Financial Summary
Net income ($ millions)
Diluted income per share ($)
Net operating income (1) ($ millions)
Net operating income per diluted share (1) ($)
2016
2017
2018
$
$
$
$
342.5
0.86
396.3
0.99
$
$
$
$
355.8
0.95
517.7
1.36
$
$
$
$
670.1
1.78
668.7
1.78
New Primary Insurance Written
($ billions)
$47.9
$49.1
$50.5
Direct Primary Insurance in Force
($ billions)
$182.0
$194.9
$209.7
2016
2017
2018
2016
2017
2018
Revenue
($ millions)
$1,062
$1,066
$1,124
Book Value per Share
$7.48
$8.51
$10.08
2016
2017
2018
2016
2017
2018
Losses incurred, net
($ millions)
$240
$54
$37
Default Inventory
(# loans)
50,282
46,556
32,898
2016
2017
2018
2016
2017
2018
(1) We believe that use of the Non-GAAP measures of net operating income and net operating income per diluted share
facilitate the evaluation of the company's core financial performance thereby providing relevant information. For a
description of how we calculate these measures and for a reconciliation of these measure to their nearest comparable
GAAP measures, 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.
MGIC Investment Corporation 2018 Annual Report | 1
Dear Fellow Shareholders:
I am pleased to report that in 2018, we produced exceptional financial results and we
continued to make great progress in furthering each of our five business strategies.
The strategies continue to be to: 1) prudently grow insurance in force, 2) pursue new
business opportunities that meet our return objectives, 3) preserve and expand the role
of MGIC and private mortgage insurance (PMI) in housing finance policy, 4) manage
and deploy capital to optimize the creation of shareholder value and 5) expand and
develop the talents of our co-workers. Specifically, in 2018 we:
•
Earned $670.1 million of GAAP Net Income and $668.7 million of Adjusted Net Operating Income
compared to $355.8 million of GAAP Net Income and $517.7 million of Adjusted Net Operating Income
for 2017. Adjusted 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 (the "MD&A").
• Wrote $50.5 billion of new insurance that is consistent with the Company’s risk and return goals. This
•
•
•
•
•
contributed to a 7.6% increase in insurance in force.
Generated a 21.2% return on beginning shareholders’ equity.
Increased book value per outstanding share by 18.4%.
Repurchased approximately 16 million shares of common stock.
Exceeded the Minimum Required Assets of the GSEs’ private mortgage insurer eligibility requirements,
or PMIERs, by $1.4 billion and the statutory capital requirement of the State of Wisconsin by $2.6 billion.
Effective March 31, 2019 revised PMEIRS will be effective. If the revised PMERS had been effective at
December 31, 2018, we estimate that MGIC’s pro forma excess would have been approximately $1 billion.
Improved our capital profile, including: 1) lowering our debt to capital ratio to 19%, 2) increasing dividend
payments from our writing company, MGIC, to our holding company ($220 million for 2018 compared to
$140 million in 2017) and 3) receiving an A- rating from A.M. Best for MGIC.
• Were recognized, for the 10th consecutive year, as a top workplace in southeastern Wisconsin
• Maintained our low expense ratio while investing in co-worker development and our operating platforms.
The increase in net income primarily reflects decreases in our provision for income taxes (discussed in more
detail in the MD&A) and losses incurred (discussed later in this letter).
The growth in insurance in force reflects the expanding purchase mortgage market, increasing persistency,
and the hard work and dedication of my fellow co-workers to deliver stellar customer service. It also reflects
the value proposition we offer to both lenders (ease of execution and ancillary services) and borrowers (faster
equity buildup and ability to cancel, when compared to FHA execution). As reported by Inside Mortgage Finance,
the PMI industry’s 2018 market share of total mortgage originations increased to 17.9% from 14.9% in 2017
and, MGIC’s 2018 market share within the PMI industry, excluding the U.S. Treasury’s Home Affordable
Refinance Program, was 17.4% in 2018. The increasing size and quality of our insurance in force, the runoff
of our older insurance books, and our improved capital structure, position us well to provide credit
enhancement and low down payment solutions to lenders, GSEs and borrowers.
In 2019, we expect to write approximately the same level of new insurance as we did in 2018, as we expect
the total mortgage origination market to be similar to 2018. Home purchase activity is expected to remain
strong. This is a net positive for us, as we estimate that our industry’s market share is approximately 3-4 times
higher for purchase loans than refinances. Among the factors influencing increased purchase activity are: 1)
consumer confidence remaining strong, 2) household formations continuing to modestly increase, 3) the
national homeownership rate remaining stable to modestly higher, and 4) mortgage interest rates remaining
relatively affordable. Our expectations for the amount of new insurance written in 2019, combined with strong
persistency, should lead to another increase in our insurance in force.
As of December 31, 2018 , our insurance book years beginning in 2009 account for approximately 83% of our
primary risk in force. Our book years of 2005 - 2008, which have experienced higher incurred losses, now
account for just 14% of primary risk in force. The quality and profitability of the book years beginning in 2009
are best captured by the following statistics:
2 | MGIC Investment Corporation 2018 Annual Report
•
•
approximately 22% of the delinquent notices at year-end 2018 are from those book years, and
at December 31, 2018, the ever-to-date incurred loss and delinquency ratios of the 2009-16 books were:
Book Year
Ever to Date Loss Ratio
Delinquency Ratio (Based on
Loan Count)
2009
13.8%
2010
6.9%
2011
4.3%
2012
2.8%
2013
3.4%
2014
5.2%
2015
4.4%
2016
4.4%
3.2%
3.3%
2.2%
1.3%
1.4%
1.7%
1.2%
0.9%
2017 and 2018 are not displayed because not enough aging has occurred to draw meaningful conclusions.
The books of business we wrote after 2008 have performed exceptionally well, in part due to improved credit
profiles of the insured loans and the strong economy, with its low unemployment and solid home price
appreciation. However, we know that economic cycles change over time and we have in place risk management
tools to prepare for such changes. One such tool is reinsurance. For several years, we have been purchasing
quota share reinsurance for new insurance written and at the end of 2018, it covered nearly 78% of our insurance
in force. In 2018, we participated in our first insurance linked note transaction in more than a decade. That
transaction provides excess of loss coverage on the substantial majority of the risk in force from our books
written in 2017 and the 2nd half of 2016 that remains after considering quota share reinsurance. Quota share
and excess of loss reinsurance reduce potential earnings volatility and are very capital efficient. Risk
management may also be performed through pricing and underwriting. In early 2019, we launched MiQ™, our
loan level pricing system that establishes our premium rates based on more borrower and loan attributes
than were considered in 2018.
Net losses incurred were 32% lower in 2018 than 2017, primarily due to a decrease in net losses related to
delinquencies reported in 2018, offset in part by a decrease in favorable loss reserve development on prior-
year delinquencies. Favorable loss reserve development on prior-year delinquencies was primarily the result
of a lower estimated claim rate for those delinquencies. The lower estimated claim rate reflects better cure
rates than our estimates. In 2018, we received 20% fewer delinquency notices than in 2017, in part because
2017 notices were elevated due to the major hurricanes that occurred that year. The primary delinquency rate
ended 2018 at 3.11% compared to 4.55% at year-end 2017. The number of loans in the primary delinquency
inventory decreased 29.3% from year-end 2017 to year-end 2018, in part because many of the delinquency
notices resulting from the 2017 hurricanes have cured. In 2019, we expect to receive fewer new delinquency
notices than in 2018 and expect the delinquent inventory to end 2019 lower than at year-end 2018.
Our total debt to capital ratio declined to approximately 19% at December 31, 2018 from approximately 21%
at December 31, 2017, primarily due to the level of our 2018 net income. Reflecting our improved financial
condition, in 2018, our Board of Directors authorized a $200 million share repurchase plan. We utilized
$175 million of that authorization, repurchasing approximately 16 million shares or 4.3% of our common stock
outstanding as of December 31, 2017. In addition, our main operating subsidiaries earned an A- rating from
A.M. Best in 2018. While credit ratings are not inhibiting our ability to write new primary business, we think
that long-term, they will become more relevant as we participate in the credit risk transactions that the GSEs
are executing.
Regarding housing finance reform, we remain optimistic about the role that our company and industry can
play, but it continues to be very difficult to gauge what actions may be taken and the timing of any such actions.
We continue to be actively engaged on this topic in Washington. A new acting director heads the FHFA while
the nominated director awaits confirmation. Exactly what will unfold and how the roles of the GSEs and private
capital play out remains to be seen. However, we are encouraged by talk that both the acting and nominated
directors view the private sector as part of the solution for transferring credit risk away from taxpayers.
Regarding the FHA, we continue to think it is unlikely that the FHA will reduce its MI premiums, or expand its
footprint in mortgage finance in the foreseeable future. We believe that the FHA is primarily focused on
improving its operational policies and procedures and the reverse mortgage business.
In addition to offering a compelling business proposition for its customers, MGIC also offers a compelling
value proposition for its employees. This enables us to maintain a low co-worker turnover rate, be a preferred
employer, and keep our expense ratio low. This is also why we invest in co-worker development programs that
promote accountability and a continuous-improvement culture and that address issues arising from the
changing workforce, evolving work environment, and ever-changing competitive landscape.
MGIC Investment Corporation 2018 Annual Report | 3
2018 was indeed a good year. We achieved strong financial results and continued to position our company
for further success. 2019 marks the 62nd year that MGIC has been supporting the U.S. housing market and
helping individuals and families to find a better way to affordable and sustainable homeownership. I am very
excited and confident about the opportunities MGIC has to continue to serve the housing market.
Our long-term strategy is fairly straightforward: remain a relevant business partner with our customers, in
order to prudently grow insurance in force, generate long-term premium flows, and grow book value for our
shareholders. In 2019, we will continue to focus our energies on the business strategies outlined at the
beginning of this letter. I continue to believe that there are greater opportunities available for us to provide
access to credit for consumers, reduce GSE credit risk and generate good returns for shareholders and we
are committed to pursuing them. That is why when I look ahead, I am very excited and confidant about the
future of our company.
I would like to thank our shareholders and customers for their support and my fellow co-workers for the hard
work and dedication that enabled our company to accomplish all that it did in 2018.
Respectfully,
Patrick Sinks
President and Chief Executive Officer
Our actual results may differ materially from those contemplated by any forward looking statements in the letter
above. We are not undertaking any obligation to update such statements. See "Risk Factors" in this Annual Report
for a discussion of factors that could cause such a difference in our actual results.
Standing from left: Paula Maggio, Executive Vice President, General Counsel and Secretary
Sal Miosi, Executive Vice President - Business Strategies and Operations
Seated from left: Pat Sinks, President and Chief Executive Officer
Steve Mackey, Executive Vice President and Chief Risk Officer
Jay Hughes, Executive Vice President - Sales and Business Development
Tim Mattke, Executive Vice President and Chief Financial Officer
4 | MGIC Investment Corporation 2018 Annual Report
Five-Year Summary of Financial Information
Summary of operations
(In thousands, except per share data)
2018
2017
2016
2015
2014
As of and for the Years Ended December 31,
Revenues:
Net premiums written
Net premiums earned
Investment income, net
Realized investment (losses) gains, net including
net impairment losses
Other revenue
Total revenues
Losses and expenses:
Losses incurred, net
Change in premium deficiency reserve
Underwriting and other expenses
Interest expense
Loss on debt extinguishment
Total losses and expenses
Income before tax
Provision for (benefit from) income taxes (1)
$
992,262
$
997,955
$
975,091
$ 1,020,277
$
881,962
975,162
141,331
(1,353)
8,708
934,747
120,871
231
10,205
925,226
110,666
8,921
17,670
896,222
103,741
28,361
12,964
844,371
87,647
1,357
9,259
1,123,848
1,066,054
1,062,483
1,041,288
942,634
36,562
53,709
240,157
—
190,143
52,993
—
279,698
844,150
174,053
—
170,749
57,035
65
281,558
784,496
428,735
—
160,409
56,672
90,531
547,769
514,714
172,197
343,547
(23,751)
164,366
68,932
507
553,601
487,687
(684,313)
496,077
(24,710)
146,059
69,648
837
687,911
254,723
2,774
Net income
$
670,097
$
355,761
$
342,517
$ 1,172,000
$
251,949
Weighted average common shares outstanding
386,078
394,766
431,992
468,039
413,547
Diluted income per share
$
1.78
$
0.95
$
0.86
$
2.60
$
0.64
Balance sheet data
Total investments
$ 5,159,019
$ 4,990,561
$ 4,692,350
$ 4,663,206
$ 4,612,669
Cash and cash equivalents
151,892
99,851
155,410
181,120
197,882
Total assets
Loss reserves
Premium deficiency reserve
Short- and long-term debt
Convertible senior notes
5,677,802
5,619,499
5,734,529
5,868,343
5,251,414
674,019
985,635
1,438,813
1,893,402
2,396,807
—
—
574,713
573,560
—
—
—
572,406
349,461
256,872
—
—
822,301
389,522
23,751
61,883
830,015
389,522
Convertible junior subordinated debentures
256,872
256,872
Shareholders' equity
Book value per share
3,581,891
3,154,526
2,548,842
2,236,140
1,036,903
10.08
8.51
7.48
6.58
3.06
(1)
In 2017, we remeasured our net deferred tax assets at the lower enacted corporate income tax rate under the Tax Act. In
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 tax matters and their impact on our consolidated financial
statements.
MGIC Investment Corporation 2018 Annual Report | 5
Other data
New primary insurance written ($ millions)
New primary risk written ($ millions)
$
$
50,526
12,657
$
$
49,123
12,217
$
$
47,875
11,831
$
$
43,031
10,824
$
$
33,439
8,530
Years Ended December 31,
2018
2017
2016
2015
2014
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
$ 209,707
$ 194,941
$ 182,040
$ 174,514
$ 164,919
$
54,063
$
50,319
$
47,195
$
45,462
$
42,946
228
191
236
235
244
303
271
388
303
505
1,058,292
1,023,951
32,898
46,556
998,294
50,282
992,188
62,633
968,748
79,901
Percentage of loans in default
3.11%
4.55%
5.04%
6.31%
8.25%
Insurance operating ratios (GAAP)
Loss ratio
Underwriting Expense ratio
Risk-to-capital ratio (statutory)
Mortgage Guaranty Insurance Corporation
Combined insurance companies
3.7%
18.2%
5.7%
16.0%
26.0%
15.3%
38.3%
14.9%
58.8%
14.7%
9.0:1
9.8:1
9.5:1
10.5:1
10.7:1
12.0:1
12.1:1
13.6:1
14.6:1
16.4:1
6 | MGIC Investment Corporation 2018 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 of Operations” and “Risk Factors” that
appeared in our Annual Report on Form 10‑K for the
year ended December 31, 2018, which was filed with
the Securities and Exchange Commission on February
22, 2019. 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.
INTRODUCTION
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. See the "Glossary of terms
and acronyms" for definitions and descriptions of
terms used throughout this Annual Report. The Risk
Factors discuss trends and uncertainties affecting us
and are an integral part of the MD&A.
Forward Looking and Other Statements
As discussed under “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 our Annual
Report on Form 10-K for the year ended December 31,
2018 was filed with the Securities and Exchange
Commission.
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.
Through our subsidiary, MGIC, we are a leading
provider of PMI in the United States, as measured by
$209.7 billion of primary IIF on a consolidated basis
at December 31, 2018.
Summary of financial results of MGIC Investment
Corporation
Year Ended
December 31,
2018
2017
Change
(in millions, except per
share data)
Selected statement of
operations data
Total revenues
$ 1,123.8
$ 1,066.1
Losses incurred, net
36.6
53.7
Other operating and
underwriting expenses,
net
Income before tax
Provision for income
taxes
Net income
Diluted income per
share
Non-GAAP Financial
Measures (1)
Adjusted pre-tax
operating income
Adjusted net operating
income
Adjusted net operating
income per diluted
share
5 %
(32)%
12 %
8 %
(59)%
88 %
178.2
844.2
174.1
670.1
159.6
784.5
428.7
355.8
$
1.78
$
0.95
87 %
$ 845.5
$
784.3
8 %
668.7
517.7
29 %
$
1.78
$
1.36
31 %
(1)
See "Explanation and Reconciliation of our use of Non-
GAAP Financial Measures."
SUMMARY OF 2018 FINANCIAL RESULTS
Net income of $670.1 million for 2018 increased by
$314.3 million when compared to the prior year, and
diluted income per share of $1.78 increased by 87%
when compared to the prior year. These increases
primarily reflect decreases in our provision for income
taxes and losses incurred associated with
delinquency notices received in the current year,
partially offset by a decrease in favorable loss reserve
development associated with delinquency notices
received in prior years. Adjusted net operating income
MGIC Investment Corporation 2018 Annual Report | 7
Management's Discussion and Analysis
of $668.7 million for 2018 (2017: $517.7 million) and
adjusted net operating income per diluted share of
$1.78 (2017: $1.36) each increased from the prior
year primarily for the same reasons.
The decrease in our tax provision reflects the lower
corporate income tax rate in 2018 under the Tax Act,
the 2017 remeasurement of our deferred tax assets
and an additional tax provision recorded in 2017 for
the settlement of our IRS litigation, partially offset by
the tax associated with a 2018 increase in income
before tax.
Losses incurred, net were $36.6 million, down 32%
when compared to the prior year. The decrease was
driven by a 20% decline in new delinquency notices
compared to the prior year, along with a lower
estimated claim rate on new notices (approximately
9%, down from approximately 10% in the prior year).
The decline in new delinquency notices reflected, in
part, that 2017 notices included an elevated level of
notices associated with major hurricanes. The
estimated claim rate on 2017 notices, excluding those
associated with hurricanes, was 10.5%. The decrease
in our estimated claim rate on new notices reflects
improved cure activity due to the current economic
environment. Favorable loss reserve development
associated with delinquency notices received in prior
years was $167 million and $231 million, in 2018 and
2017, respectively, due to a lower estimated claim rate
in each year compared to the prior year-end.
During 2018, MGIC paid $220 million in dividends to
our holding company. During 2018, we repurchased
approximately 16.0 million shares of our common
stock for approximately $175 million.
BUSINESS ENVIRONMENT
Economic conditions
Current U.S. economic conditions continue to support
favorable housing fundamentals, such as low
unemployment, strong consumer confidence,
increasing household formations, and appreciating
home values. We benefit from favorable housing
fundamentals that increase home purchase activity
and provide borrowers reliable, or increasing,
financial resources.
As a result of the current and expected economic
conditions, mortgage interest rates have been higher
on average in 2018 compared to 2017. The increase
in mortgage interest rates did not materially impact
home purchasing activity in 2018. Despite the impact
of rising rates on housing affordability, the
homeownership rate continued to edge up in 2018. In
particular, the homeownership rate of those 35 and
younger (which likely includes many first time
homebuyers that require mortgage insurance) is
indicated to be at levels last seen in 2013. The
increase in purchase mortgage originations, and first-
8 | MGIC Investment Corporation 2018 Annual Report
time homebuyer activity, resulted in a modest
increase in our NIW in 2018 when compared to 2017.
The level of unemployment, interest rates, and home
prices may change in the future. For the possible
effects of such changes, see our risk factors titled "If
the volume of low down payment home mortgage
originations declines, the amount of insurance that we
write could decline,” “Downturns in the domestic
economy or declines in the value of borrowers’ homes
from their value at the time their loans closed may
result in more homeowners defaulting and our losses
increasing, with a corresponding decrease in our
returns,” and “Changes in interest rates, house prices
or mortgage insurance cancellation requirements may
change the length of time that our policies remain in
force."
Mortgage lending
These recent years of favorable housing
fundamentals and in our view, favorable risk
characteristics of insured loans, has provided a
favorable credit backdrop for the business we have
written in recent years. In that regard, we have
experienced a declining delinquent inventory, and
lower losses incurred and claims paid. Our most
recent book years continue to experience a low level
of losses.
Although we generally view the risk characteristics of
2018 insured loans to be favorable, lending standards
did ease in 2018. The percentage of our NIW with DTI
ratios over 45% increased significantly in 2018
compared to recent years. The increase was primarily
driven by adjustments to GSE underwriting guidelines
for loans with DTI ratios over 45%. The rising cost of
homeownership and a decrease in the percentage of
our NIW from refinance transactions also resulted in
an increasing percentage of our NIW with LTV ratios
over 95%.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of changes in our NIW mix during 2018
and our efforts to mitigate our risk from the increase
in NIW with DTI ratios over 45%.
Competition
PMI. 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 premium rates,
underwriting requirements, financial strength
(including based on credit or financial strength
ratings), customer relationships, name recognition,
reputation, the strength of our management team and
field organization, the ancillary products and services
provided to lenders and the effective use of
technology and innovation in the delivery and
servicing of our mortgage insurance products.
Pricing practices
Much of the competition in the industry in the last few
years has centered on pricing practices which have
included: (i) reductions in standard filed rates for
borrower-paid mortgage insurance policies ("BPMI");
(ii) use by competitors of a spectrum of filed rates to
allow for formulaic, risk-based pricing that may be
adjusted more frequently within certain parameters
(referred to as "loan level pricing systems"); and
(iii) use of customized rates (discounted from
standard rates) that are made available to lenders that
meet certain criteria.
In response to industry competition, and changing
customer preferences, the delivery of premium rates
has continued to migrate from standard rate cards, to
use of loan level pricing systems; and use of
customized rates (discounted from standard rates)
that are made available to lenders that meet certain
criteria. Loan level pricing systems incorporate more
loan attributes than standard rate cards. They are
considered more dynamic pricing models that can
react faster to changing market conditions, including
those conditions that increase or decrease risk, and
they assist in managing risk and shaping the insured
portfolio. We expect the adoption of mortgage
insurers' loan level pricing systems by lenders to
continue to increase.
Our pricing approach continues to evolve with the
industry. In the first quarter of 2019 we introduced
MiQ™, our loan level pricing system. We expect
adoption of MiQ™ to increase during 2019 and the
pace of adoption will be driven primarily by customer
demand.
GSE Risk Share Transactions
In 2018, the GSEs initiated programs with loan level
mortgage default coverage provided by various (re)
insurers that are not mortgage insurers governed by
PMIERs, and that are not selected by the lenders. Due
to differences in policy terms, these programs offer
premium rates that are generally below prevalent
single premium LPMI rates. While we view these
programs as competing with traditional private
mortgage insurance, we have participated in them
and may participate in future GSE or other programs.
The GSEs (and other investors) have also used other
forms of credit enhancement that did not involve
traditional private mortgage insurance, such as
engaging in credit-linked note transactions executed
in the capital markets, or using other forms of debt
issuances or securitizations that transfer credit risk
directly to other investors, including competitors and
an affiliate of MGIC; using other risk mitigation
techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting
credit risk without credit enhancement.
Management's Discussion and Analysis
Government programs. PMI also competes against
government mortgage insurance programs such as
the FHA, VA, and USDA, primarily for lower FICO score
business. The market share of primary mortgage
insurance written by government programs continued
to exceed that written by PMI in 2018, however PMI
recaptured share from those programs due in part to
a reduction in refinance originations in 2018.
Generally, PMI industry share is 3-4 times higher for
purchase originations than refinance originations. The
increase in the percentage of originations from
purchase transactions along with the PMI premium
rate reductions, have contributed to a PMI market
share at its highest level since the financial crisis.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of the 2018 business environment and the
impact it had on operating measures including NIW,
IIF and RIF.
PMIERs
Since December 31, 2015 we have operated under the
requirements of the PMIERs of the GSEs in order to
insure loans delivered to or purchased by them. The
PMIERs include financial requirements that require an
approved mortgage insurer to have Available Assets
that meet or exceed its Minimum Required Assets.
MGIC's Available Assets under PMIERs totaled $4.8
billion, an excess of $1.4 billion over its Minimum
Required Assets at December 31, 2018.
Revised PMIERs were published in September 2018
and will become effective March 31, 2019. See
"Revised PMIERs" below for additional information on
the changes made to the PMIERs and their impact on
MGIC's excess of Available Assets over its Minimum
Required Assets.
BUSINESS OUTLOOK FOR 2019
Our outlook for 2019 should be viewed against the
backdrop of the business environment discussed
above.
NIW
We expect our 2019 NIW to be relatively flat with
2018. 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 2019, total
mortgage origination forecasts indicate relatively flat
origination volume in 2019 compared to 2018, with a
slight increase in purchase originations offsetting a
decline in refinance originations. We expect the PMI
penetration rate to remain strong in part because the
PMI industry's share of purchase originations has
historically been 3-4 times greater than its share of
refinance originations.
MGIC Investment Corporation 2018 Annual Report | 9
Management's Discussion and Analysis
The widespread use of loan level pricing systems by
the PMI industry will make it more difficult to compare
our rates to those offered by our competitors. We may
not be aware of industry changes until we observe
that our volume of NIW has changed and our volume
may fluctuate more as a result.
IIF and RIF
Our IIF increased 7.6% in 2018 and we expect our IIF
to increase in 2019. 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.
In a rising rate environment, total mortgage
originations may decline, however, we would also
expect policy cancellation rates to decline, and in turn
increase persistency, although the impact generally
lags the change in interest rates.
Results of operations
Premiums. We believe that in 2019, growth in our
earned premiums (on a direct basis) will continue to
be slower than the growth of our IIF. Overall, our
premium rates have been trending down in recent
years, including in 2018, and the affected books of
business represent an increasing percentage of our
total IIF.
Our 2019 direct premiums written and net premiums
earned are expected to be comparable to 2018. Our
net premiums earned will be impacted by the
decrease in premium rates noted above and by the
amount of premiums we cede under our quota share
and excess of loss reinsurance transactions. The
amount of profit commission we receive, which
reduces the amount of premiums we cede, is variable
year-to-year and is dependent on the amount of
losses ceded. Our profit commission in recent years
has benefited from favorable loss reserve
development associated with delinquency notices
received in prior years. Further, 2019 will include a full
year of premiums ceded under our excess of loss
reinsurance transaction that went into effect in the
fourth quarter of 2018. The actual amount of
premiums we cede in 2019 will also be affected by
any changes in the structure of our reinsurance
coverage, such as termination of existing quota share
reinsurance or additional excess of loss coverage.
Factors that affect the amount of premiums we earn
from our IIF are further discussed in our
"Consolidated Results of Operations - Premium yield."
Investment income. Net investment income is a
material contributor to our results of operations. We
expect an increase in our net investment income in
2019 compared to 2018 primarily due to an increase
in our invested assets. The amount of investment
income will also be impacted by the yield we can earn
on investments.
10 | MGIC Investment Corporation 2018 Annual Report
Losses. We expect 2019 losses incurred with respect
to delinquency notices received in 2019 to be lower
than the comparable amount for 2018 as we expect to
receive fewer new delinquency notices in 2019.
Overall, however, 2019 losses incurred, net are
expected to increase compared to 2018 if we
experience no favorable loss reserve development
associated with delinquency notices received in prior
years.
Income taxes. We expect our 2019 effective tax rate to
be approximately 21%.
Revised PMIERs
The primary change included in the financial
requirements of the revised PMIERs published in
September 2018 and effective March 31, 2019, is the
elimination of any credit for future premiums that had
previously been allowed for certain insurance policies.
As a result, upon their effectiveness, MGIC's excess of
Available Assets over its Minimum Required Assets
will decrease. See "GSEs" below for the expected
impact of the revised PMIERs.
CAPITAL
Share repurchase program
On April 26, 2018, our board of directors authorized a
share repurchase program under which we may
repurchase up to $200 million of our common stock
through the end of 2019. Repurchases may be made
from time to time on the open market or through
privately negotiated transactions. The repurchase
program may be suspended for periods or
discontinued at any time. During 2018, we utilized
approximately $175 million (of which $12 million
settled in January 2019) of cash at our holding
company to repurchase approximately 16.0 million
shares of our common stock.
GSEs
We must comply with the PMIERs to be eligible to
insure loans delivered to or purchased by the GSEs.
The PMIERs include financial requirements, as well as
business, quality control and certain transaction
approval requirements. The financial requirements of
the PMIERs require a mortgage insurer’s “Available
Assets” (generally only the most liquid assets of an
insurer) to equal or exceed its “Minimum Required
Assets” (which are based on an insurer’s book of
insurance in force 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, 2018, MGIC’s Available Assets totaled
$4.8 billion, or $1.4 billion in excess of its Minimum
Required Assets. If the revised PMIERs discussed
above had been effective as of December 31, 2018,
we estimate that MGIC’s pro forma excess of
Available Assets over Minimum Required Assets
would have been approximately $1 billion.
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:
è The GSEs may amend the PMIERs at any time and
may make the PMIERs more onerous in the future. In
June 2018, the FHFA issued a proposed rule on
regulatory capital requirements for the GSEs
("Enterprise Capital Requirements"), which included
a framework for determining the capital relief
allowed to the GSEs for loans with PMI. The GSEs
have indicated that there may be potential future
implications for PMIERs based upon feedback the
FHFA receives on its proposed rule on Enterprise
Capital Requirements (public comments were due
by November 16, 2018). In addition, the PMIERs
provide that the 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 have indicated that they will generally
provide notice 180 days prior to the effective date of
such updates.
è 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 assets,
thereby creating a shortfall in Available Assets.
è 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 is greater under the PMIERs than what
state regulation currently requires, our reinsurance
transactions mitigate the negative effect of the
PMIERs on our returns.
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.
Management's Discussion and Analysis
At December 31, 2018, MGIC’s risk-to-capital ratio was
9.0 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $2.6 billion above the
required MPP of $1.3 billion. Our risk-to-capital ratio
and MPP reflect full credit for the risk ceded under our
quota share reinsurance transactions with unaffiliated
reinsurers. It is possible that under the revised State
Capital Requirements discussed below, MGIC will not
be allowed full credit for the risk ceded to the
reinsurers. If MGIC is not allowed an agreed level of
credit under either the State Capital Requirements or
the PMIERs, MGIC may terminate the reinsurance
transactions, without penalty. At this time, we expect
MGIC to continue to comply with the current State
Capital Requirements; however, you should read our
risk factors for information about matters that could
negatively affect such compliance.
At December 31, 2018, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.8 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.
The NAIC plans to revise the minimum capital and
surplus requirements for mortgage insurers that are
provided for in its Mortgage Guaranty Insurance
Model Act. A working group of state regulators has
been considering since 2016 a risk-based capital
framework to establish capital requirements for
mortgage insurers, although no date has been
established by which the NAIC must propose
revisions to the capital requirements and certain
items have not yet been completely addressed by the
framework, including the treatment of ceded risk,
minimum capital floors, and action level triggers.
Currently we believe that the PMIERs contain the
more restrictive capital requirements in most
circumstances.
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
increase the likelihood that the business practices of
the GSEs change, including through administrative
action, 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.
MGIC Investment Corporation 2018 Annual Report | 11
Management's Discussion and Analysis
The Administration issued a June 2018 report
indicating that the conservatorship of the GSEs
should end and that the GSEs should transition to fully
private entities, competing on a level playing field with
private issuers of MBS (such issuers, collectively with
the GSEs, referred to in the report as the "guarantors").
The report further indicated that a federal entity
should regulate the guarantors, including their capital
adequacy, and that guarantors should have access to
an explicit federal guarantee on the MBS that is
exposed only after substantial losses are incurred by
the private market, including the guarantors. The
report also indicated that a fee on the outstanding
volume of MBS would be transferred to the
Department of Housing and Urban Development (of
which the FHA is a part) to be used for affordable
housing purposes. 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. The timing and impact on our business of
any resulting changes 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.
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.”
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 loans more affordable to borrowers
with the goal of reducing the number of foreclosures.
These programs included HAMP, which expired at the
end of 2016, and HARP, which expired at the end of
2018. The GSEs have introduced other loan
modifications programs to replace HAMP and HARP.
From 2008 through 2012, we were notified of
modifications that cured delinquencies that, had they
become paid claims, would have resulted in a material
increase in our incurred losses. Nearly all of the
reported loan modifications were for loans insured in
2009 and prior.
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.
12 | MGIC Investment Corporation 2018 Annual Report
The following table shows the percentage of our
primary RIF that has been modified as of
December 31, 2018.
Modifications
Policy Year
2003 and Prior
2004
2005
2006
2007
2008
2009
2010 - 2018
Total
HARP (1)
Modifications
HAMP & Other
Modifications
10.5%
18.1%
25.6%
28.7%
40.5%
56.7%
42.5%
—%
6.2%
45.1%
48.3%
46.5%
43.3%
33.3%
20.5%
7.6%
0.5%
6.4%
(1)
Includes proprietary programs that are substantially the
same as HARP.
Approximately 12.6% of our total primary RIF has
been modified as of December 31, 2018. Based on
loan count at December 31, 2018, the loans
associated with 97.6% of all HARP modifications and
79.6% of HAMP and other modifications were current.
FACTORS AFFECTING OUR RESULTS
Our results of operations are affected by:
Premiums written and earned
Premiums written and earned in a year are influenced
by:
•
•
NIW, which increases IIF. Many factors affect
NIW, including the volume of low down payment
home mortgage originations and competition to
provide credit enhancement on those mortgages
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.
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.
Cancellations of single premium policies, which
are generally non-refundable, result in immediate
recognition of any remaining unearned premium.
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 premium rate by the
original loan balance; thereafter, the premium rate
resets to a lower rate 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 our quota share reinsurance transactions,
and premiums ceded under our excess of loss
reinsurance transaction. See Note 9 –
“Reinsurance” to our consolidated financial
statements for a discussion of our reinsurance
transactions.
