Our Business
We are a holding company and through wholly-owned subsidiaries, including Mortgage Guaranty Insurance
Corporation, we provide private mortgage insurance, other mortgage credit risk management solutions,
and ancillary services.
Financial Summary
Net income ($ millions)
Diluted income per share ($)
Net operating income (1) ($ millions)
Net operating income per diluted share (1) ($)
2018
2019
2020
$
$
$
$
670.1 $
1.78 $
668.7 $
1.78 $
673.8 $
1.85 $
669.7 $
1.84 $
446.1
1.29
456.8
1.32
(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 2020 Annual Report | 1
New Primary Insurance Written($ billions)$50.5$63.4$112.1201820192020Revenue($ millions)$1,124$1,124$1,214$1,214$1,199$1,199201820192020Losses incurred, net($ millions)$37$37$119$119$365$365201820192020Direct Primary Insurance in Force($ billions)$209.7$222.3$246.6201820192020Book Value per Share$10.08$12.41$13.88201820192020Default Inventory(# loans)32,89832,89830,02830,02857,71057,710201820192020 Dear Fellow Shareholders:
Our main business objective is to provide critical support to the housing market,
especially first-time, and low- and moderate‑wealth, homebuyers. We strive to
achieve that objective by, among other things, offering competitive products and
best-in-class service to mortgage originators and servicers, and by maintaining a
sharp focus on the sources and uses of our capital. We deliver a product that helps
people get the keys to their own homes. At MGIC, we take pride in knowing that
what we do matters.
I am pleased to report that 2020 was another successful year for our company. We produced another year
of strong financial results and kept our focus on the long-term success of our company, all while dealing
with the impacts of the COVID-19 pandemic both personally and professionally. Following are several of
our 2020 accomplishments:
• We increased primary new insurance written (NIW) from $63.4 billion in 2019 to $112.1 billion in
2020 and increased primary insurance in force (IIF) by more than 10.9% year-over-year. The NIW is
consistent with the Company's risk and return goals.
•
In response to the COVID-19 pandemic, we transitioned 90%+ of our workforce to a remote work
environment, in a year with record-breaking NIW, and positioned our co-workers to continue to
provide high service levels.
• We continued to distribute risk by expanding our reinsurance program by securing quota share
reinsurance coverage on NIW through 2021, and by executing a $413 million insurance‑linked
notes transaction, providing excess-of-loss reinsurance coverage on the majority of our NIW from
January 1, 2020 through July 31, 2020. These transactions allow us to better manage our risk
profile and they provide an alternative source of capital.
• We continued to pay dividends to holders of our common stock, despite the COVID-19 pandemic.
• We paid $390 million of dividends of cash and investments from our insurance subsidiary, MGIC,
to our holding company, before temporarily suspending dividends from MGIC as a result of the
COVID-19 pandemic.
•
In addition to our quarterly dividends to our shareholders, we also returned approximately $120
million to shareholders by repurchasing 9.6 million shares of our stock, before we temporarily
suspended our stock repurchase program as a result of the COVID-19 pandemic.
• We issued $650 million aggregate principal amount of 5.25% Notes due in 2028, using a portion of
the proceeds to repurchase $183 million of our 5.75% Notes due in 2023 and $48 million of our 9%
Debentures due in 2063. These capital actions increased our liquidity and improved our debt
maturity profile.
• We continued to transform our business processes and to enhance our data and analytics
capabilities.
• We delivered diversity and inclusion workshops to all officers and our Business Resource Group
co-hosted several diversity and inclusion events.
• We continued to focus on enhancing career development opportunities, talent analytics and
financial health capabilities for employees.
Even with the pandemic roiling society, we earned net income of $446.1 million in 2020. This was a
decrease of $227.7 million when compared to the prior year, and diluted income per share of $1.29
decreased by 30% when compared to the prior year which reflects a material increase in losses incurred
due to the economic impact of the COVID-19 pandemic and a loss on debt extinguishment. Diluted income
per share decreased due to the decrease in net income, partially offset by a decrease in the number of
2 | MGIC Investment Corporation 2020 Annual Report
diluted weighted average shares outstanding. Despite the adverse impacts of COVID-19, we generated a
solid 10.4% return on shareholders’ equity.
The economic impact of COVID-19 was sudden and severe. Delinquencies dramatically increased,
especially in the second quarter, following the sudden and unprecedented increase in unemployment
resulting from initiatives intended to reduce the transmission of COVID-19. The federal government
enacted numerous economic stimulus programs to mitigate some of the economic impact, including
forbearance programs and foreclosure moratoriums. Many of the government actions are designed to
assist borrowers experiencing a hardship during the COVID-19 pandemic and to avoid any unnecessary
foreclosures. The GSEs and loan servicers are also providing forbearance and foreclosure relief to many
borrowers.
In the early stages of the pandemic, mortgage lending slowed almost immediately due to the uncertainty
caused by COVID-19. Not long after, however, demand for both single family purchase loans and refinance
loans began recovering and then exceeded pre-pandemic levels. The housing demand increased as
consumers began desiring more space for work, school and health reasons. With interest rates being
driven to record lows due to government actions, many consumers accelerated their home purchases.
These forces combined to make the housing market one of the bright spots in the economy, with record
volumes of both purchase and refinance mortgage originations in 2020, and enabled us to write a record
volume of new business.
This record amount of NIW more than offset the pressure of lower persistency (the percentage of
insurance remaining in force from the year prior) on our existing books of business and, as a result, our
insurance in force increased nearly 11% year-over-year. In fact, 2020 was only the sixth time in the last 30
years that our insurance in force grew by more than 10%. Our record NIW also reflects the value
proposition we offer to both lenders (ease of execution and ancillary services) and borrowers (faster equity
buildup and ability to cancel, when compared to FHA execution). As reported by Inside Mortgage Finance,
the size of the market for insurable low down-payment loans was approximately $1.4 trillion in 2020, and
the PMI industry’s share of that market was 43.9%, compared to 44.7% in 2019. MGIC’s market share
within the PMI industry was 18.7% in 2020, compared to 16.5% in 2019.
Prior to the onset of COVID-19, the insurance we wrote in recent years had performed exceptionally well, in
part due to improved credit profiles of the insured loans and the strong economy, with its low
unemployment and solid home price appreciation. However, we know that economic cycles change over
time and we have in place risk management tools to help prepare for such 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 the 2016 through 2020 books. We have been
able to execute these transactions at attractive costs of capital and intend to continue to seek to use these
tools when it makes long-term economic sense. In addition to reducing losses in weaker economic
environments (we ceded $78 million of incurred losses in 2020 compared to $11 million in 2019), these
transactions diversify our sources of capital and enhance our returns.
Reflecting our strong balance sheet and capital position at the end of 2019, in February of 2020, our Board
authorized MGIC to pay a quarterly dividend of $70 million and a special dividend of $320 million to our
holding company. Prior to temporarily suspending our stock repurchase program due to the uncertainty
surrounding COVID-19, our holding company repurchased 9.6 million shares of our common stock, totaling
$120 million. The company has $291 million remaining available under our Board’s current authorization,
which expires at the end of 2021. As a sign of our continued financial strength, our holding company
continued to pay a quarterly common stock dividend of $0.06/share during 2020, which returned an
additional $80 million to shareholders.
Our balance sheet and capital position continued to strengthen throughout 2020. At year‑end 2020, we had
$3.2 billion more capital than required under state capital requirements and $1.8 billion more available
assets than required by the private mortgage insurer eligibility requirements (PMIERs) of Fannie Mae and
Freddie Mac (the GSEs). Our excess over the PMIERs required amount includes $700 million of relief that
has been temporarily provided by the GSEs and does not include the approximately $360 million reduction
to the requirement from the insurance‑linked notes transaction we entered into in February of 2021.
MGIC Investment Corporation 2020 Annual Report | 3
Our total debt to capital ratio increased to approximately 19% at December 31, 2020 from approximately
16% at December 31, 2019, primarily due to the issuance of $650 million of Senior Notes due in 2028,
which was only partially offset by the repurchase of $183 million of our Senior Notes due in 2023 and the
repurchase of $48 million of the Junior Subordinated Debentures due in 2063.
As of December 31, 2020, our consolidated cash and investments totaled $7.0 billion, including $847
million of cash and investments at our holding company. The consolidated investment portfolio had a mix
of 83% taxable and 17% tax exempt securities, a pre-tax yield of 2.55% and a duration of 4.3 years.
While 2020 was a year of unique challenges, it also was a year that saw the public policy debate about the
future state of the residential housing and mortgage finance industry continue without a definitive
resolution, including with respect to the appropriate roles for the GSEs, the Federal Housing Administration,
and private capital.
Although there do not appear to be any short-term answers on the horizon, we intend to continue to be
actively engaged in discussions about housing finance policy. While we do not know specifically what
actions will be taken, we expect the Biden Administration will focus on continued loss mitigation efforts for
homeowners impacted by COVID-19 and on affordable housing, both owner‑occupied and rental. The
details of these initiatives should become clearer as 2021 unfolds. Meanwhile, we will continue to
advocate for the increased use of private capital, including private mortgage insurance, in the residential
housing and mortgage finance industry in order to reduce taxpayer exposure to housing while still
maintaining a resilient housing finance system.
2021 marks the 64th year that MGIC has been supporting the US housing market and helping individuals
and families find affordable and sustainable homeownership. In addition to offering a compelling business
proposition for our customers, we strive to offer a compelling value proposition for our co-workers and the
communities in which we live and work. We invest in co-worker development programs that promote
accountability and we maintain a continuous-improvement culture that addresses issues arising from the
changing workforce, work environment, and competitive landscape.
As I mentioned earlier, at MGIC, we take pride in knowing that what we do matters. Simply put we help
people own their own homes. The value we place on homes and the people in them influences the way we
approach our business and our responsibilities. It is evident in how we manage our accountabilities to all
our stakeholders – co-workers, customers, investors and communities. It is my hope that our efforts
provide a compelling investment opportunity to our shareholders. To help articulate our values, we
published our first Environmental, Social and Governance report in March of 2020 and expect to be
updating it in March of 2021.
We are confident in our positioning in this market, and we like the risk-reward equation that the current
conditions offer. Long term, I remain encouraged about the future role that our company and industry can
play in housing finance. That is why when I look ahead, I am very excited about the future of our company.
I would like to thank our shareholders, customers and business partners for their support in 2020. I
especially want to thank my fellow co-workers. Throughout our more than 60 years of providing support to
first‑time homebuyers, our people have been the cornerstone of the many accomplishments of MGIC. This
was true again in 2020.
The efforts and character of our team throughout the unprecedented operating environment of 2020, to
support our customers, their local communities and fellow co-workers, while coping with their own unique
circumstances brought about by the COVID-19 pandemic, have been remarkable. I am humbled to lead an
organization of such high dedication and integrity.
Respectfully,
Tim Mattke
Chief Executive Officer
4 | MGIC Investment Corporation 2020 Annual Report
Five-Year Summary of Financial Information
Summary of operations
(In thousands, except per share
data)
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
Underwriting and other expenses
Interest expense
Loss on debt extinguishment
Total losses and expenses
Income before tax
Provision for income taxes (1)
As of and for the Years Ended December 31,
2020
2019
2018
2017
2016
$
928,742 $
1,001,308 $
992,262 $
997,955 $
1,021,943
1,030,988
154,396
167,045
975,162
141,331
934,747
120,871
13,752
9,055
5,306
10,638
(1,353)
8,708
231
10,205
975,091
925,226
110,666
8,921
17,670
1,199,146
1,213,977
1,123,848
1,066,054
1,062,483
364,774
188,778
59,595
26,736
639,883
559,263
113,170
118,575
194,769
52,656
—
366,000
847,977
174,214
36,562
190,143
52,993
—
279,698
844,150
174,053
53,709
170,749
57,035
65
281,558
784,496
428,735
Net income
$
446,093 $
673,763 $
670,097 $
355,761 $
Weighted average common shares
outstanding
359,293
373,924
386,078
394,766
431,992
Diluted income per share
$
1.29 $
1.85 $
1.78 $
0.95 $
0.86
Balance sheet data
Total investments
$
6,682,911 $
5,758,320 $
5,159,019 $
4,990,561 $
4,692,350
Cash and cash equivalents
287,953
161,847
151,892
99,851
Total assets
Loss reserves
Short- and long-term debt
Convertible senior notes
Convertible junior subordinated
debentures
Shareholders' equity
Book value per share
$
$
7,354,526
6,229,571
5,677,802
5,619,499
880,537
1,034,379
—
555,334
575,867
—
674,019
574,713
—
985,635
573,560
—
208,814
256,872
256,872
256,872
256,872
4,698,986
4,309,234
3,581,891
3,154,526
2,548,842
13.88
12.41
10.08
8.51
7.48
(1)
In 2017, we remeasured our net deferred tax assets at the lower enacted corporate income tax rate under the Tax Act.
MGIC Investment Corporation 2020 Annual Report | 5
240,157
160,409
56,672
90,531
547,769
514,714
172,197
342,517
155,410
5,734,529
1,438,813
572,406
349,461
Other data
New primary insurance written ($
millions)
New primary risk written ($
millions)
IIF (at year-end) ($ millions)
2020
2019
2018
2017
2016
Years Ended December 31,
$
$
112,113
26,759
$
$
63,421
15,811
$
$
50,526
12,657
$
$
49,123
12,217
$
$
47,875
11,831
Direct primary IIF
$
246,572
$
222,295
$
209,707
$
194,941
$
182,040
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
Percentage of loans in default
Insurance operating ratios (GAAP)
Loss ratio
Underwriting Expense ratio
Risk-to-capital ratio (statutory)
Mortgage Guaranty Insurance
Corporation
Combined insurance companies
$
61,812
$
57,213
$
54,063
$
50,319
$
47,195
210
130
213
163
228
191
236
235
244
303
1,126,079
1,079,578
1,058,292
1,023,951
57,710
5.11 %
30,028
2.78 %
32,898
3.11 %
46,556
4.55 %
998,294
50,282
5.04 %
35.7 %
19.2 %
9.2:1
9.1:1
11.5 %
18.4 %
9.7:1
9.6:1
3.7 %
18.2 %
9.0:1
9.8:1
5.7 %
16.0 %
9.5:1
10.5:1
26.0 %
15.3 %
10.7:1
12.0:1
6 | MGIC Investment Corporation 2020 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, 2020, filed with the Securities and
Exchange Commission on February 23, 2021. 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, those sections 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.
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
$246.6 billion of primary IIF on a consolidated basis at
December 31, 2020.
Summary of financial results of MGIC Investment
Corporation
Year Ended
December 31,
2020
2019
Change
(in millions, except per
share data)
Selected statement of
operations data
Net premiums earned
$ 1,021.9 $ 1,031.0
(1) %
Investment income, net
of expenses
Losses incurred, net
Other operating and
underwriting expenses,
net
Income before tax
Provision for income
taxes
Net income
Diluted income per
share
154.4
364.8
167.0
118.6
(8) %
208 %
176.4
559.3
113.2
446.1
182.8
848.0
174.2
673.8
(3) %
(34) %
(35) %
(34) %
$
1.29 $
1.85
(30) %
Non-GAAP Financial Measures (1)
Adjusted pre-tax
operating income
$ 572.8 $ 842.9
(32) %
Adjusted net operating
income
Adjusted net operating
income per diluted
share
456.8
669.7
(32) %
$
1.32 $
1.84
(28) %
(1)
See "Explanation and Reconciliation of our use of Non-
GAAP Financial Measures."
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.
The following is a discussion and analysis of the
financial conditions and results of operations for the
year ended December 31, 2020 and 2019, including
comparisons between 2020 and 2019. Comparisons
between 2019 and 2018 have been omitted from this
Annual Report, but can be found in "Item 7 -
Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual
Report on Form 10-K for the year ended December 31,
2019 filed with the SEC.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements
and Risk Factors” in this Annual Report, actual results
may differ materially from the results contemplated
by forward looking statements. We are not
undertaking any obligation to update any forward
looking statements or other statements we may make
in the following discussion or elsewhere in this
document even though these statements may be
affected by events or circumstances occurring after
the forward looking statements or other statements
were made. Therefore, no reader of this document
should rely on these statements being current as of
any time other than the time at which our Annual
Report on Form 10-K for the year ended December 31,
2020 was filed with the Securities and Exchange
Commission.
MGIC Investment Corporation 2020 Annual Report | 7
Management's Discussion and Analysis
SUMMARY OF 2020 FINANCIAL RESULTS
Net income of $446.1 million for 2020 decreased by
$227.7 million when compared to the prior year, and
diluted income per share of $1.29 decreased by 30%
when compared to the prior year. These decreases
primarily reflect an increase in losses incurred, a loss
on debt extinguishment, a decrease in net premiums
earned, and a decrease in investment income, net of
expenses. Diluted income per share decreased due to
a decline in net income, partially offset by a decrease
in the number of diluted weighted average shares
outstanding.
Adjusted net operating income for 2020 was
$456.8 million (2019: $669.7 million) and adjusted
net operating income per diluted share was $1.32
(2019: $1.84). Adjusted net operating income for
2020 included an adjustment for a loss on debt
extinguishment and for both 2020 and 2019, included
an adjustment for net realized investment gains.
NPE decreased slightly due to lower premium rates on
our IIF and a decrease in profit commission from our
QSR transactions that was a result of higher ceded
losses incurred, partially offset by higher average IIF
and an increase in accelerated premiums from single
premium policy cancellations.
Net investment income decreased due to lower
investment yields, partially offset by an increase in the
investment portfolio balance.
Losses incurred, net were $364.8 million, compared to
$118.6 million the prior year. The increase reflects an
increase in new delinquency notices due to the
COVID-19 pandemic and the current macroeconomic
environment. The increase in losses incurred was
also due to adverse development of $19.6 million in
2020 compared to favorable development of $71.0
million in 2019, which was net of the non-recurring
recognition of a probable loss of $23.5 million for
litigation of our claims paying practices. In 2020, the
COVID-19 pandemic began to affect the U.S. economy
and we received new delinquency notices of 106,099
compared to 54,239 for the prior year. This was
partially offset by an increase in cures received in
latter half of 2020 as the economy improved.
We recorded a $26.7 million loss on debt
extinguishment associated with the repurchase of a
portion of our 5.75% Notes and our 9% Debentures.
BUSINESS ENVIRONMENT
Economic conditions
Despite the economic effects of the COVID-19
pandemic, there were favorable trends in the housing
market in 2020. Low interest rates, increasing
household formations and appreciating home values
continue to support favorable housing fundamentals.
Mortgage interest rates have been lower on average
in 2020 compared to 2019. The lower mortgage rates
contributed to a material increase in home purchase
and refinance activity in 2020. The homeownership
rate increased slightly in 2020. The continued
favorable housing trends and the increase in
refinance transactions resulted in a significant
increase in our NIW, from $112.1 billion in 2020 when
compared to $63.4 billion in 2019.
The impacts of the COVID-19 pandemic, including
unemployment resulting from initiatives intended to
reduce the transmission of COVID-19, have resulted in
an increase in the number of loans in our delinquency
inventory. Payment forbearance programs are
currently in place to assist borrowers experiencing a
hardship during the COVID-19 pandemic. Forbearance
allows for mortgages to be suspended for up to 360
days. For loans in a COVID-19 forbearance plan as of
February 28, 2021, the plan may be extended for an
additional three months, subject to certain limits. As
of December 31, 2020, 62% of the loans in our
delinquency inventory are subject to a forbearance
plan.
The COVID-19 pandemic may adversely affect our
future business, results of operations, and financial
condition. The extent of the adverse effects will
depend on the duration and continued severity of the
COVID-19 pandemic and its effect on the U.S.
economy and housing market.
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 home prices may result in
more homeowners defaulting and our losses
increasing, with a corresponding decrease in our
returns,” “Changes in interest rates, house prices or
mortgage insurance cancellation requirements may
change the length of time that our policies remain in
force," and "The COVID-19 pandemic may continue to
materially impact our financial results and may also
materially impact our business, liquidity, and financial
condition."
Mortgage lending
The past several years of favorable housing
fundamentals and in our view, favorable risk
characteristics of our recently insured loans
contributed to declining delinquent inventory, and
lower losses incurred and claims paid in 2019. While
favorable trends continued in the housing market in
2020, we experienced an increase in our losses
incurred due to the impacts of the COVID-19
pandemic.
8 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
After easing somewhat in 2018, lending standards
became tighter again in 2019. The percentage of our
NIW with DTI ratios over 45% declined in 2020 and
2019. Change in both years was primarily driven by
adjustments to GSE underwriting guidelines for loans
with DTI ratios over 45% and our pricing for loans with
such DTI ratios. The increase in the percentage of our
NIW from refinance transactions in 2020 and 2019
was due to the low interest rate environment and also
resulted in a consistently lower percentage of our NIW
with LTV ratios over 95% for both years.
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.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of changes in our NIW mix during 2020.
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
In recent years much of the changes in premium
pricing practices has centered on the decrease in the
use of our standard rate card as published on our
website, www.mgic.com/rates, the increased use of
"risk-based pricing systems" that utilize a spectrum of
filed rates that allow for formulaic, risk-based pricing
based on multiple attributes that may be quickly
adjusted within certain parameters, and customized
rate plans both of which typically have rates lower
than the standard rate card. We expect our direct
premium yield to continue to decline as older policies
with higher premium rates run off, and new insurance
policies with lower premium rates are written.
