Financial Summary
Net income ($ millions)
Diluted income per share ($)
Net operating income (1) ($ millions)
Net operating income per diluted share (1) ($)
2017
2018
2019
$
$
$
$
355.8
0.95
517.7
1.36
$
$
$
$
670.1
1.78
668.7
1.78
$
$
$
$
673.8
1.85
669.7
1.84
New Primary Insurance Written
($ billions)
$63.4
$49.1
$50.5
Direct Primary Insurance in Force
($ billions)
$209.7
$222.3
$194.9
2017
2018
2019
2017
2018
2019
Revenue
($ millions)
$1,066
$1,124
$1,214
Book Value per Share
$8.51
$10.08
$12.41
2017
2018
2019
2017
2018
2019
Losses incurred, net
($ millions)
Default Inventory
(# loans)
$119
46,556
32,898
30,028
$54
$37
2017
2018
2019
2017
2018
2019
(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 2019 Annual Report | 1
Dear Fellow Shareholders:
I am pleased to report that in 2019, we produced another year of exceptional financial
results as we continued to execute on our five business strategies and kept our focus
on the long-term success of our company. In 2019 our business strategies were to:
1) prudently grow insurance in force, 2) pursue new business opportunities that met
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 2019 we:
•
Earned $673.8 million of net income compared to $670.1 million of net income for 2018.
• Wrote $63.4 billion of new insurance that is consistent with the Company’s risk and return goals. This
was up 26% from 2018 and contributed to a 6.0% increase in insurance in force.
•
•
•
•
•
•
•
Successfully deployed MiQ, our risk-based pricing system.
Generated an 18.8% return on beginning shareholders’ equity.
Increased book value per outstanding share by 23.1%.
Repurchased 8.7 million shares of common stock.
Reestablished a quarterly common stock dividend.
Substantially exceeded the minimum required assets of Fannie Mae and Freddie Mac’s (the GSEs’) private
mortgage insurer eligibility requirements (PMIERs) and state statutory capital requirements.
Improved our capital strength and flexibility, including by: 1) lowering our debt to capital ratio, 2) increasing
dividend payments from our insurance subsidiary, MGIC, to our holding company and 3) continuing the
use of reinsurance transactions (both quota share and insurance-linked notes).
• Maintained a low level of expenses while investing in co-worker development and our operating platforms.
The increase in net income primarily reflects an increase in revenues from accelerated earnings from single
premium policies that were refinanced and higher investment income, partially offset by higher losses incurred
due to less positive loss reserve development (discussed later in this letter).
The 2019 increase in new insurance written was a result of the attractive purchase mortgage market and
refinance conditions, and the dedication of my fellow co-workers to deliver stellar customer service. It also
reflects the value proposition we offer to lenders (ease of execution and ancillary services) and borrowers
(faster equity buildup and ability to cancel compared to the FHA). Our insurance in force grew as new insurance
written was only partially offset by decreasing persistency (the percentage of insurance remaining in force
from the year prior). As reported by Inside Mortgage Finance, the PMI industry’s 2019 market share of mortgage
originations was 16.1% and MGIC’s 2019 market share within the PMI industry was 16.5%.
At December 31, 2019, the ever-to-date loss ratio (cumulative paid and incurred losses / cumulative net
premium earned) and the delinquency rates of the 2011-17 books, which account for 44% of our total insurance
in force, were:
Book Year
Ever to Date Loss Ratio
Delinquency Ratio (Based on Loan Count)
2011
4.4%
3.2%
2012
2.6%
1.6%
2013
3.3%
1.7%
2014
4.7%
2.0%
2015
3.9%
1.5%
2016
4.1%
1.2%
2017
5.0%
1.2%
The loss ratios above compare very favorably to the ever to date loss ratios for the 2005 through 2008 books,
which averaged more than 100%. As of December 31, 2019, our 2005 through 2008 books accounted for just
11% of insurance in force; and our 2009 and later books accounted for 88% of our insurance in force but only
30% of the delinquency notices in our inventory. Our 2018 and 2019 books accounted for 43% of year-end
2019 insurance in force and are not displayed in the table above because not enough aging has occurred to
draw meaningful conclusions.
The insurance we wrote after 2008 has 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, economic cycles change over time and we have in place risk management tools to help prepare for
2 | MGIC Investment Corporation 2019 Annual Report
those changes. One tool is reinsurance. We have used quota share transactions since 2013 and have used
insurance-linked notes transactions, executed in the capital markets, on portions of our 2016 through 2019
books. We have been able to execute these transactions at attractive costs of capital and intend to continue
to use them when it makes economic sense. In addition to reducing losses in weaker economic environments,
these transactions diversify our sources of capital and enhance our returns. Other risk management tools
include pricing and underwriting. In 2019 we successfully deployed MiQ, our risk-based pricing system that
establishes our premium rates based on more borrower and loan attributes than were previously considered.
MiQ allows us to react faster, and in a less disruptive manner, to changing market conditions.
Net losses incurred were $118.6 million in 2019, up from $36.6 million in 2018. This was primarily because
in 2019 we benefited from only $71 million of favorable loss reserve development on prior-year delinquencies
compared to $167 million in 2018. The favorable loss reserve development in each year was primarily the
result of a reduction in the claim rate assumption for those delinquencies. While the number of new notices
received was relatively flat year over year, the claim rate applied to those notices was 8% in 2019 compared
to 9 - 9.5% in 2018, which resulted in a decrease of $14 million for current period losses. The primary
delinquency rate ended 2019 at 2.78% compared to 3.11% at year-end 2018. The number of loans in the
primary delinquency inventory decreased approximately 9% from year-end 2018 to year-end 2019.
Our balance sheet and capital position continued to get stronger. At year end 2019 we had $3 billion more
capital than required under state capital requirements and $1.2 billion more available assets than required
by the PMIERs. Our total debt to capital ratio declined to 17% at December 31, 2019 from 19% at December
31, 2018, primarily due to the level of our 2019 net income. We have a high quality, $5.9 billion cash and
investment portfolio, including $325 million at the holding company. Our investment portfolio generated $167
million of net investment income in 2019, an 18% increase over 2018.
In support of our strategy to manage and deploy capital to maximize our long-term value, we increased the
amount of capital we were able to upstream from MGIC to our holding company, from $220 million in 2018
to $280 million in 2019. During 2019 we used the remaining $25 million under our 2018 share repurchase
authorization and our Board authorized the repurchase of an additional $200 million of common stock (this
authorization expires at the end of 2020). By year‑end 2019 we had used $89 million of that authorization to
repurchase 8.7 million shares and had $111 million remaining. In July 2019, further reflecting our strong
capital position, our Board reinstated a quarterly common stock dividend of $0.06 per share, and during 2019
we paid dividends totaling $42 million. In early 2020, our Board authorized a quarterly dividend of $70 million
and a special dividend $320 million to be paid from MGIC to the holding company and authorized the
repurchase of an additional $300 million of common stock (this authorization expires at the end of 2021).
Regarding Housing Finance Reform, in 2019, the U.S. Treasury Department issued a plan that outlines
administrative and legislative reforms for the housing finance system. The reforms are aimed at reducing
taxpayer risk, expanding the private sector’s role in housing finance, modernizing government housing
programs, and achieving sustainable homeownership. We remain encouraged about the future role that our
company and industry can play in housing finance; however, the plan Treasury plan did not contain many
detailed directives, so its impact on our company and industry is still uncertain.
The FHFA is developing its plan for the eventual end of the GSE conservatorship, which is complicated and
will take time to develop and implement. The plan includes finalizing the capital rule for the GSEs. We expect
another proposed capital rule to be released early this year, and we expect it will include a framework for
determining the capital relief allowed to the GSEs for loans with private mortgage insurance. While changes
to the GSE business practices could impact our operations, we remain encouraged about the role our company
and industry can play in assisting the GSEs to mitigate their exposure to mortgage credit risk.
We are awaiting the CFPB’s updated definition of Qualified Mortgage (QM) and specifically any update that
relates to the so-called GSE Patch, set to expire in January 2021. The GSE Patch expands the definition of
QM to include mortgages eligible to be purchased by the GSEs, even if they do not meet the debt-to-income
ratio limit of 43%. It is hard to predict an effective date for the updated definition because once proposed, a
final rule will take several months to be published. We do not believe the CFPB intends to restrict access to
credit for deserving homeowners or make homeownership materially more expensive or unattainable.
We continue to be actively engaged on all of these topics and we continue to advocate for any changes to
favor the use of private capital, including private MI.
MGIC Investment Corporation 2019 Annual Report | 3
2019 was indeed a good year. We wrote significantly more new insurance than we did in 2018, our insurance
in force increased and the new insurance we wrote has strong credit characteristics and is expected to generate
meaningful returns for shareholders. Overall, current credit conditions are favorable. The number of new
delinquency notices received continues to be low and cure rates remain strong.
2020 marks the 63rd year that MGIC has been helping individuals and families find a better way to affordable
and sustainable homeownership. We continue to focus on the long-term success of the Company by offering
competitive products and services, while maintaining a sharp focus on expected risk adjusted returns and
expenses. In addition to offering a compelling business proposition for our customers, we strive to offer a
compelling value proposition for our employees. This enables us to maintain a low co-worker turnover rate
and to be a preferred employer. We invest in co-worker development programs that promote accountability
and a continuous-improvement culture and that address issues arising from the changing workforce, work
environment, and competitive landscape. We think this is a winning strategy for all stakeholders.
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 confident 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 than enabled our company to accomplish all that it did in 2019.
Respectfully,
Tim Mattke
Chief Executive Officer
From left: Sal Miosi, President and Chief Operating Officer
Steve Thompson, Executive Vice President and Chief Risk Officer
Tim Mattke, Chief Executive Officer
Paula Maggio, Executive Vice President, General Counsel and Secretary
Nathan Colson, Executive Vice President and Chief Financial Officer
Jay Hughes, Executive Vice President - Sales and Business Development
4 | MGIC Investment Corporation 2019 Annual Report
Five-Year Summary of Financial Information
Summary of operations
(In thousands, except per share data)
2019
2018
2017
2016
2015
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)
$ 1,001,308
$
992,262
$
997,955
$
975,091
$ 1,020,277
1,030,988
167,045
975,162
141,331
5,306
10,638
(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
1,213,977
1,123,848
1,066,054
1,062,483
1,041,288
118,575
36,562
53,709
240,157
—
194,769
52,656
—
366,000
847,977
174,214
—
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)
Net income
$
673,763
$
670,097
$
355,761
$
342,517
$ 1,172,000
Weighted average common shares outstanding
373,924
386,078
394,766
431,992
468,039
Diluted income per share
$
1.85
$
1.78
$
0.95
$
0.86
$
2.60
Balance sheet data
Total investments
$ 5,758,320
$ 5,159,019
$ 4,990,561
$ 4,692,350
$ 4,663,206
Cash and cash equivalents
161,847
151,892
99,851
155,410
181,120
Total assets
Loss reserves
Short- and long-term debt
Convertible senior notes
6,229,571
5,677,802
5,619,499
5,734,529
5,868,343
555,334
575,867
—
674,019
574,713
—
985,635
573,560
—
1,438,813
1,893,402
572,406
349,461
256,872
—
822,301
389,522
Convertible junior subordinated debentures
256,872
256,872
256,872
Shareholders' equity
Book value per share
4,309,234
3,581,891
3,154,526
2,548,842
2,236,140
12.41
10.08
8.51
7.48
6.58
(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 2019 Annual Report | 5
Other data
New primary insurance written ($ millions)
New primary risk written ($ millions)
$
$
63,421
15,811
$
$
50,526
12,657
$
$
49,123
12,217
$
$
47,875
11,831
$
$
43,031
10,824
Years Ended December 31,
2019
2018
2017
2016
2015
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
$ 222,295
$ 209,707
$ 194,941
$ 182,040
$ 174,514
$
57,213
$
54,063
$
50,319
$
47,195
$
45,462
213
163
228
191
236
235
244
303
271
388
1,079,578
1,058,292
1,023,951
30,028
32,898
46,556
998,294
50,282
992,188
62,633
Percentage of loans in default
2.78%
3.11%
4.55%
5.04%
6.31%
Insurance operating ratios (GAAP)
Loss ratio
Underwriting Expense ratio
Risk-to-capital ratio (statutory)
Mortgage Guaranty Insurance Corporation
Combined insurance companies
11.5%
18.4%
3.7%
18.2%
5.7%
16.0%
26.0%
15.3%
38.3%
14.9%
9.7:1
9.6:1
9.0:1
9.8:1
9.5:1
10.5:1
10.7:1
12.0:1
12.1:1
13.6:1
6 | MGIC Investment Corporation 2019 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,” “Risk Factors” and "Financial
Statements and Supplementary Data" that appeared
in our Annual Report on Form 10‑K for the year ended
December 31, 2019, which was filed with the
Securities and Exchange Commission on February 24,
2020. Except for certain cross-references, we have
not changed what appears below in those sections
from what was in our Form 10-K. As a result, the
Management’s Discussion and Analysis, Risk Factors
and Financial Statements and Supplementary Data
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,
2019 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
$222.3 billion of primary IIF on a consolidated basis
at December 31, 2019.
Summary of financial results of MGIC Investment
Corporation
Year Ended
December 31,
2019
2018
Change
(in millions, except per
share data)
Selected statement of
operations data
Total revenues
$ 1,214.0
$ 1,123.8
8 %
Losses incurred, net
118.6
36.6
224 %
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
182.8
848.0
174.2
673.8
178.2
844.2
174.1
670.1
$
1.85
$
1.78
$ 842.9
$
845.5
669.7
668.7
3 %
— %
— %
1 %
4 %
— %
— %
$
1.84
$
1.78
3 %
(1)
See "Explanation and Reconciliation of our use of Non-
GAAP Financial Measures."
MGIC Investment Corporation 2019 Annual Report | 7
Management's Discussion and Analysis
SUMMARY OF 2019 FINANCIAL RESULTS
Net income of $673.8 million for 2019 increased by
$3.7 million when compared to the prior year, and
diluted income per share of $1.85 increased by 4%
when compared to the prior year. These increases
primarily reflect an increase in revenues and fewer
weighted average diluted shares outstanding, which
was partially offset by an increase in losses incurred.
Adjusted net operating income of $669.7 million for
2019 (2018: $668.7 million) and adjusted net
operating income per diluted share of $1.84 (2018:
$1.78) each increased from the prior year primarily for
the same reasons.
Losses incurred, net were $118.6 million, compared to
$36.6 million the prior year. The increase was due to
lower favorable loss reserve development on
previously received delinquency notices when
compared to the prior year, partially offset by a
decrease in losses incurred on delinquency notices
received in the current year. The estimated claim rate
on new delinquency notices received in 2019 was 8%
compared to 9% in 2018.
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 lower
on average in 2019 compared to 2018. The lower
mortgage rates materially increased refinancing
activity but did not have a material impact on home
purchasing activity in 2019. The homeownership rate
increased slightly in 2019. The continued favorable
housing fundamentals and the increase in refinancing
transactions resulted in an increase in our NIW in
2019 when compared to 2018.
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."
8 | MGIC Investment Corporation 2019 Annual Report
Mortgage lending
The past several years of favorable housing
fundamentals and in our view, favorable risk
characteristics of our recently insured loans have
contributed to our declining delinquent inventory, and
lower losses incurred and claims paid. Our most
recent book years continue to experience a low level
of losses.
After easing somewhat in 2018, lending standards
became tighter again in 2019. The percentage of our
NIW with DTI ratios over 45% increased significantly
in 2018 compared to recent years but declined in
2019. Change in both years was primarily driven by
adjustments to GSE underwriting guidelines for loans
with DTI ratios over 45%. The increase in the
percentage of our NIW from refinance transactions in
2019 due to the low interest rate environment also
resulted in a lower percentage of our NIW with LTV
ratios over 95% in 2019 compared with 2018.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of changes in our NIW mix during 2019.
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, strength of management teams and field
organizations, 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; (ii) use
of customized rate plans (typically lower than
standard rates) that are made available to lenders that
meet certain criteria; and (iii) use of a spectrum of
filed rates to allow for formulaic, risk-based pricing
that may be quickly adjusted within certain
parameters (referred to as "risk-based pricing
systems"). We expect premium rates to continue to
decline.
In 2019, we introduced MiQ, our risk-based pricing
system that establishes our premium rates based on
more risk attributes than were considered in 2018.
GSE Risk Share Transactions
In 2018, the GSEs initiated secondary mortgage
market 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 may offer premium
rates that are 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.
Government programs. PMI also competes against
government mortgage insurance programs such as
the FHA, VA, and USDA, primarily for lower FICO score
business. While the combined market share of
primary mortgage insurance written by government
programs continued to exceed that written by PMI in
2019, PMI recaptured some share from those
programs. The strong refinance markets increased
PMI's share of refinances in 2019, and 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 2019 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 as well as
business, quality control and certain transactional
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, calculated from tables of factors
with several risk dimensions, reduced for credit given
for risk ceded under reinsurance transactions, and
subject to a floor amount). Based on our application
of the more restrictive PMIERs, MGIC's Available
Assets under PMIERs totaled $4.6 billion, an excess
of $1.2 billion over its Minimum Required Assets at
December 31, 2019.
Management's Discussion and Analysis
BUSINESS OUTLOOK FOR 2020
Our outlook for 2020 should be viewed against the
backdrop of the business environment discussed
above.
NIW
Our NIW is affected by total mortgage originations,
the percentage of total mortgage originations using
private mortgage insurance (the "PMI penetration
rate"), and our market share within the PMI industry.
As of late January 2020, the total mortgage
origination forecasts indicate mortgage originations
of $2 trillion in 2020. The purchase originations are
expected to increase in 2020, compared to 2019. Our
NIW from refinance originations is expected to be
lower in 2020 compared to a strong 2019. In 2019,
the majority of the refinances were from recent books
that experienced only a modest level of price
appreciation. Therefore, many of the refinanced
loans in 2019 required mortgage insurance. As a
result, we expect the PMI penetration rate to decline
somewhat in 2020.
The widespread use of loan level pricing systems by
the PMI industry makes it more difficult to compare
our rates to those offered by our competitors. We may
not be aware of industry rate changes until we
observe that our volume of NIW has changed. In
addition, business under customized rate plans is
awarded by certain customers for only limited periods
of time. As a result, our NIW may fluctuate more than
it had in the past.
IIF and RIF
Our IIF increased 6.0% in 2019 and we expect our IIF
to grow in 2020. Our book of IIF is an important driver
of our future revenues, 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. Despite an increase in IIF, we expect our
2020 earned premiums (on a direct basis) to be lower
than they were in 2019. Overall, our premium rates
have been trending down in recent years, including in
2019, and the books of business written at lower rates
represent an increasing percentage of our total IIF.
Our 2020 direct premiums written and net premiums
earned are expected to be lower than 2019. 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
MGIC Investment Corporation 2019 Annual Report | 9
Management's Discussion and Analysis
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. The actual
amount of premiums we cede in 2020 will be affected
by any changes in our reinsurance coverage, such as
the addition of new 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 net investment income in 2020 to be
comparable to 2019. We expect our invested assets
will remain relatively flat as we return capital to our
shareholders (see "Capital" below). The amount of
investment income will be impacted by the change in
the yield we can earn on investments.
Losses. We expect 2020 losses incurred with respect
to delinquency notices received in 2020 to be lower
than the comparable amount for 2019 as we expect to
receive fewer new delinquency notices in 2020.
Income taxes. We expect our 2020 effective tax rate to
be approximately 21%.
CAPITAL
MGIC dividend payments to our holding company
In 2019 and 2018, MGIC paid a total of $280 million
and $220 million, respectively, in dividends to our
holding company. We have received the appropriate
approvals for MGIC to pay to our holding company, in
the first quarter of 2020, a special dividend of $320
million and a quarterly dividend of $70 million. We
expect to use most of the proceeds of the special
dividend to repurchase our common stock as
discussed below. We expect MGIC to pay quarterly
dividends totaling at least $280 million per year,
subject to approval by MGIC’s Board of Directors. We
ask the OCI not to object before MGIC pays dividends.
Share repurchase programs
In 2019 and 2018, we repurchased approximately 8.7
million and 16.0 million shares of our common stock,
respectively, using approximately $114 million and
$175 million, respectively, of holding company
resources. We received approval to repurchase up to
an additional $300 million of our common stock
through the end of 2021. The following table shows
details of our share repurchase programs.
Repurchase
Program
Expiration
Date
Repurchased
(in millions)
Authorization
Remaining
(in millions)
2018
Authorization
December
31, 2019
2019
Authorization
December
31, 2020
2020
Authorization
December
31, 2021
200
89
111
300
From January 1, 2020, through February 19, 2020, we
repurchased approximately 2.5 million shares of our
common stock for approximately $35 million.
Repurchases may be made from time to time on the
open market (including through 10b5-1 plans) or
through privately negotiated transactions. The
repurchase programs may be suspended for periods
or discontinued at any time. As of December 31, 2019,
we had approximately 347 million shares of common
stock outstanding.
Dividends to shareholders
In 2019, MGIC paid dividends of $0.06 per common
share to its shareholders in the third and fourth
quarters totaling $42 million. On January 27, 2020,
our Board of Directors declared a quarterly cash
dividend of $0.06 per common share to shareholders
of record on February 11, 2020, payable on February
28, 2020.
For additional information about how the payment of
dividends by our holding company will result in an
adjustment to the conversion rate and price of our
convertible securities, see our risk factor titled “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.”
GSEs
We must comply with a GSE's PMIERs to be eligible to
insure loans delivered to or purchased by that GSE.
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, reduced for
credit given for risk ceded under reinsurance
transactions, and are subject to a floor amount).
10 | MGIC Investment Corporation 2019 Annual Report
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 make the PMIERs more onerous in the
future. The PMIERs provide that the factors that
determine Minimum Required Assets will be updated
periodically, or as needed if there is a significant
change in macroeconomic conditions or loan
performance. We do not anticipate that the regular
periodic updates will occur more frequently than once
every two years. The PMIERs state that the GSEs will
provide notice 180 days prior to the effective date of
updates to the factors; however, the GSEs may amend
any portion of the PMIERs at any time.
è There may be future implications for PMIERs based
upon forthcoming regulatory capital requirements for
the GSEs. In 2018, the FHFA issued a proposed capital
rule for the GSEs, which included a framework for
determining the capital relief allowed to the GSEs for
loans with private mortgage insurance. The FHFA
recently indicated that it plans to re-propose a capital
rule as early as the first quarter of 2020, although the
timing and content of the proposal is uncertain. Further,
any changes to the GSEs' capital and liquidity
requirements resulting from the Treasury Housing
Reform Plan could have future implications for PMIERs.
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.
Our reinsurance transactions enable us to earn higher
returns on our business than we would without them
because fewer Available Assets are required to be
held under PMIERs. However, reinsurance may not
always be available to us; or available on similar
terms, and our quota share reinsurance subjects us to
counterparty credit risk. The total credit under the
PMIERS for risk ceded under our reinsurance
transactions is subject to a modest reduction. Our
existing reinsurance transactions are subject to
periodic review by the GSEs and there is a risk we will
not receive our current level of credit in future periods
for the risk ceded under them. In addition, we may not
receive the same level of credit under future
transactions that we receive under existing
transactions.
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
Management's Discussion and Analysis
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. The "policyholder
position" of a mortgage insurer is its net worth or
surplus, contingency reserve, and a portion of the
reserve for unearned premiums.