Premiums earned 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 earned in the
current period, although this effect may be enhanced
(or mitigated) by differences in the average premium
rates 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
transactions. Also, NIW and cancellations during a
period will generally have a greater effect on
premiums earned in subsequent periods than in the
period in which these events occur.
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-
Management's Discussion and Analysis
operating activities, such as debt or stock issuances
or repurchases.
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, 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.
The product mix of the in force book, with loans
having higher risk characteristics generally
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 or curtail
claims. Our estimated loss reserves incorporate
our estimates of future rescissions of policies
and curtailments of claims, and reversals of
rescissions and curtailments. We collectively
refer to such rescissions and denials as
“rescissions” and variations of this term. We call
reductions to claims "curtailments."
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 subsequent and then declining, although
persistency, the condition of the economy,
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.
MGIC Investment Corporation 2018 Annual Report | 13
Loss on debt extinguishment
At times, we may undertake activities to enhance our
capital position, improve our debt profile and/or
reduce potential dilution from our outstanding
convertible debt. Extinguishing our 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.
Refer to “Explanation and reconciliation of our use of
Non-GAAP financial measures” below to understand
how these items impact our evaluation of our core
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 may
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.
Management's Discussion and Analysis
•
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
Underwriting and other expenses includes items such
as employee compensation, fees for professional
services, depreciation and maintenance expense, and
premium taxes, and are reported net of ceding
commissions associated with our reinsurance
agreements. Employee compensation expenses are
variable due to share-based compensation, changes
in benefits, and headcount (which can fluctuate due
to volume).See Note 9 – “Reinsurance” to our
consolidated financial statements for a discussion of
our reinsurance agreements.
Interest expense
Interest expense reflects the interest associated with
our outstanding debt obligations and credit facility
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 being part
of our fundamental operating activities may also
impact our results of operations and are described
below.
Net realized investment gains (losses)
Fixed income securities. Realized investment gains
and losses are a function of the difference between
the amount received on the sale of a fixed income
security and the fixed income security’s cost basis, as
well as any “other than temporary” impairments
(“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.
Equity securities. Effective January 1, 2018, realized
investment gains and losses are accounted for as a
function of the periodic change in fair value. For 2017
and 2016, realized investment gains and losses were
accounted for as a function of the difference between
the amount received on the sale of an equity security
and the equity security’s cost basis, as well as any
OTTI recognized in earnings.
14 | MGIC Investment Corporation 2018 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
adjusted pre-tax operating income (loss), adjusted net
operating income (loss) and adjusted net operating
income (loss) per diluted share facilitate the
evaluation of the company's core financial
performance thereby providing relevant information to
investors. These measures are not recognized in
accordance with GAAP and should not be viewed as
alternatives to GAAP measures of performance. Other
companies may calculate these measures differently.
Therefore, their measures may not be comparable to
those used by us.
Adjusted pre-tax operating income (loss) is defined
as GAAP income (loss) before tax, excluding the
effects of net realized investment gains (losses), gain
(loss) on debt extinguishment, net impairment losses
recognized in income (loss) and infrequent or unusual
non-operating items, where applicable.
Adjusted net operating income (loss) is defined as
GAAP net income (loss) excluding the after-tax
effects of net realized investment gains (losses), gain
(loss) on debt extinguishment, net impairment losses
recognized in income (loss), and infrequent or
unusual non-operating items, where applicable, which
include the effects of changes in our deferred tax
valuation allowance. The amounts of adjustments to
components of pre-tax operating income (loss) are
tax effected using a federal statutory income tax rate
of 21% for 2018 and 35% for 2017 and 2016.
Adjusted net operating income (loss) per diluted
share is calculated in a manner consistent with the
accounting standard regarding earnings per share, by
dividing (i) adjusted net operating income (loss) after
making adjustments for interest expense on
convertible debt, whenever the impact is dilutive, by
(ii) diluted weighted average common shares
outstanding, which reflects share dilution from
unvested restricted stock units and from convertible
debt when dilutive under the "if-converted" method.
Although adjusted pre-tax operating income (loss)
and adjusted net operating income (loss) exclude
certain items that have occurred in the past and are
expected to occur in the future, the excluded items
represent items that are: (1) not viewed as part of the
operating performance of our primary activities; or (2)
impacted by both discretionary and other economic or
regulatory factors and are not necessarily indicative
of operating trends, or both. These excluded items,
along with the reasons for their treatment, are
described below. Trends in the profitability of our
fundamental operating activities can be more clearly
identified without the fluctuations of these excluded
items.
(1) Net realized investment gains (losses). The
recognition of net realized investment gains or
losses can vary significantly across periods as
the timing of individual securities sales is highly
discretionary and is influenced by such factors as
market opportunities, our tax and capital profile,
and overall market cycles.
(2) Gains and losses on debt extinguishment. Gains
and losses on debt extinguishment result from
discretionary activities that are undertaken to
enhance our capital position, improve our debt
profile, and/or reduce potential dilution from our
outstanding convertible debt.
(3) Net impairment losses recognized in earnings.
The recognition of net impairment losses on
investments can vary significantly in both size
and timing, depending on market credit cycles,
individual issuer performance, and general
economic conditions.
(4)
Infrequent or unusual non-operating items. Our
income tax expense for 2017 reflects the
remeasurement of our net deferred tax assets to
reflect the lower corporate income tax rate under
the Tax Act. Our 2018, 2017 and 2016 income tax
expense also includes amounts related to our IRS
dispute and is related to past transactions which
are non-recurring in nature and are not part of our
primary operating activities.
MGIC Investment Corporation 2018 Annual Report | 15
Management's Discussion and Analysis
Non-GAAP reconciliations
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income:
(in thousands)
Pre-tax
2018
Tax
Effect
Net
(after-tax)
Pre-tax
2017
Tax
Effect
Net
(after-tax)
Pre-tax
2016
Tax
Effect
Net
(after-tax)
Years Ended December 31,
Income before tax /
Net income
Adjustments:
Additional income
tax (provision)
related to the rate
decrease included in
the Tax Act
Additional income
tax benefit
(provision) related to
IRS litigation
Net realized
investment losses
(gains)
Loss on debt
extinguishment
Adjusted pre-tax
operating income /
Adjusted net operating
income
$ 844,150
$ 174,053
$ 670,097
784,496
428,735
355,761
514,714
172,197
342,517
—
—
—
—
—
(132,999)
132,999
2,462
(2,462)
—
(29,039)
29,039
—
—
—
—
(731)
731
1,353
284
1,069
(231)
(81)
(150)
(8,921)
(3,122)
(5,799)
—
—
—
65
23
42
90,531
31,686
58,845
$ 845,503
$ 176,799
$ 668,704
$ 784,330
$ 266,639
$ 517,691
$ 596,324
$ 200,030
$ 396,294
Reconciliation of Net income per diluted share to Adjusted net operating income per diluted share:
Weighted average
diluted shares
outstanding
Net income per diluted
share
Additional income
tax (provision)
related to the rate
decrease included in
the Tax Act
Additional income
tax (benefit)
provision related to
IRS litigation
Net realized
investment losses
(gains)
Loss on debt
extinguishment
Adjusted net operating
income per diluted
share (1)
386,078
$
1.78
394,766
$
0.95
431,992
$
0.86
—
(0.01)
—
—
0.34
0.07
—
—
—
—
(0.01)
0.14
$
1.78
$
1.36
$
0.99
(1)
For the Year Ended December 31, 2018, the Reconciliation of Net income per diluted share to Adjusted net operating
income per diluted share does not foot due to rounding of the adjustments.
16 | MGIC Investment Corporation 2018 Annual Report
Management's Discussion and Analysis
MORTGAGE INSURANCE PORTFOLIO
MORTGAGE ORIGINATIONS
MORTGAGE INSURANCE INDUSTRY
The primary mortgage insurance market is affected
by total mortgage originations and PMI's market
share. Total originations are estimated to have
declined in 2018, due to lower refinance originations,
offset only in part by higher purchase originations.
Refinance originations fell as a result of higher
mortgage interest rates on average; while continued
solid housing fundamentals, such as household
formations, low unemployment, and attractive
mortgage rates supported the increase in purchase
originations. Total mortgage originations in 2019 are
forecast to be similar to 2018 estimated levels, with a
continued decline in refinance originations offset by
an increase in purchase originations. We expect PMI's
market share to remain strong in part because the
PMI industry's share of purchase originations has
historically been 3-4 times higher than its share of
refinance originations. Competition from government
mortgage insurance programs and GSE alternative
risk share transactions will also continue to impact
the PMI's market share. In consideration of these
factors, and our market share within the PMI industry,
our 2019 NIW is expected to be relatively flat with that
of 2018.
Mortgage originations
(in billions)
2019 (F)
$1,218
$418 $1,636
2018 (E)
$1,169
$470 $1,639
2017
2016
$1,156
$643
$1,799
$1,070
$1,006
$2,076
$0
$750
$1,500
$2,250
We compete against five other private mortgage
insurers, as well as government mortgage insurance
programs, including those offered by the FHA, VA, and
USDA. Refer to "Overview - Business Environment -
Competition" for a discussion of our competitive
position.
The PMI industry increased its share of the primary
mortgage insurance market in 2018 and 2017, each
when compared to the respective prior year. PMI's
share increased primarily due to a higher percentage
of purchase originations; an increase in 97% LTV loan
offerings from lenders that sell loans to the GSEs,
which provided an alternative to similar FHA loan
programs for qualified borrowers; and PMI premium
rate reductions in recent periods, which increases
PMI's competitiveness compared to government
programs.
Estimated primary MI market share
(% of total primary MI
volume)
PMI
FHA
VA
USDA
2018
43.2%
29.9%
24.4%
2.5%
2017
38.6%
33.9%
24.7%
2.8%
2016
36.1%
34.2%
27.2%
2.5%
Source: Inside Mortgage Finance - February 15, 2019.
Includes HARP NIW.
Our estimated market share within the PMI industry
declined in 2018 when compared to 2017, due to the
competitive dynamics in the industry, including, but
not limited to, the migration to a more dynamic pricing
approach across the industry. For additional
discussion of the competitive landscape of the
industry refer to "Overview - Business Environment -
Competition."
Purchase
Refinance
Estimated MGIC market share
(% of total primary
private MI volume)
MGIC
2018
17.4%
2017
18.3%
2016
17.9%
Source: Inside Mortgage Finance - February 15, 2019 or SEC
filings. Excludes HARP NIW.
E - Estimated, F- Forecast
Source: GSEs and MBA estimates/forecasts as of January
2019. Amounts represent the average of all sources.
Estimated total of PMI, FHA, USDA, and VA primary
mortgage insurance
(in billions)
Primary
mortgage
insurance
2018
2017
2016
$675
$701
$748
Source: Inside Mortgage Finance - February 15, 2019 or SEC
filings. Includes HARP NIW.
MGIC Investment Corporation 2018 Annual Report | 17
100%
100%
100%
Primary NIW by type of mortgage
Management's Discussion and Analysis
NEW INSURANCE WRITTEN
NIW for 2018 continued to have what we believe are
favorable risk characteristics. The following tables
provide information about characteristics of our NIW.
Primary NIW by FICO score
(% of primary NIW)
2018
2017
2016
Years Ended December 31,
760 and greater
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
640 - 659
639 and less
Total
42.2%
17.1%
14.5%
11.9%
7.2%
3.8%
2.3%
1.0%
41.8%
16.8%
14.1%
11.9%
8.1%
4.0%
2.3%
1.0%
43.0%
16.1%
14.1%
11.4%
8.4%
3.9%
2.2%
1.0%
Primary NIW by loan-to-value
Years Ended December 31,
(% of primary NIW)
2018
2017
2016
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
80.01% to 85%
16.0%
43.3%
28.7%
12.0%
10.7%
46.5%
29.5%
13.3%
5.8%
47.8%
31.7%
14.7%
An increase in the percentage of purchase
originations, discussed above, an increase in 97% LTV
programs offered by lenders, and home price
appreciation, have increased the percentage of our
NIW with LTV ratios greater than 95% in 2018
compared to 2017.
Primary NIW by debt-to-income ratio
Years Ended December 31,
2018
2017
2016
19.6%
33.1%
10.4%
35.8%
4.9%
35.3%
(% of primary
NIW)
45.01% and
above
38.01% to 45.00%
38.00% and
below
To mitigate our risk from the increase in NIW written
on loans with DTI ratios over 45%, effective in March
2018 we changed our underwriting guidelines to
generally require such loans to have a FICO score of
at least 700. Further, effective in July 2018, we added
risk-based adjustments to our premium rates for
loans with DTI ratios greater than 45%. We are
continuing to monitor our exposure to such loans and
may take further action.
Primary NIW by policy payment type
Years Ended December 31,
(% of primary NIW)
2018
2017
2016
Monthly premiums
Single premiums
Annual Premiums
83.0%
16.8%
0.2%
80.8%
19.0%
0.2%
80.6%
19.1%
0.3%
(% of primary NIW)
2018
2017
2016
Years Ended December 31,
Purchases
Refinances
IIF AND RIF
93.2%
6.8%
88.6%
11.4%
80.4%
19.6%
Our IIF grew 7.6% in 2018, compared to growth of
7.1% in 2017, as NIW more than offset policy
cancellations. Cancellations are primarily due to
refinances, but also result from rescissions, claim
payments, and policy cancellations 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, 2018
was 81.7% compared to 80.1% at December 31, 2017.
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.
47.3%
53.8%
59.8%
Insurance in force and risk in force
In 2018, the percentage of our NIW with DTI ratios
over 45% was 20%, up significantly from 10% in 2017.
The increase was primarily driven by adjustments to
GSE underwriting guidelines for loans with DTI ratios
over 45%. Under our 2018 QSR Transaction, we may
cede risk for loans insured with DTI ratios below 50%;
however, the amount of risk we may cede for loans
insured with DTI ratios over 45% in any quarter is
limited to a percentage of all risk written that is
materially below the percentage of our risk written in
2018 associated with loans with DTI ratios over 45%.
($ in billions)
NIW
Cancellations
Increase in primary IIF
Direct primary IIF as of
December 31,
Direct primary RIF as of
December 31,
Years Ended December 31,
2018
2017
2016
$
$
50.5
(35.7)
14.8
$
$
49.1
$
47.9
(36.2)
(40.4)
12.9
$
7.5
$ 209.7
$
194.9
$
182.0
$
54.1
$
50.3
$
47.2
18 | MGIC Investment Corporation 2018 Annual Report
Management's Discussion and Analysis
CREDIT PROFILE OF OUR PRIMARY RIF
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 risk characteristics when compared to our
2005-2008 origination years. The credit profile of our pre-2009 RIF has benefited from modification programs
such as HARP. HARP allowed borrowers who were not delinquent, but who may not otherwise have been 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 97.6% of all our HARP
modifications were current as of December 31, 2018. The aggregate of our 2009-2018 books and our HARP
modifications accounted for approximately 89% of our total primary RIF at December 31, 2018.
The composition of our primary RIF as of December 31, 2018, 2017, and 2016 is shown below.
Primary risk in force
($ in millions)
2009+
2005 - 2008 (HARP)
Other years (HARP)
Subtotal
2005-2008 (Non-HARP)
Other years (Non-HARP)
Subtotal
December 31, 2018
December 31, 2017
December 31, 2016
RIF
% of RIF
RIF
% of RIF
RIF
% of RIF
$
45,083
83% $
39,248
78% $
33,368
3,109
229
48,421
4,796
846
5,642
5%
1%
89%
9%
2%
11%
3,773
308
43,329
5,894
1,095
6,989
7%
1%
86%
12%
2%
14%
4,489
396
38,253
7,467
1,475
8,942
71%
9%
1%
81%
16%
3%
19%
Total Primary RIF
$
54,063
100% $
50,318
100% $
47,195
100%
POOL AND OTHER INSURANCE
MGIC has written no new pool insurance since 2008, however, for a variety of reasons, 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 $419 million ($228 million on pool policies with aggregate loss limits
and $191 million on pool policies without aggregate loss limits) at December 31, 2018 compared to $471 million
($236 million on pool policies with aggregate loss limits and $235 million on pool policies without aggregate loss
limits) at December 31, 2017. 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 connection with the GSEs' credit risk transfer programs, an insurance subsidiary of MGIC provides insurance
and reinsurance covering portions of the credit risk related to certain reference pools of mortgages acquired by
the GSEs. Our RIF, as reported to us, related to these programs was approximately $53 million as of
December 31, 2018.
MGIC Investment Corporation 2018 Annual Report | 19
Management's Discussion and Analysis
CONSOLIDATED RESULTS OF OPERATIONS
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, 2018. For a discussion of the Critical
Accounting Policies used by us that affect the
Consolidated Results of Operations, see "Critical
Accounting Policies" below.
Premium yield
Premium yield is NPE divided by average IIF during
the year and is influenced by a number of key drivers,
which have a varying impact from period to period.
The following table reconciles the change in our
premium yield for the years ended 2018 and 2017
from the respective prior years.
Year Ended December 31,
2018
2017
2016
Net premiums earned
$ 975.2
$ 992.3
$
$
998.0
934.7
$
$
975.1
925.2
141.3
120.9
110.7
Revenues
Revenues
(In millions)
Net premiums
written
Investment income,
net of expenses
Net realized
investment (losses)
gains
Other revenue
Premium yield
(In basis points)
2018
2017
Premium yield - prior year
49.6
51.9
Reconciliation:
Change in premium rates
(2.8)
(3.8)
Change in premium refunds and
accruals
Single premium policy
persistency
Reinsurance
Premium yield - end of year
0.6
1.3
(0.4)
1.2
48.2
(0.6)
0.8
49.6
(1.4)
8.7
0.2
10.2
8.9
17.7
The declines in our premium yield in each of 2018 and
2017 compared to the respective prior years reflect:
Total revenues
$ 1,123.8
$ 1,066.0
$ 1,062.5
NET PREMIUMS WRITTEN AND EARNED
2018 compared to 2017. NPW was relatively flat
compared to the prior year. NPE increased 4%
compared to the prior year primarily due to lower
ceded premiums, net, as the increase in profit
commission more than offset the increase in gross
ceded premiums. The profit commission increased
due to a decrease in ceded losses. The increase in
NPE also reflects an increase in our IIF compared to
the prior year, however this impact is being offset in
part by a lower premium yield.
2017 compared to 2016. NPW increased 2% from the
prior year, due to an increase in our average IIF, a
decline in premium refunds and lower ceded
premiums, net as the increase in profit commission
more than offset the increase in gross ceded
premiums. Premium refunds declined due to lower
claim activity and our profit commission increased
due a decrease in ceded losses. NPE increased
slightly from the prior year due to the decline in
premium refunds and lower ceded premiums, net,
which offset lower earned premiums from our IIF
during the year as our premium yield decreased.
Negative drivers:
è A larger percentage of our IIF from book years with
lower premium rates due to a decline in premium
rates in recent years resulting from insuring
mortgages with lower risk characteristics and
pricing competition, and certain policies undergoing
premium rate resets on their ten-year anniversaries,
and
è lower amounts of accelerated earned premium from
cancellations on single premium policies prior to
their estimated policy life, primarily due to less
refinancing activity.
Positive drivers:
è less of an adverse impact from our reinsurance due
to lower ceded losses, which resulted in a higher
profit commission, and
è less of an adverse impact from premium refunds
primarily due to lower claim activity.
We expect our premium yield to further decline in
2019, primarily due to lower average premium rates
on our IIF.
See "Overview – Factors Affecting Our Results" above
for additional factors that also influence the amount
of net premiums written and earned in a year. 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.”
20 | MGIC Investment Corporation 2018 Annual Report
Management's Discussion and Analysis
REINSURANCE AGREEMENTS
Quota share reinsurance
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.
2017 compared to 2016:
è The 2017 transaction excluded loans with
amortization terms equal to or less than 20 years.
è Despite the 2017 transaction allowing some risk
written on loans with DTI ratios greater than 45%;
the percentage of such risk written in 2017
exceeded the coverage limit.
è We cede a fixed percentage of premiums earned
and received on insurance covered by the
transactions.
è 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).
è 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).
è We cede a fixed percentage of losses incurred on
insurance covered by the transactions.
The blended pre-tax cost of reinsurance under our
different quota share transactions is less than 6% (but
will decrease if losses are materially higher than we
expect). This blended pre-tax cost is derived by
dividing the reduction in our pre-tax net income on
loans covered by reinsurance by our direct (that is,
without reinsurance) premiums from such loans.
Although the pre-tax cost of the reinsurance under
each transaction is generally constant, the effect of
the quota share reinsurance on the various
components of pre-tax income discussed above will
vary from period to period, depending on the level of
ceded losses.
Covered Risk
The amount of our NIW (and, consequently, our NIW)
subject to our QSR transactions as shown in the
following table will vary from period to period in part
due to coverage limits that may be triggered
depending on the mix of our risk written during the
period.
The percentage of our 2018 NIW covered by our 2018
QSR Transaction decreased when compared to the
percentage of 2017 and 2016 NIW covered by our
2017 QSR Transaction and 2015 QSR Transaction,
respectively, primarily due to the following factors.
2018 compared to 2017:
è The 2018 transaction excluded loans with LTV
ratios of 85% and below.
è Despite the 2018 transaction's increased coverage limit
for risk written on loans with (1) LTV ratios of 95% and
greater, and (2) DTI ratios greater than 45%, the risk
written in 2018 exceeded these coverage limits.
2019 QSR Transaction. The transaction covering our
2019 NIW will include increased coverage limits for
risk written on loans with LTV ratios of 95% or greater
and loans with DTI ratios greater than 45%, each when
compared to our 2018 QSR Transaction.
The following table provides information related to
our quota share reinsurance agreements for 2018,
2017, and 2016.
Quota share reinsurance
(Dollars in
thousands)
NIW subject to
QSR
Transactions
IIF subject to QSR
Transactions
As of and For the Years Ended
December 31,
2018
2017
2016
75.1%
84.0%
89.2%
77.5%
78.0%
76.3%
Statements of operations:
Ceded premiums
written and
earned, net of
profit
commission
% of direct
premiums
written
% of direct
premiums
earned
Profit
commission
Ceding
commissions
Ceded losses
incurred
$ 108,337
$ 120,974
$ 125,460
10%
11%
11%
10%
11%
12%
$ 147,667
$ 125,629
$ 112,685
$ 51,201
$ 49,321
$ 47,629
$
6,543
$ 22,336
$ 30,201
Mortgage insurance portfolio:
Ceded RIF (in
millions)
$ 12,839
$ 11,849
$ 10,764
Excess of loss reinsurance
Our excess of loss reinsurance transaction entered
into October 30, 2018, which covers losses beginning
August 1, 2018, provides up to $318.6 million of loss
coverage on an existing portfolio of in force policies
having an in force date on or after July 1, 2016 and
before January 1, 2018. The initial aggregate exposed
principal balance was approximately $7.5 billion,
which takes into account the unpaid principal balance,
mortgage insurance coverage percentage, net
retained quota share percentage, and the reinsurance
MGIC Investment Corporation 2018 Annual Report | 21
Management's Discussion and Analysis
inclusion percentage.
The premiums ceded to the reinsurer, Home Re, are
composed of coverage premiums, initial expense and
supplemental premiums. The coverage premiums are
generally calculated as the difference between the
amount of interest payable by Home Re on the notes
it issued to raise funds to collateralize its reinsurance
obligations to us, and the investment income
collected on the collateral assets. Total ceded
premiums for the year ended December 31, 2018 were
$2.8 million. The amount of coverage premium due
will vary each month due to changes in interest rates
and the outstanding reinsurance coverage amount.
Captive reinsurance
The following table provides information related to
our captive reinsurance agreements for 2018, 2017,
and 2016.
Captive reinsurance
As of and For the Years Ended
December 31,
(Dollars in thousands)
2018
2017
2016
IIF subject to captive
reinsurance
agreements
Statements of operations:
—%
1%
2%
Ceded premiums
written
% of direct premiums
written
Ceded premiums
earned
% of direct premiums
earned
Ceded losses
incurred
$
125
$ 4,467
$ 7,987
—%
0.4%
0.7%
$
174
$ 4,476
$ 8,090
—%
0.4%
0.8%
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment losses in 2018, and gains in
2017, and 2016 were $1 million, $231 thousand and
$9 million, respectively.
OTHER REVENUE
2018 compared to 2017. Other revenue decreased to
$9 million in 2018 from $10 million in 2017, primarily
due to lower contract underwriting revenues.
2017 compared to 2016. Other revenue decreased to
$10 million in 2017 from $18 million in 2016, due to
lower contract underwriting revenues and a non-
recurring gain in 2016 of approximately $4 million
related to changes in foreign currency exchange rates
upon our substantial liquidation of our Australian
operations.
Losses and expenses
Losses and expenses
Year Ended December 31,
(In millions)
2018
2017
2016
Losses incurred, net
$
36.6
$
53.7
$ 240.2
Amortization of
deferred policy
acquisition costs
Other underwriting
and operating
expenses, net
Interest expense
Loss on debt
extinguishment
Total losses and
expenses
11.9
11.1
9.6
178.2
53.0
159.6
57.0
150.8
56.7
—
0.1
90.5
$ 279.7
$ 281.6
$ 547.8
$
286
$ (1,135)
$ 3,994
LOSSES INCURRED, NET
INVESTMENT INCOME, NET
2018 compared to 2017. Net investment income
increased 17% to $141 million in 2018 compared to
$121 million in 2017. The increase in investment
income was due to higher average investment yields,
as well as a higher average investment portfolio
balance.
2017 compared to 2016. Net investment income
increased 9% to $121 million in 2017 compared to
$111 million in 2016. The increase in investment
income was due to higher average investment yields,
as well as a higher average investment portfolio
balance.
See "Balance Sheet Review" in this MD&A for further
discussion regarding our investment portfolio.
22 | MGIC Investment Corporation 2018 Annual Report
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” and
“default” are used interchangeably by us. We consider
a loan delinquent 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.
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 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. 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 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. Changes to our estimates could result in
a material impact to our consolidated results of
operations and financial position, even in a stable
economic environment.
2018 compared to 2017. Losses incurred, net
decreased 32% to $37 million compared to $54
million in 2017. The decrease was due to a decrease
in losses and LAE incurred in respect to delinquencies
reported in 2018, offset in part by a decrease in
favorable development on prior year delinquencies.
New delinquency notices declined 20% when
compared to 2017, in part due to elevated 2017 notice
activity associated with 2017 hurricanes, and the
estimated claim rate on new notices also declined.
Favorable development on prior year delinquencies
occurred in 2018 due to a lower estimated claim rate
on previously reported delinquencies, partially offset
by increases in our expected severity assumption on
previously reported delinquencies. During 2018, cure
activity on loans that were delinquent twelve months
or more was significantly higher than our previous
estimates.
2017 compared to 2016. Losses incurred, net
decreased 78% to $54 million compared to $240
million in 2016. The decrease was due to both a
decrease in losses and LAE incurred in respect to
delinquencies reported in 2017 and favorable
development on prior year delinquencies. Losses
incurred with respect to delinquencies reported in
2017 declined as we estimated a lower claim rate on
new notices in 2017, which offset the slight increase
in new notices received. The increase in new notices
was caused by hurricane activity in the third quarter of
2017. Favorable development on prior year
delinquencies occurred in 2017 and 2016 due to a
lower estimated claim rate on previously reported
delinquencies, partially offset by increases in our
expected severity assumption on previously reported
delinquencies. During 2017, cure activity on loans that
were delinquent twelve months or more was
significantly higher than our previous estimates.
Management's Discussion and Analysis
See "New notice claim rate" and "Claims severity"
below for additional factors and trends that impact
these loss reserve assumptions.
Composition of losses incurred
Year Ended December 31,
(In millions)
2018
2017
2016
Current year / New
notices
Prior year reserve
development
Losses incurred, net
$
$
204
$
285
$
388
(167)
(231)
(148)
37
$
54
$
240
Loss ratio
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 2018
when compared to 2017, and in 2017 compared to
2016, reflects the lower level of losses incurred, net
and an increase in earned premiums.
Year Ended December 31,
2018
2017
2016
Loss ratio
3.7%
5.7%
26.0%
New notice claim rate
New notice claim rate - total
New notices
Claim rate (1)
Year Ended December 31,
2018
2017
2016
54,448
68,268
67,434
9%
10%
12%
(1)
Claim rate is the respective full year weighted average
rate and is rounded to the nearest whole percent.
New notices - loans insured 2008 and prior
Year Ended December 31,
2018
2017
2016
New notices
38,897
52,313
59,004
Previously delinquent
93%
90%
90%
New notices declined in 2018 compared to 2017 due
to favorable economic conditions and an improving
risk profile of our RIF; however, 2017 new notice
activity also includes the impact of hurricane activity.
The increase in new notices in 2017 compared to
2016 was driven by the 2017 hurricane activity.
Our estimated claim rate on new notices declined in
2018 compared to 2017, and in 2017 compared to
2016, in each case reflecting the economic
environment and our expectation of cure activity on
the new notices received. We also estimated a
materially lower new notice claim rate for those
notices received in the fourth quarter of 2017 that we
estimated to have been caused by hurricane activity
MGIC Investment Corporation 2018 Annual Report | 23
Management's Discussion and Analysis
that occurred in the third quarter of 2017. When
excluding our estimate of new notices caused by
hurricanes, our 2017 new notice claim rate
approximated 10.5%, marginally higher than the actual
full-year rate.
New notice activity continues to be primarily driven by
loans insured in 2008 and prior, which continue to
experience a cycle whereby many loans become
delinquent, cure, and become delinquent again. As a
result of this cycle significant judgment is required in
establishing the estimated claim rate.
Claims severity
Factors that impact claim severity include:
è exposure on the loan, which is the unpaid principal balance of the loan times our insurance coverage percentage,
è length of time between delinquency and claim filing (which impacts the amount of interest and expenses, with a
longer period between default and claim filing generally increasing severity), and
è curtailments.
As discussed in Note 8 - "Loss Reserves," the average time for servicers to process foreclosures has recently
shortened. Therefore, we expect the average number of missed payments at the time a claim is received to be
approximately 18 to 24 for new notices we have recently received, and expect to receive in 2019, compared to an
average of 40 missed payments for claims received in 2018. Our loss reserves estimates take into consideration
trends over time, because the development of the delinquencies may vary from period to period without
establishing a meaningful trend.
The majority of loans from 2005 through 2008 (which represent 60% of the 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. Under our current master policy terms, an insured can include
accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the
insured must comply with its obligations under the terms of the applicable master policy.
The quarterly trend in claims severity for each of the three years in the period ended December 31, 2018 is shown
in the following table.
Claims severity trend
Period
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Q4 2016
Q3 2016
Q2 2016
Q1 2016
Average exposure on
claim paid
$
45,366
$
43,290
44,522
45,597
44,437
43,313
44,747
44,238
43,200
43,747
43,709
44,094
Average claim paid
% Paid to exposure
Average number of
missed payments at claim
received date
47,980
47,230
50,175
51,069
49,177
46,389
49,105
49,110
48,297
48,050
47,953
49,281
105.8%
109.1%
112.7%
112.0%
110.7%
107.1%
109.7%
111.0%
111.8%
109.8%
109.7%
111.8%
41
42
39
38
36
35
35
35
35
34
35
34
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying
practices and NPL commutations.
Our estimate of loss reserves is sensitive to the underlying factors; 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, as of December 31,
2018, assuming all other factors remain constant, a $1,000 increase/decrease in the average severity reserve
factor would change the reserve amount by approximately +/- $12 million. A 1 percentage point increase/
24 | MGIC Investment Corporation 2018 Annual Report
Management's Discussion and Analysis
decrease in the average claim rate reserve factor would change the reserve amount by approximately +/- $19
million.
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).
The length of time a loan is in the delinquent 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 following
table.
Primary delinquent inventory - number of payments
delinquent
3 payments or less
4 - 11 payments
12 payments or
more (1)
Total
December 31,
2018
15,519
8,842
8,537
32,898
2017
21,678
12,446
12,432
46,556
2016
18,419
12,892
18,971
50,282
3 payments or less
4 - 11 payments
12 payments or more
47%
27%
26%
46%
27%
27%
36%
26%
38%
Total
100%
100%
100%
(1)
Approximately 38%, 43%, and 46% of the primary
delinquent inventory with 12 payments or more
delinquent has at least 36 payments delinquent as of
December 31, 2018, 2017 and 2016, respectively.
NET LOSSES AND LAE PAID
This section provides information on our claim
payment trends and exposure on our outstanding RIF
for each of the three years in the period ended
December 31, 2018. The table below presents our net
losses and LAE paid for each of those years.
Net losses and LAE paid
(in millions)
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
2018
2017
2016
$
282
$
446
$
599
50
6
—
338
(19)
319
16
335
(2)
54
10
—
510
(23)
487
18
505
—
53
56
(1)
707
(23)
684
20
704
(3)
$
333
$
505
$
701
(1)
(2)
See Note 8 - "Loss Reserves" for additional information
on our settlements of disputes for claims paying
practices and commutations of NPLs.
2016 included $42 million paid under the terms of our
settlement with Freddie Mac as discussed in Note 8 -
"Loss Reserves" to our consolidated financial
statements.
Net losses and LAE paid decreased 34% in 2018
compared to 2017 primarily due to lower claim
activity on our primary business. Net losses and LAE
paid decreased 28% in 2017 compared to 2016 due to
lower claim activity on our primary business and the
completion of our settlement payments to Freddie
Mac in 2016 related to our pool business. During each
of 2018, 2017 and 2016, losses paid included
settlement payments under commutations of
coverage on pools of NPLs and/or related to disputes
concerning our claims paying practices. We believe
losses and LAE paid will be lower in 2019 compared
to 2018.