For information about competition in the private
mortgage insurance industry, 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."
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
participate in these programs from time to time.
Government programs. PMI also competes against
government mortgage insurance programs such as
the FHA, VA, and USDA, primarily for lower FICO score
business. The combined market share of primary
mortgage insurance written by government programs
continues to exceed that written by PMI in 2019 and
2020. The strong refinance markets in 2019 and
2020, and PMI premium rate reductions, have
contributed to a PMI market share at its highest levels
since the financial crisis.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of the 2020 business environment and the
impact it had on operating measures including NIW,
IIF and RIF.
PMIERs
We operate 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 risk 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 $5.3 billion, an excess of $1.8 billion
over its Minimum Required Assets at December 31,
2020.
BUSINESS OUTLOOK FOR 2021
Our outlook for 2021 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 2021, the total mortgage
MGIC Investment Corporation 2020 Annual Report | 9
Management's Discussion and Analysis
origination forecasts from the GSEs and MBA indicate
average mortgage originations of $3.3 trillion in 2021,
compared to an average estimated $4 trillion in 2020.
Purchase originations are expected to increase in
2021, compared to 2020, while refinance transactions
are expected to decrease in 2021. Our NIW from
refinance originations is expected to be lower in 2021
compared to a strong 2020. In 2020, 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 2020
required mortgage insurance. We expect the PMI
penetration rate on refinance transactions to decline
in 2021.
The widespread use of risk based 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
Our IIF increased 10.9% in 2020, and we expect our IIF
to grow in 2021. 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. The Federal Reserve has
indicated that they expect interest rates to remain
low.
Results of operations
Premiums. Despite an increase in IIF, we expect our
2021 earned premiums (on a direct basis) to be lower
than they were in 2020. Overall, our premium rates
have been trending down in recent years, including in
2020, as the books of business written at lower rates
represent an increasing percentage of our total IIF.
Our 2021 direct premiums written are expected to be
comparable to 2020, while our net premiums earned
are expected to decrease in 2021. Our net premiums
written and earned will be impacted by the downward
trend in premium rates noted above and by the
amount of premiums we cede under our quota share
and excess of loss reinsurance transactions. Net
premiums earned are also impacted by the amount of
accelerated premiums from single premium policy
cancellations. Our unearned premium decreased to
$287.1 million at December 31, 2020 from $380.3
million at December 31, 2019. The amount of profit
commission we receive, which reduces the amount of
premiums we cede, is variable year-to-year and is
dependent on the amount of losses ceded. In 2020,
our profit commission was impacted by the increase
in ceded losses incurred. The amount of premiums
we cede in 2021 will be affected by any changes in
our reinsurance 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 2021 to be
comparable to 2020. We expect our invested assets
will remain relatively flat. The amount of investment
income will be impacted by the change in the yield we
can earn on investments.
Losses. Losses incurred, net in 2020 were $364.8
million, an increase of $246.2 million over the prior
year losses incurred of $118.6 million. The increase
was primarily due to an increase in the delinquency
inventory due to the impacts of the COVID-19
pandemic, including unemployment resulting from
initiatives intended to reduce the transmission of
COVID-19. We expect 2021 losses incurred to be
lower than the comparable amount for 2020 as we
expect to receive fewer new delinquency notices in
2021. However, given the uncertainty surrounding
the long-term economic impact of COVID-19, it is
difficult to predict the ultimate effect of COVID-19
related delinquencies on our loss incidence. The
foreclosure moratoriums and forbearance plans in
place have decreased our losses and LAE paid in
2020. As foreclosure moratoriums and forbearance
plans end, we expect to see an increase in claims
received and claims paid, but the magnitude and
timing of the increases are uncertain.
Underwriting and operating expenses, net. We expect
underwriting and operating expenses, net to increase
in 2021 as we invest in our technology infrastructure
to execute our strategies.
Income taxes. We expect our 2021 effective tax rate
to be approximately 21%.
CAPITAL
MGIC dividend payments to our holding company
In the first quarter of 2020 and in the full year of 2019,
MGIC paid a cash and/or investment security dividend
of $390 million and $280 million, respectively, to our
holding company. In the third quarter of 2020 MGIC
distributed to the holding company, as a dividend, its
ownership in $133 million of the holding company’s
9% Debentures. Future dividend payments from MGIC
to the holding company will continue to be determined
on a quarterly basis in consultation with the board,
and after considering any updated estimates about
the length and severity of the economic impacts of
10 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
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 generally based on an insurer’s
book of risk in force and are calculated from tables of
factors with several risk dimensions, reduced for
credit given for risk ceded under reinsurance
transactions).
The PMIERs generally require us to hold significantly
more Minimum Required Assets for delinquent loans
than for performing loans and the Minimum Required
Assets required to be held increases as the number of
payments missed on a delinquent loan increases. For
delinquent loans whose initial missed payment
occurred on or after March 1, 2020 and prior to April 1,
2021 (the "COVID-19 Crisis Period"), the Minimum
Required Assets are generally reduced by 70% for at
least three months. The 70% reduction will continue,
or be newly applied, for delinquent loans that are
subject to a forbearance plan that is granted in
response to a financial hardship related to COVID-19,
the terms of which are materially consistent with
terms of forbearance plans offered by Freddie Mac or
Fannie Mae. Under the PMIERs, a forbearance plan on
a loan with an initial missed payment occurring during
the COVID-19 Crisis Period is assumed to have been
granted in response to a financial hardship related to
COVID-19. Loans considered to be subject to a
forbearance plan include those that are in a
repayment plan or loan modification trial period
following the forbearance plan.
Forbearance for federally-insured mortgages allows
for mortgage payments to be suspended for up to 360
days; an initial forbearance period of up to 180 days
and, if requested by the borrower following contact by
the servicers, an extension of up to 180 days. The
servicer of the loan must begin attempts to contact
the borrower no later than 30 days prior to the
expiration of any forbearance plan term and must
continue outreach attempts until appropriate contact
is made or the forbearance plan term has expired.
the COVID-19 pandemic on our business. We ask the
Wisconsin OCI not to object before MGIC pays
dividends to the holding company, and under the
PMIERs guidance, any dividend paid by MGIC to our
holding company, through June 30, 2021, requires
GSE approval.
Share repurchase programs
In the first quarter of 2020 and in the full year of 2019,
we repurchased approximately 9.6 million and 8.7
million shares of our common stock, respectively,
using approximately $120 million and $114 million,
respectively, of holding company resources. As of
December 31, 2020, we had $291 million of
authorization remaining to repurchase our common
stock through the end of 2021 under a share
repurchase program approved by our Board of
Directors in January 2020. 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.
Due to the uncertainty caused by the COVID-19
pandemic, we have temporarily suspended stock
repurchases, but may resume them in the future.
The following table shows details of our share
repurchase programs.
Repurchase
Program
2018
Authorization
2019
Authorization
2020
Authorization
Expiration
Date
Repurchased
(in millions)
Authorization
Remaining
(in millions)
December
31, 2019
December
31, 2020
December
31, 2021
$
$
$
200 $
200 $
—
—
9 $
291
As of December 31, 2020, we had approximately 339
million shares of common stock outstanding.
Dividends to shareholders
In 2020, MGIC paid quarterly dividends of $0.06 per
common share to its shareholders totaling $83
million. On January 26, 2021, our Board of Directors
declared a quarterly cash dividend of $0.06 per
common share to shareholders of record on February
17, 2021, payable on March 3, 2021.
For 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.”
MGIC Investment Corporation 2020 Annual Report | 11
Management's Discussion and Analysis
If a servicer of a loan is unable to contact the
borrower prior to the expiration of the first 180-day
forbearance plan term, or if the forbearance plan
reaches its twelve-month anniversary and is not
further extended, the forbearance plan will generally
expire. In such case, if the loan remains delinquent,
the 70% reduction in Minimum Required Assets for
that loan will no longer be applicable, our Minimum
Required Assets will increase and our excess of
Available Assets over Minimum Required Assets will
decrease.
If MGIC ceases to be eligible to insure loans
purchased by one or both of the GSEs, it would
significantly reduce the volume of our NIW, the
substantial majority of which is for loans delivered to
or purchased by the GSEs. In addition to the increase
in Minimum Required Assets associated with
delinquent loans, 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 as a
result of changes to regulatory capital
requirements for the GSEs. In November 2020,
the FHFA adopted a rule containing a risk-based
capital framework for the GSEs that will increase
their capital requirements, effective on the later of
(i) the date of termination of the FHFA’s
conservatorship of the applicable GSE; (ii) sixty
days after publication of the adopted rule in the
Federal Register; or (iii) any later compliance date
provided in a consent order or other transition
order applicable to a GSE. The increase in capital
requirements may ultimately result in an increase
in the Minimum Required Assets required to be
held by mortgage insurers.
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 they reduce the Minimum Required Assets
we must hold 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 calculated
credit for excess of loss reinsurance transactions
under PMIERs is generally based on the PMIERs
requirement of the covered loans and the attachment
and detachment point of the coverage. PMIERs credit
is generally not given for the reinsured risk above the
PMIERs requirement. 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
Requirements allow for a maximum risk-to-capital
ratio of 25 to 1. A risk-to-capital ratio will increase if (i)
the percentage decrease in capital exceeds the
percentage decrease in insured risk, or (ii) the
percentage increase in capital is less than the
percentage increase in insured risk. Wisconsin does
not regulate capital by using a risk-to-capital measure
but instead requires a MPP. The "policyholder
position" of a mortgage insurer is its net worth or
surplus, contingency reserve, and a portion of the
reserve for unearned premiums.
12 | MGIC Investment Corporation 2020 Annual Report
At December 31, 2020, MGIC’s risk-to-capital ratio
was 9.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.2 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
reinsurance transactions. 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 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, 2020, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.1 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
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 2019, 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 conservatorships of the GSEs; increasing
competition and participation by the private sector in
Management's Discussion and Analysis
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.
The GSE capital framework adopted in November
2020 establishes a post-conservatorship regulatory
capital framework intended to ensure that the GSEs
operate in a safe and sound manner. In January 2021,
the GSEs' Preferred Stock Purchase Agreements
("PSPAs") were amended to allow the GSEs to
continue to retain earnings until they satisfy the
requirements of the 2020 GSE capital framework. In
addition, a proposed rule issued by the FHFA in
December 2020 would require minimum funding
requirements and new liquidity standards.
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."
In December 2020, the CFPB adopted a rule that will
eliminate the GSE Patch effective upon the earlier of
the GSEs’ exit from conservatorship or July 1, 2021.
The GSE Patch expanded 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.
Not all future loans with DTI ratios greater than 43%
will be affected by the expiration of the GSE Patch.
The new QM definition that becomes effective March
1, 2021, continues to require lenders to consider a
borrower's DTI ratio; however, it replaces the DTI ratio
MGIC Investment Corporation 2020 Annual Report | 13
Management's Discussion and Analysis
cap with a pricing threshold that would exclude from
the definition of QM a loan whose annual percentage
rate (“APR”) exceeds the average prime offer rate for
comparable loans by 2.25 percentage points or more.
The 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. In connection with the 2021 amendment
to the PSPAs, the GSEs must limit the acquisition of
certain loans with multiple higher risk characteristics
related to LTV, DTI and credit score, to levels
indicated to be their current levels at the time of the
amendment.
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.”
COVID-19 PANDEMIC
The COVID-19 pandemic had a material impact on our
2020 financial results. The increased level of
unemployment and economic uncertainty resulting
from the COVID-19 pandemic, initiatives to reduce the
transmission of COVID-19 (including "shelter-in-place"
restrictions), as well as COVID-19‑related illnesses
and deaths, had a material impact on our financial
results, as we reserved for losses associated with the
increased delinquency notices received. While
uncertain, the future impact of the COVID-19
pandemic on the Company’s business, financial
results, liquidity and/or financial condition may also
be material. The magnitude of the impact will be
influenced by various factors, including the length and
severity of the pandemic in the United States, the
length of time that measures intended to reduce the
transmission of COVID-19 remain in place, the level
of unemployment, and the impact of past and future
government initiatives and actions taken by the GSEs
(including mortgage forbearance and modification
programs) to mitigate the economic harm caused by
the COVID-19 pandemic and efforts to reduce its
transmission.
Current mitigation programs include, among others:
•
•
•
Payment forbearance on federally-backed
mortgages (including those delivered to or
purchased by the GSEs) to borrowers
experiencing a hardship during the COVID-19
pandemic.
Additional cash payments to individuals provided
for in the Consolidated Appropriations Act signed
into law in December 2020.
For those mortgages that are not subject to
forbearance, a suspension of foreclosures and
•
•
•
•
evictions until at least March 31, 2021, on
mortgages purchased or securitized by the GSEs.
Enhanced unemployment payments for pay
periods between December 26, 2020 and March
14, 2021.
An extension of the maximum duration for
unemployment benefits, generally through March
14, 2021.
Employee retention tax credits for certain small
businesses.
"Paycheck Protection Program" to provide small
businesses with funds to pay certain payroll and
other costs.
As noted above, the servicer of the loan must begin
attempts to contact the borrower no later than 30
days prior to the expiration of any forbearance plan
term and must continue outreach attempts until
appropriate contact is made or the forbearance plan
term has expired. In certain circumstances, the
servicer may be unable to contact the borrower and
the forbearance plan will expire after the first 180-day
plan. A delinquent mortgage for which the borrower
was unable to be contacted and that is not in a
forbearance plan may be more likely to result in a
claim than a delinquent loan in a forbearance plan.
The substantial majority of our NIW was delivered to
or purchased by the GSEs. While servicers of some
non-GSE loans may not be required to offer
forbearance to borrowers, we allow servicers to apply
GSE loss mitigation programs to non-GSE loans. In
addition, the CFPB requires substantial loss mitigation
efforts be made prior to servicers initiating
foreclosure, therefore, servicers of non-GSE loans
may have an incentive to offer forbearance or
deferment.
Historically, forbearance plans have reduced the
incidence of our losses on affected loans. However,
given the uncertainty surrounding the long-term
economic impact of COVID-19, it is difficult to predict
the ultimate effect of COVID-19 related forbearances
on our loss incidence. As of December 31, 2020 62%
of our delinquency inventory was reported to us as in
forbearance plans. Whether a loan's delinquency will
cure, including through modification, when its
forbearance plan ends will depend on the economic
circumstances of the borrower at that time. The
severity of losses associated with loans whose
delinquencies do not cure will depend on economic
conditions at that time, including home prices.
The GSEs have introduced specific loss mitigation
options for borrowers impacted by COVID-19 when
their forbearance plans end, including the COVID-19
Payment Deferral solution for borrowers who are
unable to immediately or gradually repay their missed
loan payments. Under the COVID-19 Payment Deferral
solution, the borrower's monthly loan payment would
be returned to its pre-COVID amount and the missed
payments would be added to the end of the mortgage
14 | MGIC Investment Corporation 2020 Annual Report
term without accruing any additional interest or late
fees. The deferred payments would be due when the
loan is paid off, refinanced or the home is sold.
The foreclosure moratoriums and forbearance plans
in place under the GSE initiatives have delayed, and
may continue to delay, the receipt and payment of
claims.
LOAN MODIFICATIONS AND OTHER SIMILAR
PROGRAMS
The federal government, including through the U.S.
Department of the Treasury and the GSEs, and several
lenders have modification and refinance programs to
make outstanding loans more affordable to borrowers
with the goal of reducing the number of foreclosures.
These programs included HAMP, which expired at the
end of 2016, and HARP, which expired at the end of
2018. The GSEs have introduced other loan
modifications programs to replace HAMP and HARP.
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.
As shown in the table below, approximately 8% of our
total primary RIF has been modified as of
December 31, 2020. Based on loan count at
December 31, 2020, the loans associated with 94% of
all HARP modifications and 77% of HAMP and other
modifications were current.
Modifications
Policy Year
2004 and Prior
2005 to 2008
2009 and Later
Total
HARP (1)
Modifications
HAMP & Other
Modifications
10.9%
36.0%
0.1%
3.2%
55.4%
42.7%
0.5%
4.6%
(1)
Includes proprietary programs that are substantially the
same as HARP.
FACTORS AFFECTING OUR RESULTS
As noted above, the COVID-19 pandemic may
adversely affect our future business, results of
operations, and financial condition. The extent of the
adverse effects will depend on the duration and
continued severity of the COVID-19 pandemic and its
effects on the U.S. economy and housing market. We
have addressed some of the potential impacts
throughout this document.
Management's Discussion and Analysis
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
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 profit commission under
our QSR Transactions, and premiums ceded
under our Home Re Transactions. The profit
commission varies inversely with the level of
MGIC Investment Corporation 2020 Annual Report | 15
Management's Discussion and Analysis
ceded losses on a “dollar for dollar” basis and
can be eliminated at ceded loss levels higher
than we experienced in 2020. 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 certain levels of accident year loss ratios, its
elimination). 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
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, and dividends.
Losses incurred
Losses incurred are the current expense that reflects
claim payments, cost of settling claims, and
estimated payments that will ultimately be made as a
result of delinquencies on insured loans. As explained
under “Critical Accounting Policies” below, except in
the case of a premium deficiency reserve, we
recognize an estimate of this expense only for
delinquent loans. The level of new delinquencies has
historically followed a seasonal pattern, with new
delinquencies in the first part of the year lower than
new delinquencies in the latter part of the year, though
this pattern can be affected by the state of the
economy and local housing markets. Pandemics,
including COVID-19, and other natural disasters may
result in delinquencies not following the typical
pattern. Losses incurred are generally affected by:
•
•
•
•
•
•
•
The state of the economy, including
unemployment and housing values, each of
which affects the likelihood that loans will
become delinquent and whether loans that are
delinquent cure their delinquency.
The product mix of the in force book, with loans
having higher risk characteristics generally
resulting in higher delinquencies and claims.
The size of loans insured, with higher average
loan amounts tending to increase losses
incurred.
The percentage of coverage on insured loans,
with deeper average coverage tending to increase
incurred losses.
The rate at which we rescind policies or curtail
claims. Our estimated loss reserves incorporate
our estimates of future rescissions of policies
and curtailments of claims, and reversals of
rescissions and curtailments. We collectively
refer to such rescissions and denials as
“rescissions” and variations of this term. We call
reductions to claims "curtailments."
The distribution of claims over the life of a book.
Historically, the first few years after loans are
originated are a period of relatively low claims,
with claims increasing substantially for several
years subsequent and then declining, although
persistency, the condition of the economy,
including unemployment and housing prices, and
other factors can affect this pattern. For example,
a weak economy or housing value declines can
lead to claims from older books increasing,
continuing at stable levels or experiencing a
lower rate of decline. See further information
under “Mortgage insurance earnings and cash
flow cycle” below.
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 and
consulting services, depreciation and maintenance
expense, and premium taxes, and are reported net of
ceding commissions associated with our QSR
Transactions. Employee compensation expenses are
variable due to share-based compensation, changes
in benefits, and changes in headcount (which can
fluctuate due to volume). See Note 9 – “Reinsurance”
to our consolidated financial statements for a
discussion of ceding commission on our QSR
Transactions.
16 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
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. Changes in
economic conditions, including those related to
pandemics, including COVID-19, and other natural
disasters may result in delinquencies not following
the typical pattern.
Interest expense
Interest expense reflects the interest associated with
our consolidated outstanding debt obligations
discussed in Note 7 – “Debt” to our consolidated
financial statements and under “Liquidity and Capital
Resources” below.
Other
Certain activities that we do not consider 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 reflect 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 credit allowances
(2020) and any "other than temporary"
impairments (2019) 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. Realized investment gains and
losses are accounted for as a function of the
periodic change in fair value.
Loss 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. 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 , and
the write off of unamortized debt issuance costs on
the extinguished portion of the debt.
Refer to “Explanation and reconciliation of our use of
Non-GAAP financial measures” below to understand
how these items impact our evaluation of our core
financial performance.
MGIC Investment Corporation 2020 Annual Report | 17
Management's Discussion and Analysis
EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP
FINANCIAL MEASURES
(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. Items
that are non-recurring in nature and are not part
of our primary operating activities. Past
adjustments in this category include our 2018
income tax expense related to our IRS dispute.
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. The
amounts of adjustments to components of pre-tax
operating income (loss) are tax effected using our
now federal statutory income tax rate of 21%.
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 adjustments. Other
companies may calculate these measures differently.
Therefore, their measures may not be comparable to
those used by us.