At December 31, 2019, MGIC’s risk-to-capital ratio was
9.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.0 billion above the
required MPP of $1.7 billion. The calculation of our
risk-to-capital ratio and MPP reflect credit for the risk
ceded under our QSR Transactions and Home Re
Transactions. 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, refer to our risk factor
titled “State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis” for more information about matters that could
negatively affect such compliance.
At December 31, 2019, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.6 to 1.
The NAIC has previously announced plans to revise
the minimum capital and surplus requirements for
mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In
December 2019, a working group of state regulators
released an exposure draft of a revised Mortgage
Guaranty Insurance Model Act and 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 and
minimum capital floors. Currently we believe that the
PMIERs contain more restrictive capital requirements
than the draft Mortgage Guaranty Insurance Model
Act 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
MGIC Investment Corporation 2019 Annual Report | 11
Management's Discussion and Analysis
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 September 2019, at the direction of President
Trump, the U.S. Treasury Department ("Treasury")
released the “Treasury Housing Reform Plan” (the
"Plan"). The Plan recommends administrative and
legislative reforms for the housing finance system,
with such reforms intended to achieve the goals of
ending the conservatorships of the GSEs; increasing
competition and participation by the private sector in
the mortgage market including by authorizing the
FHFA to approve additional guarantors of
conventional mortgages in the secondary market,
simplifying the qualified mortgage ("QM") rule of the
Consumer Financial Protection Bureau ("CFPB"),
transferring risk to the private sector, and eliminating
the "GSE Patch" (discussed below); establishing
regulation of the GSEs that safeguards their safety
and soundness and minimizes the risks they pose to
the financial stability of the United States; and
providing that the federal government is properly
compensated for any explicit or implicit support it
provides to the GSEs or the secondary housing
finance market. Also in September 2019, the Treasury
and FHFA entered into a letter agreement that will
allow the GSEs to remit less of their earnings to the
government, which will help them rebuild their capital.
The impact of the Plan on private mortgage insurance
is unclear. The Plan does not refer to mortgage
insurance explicitly; however, it refers to a requirement
for credit enhancement on high LTV ratio loans, which
is a requirement of the current GSE charters. The Plan
also indicates that the FHFA should continue to
support efforts to expand credit risk transfer ("CRT")
programs and should encourage the GSEs to continue
to engage in a diverse mix of economically sensible
CRT programs, including by increasing reliance on
institution-level capital (presumably, as distinguished
from capital obtained in the capital markets). For
more information about CRT programs, 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."
The current GSE Patch expands the definition of QM
under the Truth in Lending Act (Regulation Z) ("TILA")
to include mortgages eligible to be purchased by the
GSEs, even if the mortgages do not meet the debt-to-
income ("DTI") ratio limit of 43% that is included in the
standard QM definition. Originating a QM may provide
a lender with legal protection from lawsuits that claim
the lender failed to verify a borrower’s ability to repay.
The GSE Patch is scheduled to expire no later than
January 2021. Approximately 27% and 22% of our
NIW in the first and second halves of 2019,
respectively, was on loans with DTI ratios greater than
43%. However, it is possible that expiration of the GSE
Patch will be delayed and that not all future loans with
DTI ratios greater than 43% will be affected by such
expiration. In this regard, we note that the CFPB
recently indicated that it expects to issue for
comment, no later than May 2020, a proposed new
"ability-to-repay" ("ATR") rule that would replace the
use of DTI ratio in the definition of QM with an
alternative measure, such as a pricing threshold. The
CFPB also indicated that it would extend the
expiration of the GSE Patch until the earlier of the
effective date of the proposed alternative or until one
of the GSEs exits conservatorship.
We insure loans that do not qualify as QMs; however,
we are unsure the extent to which lenders will make
non-QM loans because they will not be entitled to the
presumptions about compliance with the ATR rule
that the law allows with respect to QM loans. We are
also unsure the extent to which lenders will purchase
private mortgage insurance for loans that cannot be
sold to the GSEs.
The QM definition for loans insured by the FHA, which
was issued by the Department of Housing and Urban
Development (“HUD”), is less restrictive than the
CFPB’s definition in certain respects, including that (i)
it has no DTI ratio limit, and (ii) it allows lenders
certain presumptions about compliance with the ATR
rule on higher priced loans. It is possible that, in the
future, lenders will prefer FHA-insured loans to loans
insured by private mortgage insurance as a result of
the FHA’s less restrictive QM definition. However, in
September 2019, HUD released its Housing Reform
Plan and indicated that the FHA should refocus on its
mission of providing housing finance support to low-
and moderate-income families that cannot be fulfilled
through traditional underwriting. In addition,
Treasury's Plan indicated that the FHFA and HUD
should develop and implement a specific
understanding as to the appropriate roles and overlap
between the GSEs and FHA, including with respect to
the GSEs’ acquisitions of high LTV ratio and high DTI
ratio loans.
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
12 | MGIC Investment Corporation 2019 Annual Report
2018. The GSEs have introduced other loan
modifications programs to replace HAMP and HARP.
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.
The following table shows the percentage of our
primary RIF that has been modified as of
December 31, 2019.
Modifications
Policy Year
2003 and Prior
2004
2005
2006
2007
2008
2009
2010 - 2019
Total
HARP (1)
Modifications
HAMP & Other
Modifications
•
9.9%
16.4%
24.0%
28.0%
40.6%
57.8%
51.9%
—%
4.6%
49.9%
53.6%
50.9%
47.6%
36.3%
22.6%
11.7%
0.5%
5.5%
(1)
Includes proprietary programs that are substantially the
same as HARP.
Approximately 10.1% of our total primary RIF has
been modified as of December 31, 2019. Based on
loan count at December 31, 2019, the loans
associated with 97.6% of all HARP modifications and
79.5% 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,
and other alternatives to mortgage insurance,
including GSE programs that may reduce or
eliminate the demand for 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 refinancing are affected by the level of
current mortgage interest rates compared to the
mortgage coupon rates throughout the in force
Management's Discussion and Analysis
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, the
percentage of coverage on the insured loans, and
PMIERs capital requirements. 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 QSR Transactions, and premiums
ceded under our Home Re Transactions. 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 written and
earned in the current period, although this effect may
be enhanced (or mitigated) by differences in the
average premium rate between the two periods, as
well as by premiums that are returned or expected to
be returned in connection with claim payments and
rescissions, and premiums ceded under reinsurance
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
MGIC Investment Corporation 2019 Annual Report | 13
Management's Discussion and Analysis
Our investment portfolio is composed principally of
investment grade fixed income securities. The
principal factors that influence investment income are
the size of the portfolio and its yield. As measured by
amortized cost (which excludes changes in fair value,
such as from changes in interest rates), the size of
the investment portfolio is mainly a function of cash
generated from (or used in) operations, such as NPW,
investment income, net claim payments and
expenses, and cash provided by (or used for) non-
operating activities, such as debt or stock issuances
or repurchases.
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 through case reserves. 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:
including unemployment and housing prices, and
other factors can affect this pattern. For example,
a weak economy or housing value declines can
lead to claims from older books increasing,
continuing at stable levels or experiencing a
lower rate of decline. See further information
under “Mortgage insurance earnings and cash
flow cycle” below.
•
Losses 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
ceding commission on our reinsurance agreements.
Interest expense
•
•
•
•
•
•
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.
Interest expense reflects the interest associated with
our outstanding debt obligations and former credit
facility discussed in Note 7 – “Debt” to our
consolidated financial statements and under
“Liquidity and Capital Resources” below.
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 case 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,
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,
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 2019 Annual Report
Management's Discussion and Analysis
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 incurred losses on
delinquencies 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.
MGIC Investment Corporation 2019 Annual Report | 15
Management's Discussion and Analysis
EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP
FINANCIAL MEASURES
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.
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 2019 and 2018 and 35% for 2017.
Adjusted net operating income (loss) per diluted
share is calculated in a manner consistent with the
accounting standard regarding earnings per share, by
dividing (i) adjusted net operating income (loss) after
making adjustments for interest expense on
convertible debt, whenever the impact is dilutive, by
(ii) diluted weighted average common shares
outstanding, which reflects share dilution from
unvested restricted stock units and from convertible
debt when dilutive under the "if-converted" method.
Although adjusted pre-tax operating income (loss)
and adjusted net operating income (loss) exclude
certain items that have occurred in the past and are
expected to occur in the future, the excluded items
represent items that are: (1) not viewed as part of the
operating performance of our primary activities; or (2)
impacted by both discretionary and other economic or
regulatory factors and are not necessarily indicative
of operating trends, or both. These adjustments, along
with the reasons for their treatment, are described
below. Trends in the profitability of our fundamental
operating activities can be more clearly identified
without the fluctuations of these excluded items.
Other companies may calculate these measures
differently. Therefore, their measures may not be
comparable to those used by us.
(1) Net realized investment gains (losses). The
recognition of net realized investment gains or
losses can vary significantly across periods as
the timing of individual securities sales is highly
discretionary and is influenced by such factors as
market opportunities, our tax and capital profile,
and overall market cycles.
(2) Gains and losses on debt extinguishment. Gains
and losses on debt extinguishment result from
discretionary activities that are undertaken to
enhance our capital position, improve our debt
profile, and/or reduce potential dilution from our
outstanding convertible debt.
(3) Net impairment losses recognized in earnings.
The recognition of net impairment losses on
investments can vary significantly in both size
and timing, depending on market credit cycles,
individual issuer performance, and general
economic conditions.
(4)
Infrequent or unusual non-operating items. Our
income tax expense 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 and 2017 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.
16 | MGIC Investment Corporation 2019 Annual Report
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
Years Ended December 31,
2019
Tax
Effect
Net
(after-
tax)
Pre-tax
2018
Tax
Effect
Net
(after-
tax)
Pre-tax
2017
Tax
Effect
Net
(after-
tax)
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
(gains) losses
Loss on debt
extinguishment
Adjusted pre-tax operating
income / Adjusted net
operating income
$847,977
$174,214
$ 673,763
844,150
174,053
670,097
784,496
428,735
355,761
—
—
—
—
—
—
—
—
—
—
—
(132,999)
132,999
2,462
(2,462)
—
(29,039)
29,039
(5,108)
(1,073)
(4,035)
1,353
284
1,069
(231)
(81)
(150)
—
—
—
—
—
—
65
23
42
$842,869
$173,141
$ 669,728
$ 845,503
$ 176,799
$ 668,704
$ 784,330
$ 266,639
$ 517,691
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
(gains) losses
Loss on debt
extinguishment
Adjusted net operating
income per diluted share
(1)
373,924
$
1.85
—
—
(0.01)
—
386,078
$
1.78
—
(0.01)
—
—
394,766
$
0.95
0.34
0.07
—
—
$
1.84
$
1.78
$
1.36
(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.
MGIC Investment Corporation 2019 Annual Report | 17
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
increased in 2019 compared with 2018, due to higher
refinance originations, as well as higher purchase
originations. Refinance originations increased as a
result of lower 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
2020 are forecast to be down modestly compared to
2019 estimated levels, primarily due to an expected
decrease in refinancing transactions partially offset
by an increase in purchase originations. We expect
PMI's market share to decline slightly as 2019 was a
particularly strong year for PMI's market share and
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 2020 NIW is expected to
decrease from 2019.
Mortgage originations
(in billions)
2020 (F)
$1,336
$650
$1,986
2019 (E)
$1,266
$853
$2,119
2018
2017
$1,202
$512
$1,714
$1,156
$643
$1,799
$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 2019 and 2018, each
when compared to the respective prior year. PMI's
share increased primarily due to a higher percentage
of refinances; PMI premium rate reductions in recent
periods, which increases PMI's competitiveness
compared to government programs; and 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.
Estimated primary MI market share
(% of total primary MI
volume)
PMI
FHA
VA
USDA
2019
44.7%
28.2%
25.2%
1.9%
2018
44.1%
30.5%
22.9%
2.5%
2017
38.6%
33.9%
24.7%
2.8%
Source: Inside Mortgage Finance - February 21, 2020.
Includes HARP NIW.
Our estimated market share within the PMI industry
declined in 2019 when compared to 2018, 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
2019
16.5%
2018
17.4%
2017
18.3%
Source: Inside Mortgage Finance - February 21, 2020 or SEC
filings. Excludes HARP NIW.
E - Estimated, F- Forecast
Source: GSEs and MBA estimates/forecasts as of December
2019 and January 2020. Amounts represent the average of all
sources.
Estimated total of PMI, FHA, USDA, and VA primary
mortgage insurance
(in billions)
Primary
mortgage
insurance
2019
2018
2017
$859
$662
$701
Source: Inside Mortgage Finance - February 21, 2020 or SEC
filings. Includes HARP NIW.
18 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
NEW INSURANCE WRITTEN
NIW for 2019 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
due to changes in GSE underwriting guidelines, but
was also due in part to our underwriting guideline and
pricing changes associated with such loans. The
higher percentage in 2018 was primarily driven by
adjustments to GSE underwriting guidelines for loans
with DTI ratios over 45%.
(% of primary NIW)
2019
2018
2017
Years Ended December 31,
We are continuing to monitor our exposure to such
loans and may take further action.
760 and greater
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
640 - 659
639 and less
Total
44.9%
18.7%
13.9%
10.8%
7.0%
2.7%
1.4%
0.6%
100%
42.2%
17.1%
14.5%
11.9%
7.2%
3.8%
2.3%
1.0%
100%
41.8%
16.8%
14.1%
11.9%
8.1%
4.0%
2.3%
1.0%
100%
Primary NIW by loan-to-value
Years Ended December 31,
(% of primary NIW)
2019
2018
2017
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
80.01% to 85%
12.9%
43.5%
29.5%
14.1%
16.0%
43.3%
28.7%
12.0%
10.7%
46.5%
29.5%
13.3%
An increase in the percentage of refinances,
discussed above and home price appreciation,
partially offset by an increase in 97% LTV programs
offered by lenders, have decreased the percentage of
our NIW with LTV ratios greater than 95% in 2019
compared to 2018.
Primary NIW by debt-to-income ratio
Years Ended December 31,
(% of primary NIW)
2019
2018 (1)
2017
45.01% and above
38.01% to 45.00%
38.00% and below
13.5%
32.9%
53.6%
19.6%
33.1%
47.3%
10.4%
35.8%
53.8%
(1)
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, loan originators
may have changed the information they provide to us.
Although we have changed our operational procedures
to account for this, we cannot be sure that the DTI ratio
we report for each loan beginning in late 2018 includes
the related mortgage insurance premiums in the
calculation.
In 2019, the percentage of our NIW on loans with DTI
ratios over 45% was 14%, down significantly from 20%
in 2018. We believe the decline in 2019 was primarily
Primary NIW by policy payment type
Years Ended December 31,
(% of primary NIW)
2019
2018
2017
Monthly premiums
Single premiums
Annual Premiums
84.4%
15.5%
0.1%
83.0%
16.8%
0.2%
80.8%
19.0%
0.2%
Primary NIW by type of mortgage
(% of primary NIW)
2019
2018
2017
Years Ended December 31,
Purchases
Refinances
IIF AND RIF
80.9%
19.1%
93.2%
6.8%
88.6%
11.4%
Our IIF grew 6.0% in 2019, and 7.6% in 2018, as NIW
more than offset policy cancellations. Cancellation
activity is primarily due to refinancing activity, but is
also impacted by rescissions, cancellations due to
claim payment, and policies cancelled when
borrowers achieve the required amount of home
equity. Refinancing activity has historically been
affected by the level of mortgage interest rates and
the level of home price appreciation. Cancellations
generally move inversely to the change in the direction
of interest rates, although they generally lag a change
in direction.
Persistency. Our persistency at December 31, 2019
was 75.8% compared to 81.7% at December 31, 2018.
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.
Insurance in force and risk in force
Years Ended December 31,
($ in billions)
2019
2018
2017
NIW
$
63.4
$
50.5
$
49.1
Cancellations
(50.8)
(35.7)
(36.2)
Increase in primary
IIF
Direct primary IIF as
of December 31,
Direct primary RIF as
of December 31,
$
12.6
$
14.8
$
12.9
$ 222.3
$
209.7
$
194.9
$
57.2
$
54.1
$
50.3
MGIC Investment Corporation 2019 Annual Report | 19
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 books. The credit profile of our pre-2009 RIF has benefited from modification and refinance programs
making outstanding loans more affordable to borrowers with the goal of reducing the number of foreclosures.
These programs included HAMP and HARP, which expired at the end of 2016 and 2018, respectively, but have
been replaced by other GSE modification programs. 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, 2019. The aggregate of our 2009 and later books
and our HARP modifications accounted for approximately 92% of our total primary RIF at December 31, 2019.
The composition of our primary RIF as of December 31, 2019, 2018, and 2017 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, 2019
December 31, 2018
December 31, 2017
RIF
% of RIF
RIF
% of RIF
RIF
% of RIF
$
50,044
88% $
45,083
83% $
39,248
2,485
165
52,694
3,868
651
4,519
4%
—%
92%
7%
1%
8%
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
78%
7%
1%
86%
12%
2%
14%
Total Primary RIF
$
57,213
100% $
54,063
100% $
50,318
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 $376 million ($213 million on pool policies with aggregate loss limits
and $163 million on pool policies without aggregate loss limits) at December 31, 2019 compared to $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. 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 $182 million and $53 million
as of December 31, 2019 and December 31, 2018, respectively.
20 | MGIC Investment Corporation 2019 Annual Report
CONSOLIDATED RESULTS OF OPERATIONS
Management's Discussion and Analysis
The following section of the MD&A provides a
comparative discussion of our Consolidated Results of
Operations for the three-year period ended
December 31, 2019. 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
(in basis points)
2019
2018
2017
Year Ended December 31,
In force portfolio yield
(1)
51.4
(0.5)
53.1
(0.7)
56.0
(1.3)
2.6
1.2
1.5
53.5
53.6
56.2
Revenues
Revenues
(In millions)
Net premiums
written
Year Ended December 31,
2019
2018
2017
Premium refunds
Accelerated earnings
on single premium
policies
Total direct premium
yield
Ceded premiums
earned, net of profit
commission and
assumed premiums
Net premium yield
Net premiums earned
$ 1,031.0
$ 1,001.3
$
$
992.3
975.2
$
$
998.0
934.7
(2)
(5.8)
47.7
(5.4)
48.2
(6.6)
49.6
(1) Total direct premiums earned, excluding premium
refunds and accelerated premiums from single premium
policy cancellations divided by average primary
insurance in force.
(2) Ceded premiums earned, net of profit commissions and
assumed premiums. Assumed premiums include those
from our participation in GSE CRT programs, of which the
impact on the net premium yield was 0.2 bps in 2019, 0.1
bps in 2018, and 0 bps in 2017.
Investment income,
net of expenses
Net realized
investment (losses)
gains
Other revenue
167.0
141.3
120.9
5.3
10.6
(1.4)
8.7
0.2
10.2
Total revenues
$ 1,213.9
$ 1,123.8
$ 1,066.0
NET PREMIUMS WRITTEN AND EARNED
2019 compared to 2018. NPW and NPE increased 1%
and 6%, respectively, compared to the prior year,
primarily due to an increase in premiums from a
higher average insurance in force and an increase in
premiums from single premium policy cancellations,
partially offset by lower premium rates on our IIF and
higher ceded premiums when compared to the same
period of the prior year. The increase in ceded
premiums was primarily due to premiums ceded
under our Home Re Transactions.
2018 compared to 2017. While 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 was offset in part
by a lower premium yield.
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 provides information related to
our premium yield for 2019, 2018, and 2017.
MGIC Investment Corporation 2019 Annual Report | 21
Management's Discussion and Analysis
Changes in our premium yields when compared to the
respective prior year periods reflect the following:
In force Portfolio Yield
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 pricing
competition, insuring mortgages with lower risk
characteristics, certain policies undergoing premium
rate resets on their ten-year anniversaries, and the
availability of reinsurance.
Premium Refunds
è Premium refunds adversely impact our premium
yield and are primarily driven by claim activity and
our estimate of refundable premiums on our
delinquent inventory.
Accelerated earnings on single premium policies
è Greater amounts of accelerated earned premium
from cancellation of single premium policies prior to
their estimated policy life, primarily due to increased
refinancing activity.
Ceded premiums earned, net of profit commission and
assumed premiums
è More of an adverse impact as the 2019 periods
included ceded premiums under our excess of loss
reinsurance transactions (Home Re Transactions),
which were not in effect for all of 2018.
As 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," the private mortgage
insurance industry is highly competitive and premium
rates have declined over the past several years. We
expect that will continue and that our inforce portfolio
yield will continue to decline as older insurance
policies with higher premium rates run off or have
their premium rates reset, and new insurance policies
with lower premium rates are written. While our
increased use of reinsurance over the past several
years has helped to mitigate the negative effect of
declining premium rates on our returns, refer to our
risk factor titled "Reinsurance may not always be
available or affordable" for a discussion of the risks
associated with the availability of reinsurance.
See "Overview – Factors Affecting Our Results" above
for additional factors that also influence the amount
of net premiums written and earned in a year.
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.
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
can be eliminated at loss levels significantly higher
than we are currently experiencing. As a result,
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 following table provides information related to
our quota share agreements for 2019, 2018, and
2017.
Quota share reinsurance
As of and For the Years Ended
December 31,
(Dollars in
thousands)
2019
2018
2017
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
$ 111,550
$ 108,337
$ 120,974
11%
10%
11%
11%
10%
11%
$ 139,179
$ 147,667
$ 125,629
$ 48,793
$ 51,201
$ 49,321
$ 11,395
$
6,543
$ 22,336
Mortgage insurance portfolio:
Ceded RIF (in
millions)
Covered Risk
$ 11,360
$ 12,839
$ 11,849
The amount of 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.
22 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
retained risk after quota share reinsurance, and the
reinsurance inclusion percentage of the unpaid
principal balance. Total ceded premiums for 2019 and
2018 were $17.6 million and $2.8 million, respectively.
We expect that we may enter into similar excess-of-
loss reinsurance transactions if capital market
conditions remain favorable.
The excess-of-loss reinsurance agreements
determine premium, in part, by the difference between
the interest payable on the reinsurers' notes which
reference LIBOR and earnings from a pool of
securities receiving interest that may reference LIBOR.
As discussed in our risk factor titled "The Company
may be adversely impacted by the transition from
LIBOR as a reference rate," it is uncertain whether
LIBOR will continue to be quoted after 2021.
INVESTMENT INCOME, NET
2019 compared to 2018. Net investment income
increased 18% to $167 million in 2019 compared to
$141 million in 2018. The increase in investment
income was due to a higher average investment
portfolio balance.
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.
See "Balance Sheet Review" in this MD&A for further
discussion regarding our investment portfolio.
NET REALIZED INVESTMENT GAINS (LOSSES)
Net realized investment gains (losses) in 2019, 2018,
and 2017 were $5 million, $(1) million and $231
thousand, respectively.
OTHER REVENUE
2019 compared to 2018. Other revenue increased to
$11 million in 2019 from $9 million in 2018, primarily
due to higher contract underwriting revenues.
2018 compared to 2017. Other revenue decreased to
$9 million in 2018 from $10 million in 2017, due to
lower contract underwriting revenues.
Quota share reinsurance
As of and For the Years Ended
December 31,
2019
2018
2017
NIW subject to QSR
Transactions
IIF subject to QSR
Transactions
81.5%
75.1%
84.0%
78.5%
77.5%
78.0%
We terminated a portion of our 2015 QSR Transaction
effective June 30, 2019, paid a termination fee of $6.8
million, and entered into an amended quota share
reinsurance agreement that effectively reduces the
quota share cede rate from 30% to 15% on the
remaining eligible insurance. The lower cede rate
reduced our ceded RIF but does not impact our
determination of the amount of IIF subject to quota
share reinsurance agreements.
