securities)
that market participants require to compensate them
for assuming credit, liquidity and/or prepayment
risks.
risk-free
rate
the
We manage credit risk via our investment policy
guidelines which primarily place our investments in
investment grade securities and limit the amount of
our credit exposure to any one issue, issuer and type
of instrument.
Interest rate risk is the risk that we will incur a loss
due to adverse changes in interest rates relative to
the characteristics of our interest bearing assets.
One of the measures used to quantify interest rate
this exposure is modified duration. Modified duration
measures the price sensitivity of the assets to the
changes in spreads. At December 31, 2016, the
modified duration of our fixed income investment
portfolio was 4.6 years, which means that an
instantaneous parallel shift in the yield curve of 100
basis points would result in a change of 4.6% in the
fair value of our fixed income portfolio. For an upward
shift in the yield curve, the fair value of our portfolio
would decrease and for a downward shift in the yield
curve, the fair value would increase. A discussion of
portfolio strategy appears
"Management's
Discussion and Analysis – Balance Sheet Analysis."
in
MGIC Investment Corporation 2016 Annual Report | 51
Risk Factors
As used below, “we,” “our” and “us” refer to MGIC
Investment Corporation’ s consolidated operations or
to MGIC Investment Corporation, as the context
requires; “MGIC” refers to Mortgage Guaranty
Insurance Corporation; and “MIC” refers to MGIC
Indemnity Corporation.
Our actual results could be affected by the risk factors
below. These risk factors are an integral part of this
annual report. These risk factors may also cause
actual results to differ materially from the results
contemplated by forward looking statements that we
may make. Forward looking statements consist of
statements which relate to matters other than
historical fact, including matters that inherently refer
to future events. Among others, statements that
include words such as “believe,” “anticipate,” “will” or
“expect,” or words of similar import, are forward
looking statements. We are not undertaking any
obligation to update any forward looking statements
or other statements we may make even though these
statements may be affected by events or
circumstances occurring after the forward looking
statements or other statements were made. No
reader of this annual report should rely on these
statements being current at any time other than the
time at which this annual report was filed with the
Securities and Exchange Commission.
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our
premium yields and / or increase our losses.
Our private mortgage insurance competitors include:
• Arch Mortgage
Insurance Company, which
completed its acquisition of United Guaranty
Residential Insurance Company in the fourth
quarter of 2016,
• Essent Guaranty, Inc.,
• Genworth Mortgage Insurance Corporation,
• National Mortgage Insurance Corporation, and
• Radian Guaranty Inc.
The private mortgage insurance industry is highly
competitive and is expected to remain so. We believe
that we currently compete with other private
mortgage insurers based on pricing, underwriting
requirements, financial strength (including based on
credit or financial strength ratings), customer
52 | MGIC Investment Corporation 2016 Annual Report
relationships, name recognition, reputation, the
strength of our management team and field
organization, the ancillary products and services
provided to lenders (including contract underwriting
services), the depth of our databases covering
insured loans and the effective use of technology and
innovation in the delivery and servicing of our
mortgage insurance products.
Much of the competition in the industry has centered
on pricing practices which, in the last few years
included: (i) reductions in standard filed rates on
borrower-paid policies, (ii) use by certain competitors
of a spectrum of filed rates to allow for formulaic, risk-
based pricing (commonly referred to as “black-box”
pricing); and (iii) use of customized rates (discounted
from published rates) on lender-paid, single premium
policies. The willingness of mortgage insurers to
offer reduced pricing (through filed or customized
rates) has been met with an increased demand from
various lenders for reduced rate products. There can
be no assurance that pricing competition will not
intensify further, which could result in a decrease in
our new insurance written and/or returns.
In each of 2015 and 2016, approximately 5% of our
new insurance written was for loans for which one
lender was the original insured. Our relationships with
our customers could be adversely affected by a
variety of factors, including if our premium rates are
higher
those of our competitors, our
underwriting requirements result in our declining to
insure some of the loans originated by our customers,
or our insurance rescissions and curtailments affect
the customer.
than
Substantially all of our insurance written since 2008
has been for loans purchased by Fannie Mae and
Freddie Mac (the "GSEs"). The current private
mortgage insurer eligibility requirements ("PMIERs")
of the GSEs require a mortgage insurer to maintain a
minimum amount of assets to support its insured
risk, as discussed in our risk factor titled “We may not
continue to meet the GSEs’ private mortgage insurer
eligibility requirements and our returns may decrease
as we are required to maintain more capital in order to
maintain our eligibility.” The PMIERs do not require an
insurer to maintain minimum financial strength
ratings; however, our financial strength ratings can
affect us in the following ways:
• A downgrade in our financial strength ratings could
result
increased scrutiny of our financial
condition by our customers, potentially resulting in
in
a decrease in the amount of our new insurance
written.
first mortgage with a 90%, 95% or 100% loan-to-
value ratio that has private mortgage insurance.
Risk Factors
ratings
for our mortgage
• Our ability to participate in the non-GSE mortgage
market (which has been limited since the financial
crisis, but may grow in the future), could depend on
our ability to maintain and improve our investment
insurance
grade
subsidiaries. We
competitively
could
disadvantaged with some market participants
because the financial strength ratings of our
insurance subsidiaries are lower than those of
some competitors. MGIC's financial strength rating
from Moody’ s is Baa3 (with a stable outlook) and
from Standard & Poor’ s is BBB+ (with a stable
outlook).
be
• Financial strength ratings may also play a greater
role if the GSEs no longer operate in their current
capacities, for example, due to legislative or
regulatory action. In addition, although the PMIERs
do not require minimum financial strength ratings,
the GSEs consider financial strength ratings to be
forms of credit
important when utilizing
enhancement other than traditional mortgage
insurance, including in the credit risk transfer
offering discussed in our risk factor titled "The
amount of insurance we write could be adversely
affected if lenders and investors select alternatives
to private mortgage insurance." If we are unable to
compete effectively in the current or any future
markets as a result of the financial strength ratings
assigned to our insurance subsidiaries, our future
new insurance written could be negatively affected.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives
to private mortgage insurance.
Alternatives to private mortgage insurance include:
• lenders using FHA, VA and other government
mortgage insurance programs,
• lenders and other investors holding mortgages in
portfolio and self-insuring,
• investors using risk mitigation and credit risk
transfer techniques other than private mortgage
insurance, and
• lenders originating mortgages using piggyback
structures to avoid private mortgage insurance,
such as a first mortgage with an 80% loan-to-value
ratio and a second mortgage with a 10%, 15% or
20% loan-to-value ratio (referred to as 80-10-10,
80-15-5 or 80-20 loans, respectively) rather than a
investors; using other
Investors (including the GSEs) have used risk
mitigation and credit risk transfer techniques other
than private mortgage insurance, such as obtaining
insurance from non-mortgage insurers, engaging in
credit-linked note transactions executed in the capital
markets, or using other forms of debt issuances or
securitizations that transfer credit risk directly to
risk mitigation
other
techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting
credit risk without credit enhancement. Although the
risk mitigation and credit risk transfer techniques
used by the GSEs in the past several years have not
displaced primary mortgage insurance, we cannot
predict the impact of future transactions. In the
second half of 2016, the GSEs each launched a new
credit risk transfer offering that involved forward
credit insurance policies written by a panel of
mortgage insurance company affiliates, including an
affiliate of MGIC. The policies provide additional
coverage beyond the primary mortgage insurance on
30-year fixed-rate mortgages with 80-95% loan-to-
value ratios ("LTVs"). It is difficult to predict the
amount of risk that will be insured under such
transactions in the future. The amount of capital we
have allocated to this pilot program and the
associated premiums are
immaterial. Future
participation in credit risk transfers will need to be
evaluated based upon the terms offered and
expected returns.
The FHA's share of the low down payment residential
mortgages that were subject to FHA, VA or primary
private mortgage insurance was an estimated 36.4%
in 2016, compared to 40.4% in 2015 and 33.9% in
2014. In the past ten years, the FHA’ s share has been
as low as 15.5% in 2006 and as high as 70.8% in 2009.
Factors that influence the FHA’ s market share include
relative rates and fees, underwriting guidelines and
loan limits of the FHA, VA, private mortgage insurers
and the GSEs; lenders' perceptions of legal risks
under FHA versus GSE programs; flexibility for the
FHA to establish new products as a result of federal
legislation and programs; returns expected to be
obtained by lenders for Ginnie Mae securitization of
FHA-insured loans compared to those obtained from
selling loans to Fannie Mae or Freddie Mac for
securitization; and differences in policy terms, such
as the ability of a borrower to cancel insurance
coverage under certain circumstances. In January
2017, the FHA announced a significant premium
Presidential
reduction,
the
administration suspended
reduction
indefinitely. We cannot predict how the factors that
however,
new
rate
the
MGIC Investment Corporation 2016 Annual Report | 53
Risk Factors
affect the FHA’ s share of new insurance written will
change in the future.
coverage and, if so, any transactions that are
related to that selection,
The VA's share of the low down payment residential
mortgages that were subject to FHA, VA or primary
private mortgage insurance was an estimated 27.3%
in 2016, compared to 24.6% in 2015 and 25.4% in
2014. The VA’ s 2016 market share was its highest in
the past ten years and its lowest market share in the
past ten years was 5.4% in 2007. We believe that the
VA’ s market share has generally been increasing
because the VA offers 100% LTV loans and charges
a one-time funding fee that can be included in the loan
amount but no additional monthly expense, and
because of an increase in the number of borrowers
who are eligible for the VA’ s program.
Changes in the business practices of the GSEs,
federal legislation that changes their charters or a
restructuring of the GSEs could reduce our revenues
or increase our losses.
The GSEs’ charters generally
require credit
enhancement for a low down payment mortgage loan
(a loan amount that exceeds 80% of a home’ s value)
in order for such loan to be eligible for purchase by
the GSEs. Lenders generally have used private
this credit
mortgage
enhancement requirement and low down payment
mortgages purchased by the GSEs generally are
insured with private mortgage insurance. As a result,
the business practices of the GSEs greatly impact our
business and include:
to satisfy
insurance
• private mortgage insurer eligibility requirements of
the GSEs (for information about the financial
requirements included in the PMIERs, see our risk
factor titled “We may not continue to meet the GSEs’
private mortgage insurer eligibility requirements
and our returns may decrease as we are required to
maintain more capital in order to maintain our
eligibility”),
• the level of private mortgage insurance coverage,
subject to the limitations of the GSEs’ charters
(which may be changed by federal legislation),
when private mortgage insurance is used as the
required credit enhancement on low down payment
mortgages,
• the amount of loan level price adjustments and
guaranty fees (which result in higher costs to
borrowers) that the GSEs assess on loans that
require private mortgage insurance,
• whether the GSEs influence the mortgage lender’ s
insurer providing
selection of the mortgage
54 | MGIC Investment Corporation 2016 Annual Report
• the underwriting standards that determine which
loans are eligible for purchase by the GSEs, which
can affect the quality of the risk insured by the
mortgage insurer and the availability of mortgage
loans,
• the terms on which mortgage insurance coverage
can be canceled before reaching the cancellation
thresholds established by law,
• the programs established by the GSEs intended to
avoid or mitigate loss on insured mortgages and
the circumstances in which mortgage servicers
must implement such programs,
• the terms that the GSEs require to be included in
mortgage insurance policies for loans that they
purchase,
• the terms on which the GSEs offer lenders relief on
their representations and warranties made at the
time of sale of a loan to the GSEs, which creates
pressure on mortgage
insurers to limit their
rescission rights to conform to such relief, and the
extent to which the GSEs intervene in mortgage
insurers’ rescission practices or
rescission
settlement practices with lenders, and
• the maximum loan limits of the GSEs in comparison
to those of the FHA and other investors.
The Federal Housing Finance Agency (“FHFA”) has
been the conservator of the GSEs since 2008 and has
the authority to control and direct their operations.
The increased role that the federal government has
assumed in the residential housing finance system
through the GSE conservatorship may increase the
likelihood that the business practices of the GSEs
change in ways that have a material adverse effect
on us and that the charters of the GSEs are changed
by new federal legislation. In the past, members of
Congress have introduced several bills intended to
change the business practices of the GSEs and the
FHA; however, no legislation has been enacted. The
new Presidential administration has indicated that
the conservatorship of the GSEs should end; however,
it is unclear whether and when that would occur and
how that would impact us. As a result of the matters
referred to above, it is uncertain what role the GSEs,
FHA and private capital, including private mortgage
insurance, will play in the residential housing finance
system in the future or the impact of any such
changes on our business. In addition, the timing of
the impact of any resulting changes on our business
is uncertain. Most meaningful changes would require
Congressional action to implement and it is difficult
to estimate when Congressional action would be final
and how long any associated phase-in period may
last.
We may not continue to meet the GSEs’ private
mortgage insurer eligibility requirements and our
returns may decrease as we are required to maintain
more capital in order to maintain our eligibility.
We must comply with the PMIERs to be eligible to
insure loans purchased by the GSEs. The PMIERs
include financial requirements, as well as business,
quality control and certain transaction approval
requirements. The financial requirements of the
PMIERs require a mortgage insurer’ s “Available
Assets” (generally only the most liquid assets of an
insurer) to equal or exceed its “Minimum Required
Assets” (which are based on an insurer’ s book 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 December
31, 2016, MGIC’ s Available Assets are $4.7 billion and
its Minimum Required Assets are $4.1 billion. MGIC
is in compliance with the PMIERs and eligible to
insure loans purchased by the GSEs.
If MGIC ceases to be eligible to insure loans
purchased by one or both of the GSEs, it would
significantly reduce the volume of our new business
writings. Factors that may negatively impact MGIC’ s
ability to continue to comply with the financial
requirements of the PMIERs include the following:
• The GSEs could make the PMIERs more onerous in
the future; in this regard, the PMIERs provide that
the tables of factors that determine Minimum
Required Assets will be updated every two years
and may be updated more frequently to reflect
changes in macroeconomic conditions or loan
performance. The GSEs will provide notice 180
days prior to the effective date of table updates. In
addition, the GSEs may amend the PMIERs at any
time.
• The GSEs may reduce the amount of credit they
allow under the PMIERs for the risk ceded under
our quota share reinsurance transaction. The GSEs’
ongoing approval of that transaction is subject to
several conditions and the transaction will be
reviewed under the PMIERs at least annually by the
GSEs. For more information about the transaction,
see our risk factor titled “The mix of business we
write affects our Minimum Required Assets under
the PMIERs, our premium yields and the likelihood
of losses occurring.”
Risk Factors
• Our future operating results may be negatively
impacted by the matters discussed in the rest of
these risk factors. Such matters could decrease our
revenues, increase our losses or require the use of
assets, thereby creating a shortfall in Available
Assets.
• Should capital be needed by MGIC in the future,
capital contributions from our holding company
may not be available due to competing demands
on holding company resources, including for
repayment of debt.
While on an overall basis, the amount of Available
Assets MGIC must hold in order to continue to insure
GSE loans increased under the PMIERs over what
state regulation currently requires, our reinsurance
transaction mitigates the negative effect of the
PMIERs on our returns. In this regard, see the second
bullet point above.
The benefit of our net operating loss carryforwards
may become substantially limited.
As of December 31, 2016, we had approximately $1.5
billion of net operating losses for tax purposes that
we can use in certain circumstances to offset future
taxable income and thus reduce our federal income
tax
liability. Any unutilized carryforwards are
scheduled to expire at the end of tax years 2030
through 2033. Our ability to utilize these net operating
losses to offset future taxable income may be
significantly limited if we experience an “ownership
change” as defined in Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”). In
general, an ownership change will occur if there is a
cumulative change in our ownership by “5-percent
shareholders” (as defined in the Code) that exceeds
50 percentage points over a rolling three-year period.
A corporation that experiences an ownership change
will generally be subject to an annual limitation on the
corporation’ s subsequent use of net operating loss
carryovers that arose from pre-ownership change
periods and use of losses that are subsequently
recognized with respect to assets that had a built-in-
loss on the date of the ownership change. The
amount of the annual limitation generally equals the
fair value of the corporation immediately before the
ownership change multiplied by the long-term tax-
exempt interest rate (subject to certain adjustments).
To the extent that the limitation in a post-ownership-
change year is not fully utilized, the amount of the
limitation for the succeeding year will be increased.
While we have adopted our Amended and Restated
Rights Agreement to minimize the likelihood of
transactions in our stock resulting in an ownership
change, future issuances of equity-linked securities
MGIC Investment Corporation 2016 Annual Report | 55
Risk Factors
or transactions
in our stock and equity-linked
securities that may not be within our control may
cause us to experience an ownership change. If we
experience an ownership change, we may not be able
to fully utilize our net operating losses, resulting in
additional income taxes and a reduction in our
shareholders’ equity.
As of December 31, 2016, our deferred tax asset is
recorded at $607.7 million, which relates primarily to
the future tax effects of our prior year net operating
losses expected to be carried forward to offset future
taxable income. A decrease in the federal statutory
income tax rate will result in a one-time reduction in
the amount at which our deferred tax asset is
recorded, thereby reducing our net income and book
value in that period; however, such a decrease will
also reduce our effective income tax rate, thereby
increasing net income in future periods.
We are involved in legal proceedings and are subject
to the risk of additional legal proceedings in the
future.
Before paying an insurance claim, we review the loan
and servicing files to determine the appropriateness
of the claim amount. When reviewing the files, we may
determine that we have the right to rescind coverage
on the loan. In our SEC reports, we refer to insurance
rescissions and denials of claims collectively as
“rescissions” and variations of that term. In addition,
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 recent
quarters, an
immaterial percentage of claims
in a quarter have been resolved by
received
rescissions. In 2015 and 2016, curtailments reduced
our average claim paid by approximately 6.7% and
5.5%, respectively.
Our loss reserving methodology incorporates our
estimates of future rescissions, curtailments, and
reversals of rescissions and curtailments. A variance
between ultimate actual rescission, curtailment and
reversal rates and our estimates, as a result of the
outcome of litigation, settlements or other factors,
could materially affect our losses.
When the insured disputes our right to rescind
coverage or curtail claims, we generally engage in
discussions in an attempt to settle the dispute. If we
are unable to reach a settlement, the outcome of a
dispute ultimately would be determined by legal
proceedings.
Under ASC 450-20, until a liability associated with
legal proceedings
settlement discussions or
56 | MGIC Investment Corporation 2016 Annual Report
becomes probable and can be reasonably estimated,
we consider our claim payment or rescission resolved
for financial reporting purposes and do not accrue an
estimated loss. Where we have determined that a loss
is probable and can be reasonably estimated, we have
recorded our best estimate of our probable loss. If we
are not able to implement settlements we consider
probable, we intend to defend MGIC vigorously
against any related legal proceedings.
In addition to matters for which we have recorded a
probable loss, we are involved in other discussions
and/or proceedings with insureds with respect to our
claims paying practices. Although it is reasonably
possible that when these matters are resolved we will
not prevail in all cases, we are unable to make a
reasonable estimate or range of estimates of the
potential
the maximum
exposure associated with matters where a loss is
reasonably possible to be approximately $295
million, although we believe (but can give no
assurance that) we will ultimately resolve these
matters for significantly less than this amount. This
estimate of our maximum exposure does not include
interest or consequential or exemplary damages.
liability. We estimate
insurers,
Mortgage
including MGIC, have been
involved in litigation and regulatory actions related to
alleged violations of the anti-referral fee provisions of
the Real Estate Settlement Procedures Act, which is
commonly known as RESPA, and the notice
provisions of the Fair Credit Reporting Act, which is
commonly known as FCRA. While these proceedings
in the aggregate have not resulted in material liability
for MGIC, there can be no assurance that the outcome
of future proceedings under these laws, if any, would
not have a material adverse affect on us. In addition,
various
the CFPB, state
including
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.
regulators,
In addition to the matters described above, we are
involved in other legal proceedings in the ordinary
course of business. In our opinion, based on the facts
known at this time, the ultimate resolution of these
ordinary course legal proceedings will not have a
material adverse effect on our financial position or
results of operations.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive, detailed regulation
by state insurance departments. These regulations
are principally designed for the protection of our
insured policyholders, rather than for the benefit of
investors. Although
their scope varies, state
insurance laws generally grant broad supervisory
powers to agencies or officials to examine insurance
companies and enforce rules or exercise discretion
affecting almost every significant aspect of the
insurance business. State
insurance regulatory
authorities could take actions, including changes in
capital requirements, that could have a material
adverse effect on us. For more information about
state capital requirements, see our risk factor titled
“State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis.” To the extent that we are construed to make
independent credit decisions in connection with our
contract underwriting activities, we also could be
subject to increased regulatory requirements under
the Equal Credit Opportunity Act, commonly known
as ECOA, the FCRA, and other laws. In addition to
regulation by state insurance regulators, the CFPB
may issue additional rules or regulations, which may
materially affect our business.
In December 2013, the U.S. Treasury Department’ s
Federal Insurance Office released a report that calls
for federal standards and oversight for mortgage
insurers to be developed and implemented. It is
uncertain what form the standards and oversight will
take and when they will become effective.
Resolution of our dispute with the Internal Revenue
Service could adversely affect us.
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
Risk Factors
matters of $197.5 million and at December 31, 2016,
there would also be interest related to these matters
of approximately $200.6 million. In 2007, we made a
payment of $65.2 million to the United States
Department of the Treasury which will reduce any
amounts we would ultimately owe. The Notices of
Deficiency also reflect additional amounts due of
$261.4 million, which are primarily associated with
the disallowance of the carryback of the 2009 net
operating loss to the 2004-2007 tax years. We believe
the IRS included the carryback adjustments as a
precaution to keep open the statute of limitations on
collection of the tax that was refunded when this loss
was carried back, and not because the IRS actually
intends to disallow the carryback permanently.
Depending on the outcome of this matter, additional
state income taxes and state interest may become
due when a final resolution is reached. As of
December 31, 2016, those state taxes and interest
would approximate $50.7 million. In addition, there
could also be state tax penalties. Our total amount of
unrecognized tax benefits as of December 31, 2016
is $108.2 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 filed a petition with the U.S. Tax Court contesting
most of the IRS’ proposed adjustments reflected in
the Notices of Deficiency and the IRS filed an answer
to our petition which continued to assert their claim.
The case has twice been scheduled for trial and in
each instance, the parties jointly filed, and the U.S.
Tax Court approved (most recently in February 2016),
motions for continuance to postpone the trial date.