MGIC Investment Corporation 2018 Annual Report | 25
Management's Discussion and Analysis
Primary losses paid for the top 15 jurisdictions (based
on 2018 losses paid, excluding settlement amounts)
and all other jurisdictions for each of the three years
in the period ended December 31, 2018 appears in the
table below.
Primary paid losses by jurisdiction
The primary average RIF on delinquent loans as of
December 31, 2018, 2017 and 2016 and for the top 5
jurisdictions (based on 2018 losses paid, excluding
settlement amounts) appears in the following table.
Primary average exposure - delinquent loans
2018
2017
2016
$ 65,521
$ 65,684
$ 65,196
71,795
53,371
39,753
65,421
40,136
44,584
71,260
54,872
40,794
66,266
39,848
45,153
68,729
54,018
41,765
66,005
39,287
44,520
New Jersey
New York
Florida
Illinois
Maryland
All other jurisdictions
All jurisdictions
LOSS RESERVES
Our primary default rate at December 31, 2018 was
3.11% (2017: 4.55%, 2016: 5.04%). Our primary
delinquent inventory was 32,898 loans at December
31, 2018, representing a decrease of 29% from 2017
and 35% from 2016. The reduction in our primary
delinquent inventory is the result of the total number
of delinquent 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 settlements of claims paying
disputes or commutations of coverage of pools of
NPLs, collectively, exceeding the total number of new
delinquencies on insured loans. In recent periods, we
have experienced improved cure rates and the
number of delinquencies in the inventory with twelve
or more missed payments has been declining.
Generally, the fewer missed payments associated with
a delinquent loan, the lower the likelihood it will result
in a claim. Our commutations of coverage on pools of
NPLs have each been completed with amounts paid
approximating the loss reserves previously
established on the delinquent loans. We expect our
delinquent inventory to decline in 2019 from 2018
levels.
(In millions)
New Jersey*
New York*
Florida*
Illinois*
Maryland
Pennsylvania*
California
Puerto Rico*
Ohio*
Massachusetts
Connecticut*
Virginia
Georgia
Texas
Michigan
$
2018
2017
2016
$
42
32
29
19
18
12
11
9
8
8
7
6
5
5
4
$
61
37
49
28
23
22
17
18
16
13
11
10
10
8
7
60
35
85
43
29
26
27
17
21
14
14
15
13
10
14
All other jurisdictions
67
116
176
Total primary
(excluding
settlements)
$
282
$
446
$
599
Note: Asterisk denotes jurisdictions in the table above 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 2018 losses paid, excluding
settlement amounts) for each of the three years in the
period ended December 31, 2018 appears in 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,
time between default and claim payment and loss
mitigation efforts on loans for which claims are paid.
Primary average claim paid
New Jersey*
New York*
Florida*
Illinois*
Maryland
All other jurisdictions
All jurisdictions
2018
2017
2016
$ 89,504
$ 87,333
$ 81,955
98,026
59,320
44,379
72,966
37,743
49,218
81,043
62,751
46,089
73,569
39,146
48,476
70,869
60,737
50,047
72,396
40,828
48,416
Note: Asterisk denotes jurisdictions in the table above that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a
foreclosure to be completed.
26 | MGIC Investment Corporation 2018 Annual Report
Management's Discussion and Analysis
The primary and pool loss reserves as of December 31, 2018, 2017 and 2016 appear in table below.
Gross reserves
Primary:
Direct loss reserves (In millions)
$
IBNR and LAE
Total primary loss reserves
Ending delinquent inventory
Percentage of loans delinquent (default
rate)
Average direct reserve per default
Primary claims received inventory included
in ending delinquent inventory
Pool (1):
Direct loss reserves (In millions):
With aggregate loss limits
Without aggregate loss limits
Total pool direct loss reserves
Ending delinquent inventory:
With aggregate loss limits
Without aggregate loss limits
Total pool ending delinquent inventory
Pool claims received inventory included in
ending delinquent inventory
2018
610
50
660
December 31,
2017
2016
$
913
58
971
$
1,334
79
1,413
32,898
46,556
50,282
3.11%
$ 20,077
4.55%
$ 20,851
5.04%
$ 28,104
809
954
1,385
10
3
13
10
4
14
18
7
25
595
264
859
24
952
357
1,309
42
1,382
501
1,883
72
Other gross reserves (In millions)
1
1
1
(1)
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.
The average direct reserve per default as of December 31, 2017 included the impact of delinquencies we
estimated to be caused by hurricane activity that remained in our ending delinquent inventory at December 31,
2017, which had a materially lower new notice claim rate than other new notices received. When excluding the
estimated hurricane delinquencies, the average direct reserve per default was $24,000. The average direct
reserve per default as of December 31, 2018 declined when compared to the average as of December 31, 2017
and December 31, 2016 because the estimated claim rates on loans that remain in our delinquent inventory were
lower as of December 31, 2018.
MGIC Investment Corporation 2018 Annual Report | 27
Management's Discussion and Analysis
The primary default inventory for the top 15
jurisdictions (based on 2018 losses paid, excluding
settlement amounts) at December 31, 2018, 2017 and
2016 appears in table the below.
The primary default inventory by policy year at
December 31, 2018, 2017 and 2016 appears in the
table below.
Primary delinquent inventory by policy year
Primary delinquent inventory by jurisdiction
New Jersey*
New York*
Florida*
Illinois*
Maryland
Pennsylvania*
California
Puerto Rico*
Ohio*
Massachusetts
Connecticut*
Virginia
Georgia
Texas
Michigan
All other jurisdictions
Total
2018
2017
2016
1,151
1,855
2,853
1,781
842
1,929
1,260
1,503
1,627
596
480
588
1,220
2,369
1,041
11,803
32,898
1,749
2,387
6,501
2,136
1,026
2,403
1,402
3,761
2,025
759
574
731
1,550
3,975
1,260
14,317
46,556
2,586
3,171
4,150
2,649
1,312
2,984
1,590
1,844
2,614
1,108
690
885
1,853
3,201
1,482
18,163
50,282
Note: Asterisk denotes jurisdictions in the table above that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a
foreclosure to be completed.
Florida, Puerto Rico, and Texas each experienced an
increase in their delinquent inventory as of December
31, 2017 compared to December 31, 2016. The
increases were driven by hurricanes in the third
quarter of 2017, which resulted in significant new
notice activity in the fourth quarter of 2017. Primarily
due to 2018 cure activity on hurricane-related notices,
each of those jurisdictions had significant reductions
in their delinquent inventory in 2018.
2018
2017
2016
2004 and prior
2004 and prior %:
6,061
8,739
11,116
18%
19%
22%
2005
2006
2007
2008
3,340
5,299
8,702
2,369
4,916
7,719
12,807
3,455
5,826
9,267
15,816
4,140
2005 - 2008 %
60%
62%
70%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
172
121
159
312
592
1,264
1,418
1,459
1,282
348
315
199
266
549
957
1,757
1,992
1,930
955
—
2009 and later %:
22%
19%
421
222
246
364
686
1,142
814
222
—
—
8%
Total
32,898
46,556
50,282
The delinquent inventory as of December 31, 2017 for
most policy years included new notices from
hurricane impacted areas that had not cured. As a
result, delinquencies, including in the most recent
policy years, were greater than they otherwise would
have been as of December 31, 2017. The majority of
the notices received in the hurricane impacted areas
cured during 2018.
The losses we have incurred on our 2005 through
2008 books have exceeded our premiums from those
books. 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
high-quality loans, those books are a declining
percentage of our total mortgage insurance portfolio.
Our 2005 through 2008 books of business
represented approximately 15% and 19% of our total
primary RIF at December 31, 2018 and 2017,
respectively. Approximately 39% of the remaining
primary RIF on our 2005 through 2008 books of
business benefited from HARP as of both
December 31, 2018 and 2017.
28 | MGIC Investment Corporation 2018 Annual Report
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, 2018, 59% of
our primary RIF was written subsequent to December
31, 2015, 70% of our primary RIF was written
subsequent to December 31, 2014, and 76% of our
primary RIF was written subsequent to December 31,
2013.
UNDERWRITING AND OTHER EXPENSES, NET
2018 compared to 2017. Underwriting and other
expenses for 2018 increased when compared to 2017
primarily due to higher compensation expenses.
2017 compared to 2016. Underwriting and other
expenses for 2017 increased when compared to
2016, primarily due to higher compensation,
professional services, and depreciation expenses.
Underwriting expense ratio
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, and is presented in the
table below for the past three years.
Year Ended December 31,
2018
2017
2016
Underwriting expense
ratio
18.2%
16.0%
15.3%
The increase in the underwriting expense ratio in 2018
when compared to 2017 was due to an increase in
expenses and a decrease in our NPW. The increase in
the underwriting expense ratio in 2017 when
compared to 2016 was due to an increase in
expenses, offset in part by an increase in our NPW.
INTEREST EXPENSE
2018 compared to 2017. Interest expense for 2018
decreased 7% to $53 million compared to $57 million
in 2017 as our previously outstanding 5% Notes
matured and our 2% Notes were extinguished, each
during 2017.
2017 compared to 2016. Interest expense for 2017
was relatively flat with 2016 as a full-year of interest
on our 5.75% Notes issued in August 2016 offset
lower interest due to the maturity of our 5% Notes and
extinguishment of our 2% Notes.
Management's Discussion and Analysis
LOSS ON DEBT EXTINGUISHMENT
Loss on debt extinguishment in 2016 reflects the
repurchases of a portion of our outstanding 2% and
5% Notes at amounts above our carrying values. The
loss on debt extinguishment from MGIC's purchase of
a portion of our 9% Debentures represents the
difference between the fair value and carrying value of
the liability component on the purchase date.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
Income tax provision and effective tax rate
(In millions,
except rate)
Income before
tax
Provision for
income taxes
2018
2017
2016
$ 844,150
$ 784,496
$ 514,714
174,053
428,735
172,197
Effective tax rate
20.6%
54.7%
33.5%
2018 compared to 2017. The decrease in income tax
expense for 2018 compared to 2017 reflects the
lower 2018 federal statutory income tax rate under
the Tax Act, the remeasurement of our deferred tax
assets in 2017, as well as an additional tax provision
recorded in 2017 for the settlement of our IRS
litigation, partially offset by a 2018 increase in income
before tax. Our 2018 effective tax rate was below the
federal statutory income tax rate of 21% primarily due
to the benefits of tax-preferenced securities.
2017 compared to 2016. The increase in income tax
expense in 2017 compared to 2016 was due to the
2017 remeasurement of net deferred tax assets at the
lower corporate income tax rate under the Tax Act, the
2017 increase in income before tax, and an additional
tax provision recorded for the expected settlement of
our IRS litigation. The difference between the federal
statutory income tax rate of 35% and our effective tax
provision rate of 54.7% in 2017 was primarily due to
the remeasurement of deferred tax assets at the
lower corporate tax rate and the additional tax
provision recorded for the settlement of our IRS
litigation. The difference between the federal statutory
income 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.
See Note 12 – “Income Taxes” to our consolidated
financial statements for a discussion of our tax
position.
MGIC Investment Corporation 2018 Annual Report | 29
Management's Discussion and Analysis
BALANCE SHEET REVIEW
Shareholders' equity
Shareholders' equity
(In millions)
2018
2017
$ Change
As of December 31,
To achieve our portfolio objectives, our asset
allocation 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:
Shareholders' equity
è economic and market outlooks;
Common stock
$
371
$
371
$
Paid-in capital
Treasury stock
AOCL, net of tax
Retained earnings
1,863
1,851
(175)
(124)
1,647
—
(44)
977
Total
$
3,582
$
3,155
$
—
12
(175)
(80)
670
427
è diversification effects;
è security duration;
è liquidity;
è capital considerations; and
è income tax rates.
The increase in shareholders' equity was due to net
income during 2018, offset in part by a decrease in
the fair value of our investment portfolio and the
repurchase of shares of our common stock.
Total assets and total liabilities
As of December 31, 2018, total assets were $5.7
billion and total liabilities were $2.1 billion. Compared
to year-end 2017, total assets increased by $58.3
million and total liabilities decreased by $369.1
million.
The following sections focus on the assets and
liabilities experiencing major developments in 2018.
INVESTMENT PORTFOLIO
The investment portfolio increased 3%, to $5.2 billion
as of December 31, 2018 (2017: $5.0 billion), as net
cash from operations was used in part for additional
investment.
The return we generate on our investment portfolio is
an important component of our consolidated financial
results. Our investment portfolio primarily consists of
a diverse mix of highly rated fixed income securities.
The investment portfolio is designed to achieve the
following objectives:
Operating Companies (1)
Holding Company
è Preserve PMIERs
assets
è Maximize total return
with emphasis on
yield, subject to our
other objectives
è Provide liquidity with
minimized realized
loss
è Maintain highly liquid,
low volatility assets
è Limit portfolio volatility è Maintain high credit
quality
è Duration 3.5 to 5.5
è Duration maximum of
years
2.5 years
(1)
Primarily MGIC
30 | MGIC Investment Corporation 2018 Annual Report
The average duration and embedded investment yield
of our investment portfolio as of December 31, 2018,
2017, and 2016 is shown in the following table.
Portfolio duration and embedded investment yield
Duration (in years)
Pre-tax yield (1)
After-tax yield (1)
December 31,
2018
4.1
3.1%
2.6%
2017
4.3
2.7%
2.0%
2016
4.6
2.6%
1.9%
(1)
Embedded investment yield is calculated on a yield-to-
worst basis.
The credit risk of a security is evaluated through
analysis of the security's underlying fundamentals,
including 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. The
following table shows the security ratings of our fixed
income investments as of December 31, 2018 and
2017.
Fixed income security ratings
% of fixed income securities at fair value
Security Ratings (1)
Period
AAA
AA
December 31,
2018
December 31,
2017
19%
23%
21%
26%
A
33%
36%
BBB
25%
17%
(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.
Our investment portfolio as of December 31, 2018
had a greater proportion of its invested value in
corporate and loan-backed fixed income securities
when compared to December 31, 2017. This shift in
investment mix through new investments during 2018
Management's Discussion and Analysis
LOSS RESERVES
Loss reserves, which represent our estimated liability
for losses and settlement expenses under our
mortgage guaranty insurance policies, net of related
reinsurance balances recoverable, decreased 32% to
$641 million as of December 31, 2018 from $937
million as of December 31, 2017. This decrease was
driven by the payment of claims during 2018 and
favorable development on previously received
delinquencies, offset in part by losses incurred on
new delinquency notices received in 2018 that remain
in inventory.
OTHER LIABILITIES
Other liabilities decreased 30% to $180 million as of
December 31, 2018 (2017: $256 million), primarily due
to a decrease in our income taxes payable due to
payments associated with the settlement of our IRS
litigation and a decline in our premium refund accrual
due to lower estimated claim rates.
Off-balance sheet arrangements
Home Re is a special purpose VIE that is not
consolidated in our consolidated financial statements
because we do not have the unilateral power to direct
those activities that are significant to its economic
performance. See Note 9 - "Reinsurance," to our
consolidated financial statements for additional
information.
resulted in a higher investment yield, but also
increased the percentage of “BBB” rated securities
when compared to the prior year.
See Note 5 – “Investments” to our consolidated
financial statements for additional disclosure on our
investment portfolio.
Investments outlook
The U.S. economy continued to grow in 2018 and is
expected to continue to grow in 2019. Against this
positive macroeconomic backdrop, which includes
very low unemployment, the FOMC has increased its
benchmark interest rate to a range of 225-250 basis
points as of December 31, 2018, up 100 basis points
from the prior year end. Continued economic growth
may result in additional increases to the FOMC
benchmark interest rate in 2019. Our investment
portfolio of fixed income securities is subject to
interest rate risk and its fair value is likely to decline in
a rising interest rate environment. We seek to manage
our exposure to interest rate risk and volatility by
maintaining a diverse mix of high quality securities
with an intermediate duration profile. While higher
interest rates may adversely impact the fair values of
our fixed income securities, they present an
opportunity to reinvest investment income and
proceeds from security maturities into higher yielding
securities. In light of the corporate income tax rate
reduction in the fourth quarter of 2017, we reduced
the percentage of our investments in tax-exempt
securities during 2018 and increased our corporate
and CLO concentrations. We will continue to evaluate
the relative value of tax-exempt versus taxable fixed
income securities during 2019, and our investment
allocations may shift over time.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased 52%, to $152
million as of December 31, 2018 (2017: $100 million),
as net cash generated from operating activities was
only partly offset by net cash used in investing and
financing activities.
DEFERRED INCOME TAXES
Deferred income taxes, net decreased 70%, to $69
million as of December 31, 2018 (2017: $234 million),
primarily through the continued use of our net
operating loss carryforwards to offset taxable
income. We had no remaining net operating loss
carryforwards as of December 31, 2018.
MGIC Investment Corporation 2018 Annual Report | 31
Management's Discussion and Analysis
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 purchases of
property and equipment and (3) financing cash flows
generally from activities that impact our capital
structure, such as changes in debt and shares
outstanding. The following table summarizes these
three cash flows on a consolidated basis for the last
three years.
Summary of consolidated cash flows
(In thousands)
2018
2017
2016
Years ended December 31,
Total cash provided
by (used in):
Operating activities
$ 544,517
$ 406,657
$ 224,760
Investing activities
(317,780)
(303,641)
(93,392)
Financing activities
(171,550)
(158,575)
(157,078)
Increase (decrease)
in cash and cash
equivalents and
restricted cash
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
- Premium ceded to reinsurers
-
Interest expense
- Operating expenses
-
IRS litigation settlement payments
Our largest source of cash is from premiums received
from our insurance policies, which we receive on a
monthly installment basis 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 delinquency results in an
insured loss. We invest our claims paying resources
from premiums and other sources in various
investment securities that earn interest. We also use
32 | MGIC Investment Corporation 2018 Annual Report
cash to pay for our ongoing expenses such as
salaries, debt interest, and rent.
In connection with the reinsurance we use to manage
the risk associated with our insurance policies, we
cede, or pay out, part of the premiums we receive to
our reinsurers and collect cash back when claims
subject to our reinsurance coverage are paid.
Net cash provided by operating activities in 2018
increased compared to 2017 primarily due to a lower
level of losses paid, net and an increase in investment
income, offset in part by payments made in
connection with our IRS litigation settlement.
Net cash provided by operating activities in 2017
increased compared to 2016 primarily due to a lower
level of losses paid and an increase in net premiums
written, offset in part by increases in payments for
interest and other expenses.
Investing activities
The following list highlights the major sources and
uses of cash flow from investing activities:
Sources
+ Proceeds from sales of investments
Uses
- Purchases of investments
- 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, 2018, our portfolio had a fair
value of $5.2 billion, an increase of $168.5 million, or
3.4% from December 31, 2017. In addition to
investment portfolio activities, our investing activities
included additions to property and equipment.
Beginning in 2016, we began an initiative to update
our corporate headquarters building, which is
substantially complete, and continued our investment
in our technology infrastructure to enhance our ability
to conduct business and execute our strategies.
Net cash flows used in investing activities in 2018,
2017, and 2016 primarily reflect purchasing fixed
income securities in an amount that exceeded our
proceeds from sales and maturities of fixed income
securities during the year as cash from operations
was available for additional investment. In addition,
cash was used in each of 2018, 2017, and 2016 to
make additions to property and equipment.
$ 55,187
$ (55,559) $ (25,710)
+ Proceeds from maturity of fixed income securities
Financing activities
The following list highlights the major sources and
uses of cash flow from financing activities:
Sources
+ Proceeds from debt and/or common stock issuances
Uses
- Repayment/repurchase of debt
- Repurchase of common stock
- Payment of debt issuance costs
-
Payment of withholding taxes related to share-based
compensation net share settlement
Net cash flows used in financing activities in 2018
reflect repurchases of our common stock and the
payment of withholding taxes related to share-based
compensation net share settlement.
Net cash flows used in financing activities for 2017
included the repayment at maturity of our 5% Notes,
redemption of a portion of our 2% Notes, expenses
paid to establish our revolving credit facility and
payment of withholding taxes related to share-based
compensation net share settlement.
Cash flows used in financing activities for 2016
included the repurchase of a portion of the
outstanding principal on our 5% Notes and 2% Notes,
the purchase by MGIC of a portion of the outstanding
principal on our 9% Debentures, and payment of
withholding taxes related to share-based
compensation net share settlement. MGIC's
ownership of our 9% Debentures is eliminated in
consolidation. These transactions were offset in part
by cash inflows from the issuance of long-term debt,
including an FHLB borrowing and our 5.75% Notes,
net of related issuance fees.
* * *
For a further discussion of matters affecting our cash
flows, see "Balance Sheet Review" and "Debt at our
Holding Company and Holding Company Liquidity"
below.
Management's Discussion and Analysis
CAPITALIZATION
Capital Risk
Capital risk is the risk of adverse impact on our ability
to comply with capital requirements (regulatory and
GSE) and to maintain the level, structure and
composition of capital required for meeting financial
performance objectives.
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
invest in our business, even in a stressed
environment.
Our capital management objectives are to:
è influence and ensure compliance with capital
requirements,
è manage relationships to foster access to capital and
reinsurance markets,
è size our capital to balance competitive needs,
handle contingencies and create shareholder value,
including analyzing the size and form of capital
return to shareholders
è position our mix of debt, equity and/or reinsurance
to support our business strategy while considering
the competing needs of credit ratings agencies,
regulators and shareholders, and
è support business opportunities by efficiently using
company resources, aligning legal structure and
enabling capital flexibility.
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. The focus we place on any individual
objective may change over time due to factors that
include, but are not limited to, economic conditions,
changes at the GSEs, competition, and alternative
transactions to transfer mortgage risk.
MGIC Investment Corporation 2018 Annual Report | 33
Management's Discussion and Analysis
Capital Structure
The following table summarizes our capital structure as of December 31, 2018, 2017, and 2016.
(In thousands, except ratio)
2018
2017
2016
Common stock, paid-in capital, retained earnings, less treasury stock
$
3,706,105
$
3,198,309
$
2,623,942
Accumulated other comprehensive loss, net of tax
(124,214)
(43,783)
(75,100)
Total shareholders' equity
Long-term debt, par value
Total capital resources
3,581,891
836,872
3,154,526
836,872
2,548,842
1,189,472
$
4,418,763
$
3,991,398
$
3,738,314
Ratio of long-term debt to shareholders' equity
23.4%
26.5%
46.7%
The increase in total shareholders' equity in 2018
from 2017 was primarily due to net income during
2018, offset by our repurchases of our common stock
and the increase in unrealized investment losses. The
increase in shareholders' equity in 2017 from 2016
was primarily due to net income in 2017 and
conversion of substantially all of our then-remaining
2% Notes into shares of common stock. See Note 13 -
"Shareholders' Equity" for further information on the
2% Note conversion.
DEBT AT OUR HOLDING COMPANY AND HOLDING
COMPANY LIQUIDITY
Debt obligations - holding company
The 5.75% Notes and 9% Debentures are obligations
of our holding company, MGIC Investment
Corporation, and not of its subsidiaries. We have no
debt obligations due within the next twelve months.
As of December 31, 2018, our 5.75% Note had $425
million of outstanding principal, due in August 2023,
and our 9% Debentures had $389.5 million of
outstanding principal, due in April 2063. MGIC's
ownership of $132.7 million of our holding company's
9% Debentures is eliminated in consolidation, but they
remain outstanding obligations owed by our holding
company to MGIC. The 9% Debentures are a
convertible debt issuance. Subject to certain
limitations and restrictions, holders of the 9%
Debentures 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
prior to the scheduled maturity.
See Note 7 - "Debt" for further information on our
outstanding debt obligations and transactions
impacting our consolidated financial statements in
2018 and 2017.
Liquidity analysis - holding company
As of December 31, 2018, we had approximately $248
million in cash and investments at our holding
company. These resources are maintained primarily
to service our debt interest expense, pay debt
maturities, and to settle intercompany obligations.
While these assets are held, we generate investment
34 | MGIC Investment Corporation 2018 Annual Report
income that serves to offset a portion of our interest
expense. Investment income and the payment of
dividends from our insurance subsidiaries are the
principal sources of holding company cash inflow.
MGIC is the principal source of dividends, and their
payment is restricted by insurance regulation. See
Note 14 - "Statutory Information" to our consolidated
financial statements for additional information about
MGIC's dividend restrictions. The payment of
dividends from MGIC is also influenced by our view of
the appropriate level of PMIERs Available Assets to
maintain an excess of Minimum Required Assets.
Other sources of holding company cash inflow
include any unused capacity on our unsecured
revolving credit facility and raising capital in the public
markets. 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.
Over the next twelve months the principal demand on
holding company resources will be interest payments
on our 5.75% Notes and 9% Debentures
approximating $60 million. We expect MGIC will
continue to pay dividends of at least $60 million per
quarter in 2019. Our unsecured revolving credit facility
provides $175 million of borrowing capacity, of which
no amount is currently drawn. We believe our holding
company has sufficient sources of liquidity to meet
its payment obligations for the foreseeable future.
During 2018, we used approximately $175 million (of
which $12 million settled in January 2019) of
available holding company cash to repurchase shares
of our common stock. We may use additional holding
company cash to repurchase additional shares or to
repurchase our outstanding debt obligations. Such
repurchases may be material, may be made for cash,
including with funds provided by debt, and/or
exchanges for other securities, and may be made in
open market purchases, privately negotiated
acquisitions or other transactions. See "Overview-
Capital" of this MD&A for a discussion of the share
repurchase program authorized on April 26, 2018.
In 2018, our holding company cash and investments
increased by $32 million, to $248 million as of
December 31, 2018. Cash inflows included $220
million of dividends received from MGIC and $35
million of other inflows, which included intercompany
activity. Cash outflows included $163 million used to
repurchase shares of our common stock and $60
million of interest payments, of which approximately
$12 million was paid to MGIC for the portion of our 9%
Debentures owned by MGIC.
The net unrealized losses on our holding company
investment portfolio were approximately $2.2 million
at December 31, 2018 and the portfolio had a
modified duration of approximately 1.4 years.
Scheduled debt maturities beyond the next twelve
months include $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. The
principal amount of the 9% Debentures is currently
convertible, at the holder’s option, at an initial
conversion rate, which is subject to adjustment, of
74.0741 common shares per $1,000 principal amount
of debentures. This represents an initial conversion
price of approximately $13.50 per share. We may
redeem the 9% Debentures in whole or in part from
time to time, at our option, at a redemption price equal
to 100% of the principal amount of the 9% Debentures
being redeemed, plus any accrued and unpaid
interest, if the closing sale price of our common stock
exceeds $17.55 for at least 20 of the 30 trading days
preceding notice of the redemption.
See Note 7 – “Debt” to our consolidated financial
statements for additional information about the
conversion terms of our 9% Debentures and the terms
of our indebtedness, including our option to defer
interest. 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 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.
The terms of our 5.75% Notes are contained in a
Supplemental Indenture, dated as of August 5, 2016,
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 August 5, 2016, and in the Indenture
dated as of October 15, 2000 between us and the
trustee.
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
Management's Discussion and Analysis
consolidated financial statements for other possible
uses of holding company resources.
DEBT AT SUBSIDIARIES
MGIC is a member of the FHLB. Membership in the
FHLB provides MGIC access to an additional source
of liquidity via a secured lending facility. MGIC has
outstanding a $155.0 million fixed rate advance from
the FHLB. Interest on the advance is payable monthly
at a fixed annual rate of 1.91%. The principal of the
advance matures on February 10, 2023, but may be
prepaid 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 in the
form of pledged securities from the investment
portfolio, whose market value must be maintained at
a minimum of 102% of the principal balance of the
advance.
Capital Adequacy
PMIERs
We operate under the PMIERs of the GSEs that
became effective December 31, 2015. Revised
PMIERs were published in September 2018 and will
become effective March 31, 2019. Refer to "Overview -
Capital - GSEs" of this MD&A for further discussion of
PMIERs.
As of December 31, 2018, MGIC’s Available Assets
under PMIERs totaled approximately $4.8 billion, an
excess of approximately $1.4 billion over its Minimum
Required Assets; and MGIC is in compliance with the
requirements of the PMIERs and eligible to insure
loans delivered to or purchased by the GSEs. If the
revised PMIERs had been effective as of December
31, 2018, we estimate that MGIC's pro forma excess
of Available Assets over Minimum Required Assets
would have been approximately $1.0 billion. The
decrease in the pro forma excess from the reported
excess of $1.4 billion is primarily due to the
elimination of any credit for future premiums that had
previously been allowed for certain insurance policies.
Maintaining a sufficient level of excess Available
Assets will allow MGIC to remain in compliance with
the PMIERs financial requirements. Our reinsurance
transactions provided an aggregate of approximately
$1.2 billion of PMIERs capital credit as of
December 31, 2018. Our 2019 QSR transaction terms
are expected to be no less favorable than our existing
QSR transactions and will also provide PMIERs capital
credit. Refer to Note 9 - "Reinsurance" to our
consolidated financial statements for additional
information on our reinsurance transactions.
We plan to continuously comply with the PMIERs
through our operational activities or through the
contribution of funds from our holding company,
MGIC Investment Corporation 2018 Annual Report | 35
Management's Discussion and Analysis
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 the risk covered by quota share 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 reported as a liability on the
statutory balance sheet. A mortgage insurance
company is required to make annual additions to a
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.
The table below presents MGIC’s separate company
risk-to-capital calculation.
Risk-to-capital - MGIC separate company
(In millions, except ratio)
RIF - net (1)
Statutory policyholders' surplus
Statutory contingency reserve
Statutory policyholders'
position
Risk-to-capital
December 31,
2018
2017
$
$
34,502
1,682
2,138
$
$
31,144
1,620
1,654
$
3,820
$
9.0:1
3,274
9.5:1
(1)
RIF – net, as shown in the table above, is net of quota
share reinsurance and exposure on policies currently in
default and for which loss reserves have been
established.
36 | MGIC Investment Corporation 2018 Annual Report
The table below presents our combined insurance
companies’ risk-to-capital calculation (which includes
a reinsurance affiliate). 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.
Risk-to-capital - Combined insurance companies
(In millions, except ratio)
RIF - net (1)
Statutory policyholders' surplus
Statutory contingency reserve
Statutory policyholders'
position
Risk-to-capital
December 31,
2018
2017
$
$
40,239
1,683
2,443
$
$
36,818
1,622
1,897
$
4,126
$
3,519
9.8:1
10.5:1
(1)
RIF – net, as shown in the table above, is net of quota
share reinsurance and exposure on policies currently
delinquent ($1.6 billion at December 31, 2018 and $2.3
billion at December 31, 2017) and for which loss
reserves have been established.
The 2018 reductions in the risk-to-capital of MGIC and
our combined insurance companies were due to an
increase in statutory policyholders' position, primarily
due to an increase in statutory contingency reserves,
partially offset by an increase in net RIF. Our RIF, net
of reinsurance, increased in 2018, due to an increase
in our IIF. Our risk-to-capital ratio will decrease if the
percentage increase in capital exceeds the
percentage increase in insured risk.
For additional information regarding regulatory capital
see Note 14 – “Statutory Information” to our
consolidated financial statements as well as our risk
factor titled “State capital requirements may prevent
us from continuing to write new insurance on an
uninterrupted basis.”
Financial Strength Ratings
MGIC financial strength ratings
Rating Agency
Moody's Investor Services
Standard and Poor's Rating Services
A.M. Best
Rating
Outlook
Baa2
BBB+
A-
Stable
Stable
Stable
For further information about the importance of
MGIC’s ratings, 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.”
MAC financial strength ratings
Rating Agency
A.M. Best
Rating
A-
Outlook
Stable
Management's Discussion and Analysis
Contractual Obligations
The following table summarizes, as of December 31, 2018, the approximate future payments under our
contractual obligations and estimated claim payments on established loss reserves.
Contractual obligations
(In millions)
Total
Payments due by period
Less than
1 year
1-3 years
3-5 years
More than
5 years
Long-term debt obligations
$
2,001.1
$
51.3
$
101.3
$
678.4
$
1,170.1
Operating lease obligations
Purchase obligations
Other long-term liabilities
3.0
10.2
674.1
1.4
7.4
252.8
1.4
2.3
306.0
0.2
0.5
115.3
—
—
—
Total
$
2,688.4
312.9
$
411.0
$
794.4
$
1,170.1
Our long-term debt obligations as of December 31, 2018 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. 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.
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 delinquency to develop into a received claim and the length of time it takes for a received
claim to be paid. The future claim payment periods are estimated based on historical experience, and could
emerge differently than this estimate, in part, due to uncertainty regarding the effect of 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. See Note 8 – “Loss Reserves” to our
consolidated financial statements and “Critical Accounting Policies” below for additional information on our loss
reserves. In accordance with GAAP for the mortgage insurance industry, we establish loss reserves only for
delinquent loans. 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.
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 defined benefit pension plan obligations. We do not have a
minimum funding requirement for the defined benefit pension plan for 2019 and do not anticipate having a
minimum funding requirement in 2020. We have significant discretion in making contributions above those
necessary to satisfy the minimum funding requirements. In 2018, 2017, and 2016, there was no minimum
funding requirement for the defined benefit pension plan. In 2018, 2017, and 2016, we voluntarily made
contributions totaling $10.0 million, $9.1 million, and $8.7 million, respectively. We plan on making a voluntary
contribution of approximately $7 million to the defined benefit pension plan in 2019. In determining future
contributions, we will consider the performance of the plan's investment portfolio, the effects of interest rates on
the projected benefit obligation of the plan and our other capital requirements. As of December 31, 2018, we had
accrued a liability of $7.4 million related to our defined benefit pension plan as the projected obligation was in
excess of plan assets. The supplemental executive retirement plan benefits are accrued for and are paid from
MGIC assets following employee retirements. We plan on paying benefits of approximately $4 million under the
supplemental executive retirement plan in 2019.