The percentage of 2019 NIW covered by QSR
Transactions increased when compared to 2018. The
percentage of 2018 NIW covered by QSR Transactions
decreased when compared to 2017, primarily due to
the following factors:
2019 compared to 2018:
è The 2019 QSR Transaction increased thresholds 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.
In 2018, risk written on loans with LTV ratios greater
than 95% and DTI greater than 45% exceeded the
thresholds on the 2018 QSR Transaction.
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.
2020 and 2021 QSR Transaction. We have agreed to
terms with a group of unaffiliated reinsurers for
reinsurance transactions with similar structures to our
existing QSR transactions that will cover most of our
NIW in 2020 (with a 30% quota share) and 2021 (with
a 17.5% quota share).
Excess of loss reinsurance
Our excess-of-loss reinsurance agreements provide
$532.0 million of loss coverage on an existing
portfolio of inforce policies having an inforce date on
or after July 1, 2016 and before March 31, 2019. As of
December 31, 2019, the aggregate exposed principal
balances under the Home Re 2018-1 and 2019-1
transactions were approximately $5.9 billion and $6.0
billion, respectively, which take into account the
mortgage insurance coverage percentage, net
MGIC Investment Corporation 2019 Annual Report | 23
2019 compared to 2018. Losses incurred, net
increased 224% to $119 million compared to $37
million in 2018. The increase was due to a lower
amount of favorable loss reserve development on
previously received delinquency notices of $71 million
in 2019 compared with $167 million in 2018. Current
year losses incurred decreased in 2019 from 2018,
primarily due to a lower claim rate on new
delinquency notices when compared to the prior year.
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 loss reserve development on prior year
delinquencies. New delinquency notices declined 20%
when compared to 2017, in part due to elevated 2017
delinquency notice activity associated with 2017
hurricanes, and the estimated claim rate on new
delinquency 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.
See "New notice claim rate" and "Claims severity"
below for additional factors and trends that impact
these loss reserve assumptions.
Composition of losses incurred
(In millions)
2019
2018
2017
Year Ended December 31,
Current year / New
notices
Prior year reserve
development
$
190
$
204
$
285
(71)
(167)
(231)
Losses incurred, net
$
119
$
37
$
54
Management's Discussion and Analysis
Losses and expenses
Losses and expenses
Year Ended December 31,
(In millions)
2019
2018
2017
Losses incurred, net
$ 118.6
$
36.6
$
53.7
Amortization of
deferred policy
acquisition costs
Other underwriting and
operating expenses, net
Interest expense
Loss on debt
extinguishment
Total losses and
expenses
12.0
11.9
11.1
182.8
52.7
178.2
53.0
159.6
57.0
—
—
0.1
$ 366.0
$ 279.7
$ 281.6
LOSSES INCURRED, NET
As discussed in “Critical Accounting Policies” below
and consistent with industry practices, we establish
case 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 to be delinquent when it is two or
more payments past due. Case loss reserves are
established based on estimating the number of loans
in our delinquent 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.
24 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
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 increase in the loss ratio in 2019 when compared to 2018, reflects a higher level of losses incurred,
partially offset by an increase in earned premiums. The decrease in the loss ratio in 2018 compared to 2017,
reflects the lower level of losses incurred, net and an increase in earned premiums.
Loss ratio
Year Ended December 31,
2019
2018
2017
11.5%
3.7%
5.7%
New notice claim 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 default, cure, and re-default. This cycle, along with the duration that
defaults may ultimately remain in our notice inventory, results in significant judgment in establishing the
estimated claim rate.
New notice claim rate
New notices - 2008 and prior
New notices - 2009 and later
Total
Claim rate (1)
Previously delinquent %
2019
2018
2017
34,252
19,987
54,239
8.0%
94.0%
63%
37%
38,897
15,551
71%
29%
52,313
15,955
100%
54,448
100%
68,268
77%
23%
100%
9.0%
93.0%
10.0%
90.0%
(1) Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
New notices declined in 2019 compared to 2018 and 2018 compared to 2017 due to favorable economic
conditions and an improving risk profile of our RIF. However, 2017 new notice activity also included the impact
of hurricane activity.
Our estimated claim rate on new notices declined in 2019 compared to 2018 and 2018 compared to 2017, 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 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.
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 received, and expect to receive in 2020, compared to an average
of 35 missed payments for claims received in 2019. 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 54% 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.
MGIC Investment Corporation 2019 Annual Report | 25
Management's Discussion and Analysis
The quarterly trend in claims severity for each of the three years in the period ended December 31, 2019 is shown
in the following table.
Claims severity trend
Period
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Q4 2017
Q3 2017
Q2 2017
Q1 2017
Average exposure on
claim paid
$
46,076
$
42,821
46,950
42,277
45,366
43,290
44,522
45,597
44,437
43,313
44,747
44,238
Average claim paid
% Paid to exposure
Average number of
missed payments at
claim received date
46,302
44,388
46,883
43,930
47,980
47,230
50,175
51,069
49,177
46,389
49,105
49,110
100.5%
103.7%
99.9%
103.9%
105.8%
109.1%
112.7%
112.0%
110.7%
107.1%
109.7%
111.0%
34
35
34
35
35
35
38
38
36
35
35
35
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying
practices and/or commutations of policies.
In considering the potential sensitivity of the factors underlying our estimate of loss reserves, it is possible that
even a relatively small change in our estimated claim rate or severity could have a material impact on loss
reserves and, correspondingly, on our consolidated results of operations even in a stable economic
environment. For example, as of December 31, 2019, assuming all other factors remain constant, a $1,000
increase/decrease in the average severity reserve factor would change the loss reserve amount by approximately
+/- $10 million. A one percentage point increase/decrease in the average claim rate reserve factor would change
the loss reserve amount by approximately +/- $17 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).
26 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
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.
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, 2019. The following table below
presents our net losses and LAE paid for each of
those years.
Net losses and LAE paid
Primary delinquent inventory - number of payments
delinquent
(in millions)
2019
2018
2017
December 31,
2019
2018
3 payments or less
14,895
15,519
4 - 11 payments
12 payments or more (1)
Total
8,519
6,614
8,842
8,537
30,028
32,898
2017
21,678
12,446
12,432
46,556
3 payments or less
4 - 11 payments
12 payments or more
50%
28%
22%
47%
27%
26%
46%
27%
27%
Total
100%
100%
100%
(1)
Approximately 33%, 38%, and 43% of the primary
delinquent inventory with 12 payments or more
delinquent has at least 36 payments delinquent as of
December 31, 2019, 2018 and 2017, respectively.
54
10
—
510
(23)
487
18
505
—
$ 193
$ 282
$
446
Total primary (excluding
settlements)
Claims paying practices
and NPL settlements (1)
Pool
Other
Direct losses paid
Reinsurance
Net losses paid
LAE
30
4
—
227
(8)
219
21
50
6
—
338
(19)
319
16
Net losses and LAE paid
before terminations
Reinsurance
terminations
240
335
(14)
(2)
Net losses and LAE paid
$ 226
$ 333
$
505
(1)
See Note 8 - "Loss Reserves" for additional information
on our settlements of disputes for claims paying
practices and/or commutations of policies
Net losses and LAE paid decreased 32% in 2019
compared to 2018 and decreased 34% in 2018
compared to 2017, primarily due to lower claim
activity on our primary business. During each of 2019,
2018, and 2017, losses paid included settlement
payments under commutations of coverage on
policies and/or related to disputes concerning our
claims paying practices. We believe losses and LAE
paid will be lower in 2020 compared to 2019.
MGIC Investment Corporation 2019 Annual Report | 27
Management's Discussion and Analysis
Primary losses paid for the top 15 jurisdictions (based
on 2019 losses paid, excluding settlement amounts)
and all other jurisdictions for each of the three years
in the period ended December 31, 2019 appears in the
table below.
Primary paid losses by jurisdiction
(In millions)
Florida *
New York *
New Jersey *
Illinois *
Puerto Rico *
Maryland
Pennsylvania *
Ohio *
Connecticut *
California
Texas
Michigan
Virginia
Georgia
Wisconsin
$
2019
2018
2017
$
28
25
20
13
12
9
8
7
6
5
4
4
4
3
3
$
29
32
42
19
9
18
12
8
7
11
5
4
6
5
4
49
37
61
28
18
23
22
16
11
17
8
7
10
10
7
All other jurisdictions
42
71
122
Total primary
(excluding
settlements)
$
193
$
282
$
446
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 2019 losses paid, excluding
settlement amounts) for each of the three years in the
period ended December 31, 2019 appears in table
below.
Primary average claim paid
Florida *
New York *
New Jersey *
Illinois *
Puerto Rico *
All other jurisdictions
All jurisdictions
2019
2018
2017
$ 65,576
$ 59,320
$ 62,751
102,819
81,811
42,833
44,393
34,375
45,324
98,026
89,504
44,379
45,910
39,597
49,218
81,043
87,333
46,089
43,630
40,551
48,476
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 can vary materially
from period to period based upon a variety of factors,
including the local market conditions, average loan
amount, average coverage percentage, the amount of
time between delinquency and claim filing, and our
loss mitigation efforts on loans for which claims are
paid.
The primary average RIF on delinquent loans as of
December 31, 2019, 2018 and 2017 and for the top 5
jurisdictions (based on 2019 losses paid, excluding
settlement amounts) appears in the following table.
Primary average exposure - delinquent loans
Florida
New York
New Jersey
Illinois
Puerto Rico
All other jurisdictions
All jurisdictions
2019
2018
2017
$ 52,566
$ 53,371
$ 54,847
72,188
64,444
38,740
33,920
42,347
45,028
71,795
65,521
39,753
35,420
41,331
44,584
71,170
65,659
40,767
36,644
41,134
45,131
The primary average RIF on all loans was $52,995,
$51,085, and $49,142 at December 31, 2019,
December 31, 2018, and December 31, 2017,
respectively.
LOSS RESERVES
Our primary default rate at December 31, 2019 was
2.78% (2018: 3.11%, 2017: 4.55%). Our primary
delinquent inventory was 30,028 loans at December
31, 2019, representing a decrease of 9% from 2018
and 36% from 2017. 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 policies, collectively,
exceeding the total number of new delinquencies
notices received 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 2020 from 2019
levels.
28 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
The primary and pool loss reserves as of December 31, 2019, 2018 and 2017 appear in the table below.
Gross loss reserves
Primary:
Case reserves (In millions)
IBNR and LAE
Total primary direct 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
Other gross loss reserves (In millions)
2019
December 31,
2018
2017
$
490
56
546
$
610
50
660
$
913
58
971
30,028
2.78%
$ 18,171
32,898
3.11%
$ 20,077
46,556
4.55%
$ 20,851
538
809
954
7
2
9
—
10
3
13
10
4
14
430
223
653
11
595
264
859
24
952
357
1,309
42
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 delinquency notice claim rate than other new delinquency 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, 2019 declined when compared to the
average as of December 31, 2018 and December 31, 2017 because the estimated claim rates on loans that
remain in our delinquent inventory were lower as of December 31, 2019.
MGIC Investment Corporation 2019 Annual Report | 29
Management's Discussion and Analysis
The primary default inventory for the top 15
jurisdictions (based on 2019 losses paid, excluding
settlement amounts) at December 31, 2019, 2018 and
2017 appears in table the below.
The primary default inventory by policy year at
December 31, 2019, 2018 and 2017 appears in the
table below.
Primary delinquent inventory by jurisdiction
Primary delinquent inventory by policy year
2019
2018
2017
2019
2018
2017
Florida *
New York *
New Jersey *
Illinois *
Puerto Rico *
Maryland
Pennsylvania *
Ohio *
Connecticut *
California
Texas
Michigan
Virginia
Georgia
Wisconsin
All other jurisdictions
Total
2,504
1,634
992
1,749
1,122
796
1,755
1,498
506
1,213
2,251
921
580
1,128
694
10,685
30,028
2,853
1,855
1,151
1,781
1,503
842
1,929
1,627
480
1,260
2,369
1,041
588
1,220
726
6,501
2,387
1,749
2,136
3,761
1,026
2,403
2,025
574
1,402
3,975
1,260
731
1,550
913
11,673
32,898
14,163
46,556
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. The increases were driven by hurricanes in
the third quarter of 2017, which resulted in significant
new delinquency 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.
2004 and prior
2004 and prior %:
4,686
6,061
8,739
16%
18%
19%
2005
2006
2007
2008
2,799
4,582
7,096
1,798
3,340
5,299
8,702
2,369
4,916
7,719
12,807
3,455
2005 - 2008 %
54%
60%
62%
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
148
115
143
231
521
1,101
1,388
1,578
1,989
1,521
332
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 %:
30%
22%
19%
Total
30,028
32,898
46,556
The delinquent inventory as of December 31, 2017 for
most policy years included new delinquency 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 may experience on those
books, as we continue to write new insurance, those
books have become a smaller percentage of our total
mortgage insurance portfolio. Our 2005 through 2008
books of business represented approximately 11%
and 15% of our total primary RIF at December 31,
2019 and 2018, respectively. Approximately 39% of
the remaining primary RIF on our 2005 through 2008
books of business benefited from HARP as of both
December 31, 2019 and 2018.
30 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
On our primary business, the highest claim frequency
years have typically been the third and fourth year
after loan origination. However, the pattern of claim
frequency can be affected by many factors, including
persistency and deteriorating economic conditions.
Deteriorating economic conditions can result in
increasing claims following a period of declining
claims. As of December 31, 2019, 58% of our primary
RIF was written subsequent to December 31, 2016,
70% of our primary RIF was written subsequent to
December 31, 2015, and 79% of our primary RIF was
written subsequent to December 31, 2014.
INTEREST EXPENSE
2019 compared to 2018. Interest expense for 2019
was $53 million, unchanged from 2018.
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.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
UNDERWRITING AND OTHER EXPENSES, NET
Income tax provision and effective tax rate
Underwriting and other expenses includes items such
as employee compensation costs, fees for
professional services, depreciation and maintenance
expense, and premium taxes, and are reported net of
ceding commissions.
2019 compared to 2018. Underwriting and other
expenses for 2019 increased when compared to 2018
primarily due to an increase in benefit expenses and a
reduction in ceding commissions.
2018 compared to 2017. Underwriting and other
expenses for 2018 increased when compared to
2017, primarily due to higher compensation.
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,
2019
2018
2017
Underwriting expense
ratio
18.4%
18.2%
16.0%
The underwriting expense ratio increased in 2019
compared with 2018 due to an increase in
underwriting expenses partially offset by slightly
higher NPW. 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.
(In millions, except
rate)
2019
2018
2017
Income before tax
$
848
$
844
$
784
Provision for
income taxes
Effective tax rate
174
20.5%
174
20.6%
429
54.7%
2019 compared to 2018. The income tax expense for
2019 was flat compared to the income tax expense
for 2018. Our effective tax rate for 2019 and 2018 was
below the federal statutory income tax rate of 21%
primarily due to the benefits of tax-preferenced
securities.
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.
See Note 12 – “Income Taxes” to our consolidated
financial statements for a discussion of our tax
position.
MGIC Investment Corporation 2019 Annual Report | 31
Management's Discussion and Analysis
BALANCE SHEET REVIEW
Shareholders' equity
Shareholders' equity
(In millions)
2019
2018
$ Change
As of December 31,
Shareholders' equity
Common stock
$
371
$
371
$
Paid-in capital
Treasury stock
Accumulated Other
Comprehensive
Income (Loss), net
of tax
Retained earnings
1,870
(283)
1,863
(175)
73
2,278
(124)
1,647
Total
$
4,309
$
3,582
$
(1)
Primarily MGIC
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:
è economic and market outlooks;
—
7
(108)
è diversification effects;
è security duration;
è liquidity;
è capital considerations; and
è income tax rates.
197
631
727
The increase in shareholders' equity was due to net
income during 2019 and an increase in the fair value
of our investment portfolio, offset in part by the
repurchase of shares of our common stock and
dividends paid to shareholders.
Total assets and total liabilities
As of December 31, 2019, total assets were $6.2
billion and total liabilities were $1.9 billion. Compared
to year-end 2018, total assets increased by $551.8
million and total liabilities decreased by $175.6
million.
The following sections focus on the assets and
liabilities experiencing major developments in 2019.
INVESTMENT PORTFOLIO
The investment portfolio increased 12%, to $5.8
billion as of December 31, 2019 (2018: $5.2 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
The average duration and embedded investment yield
of our investment portfolio as of December 31, 2019,
2018, and 2017 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,
2019
3.9
3.1%
2.5%
2018
4.1
3.1%
2.6%
2017
4.3
2.7%
2.0%
(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, 2019 and
2018.
Fixed income security ratings
% of fixed income securities at fair value
Security Ratings (1)
Period
December 31, 2019
December 31, 2018
AAA
21%
19%
AA
20%
23%
A
34%
33%
BBB
24%
25%
(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 shown; otherwise the
lowest rating is shown.
Our investment portfolio mix was comparable for the
years ended December 31, 2019 and December 31,
2018. See Note 5 – “Investments” to our
32 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
LOSS RESERVES
Our loss reserves include estimates of losses and
settlement expenses on (1) reported delinquencies
known as case reserves (2) IBNR reserves, and (3)
LAE reserves. Our gross reserves are reduced by
reinsurance recoverable on our estimated losses and
settlement expenses to calculate a net reserve
balance. Loss reserves decreased by 18% to $555
million as of December 31, 2019, from $674 million
of December 31, 2018. Reinsurance recoverables on
our estimated losses and settlement expenses were
$22 million and $33 million as of December 31, 2019
and December 31, 2018, respectively. This decrease
was driven by favorable development on previously
received delinquencies, offset in part by losses
incurred on new delinquency notices received in 2019
that remain in inventory.
OTHER LIABILITIES
Other liabilities decreased 16% to $152 million as of
December 31, 2019 (2018: $180 million), primarily due
to decreases in our income taxes payable, accounts
payable, pension-related liabilities and our premium
refund accrual due to lower estimated claim rates,
and the settlement of 2018 share repurchases in the
first quarter of 2019, partially offset by an increase in
accrued salaries and benefits.
Off-balance sheet arrangements
Home Re 2018-1 Ltd. and Home Re 2019-1 Ltd. are
special purpose variable interest entities that are not
consolidated in our consolidated financial statements
because we do not have the unilateral power to direct
those activities that are significant to their economic
performance. See Note 9 - "Reinsurance," to our
consolidated financial statements for additional
information.
consolidated financial statements for additional
disclosure on our investment portfolio.
Investments outlook
The U.S. economy continued to grow in 2019 and is
expected to continue to grow at a slower rate in 2020.
Against this positive macroeconomic backdrop, which
includes very low unemployment, the Federal Open
Market Committee left its benchmark interest rate at
a range of 150 to 175 basis points as of December 31,
2019 and has signaled that it does not expect
increases in 2020. 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
2020, and our investment allocations may shift over
time.
As of December 31, 2019, approximately 6% of the fair
value of our investment portfolio consisted of
securities referencing LIBOR. As discussed in our risk
factor titled "The Company may be adversely
impacted by the transition from LIBOR as a reference
rate", it is uncertain whether LIBOR will continue to be
quoted after 2021.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased 7%, to $162
million as of December 31, 2019 (2018: $152 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 92%, to $6
million as of December 31, 2019 (2018: $69 million),
primarily due to the tax effect of unrealized gains
generated by the investment portfolio.
MGIC Investment Corporation 2019 Annual Report | 33
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 and dividend payouts. The following table
summarizes these three cash flows on a consolidated
basis for the last three years.
Summary of consolidated cash flows
(In thousands)
2019
2018
2017
Years ended December 31,
Total cash
provided by (used
in):
insured loss. We invest our claims paying resources
from premiums and other sources in various
investment securities that earn interest. We also use
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 2019
increased compared to 2018 primarily due to a lower
level of losses paid, net, an increase in net premium
written, and an increase in investment income.
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.
Operating activities
$ 609,532
$ 544,517
$ 406,657
Investing activities
Investing activities
(422,108)
(317,780)
(303,641)
The following list highlights the major sources and
uses of cash flow from investing activities:
Financing activities
(173,406)
(171,550)
(158,575)
Sources
Increase
(decrease) in cash
and cash
equivalents and
restricted cash and
cash equivalents
Operating activities
$ 14,018
$ 55,187
$ (55,559)
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
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
+ Proceeds from sales of investments
+ Proceeds from maturity of fixed income securities
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, 2019, our portfolio had a fair
value of $5.8 billion, an increase of $599.3 million, or
11.6% from December 31, 2018. Net cash flows used
in investing activities in 2019, 2018, and 2017
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 to investment
portfolio activities, our investing activities included
investment in our technology infrastructure to
enhance our ability to conduct business and execute
our strategies, as well as an initiative to update our
corporate headquarters building which was
substantially complete in 2018.
34 | MGIC Investment Corporation 2019 Annual Report
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
- Repurchase of common stock
- Payment of dividends to shareholders
- Repayment/repurchase of debt
-
Payment of withholding taxes related to share-based
compensation net share settlement
Net cash flows used in financing activities in 2019
reflect repurchases of our common stock, payment of
dividends to shareholders and the payment of
withholding taxes related to share-based
compensation net share settlement. Net cash flows
used in financing activities in 2018 also 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.
* * *
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 maintain access to capital and reinsurance markets,
è manage our capital to support our business
strategies and the competing priorities of relevant
stakeholders
è assess appropriate uses for capital that cannot be
deployed in support of our business strategies,
including the size and form of capital return to
shareholders and efficiently using company
resources, and
è support business opportunities by enabling capital
flexibility and efficiently using company resources.
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 2019 Annual Report | 35
Management's Discussion and Analysis
Capital Structure
The following table summarizes our capital structure as of December 31, 2019, 2018, and 2017.
(In thousands, except ratio)
2019
2018
2017
Common stock, paid-in capital, retained earnings, less treasury stock
$
4,236,526
$
3,706,105
$
3,198,309
Accumulated other comprehensive loss, net of tax
72,708
(124,214)
(43,783)
Total shareholders' equity
Long-term debt, par value
Total capital resources
4,309,234
836,872
3,581,891
836,872
3,154,526
836,872
$
5,146,106
$
4,418,763
$
3,991,398
Ratio of long-term debt to shareholders' equity
19.4%
23.4%
26.5%
The increase in total shareholders' equity in 2019
from 2018 was primarily due to net income during
2019, offset by our repurchases of our common stock
and the increase in gross unrealized investment
losses. See Note 13 - "Shareholders' Equity" for further
information .
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, 2019, 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
2019 and 2018.
Liquidity analysis - holding company
As of December 31, 2019, and December 31, 2018, we
had approximately $325 million and $248 million,
respectively, in cash and investments at our holding
company. These resources are maintained primarily
to service our debt interest expense, pay debt
maturities, repurchase shares, pay dividends to
shareholders, and to settle intercompany obligations.
While these assets are held, we generate investment
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 statement 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 over Minimum Required Assets.
Other sources of holding company liquidity include
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 have received the
appropriate approvals for MGIC to pay our holding
company, in the first quarter or 2020, a special
dividend of $320 million and a quarterly dividend of
$70 million. We expect MGIC to pay quarterly
dividends totaling at least $280 million per year. We
believe our holding company has sufficient sources of
liquidity to meet its payment obligations for the
foreseeable future.
During 2019 and 2018, we used approximately $114
million and $175 million (of which $12 million settled
in January 2019), respectively, of available holding
company cash to repurchase shares of our common
stock. From January 1, 202, through February 19,
2020, we repurchased approximately 2.5 million
shares of our common stock for approximately $35
million.