18 | MGIC Investment Corporation 2020 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:
Years Ended December 31,
2020
2019
(in thousands)
Pre-tax
Tax Effect
Net
(after-tax)
Pre-tax
Tax Effect
Net
(after-tax)
Income before tax / Net income
$
559,263 $
113,170 $
446,093
847,977
174,214
673,763
Adjustments:
Net realized investment (gains) losses
Loss on debt extinguishment
Adjusted pre-tax operating income /
Adjusted net operating income
(13,245)
26,736
(2,781)
5,615
(10,464)
21,121
(5,108)
(1,073)
(4,035)
—
—
—
$
572,754 $
116,004 $
456,750 $
842,869 $
173,141 $
669,728
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
Net realized investment (gains) losses
Loss on debt extinguishment
Adjusted net operating income per diluted
share (1)
$
359,293
1.29
(0.03)
0.06
$
1.32
$
373,924
1.85
(0.01)
—
$
1.84
MORTGAGE INSURANCE PORTFOLIO
MORTGAGE ORIGINATIONS
The primary mortgage insurance market is affected
by total mortgage originations and PMI's market
share. Total originations are estimated to have
increased in 2020 compared with 2019, 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 and attractive mortgage rates
supported the increase in purchase originations,
despite the increase in unemployment. Total
mortgage originations in 2021 are forecast to be
down compared to 2020 estimated levels, primarily
due to an expected decrease in refinancing
transactions partially offset by an expected increase
in purchase originations. The COVID-19 pandemic,
including the related restrictions on business in many
parts of the U.S., and its effect on unemployment and
consumer confidence, may affect the number of
purchase mortgage originations.
E - Estimated, F- Forecast
Source: GSEs and MBA estimates/forecasts as of January
2021. Amounts represent the average of all sources.
PMI's market share is impacted by competition from
government mortgage insurance programs and the
GSEs' CRT transactions. In consideration of the
expected decrease in mortgage originations and
these factors, our 2021 NIW is expected to decrease
from 2020.
MGIC Investment Corporation 2020 Annual Report | 19
Mortgage originations(in billions)$3,307$3,307$3,996$3,996$2,383$2,383$1,625$1,483$1,285$1,682$2,513$1,098PurchaseRefinance2021 (F)2020 (E)2019$0$2,000$4,000
Management's Discussion and Analysis
Estimated total of PMI, FHA, USDA, and VA primary
mortgage insurance
(in billions)
Primary
mortgage
insurance
Nine Months Ended
September 30, 2020
Twelve Months
Ended December 31,
2019
$978
$859
Source: Inside Mortgage Finance - November 13, 2020 or
SEC filings. Includes HARP NIW.
MORTGAGE INSURANCE INDUSTRY
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's market share through September
30, 2020 decreased compared to the market share for
the full year of 2019.
Estimated primary MI market share
(% of total
primary MI
volume)
Nine Months Ended
September 30, 2020
Twelve Months
Ended December 31,
2019
PMI
FHA
VA
USDA
43.2%
24.4%
30.6%
1.8%
44.7%
28.2%
25.2%
1.9%
Source: Inside Mortgage Finance - November 13, 2020.
Includes HARP NIW.
We expect that our market share within the PMI
industry increased in 2020 when compared to 2019.
For additional discussion of the competitive
landscape of the industry refer to "Overview -
Business Environment - Competition."
Estimated MGIC market share
(% of total primary
private MI volume)
Nine Months Ended
September 30,
2020
Twelve Months
Ended December
31, 2019
MGIC
18.7%
16.5%
Source: Inside Mortgage Finance - November 13, 2020 or SEC
filings. Excludes HARP NIW.
NEW INSURANCE WRITTEN
NIW for 2020 continued to have what we believe are
favorable risk characteristics. The following tables
provide information about characteristics of our NIW.
Primary NIW by FICO score
(% of primary NIW)
2020
2019
Years Ended December 31,
760 and greater
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
640 - 659
639 and less
Total
47.1 %
18.2 %
13.3 %
10.3 %
7.3 %
2.1 %
1.1 %
0.6 %
100 %
44.9 %
18.7 %
13.9 %
10.8 %
7.0 %
2.7 %
1.4 %
0.6 %
100 %
Primary NIW by loan-to-value
(% of primary NIW)
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
80.01% to 85%
Total
Years Ended December 31,
2020
2019
8.6 %
39.1 %
32.1 %
20.2 %
100 %
12.9 %
43.5 %
29.5 %
14.1 %
100 %
An increase in the percentage of refinances,
discussed below, and home price appreciation have
decreased the percentage of our NIW with LTV ratios
greater than 95% in 2020 compared to 2019.
Primary NIW by debt-to-income ratio
(% of primary NIW)
45.01% and above
38.01% to 45.00%
38.00% and below
Total
Years Ended December 31,
2020
2019
11.3 %
30.8 %
57.9 %
100 %
13.5 %
32.9 %
53.6 %
100 %
In 2020, the percentage of our NIW on loans with DTI
ratios over 45% was 11.3%, down from 13.5% in 2019.
We believe the decline in 2020 was primarily due to
pricing changes associated with such loans.
20 | MGIC Investment Corporation 2020 Annual Report
Primary NIW by policy payment type
Years Ended December 31,
(% of primary NIW)
2020
2019
Monthly premiums
Single premiums
Annual Premiums
91.0 %
8.9 %
0.1 %
84.4 %
15.5 %
0.1 %
Primary NIW by type of mortgage
(% of primary NIW)
2020
2019
Years Ended December 31,
Purchases
Refinances
IIF AND RIF
64.3 %
35.7 %
80.9 %
19.1 %
Our IIF grew 10.9% in 2020, and 6.0% in 2019, 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, 2020
was 60.5% compared to 75.8% at December 31, 2019.
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
($ in billions)
NIW
Cancellations
Increase in
primary IIF
Direct primary IIF as
of December 31,
Direct primary RIF
as of December 31,
$
$
$
$
Years Ended December 31,
2020
2019
112.1
$
(87.8)
63.4
(50.8)
24.3
$
12.6
246.6
$
222.3
61.8
$
57.2
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
Management's Discussion and Analysis
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. As of
December 31, 2020, HARP modifications accounted
for approximately 3.2% of our total primary RIF,
compared to 4.6% at December 31, 2019. Loans
associated with 94.1% of all our HARP modifications
were current as of December 31, 2020. For additional
information on the composition of our primary RIF see
"Business - Our Products and Services"
The composition of our primary RIF by policy year as
of December 31, 2020 and 2019 is shown below:
Primary risk in force
($ in millions)
2004 and prior
2005 - 2008
2009 and later
Total
December 31,
2020
December 31,
2019
635
5,043
56,134
61,812
760
6,352
50,101
57,213
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 $340 million ($210 million on pool policies with
aggregate loss limits and $130 million on pool
policies without aggregate loss limits) at
December 31, 2020 compared to $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. 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' CRT 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 $287 million and $182
million as of December 31, 2020 and December 31,
2019, respectively.
MGIC Investment Corporation 2020 Annual Report | 21
Management's Discussion and Analysis
CONSOLIDATED RESULTS OF
OPERATIONS
The following section of the MD&A provides a
comparative discussion of our Consolidated Results of
Operations for the two-year period ended December 31,
2020. For a discussion of the Critical Accounting
Policies used by us that affect the Consolidated
Results of Operations, see "Critical Accounting
Policies" below.
Revenues
Revenues
(In millions)
Year Ended December 31,
2020
2019
Net premiums written
$
928.7 $ 1,001.3
Net premiums earned
$ 1,021.9 $ 1,031.0
Investment income, net of
expenses
Net realized investment
(losses) gains
Other revenue
Total revenues
154.4
167.0
13.8
9.1
5.3
10.6
$ 1,199.1 $ 1,214.0
NET PREMIUMS WRITTEN AND EARNED
NPW and NPE decreased 7% and 1%, respectively,
compared to the prior year, primarily due to lower
premium rates on our IIF and an increase in our
reduction for ceded premiums due to the decrease in
profit commission from our QSR transactions. The
decrease in profit commission was a result of higher
ceded losses incurred. This was partially offset by
higher average insurance. NPE was also impacted by
an increase in accelerated premiums from single
premium policy cancellations.
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 2020, and 2019.
Premium Yield
(in basis points)
2020
2019
Year Ended December 31,
In force portfolio yield
(1)
Premium refunds
Accelerated earnings on
single premium policies
Total direct premium
yield
Ceded premiums earned,
net of profit commission
and assumed premiums
(2)
Net premium yield
46.7
(0.5)
5.0
51.2
(7.6)
43.6
51.4
(0.5)
2.6
53.5
(5.8)
47.7
(1) Total direct premiums earned, excluding premium
refunds and accelerated premiums from single premium
policy cancellations divided by average primary
insurance in force.
(2) Assumed premiums include those from our participation
in GSE CRT programs, of which the impact on the net
premium yield was 0.5 bps in 2020 and 0.2 bps in 2019
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 is 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, lower required capital, 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 Ceded premiums earned, net of profit commission
adversely impact our premium yield. Ceded premium
earned, net of profit commission, were primarily
associated with QSR Transactions and Home Re
Transactions. Assumed premiums consists primarily
of premiums from GSE CRT programs. See
"Reinsurance Agreements" below for further
discussion on our reinsurance transactions.
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 our inforce portfolio yield will continue to
22 | MGIC Investment Corporation 2020 Annual Report
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 agreements.
è We receive the benefit of a profit commission through
a reduction in the premiums we cede. The profit
commission varies inversely with the level of losses on
a "dollar for dollar" basis and can be eliminated at loss
levels 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 ceded losses result in more benefit
from ceded losses and a lower profit commission (or
for certain levels of losses of accident year loss ratios,
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 agreements.
The following table provides information related to
our quota share agreements for 2020 and 2019.
Management's Discussion and Analysis
Quota share reinsurance
(Dollars in thousands)
2020
2019
As of and For the Years Ended
December 31,
$ 167,930
$ 111,550
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
$
$
$
Mortgage insurance portfolio:
Ceded RIF (in millions)
2015 QSR
2017 QSR
2018 QSR
2019 QSR
2020 QSR
Credit Union QSR
Covered Risk
$
$
$
$
$
$
$
15 %
14 %
11 %
11 %
72,452
$ 139,179
48,077
78,012
14,006
1,625
1,330
1,333
2,779
6,169
770
$
$
$
$
$
$
$
$
$
48,793
11,395
11,360
2,657
2,297
2,389
4,017
—
—
The amount of our NIW, new risk written, IIF, and RIF
subject to our QSR Transactions as shown in the
following table will vary from period to period in part
due to the mix of our risk written during the period.
Quota share reinsurance
NIW subject to QSR
Transactions
New Risk Written subject to
QSR Transactions
IIF subject to QSR Transactions
RIF subject to QSR
Transactions
As of and For the Years
Ended December 31,
2020
2019
74.4 %
81.5 %
85.5 %
75.9 %
89.5 %
78.5 %
81.8 %
81.4 %
The NIW subject to quota share reinsurance
decreased in 2020 compared to 2019 due to an
increase in NIW with LTVs less than or equal to 85%
and amortization terms less than or equal to 20 years,
which are excluded from the QSR Transactions.
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
MGIC Investment Corporation 2020 Annual Report | 23
Management's Discussion and Analysis
determination of the amount of IIF subject to quota
share reinsurance agreements.
2021 and 2022 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 2021 (with an additional 12.5% quota share)
and 2022 (with a 15% quota share). This is in addition
to the reinsurance agreements executed in 2020 that
included a 17.5% quota share on eligible 2021 NIW
and the Credit Union QSR Transaction that covers
NIW on loans originated by credit unions with a 65%
quota share.
Excess of loss reinsurance
Our excess-of-loss reinsurance agreements provide
$839.4 million of loss coverage on an existing
portfolio of in force policies having an in force dates
from July 1, 2016 through March 31, 2019 and
January 1, 2020 through July 31, 2020. As of
December 31, 2020, the aggregate exposed principal
balances under the Home Re 2018-1, 2019-1, and
2020-1 transactions were approximately $3.5 billion,
$3.3 billion, and $8.7 billion, respectively, which take
into account the mortgage insurance coverage
percentage, net retained risk after quota share
reinsurance, and the reinsurance inclusion percentage
of the unpaid principal balance. Total ceded
premiums for 2020 and 2019 were $20.8 million and
$17.6 million, respectively.
In October 2020, MGIC entered into an excess-of-loss
agreement (executed through an insurance linked
notes transaction) on a portfolio of policies having in
force dates from January 1, 2020 through July 31,
2020.
In February 2021, MGIC entered into $398.8 excess of
loss agreement (executed through an insurance
linked notes transaction) on a portfolio of policies
having in force dates from August 1, 2020 through
December 31, 2020.
A "Trigger Event" has occurred on for each our
outstanding ILN transactions. On the 2018 and 2019
ILN transactions a “Trigger Event” has occurred
because the reinsured principal balance of loans that
were reported 60 or more days delinquent exceeded
4% of the total reinsured principal balance of loans
under each transaction. A “Trigger Event” has
occurred on our 2020 ILN transaction because the
credit enhancement of the most senior tranche is less
than the target credit enhancement. While the “Trigger
Event” is in effect, payment of principal on the related
notes will be suspended and the reinsurance
coverage available to MGIC under the transactions
will not be reduced by such principal payments.
INVESTMENT INCOME, NET
Net investment income decreased 8% to $154 million
in 2020 compared to $167 million in 2019. The
decrease in investment income was due to lower
investment yields, partially offset by an increase in the
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 2020 and
2019 were $14 million and $5 million, respectively.
The increase in net realized investment gains was due
to an increase in the sale of fixed income and equity
securities.
OTHER REVENUE
Other revenue decreased to $9 million in 2020 from
$11 million in 2019.
Losses and expenses
Losses and expenses
(In millions)
Year Ended December 31,
2020
2019
Losses incurred, net
$
364.8 $
118.6
Amortization of deferred policy
acquisition costs
Other underwriting and
operating expenses, net
Interest expense
Loss on debt extinguishment
12.4
12.0
176.4
59.6
26.7
182.8
52.7
—
Total losses and expenses
$
639.9 $
366.0
LOSSES INCURRED, NET
As discussed in “Critical Accounting Policies” below
and consistent with industry practices, we establish
case loss reserves for future claims on delinquent
loans that were reported to us as two payments past
due and have not become current or resulted in a
claim payment. Such loans are referred to as being
in our delinquency inventory. 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.
IBNR reserves are established for delinquencies
estimated to have occurred prior to the close of an
accounting period, but not yet reported to us. IBNR
reserves are established using estimated
delinquencies, 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
24 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
See "New notice claim rate" and "Claims severity"
below for additional factors and trends that impact
these loss reserve assumptions.
Composition of losses incurred
(In millions)
Current year / New notices
Prior year reserve development
Losses incurred, net
Year Ended December 31,
2020
2019
$
$
345 $
20
365 $
190
(71)
119
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
2020 when compared to 2019 was primarily due to an
increase in losses incurred discussed above.
Year Ended December 31,
2020
2019
35.7 %
11.5 %
Loss ratio
New notice claim rate
We received an increased number of new delinquency
notices in 2020 compared to 2019, as a result of the
COVID-19 pandemic and its related effects (including
higher unemployment and the widespread
introduction of loan forbearance plans as a
mechanism for economic relief). The decrease in the
weighted average new notice claim rate for 2020 to
7% from 8% at December 31, 2019 is primarily due to
the percentage of new notices of delinquency
reported to as being in a COVID-19 related
forbearance plan. As of December 31, 2020, 62% of
our delinquency inventory were in such plans.
Historically, forbearance plans have reduced the
incidence of our losses on affected loans. However,
given the uncertainty surrounding the long-term
economic impact of COVID-19, it is difficult to predict
the ultimate effect of COVID-19 related forbearances
on our loss incidence. Whether a loan's delinquency
will cure when its forbearance plan ends will depend
on the economic circumstances of the borrower at
that time. Forbearance information is based on the
most recent information provided by the GSEs, as well
as loan servicers, and we believe substantially all
represent forbearances related to COVID-19. While the
forbearance information provided by the GSEs refers
to delinquent loans in forbearance as of the prior
month-end, the information provided by loan servicers
may be more current.
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. Changes in economic
circumstances, including those associated with the
COVID-19 pandemic affected this pattern in 2020.
As discussed in our Risk Factor titled “The Covid-19
pandemic may continue to materially impact our
financial results and may also materially impact our
business, liquidity and financial condition" the impact
of the COVID-19 pandemic on our future incurred
losses is uncertain and may be material. As
discussed in our risk factor titled “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” if
we have not received a notice of delinquency with
respect to a loan and if we have not estimated the
loan to be delinquent as of December 31, 2020 and
recorded an IBNR reserve, then we have not yet
recorded an incurred loss with respect to that loan.
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.
Losses incurred, net increased to $365 million
compared to $119 million in 2019. The increase was
primarily due to an increase in the delinquency
inventory due to the impacts of the COVID-19
pandemic, including unemployment resulting from
initiatives intended to reduce the transmission of
COVID-19. There were 57,710 loans in our delinquency
inventory at December 31, 2020 compared to 30,028
at December 31, 2019. The increase in losses
incurred, net was also due to adverse loss reserve
development on previously received delinquencies of
$20 million in 2020 compared to favorable
development of $71 million in 2019.
MGIC Investment Corporation 2020 Annual Report | 25
Management's Discussion and Analysis
The table below presents our new notices, delinquency inventory, and the average missed payment of the
delinquency inventory by policy year.
New notices and delinquency inventory during the period
December 31, 2020
Policy Year
New Notices in 2020
Delinquency Inventory as
of 12/31/20
% of Delinquency
Inventory in Forbearance
Avg. Number of Missed
Payments of
Delinquency Inventory
2004 and prior
2005-2008
2009-2015
2016
2017
2018
2019
2020
Total
Claim rate on new
notices (1)
6,079
26,838
13,513
9,497
13,139
15,040
16,904
5,089
106,099
7.0 %
3,885
17,084
6,917
4,599
6,746
7,468
7,929
3,082
57,710
24.1 %
38.0 %
66.1 %
75.9 %
76.8 %
79.4 %
84.1 %
84.8 %
62.2 %
16
14
8
7
7
7
6
5
10
Policy Year
New Notices in 2019
Inventory as of 12/31/19
Avg. Number of Missed
Payments of
Delinquency Inventory
December 31, 2019
2004 and prior
2005-2008
2009-2015
2016
2017
2018
2019
Total
Claim rate on new
notices (1)
7,742
26,510
7,776
3,700
4,486
3,374
651
54,239
8.0 %
4,686
16,275
3,647
1,578
1,989
1,521
332
30,028
16
14
7
6
5
4
3
12
(1) - Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
Claims severity
Factors that impact claim severity include:
è economic conditions at that time, including home prices compared to home prices at the time of placement of
coverage
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, prior to 2020,
has been decreasing. In light of the uncertainty caused by the COVID-19 pandemic, the average number of
missed payments at the time a claim is received and expected to be received will increase in 2021. 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 30% 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
26 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
an insured can include interest when filing a claim. Under our current master policy terms, an insured can include
accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the
insured must comply with its obligations under the terms of the applicable master policy.
The quarterly trend in claims severity for each of the three years in the period ended December 31, 2020 is shown
in the following table.
Claims severity trend
Period
Q4 2020
Q3 2020
Q2 2020
Q1 2020
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Q4 2018
Q3 2018
Q2 2018
Q1 2018
Average exposure on
claim paid
$
48,321 $
47,780
44,905
46,247
46,076
42,821
46,950
42,277
45,366
43,290
44,522
45,597
Average claim paid
% Paid to exposure
Average number of
missed payments at
claim received date
40,412
40,600
42,915
47,222
46,302
44,388
46,883
43,930
47,980
47,230
50,175
51,069
83.6 % $
85.0 %
95.6 %
102.1 %
100.5 %
103.7 %
99.9 %
103.9 %
105.8 %
109.1 %
112.7 %
112.0 %
32
27
32
33
34
35
34
35
35
35
38
38
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying
practices and/or commutations of policies.
The foreclosure moratoriums and forbearance plans in place under GSE initiatives have and may continue to
delay the receipt of claims. Claims that were resolved after the first quarter of 2020 experienced an increase in
loss mitigation activities, primarily third party acquisitions (sometimes referred to as “short sales”), resulting in a
decrease in the average claim paid and the average claim paid as a percentage of exposure. As foreclosure
moratoriums and forbearance plans end, we expect to see an increase in claims received and claims paid at
exposure levels above those experienced prior to the second quarter of 2020. The magnitude and timing of the
increases are uncertain.
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, 2020, 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
+/- $16 million. A one percentage point increase/decrease in the average claim rate reserve factor would change
the loss reserve amount by approximately +/- $34 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).
MGIC Investment Corporation 2020 Annual Report | 27
Management's Discussion and Analysis
The length of time a loan is in the delinquency inventory can differ from the number of payments that the
borrower has not made or is considered delinquent. These differences typically result from a borrower making
monthly payments that do not result in the loan becoming fully current. The number of payments that a borrower
is delinquent is shown in the following table.
Primary delinquent inventory - number of payments delinquent
2020
Non-Forbearance
2020
Forbearance (2)
2020
Total
2019
Total
December 31,
7,603
7,824
6,405
21,832
35 %
36 %
29 %
100 %
6,580
28,153
1,145
35,878
18 %
79 %
3 %
100 %
14,183
35,977
7,550
57,710
25 %
62 %
13 %
100 %
14,895
8,519
6,614
30,028
50 %
28 %
22 %
100 %
3 payments or less
4 - 11 payments
12 payments or more (1)
Total
3 payments or less
4 - 11 payments
12 payments or more
Total
(1)
(2)
Approximately 31% and 36% of the loans in the primary delinquency inventory with 12 payments or more delinquent
have at least 36 payments delinquent as of December 31, 2020, and 2019 , respectively.
We believe substantially all represent forbearances related to COVID-19.