Also in February 2016, the U.S. Tax Court approved a
joint motion to consolidate for trial, briefing, and
opinion, our case with similar cases of Radian Group,
Inc., as successor to Enhance Financial Services
Group, Inc., et al. In January 2017, the parties
informed the Tax Court that they had reached a basis
for settlement of the major issues in the case. Any
agreed settlement terms will ultimately be subject to
review by the Joint Committee on Taxation (“JCT”)
before a settlement can be completed and there is no
assurance that a settlement will be completed. Based
on information that we currently have regarding the
status of our ongoing dispute, we expect to record a
provision for additional taxes and interest of $15-25
million in the first quarter of 2017.
Should a settlement not be completed, ongoing
litigation to resolve our dispute with the IRS could be
lengthy and costly in terms of legal fees and related
expenses. We would need
further
adjustments, which could be material, to our tax
provision and liabilities if our view of the probability
of success in this matter changes, and the ultimate
to make
MGIC Investment Corporation 2016 Annual Report | 57
Risk Factors
resolution of this matter could have a material
negative impact on our effective tax rate, results of
operations, cash flows, available assets and statutory
capital. In this regard, see our risk factors titled “We
may not continue to meet the GSEs’ private mortgage
insurer eligibility requirements and our returns may
decrease as we are required to maintain more capital
in order to maintain our eligibility” and “State capital
requirements may prevent us from continuing to write
new insurance on an uninterrupted basis.”
Because we establish loss reserves only upon a loan
default rather than based on estimates of our ultimate
losses on risk
losses may have a
disproportionate adverse effect on our earnings in
certain periods.
in force,
In accordance with accounting principles generally
accepted in the United States, commonly referred to
as GAAP, we establish reserves for insurance losses
and loss adjustment expenses only when notices of
default on insured mortgage loans are received and
for loans we estimate are in default but for which
notices of default have not yet been reported to us by
the servicers (this is often referred to as “IBNR”).
Because our reserving method does not take account
of losses that could occur from loans that are not
delinquent, such losses are not reflected in our
financial statements, except in the case where a
premium deficiency exists. As a result, future losses
on loans that are not currently delinquent may have
a material impact on future results as such losses
emerge.
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially
different than our loss reserves.
rescissions
curtailments.
When we establish reserves, we estimate the ultimate
loss on delinquent loans using estimated claim rates
and claim amounts. The estimated claim rates and
claim amounts represent our best estimates of what
we will actually pay on the loans in default as of the
reserve date and incorporate anticipated mitigation
from
The
and
establishment of loss reserves is subject to inherent
uncertainty and requires judgment by management.
The actual amount of the claim payments may be
substantially different
reserve
estimates. Our estimates could be affected by several
factors, including a change in regional or national
economic conditions, and a change in the length of
time loans are delinquent before claims are received.
The change in conditions may include changes in
unemployment, affecting borrowers’ income and
thus their ability to make mortgage payments, and
changes
in housing values, which may affect
borrower willingness to continue to make mortgage
than our
loss
58 | MGIC Investment Corporation 2016 Annual Report
payments when the value of the home is below the
mortgage balance. Changes to our estimates could
have a material impact on our future results, even in
a stable economic environment.
In addition,
historically, losses incurred have followed a seasonal
trend in which the second half of the year has weaker
credit performance than the first half, with higher new
default notice activity and a lower cure rate.
We rely on our management team and our business
could be harmed if we are unable to retain qualified
personnel or successfully develop and/or recruit their
replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our
management team and other key personnel. The
unexpected departure of key personnel could
adversely affect the conduct of our business. In such
event, we would be required to obtain other personnel
to manage and operate our business. In addition, we
will be required to replace the knowledge and
expertise of our aging workforce as our workers
retire. In either case, there can be no assurance that
we would be able to develop or recruit suitable
replacements for the departing individuals; that
replacements could be hired, if necessary, on terms
that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We
currently have not entered into any employment
agreements with our officers or key personnel.
Volatility or lack of performance in our stock price
may affect our ability to retain our key personnel or
attract replacements should key personnel depart.
Without a properly skilled and experienced workforce,
our costs, including productivity costs and costs to
replace employees may increase, and this could
negatively impact our earnings.
Loan modification and other similar programs may
not continue to provide substantial benefits to us.
The federal government, including through the U.S.
Department of the Treasury and the GSEs, and several
lenders have modification and refinance programs to
make loans more affordable to borrowers with the
goal of reducing the number of foreclosures. These
programs include the Home Affordable Modification
Program (“HAMP”) and the Home Affordable
Refinance Program (“HARP”). During 2015 and 2016,
we were notified of modifications that cured
delinquencies that had they become paid claims
would have resulted in approximately $0.6 billion and
respectively, of estimated claim
$0.5 billion,
payments. These levels are down from a high of $3.2
billion in 2010.
HAMP expired at the end of 2016 and although HARP
has been extended through September 2017,we
believe that we have realized the majority of the
benefits from that program because the number of
loans insured by us that we are aware are entering
that program has decreased significantly. The GSEs
have introduced the "Flex Modification" program to
replace HAMP effective in October 2017. Until it
becomes effective, loan servicers must still evaluate
borrowers for other GSE modification programs.
We cannot determine the total benefit we may derive
from loan modification programs, particularly given
the uncertainty around the re-default rates for
defaulted loans that have been modified. Our loss
reserves do not account for potential re-defaults of
current loans.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that
we write could decline.
The factors that affect the volume of low down
payment mortgage originations include:
• restrictions on mortgage credit due to more
stringent underwriting standards, liquidity issues or
requirements
risk-retention
affecting lenders,
capital
and/or
• the level of home mortgage interest rates and the
deductibility of mortgage interest or mortgage
insurance premiums for income tax purposes,
• the health of the domestic economy as well as
conditions in regional and local economies and the
level of consumer confidence,
• housing affordability,
• population trends, including the rate of household
formation,
• the rate of home price appreciation, which in times
of heavy refinancing can affect whether refinanced
loans have loan-to-value ratios that require private
mortgage insurance, and
• government housing policy encouraging loans to
first-time homebuyers.
A decline in the volume of low down payment home
mortgage originations could decrease demand for
mortgage insurance and decrease our new insurance
written . For other factors that could decrease the
demand for mortgage insurance, see our risk factor
titled “The amount of insurance we write could be
Risk Factors
adversely affected if lenders and investors select
alternatives to private mortgage insurance.”
State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis.
The insurance laws of 16 jurisdictions, including
Wisconsin, our domiciliary state, require a mortgage
insurer to maintain a minimum amount of statutory
capital relative to its risk in force (or a similar
measure) in order for the mortgage insurer to
continue to write new business. We refer to these
requirements as the “State Capital Requirements.”
While they vary among jurisdictions, the most
common State Capital Requirements allow for a
maximum risk-to-capital ratio of 25 to 1. A risk-to-
capital ratio will increase if (i) the percentage
decrease in capital exceeds the percentage decrease
in insured risk, or (ii) the percentage increase in
capital is less than the percentage increase in insured
risk. Wisconsin does not regulate capital by using a
risk-to-capital measure but
instead requires a
(“MPP”). The
minimum policyholder position
“policyholder position” of a mortgage insurer is its net
worth or surplus, contingency reserve and a portion
of the reserves for unearned premiums.
At December 31, 2016, MGIC’ s risk-to-capital ratio
was 10.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $1.6 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 transaction, without
penalty. At this time, we expect MGIC to continue to
comply with the current State Capital Requirements;
however, you should read the rest of these risk factors
for information about matters that could negatively
affect such compliance.
At December 31, 2016, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 12.0 to 1. Reinsurance
transactions with our affiliate permit MGIC to write
insurance with a higher coverage percentage than it
its own under certain state-specific
could on
requirements. A higher risk-to-capital ratio on a
combined basis may indicate that, in order for MGIC
to continue to utilize reinsurance arrangements with
MGIC Investment Corporation 2016 Annual Report | 59
Risk Factors
reinsurance
its
contributions to the affiliate could be needed.
additional
affiliate,
capital
The NAIC it plans to revise the minimum capital and
surplus requirements for mortgage insurers that are
provided for in its Mortgage Guaranty Insurance
Model Act. In May 2016, a working group of state
regulators released an exposure draft of a risk-based
capital framework to establish capital requirements
for mortgage insurers, although no date has been
established by which the NAIC must propose
revisions to the capital requirements. We continue to
evaluate the impact of the framework contained in
the exposure draft, including the potential impact of
certain items that have not yet been completely
addressed by the framework which include: the
treatment of ceded risk, minimum capital floors, and
action level triggers. Currently we believe that the
restrictive capital
the more
PMIERs contain
requirements in most circumstances.
While MGIC currently meets the State Capital
Requirements of Wisconsin and all other
jurisdictions, it could be prevented from writing new
business in the future in all jurisdictions if it fails to
meet the State Capital Requirements of Wisconsin,
or it could be prevented from writing new business in
a particular jurisdiction if it fails to meet the State
Capital Requirements of that jurisdiction, and in each
case MGIC does not obtain a waiver of such
requirements. It is possible that regulatory action by
one or more jurisdictions, including those that do not
have specific State Capital Requirements, may
prevent MGIC from continuing to write new insurance
in such jurisdictions. If we are unable to write
business in all jurisdictions, lenders may be unwilling
to procure insurance from us anywhere. In addition,
a lender’ s assessment of the future ability of our
insurance operations to meet the State Capital
Requirements or
its
willingness to procure insurance from us. In this
regard, see our risk factor titled “Competition or
changes in our relationships with our customers could
reduce our revenues, reduce our premium yields and/
or increase our losses.” A possible future failure by
MGIC to meet the State Capital Requirements or the
PMIERs will not necessarily mean that MGIC lacks
sufficient resources to pay claims on its insurance
liabilities. While we believe MGIC has sufficient
claims paying resources to meet its claim obligations
on its insurance in force on a timely basis, you should
read the rest of these risk factors for information
about matters that could negatively affect MGIC’ s
claims paying resources.
the PMIERs may affect
60 | MGIC Investment Corporation 2016 Annual Report
Downturns in the domestic economy or declines in
the value of borrowers’ homes from their value at the
time their
in more
loans closed may result
homeowners defaulting and our losses increasing,
with a corresponding decrease in our returns.
Losses result from events that reduce a borrower’ s
ability or willingness to continue to make mortgage
payments, such as unemployment, health issues,
family status, and whether the home of a borrower
who defaults on his mortgage can be sold for an
amount that will cover unpaid principal and interest
and the expenses of the sale. In general, favorable
economic conditions reduce the likelihood that
borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of
homes, thereby reducing and in some cases even
eliminating a loss from a mortgage default. A
deterioration in economic conditions, including an
increase in unemployment, generally increases the
likelihood that borrowers will not have sufficient
income to pay their mortgages and can also adversely
affect housing values, which in turn can influence the
willingness of borrowers with sufficient resources to
make mortgage payments to do so when the
mortgage balance exceeds the value of the home.
Housing values may decline even absent a
deterioration in economic conditions due to declines
in demand for homes, which in turn may result from
changes in buyers’ perceptions of the potential for
future appreciation, restrictions on and the cost of
mortgage credit due to more stringent underwriting
standards, higher interest rates generally, changes to
the deductibility of mortgage interest or mortgage
insurance premiums for income tax purposes, or
other factors. Changes
in housing values and
inherently difficult to
unemployment
forecast given the uncertainty in the current market
environment, including uncertainty about the effect
of actions the federal government has taken and may
take with respect to tax policies, mortgage finance
programs and policies, and housing finance reform.
levels are
The mix of business we write affects our Minimum
Required Assets under the PMIERs, our premium
yields and the likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are,
in part, a function of the direct risk-in-force and the
risk profile of the loans we insure, considering loan-
to-value ratio, credit score, vintage, HARP status and
delinquency status; and whether the loans were
insured under
insurance
policies or other policies that are not subject to
automatic
the
Homeowners Protection Act
requirements for
borrower paid mortgage insurance. Therefore, if our
direct risk-in-force increases through increases in
lender-paid mortgage
consistent with
termination
new insurance written, or if our mix of business
changes to include loans with higher loan-to-value
ratios or lower FICO scores, for example, or if we
insure more loans under lender-paid mortgage
insurance policies, all other things equal, we will be
required to hold more Available Assets in order to
maintain GSE eligibility.
The minimum capital required by the risk-based
capital framework contained in the exposure draft
released by the NAIC in May 2016 would be, in part,
a function of certain loan factors, including property
location, loan-to-value ratio and credit score; general
underwriting quality in the market at the time of loan
origination; the age of the loan; and the premium rate
we charge. Depending on the provisions of the capital
requirements when they are released in final form and
become effective, our mix of business may affect the
minimum capital we are required to hold under the
new framework.
Beginning in 2014, we have increased the percentage
of our business from lender-paid single premium
policies. Depending on the actual life of a single
premium policy and its premium rate relative to that
of a monthly premium policy, a single premium policy
may generate more or less premium than a monthly
premium policy over its life.
We have
in place a quota share reinsurance
transaction with a group of unaffiliated reinsurers
that covers most of our insurance written from 2013
through 2016, and a portion of our insurance written
prior to 2013. We expect that in the first quarter of
2017, we will enter into a similar agreement covering
most of our new insurance written in 2017. Although
the transactions reduce our premiums, they have a
lesser impact on our overall results, as losses ceded
under the transactions reduce our losses incurred
and the ceding commission we receive reduce our
underwriting expenses. The net cost of reinsurance,
with respect to a covered loan, is 6% (but can be lower
if losses are materially higher than we expect). This
cost is derived by dividing the reduction in our pre-tax
net income from such loan with reinsurance by our
direct (that is, without reinsurance) premiums from
such loan. Although the net cost of the reinsurance
is generally constant at 6%, the effect of the
reinsurance on the various components of pre-tax
income will vary from period to period, depending on
the level of ceded losses.
In addition to the effect of reinsurance on our
premiums, we expect a modest decline in our
premium yield resulting from the premium rates
themselves: the books we wrote before 2009, which
have a higher average premium rate than subsequent
books, are expected to continue to decline as a
Risk Factors
percentage of the insurance in force; and the average
premium rate on these books is also expected to
decline as the premium rates reset to lower levels at
the time the loans reach the ten-year anniversary of
their initial coverage date. However, for loans that
have utilized HARP, the initial ten-year period was
reset to begin as of the date of the HARP transaction.
As of December 31, 2016, approximately 4% and 2%
of our total primary insurance in force was written in
2007 and 2008, respectively, has not been refinanced
under HARP and is subject to a reset after ten years.
The circumstances in which we are entitled to rescind
coverage have narrowed for insurance we have
written in recent years. During the second quarter of
2012, we began writing a portion of our new insurance
under an endorsement to our then existing master
policy (the “Gold Cert Endorsement”), which limited
our ability to rescind coverage compared to that
master policy. To comply with requirements of the
GSEs, we introduced our current master policy in
2014. Our rescission rights under our current master
policy are comparable to those under our previous
master policy, as modified by the Gold Cert
Endorsement, but may be further narrowed if the
GSEs permit modifications to them. Our current
master policy is filed as Exhibit 99.19 to our quarterly
report on Form 10-Q for the quarter ended September
30, 2014 (filed with the SEC on November 7, 2014).
All of our primary new insurance on loans with
mortgage insurance application dates on or after
October 1, 2014, was written under our current master
policy. As of December 31, 2016, approximately 63%
of our flow, primary insurance in force was written
under our Gold Cert Endorsement or our current
master policy.
From time to time, in response to market conditions,
we change the types of loans that we insure and the
requirements under which we insure them. We also
change our underwriting guidelines, in part through
aligning some of them with Fannie Mae and Freddie
Mac for loans that receive and are processed in
accordance with certain approval recommendations
from a GSE automated underwriting system. As a
result of changes to our underwriting guidelines and
requirements and other factors, our business written
beginning in the second half of 2013 is expected to
have a somewhat higher claim incidence than
business written in 2009 through the first half of 2013.
However, we believe this business presents an
acceptable
risk. Our underwriting
requirements are available on our website at http://
www.mgic.com/underwriting/index.html.
We monitor the competitive landscape and will make
adjustments
to our pricing and underwriting
guidelines as warranted. We also make exceptions to
our underwriting requirements on a loan-by-loan
level of
MGIC Investment Corporation 2016 Annual Report | 61
Risk Factors
basis and for certain customer programs. Together,
the number of loans for which exceptions were made
accounted for fewer than 2% of the loans we insured
in each of 2015 and 2016.
including
limited underwriting,
Even when housing values are stable or rising,
mortgages with certain characteristics have higher
probabilities of claims. These characteristics include
loans with higher loan-to-value ratios, lower FICO
scores,
limited
borrower documentation, or higher total debt-to-
income ratios, as well as loans having combinations
of higher risk factors. As of December 31, 2016,
approximately 14.4% of our primary risk in force
consisted of loans with loan-to-value ratios greater
than 95%, 3.8% had FICO scores below 620, and 3.7%
had limited underwriting, including limited borrower
documentation, each attribute as determined at the
time of loan origination. A material number of these
loans were originated in 2005 - 2007 or the first half
of 2008. For information about our classification of
loans by FICO score and documentation, see
footnotes (6) and (7) to the Characteristics of Primary
Risk in Force table under “Business – Our Products
and Services” in Item 1 of our Annual Report on Form
for the year ended December 31, 2016, which
was filed with the SEC on February 21, 2017.
As of December 31, 2016, approximately 2% of our
primary risk in force consisted of adjustable rate
mortgages in which the initial interest rate may be
adjusted during the five years after the mortgage
closing (“ARMs”). We classify as fixed rate loans
adjustable rate mortgages in which the initial interest
rate is fixed during the five years after the mortgage
closing. If interest rates should rise between the time
of origination of such loans and when their interest
rates may be reset, claims on ARMs and adjustable
rate mortgages whose interest rates may only be
adjusted after five years would be substantially higher
than for fixed rate loans. In addition, we have insured
“interest-only” loans, which may also be ARMs, and
loans with negative amortization features, such as
pay option ARMs. We believe claim rates on these
loans will be substantially higher than on loans
without scheduled payment increases that are made
to borrowers of comparable credit quality.
If state or federal regulations or statutes are changed
in ways that ease mortgage lending standards and/
or requirements, it is possible that more mortgage
loans could be originated with higher
risk
characteristics than are currently being originated
such as loans with lower FICO scores, higher debt to
income
ratios and non-amortizing payments.
Lenders could pressure mortgage insurers to insure
such loans. Although we attempt to incorporate these
higher expected claim rates into our underwriting and
62 | MGIC Investment Corporation 2016 Annual Report
pricing models, there can be no assurance that the
premiums earned and the associated investment
income will be adequate to compensate for actual
losses even under our current underwriting
requirements. We do, however, believe that our
insurance written beginning in the second half of
2008 will generate underwriting profits.
The premiums we charge may not be adequate to
compensate us for our liabilities for losses and as a
result any inadequacy could materially affect our
financial condition and results of operations.
We set premiums at the time a policy is issued based
on our expectations regarding likely performance of
the insured risks over the long-term. Our premiums
are subject to approval by state regulatory agencies,
which can delay or limit our ability to increase our
premiums. Generally, we cannot cancel mortgage
insurance coverage or adjust renewal premiums
during the life of a mortgage insurance policy. As a
result, higher than anticipated claims generally
cannot be offset by premium increases on policies in
force or mitigated by our non-renewal or cancellation
of insurance coverage. The premiums we charge, and
the associated investment income, may not be
adequate to compensate us for the risks and costs
associated with the insurance coverage provided to
customers. An increase in the number or size of
claims, compared to what we anticipate, could
adversely affect our results of operations or financial
condition. Our premium rates are also based in part
on the amount of capital we are required to hold
against the insured risk. If the amount of capital we
are required to hold increases from the amount we
were required to hold when a policy was written, we
cannot adjust premiums to compensate for this and
our returns may be lower than we assumed.
The losses we have incurred on our 2005-2008 books
have exceeded our premiums from those books. Our
current expectation is that the incurred losses from
those books, although declining, will continue to
generate a material portion of our total incurred
losses for a number of years. The ultimate amount of
these losses will depend in part on general economic
conditions,
the
direction of home prices.
including unemployment, and
We are susceptible to disruptions in the servicing of
mortgage loans that we insure.
We depend on reliable, consistent third-party
servicing of the loans that we insure. Over the last
several years, the mortgage loan servicing industry
has experienced consolidation and an increase in the
number of specialty servicers servicing delinquent
loans. The resulting change in the composition of
servicers could lead to disruptions in the servicing of
mortgage loans covered by our insurance policies.
Further changes in the servicing industry resulting in
the transfer of servicing could cause a disruption in
the servicing of delinquent loans which could reduce
servicers’ ability to undertake mitigation efforts that
could help limit our losses. Future housing market
conditions could lead to additional increases in
delinquencies and transfers of servicing.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the
length of time that our policies remain in force.
The premium from a single premium policy is
collected upfront and generally earned over the
estimated life of the policy. In contrast, premiums
from a monthly premium policy are received and
earned each month over the life of the policy. In each
year, most of our premiums received are from
insurance that has been written in prior years. As a
result, the length of time insurance remains in force,
which is also generally referred to as persistency, is
a significant determinant of our revenues. Future
premiums on our monthly premium policies in force
represent a material portion of our claims paying
resources and a low persistency rate will reduce
those future premiums. In contrast, a higher than
expected persistency
the
profitability from single premium policies because
they will remain in force longer than was estimated
when the policies were written.
rate will decrease
The monthly premium policies for the substantial
majority of loans we insured provides that, for the first
ten years of the policy, the premium is determined by
the product of the premium rate and the initial loan
balance; thereafter, a lower premium rate is applied
to the initial loan balance. The initial ten-year period
is reset when the loan is refinanced under HARP. The
premiums on many of the policies in our 2006 book
that were not refinanced under HARP reset in 2016.
As of December 31, 2016, approximately 4% and 2%
of our total primary insurance in force was written in
2007 and 2008, respectively, has not been refinanced
under HARP, and is subject to a rate reset after ten
years.
Our persistency rate was 76.9% at December 31,
2016, compared to 79.7% at December 31, 2015 and
82.8% at December 31, 2014. Since 2000, our year-
end persistency ranged from a high of 84.7% at
December 31, 2009 to a low of 47.1% at December
31, 2003.
Risk Factors
which affects the vulnerability of the insurance in
force to refinancing. Our persistency rate is also
affected by mortgage insurance cancellation policies
of mortgage investors along with the current value of
the homes underlying the mortgages in the insurance
in force.
Your ownership in our company may be diluted by
additional capital that we raise or if the holders of our
outstanding convertible debt convert that debt into
shares of our common stock.