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 (funded by debt)
and/or exchanges for other securities, and may be
made in open market purchases (including through
10b5-1 plans), privately negotiated acquisitions or
other transactions. See "Overview-Capital" of this
36 | MGIC Investment Corporation 2019 Annual Report
MD&A for a discussion of the approval to repurchase
up to an additional $300 million of our common stock
through the end of 2021.
dated as of October 15, 2000 between us and the
trustee.
Management's Discussion and Analysis
In 2019 we used $42 million to pay cash dividends to
shareholders. On January 28, 2020, our Board of
Directors declared a quarterly cash dividend of $0.06
per common share to shareholders of record on
February 11, 2020, payable on February 28, 2020.
Our holding company cash and investments
increased by $77 million in 2019, to $325 million as of
December 31, 2019. Cash inflows included $280
million of dividends received from MGIC and $25
million of other inflows, which included intercompany
activity. Cash outflows included $126 million used to
repurchase shares of our common stock, $60 million
of interest payments, of which approximately $12
million was paid to MGIC for the portion of our 9%
Debentures owned by MGIC, and $42 million in
common stock dividends.
The net unrealized losses on our holding company
investment portfolio were approximately $2.9 million
at December 31, 2019 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
74.4718 common shares per $1,000 principal amount
of debentures. This represents an initial conversion
price of approximately $13.43 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 $17.46 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
Although not anticipated in the near term, we may
also contribute funds to our insurance operations to
comply with the PMIERs or the State Capital
Requirements. See “Overview – Capital” above for a
discussion of these requirements. See the discussion
of our non-insurance contract underwriting services in
Note 17 – “Litigation and Contingencies” to our
consolidated financial statements for other possible
uses of holding company resources.
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 each of the GSE's PMIERs. Refer to
"Overview - Capital - GSEs" of this MD&A for further
discussion of PMIERs.
As of December 31, 2019, MGIC’s Available Assets
under PMIERs totaled approximately $4.6 billion, an
excess of approximately $1.2 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.
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, 2019. Our 2020 QSR transaction terms
are generally comparable to 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 2019 Annual Report | 37
The table below presents our combined insurance
companies’ risk-to-capital calculation (which includes
a reinsurance affiliate).
Risk-to-capital - Combined insurance companies
(In millions, except ratio)
RIF - net (1)
December 31,
2019
2018
$ 44,550
$ 40,239
Statutory policyholders' surplus
$
1,619
$
1,683
Statutory contingency reserve
3,021
2,443
Statutory policyholders' position
$
4,640
$
4,126
Risk-to-capital
9.6:1
9.8:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent ($1.5 billion at December 31, 2019 and $1.6
billion at December 31, 2018) and for which case loss
reserves have been established.
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 case loss reserves have been
established and the risk covered by reinsurance. The
risk amount includes pools of loans with contractual
aggregate loss limits and without these limits.
Policyholders’ position consists primarily of statutory
policyholders’ surplus (which increases as a result of
statutory net income and decreases as a result of
statutory net loss and dividends paid), plus the
statutory contingency reserve and a portion of the
reserves for unearned premiums. The statutory
contingency reserve is 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)
December 31,
2019
2018
$ 44,338
$ 34,502
Statutory policyholders' surplus
$
1,619
$
1,682
Statutory contingency reserve
2,963
2,138
Statutory policyholders' position
$
4,582
$
3,820
Risk-to-capital
9.7:1
9.0:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent and for which case loss reserves have been
established.
38 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
Financial Strength Ratings
MGIC financial strength ratings
Rating Agency
Moody's Investor Services
Standard and Poor's Rating Services
A.M. Best
Rating
Outlook
Baa1
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
Outlook
A-
Stable
The 2019 increase in risk-to-capital of MGIC is due to
an increase in net RIF, offset by an increase in
statutory policyholders' position, primarily due to an
increase in statutory contingency reserves. The
reductions in the risk-to-capital of 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 2019, due to an increase in
our IIF and a reduction in our ceded RIF under our
2015 QSR Transaction. Our risk-to-capital ratio will
decrease if the percentage increase in capital
exceeds the percentage increase in insured risk.
In the first quarter of 2020, we received the
appropriate approvals for MGIC to pay our holding
company a special dividend of $320 million. The
$320 million special dividend will reduce the statutory
policyholder's position of MGIC, which will result in an
increase to the risk-to-capital.
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.”
MGIC Investment Corporation 2019 Annual Report | 39
Management's Discussion and Analysis
Contractual Obligations
The following table summarizes, as of December 31, 2019, the approximate future payments under our
contractual obligations and estimated claim payments on established loss reserves.
Contractual obligations
(In millions)
Long-term debt obligations
Operating lease obligations
Purchase obligations
Other long-term liabilities
Total
Payments due by period
Less than
1 year
1-3 years
3-5 years
50.7
1.2
6.5
208.2
266.6
101.1
1.0
2.6
252.1
356.8
651.0
0.1
—
95.0
746.1
More than
5 years
1,146.9
—
—
—
1,146.9
Total
1,949.7
2.3
9.1
555.3
2,516.4
Our long-term debt obligations as of December 31, 2019 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 case and LAE loss reserves established to recognize the liability for
losses and LAE related to existing delinquencies on insured mortgage loans. The timing of the future claim
payments associated with the established case 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 ultimately 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 impact 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 case 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.
40 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
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 did not have a
minimum funding requirement for the defined benefit pension plan for 2019 or 2018 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 2019 and 2018, we voluntarily made contributions
totaling $7.1 million, and $10.0 million, respectively. We plan to make a voluntary contribution of approximately
$6.5 million to the defined benefit pension plan in 2020. 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, 2019, we had accrued a liability of $3.1 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 to pay benefits of approximately $6 million under the supplemental executive
retirement plan in 2020.
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
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.
MGIC Investment Corporation 2019 Annual Report | 41
Management's Discussion and Analysis
CRITICAL ACCOUNTING POLICIES
The accounting policies described below require
significant judgments and estimates in the
preparation of our consolidated financial statements.
LOSS RESERVES
Loss reserves include case reserves, IBNR reserves,
and LAE reserves.
Case Reserves
Case reserves are established for estimated
insurance losses 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
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, 2019,
assuming all other factors remain constant, a $1,000
increase/decrease in the average severity reserve
factor would change the reserve amount by
approximately +/- $10 million. A one percentage point
increase/decrease in the average claim rate reserve
factor would change the reserve amount by
approximately +/- $17 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:
42 | MGIC Investment Corporation 2019 Annual Report
Management's Discussion and Analysis
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, 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 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.
Historical development of loss reserves
(In thousands)
Losses incurred
related to prior
years (1)
Reserve at end of
prior year
2019
2018
2017
2016
2015
(71,006)
(167,366)
(231,204)
(147,658)
(110,302)
674,019
985,635
1,438,813
1,893,402
2,396,807
(1)
A negative number for a prior year indicates a
redundancy of loss reserves.
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, 2019 and 2018, we had IBNR
reserves of approximately $23 million and $29 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
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 re-
underwrite or reprice these policies after issuance.
Premiums written on monthly premium policies are
earned as coverage is provided. Premiums written on
single premium policies and annual premium policies
MGIC Investment Corporation 2019 Annual Report | 43
Management's Discussion and Analysis
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. 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.
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
sided markets, benchmark securities, bids, offers and
44 | MGIC Investment Corporation 2019 Annual Report
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
loss is determined to exist if the present value of the
Management's Discussion and Analysis
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, 2019, 2018, and
2017, we did not elect the fair value option for any
financial instruments acquired, or issued, such as our
outstanding debt obligations, for which the primary
basis of accounting is not fair value.
MGIC Investment Corporation 2019 Annual Report | 45
Glossary of terms and acronyms
/ A
ARMs
Adjustable rate mortgages
ABS
Asset-backed securities
ASC
Accounting Standards Codification
Available Assets
Assets, as designated under the PMIERs, that are
readily available to pay claims, and include the most
liquid assets
/ B
Book or book year
A group of loans insured in a particular calendar year
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
/ F
Fannie Mae
Federal National Mortgage Association
FCRA
Fair Credit Reporting Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank of Chicago, of which MGIC
is a member
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
Freddie Mac
Federal Home Loan Mortgage Corporation
/ G
GAAP
Generally Accepted Accounting Principles in the
United States
GSEs
Collectively, Fannie Mae and Freddie Mac
/ H
HAMP
CRT
Credit Risk Transfer. The transfer of a portion of
mortgage credit risk to the private sector through
different forms of transactions and structures
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
/ D
DAC
Deferred insurance policy acquisition costs
Home Re Transactions
Excess-of-loss reinsurance transactions with
unaffiliated special purpose insurers domiciled in
Bermuda
Debt-to-income ("DTI") ratio
The ratio, expressed as a percentage, of a borrower's
total debt payments to gross income
HOPA
Homeowners Protection Act
Direct
Direct means before giving effect to reinsurance
HUD
Housing and Urban Development
/E
EPS
Earnings per share
/ I
IBNR
Losses incurred but not reported
IIF
46 | MGIC Investment Corporation 2019 Annual Report
Glossary
Insurance in force, which for loans insured by us, is
equal to the unpaid principal balance, as reported to
us
ILN
Insurance-linked notes
/ L
LAE
Loss adjustment expenses
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:
5.75% 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
Minimum Required Assets
The minimum amount of Available Assets that must
be held under the PMIERs, which is based on an
insurer's book of IIF and is calculated from tables of
factors with several risk dimensions, reduced for
credit given for risk ceded under reinsurance
transactions, and subject to a floor of $400 million.
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
National Association of Insurance Commissioners
NIW
New Insurance Written, is the aggregate original
principal amount of the mortgages that are insured
during a period
9% Convertible Junior Subordinated Debentures
due on April 1, 2063, with interest payable semi-
annually on April 1 and October 1 of each year
N/M
Data, or calculation, deemed not meaningful for the
period presented
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on
February 10, 2023, with interest payable monthly
NPE
The amount of premiums earned, net of premiums
assumed and ceded under reinsurance agreements
Loss ratio
The ratio, expressed as a percentage, of the sum of
incurred losses and loss adjustment expenses to NPE
NPL
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
Low down payment loans or mortgages
Loans with less than 20% down payments
NPW
The amount of premiums written, net of premiums
assumed and ceded under reinsurance agreements
LPMI
Lender-paid mortgage insurance
/ M
MBS
Mortgage-backed securities
MD&A
Management's discussion and analysis of financial
condition and results of operations
MGIC
Mortgage Guaranty Insurance Corporation, a
subsidiary of MGIC Investment Corporation
MAC
MGIC Assurance Corporation, a subsidiary of MGIC
/ O
OCI
Office of the Commissioner of Insurance of the State
of Wisconsin
OTTI
Other than temporary impairment
/ P
Persistency
The percentage of our insurance remaining in force
from one year prior
PMI
Private Mortgage Insurance (as an industry or product
type)
MGIC Investment Corporation 2019 Annual Report | 47
/ S
State Capital Requirements
Under certain state regulations, the minimum amount
of statutory capital relative to risk in force (or similar
measure)
/ T
TILA
Truth in Lending Act
Tax Act
The U.S. tax reform enacted on December 22, 2017
and commonly referred to as the "Tax Cuts and Jobs
Act"
/ U
Underwriting Expense Ratio
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
Underwriting profit
NPE minus incurred losses and underwriting and
operating expenses
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
VIE
Variable interest entity
Glossary
PMIERs
Private Mortgage Insurer Eligibility Requirements
issued by each of Fannie Mae and Freddie Mac to set
forth requirements that an approved insurer must
meet and maintain to provide mortgage guaranty
insurance on loans delivered to or acquired by Fannie
Mae or Freddie Mac, as applicable
Premium Yield
The ratio of NPE divided by the average IIF
outstanding for the period measured
Premium Rate
The contractual rate charged for coverage under our
insurance policies.
Primary Insurance
Insurance that provides mortgage default protection
on individual loans. Primary insurance may be written
on a "flow" basis, in which loans are insured in
individual, loan-by-loan transactions, or on a "bulk"
basis, in which each loan in a portfolio of loans is
individually insured in a single bulk transaction
/ Q
QSR Transaction
Quota share reinsurance transaction with a group of
unaffiliated reinsurers
QM
A mortgage loan that satisfies the "qualified
mortgage" loan characteristics pursuant to the
Consumer Financial Protection Bureau's ability-to-
repay under the Truth in Lending Act. Originating a QM
loan may provide a lender with legal protection from
lawsuits that claim the lender failed to verify a
borrower's ability to repay
/ R
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
Risk-to-capital
Under certain state regulations, the ratio of RIF, net of
reinsurance and exposure on policies currently in
default and for which loss reserves have been
established, to the level of statutory capital
RMBS
Residential mortgage-backed securities
48 | MGIC Investment Corporation 2019 Annual Report
Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolio is essentially a fixed income
portfolio and is exposed to market risk. Important
drivers of the market risk are credit spread risk and
interest rate risk.
Credit spread risk is the risk that we will incur a loss
due to adverse changes in credit spreads. Credit
spread is the additional yield on fixed income
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, 2019, the
modified duration of our fixed income investment
portfolio was 3.9 years, which means that an
instantaneous parallel shift in the yield curve of 100
basis points would result in a change of 3.9% 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."
MGIC Investment Corporation 2019 Annual Report | 49
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.
The private mortgage insurance industry is highly
competitive and is expected to remain so. We believe
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, strength of
management teams and field organizations, 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.
Our relationships with our customers, which may
affect the amount of our NIW, could be adversely
affected by a variety of factors, including if our
premium rates are higher than those of our
competitors, our underwriting requirements are more
restrictive than those of our competitors, or our
customers are dissatisfied with our claims-paying
practices (including insurance policy rescissions and
claim curtailments).
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; (ii) use
of customized rate plans (typically lower than
standard rates) that are made available to lenders that
meet certain criteria; and (iii) use of a spectrum of
filed rates to allow for formulaic, risk-based pricing
that may be quickly adjusted within certain parameters
(referred to as "risk-based pricing systems"). We
expect premium rates to continue to decline. While our
increased use of reinsurance over the past several
years has helped to mitigate the negative effect of
declining premium rates on our returns, refer to our
risk factor titled "Reinsurance may not always be
available or affordable" for a discussion of the risks
associated with the availability of reinsurance.
In 2019, we introduced MiQ, our risk-based pricing
system that establishes our premium rates based on
more risk attributes than were considered in 2018. The
widespread use of risk-based pricing systems by the
private mortgage insurance industry makes it more
difficult to compare our rates to those offered by our
competitors. We may not be aware of industry rate
changes until we observe that our volume of new
insurance written ("NIW") has changed. In addition,
business under customized rate plans is awarded by
certain customers for only limited periods of time. As
a result, our NIW may fluctuate more than it had in the
past. Regarding the concentration of our new
business, our top ten customers accounted for
approximately 24% of our NIW, in each of the twelve
months ended December 31, 2018 and 2019.
We monitor various competitive and economic factors
while seeking to balance both profitability and market
share considerations in developing our pricing
strategies. A reduction in our premium rates 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. Our premium rates are subject to
approval by state regulatory agencies, which can delay
or limit our ability to change them, outside of the
parameters already approved.
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."
50 | MGIC Investment Corporation 2019 Annual Report
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."
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 each 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 if 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 NIW.
Our ability to participate in the non-GSE mortgage
market (the size of 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 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 A.M. Best is A- (with a stable outlook),
from Moody’s is Baa1 (with a stable outlook) and
from Standard & Poor’s is BBB+ (with a stable
outlook).
Financial strength ratings may also play a greater
role if the GSEs no longer operate in their current
capacities, for example, due to legislative or
regulatory action. In addition, although the
PMIERs do not require minimum financial
strength ratings, the GSEs consider financial
strength ratings to be important when using
forms of credit enhancement other than
traditional mortgage insurance, as discussed in
our risk factor titled "The amount of insurance we
Risk Factors
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:
•
•
•
•
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,
lenders using Federal Housing Administration
("FHA"), U.S. Department of Veterans Affairs
("VA") and other government mortgage insurance
programs, and
lenders originating mortgages using piggyback
structures to avoid private mortgage insurance,
such as a first mortgage with an 80% loan-to-
value ("LTV") ratio and a second mortgage with a
10%, 15% or 20% LTV 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% LTV ratio that has private mortgage
insurance.
The GSEs’ charters generally require credit
enhancement for a low down payment mortgage loan
(a loan with an amount that exceeds 80% of a home’s
value) in order for such loan to be eligible for purchase
by the GSEs. Private mortgage insurance has generally
been purchased by lenders in primary mortgage
market transactions to satisfy this credit enhancement
requirement. In 2018, Freddie Mac and Fannie Mae
initiated secondary mortgage market 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. These programs compete with traditional
private mortgage insurance and, due to differences in
policy terms, they may offer premium rates that are
below prevalent single premium lender paid mortgage
insurance ("LPMI") rates. We participate in these
programs from time to time. 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” for a discussion of various business practices
MGIC Investment Corporation 2019 Annual Report | 51
Risk Factors
of the GSEs that may be changed, including through
expansion or modification of these programs.
and because eligible borrowers have opted to use the
VA program when refinancing their mortgages.
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 GSEs' charters also permit the use of "Lender Risk
Sharing" transactions as a form of credit
enhancement. In these transactions, the lender may
issue securities to transfer all or a portion of its risk or
the lender may retain the credit risk. While the use of
Lender Risk Sharing transactions has recently been
increasing, we are not aware that their use has
displaced private mortgage insurance. The amount of
business we write would be adversely affected if
Lender Risk Sharing transactions are structured in a
manner that displaces private mortgage insurance.
The FHA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 28.2% in
2019, 30.5% in 2018 and 33.9% in 2017. In the past ten
years, the FHA’s share has been as low as 28.2% in
2019 and as high as 64.5% in 2010. 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 25.2% in
2019, 22.9% in 2018 and 24.7% in 2017. In the past ten
years, the VA’s share has been as low as 15.7% in 2010
and as high as 27.2% in 2016. We believe that the VA’s
market share has generally been elevated in recent
years because of an increase in the number of
borrowers that are eligible for the VA’s program, which
offers 100% LTV ratio loans and charges a one-time
funding fee that can be included in the loan amount,
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.
Substantially all of our insurance written since 2008
has been for loans purchased by the GSEs, therefore,
the business practices of the GSEs greatly impact our
business and include:
•
•
•
•
•
•
•
•
the GSEs' PMIERs, 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 if 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 GSEs generally require a
level of mortgage insurance coverage that is
higher than the level of coverage required by their
charters; any change in the required level of
coverage will impact our new risk written),
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 select or 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
52 | MGIC Investment Corporation 2019 Annual Report
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
the maximum loan limits of the GSEs compared
to those of the FHA and other investors.
•
•
•
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 September 2019, at the direction of President
Trump, the U.S. Treasury Department ("Treasury")
released the “Treasury Housing Reform Plan” (the
"Plan"). The Plan recommends administrative and
legislative reforms for the housing finance system,
with such reforms intended to achieve the goals of
ending the conservatorships of the GSEs; increasing
competition and participation by the private sector in
the mortgage market including by authorizing the
FHFA to approve additional guarantors of conventional
mortgages in the secondary market, simplifying the
qualified mortgage ("QM") rule of the Consumer
Financial Protection Bureau ("CFPB"), transferring risk
to the private sector, and eliminating the "GSE
Patch" (discussed below); establishing regulation of
the GSEs that safeguards their safety and soundness
and minimizes the risks they pose to the financial
stability of the United States; and providing that the
federal government is properly compensated for any
explicit or implicit support it provides to the GSEs or
the secondary housing finance market. Also in
September 2019, the Treasury and FHFA entered into a
letter agreement that will allow the GSEs to remit less
of their earnings to the government, which will help
them rebuild their capital.
The impact of the Plan on private mortgage insurance
is unclear. The Plan does not refer to mortgage
insurance explicitly; however, it refers to a requirement
for credit enhancement on high LTV ratio loans, which
is a requirement of the current GSE charters. The Plan
also indicates that the FHFA should continue to
support efforts to expand credit risk transfer ("CRT")
programs and should encourage the GSEs to continue
Risk Factors
to engage in a diverse mix of economically sensible
CRT programs, including by increasing reliance on
institution-level capital (presumably, as distinguished
from capital obtained in the capital markets). For
more information about CRT programs, 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."
The current GSE Patch expands the definition of QM
under the Truth in Lending Act (Regulation Z) ("TILA")
to include mortgages eligible to be purchased by the
GSEs, even if the mortgages do not meet the debt-to-
income ("DTI") ratio limit of 43% that is included in the
standard QM definition. Originating a QM may provide
a lender with legal protection from lawsuits that claim
the lender failed to verify a borrower’s ability to repay.
The GSE Patch is scheduled to expire no later than
January 2021. Approximately 27% and 22% of our NIW
in the first and second halves of 2019, respectively,
was on loans with DTI ratios greater than 43%.
However, it is possible that expiration of the GSE Patch
will be delayed and that not all future loans with DTI
ratios greater than 43% will be affected by such
expiration. In this regard, we note that the CFPB
recently indicated that it expects to issue for
comment, no later than May 2020, a proposed new
"ability-to-repay" ("ATR") rule that would replace the
use of DTI ratio in the definition of QM with an
alternative measure, such as a pricing threshold. The
CFPB also indicated that it would extend the expiration
of the GSE Patch until the earlier of the effective date
of the proposed alternative or until one of the GSEs
exits conservatorship.
We insure loans that do not qualify as QMs; however,
we are unsure the extent to which lenders will make
non-QM loans because they will not be entitled to the
presumptions about compliance with the ATR rule that
the law allows with respect to QM loans. We are also
unsure the extent to which lenders will purchase
private mortgage insurance for loans that cannot be
sold to the GSEs.
The QM definition for loans insured by the FHA, which
was issued by the Department of Housing and Urban
Development (“HUD”), is less restrictive than the
CFPB’s definition in certain respects, including that (i)
it has no DTI ratio limit, and (ii) it allows lenders
certain presumptions about compliance with the ATR
rule on higher priced loans. It is possible that, in the
future, lenders will prefer FHA-insured loans to loans
insured by private mortgage insurance as a result of
the FHA’s less restrictive QM definition. However, in
September 2019, HUD released its Housing Reform
Plan and indicated that the FHA should refocus on its
mission of providing housing finance support to low-
and moderate-income families that cannot be fulfilled
through traditional underwriting. In addition, Treasury's
Plan indicated that the FHFA and HUD should develop
and implement a specific understanding as to the
MGIC Investment Corporation 2019 Annual Report | 53
Risk Factors
appropriate roles and overlap between the GSEs and
FHA, including with respect to the GSEs’ acquisitions
of high LTV ratio and high DTI ratio loans.
ability to continue to comply with the financial
requirements of the PMIERs include the following:
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. Many of the proposed 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 if we are required to maintain
more capital in order to maintain our eligibility.
We must comply with a GSE's PMIERs to be eligible to
insure loans delivered to or purchased by that GSE.
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 calculated from tables of
factors with several risk dimensions, reduced for credit
given for risk ceded under reinsurance agreements,
and subject to a floor amount).
Based on our interpretation of the more restrictive
application of PMIERs, as of December 31, 2019,
MGIC’s Available Assets totaled $4.6 billion, or $1.2
billion in excess of its Minimum Required Assets.