COVID-19 Delinquency Activity
New delinquency notices increased in 2020 because of the impacts of the COVID-19 pandemic, including the
high level of unemployment and economic uncertainty resulting from measures to reduce the transmission of the
COVID-19. The number of new delinquency notices received in the second quarter of 2020 was 57,584, but
decreased 74% by the fourth quarter to 15,193 new delinquency notices. In the third and fourth quarter of 2020,
we experienced an increase in cures, likely associated with our COVID-19 new delinquency notices.
Forbearance programs enacted by the GSEs provide for payment forbearance on mortgages to borrowers
experiencing a hardship during the COVID-19 pandemic. These forbearance plans generally allow for mortgage
payments to be suspended for up to 360 days: an initial forbearance period up to 180 days and, if requested by
the borrower, an extension of up to 180 days. For loans in a COVID-19 forbearance plan as of February 28, 2021,
the plan may be extended for an additional three months, subject to certain limits. As of December 31, 2020, 62%
of our delinquency inventory was reported as subject to a forbearance plan. We believe substantially all represent
forbearances related to COVID-19. Forbearance information is based on the most recent information provided by
the GSEs, as well as loan servicer. While the forbearance information provided by the GSEs refers to delinquent
loans in forbearance as of the prior month-end, the information provided by loan servicers may be more current.
We expect our delinquency inventory will remain at elevated levels during 2021 due to the impacts of the
COVID-19 pandemic and initiatives intended to reduce the transmission of COVID-19. Given the uncertainty
surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19
related delinquencies on our loss incidence.
28 | MGIC Investment Corporation 2020 Annual Report
NET LOSSES AND LAE PAID
Net losses and LAE paid decreased 50% in 2020
compared to 2019 primarily due to lower claim
activity on our primary business due to foreclosure
moratoriums and payment forbearance plans in place.
During 2019, losses paid included settlement
payments under commutations of coverage on
policies and/or related to disputes concerning our
claims paying practices.
While foreclosure moratoriums and payment
forbearance plans remain in place, net losses and LAE
paid are expected to continue to be lower. As the
various moratorium and forbearance plans end, we
expect net losses and LAE paid to increase, however,
the magnitude and timing of the increases are
uncertain.
The table below presents our net losses and LAE paid
for 2020 and 2019.
Net losses and LAE paid
(in millions)
2020
2019
Total primary (excluding
settlements)
Claims paying practices and
NPL settlements (1)
Pool
Direct losses paid
Reinsurance
Net losses paid
LAE
Net losses and LAE paid
before terminations
Reinsurance terminations
—
2
100
(4)
96
18
114
—
30
4
227
(8)
219
21
240
(14)
226
Net losses and LAE paid
$
114
$
(1)
See Note 8 - "Loss Reserves" for additional information
on our settlements of disputes for claims paying
practices and/or commutations of policies
$
98
$
193
Wisconsin
Management's Discussion and Analysis
Primary losses paid for the top 15 jurisdictions (based
on 2020 losses paid) and all other jurisdictions for
2020 and 2019 appears in the table below.
Primary paid losses by jurisdiction
(In millions)
Florida *
New York *
Illinois *
New Jersey *
Maryland
Puerto Rico *
Pennsylvania *
California
Ohio *
Virginia
Massachusetts
Michigan
Texas
Connecticut *
2020
2019
$
13 $
11
9
8
7
5
4
3
3
2
2
2
2
2
2
28
25
13
20
9
12
8
5
7
4
3
4
4
6
3
42
193
All other jurisdictions
Total primary (excluding
settlements)
$
22
98 $
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 2020 losses paid) for 2020
and 2019 appears in table below.
Primary average claim paid
Florida *
New York *
Illinois *
New Jersey *
Maryland
All other jurisdictions
All jurisdictions
2020
2019
$
59,610 $
65,576
111,112
102,819
43,339
96,116
63,665
32,798
43,901
42,833
81,811
60,905
33,983
45,324
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.
MGIC Investment Corporation 2020 Annual Report | 29
Management's Discussion and Analysis
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, 2020 and 2019 and for the top 5
jurisdictions (based on 2020 losses paid) appears in
the following table.
Primary average exposure - delinquent loans
2020
2019
Florida
New York
Illinois
New Jersey
Maryland
All other jurisdictions
All jurisdictions
$
56,956 $
73,509
41,451
67,709
68,347
52,071
53,804
52,566
72,188
38,740
64,444
64,208
41,145
45,028
The primary average RIF on all loans was $54,891,
$52,995 at December 31, 2020 and December 31,
2019, respectively.
LOSS RESERVES
Our primary default rate at December 31, 2020 was
5.11% (2019: 2.78% ). Our primary delinquency
inventory held 57,710 loans at December 31, 2020,
compared to 30,028 at December 31, 2019. The
increase in our primary delinquency inventory from
the prior year is primarily due to the adverse economic
impact of the COVID-19 pandemic. As of December
31, 2020, 62% of our delinquency inventory were
reported to us as subject to forbearance plans. We
believe substantially all represent forbearance plans
related to COVID-19. Prior to 2020, we experienced a
decline in the number of delinquencies in inventory
with twelve or more missed payments. Generally, a
defaulted loan with fewer missed payments is less
likely to result in a claim. However, given the
uncertainty surrounding the long-term economic
impact of COVID-19, it is difficult to predict the
ultimate effect of COVID-19 related delinquencies and
forbearances on our loss incidence. Whether a loan’s
delinquency will cure when its forbearance plan ends
will depend on the economic circumstances of the
borrower at that time.
30 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
The primary and pool loss reserves as of December 31, 2020, and 2019 appear in the table below.
Gross loss reserves
Primary:
Case reserves (In millions)
IBNR and LAE
Total primary direct loss reserves
Ending delinquency inventory
Percentage of loans delinquent (default rate)
Average direct reserve per default
Primary claims received inventory included in ending
delinquency inventory
Pool (1):
Direct loss reserves (In millions):
With aggregate loss limits
Without aggregate loss limits
Total pool direct loss reserves
Ending delinquency inventory:
With aggregate loss limits
Without aggregate loss limits
Total pool ending delinquency inventory
Pool claims received inventory included in ending
delinquency inventory
Other gross loss reserves (2) (In millions)
December 31,
2020
2019
$
789
82
871
$
490
56
546
57,710
5.11 %
30,028
2.78 %
$
15,100
$
18,171
159
538
6
2
8
2
442
238
680
10
7
2
9
—
430
223
653
11
(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.
(2) Other gross loss reserves includes direct and assumed reserves that are not included within our primary or pool loss
reserves.
The average direct reserve per default as of December 31, 2020 declined when compared to the average as of
December 31, 2019 because the delinquency inventory as of December 31, 2020 included loans with fewer
missed payments and loans with lower anticipated paid to exposure rates.
MGIC Investment Corporation 2020 Annual Report | 31
Management's Discussion and Analysis
The primary default inventory for the top 15 jurisdictions (based on 2020 losses paid) at December 31, 2020, and
2019 appears in table the below.
Primary delinquent inventory by jurisdiction
Non-Forbearance
2020
Forbearance (1)
2020
Total
2020
Total
2019
Florida *
New York *
Illinois *
New Jersey *
Maryland
Puerto Rico *
Pennsylvania *
California
Ohio *
Virginia
Massachusetts
Michigan
Texas
Connecticut *
Wisconsin
All other jurisdictions
Total
1,786
1,328
1,298
786
562
828
1,299
916
1,313
442
397
691
1,332
344
520
7,990
21,832
4,150
1,088
2,162
1,174
994
630
1,294
2,668
1,228
935
451
1,151
3,285
565
536
13,567
35,878
5,936
2,416
3,460
1,960
1,556
1,458
2,593
3,584
2,541
1,377
848
1,842
4,617
909
1,056
21,557
57,710
2,504
1,634
1,749
992
796
1,122
1,755
1,213
1,498
580
544
921
2,251
506
694
11,269
30,028
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.
(1) We believe substantially all represent forbearances related to COVID-19.
32 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
The primary default inventory by policy year at December 31, 2020, and 2019 appears in the table below.
Primary delinquent inventory by policy year
Non-Forbearance
Forbearance (1)
2020
2020
Total
2020
Total
2019
2004 and prior
2004 and prior %:
2005
2006
2007
2008
2005 - 2008 %
2009
2010
2011
2012
2013
2014
2015
2009 - 2015 %
2016
2017
2018
2019
2020
2016 and later %:
2,948
14 %
1,791
2,972
4,681
1,149
49 %
75
61
85
128
346
700
953
11 %
1,109
1,566
1,541
1,259
468
27 %
937
3 %
671
1,293
3,330
1,197
18 %
84
38
66
229
583
1,389
2,180
13 %
3,490
5,180
5,927
6,670
2,614
67 %
Total
(1) We believe substantially all represent forbearances related to COVID-19.
35,878
21,832
3,885
6 %
2,462
4,265
8,011
2,346
30 %
159
99
151
357
929
2,089
3,133
12 %
4,599
6,746
7,468
7,929
3,082
52 %
57,710
4,686
16 %
2,799
4,582
7,096
1,798
54 %
148
115
143
231
521
1,101
1,388
12 %
1,578
1,989
1,521
332
—
18 %
30,028
We expect that delinquencies will remain at elevated levels in 2021 as a result of the COVID-19 pandemic,
including as a result of the increase in unemployment associated with initiatives intended to reduce the
transmission of COVID-19. Historically, forbearance plans have reduced the incidence of our losses on affected
loans. However, given the uncertainty surrounding the long-term economic impact of COVID-19, it is difficult to
predict the ultimate effect of COVID-19 related forbearances on our loss incidence. Whether a loan's delinquency
will cure when its forbearance plan ends will depend on the economic circumstances of the borrower at that
time. Forbearance information is based on the most recent information provided by the GSEs, as well as loan
servicers, and we believe substantially all forbearance plans reported are related to COVID-19. While the
forbearance information provided by the GSEs refers to delinquent loans in forbearance as of the prior month-
end, the information provided by loan servicers may be more current.
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 8% and 11% of our total primary
RIF at December 31, 2020 and 2019, respectively. Approximately 37% and 39% of the remaining primary RIF on
our 2005 through 2008 books of business benefited from HARP as of both December 31, 2020 and 2019,
respectively.
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, 2020, 66% of our primary RIF was written subsequent
to December 31, 2017, 74% of our primary RIF was written subsequent to December 31, 2016, and 82% of our
primary RIF was written subsequent to December 31, 2015.
MGIC Investment Corporation 2020 Annual Report | 33
Management's Discussion and Analysis
UNDERWRITING AND OTHER EXPENSES, NET
Underwriting and other expenses includes items such
as employee compensation costs, fees for
professional and consulting services, depreciation
and maintenance expense, and premium taxes, and
are reported net of ceding commissions.
Underwriting and other expenses for 2020 decreased
when compared to 2019 primarily due to a decreases
in employee compensation costs, including equity-
based compensation, and travel. This was partially
offset by increases in professional services and
equipment and software expense.
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 two years.
Underwriting expense ratio
19.2 %
18.4 %
Year Ended December 31,
2020
2019
The underwriting expense ratio increased in 2020
compared with 2019 due to lower NPW partially
offset by a decrease in underwriting expenses.
INTEREST EXPENSE
2020 compared to 2019. Interest expense for 2020
was $60 million compared to $53 million for 2019.
The increase is due to the issuance of the 5.25%
Notes in August 2020, partially offset by the
repurchase of a portion of the 5.75% Notes and the
9% Debentures.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
Income tax provision and effective tax rate
(In millions, except rate)
2020
2019
Income before tax
$
Provision for income taxes
Effective tax rate
$
559
113
848
174
20.2 %
20.5 %
The decrease in our provision for income tax expense
for 2020 compared to 2019 was primarily due to a
decrease in income before tax. Our effective tax rate
for 2020 and 2019 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.
BALANCE SHEET REVIEW
Shareholders' equity
Shareholders' equity
(In millions)
2020
2019
$ 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
1,862
(393)
1,870
(283)
217
2,642
73
2,278
Total
$
4,699 $
4,309 $
—
(8)
(110)
144
364
390
The increase in shareholders' equity in 2020
compared with the prior year was due to net income
and an increase in the fair value of our investment
portfolio, offset in part by quarterly dividends paid to
shareholders and the repurchase of shares of our
common stock in the first quarter of 2020.
Total assets and total liabilities
As of December 31, 2020, total assets were $7.4
billion and total liabilities were $2.7 billion. Compared
to year-end 2019, total assets increased by $1.1
billion and total liabilities increased by $0.7 billion.
The following sections focus on the assets and
liabilities experiencing major developments in 2020.
INVESTMENT PORTFOLIO
The investment portfolio increased 16%, to $6.7 billion
as of December 31, 2020 (2019: $5.8 billion), as net
cash from operations and proceeds from debt
issuances were 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:
34 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
Operating Companies (1)
è Preserve PMIERs
assets
è Maximize total return
with emphasis on yield,
subject to our other
objectives
Holding Company
è Provide liquidity with
minimized realized
loss
è Maintain highly liquid,
low volatility assets
è Limit portfolio volatility è Maintain high credit
Fixed income security ratings
% of fixed income securities at fair value
Security Ratings (1)
Period
AAA
AA
A
December 31,
2020
December 31,
2019
23%
21%
22%
20%
35%
34%
BBB
20%
24%
è Duration 3.5 to 5.5
è Duration maximum of
years
2.5 years
quality
(1)
(1)
Primarily MGIC
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.
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:
Our investment portfolio was invested in comparable
security types for the years ended December 31, 2020
and December 31, 2019. See Note 5 – “Investments”
to our consolidated financial statements for
additional disclosure on our investment portfolio.
è economic and market outlooks;
Investments outlook
è diversification effects;
è security duration;
è liquidity;
è capital considerations; and
è income tax rates.
The average duration and embedded investment yield
of our investment portfolio as of December 31, 2020
and 2019 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,
2020
4.3
2.6%
2.1%
2019
3.9
3.1%
2.5%
(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, 2020 and
2019.
Our investment portfolio of fixed income securities is
subject to interest rate risk and its fair value is likely to
increase in a decreasing 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.
Investing activity will continue to decrease our
portfolio yield as long as market yields remain below
the current portfolio yield. Any decline in market-
based portfolio yield is expected to result in lower net
investment income in future periods.
As of December 31, 2020, approximately 5% of the fair
value of our investment portfolio consisted of
securities referencing LIBOR, none of which reference
one-week and two-month tenors. As discussed in our
risk factor titled "The Company may be adversely
impacted by the transition from LIBOR as a reference
rate," the ICE Benchmark Administration, the
administrator of LIBOR, began consulting on its
intention to cease publishing after 2021, with respect
to USD LIBOR, only the one-week and two-month
tenors and, on June 30, 2023, all other USD LIBOR
tenors.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased 78%, to $288
million, as of December 31, 2020 (2019: $162 million),
as net cash generated from operating and financing
activities was only partly offset by net cash used in
investing activities.
MGIC Investment Corporation 2020 Annual Report | 35
Management's Discussion and Analysis
LOSS RESERVES
Our loss reserves include estimates of losses and
settlement expenses on (1) loans in our delinquency
inventory (known as case reserves) (2) IBNR
delinquencies, and (3) LAE. Our gross reserves are
reduced by reinsurance recoverable on our estimated
losses and settlement expenses to calculate a net
reserve balance. Loss reserves increased by 59% to
$881 million as of December 31, 2020, from $555
million of December 31, 2019. Reinsurance
recoverables on our estimated losses and settlement
expenses were $95 million and $22 million as of
December 31, 2020 and December 31, 2019,
respectively. The overall increase in our net loss
reserves during 2020 was primarily due to an increase
in new delinquency notices as well as IBNR reserves,
each due to the impacts of the COVID-19 pandemic.
LONG-TERM DEBT
Our long-term debt increased to $1,243.2 million as of
December 31, 2020 from $832.8 million as of
December 31, 2019. In August, 2020, we issued
$650.0 million aggregate principal amount of 5.25%
Notes due in 2028 with a three year call feature. We
used a portion of the proceeds to repurchase $182.7
million in aggregate principal of our 5.75% Notes due
in 2023 and $48.1 million in aggregate principal of our
9% Debentures due 2063. The balance of the
proceeds remains at the holding company.
UNEARNED PREMIUM
Our unearned premium decreased to $287.1 million
as of December 31, 2020 from $380.3 million as of
December 31, 2019 primarily due to an increase in
single premium policy cancellations.
OTHER LIABILITIES
Other liabilities increased 61% to $245 million as of
December 31, 2020 (2019: $152 million), primarily due
to increases in our deferred income tax liability,
reinsurance premium payable (net of ceding
commission and profit commission), investment
securities payable, and interest payable. This was
partially offset by decreases in accrued salaries and
benefits payable.
Off-balance sheet arrangements
Home Re 2018-1 Ltd., Home Re 2019-1 Ltd., and
Home Re 2020-1 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.
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 two years.
Summary of consolidated cash flows
(In thousands)
2020
2019
Years ended December 31,
Total cash provided by
(used in):
Operating activities
$ 732,309 $
609,532
Investing activities
Financing activities
(772,506)
(422,108)
167,821
(173,406)
Increase (decrease) in cash
and cash equivalents and
restricted cash and cash
equivalents
Operating activities
$ 127,624 $
14,018
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
generally for claims that arise when a delinquency
results in an insured loss. Due to the foreclosure
moratorium and payment forbearance plans in place,
we have experienced a decrease in losses and LAE
paid. As the various moratorium and forbearance
36 | MGIC Investment Corporation 2020 Annual Report
plans end, we expect net losses and LAE paid to
increase, however, the magnitude and timing of the
increases are uncertain. 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, professional services and
occupancy costs.
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 2020
increased compared to 2019 primarily due to a lower
level of losses paid, net, and a decrease in taxes paid,
partially offset by a decrease in net premium written.
Investing activities
The following list highlights the major sources and
uses of cash flow from investing activities:
Sources
+ 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, 2020, our portfolio had a fair
value of $6.7 billion, an increase of $0.9 billion, or
16.1% from December 31, 2019. Net cash flows used
in investing activities in 2020 and 2019 primarily
reflect purchases of fixed income securities in an
amount that exceeded our proceeds from sales and
maturities of such securities during the year as cash
from operations and financing activities 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.
Financing activities
The following list highlights the major sources and
uses of cash flow from financing activities:
Management's Discussion and Analysis
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 2020
primarily reflect the issuance of our 5.25% Notes,
partially offset by the repurchase of a portion of our
5.75% Notes and 9% Debentures, repurchases of our
common stock, payment of dividends to shareholders
and the 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" above and "Debt at
our Holding Company and Holding Company Liquidity"
below.
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
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
MGIC Investment Corporation 2020 Annual Report | 37
Management's Discussion and Analysis
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.
Capital Structure
The following table summarizes our capital structure as of December 31, 2020, and 2019.
(In thousands, except ratio)
2020
2019
Common stock, paid-in capital, retained earnings, less treasury stock
$
4,482,165
$
4,236,526
Accumulated other comprehensive loss, net of tax
Total shareholders' equity
Long-term debt, par value
Total capital resources
216,821
4,698,986
1,256,110
72,708
4,309,234
836,872
$
5,955,096
$
5,146,106
Ratio of long-term debt to shareholders' equity
26.7 %
19.4 %
The increase in total shareholders' equity in 2020 from 2019 was primarily due to net income during 2020, offset
by our repurchases of our common stock and an increase in gross unrealized gains. See Note 13 - "Shareholders'
Equity" for further information.
DEBT AT OUR HOLDING COMPANY AND HOLDING
COMPANY LIQUIDITY
Debt obligations - holding company
In August, 2020, we issued $650.0 million aggregate
principal amount of 5.25% Notes due in 2028. We
used a portion of the proceeds to repurchase $182.7
million in aggregate principal of our 5.75% Senior
notes due in 2023 and $48.1 million in aggregate
principal of our 9% Debentures due 2063.
The 5.75% Notes, 5.25% 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, 2020, our 5.25%
Notes had $650 million of outstanding principal due in
2028, our 5.75% Notes had $242.3 million of
outstanding principal due in August 2023, and our 9%
Debentures had $208.8 million of outstanding
principal due in April 2063. 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.
In the third quarter of 2020, MGIC distributed to the
holding company, as a dividend, its ownership in the
9% Debentures of $132.7 million. In 2019, the $132.7
million was an outstanding obligation of our holding
company to MGIC.
See Note 7 - "Debt" for further information on our
outstanding debt obligations and transactions
impacting our consolidated financial statements in
2020 and 2019.
Liquidity analysis - holding company
As of December 31, 2020, and December 31, 2019, we
had approximately $847 million and $325 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. Under
the PMIERs guidance, any dividend paid by MGIC to
our holding company, through June 30, 2021 requires
approval by the GSEs. 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
excess PMIERs Available Assets to maintain. Raising
capital in the public markets is another potential
source of holding company liquidity. 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.
38 | MGIC Investment Corporation 2020 Annual Report
Over the next twelve months the principal demand on
holding company resources will be interest payments
on our 5.75% Notes, 5.25% Notes, and 9% Debentures
approximating $67 million. We believe our holding
company has sufficient sources of liquidity to meet its
payment obligations for the foreseeable future.