As noted above under our risk factor titled “ We may
not continue to meet the GSEs’ private mortgage
insurer eligibility requirements and our returns may
decrease as we are required to maintain more capital
in order to maintain our eligibility,” although we are
currently in compliance with the requirements of the
PMIERs, there can be no assurance that we would not
seek to issue non-dilutive debt capital or to raise
additional equity capital to manage our capital
position under the PMIERs or for other purposes. Any
future issuance of equity securities may dilute your
ownership interest in our company. In addition, the
market price of our common stock could decline as
a result of sales of a large number of shares or similar
securities in the market or the perception that such
sales could occur.
in 2063
At December 31, 2016, we had outstanding $390
million principal amount of 9% Convertible Junior
("9%
Subordinated Debentures due
Debentures") (of which approximately $133 million
was purchased by and is held by MGIC, and is
eliminated on the consolidated balance sheet), $145
million principal amount of 5% Convertible Senior
Notes due in 2017 ("5% Notes") and $208 million
principal amount of 2% Convertible Senior Notes due
in 2020 ("2% Notes"). The principal amount of the 9%
Debentures is currently convertible, at the holder’ s
option, at an initial conversion rate, which is subject
to adjustment, of 74.0741 common shares per $1,000
principal amount of debentures. This represents an
initial conversion price of approximately $13.50 per
share. We have the right, and may elect, to defer
interest payable under the debentures in the future. If
a holder elects to convert its debentures, the interest
that has been deferred on the debentures being
converted is also convertible into shares of our
common stock. The conversion rate for such deferred
interest is based on the average price that our shares
traded at during a 5-day period immediately prior to
the election to convert the associated debentures. We
may elect to pay cash for some or all of the shares
issuable upon a conversion of the debentures.
Our persistency rate is primarily affected by the level
of current mortgage interest rates compared to the
mortgage coupon rates on our insurance in force,
The 5% Notes are convertible, at the holder’ s option,
at an initial conversion rate, which is subject to
MGIC Investment Corporation 2016 Annual Report | 63
Risk Factors
adjustment, of 74.4186 shares per $1,000 principal
amount at any time prior to the maturity date. This
represents
conversion price of
approximately $13.44 per share.
initial
an
Prior to January 1, 2020, the 2% Notes are convertible
only upon satisfaction of one or more conditions. One
such condition is that conversion may occur during
any calendar quarter commencing after March 31,
2014, if the last reported sale price of our common
stock for each of at least 20 trading days during the
30 consecutive trading days ending on, and including,
the last trading day of the immediately preceding
calendar quarter is greater than or equal to 130% of
the applicable conversion price on each applicable
trading day. The notes are convertible at an initial
conversion rate, which is subject to adjustment, of
143.8332 shares per $1,000 principal amount. This
conversion price of
represents
approximately $6.95 per share. 130% of such
conversion price is $9.04. This condition was met for
the quarter ended December 31, 2016, therefore, the
2% Notes are convertible in the first quarter of 2017.
They will also be convertible in later quarters in which
the stock price condition was met for the prior
quarter. On or after January 1, 2020, holders may
convert their notes irrespective of satisfaction of the
conditions.
initial
an
Beginning on April 10, 2017, we may redeem all or
part of the 2% Notes if the last reported sale price of
our common stock was at least $9.04 for each of at
least 20 trading days during the 30 consecutive
trading days (including on the last trading day)
preceding the date notice is provided to the holders
of the notes that we intend to redeem the notes (the
“Redemption Notice”). The Redemption Notice is
irrevocable and must be given not less than 30 days
and not more than 60 calendar days prior to the
redemption date. Once the Redemption Notice is
given, holders may convert their notes at any time
before the redemption date specified
in the
Redemption Notice and we expect they will do so if
the price of our common stock remains above the
conversion price of $6.95
We do not have the right to defer interest on our 5%
Notes or 2% Notes. For a discussion of the dilutive
effects of our convertible securities on our earnings
per share, see Note 6 – “Summary of Significant
Accounting Policies Earnings per Share” to our
consolidated financial statements in our Quarterly
Report on Form 10-Q filed with the SEC on November
7, 2016.
64 | MGIC Investment Corporation 2016 Annual Report
Our holding company debt obligations materially
exceed our holding company cash and investments.
At December 31, 2016, we had approximately $283
million in cash and investments at our holding
company and our holding company’ s debt obligations
were $1,168 million in aggregate principal amount,
consisting of $145 million of 5% Notes, $208 million
of 2% Notes, $425 million of 5.75% Senior Notes due
in 2023 ("5.75% Notes"), and $390 million of 9%
Debentures (of which approximately $133 million
was purchased by and is held by MGIC, and is
eliminated on the consolidated balance sheet).
Annual debt service on the outstanding holding
is
company debt as of December 31, 2016,
approximately $71 million (of which approximately
$12 million will be paid to MGIC and will be eliminated
on the consolidated statement of operations). For
more information about the purchase by MGIC of a
portion of our outstanding 9% Convertible Junior
Subordinated Debentures, see
"Management's
Discussion and Analysis – Debt at Our Holding
Company and Holding Company Capital Resources"
in our Annual Report on Form 10-K filed with the SEC
on February 26, 2016. For information about our 2016
public offering of the 5.75% Notes and the use of
proceeds from the offering to purchase a portion of
the 2% Notes, see Note 3 – “Debt” to our consolidated
financial statements in our Quarterly Report on Form
10-Q filed with the SEC on November 7, 2016. We may
continue to purchase our debt securities in the future.
The Convertible Senior Notes, Senior Notes and
Convertible Junior Subordinated Debentures are
obligations of our holding company, MGIC
Investment Corporation, and not of its subsidiaries.
The payment of dividends from our insurance
subsidiaries which, other than investment income
and raising capital in the public markets, is the
principal source of our holding company cash inflow,
is restricted by insurance regulation. MGIC is the
principal source of dividend-paying capacity. In 2016,
MGIC paid a total of $64 million in dividends to our
holding company, its first dividends since 2008, and
we expect MGIC to continue to pay quarterly
dividends. OCI authorization is sought before MGIC
pays dividends and MGIC will pay a dividend of $20
million to our holding company in the first quarter of
2017. If any additional capital contributions to our
subsidiaries were required, such contributions would
decrease our holding company cash and
investments. As described in our Current Report on
Form 8-K filed on February 11, 2016, MGIC borrowed
$155 million from the Federal Home Loan Bank of
Chicago. This is an obligation of MGIC and not of our
holding company.
Risk Factors
We could be adversely affected
if personal
information on consumers that we maintain is
improperly disclosed and our information technology
systems may become outdated and we may not be
able to make timely modifications to support our
products and services.
We rely on the efficient and uninterrupted operation
of complex information technology systems. All
information technology systems are potentially
vulnerable to damage or interruption from a variety
of sources, including through the actions of third
parties. Due to our reliance on our information
technology systems, their damage or interruption
could severely disrupt our operations, which could
have a material adverse effect on our business,
business prospects and results of operations. As part
of our business, we maintain large amounts of
personal information on consumers. While we believe
we have appropriate information security policies
and systems to prevent unauthorized disclosure,
there can be no assurance that unauthorized
disclosure, either through the actions of third parties
or employees, will not occur. Unauthorized disclosure
could adversely affect our reputation and expose us
to material claims for damages.
In addition, we are in the process of upgrading certain
of our information systems that have been in place
for a number of years. The implementation of these
technological improvements is complex, expensive
and time consuming. If we fail to timely and
successfully
technology
systems, or if the systems do not operate as
expected, it could have an adverse impact on our
business, business prospects and
results of
operations.
implement
the new
MGIC Investment Corporation 2016 Annual Report | 65
Management's Report on Internal Control Over Financial
Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)). Our internal control over financial reporting is designed
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. Because of
its inherent limitations, however, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management, with the participation of our principal executive officer and principal financial officer, has
evaluated the effectiveness of our internal control over financial reporting using the framework in Internal
Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on such evaluation, our management concluded that our internal control over financial
reporting was effective as of December 31, 2016.
PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the consolidated
financial statements and effectiveness of internal control over financial reporting as of December 31, 2016,
as stated in their report which appears herein.
66 | MGIC Investment Corporation 2016 Annual Report
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
MGIC Investment Corporation:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of
operations, comprehensive income, shareholders’ equity and of cash flows present fairly, in all material
respects, the financial position of MGIC Investment Corporation and its subsidiaries (the “Company”) at
December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in
the United States of America. Also in our opinion, the Company maintained, in all material respects, effective
internal control over financial reporting as of December 31, 2016, based on criteria established in Internal
Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company's management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in the accompanying Management's Report on Internal
Control over Financial Reporting. Our responsibility is to express opinions on these financial statements, and
on the Company's internal control over financial reporting based on our integrated audits. We conducted our
audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control over financial
reporting was maintained in all material respects. Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial reporting included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists,
and testing and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audits also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’ s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes
in accordance with generally accepted accounting principles. A company’ s internal control over financial
reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with authorizations of management and
directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the company’ s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk
that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Milwaukee, Wisconsin
February 21, 2017
MGIC Investment Corporation 2016 Annual Report | 67
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS
Investment portfolio:
Securities, available-for-sale, at fair value:
December 31,
Note
2016
2015
5 / 6
Fixed income (amortized cost, 2016 - $4,717,211; 2015 - $4,684,148)
$ 4,685,222
$
4,657,561
7,128
5,645
4,692,350
4,663,206
155,410
181,120
44,073
50,493
4,964
52,392
36,088
17,759
607,655
73,345
40,224
44,487
3,319
48,469
30,095
15,241
762,080
80,102
$ 5,734,529
$
5,868,343
$ 1,438,813
$
1,893,402
329,737
155,000
417,406
349,461
256,872
238,398
279,973
—
—
822,301
389,522
247,005
3,185,687
3,632,203
359,400
340,097
1,782,337
1,670,238
(150,359)
(75,100)
632,564
(3,362)
(60,880)
290,047
2,548,842
2,236,140
$ 5,734,529
$
5,868,343
9
9
12
8
7
7
7
7
17
13
10
Equity securities
Total investment portfolio
Cash and cash equivalents
Accrued investment income
Reinsurance recoverable on loss reserves
Reinsurance recoverable on paid losses
Premiums receivable
Home office and equipment, net
Deferred insurance policy acquisition costs
Deferred income taxes, net
Other assets
Total assets
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Loss reserves
Unearned premiums
FHLB Advance
Senior notes
Convertible senior notes
Convertible junior subordinated debentures
Other liabilities
Total liabilities
Contingencies
Shareholders' equity:
Common stock (one dollar par value, shares authorized 1,000,000; shares issued
2016 - 359,400; 2015 - 340,097; outstanding 2016 - 340,663; 2015 - 339,657)
Paid-in capital
Treasury stock (shares at cost 2016 - 18,737; 2015 - 440)
Accumulated other comprehensive loss, net of tax
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
See accompanying notes to consolidated financial statements.
68 | MGIC Investment Corporation 2016 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2016
2015
2014
Years Ended December 31,
Revenues:
Premiums written:
Direct
Assumed
Ceded
Net premiums written
Increase in unearned premiums
Net premiums earned
Investment income, net of expenses
Net realized investment gains (losses):
Total other-than-temporary impairment losses
Portion of losses recognized in other comprehensive
income (loss), before taxes
Net impairment losses recognized in earnings
Other realized investment gains
Net realized investment gains
Other revenue
Total revenues
Losses and expenses:
Losses incurred, net
Change in premium deficiency reserve
Amortization of deferred policy acquisition costs
Other underwriting and operating expenses, net
Interest expense
Loss on debt extinguishment
Total losses and expenses
Income before tax
Provision for (benefit from) income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
9
9
5
5
$
1,107,923
$
1,074,490
$
999,943
1,053
1,178
1,653
(133,885)
(55,391)
(119,634)
975,091
(49,865)
925,226
1,020,277
(124,055)
896,222
881,962
(37,591)
844,371
110,666
103,741
87,647
—
—
—
8,932
8,932
17,659
—
—
—
28,361
28,361
12,964
(144)
—
(144)
1,501
1,357
9,259
1,062,483
1,041,288
942,634
8 / 9
240,157
3
7
7
12
4
4
4
—
9,646
150,763
56,672
90,531
547,769
514,714
172,197
343,547
(23,751)
8,789
155,577
68,932
507
553,601
487,687
(684,313)
496,077
(24,710)
7,618
138,441
69,648
837
687,911
254,723
2,774
$
342,517
$
1,172,000
$
251,949
$
$
$
1.00
0.86
$
$
3.45
2.60
$
$
0.74
0.64
342,890
431,992
339,552
468,039
338,523
413,522
— $
— $
—
Dividends per share
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2016 Annual Report | 69
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive (loss) income, net of tax:
Change in unrealized investment gains and losses
Benefit plans adjustment
Foreign currency translation adjustment
Other comprehensive (loss) income, net of tax
Comprehensive income
Years Ended December 31,
Note
2016
2015
2014
$
342,517
$
1,172,000
$
251,949
10
5
11
(3,649)
(9,620)
(951)
(14,220)
40,403
(15,714)
(4,228)
20,461
91,139
(52,112)
(2,642)
36,385
$
328,297
$
1,192,461
$
288,334
See accompanying notes to consolidated financial statements.
70 | MGIC Investment Corporation 2016 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended December 31,
Note
2016
2015
2014
(In thousands)
Common stock
Balance, beginning of year
Common stock issuance
Net common stock issued under share-based compensation plans
Balance, end of year
Paid-in capital
Balance, beginning of year
Common stock issuance
13
13
Net common stock issued under share-based compensation plans
Reissuance of treasury stock, net
Tax benefit from share-based compensation
Equity compensation
Reacquisition of convertible junior subordinated debentures-equity
component
7
Balance, end of year
$
340,097
$
340,047
$
340,047
18,313
990
—
50
—
—
359,400
340,097
340,047
1,670,238
1,663,592
1,661,269
113,146
(6,020)
(130)
67
11,373
—
(478)
(6,894)
2,116
11,902
—
—
(6,680)
—
9,003
(6,337)
—
—
1,782,337
1,670,238
1,663,592
Treasury stock
Balance, beginning of year
Purchases of common stock
Reissuance of treasury stock, net
Balance, end of year
Accumulated other comprehensive loss
Balance, beginning of year
Other comprehensive (loss) income
Balance, end of year
Retained earnings (deficit)
Balance, beginning of year
Net income
Reissuance of treasury stock, net
Balance, end of year
(3,362)
(32,937)
(64,435)
13
(147,127)
130
(150,359)
—
29,575
(3,362)
—
31,498
(32,937)
10
(60,880)
(14,220)
(75,100)
(81,341)
(117,726)
20,461
(60,880)
36,385
(81,341)
290,047
342,517
(852,458)
(1,074,617)
1,172,000
—
(29,495)
251,949
(29,790)
632,564
290,047
(852,458)
Total shareholders' equity
$ 2,548,842
$ 2,236,140
$ 1,036,903
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2016 Annual Report | 71
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and other amortization
Deferred tax expense (benefit)
Net realized investment gains
Loss on debt extinguishment
Excess tax benefits related to share-based compensation
Change in certain assets and liabilities:
Accrued investment income
Prepaid reinsurance premium
Reinsurance recoverable on loss reserves
Reinsurance recoverable on paid losses
Premiums receivable
Deferred insurance policy acquisition costs
Profit commission receivable
Loss reserves
Premium deficiency reserve
Unearned premiums
Return premium accrual
Income taxes payable - current
Other, net
Net cash provided by (used in) operating activities
Cash flows from investing activities:
Purchases of investments:
Fixed income
Equity securities
Proceeds from sales of fixed income
Proceeds from maturity of fixed income
Proceeds from sale of equity securities
Net decrease in payables for securities
Net decrease in restricted cash
Additions to property and equipment
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Repayment of long-term debt
Repurchase of convertible senior notes
Payment of original issue discount - convertible senior notes
Purchase of convertible junior subordinated debentures
Payment of original issue discount-convertible junior subordinated debentures
Cash portion of loss on debt extinguishment
Repurchase of common stock
Payment of debt issuance costs
Years Ended December 31,
2016
2015
2014
$ 342,517
$1,172,000
$ 251,949
61,342
52,559
162,356
(692,810)
48,861
312
(8,932)
(28,361)
(1,357)
90,531
507
(67)
(2,117)
837
—
(3,849)
(9,706)
101
(6,006)
(1,645)
(3,923)
(2,518)
(747)
47,457
13,354
3,105
8,973
(3,001)
64,525
1,142
(11,380)
6,244
4,001
4,859
(2,519)
(89,132)
(454,589)
(503,405)
(664,594)
—
(23,751)
(24,710)
49,764
(18,800)
1,123
13,005
76,559
(9,600)
2,518
(16,770)
48,935
22,200
(674)
(251)
219,663
152,036
(405,277)
(1,360,386)
(2,462,844)
(1,979,917)
(3,197)
(2,623)
(94)
728,042
1,796,153
1,147,624
547,444
559,774
1,129,087
5,257
—
—
(10,552)
—
—
17,212
(4,630)
—
13
228
(4,707)
(93,392)
(96,958)
292,234
573,094
—
(363,778)
(11,250)
(100,860)
(41,540)
(59,460)
(147,127)
(1,127)
—
(61,953)
(11,152)
(345)
—
—
—
(20,772)
—
(158)
—
—
(507)
(837)
—
—
—
—
—
Excess tax benefits related to share-based compensation
67
2,117
Net cash used in financing activities
Net decrease in cash and cash equivalents
Cash and cash equivalents at beginning of year
Cash and cash equivalents at end of year
See accompanying notes to consolidated financial statements.
72 | MGIC Investment Corporation 2016 Annual Report
(151,981)
(71,840)
(21,767)
(25,710)
(16,762)
(134,810)
181,120
197,882
332,692
$ 155,410
$ 181,120
$ 197,882
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2016, 2015 and 2014
Note 1. Nature of Business
Note 2. Basis of Presentation
through Mortgage Guaranty
MGIC Investment Corporation is a holding company
which,
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. Our principal product is
insurance. Primary insurance
primary mortgage
provides mortgage default protection on individual
loans and covers unpaid loan principal, delinquent
interest and certain expenses associated with the
default and subsequent foreclosure or sale approved
by us. Through certain other non-insurance
subsidiaries, we also provide various services for the
industry, such as contract
mortgage
loan originations and
underwriting, analysis of
lead generation. An
portfolios, and mortgage
insurance subsidiary of MGIC provides credit
insurance for certain mortgages under Fannie Mae
and Freddie Mac (the "GSEs") credit risk transfer
programs.
finance
At December 31, 2016, our direct domestic primary
insurance in force ("IIF") was $182.0 billion, which
represents the principal balance in our records of all
mortgage loans that we insure, and our direct
domestic primary risk in force ("RIF") was $47.2
billion, which represents the insurance in force
multiplied by the insurance coverage percentage.
Substantially all of our insurance written since 2008
has been for loans purchased by the GSEs. We
operate under the Private Mortgage Insurer Eligibility
Requirements ("PMIERs") of the GSEs that became
effective December 31, 2015, and were most recently
revised
financial
in December 2016. The
requirements of the PMIERs require a mortgage
insurer’ s "Available Assets" (generally only the most
liquid assets of an insurer) to equal or exceed its
"Minimum Required Assets" (which are based on an
insurer's book and are calculated from tables of
factors with several risk dimensions and are subject
to a floor amount). Based on our interpretation of the
PMIERs, as of December 31, 2016, MGIC’ s Available
Assets are in excess of its Minimum Required Assets;
and MGIC is in compliance with the requirements of
the PMIERs and eligible to insure loans purchased by
the GSEs. The revisions to the PMIERs in December
2016 had no impact on our calculation of Available
Assets or Minimum Required Assets, and did not
impact our operations.
include
consolidated
Basis of presentation
The
financial
accompanying
statements have been prepared in accordance with
accounting principles generally accepted in the
United States of America ("GAAP"), as codified in the
Accounting Standards Codification ("ASC"). Our
consolidated
the
financial statements
accounts of MGIC
Investment Corporation
and its majority-owned subsidiaries. Intercompany
transactions and balances have been eliminated. In
accordance with GAAP, we are required to make
estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the
consolidated financial statements and the reported
amounts of revenues and expenses during the
reporting periods. Actual results could differ from
those estimates. We have considered subsequent
events through the date of this filing.
Reclassifications
Certain reclassifications to 2015 and 2014 amounts
have been made in the accompanying consolidated
financial statements to conform to the 2016
presentation. See Note 3 - "Significant Accounting
Policies" for a discussion of our adoption of
accounting guidance in 2016 related to: (1) the
presentation of debt issuance costs in the first
quarter of 2016, and (2) clarification of certain cash
receipts and cash payments. Both of the adopted
accounting updates were retrospectively applied to
all periods presented, as applicable.
Note 3. Significant Accounting Policies
Cash and Cash Equivalents
We consider money market funds and investments
with original maturities of three months or less to be
cash equivalents.
Fair value measurements
The authoritative guidance around fair value
established a framework for measuring fair value.
Fair value is disclosed using a fair value hierarchy that
prioritizes the inputs to valuation techniques used to
measure fair value and includes Levels 1, 2, and 3. 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
MGIC Investment Corporation 2016 Annual Report | 73
Notes
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
two sided markets,
quotes,
benchmark securities, bids, offers and reference data
including data published
research
publications. Inputs may be weighted differently for
any security, and not all inputs are used for each
security evaluation.
issuer spreads,
in market
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
trading
tolerance
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.
reviewing
reports,
In accordance with fair value accounting 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 that we can access; 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 instrument.
The observable inputs are used in valuation models
to calculate the fair value of the instruments.
Financial assets utilizing Level 2 inputs primarily
include obligations of U.S. government corporations
and agencies, corporate bonds, mortgage-backed
securities, asset-backed securities, and most
municipal bonds.
74 | MGIC Investment Corporation 2016 Annual Report
The
independent pricing sources utilize these
approaches to determine the fair value of the
instruments in Level 2 of the fair value hierarchy
based on type of instrument:
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 ("RMBS")
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 ("CMBS")
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 ("ABS") 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
trade activity, bids, and offers are applied, resulting in
tranche specific prices.
Collateralized loan obligations ("CLO") Collateralized
Loan Obligations are evaluated by manager rating,
seniority in the capital structure, assumptions about
prepayment, default and recovery and their impact on
cash flow generation. Loan level net asset values are
determined and aggregated for tranches and as a
final step prices are checked against available recent
trade activity.
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 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.
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.
Investments
Our entire investment portfolio is classified as
available-for-sale and is reported at fair value or, for
certain equity securities carried at cost, amounts that
approximate fair value. The related unrealized
investment gains or losses are, after considering the
related tax expense or benefit, recognized as a
component of accumulated other comprehensive
income (loss)
in shareholders' equity. Realized
investment gains and losses are reported in income
based upon specific identification of securities sold.