MGIC is in compliance with the PMIERs and eligible to
insure loans purchased by the GSEs. In calculating
these "Minimum Required Assets," the total credit for
risk ceded under our reinsurance transactions is
subject to a modest reduction. Our reinsurance
transactions are 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 existing reinsurance
transactions are subject to periodic review by the
GSEs and there is a risk we will not receive our current
level of credit in future periods for the risk ceded under
them. In addition, we may not receive the same level of
credit under future reinsurance transactions that we
receive under existing transactions. 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
•
•
•
•
The GSEs may make the PMIERs more onerous in
the future. The PMIERs provide that the factors
that determine Minimum Required Assets will be
updated periodically, or as needed if there is a
significant change in macroeconomic conditions
or loan performance. We do not anticipate that
the regular periodic updates will occur more
frequently than once every two years. The PMIERs
state that the GSEs will provide notice 180 days
prior to the effective date of updates to the
factors; however, the GSEs may amend any
portion of the PMIERs at any time.
There may be future implications for PMIERs
based upon forthcoming regulatory capital
requirements for the GSEs. In 2018, the FHFA
issued a proposed capital rule for the GSEs, which
included a framework for determining the capital
relief allowed to the GSEs for loans with private
mortgage insurance. The FHFA recently indicated
that it plans to re-propose a capital rule as early
as the first quarter of 2020, although the timing
and content of the proposal is uncertain. Further,
any changes to the GSEs' capital and liquidity
requirements resulting from the Treasury Housing
Reform Plan could have future implications for
PMIERs.
Our future operating results may be negatively
impacted by the matters discussed in the rest of
these risk factors. Such matters could decrease
our revenues, increase our losses or require the
use of assets, thereby creating a shortfall in
Available Assets.
Should capital be needed by MGIC in the future,
capital contributions from our holding company
may not be available due to competing demands
on holding company resources, including for
repayment of debt.
Reinsurance may not always be available or
affordable.
As 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," we have in place quota
share and excess of loss reinsurance transactions
covering a portion of our risk in force. These
reinsurance transactions enable us to earn higher
returns on our business than we would without them
because fewer Available Assets are required to be held
under PMIERs. However, reinsurance may not always
be available to us or available on similar terms, the
quota share reinsurance transactions subject us to
counterparty credit risk and the GSEs may change the
credit they allow under the PMIERs for risk ceded
54 | MGIC Investment Corporation 2019 Annual Report
under our reinsurance transactions. If we are unable to
obtain reinsurance for NIW, our returns may decrease
absent an increase in premium rates. An increase in
our premium rates may lead to a decrease in our NIW.
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 2018
and 2019, curtailments reduced our average claim
paid by approximately 5.8% and 5.0%, 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 loss 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. When we determine that a loss is
probable and can be reasonably estimated, we record
our best estimate of our probable loss. In those cases,
until settlement negotiations or legal proceedings are
concluded (including the receipt of any necessary GSE
approvals), it is reasonably possible that we will record
an additional loss. In the fourth quarter of 2019, the
agreement for which we had recorded a probable loss
of $23.5 million, received necessary GSE approvals.
There was no additional loss recognized as a result of
entering into the agreement, as the settlement amount
was consistent with our original estimate of the
probable loss. We are currently involved in discussions
and/or proceedings with insureds with respect to our
claims paying practices. Although it is reasonably
possible that when all of these matters are resolved
we will not prevail in all cases, we are unable to make
Risk Factors
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 $46 million. This
estimate of maximum exposure is based upon
currently available information; is subject to significant
judgment, numerous assumptions and known and
unknown uncertainties; will include an amount for
matters for which we have recorded a probable loss
until such matters are concluded; will include different
matters from time to time; and does not include
interest or consequential or exemplary damages.
In addition to the matters described above, we are
involved in other legal proceedings in the ordinary
course of business. In our opinion, based on the facts
known at this time, the ultimate resolution of these
ordinary course legal proceedings will not have a
material adverse effect on our financial position or
results of operations.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive, detailed regulation,
including by state insurance departments. Many of
these regulations are designed for the protection of
our insured policyholders and consumers, rather than
for the benefit of investors. Mortgage insurers,
including MGIC, have in the past been involved in
litigation and regulatory actions related to alleged
violations of the anti-referral fee provisions of the Real
Estate Settlement Procedures Act ("RESPA"), and the
notice provisions of the Fair Credit Reporting Act
("FCRA"). While these proceedings in the aggregate did
not result 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. 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
("ECOA"), FCRA, and other laws. Under ECOA,
examination may also be made of whether a mortgage
insurer's underwriting decisions have a disparate
impact on persons belonging to a protected class in
violation of the law.
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,
including payment for the referral of insurance
business, premium rates and discrimination in pricing,
and minimum capital requirements. For more
information about state capital requirements, see our
risk factor titled “State capital requirements may
prevent us from continuing to write new insurance on
an uninterrupted basis.” For information about
MGIC Investment Corporation 2019 Annual Report | 55
Risk Factors
regulation of data privacy, see our risk factor titled “We
could be adversely affected if personal information on
consumers that we maintain is improperly disclosed;
and damage to, or interruption in, our information
technology systems may disrupt our operations.” 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 Form
10-K for the year ended December 31, 2019. 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.
If our risk management programs are not effective in
identifying, or adequate in controlling or mitigating,
the risks we face, or if the models used in our
businesses are inaccurate, it could have a material
adverse impact on our business, results of operations
and financial condition.
Our enterprise risk management program, described in
"Business - Our Products and Services - Risk
Management" in the Business Section of our Annual
Report on Form10-K for the year ended December 31,
2019, 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
risk-based pricing system), determine the techniques
used to underwrite insurance, estimate reserves,
generate projections used to estimate future pre-tax
income and to evaluate loss recognition testing,
evaluate risk, determine internal capital requirements,
perform stress testing, and for other uses. These
models rely on estimates and projections that are
inherently uncertain and may not operate as intended.
In addition, from time to time we seek to improve
certain models, and the conversion process may result
in material changes to assumptions, including those
about returns and financial results. The models we
employ are complex, which increases our risk of error
in their design, implementation or use. Also, the
associated input data, assumptions and calculations
may not be correct, and the controls we have in place
to mitigate that risk may not be effective in all cases.
The risks related to our models may increase when we
change assumptions and/or methodologies, or when
we add or change modeling platforms. We have
enhanced, and we intend to continue to enhance, our
modeling capabilities. Moreover, we may use
information we receive through enhancements to
refine or otherwise change existing assumptions and/
or methodologies.
Because we establish loss reserves only upon a loan
delinquency rather than based on estimates of our
ultimate losses on risk in force, losses may have a
disproportionate adverse effect on our earnings in
certain periods.
In accordance with accounting principles generally
accepted in the United States, we establish case
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 case reserves, we estimate the
ultimate loss on delinquent loans 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. The estimated claim rate and claim severity
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.
56 | MGIC Investment Corporation 2019 Annual Report
We rely on our management team and our business
could be harmed if we are unable to retain qualified
personnel or successfully develop and/or recruit their
replacements.
Our success depends, in part, on the skills, working
relationships and continued services of our
management team and other key personnel. The
unexpected departure of key personnel could
adversely affect the conduct of our business. In such
event, we would be required to obtain other personnel
to manage and operate our business. In addition, we
will be required to replace the knowledge and
expertise of our aging workforce as our workers retire.
In either case, there can be no assurance that we
would be able to develop or recruit suitable
replacements for the departing individuals; that
replacements could be hired, if necessary, on terms
that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We
currently have not entered into any employment
agreements with our officers or key personnel.
Volatility or lack of performance in our stock price may
affect our ability to retain our key personnel or attract
replacements should key personnel depart. Without a
properly skilled and experienced workforce, our costs,
including productivity costs and costs to replace
employees may increase, and this could negatively
impact our earnings.
If the volume of low down payment home mortgage
originations declines, the amount of insurance that we
write could decline.
The factors that may affect the volume of low down
payment mortgage originations include:
•
•
•
•
•
•
•
•
restrictions on mortgage credit due to more
stringent underwriting standards, liquidity issues
or risk-retention and/or capital requirements
affecting lenders,
the level of home mortgage interest rates,
the health of the domestic economy as well as
conditions in regional and local economies and
the level of consumer confidence,
housing affordability,
new and existing housing availability,
the rate of household formation, which is
influenced, in part, by population and immigration
trends,
homeownership rates,
the rate of home price appreciation, which in
times of heavy refinancing can affect whether
Risk Factors
refinanced loans have LTV 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 limit our NIW. 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, 2019, MGIC’s risk-to-capital ratio was
9.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.0 billion above the
required MPP of $1.7 billion. Our risk-to-capital ratio
and MPP reflect full credit for the risk ceded under our
quota share reinsurance and excess of loss
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 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, 2019, the risk-to-
capital ratio of our combined insurance operations
was 9.6 to 1.
MGIC Investment Corporation 2019 Annual Report | 57
Risk Factors
The NAIC has previously announced plans to revise
the minimum capital and surplus requirements for
mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In December
2019, a working group of state regulators released an
exposure draft of a revised Mortgage Guaranty
Insurance Model Act and 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 and minimum
capital floors. 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 if 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
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 LTV ratio,
credit score, vintage, Home Affordable Refinance
Program ("HARP") status and delinquency status; and
whether the loans were insured under lender-paid
mortgage insurance policies or other policies that are
not subject to automatic termination consistent with
the Homeowners Protection Act requirements for
borrower paid mortgage insurance. Therefore, if our
direct risk-in-force increases through increases in NIW,
or if our mix of business changes to include loans with
higher LTV ratios or lower FICO scores, for example, or
if we insure a higher percentage of loans under lender-
paid mortgage insurance policies, all other things
equal, we will be required to hold more Available
Assets in order to maintain GSE eligibility.
The minimum capital required by the risk-based
capital framework contained in the exposure draft
released by the NAIC in December 2019 would be, in
part, a function of certain loan and economic factors,
including property location, LTV ratio and credit score;
general underwriting quality in the market at the time
58 | MGIC Investment Corporation 2019 Annual Report
Risk Factors
of loan origination; the age of the loan; and the
premium rate we charge. Depending upon 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 has ranged from approximately 10% in 2013
to 19% in 2017 and was 17% in 2018 and 16% in 2019.
Depending upon 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
2019, 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 effect of the
QSR transactions on the various components of pre-
tax income will vary from period to period, depending
upon the level of ceded losses.
In 2018 and 2019, MGIC entered into reinsurance
agreements that provide excess-of-loss reinsurance
coverage for a portion of the risk associated with
certain mortgage insurance policies having an
insurance coverage in force date on or after July 1,
2016 and before April 1, 2019. The transactions were
entered into with special purpose insurers that issued
notes linked to the reinsurance coverage ("Insurance
Linked Notes" or "ILNs"). We expect that we may enter
into other ILN transactions if capital market conditions
remain favorable.
In addition to the effect of reinsurance on our
premiums, we expect a decline in our premium yield
because an increasing percentage of our insurance in
force is from recent book years whose premium rates
have been trending lower.
change our underwriting guidelines, in part through
aligning most of them with the GSEs 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. 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. As of December 31, 2019, mortgages with
these characteristics in our primary risk in force
included mortgages with LTV ratios greater than 95%
(15.3%), loans with borrowers having FICO scores
below 620 (2.0%), mortgages with borrowers having
FICO scores of 620-679 (9.0%), mortgages with limited
underwriting, including limited borrower
documentation (1.7%), and mortgages with borrowers
having DTI ratios greater than 45% (or where no ratio is
available) (14.2%), 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, although the percentage of NIW that we
have written on mortgages with DTI ratios greater than
45% has declined in 2019 from its 2018 level. 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, loan originators
may have changed the information they provide to us.
Although we have revised our operational procedures
to account for this possibility, we cannot be sure that
the DTI ratio we report for each loan beginning in late
2018 includes the related mortgage insurance
premiums in the calculation. In addition, 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.
Our ability to rescind insurance coverage became
more limited for insurance we wrote beginning in
mid-2012. As a result of revised PMIERs requirements,
we have revised our master policy and expect it to be
effective for new insurance written beginning March 1,
2020. Our ability to rescind insurance coverage will
become further limited for insurance we write under
the new master policy, potentially resulting in higher
losses than would be the case under our existing
master policies.
The widespread use of risk-based pricing systems by
the private mortgage insurance industry (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") makes it more difficult to compare our
premium rates to those offered by our competitors.
We may not be aware of industry rate changes until we
observe that our mix of new insurance written has
changed and our mix may fluctuate more as a result.
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
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
MGIC Investment Corporation 2019 Annual Report | 59
Risk Factors
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 DTI ratios. 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.
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.
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 and we rely on third-
party reporting for information regarding the mortgage
loans we insure.
The information presented in this report and on our
website with respect to the mortgage loans we insure
is based on information reported to us by third parties,
including the servicers and originators of the
mortgage loans. Consequently, information presented
may be subject to lapses or inaccuracies in reporting
from such third parties. In many cases, we may not be
aware that information reported to us by third parties
is incorrect until such time as a claim is made against
us under the relevant insurance policy. We do not
receive monthly information from servicers for single
premium policies, and may not be aware that the
mortgage loans insured by such policies have been
repaid. We periodically attempt to determine if
coverage is still in force on such policies by asking the
last servicer of record or through the periodic
reconciliation of loan information with certain
servicers. It may be possible that our reports continue
to reflect, as active, policies on mortgage loans that
have been repaid.
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.
We depend on reliable, consistent third-party servicing
of the loans that we insure. Over the last several years,
Our persistency rate was 75.8% at December 31, 2019,
81.7% at December 31, 2018, and 80.1% at December
60 | MGIC Investment Corporation 2019 Annual Report
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.
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, 2019, we had approximately $325
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 due in 2063 (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, 2019, 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
dividends, and in 2019 and 2018, it paid a total of $280
million and $220 million, respectively, in quarterly
dividends to our holding company. We have received
the appropriate approvals for MGIC to pay to our
holding company, in the first quarter of 2020, a special
dividend of $320 million and a quarterly dividend of
$70 million. We expect to use most of the proceeds of
the special dividend to repurchase our common stock
as discussed below. We expect MGIC to pay quarterly
dividends totaling at least $280 million per year,
subject to approval by its Board of Directors. We ask
the OCI not to object before MGIC pays dividends.
In 2019 and 2018, we repurchased approximately 8.7
million and 16.0 million shares of our common stock,
respectively, using approximately $114 million and
Risk Factors
$175 million of holding company resources,
respectively. As of December 31, 2019, we had $111
million of authorization remaining to repurchase our
common stock through the end of 2020 under a share
repurchase program approved by our Board of
Directors in 2019. From January 1, 2020 through
February 19, 2020, we repurchased approximately 2.5
million shares of our common stock for approximately
$35 million. In addition, in January 2020, our Board of
Directors approved the repurchase of up to an
additional $300 million of our common stock through
the end of 2021. Repurchases may be made from time
to time on the open market (including through 10b5-1
plans) or through privately negotiated transactions.
The repurchase program may 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 if 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, 2019, 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 a conversion rate, which is
subject to adjustment, of 74.4718 common shares per
$1,000 principal amount of debentures. This
represents a conversion price of approximately $13.43
per share. The payment of dividends by our holding
company will result in an adjustment to the conversion
rate and price, with such adjustment generally
deferred until the end of the year.
MGIC Investment Corporation 2019 Annual Report | 61
Risk Factors
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 $17.46 for at least 20 of the
30 trading days preceding notice of the redemption.
We have the right, and may elect, to defer interest
payable under the debentures in the future. If a holder
elects to convert its debentures, the interest that has
been deferred on the debentures being converted is
also convertible into shares of our common stock. The
conversion rate for such deferred interest is based on
the average price that our shares traded at during a 5-
day period immediately prior to the election to convert
the associated debentures. We may elect to pay cash
for some or all of the shares issuable upon a
conversion of the debentures.
For a discussion of the dilutive effects of our
convertible securities on our earnings per share, see
Note 4 – “Earnings Per Share” to our consolidated
financial statements. As noted above, during 2019 and
2018, we repurchased shares of our common stock
and may do so in the future. In addition, we have in the
past purchased, and may in the future purchase, our
debt securities.
The price of our common stock may fluctuate
significantly, which may make it difficult for holders to
resell common stock when they want or at a price they
find attractive.
The market price for our common stock may fluctuate
significantly. In addition to the risk factors described
herein, the following factors may have an adverse
impact on the market price for our common stock:
announcements by us or our competitors of
acquisitions or strategic initiatives; our actual or
anticipated quarterly and annual operating results;
changes in expectations of future financial
performance (including incurred losses on our
insurance in force); changes in estimates of securities
analysts or rating agencies; actual or anticipated
changes in our share repurchase program or
dividends; changes in general conditions in the
economy, the mortgage insurance industry or the
financial markets; changes in operating performance
or market valuation of companies in the mortgage
insurance industry; the addition or departure of key
personnel; changes in tax law; and adverse press or
news announcements affecting us or the industry. In
addition, ownership by certain types of investors may
affect the market price and trading volume of our
common stock. For example, ownership in our
common stock by investors such as index funds and
exchange-traded funds can affect the stock’s price
when those investors must purchase or sell our
common stock because the investors have
experienced significant cash inflows or outflows, the
index to which our common stock belongs has been
rebalanced, or our common stock is added to and/or
removed from an index (due to changes in our market
capitalization, for example).
We could be adversely affected if personal information
on consumers that we maintain is improperly
disclosed, and damage to, or interruption in, our
information technology systems may disrupt our
operations.
As part of our business, we maintain large amounts of
personal information on consumers. Federal and state
laws designed to promote the protection of personal
information of consumers require businesses that
collect or maintain consumer information to adopt
information security programs, notify individuals, and
in some jurisdictions, regulatory authorities, of security
breaches involving personally identifiable information.
Those laws may require free credit monitoring
services to be provided to individuals affected by
security breaches. 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 information technology
systems, including ours and those of our customers
and third party service providers, 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 continue to deploy and
enhance our risk-based pricing system. The
implementation of these technological improvements,
as well as their integration with customer and third
party 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.
62 | MGIC Investment Corporation 2019 Annual Report
Risk Factors
Our success depends, in part, on our ability to manage
risks in our investment portfolio.
prone areas, lenders may be unwilling to procure
insurance from us anywhere.
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.
Hurricanes and other natural disasters 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,
earthquakes, wildfires and floods, or other events
related to changing climatic conditions, 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, rising sea levels and increased cost
of flood insurance could lead to a decrease in home
prices in the affected areas, or in areas with similar
risks, 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-
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.
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 a natural disaster 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 if we are
required to maintain more capital in order to maintain
our eligibility."
The Company may be adversely impacted by the
transition from LIBOR as a reference rate.
In 2017, the United Kingdom’s Financial Conduct
Authority, which regulates LIBOR, announced that after
2021 it would no longer compel banks to submit rate
quotations required to calculate LIBOR. As a result, it
is uncertain whether LIBOR will continue to be quoted
after 2021. Efforts are underway to identify and
transition to a set of alternative reference rates. The
set of alternative rates includes the Secured Overnight
Financing Rate (“SOFR”), which the Federal Reserve
Bank of New York began publishing in 2018. SOFR is
calculated based on different criteria than LIBOR.
Accordingly, SOFR and LIBOR may diverge. In addition,
SOFR may be subject to direct influence by activities
of the Federal Reserve and the Federal Reserve Bank
of New York in ways that other rates may not be.
There is considerable uncertainty as to how the
financial services industry will address the
discontinuance of LIBOR in financial instruments.
Financial instruments indexed to LIBOR could
experience disparate outcomes based on their
contractual terms, ability to amend those terms,
market or product type, legal or regulatory jurisdiction,
and other factors. Alternative reference rates that
replace LIBOR may not yield the same or similar
economic results over the lives of the financial
instruments, which could adversely affect the value of
and return on these instruments.
While it is not currently possible to determine precisely
whether, or to what extent, the replacement of LIBOR
would affect us, the implementation of alternative
MGIC Investment Corporation 2019 Annual Report | 63
Risk Factors
benchmark rates to LIBOR may have an adverse effect
on our business, results of operations or financial
condition.
Our transactions involving financial instruments that
reference LIBOR, include:
•
•
•
Buying and selling fixed income securities (as of
December 31, 2019, approximately 6.0% of the fair
value of our investment portfolio consisted of
securities referencing LIBOR).
Insuring adjustable rate mortgages (“ARMs”)
whose interest is referenced to LIBOR (as of
December 31, 2019, approximately $1.1 billion of
our risk in force was on ARMs referencing LIBOR).
A change in reference rate associated with these
loans may affect their principal balance, which
may affect our risk-in-force and the amount of
Minimum Required Assets we are required to
maintain under PMIERs. A change in reference
rate may also affect the amount of principal and/
or accrued interest we are required to pay in the
event of a claim payment.
Entering into reinsurance agreements under which
our premiums are determined, in part, by the
difference between interest payable on the
reinsurers’ notes which reference LIBOR and
earnings from a pool of securities receiving
interest that may reference LIBOR (in 2019, our
total premiums on such transactions was
approximately $17.6 million).
64 | MGIC Investment Corporation 2019 Annual Report
Management's Report on Internal Control Over Financial Reporting
CHANGES IN INTERNAL CONTROL DURING THE
FOURTH QUARTER
As of October 1, 2019, we implemented a new
financial management system, by transitioning certain
of our operations, including the general ledger, to the
new system. We have modified our existing controls
infrastructure, as well as added other processes and
internal controls, to adapt to our new financial
management system. There are no other changes in
our internal control over financial reporting (as defined
in Rule 13a-15(f) and Rule 15d-15(f) under the
Exchange Act) that occurred during the quarter ended
December 31, 2019 that have materially affected, or
are reasonably likely to materially affect, our 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,
2019.
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, 2019, as stated in their report which
appears herein.
MGIC Investment Corporation 2019 Annual Report | 65
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of
MGIC Investment Corporation
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 (the “Company”) as of December 31, 2019
and 2018, and the related consolidated statements of
operations, of comprehensive income, of shareholders'
equity and of cash flows for each of the three years in the
period ended December 31, 2019, 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”). We also
have audited the Company's internal control over
financial reporting as of December 31, 2019, 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,
2019 and 2018, and the results of its operations and its
cash flows for each of the three years in the period
ended December 31, 2019 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, 2019, 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
appearing under Item 9A. 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 respects.
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.
66 | MGIC Investment Corporation 2019 Annual Report
Critical Audit Matters
The critical audit matter communicated below is a matter
arising from the current period audit of the consolidated
financial statements that was communicated or required
to be communicated to the audit committee and that (i)
relates to accounts or disclosures that are material to the
consolidated financial statements and (ii) involved our
especially challenging, subjective, or complex judgments.
The communication of critical audit matters does not
alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by
communicating the critical audit matter below, providing
a separate opinion on the critical audit matter or on the
accounts or disclosures to which it relates.
Valuation of loss reserves
As described in Notes 3 and 8 to the consolidated
financial statements, the Company establishes reserves
to recognize the estimated liability for losses related to
reported defaults on insured mortgage loans. As of
December 31, 2019, the Company’s recorded loss
reserves were $555 million. A significant portion of total
loss reserves relate to primary case reserves established
for the Company’s primary insurance business. Case
reserves are established by estimating the number of
loans in the inventory of delinquent loans that will result
in a claim payment, which is referred to as the claim rate,
and further estimating the amount of the claim payment,
which is referred to as claim severity. Our case reserve
estimates are established based upon historical
experience, including rescissions of policies,
curtailments of claims, and loan modification activity.
The conditions that affect the claim rate and claim
severity include the current and future state of the
domestic economy, including unemployment and the
current and future strength of local housing markets;
exposure on insured loans; the amount of time between
default and claim filing; and curtailments and
rescissions.