Our projected benefit 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 defined benefit pension plan 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 percentage invested in a mix of equity securities. If the performance of our invested plan assets differs
from our expectations, the funded status of the benefit pension plan may decline, even with no significant
MGIC Investment Corporation 2018 Annual Report | 37
Management's Discussion and Analysis
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.
38 | MGIC Investment Corporation 2018 Annual Report
CRITICAL ACCOUNTING POLICIES
The accounting policies described below require
significant judgments and estimates in the
preparation of our consolidated financial statements.
LOSS RESERVES
Reserves are established for estimated insurance
losses and LAE based on when notices of
delinquency on insured mortgage loans are received.
For reporting purposes, we consider a loan delinquent
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 delinquent.
We establish reserves using estimated claim rates
and claim severities in estimating the ultimate loss.
The estimated claim rates and claim severities are
used to determine the amount we estimate will
actually be paid on the delinquent loans 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 through a successful
loan modification, the cure reduces the historical
claim rate used in establishing reserves. Our
methodology to estimate claim rates and claim
severities is based on our review of recent trends in
the delinquent 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
claims paid compared to our loan exposures, 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.
The claim rates and claim severities are affected by
external events, including actual economic conditions
such as changes in unemployment rates, interest
rates or housing values; and natural disasters. Our
estimation process does not include a correlation
Management's Discussion and Analysis
between claim rates and claim severities to projected
economic conditions such as changes in
unemployment rates, interest rates or housing
values. Our experience is that analysis of that nature
would not produce reliable results as the change in
one economic condition cannot be isolated to
determine its specific effect on our ultimate paid
losses because each economic condition is also
influenced by other economic conditions. Additionally,
the changes and interactions of these economic
conditions are not likely homogeneous throughout the
regions in which we conduct business. Each
economic condition 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.
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.
Our estimate of loss reserves is sensitive to changes
in claim rate and claim severity; 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, as of December 31, 2018,
assuming all other factors remain constant, a $1,000
increase/decrease in the average severity reserve
factor would change the reserve amount by
approximately +/- $12 million. A 1 percentage point
increase/decrease in the average claim rate reserve
factor would change the reserve amount by
approximately +/- $19 million. 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:
Historical development of loss reserves
(In thousands)
Losses incurred
related to prior
years (1)
Reserve at end of
prior year
2018
2017
2016
2015
2014
$
(167,366) $
(231,204)
(147,658)
(110,302)
(100,359)
985,635
1,438,813
1,893,402
2,396,807
3,061,401
(1)
A negative number for a prior year indicates a
redundancy of loss reserves.
MGIC Investment Corporation 2018 Annual Report | 39
Management's Discussion and Analysis
See Note 8 – “Loss Reserves” to our consolidated
financial statements for a discussion of recent loss
development.
IBNR Reserves
Reserves are established for estimated IBNR, which
results from delinquencies occurring prior to the close
of an accounting period, but which have not been
reported to us. Consistent with reserves for reported
delinquencies, IBNR reserves are established using
estimated claim rates and claim severities for the
estimated number of delinquencies not reported. As
of December 31, 2018 and 2017, we had IBNR
reserves of approximately $29 million and $35 million,
respectively.
The actual amount of the claim payments may be
substantially different than our loss reserve
estimates. Our estimates could be adversely affected
by several factors, including a deterioration of regional
or national economic conditions, including
unemployment, leading to a reduction in borrower
income and thus their ability to make mortgage
payments, and a drop in housing values, 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.
LAE
Reserves are established for the estimated costs of
settling claims, including legal and other expenses
and general expenses of administering the claims
settlement process.
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
inception of the policy life. We are generally obligated
to renew the policies and 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 based on
historical experience, which includes the anticipated
incurred loss pattern.. 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. Policies may be
cancelled by the insured, or due to rescissions or
claim payments. When a policy is rescinded, all
previously collected premium is returned to the
servicer and when a claim is paid, all premium
collected since the date of default is returned. The
40 | MGIC Investment Corporation 2018 Annual Report
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 and the
actual return of premium affect premiums written and
earned.
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 transactions. 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 investment income 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.
Because our insurance premiums are earned over
time, changes in persistency result in DAC being
amortized against revenue over a longer or shorter
period of time. However, even 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
Fixed income securities. Our fixed income securities
are classified as available-for-sale and are reported at
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 on fixed income securities are reported in
income based upon specific identification of
securities sold, as well as any "other than temporary"
impairments ("OTTI") recognized in earnings.
Equity securities. At December 31, 2017, equity
securities were classified as available-for-sale and
were reported at fair value, except for certain equity
securities that were carried at cost, for which the
amount reported approximated fair value. These
equity securities carried at cost were reported as
Other invested assets at December 31, 2018, as
required under ASU 2016-01, discussed in "Recent
Accounting and Reporting Developments" in Note 3 -
"Significant Accounting Policies." The updated
guidance also requires, effective January 1, 2018, the
periodic change in fair value of equity securities to be
recognized as realized investment gains and losses.
For periods prior, realized investment gains and
losses on equity securities were a function of the
difference between the amount received on the sale
of an equity security and the equity security's cost
basis, as well as any OTTI recognized in earnings.
Other invested assets. Other invested assets are
carried at cost. These assets represent our
investment in FHLB stock, which due to restrictions, is
required to be redeemed or sold only to the security
issuer at par value.
Management's Discussion and Analysis
In accordance with fair value guidance, we applied the
following fair value hierarchy in order to measure fair
value for assets and liabilities:
è Level 1 Quoted prices for identical instruments in
active markets that we can access.
Financial assets using Level 1 inputs
primarily include U.S. Treasury securities,
money market funds, and certain equity
securities.
è 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
using 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.
The independent pricing sources used for
our Level 2 investments vary by type of
investment. See Note 6 - "Fair Value
Measurements" for further information.
è Level 3 Valuations derived from valuation
techniques in which one or more
significant inputs or value drivers are
unobservable or, from par values due to
restrictions on certain securities that
require them to be redeemed or sold only
to the security issuer at par value. 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 using Level 3
inputs include obligations of U.S. states
and political subdivisions and certain
equity securities (2017 only). 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.
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; in approximate
order of priority, they are: benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two
MGIC Investment Corporation 2018 Annual Report | 41
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.
Fair Value Option
For the years ended December 31, 2018, 2017, and
2016, 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.
Management's Discussion and Analysis
sided markets, benchmark securities, bids, offers and
reference data including data published in market
research publications.
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, data
changes, and directional moves compared to market
moves. In addition, on a quarterly basis, we perform
quality controls over values received from the pricing
sources which also include reviewing tolerance
reports, trading information, data changes, and
directional moves compared to market moves. We
have not made any adjustments to the prices
obtained from the independent pricing sources.
Unrealized losses and 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
value is other-than-temporary, we consider several
factors including, but not limited to:
è 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;
è the present value of the discounted cash flows we
expect to collect compared to the amortized cost
basis of the security;
è extent and duration of the decline;
è failure of the issuer to make scheduled interest or
principal payments;
è change in rating below investment grade; and
è 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
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 income (loss), net of taxes. A credit
42 | MGIC Investment Corporation 2018 Annual Report
Glossary of terms and acronyms
/ A
ARMs
/ F
Fannie Mae
Adjustable rate mortgages
Federal National Mortgage Association
ABS
Asset-backed securities
ASC
FCRA
Fair Credit Reporting Act
FEMA
Accounting Standards Codification
Federal Emergency Management Agency
Available Assets
FHA
Assets, as designated under the PMIERs, that are
readily available to pay claims, and include the most
liquid investments
/ B
Book or book year
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
A group of loans insured in a particular calendar year
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
DAC
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
GSEs
Deferred insurance policy acquisition costs
Collectively, Fannie Mae and Freddie Mac
Debt-to-income ("DTI") ratio
The ratio, expressed as a percentage, of a borrower's
total debt payments to gross income
Direct
When referring to insurance or risk written or in force,
"direct" means before giving effect to reinsurance
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
/ E
ETFs
Exchange traded funds
Home Re
Home Re 2018-1, Ltd., an unaffiliated special purpose
insurer domiciled in Bermuda
MGIC Investment Corporation 2018 Annual Report | 43
HOPA
Homeowners Protection Act
/ I
IADA
Individual Assistance Disaster Area
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
/ L
LAE
Loss adjustment expenses
Legacy book
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 of financial
condition and results of operations
Mortgage insurance policies written prior to 2009
MGIC
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
does not reflect subsequent housing price
appreciation or depreciation. Subordinate mortgages
may also be present
Long-term debt:
5% Notes
5% Convertible Senior Notes due on 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
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
Mortgage Guaranty Insurance Corporation, a
subsidiary of MGIC Investment Corporation
MAC
MGIC Assurance Corporation, a subsidiary of MGIC
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
certain state requirements. The “policyholder
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
NAIC
The National Association of Insurance
Commissioners
NIW
New Insurance Written, is the aggregate original
principal amount of the mortgages that are insured
during a period
N/M
44 | MGIC Investment Corporation 2018 Annual Report
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
Risk-to-capital
Under certain state regulations, the ratio of RIF, net of
quota share reinsurance and exposure on policies
currently in default and for which loss reserves have
been established, to the level of statutory capital
NPL
RMBS
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
Residential mortgage-backed securities
NPW
The amount of premiums written, net of premiums
assumed and ceded under reinsurance agreements
/ O
OCI
Office of the Commissioner of Insurance of the State
of Wisconsin
/ P
Persistency
/ S
State Capital Requirements
Under certain state regulations, the minimum amount
of statutory capital relative to risk in force (or similar
measure)
/ T
Tax Act
The U.S. tax reform enacted on December 22, 2017
and commonly referred to as the "Tax Cuts and Jobs
Act"
The percentage of our insurance remaining in force
from one year prior
/ U
Underwriting Expense Ratio
PMI
Private Mortgage Insurance (as an industry or product
type)
PMIERs
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
subsidiaries) to NPW
Private Mortgage Insurer Eligibility Requirements
issued by the GSEs
Underwriting profit
Premium Yield
The ratio of NPE divided by the average IIF
outstanding for the period measured
Primary
Insurance written on a flow and bulk basis
/ Q
QSR Transaction
NPE minus incurred losses and underwriting
expenses
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
Quota share reinsurance transaction
VIE
Variable interest entity
/ R
REMIC
Real Estate Mortgage Investment Conduit
RESPA
Real Estate Settlement Procedures Act
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
MGIC Investment Corporation 2018 Annual Report | 45
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
securities above the risk-free rate (typically referenced
as the yield on U.S. Treasury securities) that market
participants require to compensate them for
assuming credit, liquidity and/or prepayment risks.
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, 2018, the
modified duration of our fixed income investment
portfolio was 4.1 years, which means that an
instantaneous parallel shift in the yield curve of 100
basis points would result in a change of 4.1% 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 in "Management's
Discussion and Analysis – Balance Sheet Review–
Investment Portfolio."
46 | MGIC Investment Corporation 2018 Annual Report
Risk Factors
As used below, “we,” “our” and “us” refer to MGIC
Investment Corporation’s consolidated operations or
to MGIC Investment Corporation, as the context
requires; and “MGIC” refers to Mortgage Guaranty
Insurance Corporation.
Our actual results could be affected by the risk factors
below. These risk factors 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,
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 premium rates, underwriting
requirements, financial strength (including based on
credit or financial strength ratings), customer
relationships, name recognition, reputation, the
strength of our management team and field
organization, the ancillary products and services
provided to lenders and the effective use of
technology and innovation in the delivery and servicing
of our mortgage insurance products.
Much of the competition in the industry in the last few
years has centered on pricing practices which have
included: (i) reductions in standard filed rates for
borrower-paid mortgage insurance policies ("BPMI");
(ii) use by competitors of a spectrum of filed rates to
allow for formulaic, risk-based pricing that may be
adjusted more frequently within certain parameters
(referred to as "loan level pricing systems"); and
(iii) use of customized rates (discounted from
standard rates) that are made available to lenders that
meet certain criteria.
We monitor various competitive and economic factors
while seeking to balance both profitability and market
share considerations in developing our pricing
strategies. We reduced certain of our rates in 2018,
which will reduce our premium yield (net premiums
earned divided by the average insurance in force) over
time as older insurance policies with higher premium
rates run off and new insurance policies with lower
premium rates are written.
In 2018, we continued to evolve our pricing from a
standard rate card approach, where premium rates
vary based on relatively few attributes, to a more
granular approach, where more attributes are
considered. In the first quarter of 2019, we introduced
MiQ™, our loan level pricing system that establishes
our premium rates based on more risk attributes than
were considered in 2018. The widespread use of loan
level pricing systems by the private mortgage industry
will make it more difficult to compare our rates to
those offered by our competitors. We may not be
aware of industry changes until we observe that our
volume of new insurance written ("NIW") has changed
and our volume may fluctuate more as a result.
There can be no assurance that our premium rates
adequately reflect the risk associated with the
underlying mortgage insurance policies. For additional
information, see our risk factors titled “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" and "If our risk management
programs are not effective in identifying, or adequate in
controlling or mitigating, the risks we face, or if the
models used in our businesses are inaccurate, it could
have a material adverse impact on our business, results
of operations and financial condition."
Our relationships with our customers, which may
affect the amount of our new business written, could
be adversely affected by a variety of factors, including
if our premium rates are higher than those of our
competitors, our underwriting requirements result in
our declining to insure some of the loans originated by
our customers, or our insurance policy rescissions and
claim curtailments affect the customer. Regarding the
MGIC Investment Corporation 2018 Annual Report | 47
Risk Factors
concentration of our new business, our largest
customer accounted for approximately 4% and 5% of
our NIW in each of 2017 and 2018, respectively, and
our top ten customers accounted for approximately
23% and 24% of our NIW, in each of 2017 and 2018,
respectively.
Certain of our competitors have access to capital at a
lower cost than we do (including, through off-shore
reinsurance vehicles, which are tax-advantaged). As a
result, they may be able to achieve higher after-tax
rates of return on their NIW compared to us, which
could allow them to leverage reduced premium rates
to gain market share, and they may be better
positioned to compete outside of traditional mortgage
insurance, including by participating in alternative
forms of credit enhancement pursued by Fannie Mae
and Freddie Mac (the "GSEs") 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."
PMIERs do not require minimum financial
strength ratings, the GSEs consider financial
strength ratings to be important when using
forms of credit enhancement other than
traditional mortgage insurance, as discussed in
our risk factor titled "The amount of insurance we
write could be adversely affected if lenders and
investors select alternatives to private mortgage
insurance."
If we are unable to compete effectively in the current
or any future markets as a result of the financial
strength ratings assigned to our insurance
subsidiaries, our future new insurance written could be
negatively affected.
The amount of insurance we write could be adversely
affected if lenders and investors select alternatives to
private mortgage insurance.
Alternatives to private mortgage insurance include:
Substantially all of our insurance written since 2008
has been for loans purchased by 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 in increased scrutiny of our financial
condition by the GSEs and/or our customers,
potentially resulting in a decrease in the amount
of our new insurance written.
Our ability to participate in the non-GSE mortgage
market (which has been limited since 2008, but
may grow in the future), could depend on our
ability to maintain and improve our investment
grade ratings for our mortgage insurance
subsidiaries. We could be competitively
disadvantaged with some market participants
because the financial strength ratings of our
insurance subsidiaries are lower than those of
some competitors. MGIC's financial strength
rating from Moody’s is Baa2 (with a stable
outlook) , from Standard & Poor’s is BBB+ (with a
stable outlook) and from A.M. Best is A- (with a
stable outlook).
Financial strength ratings may also play a greater
role if the GSEs no longer operate in their current
capacities, for example, due to legislative or
regulatory action. In addition, although the
48 | MGIC Investment Corporation 2018 Annual Report
lenders using FHA, VA and other government
mortgage insurance programs,
investors using risk mitigation and credit risk
transfer techniques other than private mortgage
insurance,
lenders and other investors holding mortgages in
portfolio and self-insuring, and
lenders originating mortgages using piggyback
structures to avoid private mortgage insurance,
such as a first mortgage with an 80% loan-to-
value ratio and a second mortgage with a 10%,
15% or 20% loan-to-value ratio (referred to as
80-10-10, 80-15-5 or 80-20 loans, respectively)
rather than a first mortgage with a 90%, 95% or
100% loan-to-value ratio that has private
mortgage insurance.
In 2018, Freddie Mac and Fannie Mae initiated
programs with loan level mortgage default coverage
provided by various (re)insurers that are not mortgage
insurers governed by PMIERs, and that are not
selected by the lenders. Due to differences in policy
terms, these programs offer premium rates that are
generally below prevalent single premium lender paid
mortgage insurance ("LPMI") rates. While we view
these programs as competing with traditional private
mortgage insurance, we have participated in them and
may participate in future GSE or other programs.
The GSEs (and other investors) have also used other
forms of credit enhancement that did not involve
traditional private mortgage insurance, such as
engaging in credit-linked note transactions executed in
the capital markets, or using other forms of debt
issuances or securitizations that transfer credit risk
directly to other investors, including competitors and
an affiliate of MGIC; using other risk mitigation
techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting
credit risk without credit enhancement.
The FHA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 29.9% in
2018, 33.9% in 2017 and 34.2% in 2016 (these figures
exclude FHA's home equity conversion mortgages, or
HECMs). In the past ten years, the FHA’s share has
been as low as 29.9% in 2018 and as high as 66.8% 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 the GSEs for securitization; and
differences in policy terms, such as the ability of a
borrower to cancel insurance coverage under certain
circumstances. We cannot predict how the factors
that affect the FHA’s share of new insurance written
will change in the future.
The VA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 24.4% in
2018, 24.7% in 2017 and 27.2% in 2016. In the past ten
years, the VA’s share has been as low as 14.3% in 2009
and as high as 27.2% in 2016. We believe that the VA’s
market share has generally been increasing because
of an increase in the number of borrowers that are
eligible for the VA’s program, which offers 100% loan-
to-value ratio ("LTV") loans and charges a one-time
funding fee that can be included in the loan amount,
and because eligible borrowers have opted to use the
VA program when refinancing their mortgages.
Changes in the business practices of the GSEs, federal
legislation that changes their charters or a
restructuring of the GSEs could reduce our revenues or
increase our losses.
The GSEs’ charters generally require credit
enhancement for a low down payment mortgage loan
(a loan amount that exceeds 80% of a home’s value) in
order for such loan to be eligible for purchase by the
GSEs. Lenders generally have used private mortgage
insurance to satisfy this credit enhancement
requirement. (For information about GSE programs
initiated in 2018 that provide loan level default
coverage by various (re)insurers (which may include
affiliates of private mortgage insurers), see our risk
factor titled "The amount of insurance we write could
be adversely affected if lenders and investors select
alternatives to private mortgage insurance.") Because
Risk Factors
low down payment mortgages purchased by the GSEs
have generally been insured with private mortgage
insurance, the business practices of the GSEs greatly
impact our business and include:
•
•
•
•
•
•
•
•
•
•
private mortgage insurer eligibility requirements
of the GSEs, the financial requirements of which
are 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 capital and collateral requirements for
participants in the GSEs' alternative forms of
credit enhancement discussed in our risk factor
titled "The amount of insurance we write could be
adversely affected if lenders and investors select
alternatives to private mortgage insurance,"
the level of private mortgage insurance coverage,
subject to the limitations of the GSEs’ charters,
when private mortgage insurance is used as the
required credit enhancement on low down
payment mortgages,
the amount of loan level price adjustments and
guaranty fees (which result in higher costs to
borrowers) that the GSEs assess on loans that
require private mortgage insurance,
whether the GSEs influence the mortgage lender’s
selection of the mortgage insurer providing
coverage,
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, including limitations on the rescission
rights of mortgage insurers,
the extent to which the GSEs intervene in
mortgage insurers’ claims paying practices,
rescission practices or rescission settlement
practices with lenders, and
MGIC Investment Corporation 2018 Annual Report | 49
Risk Factors
•
the maximum loan limits of the GSEs compared
to those of the FHA and other investors.
factors with several risk dimensions and are subject to
a floor amount).
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, including through administrative action, in
ways that have a material adverse effect on us and
that the charters of the GSEs are changed by new
federal legislation. In the past, members of Congress
have introduced several bills intended to change the
business practices of the GSEs and the FHA; however,
no legislation has been enacted.
The Administration issued a June 2018 report
indicating that the conservatorship of the GSEs should
end and that the GSEs should transition to fully private
entities, competing on a level playing field with private
issuers of mortgage-backed securities ("MBS") (such
issuers, collectively with the GSEs, referred to in the
report as the "guarantors"). The report further
indicated that a federal entity should regulate the
guarantors, including their capital adequacy, and that
guarantors should have access to an explicit federal
guarantee on the MBS that is exposed only after
substantial losses are incurred by the private market,
including the guarantors. The report also indicated
that a fee on the outstanding volume of MBS would be
transferred to the Department of Housing and Urban
Development (of which the FHA is a part) to be used
for affordable housing purposes. 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. The timing and impact on
our business of any resulting changes 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 delivered to or purchased by the GSEs.
The PMIERs include financial requirements, as well as
business, quality control and certain transaction
approval requirements. The financial requirements of
the PMIERs require a mortgage insurer’s “Available
Assets” (generally only the most liquid assets of an
insurer) to equal or exceed its “Minimum Required
Assets” (which are based on an insurer’s book of
insurance in force and are calculated from tables of
50 | MGIC Investment Corporation 2018 Annual Report
Based on our interpretation of the PMIERs, as of
December 31, 2018, MGIC’s Available Assets totaled
$4.8 billion, or $1.4 billion in excess of its Minimum
Required Assets. MGIC is in compliance with the
PMIERs and eligible to insure loans purchased by the
GSEs. Revised PMIERs were published in September
2018 and will become effective March 31, 2019. If the
revised PMIERs had been effective as of December 31,
2018, we estimate that MGIC’s pro forma excess of
Available Assets over Minimum Required Assets
would have been approximately $1 billion. The
decrease in the pro forma excess from the reported
excess of $1.4 billion is primarily due to the
elimination of any credit for future premiums that had
previously been allowed for certain insurance policies.
In calculating our "Minimum Required Assets," we are
allowed full credit for the risk ceded under our quota
share reinsurance transactions with unaffiliated
reinsurers and expect to be allowed full credit for our
excess-of-loss reinsurance transaction entered into on
October 30, 2018, discussed in 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 reinsurance
transactions will be reviewed under the PMIERs at
least annually and there is a risk we will not receive full
credit in future periods for the risk ceded under them.
If MGIC is not allowed certain levels of credit under the
PMIERs, under certain circumstances, MGIC may
terminate the reinsurance transactions, without
penalty.
If MGIC ceases to be eligible to insure loans
purchased by one or both of the GSEs, it would
significantly reduce the volume of our new business
writings. Factors that may negatively impact MGIC’s
ability to continue to comply with the financial
requirements of the PMIERs include the following:
•
The GSEs may amend the PMIERs at any time and
may make the PMIERs more onerous in the future.
In June 2018, the FHFA issued a proposed rule on
regulatory capital requirements for the GSEs
("Enterprise Capital Requirements"), which
included a framework for determining the capital
relief allowed to the GSEs for loans with private
mortgage insurance. The GSEs have indicated
that there may be potential future implications for
PMIERs based upon feedback the FHFA receives
on its proposed rule on Enterprise Capital
Requirements (public comments were due by
November 16, 2018). In addition, the PMIERs
provide that the 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 have indicated that they
will generally provide notice 180 days prior to the
effective date of such updates.
•
•
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 is greater under the PMIERs than what state
regulation currently requires, our reinsurance
transactions mitigate the negative effect of the
PMIERs on our returns. However, reinsurance may not
always be available to us or available on similar terms,
it subjects us to counterparty credit risk and the GSEs
may change the credit they allow under the PMIERs for
risk ceded under our reinsurance transactions.
We are involved in legal proceedings and are subject to
the risk of additional legal proceedings in the future.
Before paying an insurance claim, we review the loan
and servicing files to determine the appropriateness of
the claim amount. When reviewing the files, we may
determine that we have the right to rescind coverage
on the loan. In our SEC reports, we refer to insurance
rescissions and denials of claims collectively as
“rescissions” and variations of that term. In addition,
our insurance policies generally provide that we can
reduce or deny a claim if the servicer did not comply
with its obligations under our insurance policy. We call
such reduction of claims “curtailments.” In recent
quarters, an immaterial percentage of claims received
in a quarter have been resolved by rescissions. In 2017
and 2018, curtailments reduced our average claim
paid by approximately 5.6% and 5.8%, 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 may be determined by legal
proceedings.
Risk Factors
Under ASC 450-20, until a liability associated with
settlement discussions or legal proceedings becomes
probable and can be reasonably estimated, we
consider our claim payment or rescission resolved for
financial reporting purposes and do not accrue an
estimated loss. Where we have determined that a loss
is probable and can be reasonably estimated, we have
recorded our best estimate of our probable loss.
In addition to matters for which we have recorded a
probable loss, we are involved in other discussions
and/or proceedings with insureds with respect to our
claims paying practices. Although it is reasonably
possible that when these matters are resolved we will
not prevail in all cases, we are unable to make a
reasonable estimate or range of estimates of the
potential liability. We estimate the maximum exposure
associated with matters where a loss is reasonably
possible to be approximately $279 million. This
estimate of maximum exposure is based upon
currently available information and is subject to
significant judgment, numerous assumptions and
known and unknown uncertainties. The matters
underlying the estimate of maximum exposure will
change from time to time. This estimate of our
maximum exposure does not include interest or
consequential or exemplary damages.
Mortgage insurers, including MGIC, have been involved
in litigation and regulatory actions related to alleged
violations of the anti-referral fee provisions of the Real
Estate Settlement Procedures Act, which is commonly
known as RESPA, and the notice provisions of the Fair
Credit Reporting Act, which is commonly known as
FCRA. While these proceedings in the aggregate have
not resulted in material liability for MGIC, there can be
no assurance that the outcome of future proceedings,
if any, under these laws would not have a material
adverse effect on us. In addition, various regulators,
including the CFPB, state insurance commissioners
and state attorneys general may bring other actions
seeking various forms of relief in connection with
alleged violations of RESPA. The insurance law
provisions of many states prohibit paying for the
referral of insurance business and provide various
mechanisms to enforce this prohibition. While we
believe our practices are in conformity with applicable
laws and regulations, it is not possible to predict the
eventual scope, duration or outcome of any such
reviews or investigations nor is it possible to predict
their effect on us or the mortgage insurance industry.
In addition to the matters described above, we are
involved in other legal proceedings in the ordinary
course of business. In our opinion, based on the facts
known at this time, the ultimate resolution of these
ordinary course legal proceedings will not have a
material adverse effect on our financial position or
results of operations.
MGIC Investment Corporation 2018 Annual Report | 51
Risk Factors
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive, detailed regulation
by state insurance departments. These regulations are
principally designed for the protection of our insured
policyholders, rather than for the benefit of investors.
Although their scope varies, state insurance laws
generally grant broad supervisory powers to agencies
or officials to examine insurance companies and
enforce rules or exercise discretion affecting almost
every significant aspect of the insurance business.
State insurance regulatory authorities could take
actions, including changes in capital requirements,
that could have a material adverse effect on us. For
more information about state capital requirements,
see our risk factor titled “State capital requirements
may prevent us from continuing to write new insurance
on an uninterrupted basis.” To the extent that we are
construed to make independent credit decisions in
connection with our contract underwriting activities,
we also could be subject to increased regulatory
requirements under the Equal Credit Opportunity Act,
commonly known as ECOA, FCRA, and other laws. For
more details about the various ways in which our
subsidiaries are regulated, see “Business - Regulation”
in the Business Section of our Annual Report on
Form10-K for the year ended December 31, 2018. In
addition to regulation by state insurance regulators,
the CFPB may issue additional rules or regulations,
which may materially affect our business.
In December 2013, the U.S. Treasury Department’s
Federal Insurance Office released a report that calls
for federal standards and oversight for mortgage
insurers to be developed and implemented. It is
uncertain if and when the standards and oversight will
become effective and what form they will take.
If our risk management programs are not effective in
identifying, or adequate in controlling or mitigating,
the risks we face, or if the models used in our
businesses are inaccurate, it could have a material
adverse impact on our business, results of operations
and financial condition.
Our enterprise risk management program, described in
the Business Section of our Annual Report on Form
10-K for the year ended December 31, 2018, may not
be effective in identifying, or adequate in controlling or
mitigating, the risks we face in our business.
We employ proprietary and third party models to
project returns, price products (including through our
new loan level pricing system), calculate reserves,
generate projections used to estimate future pre-tax
income and to evaluate loss recognition testing,
evaluate risk, determine internal capital requirements,
perform stress testing, and for other uses. These
models rely on estimates and projections that are
inherently uncertain and may not operate as intended.
52 | MGIC Investment Corporation 2018 Annual Report
In addition, from time to time we seek to improve
certain models, and the conversion process may result
in material changes to assumptions, including those
about returns and financial results. The models we
employ are complex, which increases our risk of error
in their design, implementation or use. Also, the
associated input data, assumptions and calculations
may not be correct, and the controls we have in place
to mitigate that risk may not be effective in all cases.
The risks related to our models may increase when we
change assumptions and/or methodologies, or when
we add or change modeling platforms. We have
enhanced, and we intend to continue to enhance, our
modeling capabilities. Moreover, we may use
information we receive through enhancements to
refine or otherwise change existing assumptions and/
or methodologies.
Because we establish loss reserves only upon a loan
delinquency rather than based on estimates of our
ultimate losses on risk in force, losses may have a
disproportionate adverse effect on our earnings in
certain periods.
In accordance with accounting principles generally
accepted in the United States, commonly referred to
as GAAP, we establish reserves for insurance losses
and loss adjustment expenses only when notices of
default on insured mortgage loans are received and
for loans we estimate are in default but for which
notices of default have not yet been reported to us by
the servicers (this is often referred to as “IBNR”).
Because our reserving method does not take account
of losses that could occur from loans that are not
delinquent, such losses are not reflected in our
financial statements, except in the case where a
premium deficiency exists. As a result, future losses
on loans that are not currently delinquent may have a
material impact on future results as such losses
emerge.
Because loss reserve estimates are subject to
uncertainties, paid claims may be substantially
different than our loss reserves.
When we establish reserves, we estimate the ultimate
loss on delinquent loans using estimated claim rates
and claim amounts. The estimated claim rates and
claim amounts represent our best estimates of what
we will actually pay on the loans in default as of the
reserve date and incorporate anticipated mitigation
from rescissions and curtailments. The establishment
of loss reserves is subject to inherent uncertainty and
requires judgment by management. The actual
amount of the claim payments may be substantially
different than our loss reserve estimates. Our
estimates could be affected by several factors,
including a change in regional or national economic
conditions, and a change in the length of time loans
are delinquent before claims are received. The change
in conditions may include changes in unemployment,
affecting borrowers’ income and thus their ability to
make mortgage payments, and changes in home
prices, which may affect borrower willingness to
continue to make mortgage payments when the value
of the home is below the mortgage balance. Changes
to our estimates could have a material impact on our
future results, even in a stable economic environment.
In addition, historically, losses incurred have followed
a seasonal trend in which the second half of the year
has weaker credit performance than the first half, with
higher new default notice activity and a lower cure
rate.
We rely on our management team and our business
could be harmed if we are unable to retain qualified
personnel or successfully develop and/or recruit their
replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our
management team and other key personnel. The
unexpected departure of key personnel could
adversely affect the conduct of our business. In such
event, we would be required to obtain other personnel
to manage and operate our business. In addition, we
will be required to replace the knowledge and
expertise of our aging workforce as our workers retire.
In either case, there can be no assurance that we
would be able to develop or recruit suitable
replacements for the departing individuals; that
replacements could be hired, if necessary, on terms
that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We
currently have not entered into any employment
agreements with our officers or key personnel.
Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a
properly skilled and experienced workforce, our costs,
including productivity costs and costs to replace
employees may increase, and this could negatively
impact our earnings.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that we
write could decline.
The factors that may affect the volume of low down
payment mortgage originations include:
•
•
•
restrictions on mortgage credit due to more
stringent underwriting standards, liquidity issues
or risk-retention and/or capital requirements
affecting lenders,
the level of home mortgage interest rates,
the health of the domestic economy as well as
conditions in regional and local economies and
the level of consumer confidence,
Risk Factors
•
•
•
•
•
housing affordability,
new and existing housing availability,
the rate of household formation, which is
influenced, in part, by population and immigration
trends,
the rate of home price appreciation, which in
times of heavy refinancing can affect whether
refinanced loans have loan-to-value ratios that
require private mortgage insurance, and
government housing policy encouraging loans to
first-time homebuyers.
A decline in the volume of low down payment home
mortgage originations could decrease demand for
mortgage insurance and decrease our new insurance
written. For other factors that could decrease the
demand for mortgage insurance, see our risk factor
titled “The amount of insurance we write could be
adversely affected if lenders and investors select
alternatives to private mortgage insurance.”
State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis.