(See Note 5 – “Investments.”)
Each quarter we perform reviews of our investments
in order to determine whether declines in fair value
below amortized cost were considered other-than-
temporary. In evaluating whether a decline in fair
value is other-than-temporary, we consider several
factors including, but not limited to:
our intent to sell the security or whether it is more
likely than not that we will be required to sell the
security before recovery of its amortized cost
basis;
the present value of the discounted cash flows we
expect to collect compared to the amortized cost
basis of the security;
extent and duration of the decline;
failure of the issuer to make scheduled interest or
principal payments;
change in rating below investment grade; and
adverse conditions specifically related to the
security, an industry, or a geographic area.
Based on our evaluation, we will record an other-than-
temporary impairment ("OTTI") adjustment on a
Notes
security if we intend to sell the impaired security, if it
is more likely than not that we will be required to sell
the
its
impaired security prior to recovery of
amortized cost basis, or if the present value of the
discounted cash flows we expect to collect is less
than the amortized cost basis of the security. If the
fair value of a security is below its amortized cost at
the time of our intent to sell, the security is classified
as other-than-temporarily impaired and the full
amount of the impairment is recognized as a loss in
the statement of operations. Otherwise, when a
security is considered to be other-than-temporarily
impaired, the losses are separated into the portion of
the loss that represents the credit loss and the portion
that is due to other factors. The credit loss portion is
recognized as a loss in the statement of operations,
while the loss due to other factors is recognized in
accumulated other comprehensive loss, net of taxes.
A credit loss is determined to exist if the present value
of the discounted cash flows, using the security’ s
original yield, expected to be collected from the
security is less than the cost basis of the security.
Home office and equipment
Home office and equipment is carried at cost net of
depreciation. For financial reporting purposes,
depreciation is determined on a straight-line basis for
the home office and equipment over estimated lives
ranging from 3 to 45 years. For income tax purposes,
we use accelerated depreciation methods.
is shown net of
Home office and equipment
accumulated depreciation of $30.6 million, $26.1
million and $54.9 million as of December 31, 2016,
2015 and 2014, respectively. Depreciation expense
for the years ended December 31, 2016, 2015 and
2014 was $4.6 million, $3.2 million and $2.2 million,
respectively.
Deferred Insurance Policy Acquisition Costs
Costs directly associated with the successful
acquisition of mortgage
insurance business,
consisting of employee compensation and other
policy issuance and underwriting expenses, are
initially deferred and reported as deferred insurance
policy acquisition costs ("DAC"). The deferred costs
are net of any ceding commissions received
associated with our reinsurance agreements. For
each underwriting year of business, these costs are
amortized to income in proportion to estimated gross
profits over the estimated life of the policies. We
utilize anticipated
in our
calculation. This includes accruing interest on the
unamortized balance of DAC. The estimates for each
underwriting year are reviewed quarterly and updated
when necessary to reflect actual experience and any
changes to key variables such as persistency or loss
development. If a premium deficiency exists (in other
investment
income
MGIC Investment Corporation 2016 Annual Report | 75
Notes
words, no gross profit is expected), we reduce the
related DAC by the amount of the deficiency or to zero
through a charge to current period earnings. If the
deficiency is more than the related DAC balance, we
then establish a premium deficiency reserve equal to
the excess, through a charge to current period
earnings.
expected future premium and already established
reserves. The discount rate used in the calculation
of the premium deficiency reserve is based upon our
pre-tax investment yield at year-end. Products are
grouped for premium deficiency testing purposes
based on similarities in the way the products are
acquired, serviced and measured for profitability.
Loss Reserves
Reserves are established for insurance losses and
loss adjustment expenses ("LAE") when we receive
notices of default on insured mortgage loans. We
consider a loan in default when it is two or more
payments past due. Even though the accounting
standard, ASC 944, regarding accounting and
reporting by insurance entities specifically excludes
mortgage insurance from its guidance relating to loss
reserves, we establish loss reserves using the general
principles contained in the insurance standard.
However, consistent with industry standards for
mortgage insurers, we do not establish loss reserves
for future claims on insured loans which are not
currently in default. Loss reserves are established by
estimating the number of loans in our inventory of
delinquent 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. Our loss estimates are
established based upon historical experience,
including rescission and loan modification activity.
Adjustments to reserve estimates are reflected in the
financial statements in the years in which the
adjustments are made. The liability for reinsurance
assumed is based on information provided by the
ceding companies.
Reserves are also established for estimated losses
from defaults occurring prior to the close of an
accounting period on notices of default not yet
reported to us. These incurred but not reported
reserves are also established using
("IBNR")
estimated claim rates and claim severities.
Reserves are also established for the estimated costs
of settling claims, including legal and other expenses
and general expenses of administering the claims
settlement process. Reserves are also ceded to
reinsurers under our reinsurance agreements. (See
Note 8 –
“Loss Reserves” and Note 9 –
“Reinsurance.”)
Premium Deficiency Reserve
After our loss reserves are initially established, we
perform premium deficiency tests using our best
estimate assumptions as of the testing date.
Premium deficiency reserves are established, if
necessary, when the present value of expected future
losses and expenses exceeds the present value of
76 | MGIC Investment Corporation 2016 Annual Report
The calculation of premium deficiency reserves
requires the use of significant judgments and
estimates to determine the present value of future
premium and present value of expected losses and
expenses on our business. The calculation of future
premium depends on, among other
things,
assumptions about persistency and repayment
patterns on underlying loans. The calculation of
expected
losses and expenses depends on
assumptions relating to severity of claims and claim
rates on current defaults, and expected defaults in
future periods. These assumptions also include an
estimate of expected rescission activity. Similar to
our
loss reserve estimates, our estimates for
premium deficiency reserves could be adversely
affected by several factors, including a deterioration
of regional or economic conditions leading to a
reduction in borrowers' income and thus their ability
to make mortgage payments, and a drop in housing
values can influence the willingness of borrowers
with sufficient
to make mortgage
payments to do so when the mortgage balance
exceeds the value of the home, which could expose
us to greater losses. Assumptions used in calculating
the deficiency reserves can also be affected by
volatility in the current housing and mortgage lending
industries. To the extent premium patterns and actual
loss experience differ from the assumptions used in
calculating the premium deficiency reserves, the
differences between the actual results and our
estimate will affect future period earnings and could
be material.
resources
We previously established a premium deficiency
reserve in 2007 on our Wall Street Bulk business,
which we also ceased writing in that year. As of
December 31, 2015 a premium deficiency reserve
was no longer required. Changes in the premium
deficiency reserve from period to period were
primarily due to the recognition of previously
estimated premiums, losses, and expenses, and
changes in our assumptions relating to the present
value of expected future premiums, losses, and
expenses on the remaining Wall Street Bulk IIF. Our
consolidated statements of operations for the years
ended December 31, 2015 and 2014 were affected by
decreases in our premium deficiency reserves of $24
million and $25 million, respectively. The decreases
represented the net result of actual premiums, losses
and expenses as well as a net change in assumptions
for these periods.
Revenue Recognition
We write policies which are guaranteed renewable
contracts at the insured's option on a monthly, single,
or annual premium basis. We have no ability to
reunderwrite or reprice these contracts. Premiums
written on monthly premium policies are earned as
coverage is provided. Premiums written on single
premium policies and annual premium policies are
initially deferred as unearned premium reserve and
earned over the estimated policy life. Premiums
written on policies covering more than one year are
amortized over the policy life in relationship to the
anticipated incurred loss pattern based on historical
experience. Premiums written on annual premium
policies are earned on a monthly pro rata basis. When
a policy is cancelled for a reason other than rescission
or claim payment, all premium that is non-refundable
is immediately earned. Any refundable premium is
returned to the servicer or borrower. When a policy is
cancelled due to rescission, all previously collected
premium is returned to the servicer and when a policy
is cancelled because a claim is paid, we return any
premium received since the date of default. The
liability associated with our estimate of premium to
be returned is accrued for separately and included in
"Other liabilities" on our consolidated balance sheets.
When a premium deficiency exists the premium
refund liability is included in “Premium deficiency
reserves” on our consolidated balance sheets.
Changes in these liabilities affect premiums written
and earned and change in premium deficiency
reserve, respectively. The actual return of premium
for all periods affects premiums written and earned.
Policy cancellations also lower the persistency rate
which is a variable used in calculating the rate of
amortization of deferred insurance policy acquisition
costs.
Fee income of our non-insurance subsidiaries is
earned and recognized as the services are provided
and the customer is obligated to pay. Fee income
consists primarily of contract underwriting and
related fee-based services provided to lenders and is
included in “Other revenue” on the consolidated
statements of operations.
Income Taxes
Deferred income taxes are provided under the liability
method, which recognizes the future tax effects of
temporary differences between amounts reported in
the consolidated financial statements and the tax
bases of these items. The expected tax effects are
computed at the enacted regular federal statutory tax
rate. Using this method, we have recorded a net
deferred tax asset primarily due to net operating
Notes
losses incurred in prior years. On a quarterly basis,
we review the need to maintain a deferred tax asset
valuation allowance as an offset to the net deferred
tax asset, before valuation allowance. We analyze
several 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 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, as discussed in Note 12
–“Income Taxes,” we concluded that it was more likely
than not that our deferred tax assets would be fully
realizable and we reversed the valuation allowance.
We provide for uncertain tax positions and the related
interest and penalties based on our assessment of
whether a tax benefit is more likely than not to be
taxing
sustained under any examination by
authorities.
supplemental
Benefit Plans
We have a non-contributory defined benefit pension
plan covering substantially all employees, as well as
a
retirement plan.
executive
Retirement benefits are based on compensation and
years of service. We recognize these retirement
benefit costs over the period during which employees
render the service that qualifies them for benefits. Our
policy is to fund pension cost as required under the
Employee Retirement Income Security Act of 1974.
We offer both medical and dental benefits for retired
domestic employees, their eligible spouses and
dependents until the retiree reaches the age of 65.
Under the plan retirees pay a premium for these
benefits. We accrue the estimated costs of retiree
medical and dental benefits over the period during
which employees render the service that qualifies
them for benefits. (See Note 11 – “Benefit Plans.”)
Reinsurance
Loss reserves and unearned premiums are reported
before taking credit for amounts ceded under
reinsurance agreements. Ceded loss reserves are
reflected as "Reinsurance recoverable on
loss
reserves." Ceded unearned premiums are included in
“Other assets.” Amounts due from reinsurers on paid
claims are reflected as “Reinsurance recoverable on
paid losses.” Ceded premiums payable are included
in “Other liabilities.” Any profit commissions are
included with “Premiums written – Ceded” and any
included with “Other
ceding commissions are
MGIC Investment Corporation 2016 Annual Report | 77
Notes
underwriting and operating expenses, net.” We
remain liable for all insurance ceded. (See Note 9 –
“Reinsurance.”)
Share-Based Compensation
We have certain share-based compensation plans.
Under the fair value method, compensation cost is
measured at the grant date based on the fair value of
the award and is recognized over the service period
which generally corresponds to the vesting period.
The fair value of awards classified as liabilities is
remeasured at each reporting period until the award
is settled. Awards under our plans generally vest over
periods ranging from one to three years. (See Note
15 – “Share-based Compensation Plans.”)
Earnings per Share
Basic earnings per share ("EPS") is calculated by
dividing net income by the weighted average number
of shares of common stock outstanding. Diluted EPS
includes the components of basic EPS and also gives
effect to dilutive common stock equivalents. We
calculate diluted EPS using the treasury stock
method and if-converted method. Under the treasury
stock method, diluted EPS reflects the potential
dilution that could occur if our unvested restricted
stock units result in the issuance of common stock.
Under the if-converted method, diluted EPS reflects
the potential dilution that could occur
if our
convertible debt instruments result in the issuance of
common stock. The determination of potentially
issuable shares does not consider the satisfaction of
the conversion requirements and the shares are
included in the determination of diluted EPS as of the
beginning of the period, if dilutive. We have several
debt issuances that could result in contingently
issuable shares and consider each potential issuance
of shares separately to reflect the maximum potential
dilution. Nonetheless, our dilutive common stock
equivalents may not reflect all of the contingently
issuable shares that could be required to be issued
upon any debt conversion. For purposes of
calculating basic and diluted EPS, vested restricted
stock and restricted stock units ("RSUs") are
considered outstanding.
Related party transactions
There were no related party transactions during 2016,
2015 or 2014.
78 | MGIC Investment Corporation 2016 Annual Report
Notes
Recent accounting and reporting developments
Standard
Summary of guidance
Presentation of
Debt Issuance
Costs
• 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 as a
deferred charge.
Effects on financial statements
and/or disclosures
• Adopted March 31, 2016 with
retrospective application to prior
periods.
• Does not impact the amortization method for these
• There was no material impact on
costs.
Accounting for
Share-Based
Compensation
When the
Terms of an
Award Provide
That a
Performance
Target Could Be
Achieved after
the Requisite
Service Period
• Requires that a performance target that affects
vesting and that can be achieved after the requisite
service period be treated as a performance
condition.
in which
• Compensation cost should be recognized in the
it become probable that the
period
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 consolidated balance
sheets, and no impact on our
statements of operations.
• For further information, see Note
7. "Debt."
• Adopted March 31, 2016 with
application to performance
based awards granted in 2016.
• There was no material impact on
our consolidated financial
statements.
• For further information, see Note
15. "Share-based Compensation
Plans".
Disclosures
about Short-
Duration
Contracts
• Requires expanded disclosures designed to provide
additional insight into an insurance entity's ability to
underwrite and anticipate costs associated with
claims.
• This standard is not considered
applicable to our business and
therefore we have not adopted
these disclosure requirements.
• 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.
• Expanded disclosures also include more transparent
information
in
methodologies and assumptions used to estimate
claims, and the timing, frequency, and severity of
claims.
significant
changes
about
Classification
of Certain Cash
Receipts and
Cash Payments
• Provides specific guidance on the presentation of
certain cash flow items including, but not limited to,
debt prepayment and debt issuance costs and
proceeds from the settlement of insurance claims.
• Adopted December 31, 2016
with application to prior periods.
• Cash flows related to debt
prepayment and debt issuance
transactions have been
reclassified as financing
activities from operating
activities.
• For further information on the
impact our transactions had on
our cash and cash equivalents
see our consolidated
statements of cash flows.
MGIC Investment Corporation 2016 Annual Report | 79
Notes
Financial Accounting Standards Board ("FASB") Standards Issued but not yet Adopted
Standard
Summary of guidance
• Requires equity
for under
investments, except
those
accounted
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 earnings.
Effects on financial statements
and/or disclosures
• Required effective date: January
1, 2018.
Recognition
and
Measurement
of Financial
Assets and
Financial
Liabilities
Issued January
2016
Improvements
to Employee
Share-Based
Compensation
Accounting
Issued March
2016
Measurement
of Credit
Losses on
Financial
Statements
Issued June
2016
• 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 potential impact from the
adoption of this guidance is not
expected to have a material
impact our consolidated balance
sheets, consolidated statements
of operations, or liquidity.
• Requires
recognition of a cumulative effect
adjustment to retained earnings as of the beginning
of the reporting period of adoption.
• For further information on our
current equity investments see
Note 5. "Investments."
• Required effective date: January
1, 2017.
• We are currently evaluating the
impacts the adoption of this
guidance will have on our
consolidated financial
statements.
• Required effective date: January
1, 2020.
• We are currently evaluating the
impacts the adoption of this
guidance will have on our
consolidated financial
statements, but do not expect it
to have a material impact.
• Requires that, prospectively, all tax effects related to
share-based compensation be made through the
statement of operations at the time of settlement,
rather than recognizing excess tax benefits within
paid-in capital.
• 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.
• Requires all tax related cash flows resulting from
share-based compensation to be reported as
operating activities, a change from the existing
requirement to present tax benefits as an inflow from
financing activities and an outflow from operating
activities.
• Entities, for tax withholding purposes, will be allowed
to withhold an amount of shares up to an 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.
• Requires immediate recognition of estimated credit
losses expected to occur over the remaining life of
many financial instruments. Entities are required to
use a current expected credit
loss ("CECL")
methodology that incorporates their forecasts of
future economic conditions, unless such forecast is
not reasonable or supportable, in which case the
entity will revert to historical loss experience.
• Amends existing guidance for available-for-sale
fixed income securities to incorporate an allowance,
rather than a write-down of the asset, with the
amount of the allowance limited to the amount by
which the fair value is less than amortized cost. The
guidance will allow for reversals of impairment
losses in the event that the credit of an issuer
improves. The length of time a security has been in
an unrealized loss position will no longer impact the
determination of whether a credit loss exists.
• Updated guidance is not prescriptive about certain
aspects of estimating expected credit
losses,
including the specific methodology to use, and
therefore will require significant
in
application.
judgment
80 | MGIC Investment Corporation 2016 Annual Report
Note 4. Earnings Per Share
The computation of basic EPS
includes as
"participating securities" unvested share-based
compensation awards that contain non-forfeitable
rights to dividends or dividend equivalents, whether
paid or unpaid, under the "two-class" method. Our
participating securities are composed of vested
restricted stock and restricted stock units with non-
forfeitable rights to dividends (of which none have
these
been declared since
participating securities). For each of the years ended
December 31, 2016, 2015, and 2014, participating
securities of 0.1 million have been included in basic
EPS.
issuance of
the
The computation of diluted EPS for the years ended
December 31, 2016, 2015, and 2014
includes
weighted average unvested restricted stock units
outstanding of 1.5 million, 2.1 million, and 3.1 million,
respectively.
For the years ended December 31, 2016 and 2015, all
of our outstanding Convertible Senior Notes and
Convertible Junior Subordinated Debentures are
reflected in diluted earnings per share using the “if-
converted” method. Under this method, if dilutive, the
common stock related to the outstanding Convertible
Senior Notes and/or Convertible Junior Debentures
is assumed issued as of the beginning of the
reporting period and the related interest expense, net
of tax, is added back to earnings in calculating diluted
EPS. For the year ended December 31, 2014 our 5%
Notes and 9% Debentures were not included in
calculating diluted EPS as the result was anti-dilutive
under the "if-converted" method.
Notes
The following table reconciles basic and diluted EPS
amounts:
(In thousands, except per
share data)
Basic earnings per share:
Years Ended December 31,
2016
2015
2014
Net income
$342,517
$1,172,000
$251,949
Weighted average common
shares outstanding
342,890
339,552
338,523
Basic income per share
$
1.00
$
3.45
$
0.74
Diluted earnings per share:
Net income
$342,517
$1,172,000
$251,949
Interest expense, net of tax (1):
2% Notes
5% Notes
9% Debentures
Diluted income available to
common shareholders
Weighted-average shares -
Basic
Effect of dilutive securities:
Unvested restricted stock
units
2% Notes
5% Notes
9% Debentures
6,111
6,362
15,893
7,928
12,197
12,228
22,786
—
—
$370,883
$1,214,942
$264,146
342,890
339,552
338,523
1,470
54,450
13,107
20,075
2,113
71,917
25,603
28,854
3,082
71,917
—
—
Weighted-average shares -
Diluted
431,992
468,039
413,522
Diluted earnings per share
$
0.86
$
2.60
$
0.64
Anti-dilutive securities (in
millions)
—
—
54.5
(1)
Interest expense for the years ended December 31, 2016
and December 31, 2015 has been tax effected at a rate of
35%. Due to the valuation allowance recorded against
deferred tax assets, interest expense for the year ended
December 31, 2014 was not tax effected.
MGIC Investment Corporation 2016 Annual Report | 81
Notes
Note 5. Investments
The amortized cost, gross unrealized gains and losses and fair value of the investment portfolio as of
December 31, 2016 and 2015 are shown below:
December 31, 2016
(In thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of U.S. states and political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Total debt securities
Equity securities
Total investment portfolio
December 31, 2015
(In thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of U.S. states and political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Debt securities issued by foreign sovereign governments
Total debt securities
Equity securities
Total investment portfolio
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses (1)
Fair Value
$
73,847
$
407
$
(724) $
73,530
2,147,458
1,756,461
59,519
231,733
327,042
121,151
20,983
6,059
74
102
769
226
(25,425)
(18,610)
(28)
(7,626)
(7,994)
(202)
2,143,016
1,743,910
59,565
224,209
319,817
121,175
4,717,211
28,620
(60,609)
4,685,222
7,144
8
(24)
7,128
$ 4,724,355
$
28,628
$
(60,633) $ 4,692,350
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses (1)
Fair Value
$
160,393
$
2,133
$
(1,942) $
160,584
1,766,407
2,046,697
116,764
265,879
237,304
61,345
29,359
4,684,148
5,625
33,410
2,836
56
161
162
3
2,474
41,235
38
(7,290)
1,792,527
(44,770)
2,004,763
(203)
(8,392)
(3,975)
(1,148)
(102)
116,617
257,648
233,491
60,200
31,731
(67,822)
4,657,561
(18)
5,645
$
4,689,773
$
41,273
$
(67,840) $
4,663,206
(1)
There were no OTTI losses recorded in other comprehensive (loss) income as of December 31, 2016 and 2015.
total investment portfolio amount shown above with
a total fair value of $164.4 million.
The amortized cost and fair values of debt securities
as of December 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.
including proceeds
During the first quarter of 2016 we substantially
liquidated our Australian entities and repatriated
most assets,
the
monetization of our Australian investment portfolio.