The principal considerations for our determination that
performing procedures relating to the valuation of loss
reserves is a critical audit matter are (i) there was
significant judgment by management when developing
their estimate, which in turn led to a high degree of
auditor judgment and subjectivity in performing
procedures relating to loss reserves; (ii) there was
significant auditor effort and judgment in evaluating the
audit evidence relating to the significant assumptions,
including the claim rate and claim severity; and (iii) the
audit effort included the involvement of professionals
with specialized skill and knowledge to assist in
performing these procedures and evaluating the audit
evidence obtained.
Addressing the matter involved performing procedures
and evaluating audit evidence in connection with forming
our overall opinion on the consolidated financial
statements. These procedures included testing the
effectiveness of controls relating to the valuation of loss
reserves, including controls over the development of
significant assumptions, including the claim rate and
claim severity. These procedures also included, among
others, the involvement of professionals with specialized
skill and knowledge to assist in developing an
independent estimate of loss reserves using historical
experience and comparing this independent estimate to
management’s recorded loss reserves to evaluate the
reasonableness of the recorded loss reserves.
Developing the independent estimate involved testing the
completeness, accuracy, and relevance of data provided
by management and independently developing
assumptions, including the claim rate and claim severity.
Milwaukee, Wisconsin
February 21, 2020
We have served as the Company’s auditor since 1985.
MGIC Investment Corporation 2019 Annual Report | 67
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Investment portfolio:
Fixed income, available-for-sale, at fair value (amortized cost, 2019 -
$5,562,550; 2018 - $5,196,784)
Equity securities, at fair value (cost, 2019 - $17,188; 2018 - $3,993)
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
Federal Home Loan Bank 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
2019 - 371,353; 2018 - 371,353; outstanding 2019 - 347,308; 2018 - 355,371)
Paid-in capital
Treasury stock (shares at cost 2019 - 24,045; 2018 - 15,982)
Accumulated other comprehensive income (loss), net of tax
Retained earnings
Total shareholders' equity
December 31,
Note
2019
2018
5 / 6
$ 5,737,892
$
5,151,987
17,328
3,100
3,932
3,100
5,758,320
5,159,019
161,847
151,892
7,209
49,705
21,641
1,521
55,587
50,121
18,531
5,742
99,347
3,146
48,001
33,328
2,948
55,090
51,734
17,888
69,184
85,572
$ 6,229,571
$
5,677,802
$
555,334
$
674,019
380,302
155,000
420,867
256,872
151,962
409,985
155,000
419,713
256,872
180,322
1,920,337
2,095,911
371,353
371,353
1,869,719
1,862,536
(283,196)
72,708
2,278,650
4,309,234
(175,059)
(124,214)
1,647,275
3,581,891
9
9
12
8
7
7
7
17
13
10
Total liabilities and shareholders' equity
$ 6,229,571
$
5,677,802
See accompanying notes to consolidated financial statements.
68 | MGIC Investment Corporation 2019 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2019
2018
2017
Years Ended December 31,
Revenues:
Premiums written:
Direct
Assumed
Ceded
Net premiums written
Decrease (increase) in unearned premiums
Net premiums earned
Investment income, net of expenses
Net realized investment gains (losses)
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
$ 1,124,196
$
1,103,332
$
1,121,776
6,446
271
1,905
(129,334)
(111,341)
(125,726)
1,001,308
29,680
1,030,988
167,045
5,306
10,638
992,262
(17,100)
975,162
141,331
(1,353)
8,708
997,955
(63,208)
934,747
120,871
231
10,205
1,213,977
1,123,848
1,066,054
118,575
12,001
182,768
52,656
—
366,000
847,977
174,214
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
$
673,763
$
670,097
$
355,761
$
$
1.91
1.85
$
$
1.83
1.78
$
$
0.98
0.95
352,827
373,924
365,406
386,078
362,380
394,766
9
9
5
5
8 / 9
7
13
12
4
4
4
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2019 Annual Report | 69
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Other comprehensive income (loss), net of tax:
Change in unrealized investment gains and losses
Benefit plans adjustment
Foreign currency translation adjustment
Other comprehensive income (loss), net of tax
Comprehensive income
Years Ended December 31,
Note
2019
2018
2017
$
673,763
$
670,097
$
355,761
10
5
11
173,910
23,012
—
(64,646)
(15,767)
—
196,922
(80,413)
47,547
(5,839)
31
41,739
$
870,685
$
589,684
$
397,500
See accompanying notes to consolidated financial statements.
70 | MGIC Investment Corporation 2019 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
Equity compensation
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 income (loss)
Cumulative effect to reclassify certain tax effects from
accumulated other comprehensive loss
Balance, end of year
Retained earnings
Balance, beginning of year
Years Ended December 31,
Note
2019
2018
2017
13
13
13
3
10
$
371,353
$
370,567
$
359,400
—
—
—
786
10,386
781
371,353
371,353
370,567
1,862,536
1,850,582
1,782,337
—
—
—
—
—
49
60,903
(8,917)
(7,602)
(11,715)
18,898
—
20,871
—
14,895
1,869,719
1,862,536
1,850,582
—
(150,359)
(175,059)
(114,126)
—
5,989
(175,059)
—
—
(283,196)
(175,059)
—
150,359
—
—
(124,214)
(43,783)
(75,100)
—
(18)
—
196,922
(80,413)
41,739
—
—
72,708
(124,214)
(10,422)
(43,783)
1,647,275
977,160
632,564
Cumulative effect of financial instruments accounting standard
update
3
Cumulative effect of share-based compensation accounting
standard update
Net income
Cash dividends
Reissuance of treasury stock, net
Cumulative effect to reclassify certain tax effects from
accumulated other comprehensive loss
13
13
—
—
673,763
(42,388)
—
—
18
—
—
153
670,097
355,761
—
—
—
—
(21,740)
10,422
977,160
Balance, end of year
Total shareholders' equity
See accompanying notes to consolidated financial statements.
2,278,650
1,647,275
$ 4,309,234
$
3,581,891
$
3,154,526
MGIC Investment Corporation 2019 Annual Report | 71
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and other amortization
Deferred tax expense
Net realized investment (gains) losses
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 (decrease) 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
Purchase or repayment of convertible senior notes
Payment of original issue discount - convertible senior notes
Repurchase of common stock
Dividends paid
Payment of debt issuance costs
Payment of withholding taxes related to share-based compensation net
share settlement
Net cash used in financing activities
Years Ended December 31,
2019
2018
2017
$
673,763
$
670,097
$
355,761
48,784
11,096
(5,306)
—
(1,704)
11,687
1,427
(497)
(643)
4,945
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)
(118,685)
(311,616)
(453,178)
(29,683)
(11,500)
1,057
24,791
609,532
17,051
(22,900)
(77,551)
14,738
544,517
63,197
(25,400)
51,296
128
406,657
(1,394,126)
(1,459,473)
(1,293,695)
229,796
748,165
(307)
(5,636)
370,449
785,175
307
246,908
759,212
—
(14,238)
(16,066)
(422,108)
(317,780)
(303,641)
—
—
—
—
—
—
—
—
(125,766)
(163,419)
(41,914)
—
—
—
150,000
(150,000)
(145,620)
(4,504)
—
—
(1,630)
(5,726)
(8,131)
(6,821)
(173,406)
(171,550)
(158,575)
Net increase (decrease) in cash and cash equivalents and restricted cash and
cash equivalents
14,018
55,187
(55,559)
Cash and cash equivalents and restricted cash and cash equivalents at
beginning of year
155,038
99,851
155,410
Cash and cash equivalents and restricted cash and cash equivalents at end of
year
$
169,056
$
155,038
$
99,851
See accompanying notes to consolidated financial statements.
72 | MGIC Investment Corporation 2019 Annual Report
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1
Nature of Business
NOTE 2
Basis of Presentation
MGIC Investment Corporation is a holding company
which, through Mortgage Guaranty Insurance
Corporation ("MGIC"), is principally engaged in the
mortgage insurance business. We provide mortgage
insurance to lenders throughout the United States and
to government sponsored entities to protect against
loss from defaults on low down payment residential
mortgage loans. 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, 2019, our direct primary insurance in
force ("IIF") was $222.3 billion, which represents the
principal balance in our records of all mortgage loans
that we insure, and our direct primary risk in force
("RIF") was $57.2 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. The
current private mortgage insurer eligibility
requirements ("PMIERs") of the GSEs include financial
requirements, as well as business, quality control and
certain transactional 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,
calculated from tables of factors with several risk
dimensions, reduced for credit given for risk ceded
under reinsurance transactions, and subject to a floor
amount). Based on our interpretation of the more
restrictive application of the PMIERs, as of
December 31, 2019, MGIC’s Available Assets are in
excess of its Minimum Required Assets; and MGIC is
in compliance with the PMIERs and eligible to insure
loans purchased by the GSEs.
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 2018 and 2017 amounts
have been made in the accompanying consolidated
financial statements to conform to the 2019
presentation. See Note 3 - "Significant Accounting
Policies" for a discussion of our adoption of
accounting guidance in 2019 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,
MGIC Investment Corporation 2019 Annual Report | 73
Notes
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
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 and cash equivalents. 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.
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. Equity securities are reported at fair
value, except for certain securities that are carried at
74 | MGIC Investment Corporation 2019 Annual Report
cost. Equity securities carried at cost are reported as
Other invested assets. Effective January 1, 2018,
realized investment gains and losses, after
considering the related tax expense or benefit, are
accounted for as a function of the periodic change in
fair value. For 2017, 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.
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
factors is recognized in accumulated other
comprehensive loss, net of taxes. A credit loss is
determined to exist if the present value of the
Notes
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 $43.0 million, $38.1
million and $33.9 million as of December 31, 2019,
2018 and 2017, respectively. Depreciation expense for
the years ended December 31, 2019, 2018 and 2017
was $6.5 million, $6.0 million and $5.4 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
Case reserves and loss adjustment expenses ("LAE")
reserves are established when we receive notices of
delinquency on insured mortgage loans. 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 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 case reserves for future
claims on insured loans which are not currently
delinquent. Case reserves are established by
estimating the number of loans in our inventory of
delinquent loans that will result in a claim payment,
which is referred to as the claim rate, and further
estimating the amount of the claim payment, which is
referred to as claim severity. Our case reserve
MGIC Investment Corporation 2019 Annual Report | 75
Notes
estimates are established based upon historical
experience, including 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.
Incurred but not reported ("IBNR") 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. IBNR
reserves are also established using estimated claim
rates and claim severities.
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.
Loss 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 re-
underwrite 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 estimated 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
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. The first step applies a more-
likely-than-not threshold for recognition and
derecognition. The second step measures the tax
position as the greatest amount of benefit that is
cumulatively greater than 50% likely to be 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.
Federal tax law permits mortgage guaranty insurance
companies to deduct from taxable income, subject to
certain limitations, the amounts added to contingency
loss reserves that are recorded for regulatory
purposes. The amounts we deduct must generally be
included in taxable income in the tenth subsequent
year. The deduction is allowed only to the extent that
we purchase and hold U.S. government non-interest-
bearing tax and loss bonds in an amount equal to the
tax benefit attributable to the deduction. We account
for these purchases as a payment of current federal
income tax. (See "Note 12 - Income Taxes.")
76 | MGIC Investment Corporation 2019 Annual Report
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. Diluted EPS
includes the components of basic EPS and also gives
Notes
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 addition to our 9%
Debentures, we had other convertible notes in 2017
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 2019,
2018, or 2017.
RECENT ACCOUNTING AND REPORTING
DEVELOPMENTS
Accounting standards effective in 2019, or early
adopted, and relevant to our financial statements
Accounting Standard Update (“ASU”) 2016-02 - Leases
In February 2016, the FASB amended the previous
leasing standard and created ASC 842, Leases. ASC
842 requires a lessee to recognize a right-of-use asset
and lease liability for substantially all leases. Effective
for the quarter ended March 31, 2019, we adopted the
updated guidance for leases and also elected to apply
all practical expedients applicable to us in the
updated guidance for transition of leases in effect at
adoption. The adoption of the updated guidance
resulted in the recognition of an immaterial right-of-
use asset as part of other assets and a lease liability
as part of other liabilities in the consolidated balance
sheet.
è Adoption impact: The adoption of the updated guidance
did not have a material effect on our consolidated
results of operations or liquidity.
MGIC Investment Corporation 2019 Annual Report | 77
Notes
PROSPECTIVE ACCOUNTING STANDARDS
Table 3.1 shows the relevant new amendments to
accounting standards, which are not yet effective or
adopted.
Standard / Interpretation
Table 3.1
Amended Standards
Effective
date
ASC 326
Financial Instruments - Credit
Losses
•
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
ASC 740
Income Taxes
•
ASU 2019-12 - Simplifying the
Accounting for Income Taxes
January 1,
2021
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. We have concluded that
our mortgage insurance policies are outside the
scope of this ASU, however, the provisions of this
guidance do apply to our reinsurance transactions,
which are highly rated, as discussed in Note 9 –
“Reinsurance” to our consolidated financial
statements. Entities are required to incorporate 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. The allowance for current
expected credit losses (“CECL”) generally reduces the
amortized cost basis of the financial instrument to
the amount an entity expects to collect, however,
credit losses relating to available-for-sale fixed
maturity securities are to be recorded through an
allowance for credit losses, 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, including interim periods
within those annual periods. In May 2019, the FASB
amended this guidance to provide entities with an
option to irrevocably elect the fair value option for
eligible instruments in order to provide targeted
transition relief that is intended to increase
comparability of financial statement information for
some entities that otherwise would have measured
similar financial instruments using different
measurement methodologies. We have evaluated the
impacts the adoption of this guidance will have on our
consolidated financial statements, and determined it
will not have a material impact.
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 requires 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. We have evaluated the
impacts the adoption of this guidance will have on our
consolidated financial statements, and determined it
will not 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
disclosure requirements 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
78 | MGIC Investment Corporation 2019 Annual Report
Notes
updated guidance is effective for annual periods
beginning 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.
Simplifying the Accounting for Income Taxes
In December 2019, the FASB issued guidance which
simplifies Accounting for Income Taxes (Topic 740).
The ASU intends to reduce complexity through
clarification and amendments of existing guidance.
The updated guidance is effective for fiscal years
beginning after December 15, 2020. Early adoption is
permitted in any interim periods for which financial
statements have not been issued. 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.
MGIC Investment Corporation 2019 Annual Report | 79
Notes
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,
2019
2018
2017
$
$
$
673,763
352,827
1.91
673,763
$
$
$
670,097
365,406
1.83
670,097
$
$
$
—
—
—
—
18,264
18,264
355,761
362,380
0.98
355,761
907
1,709
15,027
373,404
362,380
1,493
8,317
3,548
19,028
394,766
0.95
Diluted income available to common shareholders
$
692,027
$
688,361
$
Weighted-average shares - basic
Effect of dilutive securities:
Unvested restricted stock units
2% Notes
5% Notes
9% Debentures
Weighted average common shares outstanding - diluted
352,827
365,406
2,069
—
—
19,028
373,924
1,644
—
—
19,028
386,078
Diluted income per share
$
1.85
$
1.78
$
(1)
Interest expense for the years ended December 31, 2019, 2018 and 2017 has been tax effected at a rate of
21%, 21%, and 35%, respectively.
For the years ended December 31, 2019, 2018, and 2017, 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 Subordinated 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.
80 | MGIC Investment Corporation 2019 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, 2019 and 2018 are shown below:
Details of fixed income investment securities by category as of December 31, 2019
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
$
195,176
$
1,237
$
(210) $
196,203
1,555,394
2,711,910
227,376
271,384
274,234
327,076
99,328
76,220
2,466
429
5,531
33
(857)
(3,008)
(178)
(3,227)
(779)
(1,643)
1,653,865
2,785,122
229,664
268,586
278,986
325,466
Total fixed income securities
$
5,562,550
$
185,244
$
(9,902) $
5,737,892
Details of fixed income investment securities by category as of December 31, 2018
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
$
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
(1) There were no OTTI losses recorded in other comprehensive (loss) income as of December 31, 2019 and
2018.
The increase in gross unrealized gains and the decrease in gross unrealized losses in our fixed income securities
from December 31, 2018 to December 31, 2019 were primarily caused by declines in interest rates during that
period.
We had $13.9 million and $13.5 million of investments at fair value on deposit with various states as of
December 31, 2019 and 2018, respectively, due to regulatory requirements of those states' 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 $89.9 million and $26.3 million at December 31, 2019 and 2018, respectively.
MGIC Investment Corporation 2019 Annual Report | 81
Notes
Table 5.2 compares the amortized cost and fair values of fixed income securities, by contractual maturity, as of
December 31, 2019. 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.
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, 2019
Amortized
Cost
Fair Value
$
425,739
$
427,616
1,911,433
1,031,056
1,094,252
4,462,480
227,376
271,384
274,234
327,076
1,952,278
1,088,012
1,167,284
4,635,190
229,664
268,586
278,986
325,466
Total as of December 31, 2019
$
5,562,550
$
5,737,892
Proceeds from the sale of fixed income securities classified as available-for-sale were $228.1 million, $365.6
million, and $246.9 million during the years ended December 31, 2019, 2018, and 2017, respectively. Gross gains
of $7.1 million, $0.7 million, and $1.6 million and gross losses of $3.5 million, $3.8 million and $1.4 million were
realized on those sales during the years ended December 31, 2019, 2018, and 2017, respectively.
For the years ended December 31, 2019 and December 31, 2018, we recorded $0.1 million and $1.8 million of
OTTI losses in earnings, respectively. For the year ended December 31, 2017, there were no OTTI losses in
earnings.
EQUITY SECURITIES
The cost and fair value of investments in equity securities as of December 31, 2019 and December 31, 2018 are
shown in tables 5.3a and 5.3b below. 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.
Details of equity investment securities as of December 31, 2019
5.3a
Table
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
17,188
154
(14)
17,328
Details of equity investment securities as of December 31, 2018
5.3b
Table
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
3,993
11
(72)
3,932
Proceeds from the sale of equity securities were $1.7 million and $4.9 million during the years ended
December 31, 2019 and 2018, respectively. Gross gains of $1.6 million and $3.7 million were realized on those
sales during the year ended December 31, 2019 and 2018, respectively. There were no sales of equity securities
in 2017. For the year ended December 31, 2019 and December 31, 2018, we recognized $201 thousand and $84
thousand of net losses on equity securities still held as of December 31, 2019 and December 31, 2018,
respectively, which are reported in Net realized investment (losses) gains on our consolidated statements of
operations.
82 | MGIC Investment Corporation 2019 Annual Report
Notes
OTHER INVESTED ASSETS
Other invested assets include an investment in Federal Home Loan Bank ("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, 2019, that
collateral consisted of fixed income securities included in our total investment portfolio, and cash and cash
equivalents, with a total fair value of $165.7 million.
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, 2019 and 2018, 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 $10 million and $78 million as of December 31, 2019 and 2018, 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, 2019
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
$
57,301
$
(200) $
5,806
$
(10) $
63,107
$
(210)
74,859
221,357
21,542
105,443
62,388
81,444
(847)
(2,847)
(118)
(461)
(728)
(225)
6,957
43,505
3,851
110,452
11,852
196,988
(10)
(161)
(60)
81,816
264,862
25,393
(2,766)
215,895
(51)
74,240
(1,418)
278,432
$
624,334
$
(5,426) $
379,411
$
(4,476) $ 1,003,745
$
(857)
(3,008)
(178)
(3,227)
(779)
(1,643)
(9,902)
Unrealized loss aging for securities by type and length of time as of December 31, 2018
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
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)
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, 2019 and 2018 were primarily caused by changes in interest rates between the time of purchase
and the respective year end. There were 217 and 721 securities in an unrealized loss position as of December 31,
2019 and 2018, respectively. As of December 31, 2019, the fair value as a percent of amortized cost of the
securities in an unrealized loss position was 99% and approximately 28% of the securities in an unrealized loss
position were backed by the U.S. Government.
MGIC Investment Corporation 2019 Annual Report | 83
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
2019
2018
2017
$
165,523
$
140,539
$
122,105
406
4,444
974
228
3,423
816
206
1,447
620
171,347
145,006
124,378
(4,302)
(3,675)
(3,507)
$
167,045
$
141,331
$
120,871
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
2019
2018
2017
$
220,139
$
(81,834) $
69,026
—
—
—
—
39
(13)
Change in unrealized gains/losses
$
220,139
$
(81,834) $
69,052
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
84 | MGIC Investment Corporation 2019 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
•
Real estate acquired are valued at 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.
RECURRING FAIR VALUE MEASUREMENTS
Assets carried at fair value included those listed, by hierarchy level, in the following tables as of December 31,
2019 and 2018:
Assets carried at fair value by hierarchy level as of December 31, 2019
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
$
196,203
$
34,240
$
161,963
$
1,653,865
2,785,122
229,664
268,586
278,986
325,466
5,737,892
17,328
164,693
7,252
—
—
—
—
—
—
34,240
17,328
164,693
—
1,653,865
2,785,122
229,664
268,586
278,986
325,466
5,703,652
—
—
—
$
5,927,165
$
216,261
$
5,703,652
$
—
—
—
—
—
—
—
—
—
—
7,252
7,252
MGIC Investment Corporation 2019 Annual Report | 85
Notes
Assets carried at fair value by hierarchy level as of December 31, 2018
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)
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
(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.
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, 2019, 2018, and 2017 is shown in tables
6.2a, 6.2b and 6.2c below. 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 6.2b 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, 2019 and 2017. There were no losses included in earnings for the years ended
December 31, 2019, 2018, and 2017 attributable to the change in unrealized losses on assets still held at the end
of each applicable year.
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2019
Table
6.2a
(In thousands)
Debt Securities
Equity
Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2018
Total realized/unrealized gains (losses):
Included in earnings and reported as losses
incurred, net
Acquisitions
Sales
Balance at December 31, 2019
$
$
13
$
— $
13
$
14,535
—
—
(13)
—
—
—
—
—
(13)
— $
— $
— $
(476)
24,204
(31,011)
7,252
86 | MGIC Investment Corporation 2019 Annual Report
Notes
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2018
Table
6.2b
(In thousands)
Debt Securities
Equity
Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2017
$
271
$
4,268
$
4,539
$
12,713
Reclassification for adoption of new accounting
standard
Total realized/unrealized gains (losses):
Included in earnings and reported as net realized
investment gains
Included in earnings and reported as losses
incurred, net
Acquisitions
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
6.2c
(In thousands)
Debt Securities
Equity
Securities
Total
Investments
Real Estate
Acquired
Balance at December 31, 2016
$
691
$
4,268
$
4,959
$
11,748
Total realized/unrealized gains (losses):
Included in earnings and reported as losses
incurred, net
Acquisitions
Sales
—
—
(420)
—
—
—
—
—
(420)
Balance at December 31, 2017
$
271
$
4,268
$
4,539
$
(1,315)
34,749
(32,469)
12,713
Additional fair value disclosures related to our investment portfolio are included in Note 5 – “Investments.”
FINANCIAL LIABILITIES NOT CARRIED AT FAIR VALUE
Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that
require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of
other invested assets is categorized as Level 2.
Financial liabilities include our outstanding debt obligations. 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 2019 Annual Report | 87
Notes
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, 2019 and 2018.
Financial liabilities not carried at fair value
Table
6.3
(In thousands)
Financial assets
Other invested assets
Financial liabilities
FHLB Advance
5.75% Notes
9% Debentures
Total financial liabilities
December 31, 2019
December 31, 2018
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
$
3,100
$
3,100
$
3,100
$
3,100
155,000
$
156,422
$
155,000
$
420,867
256,872
471,827
346,289
419,713
256,872
150,551
425,791
338,069
832,739
$
974,538
$
831,585
$
914,411
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, 2019 and 2018.