The insurance laws of 16 jurisdictions, including
Wisconsin, MGIC's domiciliary state, require a
mortgage insurer to maintain a minimum amount of
statutory capital relative to its risk in force (or a similar
measure) in order for the mortgage insurer to continue
to write new business. We refer to these requirements
as the “State Capital Requirements.” While they vary
among jurisdictions, the most common State Capital
Requirements allow for a maximum risk-to-capital
ratio of 25 to 1. A risk-to-capital ratio will increase if
(i) the percentage decrease in capital exceeds the
percentage decrease in insured risk, or (ii) the
percentage increase in capital is less than the
percentage increase in insured risk. Wisconsin does
not regulate capital by using a risk-to-capital measure
but instead requires a minimum policyholder position
(“MPP”). The “policyholder position” of a mortgage
insurer is its net worth or surplus, contingency reserve
and a portion of the reserves for unearned premiums.
At December 31, 2018, MGIC’s risk-to-capital ratio was
9.0 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $2.6 billion above the
required MPP of $1.3 billion. Our risk-to-capital ratio
and MPP reflect full credit for the risk ceded under our
quota share reinsurance transactions with 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 under such
transactions. If MGIC is not allowed an agreed level of
MGIC Investment Corporation 2018 Annual Report | 53
Risk Factors
credit under the State Capital Requirements, MGIC
may terminate the reinsurance transactions, without
penalty. At this time, we expect MGIC to continue to
comply with the current State Capital Requirements;
however, you should read the rest of these risk factors
for information about matters that could negatively
affect such compliance.
At December 31, 2018, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.8 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.
The NAIC plans to revise the minimum capital and
surplus requirements for mortgage insurers that are
provided for in its Mortgage Guaranty Insurance Model
Act. In May 2016, a working group of state regulators
released an exposure draft of a risk-based capital
framework to establish capital requirements for
mortgage insurers, although no date has been
established by which the NAIC must propose revisions
to the capital requirements and certain items have not
yet been completely addressed by the framework,
including the treatment of ceded risk, minimum capital
floors, and action level triggers. Currently we believe
that the PMIERs contain more restrictive capital
requirements than the draft Mortgage Guaranty
Insurance Model Act in most circumstances.
While MGIC currently meets, and expects to continue
to meet, 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 a
particular jurisdiction, lenders may be unwilling to
procure insurance from us anywhere. In addition, a
lender’s assessment of the future ability of our
insurance operations to meet the State Capital
Requirements or the PMIERs may affect its willingness
to procure insurance from us. In this regard, see our
risk factor titled “Competition or changes in our
relationships with our customers could reduce our
revenues, reduce our premium yields and/or increase
our losses.” A possible future failure by MGIC to meet
the State Capital Requirements or the PMIERs will not
necessarily mean that MGIC lacks sufficient resources
to pay claims on its insurance liabilities. While we
believe MGIC has sufficient claims paying resources
to meet its claim obligations on its insurance in force
54 | MGIC Investment Corporation 2018 Annual Report
on a timely basis, you should read the rest of these
risk factors for information about matters that could
negatively affect MGIC’s claims paying resources.
Downturns in the domestic economy or declines in the
value of borrowers’ homes from their value at the time
their loans closed may result in more homeowners
defaulting and our losses increasing, with a
corresponding decrease in our returns.
Losses result from events that reduce a borrower’s
ability or willingness to continue to make mortgage
payments, such as unemployment, health issues,
family status, and whether the home of a borrower
who defaults on his mortgage can be sold for an
amount that will cover unpaid principal and interest
and the expenses of the sale. In general, favorable
economic conditions reduce the likelihood that
borrowers will lack sufficient income to pay their
mortgages and also favorably affect the value of
homes, thereby reducing and in some cases even
eliminating a loss from a mortgage default. A
deterioration in economic conditions, including an
increase in unemployment, generally increases the
likelihood that borrowers will not have sufficient
income to pay their mortgages and can also adversely
affect home prices, which in turn can influence the
willingness of borrowers with sufficient resources to
make mortgage payments to do so when the
mortgage balance exceeds the value of the home.
Home prices may decline even absent a deterioration
in economic conditions due to declines in demand for
homes, which in turn may result from changes in
buyers’ perceptions of the potential for future
appreciation, restrictions on and the cost of mortgage
credit due to more stringent underwriting standards,
higher interest rates generally, changes to the
deductibility of mortgage interest for income tax
purposes, decreases in the rate of household
formations, or other factors. Changes in home prices
and unemployment levels are inherently difficult to
forecast given the uncertainty in the current market
environment, including uncertainty about the effect of
actions the federal government has taken and may
take with respect to tax policies, mortgage finance
programs and policies, and housing finance reform.
The mix of business we write affects our Minimum
Required Assets under the PMIERs, our premium
yields and the likelihood of losses occurring.
The Minimum Required Assets under the PMIERs are,
in part, a function of the direct risk-in-force and the risk
profile of the loans we insure, considering loan-to-
value ratio, credit score, vintage, Home Affordable
Refinance Program ("HARP") status and delinquency
status; and whether the loans were insured under
lender-paid mortgage insurance policies or other
policies that are not subject to automatic termination
consistent with the Homeowners Protection Act
requirements for borrower paid mortgage insurance.
Risk Factors
Therefore, if our direct risk-in-force increases through
increases in new insurance written, or if our mix of
business changes to include loans with higher loan-to-
value ratios or lower FICO scores, for example, or if we
insure a higher percentage of loans under lender-paid
mortgage insurance policies, all other things equal, we
will be required to hold more Available Assets in order
to maintain GSE eligibility.
force date on or after July 1, 2016 and before January
1, 2018. For the reinsurance coverage period, MGIC
will retain the first layer of $168.7 million of aggregate
losses, and the reinsurer will provide second layer
coverage up to the outstanding reinsurance coverage
amount. The reinsurance premiums ceded under this
reinsurance agreement reduced our net premiums by
$2.8 million in the fourth quarter of 2018.
The minimum capital required by the risk-based
capital framework contained in the exposure draft
released by the NAIC in May 2016 would be, in part, a
function of certain loan and economic factors,
including property location, loan-to-value ratio and
credit score; general underwriting quality in the market
at the time of loan origination; the age of the loan; and
the premium rate we charge. Depending on the
provisions of the capital requirements when they are
released in final form and become effective, our mix of
business may affect the minimum capital we are
required to hold under the new framework.
The percentage of our NIW from all single-premium
policies (LPMI and BPMI, combined) has ranged from
approximately 10% in 2013 to 19% in 2017 and was
17% in 2018. Depending on the actual life of a single
premium policy and its premium rate relative to that of
a monthly premium policy, a single premium policy
may generate more or less premium than a monthly
premium policy over its life.
We have in place quota share reinsurance ("QSR")
transactions with unaffiliated reinsurers that cover
most of our insurance written from 2013 through
2018, and a portion of our insurance written prior to
2013. Although the transactions reduce our premiums,
they have a lesser impact on our overall results, as
losses ceded under the transactions reduce our losses
incurred and the ceding commissions we receive
reduce our underwriting expenses. The blended pre-
tax cost of reinsurance under our different
transactions is less than 6% (but will decrease if
losses are materially higher than we expect). This
blended pre-tax cost is derived by dividing the
reduction in our pre-tax income on loans covered by
reinsurance by our direct (that is, without reinsurance)
premiums from such loans. Although the pre-tax cost
of the reinsurance under each transaction is generally
constant, the effect of the reinsurance on the various
components of pre-tax income will vary from period to
period, depending on the level of ceded losses. We
expect that in the first quarter of 2019, we will enter
into an agreement covering most of our new insurance
written in 2019, on terms no less favorable than our
existing transactions.
On October 30, 2018, MGIC entered into a reinsurance
agreement that provides for up to $318.6 million of
aggregate excess-of-loss reinsurance coverage for a
portion of the risk associated with certain mortgage
insurance policies having an insurance coverage in
In addition to the effect of reinsurance on our
premiums, we expect a decline in our premium yield
resulting from the premium rates themselves. An
increasing percentage of our insurance in force is from
book years with lower premium rates because
premium rates have trended lower in recent periods
and are expected to continue to trend lower into 2019.
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. As of December 31,
2018, approximately 82% of our flow, primary
insurance in force was written under our Gold Cert
Endorsement or our current master policy. The revised
PMIERs, which become effective March 31, 2019,
include rescission relief principles that were provided
as guidance to be used when drafting our new master
policy. The principles will, among other things, further
limit the circumstances under which we may rescind
coverage, potentially resulting in higher losses than
would be the case under our existing master policies.
We expect a new version of our master policy,
incorporating these rescission relief principles, to be
effective for business written beginning in the third or
fourth quarter of 2019, subject to state statutory
approvals.
From time to time, in response to market conditions,
we change the types of loans that we insure and the
requirements under which we insure them. We also
change our underwriting guidelines, in part through
aligning some of them with Fannie Mae and Freddie
Mac for loans that receive and are processed in
accordance with certain approval recommendations
from a GSE automated underwriting system. We also
make exceptions to our underwriting requirements on
a loan-by-loan basis and for certain customer
programs. As a result of changes to our underwriting
guidelines and requirements (including those related
to debt to income ("DTI") ratios, credit scores, and the
manner in which income levels and property values are
determined) and other factors, our business written
beginning in the second half of 2013 is expected to
MGIC Investment Corporation 2018 Annual Report | 55
Risk Factors
have a somewhat higher claim incidence than
business written in 2009 through the first half of 2013,
but materially below that on business written in
2005-2008. However, we believe this business
presents an acceptable level of risk. Our underwriting
requirements are available on our website at http://
www.mgic.com/underwriting/index.html.
Even when home prices are stable or rising, mortgages
with certain characteristics have higher probabilities
of claims. These characteristics include higher LTV
ratios, lower FICO scores, limited underwriting,
including limited borrower documentation, or higher
DTI ratios, as well as loans having combinations of
higher risk factors. As of December 31, 2018,
mortgages with these characteristics in our primary
risk in force included mortgages with LTV ratios
greater than 95% (14.8%), loans with borrowers having
FICO scores below 620 (2.3%), mortgages with
borrowers having FICO scores of 620-679 (10.3%),
mortgages with limited underwriting, including limited
borrower documentation (2.2%), and mortgages with
borrowers having DTI ratios greater than 45% (or
where no ratio is available) (14.3%), each attribute as
determined at the time of loan origination. An
individual loan may have more than one of these
attributes.
Beginning in 2017, the percentage of NIW that we have
written on mortgages with LTV ratios greater than 95%
and mortgages with DTI ratios greater than 45% has
increased. In 2018, we started considering DTI ratios
when setting our premium rates, and we changed our
methodology for calculating DTI ratios for pricing and
eligibility purposes to exclude the impact of mortgage
insurance premiums. As a result of this change, we
expect to insure certain loans that would not have
previously met our guidelines and to offer premium
rates for certain loans lower than would have been
offered under our previous methodology.
Until our loan level pricing system (discussed in 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") is more broadly adopted by customers, we
will be unable to adjust our rates as quickly as those
competitors using loan level pricing systems for the
majority of their business. During that time, there is an
increased risk that we are adversely selected by
lenders to insure certain loans, which may result in an
increase in the credit risk we bear and/or a decrease in
the volume of loans we insure.
As of December 31, 2018, approximately 1% of our
primary risk in force consisted of adjustable rate
mortgages which allow for adjustment of the initial
interest rate during the five years after the mortgage
closing (“ARMs”). We classify as fixed rate loans
adjustable rate mortgages with an initial interest rate
that is fixed during the five years after the mortgage
56 | MGIC Investment Corporation 2018 Annual Report
closing and loans with temporary interest rate
adjustments during the initial five years, commonly
referred to as "buydowns," that convert to a fixed rate
for the duration of the loan term. If interest rates
should rise between the time of origination of such
loans and when their interest rates may be reset, claim
rates on such loans may be substantially higher than
for loans without variable interest rate features. In
addition, prior to 2011, we insured “interest-only”
loans, which may also be ARMs, and loans with
negative amortization features, such as pay option
ARMs. We believe claim rates on these loans will be
substantially higher than on loans without scheduled
payment increases that are made to borrowers of
comparable credit quality.
If state or federal regulations or statutes are changed
in ways that ease mortgage lending standards and/or
requirements, or if lenders seek ways to replace
business in times of lower mortgage originations, it is
possible that more mortgage loans could be
originated with higher risk characteristics than are
currently being originated, such as loans with lower
FICO scores and higher DTIs. Lenders could pressure
mortgage insurers to insure such loans, which are
expected to experience higher claim rates. Although
we attempt to incorporate these higher expected claim
rates into our underwriting and pricing models, there
can be no assurance that the premiums earned and
the associated investment income will be adequate to
compensate for actual losses even under our current
underwriting requirements. We do, however, believe
that our insurance written beginning in the second half
of 2008 will generate underwriting profits.
The premiums we charge may not be adequate to
compensate us for our liabilities for losses and as a
result any inadequacy could materially affect our
financial condition and results of operations.
We set premiums at the time a policy is issued based
on our expectations regarding likely performance of
the insured risks over the long term. Our premiums are
subject to approval by state regulatory agencies, which
can delay or limit our ability to increase our premiums.
Generally, we cannot cancel mortgage insurance
coverage or adjust renewal premiums during the life of
a mortgage insurance policy. As a result, higher than
anticipated claims generally cannot be offset by
premium increases on policies in force or mitigated by
our non-renewal or cancellation of insurance coverage.
The premiums we charge, the investment income we
earn and the amount of reinsurance we carry may not
be adequate to compensate us for the risks and costs
associated with the insurance coverage provided to
customers. An increase in the number or size of
claims, compared to what we anticipate, could
adversely affect our results of operations or financial
condition. Our premium rates are also based in part on
the amount of capital we are required to hold against
the insured risk. If the amount of capital we are
required to hold increases from the amount we were
required to hold when a policy was written, we cannot
adjust premiums to compensate for this and our
returns may be lower than we assumed.
The losses we have incurred on our 2005-2008 books
of business have exceeded our premiums from those
books. The incurred losses from those books,
although declining, continue to generate a material
portion of our total incurred losses. The ultimate
amount of these losses will depend in part on general
economic conditions, including unemployment, and
the direction of home prices.
We are susceptible to disruptions in the servicing of
mortgage loans that we insure.
We depend on reliable, consistent third-party servicing
of the loans that we insure. Over the last several years,
the mortgage loan servicing industry has experienced
consolidation and an increase in the number of
specialty servicers servicing delinquent loans. The
resulting change in the composition of servicers could
lead to disruptions in the servicing of mortgage loans
covered by our insurance policies. Further changes in
the servicing industry resulting in the transfer of
servicing could cause a disruption in the servicing of
delinquent loans which could reduce servicers’ ability
to undertake mitigation efforts that could help limit
our losses. Future housing market conditions could
lead to additional increases in delinquencies and
transfers of servicing.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the
length of time that our policies remain in force.
The premium from a single premium policy is
collected upfront and generally earned over the
estimated life of the policy. In contrast, premiums from
a monthly premium policy are received and earned
each month over the life of the policy. In each year,
most of our premiums earned are from insurance that
has been written in prior years. As a result, the length
of time insurance remains in force, which is generally
measured by persistency (the percentage of our
insurance remaining in force from one year prior), is a
significant determinant of our revenues. Future
premiums on our monthly premium policies in force
represent a material portion of our claims paying
resources and a low persistency rate will reduce those
future premiums. In contrast, a higher than expected
persistency rate will decrease the profitability from
single premium policies because they will remain in
force longer than was estimated when the policies
were written.
Our persistency rate was 81.7% at December 31, 2018,
80.1% at December 31, 2017 and 76.9% at December
31, 2016. Since 2000, our year-end persistency ranged
Risk Factors
from a high of 84.7% at December 31, 2009 to a low of
47.1% at December 31, 2003.
Our persistency rate is primarily affected by the level
of current mortgage interest rates compared to the
mortgage coupon rates on our insurance in force,
which affects the vulnerability of the insurance in force
to refinancing. Our persistency rate is also affected by
the mortgage insurance cancellation policies of
mortgage investors along with the current value of the
homes underlying the mortgages in the insurance in
force. In 2018, the GSEs announced changes to
various mortgage insurance termination requirements
that are intended to further simplify the process of
evaluating borrower-initiated requests for mortgage
insurance termination and may reduce our persistency
rate in the future.
Our holding company debt obligations materially
exceed our holding company cash and investments.
At December 31, 2018, we had approximately $248
million in cash and investments at our holding
company and our holding company’s debt obligations
were $815 million in aggregate principal amount,
consisting of $425 million of 5.75% Senior Notes due
in 2023 ("5.75% Notes") and $390 million of 9%
Debentures (of which approximately $133 million was
purchased, and is held, by MGIC, and is eliminated on
the consolidated balance sheet). Annual debt service
on the 5.75% Notes and 9% Debentures outstanding as
of December 31, 2018, is approximately $60 million (of
which approximately $12 million will be paid to MGIC
and will be eliminated on the consolidated statement
of operations).
The 5.75% Senior Notes and 9% Debentures are
obligations of our holding company, MGIC Investment
Corporation, and not of its subsidiaries. The payment
of dividends from our insurance subsidiaries which,
other than investment income and raising capital in
the public markets, is the principal source of our
holding company cash inflow, is restricted by
insurance regulation. MGIC is the principal source of
dividend-paying capacity. In 2018 and 2017, MGIC paid
a total of $220 million and $140 million, respectively, in
dividends to our holding company. We expect MGIC to
continue to pay quarterly dividends of at least the $60
million amount paid in the fourth quarter of 2018,
subject to approval by its Board of Directors. We ask
the OCI not to object before MGIC pays dividends.
On April 26, 2018, our Board of Directors authorized a
share repurchase program under which we may
repurchase up to $200 million of our common stock
through the end of 2019. During 2018, we repurchased
approximately 16.0 million shares of our common
stock using approximately $175 million of holding
company resources. Repurchases may be made from
time to time on the open market or through privately
negotiated transactions. The repurchase program may
MGIC Investment Corporation 2018 Annual Report | 57
Risk Factors
be suspended for periods or discontinued at any time.
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.
Your ownership in our company may be diluted by
additional capital that we raise or if the holders of our
outstanding convertible debt convert that debt into
shares of our common stock.
As noted above under our risk factor titled “We may
not continue to meet the GSEs’ private mortgage
insurer eligibility requirements and our returns may
decrease as we are required to maintain more capital in
order to maintain our eligibility,” although we are
currently in compliance with the requirements of the
PMIERs, there can be no assurance that we would not
seek to issue non-dilutive debt capital or to raise
additional equity capital to manage our capital
position under the PMIERs or for other purposes. Any
future issuance of equity securities may dilute your
ownership interest in our company. In addition, the
market price of our common stock could decline as a
result of sales of a large number of shares or similar
securities in the market or the perception that such
sales could occur.
At December 31, 2018, we had outstanding $390
million principal amount of 9% Convertible Junior
Subordinated Debentures due in 2063 ("9%
Debentures") (of which approximately $133 million
was purchased, and is held, by MGIC, and is eliminated
on the consolidated balance sheet). The principal
amount of the 9% Debentures is currently convertible,
at the holder’s option, at an initial conversion rate,
which is subject to adjustment, of 74.0741 common
shares per $1,000 principal amount of debentures.
This represents an initial conversion price of
approximately $13.50 per share. We may redeem the
9% Debentures in whole or in part from time to time, at
our option, at a redemption price equal to 100% of the
principal amount of the 9% Debentures being
redeemed, plus any accrued and unpaid interest, if the
closing sale price of our common stock exceeds
$17.55 for at least 20 of the 30 trading days preceding
notice of the redemption.
We have the right, and may elect, to defer interest
payable under the debentures in the future. If a holder
elects to convert its debentures, the interest that has
been deferred on the debentures being converted is
also convertible into shares of our common stock. The
conversion rate for such deferred interest is based on
the average price that our shares traded at during a 5-
day period immediately prior to the election to convert
the associated debentures. We may elect to pay cash
58 | MGIC Investment Corporation 2018 Annual Report
for some or all of the shares issuable upon a
conversion of the debentures.
For a discussion of the dilutive effects of our
convertible securities on our earnings per share, see
Note 4 – “Earnings Per Share” to our consolidated
financial statements. As noted above, during 2018, we
repurchased shares of our common stock and may do
so in the future. In addition, we have in the past, and
may in the future, purchase our debt securities.
We could be adversely affected if personal information
on consumers that we maintain is improperly
disclosed and our information technology systems
may become outdated and we may not be able to make
timely modifications to support our products and
services.
As part of our business, we maintain large amounts of
personal information on consumers. While we believe
we have appropriate information security policies and
systems to prevent unauthorized disclosure, there can
be no assurance that unauthorized disclosure, either
through the actions of third parties or employees, will
not occur. Unauthorized disclosure could adversely
affect our reputation, result in a loss of business and
expose us to material claims for damages.
We rely on the efficient and uninterrupted operation of
complex information technology systems. All
information technology systems are potentially
vulnerable to damage or interruption from a variety of
sources, including through the actions of third parties.
Due to our reliance on our information technology
systems, their damage or interruption could severely
disrupt our operations, which could have a material
adverse effect on our business, business prospects
and results of operations.
In addition, we are in the process of upgrading certain
of our information systems that have been in place for
a number of years and are implementing our loan level
pricing system. The implementation of these
technological improvements, as well as their
integration with customer systems when applicable, is
complex, expensive and time consuming. If we fail to
timely and successfully implement and integrate the
new technology systems, or if the systems do not
operate as expected, it could have an adverse impact
on our business, business prospects and results of
operations.
Our success depends, in part, on our ability to manage
risks in our investment portfolio.
Our investment portfolio is an important source of
revenue and is our primary source of claims paying
resources. Although our investment portfolio consists
mostly of highly-rated fixed income investments, our
investment portfolio is affected by general economic
conditions and tax policy, which may adversely affect
the markets for credit and interest-rate-sensitive
securities, including the extent and timing of investor
participation in these markets, the level and volatility
of interest rates and credit spreads and, consequently,
the value of our fixed income securities, and as such,
we may not achieve our investment objectives.
Volatility or lack of liquidity in the markets in which we
hold securities has at times reduced the market value
of some of our investments, and if this worsens
substantially it could have a material adverse effect on
our liquidity, financial condition and results of
operations.
For the significant portion of our investment portfolio
that is held by MGIC, to receive full capital credit under
insurance regulatory requirements and under the
PMIERs, we generally are limited to investing in
investment grade fixed income securities whose yields
reflect their lower credit risk profile. Our investment
income depends upon the size of the portfolio and its
reinvestment at prevailing interest rates. A prolonged
period of low investment yields would have an adverse
impact on our investment income as would a decrease
in the size of the portfolio.
In addition, we structure our investment portfolio to
satisfy our expected liabilities, including claim
payments in our mortgage insurance business. If we
underestimate our liabilities or improperly structure
our investments to meet these liabilities, we could
have unexpected losses resulting from the forced
liquidation of fixed income investments before their
maturity, which could adversely affect our results of
operations.
Our financial results may be adversely impacted by
natural disasters; certain hurricanes may impact our
incurred losses, the amount and timing of paid claims,
our inventory of notices of default and our Minimum
Required Assets under PMIERs.
Natural disasters, such as hurricanes, tornadoes,
wildfires and floods, could trigger an economic
downturn in the affected areas, which could result in a
decline in our business and an increased claim rate on
policies in those areas. Natural disasters could lead to
a decrease in home prices in the affected areas, which
could result in an increase in claim severity on policies
in those areas. If we were to attempt to limit our new
insurance written in disaster-prone areas, lenders may
be unwilling to procure insurance from us anywhere.
Natural disasters could also lead to increased
reinsurance rates or reduced availability of
reinsurance. This may cause us to retain more risk
than we otherwise would retain and could negatively
affect our compliance with the financial requirements
of the PMIERs.
We insure mortgages for homes in areas that have
been impacted by recent natural disasters, including
Risk Factors
2017 and 2018 hurricanes. We do not expect those
hurricanes to result in a material increase in our
incurred losses or paid claims. However, the following
factors could cause our actual results to differ from
our expectation in the forward looking statement in
the preceding sentence:
•
•
•
Home values in hurricane-affected areas may
decrease at the time claims are filed from their
current levels thereby adversely affecting our
ability to mitigate loss.
Hurricane-affected areas may experience
deteriorating economic conditions resulting in
more borrowers defaulting on their loans in the
future (or failing to cure existing defaults) than we
currently expect.
If an insured contests our claim denial or
curtailment, there can be no assurance we will
prevail. We describe how claims under our policy
are affected by damage to the borrower’s home in
our Current Report on Form 8-K filed with the SEC
on September 14, 2017.
Due to the suspension of certain foreclosures by the
GSEs from time-to-time, our receipt of claims
associated with foreclosed mortgages in hurricane-
affected areas may be delayed.
The PMIERs require us to maintain significantly more
"Minimum Required Assets" for delinquent loans than
for performing loans; however, the increase in
Minimum Required Assets is not as great for certain
delinquent loans in areas that the Federal Emergency
Management Agency has declared major disaster
areas. An increase in delinquency notices resulting
from hurricanes may result in an increase in "Minimum
Required Assets" and a decrease in the level of our
excess "Available Assets" which is discussed in our
risk factor titled "We may not continue to meet the
GSEs’ private mortgage insurer eligibility requirements
and our returns may decrease as we are required to
maintain more capital in order to maintain our
eligibility."
MGIC Investment Corporation 2018 Annual Report | 59
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,
2018.
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, 2018, as stated in their report which
appears herein.
60 | MGIC Investment Corporation 2018 Annual Report
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
MGIC Investment Corporation
respects.
Opinions on the Financial Statements and Internal Control
over Financial Reporting
We have audited the accompanying consolidated balance
sheets of MGIC Investment Corporation and its
subsidiaries as of December 31, 2018 and 2017, and the
related consolidated statements of operations,
comprehensive income, shareholders’ equity and cash
flows for each of the three years in the period ended
December 31, 2018, including the related notes and
financial statement schedules listed in the index
appearing under Item 15 (a)(2) (collectively referred to as
the “consolidated financial statements”) in the Annual
Report on Form 10-K. We also have audited the
Company's internal control over financial reporting as of
December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by
the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).
In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the
financial position of the Company as of December 31,
2018 and 2017, and the results of its operations and its
cash flows for each of the three years in the period ended
December 31, 2018 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, 2018, based on
criteria established in Internal Control - Integrated
Framework (2013) issued by the COSO.
Basis for Opinions
The Company's management is responsible for these
consolidated 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 Management’s Report
on Internal Control over Financial Reporting. Our
responsibility is to express opinions on the Company’s
consolidated financial statements and on the Company's
internal control over financial reporting based on our
audits. We are a public accounting firm registered with
the Public Company Accounting Oversight Board (United
States) (PCAOB) and are required to be independent with
respect to the Company in accordance with the U.S.
federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission
and the PCAOB.
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require that we
plan and perform the audits to obtain reasonable
assurance about whether the consolidated financial
statements are free of material misstatement, whether
due to error or fraud, and whether effective internal control
over financial reporting was maintained in all material
Our audits of the consolidated financial statements
included performing procedures to assess the risks of
material misstatement of the consolidated financial
statements, whether due to error or fraud, and performing
procedures that respond to those risks. Such procedures
included examining, on a test basis, evidence regarding
the amounts and disclosures in the consolidated financial
statements. Our audits also included evaluating the
accounting principles used and significant estimates
made by management, as well as evaluating the overall
presentation of the consolidated financial statements.
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.
Definition and Limitations of Internal Control over
Financial Reporting
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 22, 2019
We have served as the Company’s auditor since 1985.
MGIC Investment Corporation 2018 Annual Report | 61
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Investment portfolio:
Fixed income, available-for-sale, at fair value (amortized cost, 2018 -
$5,196,784; 2017 - $4,946,278)
Equity securities, at fair value (cost, 2018 - $3,993; 2017 - $7,223)
Other invested assets, at cost
Total investment portfolio
Cash and cash equivalents
Restricted 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 junior subordinated debentures
Other liabilities
Total liabilities
Contingencies
Shareholders' equity:
Common stock (one dollar par value, shares authorized 1,000,000; shares issued
2018 - 371,353; 2017 - 370,567; outstanding 2018 - 355,371; 2017 - 370,567)
Paid-in capital
Treasury stock (shares at cost 2018 - 15,982)
Accumulated other comprehensive loss, net of tax
Retained earnings
Total shareholders' equity
December 31,
Note
2018
2017
5 / 6
$ 5,151,987
$
4,983,315
3,932
3,100
7,246
—
5,159,019
4,990,561
151,892
3,146
48,001
33,328
2,948
55,090
51,734
17,888
69,184
85,572
99,851
—
46,060
48,474
3,872
54,045
44,936
18,841
234,381
78,478
$ 5,677,802
$
5,619,499
$
674,019
$
985,635
409,985
155,000
419,713
256,872
180,322
392,934
155,000
418,560
256,872
255,972
2,095,911
2,464,973
371,353
370,567
1,862,536
1,850,582
(175,059)
(124,214)
1,647,275
3,581,891
—
(43,783)
977,160
3,154,526
9
9
12
8
7
7
7
17
13
10
Total liabilities and shareholders' equity
$ 5,677,802
$
5,619,499
See accompanying notes to consolidated financial statements.
62 | MGIC Investment Corporation 2018 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2018
2017
2016
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 (losses) gains
Other revenue
Total revenues
Losses and expenses:
Losses incurred, net
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 income taxes
Net income
Earnings per share:
Basic
Diluted
Weighted average common shares outstanding - basic
Weighted average common shares outstanding - diluted
$ 1,103,332
$
1,121,776
$
1,107,923
271
1,905
1,053
(111,341)
(125,726)
(133,885)
992,262
(17,100)
975,162
141,331
(1,353)
8,708
997,955
(63,208)
934,747
120,871
231
10,205
975,091
(49,865)
925,226
110,666
8,921
17,670
1,123,848
1,066,054
1,062,483
36,562
11,932
178,211
52,993
—
279,698
844,150
174,053
53,709
11,111
159,638
57,035
65
281,558
784,496
428,735
240,157
9,646
150,763
56,672
90,531
547,769
514,714
172,197
$
670,097
$
355,761
$
342,517
$
$
1.83
1.78
$
$
0.98
0.95
$
$
1.00
0.86
365,406
386,078
362,380
394,766
342,890
431,992
9
9
5
5
8 / 9
7
13
12
4
4
4
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2018 Annual Report | 63
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
2018
2017
2016
$
670,097
$
355,761
$
342,517
10
5
11
(64,646)
(15,767)
—
(80,413)
47,547
(5,839)
31
41,739
(3,649)
(9,620)
(951)
(14,220)
$
589,684
$
397,500
$
328,297
See accompanying notes to consolidated financial statements.
64 | MGIC Investment Corporation 2018 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common stock
Balance, beginning of year
Issuance of common stock
Net common stock issued under share-based compensation
plans
Balance, end of year
Paid-in capital
Balance, beginning of year
Cumulative effect of share-based compensation accounting
standard update
Issuance of common stock
Net common stock issued under share-based compensation
plans
Reissuance of treasury stock, net under share-based
compensation plans
Tax benefit from share-based compensation
Equity compensation
Reacquisition of convertible junior subordinated debentures-
equity component
Balance, end of year
Treasury stock
Balance, beginning of year
Purchases of common stock
Reissuance of treasury stock, net
Reissuance of treasury stock, net under share-based
compensation plans
Balance, end of year
Accumulated other comprehensive loss
Balance, beginning of year
Cumulative effect of financial instruments accounting standard
update
Other comprehensive (loss) income
Cumulative effect to reclassify certain tax effects from
accumulated other comprehensive loss
Balance, end of year
Retained earnings
Balance, beginning of year
Cumulative effect of financial instruments accounting standard
update
3
Cumulative effect of share-based compensation accounting
standard update
Net income
Reissuance of treasury stock, net
Cumulative effect to reclassify certain tax effects from
accumulated other comprehensive loss
13
13
Balance, end of year
Total shareholders' equity
See accompanying notes to consolidated financial statements.
Years Ended December 31,
Note
2018
2017
2016
13
13
$
370,567
$
359,400
$
340,097
—
786
10,386
18,313
781
990
371,353
370,567
359,400
1,850,582
1,782,337
1,670,238
—
—
49
60,903
—
113,146
(8,917)
(7,602)
(6,020)
—
—
—
—
(130)
67
20,871
14,895
11,373
13
—
—
(6,337)
1,862,536
1,850,582
1,782,337
—
(150,359)
(3,362)
13
(175,059)
—
(147,127)
—
—
(175,059)
150,359
—
—
—
130
(150,359)
(43,783)
(75,100)
(60,880)
3
10
(18)
—
—
(80,413)
41,739
(14,220)
—
(124,214)
(10,422)
(43,783)
—
(75,100)
977,160
632,564
290,047
18
—
670,097
—
—
1,647,275
—
153
355,761
(21,740)
10,422
977,160
—
—
342,517
—
—
632,564
$ 3,581,891
$
3,154,526
$
2,548,842
MGIC Investment Corporation 2018 Annual Report | 65
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 operating activities:
Depreciation and other amortization
Deferred tax expense
Net realized investment losses (gains)
Loss on debt extinguishment
Change in certain assets and liabilities:
Accrued investment income
Reinsurance recoverable on loss reserves
Reinsurance recoverable on paid losses
Premiums receivable
Deferred insurance policy acquisition costs
Profit commission receivable
Loss reserves
Unearned premiums
Return premium accrual
Current income taxes
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchases of investments
Proceeds from sales of investments
Proceeds from maturity of fixed income securities
Net increase in payables for securities
Additions to property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from revolving credit facility
Repayment of revolving credit facility
Proceeds from issuance of long-term debt
Purchase or repayment 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
Payment of withholding taxes related to share-based compensation net share
settlement
Net cash used in financing activities
Net increase (decrease) in cash and cash equivalents and restricted cash and cash
equivalents
Cash and cash equivalents and restricted cash and cash equivalents at beginning of
year
Years Ended December 31,
2018
2017
2016
$
670,097
$
355,761
$
342,517
58,215
186,572
1,353
—
(1,941)
15,146
924
(1,045)
953
(5,479)
64,430
355,044
(231)
65
(1,987)
2,019
1,092
(1,653)
(1,082)
(2,844)
61,342
162,356
(8,921)
90,531
(3,849)
(6,006)
(1,645)
(3,923)
(2,518)
(747)
(311,616)
(453,178)
(454,589)
17,051
(22,900)
(77,551)
14,738
544,517
63,197
(25,400)
51,296
128
49,764
(18,800)
4,941
14,307
406,657
224,760
(1,459,473)
(1,293,695)
(1,363,583)
370,449
785,175
307
246,908
759,212
—
(14,238)
(16,066)
(317,780)
(303,641)
733,299
547,444
—
(10,552)
(93,392)
—
—
—
—
—
—
—
—
(163,419)
150,000
(150,000)
—
—
—
573,094
(145,620)
(363,778)
(4,504)
(11,250)
—
—
—
—
(100,860)
(41,540)
(59,460)
(147,127)
—
(1,630)
(1,127)
(8,131)
(6,821)
(5,030)
(171,550)
(158,575)
(157,078)
55,187
(55,559)
(25,710)
99,851
155,410
181,120
Cash and cash equivalents and restricted cash and cash equivalents at end of year
$
155,038
$
99,851
$
155,410
See accompanying notes to consolidated financial statements.