As of December 31, 2016 we held no investments in
foreign sovereign governments. As of December 31,
2015 our foreign investments primarily consisted of
Australian government and semi government
securities.
from
As discussed in Note 7 - "Debt" we are required to
maintain collateral of at least 102% of the outstanding
principal balance of the FHLB Advance. As of
December 31, 2016 that collateral is included in our
82 | MGIC Investment Corporation 2016 Annual Report
December 31, 2016
(In thousands)
Due in one year or less
Due after one year through five years
Due after five years through ten years
Due after ten years
ABS
RMBS
CMBS
CLOs
Total as of December 31, 2016
Notes
Amortized
Cost
Fair Value
$
433,464
$
433,770
1,211,034
1,212,650
1,157,091
1,139,552
1,176,177
1,174,484
3,977,766
3,960,456
59,519
231,733
327,042
121,151
59,565
224,209
319,817
121,175
$ 4,717,211
$ 4,685,222
At December 31, 2016 and 2015, the investment portfolio had gross unrealized losses of $61 million and $68
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:
December 31, 2016
Less Than 12 Months
12 Months or Greater
Total
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of U.S. states and
political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Equity securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
48,642
$
(724) $
— $
— $
48,642
$
(724)
1,136,676
915,777
3,366
46,493
205,545
13,278
568
(24,918)
(16,771)
(28)
(857)
(7,529)
(73)
(15)
13,681
35,769
656
(507)
1,150,357
(1,839)
951,546
—
171,326
(6,769)
38,587
34,760
137
(465)
(129)
(9)
4,022
217,819
244,132
48,038
705
(25,425)
(18,610)
(28)
(7,626)
(7,994)
(202)
(24)
Total investment portfolio
$ 2,370,345
$
(50,915) $
294,916
$
(9,718) $ 2,665,261
$
(60,633)
December 31, 2015
Less Than 12 Months
12 Months or Greater
Total
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of U.S. states and
political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Debt securities issued by foreign
sovereign governments
Equity securities
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
60,548
$
(1,467) $
1,923
$
(475) $
62,471
$
(1,942)
417,615
1,470,628
86,604
35,064
134,488
—
4,463
355
(6,404)
(38,519)
(173)
(312)
(2,361)
—
(102)
(8)
37,014
114,982
5,546
209,882
69,927
51,750
—
171
(886)
454,629
(6,251)
1,585,610
(30)
(8,080)
(1,614)
(1,148)
—
(10)
92,150
244,946
204,415
51,750
4,463
526
(7,290)
(44,770)
(203)
(8,392)
(3,975)
(1,148)
(102)
(18)
Total investment portfolio
$ 2,209,765
$
(49,346) $
491,195
$
(18,494) $ 2,700,960
$
(67,840)
The unrealized losses in all categories of our
investments as of December 31, 2016 and 2015 were
primarily caused by changes in interest rates between
the time of purchase and the respective year end.
MGIC Investment Corporation 2016 Annual Report | 83
Notes
There were 607 and 303 securities in an unrealized
loss position as of December 31, 2016 and 2015,
respectively. As of December 31, 2016, the fair value
as a percent of amortized cost of the securities in an
unrealized loss position was 98% and approximately
14% of the securities in an unrealized loss position
were backed by the U.S. Government.
There were no OTTI losses in earnings during 2016
and 2015. We recognized OTTI losses of $0.1 million
during 2014.
For the years ended December 31, 2016, 2015, and
2014, there were no credit losses recognized in
earnings for which a portion of an OTTI loss was
recognized in accumulated other comprehensive
loss.
The source of net investment income is as follows:
2016
2015
2014
$ 112,513
$ 105,882
$ 89,437
182
754
433
208
191
455
227
179
711
113,882
106,736
90,554
(In thousands)
Fixed income
Equity securities
Cash equivalents
Other
Investment
income
Investment
expenses
Net investment
income
realized
The net
including
impairment losses, and change in net unrealized
gains (losses) of investments are as follows:
investment gains,
(In thousands)
2016
2015
2014
Net realized
investment gains on
investments:
Fixed income
$
5,310
$ 28,335
$
1,000
3,622
—
26
—
356
1
$
8,932
$ 28,361
$
1,357
Equity securities
Other
Total net realized
investment gains
Change in net
unrealized gains
(losses):
Fixed income
$ (5,403) $ (33,687) $ 91,718
Equity securities
Other
Total (decrease)
increase in net
unrealized gains/
losses
(36)
14
(32)
1
66
(4)
$ (5,425) $ (33,718) $ 91,780
The gross realized gains, gross realized losses and
impairment losses are as follows:
(3,216)
(2,995)
(2,907)
Gross realized gains
$ 11,909
$ 30,039
$
4,966
(In thousands)
2016
2015
2014
$ 110,666
$ 103,741
$ 87,647
Gross realized
losses
Other-than-
temporary-
impairment losses
Net realized
gains on
securities
(2,977)
(1,678)
(3,465)
—
—
(144)
$
8,932
$ 28,361
$
1,357
We had $13.6 million and $18.9 million of
investments at fair value on deposit with various
states as of December 31, 2016 and 2015,
respectively, due to regulatory requirements of those
state insurance departments.
84 | MGIC Investment Corporation 2016 Annual Report
Note 6. Fair Value Measurements
Assets measured at fair value included those listed, by hierarchy level, in the following tables as of
December 31, 2016 and 2015:
Notes
December 31, 2016
(In thousands)
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
—
691
—
—
—
—
—
691
4,268
4,959
—
1,228
—
—
—
—
—
—
1,228
2,855
4,083
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of U.S. states and political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Total debt securities
Equity securities (1)
Total investments
Real estate acquired (2)
December 31, 2015
$
73,530
$
30,690
$
42,840
$
2,143,016
1,743,910
59,565
224,209
319,817
121,175
4,685,222
7,128
$
$
4,692,350
11,748
$
$
—
—
—
—
—
—
30,690
2,860
2,142,325
1,743,910
59,565
224,209
319,817
121,175
4,653,841
—
33,550
$
4,653,841
$
— $
— $
11,748
(In thousands)
Fair Value
Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
Significant
Other
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
$
160,584
$
46,197
$
114,387
$
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of U.S. states and political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Debt securities issued by foreign sovereign
governments
Total debt securities
Equity securities (1)
Total investments
Real estate acquired (2)
1,792,527
2,004,763
116,617
257,648
233,491
60,200
31,731
4,657,561
5,645
$
$
4,663,206
12,149
$
$
—
—
—
—
—
—
31,731
77,928
2,790
1,791,299
2,004,763
116,617
257,648
233,491
60,200
—
4,578,405
—
80,718
$
4,578,405
$
— $
— $
12,149
(1)
(2)
Equity securities in Level 3 are carried at cost, which approximates fair value.
Real estate acquired through claim settlement, which is held for sale, is reported in other assets on the consolidated balance
sheets.
MGIC Investment Corporation 2016 Annual Report | 85
Notes
For assets and liabilities measured at fair value using significant unobservable inputs (Level 3), a reconciliation
of the beginning and ending balances for the years ended December 31, 2016, 2015, and 2014 is shown in
the following tables. There were no transfers into or out of Level 3 in those years and there we no losses
included in earnings for those years attributable to the change in unrealized losses on assets still held at the
end of each applicable year.
Level 3 reconciliations:
(In thousands)
Obligations of
U.S. States and
Political
Subdivisions
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 net realized
investment gains
Included in earnings and reported as losses
incurred, net
Purchases
Sales
—
—
—
(537)
3,579
3,579
—
—
4,258
(6,424)
—
4,258
(6,961)
(1,142)
36,859
(36,118)
11,748
Balance at December 31, 2016
$
691
$
4,268
$
4,959
$
(In thousands)
Obligations of
U.S. States and
Political
Subdivisions
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
Purchases
Sales
—
7
(625)
—
2,534
—
—
2,541
(625)
Balance at December 31, 2015
$
1,228
$
2,855
$
4,083
$
(2,322)
34,624
(32,811)
12,149
(In thousands)
Obligations of
U.S. States and
Political
Subdivisions
Equity
Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2013
$
2,423
$
321
$
2,744
$
13,280
Total realized/unrealized gains (losses):
Included in earnings and reported as losses
incurred, net
Purchases
Sales
—
30
(607)
—
—
—
—
30
(607)
Balance at December 31, 2014
$
1,846
$
321
$
2,167
$
(4,129)
42,247
(38,740)
12,658
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.
As of December 31, 2016, the majority of the $5.0
million balance of Level 3 securities are equity
securities that can only be redeemed or sold at their
86 | MGIC Investment Corporation 2016 Annual Report
its
remaining
par value and only to the security issuer, with the
remainder of the balance held in a state premium tax
credit investment. The state premium tax credit
investment has an average maturity of less than 3
years and a credit rating of AAA, and its balance
reflects
scheduled payments
discounted at an average annual rate of 7.1%. As of
December 31, 2015 our Level 3 securities were equity
securities that can only be redeemed or sold at their
par value and only to the security issuer and state
premium tax credit investments. As of December 31,
2014 the majority of our Level 3 securities were state
premium tax credit investments.
Additional fair value disclosures related to our
investment portfolio are included in Note 5 –
“Investments.”
We incur financial liabilities in the normal course of
our business. The following table presents the
carrying value and fair value of our financial liabilities
disclosed, but not carried, at
fair value at
December 31, 2016 and 2015. The fair values of our
5% Notes, 2% Notes, 5.75% Notes, and 9% Debentures
were based on observable market prices and the fair
value of the FHLB 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. See
Note 7 - "Debt" for a description of the financial
liabilities in the table below.
(In thousands)
Financial
liabilities:
FHLB
Advance
5% Notes
2% Notes
5.75% Notes
9%
Debentures
Total financial
liabilities
December 31, 2016
December 31, 2015
Carrying
Value
Fair Value
Carrying
Value
Fair Value
$ 155,000
$ 151,905
n/a
n/a
144,789
147,679
331,546
345,616
204,672
308,605
490,755
701,955
417,406
445,987
n/a
n/a
256,872
323,040
389,522
455,067
$1,178,739
$1,377,216
$1,211,823
$1,502,638
The 5% Notes, 2% Notes, 5.75% Notes, and 9%
Debentures are obligations of our holding company,
MGIC
its
subsidiaries.
Investment Corporation, and not of
Note 7. Debt
Accounting standard update
As of March 31, 2016 we adopted the accounting
update related to the presentation of debt issuance
costs in the consolidated 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
impact on our consolidated statements of
no
operations or retained earnings.
The impact of the reclassification of debt issuance
costs on our outstanding debt obligations as of
December 31, 2015 is as follows.
Notes
December 31, 2015
As
previously
reported
Adjustment
As
Adjusted
$
333.5
$
(2.0) $
500.0
389.5
(9.2)
—
331.5
490.8
389.5
$
1,223.0
$
(11.2) $
1,211.8
(In millions)
5% Notes
2% Notes
9% Debentures
Total long-
term debt
Long-term debt
Long-term debt as of December 31, 2016 and 2015
consisted of the following obligations.
(In millions)
FHLB Advance
5% Notes
2% Notes
5.75% Notes
9% Debentures
Long-term debt, par value
Less: debt issuance costs
December 31,
2016
2015
$
155.0
$
145.0
207.6
425.0
256.9
1,189.5
10.8
—
333.5
500.0
—
389.5
1,223.0
11.2
Long-term debt, carrying value
$ 1,178.7
$ 1,211.8
Interest payments, on a consolidated basis, for our
debt obligations existing during 2016 and 2015
appear below.
(In millions)
5.375% Notes
FHLB Advance
5% Notes
2% Notes
5.75% Notes
9% Debentures
Years Ended December 31,
2016
2015
$
— $
2.4
10.6
9.1
—
27.4
3.3
—
17.3
10.0
—
35.1
65.7
Total interest payments
$
49.5
$
5.75% Notes
In August 2016, we issued $425 million aggregate
principal amount of 5.75% Senior Notes due in 2023
("5.75% Notes") and received net proceeds, after the
deduction of underwriting fees, of $418.1 million.
Interest on the 5.75% Notes is payable semi-annually
on February 15 and August 15 of each year,
commencing on February 15, 2017. We have the
option to redeem these notes, in whole or in part, at
any time or from time to time prior to maturity at a
redemption price equal to the greater of (i)100% of
the aggregate principal amount of the notes to be
redeemed and (ii) the make-whole amount, which is
the sum of the present values of the remaining
scheduled payments of principal and
interest
discounted at the treasury rate defined in the notes
MGIC Investment Corporation 2016 Annual Report | 87
Notes
plus 50 basis points, plus, in each case, accrued
interest thereon to, but excluding, the redemption
date. In addition to underwriting fees, we incurred
approximately $1.2 million of other expenses
associated with the issuance of these notes.
The 5.75% Notes have covenants customary for
securities of this nature, including customary events
of default and further provide that the trustee or
holders of at least 25% in aggregate principal amount
of the outstanding 5.75% Notes may declare them
immediately due and payable upon the occurrence of
certain events of default after the expiration of the
applicable grace period. In addition, in the case of an
event of default arising from certain events of
bankruptcy, insolvency or reorganization relating to
the Company or any of its significant subsidiaries, the
5.75% Notes will become due and payable
immediately. This description is not intended to be
complete in all respects and is qualified in its entirety
by the terms of the 5.75% Notes, including their
covenants and events of default.
The net proceeds from the 5.75% Notes issuance
were primarily used as (i) cash consideration to
repurchase a portion of our 2% Notes, and (ii) to
repurchase the shares issued as partial consideration
repurchases of our 2% Notes, as
in
further described below. The remaining proceeds are
being held for general corporate purposes.
the
FHLB Advance
In February 2016, MGIC borrowed $155.0 million in
the form of a fixed rate advance from the Federal
Home Loan Bank of Chicago ("FHLB Advance").
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.
5.375% Notes
We repaid the outstanding 5.375% Notes with cash
at the holding company on November 2, 2015.
Interest on these notes was payable semi-annually in
arrears on May 1 and November 1 each year. The
repayment of our Senior Notes had no material
impact on our financial position or liquidity.
88 | MGIC Investment Corporation 2016 Annual Report
5% Notes
As of December 31, 2016 and 2015 we had
outstanding $145.0 million and $333.5 million,
respectively, principal amount of 5% Notes due in
2017 ("5% Notes"). In 2016, we repurchased $188.5
million in aggregate principal of our 5% Notes at a
purchase price of $195.5 million, plus accrued
interest using funds held at our holding company. In
2015, we purchased $11.5 million in aggregate
principal of our 5% Notes at a purchase price of $12.0
million, plus accrued interest, using funds held at our
holding company. In each of 2016 and 2015, the
excess of the purchase price over carrying value, plus
the write-off of unamortized issuance costs on the
par value repurchased, is reflected as a loss on debt
extinguishment on our consolidated statements of
operations. Our 5% Notes repurchase in 2015
reduced our potentially dilutive shares by
approximately 0.9 million shares, and our 2016 5%
Notes repurchases reduced our potentially dilutive
shares by approximately 14.0 million shares.
Interest on the 5% Notes is payable semi-annually in
arrears on May 1 and November 1 of each year. The
5% Notes will mature on May 1, 2017. The 5% Notes
are convertible, at the holder's option, at an initial
conversion rate, which is subject to adjustment, of
74.4186 shares per $1,000 principal amount at any
time prior to the maturity date. This represents an
initial conversion price of approximately $13.44 per
share. These 5% Notes will be equal in right of
payment to our other senior debt and will be senior in
right of payment to our 9% Debentures. Debt issuance
costs are being amortized to interest expense over
the contractual life of the 5% Notes. We have 10.8
million authorized shares reserved for conversion
under our 5% Notes.
The provisions of the 5% Notes are complex.
Covenants in the 5% Notes include a requirement to
notify holders in advance of certain events and that
we and the designated subsidiaries preserve our
corporate existence, rights and franchises unless we
or any such subsidiary determines that such
preservation is no longer necessary in the conduct of
its business and that the loss thereof is not
disadvantageous to the holders of the 5% Notes. A
designated subsidiary is any of our consolidated
subsidiaries which has shareholders' equity of at
least 15% of our consolidated shareholders' equity.
Further, the notes are subject to the indenture
between us and the trustee that, among other terms,
includes provisions that would constitute an event of
default under the indenture. Upon such a default, the
trustee could accelerate the maturity of the notes
independent of any action by holders of the 5% Notes.
This description is not intended to be complete in all
respect and is qualified in its entirety by the terms of
the 5% Notes, including their covenants and events
of default. We were in compliance with all covenants
at December 31, 2016.
convert their notes irrespective of satisfaction of the
conditions.
Notes
2% Notes
As of December 31, 2016 and 2015, we had
outstanding $207.6 million and $500.0 million,
respectively, principal amount of our 2% Notes due in
2020 ("2% Notes"). In the third quarter of 2016, we
entered into privately negotiated agreements to
repurchase $292.4 million in aggregate principal of
our outstanding 2% Notes at a purchase price of
$362.1 million, plus accrued interest. We funded the
purchases with $230.7 million
in cash, using
proceeds from the issuance of our 5.75% Notes, and
by issuing to certain sellers approximately 18.3
million shares of our common stock. The excess of
the purchase price over carrying value, plus the write-
off of unamortized issuance costs on the par value
repurchased,
loss on debt
is reflected as a
extinguishment on our consolidated statements of
operations for the year ended December 31, 2016.
The shares issued as consideration for the notes
repurchases have been
repurchased as of
December 31, 2016 using cash from our 5.75% Notes
issuance. The repurchases of the 2% Notes reduced
potentially dilutive shares by approximately 42.1
million shares, without considering the shares issued
as partial consideration in the purchases of the 2%
Notes or the repurchase of shares to offset such
shares issued.
Interest on the 2% Notes is payable semi-annually in
arrears on April 1 and October 1 of each year. Debt
issuance costs are being amortized to interest
expense over the contractual life of the 2% Notes. The
2% Notes will mature on April 1, 2020, unless earlier
repurchased by us or converted.
Prior to January 1, 2020, the 2% Convertible Senior
Notes are convertible only upon satisfaction of one
or more conditions. One such condition is that during
any calendar quarter commencing after March 31,
2014, the last reported sale price of our common
stock for each of at least 20 trading days during the
30 consecutive trading days ending on, and including,
the last trading day of the immediately preceding
calendar quarter be greater than or equal to 130% of
the applicable conversion price on each applicable
trading day. This condition was met for the quarter
ended December 31, 2016. The 2% Notes are
convertible at an initial conversion rate, which is
subject to adjustment, of 143.8332 shares per $1,000
initial
principal amount. This
conversion price of approximately $6.95 per share.
130% of such conversion price is approximately
$9.04. On or after January 1, 2020, holders may
represents an
Prior to April 10, 2017, the notes will not be
redeemable. On any business day on or after April 10,
2017 we may redeem for cash all or part of the notes,
at our option, at a redemption price equal to 100% of
the principal amount of the notes being redeemed,
plus any accrued and unpaid interest, if the closing
sale price of our common stock exceeds 130% of the
then prevailing conversion price of the notes for at
least 20 of the 30 trading days preceding notice of
the redemption. We have 29.9 million authorized
shares reserved for conversion under our 2% Notes.
The provisions of the 2% Notes are complex.
Covenants in the 2% Notes include a requirement to
notify holders in advance of certain events and that
we and the designated subsidiaries (defined above)
preserve our corporate existence,
rights and
franchises unless we or any such subsidiary
determines that such preservation is no longer
necessary in the conduct of its business and that the
loss thereof is not disadvantageous to holders of the
2% Notes. Further, the notes are subject to the
indenture between us and the trustee that, among
other
that would
includes provisions
constitute an event of default under the indenture.
Upon such a default, the trustee could accelerate the
maturity of the notes independent of any action by
holders of the 2% Notes. This description is not
intended to be complete in all respect and is qualified
in its entirety by the terms of the 2% Notes, including
their covenants and events of default. We were in
compliance with all covenants at December 31, 2016.
These 2% Notes will be equal in right of payment to
our other senior debt and will be senior in right of
payment to our 9% Debentures.
terms,
9% Debentures
As of December 31, 2016 and 2015 we had
outstanding $256.9 million and $389.5 million,
respectively, principal amount of our 9% Debentures
due in 2063 ("9% Debentures"). In February 2016,
in aggregate
MGIC purchased $132.7 million
principal of our outstanding 9% Debentures 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
the
between
liability
component and
the equity
component. The purchase of the 9% Debentures
loss on debt
resulted
the extinguishment of
reacquisition of
in an $8.3 million
MGIC Investment Corporation 2016 Annual Report | 89
Notes
extinguishment on the consolidated statement of
operations for the year ended December 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 $6.3 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.
When interest on the 9% Debentures is deferred, we
are required, not later than a specified time, to use
reasonable commercial efforts to begin selling
qualifying securities to persons who are not our
affiliates. The specified time is one business day after
we pay interest on the 9% Debentures that was not
deferred, or if earlier, the fifth anniversary of the
scheduled interest payment date on which the
deferral started. Qualifying securities are common
stock, certain warrants and certain non-cumulative
perpetual preferred stock. The requirement to use
such efforts to sell such securities is called the
Alternative Payment Mechanism.
The 9% Debentures are currently convertible, at the
holder's option, at an initial conversion rate, which is
subject to adjustment, of 74.0741 common shares
per $1,000 principal amount of the 9% Debentures at
any time prior to the maturity date. This represents
an initial conversion price of approximately $13.50
per share. If a holder elects to convert their 9%
Debentures, deferred interest owed on the 9%
Debentures being converted is also converted into
shares of our common stock. The conversion rate for
any deferred interest is based on the average price
that our shares traded at during a 5-day period
immediately prior to the election to convert. In lieu of
issuing shares of common stock upon conversion of
the 9% Debentures, we may, at our option, make a
cash payment to converting holders for all or some
of the shares of our common stock otherwise
issuable upon conversion. We have 19.0 million
authorized shares reserved for conversion under our
9% debentures.
We may redeem the 9% Debentures in whole or in part
from time to time, at our option, at a redemption price
equal to 100% of the principal amount of the 9%
Debentures being redeemed, plus any accrued and
unpaid interest, if the closing sale price of our
common stock exceeds 130% of the then prevailing
conversion price of the 9% Debentures for at least 20
of the 30 trading days preceding notice of the
redemption. 130% of such conversion price is $17.55.
Interest on the 9% Debentures is payable semi-
annually in arrears on April 1 and October 1 of each
year. As long as no event of default with respect to
the debentures has occurred and is continuing, we
interest, under an optional deferral
may defer
provision, for one or more consecutive interest
periods up to 10 years without giving rise to an event
of default. Deferred interest will accrue additional
interest at the rate then applicable to the debentures.
During an optional deferral period we may not pay or
declare dividends on our common stock.
The net proceeds of Alternative Payment Mechanism
sales are to be applied to the payment of deferred
interest, including the compound portion. We cannot
pay deferred interest other than from the net
proceeds of Alternative Payment Mechanism sales,
except at the final maturity of the debentures or at the
tenth anniversary of the start of the interest deferral.
The Alternative Payment Mechanism does not
require us to sell common stock or warrants before
the fifth anniversary of the interest payment date on
which that deferral started if the net proceeds
(counting any net proceeds of those securities
previously sold under the Alternative Payment
Mechanism) would exceed the 2% cap. The 2% cap
is 2% of the average closing price of our common
stock times the number of our outstanding shares of
common stock. The average price is determined over
a specified period ending before the issuance of the
common stock or warrants being sold, and the
number of outstanding shares is determined as of the
date of our most recent publicly released financial
statements.
We are not required to issue under the Alternative
Payment Mechanism a total of more than 10 million
shares of common stock, including shares underlying
qualifying warrants. In addition, we may not issue
under the Alternative Payment Mechanism qualifying
preferred stock if the total net proceeds of all
issuances would exceed 25% of the aggregate
principal amount of the debentures.