During the first quarter of 2020 and for the full year of
2019, we used approximately $120 million and $114
million respectively, of available holding company
cash to repurchase shares of our common stock. The
repurchase programs may be suspended or
discontinued at any time, and in light of the
uncertainty caused by the COVID-19 pandemic, we
have temporarily suspended stock repurchases, but
may resume them in the future. See “Overview -
Capital” of this MD&A for a discussion of our share
repurchase programs.
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
MD&A for a discussion for a discussion of our share
repurchase programs.
In 2020 we used $82 million to pay cash dividends to
shareholders. On January 26, 2021, our Board of
Directors declared a quarterly cash dividend of $0.06
per common share to shareholders of record on
February 17, 2021, payable on March 3, 2021.
Our holding company cash and investments increased
$522 million in 2020, to $847 million as of
December 31, 2020.
Significant cash and investments inflows during the
year:
•
•
•
$640 million of net proceeds from the issuance
of our 5.25% Notes,
$390 million of dividends received from MGIC,
and
$13 million of investment income.
Significant cash outflows during the year:
•
$120 million of share repurchase transactions,
•
•
•
•
$82 million in cash dividends paid to
shareholders,
$198 million in repurchases of our 5.75% Notes,
$62 million in repurchases of our 9% Debentures,
and
$59 million of interest payments on our 5.75%
Notes and 9% Debentures, of which
approximately $12 million was paid for the
Management's Discussion and Analysis
portion of our 9% Debenture previously owned by
MGIC.
The net unrealized gains on our holding company
investment portfolio were approximately $4.7 million
at December 31, 2020 and the portfolio had a
modified duration of approximately 1.8 years.
Scheduled debt maturities beyond the next twelve
months include $242.3 million of our 5.75% Notes in
2023, $650 of our 5.25% Notes in 2028, and $208.8
million of our 9% Debentures in 2063. 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 75.5932 common
shares per $1,000 principal amount of debentures.
This represents an initial conversion price of
approximately $13.23 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
$17.20 for at least 20 of the 30 trading days preceding
notice of the redemption.
See Note 7 – “Debt” to our consolidated financial
statements for additional information about the
conversion terms of our 9% Debentures and the terms
of our indebtedness, including our option to defer
interest. The description in Note 7 - “Debt" to our
consolidated financial statements is qualified in its
entirety by the terms of the notes and debentures. The
terms of our 9% Debentures are contained in the
Indenture dated as of March 28, 2008, between us
and U.S. Bank National Association filed as an exhibit
to our Form 10-Q filed with the SEC on May 12, 2008.
The terms of our 5.75% Notes are contained in a
Supplemental Indenture, dated as of August 5, 2016,
between us and U.S. Bank National Association, as
trustee, which is included as an exhibit to our 8-K filed
with the SEC on August 5, 2016, and in the Indenture
dated as of October 15, 2000 between us and the
trustee. The terms of our 5.25% Notes are contained
in a Supplemental Indenture, dated as of August 12,
2020, 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 12, 2020, and in the
Indenture dated as of October 15, 2000 between us
and the trustee.
Although not anticipated in the near term, we may
also contribute funds to our insurance operations to
comply with the PMIERs or the State Capital
Requirements. See “Overview – Capital” above for a
discussion of these requirements. See the discussion
of our non-insurance contract underwriting services in
Note 17 – “Litigation and Contingencies” to our
consolidated financial statements for other possible
uses of holding company resources.
MGIC Investment Corporation 2020 Annual Report | 39
Management's Discussion and Analysis
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, 2020, MGIC’s Available Assets
under PMIERs totaled approximately $5.3 billion, an
excess of approximately $1.8 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.
The table below presents the PMIERS capital credit
for our reinsurance transactions.
PMIERs - Reinsurance Credit
(In millions)
December 31,
2020
2019
QSR Transactions
$
1,002 $
Home Re Transactions
482
779
513
Total capital credit for
Reinsurance Transactions
$
1,484 $
1,292
Our 2021 QSR transaction terms are generally
comparable to our existing QSR transactions and will
also provide PMIERs capital credit. The excess of loss
agreement entered into in February 2021 will also
provide additional PMIERs credit. Refer to Note 9 -
"Reinsurance" to our consolidated financial
statements for additional information on our
reinsurance transactions.
We anticipate our delinquency inventory to remain
elevated in 2021 due to the impacts of the COVID-19
pandemic. The PMIERS generally require us to hold
significantly more Minimum Required Assets for
delinquent loans than for performing loans and the
Minimum Required Assets required to be held
increases as the number of payments missed on a
delinquent loan increases. For delinquent loans
whose initial missed payment occurred on or after
March 1, 2020 and prior to April 1, 2021 (the
"COVID-19 Crisis Period"), the Minimum Required
Assets are generally reduced by 70% for at least three
months. The 70% reduction will continue, or be newly
applied, for delinquent loans that are subject to a
forbearance plan that is granted in response to a
financial hardship related to COVID-19, the terms of
which are materially consistent with terms of
forbearance plans offered by Freddie Mac or Fannie
Mae. Under the PMIERs, a forbearance plan on a loan
with an initial missed payment occurring during the
COVID-19 Crisis Period is assumed to have been
granted in response to a financial hardship related to
COVID-19. Loans considered to be subject to a
forbearance plan include those that are in a
repayment plan or loan modification trial period
following the forbearance plan.
Forbearance for federally-insured mortgages allows
for mortgage payments to be suspended for up to 360
days; an initial forbearance period of up to 180 days
and, if requested by the borrower following contact by
the servicer, an extension of up to 180 days. The
servicer of the loan must begin attempts to contact
the borrower no later than 30 days prior to the
expiration of any forbearance plan term has expired.
If a servicer of a loan is unable to contact the
borrower prior to the expiration of the first 180-day
forbearance plan term, or, if the forbearance plan
reaches its twelve-month anniversary and is not
further extended, the forbearance plan will expire. In
such case, the 70% reduction in Minimum Required
Assets for that loan will no longer be applicable and
our Minimum Required Assets will increase.
Based on the date each loan in our delinquency
inventory was reported to us as being in forbearance,
we estimate that during the first two quarters of 2021,
69% of those will reach their twelve-month
anniversary of having been in forbearance and, as a
result, their forbearance plans may end.
We expect the GSEs and servicers will provide us with
information about the forbearance status for nearly all
of the loans in our delinquency inventory, and we
believe substantially all reported forbearances are
related to COVID-19. While the forbearance
information provided by the GSEs refers to delinquent
loans in forbearance as of the prior month-end, the
information provided by loan servicers may be more
current. As a result, in some cases, there may be a
delay in our ability to take advantage of the 70%
reduction.
We plan to continuously comply with the PMIERs
through our operational activities or through the
contribution of funds from our holding company,
40 | MGIC Investment Corporation 2020 Annual Report
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)
Statutory policyholders' surplus
December 31,
2020
2019
$ 44,511 $ 44,338
$ 1,336 $ 1,619
Statutory contingency reserve
3,521
2,963
Statutory policyholders' position
$ 4,857 $ 4,582
Risk-to-capital
9.2:1
9.7:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent ($2.9 billion at December 31, 2020 and $1.5
billion at December 31, 2019) and for which case loss
reserves have been established.
Management's Discussion and Analysis
Risk-to-capital - Combined insurance companies
(In millions, except ratio)
RIF - net (1)
Statutory policyholders' surplus
December 31,
2020
2019
$ 44,868 $ 44,550
$ 1,340 $ 1,619
Statutory contingency reserve
3,586
3,021
Statutory policyholders' position
$ 4,926 $ 4,640
Risk-to-capital
9.1:1
9.6:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent ($2.9 billion at December 31, 2020 and $1.5
billion at December 31, 2019) and for which case loss
reserves have been established.
The 2020 decrease in MGIC's risk-to-capital and our
combined insurance companies' risk to capital was
due to an increase in statutory policyholders' position,
partially offset by an increase in RIF, net of
reinsurance. The increase in statutory policyholders'
position was primarily due to an increase in statutory
contingency reserves, offset by dividends paid to our
holding company of $390 million. The increase in our
RIF, net of reinsurance, was due to an increase in our
IIF, offset by an increase in our reduction to risk on
policies that are currently in default for which loss
reserves have been established. Our risk-to-capital
ratio will decrease if the percentage increase in
capital exceeds the percentage increase in insured
risk.
For additional information regarding regulatory capital
see Note 14 – “Statutory Information” to our
consolidated financial statements as well as our risk
factor titled “State capital requirements may prevent
us from continuing to write new insurance on an
uninterrupted basis.” .
Financial Strength Ratings
MGIC financial strength ratings
Rating Agency
Moody's Investors Service
Standard and Poor's Rating Services
A.M. Best
Rating
Outlook
Baa1
BBB+
A-
Stable
Negative
Stable
The table below presents our combined insurance
companies’ risk-to-capital calculation (which includes
a reinsurance affiliate).
Rating Agency
A.M. Best
Rating
Outlook
A-
Stable
MAC financial strength ratings
Earlier this year, Standard and Poor's revised its
outlook for the U.S. Mortgage Insurers market
segment to "negative,” due to the risks associated
with the COVID-19 pandemic and A.M. Best revised its
outlook for the U.S. Mortgage Insurers market
segment to "negative," but did not change MGIC's or
MGIC Investment Corporation 2020 Annual Report | 41
Management's Discussion and Analysis
MAC’s outlook at that time. 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
Contractual Obligations
revenues, reduce our premium yields and / or increase
our losses.”
The following table summarizes, as of December 31, 2020, 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
More than
Total
1 year
1-3 years
3-5 years
5 years
2,376.1
1.9
25.2
880.5
3,283.7
70.1
0.8
19.2
137.5
227.6
534.3
105.8
1,665.9
1.0
5.0
485.3
1,025.6
0.1
1.0
257.7
364.6
—
—
—
1,665.9
Our long-term debt obligations as of December 31, 2020 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 impacts from the COVID-19 pandemic, 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.
42 | MGIC Investment Corporation 2020 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 2020 or 2019 and do not anticipate having
a minimum funding requirement in 2021. We have significant discretion in making contributions above those
necessary to satisfy the minimum funding requirements. In 2020 and 2019, we voluntarily made contributions
totaling $5.9 million, and $7.1 million, respectively. We plan to make a voluntary contribution of approximately
$6.2 million to the defined benefit pension plan in 2021. 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, 2020, we had accrued a liability of $10.4 million
related to our defined benefit pension plan as the projected obligation was in excess of plan assets. The
supplemental executive retirement plan benefits are accrued for and are paid from MGIC assets following
employee retirements. We plan to pay benefits of approximately $0.3 million under the supplemental executive
retirement plan in 2021.
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 defined 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 2020 Annual Report | 43
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. Such loans are
referred to as being in out delinquency inventory. For
reporting purposes, we consider a loan delinquent
when it is two or more payments past due and has not
become current or resulted in a claim payment. 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. 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, pandemics 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 generally 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, 2020,
assuming all other factors remain constant, a $1,000
increase/decrease in the average severity reserve
factor would change the reserve amount by
approximately +/- $16 million. A one percentage point
increase/decrease in the average claim rate reserve
factor would change the reserve amount by
approximately +/- $34 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:
44 | MGIC Investment Corporation 2020 Annual Report
Historical development of loss reserves
(In thousands)
Losses incurred
related to prior
years (1)
Reserve at end of
prior year
2020
2019
2018
2017
2016
19,604
(71,006)
(167,366)
(231,204)
(147,658)
555,334
674,019
985,635
1,438,813
1,893,402
(1)
A negative number for a prior year indicates a
redundancy of loss reserves. A positive number for a
prior year indicates a deficiency of loss reserves.
See Note 8 – “Loss Reserves” to our consolidated
financial statements for a discussion of recent loss
development.
IBNR Reserves
IBNR reserves are established for delinquencies
estimated to have occurred prior to the close of an
accounting period, but not yet 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, 2020
and 2019, we had IBNR reserves of approximately
$28 million and $23 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
are initially deferred as unearned premium reserve
Management's Discussion and Analysis
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.
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
MGIC Investment Corporation 2020 Annual Report | 45
Management's Discussion and Analysis
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 credit allowance (2020),
and any "other than temporary" impairments (2019)
recognized in earnings.
Equity securities. Our equity securities reported at fair
value are classified as available-for-sale. Equity
securities carried at cost, for which the amount
approximates fair value, are reported as Other
Invested Assets. Realized investment gains and
losses on equity securities are reported in income
based upon specific identification of securities sold,
as well as any change in fair value of equity
securities.
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, treasury bills, 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, most municipal bonds,
and commercial paper.
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. 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
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 allowance for credit losses
Effective January 1, 2020, each quarter we perform
reviews of our investments to assess declines in fair
value of available-for-sale securities. Any impairment
losses on available-for-sale securities are recorded as
46 | MGIC Investment Corporation 2020 Annual Report
Management's Discussion and Analysis
is determined to be other-than-temporary-impaired
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.
Fair Value Option
For the years ended December 31, 2020, 2019, and
2018, 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.
an allowance for credit losses, subject to reversal,
with realized investment gains and losses. In
evaluating whether a credit allowance should be
established, 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 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.
When a security is considered to be 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. An allowance for credit losses is
recorded, subject to reversal, for the credit loss
portion in the statement of operations, while the loss
due to other factors is recognized in accumulated
other comprehensive loss, net of taxes. A credit loss
is determined to exist if the present value of the
discounted cash flows, using the security’s original
yield, expected to be collected from the security is
less than the cost basis of the security.
For 2019, our evaluation of whether a decline in fair
values is other-than-temporary also included
reviewing the extent and duration of the decline.
Based on our evaluation, if the fair value of a security
is below its amortized cost at the time of our intent to
sell, the security is classified as other-than-
temporarily
impaired and the full amount of the impairment is
recognized as a loss in the statement of operations.
Otherwise, when a security is considered to be other-
than-temporarily impaired, the losses are separated
into the portion of the loss that represents the credit
loss and the portion that is due to other factors. The
credit loss portion is recognized as a loss in the
statement of operations, while the loss due to other
factors is recognized in accumulated other
comprehensive loss, net of taxes. A credit loss is
determined to exist if the present value of the
discounted cash flows, using the security’s original
yield, expected to be collected from the security is
less than the cost basis of the security. If the security
MGIC Investment Corporation 2020 Annual Report | 47
Glossary of terms and acronyms
/ A
ARMs
Adjustable rate mortgages
ABS
Asset-backed securities
ASC
Accounting Standards Codification
Available Assets
Assets, as designated under the PMIERs, that are
readily available to pay claims, and include the most
liquid investments
/ B
Book or book year
A group of loans insured in a particular calendar year
BPMI
Borrower-paid mortgage insurance
/ C
CARES Act
The Coronavirus Aid, Relief, and Economic, Security
Act enacted on March 27, 2020
/ D
DAC
Deferred insurance policy acquisition costs
Debt-to-income ("DTI") ratio
The ratio, expressed as a percentage, of a borrower's
total debt payments to gross income
Direct
Before giving effect to reinsurance
Delinquent Loan
A loan that is past due on a mortgage payment. A
delinquent loan is typically reported to us by servicers
when the loan has missed two or more payments. A
loan will continue to be reported as delinquent until it
becomes current or a claim payment has been made.
A delinquent loan is also referred to as a default
/E
EPS
Earnings per share
/ F
Fannie Mae
CECL
Current expected credit losses covered under ASC
326
FCRA
Fair Credit Reporting Act
Federal National Mortgage Association
CFPB
FHA
Consumer Financial Protection Bureau
Federal Housing Administration
CLO
FHFA
Collateralized loan obligations
Federal Housing Finance Agency
CMBS
Commercial mortgage-backed securities
COVID-19 Pandemic
An outbreak of the novel coronavirus disease, later
named COVID-19, that has spread globally, causing
significant adverse effects on populations and
economies. The outbreak of COVID-19 was declared a
pandemic by the World Health Organization and a
national emergency in the United States in March
2020
CRT
Credit risk transfer. The transfer of a portion of
mortgage credit risk to the private sector through
different forms of transactions and structures
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
48 | MGIC Investment Corporation 2020 Annual Report
GSEs
5.25% Notes
Glossary
Collectively, Fannie Mae and Freddie Mac
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
Home Re Transactions
Excess-of-loss reinsurance transactions with
unaffiliated special purpose insurers domiciled in
Bermuda
HOPA
Homeowners Protection Act
HUD
Housing and Urban Development
/ I
IBNR Reserves
Loss reserves established on loans we estimate are
delinquent, but for which the delinquency has not
been reported to us
IIF
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, which includes the costs
of settling claims, including legal and other expenses
and general expenses of administering the claims
settlement process.
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
5.25% Senior Notes due on August 15, 2028, with
interest payable semi-annually on February 15 and
August 15 of each year
9% Debentures
9% Convertible Junior Subordinated Debentures
due on April 1, 2063, with interest payable semi-
annually on April 1 and October 1 of each year
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB due on
February 10, 2023, with interest payable monthly
Loss ratio
The ratio, expressed as a percentage, of the sum of
incurred losses and loss adjustment expenses to NPE
Low down payment loans or mortgages
Loans with less than 20% down payments
LPMI
Lender-paid mortgage insurance
/ M
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
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 RIF 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
MGIC Investment Corporation 2020 Annual Report | 49
Glossary
/ N
N/A
Not applicable for the period presented
NAIC
The National Association of Insurance
Commissioners
NIW
New Insurance Written, is the aggregate original
principal amount of the mortgages that are insured
during a period
N/M
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
Data, or calculation, deemed not meaningful for the
period presented
Profit Commission
NPE
The amount of premiums earned, net of premiums
assumed and ceded under reinsurance agreements
NPL
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
NPW
The amount of premiums written, net of premiums
assumed and ceded under reinsurance agreements
/ O
OCI
Payments we receive from reinsurers under each of
our quota share reinsurance transactions if the annual
loss ratio is below levels specified in the quota share
reinsurance transaction
/ Q
QSR Transaction
Quota share reinsurance transaction with a group of
unaffiliated reinsurers
2015 QSR
Our QSR transaction that provides coverage on
eligible NIW written prior to 2017
2017 QSR
Office of the Commissioner of Insurance of the State
of Wisconsin
Our QSR transaction that provides coverage on
eligible NIW in 2017
OTTI
Other than temporary impairment
/ P
Persistency
2018 QSR
Our QSR transaction that provides coverage on
eligible NIW in 2018
2019 QSR
The percentage of our insurance remaining in force
from one year prior
Our QSR transaction that provides coverage on
eligible NIW in 2019
PMI
2020 QSR
Private Mortgage Insurance (as an industry or product
type)
Our QSR transactions that provide coverage on
eligible NIW in 2020
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
Credit Union QSR
Our QSR transaction that provides coverage on
eligible NIW from credit union institutions
originated from April 1, 2020 through December 31,
2025
QM
A mortgage loan that satisfies the "qualified
mortgage" loan characteristics pursuant to the
Consumer Financial Protection Bureau's ability-to-
50 | MGIC Investment Corporation 2020 Annual Report
Glossary
TILA
Truth in Lending 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
repay under the TILA. 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
/ S
State Capital Requirements
Under certain state regulations, the minimum amount
of statutory capital relative to risk in force (or similar
measure)
/ T
Tax Act
The U.S. tax reform enacted on December 22, 2017
and commonly referred to as the "Tax Cuts and Jobs
Act"
MGIC Investment Corporation 2020 Annual Report | 51
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 require us to place our
investments in investment grade securities and limit
the amount of our credit exposure to any one issue,
issuer and type of instrument. Guideline and
investment portfolio detail is available in "Business –
Section C, Investment Portfolio" in Item 1 of our
Annual Report on Form 10-K for the year ended
December 31, 2020 filed with the SEC on February 23,
2021.
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 this exposure is
modified duration. Modified duration measures the
price sensitivity of the assets to the changes in
spreads. At December 31, 2020, the modified duration
of our fixed income investment portfolio was 4.3
years, which means that an instantaneous parallel
shift in the yield curve of 100 basis points would
result in a change of 4.3% 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."
52 | MGIC Investment Corporation 2020 Annual Report
Risk Factors
As used below, “we,” “our” and “us” refer to MGIC
Investment Corporation’s consolidated operations or
to MGIC Investment Corporation, as the context
requires; and “MGIC” refers to Mortgage Guaranty
Insurance Corporation.
Our actual results could be affected by the risk factors
below. These risk factors are an integral part of this
annual report. These risk factors may also cause
actual results to differ materially from the results
contemplated by forward looking statements that we
may make. Forward looking statements consist of
statements which relate to matters other than
historical fact, including matters that inherently refer
to future events. Among others, statements that
include words such as “believe,” “anticipate,” “will” or
“expect,” or words of similar import, are forward
looking statements. We are not undertaking any
obligation to update any forward looking statements
or other statements we may make even though these
statements may be affected by events or
circumstances occurring after the forward looking
statements or other statements were made. No reader
of this annual report should rely on these statements
being current at any time other than the time at which
this annual report was filed with the Securities and
Exchange Commission.
Risk Factors Relating to the COVID-19 Pandemic
The COVID-19 pandemic may continue to materially
impact our financial results and may also materially
impact our business, liquidity and financial condition.