66 | MGIC Investment Corporation 2018 Annual Report
NOTES TO CONSOLDATED FNANCIAL STATEMENTS
NOTE 1
Nature of Business
MGIC Investment Corporation is a holding company
which, through Mortgage Guaranty Insurance
Corporation ("MGIC"), is principally engaged in the
mortgage insurance business. We provide mortgage
insurance to lenders throughout the United States and
to government sponsored entities to protect against
loss from defaults on low down payment residential
mortgage loans. Primary mortgage insurance
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 non-insurance subsidiaries, we
also provide various services for the mortgage
finance industry, such as contract underwriting,
analysis of loan originations and portfolios, and
mortgage lead generation. MGIC Assurance
Corporation ("MAC"), an insurance subsidiary of MGIC
provides insurance for certain mortgages under
Fannie Mae and Freddie Mac (the "GSEs") credit risk
transfer programs and is a participant in the Fannie
Mae Enterprise-Paid Mortgage Insurance program.
At December 31, 2018, our direct domestic primary
insurance in force ("IIF") was $209.7 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 $54.1
billion, which represents the IIF 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 which have been
amended from time to time. 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, calculated from tables of factors with
several risk dimensions and subject to a floor
amount). Based on our interpretation of the PMIERs,
as of December 31, 2018, MGIC’s Available Assets are
in excess of its Minimum Required Assets; and MGIC
is in compliance with the financial requirements of the
PMIERs and eligible to insure loans purchased by the
GSEs.
NOTE 2
Basis of Presentation
BASIS OF PRESENTATION
The accompanying consolidated financial 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
financial statements include the 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 2017 and 2016 amounts
have been made in the accompanying consolidated
financial statements to conform to the 2018
presentation. See Note 3 - "Significant Accounting
Policies" for a discussion of our adoption of
accounting guidance in 2018 that resulted in other
reclassifications.
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.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consists of
cash and money market funds held in trusts for the
benefit of contractual counterparties under
reinsurance agreements.
FAIR VALUE MEASUREMENTS
We carry certain financial instruments at fair value
and disclose the fair value of all financial instruments.
Our financial instruments carried at fair value are
predominantly measured on a recurring basis.
Financial instruments measured on a nonrecurring
basis are subject to fair value adjustments only in
certain circumstances (for example, when there is
evidence of impairment).
The fair value of an asset or liability is defined as the
price that would be received upon a sale of an asset,
or paid to transfer a liability, in an orderly transaction
between market participants at the measurement
date. Fair value is based on quoted market prices or
inputs, where available. If prices or quotes are not
available, fair value is based on valuation models or
other valuation techniques that consider relevant
transaction characteristics (such as maturity) and use
MGIC Investment Corporation 2018 Annual Report | 67
Notes
as inputs observable or unobservable market
parameters including yield curves, interest rates,
volatilities, equity or debt prices, foreign exchange
rates and credit curves. Valuation adjustments may
be made to ensure that financial instruments are
recorded at fair value, as described below.
Valuation process
We use independent pricing sources to determine the
fair value of a substantial majority of our financial
instruments, which primarily consist of assets in our
investment portfolio, but also includes amounts
included in cash and cash equivalents and restricted
cash. A variety of inputs are used; in approximate
order of priority, they are: benchmark yields, reported
trades, broker/dealer quotes, issuer spreads, two-
sided markets, benchmark securities, bids, offers, and
reference data including market research
publications.
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.
On a quarterly basis, we perform quality controls over
values received from the pricing sources which also
include reviewing tolerance reports, data changes,
and directional moves compared to market moves.
We have not made any adjustments to the prices
obtained from the independent pricing sources.
Valuation hierarchy
A three-level valuation hierarchy has been established
under GAAP for disclosure of fair value
measurements. The valuation hierarchy is based on
the transparency of inputs to the valuation of a
financial instrument as of the measurement date. To
determine the fair value of securities available-for-sale
in Level 1 and Level 2 of the fair value hierarchy,
independent pricing sources, as described in
"Valuation process," 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.
68 | MGIC Investment Corporation 2018 Annual Report
The three levels are defined as follows.
è Level 1 Quoted prices for identical instruments in
active markets that we can access.
Financial assets using Level 1 inputs
primarily include U.S. Treasury securities,
money market funds, and certain equity
securities.
è 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
using 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.
The independent pricing sources used for
our Level 2 investments vary by type of
investment. See Note 6 - "Fair Value
Measurements" for further information.
è Level 3 Valuations derived from valuation
techniques in which one or more significant
inputs or value drivers are unobservable or,
from par values due to restrictions on
certain securities that require them to be
redeemed or sold only to the security issuer
at par value. 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 using
Level 3 inputs include obligations of U.S.
states and political subdivisions and
certain equity securities (2017 only). 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
Fixed income securities. Our fixed income securities
are classified as available-for-sale and are reported at
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 on fixed income securities are reported in
income based upon specific identification of
securities sold. as well as any "other than temporary"
impairments ("OTTI") recognized in earnings.
Equity securities. At December 31, 2017, equity
securities were classified as available-for-sale and
were reported at fair value, except for certain equity
securities that were carried at cost, for which the
amount reported approximated fair value. These
equity securities carried at cost are reported as Other
invested assets at December 31, 2018, as required
under ASU 2016-01, discussed in "Recent Accounting
and Reporting Developments" below. The updated
guidance also requires, effective January 1, 2018, the
periodic change in fair value of equity securities to be
recognized as realized investment gains and losses.
For periods prior, realized investment gains and
losses on equity securities were a function of the
difference between the amount received on the sale
of an equity security and the equity security's cost
basis, as well as any OTTI recognized in earnings.
Other invested assets. Other invested assets are
carried at cost. These assets represent our
investment in Federal Home Loan Bank of Chicago
("FHLB") stock, which due to restrictions, is required
to be redeemed or sold only to the security issuer at
par value.
Unrealized losses and 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
value is other-than-temporary, we consider several
factors including, but not limited to:
è 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;
è the present value of the discounted cash flows we
expect to collect compared to the amortized cost
basis of the security;
è extent and duration of the decline;
è failure of the issuer to make scheduled interest or
principal payments;
è change in rating below investment grade; and
è 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 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
Notes
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.
Home office and equipment is shown net of
accumulated depreciation of $38.1 million, $33.9
million and $30.6 million as of December 31, 2018,
2017 and 2016, respectively. Depreciation expense for
the years ended December 31, 2018, 2017 and 2016
was $6.0 million, $5.4 million and $4.6 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 investment income 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.
LOSS RESERVES
Reserves are established for insurance losses and
loss adjustment expenses ("LAE") when we receive
notices of delinquency 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 delinquent. Loss reserves are established by
estimating the number of loans in our inventory of
delinquent loans that will result in a claim payment,
MGIC Investment Corporation 2018 Annual Report | 69
Notes
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 with rescissions of policies, curtailments of
claims, 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 established for estimated losses from
delinquencies occurring prior to the close of an
accounting period on notices of delinquency not yet
reported to us. These incurred but not reported
("IBNR") reserves are also established using
estimated claim rates and claim severities.
Reserves are established for the estimated costs of
settling claims, including legal and other expenses
and general expenses of administering the claims
settlement process. Reserves are 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
expected future premium and already established
reserves. Products are grouped for premium
deficiency testing purposes based on similarities in
the way the products are acquired, serviced and
measured for profitability.
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 based on historical
experience, which includes the anticipated incurred
loss pattern. 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,
premium collected since the date of delinquency is
70 | MGIC Investment Corporation 2018 Annual Report
returned. 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. Changes in this liability, and the
actual return of premiums for all periods, affects
premiums written and earned.
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 estimated tax effects are
computed at the enacted federal statutory income tax
rate. Changes in tax laws, rates, regulations, and
policies or the final determination of tax audits or
examinations, could materially affect our estimates
and can be significant to our operating results. We
evaluate the realizability of the deferred tax assets
based on the weight of all available positive and
negative evidence. Deferred tax assets are reduced by
a valuation allowance if it is more likely than not that
all or some portion of the deferred tax assets will not
be realized.
The recognition of a tax position is determined using
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. When evaluating a tax position for
recognition and measurement, we presume that the
tax position will be examined by the relevant taxing
authority that has full knowledge of all relevant
information. We recognize interest accrued and
penalties related to unrecognized tax benefits in our
provision for income taxes. (See "Note 12 - Income
Taxes.")
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 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 and prepaid reinsurance
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 ceding commissions are
included with “Other 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.
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. The
computation of basic EPS includes as "participating
securities" an immaterial number of 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 ("RSUs")
with non-forfeitable rights to dividends (of which none
have been declared since the issuance of these
participating securities).
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. In
Notes
addition to our 9% Debentures, of which a portion
remain outstanding, we previously had several
convertible senior note debt issuances that could
have resulted in contingently issuable shares and we
considered each potential issuance of shares
separately to reflect the maximum potential dilution
for the period the debt issuances were outstanding.
For purposes of calculating basic and diluted EPS,
vested restricted stock and RSUs are considered
outstanding.
RELATED PARTY TRANSACTIONS
There were no related party transactions during 2018,
2017 or 2016.
RECENT ACCOUNTING AND REPORTING
DEVELOPMENTS
Accounting standards effective in 2018, or early
adopted, and relevant to our financial statements
Table 3.1 shows the relevant amendments to
accounting standards that have been implemented for
the fiscal year beginning January 1, 2018; none had a
material impact on our consolidated financial
statements or disclosures.
Standard / Interpretation
Table 3.1
Amended Standards
ASC 230
Statement of Cash Flows
• ASU 2016-18 - Restricted Cash
ASC 718
Compensation - Stock Compensation
•
ASU 2017-09 - Scope of
Modification Accounting
ASC 310
Receivables - Nonrefundable Fees
and Other Costs
Effective
date
January 1,
2018
January 1,
2018
•
ASU 2017-08 - Premium
Amortization on Purchased
Callable Debt Securities
January 1,
2019
ASC 715
Compensation - Retirement Benefits
•
ASU 2017-07 - Improving the
Presentation of Net Periodic
Pension Cost and Net Periodic
Postretirement Benefit Cost
January 1,
2018
ASC 825
Financial Instruments - Overall
•
ASU 2016-01 - Recognition and
Measurement of Financial Assets
and Financial Liabilities
January 1,
2018
Statement of Cash Flows - Restricted Cash
In November 2016, the Financial Accounting
Standards Board ("FASB") issued updated guidance
related to the presentation of restricted cash in the
statement of cash flows. The updated guidance
requires that the statement of cash flows explain the
change during the period in total cash, cash
equivalents, and amounts generally described as
restricted cash or restricted cash equivalents.
Therefore, amounts generally described as restricted
cash and restricted cash equivalents should be
MGIC Investment Corporation 2018 Annual Report | 71
Notes
included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period
total amounts shown on the statement of cash flows.
The updated guidance is effective for annual periods
beginning after December 15, 2017, including interim
periods within those annual periods.
è Adoption impact: The statements of cash flows
presented for the three years ended December 31, 2018
are in accordance with the guidance of this updated
standard.
Stock Compensation - Scope of Modification
Accounting
In May 2017, the FASB issued updated guidance
related to a change in the terms or conditions
(modification) of a share-based award. The updated
guidance provides that an entity should account for
the effects of a modification unless the fair value and
vesting conditions of the modified award and the
classification of the award (equity or liability
instrument) are the same as the original award
immediately before the modification. The updated
guidance is effective for annual periods beginning
after December 15, 2017, including interim periods
within those annual periods.
è Adoption impact: The adoption of this guidance had no
impact on our consolidated financial statements or
disclosures.
Premium Amortization on Purchased Callable Debt
Securities
In March 2017, the FASB issued updated guidance to
amend the amortization period for certain purchased
callable debt securities held at a premium, shortening
the amortization period to the earliest call date. This
updated guidance aligns with how callable debt
securities, in the United States, are generally quoted,
priced, and traded, which incorporates consideration
of calls (also referred to as “yield-to-worst” pricing).
The updated guidance is effective for annual periods
beginning after December 15, 2018, including interim
periods within those annual periods, but allows for
early adoption.
è Adoption impact: We adopted this guidance as of
January 1, 2018 with no impact to our consolidated
financial statements or disclosures as our accounting
policy adhered to the updated guidance.
Improving the Presentation of Net Periodic Pension
Cost and Net Periodic Postretirement Benefit Cost
In March 2017, the FASB issued updated guidance
intended to improve the reporting of net benefit cost
in the financial statements. The updated guidance
requires that an employer report the service cost
component of pension and post-retirement benefit
costs in the same financial statement caption as
other compensation costs arising from services
rendered by employees during the period. The other
components of net benefit cost are required to be
72 | MGIC Investment Corporation 2018 Annual Report
presented in the statement of operations separately
from the service cost component and outside a
subtotal of income from operations, if one is
presented. Previous guidance did not prescribe where
the amount of net benefit cost should be presented in
an employer’s statement of operations and did not
require entities to disclose by line item the amount of
net benefit cost that is included in the statement of
operations. The updated guidance is effective for
annual periods beginning after December 15, 2017,
including interim periods within those annual periods.
è Adoption impact: The adoption of this guidance had no
impact on our consolidated financial statements or
disclosures as the service cost component is reported in
the same financial statement caption as other
compensation costs and we do not present a subtotal of
income outside of income from operations. The service
cost component of our benefit plans is disclosed in Note
11 - “Benefit Plans” to our consolidated financial
statements.
Recognition and Measurement of Financial Assets and
Financial Liabilities
In January 2016, the FASB issued updated guidance
to address the recognition, measurement,
presentation, and disclosure of certain financial
instruments. The updated guidance requires equity
investments, except those accounted for under the
equity method of accounting, that have a readily
determinable fair value to be measured at fair value
with changes in fair value recognized in net income.
Equity investments that do not have readily
determinable fair values may be remeasured at fair
value either upon the occurrence of an observable
price change or upon identification of an impairment.
A qualitative assessment for impairment is required
for equity investments without readily determinable
fair values. The updated guidance also eliminates the
requirement to disclose the method and significant
assumptions used to estimate the fair value of
financial instruments measured at amortized cost on
the balance sheet. Further, the updated guidance
clarifies that entities should evaluate the need for a
valuation allowance on a deferred tax asset related to
available-for-sale securities in combination with the
entities’ other deferred tax assets. The updated
guidance is effective for annual periods beginning
after December 15, 2017, including interim periods
within those annual periods and requires recognition
of a cumulative effect adjustment at adoption.
è Adoption impact: The adoption of this guidance resulted
in an immaterial cumulative effect adjustment to our
2018 beginning accumulated other comprehensive
(loss) income and retained earnings to recognize
unrealized gains on equity investments. At December 31,
2017, equity investments were classified as available-
for-sale on the consolidated balance sheet. Upon
adoption, the updated guidance eliminated the available-
for-sale balance sheet classification for equity
securities.
In February 2018, the FASB issued a separate update
for technical corrections and improvements to clarify
certain aspects of the guidance described above. This
update clarifies the presentation of investments in,
among other things, Federal Home Loan Bank stock
and prohibits those investments from being shown
with equity securities.
è Adoption impact: At December 31, 2018, the value of our
investment in FHLB stock, which is carried at cost, is
presented within “Other invested assets” on our
consolidated balance sheet.
PROSPECTIVE ACCOUNTING STANDARDS
Table 3.2 shows the relevant new amendments to
accounting standards, which are not yet effective or
adopted.
Standard / Interpretation
Table 3.2
Amended Standards
ASC 326
Financial Instruments - Credit Losses
Effective
date
•
ASU 2016-13 - Measurement of
Credit Losses on Financial
Instruments
January 1,
2020
ASC 820
Fair Value Measurement
•
ASU 2018-13 - Changes to the
Disclosure Requirements for Fair
Value Measurements
January 1,
2020
ASC 715
Compensation - Retirement Benefits
•
ASU 2018-14 - Changes to the
Disclosure Requirements for
Defined Benefit Plans
January 1,
2021
Measurement of Credit Losses on Financial
Instruments
In June 2016, the FASB issued updated guidance that
requires immediate recognition of estimated credit
losses expected to occur over the remaining life of
many financial instruments. Entities will be required to
utilize a current expected credit losses (“CECL”)
methodology that incorporates their forecast of future
economic conditions into their loss estimate unless
such forecast is not reasonable and supportable, in
which case the entity will revert to historical loss
experience. Any allowance for CECL reduces the
amortized cost basis of the financial instrument to
the amount an entity expects to collect. Credit losses
relating to available-for-sale fixed maturity securities
are to be recorded through an allowance for credit
losses, rather than a write-down of the asset, with the
amount of the allowance limited to the amount by
which fair value is less than amortized cost. In
addition, 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. The
updated guidance is not prescriptive about certain
aspects of estimating expected credit losses,
including the specific methodology to use, and
therefore will require significant judgment in
application. The updated guidance is effective for
annual periods beginning after December 15, 2019,
Notes
including interim periods within those annual periods.
Early adoption is permitted for annual and interim
periods in fiscal years beginning after December 15,
2018. 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 on our consolidated
financial statements or disclosures.
Changes to the Disclosure Requirements for Fair Value
Measurement
In August 2018, the FASB issued updated guidance
that changes the disclosure requirements for fair
value measurements. The updated guidance removed
the requirement to disclose the amount of and
reasons for transfers between Level 1 and Level 2 of
the fair value hierarchy; the policy for timing of
transfers between levels; and the valuation processes
for Level 3 fair value measurements. The updated
guidance clarifies that the measurement uncertainty
disclosure is to communicate information about the
uncertainty in measurements as of the reporting date.
Further, the updated guidance will require disclosure
of changes in unrealized gains and losses for the
period included in other comprehensive income for
recurring Level 3 fair value measurements held at the
end of the reporting period; and the range and
weighted average of significant unobservable inputs
used to develop Level 3 fair value measurements. The
updated guidance is effective for annual periods
beginning after December 15, 2019, including interim
periods within those annual periods. Early adoption
was permitted upon issuance of this update. An entity
is permitted to early adopt any guidance that removed
or modified disclosures upon issuance of this update
and to delay adoption of the additional disclosures
until its effective date. We are currently evaluating the
impacts the adoption of this guidance will have on our
consolidated financial statement disclosures, but do
not expect it to have a material impact.
Changes to the Disclosure Requirements for Defined
Benefit Plans
In August 2018, the FASB issued amendments to
modify the disclosure requirements for defined
benefit plans. The updated guidance removed the
requirements to identify amounts that are expected to
be reclassified out of accumulated other
comprehensive income and recognized as
components of net periodic benefit cost in the
coming year and the effects of a one-percentage-
point change in assumed health care cost trend rates
on service and interest cost and on the postretirement
benefit obligation. The updated guidance added
disclosures for the weighted-average interest
crediting rates for cash balance plans and other plans
with interest crediting rates and explanations for
significant gains and losses related to changes in the
benefit obligation for the period. The updated
guidance is effective for annual periods beginning
MGIC Investment Corporation 2018 Annual Report | 73
Notes
after December 15, 2020. Early adoption is permitted.
An entity should apply the amendments on a
retrospective basis to all periods presented. We are
currently evaluating the impacts the adoption of this
guidance will have on our consolidated financial
statement disclosures, but do not expect it to have a
material impact.
NOTE 4
Earnings Per Share
Table 4.1 reconciles basic and diluted EPS amounts:
Earnings per share
Table
4.1
(In thousands, except per share data)
Basic earnings per share:
Net income
Weighted average common shares outstanding - basic
Basic earnings per share
Diluted earnings per share:
Net income
Interest expense, net of tax (1):
2% Notes
5% Notes
9% Debentures
Years Ended December 31,
2018
2017
2016
$
$
$
670,097
365,406
1.83
670,097
$
$
$
355,761
362,380
0.98
355,761
$
$
$
—
—
18,264
907
1,709
15,027
342,517
342,890
1.00
342,517
6,111
6,362
15,893
370,883
342,890
1,470
54,450
13,107
20,075
431,992
0.86
Diluted income available to common shareholders
$
688,361
$
373,404
$
Weighted-average shares - basic
Effect of dilutive securities:
Unvested restricted stock units
2% Notes
5% Notes
9% Debentures
Weighted average common shares outstanding - diluted
365,406
362,380
1,644
—
—
19,028
386,078
1,493
8,317
3,548
19,028
394,766
Diluted income per share
$
1.78
$
0.95
$
(1)
Interest expense for the years ended December 31, 2018, 2017 and 2016 has been tax effected at a rate of
21%, 35%, and 35%, respectively.
For the years ended December 31, 2018, 2017, and 2016, all of our then 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.
74 | MGIC Investment Corporation 2018 Annual Report
Notes
NOTE 5
Investments
FIXED INCOME SECURITIES
The amortized cost, gross unrealized gains and losses and fair value of our fixed income securities as of
December 31, 2018 and 2017 are shown below:
Details of fixed income investment securities by category as of December 31, 2018
Table
5.1a
(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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses (1)
Fair Value
$
167,655
$
597
$
(1,076) $
167,176
1,701,826
2,439,173
111,953
189,238
276,352
310,587
29,259
2,103
226
32
888
2
(10,985)
(40,514)
(146)
(10,309)
(9,580)
(5,294)
1,720,100
2,400,762
112,033
178,961
267,660
305,295
Total fixed income securities
$
5,196,784
$
33,107
$
(77,904) $
5,151,987
Details of fixed income investment securities by category as of December 31, 2017
Table
5.1b
(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
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses (1)
Fair Value
$
179,850
$
274
$
(1,278) $
178,846
2,105,063
2,065,475
4,925
189,153
301,014
100,798
56,210
10,532
—
60
1,204
304
(8,749)
(9,169)
(2)
(7,364)
(4,906)
(79)
2,152,524
2,066,838
4,923
181,849
297,312
101,023
Total fixed income securities
$
4,946,278
$
68,584
$
(31,547) $
4,983,315
(1) There were no OTTI losses recorded in other comprehensive (loss) income as of December 31, 2018 and
2017.
We had $13.5 million and $13.6 million of investments at fair value on deposit with various states as of
December 31, 2018 and 2017, respectively, due to regulatory requirements of those state insurance departments.
In connection with our insurance and reinsurance activities, we are required to maintain assets in trusts for the
benefit of contractual counterparties. The fair value of the investments on deposit in these trusts was $26.3
million and $7.7 million at December 31, 2018 and 2017, respectively.
Table 5.2 compares the amortized cost and fair values of fixed income securities, by contractual maturity, as of
December 31, 2018. The analysis is based upon contractual maturity. Actual maturities may differ from
contractual maturities because certain borrowers have the right to call or prepay certain obligations with or
without call or prepayment penalties. Because most mortgage and asset-backed securities provide for periodic
payments throughout their lives, they are listed separately in the table.
MGIC Investment Corporation 2018 Annual Report | 75
Notes
Fixed income securities maturity schedule
Table
5.2
(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
December 31, 2018
Amortized
Cost
Fair Value
$
484,485
$
482,919
1,652,638
1,011,237
1,160,294
4,308,654
111,953
189,238
276,352
310,587
1,632,494
996,335
1,176,290
4,288,038
112,033
178,961
267,660
305,295
Total as of December 31, 2018
$
5,196,784
$
5,151,987
Proceeds from the sale of fixed income securities classified as available-for-sale were $365.6 million, $246.9
million, and $728.0 million during the years ended December 31, 2018, 2017, and 2016, respectively. Gross gains
of $0.7 million, $1.6 million, and $11.9 million and gross losses of $3.8 million, $1.4 million and $3.0 million were
realized on those sales during the years ended December 31, 2018, 2017, and 2016, respectively.
For the year ended December 31, 2018, we recorded $1.8 million of OTTI losses in earnings. For the years ended
December 31, 2017 and 2016, there were no OTTI losses in earnings.
EQUITY SECURITIES
The cost and fair value of investments in equity securities as of December 31, 2018 and December 31, 2017 are
showing in tables 5.3a and 5.3b below. As described in Note 3 - "Significant Accounting Pronouncements," under
updated guidance regarding the "Recognition and Measurement of Financial Assets and Financial Liabilities"
which became effective on January 1, 2018, the amount of our FHLB stock investment has been reclassified and
presented in "Other invested assets" on our consolidated balance sheet as of December 31, 2018.
Details of equity investment securities as of December 31, 2018
5.3a
Table
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
3,993
11
(72)
3,932
Details of equity investment securities as of December 31, 2017
5.3b
Table
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
7,223
39
(16)
7,246
Proceeds from the sale of equity securities were $4.9 million during the year ended December 31, 2018. Gross
gains of $3.7 million were realized on those sales during the year ended December 31, 2018. There were no sales
of equity securities in 2017 or 2016. For the year ended December 31, 2018, we recognized $84 thousand of net
losses on equity securities still held as of December 31, 2018, which are reported in Net realized investment
(losses) gains on our consolidated statements of operations.
OTHER INVESTED ASSETS
Other invested assets include an investment in FHLB stock that is carried at cost, which due to its nature
approximates fair value. Ownership of FHLB stock provides access to a secured lending facility, and our current
FHLB Advance amount is secured by eligible collateral whose fair value is maintained at a minimum of 102% of
the outstanding principal balance of the FHLB Advance. As of December 31, 2018, that collateral consisted of
fixed income securities included in our total investment portfolio, and cash and cash equivalents, with a total fair
value of $168.9 million.
76 | MGIC Investment Corporation 2018 Annual Report
Notes
UNREALIZED INVESTMENT LOSSES
Tables 5.4a and 5.4b below summarize, for all available-for-sale investments in an unrealized loss position as of
December 31, 2018 and 2017, the aggregate fair value and gross unrealized losses by the length of time those
securities have been continuously in an unrealized loss position. Gross unrealized losses on our available-for-
sale investments amounted to $78 million and $32 million as of December 31, 2018 and 2017, respectively. The
fair value amounts reported in tables 5.4a and 5.4b below are estimated using the process described in Note 6 -
"Fair Value Measurements" to these consolidated financial statements.
Unrealized loss aging for securities by type and length of time as of December 31, 2018
Table
5.4a
(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
Less Than 12 Months
12 Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
23,710
$
(15) $
69,146
$
(1,061) $
92,856
$
(1,076)
316,655
1,272,279
51,324
24
65,704
296,497
(3,875)
(18,130)
(146)
—
(1,060)
(5,294)
358,086
785,627
—
178,573
163,272
—
(7,110)
674,741
(22,384)
2,057,906
—
(10,309)
(8,520)
—
51,324
178,597
228,976
296,497
(10,985)
(40,514)
(146)
(10,309)
(9,580)
(5,294)
$ 2,026,193
$
(28,520) $ 1,554,704
$
(49,384) $ 3,580,897
$
(77,904)
Unrealized loss aging for securities by type and length of time as of December 31, 2017
Table
5.4b
(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
Total
Less Than 12 Months
12 Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
144,042
$
(796) $
31,196
$
(482) $
175,238
$
(1,278)
505,311
932,350
4,923
14,979
51,096
14,243
226
(3,624)
(4,288)
(2)
(280)
(358)
(7)
(2)
211,684
200,716
—
166,329
138,769
3,568
431
(5,125)
(4,881)
—
(7,084)
(4,548)
(72)
(14)
716,995
1,133,066
4,923
181,308
189,865
17,811
657
(8,749)
(9,169)
(2)
(7,364)
(4,906)
(79)
(16)
$ 1,667,170
$
(9,357) $
752,693
$
(22,206) $ 2,419,863
$
(31,563)
For those securities in an unrealized loss position, the length of time the securities were in such a position, is
measured by their month-end fair values. The unrealized losses in all categories of our investments as of
December 31, 2018 and 2017 were primarily caused by changes in interest rates between the time of purchase
and the respective year end. There were 721 and 586 securities in an unrealized loss position as of December 31,
2018 and 2017, respectively. As of December 31, 2018, the fair value as a percent of amortized cost of the
securities in an unrealized loss position was 98% and approximately 8% of the securities in an unrealized loss
position were backed by the U.S. Government.
MGIC Investment Corporation 2018 Annual Report | 77
Notes
The source of net investment income is shown in table 5.5 below.
Net investment income
Table
5.5
(In thousands)
Fixed income securities
Equity securities
Cash equivalents
Other
Investment income
Investment expenses
Net investment income
2018
2017
2016
$
140,539
$
122,105
$
112,513
228
3,423
816
206
1,447
620
182
754
433
145,006
124,378
113,882
(3,675)
(3,507)
(3,216)
$
141,331
$
120,871
$
110,666
The change in unrealized gains (losses) of investments is shown in table 5.6 below.
Change in unrealized gains (losses)
Table
5.6
(In thousands)
Fixed income securities
Equity securities
Other
2018
2017
2016
$
(81,834) $
69,026
$
(5,403)
—
—
39
(13)
(36)
14
Change in unrealized gains/losses
$
(81,834) $
69,052
$
(5,425)
NOTE 6
Fair Value Measurements
The following table describes the valuation methodologies generally used by the independent pricing sources, or
by us, to measure financial instruments at fair value, including the general classification of such financial
instruments pursuant to the valuation hierarchy.
Level 1 measurements
•
•
•
Fixed income securities: Consist of primarily U.S. Treasury securities with valuations derived from quoted
prices for identical instruments in active markets that we can access.
Equity securities: Consist of actively traded, exchange-listed equity securities with valuations derived from
quoted prices for identical assets in active markets that we can access.
Other: Consists of money market funds with valuations derived from quoted prices for identical assets in
active markets that we can access.
Level 2 measurements
•
Fixed income securities:
Corporate Debt & U.S. Government and Agency Bonds are valued by surveying the dealer community,
obtaining relevant trade data, benchmark quotes and spreads and incorporating this information into the
valuation process.
Obligations of U.S. States & Political Subdivisions are valued by tracking, capturing, and analyzing quotes
for active issues and trades reported via the Municipal Securities Rulemaking Board records. Daily
briefings and reviews of current economic conditions, trading levels, spread relationships, and the slope of
the yield curve provide further data for evaluation.
Residential Mortgage-Backed Securities ("RMBS") are valued by monitoring interest rate movements, and
other pertinent data daily. Incoming market data is enriched to derive spread, yield and/or price data as
appropriate, enabling known data points to be extrapolated for valuation application across a range of
related securities.
Commercial Mortgage-Backed Securities ("CMBS") are valued using techniques that reflect market
participants’ assumptions and maximize the use of relevant observable inputs including quoted prices for
similar assets, benchmark yield curves and market corroborated inputs. Evaluation uses regular reviews of
78 | MGIC Investment Corporation 2018 Annual Report
Notes
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 valued using spreads and other information solicited from market buy-
and-sell-side sources, including primary and secondary dealers, portfolio managers, and research
analysts. Cash flows are generated for each tranche, benchmark yields are determined, and deal collateral
performance and tranche level attributes including trade activity, bids, and offers are applied, resulting in
tranche specific prices.
Collateralized loan obligations ("CLO") Collateralized Loan Obligations are valued by evaluating manager
rating, seniority in the capital structure, assumptions about prepayment, default and recovery and their
impact on cash flow generation. Loan level net asset values are determined and aggregated for tranches
and as a final step prices are checked against available recent trade activity.
Level 3 measurements
•
Equity securities (2017): FHLB stock valued at par value due to restrictions that require it to be redeemed
or sold only to the security issuer at par value.