The Alternative Payment Mechanism does not apply
during any period between scheduled
interest
payment dates if there is a “market disruption event”
that occurs over a specified portion of such period.
include any material
Market disruption events
adverse change
international
economic or financial conditions.
in domestic or
The provisions of the 9% Debentures are complex.
The description above is not intended to be complete
in all respects. Moreover, that description is qualified
in its entirety by the terms of the 9% Debentures,
90 | MGIC Investment Corporation 2016 Annual Report
including their covenants and events of default. We
in compliance with all covenants at
were
December 31, 2016. The 9% Debentures rank junior
to all of our existing and future senior indebtedness.
Note 8. Loss Reserves
As described in Note 3 – “Summary of Significant
Accounting Policies – Loss Reserves,” we establish
reserves to recognize the estimated liability for
losses and LAE related to defaults on insured
mortgage loans. Loss reserves are established by
estimating the number of loans in our inventory of
delinquent 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, the
current and future strength of local housing markets;
exposure on insured loans; the amount of time
between default and claim filing, and curtailments
and rescissions. The actual amount of the claim
payments may be substantially different than our loss
reserve estimates. Our estimates could be adversely
affected by several factors, including a deterioration
of
regional or national economic conditions,
including unemployment, leading to a reduction in
borrowers’ 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 “Losses incurred” section of the table below
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 that occurred 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 claim rate and 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
Notes
exposure, changes in the relative level of defaults by
geography and changes in average loan exposure.
Losses incurred on default notices received in the
current year decreased in 2016 compared to 2015,
and in 2015 compared to 2014, primarily due to a
decrease in the number of new defaults, net of cures,
as well as a decrease in the estimated claim rate on
recently reported defaults.
The “Losses paid” section of the table below 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 2016, our losses paid included $53 million
associated with settlements for claims paying
practices and NPL settlements. These settlements
reduced our delinquent inventory by 1,273 notices.
During 2015, our losses paid included $10 million
associated with settlements for claim paying
practices. These settlements reduced our delinquent
inventory by 1,121 notices. These settlements had no
material impact on our losses incurred in either year.
liability associated with our estimate of
The
premiums to be refunded on expected claim
payments is accrued for separately at December 31,
2016 and 2015 and approximated $85 million and
$102 million, respectively. This liability was included
in "Other liabilities" on our consolidated balance
sheets.
In each of 2016, 2015, and 2014, we paid $42 million
in connection with a 2012 settlement agreement with
Freddie Mac regarding the aggregate loss limit under
certain pool insurance policies. The final payment
under that settlement agreement was made on
December 1, 2016.
MGIC Investment Corporation 2016 Annual Report | 91
Notes
The following table provides a reconciliation of
beginning and ending loss reserves for each of the
past three years:
(In thousands)
2016
2015
2014
$1,893,402
$2,396,807
$3,061,401
44,487
57,841
64,085
1,848,915
2,338,966
2,997,316
Reserve at beginning of
year
Less reinsurance
recoverable
Net reserve at beginning
of year
Losses incurred:
Losses and LAE
incurred in respect of
default notices
received in:
Current year
Prior years (1)
387,815
453,849
596,436
(147,658)
(110,302)
(100,359)
Total losses incurred
240,157
343,547
496,077
Losses paid:
Losses and LAE paid in
respect of default
notices received in:
Current year
Prior years
Reinsurance
terminations (2)
14,823
25,980
32,919
689,258
823,058
1,121,508
(3,329)
(15,440)
—
Total losses paid
700,752
833,598
1,154,427
Net reserve at end of
year
Plus reinsurance
recoverables
1,388,320
1,848,915
2,338,966
50,493
44,487
57,841
Reserve at end of year
$1,438,813
$1,893,402
$2,396,807
(1) A negative number for prior year losses incurred indicates
a redundancy of prior year loss reserves. See table below
for more information about prior year loss development.
(2)
In a termination, 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 to 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. (See Note 9 – “Reinsurance”)
For the years ended December 31, 2016, 2015 and
2014 we experienced favorable prior year loss reserve
development. This development was, in part, due to
the resolution of approximately 63%, 60% and 58% for
the years ended December 31, 2016, 2015 and 2014,
respectively, of the prior year default inventory. In
2016, 2015, and 2014 we experienced improved cure
rates on prior year defaults. Additionally, during 2015
the claim rate development was favorably impacted
by re-estimations of previously recorded reserves
relating to disputes on our claims paying practices
and adjustments to IBNR. The favorable development
for the years ended 2016 and 2015 was offset, in part,
by an increase in the estimated severity on prior year
defaults remaining in the delinquent inventory. The
92 | MGIC Investment Corporation 2016 Annual Report
decrease in the estimated severity in 2014 was based
on the resolution of the prior year default inventory.
The prior year development of the reserves in 2016,
2015 and 2014 is reflected in the table below.
(In millions)
2016
2015
2014
Decrease in estimated
claim rate on primary
defaults
Increase (decrease) in
estimated severity on
primary defaults
Change in estimates
related to pool
reserves, LAE
reserves, reinsurance
and other
Total prior year loss
development (1)
$
(148) $
(141) $
(43)
9
43
(35)
(9)
(12)
(22)
$
(148) $
(110) $
(100)
(1) A negative number for prior year loss development
indicates a redundancy of prior year loss reserves.
in the table below. The
Default Inventory
A rollforward of our primary default inventory for the
years ended December 31, 2016, 2015 and 2014
appears
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.
Default inventory at
beginning of year
New Notices
Cures
Paids (including those
charged to a deductible
or captive)
Rescissions and
denials
Other items removed
from inventory
Default inventory at end
of year
2016
2015
2014
62,633
67,434
79,901
103,328
74,315
88,844
(65,516)
(73,610)
(87,278)
(12,367)
(16,004)
(23,494)
(629)
(848)
(1,306)
(1,273)
(1,121)
(193)
50,282
62,633
79,901
The decrease in the primary default
inventory
experienced during 2016 and 2015 was generally
across all markets and all book years prior to 2013.
In 2016 and 2015, the percentage of loans in the
inventory that had been in default for 12 or more
consecutive months had decreased compared to the
respective prior years. 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 17 - "Litigation and Contingencies".
Pool insurance default inventory decreased to 1,883
at December 31, 2016 from 2,739 at December 31,
2015 and 3,797 at December 31, 2014.
Notes
The number of consecutive months that a borrower
has been delinquent is shown in the table below.
Consecutive months in default
December 31,
2016
2015
2014
12,194
24% 13,053
21% 15,319
19%
13,450
27% 15,763
25% 19,710
25%
24,638
49% 33,817
54% 44,872
56%
50,282
100% 62,633
100% 79,901
100%
3 months
or less
4 - 11
months
12
months
or
more (1)
Total
primary
default
inventory
Primary
claims
received
inventory
included
in ending
default
inventory
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.
is accrued
The
liability associated with our estimate of
premiums to be refunded on expected future
rescissions
separately. At
December 31, 2016 and 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
For
legal
information about discussions and
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 17 – “Litigation and Contingencies.”
1,385
3%
2,769
4%
4,746
6%
Note 9. Reinsurance
Our consolidated financial statements reflect the
effects of assumed and ceded
reinsurance
transactions. Assumed reinsurance refers to the
acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded
reinsurance involves transferring certain insurance
risks (along with the related earned premiums) we
have underwritten to other insurance companies who
agree to share these risks. The primary purpose of
ceded reinsurance is to protect us, at a cost, against
a fixed percentage of losses arising from policies
covered by the agreement; however we also utilize
reinsurance to manage our capital requirements
under PMIERs. Reinsurance is currently placed on a
quota-share basis, but we also have captive
reinsurance agreements that remain in effect. The
reinsurance agreements we have entered into are
discussed below.
(1) Approximately 47%, 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 December 31, 2016, 2015 and 2014, respectively.
The length of time 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.
Number of payments delinquent
December 31,
2016
2015
2014
3
payments
or less
4 - 11
payments
12
payments
or more
Total
primary
default
inventory
18,419
36% 20,360
33% 23,253
29%
12,892
26% 15,092
24% 19,427
24%
18,971
38% 27,181
43% 37,221
47%
50,282
100% 62,633
100% 79,901
100%
MGIC Investment Corporation 2016 Annual Report | 93
Notes
The effect of all reinsurance agreements on
premiums earned and losses incurred, which is
reflected
the consolidated statements of
in
operations, is as follows:
(In thousands)
2016
2015
2014
Years ended December 31,
Premiums
earned:
Direct
Assumed
Ceded
Net premiums
earned
Losses incurred:
Direct
Assumed
Ceded
Net losses
incurred
$ 1,058,545
$ 997,892
$ 950,973
662
1,178
1,653
(133,981)
(102,848)
(108,255)
$ 925,226
$ 896,222
$ 844,371
$ 273,207
$ 369,680
$ 524,051
1,138
1,552
2,012
(34,188)
(27,685)
(29,986)
$ 240,157
$ 343,547
$ 496,077
Quota share reinsurance
2015 QSR Transaction
We utilize a quota-share reinsurance agreement with
a group of unaffiliated reinsurers, each with an insurer
financial strength rating of A- or better by Standard
and Poor's Rating Services, A.M. Best, or both, to
manage our exposure to losses resulting from our
mortgage guaranty policies and
to provide
reinsurance capital credit under the PMIERs. Our
2015 quota share reinsurance agreement("2015 QSR
Transaction"), which became effective July 1, 2015
provides coverage on policies that were in the 2013
quota share reinsurance agreement ("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. 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 PMIERs for the risk
ceded in any required calculation period.
The 2015 QSR Transaction increased the amount of
our IIF covered by reinsurance and will increase the
amount of premiums and losses ceded. A higher level
of losses ceded will reduce our profit commission.
The structure of the 2015 QSR Transaction is a 30%
quota share for all policies covered, with a 20% ceding
94 | MGIC Investment Corporation 2016 Annual Report
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%.
2013 QSR Transaction
Effective July 1, 2015, we settled our 2013 QSR
Transaction by commutation. The settlement
included unearned premiums, loss reserves, and
profit commission. The commutation resulted in an
increase in net premiums written and earned of $69.4
million and $11.6 million, respectively, and a decrease
in ceding commissions of $11.6 million in the third
quarter of 2015. Receipt of our profit commission of
$142.5 million, in addition to other premium and loss
amounts, was also completed as part of the
settlement.
2017 QSR Transaction
We have agreed to terms on a quota-share
reinsurance agreement for 2017
("2017 QSR
Transaction") with a group of unaffiliated reinsurers,
each with an insurer financial strength rating of A- or
better by Standard and Poor's, A.M. Best or both, to
manage our exposure to losses resulting from our
to provide
mortgage guaranty policies and
reinsurance capital credit under the PMIERs. The
GSEs have approved the terms of our proposed 2017
QSR Transaction. The 2017 QSR Transaction is
expected to be executed during the first quarter of
2017 with an effective date retroactive to January 1,
2017, and will provide coverage on new business
written January 1, 2017 through December 29, 2017
that meets certain eligibility requirements. Under the
agreed upon terms, the 2017 QSR Transaction will
cede losses incurred and premiums on or after the
effective date through December 31, 2028, at which
time the agreement expires. Early termination of the
agreement can be elected by us effective
December 31, 2021 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 PMIERs for the risk ceded in
any required calculation period.
The agreed upon structure of the 2017 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 2017 QSR
Transaction, we will receive a profit commission
provided that the loss ratio on the loans covered under
the agreement remains below 60%.
Following is a summary of our quota share
reinsurance agreements, excluding captive
agreements, for 2016, 2015 and 2014.
(In thousands)
2016
2015
2014
Years ended December 31,
2015 QSR
Transaction
(Effective July 1,
2015)
Ceded premiums
written, net of
profit
commission (1)
Ceded premiums
earned, net of
profit
commission (1)
Ceded losses
incurred
Ceding
commissions (2)
Profit
commission
2013 QSR
Transaction
Ceded premiums
written, net of
profit
commission
Ceded premiums
earned, net of
profit
commission
Ceded losses
incurred
Ceding
commissions (2)
Profit
commission
$ 125,460
$ 52,588
n/a
125,460
52,588
30,201
11,424
47,629
20,582
112,685
50,322
n/a
n/a
n/a
n/a
n/a
$ (11,355) (3) $100,031
n/a
n/a
n/a
n/a
35,999 (3)
88,528
6,060
15,163
10,235 (3)
37,833
62,525 (3)
89,133
(1) As of 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.
(3)
The year ended December 31, 2015 includes the non-
recurring
impact of commuting our 2013 QSR
Transaction. The commutation had no impact on ceded
losses incurred.
Under the terms of 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 $31.8
Notes
million as of December 31, 2016 and $10.9 million
reinsurance
as of December 31, 2015. The
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 CFPB in 2013 and with the
Minnesota Department of Commerce in 2015,
MGIC has agreed to 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 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.
The reinsurance recoverable on loss reserves
related to captive agreements was $19 million at
December 31, 2016 which was supported by $91
million of trust assets, while at 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. 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.
MGIC Investment Corporation 2016 Annual Report | 95
Notes
Note 10. Other Comprehensive (Loss)
Income
income and related
The pretax components of our other comprehensive
(loss)
income tax benefit
(expense) for the years ended December 31, 2016,
2015 and 2014 are included in the table below:
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 years
ended December 31, 2016, 2015 and 2014 are
included in the table below:
(In thousands)
2016
2015
2014
(In thousands)
2016
2015
2014
Net unrealized investment
(losses) gains arising during
the year
Income tax benefit
(expense)
Valuation allowance (1)
$ (5,425) $(33,718) $ 91,782
1,776
11,738
(32,017)
—
62,383
31,374
Net of taxes
(3,649)
40,403
91,139
Net changes in benefit plan
assets and obligations
Income tax benefit
Valuation allowance (1)
(14,799)
(12,818)
(52,112)
5,179
4,487
18,239
—
(7,383)
(18,239)
Net of taxes
(9,620)
(15,714)
(52,112)
Reclassification adjustment
for net realized gains (losses)
included in net income (1)
Income tax (expense)
benefit
Valuation allowance (2)
$ 6,207
$11,693
$ (6,816)
(2,050)
(4,076)
2,402
—
3,635
(2,502)
Net of taxes
4,157
11,252
(6,916)
Reclassification adjustment
related to benefit plan assets
and obligations (3)
Income tax expense
Valuation allowance (2)
Net of taxes
1,480
2,184
6,930
(518)
(764)
(2,425)
—
962
574
1,994
2,425
6,930
Net changes in unrealized
foreign currency translation
adjustment
Income tax benefit
Valuation allowance (1)
(1,463)
(5,699)
(4,067)
Reclassification adjustment
related to foreign currency (4)
512
—
2,000
1,425
(529)
—
Income tax expense
Net of taxes
1,467
(513)
954
—
—
—
—
—
—
Net of taxes
(951)
(4,228)
(2,642)
Total other
comprehensive (loss)
income
Total income tax
benefit, net of
valuation allowance
Total other
comprehensive
(loss) income, net of
tax
(21,687)
(52,235)
35,603
7,467
72,696
782
$(14,220) $ 20,461
$ 36,385
(1)
See Note 12 – “Income Taxes” for a discussion of the
valuation allowance recorded against deferred tax assets.
Total reclassifications
9,154
13,877
114
Total income tax
expense, net of
valuation allowance
Total reclassifications,
net of tax
(3,081)
(631)
(100)
$ 6,073
$13,246
$
14
(1)
Increases (decreases) Net realized investment gains on
the consolidated statements of operations.
(2)
See Note 12 – “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.
(4)
Increases (decreases) Other revenue on the consolidated
statements of operations.
96 | MGIC Investment Corporation 2016 Annual Report
Notes
A rollforward of accumulated other comprehensive
loss ("AOCL") for the years ended December 31, 2016,
2015, and 2014, including amounts reclassified from
accumulated other comprehensive loss, are included
in the table below.
Net
unrealized
gains and
losses on
available-
for-sale
securities
Net benefit
plan assets
and
obligations
recognized
in
shareholde
rs' equity
Net
unrealized
foreign
currency
translation
Total
AOCL
(In thousands)
Balance, December
31, 2013, net of tax
$(148,690) $
23,174
$
7,790
$(117,726)
Other
comprehensive
income (loss)
before
reclassifications
Less: Amounts
reclassified from
AOCL
84,223
(45,182)
(2,642)
36,399
(6,916)
6,930
—
14
Balance, December
31, 2014, net of tax
(57,551)
(28,938)
5,148
(81,341)
Other
comprehensive
income (loss)
before
reclassifications
Less: Amounts
reclassified from
AOCL
51,655
(13,720)
(4,228)
33,707
11,252
1,994
—
13,246
Balance, December
31, 2015, net of tax
(17,148)
(44,652)
920
(60,880)
Other
comprehensive
income (loss)
before
reclassifications
Less: Amounts
reclassified from
AOCL
508
(8,658)
3
(8,147)
4,157
962
954
6,073
Balance, December
31, 2016, net of tax
$ (20,797) $ (54,272) $
(31)
(75,100)
MGIC Investment Corporation 2016 Annual Report | 97
Notes
Note 11. Benefit Plans
We have a non-contributory defined benefit pension plan covering substantially all domestic employees, as
well as a supplemental executive retirement plan. We also offer both medical and dental benefits for retired
domestic employees and their eligible spouses under a postretirement benefit plan. The following tables
provide the components of aggregate annual net periodic benefit cost for each of the years ended
December 31, 2016, 2015, and 2014 and changes in the benefit obligation and the funded status of the pension,
supplemental executive retirement and other postretirement benefit plans as recognized in the consolidated
balance sheets as of December 31, 2016 and 2015.
Components of Net Periodic Benefit Cost
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
(In thousands)
12/31/2016
12/31/2015
12/31/2014
12/31/2016
12/31/2015
12/31/2014
1. Company Service Cost
$
9,130
$
10,256
$
8,565
$
2. Interest Cost
15,906
15,847
15,987
$
751
704
$
833
697
659
653
3. Expected Return on Assets
(19,508)
(21,109)
(21,030)
(4,886)
(4,991)
(4,648)
4. Other Adjustments
Subtotal
5. Amortization of :
a. Net Transition Obligation/(Asset)
b. Net Prior Service Cost/(Credit)
c. Net Losses/(Gains)
Total Amortization
6. Net Periodic Benefit Cost
7. Cost of settlements or
curtailments
—
5,528
—
(687)
5,856
5,169
10,697
1,277
—
4,994
—
(845)
5,485
4,640
9,634
3,172
—
3,522
—
(930)
1,083
153
3,675
302
—
—
—
(3,431)
(3,461)
(3,336)
—
(6,649)
—
(6,649)
—
(6,649)
(175)
(6,824)
—
(6,649)
(435)
(7,084)
(10,080)
(10,285)
(10,420)
—
—
—
8. Total Expense for Year
$
11,974
$
12,806
$
3,977
$
(10,080) $
(10,285) $
(10,420)
Development of Funded Status
(In thousands)
Actuarial Value of Benefit Obligations
1. Measurement Date
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
12/31/2016
12/31/2015
12/31/2016
12/31/2015
2. Accumulated Benefit Obligation
$
360,423
$
338,450
$
17,378
$
16,423
Funded Status/Asset (Liability) on the Consolidated
Balance Sheet
1. Projected Benefit Obligation
2. Plan Assets at Fair Value
3. Funded Status - Overfunded/Asset
4. Funded Status - Underfunded/Liability
Accumulated Other Comprehensive Income (Loss)
(In thousands)
1. Net Actuarial (Gain)/Loss
2. Net Prior Service Cost/(Credit)
3. Net Transition Obligation/(Asset)
4. Total at Year End
$
(369,808) $
(349,483) $
(17,378) $
(16,423)
360,900
350,107
70,408
N/A $
624
$
53,030
$
(8,908)
N/A
N/A
65,568
49,145
N/A
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
$
103,861
$
95,636
$
(6,088) $
(5,311)
(2,286)
(2,989)
(11,991)
(18,640)
—
—
—
—
$
101,575
$
92,647
$
(18,079) $
(23,951)
98 | MGIC Investment Corporation 2016 Annual Report
Notes
The amortization of gains and losses resulting from actual experience different from assumed experience or
changes in assumptions including discount rates is included as a component of Net Periodic Benefit Cost/
(Income) for the year. The gain or loss in excess of a 10% corridor is amortized by the average remaining
service period of participating employees expected to receive benefits under the plan.
The changes in the projected benefit obligation are as follows:
Change in Projected Benefit/Accumulated Benefit Obligation
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
1. Benefit Obligation at Beginning of Year
$
349,483
$
379,324
$
16,423
$
18,225
2. Company Service Cost
3. Interest Cost
4. Plan Participants' Contributions
5. Net Actuarial (Gain)/Loss due to Assumption Changes
6. Net Actuarial (Gain)/Loss due to Plan Experience
7. Benefit Payments from Fund (1)
8. Benefit Payments Directly by Company
9. Plan Amendments
10. Other Adjustment
9,130
15,906
—
14,450
5,428
(21,831)
(2,669)
16
(105)
10,256
15,847
—
(24,118)
7,155
(32,646)
(7,661)
19
1,307
751
704
408
497
357
(1,678)
—
—
(84)
833
697
361
(2,083)
(397)
(1,147)
—
—
(66)
11. Benefit Obligation at End of Year
$
369,808
$
349,483
$
17,378
$
16,423
(1)
Includes lump sum payments of $11.2 million and $22.4 million in 2016 and 2015, respectively, from our pension plan to
eligible participants, which were former employees with vested benefits.
The increase in our pension and supplemental executive retirement plans obligation in 2016 compare to 2015
was primarily due to a decrease in the discount rate used to calculate the obligation and a lower amount of
benefits paid from the fund. The increase in our other postretirement plan obligation was primarily due a
decrease in the discount rate used to calculate the obligation.