The COVID-19 pandemic had a material impact on our
2020 financial results. While uncertain, the future
impact of the COVID-19 pandemic on the Company’s
business, financial results, liquidity and/or financial
condition may also be material. The magnitude of the
impact will be influenced by various factors, including
the length and severity of the pandemic in the United
States, the length of time that measures intended to
reduce the transmission of COVID-19 remain in place,
the level of unemployment, and the impact of
government initiatives and actions taken by Fannie
Mae and Freddie Mac (the "GSEs") (including
mortgage forbearance and modification programs) to
mitigate the economic harm caused by COVID-19.
The COVID-19 pandemic may continue to impact our
business in various ways, including the following, each
of which is described in more detail in the remainder
of these risk factors:
•
Our incurred losses will increase if the number of
insured mortgages in our delinquency inventory
increases. We establish reserves for insurance
losses when delinquency notices are received on
loans that are two or more payments past due
and for loans we estimate are delinquent prior to
the close of the accounting period but for which
delinquency notices have not yet been reported to
us (this is often referred to as “IBNR”).
• We may be required to maintain more capital
under the private mortgage insurer eligibility
requirements ("PMIERs") of the GSEs, which
generally require more capital to be held for
delinquent loans than for performing loans and
require more capital to be held as the number of
payments missed on delinquent loans increases.
•
•
•
•
•
If the number of delinquencies increases, the
number of claims that we must pay over time
generally increases. In addition, our current
estimates of the number of delinquencies for
which we will receive claims, and the amount, or
severity, of each claim, may increase.
If the number of purchase and/or refinance
mortgage originations decreases, the number of
mortgages available for us to insure in the near
term may decrease.
Our access to the reinsurance markets may be
limited and the terms under which we are able to
secure reinsurance may be less attractive than
the terms of our previous transactions.
Our access to the capital markets may be limited
and the terms under which we may access the
capital markets may be less attractive than the
terms of our previous transactions.
Our operations may be impacted if our
management or other employees are unable to
perform their duties as a result of COVID-19-
related illnesses.
Risk Factors Relating to the Mortgage Insurance
Industry and its Regulation
Downturns in the domestic economy or declines in
home prices 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 make mortgage payments,
such as unemployment, health issues, family status,
and whether the home of a borrower who defaults on a
mortgage can be sold for an amount that will cover
unpaid principal and interest and the expenses of the
sale. 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
MGIC Investment Corporation 2020 Annual Report | 53
Risk Factors
willingness of borrowers with sufficient resources to
make mortgage payments 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, changes to the tax deductibility of mortgage
interest, decreases in the rate of household
formations, or other factors.
The unemployment rate rose from 3.5% as of
December 31, 2019, to 14.7% as of April 30, 2020. It
was 6.7% as of December 31, 2020. High levels of
unemployment may result in an increasing number of
loans in our delinquency inventory and an increasing
number of insurance claims; however, the increases
are difficult to predict given the uncertainty in the
current market environment, including uncertainty
about the length and severity of the COVID-19
pandemic; the length of time that measures intended
to reduce the transmission of COVID-19 remain in
place; effects of forbearance programs enacted by the
GSEs, various states and municipalities; and effects of
past and future government stimulus programs.
Current programs include, among others:
•
•
•
•
•
•
•
Payment forbearance on federally-backed
mortgages (including those delivered to or
purchased by the GSEs) to borrowers
experiencing a hardship during the COVID-19
pandemic.
Additional cash payments to individuals provided
for in the Consolidated Appropriations Act signed
into law in December 2020.
For those mortgages that are not subject to
forbearance, a suspension of foreclosures and
evictions until at least March 31, 2021, on
mortgages purchased or securitized by the GSEs.
Enhanced unemployment payments for pay
periods between December 26, 2020 and March
14, 2021.
An extension of the maximum duration for
unemployment benefits, generally through March
14, 2021.
Employee retention tax credits for certain small
businesses.
"Paycheck Protection Program" to provide small
businesses with funds to pay certain payroll and
other costs.
Forbearance for federally-insured mortgages allows
for mortgage payments to be suspended for up to 360
days; an initial forbearance period of up to 180 days
and, if requested by the borrower following contact by
the servicer, an extension of up to 180 days. The
servicer of the loan must begin attempts to contact
the borrower no later than 30 days prior to the
expiration of any forbearance plan term and must
continue outreach attempts until appropriate contact
is made or the forbearance plan term has expired. In
certain circumstances, the servicer will be unable to
contact the borrower and the forbearance plan will
expire after the first 180-day plan. A delinquent loan
for which the borrower was unable to be contacted
and that is not in a forbearance plan may be more
likely to result in a claim than a delinquent loan in a
forbearance plan. For loans in a COVID-19
forbearance plan as of February 28, 2021, the plan
may be extended for an additional three months,
subject to certain limits.
Of our insurance in force written through the first half
of 2020, approximately 10.9% was not delivered to or
purchased by the GSEs. While servicers of some non-
GSE loans may not be required to offer forbearance to
borrowers, we allow servicers to apply GSE loss
mitigation programs to non-GSE loans. In addition, the
Consumer Financial Protection Bureau ("CFPB")
requires substantial loss mitigation efforts be made
prior to servicers initiating foreclosures, therefore,
servicers of non-GSE loans may have an incentive to
offer forbearance or deferment.
Historically, forbearance plans have reduced the
incidence of our losses on affected loans. However,
given the uncertainty surrounding the long-term
economic impact of COVID-19, it is difficult to predict
the ultimate effect of COVID-19 related forbearances
on our loss incidence. Of the loans in our delinquency
inventory at December 31, 2020, 35,878 were reported
to us as in forbearance. Approximately 2,500 loans
that had been reported to us as in forbearance as of
September 30, 2020, were no longer reported to us as
in forbearance as of December 31, 2020, but remained
delinquent. Based on the date each loan in our
delinquency inventory was reported to us as being in
forbearance, we estimate that during the first two
quarters of 2021, 69% of those will reach their twelve-
month anniversary of having been in forbearance and,
unless their forbearance plans are extended, their
forbearance plans may end. Whether a loan's
delinquency will cure, including through modification,
when its forbearance plan ends will depend on the
economic circumstances of the borrower at that time.
The severity of losses associated with loans whose
delinquencies do not cure will depend on economic
conditions at that time, including home prices.
54 | MGIC Investment Corporation 2020 Annual Report
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 generally based on an insurer’s
book of risk in force and calculated from tables of
factors with several risk dimensions, reduced for
credit given for risk ceded under reinsurance
agreements).
Based on our interpretation of the PMIERs, as of
December 31, 2020, MGIC’s Available Assets totaled
$5.3 billion, or $1.8 billion in excess of its Minimum
Required Assets. MGIC is in compliance with the
PMIERs and eligible to insure loans purchased by the
GSEs. Our "Minimum Required Assets" reflect a credit
for risk ceded under our reinsurance transactions,
which 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." The calculated credit
for excess of loss reinsurance transactions under
PMIERs is generally based on the PMIERs requirement
of the covered loans and the attachment and
detachment point of the coverage, all of which
fluctuate over time. PMIERs credit is generally not
given for the reinsured risk above the PMIERs
requirement. The GSEs have discretion to further limit
reinsurance credit under the PMIERs. The total credit
for risk ceded under our reinsurance transactions is
subject to a modest reduction and is subject to
periodic review by the GSEs. There is a risk we will not
receive our current level of credit in future periods for
ceded risk. 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.
The PMIERs generally require us to hold significantly
more Minimum Required Assets for delinquent loans
than for performing loans and the Minimum Required
Assets required to be held increases as the number of
payments missed on a delinquent loan increases. For
delinquent loans whose initial missed payment
occurred on or after March 1, 2020 and prior to April 1,
2021 (the "COVID-19 Crisis Period"), the Minimum
Required Assets are generally reduced by 70% for at
least three months. The 70% reduction will continue, or
be newly applied, for delinquent loans that are subject
to a forbearance plan that is granted in response to a
Risk Factors
financial hardship related to COVID-19, the terms of
which are materially consistent with terms of
forbearance plans offered by Freddie Mac or Fannie
Mae. Under the PMIERs, a forbearance plan on a loan
with an initial missed payment occurring during the
COVID-19 Crisis Period is assumed to have been
granted in response to a financial hardship related to
COVID-19. Loans considered to be subject to a
forbearance plan include those that are in a repayment
plan or loan modification trial period following the
forbearance plan. As noted above, if a servicer of a
loan is unable to contact the borrower prior to the
expiration of the first 180-day forbearance plan term,
or if the forbearance plan reaches its twelve-month
anniversary and is not further extended, the
forbearance plan generally will expire. In such case,
the 70% reduction in Minimum Required Assets for
that loan will no longer be applicable, our Minimum
Required Assets will increase and our excess of
Available Assets over Minimum Required Assets will
decrease. As of December 31, 2020, application of the
70% reduction decreased our Minimum Required
Assets from approximately $4.2 billion to
approximately $3.5 billion. We do not expect our
Minimum Required Assets for the loans in forbearance
at December 31, 2020 to increase by the full amount
of the reduction upon expiration of the forbearance
plans because we expect some loans whose
forbearance plans expire to have their delinquencies
cured through modification or otherwise.
Despite reducing the Minimum Required Assets for
certain delinquent loans by 70%, an increasing number
of loan delinquencies caused by the COVID-19
pandemic may cause our Minimum Required Assets to
exceed our Available Assets. As of December 31,
2020, there were 57,710 loans in our delinquency
inventory, of which 62% were reported to us as being
subject to a forbearance plan. We believe substantially
all of the reported forbearance plans are COVID-19-
related. We are unable to predict the ultimate number
of loans that will become delinquent as a result of the
COVID-19 pandemic.
If our Available Assets fall below our Minimum
Required Assets, we would not be in compliance with
the PMIERs. The PMIERs provide a list of remediation
actions for a mortgage insurer's non-compliance, with
additional actions possible in the GSEs' discretion. At
the extreme, the GSEs may suspend or terminate our
eligibility to insure loans purchased by them. Such
suspension or termination would significantly reduce
the volume of our new insurance written ("NIW"); the
substantial majority of which is for loans delivered to
or purchased by the GSEs. In addition to the increase
in Minimum Required Assets associated with
delinquent loans, factors that may negatively impact
MGIC’s ability to continue to comply with the financial
requirements of the PMIERs include the following:
MGIC Investment Corporation 2020 Annual Report | 55
Risk Factors
•
•
•
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 the
PMIERs at any time.
There may be future implications for PMIERs as a
result of changes to the regulatory capital
requirements for the GSEs. In November 2020, the
Federal Housing Finance Agency (the “FHFA”)
adopted a rule containing a risk-based capital
framework for the GSEs that will increase their
capital requirements, effective on the later of
(i) the date of termination of the FHFA’s
conservatorship of the applicable GSE; (ii) sixty
days after publication of the adopted rule in the
Federal Register; or (iii) any later compliance date
provided in a consent order or other transition
order applicable to a GSE. The increase in capital
requirements may ultimately result in an increase
in the Minimum Required Assets required to be
held by mortgage insurers.
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.
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 delinquency notices are received
for insured loans that are two or more payments past
due and for loans we estimate are delinquent but for
which delinquency notices have not yet been received
(this is often referred to as “IBNR”). Losses that may
occur from loans that are not delinquent are not
reflected in our financial statements, except in the
case where a premium deficiency exists. A premium
deficiency would be recorded if the present value of
expected future losses and expenses exceeds the
present value of expected future premiums and
already established loss reserves on the applicable
loans. As a result, future losses on loans that are not
currently delinquent may have a material impact on
future results as such losses emerge. As of December
31, 2020, we had established case reserves and
reported losses incurred for 57,710 loans in our
delinquency inventory and our IBNR reserve totaled
$27 million. Though not reflected in our December 31,
2020 financial results, as of January 31, 2021, our
delinquency inventory had decreased to 56,315 loans.
The number of loans in our delinquency inventory may
increase from that level as a result of the COVID-19
pandemic, including as a result of high unemployment
associated with initiatives intended to reduce the
transmission of COVID-19. As a result, our losses
incurred may increase in future periods. The impact of
the COVID-19 pandemic on the number of
delinquencies and our losses incurred will be
influenced by various factors, including those
discussed in our risk factor titled "The COVID-19
pandemic may continue to materially impact our
financial results and may also materially impact our
business, liquidity and financial condition."
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 our
ultimate loss on delinquent loans by estimating the
number of such loans that will result in a claim
payment (the "claim rate"), and further estimating the
amount of the claim payment (the "claim severity").
Our estimates incorporate anticipated cures, loss
mitigation activity, rescissions and curtailments. The
establishment of loss reserves is subject to inherent
uncertainty and requires judgment by management.
Our actual 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, the impact of past and future government
initiatives and actions taken by the GSEs to mitigate
the economic harm caused by the COVID-19 pandemic
(including foreclosure moratoriums and mortgage
forbearance and modification programs) and efforts
to reduce the transmission of COVID-19, and a change
in the length of time loans are delinquent before
claims are received. All else being equal, the longer a
loan is delinquent before a claim is received, the
greater the severity. In light of the uncertainty caused
by the COVID-19 pandemic, including the impact of
foreclosure moratoriums and forbearance programs,
the average time it takes to receive a claim may
increase. The change in economic conditions may
include changes in unemployment, including
prolonged unemployment as a result of the COVID-19
pandemic, which may affect the ability of borrowers to
make mortgage payments, and changes in home
prices, which may affect the willingness of borrowers
56 | MGIC Investment Corporation 2020 Annual Report
to make mortgage payments when the value of the
home is below the mortgage balance. The economic
effects of the COVID-19 pandemic may be
disproportionately concentrated in certain geographic
regions. Information about the geographic dispersion
of our insurance in force can be found in our Annual
Reports on Form 10-K and our Quarterly Reports on
Form 10-Q filed with the SEC. Changes to our claim
rate and claim severity estimates could have a
material impact on our future results, even in a stable
economic environment. Losses incurred generally
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; however, the effects of the
COVID-19 pandemic affected this pattern in 2020.
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 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 in 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 generally has
been purchased by lenders in primary mortgage
market transactions to satisfy this credit enhancement
requirement. 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. These programs,
which currently account for a small percentage of the
low down payment market, 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
Risk Factors
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
of the GSEs that may be changed, including through
expansion or modification of these programs.
The GSEs (and other investors) have also used other
forms of credit enhancement that did not involve
traditional private mortgage insurance, such as
engaging in credit-linked note transactions executed in
the capital markets, or using other forms of debt
issuances or securitizations that transfer credit risk
directly to other investors, including competitors and
an affiliate of MGIC; using other risk mitigation
techniques in conjunction with reduced levels of
private mortgage insurance coverage; or accepting
credit risk without credit enhancement.
The FHA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 24.4% in the
first three quarters of 2020, 28.2% in 2019 and 30.5%
in 2018. In the past ten years, the FHA’s share has
been as low as 24.4% (in the first three quarters of
2020) 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. The
current Presidential Administration appears more
likely than the last Administration to reduce the FHA’s
mortgage insurance premium rates. Such a rate
reduction would negatively impact our NIW; however,
given the many factors that influence the FHA's
market share, it is difficult to predict the impact. In
addition, 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 30.6% in the
first three quarters of 2020, 25.2% in 2019 and 22.9%
in 2018. In the past ten years, the VA’s share has been
as low as 15.7% (in 2010) and as high as 30.6% (in the
first three quarters of 2020). 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,
MGIC Investment Corporation 2020 Annual Report | 57
Risk Factors
and because eligible borrowers have opted to use the
VA program when refinancing their mortgages.
Changes in the business practices of the GSEs, federal
legislation that changes their charters or a
restructuring of the GSEs could reduce our revenues or
increase our losses.
The substantial majority of our NIW is for loans
purchased by the GSEs; therefore, the business
practices of the GSEs greatly impact our business and
they 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. The GSEs
announced an adjustment for certain loans,
effective December 1, 2020, and the recently
adopted GSE capital framework may lead the
GSEs to increase their guaranty fees.
• 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 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.
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 2019, 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 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. The
GSE capital framework adopted in November 2020
establishes a post-conservatorship regulatory capital
framework intended to ensure that the GSEs operate in
a safe and sound manner. In January 2021, the GSEs'
Preferred Stock Purchase Agreements ("PSPAs") were
amended to allow the GSEs to continue to retain
earnings until they satisfy the requirements of the
2020 GSE capital framework. In addition, a proposed
rule issued by the FHFA in December 2020 would
require minimum funding requirements and new
liquidity standards. The impact of the Plan on private
mortgage insurance is unclear. The Plan does not
refer to mortgage insurance explicitly; however, it
58 | MGIC Investment Corporation 2020 Annual Report
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."
In December 2020, the CFPB adopted a rule that will
eliminate the GSE Patch effective upon the earlier of
the GSEs' exit from conservatorship or July 1, 2021.
The GSE Patch had expanded 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 did not meet the debt-to-
income ("DTI") ratio limit of 43% that was 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. Approximately 20% of our NIW in 2020 was
on loans with DTI ratios greater than 43%. However,
not all future loans with DTI ratios greater than 43%
will be affected by the expiration of the GSE Patch. The
new QM definition that becomes effective March 1,
2021, continues to require lenders to consider a
borrower's DTI ratio; however, it replaces the DTI ratio
cap with a pricing threshold that excludes from the
definition of QM a loan whose annual percentage rate
("APR") exceeds the average prime offer rate for
comparable loans by 2.25 percentage points or more.
We believe less than 2% of our 2020 NIW was on loans
whose APR exceeded the maximum to qualify as a
QM.
Treasury's Plan indicated that the FHFA and the
Department of Housing and Urban Development
("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 loans and high
DTI ratio loans. In connection with the 2021
amendment to the PSPAs, the GSEs must limit the
acquisition of certain loans with multiple higher risk
characteristics related to LTV, DTI and credit score, to
levels indicated to be their current levels at the time of
the amendment.
As a result of the matters referred to above and the
change in the Presidential Administration occurring in
January 2021, 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
Risk Factors
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.
Reinsurance may not always be available or
affordable.
We have in place quota share reinsurance ("QSR") and
excess of loss reinsurance ("XOL") transactions
providing various amounts of coverage on 88% of our
risk in force as of December 31, 2020. Our QSR
transactions with unaffiliated reinsurers cover most of
our insurance written from 2013 through 2022, and
smaller portions of our insurance written prior to 2013
and from 2023 through 2025. The weighted average
coverage percentage of our QSR transactions was
23%, based on risk in force as of December 31, 2020.
Considering the transaction we entered into in
February 2021, our XOL transactions provide excess-
of-loss reinsurance coverage for a portion of the risk
associated with certain mortgage insurance policies
having insurance coverage in force dates from July 1,
2016 through March 31, 2019 and January 1, 2020
through December 31, 2020, all dates inclusive. The
XOL transactions were entered into with special
purpose insurers that issued notes linked to the
reinsurance coverage ("Insurance Linked Notes" or
"ILNs"). The reinsurance transactions reduce the tail-
risk associated with stress scenarios. As a result, they
reduce the capital that we are required to hold to
support the risk and they allow us to earn higher
returns on our business than we would without them.
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 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 subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
We are subject to comprehensive regulation, including
by state insurance departments. Many 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
MGIC Investment Corporation 2020 Annual Report | 59
Risk Factors
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.
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 refinanced loans have LTV ratios that
require private mortgage insurance; and government
housing policy encouraging loans to first-time
homebuyers.
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. The increased
use, by the private mortgage insurance industry, of
risk-based pricing systems that establish premium
rates based on more attributes than previously
considered may result in increased state and/or
federal scrutiny of premium rates. The increased use
of algorithms, artificial intelligence and data and
analytics in the mortgage insurance industry may also
lead to additional regulatory scrutiny related to other
matters such as discrimination in pricing and
underwriting, data privacy and access to insurance.
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 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; our information technology
systems are damaged or their operations are
interrupted; or our automated processes do not
operate as expected.” For more details about the
various ways in which our subsidiaries are regulated,
see “Business - Regulation” in Item 1 of our Annual
Report on Form 10-K for the year ended December 31,
2020 filed with the SEC on February 23, 2021. 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
reviews or investigations nor is it possible to predict
their effect on us or the mortgage insurance industry.
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 the health of
the U.S. economy, conditions in regional and local
economies and the level of consumer confidence;
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;
A decline in the volume of low down payment home
mortgage originations could decrease demand for
mortgage insurance and limit our NIW. The COVID-19
pandemic, including the related restrictions on
business in many parts of the U.S., its effect on
unemployment and consumer confidence, and
changing underwriting standards may affect the
number of purchase mortgage originations. 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, 2020, MGIC’s risk-to-capital ratio was
9.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.2 billion above the
required MPP of $1.7 billion. At December 31, 2020,
the risk-to-capital ratio of our combined insurance
operations was 9.1 to 1. 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
60 | MGIC Investment Corporation 2020 Annual Report
not allowed an agreed level of credit under the State
Capital Requirements, MGIC may terminate the
reinsurance transactions, without penalty.
The NAIC previously announced plans to revise the
State Capital Requirements 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 compliance with State Capital
Requirements and its claims paying resources,
including the effects of the COVID-19 pandemic.
Risk Factors
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.