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,
2019
2018
$
155.0
$
155.0
420.9
256.9
419.7
256.9
831.6
Long-term debt, carrying value
$
832.7
$
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. We have
the option to redeem these notes, in whole or in part,
at any time or from time to time prior to maturity at a
redemption price equal to the greater of (i)100% of the
aggregate principal amount of the notes to be
redeemed and (ii) the make-whole amount, which is
the sum of the present values of the remaining
scheduled payments of principal and interest
discounted at the treasury rate defined in the notes
plus 50 basis points and accrued interest.
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,
2019.
9% Debentures
The 9% Debentures are currently convertible, at the
holder's option, at an initial conversion rate, which is
subject to adjustment, of 74.4718 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 $13.43 per
88 | MGIC Investment Corporation 2019 Annual Report
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
19.1 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 $17.46 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
Notes
the 2% cap. The 2% cap is 2% of the average closing
price of our common stock times the number of our
outstanding shares of common stock. The average
price is determined over a specified period ending
before the issuance of the common stock or warrants
being sold, and the number of outstanding shares is
determined as of the date of our most recent publicly
released financial statements.
We are not required to issue under the Alternative
Payment Mechanism a total of more than 10 million
shares of common stock, including shares underlying
qualifying warrants. In addition, we may not issue
under the Alternative Payment Mechanism qualifying
preferred stock if the total net proceeds of all
issuances would exceed 25% of the aggregate
principal amount of the debentures.
The Alternative Payment Mechanism does not apply
during any period between scheduled interest
payment dates if there is a “market disruption event”
that occurs over a specified portion of such period.
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 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, 2019. The 9% Debentures
rank junior to all of our existing and future senior
indebtedness.
CREDIT FACILITY
In May 2019, we terminated our $175 million unsecured
revolving credit facility. At the time of termination there
were no amounts drawn on the credit facility. The
unused portion of our revolving credit facility was
subject to recurring commitment fees, which are
reflected in interest payments.
INTEREST PAYMENTS
Interest payments were $50.8 million during 2019,
$51.3 million during 2018, and $57.8 million during
2017.
NOTE 8
Loss Reserves
As described in Note 3 – “Summary of Significant
Accounting Policies – Loss Reserves,” Case reserves
and loss adjustment expenses ("LAE") reserves are
established when we receive notices of delinquency
on insured mortgage loans. We consider a loan
delinquent when it is two or more payments past due.
Case 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
MGIC Investment Corporation 2019 Annual Report | 89
Notes
of the claim payment, which is referred to as claim
severity.
IBNR 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. IBNR reserves are also established
using estimated claim rates and claim severities
Estimation of losses is inherently judgmental. The
conditions that affect the claim rate and claim
severity include the current and future state of the
domestic economy, including unemployment and the
current and future strength of local housing markets;
exposure on insured loans; the amount of time
between delinquency 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 2019 compared to 2018 and
in 2018 compared to 2017, 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 are utilizing 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 $30 million and $40 million at
December 31, 2019 and 2018, respectively.
90 | MGIC Investment Corporation 2019 Annual Report
Notes
Table 8.1 provides a reconciliation of beginning and ending loss reserves for each of the past three years:
Development of loss reserves
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
2019
2018
2017
$
674,019
$
985,635
$
1,438,813
33,328
640,691
48,474
937,161
50,493
1,388,320
189,581
(71,006)
118,575
203,928
(167,366)
36,562
284,913
(231,204)
53,709
4,018
235,551
(13,996)
225,573
533,693
21,641
7,298
327,743
(2,009)
333,032
640,691
33,328
$
555,334
$
674,019
$
11,267
493,300
301
504,868
937,161
48,474
985,635
(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 2019, 2018 and 2017 for previously received delinquencies.
Reserve development on previously received delinquencies
Table
8.2
(In millions)
Decrease in estimated claim rate on primary delinquencies
(Decrease) 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)
2019
2018
2017
(112) $
(213) $
(248)
(1)
42
29
17
9
8
(71) $
(167) $
(231)
$
$
(1)
A negative number for prior year loss development indicates a redundancy of prior year loss reserves.
For the years ended December 31, 2019, 2018 and 2017, we experienced favorable development on previously
received delinquencies. This development was, in part, due to the resolution of approximately 69%, 73% and 67%
for the years ended December 31, 2019, 2018 and 2017, respectively, of the prior year delinquent inventory, with
improved cure rates. During 2019, 2018, and 2017, cure activity on loans that were delinquent twelve months or
more was significantly higher than our previous estimates. During 2019, the favorable development was offset by
adjustments to LAE reserves and amounts paid in settlement of disputes for claim paying practices. See Note 17
– “Litigation and Contingencies.” The favorable development for the years ended 2018 and 2017 was offset, in
part, by an increase in the estimated severity on previously reported delinquencies remaining in the delinquent
inventory.
MGIC Investment Corporation 2019 Annual Report | 91
Notes
DELINQUENT INVENTORY
A roll-forward of our primary delinquent inventory for
the years ended December 31, 2019, 2018, and 2017
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.
In 2019 our losses paid included $23.5 million paid in
connection with settlements of disputes concerning
our claims paying practices.
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 had been delinquent for three months
or less (table 8.4) as of December 31, 2017.
Primary delinquent inventory roll-forward
Table
8.3
The number of consecutive months that a borrower
has been delinquent is shown in table 8.4 below.
2019
2018
2017
32,898
54,239
46,556
54,448
50,282
68,268
(52,035)
(60,511)
(61,094)
(4,267)
(5,750)
(9,206)
3 months or less
(168)
(267)
(357)
4 - 11 months
12 months or more (1)
(639)
(1,578)
(1,337)
Total
30,028
32,898
46,556
Primary delinquent inventory - consecutive months delinquent
Table
8.4
December 31,
2019
2018
9,447
9,664
10,917
30,028
9,829
9,655
13,414
32,898
2017
17,119
12,050
17,387
46,556
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
(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. Loans in our ending delinquent
inventory within the IADAs were 12,446 as of
December 31, 2017. The majority of notices of
delinquency received from the IADAs due to the
hurricane activity cured during 2018.
Other items removed from inventory
During 2019, 2018, and 2017 our losses paid included
amounts paid upon commutation of coverage on
policies . The impacts of the commutations of
coverage on policies and/or settlements in each of
the past three years were as follows:
•
•
•
2019 - 639 notices removed from delinquent
inventory with an amount paid of $30 million,
2018 - 1,578 notices removed from delinquent
inventory with an amount paid of $50 million,
2017 - 1,337 notices removed from delinquent
inventory with an amount paid of $54 million.
3 months or less
4 - 11 months
12 months or more
32%
32%
36%
30%
29%
41%
37%
26%
37%
Total
100%
100%
100%
Primary claims
received inventory
included in ending
delinquent inventory
538
809
954
(1)
Approximately 36%, 38%, and 45% of the delinquent
inventory for 12 consecutive months or more has been
delinquent for at least 36 consecutive months as of
December 31, 2019, 2018 and 2017, respectively.
POOL INSURANCE DEFAULT INVENTORY
Pool insurance default inventory decreased to 653 at
December 31, 2019 from 859 at December 31, 2018
and 1,309 at December 31, 2017.
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, see Note 17 – “Litigation and
Contingencies.”
92 | MGIC Investment Corporation 2019 Annual Report
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)
2019
2018
2017
Years ended December 31,
Premiums earned:
Direct
Assumed
Ceded
$1,155,240
$ 1,084,748
$ 1,059,973
5,085
1,805
509
(129,337)
(111,391)
(125,735)
Net premiums
earned
Losses incurred:
Direct
Assumed
Ceded
Net losses
incurred
$1,030,988
$ 975,162
$ 934,747
$ 130,100
$
43,060
$
74,727
(125)
331
183
(11,400)
(6,829)
(21,201)
$ 118,575
$
36,562
$
53,709
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 (or a
comparable rating) by Standard and Poor's Rating
Services, A.M. Best, Moody's, or a combination of the
three.
2019 QSR Transaction. We entered into 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
NIW in 2019. Under the 2019 QSR Transaction, we will
cede losses 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
Notes
31, 2021 or 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, full financial
statement credit or full credit under applicable
regulatory capital requirements for the risk ceded in
any required calculation period.
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 an annual profit
commission provided the annual loss ratio on the
loans covered under the transactions remains below
62%.
2018 QSR Transaction. Our 2018 quota share
reinsurance agreement ("2018 QSR Transaction")
provides coverage on eligible NIW 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, full financial
statement credit or full credit under applicable
regulatory capital requirements 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 an annual profit commission provided the
annual loss ratio on the loans covered under the
transactions remains below 62%.
2017 QSR Transaction. Our 2017 quota share
reinsurance agreement ("2017 QSR Transaction")
provides coverage on eligible NIW 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, full
financial statement credit or full credit under
applicable regulatory capital requirements for the risk
ceded in any required calculation period.
The structure of the 2017 QSR Transaction is a 30%
quota share for all policies covered, with a 20% ceding
commission as well as a profit commission.
MGIC Investment Corporation 2019 Annual Report | 93
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
$21.6 million as of December 31, 2019 and $33.2
million as of December 31, 2018. The reinsurance
recoverable balance is secured by funds on deposit
from the reinsurers, the amount of which is based on
the funding requirements of PMIERs.
Notes
Generally, under the 2017 QSR Transaction, we will
receive an annual profit commission provided the
annual loss ratio on the loans covered under the
transactions remains below 60%.
2015 QSR Transaction. We terminated a portion of our
2015 QSR Transaction effective June 30, 2019 and
entered into an amended quota share reinsurance
agreement with certain participants from the existing
reinsurance panel that effectively reduces the quota
share cede rate from 30% to 15% on the remaining
eligible insurance. During the second quarter of 2019,
we incurred a termination fee of $6.8 million, which
was paid to participants of the reinsurance panel that
are not participating in the amended 2015 QSR
Transaction. Under the amended 2015 QSR
Transaction we cede losses and premiums on eligible
insurance written before 2017 through December 31,
2031, at which time the agreement expires. Early
termination of the amended agreement can be
elected by us on or after June 30, 2021, bi-annually
thereafter for no fee, or under specified scenarios,
including if we will receive less than 90% of the full
credit amount under the PMIERs, full financial
statement credit or full credit under applicable
regulatory capital requirements for the risk ceded in
any required calculation period. Generally, under our
amended 2015 QSR Transaction, we will receive an
annual profit commission provided the annual loss
ratio on the loans covered under the transactions
remains below 68%.
Table 9.2 provides a summary of our quota share
reinsurance agreements, excluding captive
agreements, for 2019, 2018 and 2017.
Quota share reinsurance
Table
9.2
(In thousands)
2019
2018
2017
Years ended December 31,
Ceded premiums
written and earned,
net of profit
commission (1)
Ceded losses
incurred
Ceding
commissions (2)
Profit commission
$111,550
$ 108,337
$ 120,974
11,395
6,543
22,336
48,793
51,201
49,321
139,179
147,667
125,629
(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.
94 | MGIC Investment Corporation 2019 Annual Report
Notes
EXCESS OF LOSS REINSURANCE
We have aggregate excess of loss reinsurance
agreements (“Home Re Transactions”) with
unaffiliated special purpose insurers domiciled in
Bermuda (“Home Re Entities”). For the reinsurance
coverage periods, we retain the first layer of the
respective aggregate losses, and a Home Re special
purpose entity will then provide second layer coverage
up to the outstanding reinsurance coverage amount.
We retain losses in excess of the outstanding
reinsurance coverage amount. The aggregate excess
of loss reinsurance coverage decreases over a ten-
year period, subject to certain conditions, as the
underlying covered mortgages amortize or are repaid,
or mortgage insurance losses are paid. MGIC has
rights to terminate the Home Re
Transactions under certain circumstances. The Home
Re entities financed the coverages by issuing
mortgage insurance-linked notes (“ILNs”) to
unaffiliated investors in an aggregate amount equal to
the initial reinsurance coverage amounts. The ILNs
each have ten-year legal maturities and are non-
recourse to any assets of MGIC or affiliates. The
proceeds of the ILNs, which were deposited into
reinsurance trusts for the benefit of MGIC, will be the
source of reinsurance claim payments to MGIC and
principal repayments on the ILNs.
Table 9.3 provides a summary of our excess of loss
reinsurance agreements as of December 31, 2019 and
December 31, 2018.
2020 QSR Transaction. We have agreed to terms on a
QSR Transaction with a group of unaffiliated
reinsurers with an effective date of January 1, 2020
("2020 QSR Transaction"), which provides coverage on
eligible NIW in 2020
Under the 2020 QSR Transaction, we cede losses
incurred and premiums on or after the effective date
through December 31, 2031, at which time the
agreement expires. Early termination of the
agreement can be elected by us effective
December 31, 2022, 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.
The structure of the 2020 QSR Transaction is a 30%
quota share on 2020 NIW, with an option to reduce the
cede rate to either 25.0% or 20% effective July 1, 2021
or semiannually thereafter. Generally, under the 2020
QSR Transaction, we will receive an annual profit
commission provided the annual loss ratio on the
loans covered under the transactions remains below
62%.
2021 QSR Transaction. In addition, we have agreed to
terms on a QSR Transaction with a group of
unaffiliated reinsurers with an effective date of
January 1, 2021 ("2021 QSR Transaction"), which
provides coverage on eligible NIW in 2021.
Under the 2021 QSR Transaction, we cede losses
incurred and premiums on or after the effective date
through December 31, 2032 for 2021 NIW, at which
time the agreement expires. Early termination of the
agreement can be elected by us effective
December 31, 2023, 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.
The structure of the 2021 QSR Transaction is a 17.5%
quota share on 2021 NIW, with an option to reduce the
cede rate to either 14.5% or 12% effective July 1, 2022
or semiannually thereafter. Generally, under the 2021
QSR Transaction, we will receive an annual profit
commission provided the annual loss ratio on the
loans covered under the transactions remains below
62%.
MGIC Investment Corporation 2019 Annual Report | 95
Notes
Excess of Loss Reinsurance
Table 9.3
(In thousands)
Home Re Entity
(Issue Date)
Home Re 2018-1
Ltd. (Oct. - 2018)
Home Re 2019-1
Ltd. (May - 2019)
Total
Policy Inforce Dates
July 1, 2016 -
December 31, 2017
January 1, 2018 -
March 31, 2019
As of December 31, 2019
As of December 31, 2018
Remaining
First Layer
Retention
Remaining
Excess of
Loss
Reinsurance
Coverages
Remaining
First Layer
Retention
Remaining
Excess of
Loss
Reinsurance
Coverages
$
167,779
$
260,957 $
168,691
$
318,636
Termination
Option Date
(1)
October 25,
2025
May 25, 2026
185,636
271,021
—
—
$
353,415
$
531,978 $
168,691
$
318,636
(1) We have the right to terminate the excess-of-loss reinsurance agreements under certain circumstances and on any payment
date on or after the respective termination option date.
The reinsurance premiums ceded to each Home Re
Entity are composed of coverage, initial expense and
supplemental premiums. The coverage premiums are
generally calculated as the difference between the
amount of interest payable by the Home Re Entity on
the unpaid portion of the ILNs it issued to raise funds
to collateralize its reinsurance obligations to us, and
the investment income collected on the collateral
assets. The amount of monthly reinsurance coverage
premium ceded will fluctuate due to changes in one-
month LIBOR, (or the fallback reference rate, as
applicable) and changes in money market rates that
affect investment income collected on the assets in
the reinsurance trust. As a result, we concluded that
each reinsurance agreement contains an embedded
derivative that is accounted for separately as a
freestanding derivative. The fair values of the
derivatives at December 31, 2019, were not material
to our consolidated balance sheet, and the change in
fair values during the year ended December 31, 2019
were not material to our consolidated statements of
operations. Total ceded premiums were $17.6 million
and $2.8 million for the years ended December 31,
2019 and December 31, 2018, respectively.
At the time the Home Re Transactions were entered
into, we concluded that each Home Re Entity is 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. Given that MGIC (1) does not have the
unilateral power to direct the activities that most
significantly affect each Home Re Entity’s economic
performance and (2) does not have the obligation to
absorb losses or the right to receive benefits of each
Home Re Entity, consolidation of neither Home Re
Entity is 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 statements of
operations, as a result of our involvement with the
VIEs under our Home Re Transactions. As of
December 31, 2019, and December 31, 2018, we did
not have material exposure to the VIEs as we have no
investment in the VIEs and had no reinsurance claim
payments due from either VIE under our reinsurance
agreements. We are unable to determine the timing or
extent of claims from losses that are ceded under the
reinsurance agreements. The VIE assets are
deposited in reinsurance trusts for the benefit of
MGIC that will be the source of reinsurance claim
payments to MGIC. The purpose of the reinsurance
trusts is to provide security to MGIC for the
obligations of the VIEs under the reinsurance
agreements. The trustee of the reinsurance trusts, a
recognized provider of corporate trust services, has
established segregated accounts within the
reinsurance trusts for the benefit of MGIC, pursuant to
the trust agreements. The trust agreements are
governed by, and construed in accordance with, the
laws of the State of New York. If the trustee of the
reinsurance trusts failed to distribute claim payments
to us as provided in the reinsurance trusts, we would
incur a loss related to our losses ceded under the
reinsurance agreements and deemed unrecoverable.
We are also unable to determine the impact such
possible failure by the trustee to perform pursuant to
the reinsurance trust agreements 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 VIEs. MGIC has
certain termination rights under the reinsurance
agreements should its claims not be paid. We
consider our exposure to loss from our reinsurance
agreements with the VIEs to be remote.
96 | MGIC Investment Corporation 2019 Annual Report
Notes
Table 9.4 presents the total assets of Home Re
Entities as of December 31, 2019 and December 31,
2018.
Home Re Entities total assets
Table
9.4
(In thousands)
Home Re Entity
December 31, 2019
Home Re 2018-01 Ltd.
Home Re 2019-01 Ltd.
December 31, 2018
Home Re 2018-1 Ltd.
Total VIE Assets
$
$
$
269,451
283,150
318,636
The reinsurance trust agreements provide 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 the Home Re Entities 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 2019 Annual Report | 97
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, 2019, 2018 and 2017 are included in table 10.1 below.
Components of other comprehensive income (loss)
10.1
Table
(In thousands)
2019
2018
2017
Net unrealized investment gains (losses) arising during the year
$
220,139
$
(81,834) $
Income tax (expense) benefit
Net of taxes
Net changes in benefit plan assets and obligations
Income tax (expense) benefit
Net of taxes
Net changes in unrealized foreign currency translation adjustment
Income tax benefit (expense)
Net of taxes
Total other comprehensive income (loss)
Total income tax (expense) benefit, net
(46,229)
173,910
29,129
(6,117)
23,012
—
—
—
17,188
(64,646)
(19,958)
4,191
(15,767)
—
—
—
249,268
(52,346)
(101,792)
21,379
Total other comprehensive income (loss), net of tax
$
196,922
$
(80,413) $
69,052
(21,505)
47,547
(8,983)
3,144
(5,839)
45
(14)
31
60,114
(18,375)
41,739
The pretax and related income tax benefit (expense) components of the amounts reclassified from our
accumulated other comprehensive income (loss) ( "AOCI", "AOCL") to our consolidated statements of operations
for the years ended December 31, 2019, 2018 and 2017 are included in table 10.2 below.
Reclassifications from Accumulated Other Comprehensive Income (Loss)
Table
10.2
(In thousands)
2019
2018
2017
Reclassification adjustment for net realized (losses) gains included in
net income (1)
$
3,637
$
(7,037) $
Income tax (expense) benefit
Net of taxes
Reclassification adjustment related to benefit plan assets and
obligations (2)
Income tax benefit (expense)
Net of taxes
Total reclassifications
Total income tax benefit, net
(763)
2,874
(8,097)
1,701
(6,396)
(4,460)
938
1,477
(5,560)
(2,232)
469
(1,763)
(9,269)
1,946
Total reclassifications, net of tax
$
(3,522) $
(7,323) $
(2,580)
903
(1,677)
906
(317)
589
(1,674)
586
(1,088)
(1)
(2)
(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.
98 | MGIC Investment Corporation 2019 Annual Report
Notes
A roll-forward of AOCI (AOCL) for the years ended December 31, 2019, 2018, and 2017, including amounts
reclassified from AOCI (AOCL), is included in table 10.3 below.
Roll-forward of Accumulated Other Comprehensive Income (Loss)
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, 2016, net of tax
$
(20,797) $
(54,272) $
(31) $
(75,100)
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
Balance, December 31, 2018, net of tax
Other comprehensive income (loss)
before reclassifications
Less: Amounts reclassified from
AOCL
45,870
(1,677)
(2,525)
29,275
(18)
(70,206)
(5,560)
(35,389)
176,784
2,874
(5,250)
589
12,947
(73,058)
—
(17,530)
(1,763)
(88,825)
16,616
(6,396)
Balance, December 31, 2019, net of tax
$
138,521
$
(65,813) $
31
—
—
—
—
—
—
—
—
—
—
40,651
(1,088)
10,422
(43,783)
(18)
(87,736)
(7,323)
(124,214)
193,400
(3,522)
72,708
MGIC Investment Corporation 2019 Annual Report | 99
Notes
NOTE 11
Benefit Plans
We have a non-contributory defined benefit pension plan covering substantially all domestic employees, as well
as a supplemental executive retirement plan. We also offer both medical and dental benefits for retired domestic
employees, 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, 2019, 2018, and 2017 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, 2019 and 2018.
Components of net periodic benefit cost
Table
11.1
(In thousands)
12/31/2019
12/31/2018
12/31/2017
12/31/2019
12/31/2018
12/31/2017
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
1. Company Service Cost
$
8,345
$
10,530
$
9,556
$
1,345
$
1,160
$
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
15,705
(19,466)
—
4,584
15,095
(22,250)
—
3,375
15,475
(20,099)
—
4,932
—
—
—
1,130
(5,785)
—
834
(6,359)
—
813
706
(5,248)
—
(3,310)
(4,365)
(3,729)
(281)
8,412
8,131
12,715
1,933
(351)
6,937
6,586
9,961
—
—
(34)
—
(34)
(426)
6,169
5,743
10,675
(3,344)
—
—
—
—
(4,104)
(250)
(4,354)
(8,719)
—
(6,649)
—
(6,649)
(10,378)
—
8. Total Expense for Year
$
14,648
$
9,961
$
10,675
$
(3,344) $
(8,719) $
(10,378)
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
12/31/2019
12/31/2018
12/31/2019
12/31/2018
12/31/2019
12/31/2018
12/31/2019
12/31/2018
2. Accumulated Benefit Obligation
$
412,939
$
375,562
$
27,496
$
28,085
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
$ (413,350) $ (376,153) $
(27,496) $
(28,085)
402,691
359,719
99,590
N/A
N/A $
72,094
$
(10,659)
(16,434)
N/A
77,762
49,677
N/A
100 | MGIC Investment Corporation 2019 Annual Report
Notes
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
12/31/2019
12/31/2018
12/31/2019
12/31/2018
$
99,826
$
110,321
$
(18,005) $
(1,237)
(1,513)
—
—
2,724
—
939
2,690
—
$
98,589
$
108,808
$
(15,281) $
3,629
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.
Table 11.4 shows the changes in the projected benefit obligation for 2019 and 2018.