RECURRING FAIR VALUE MEASUREMENTS
Assets carried at fair value included those listed, by hierarchy level, in the following tables as of December 31,
2018 and 2017:
Assets carried at fair value by hierarchy level as of December 31, 2018
Table
6.1a
(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)
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 fixed income securities
Equity securities
Other (1)
Real estate acquired (2)
Total
$
167,176
$
42,264
$
124,912
$
1,720,100
2,400,762
112,033
178,961
267,660
305,295
5,151,987
3,932
96,403
14,535
—
—
—
—
—
—
42,264
3,932
96,403
—
1,720,087
2,400,762
112,033
178,961
267,660
305,295
5,109,710
—
—
—
$
5,266,857
$
142,599
$
5,109,710
$
—
13
—
—
—
—
—
13
—
—
14,535
14,548
MGIC Investment Corporation 2018 Annual Report | 79
Notes
Assets carried at fair value by hierarchy level as of December 31, 2017
Table
6.1b
(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)
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 fixed income securities
Equity securities (3)
Real estate acquired (2)
Total
$
178,846
$
81,598
$
97,248
$
2,152,524
2,066,838
4,923
181,849
297,312
101,023
4,983,315
7,246
12,713
—
—
—
—
—
—
81,598
2,978
—
2,152,253
2,066,838
4,923
181,849
297,312
101,023
4,901,446
—
—
$
5,003,274
$
84,576
$
4,901,446
$
—
271
—
—
—
—
—
271
4,268
12,713
17,252
(1)
(2)
(3)
Consists of money market funds included in "Cash and Cash Equivalents" and "Restricted Cash and Cash Equivalents" on
the consolidated balance sheet.
Real estate acquired through claim settlement, which is held for sale, is reported in "Other assets" on the consolidated
balance sheets.
Equity securities in Level 3 are carried at cost, which approximates fair value. See "Reconciliation of Level 3 assets" below
for information regarding a change in presentation of amounts previously included in Level 3 Equity securities.
Certain financial instruments, including insurance contracts, are excluded from fair value disclosure
requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level
2) approximated their fair values.
RECONCILIATIONS OF LEVEL 3 ASSETS
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, 2018, 2017, and 2016 is shown in tables
6.2a, 6.2b and 6.2c below. As described in Note 3 - "Significant Accounting Policies," under updated guidance
regarding the "Recognition and Measurement of Financial Assets and Financial Liabilities" which became effective
on January 1, 2018, our investment in FHLB stock is no longer presented with equity securities. Prior to the
updated guidance, the FHLB stock was included in our Level 3 equity securities. As shown in table 6.2a below, for
the year ended December 31, 2018, we have transferred the FHLB stock out of Level 3 assets, and it is carried at
cost, which approximates fair value, on our consolidated balance sheet in "Other invested assets" as of December
31, 2018. There were no transfers into or out of Level 3 for the years ending December 31, 2017 and 2016. There
were no losses included in earnings for the years ended December 31, 2018, 2017, and 2016 attributable to the
change in unrealized losses on assets still held at the end of each applicable year.
80 | MGIC Investment Corporation 2018 Annual Report
Notes
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2018
Table
6.2a
(In thousands)
Debt Securities
Equity Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2017
$
271
$
4,268
$
4,539
$
12,713
Transfers out of Level 3
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
Balance at December 31, 2018
$
—
—
—
—
(3,100)
(3,100)
3,663
3,663
—
—
—
—
(258)
13
$
(4,831)
(5,089)
— $
13
$
—
—
(1,995)
33,912
(30,095)
14,535
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2017
Table
6.2b
(In thousands)
Debt Securities
Equity Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2016
Total realized/unrealized gains (losses):
Included in earnings and reported as losses
incurred, net
Purchases
Sales
Balance at December 31, 2017
$
$
691
$
4,268
$
4,959
$
11,748
—
—
(420)
271
$
—
—
—
—
—
(420)
4,268
$
4,539
$
(1,315)
34,749
(32,469)
12,713
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2016
Table
6.2c
(In thousands)
Debt Securities
Equity Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2015
$
1,228
$
2,855
$
4,083
$
12,149
Total realized/unrealized gains (losses):
Included in earnings and reported as net
realized investment gains
Included in earnings and reported as losses
incurred, net
Purchases
Sales
Balance at December 31, 2016
$
—
—
—
(537)
691
$
3,579
—
4,258
(6,424)
3,579
—
4,258
(6,961)
4,268
$
4,959
$
—
(1,142)
36,859
(36,118)
11,748
Additional fair value disclosures related to our investment portfolio are included in Note 5 – “Investments.”
FINANCIAL LIABILITIES NOT CARRIED AT FAIR VALUE
Financial liabilities are incurred in the normal course of our business. Table 6.3 compares the carrying value and
fair value of our financial liabilities disclosed, but not carried, at fair value as of December 31, 2018 and 2017.
The fair values of our 5.75% Notes and 9% Debentures were based on observable market prices. The fair value of
the FHLB Advance was estimated using cash flows discounted at 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 table 6.3.
MGIC Investment Corporation 2018 Annual Report | 81
Notes
Financial liabilities not carried at fair value
Table
6.3
(In thousands)
Liabilities
FHLB Advance
5.75% Notes
9% Debentures
Total financial liabilities
December 31, 2018
December 31, 2017
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
155,000
$
150,551
$
155,000
$
419,713
256,872
425,791
338,069
418,560
256,872
831,585
$
914,411
$
830,432
$
152,124
465,473
353,507
971,104
The 5.75% Notes and 9% Debentures are obligations of our holding company, MGIC Investment Corporation, and
not of its subsidiaries.
NOTE 7
Debt
DEBT OBLIGATIONS
Table 7.1 shows the carrying value of our long-term
debt obligations as of December 31, 2018 and 2017.
Long-term debt obligations
Table
7.1
(In millions)
FHLB Advance - 1.91%, due
February 2023
5.75% Notes, due August 2023
(par value: $425 million)
9% Debentures, due April 2063
December 31,
2018
2017
$
155.0
$
155.0
419.7
256.9
418.5
256.9
830.4
Long-term debt, carrying value
$
831.6
$
FHLB Advance
MGIC borrowed $155.0 million in the form of a fixed
rate advance from the Federal Home Loan Bank of
Chicago ("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.
5.75% Notes
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
82 | MGIC Investment Corporation 2018 Annual Report
scheduled payments of principal and interest
discounted at the treasury rate defined in the notes
plus 50 basis points, plus, in each case, accrued
interest thereon to, but excluding, the redemption
date.
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. We were in
compliance with all covenants as of December 31,
2018.
9% Debentures
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, if any, 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. We have
19.0 million authorized shares reserved for
conversion under our 9% debentures.
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. We may redeem the 9% Debentures in
whole or in part from time to time, at our option, at a
redemption price equal to 100% of the principal
amount of the 9% Debentures being redeemed, plus
any accrued and unpaid interest, if the closing sale
price of our common stock exceeds $17.55 for at
least 20 of the 30 trading days preceding notice of the
redemption.
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 may
defer interest, under an optional deferral 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.
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 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.
Notes
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.
Market disruption events include any material adverse
change in domestic or international economic or
financial conditions.
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,
including their covenants and events of default. We
were in compliance with all covenants at
December 31, 2018. The 9% Debentures rank junior to
all of our existing and future senior indebtedness.
CREDIT FACILITY
As of December 31, 2018 and 2017, there were no
amounts drawn on our unsecured revolving credit
facility. The Credit Agreement with various lenders
provides for a $175 million unsecured revolving credit
facility maturing on March 21, 2020. We are required
under the Credit Agreement to pay commitment fees
on the average daily amount of the unused revolving
commitments of the lenders, and an annual
administrative fee to the administrative agent.
Commitment fees are recognized as interest expense.
INTEREST PAYMENTS
Interest payments were $51.3 million during 2018,
$57.8 million during 2017, and $49.5 million during
2016.
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 loss adjustment expenses ("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 and the
MGIC Investment Corporation 2018 Annual Report | 83
Notes
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
consolidated results of operations and financial
position, even in a stable economic environment.
LOSSES INCURRED
The “Losses incurred” section of table 8.1 below
shows losses incurred on delinquencies that occurred
in the current year and in prior years. The amount of
losses incurred relating to delinquencies that
occurred in the current year represents the estimated
amount to be ultimately paid on such delinquencies.
The amount of losses incurred relating to
delinquencies that occurred in prior years represents
the difference between the actual claim rate and
severity associated with those delinquencies resolved
in the current year compared to the estimated claim
rate and severity at the prior year-end, as well as a re-
estimation of amounts to be ultimately paid on
delinquencies continuing from the end of the prior
year. This re-estimation of the claim rate and severity
is the result of our review of current trends in the
delinquent inventory, such as percentages of
delinquencies that have resulted in a claim, the
amount of the claims relative to the average loan
exposure, changes in the relative level of
delinquencies by geography and changes in average
loan exposure.
Losses incurred on delinquencies that occurred in the
current year decreased in 2018 compared to 2017 and
in 2017 compared to 2016, in each case, primarily due
to a decrease in the number of new delinquencies, net
of cures, as well as a decrease in the estimated claim
rate on recently reported delinquencies.
LOSSES PAID
The “Losses paid” section of table 8.1 below shows
the amount of losses paid on delinquencies that
occurred in the current year and losses paid on
delinquencies that occurred in prior years. For several
years, the average time it took to receive a claim
associated with a delinquency had increased
significantly from our historical experience of
approximately twelve months. This was, 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. In
recent quarters, we have experienced a decline in the
average time it takes servicers to process
foreclosures, which has reduced the average time to
receive a claim associated with new delinquent
notices that do not cure. All else being equal, the
longer the period between delinquency and claim
filing, the greater the severity.
Premium refunds
Our estimate of premiums to be refunded on expected
claim payments is accrued for separately in "Other
liabilities" on our consolidated balance sheets and
approximated $40 million and $61 million at
December 31, 2018 and 2017, respectively.
84 | MGIC Investment Corporation 2018 Annual Report
Notes
Table 8.1 provides a reconciliation of beginning and ending loss reserves for each of the past three years:
Development of reserves for losses and loss adjustment expenses
8.1
Table
(In thousands)
Reserve at beginning of year
Less reinsurance recoverable
Net reserve at beginning of year
Losses incurred:
Losses and LAE incurred in respect of delinquent notices received in:
Current year
Prior years (1)
Total losses incurred
Losses paid:
Losses and LAE paid in respect of delinquent notices received in:
Current year
Prior years
Reinsurance terminations
Total losses paid
Net reserve at end of year
Plus reinsurance recoverables
Reserve at end of year
2018
2017
2016
$
985,635
$
1,438,813
$
1,893,402
48,474
937,161
50,493
1,388,320
44,487
1,848,915
203,928
(167,366)
36,562
284,913
(231,204)
53,709
387,815
(147,658)
240,157
7,298
327,743
(2,009)
333,032
640,691
33,328
11,267
493,300
301
504,868
937,161
48,474
14,823
689,258
(3,329)
700,752
1,388,320
50,493
$
674,019
$
985,635
$
1,438,813
(1)
A negative number for prior year losses incurred indicates a redundancy of prior year loss reserves. See table 8.2 below
for more information about prior year loss development.
Table 8.2 below shows the development of reserves in 2018, 2017 and 2016 for previously received delinquencies.
Reserve development on previously received delinquencies
Table
8.2
(In millions)
Decrease in estimated claim rate on primary delinquencies
Increase in estimated severity on primary delinquencies
Change in estimates related to pool reserves, LAE reserves,
reinsurance and other
Total prior year loss development (1)
2018
2017
2016
(213) $
(248) $
29
17
9
8
(167) $
(231) $
(148)
9
(9)
(148)
$
$
(1)
A negative number for prior year loss development indicates a redundancy of prior year loss reserves.
For the years ended December 31, 2018, 2017 and 2016, we experienced favorable development on previously
received delinquencies. This development was, in part, due to the resolution of approximately 73%, 67% and 63%
for the years ended December 31, 2018, 2017 and 2016, respectively, of the prior year delinquent inventory, with
improved cure rates. During 2018 and 2017, cure activity on loans that were delinquent twelve months or more
was significantly higher than our previous estimates. The favorable development for the years ended 2018, 2017,
and 2016 was offset, in part, by an increase in the estimated severity on previously reported delinquencies
remaining in the delinquent inventory.
MGIC Investment Corporation 2018 Annual Report | 85
Notes
DELINQUENT INVENTORY
A roll-forward of our primary delinquent inventory for
the years ended December 31, 2018, 2017, and 2016
appears in table 8.3 below. The information
concerning new notices and cures is compiled from
monthly reports received from loan servicers. The
level of new notice and cure activity reported in a
particular month can be influenced by, among other
things, the date on which a servicer generates its
report, the number of business days in a month and
transfers of servicing between loan servicers.
Primary delinquent inventory roll-forward
Table
8.3
2018
2017
2016
46,556
54,448
50,282
68,268
62,633
67,434
(60,511)
(61,094)
(65,516)
(5,750)
(9,206)
(12,367)
(267)
(357)
(629)
(1,578)
(1,337)
(1,273)
32,898
46,556
50,282
Beginning delinquent
inventory
New Notices
Cures
Paid claims
Rescissions and
denials
Other items
removed from
inventory
Ending delinquent
inventory
Hurricane activity
New delinquent notice activity increased in 2017
compared to 2016 (particularly in the fourth quarter)
because of hurricane activity that primarily impacted
Puerto Rico, Texas, and Florida in the third quarter of
2017. In response to the hurricanes, the Federal
Emergency Management Agency declared Individual
Assistance Disaster Areas ("IADA") which we used to
identify new notices of delinquency for reserving and
loss mitigation purposes. We received 9,294 new
notices of delinquency on loans in the IADAs in the
fourth quarter of 2017, which compares to 1,968 new
notices in the same areas in the fourth quarter of
2016. Loans in our ending delinquent inventory within
the IADAs were 12,446 and 7,162 as of December 31,
2017 and 2016, respectively. The majority of notices
of delinquency received from the IADAs due to the
hurricane activity cured during 2018.
Other items removed from inventory
During 2018, 2017, and 2016 our losses paid included
amounts paid upon commutation of coverage on
pools of non-performing loans ("NPLs"), and in 2016
our losses paid also included amounts paid in
connection with settlements for disputes concerning
our claims paying practices. The impacts of the
commutations of coverage on NPLs and/or
settlements in each of the past three years were as
follows:
•
2018 - 1,578 notices removed from delinquent
inventory with an amount paid of $50 million,
86 | MGIC Investment Corporation 2018 Annual Report
•
•
2017 - 1,337 notices removed from delinquent
inventory with an amount paid of $54 million,
2016 - 1,273 notices removed from delinquent
inventory with an amount paid of $53 million. In
addition, we made a final payment of $42 million
in connection with a 2012 settlement agreement
with Freddie Mac regarding the aggregate loss
limit under certain pool insurance policies.
Aging of delinquent inventory
Historically as a delinquency ages it becomes more
likely to result in a claim. The new notice activity from
hurricane impacted areas in the fourth quarter of
2017 increased the percentage of our delinquent
inventory that has been delinquent for three months
or less (table 8.4) as of December 31, 2017 when
compared to December 31, 2016.
The number of consecutive months that a borrower
has been delinquent is shown in the table below.
Primary delinquent inventory - consecutive months delinquent
Table
8.4
3 months or less
4 - 11 months
12 months or more (1)
Total
3 months or less
4 - 11 months
12 months or more
December 31,
2018
9,829
9,655
13,414
32,898
2017
17,119
12,050
17,387
46,556
2016
12,194
13,450
24,638
50,282
30%
29%
41%
37%
26%
37%
24%
27%
49%
Total
100%
100%
100%
Primary claims
received inventory
included in ending
delinquent inventory
809
954
1,385
(1)
Approximately 38%, 45%, and 47% of the primary
delinquent inventory delinquent for 12 consecutive
months or more has been delinquent for at least 36
consecutive months as of December 31, 2018, 2017
and 2016, respectively.
POOL INSURANCE DEFAULT INVENTORY
Pool insurance default inventory decreased to 859 at
December 31, 2018 from 1,309 at December 31, 2017
and 1,883 at December 31, 2016.
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. Our
estimate of premiums to be refunded on expected
future rescissions is accrued for separately and is
included in "Other liabilities" on our consolidated
balance sheets.
For information about discussions and legal
proceedings with customers with respect to our
claims paying practices, including settlements that we
believe are probable, as defined in ASC 450-20, see
Note 17 – “Litigation and Contingencies.”
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 purpose of ceded
reinsurance is to protect us, at a cost, against losses
arising from our mortgage guaranty policies covered
by the agreement and to manage our capital
requirements under PMIERs. Reinsurance is currently
placed on a quota-share and excess of loss basis, but
we also have immaterial captive reinsurance
agreements that remain in effect.
Table 9.1 below shows the effect of all reinsurance
agreements on premiums earned and losses incurred
as reflected in the consolidated statements of
operations.
Reinsurance
Table
9.1
(In thousands)
2018
2017
2016
Years ended December 31,
Premiums
earned:
Direct
Assumed
Ceded
Net premiums
earned
Losses
incurred:
Direct
Assumed
Ceded
Net losses
incurred
$1,084,748
$ 1,059,973
$ 1,058,545
1,805
509
662
(111,391)
(125,735)
(133,981)
$ 975,162
$ 934,747
$ 925,226
$
43,060
$
74,727
$ 273,207
331
183
1,138
(6,829)
(21,201)
(34,188)
$
36,562
$
53,709
$ 240,157
QUOTA SHARE REINSURANCE
Each of the reinsurers under our quota share
reinsurance agreements described below has an
insurer financial strength rating of A- or better by
Standard and Poor's Rating Services, A.M. Best, or
both.
Notes
2018 QSR Transaction. Our 2018 quota share
reinsurance agreement ("2018 QSR Transaction")
provides coverage on eligible new business written in
2018. Under the 2018 QSR Transaction, we cede
losses incurred and premiums on or after the
effective date through December 31, 2029, at which
time the agreement expires. Early termination of the
agreement can be elected by us effective
December 31, 2021, and annually thereafter, 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 structure of the 2018 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 2018 QSR Transaction, we will
receive a profit commission provided that the loss
ratio on the loans covered under the agreement
remains below 62%.
2017 QSR Transaction. Our 2017 quota share
reinsurance agreement ("2017 QSR Transaction")
provides coverage on eligible new business written in
2017. Under our 2017 QSR Transaction we 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.
2015 QSR Transaction. Our 2015 quota share
reinsurance agreement ("2015 QSR Transaction")
provides coverage on eligible business written before
2017. Under the 2015 QSR Transaction we cede
losses incurred and premiums through December 31,
2024, at which time the agreement expires. Early
termination of the agreement can be elected by us for
a fee on a bi-annual basis, 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. Our next early
termination option is at June 30, 2019 and requires 90
days' prior written notice.
The structure of both the 2017 QSR Transaction and
2015 QSR Transactions is a 30% quota share for all
policies covered, with a 20% ceding commission as
well as a profit commission. Generally, under the 2017
and 2015 QSR Transactions, we will receive a profit
commission provided that the loss ratio on the loans
covered under the agreement remains below 60%.
MGIC Investment Corporation 2018 Annual Report | 87
Notes
Table 9.2 provides a summary of our quota share
reinsurance agreements, excluding captive
agreements, for 2018, 2017 and 2016.
Quota share reinsurance
Table
9.2
(In thousands)
2018
2017
2016
Years ended December 31,
Ceded premiums
written and earned,
net of profit
commission (1)
Ceded losses
incurred
Ceding
commissions (2)
Profit commission
$108,337
$ 120,974
$ 125,460
6,543
22,336
30,201
51,201
49,321
47,629
147,667
125,629
112,685
(1)
(2)
Under our QSR Transactions, premiums are ceded on an
earned and received basis as defined in our
agreements.
Ceding commissions are reported within Other
underwriting and operating expenses, net on the
consolidated statements of operations.
Under the terms of our QSR Transactions currently in
effect, 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 was
$33.2 million as of December 31, 2018 and $39.3
million as of December 31, 2017. The reinsurance
recoverable balance is secured by funds on deposit
from the reinsurers which are based on the funding
requirements of PMIERs that address ceded risk.
2019 QSR Transaction. We have agreed to terms on a
QSR Transaction with a group of unaffiliated
reinsurers with an effective date of January 1, 2019
("2019 QSR Transaction"), which provides coverage on
eligible new business written in 2019. Under the 2019
QSR Transaction, we cede losses incurred and
premiums on or after the effective date through
December 31, 2030, at which time the agreement
expires. Early termination of the agreement can be
elected by us effective December 31, 2021, and bi-
annually thereafter, 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.
88 | MGIC Investment Corporation 2018 Annual Report
The structure of the 2019 QSR Transaction is a 30%
quota share, with a one-time option, elected by us, to
reduce the cede rate to either 25% or 20% effective
July 1, 2020, or bi-annually thereafter, for a fee, for all
policies covered, with a 20% ceding commission as
well as a profit commission. Generally, under the 2019
QSR Transaction, we will receive a profit commission
provided that the loss ratio on the loans covered
under the agreement remains below 62%.
EXCESS OF LOSS REINSURANCE
On October 30, 2018, MGIC entered into a fully
collateralized reinsurance agreement with Home Re
2018-1 Ltd. (“Home Re”), an unaffiliated special
purpose insurer domiciled in Bermuda, that provides
for up to $318.6 million of aggregate excess-of-loss
reinsurance coverage as of August 1, 2018 on a
portfolio of mortgage insurance policies having an
insurance coverage in force date on or after July 1,
2016 and before January 1, 2018. For the reinsurance
coverage period, MGIC will retain the first layer of
$168.7 million of aggregate losses, and Home Re will
then provide second layer coverage up to the
outstanding reinsurance coverage amount. The
premiums ceded to the reinsurer, Home Re, are
composed of coverage premiums, initial expense and
supplemental premiums. The coverage premiums are
generally calculated as the difference between the
amount of interest payable by Home Re on the notes
it issued to raise funds to collateralize its reinsurance
obligations to us, and the investment income
collected on the collateral assets.
The aggregate excess of loss reinsurance coverage
decreases over a ten-year period, subject to certain
conditions, as the underlying covered mortgages
amortize, principal is prepaid, or mortgage insurance
losses are paid. MGIC has rights to terminate the
reinsurance agreement, which includes an option to
terminate on or after October 25, 2025. Home Re
financed the coverage by issuing mortgage insurance-
linked notes in an aggregate amount of $318.6
million to unaffiliated investors. The notes have ten-
year legal maturities and are non-recourse to any
assets of MGIC or its affiliates. The proceeds of the
notes were deposited into a reinsurance trust for the
benefit of MGIC that will be the source of reinsurance
claim payments to MGIC and principal repayments on
the mortgage insurance-linked notes.
The amount of monthly reinsurance coverage
premium ceded will fluctuate due to change in one-
month LIBOR and changes in money market rates that
affect investment income collected on the assets in
the reinsurance trust. As the reinsurance premium will
vary based on changes in these rates, we concluded
that the reinsurance agreement contains an
embedded derivative that will be accounted for
separately as a freestanding derivative. The fair value
of the derivative at December 31, 2018, and the
change in fair value from inception of the reinsurance
agreement to December 31, 2018, was not material to
our consolidated balance sheet and consolidated
statement of operations, respectively. Total ceded
premiums were $2.8 million for the year ended
December 31, 2018.
In connection with entering into the reinsurance
agreement with Home Re, we concluded that the risk
transfer requirements for reinsurance accounting
were met as Home Re is assuming significant
insurance risk and a reasonable possibility of
significant loss. In addition, we assessed whether
Home Re was a variable interest entity (“VIE”). A VIE is
a legal entity that does not have sufficient equity at
risk to finance its activities without additional
subordinated financial support or is structured such
that equity investors lack the ability to make sufficient
decisions relating to the entity’s operations through
voting rights or do not substantively participate in
gains and losses of the entity. We concluded that
Home Re is a VIE. However, given that MGIC (1) does
not have the unilateral power to direct the activities
that most significantly affect Home Re’s economic
performance and (2) does not have the obligation to
absorb losses or the right to receive benefits of Home
Re, consolidation of Home Re is not required.
We are required to disclose our maximum exposure to
loss, which we consider to be an amount that we
could be required to record in our statement of
operations, as a result of our involvement with this
VIE. As of December 31, 2018, we did not have
exposure to the VIE as we have no investment in the
VIE and had no reinsurance claim payments due from
the VIE under our reinsurance agreement. We are
unable to determine the timing or extent of losses
that may be ceded under the reinsurance agreement.
The VIE assets are deposited in a reinsurance trust for
the benefit of MGIC that will be the source of
reinsurance claim payments to MGIC. The purpose of
the reinsurance trust is to provide security to MGIC for
the obligations of the VIE under the reinsurance
agreement. The trustee of the reinsurance trust, a
recognized provider of corporate trust services, has
established a segregated account within the
reinsurance trust for the benefit of MGIC, pursuant to
the trust agreement. The trust agreement is governed
by, and construed in accordance with, the laws of the
State of New York. If the trustee of the reinsurance
trust failed to distribute claim payments to us as
provided in the reinsurance trust, we would incur a
loss related to our losses ceded under the reinsurance
agreement and deemed unrecoverable. We are also
unable to determine the impact such possible failure
by the trustee to perform pursuant to the reinsurance
trust agreement may have on our consolidated
financial statements. As a result, we are unable to
quantify our maximum exposure to loss related to our
involvement with the VIE. MGIC has certain
termination rights under the reinsurance agreement
should its claims not be paid. We consider our
Notes
exposure to loss from our reinsurance agreement with
the VIE to be remote.
The following presents the total assets of Home Re
as of December 31, 2018.
Home Re total assets
Table
9.3
(In thousands)
Home Re 2018-1 Ltd.
Total VIE Assets
$
318,636
The reinsurance trust agreement provides that the
trust assets may generally only be invested in certain
money market funds that (i) invest at least 99.5% of
their total assets in cash or direct U.S. federal
government obligations, such as U.S. Treasury bills,
as well as other short-term securities backed by the
full faith and credit of the U.S. federal government or
issued by an agency of the U.S. federal government,
(ii) have a principal stability fund rating of “AAAm” by
S&P or a money market fund rating of “Aaa-mf” by
Moody’s as of the Closing Date and thereafter
maintain any rating with either S&P or Moody’s, and
(iii) are permitted investments under the applicable
credit for reinsurance laws and applicable PMIERs
credit for reinsurance requirements.
The assets of Home Re provide capital credit under
the PMIERs financial requirements (see Note 1 -
"Nature of Business"). A decline in the assets
available to pay claims would reduce the capital credit
available to MGIC.
MGIC Investment Corporation 2018 Annual Report | 89
Notes
NOTE 10
Other Comprehensive Income (Loss)
The pretax components of our other comprehensive income (loss) and related income tax (expense) benefit for
the years ended December 31, 2018, 2017 and 2016 are included in table 10.1 below.
Components of other comprehensive income (loss)
10.1
Table
(In thousands)
2018
2017
2016
Net unrealized investment (losses) gains arising during the year
$
(81,834) $
69,052
$
Income tax benefit (expense)
Net of taxes
Net changes in benefit plan assets and obligations
Income tax benefit
Net of taxes
Net changes in unrealized foreign currency translation adjustment
Income tax (expense) benefit
Net of taxes
Total other comprehensive (loss) income
Total income tax benefit (expense), net
17,188
(64,646)
(19,958)
4,191
(15,767)
—
—
—
(21,505)
47,547
(8,983)
3,144
(5,839)
45
(14)
31
(101,792)
21,379
60,114
(18,375)
(5,425)
1,776
(3,649)
(14,799)
5,179
(9,620)
(1,463)
512
(951)
(21,687)
7,467
Total other comprehensive (loss) income, net of tax
$
(80,413) $
41,739
$
(14,220)
The pretax and related income tax benefit (expense) components of the amounts reclassified from our
accumulated other comprehensive loss ("AOCL") to our consolidated statements of operations for the years
ended December 31, 2018, 2017 and 2016 are included in table 10.2 below.
Reclassifications from AOCL
Table
10.2
(In thousands)
2018
2017
2016
Reclassification adjustment for net realized (losses) gains included in
net income (1)
$
(7,037) $
(2,580) $
Income tax benefit (expense)
Net of taxes
Reclassification adjustment related to benefit plan assets and
obligations (2)
Income tax benefit (expense)
Net of taxes
Reclassification adjustment related to foreign currency (3)
Income tax (expense)
Net of taxes
Total reclassifications
Total income tax benefit (expense), net
Total reclassifications, net of tax
1,477
(5,560)
(2,232)
469
(1,763)
—
—
—
(9,269)
1,946
903
(1,677)
906
(317)
589
—
—
—
(1,674)
586
$
(7,323) $
(1,088) $
6,207
(2,050)
4,157
1,480
(518)
962
1,467
(513)
954
9,154
(3,081)
6,073
(1)
(2)
(3)
(Decreases) increases Net realized investment gains on the consolidated statements of operations.
Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
Increases (decreases) Other revenue on the consolidated statements of operations.
90 | MGIC Investment Corporation 2018 Annual Report
Notes
A roll-forward of AOCL for the years ended December 31, 2018, 2017, and 2016, including amounts reclassified
from AOCL, is included in table 10.3 below.
Roll-forward of AOCL
Table
10.3
(In thousands)
Net unrealized
gains and losses
on available-for-
sale securities
Net benefit plan
assets and
obligations
recognized in
shareholders' equity
Net unrealized
foreign currency
translation
Total AOCL
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
Balance, December 31, 2016, net of tax
Other comprehensive income (loss)
before reclassifications
Less: Amounts reclassified from
AOCL
Less: Amounts reclassified for lower
enacted corporate tax rate
Balance, December 31, 2017, net of tax
Cumulative effect of adopting the
accounting standard update for
financial instruments
Other comprehensive income (loss)
before reclassifications
Less: Amounts reclassified from
AOCL
508
4,157
(20,797)
45,870
(1,677)
(2,525)
29,275
(18)
(70,206)
(5,560)
(8,658)
962
(54,272)
(5,250)
589
12,947
(73,058)
—
(17,530)
(1,763)
Balance, December 31, 2018, net of tax
$
(35,389) $
(88,825) $
NOTE 11
Benefit Plans
3
954
(31)
31
—
—
—
—
—
—
—
(8,147)
6,073
(75,100)
40,651
(1,088)
10,422
(43,783)
(18)
(87,736)
(7,323)
(124,214)
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, their eligible spouses and dependents under a postretirement benefit plan. The following tables 11.1,
11.2, and 11.3 provide the components of aggregate annual net periodic benefit cost for each of the years ended
December 31, 2018, 2017, and 2016 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, 2018 and 2017.
MGIC Investment Corporation 2018 Annual Report | 91
2. Interest Cost
3. Expected Return on Assets
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
Notes
Components of net periodic benefit cost
Table
11.1
(In thousands)
12/31/2018
12/31/2017
12/31/2016
12/31/2018
12/31/2017
12/31/2016
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
1. Company Service Cost
$
10,530
$
9,556
$
9,130
$
1,160
$
15,095
(22,250)
—
3,375
15,475
(20,099)
—
4,932
15,906
(19,508)
—
5,528
834
(6,359)
—
$
813
706
751
704
(5,248)
(4,886)
—
—
(4,365)
(3,729)
(3,431)
—
—
—
—
—
—
(351)
6,937
6,586
9,961
—
(426)
6,169
5,743
10,675
—
(687)
5,856
5,169
10,697
1,277
(4,104)
(250)
(4,354)
(8,719)
—
(6,649)
(6,649)
—
(6,649)
(10,378)
—
—
(6,649)
(10,080)
—
8. Total Expense for Year
$
9,961
$
10,675
$
11,974
$
(8,719) $
(10,378) $
(10,080)
Development of funded status
Table
11.2
(In thousands)
Actuarial Value of Benefit Obligations
1. Measurement Date
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
12/31/2018
12/31/2017
12/31/2018
12/31/2017
2. Accumulated Benefit Obligation
$
375,562
$
411,996
$
28,085
$
24,716
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
$ (376,153) $ (417,770) $
(28,085) $
(24,716)
359,719
401,142
77,762
N/A
N/A $
49,677
$
(16,434)
(16,628)
N/A
85,303
60,587
N/A
Accumulated other comprehensive income (loss)
Table
11.3
(In thousands)
1. Net Actuarial (Gain)/Loss
2. Net Prior Service Cost/(Credit)
3. Net Transition Obligation/(Asset)
4. Total at Year End
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
$
110,321
$
109,904
$
939
$
(10,234)
(1,513)
(1,850)
—
—
2,690
—
(5,342)
—
$
108,808
$
108,054
$
3,629
$
(15,576)
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.
92 | MGIC Investment Corporation 2018 Annual Report
Notes
Table 11.4 shows the changes in the projected benefit obligation for 2018 and 2017.
Change in projected benefit / accumulated benefit
Table
11.4
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
1. Benefit Obligation at Beginning of Year
$
417,770
$
369,808
$
24,716
$
17,378
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
10,530
15,095
—
(36,132)
2,487
9,556
15,475
—
38,496
2,338
(32,674)
(17,578)
(908)
(15)
—
(335)
10
—
1,160
834
475
(1,209)
(692)
(1,077)
—
3,928
(50)
813
706
395
5,981
924
(1,404)
—
—
(77)
11. Benefit Obligation at End of Year
$
376,153
$
417,770
$
28,085
$
24,716
(1)
Includes lump sum payments of $20.9 million and $6.3 million in 2018 and 2017, respectively, from our pension plan to
eligible participants, which were former employees with vested benefits.
The decrease in our pension and supplemental executive retirement plans obligation in 2018 compared to 2017
was primarily due to an increase in the discount rate used to calculate the obligation and a higher amount of
benefits paid from the fund. The increase in our other postretirement plan obligation was primarily due to a plan
amendment, offset by an increase in the discount rate used to calculate the obligation. Table 11.8 below includes
the actuarial assumptions used to calculate the benefit obligations of our plans for 2018 and 2017.
Tables 11.5 and 11.6 shows the changes in the fair value of the net assets available for plan benefits, and
changes in other comprehensive income (loss) during 2018 and 2017.