We depend on reliable, consistent third-party servicing
of the loans that we insure. An increase in delinquent
loans, including as a result of the COVID-19 pandemic,
may result in liquidity issues and operational burdens
for servicers. When a mortgage loan that is collateral
for a mortgage backed security ("MBS") becomes
delinquent, the servicer is usually required to continue
to pay principal and interest to the MBS investors,
generally for four months, even though the servicer is
not receiving payments from borrowers. This may
cause liquidity issues for especially non-bank servicers
(who service approximately 42.1% of the loans
underlying our insurance in force as of December 31,
2020) because they do not have the same sources of
liquidity that bank servicers have.
While there has been no disruption in our premium
receipts through the end of December 2020, servicers
who experience future liquidity issues may be less
likely to advance premiums to us on policies covering
delinquent loans or to remit premiums on policies
covering loans that are not delinquent. Our policies
allow us to cancel coverage on loans that are not
delinquent if the premiums are not paid within a grace
period. However, in response to the COVID-19
pandemic, many states have enacted moratoriums on
the cancellation of insurance due to non-payment. The
specific provisions of the moratoriums vary from
state-to-state. In addition, the GSEs amended the
PMIERs to require that mortgage insurers notify the
GSEs before coverage is cancelled in specific
circumstances and to give the GSEs the opportunity to
pay the premium on behalf of the servicer to keep
coverage in force.
The increased operational burdens associated with
the current numbers of delinquent loans and the
potential increase in delinquent loans caused by the
COVID-19 pandemic, as well as the possible transfer
of servicing resulting from liquidity issues, may cause
a disruption in the servicing of delinquent loans and
reduce servicers’ abilities to undertake mitigation
efforts that could help limit our losses.
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, and 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 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
MGIC Investment Corporation 2020 Annual Report | 61
Risk Factors
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.
Our persistency rate was 60.5% at December 31, 2020,
75.8% at December 31, 2019 and 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. 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.
Pandemics, 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.
Pandemics and other 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, or in areas with similar risks, which
could result in a decline in our business and an
increased claim rate on policies in those areas.
Natural disasters and rising sea levels 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. In
addition, the inability of a borrower to obtain hazard
insurance, or the increased cost of hazard insurance,
could lead to an increase in defaults or a decrease in
home prices in the affected areas. If we were to
attempt to limit our new insurance written in disaster-
prone areas, lenders may be unwilling to procure
insurance from us anywhere.
Pandemics and other 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 and for certain loans whose borrowers have
been affected by COVID-19. An increase in
delinquency notices resulting from a pandemic, such
as the COVID-19 pandemic, or other 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."
Risk Factors Relating to Our Business Generally
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. Generally, we
cannot cancel mortgage insurance coverage or adjust
renewal premiums during the life of a 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. Our premiums are subject to
approval by state regulatory agencies, which can delay
or limit our ability to increase premiums on future
policies. In addition, our customized rate plans may
delay our ability to increase premiums on future
policies covered by such plans. 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 anticipated when we set the premiums,
62 | MGIC Investment Corporation 2020 Annual Report
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 we set the premiums, our
returns may be lower than we assumed. For a
discussion of the effect of the COVID-19 pandemic on
the amount of capital we are required to hold, see 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."
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).
Risk Factors
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. Regarding the
concentration of our new business, our top ten
customers accounted for approximately 41% and 24%
of our NIW, in each of 2020 and 2019, respectively.
We monitor various competitive and economic factors
while seeking to balance both profitability and market
share considerations in developing our pricing
strategies. Premium rates on NIW will change our
premium yield (net premiums earned divided by the
average insurance in force) over time as older
insurance policies run off and new insurance policies
with different premium rates are written.
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 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."
Although the current PMIERs of the GSEs do not
require an insurer to maintain minimum financial
strength ratings, our financial strength ratings can
affect us in the ways set forth below. 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.
In recent years, much of the competition in the
industry has centered on pricing practices which have
included: (a) decreased use of standard rate cards;
and (b) increased use of (i) "risk-based pricing
systems" that use a spectrum of filed rates to allow for
formulaic, risk-based pricing based on multiple
attributes that may be quickly adjusted within certain
parameters, and (ii) customized rate plans, both of
which typically have rates lower than the standard rate
card. 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.
•
•
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
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. In 2020, Standard and Poor's revised
its outlook, to "negative," for MGIC and other U.S.
mortgage insurers due to the risks associated
with the COVID-19 pandemic, and A.M. Best
revised its outlook for the U.S. Private Mortgage
Insurers market segment to "negative," but has
since reaffirmed MGIC's rating with no change.
Our ability to participate in the non-GSE residential
mortgage-backed securities 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
MGIC Investment Corporation 2020 Annual Report | 63
Risk Factors
•
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 negative
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
write could be adversely affected if lenders and
investors select alternatives to private mortgage
insurance." The final GSE capital framework
provides more capital credit for transactions with
higher rated counterparties, as well as those who
are diversified. Although we are currently
unaware of a direct impact on MGIC, this could
potentially become a competitive disadvantage in
the future.
We are involved in legal proceedings and are subject to
the risk of additional legal proceedings in the future.
Before paying an insurance claim, generally 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 or deny a claim on the loan (both
referred to as “rescissions”). In addition, our insurance
policies generally provide that we can reduce a claim if
the servicer did not comply with its obligations under
our insurance policy (such reduction referred to as a
“curtailment”). In recent quarters, an immaterial
percentage of claims received in a quarter have been
resolved by rescissions. In 2020 and 2019,
curtailments reduced our average claim paid by
approximately 3.6% 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. We are currently involved in
discussions and/or proceedings with respect to our
claims paying practices. Although it is reasonably
possible that, when resolved, we will not prevail on all
matters, we are unable to make a reasonable estimate
or range of estimates of the potential liability. We
estimate the maximum exposure where a loss is
reasonably possible to be approximately $40 million.
This estimate of maximum exposure is based on
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.
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 Item 1 of our Annual Report on Form
10-K for the year ended December 31, 2020 filed with
the SEC on February 23, 2021, 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,
especially in unprecedented circumstances such as
64 | MGIC Investment Corporation 2020 Annual Report
those surrounding the COVID-19 pandemic, or with
respect to emerging risks, such as changing climatic
conditions. 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.
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.
In response to the COVID-19 pandemic, the Company
activated its business continuity program by
transitioning to a virtual workforce model with certain
essential activities supported by limited staff in
controlled office environments. This transition was
made to responsibly provide for the safety of
employees and to continue to serve customers across
our businesses. We have established a temporary
succession plan for each of our key executives, should
an executive be unable to perform his or her duties
due to a COVID-19 related illness; however, it is
Risk Factors
uncertain what impact COVID-19-related illnesses may
have on our operations in the future.
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, 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
of loan origination; the age of the loan; and the
premium rate we charge. Depending on the provisions
of the capital requirements when they are released in
final form and become effective, our mix of business
may affect the minimum capital we are required to
hold under the new framework.
The percentage of our NIW from all single-premium
policies was 9% in 2020 and 16% in 2019, and has
ranged from approximately 9% in 2020 to 19% in 2017.
Depending on the actual life of a single premium
policy and its premium rate relative to that of a
monthly premium policy, a single premium policy may
generate more or less premium than a monthly
premium policy over its life.
As discussed in our risk factor titled "Reinsurance may
not always be available or affordable," we have in place
various QSR transactions. 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 on the level of ceded
losses. We also have in place various excess-of-loss
("XOL") reinsurance transactions, under which we cede
premiums. Under the XOL reinsurance transactions,
for the respective reinsurance coverage periods, we
retain the first layer of aggregate losses, and a special
MGIC Investment Corporation 2020 Annual Report | 65
Risk Factors
purpose entity provides second layer coverage up to
the outstanding reinsurance coverage amount.
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
had been trending lower.
Our ability to rescind insurance coverage became
more limited for new insurance written beginning in
mid-2012, and it became further limited for new
insurance written under our revised master policy that
became effective March 1, 2020. These limitations
may result in higher losses than would be the case
under our previous master policies. In addition, our
rescission rights temporarily have become more
limited due to accommodations we have made in
connection with the COVID-19 pandemic. We have
waived our rescission rights in certain circumstances
where the failure to make payments was associated
with a COVID-19 pandemic-related forbearance.
From time to time, in response to market conditions,
we change the types of loans that we insure. We also
may change our underwriting guidelines, in part by
agreeing 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, 2020, mortgages with
these characteristics in our primary risk in force
included mortgages with LTV ratios greater than 95%
(14.7%), mortgages with borrowers having FICO
scores below 680 (9.2%), including those with
borrowers having FICO scores of 620-679 (7.8%),
mortgages with limited underwriting, including limited
borrower documentation (1.3%), and mortgages with
borrowers having DTI ratios greater than 45% (or
where no ratio is available) (13.5%), each attribute as
determined at the time of loan origination. Loans with
more than one of these attributes accounted for 2.7%
of our primary risk in force as of December 31, 2020,
and less than one percent of our NIW in 2020 and 1.0%
of our NIW in 2019.
From time to time, we change the processes we use to
underwrite loans. For example, we may rely on
information provided to us by a lender that was
obtained from certain of the GSEs’ automated
appraisal and income verification tools. Those tools
may produce results that differ from the results that
would have determined using different methods. For
example, the appraisal tools may indicate property
values that differ from the values that would have
been determined by onsite appraisals. In addition, we
continue to further automate our underwriting
processes. It is possible that our automated
processes result in our insuring loans that we would
not otherwise have insured under our prior processes.
Approximately 70.2% of our 2020 NIW (by risk written)
was originated under delegated underwriting
programs pursuant to which the loan originators had
authority on our behalf to underwrite the loans for our
mortgage insurance. For loans originated through a
delegated underwriting program, we depend on the
originators' compliance with our guidelines and rely on
the originators' representations that the loans being
insured satisfy the underwriting guidelines, eligibility
criteria and other requirements. While we have
established systems and processes to monitor
whether certain aspects of our underwriting guidelines
were being followed by the originators, such systems
may not ensure that the guidelines were being strictly
followed at the time the loans were originated.
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.
If state or federal regulations or statutes are changed
in ways that ease mortgage lending standards and/or
requirements, or if lenders seek ways to replace
business in times of lower mortgage originations, it is
possible that more mortgage loans could be originated
with higher risk characteristics than are currently being
originated, such as loans with lower FICO scores and
higher 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.
Our holding company debt obligations materially
exceed our holding company cash and investments.
At December 31, 2020, we had approximately $847
million in cash and investments at our holding
company and our holding company’s debt obligations
were $1.1 billion in aggregate principal amount,
consisting of $242 million of 5.75% Senior Notes due
in 2023 ("5.75% Notes"), $650 million of 5.25% Senior
Notes due 2028 (the 5.25% Notes), and $209 million of
9% Convertible Junior Subordinated Debentures due in
66 | MGIC Investment Corporation 2020 Annual Report
2063 ("9% Debentures"). Annual debt service on the
5.75% Notes, 5.25% Notes and 9% Debentures
outstanding as of December 31, 2020, is
approximately $67 million.
The 5.75% Senior Notes, 5.25% 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. In addition,
through June 30, 2021, dividends paid by MGIC to our
holding company require GSE approval. MGIC is the
principal source of dividends, and in the first quarter of
2020 and in the full year 2019, it paid a total of $390
million and $280 million, respectively, in dividends of
cash and investments to our holding company. We ask
the OCI not to object before MGIC pays dividends and,
due to the uncertainty surrounding the COVID-19
pandemic, MGIC did not pay a dividend of cash and/or
investment securities to the holding company after the
first quarter of 2020; however, in the third quarter of
2020, MGIC distributed to the holding company, as a
dividend, its ownership in $133 million of the 9%
Debentures, with a fair value of $167 million. Future
dividend payments from MGIC to the holding company
will be determined on a quarterly basis in consultation
with the board of directors, and after considering any
updated estimates about the length and severity of the
economic impacts of the COVID-19 pandemic on our
business.
In the third quarter of 2020, we issued the 5.25%
Senior Notes and used a portion of the proceeds to
repurchase $183 million of our 5.75% Senior Notes
and $48 million of our 9% Debentures. We may, from
time to time, repurchase our debt obligations on the
open market (including through 10b5-1 plans) or
through privately negotiated transactions.
In the first quarter of 2020 and in 2019, we
repurchased approximately 9.6 million and 8.7 million
shares of our common stock, respectively, using
approximately $120 million and $114 million of
holding company resources, respectively. As of
December 31, 2020, we had $291 million of
authorization remaining to repurchase our common
stock through the end of 2021 under a share
repurchase program approved by our Board of
Directors in January 2020. 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.
Due to the uncertainty caused by the COVID-19
pandemic, we have temporarily suspended stock
repurchases, but may resume them in the future. If any
additional capital contributions to our subsidiaries
were required, such contributions would decrease our
Risk Factors
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 additional debt capital or to raise
additional equity or equity-linked 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, 2020, we had outstanding $209
million principal amount of 9% Debentures. 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 75.5932 common
shares per $1,000 principal amount of debentures.
This represents a conversion price of approximately
$13.23 per share. The payment of dividends by our
holding company results in an adjustment to the
conversion rate and price, with such adjustment
generally deferred until the end of the year.
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 $17.20 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 9% Debentures in the future. If a
holder elects to convert its 9% Debentures, the interest
that has been deferred on the 9% 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
more information about the 9% Debentures, including
additional requirements resulting from the deferral of
MGIC Investment Corporation 2020 Annual Report | 67
Risk Factors
interest, see Note 7 – “Debt” to our consolidated
financial statements.
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, in the first
quarter of 2020 and in 2019, we repurchased shares of
our common stock and may do so again in the future.
In addition, in the third quarter of 2020, we
repurchased a portion of our debt obligations, and may
do so again in the future.
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:
changes in general conditions in the economy, the
mortgage insurance industry or the financial markets;
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 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, our information technology systems are
damaged or their operations are interrupted, or our
automated processes do not operate as expected.
programs, and to 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 by third-party cyber-attacks. 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 response to the COVID-19 pandemic, the Company
activated its business continuity program by
transitioning to a virtual workforce model with certain
essential activities supported by limited staff in
controlled office environments. While we continue to
maintain our full operations, the virtual workforce
model may be more vulnerable to security breaches,
damage or disruption.
We are in the process of upgrading certain of our
information systems, and transforming and
automating certain of our business processes, that
have been in place for a number of years and we
continue to deploy and enhance our risk-based pricing
system. The implementation of these technological
and business process 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,
if the third party providers to which we are becoming
increasingly reliant do not perform as expected, or if
the systems and/or transformed and automated
business processes do not operate as expected, it
could have an adverse impact on our business,
business prospects and results of operations.
Our success depends, in part, on our ability to manage
risks in our investment portfolio.
As part of our business, we maintain large amounts of
personal information of consumers. Federal and state
laws designed to promote the protection of such
information require businesses that collect or maintain
consumer information to adopt information security
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
68 | MGIC Investment Corporation 2020 Annual Report
Risk Factors
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. Because
SOFR is calculated based on different criteria than
LIBOR, SOFR and LIBOR may diverge.
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
benchmark rates to LIBOR may have an adverse effect
on our business, results of operations or financial
condition. We have three primary types of transactions
that involve financial instruments referencing LIBOR.
First, as of December 31, 2020, approximately 5% of
the fair value of our investment portfolio consisted of
securities referencing LIBOR, none of which reference
one-week and two-month tenors. Second, as of
December 31, 2020, approximately $1 billion of our
risk in force was on adjustable rate mortgages whose
interest is referenced to one-month USD 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. Third, we enter
into reinsurance agreements under which our
premiums are determined, in part, by the difference
between interest payable on the reinsurers’ notes
which reference one-month USD LIBOR and earnings
from a pool of securities receiving interest that may
reference LIBOR (in 2020, our total premiums on such
transactions were approximately $20.8 million).
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. The value of
our investment portfolio may also be adversely
affected by ratings downgrades, increased
bankruptcies and credit spreads widening in
distressed industries, such as energy, lodging and
leisure, autos, transportation and retail. In addition,
the collectability and valuation of our municipal bond
portfolio may be adversely affected if state and local
municipalities incur increased costs to respond to
COVID-19 and receive fewer tax revenues due to
adverse economic conditions. Our investment
portfolio also includes commercial mortgage-backed
securities, collateralized loan obligations, and asset-
backed securities, which could be adversely affected
by declines in real estate valuations and/or financial
market disruption, including a heightened collection
risk on the underlying loans. As a result of these
matters, we may not achieve our investment
objectives and a reduction in the market value of our
investments could have an 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.
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.
The Company may be adversely impacted by the
transition from LIBOR as a reference rate.
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. However, in
December 2020, ICE Benchmark Administration, the
administrator of LIBOR, began consulting on its
intention to cease publishing after 2021, with respect
to USD LIBOR, only the one-week and two-month
tenors and, on June 30, 2023, all other USD LIBOR
tenors. Efforts are underway to identify and transition
MGIC Investment Corporation 2020 Annual Report | 69
Management's Report on Internal Control Over Financial Reporting
CHANGES IN INTERNAL CONTROL DURING THE
FOURTH QUARTER
There are no 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, 2020 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,
2020.
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, 2020, as stated in their report which
appears herein.
70 | MGIC Investment Corporation 2020 Annual Report
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
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.
We have audited the accompanying consolidated
balance sheets of MGIC Investment Corporation and
its subsidiaries (the “Company”) as of December 31,
2020 and 2019, 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,
2020, 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, 2020, 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, 2020 and 2019, and the results of its
operations and its cash flows for each of the three
years in the period ended December 31, 2020 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, 2020, 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
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
MGIC Investment Corporation 2020 Annual Report | 71
compliance with the policies or procedures may
deteriorate.
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, 2020, the Company’s
recorded loss reserves were $881 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. The Company’s
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) the
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, related to the claim rate and
claim severity; and (iii) the audit effort included the
involvement of professionals with specialized skill
and knowledge.
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
related to 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 related to the claim rate and
claim severity.
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 23, 2021
We have served as the Company’s auditor since 1985.
72 | MGIC Investment Corporation 2020 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Investment portfolio:
Fixed income, available-for-sale, at fair value (amortized cost, 2020 -
$6,317,164; 2019 - $5,562,550)
Equity securities, at fair value (cost, 2020 - $17,522; 2019 - $17,188)
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
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 2020 - 371,353; 2019 - 371,353; outstanding 2020 - 338,573; 2019 -
347,308)
Paid-in capital
Treasury stock (shares at cost 2020 - 32,779; 2019 - 24,045)
Accumulated other comprehensive income, net of tax
Retained earnings
Total shareholders' equity
December 31,
Note
2020
2019
5 / 6
$
6,661,596 $
5,737,892
18,215
3,100
17,328
3,100
6,682,911
5,758,320
287,953
161,847
8,727
49,997
95,042
669
56,044
47,144
21,561
7,209
49,705
21,641
1,521
55,587
50,121
18,531
104,478
105,089
$
7,354,526 $
6,229,571
$
880,537 $
287,099
155,000
879,379
208,814
244,711
555,334
380,302
155,000
420,867
256,872
151,962
2,655,540
1,920,337
371,353
1,862,042
(393,326)
216,821
2,642,096
4,698,986
371,353
1,869,719
(283,196)
72,708
2,278,650
4,309,234
9
9
8
7
7
7
17
13
10
Total liabilities and shareholders' equity
$
7,354,526 $
6,229,571
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2020 Annual Report | 73
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2020
2019
2018
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
Loss on debt extinguishment
Interest expense
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
$
1,106,632 $
1,124,196 $
1,103,332
10,837
(188,727)
928,742
93,201
1,021,943
154,396
13,752
9,055
6,446
(129,334)
1,001,308
29,680
1,030,988
167,045
5,306
10,638
271
(111,341)
992,262
(17,100)
975,162
141,331
(1,353)
8,708
1,199,146
1,213,977
1,123,848
364,774
12,380
176,398
26,736
59,595
639,883
559,263
113,170
118,575
12,001
182,768
—
52,656
366,000
847,977
174,214
$
446,093 $
673,763 $
36,562
11,932
178,211
—
52,993
279,698
844,150
174,053
670,097
$
$
1.31 $
1.29 $
1.91 $
1.85 $
1.83
1.78
339,953
359,293
352,827
373,924
365,406
386,078
9
9
5
5
8 / 9
7
7
12
4
4
4
See accompanying notes to consolidated financial statements.
74 | MGIC Investment Corporation 2020 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Years Ended December 31,
Note
2020
2019
2018
$
446,093 $
673,763 $
670,097
Other comprehensive income (loss), net of tax:
Change in unrealized investment gains and losses
Benefit plans adjustment
Other comprehensive income (loss), net of tax
10
5
11
133,616
10,497
144,113
173,910
23,012
196,922
(64,646)
(15,767)
(80,413)
Comprehensive income
$
590,206 $
870,685 $
589,684
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2020 Annual Report | 75
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common stock
Note
2020
2019
2018
Years Ended December 31,
Balance, beginning of year
$
371,353 $
371,353 $
370,567
Net common stock issued under share-based
compensation plans
Balance, end of year
Paid-in capital
Balance, beginning of year
Reacquisition of convertible junior subordinated
debentures-equity component
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 under share-based
compensation plans
Balance, end of year
Accumulated other comprehensive income (loss)
Balance, beginning of year
Cumulative effect of financial instruments accounting
standard update
Other comprehensive income (loss)
Balance, end of year
Retained earnings
Balance, beginning of year
13
3
10
Cumulative effect of financial instruments accounting
standard update
3
Net income
Cash dividends
Balance, end of year
—
—
371,353
371,353
786
371,353
1,869,719
1,862,536
1,850,582
7
(2,673)
—
(18,807)
13,803
—
—
(11,715)
18,898
1,862,042
1,869,719
—
(8,917)
—
20,871
1,862,536
(283,196)
(119,997)
(175,059)
(114,126)
—
(175,059)
9,867
5,989
—
(393,326)
(283,196)
(175,059)
72,708
(124,214)
(43,783)
—
144,113
216,821
—
196,922
72,708
(18)
(80,413)
(124,214)
2,278,650
1,647,275
977,160
—
446,093
(82,647)
—
673,763
(42,388)
18
670,097
—
2,642,096
2,278,650
1,647,275
Total shareholders' equity
$
4,698,986 $
4,309,234 $
3,581,891
See accompanying notes to consolidated financial statements.