Change in projected benefit / accumulated benefit
Table
11.4
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2019
12/31/2018
12/31/2019
12/31/2018
1. Benefit Obligation at Beginning of Year
$
376,153
$
417,770
$
28,085
$
24,716
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
11. Settlement (Gain)/Loss
8,345
15,705
—
43,302
3,811
(30,829)
(3,105)
(5)
—
(27)
10,530
15,095
—
1,345
1,130
382
(36,132)
(1,215)
2,487
(32,674)
(908)
(15)
—
—
(860)
(826)
—
—
(545)
—
1,160
834
475
(1,209)
(692)
(1,077)
—
3,928
(50)
—
11. Benefit Obligation at End of Year
$
413,350
$
376,153
$
27,496
$
28,085
(1)
Includes lump sum payments of $18.5 million and $20.9 million in 2019 and 2018, respectively, from our pension plan to
eligible participants, which were former employees with vested benefits.
The increase in our pension and supplemental executive retirement plans obligation in 2019 compared to 2018
was primarily due to a decrease in the discount rate used to calculate the obligation partially offset by benefits
paid from the fund. Table 11.8 below includes the actuarial assumptions used to calculate the benefit obligations
of our plans for 2019 and 2018.
MGIC Investment Corporation 2019 Annual Report | 101
Notes
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 2019 and 2018.
Change in plan assets
Table
11.5
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2019
12/31/2018
12/31/2019
12/31/2018
1. Fair Value of Plan Assets at Beginning of Year
$
359,719
$
401,142
$
77,762
$
85,303
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
10,205
10,908
—
—
(30,829)
(32,674)
(3,105)
70,262
(3,561)
(908)
(19,583)
22,654
834
(382)
—
382
(826)
—
—
475
(1,077)
—
(6,464)
(475)
8. Fair Value of Plan Assets at End of Year
$
402,691
$
359,719
$
99,590
$
77,762
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
12/31/2019
12/31/2018
12/31/2019
12/31/2018
$
108,808
$
108,054
$
3,629
$
(15,576)
a. Recognized during year - Prior Service (Cost)/Credit
b. Recognized during year - Net Actuarial (Losses)/Gains
c. Occurring during year - Prior Service Cost
d. Occurring during year - Net Actuarial Losses/(Gains)
e. Occurring during year - Net Settlement Losses/(Gains)
281
(8,412)
(5)
(150)
(1,933)
351
(6,937)
(15)
7,355
—
34
—
—
4,104
250
3,928
(18,944)
10,923
—
—
3. AOCI in Current Year
$
98,589
$
108,808
$
(15,281) $
3,629
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, 2020.
Amortization expected to be recognized during fiscal year ending
Table
11.7
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement
Benefits
12/31/2019
12/31/2019
1. Amortization of Net Transition Obligation/(Asset)
$
2. Amortization of Prior Service Cost/(Credit)
3. Amortization of Net Losses/(Gains)
— $
(248)
6,534
—
51
(761)
102 | MGIC Investment Corporation 2019 Annual Report
Notes
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
12/31/2019
12/31/2018
12/31/2019
12/31/2018
3.45%
3.00%
4.40%
3.00%
3.20%
N/A
4.25%
N/A
4.40%
5.75%
3.00%
N/A
N/A
N/A
3.75%
5.75%
3.00%
N/A
N/A
N/A
4.25%
7.50%
N/A
3.55%
7.50%
N/A
6.00%
6.25%
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
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.
Plan assets
Table
11.9
1. Equity Securities
2. Debt Securities
3. Total
Pension Plan
Other Postretirement
Benefits
12/31/2019
12/31/2018
12/31/2019
12/31/2018
23%
77%
100%
23%
77%
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
MGIC Investment Corporation 2019 Annual Report | 103
Notes
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, 2019 and 2018. There were no securities that used
Level 3 inputs.
Pension plan assets at fair value as of December 31, 2019
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
Pension plan assets at fair value as of December 31, 2018
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
$
7,325
$
— $
7,325
—
203,684
203,684
32,166
—
—
—
—
2,511
38,998
34,024
—
34,677
38,998
34,024
—
83,983
83,983
$
39,491
$
363,200
$
402,691
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
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%.
104 | MGIC Investment Corporation 2019 Annual Report
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:
The equity investments use combinations of mutual
funds, ETFs, and pooled equity account structures
focused on the following strategies:
Strategy
Objective
Return
seeking
growth
Return
seeking
bridge
Funded ratio
improvement over
the long term
Downside protection
in the event of a
declining equity
market
Investment types
● Global quality
growth
● Global low
volatility
● 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, 2019 and 2018. All are Level 1 assets.
Other postretirement benefits plan assets at fair value as
of December 31, 2019
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, 2019 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.
Table
11.11a
(In thousands)
Level 1
Total
Company contributions
Table
11.12
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2019
12/31/2019
Company
Contributions for
the Year Ending:
1. Current
2. Current + 1
$
10,205
$
12,350
—
—
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
77,640
$
77,640
21,950
21,950
99,590
$
99,590
Other postretirement benefits plan assets at fair value as
of December 31, 2018
Table
11.11b
(In thousands)
Level 1
Total
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
60,405
$
17,357
77,762
$
60,405
17,357
77,762
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 2019 Annual Report | 105
Notes
Benefits payments - total
Table
11.13
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2019
12/31/2019
Actual Benefit
Payments for the
Year Ending:
1. Current
$
33,934
$
989
Expected Benefit
Payments for the
Year Ending:
2. Current + 1
3. Current + 2
4. Current + 3
5. Current + 4
6. Current + 5
34,943
31,008
30,981
31,175
30,547
1,600
1,847
2,087
2,254
2,367
7. Current + 6 - 10
141,768
11,874
HEALTH CARE SENSITIVITIES
Assumed health care cost trend rates have a
significant effect on the amounts reported for the
other postretirement benefits plan. A one 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
$
380
$
(328)
2,528
(2,239)
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
of 100% up to the first 4% contributed. We recognized
expenses related to these plans of $7.4 million, $6.0
million and $6.0 million in 2019, 2018 and 2017,
respectively.
NOTE 12
Income Taxes
Net deferred tax assets and liabilities as of
December 31, 2019 and 2018 are as follows:
Deferred tax assets and liabilities
12.1
Table
(In thousands)
2019
2018
Total deferred tax assets
$
63,533
$
83,082
Total deferred tax liabilities
(57,791)
(13,898)
Net deferred tax asset
$
5,742
$
69,184
Table 12.2 includes the components of the net
deferred tax asset as of December 31, 2019 and
2018.
Deferred tax components
Table
12.2
(In thousands)
2019
2018
Unearned premium reserves
$
30,487
$
31,808
Benefit plans
Loss reserves
Unrealized (appreciation)
depreciation in investments
Mortgage investments
Deferred compensation
AMT credit carryforward
Other, net
(10,790)
2,175
(36,822)
8,359
9,270
8,303
(5,240)
(5,047)
3,113
9,407
8,307
8,662
17,521
(4,587)
Net deferred tax asset
$
5,742
$
69,184
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 and 2019 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)
2019
2018
2017
Current Federal
$ 162,911
$ (16,272) $
73,348
Deferred Federal
11,860
185,598
351,677
Other
(557)
4,727
3,710
Provision for
income taxes
$ 174,214
$ 174,053
$ 428,735
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
106 | MGIC Investment Corporation 2019 Annual Report
Notes
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 $158.3
million, $12.2 million, and $22.0 million in 2019, 2018
and 2017, respectively. At December 31, 2019 we
owned $176.0 million of tax and loss bonds.
Table 12.6 reconciles the federal statutory income tax
rate to our effective tax provision rate.
Effective tax rate reconciliation
Table
12.6
Unrecognized tax benefits reconciliation
Table
12.7
(In thousands)
2018
2017
Balance at beginning of year
$ 142,821
$ 108,245
Additions for tax positions of
prior years
Reductions for tax positions
of prior years
Settlements
—
35,003
(3,070)
(139,751)
(427)
—
2019
2018
2017
Balance at end of year
$
— $ 142,821
Federal statutory
income tax rate
Additional income
tax provision
(benefit) related to
the rate decrease
included in the Tax
Act
Additional income
tax provision
(benefit) related to
IRS litigation
Tax exempt
municipal bond
interest
Other, net
Effective tax rate
21.0 %
21.0 %
35.0 %
— %
— %
17.0 %
We have no unrecognized tax benefits at December
31, 2018 and December 31, 2019. We have not
recorded any uncertain tax positions during 2019. We
recognize interest accrued and penalties related to
unrecognized tax benefits in income taxes. The
statute of limitations related to the consolidated
federal income tax return is closed for all years prior
to 2015.
— %
(0.3)%
3.7 %
NOTE 13
Shareholders' Equity
(0.6)%
0.1 %
20.5 %
(0.7)%
0.6 %
20.6 %
(1.4)%
0.4 %
54.7 %
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 2018, we finalized an agreement with the IRS to
settle all issues in the examinations and related U.S.
Tax Court case. 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.
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 2019 Annual Report | 107
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 2019, MGIC's losses incurred were 12% 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.
As a mortgage guaranty insurer, we are eligible for a
tax deduction, subject to certain limitations, under
Section 832(e) of the IRC for amounts required by
state law or regulation to be set aside in statutory
contingency reserves. The deduction is allowed only
to the extent that we purchase tax and loss bonds
(“T&L Bonds”) in an amount equal to the tax benefit
derived from deducting any portion of our statutory
contingency reserves. Under statutory accounting
practices, purchases of T&L Bonds are accounted for
as investments. Under GAAP, purchases of T&L
Bonds are accounted for as a payment of current
taxes.
Notes
SHARE REPURCHASE PROGRAM
During 2019 we repurchased approximately 8.7
million shares of our common stock at a weighted
average cost per share of $13.13, which included
commissions. We may repurchase an additional $111
million of our common stock through the end of 2020
under share repurchase programs approved by our
Board of Directors in 2019. We received authorization
in the first quarter of 2020 to repurchase an additional
$300 million of our common stock through the end of
2021.
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.
Repurchases may be made from time to time on the
open market (including through 10b5-1 plans) or
through privately negotiated transactions. The
repurchase program may be suspended for periods or
discontinued at any time.
Cash dividends
In September 2019 and November 2019, we paid a
quarterly cash dividend of $0.06 per share to
shareholders which totaled $42 million. On January
28, 2020, the Board of Directors declared a quarterly
cash dividend to holders of the company's common
stock of $0.06 per share payable on February 28,
2020, to shareholders of record at the close of
business on February 11, 2020.
2017 CAPITAL TRANSACTIONS
2% Notes
In 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.
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
108 | MGIC Investment Corporation 2019 Annual Report
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)
2019
2018
2017
Statutory net
income
Statutory
policyholders'
surplus
Contingency
reserve
$ 305,857
$ 375,484
$ 310,776
1,619,069
1,683,058
1,622,115
3,021,055
2,442,996
1,896,701
For the years ended December 31, 2019, 2018, and
2017 there were no surplus contributions made to
MGIC or distributions from other insurance
subsidiaries to us. Dividends paid by MGIC are shown
in table 14.2 below.
Surplus contributions and dividends of insurance
subsidiaries
Table
14.2
(In thousands)
2019
2018
2017
Years Ended December 31,
Dividends paid by
MGIC to the
parent company
$ 280,000
220,000
140,000
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
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.
Notes
At December 31, 2019, MGIC’s risk-to-capital ratio was
9.7 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $3.0 billion above the
required MPP of $1.7 billion. The calculation of our
risk-to-capital ratio and MPP reflect credit for the risk
ceded under our QSR Transactions and Home Re
Transactions with a group of unaffiliated reinsurers. It
is possible that under the revised State Capital
Requirements discussed below, MGIC will not be
allowed full credit for the risk ceded to the reinsurers.
If MGIC is not allowed an agreed level of credit under
either the State Capital Requirements or the PMIERs,
MGIC may terminate the reinsurance agreements,
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, 2019, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.6 to 1. In the first quarter
of 2020, we received the appropriate approvals for
MGIC to pay our holding company a special dividend
of $320 million. The $320 million special dividend will
reduce the statutory policyholder's position of MGIC,
which will result in an increase to the risk-to-capital.
The NAIC has previously announced plans to revise
the minimum capital and surplus requirements for
mortgage insurers that are provided for in its
Mortgage Guaranty Insurance Model Act. In
December 2019, a working group of state regulators
released an exposure draft of a revised Mortgage
Guaranty Insurance Model Act and 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 and
minimum capital floors. 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 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
MGIC Investment Corporation 2019 Annual Report | 109
Notes
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 2019, MGIC paid a total of $280 million in dividends
to our holding company. We received the appropriate
approvals for MGIC to pay our holding company, in the
first quarter of 2020, a special dividend of $320
million and a quarterly dividend of $70 million. We
expect MGIC to continue to pay dividends of at least
$280 million per year.
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. Before making any
dividend payments in 2020, we will notify the OCI to
ensure it does not object.
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 is reduced. For the year
ended December 31, 2019, MGIC’s increase in
contingency reserves was $556 million and statutory
net income was $273 million. As of December 31,
2019, MGIC's statutory policyholders' surplus was
$1,619 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 incentive 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,
2019, 3.4 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 $18.9
million, $20.9 million, and $14.9 million for the years
ended December 31, 2019, 2018 and 2017,
respectively. The related income tax benefit
recognized for share-based plans was $2.7 million,
$3.0 million, and $5.2 million for the years ended
December 31, 2019, 2018, and 2017, respectively.
Table 15.1 summarizes restricted stock or restricted
stock unit (collectively called “restricted stock”)
activity during 2019.
Restricted stock
Table
15.1
Weighted
Average Grant
Date Fair Market
Value
Restricted stock
outstanding at
December 31, 2018
$
Granted
Vested
Forfeited
Restricted stock
outstanding at
December 31, 2019
Shares
3,583,506
2,002,500
(1,067,890)
(367,722)
12.27
11.92
9.37
13.67
$
12.81
4,150,394
110 | MGIC Investment Corporation 2019 Annual Report
At December 31, 2019, the 4.2 million shares of
restricted stock outstanding consisted of 3.2 million
shares that are subject to performance conditions
(“performance shares”) and 1.0 million shares that are
subject only to service conditions (“time vested
shares”). The weighted-average grant date fair value
of restricted stock granted during 2018 and 2017 was
$15.69 and $10.41, 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 or previous trading day if the
Exchange is closed on the date of grant. The total fair
value of restricted stock vested during 2019, 2018
and 2017 was $13.7 million, $19.1 million, and $15.3
million, respectively.
As of December 31, 2019, there was $30.7 million of
total unrecognized compensation cost related to non-
vested share-based compensation agreements
granted under the plans. Of this total, $20.2 million of
unrecognized compensation costs relate to
performance shares and $10.5 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.
Table 16.1 shows minimum the future operating lease
payments as of December 31, 2019.
Minimum future operating lease payments
16.1
Table
(In thousands)
2020
2021
2022
2023
2024 and thereafter
Total
Amount
1,204
588
380
83
—
2,255
$
$
Notes
Table 16.2 shows minimum the future operating lease
payments as of December 31, 2018.
Minimum future operating lease payments
16.2
Table
(In thousands)
2019
2020
2021
2022
2023 and thereafter
Total
Amount
1,406
1,069
371
161
—
3,007
$
$
Total lease expense under operating leases was $2.1
million in 2019, $1.9 million in 2018, and $2.0 million
in 2017.
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
2019 and 2018 , curtailments reduced our average
claim paid by approximately 5.0% 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 loss 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. When we determine that a loss is
probable and can be reasonably estimated, we record
MGIC Investment Corporation 2019 Annual Report | 111
met, and we have an established reserve for such
future obligations. Claims for remedies may be made
a number of years after the underwriting work was
performed. The related contract underwriting remedy
expense for each of the years ended December 31,
2019, 2018, and 2017, 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
our best estimate of our probable loss. In those
cases, until settlement negotiations or legal
proceedings are concluded (including the receipt of
any necessary GSE approvals), it is reasonably
possible that we will record an additional loss. In the
fourth quarter of 2019, the agreement for which we
had recorded a probable loss of $23.5 million,
received necessary GSE approvals. There was no
additional loss recognized as a result of entering
into the agreement, as the settlement amount was
consistent with our original estimate of the probable
loss. We are currently involved in discussions and/or
proceedings with insureds with respect to our claims
paying practices. Although it is reasonably possible
that when all of 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 $46 million.
This estimate of maximum exposure is based upon
currently available information; is subject to
significant judgment, numerous assumptions and
known and unknown uncertainties; will include an
amount for matters for which we have recorded a
probable loss until such matters are concluded; will
include different matters from time to time; and does
not include interest or consequential or exemplary
damages.
Mortgage insurers, including MGIC, have in the past
been involved in litigation and regulatory actions
related to alleged violations of the anti-referral fee
provisions of the Real Estate Settlement Procedures
Act ("RESPA") and the notice provisions of the Fair
Credit Reporting Act ("FCRA"). While these
proceedings in the aggregate did not result 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.
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 (“EOCA”), FCRA, and
other laws. Under ECOA, examination may also be
made of whether a mortgage insurer’s underwriting
decisions have a disparate impact on persons
belonging to a protected class in violation of the law.
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
112 | MGIC Investment Corporation 2019 Annual Report
NOTE 18
Unaudited Quarterly Financial Data
Unaudited quarterly financial data - current year:
18.1a
Table:
2019:
Quarter
(In thousands, except per share data)
First
Second
Third
Fourth
Notes
Full
Year
Net premiums earned
$
249,762
$
247,102
$
267,857
$
266,267
$ 1,030,988
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
40,585
(526)
1,830
39,064
61,650
38,996
42,423
307
2,485
21,836
59,270
43,433
42,715
4,205
3,606
33,985
61,278
46,186
41,322
1,320
2,717
23,690
65,227
45,599
151,941
167,778
176,934
177,110
0.43
0.42
0.47
0.46
0.50
0.49
0.51
0.49
Unaudited quarterly financial statements - prior year:
18.1b
Table:
2018:
Quarter
(In thousands, except per share data)
First
Second
Third
Fourth
167,045
5,306
10,638
118,575
247,425
174,214
673,763
1.91
1.85
Full
Year
Net premiums earned
$
232,107
$
246,964
$
250,426
$
245,665
$
975,162
Investment income, net of expenses
Realized gains (losses)
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
0.50
0.49
0.44
0.43
141,331
(1,353)
8,708
36,562
243,136
174,053
670,097
1.83
1.78
(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 2019 Annual Report | 113
Directors
MGIC Investment Corporation
Daniel A. Arrigoni
Timothy A. Holt
Former President & Chief
Former Senior Vice President &
Executive Officer
Chief Investment Officer
U.S. Bank Home Mortgage Corp.
Aetna, Inc.
Home loan originator
and servicer
Diversified health care benefits
company
Melissa B. Lora
Former President
Taco Bell International
Restaurant company
Timothy J. Mattke
Chief Executive Officer
Cassandra C. Carr
Kenneth M. Jastrow, II
MGIC Investment Corporation
Consultant; Former Global Vice
Corporate Director & Private Investor
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
Sheryl L. Sculley
Former City Manager (CEO)
City of San Antonio
Mark M. Zandi
Chief Economist
Moody’s Analytics, Inc.
Risk measurement and
management firm
Jay C. Hartzell
Dean
Michael E. Lehman
Special Advisor to the Chancellor and
McCombs School of Business at the
Interim Chief Operating Officer
University of Texas at Austin
of the School of Business
University of Wisconsin
Julie K. Sperber
Controller & Chief Accounting Officer
Martha F. Tsuchihashi
Assistant Secretary
Officers
MGIC Investment Corporation
Chief Executive Officer
Timothy J. Mattke
President and Chief Operating Officer
Salvatore A. Miosi
Executive Vice Presidents
Nathaniel H. Colson
Chief Financial Officer
Paula C. Maggio
General Counsel and Secretary
Vice Presidents
Heidi A. Heyrman
Assistant Secretary
Lisa M. Pendergast
Treasurer
Brian M. Remington
Assistant Secretary
114 | MGIC Investment Corporation 2019 Annual Report
Officers
Mortgage Guaranty Insurance Corporation
Chief Executive Officer
Timothy J. Mattke
Margaret M. Crowley
W. Todd Pittman
Marketing and Customer Experience
Managing Director
President and Chief Operating Officer
Dean D. Dardzinski
Salvatore A. Miosi
Managing Director
Tara E. Radmann
Business Automation
Executive Vice Presidents
Nathaniel H. Colson
Chief Financial Officer
Stephen M. Dempsey
Managing Director
Brian M. Remington
Loss Mitigation, Assistant
General Counsel and Assistant
James J. Hughes
Risk, Loss Forecasting & Analytics
Hans F. DeSelms
Secretary
Sales and Business Development
Paula C. Maggio
General Counsel and Secretary
Steven M. Thompson
Chief Risk Officer
Senior Vice Presidents
Robert J. Candelmo
Chief Information Officer
Sean A. Dilweg
Government Relations
Michael J. Zimmerman
Investor Relations
Vice Presidents
Terry A. Aikin
Managing Director
Robert K. Bates
Sales Strategy
Jane S. Coleman
National Accounts
Luis A. Contreras
National Accounts
Geoffrey F. Cooper
Product Development
Mary L. Elkins
Systems Development
Heidi A. Heyrman
Regulatory Relations, Assistant General
David H. Schroeder
Claims & Policy Servicing
John R. Schroeder
Corporate Development
Counsel and Assistant Secretary
Bryan D. Specht
Dianna L. Higgins
Internal Audit
Michael E. Jacobson
Product Strategy
Mark J. Krauter
National Accounts
Michael L. Kull
Managing Director
Elyse M. Mitchell
National Accounts
Underwriting & Customer Care
Julie K. Sperber
Controller and
Chief Accounting Officer
Paul A. Spiroff
Finance
Jennifer M. Steffens
Credit Policy and Analytics
Martha F. Tsuchihashi
Securities Law, Assistant General
Counsel and Assistant Secretary
Stacey B. Murphy
Sean R. Valcamp
Talent and Total Rewards
Chief Technology Officer
Jeffrey N. Nielsen
Kathleen E. Valenti
Financial Planning/Analysis
Chief Compliance Officer
Lisa M. Pendergast
Treasurer & Investments
Jerry L. Wormmeester
National Accounts
Christopher T. Perry
Sales
MGIC Investment Corporation 2019 Annual Report | 115
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 2019 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. and Radian Group. We selected this peer group because
it includes all of our direct competitors that were public companies in 2019 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
2014
2015
2016
2017
2018
2019
Russell 2000 Financial Index
S&P 500
Peer Index (AMBC, ACGL, AGO, ESNT, FAF, FBC, FNF, GNW, MBI, NMIH, OCN, PFSI & 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
2014
100
100
100
100
2015
101
101
91
95
2016
132
113
109
109
2017
139
138
130
151
2018
124
132
117
112
2019
154
174
171
153
116 | MGIC Investment Corporation 2019 Annual Report
MGIC Stock
MGIC Investment Corporation Common Stock is listed
on the New York Stock Exchange under the symbol
MTG. At March 6, 2020, 340,860,286 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
Subordinated 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” to our consolidated financial
statements.
As of March 6, 2020, the number of shareholders of
record was 242. In addition, we estimate that there are
approximately 42,000 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 9 a.m. Central
the Corporation's
Time on April 23, 2020, at
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, 2019, filed with the Securities and
Exchange Commission, are available without charge to
shareholders on request from:
Secretary
MGIC Investment Corporation
P. O. Box 488
Milwaukee, WI 53201
The Annual Report on Form 10-K referred to above
includes as exhibits certifications from the Company’s
Chief Executive Officer and Chief Financial Officer under
Section 302 of the Sarbanes-Oxley Act. Following the
2019 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 2019 Annual Report | 117