Change in plan assets
Table
11.5
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
1. Fair Value of Plan Assets at Beginning of Year
$
401,142
$
360,900
$
85,303
$
70,408
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
10,908
—
9,435
—
—
475
—
395
(32,674)
(17,578)
(1,077)
(1,404)
(908)
(335)
(19,583)
48,720
834
—
—
(6,464)
(475)
—
16,299
(395)
8. Fair Value of Plan Assets at End of Year
$
359,719
$
401,142
$
77,762
$
85,303
MGIC Investment Corporation 2018 Annual Report | 93
Notes
Change in accumulated other comprehensive income (loss) ("AOCI")
Table
11.6
(In thousands)
1. AOCI in Prior Year
2. Increase/(Decrease) in AOCI
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
$
108,054
$
101,575
$
(15,576) $
(18,079)
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)
351
(6,937)
(15)
7,355
426
(6,169)
10
4,104
250
3,928
6,649
—
—
12,212
10,923
(4,146)
3. AOCI in Current Year
$
108,808
$
108,054
$
3,629
$
(15,576)
Table 11.7 shows the amount of amortization on components of net periodic benefit costs expected to be
recognized during the year ending December 31, 2019.
Amortization expected to be recognized during fiscal year ending
Table
11.7
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2018
12/31/2018
1. Amortization of Net Transition Obligation/(Asset)
$
2. Amortization of Prior Service Cost/(Credit)
3. Amortization of Net Losses/(Gains)
— $
(280)
8,271
—
(34)
—
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
Table
11.8
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
12/31/2018
12/31/2017
12/31/2018
12/31/2017
4.40%
3.00%
3.75%
3.00%
4.25%
N/A
3.55%
N/A
3.75%
5.75%
3.00%
N/A
N/A
N/A
4.30%
5.75%
3.00%
N/A
N/A
N/A
3.55%
7.50%
N/A
3.95%
7.50%
N/A
6.25%
6.50%
5.00%
2024
5.00%
2024
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
94 | MGIC Investment Corporation 2018 Annual Report
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 shown in table 11.9 below.
Notes
Plan assets
Table
11.9
1. Equity Securities
2. Debt Securities
3. Total
Pension Plan
Other Postretirement
Benefits
12/31/2018
12/31/2017
12/31/2018
12/31/2017
23%
77%
100%
21%
79%
100%
100%
—%
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:
è Level 1 Quoted prices for identical instruments in active markets that we can access. Financial assets using
Level 1 inputs include equity securities, mutual funds, money market funds, certain U.S. Treasury
securities and exchange traded funds ("ETFs").
è 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 using 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 used. 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 used by the
independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes,
issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market
research publications. Inputs may be weighted differently for any security, and not all inputs are used for each
security evaluation. Market indicators, industry and economic events are also considered. This information is
evaluated using a multidimensional pricing model. 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 that their controls around valuing securities are operating effectively. We have not made any
adjustments to the prices obtained from the independent sources.
Tables 11.10a and 11.10b set forth by level, within the fair value hierarchy, the pension plan assets and related
accrued investment income at fair value as of December 31, 2018 and 2017. There were no securities that used
Level 3 inputs.
Pension plan assets at fair value as of December 31, 2018
Table
11.10a
(In thousands)
Domestic Mutual Funds
Corporate Bonds
U.S. Government Securities
Municipal Bonds
Foreign Bonds
ETFs
Pooled Equity Accounts
Total Assets at fair value
Level 1
Level 2
Total
$
13,744
$
— $
13,744
—
181,363
181,363
19,904
—
—
5,241
—
1,324
43,424
30,113
—
64,606
21,228
43,424
30,113
5,241
64,606
$
38,889
$
320,830
$
359,719
MGIC Investment Corporation 2018 Annual Report | 95
Notes
Pension plan assets at fair value as of December 31, 2017
Table
11.10b
(In thousands)
Domestic Mutual Funds
Corporate Bonds
U.S. Government Securities
Municipal Bonds
Foreign Bonds
ETFs
Pooled Equity Accounts
Total Assets at fair value
Level 1
Level 2
Total
$
1,006
$
— $
1,006
—
202,840
202,840
17,996
—
—
5,734
—
1,400
62,293
32,949
—
76,924
19,396
62,293
32,949
5,734
76,924
$
24,736
$
376,406
$
401,142
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 benefit payments. Overall
asset allocation is 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%.
96 | MGIC Investment Corporation 2018 Annual Report
The equity investments use combinations of mutual
funds, ETFs, and pooled equity account structures
focused on the following strategies:
Strategy
Objective
Return seeking
growth
Funded ratio
improvement over
the long term
Investment types
● Global quality
growth
● Global low
volatility
Notes
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 objectives the minimum and maximum
allocation ranges for fixed income securities and
equity securities are:
Return seeking
bridge
Downside protection
in the event of a
declining equity
market
● Enduring asset
Equities (long only)
● Durable
company
Real estate
Commodities
Fixed income/Cash
Minimum
Maximum
70%
0%
0%
0%
100%
15%
10%
10%
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, government agency, 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.
Tables 11.11a and 11.11b set forth the other
postretirement benefits plan assets at fair value as of
December 31, 2018 and 2017. All are Level 1 assets.
Other postretirement benefits plan assets at fair value as of
December 31, 2018
Table
11.11a
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
Level 1
Total
$
$
60,405
$
60,405
17,357
17,357
77,762
$
77,762
Other postretirement benefits plan assets at fair value as of
December 31, 2017
Table
11.11b
(In thousands)
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, 2018 included 3% that was
primarily invested in equity securities of emerging
market countries and another 19% was invested in
securities of companies primarily based in Europe
and the Pacific Basin.
Tables 11.12 and 11.13 show the current and
estimated future contributions and benefit payments.
Company contributions
Table
11.12
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2018
12/31/2018
Company
Contributions for
the Year Ending:
Level 1
Total
1. Current
$
10,908
$
—
—
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
64,489
$
20,814
85,303
$
64,489
20,814
85,303
2. Current + 1
10,650
Our postretirement plan portfolio is designed to
achieve the following objectives over each market
cycle and for at least 5 years:
è Total return should exceed growth in the
Consumer Price Index by 5.75% annually
è Achieve competitive investment results
MGIC Investment Corporation 2018 Annual Report | 97
Notes
Benefits payments - total
Table
11.13
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2018
12/31/2018
Actual Benefit
Payments for the Year
Ending:
1. Current
$
33,582
$
652
Expected Benefit
Payments for the Year
Ending:
2. Current + 1
3. Current + 2
4. Current + 3
5. Current + 4
6. Current + 5
33,258
28,688
30,574
30,490
30,510
1,352
1,650
1,916
2,386
2,613
7. Current + 6 - 10
143,389
14,065
HEALTH CARE SENSITIVITIES
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 the following effects on other
postretirement benefits:
Health care trend rate assumption
Table
11.14
(In thousands)
Effect on total service
and interest cost
components
Effect on postretirement
benefit obligation
1-Percentage
Point Increase
1-Percentage
Point Decrease
$
327
$
(282)
3,221
(2,866)
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 to the plan of
up to 5% of each participant's eligible compensation.
We provide a matching 401(k) savings contribution
for 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 $6.0 million, $6.0 million and $5.9
million in 2018, 2017 and 2016, respectively.
98 | MGIC Investment Corporation 2018 Annual Report
NOTE 12
Income Taxes
Net deferred tax assets and liabilities as of
December 31, 2018 and 2017 are as follows:
Deferred tax assets and liabilities
12.1
Table
(In thousands)
2018
2017
Total deferred tax assets
$
83,082
$ 258,663
Total deferred tax liabilities
(13,898)
(24,282)
Net deferred tax asset
$
69,184
$ 234,381
Table 12.2 includes the components of the net
deferred tax asset as of December 31, 2018 and
2017.
Deferred tax components
Table
12.2
(In thousands)
2018
2017
Unearned premium reserves
$
31,808
$
29,196
Benefit plans
Federal net operating loss
Loss reserves
Unrealized depreciation
(appreciation) in investments
Mortgage investments
Deferred compensation
AMT credit carryforward
Other, net
(5,047)
(7,162)
—
155,839
3,113
4,994
9,407
8,307
8,662
17,521
(4,587)
(7,782)
8,963
7,265
37,017
6,051
Net deferred tax asset
$
69,184
$ 234,381
We used the remaining balance of our Federal net
operating loss carryforward to offset taxable income
during 2018. We believe that all gross deferred tax
assets at December 31, 2018 are fully realizable and
no valuation allowance has been established.
Table 12.3 summarizes the components of the
provision for (benefit from) income taxes:
Provision for (benefit from) income taxes
Table
12.3
(In thousands)
2018
2017
2016
Current Federal
$ (16,272) $
73,348
$
9,470
Deferred Federal
185,598
351,677
160,657
Other
4,727
3,710
2,070
Provision for
income taxes
$ 174,053
$ 428,735
$ 172,197
Our income tax expense for 2017 reflects the
remeasurement of our net deferred tax assets to
reflect the lower corporate tax rate of 21% under the
Tax Act. As a result of the lower tax rate, we recorded
a decrease to our net deferred tax assets of $133
million with a corresponding increase to our deferred
Federal statutory
income tax rate
Additional income
tax provision
related to the rate
decrease included
in the Tax Act
Additional income
tax provision
related to IRS
litigation
Tax exempt
municipal bond
interest
Other, net
Effective tax rate
income tax expense for the year ended December 31,
2017.
A reconciliation of the beginning and ending amount
of unrecognized tax benefits is shown in table 12.7.
Current federal income tax payments were $12.2
million, $22.0 million, and $4.5 million in 2018, 2017
and 2016, respectively.
Unrecognized tax benefits reconciliation
Table
12.7
(In thousands)
2018
2017
2016
Notes
Table 12.6 reconciles the federal statutory income tax
rate to our effective tax provision rate.
Effective tax rate reconciliation
Table
12.6
2018
2017
2016
21.0 %
35.0 %
35.0 %
Balance at
beginning of year
Additions for tax
positions of prior
years
Reductions for
tax positions of
prior years
Settlements
$ 142,821
$ 108,245
$ 107,120
—
35,003
1,125
(3,070)
(139,751)
(427)
—
—
—
Balance at end of
year
$
— $ 142,821
$ 108,245
— %
17.0 %
— %
(0.3)%
3.7 %
0.1 %
(0.7)%
0.6 %
20.6 %
(1.4)%
0.4 %
54.7 %
(1.9)%
0.3 %
33.5 %
With the approval of our settlement by the U.S. Tax
Court, we have no unrecognized tax benefits at
December 31, 2018. We recognize interest accrued
and penalties related to unrecognized tax benefits in
income taxes. During 2018, we recognized an interest
benefit of $3.1 million. As of December 31, 2017, we
had $52.0 million of accrued interest related to
uncertain tax positions. The statute of limitations
related to the consolidated federal income tax return
is closed for all years prior to 2015.
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").
In 2014, we received Notices of Deficiency (commonly
referred to as "90 day letters") from the IRS. We filed
a petition with the U.S. Tax Court contesting most of
the IRS' proposed adjustments reflected in the
Notices of Deficiency. In July 2018, we finalized an
agreement with the IRS to settle all issues in the
examinations and related U.S. Tax Court case; the
settlement was approved by the U.S. Tax Court on
July 26, 2018. As a result of our settlement, we made
federal tax and interest payments of $14.8 million
during 2018. We also made state tax and interest
payments of $36.8 million during 2018. The impact of
the agreed upon settlement was previously reflected
in our consolidated statements of operations.
NOTE 13
Shareholders' Equity
CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2018, the updated guidance of
"Recognition and Measurement of Financial Assets
and Financial Liabilities" became effective. The
application of this guidance resulted in an immaterial
cumulative effect adjustment to our 2018 beginning
accumulated other comprehensive (loss) income and
retained earnings to recognize unrealized gains on
equity securities.
As of January 1, 2017, we adopted the updated
guidance of "Improvements to Employee Share-Based
Compensation Accounting." The adoption of this
guidance resulted in an immaterial cumulative effect
adjustment to our 2017 beginning retained earnings.
For the year ending December 31, 2017, we adopted
the updated guidance of "Reclassification of Certain
Tax Effects from Accumulated Other Comprehensive
Income." The adoption of this guidance resulted in a
$10.4 million reclassification from accumulated other
comprehensive loss to retained earnings in the fourth
quarter of 2017.
MGIC Investment Corporation 2018 Annual Report | 99
Notes
SHARE REPURCHASE PROGRAM
On April 26, 2018, our Board of Directors authorized a
share repurchase program under which we may
repurchase up to $200 million of our common stock
through the end of 2019. Repurchases may be made
from time to time on the open market or through
privately negotiated transactions. The repurchase
program may be suspended for periods or
discontinued at any time.
During 2018, we repurchased approximately 16.0
million shares of our common stock at a weighted
average cost per share of $10.95, which included
commissions. As of December 31, 2018, the
authorized share repurchase program had
approximately $25 million remaining.
2017 CAPITAL TRANSACTIONS
2% Notes
In April 2017, holders of approximately $202.5 million
of the outstanding principal amount of our 2% Notes
exercised their rights to convert their notes into
shares of our common stock resulting in the delivery
of approximately 29.1 million shares of our common
stock to the holders. The transactions included the
delivery of approximately 18.7 million from our
treasury stock and an additional 10.4 million of newly
issued shares. Shareholders' equity was increased by
the carrying value of the notes at the time of
conversion.
2016 CAPITAL TRANSACTIONS
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. The excess of the purchase
price over carrying value was reflected as a loss on
debt extinguishment of $7.9 million on our
consolidated statement of operations.
2% Notes
In 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 of 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 is reflected as
a loss of debt extinguishment of $74.3 million on our
consolidated statement of operations for the year
ended December 31, 2016. As of December 31, 2016,
we had repurchased all of the shares issued as partial
consideration for our 2% Notes repurchases. The
weighted average cost per share was $8.03, which
included commissions, and the aggregate purchase
amount was $147.1 million.
100 | MGIC Investment Corporation 2018 Annual Report
9% Debentures
In 2016, MGIC purchased $132.7 million in aggregate
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
between the extinguishment of the liability
component and reacquisition of the equity
component. The purchase of the 9% Debentures
resulted in an $8.3 million loss on debt
extinguishment on the consolidated statement of
operations for the 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 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.
NOTE 14
Statutory Information
STATUTORY ACCOUNTING PRINCIPLES
The statutory financial statements of our insurance
companies are presented on the basis of accounting
principles prescribed, or practices 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") Statements of Statutory Accounting
Principles ("SSAP") as the basis of its statutory
accounting principles. In converting from statutory to
GAAP, typical adjustments include deferral of policy
acquisition costs, the inclusion of net unrealized
holding gains or losses in shareholders' equity relating
to fixed income securities and the inclusion of
statutory non-admitted assets.
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 principles
prescribed by the OCI, and 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 2018, MGIC's losses incurred were 4% of net
premiums earned. Changes in contingency loss
reserves impact the statutory statement of
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.
The statutory net income loss, policyholders' surplus
and contingency reserve liability of the insurance
subsidiaries of our holding company are show in table
14.1 below. 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.
Statutory financial information of holding company and
insurance subsidiaries
Table
14.1
As of and for the Years Ended
December 31,
(In thousands)
2018
2017
2016
Statutory net
income
Statutory
policyholders'
surplus
Contingency
reserve
$ 375,484
$ 310,776
$ 106,326
1,683,058
1,622,115
1,506,475
2,442,996
1,896,701
1,360,088
The surplus contributions made to MGIC, dividends
paid by MGIC, and distributions from other insurance
subsidiaries to us, are shown in table 14.2 below.
Surplus contributions and dividends of insurance
subsidiaries
Table
14.2
(In thousands)
2018
2017
2016
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
$ 220,000
140,000
64,000
$
—
—
52,001
STATUTORY CAPITAL REQUIREMENTS
The insurance laws of 16 jurisdictions, including
Wisconsin, our domiciliary state, require a mortgage
insurer to maintain a minimum amount of statutory
capital relative to the RIF (or a similar measure) in
order for the mortgage insurer to continue to write
new business. We refer to these requirements as the
“State Capital Requirements” and, together with the
GSE Financial Requirements, the “Financial
Requirements.” While they vary among jurisdictions,
the most common State Capital Requirements allow
for a maximum risk-to-capital ratio of 25 to 1. A risk-
to-capital ratio will increase if (i) the percentage
Notes
decrease in capital exceeds the percentage decrease
in insured risk, or (ii) the percentage increase in
capital is less than the percentage increase in insured
risk. Wisconsin does not regulate capital by using a
risk-to-capital measure but instead requires a
minimum policyholder position ("MPP"). The
“policyholder position” of a mortgage insurer is its net
worth or surplus, contingency reserve and a portion of
the reserves for unearned premiums.
At December 31, 2018, MGIC’s risk-to-capital ratio was
9.0 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $2.6 billion above the
required MPP of $1.3 billion. In calculating our risk-to-
capital ratio and MPP, we are allowed full credit for the
risk ceded under our quota share reinsurance
transactions with unaffiliated reinsurers. It is possible
that under the revised State Capital Requirements
discussed below, MGIC will not be allowed full credit
for the risk ceded to the reinsurers. If MGIC is not
allowed an agreed level of credit under either the
State Capital Requirements or the PMIERs, MGIC may
terminate the reinsurance agreement, without penalty.
At this time, we expect MGIC to continue to comply
with the current State Capital Requirements; however,
you should read the rest of these financial statement
footnotes for information about matters that could
negatively affect such compliance.
At December 31, 2018, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.8 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.
The NAIC plans to revise the minimum capital and
surplus requirements for mortgage insurers that are
provided for in its Mortgage Guaranty Insurance
Model Act. In May 2016, a working group of state
regulators released an exposure draft of a risk-based
capital framework to establish capital requirements
for mortgage insurers, although no date has been
established by which the NAIC must propose
revisions to the capital requirements and certain
items have not yet been completely addressed by the
framework, including the treatment of ceded risk,
minimum capital floors, and action level triggers.
Currently we believe that the PMIERs contain the
more restrictive capital requirements than the draft
Mortgage Guaranty Insurance Model Act 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
MGIC Investment Corporation 2018 Annual Report | 101
is reduced. For the year ended December 31, 2018,
MGIC’s increase in contingency reserves was $484
million and statutory net income was $325 million. As
of December 31, 2018, MGIC's statutory policyholders'
surplus was $1,682 million.
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.
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. 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. At December 31,
2018, 5.1 million shares were available for future
grant under the 2015 plan.
The compensation cost that has been charged
against income for share-based plans was $20.9
million, $14.9 million, and $11.4 million for the years
ended December 31, 2018, 2017 and 2016,
respectively. The related income tax benefit
recognized for share-based plans was $3.0 million,
$5.2 million, and $4.0 million for the years ended
December 31, 2018, 2017, and 2016, respectively.
Notes
jurisdiction if it fails to meet the State Capital
Requirements of that jurisdiction and in each case
MGIC does not obtain a waiver of such requirements.
It is possible that regulatory action by one or more
jurisdictions, including those that do not have specific
State Capital Requirements, may prevent MGIC from
continuing to write new insurance in such
jurisdictions. If we are unable to write business in all
jurisdictions, lenders may be unwilling to procure
insurance from us anywhere. In addition, a lender’s
assessment of the future ability of our insurance
operations to meet the State Capital Requirements or
the PMIERs may affect its willingness to procure
insurance from us. A possible future failure by MGIC
to meet the State Capital Requirements or the PMIERs
will not necessarily mean that MGIC lacks sufficient
resources to pay claims on its insurance liabilities.
While we believe MGIC has sufficient claims paying
resources to meet its claim obligations on its 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.
DIVIDEND RESTRICTIONS
In 2018, MGIC paid a total of $220 million in dividends
to our holding company, and we expect MGIC to
continue to pay quarterly dividends. In 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 holding company
subsequently contributed the majority of the funds to
MGIC in relation to the transfer of risk.
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 principles prescribed, or
practices permitted, by the State of Wisconsin for
determining and reporting the financial condition and
results of operations of an insurance company. The
OCI has adopted certain prescribed accounting
practices that differ from those found in other states.
Specifically, Wisconsin domiciled companies record
changes in the contingency 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
102 | MGIC Investment Corporation 2018 Annual Report
Table 15.1 summarizes restricted stock or restricted
stock unit (collectively called “restricted stock”)
activity during 2018.
Restricted stock
Table
15.1
Weighted
Average Grant
Date Fair Market
Value
Restricted stock
outstanding at
December 31, 2017
$
Granted
Vested
Forfeited
Restricted stock
outstanding at
December 31, 2018
Shares
3,300,609
1,685,264
(1,371,063)
(31,304)
8.78
15.69
7.81
13.28
$
12.27
3,583,506
At December 31, 2018, the 3.6 million shares of
restricted stock outstanding consisted of 2.7 million
shares that are subject to performance conditions
(“performance shares”) and 0.9 million shares that are
subject only to service conditions (“time vested
shares”). The weighted-average grant date fair value
of restricted stock granted during 2017 and 2016 was
$10.41 and $5.66, 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 2018, 2017 and 2016 was $19.1
million, $15.3 million, and $12.2 million, respectively.
As of December 31, 2018, there was $18.0 million of
total unrecognized compensation cost related to non-
vested share-based compensation agreements
granted under the plans. Of this total, $12.4 million of
unrecognized compensation costs relate to
performance shares and $5.6 million relates to time
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 1.8 years.
NOTE 16
Leases
We lease certain office space as well as data
processing equipment and autos under operating
leases that expire during the next four years.
Generally, rental payments are fixed.
Notes
Table 16.1 shows minimum the future operating lease
payments as of December 31, 2018.
Minimum future operating lease payments
Table
(In thousands)
16.1
Amount
2019
2020
2021
2022
2023 and thereafter
Total
$
$
1,406
1,069
371
161
—
3,007
Total rental expense under operating leases was $1.9
million in 2018, $2.0 million in 2017, and $2.1 million
in 2016.
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,
our insurance policies generally provide that we can
reduce or deny a claim if the servicer did not comply
with its obligations under our insurance policy. We call
such reduction of claims “curtailments.” In recent
quarters, an immaterial percentage of claims received
in a quarter have been resolved by rescissions. In
2017 and 2018, curtailments reduced our average
claim paid by approximately 5.6% and 5.8%,
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 may be determined by legal
proceedings.
Under ASC 450-20, until a liability associated with
settlement discussions or legal proceedings becomes
probable and can be reasonably estimated, we
consider our claim payment or rescission resolved for
financial reporting purposes and do not accrue an
estimated loss. Where we have determined that a loss
MGIC Investment Corporation 2018 Annual Report | 103
a number of years after the underwriting work was
performed. The related contract underwriting remedy
expense for each of the years ended December 31,
2018, 2017, and 2016, 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.
Notes
is probable and can be reasonably estimated we have
recorded our best estimate of our probable loss.
In addition to matters for which we have recorded a
probable loss, we are involved in other discussions
and/or proceedings with insureds with respect to our
claims paying practices. Although it is reasonably
possible that when these matters are resolved we will
not prevail in all cases, we are unable to make a
reasonable estimate or range of estimates of the
potential liability. We estimate the maximum exposure
associated with matters where a loss is reasonably
possible to be approximately $279 million. This
estimate of maximum exposure is based upon
currently available information and is subject to
significant judgment, numerous assumptions and
known and unknown uncertainties. The matters
underlying the estimate of maximum exposure will
change from time to time. This estimate of our
maximum exposure does not include interest or
consequential or exemplary damages.
Mortgage insurers, including MGIC, have been
involved in litigation and regulatory actions related to
alleged violations of the anti-referral fee provisions of
the Real Estate Settlement Procedures Act, which is
commonly known as RESPA, and the notice provisions
of the Fair Credit Reporting Act, which is commonly
known as FCRA.
While these proceedings in the aggregate have not
resulted in material liability for MGIC, there can be no
assurance that the outcome of future proceedings, if
any, under these laws would not have a material
adverse effect 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.
Through a non-insurance subsidiary, we utilize our
underwriting skills to provide an outsourced
underwriting service to our customers known as
contract underwriting. As part of the contract
underwriting activities, that subsidiary is responsible
for the quality of the underwriting decisions in
accordance with the terms of the contract
underwriting agreements with customers. That
subsidiary may be required to provide certain
remedies to its customers if certain standards
relating to the quality of our underwriting work are not
met, and we have an established reserve for such
future obligations. Claims for remedies may be made
104 | MGIC Investment Corporation 2018 Annual Report
NOTE 18
Unaudited Quarterly Financial Data
Unaudited quarterly financial data - current year:
Table:
2018:
18.1a
Quarter
(In thousands, except per share data)
First
Second
Third
Fourth
Notes
Full
Year
Net premiums earned
$
232,107
$
246,964
$
250,426
$
245,665
$
975,162
Investment income, net of expenses
Realized (losses) gains
Other revenue
Loss incurred, net
Underwriting and other expenses, net
Provision for income tax
Net income
Income per share (a) (b):
Basic
Diluted
32,121
(329)
1,871
23,850
61,895
36,388
143,637
0.39
0.38
34,502
(1,897)
2,431
(13,455)
57,933
50,708
186,814
0.51
0.49
36,380
1,114
2,525
(1,518)
60,069
49,994
38,328
(241)
1,881
27,685
63,239
36,963
181,900
157,746
141,331
(1,353)
8,708
36,562
243,136
174,053
670,097
0.50
0.49
0.44
0.43
1.83
1.78
Unaudited quarterly financial statements - prior year:
Table:
2017:
18.1b
Quarter
(In thousands, except per share data)
First
Second
Third
Fourth
Full
Year
Net premiums earned
$
229,103
$
231,136
$
237,083
$
237,425
$
934,747
Investment income, net of expenses
Realized gains (losses)
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
29,477
(125)
2,425
27,619
59,304
—
84,159
89,798
0.26
0.24
29,716
(52)
2,512
27,339
55,292
65
61,994
118,622
0.32
0.31
30,402
(50)
2,925
29,747
56,146
—
64,440
120,027
0.32
0.32
31,276
458
2,343
(30,996)
57,042
—
218,142
27,314
0.07
0.07
120,871
231
10,205
53,709
227,784
65
428,735
355,761
0.98
0.95
(a)
(b)
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.
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. See Note 4 –
“Earnings Per Share” for further discussion on our calculation of diluted EPS.
MGIC Investment Corporation 2018 Annual Report | 105
Directors
MGIC Investment Corporation
Daniel A. Arrigoni
Timothy A. Holt
Michael E. Lehman
Former President & Chief
Former Senior Vice President &
Special Advisor to the Chancellor
Executive Officer
Chief Investment Officer
University of Wisconsin
U.S. Bank Home Mortgage Corp.
Aetna, Inc.
Home loan originator
and servicer
Diversified health care benefits
company
Cassandra C. Carr
Kenneth M. Jastrow, II
Consultant; Former Global Vice
Corporate Director & Private Investor
Melissa B. Lora
Former President
Taco Bell International
Restaurant company
Chair of Talent
Hill+Knowlton Strategies
Former Chairman &
Chief Executive Officer
Gary A. Poliner
Former President
Public relations consulting firm
Temple-Inland Inc.
Northwestern Mutual Life Ins. Co.
Paper & forest products company
Financial services company
C. Edward Chaplin
Former President & CFO
MBIA Inc.
Provider of financial guarantee
insurance
Curt S. Culver
Chairman
with financial services and
real estate interests
Jodeen A. Kozlak
Founder and CEO
Kozlak Capital Partners, LLC
Former Senior Vice President
of Human Resources
Former Chief Executive Officer
Alibaba Group
MGIC Investment Corporation
Multinational Conglomerate
Patrick Sinks
President &
Chief Executive Officer
MGIC Investment Corporation
Mark M. Zandi
Chief Economist
Moody’s Analytics, Inc.
Risk measurement and
management firm
Officers
MGIC Investment Corporation
President &
Chief Executive Officer
Patrick Sinks
Executive Vice Presidents
Stephen C. Mackey
Chief Risk Officer
Paula C. Maggio
General Counsel and Secretary
Timothy J. Mattke
Chief Financial Officer
Paul A. Spiroff
Assistant Treasurer
Martha F. Tsuchihashi
Assistant Secretary
Vice Presidents
Heidi A. Heyrman
Assistant Secretary
Lisa M. Pendergast
Treasurer
Brian M. Remington
Assistant Secretary
Julie K. Sperber
Controller & Chief Accounting Officer
106 | MGIC Investment Corporation 2018 Annual Report
Officers
Mortgage Guaranty Insurance Corporation
President &
Chief Executive Officer
Patrick Sinks
Executive Vice Presidents
James J. Hughes
Sales and Business Development
Stephen C. Mackey
Chief Risk Officer
Paula C. Maggio
General Counsel and Secretary
Timothy J. Mattke
Chief Financial Officer
Salvatore A. Miosi
Business Strategies and Operations
Senior Vice Presidents
Robert J. Candelmo
Chief Information Officer
Sean A. Dilweg
Government Relations
Kurt J. Thomas
Chief Human Resources Officer
Michael J. Zimmerman
Investor Relations
Vice Presidents
Terry A. Aikin
Managing Director
Robert K. Bates
Sales Strategy
Jane S. Coleman
National Accounts
Nathaniel H. Colson
Finance
Luis A. Contreras
National Accounts
Geoffrey F. Cooper
Product Development
Margaret M. Crowley
Marketing and Customer Experience
Christopher T. Perry
Sales
Dean D. Dardzinski
Managing Director
Stephen M. Dempsey
Managing Director
Hans F. DeSelms
Loss Forecasting & Analytics
Edward G. Durant
Model Development and Portfolio
Analytics
Mary L. Elkins
Systems Development
David A. Greco
Operational Risk
W. Todd Pittman
Managing Director
Tara E. Radman
Business Automation
Brian M. Remington
Loss Mitigation, Assistant
General Counsel and Assistant
Secretary
David H. Schroeder
Claims
John R. Schroeder
Corporate Development
Peter A. Semenak
Underwriting
Heidi A. Heyrman
Regulatory Relations, Assistant General
Counsel and Assistant Secretary
Bryan D. Specht
Policy Acquisition & Servicing
Dianna L. Higgins
Internal Audit
Michael E. Jacobson
Corporate Development
Mark J. Krauter
National Accounts
Michael L. Kull
Managing Director
Elyse M. Mitchell
National Accounts
Jerome J. Murphy
Business Process Transformation
Stacey B. Murphy
Talent Management
Jeffrey N. Nielsen
Financial Planning/Analysis
Lisa M. Pendergast
Treasurer & Investments
Julie K. Sperber
Controller and
Chief Accounting Officer
Paul A. Spiroff
Investments
Steven M. Thompson
Credit Policy and Pricing
Martha F. Tsuchihashi
Securities Law, Assistant General
Counsel and Assistant Secretary
Sean R. Valcamp
Chief Technology Officer
Kathleen E. Valenti
Chief Compliance Officer
Jerry L. Wormmeester
National Accounts
MGIC Investment Corporation 2018 Annual Report | 107
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 Services Index and (d) the S&P 500.
Our peer group index consists of the peers against which we analyzed our 2018 executive compensation: Ambac
Financial Group, Inc., Arch Capital Group Ltd., Assured Guaranty Ltd., Essent Group Ltd., Fidelity National Financial
Inc., First American Financial Corp., Flagstar Bancorp Inc., Genworth Financial Inc., MBIA Inc., NMI Holdings Inc.,
Ocwen Financial Corp., PennyMac Financial Services Inc., PHH Corporation (prior to its acquisition by Ocwen
Financial Corp.) and Radian Group. We selected this peer group because it includes all of our direct competitors
that were public companies in 2018 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.
180
160
140
120
100
80
60
2013
2014
2015
2016
2017
2018
Russell 2000 Financial Index
S&P 500
Peer Index (AMBC, ACGL, AGO, ESNT, FAF, FBC, FNF, GNW, MBI, NMIH, OCN, PFSI, PHH & RDN)
MGIC
Russell 2000 Financial Index
S&P 500
Peer Index (AMBC, ACGL, AGO, ESNT, FAF, FBC,
FNF, GNW, MBI, NMIH, OCN, PFSI, PHH & RDN)
MGIC
2013
100
100
100
100
2014
109
114
89
110
2015
110
115
81
105
2016
144
129
96
121
2017
152
157
115
167
2018
135
150
104
124
108 | MGIC Investment Corporation 2018 Annual Report
MGIC Stock
MGIC Investment Corporation Common Stock is
listed on the New York Stock Exchange under the
symbol MTG. At March 7, 2019, 355,925,173 shares
of our common stock were entitled to vote.
The payment of 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 from its insurance subsidiaries is
restricted by insurance regulations. For a discussion
of these restrictions, see Note 14 - "Statutory
Information, Dividend Restrictions”
our
consolidated financial statements.
to
As of March 7, 2019, the number of shareholders of
record was 265. In addition, we estimate that there
are approximately 46,000 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 4 p.m. Central
Time on April 24, 2019, 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, 2018, 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
from
The Annual Report on Form 10-K referred to above
includes as exhibits certifications
the
Company’s Chief Executive Officer and Chief
Financial Officer under Section 302 of the Sarbanes-
Oxley Act. Following the 2018 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
American Stock Transfer & Trust Company, LLC
6201 15th Avenue
Brooklyn, NY 11219
800-937-5549
Corporate Headquarters
MGIC Plaza
270 East Kilbourn Avenue
Milwaukee, Wisconsin 53202
Mailing Address
P. O. Box 488
Milwaukee, Wisconsin 53201
Shareholder Services
(414) 347-6596
MGIC Investment Corporation 2018 Annual Report | 109