The changes in the fair value of the net assets available for plan benefits are as follows:
Change in Plan Assets
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
1. Fair Value of Plan Assets at Beginning of Year
$
350,107
$
378,701
$
65,568
$
66,940
2. Company Contributions
3. Plan Participants' Contributions
4. Benefit Payments from Fund
5. Benefit Payments paid directly by Company
6. Actual Return on Assets
7. Other Adjustment
11,369
17,311
—
—
408
—
361
—
(21,831)
(2,669)
23,924
—
(32,646)
(1,678)
(1,147)
(7,661)
(5,094)
(504)
—
6,518
(408)
—
(225)
(361)
8. Fair Value of Plan Assets at End of Year
$
360,900
$
350,107
$
70,408
$
65,568
MGIC Investment Corporation 2016 Annual Report | 99
Notes
Change in Accumulated Other Comprehensive Income (Loss) ("AOCI")
(In thousands)
1. AOCI in Prior Year
2. Increase/(Decrease) in AOCI
a. Recognized during year - Prior Service (Cost)/Credit
b. Recognized during year - Net Actuarial (Losses)/Gains
c. Occurring during year - Prior Service Cost
d. Occurring during year - Net Actuarial Losses/(Gains)
e. Occurring during year - Net Settlement Losses/(Gains)
f. Other adjustments
3. AOCI in Current Year
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
$
92,647
$
89,390
$
(23,951) $
(33,511)
687
(5,856)
16
15,358
(1,277)
—
845
(5,485)
19
11,050
(3,172)
—
6,649
—
—
(777)
—
—
6,649
175
—
2,736
—
—
$
101,575
$
92,647
$
(18,079) $
(23,951)
Amortizations Expected to be Recognized During Next Fiscal Year Ending
(In thousands)
Pension and
Supplemental
Executive
Retirement Plans
Other
Postretirement
Benefits
12/31/2017
12/31/2017
1. Amortization of Net Transition Obligation/(Asset)
$
— $
2. Amortization of Prior Service Cost/(Credit)
3. Amortization of Net Losses/(Gains)
(428)
6,141
—
(6,649)
—
The projected benefit obligations, net periodic benefit costs and accumulated postretirement benefit
obligation for the plans were determined using the following weighted average assumptions.
Actuarial Assumptions
Weighted-Average Assumptions Used to Determine
Benefit Obligations at year end
1. Discount Rate
2. Rate of Compensation Increase
Weighted-Average Assumptions Used to Determine
Net Periodic Benefit Cost for Year
1. Discount Rate
2. Expected Long-term Return on Plan Assets
3. Rate of Compensation Increase
Assumed Health Care Cost Trend Rates at year end
1. Health Care Cost Trend Rate Assumed for Next Year
2. Rate to Which the Cost Trend Rate is Assumed to Decline
(Ultimate Trend Rate)
3. Year That the Rate Reaches the Ultimate Trend Rate
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
4.30%
3.00%
4.65%
3.00%
3.95%
N/A
4.30%
N/A
4.65%
5.75%
3.00%
N/A
N/A
N/A
4.25%
5.75%
3.00%
N/A
N/A
N/A
4.30%
7.50%
N/A
4.00%
7.50%
N/A
6.50%
7.00%
5.00%
2020
5.00%
2020
100 | MGIC Investment Corporation 2016 Annual Report
Notes
data
including market
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
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. In addition, on a quarterly basis, we
perform quality controls over values received from
the pricing source (the “Trustee”) which include
comparing values to other independent pricing
sources. In addition, we review annually the Trustee’ s
auditor’ s report on internal controls in order to
determine
their controls around valuing
securities are operating effectively. We have not
made any adjustments to the prices obtained from
the independent sources.
that
The following table sets forth by level, within the fair
value hierarchy, the pension plan assets at fair value
as of December 31, 2016 and 2015. There were no
securities that utilized Level 3 inputs.
Pension Plan
Assets at Fair Value as of December 31, 2016
(In thousands)
Level 1
Level 2
Total
Domestic Mutual
Funds
Corporate Bonds
U.S. Government
Securities
Municipal Bonds
Foreign Bonds
ETFs
Pooled Equity
Accounts
$ 11,805
$
— $ 11,805
—
178,412
178,412
6,761
—
—
5,694
354
63,492
27,917
—
7,115
63,492
27,917
5,694
—
66,465
66,465
Total Assets at fair
value
$ 24,260
$ 336,640
$ 360,900
In selecting a discount rate, we performed a
hypothetical cash flow bond matching exercise,
matching our expected pension plan and
postretirement medical plan cash flows, respectively,
against a selected portfolio of high quality corporate
bonds. The modeling was performed using a bond
portfolio of noncallable bonds with at least $50
million outstanding. The average yield of these
hypothetical bond portfolios was used as the
benchmark for determining the discount rate. In
selecting the expected long-term rate of return on
assets, we considered the average rate of earnings
expected on the classes of funds invested or to be
invested to provide for the benefits of these plans.
This included considering the trusts' targeted asset
allocation for the year and the expected returns likely
to be earned over the next 20 years.
The year-end asset allocations of the plans are as
follows:
Plan Assets
1. Equity
Securities
2. Debt
Securities
3. Total
Pension Plan
Other Postretirement
Benefits
12/31/2016
12/31/2015
12/31/2016
12/31/2015
23%
20%
100%
100%
77%
100%
80%
100%
—%
100%
—%
100%
In accordance with fair value guidance, we applied
the following fair value hierarchy in order to measure
fair value of our benefit plan assets:
Level 1 – Quoted prices for identical instruments
in active markets that we can access. Financial
assets utilizing Level 1 inputs include equity
securities, mutual funds, money market funds,
certain U.S. Treasury securities and exchange
traded funds ("ETFs").
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 instrument.
The observable inputs are used in valuation
models to calculate the fair value of the
instruments. Financial assets utilizing Level 2
inputs include certain municipal, corporate and
foreign bonds, obligations of U.S. government
corporations and agencies, and pooled equity
accounts.
To determine the fair value of securities 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
MGIC Investment Corporation 2016 Annual Report | 101
Notes
Pension Plan
Assets at Fair Value as of December 31, 2015
(In thousands)
Level 1
Level 2
Total
following
table sets
the other
The
postretirement benefits plan assets at fair value as
of December 31, 2016 and 2015. All are Level 1
assets.
forth
Domestic Mutual
Funds
Corporate Bonds
U.S. Government
Securities
Municipal Bonds
Foreign Bonds
ETFs
Pooled Equity
Accounts
Total Assets at fair
value
$
1,442
$
— $
1,442
—
188,332
188,332
Other Postretirement Benefits Plan
3,133
—
—
5,676
497
61,206
25,251
—
3,630
61,206
25,251
5,676
—
64,570
64,570
Assets at Fair Value as of December 31, 2016
(In thousands)
Level 1
Total
Domestic Mutual Funds
$ 54,426
$ 54,426
International Mutual Funds
15,982
15,982
Total Assets at fair value
$ 70,408
$ 70,408
$ 10,251
$ 339,856
$ 350,107
Other Postretirement Benefits Plan
The pension plan has implemented a strategy to
reduce risk through the use of a targeted funded ratio.
The liability driven component is key to the asset
allocation. The liability driven component seeks to
align the duration of the fixed income asset allocation
with the expected duration of the plan liabilities or
is
benefit payments. Overall asset allocation
dynamic and specifies target allocation weights and
ranges based on the funded status.
An improvement in funded status results in the de-
risking of the portfolio, allocating more funds to fixed
income and less to equity. A decline in funded status
would result in a higher allocation to equity. The
maximum equity allocation is 40%.
The equity investments utilize combinations of
mutual funds, ETFs, and pooled equity account
structures focused on the following strategies:
Strategy
Objective
Investment types
Return
seeking
growth
Return
seeking
bridge
Funded ratio
improvement
over the long
term
Downside
protection in the
event of a
declining equity
market
Global quality growth
Global low volatility
Enduring asset
Durable company
agency,
government
The fixed income objective is to preserve capital and
to provide monthly cash flows for the payment of plan
liabilities. Fixed income investments can include
government,
corporate,
mortgage-backed, asset-backed, and municipal
securities, and other classes of bonds. The duration
of the fixed income portfolio has an objective of being
within one year of the duration of the accumulated
benefit obligation. The fixed income investments
have an objective of a weighted average credit of A3/
A-/A- by Moody’ s, S&P, and Fitch, respectively.
Assets at Fair Value as of December 31, 2015
(In thousands)
Level 1
Total
Domestic Mutual Funds
$ 49,887
$ 49,887
International Mutual Funds
15,681
15,681
Total Assets at fair value
$ 65,568
$ 65,568
Our postretirement plan portfolio is designed to
achieve the following objectives over each market
cycle and for at least 5 years:
• Total return should exceed growth
Consumer Price Index by 5.75% annually
in the
• Achieve competitive investment results
The primary focus in developing asset allocation
ranges for the portfolio is the assessment of the
portfolio's investment objectives and the level of risk
that is acceptable to obtain those objectives. To
achieve these goals the minimum and maximum
allocation ranges for fixed income securities and
equity securities are:
Equities (long only)
Real estate
Commodities
Fixed income/Cash
Minimum
Maximum
70%
0%
0%
0%
100%
15%
10%
10%
Given the long term nature of this portfolio and the
lack of any immediate need for significant cash flow,
it is anticipated that the equity investments will
consist of growth stocks and will typically be at the
higher end of the allocation ranges above.
Investment in international mutual funds is limited to
a maximum of 30% of the equity range. The allocation
as of December 31, 2016 included 3% that was
primarily invested in equity securities of emerging
market countries and another 20% was invested in
securities of companies primarily based in Europe
and the Pacific Basin.
102 | MGIC Investment Corporation 2016 Annual Report
The following tables show the current and estimated
future contributions and benefit payments.
Company Contributions
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2016
12/31/2016
Company
Contributions for the
Year Ending:
1. Current
2. Current + 1
$
11,369
$
9,500
—
—
Notes
Profit sharing and 401(k)
We have a profit sharing and 401(k) savings plan for
employees. At the discretion of the Board of
Directors, we may make a contribution of up to 5% of
each participant's eligible compensation. We provide
for
a matching 401(k) savings contribution
employees on their before-tax contributions at a rate
of 80% of the first $1,000 contributed and 40% of the
next $2,000 contributed. For employees hired after
January 1, 2014, the match is 100% up to 4%
contributed. We recognized expenses related to
these plans of $5.9 million, $5.1 million and $5.0
million in 2016, 2015 and 2014, respectively.
Benefit Payments (Total)
Note 12. Income Taxes
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
Net deferred tax assets and
December 31, 2016 and 2015 are as follows:
liabilities as of
(In thousands)
2016
2015
(In thousands)
12/31/2016
12/31/2016
Total deferred tax assets
$ 636,449
$
791,286
Actual Benefit
Payments for the
Year Ending:
1. Current
$
24,500
$
1,355
Expected Benefit
Payments for the
Year Ending:
2. Current + 1
3. Current + 2
4. Current + 3
5. Current + 4
6. Current + 5
21,831
23,439
26,927
27,199
27,151
7. Current + 6 - 10
146,471
847
978
1,068
1,257
1,410
8,574
Health care sensitivities
For measurement purposes, a 7.0% health care trend
rate was used for benefits for retirees before they
reach age 65 years for 2016. In 2017, the rate is
assumed to be 6.5%, decreasing to 5.0% by 2020 and
remaining at this level beyond.
Assumed health care cost trend rates have a
significant effect on the amounts reported for the
other postretirement benefits plan. A 1 percentage
point change in the health care trend rate assumption
would have
following effects on other
postretirement benefits:
the
1-Percentage
Point Increase
1-Percentage
Point Decrease
$
237
$
(205)
(In thousands)
Effect on total service
and interest cost
components
Effect on
postretirement benefit
obligation
Total deferred tax liabilities
(28,794)
(29,206)
Net deferred tax asset
$ 607,655
$
762,080
The components of the net deferred tax asset as of
December 31, 2016 and 2015 are as follows:
(In thousands)
2016
2015
Unearned premium reserves
$
40,153
$
33,262
Benefit plans
Federal net operating loss
Loss reserves
Unrealized depreciation in
investments
Mortgage investments
Deferred compensation
Other, net
(12,350)
(14,283)
520,812
10,883
680,975
15,536
11,211
17,751
12,517
6,678
8,904
17,386
12,927
7,373
Net deferred tax asset
607,655
762,080
We review the need to maintain a deferred tax asset
valuation allowance on a quarterly basis. We analyze
several factors, among which are the severity and
frequency of operating losses, our capacity for the
losses, the
carryback or carryforward of any
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 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.
2,382
(2,102)
In the third quarter of 2015, we concluded that it was
more likely than not that our deferred tax assets
MGIC Investment Corporation 2016 Annual Report | 103
Notes
would be fully realizable and that the valuation
allowance was no longer necessary and we reversed
the valuation allowance.
For the year ended
December 31, 2015, we reversed $161.1 million of our
valuation allowance based on income from 2015. The
portion of the valuation allowance reversed related to
deferred tax assets that are expected to be realized
in future years, totaling $747.5 million, is treated as a
is recognized as a
discrete period
component of the tax provision
in continuing
operations in the period of release. Furthermore, in
determining the discrete period impact from the
reversal, we
period
disproportionate tax effects that had arisen in other
comprehensive income because of the valuation
allowance. This reduced the amount of tax benefit
included in net income and resulted in an allocation
of tax benefit of $60.8 million to components of other
comprehensive income.
item and
removed
prior
the
The following table provides a rollforward of our
deferred tax asset valuation allowance for the year
ended December 31, 2015.
(In millions)
Balance at December 31, 2014
For the year
ended
December
31, 2015
$
902.3
Reduction in tax provision in current year
(161.1)
Amounts recorded in other comprehensive
income in the current year
Change in valuation allowance for
deferred tax assets in the current year
Reduction in tax provision for amounts to
be realized in future years
Amounts recorded in other comprehensive
income to be realized in future years
Change in valuation allowance for
deferred tax assets realizable in future
years
6.3
(154.8)
(686.7)
(60.8)
The total valuation allowance as of December 31,
2014 was $902.3 million. The remaining valuation
allowance was reversed in the third quarter of 2015.
The change in the valuation allowance that was
included in other comprehensive income was a
decrease of $54.5 million, and $13.1 million for the
years ended December 31, 2015 and 2014,
respectively.
Giving full effect to the carryback of net operating
losses for federal income tax purposes, we have
approximately $1,489 million of net operating loss
("NOL") carryforwards on a regular tax basis and $589
million of net operating loss carryforwards for
computing the alternative minimum tax as of
December 31, 2016. Any unutilized carryforwards are
scheduled to expire at the end of tax years 2030
through 2033.
The following summarizes the components of the
provision for (benefit from) income taxes:
(In thousands)
2016
2015
2014
Current Federal
$
9,470
$
8,067
$
2,391
Deferred Federal
160,657
(686,652)
Other
2,070
(5,728)
1
382
Provision for
(benefit from)
income taxes
$ 172,197
$(684,313) $
2,774
We paid $4.5 million, $5.4 million, and $1.3 million in
federal
in 2016, 2015 and 2014,
respectively.
income tax
The reconciliation of the federal statutory income tax
rate to the effective tax provision (benefit) rate is as
follows:
2016
2015
2014
Federal statutory
income tax rate
35.0 %
35.0 %
35.0 %
(747.5)
Valuation allowance
— %
(173.8)%
(34.9)%
Balance at December 31, 2015
$
—
The effect of the change in valuation allowance on
the provision for (benefit from) income taxes was as
follows:
(In thousands)
2016
2015
2014
Provision for income
taxes before
valuation allowance
Change in valuation
allowance
Reversal of the
valuation allowance
Provision for
(benefit from)
income taxes
$ 172,197
$ 163,497
$ 91,607
—
—
(161,158)
(88,833)
(686,652)
—
$ 172,197
$(684,313) $
2,774
Tax exempt municipal
bond interest
Other, net
Effective tax
provision (benefit)
rate
(1.9)%
0.4 %
(0.8)%
(0.7)%
(0.4)%
1.4 %
33.5 %
(140.3)%
1.1 %
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.
104 | MGIC Investment Corporation 2016 Annual Report
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 December 31, 2016,
there would also be interest related to these matters
of approximately $200.6 million. In 2007, we made a
payment of $65.2 million to the United States
Department of the Treasury which will reduce any
amounts we would ultimately owe. The Notices of
Deficiency also reflect additional amounts due of
$261.4 million, which are primarily associated with
the disallowance of the carryback of the 2009 net
operating loss to the 2004-2007 tax years. We believe
the IRS included the carryback adjustments as a
precaution to keep open the statute of limitations on
collection of the tax that was refunded when this loss
was carried back, and not because the IRS actually
intends to disallow the carryback permanently.
Depending on the outcome of this matter, additional
state income taxes and state interest may become
due when a final resolution is reached. As of
December 31, 2016, those state taxes and interest
would approximate $50.7 million. In addition, there
could also be state tax penalties. Our total amount of
unrecognized tax benefits as of December 31, 2016
is $108.2 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 filed a petition with the U.S. Tax Court contesting
most of the IRS’ proposed adjustments reflected in
the Notices of Deficiency and the IRS filed an answer
to our petition which continued to assert their claim.
The case has twice been scheduled for trial and in
each instance, the parties jointly filed, and the U.S.
Tax Court approved (most recently in February 2016),
motions for continuance to postpone the trial date.
Also in February 2016, the U.S. Tax Court approved a
joint motion to consolidate for trial, briefing, and
opinion, our case with similar cases of Radian Group,
Inc., as successor to Enhance Financial Services
Group, Inc., et al. In January 2017, the parties
informed the Tax Court that they had reached a basis
for settlement of the major issues in the case. Any
agreed settlement terms will ultimately be subject to
review by the Joint Committee on Taxation ("JCT")
before a settlement can be completed and there is no
assurance that a settlement will be completed. Based
on information that we currently have regarding the
status of our ongoing dispute, we expect to record a
provision for additional taxes and interest of $15 to
$25 million in the first quarter of 2017.
Notes
to make
Should a settlement not be completed, ongoing
litigation to resolve our dispute with the IRS could be
lengthy and costly in terms of legal fees and related
expenses. We would need
further
adjustments, which could be material, to our tax
provision and liabilities if our view of the probability
of success in this matter changes, and the ultimate
resolution of this matter could have a material
negative impact on our effective tax rate, results of
operations, cash flows, available assets and statutory
capital. In this regard, see Note 14 - "Statutory
Information."
In October 2014, we received a Revenue Agent’ s
Report from the IRS related to the examination of our
federal income tax returns for the years 2011 and
2012. The result of this examination had no material
effect on the financial statements.
Under current guidance, when evaluating a tax
position for recognition and measurement, an entity
shall presume that the tax position will be examined
by the relevant taxing authority that has full
information. The
relevant
knowledge of all
interpretation adopts a benefit recognition model
with a two-step approach, a more-likely-than-not
threshold for recognition and derecognition, and a
measurement attribute that is the greatest amount of
benefit that is cumulatively greater than 50% likely of
being realized. A reconciliation of the beginning and
ending amount of unrecognized tax benefits is as
follows:
(In thousands)
2016
2015
2014
Balance at beginning
of year
Additions based on
tax positions related
to the current year
Additions for tax
positions of prior
years
Reductions for tax
positions of prior
years
Settlements
$107,120
$ 106,230
$ 105,366
—
—
—
1,125
890
864
—
—
—
—
—
—
Balance at end of year
$108,245
$ 107,120
$ 106,230
The total amount of the unrecognized tax benefits,
related to our aforementioned REMIC issue, which
would affect our effective tax rate, is $94.6 million.
We recognize interest accrued and penalties related
to unrecognized tax benefits in income taxes. During
2016, we recognized $1.1 million in interest. As of
December 31, 2016 and 2015, we had $28.9 million
and $27.8 million of accrued interest related to
uncertain tax positions, respectively. The statute of
limitations related to the consolidated federal income
tax return is closed for all years prior to 2000. It is
MGIC Investment Corporation 2016 Annual Report | 105
Notes
reasonably possible that our 2000-2007 federal tax
case will be resolved, other than through litigation. If
it is resolved under the basis of settlement as
disclosed above, our total unrecognized tax benefits
would be reduced by $108.2 million during 2017. After
taking into account prior payments and the effect of
available net operating loss carrybacks, any net cash
outflows would approximate $52 million.
Note 13. Shareholders' Equity
As described in Note 7 - "Debt", we entered into
privately negotiated agreements to repurchase, for
cash, together with, in certain cases, shares of our
common stock, $292.4 million aggregate principal
amount of our outstanding 2% Notes. We issued
approximately 18.3 million shares of our common
stock as partial consideration under
these
agreements. As of December 31, 2016 we have
repurchased all of the shares issued as partial
consideration for our 2% Notes repurchases. The
the share
weighted average price paid
repurchases was
includes
commissions, and the aggregate purchase amount
was $147.1 million.
$8.03, which
for
As described in Note 7 - "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 $6.3 million as of December 31, 2016.
This reduction represents the allocated portion of the
consideration paid to reacquire the equity component
of the 9% Debentures, net of tax. 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.
Our Amended and Restated Rights Agreement dated
July 23, 2015 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
106 | MGIC Investment Corporation 2016 Annual Report
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
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. Statutory Information
Statutory Accounting Principles
The statutory financial statements of our insurance
companies are presented on the basis of accounting
practices prescribed or permitted by the Office of the
Commissioner of Insurance of the State of Wisconsin
(the
"OCI"), which has adopted the National
Association of Insurance Commissioners ("NAIC")
statutory accounting practices as the basis of its
In
statutory accounting practices
converting
typical
adjustments include deferral of policy acquisition
costs, the inclusion of net unrealized holding gains or
losses in shareholders' equity relating to fixed
maturities and the
inclusion of statutory non-
admitted assets.
from statutory
to GAAP,
("SSAP").
In addition to the typical adjustments from statutory
to GAAP, mortgage insurance companies are required
to maintain contingency loss reserves equal to 50%
of premiums earned under SSAP and practices
prescribed by the OCI, Such amounts cannot be
withdrawn for a period of ten years except as
permitted by insurance regulations. With regulatory
approval a mortgage guaranty insurance company
may make early withdrawals from the contingency
reserve when incurred losses exceed 35% of net
premiums earned in a calendar year. For the year
ended 2016, MGIC's losses incurred were 26% of net
premiums earned. Changes in contingency loss
the statutory statement of
reserves
impact
operations. Contingency
loss reserves are not
reflected as liabilities under GAAP and changes in
contingency loss reserves do not impact the GAAP
statements of operations. A premium deficiency
reserve that may be recorded on a GAAP basis when
the present value of expected future losses and
expenses exceeds the present value of expected
future premiums and already established
loss
reserves, may not be recorded on a statutory basis if
the present value of expected future premiums and
already established loss reserves and statutory
contingency reserves, exceeds the present value of
expected future losses and expenses. On a GAAP
basis, when calculating a premium deficiency reserve
policies are grouped based on how they are acquired,
serviced and measured. On a statutory basis, a
premium deficiency reserve is calculated on all
policies in force.
The statutory net
income (loss), policyholders'
surplus and contingency reserve liability of the
insurance subsidiaries of our holding company are
show in the following table. The statutory net loss in
2015 was driven by the dissolution of an MGIC non-
insurance subsidiary. The surplus amounts included
in the following table are the combined policyholders'
surplus of our insurance operations as utilized in our
risk-to-capital calculations.
As of and for the Years Ended
December 31,
(In thousands)
2016
2015
2014
Statutory net
income (loss)
Statutory
policyholders'
surplus
Contingency
reserve
$ 106,326
$ (72,767) (1) $ 13,203
1,506,475
1,608,214
1,585,164
(1)
1,360,088
826,706
318,247
(1)
The dissolution of an MGIC non-insurance subsidiary in
2015 had no impact on statutory surplus as the equity
value of the investment was fully reflected in surplus as
an unrealized loss prior to 2015.
The surplus contributions made to MGIC and
dividends paid by MGIC and distributions from other
insurance subsidiaries to us, are shown in the table
below.
(In thousands)
2016
2015
2014
Years Ended December 31,
Additions to the surplus
of MGIC from parent
company funds
Dividends paid by MGIC
to the parent company
Distributions from other
insurance subsidiaries
to the parent company
$ 36,025
$ 64,000
—
—
$ 52,001
38,500
—
—
—
Notes
the
Statutory Capital Requirements
The insurance laws of 16 jurisdictions, including
Wisconsin, our domiciliary state, require a mortgage
insurer to maintain a minimum amount of statutory
capital relative to the RIF (or a similar measure) in
order for the mortgage insurer to continue to write
new business. We refer to these requirements as the
“State Capital Requirements” and, together with the
GSE Financial Requirements,
“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
instead requires a
risk-to-capital measure but
("MPP"). The
minimum policyholder position
“policyholder position” of a mortgage insurer is its net
worth or surplus, contingency reserve and a portion
of the reserves for unearned premiums.
At December 31, 2016, MGIC’ s risk-to-capital ratio
was 10.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $1.6 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
reinsurance agreement, without
terminate
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.
the
At December 31, 2016, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 12.0 to 1. Reinsurance
transactions with our affiliate permit MGIC to write
insurance with a higher coverage percentage than it
could on
its own under certain state-specific
requirements. A higher risk-to-capital ratio on a
combined basis may indicate that, in order for MGIC
to continue to utilize reinsurance arrangements with
its
capital
contributions to the affiliate could be needed.
reinsurance
additional
affiliate,
The NAIC previously announced that it plans to revise
the minimum capital and surplus requirements for
mortgage insurers that are provided for in its
MGIC Investment Corporation 2016 Annual Report | 107
Notes
Mortgage Guaranty Insurance Model Act. In May
2016, a working group of state regulators released an
exposure draft of a risk-based capital framework to
establish capital requirements for mortgage insurers,
although no date has been established by which the
the capital
NAIC must propose revisions
requirements. We continue to evaluate the impact of
the framework contained in the exposure draft,
including the potential impact of certain items that
have not yet been completely addressed by the
framework which include: the treatment of ceded risk,
minimum capital floors, and action level triggers.
Currently we believe that the PMIERs contain the
more restrictive capital requirements
in most
circumstances.
to
While MGIC currently meets the State Capital
Requirements of Wisconsin and all other
jurisdictions, it could be prevented from writing new
business in the future in all jurisdictions if it fails to
meet the State Capital Requirements of Wisconsin,
or it could be prevented from writing new business in
a particular jurisdiction if it fails to meet the State
Capital Requirements of that jurisdiction and in each
case MGIC does not obtain a waiver of such
requirements. It is possible that regulatory action by
one or more jurisdictions, including those that do not
have specific State Capital Requirements, may
prevent MGIC from continuing to write new insurance
in such jurisdictions. If we are unable to write
business in all jurisdictions, lenders may be unwilling
to procure insurance from us anywhere. In addition,
a lender’ s assessment of the future ability of our
insurance operations to meet the State Capital
Requirements or
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 IIF 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.
the PMIERs may affect
Dividend restrictions
In 2016, MGIC paid a total of $64 million in dividends
to our holding company, its first dividends since 2008,
and we expect MGIC to continue to pay quarterly
dividends. During 2016, distributions of $52 million
were paid to our holding company from other
insurance subsidiaries. These distributions were
completed in conjunction with the transfer of risk and
the final dissolution of those insurance entities during
2016. Our
subsequently
contributed the majority of the funds to MGIC in
relation to the transfer of risk. During 2015,
company
holding
108 | MGIC Investment Corporation 2016 Annual Report
distributions of $38.5 million were paid to our holding
company from other insurance subsidiaries.
MGIC is subject to statutory regulations as to
payment of dividends. The maximum amount of
dividends that MGIC may pay in any twelve-month
period without regulatory approval by the OCI is the
lesser of adjusted statutory net income or 10% of
statutory policyholders' surplus as of the preceding
calendar year end. Adjusted statutory net income is
defined for this purpose to be the greater of statutory
net income, net of realized investment gains, for the
calendar year preceding the date of the dividend or
statutory net income, net of realized investment
gains, for the three calendar years preceding the date
of the dividend less dividends paid within the first two
of the preceding three calendar years. The 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,
2016, MGIC’ s statutory net income was reduced by
$490 million to account for the
in
contingency reserves.
increase
Note 15. Share-based Compensation
Plans
We have certain share-based compensation plans.
Under the fair value method, compensation cost is
measured at the grant date based on the fair value of
the award and is recognized over the service period
which generally corresponds to the vesting period.
The fair value of awards classified as liabilities is
remeasured at each reporting period until the award
is settled. Awards under our plans generally vest over
periods ranging from one to three years.
We have an omnibus incentive plan that was adopted
on April 23, 2015. When the 2015 plan was adopted,
no further awards could be made under our previous
2011 plan. The purpose of the 2015 plan is to
motivate and incent performance by, and to retain the
services of, key employees and non-employee
directors through receipt of equity-based and other
incentive awards under the plan. The maximum
number of shares of stock that can be awarded under
the 2015 plan is 10.0 million. Awards issued under
the plan that are subsequently forfeited will not count
against the limit on the maximum number of shares
that may be issued under the plan. The 2015 plan
provides for the award of stock options, stock
appreciation rights, restricted stock and restricted
stock units, as well as cash incentive awards. No
awards may be granted after April 23, 2025 under the
2015 plan. The vesting provisions of options,
restricted stock and restricted stock units are
determined at the time of grant. Shares issued under
the 2015 plan will be newly issued shares.
The compensation cost that has been charged
against income for share-based plans was $11.4
million, $11.9 million, and $9.2 million for the years
ended December 31, 2016, 2015 and 2014,
tax benefit
respectively. The
recognized for share-based plans was $4.0 million
and $4.2 million for the years ended December 31,
2016 and 2015, respectively. The related income tax
benefit, before valuation allowance, recognized for
share-based plans was, and $3.2 million for the year
ended December 31, 2014.
income
related
Notes
vested shares. A portion of the unrecognized costs
associated with the performance shares may or may
not be recognized in future periods, depending upon
whether or not the performance and service
conditions are met. The cost associated with the time
vested shares is expected to be recognized over a
weighted-average period of 1.3 years.
At December 31, 2016, 8.3 million shares were
available for future grant under the 2015 omnibus
incentive plan.
Note 16. Leases
We lease certain office space as well as data
processing equipment and autos under operating
leases that expire during the next five years. Generally,
rental payments are fixed.
Total rental expense under operating leases was $2.1
million in 2016, $2.2 million in 2015, and $2.8 million
in 2014.
A summary of restricted stock or restricted stock unit
(collectively called “restricted stock”) activity during
2016 is as follows:
At December 31, 2016, minimum future operating
lease payments are as follows (in thousands):
Weighted
Average Grant
Date Fair
Market Value
Shares
Restricted stock
outstanding at December
31, 2015
$
Granted
Vested
Forfeited
7.97
5.66
7.00
4.24
3,319,467
1,689,300
(1,707,711)
(154,384)
Restricted stock
outstanding at December
31, 2016
$
7.44
3,146,672
At December 31, 2016, the 3.1 million shares of
restricted stock outstanding consisted of 2.3 million
shares that are subject to performance conditions
(“performance shares”) and 0.8 million shares that
are subject only to service conditions (“time vested
shares”). The weighted-average grant date fair value
of restricted stock granted during 2015 and 2014 was
$9.03 and $8.43, respectively. The fair value of
restricted stock granted is the closing price of the
common stock on the New York Stock Exchange on
the date of grant. The total fair value of restricted
stock vested during 2016, 2015 and 2014 was $12.2
million, $17.2 million, and $12.1 million, respectively.
As of December 31, 2016, there was $11.7 million of
total unrecognized compensation cost related to non-
vested share-based compensation agreements
granted under the plans. Of this total, $8.9 million of
unrecognized compensation costs
to
performance shares and $2.8 million relates to time
relate
2017
2018
2019
2020
2021 and thereafter
Total
$
$
665
676
688
490
46
2,565
Note 17. Litigation and Contingencies
Before paying an insurance claim, we review the loan
and servicing files to determine the appropriateness
of the claim amount. When reviewing the files, we may
determine that we have the right to rescind coverage
on the loan. We refer to insurance rescissions and
denials of claims collectively as “rescissions” and
variations of that term. In addition, 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 2016, curtailments
reduced our average claim paid by approximately
6.7% and 5.5%, respectively.
Our loss reserving methodology incorporates our
estimates of future rescissions, curtailments, and
reversals of rescissions and curtailments. A variance
between ultimate actual rescission, curtailment, and
reversal rates and our estimates, as a result of the
outcome of litigation, settlements or other factors,
could materially affect our losses.
MGIC Investment Corporation 2016 Annual Report | 109
the
terms of
Through a non-insurance subsidiary, we utilize our
to provide an outsourced
underwriting skills
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 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 related contract underwriting
remedy expense for the years ended December 31,
2016, 2015, and 2014, respectively, was immaterial
to our consolidated financial statements.
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
consolidated results of operations.
See Note 12 – “Income Taxes” for a description of
federal income tax contingencies.
Notes
When the insured disputes our right to rescind
coverage or curtail claims, we generally engage in
discussions in an attempt to settle the dispute. If we
are unable to reach a settlement, the outcome of a
dispute ultimately would be determined by legal
proceedings.
Under ASC 450-20, until a liability associated with
settlement discussions or
legal proceedings
becomes probable and can be reasonably estimated,
we consider our claim payment or rescission resolved
for financial reporting purposes and do not accrue an
estimated loss. Where we determine that a loss is
probable and can be reasonably estimated we have
recorded our best estimate of our probable loss. If we
are not able to implement settlements we consider
probable, we intend to defend MGIC vigorously
against any related legal proceedings.
In addition to matters for which we have recorded a
probable loss, we are involved in other discussions
and/or proceedings with insureds with respect to our
claims paying practices. Although it is reasonably
possible that when these matters are resolved we will
not prevail in all cases, we are unable to make a
reasonable estimate or range of estimates of the
potential
the maximum
exposure associated with matters where a loss is
reasonably possible to be approximately $295
million, although we believe (but can give no
assurance that) we will ultimately resolve these
matters for significantly less than this amount. This
estimate of our maximum exposure does not include
interest or consequential or exemplary damages.
liability. We estimate
insurers,
Mortgage
including MGIC, have been
involved in litigation and regulatory actions related to
alleged violations of the anti-referral fee provisions of
RESPA, and the notice provisions of the FCRA.
While these proceedings in the aggregate have not
resulted in material liability for MGIC, there can be no
assurance that the outcome of future proceedings
under these laws, if any, would have a material
adverse affect on us. In addition, various regulators,
including the CFPB, state insurance commissioners
and state attorneys general may bring other actions
seeking various forms of relief in connection with
alleged violations of RESPA. The insurance law
provisions of many states prohibit paying for the
referral of insurance business and provide various
mechanisms to enforce this prohibition. While we
believe our practices are in conformity with applicable
laws and regulations, it is not possible to predict the
eventual scope, duration or outcome of any such
reviews or investigations nor is it possible to predict
their effect on us or the mortgage insurance industry.
110 | MGIC Investment Corporation 2016 Annual Report
Note 18. Unaudited Quarterly Financial Data
2016:
Quarter
(In thousands, except per share data)
First
Second
Third
Fourth
Notes
Full
Year
Net premiums earned
$
221,341
$
231,456
$
237,376
$
235,053
$
925,226
28,094
110,666
Investment income, net of expenses
Realized gains
Other revenue
Loss incurred, net
Underwriting and other expenses, net
Loss on debt extinguishment
Provision for income tax
Net income
Income per share (a) (b):
Basic
Diluted
2015:
27,809
3,056
6,373
85,012
56,439
13,440
34,497
69,191
0.20
0.17
27,515
5,092
3,867
60,897
53,981
75,223
27,131
56,618
0.16
0.14
27,248
836
3,994
46,590
49,837
1,868
56,018
109,221
0.32
0.26
Quarter
(52)
3,425
47,658
56,824
—
54,551
107,487
0.31
0.28
8,932
17,659
240,157
217,081
90,531
172,197
342,517
1.00
0.86
Full
Year
(In thousands, except per share data)
First
Second
Third
Fourth
Net premiums earned
$
217,288
$
213,508
$
239,234
$
226,192
$
896,222
Investment income, net of expenses
Realized (losses) gains
Other revenue
Loss incurred, net
Underwriting and other expenses, net
Loss on debt extinguishment
Provision for (benefit from) income tax
Net income
Income per share (a) (b):
Basic
Diluted
24,120
26,327
2,480
81,785
51,969
—
3,385
25,756
166
3,699
90,238
37,915
—
1,322
133,076
113,654
25,939
640
3,698
76,458
65,805
—
(695,604)
822,852
27,926
1,228
3,087
95,066
53,858
507
6,584
103,741
28,361
12,964
343,547
209,547
507
(684,313)
102,418
1,172,000
0.39
0.32
0.33
0.28
2.42
1.78
0.30
0.24
3.45
2.60
(a) Due to the use of weighted average shares outstanding when calculating earnings per share, the sum of the quarterly per
share data may not equal the per share data for the year.
(b)
In periods where convertible debt instruments are dilutive to earnings per share the “if-converted” method of computing
diluted EPS requires an interest expense adjustment, net of tax, to net income available to shareholders. The interest expense
adjustment was not tax effected for the first and second quarter of 2015 due to our valuation allowance on deferred tax
assets. See Note 4 – “Earnings Per Share” for further discussion on our calculation of diluted EPS.
MGIC Investment Corporation 2016 Annual Report | 111
Directors
Daniel A. Arrigoni
Former President & Chief
Executive Officer
U.S. Bank Home Mortgage Corp.
Home loan originator
and servicer
Cassandra C. Carr
Consultant
C. Edward Chaplin
Former President & CFO
MBIA Inc.
Provider of financial guarantee
insurance
Officers
MGIC Investment Corporation
President &
Chief Executive Officer
Patrick Sinks
Executive Vice Presidents
Jeffrey H. Lane
General Counsel and Secretary
Curt S. Culver
Chairman
Former Chief Executive Officer
MGIC Investment Corporation
Timothy A. Holt
Former Senior Vice President &
Chief Investment Officer
Aetna, Inc.
Diversified health care benefits
company
Kenneth M. Jastrow, II
Corporate Director & Private Investor
Former Chairman &
Chief Executive Officer
Temple-Inland Inc.
Paper & forest products company
with previous financial services
and real estate interests
Michael E. Lehman
Interim Chief Information Officer
& Special Advisor to the
Chancellor
University of Wisconsin
Gary A. Poliner
Former President
Northwestern Mutual Life Ins. Co.
Financial services company
Patrick Sinks
President &
Chief Executive Officer
MGIC Investment Corporation
Mark M. Zandi
Chief Economist
Moody’ s Analytics, Inc.
Risk measurement and
management firm
Stephen C. Mackey
Chief Risk Officer
Timothy J. Mattke
Chief Financial Officer
Vice Presidents
Heidi A. Heyrman
Assistant Secretary
Lisa M. Pendergast
Treasurer
Brain M. Remington
Assistant Secretary
Julie K. Sperber
Controller & Chief Accounting
Officer
Paul A. Spiroff
Assistant Treasurer
Dan D. Stilwell
Assistant Secretary
Martha F. Tsuchihashi
Assistant Secretary
Mortgage Guaranty Insurance Corporation
President &
Chief Executive Officer
Patrick Sinks
Gary A. Antonovich
Internal Audit
Executive Vice Presidents
James J. Hughes
Sales and Business Development
Jeffrey H. Lane
General Counsel and Secretary
Stephen C. Mackey
Chief Risk Officer
Timothy J. Mattke
Chief Financial Officer
Salvatore A. Miosi
Business Strategies and
Operations
Senior Vice Presidents
Gregory A. Chi
Chief Information Officer
Sean A. Dilweg
Government Relations
Carla A. Gallas
Claims
Robert K. Bates
National Accounts
Robert J. Candelmo
Chief Technology Officer
Geoffrey F. Cooper
Product Development
Margaret M. Crowley
Marketing and Customer
Experience
Dean D. Dardzinski
Managing Director
Stephen M. Dempsey
Managing Director
Hans F. DeSelms
Loss Forecasting & Analytics
Sandra K. Dunst
Claims Operations
Edward G. Durant
Analytic Services
Kurt J. Thomas
Chief Human Resources Officer
Mary L. Elkins
Systems Development
Michael J. Zimmerman
Investor Relations
David A. Greco
Operational Risk
Vice Presidents
Terry A. Aikin
Managing Director
Heidi A. Heyrman
Regulatory Relations,
Assistant General Counsel and
Assistant Secretary
Eric B. Klopfer
Corporate Strategy
Mark J. Krauter
National Accounts
Michael L. Kull
National Accounts
Elyse M. Mitchell
National Accounts
Peter A. Semenak
Underwriting
Bryan D. Specht
Policy Acquisition & Servicing
Julie K. Sperber
Controller and
Chief Accounting Officer
Paul A. Spiroff
Investments
Jerome J. Murphy
Business Process Transformation
Stacey B. Murphy
Talent Management
Dan D. Stilwell
Chief Compliance Officer,
Assistant General Counsel and
Assistant Secretary
Jeffrey N. Nielsen
Financial Planning/Analysis
Steven M. Thompson
Credit Policy and Pricing
Lisa M. Pendergast
Treasurer
Christopher T. Perry
Sales
W. Todd Pittman
Managing Director
Brian M. Remington
Loss Mitigation Counsel &
Assistant Secretary
David H. Schroeder
Claims
John R. Schroeder
Risk Management
Martha F. Tsuchihashi
Securities Law Counsel,
Assistant General Counsel and
Assistant Secretary
Kathleen E. Valenti
Loss Mitigation
Carie L. Vos
Claims Administration
William E. Walker
Chief Information Security Officer
John S. Wiseman
Managing Director
Jerry L. Wormmeester
National Accounts
112 | MGIC Investment Corporation 2016 Annual Report
Performance Graph
The graph below compares the cumulative total return on (a) our Common Stock, (b) a composite peer group
index selected by us, (c) the Russell 2000 Financial Index and (d) the S&P 500.
Our peer group index consists of the peers against which we analyzed our 2016 executive compensation:
Ambac Financial Group, Inc., Arch Capital Group Ltd., Assured Guaranty Ltd., Essent Group Ltd., Fidelity
National Financial Inc., First American Financial Corp., Genworth Financial Inc., MBIA Inc., NMI Holdings Inc.
and Radian Group. We selected this peer group because it includes all of our direct competitors that were
public throughout 2016 and whose mortgage insurance operations are a significant part of their overall
business, financial guaranty insurers, and other financial services companies focused on the residential real
estate industry that are believed to be potential competitors for executive talent.
Russell 2000 Financial Index
S&P 500
Peer Index (AMBC, ACGL, AGO, ESNT, FNF, FAF,
GNW, MBI, NMIH, & RDN)
MGIC
2011
100
100
2012
121
116
100
100
125
71
2013
160
154
189
226
2014
174
174
187
250
2015
175
177
176
237
2016
229
198
214
273
MGIC Investment Corporation 2016 Annual Report | 113
MGIC Stock
MGIC Investment Corporation Common Stock is
listed on the New York Stock Exchange under the
symbol MTG. At June 2, 2017, 370,556,561 shares
were outstanding. The following table sets forth
for 2016 and 2015 by quarter the high and low sales
prices of the Common Stock on the New York Stock
Exchange.
2016
2015
Quarter
1st
2nd
3rd
4th
Low
Low
High
High
$ 8.72 $ 5.63 $ 9.96 $ 8.00
9.47
9.07
8.72
11.55
11.72
10.05
6.31
8.23
10.58
5.92
5.45
7.84
In October 2008, the Company’ s Board suspended
payment of our dividend. Accordingly, no cash
dividends were paid in 2016 or 2015. The payment
of future dividends is subject to the discretion of
our Board and will depend on many factors,
including our operating results, financial condition
and capital position. See Note 7 - “Debt” to our
consolidated financial statements for dividend
restrictions that apply when we elect to defer
interest on our Convertible Junior Debentures.
The Company is a holding company and the
payment of dividends
insurance
subsidiaries is restricted by insurance regulations.
For a discussion of these restrictions, see Note 14
- "Statutory Information, Dividend Restrictions” to
our consolidated financial statements.
from
its
As of June 2, 2016, the number of shareholders of
record was 213. In addition, we estimate that there
are approximately 39,700 beneficial owners of
shares held by brokers and fiduciaries.
Shareholder Information
The Annual Meeting
The Annual Meeting of Shareholders of MGIC
Investment Corporation will convene at 2 p.m.
Central Time on July 26, 2017, at the Corporation's
headquarters, 270 East Kilbourn Avenue,
Milwaukee, Wisconsin.
10-K Report
Copies of the Annual Report on Form 10-K for the
year ended December 31, 2016, filed with the
Securities and Exchange Commission, are
available without charge to shareholders on
request from:
Secretary
MGIC Investment Corporation
P. O. Box 488
Milwaukee, WI 53201
The Annual Report on Form 10-K referred to above
includes as exhibits certifications from the
Company’ s Chief Executive Officer and Chief
Financial Officer under Section 302 of the
Sarbanes-Oxley Act. Following the 2016 Annual
Meeting of Shareholders, the Company’ s Chief
Executive Officer submitted a Written Affirmation
to the New York Stock Exchange that he was not
aware of any violation by the Company of the
corporate governance
listing standards of
Exchange.
Transfer Agent and Registrar
Wells Fargo Shareowner Services
P. O. Box 64874
St. Paul, Minnesota 55164-0874
(800) 468-9716
Corporate Headquarters
MGIC Plaza
250 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Mailing Address
P. O. Box 488
Milwaukee, Wisconsin 53201
Shareholder Services
(414) 347-6596
114 | MGIC Investment Corporation 2016 Annual Report