76 | MGIC Investment Corporation 2020 Annual Report
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:
Years Ended December 31,
2020
2019
2018
$
446,093 $
673,763 $
670,097
Depreciation and other amortization
Deferred tax expense
Loss on debt extinguishment
Net realized investment (gains) losses
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 in payables for securities
Additions to property and equipment
Net cash used in investing activities
Cash flows from financing activities:
Proceeds from issuance of senior notes
Purchase of senior notes
Payment of original issue discount - senior notes
Purchase of convertible junior subordinated debentures
Payment of original issue discount- convertible junior
subordinated debentures
Cash portion of loss on debt extinguishment
Repurchase of common stock
Dividends paid
Payment of debt issuance costs
Payment of withholding taxes related to share-based
compensation net share settlement
Net cash provided by (used in) financing activities
Net increase in cash and cash equivalents and restricted cash and
cash equivalents
Cash and cash equivalents and restricted cash and cash
equivalents at beginning of year
Cash and cash equivalents and restricted cash and cash
equivalents at end of year
See accompanying notes to consolidated financial statements.
57,812
27,475
26,736
(13,752)
(292)
(73,401)
852
(457)
(3,030)
4,586
325,203
(93,203)
(500)
6,271
21,916
732,309
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)
(118,685)
(311,616)
(29,683)
(11,500)
1,057
24,791
609,532
17,051
(22,900)
(77,551)
14,738
544,517
(2,636,972)
(1,394,126)
(1,459,473)
229,796
748,165
(307)
(5,636)
(422,108)
370,449
785,175
307
(14,238)
(317,780)
836,851
1,030,926
—
(3,311)
(772,506)
640,250
(179,735)
(2,969)
(36,392)
(15,049)
(25,266)
(119,997)
(82,061)
(2,020)
(8,940)
167,821
—
—
—
—
—
—
(125,766)
(41,914)
—
(5,726)
(173,406)
—
—
—
—
—
—
(163,419)
—
—
(8,131)
(171,550)
55,187
99,851
127,624
14,018
169,056
155,038
$
296,680 $
169,056 $
155,038
MGIC Investment Corporation 2020 Annual Report | 77
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 a percentage of the unpaid loan
principal, delinquent interest and certain expenses
associated with the default and subsequent
foreclosure or sale approved by us, of the underlying
property. MGIC Assurance Corporation ("MAC") and
MGIC Indemnity Corporation ("MIC"), insurance
subsidiaries of MGIC, provide insurance for certain
mortgages under Fannie Mae and Freddie Mac (the
"GSEs") credit risk transfer programs.
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.
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.
RECLASSIFICATIONS
Certain reclassifications to 2019 and 2018 amounts
have been made in the accompanying consolidated
financial statements to conform to the 2020
presentation.
At December 31, 2020, our direct primary insurance in
force ("IIF") was $246.6 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 $61.8 billion, which represents the IIF
multiplied by the insurance coverage percentage.
The substantial majority of our NIW 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 risk
in force, calculated from tables of factors with several
risk dimensions). Based on our application of the
PMIERs, as of December 31, 2020, 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.
RECENT DEVELOPMENTS
The COVID-19 pandemic had a material impact on our
2020 financial results. Among other things, the
COVID-19 pandemic led to an increase in
delinquencies, which increased our capital
requirements under PMIERs on those delinquent
loans and increased our losses incurred. While
uncertain, the future impact of the COVID-19
pandemic on the Company’s business, financial
results, liquidity and/or financial condition may also
be material. The magnitude of the impact will be
influenced by various factors, including the length and
severity of the pandemic in the United States, the
length of time that measures intended to reduce the
transmission of COVID-19 remain in place, the level of
unemployment, and the impact of government
initiatives and actions taken by Fannie Mae and
Freddie Mac (the "GSEs") (including mortgage
forbearance and modification programs) to mitigate
the economic harm caused by COVID-19.
SUBSEQUENT EVENTS
We have considered subsequent events through the
date of this filing. In February 2021, MGIC executed an
insurance linked note transaction. In addition, we have
agreed to terms on a quota share reinsurance
transaction which provides coverage on eligible NIW
in 2021 and 2022 (see Note 9 - "Reinsurance").
78 | MGIC Investment Corporation 2020 Annual Report
NOTE 3
Significant Accounting Policies
information, data changes, and directional moves
compared to market moves.
Notes
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.
CASH AND CASH EQUIVALENTS
We consider money market funds and investments
with original maturities of three months or less to be
cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consists of
cash and money market funds held in trusts for the
benefit of contractual counterparties under
reinsurance agreements.
FAIR VALUE MEASUREMENTS
We carry certain financial instruments at fair value
and disclose the fair value of all financial instruments.
Our financial instruments carried at fair value are
predominantly measured on a recurring basis.
Financial instruments measured on a nonrecurring
basis are subject to fair value adjustments only in
certain circumstances (for example, when there is
evidence of impairment).
The fair value of an asset or liability is defined as the
price that would be received upon a sale of an asset,
or paid to transfer a liability, in an orderly transaction
between market participants at the measurement
date. Fair value is based on quoted market prices or
inputs, where available. If prices or quotes are not
available, fair value is based on valuation models or
other valuation techniques that consider relevant
transaction characteristics (such as maturity) and use
as inputs observable or unobservable market
parameters including yield curves, interest rates,
volatilities, equity or debt prices, 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 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
MGIC Investment Corporation 2020 Annual Report | 79
Notes
The three levels are defined as follows:
INVESTMENTS
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, treasury bills, 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, most municipal bonds,
and commercial paper.
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. 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.
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 credit allowance (2020),
and any "other than temporary" impairments ("OTTI")
(2019).
Equity securities. Equity securities are reported at fair
value, except for certain securities that are carried at
cost. Equity securities carried at cost are reported as
Other invested assets. Realized investment gains and
losses on equity securities are reported in income
based upon specific identification of securities sold,
as well as any change in fair value of equity
securities.
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 allowance for credit losses
Effective January 1, 2020, each quarter we perform
reviews of our investments to assess if declines in
fair value of available-for-sale securities are impaired.
In evaluating the decline in fair value, 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 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 a realized loss
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.
When a security is considered to be impaired, the
losses are separated into the portion of the loss that
80 | MGIC Investment Corporation 2020 Annual Report
represents the credit loss and the portion that is due
to other factors. An allowance for credit losses is
recorded, subject to reversal, for the credit loss
portion in the statement of operations, while the loss
due to other factors is recognized in accumulated
other comprehensive loss, net of taxes. A credit loss
is determined to exist if the present value of the
discounted cash flows, using the security’s original
yield, expected to be collected from the security is
less than the cost basis of the security.
For 2019, our evaluation of whether a decline in fair
values is other-than-temporary also includes
reviewing the extent and duration of the decline.
Based on our evaluation, if the fair value of a security
is below its amortized cost at the time of our intent to
sell, the security is classified as other-than-
temporarily
impaired and the full amount of the impairment is
recognized as a loss in the statement of operations.
Otherwise, when a security is considered to be other-
than-temporarily impaired, the losses are separated
into the portion of the loss that represents the credit
loss and the portion that is due to other factors. The
credit loss portion is recognized as a loss in the
statement of operations, while the loss due to other
factors is recognized in accumulated other
comprehensive loss, net of taxes. A credit loss is
determined to exist if the present value of the
discounted cash flows, using the security’s original
yield, expected to be collected from the security is
less than the cost basis of the security. If the security
is determined to be other-than-temporary-impaired
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.
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.
Notes
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 notices of delinquency
on insured mortgage loans are received. Such loans
are referred to as being in our delinquency inventory.
For reporting purposes, we consider a loan delinquent
when it is two or more payments past due and has not
become current or resulted in a claim payment. 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 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.
Home office and equipment is shown net of
accumulated depreciation of $51.2 million, $43.0
million and $38.1 million as of December 31, 2020,
2019 and 2018, respectively. Depreciation expense for
the years ended December 31, 2020, 2019 and 2018
was $6.3 million, $6.5 million and $6.0 million,
respectively.
Incurred but not reported ("IBNR") reserves are
established for delinquencies estimated to have
occurred prior to the close of an accounting period,
but not yet reported to us. Consistent with reserves
for reported delinquencies, IBNR reserves are also
established using estimated claim rates and claim
severities.
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
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.”)
MGIC Investment Corporation 2020 Annual Report | 81
Notes
PREMIUM DEFICIENCY RESERVE
INCOME TAXES
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.
Effective, January 1, 2020, we assess whether a credit
loss exists for our premium receivable. In
determining if a credit loss allowance is required for
premium receivable, consideration is given to the life
of the premium receivable asset, areas of potential
credit loss, and forward-looking predictive indicators.
Any estimated credit loss would be immediately
recognized.
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.
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.")
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. Effective January 1, 2019, all
participants, regardless of hire or rehire date, earn
benefits using a cash balance formula. Participants
hired or rehired prior to January 1, 2014, earned
benefits under a traditional formula through
December 31, 2018. which calculated a pension credit
for each year of eligible service. Under the cash
balance formula, participants’ accounts are credited
each year with an employer contribution and interest.
The employer contribution is a percentage of eligible
earnings based on the participant’s age on January 1,
82 | MGIC Investment Corporation 2020 Annual Report
2019. 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 are reported before taking credit for
amounts ceded under reinsurance
agreements. Ceded loss reserves are reflected as
"Reinsurance recoverable on loss reserves." Amounts
due from reinsurers on paid claims are reflected as
“Reinsurance recoverable on paid losses.” Ceded
premiums payable are included in “Other liabilities.”
Profit commissions are included with “Premiums
written – Ceded” and ceding commissions are
included with “Other underwriting and operating
expenses, net.” We remain liable for all insurance
ceded. (See Note 9 – “Reinsurance.”)
Quarterly, we assess the credit risk associated with
our reinsurance recoverable. Effective January 1,
2020 if an estimated credit loss is expected to occur
over the remaining life of reinsurance recoverable, it is
immediately recorded to income. In assessing
whether a credit allowance should be established, we
consider several factors including, but not limited to
the credit ratings of individual reinsurers, investor
reports for our Home Re Transactions, collateral held
in trust accounts in which MGIC is the sole
beneficiary, and aging of outstanding reinsurance
recoverable balances.
Assumed reinsurance is based on information
received from the ceding company.
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-
Notes
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
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 9% Debentures 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. For
purposes of calculating basic and diluted EPS, vested
restricted stock and RSUs are considered
outstanding.
RELATED PARTY TRANSACTIONS
In 2020, MGIC Reinsurance Corporation of Wisconsin,
a subsidiary of MGIC, merged with MGIC. There were
no related party transactions during 2019 or 2018.
RECENT ACCOUNTING AND REPORTING
DEVELOPMENTS
Accounting standards effective in 2020, or early
adopted, and relevant to our financial statements
Measurement of Credit Losses on Financial
Instruments: ASU 2016-13
Effective January 1, 2020, we adopted ASC 326,
Financial Instruments - Credit Losses (“CECL”). This
new standard replaced the incurred loss impairment
methodology with a methodology that reflects lifetime
expected credit losses and requires consideration of a
broader range of reasonable and supportable
information to inform credit loss estimates. Under
CECL, allowances are established by incorporating the
forecast of future economic conditions into our loss
estimate unless such forecast is not reasonable and
supportable, in which case we revert to historical loss
experience. Application of the CECL model impacts
our reinsurance recoverables and premium
receivable. ASC 326 also replaced the OTTI model
with an impairment allowance model, subject to
reversal, for available-for-sale investments, which are
measured at fair value. Our mortgage insurance
policies are outside the scope of ASC 326. The new
guidance is not prescriptive about certain aspects of
estimating expected credit losses, including the
specific methodology to use, and therefore requires
significant judgment in application. Applying ASC 326,
we have determined that an allowance for credit
losses related to our premium receivables and
reinsurance recoverables was not necessary as of
MGIC Investment Corporation 2020 Annual Report | 83
Notes
December 31, 2020. At December 31, 2020, we
established an allowance for credit losses for
available-for-sale securities of $49 thousand. We
continue to apply the previous guidance to 2019 and
prior periods.
Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to
accounting standards, which are not yet effective or
adopted.
Changes to the Disclosure Requirements for Fair Value
Measurement: ASU 2018-13
Effective January 1, 2020, we adopted FASB guidance
that changes the disclosure requirements for fair
value measurements. The updated guidance removed
the requirement to disclose the amount 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
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 adoption of the updated
guidance did not have a material effect on our
consolidated financial statement disclosures.
Changes to the Disclosure Requirements for Defined
Benefit Plans: ASU 2018-14
In August 2018, the FASB issued amendments to
modify the disclosure requirements for defined
benefit plans. The updated guidance removed the
requirements to identify amounts that are expected to
be reclassified out of accumulated other
comprehensive income and recognized as
components of net periodic benefit cost in the coming
year and the effects of a one-percentage-point change
in assumed health care cost trend rates on service
and interest cost and on the postretirement benefit
obligation. The updated guidance added disclosures
for the weighted-average interest crediting rates for
cash balance plans and other plans with interest
crediting rates and explanations for significant gains
and losses related to changes in the benefit obligation
for the period. Early adoption is permitted. An entity
should apply the amendments on a retrospective
basis to all periods presented. The adoption of this
guidance did not have a material impact to our
consolidated financial statement disclosures.
Standard / Interpretation
Table 2.1
Amended Standards
ASC 321,
323, 815 Investments
•
ASU 2020-01 - Investments-
Equity Securities (Topic 321),
Investments-Equity Method and
Joint Ventures (Topic 323), and
Derivatives and Hedging (Topic
815)
Effective
date
January 1,
2021
ASC 740 Income Taxes
•
ASU 2019-12 - Simplifying the
Accounting for Income Taxes
January 1,
2021
ASC
310-20
Receivables
•
ASU 2020-08 - Codification
Improvements to Subtopic
310-20, Receivables -
Nonrefundable Fees and Other
Costs
January 1,
2021
ASC 470,
815
Debt
•
ASU 2020-06 - Debt with
conversion and other options
(Topic 470), derivatives and
hedging - contracts in entity’s
own equity (Topic 815)
January 1,
2022
Clarification of Accounting for Equity Securities: ASU
2020-01
In January 2020, the FASB issued guidance which
clarifies certain interactions of accounting for equity
securities under Topic 321, under the equity method
of accounting in Topic 323, and accounting for certain
forward contracts and purchased options in Topic
815. The amendment clarifies the consideration of
observable transactions before applying or
discounting the equity method of accounting. The
updated guidance is effective for annual periods
beginning after December 15, 2020, 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.
84 | MGIC Investment Corporation 2020 Annual Report
Simplifying the Accounting for Income Taxes: ASU
2019-12
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 annual periods
beginning after December 15, 2020, 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.
Codification Improvements to Subtopic 310-20,
Receivables - Nonrefundable Fees and Other Costs:
ASU 2020-08
In October 2020, the FASB issued amendments to the
codification that clarifies the accounting guidance for
Accounting Standards Update No. 2017-08,
Receivables—Nonrefundable Fees and Other Costs
(Subtopic 310-20): Premium Amortization on
Purchased Callable Debt Securities. FASB standard
2017-08 shortened the amortization period for certain
purchased callable debt securities held at a premium
by requiring that entities amortize the premium
associated with those callable debt securities within
the scope of paragraph 310-20-25-33 to the earliest
call date and clarified the FASB’s intent that an entity
should reevaluate whether a callable debt security
that has multiple call dates is within the scope of
paragraph 310-20-35-33 for each reporting period.
This guidance clarifies the issuer of a callable debt
security should utilize the next call date versus the
earliest call date in amortizing premium. The
updated guidance is effective for annual periods
beginning after December 15, 2020, including interim
periods within those annual periods. We have
evaluated the impacts the adoption of this guidance
Notes
will have on our consolidated financial statements,
and determined it will not have a material impact.
Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity: ASU 2020-06
In August 2020, the FASB issued guidance that
simplifies the accounting for certain financial
instruments with characteristics of liabilities and
equity. It also includes amendments to EPS
guidance. The updated guidance reduces the number
of accounting models for convertible debt
instruments and convertible preferred stock. This ASU
eliminates the cash conversion and the beneficial
conversion models, which will make more
instruments eligible for the fair value option. As a
result of these changes, more convertible instruments
will be reported as a single unit on the balance sheet.
The updated guidance also includes updates to the
EPS calculation. The ASU requires companies to use
the if-converted method, assume share settlement
when settlement can be in cash or in shares, use an
average market price for the period if the number of
shares is based on an entity’s share price, and use the
weighted average shares from each quarter to
calculate the year to date weighted average shares.
The ASU also includes improvements to the
disclosures for convertible instruments and EPS. The
updated guidance is effective for annual periods
beginning after December 15, 2021. Early adoption is
permitted for fiscal years beginning after December
15, 2020. The ASU requires adoption to be applied
retrospectively or using a modified retrospective
basis. We are currently evaluating the impacts the
adoption of this guidance will have on our
consolidated financial statement disclosures and
whether we would early adopt.
MGIC Investment Corporation 2020 Annual Report | 85
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)
2020
2019
2018
Years Ended December 31,
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):
9% Debentures
$
$
$
446,093 $
673,763 $
339,953
352,827
1.31 $
1.91 $
670,097
365,406
1.83
446,093 $
673,763 $
670,097
17,004
18,264
Diluted income available to common shareholders
$
463,097 $
692,027 $
Weighted-average shares - basic
Effect of dilutive securities:
Unvested restricted stock units
9% Debentures
Weighted average common shares outstanding - diluted
339,953
352,827
1,589
17,751
359,293
2,069
19,028
373,924
Diluted income per share
$
1.29 $
1.85 $
18,264
688,361
365,406
1,644
19,028
386,078
1.78
(1) Interest expense for the years ended December 31, 2020, 2019 and 2018 has been tax effected at a rate of 21%.
For the years ended December 31, 2020, 2019, and 2018, all of our then outstanding 9% 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 9% 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.
86 | MGIC Investment Corporation 2020 Annual Report
Notes
NOTE 5
Investments
FIXED INCOME SECURITIES
Our fixed income securities consisted of the following as of December 31, 2020 and 2019:
Details of fixed income investment securities by category as of December 31, 2020
Table
5.1a
(In thousands)
Amortized Cost
Allowance for
Expected Credit
Loss
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
U.S. Treasury securities and
obligations of U.S.
government corporations
and agencies
Obligations of U.S. states
and political subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Debt securities issued by
foreign sovereign
governments
Other Investments (1)
Total fixed income
securities
$
264,531 $
— $
1,164 $
(2) $
265,693
2,083,568
2,690,860
203,807
425,532
312,572
310,616
4,485
21,193
—
—
(49)
—
—
—
—
—
166,557
155,156
2,946
6,472
16,055
566
224
—
(256)
(1,728)
(18)
(838)
(1,125)
(692)
2,249,869
2,844,288
206,686
431,166
327,502
310,490
—
—
4,709
21,193
$
6,317,164 $
(49) $
349,140 $
(4,659) $
6,661,596
Details of fixed income investment securities by category as of December 31, 2019
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
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
(1)
Consists of short-term commercial paper with original maturities greater than ninety days.
The increase in gross unrealized gains and the decrease in gross unrealized losses in our fixed income securities
from December 31, 2019 to December 31, 2020 were primarily caused by declines in interest rates during that
period.
We had $14.1 million and $13.9 million of investments at fair value on deposit with various states as of
December 31, 2020 and 2019, 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 $165.9 million and $88.9 million at December 31, 2020 and 2019, respectively.
MGIC Investment Corporation 2020 Annual Report | 87
Notes
Table 5.2 compares the amortized cost and fair values of fixed income securities, by contractual maturity, as of
December 31, 2020. 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, 2020
Amortized Cost
Fair Value
$
390,510 $
393,286
1,945,158
1,280,760
1,448,209
5,064,637
203,807
425,532
312,572
310,616
2,033,183
1,402,640
1,556,643
5,385,752
206,686
431,166
327,502
310,490
Total as of December 31, 2020
$
6,317,164 $
6,661,596
Proceeds from the sale of fixed income securities classified as available-for-sale were $803.4 million, $228.1
million, and $365.6 million during the years ended December 31, 2020, 2019, and 2018, respectively. Gross gains
of $21.3 million, $7.1 million, and $0.7 million and gross losses of $8.8 million, $3.5 million, and $3.8 million
were realized on those sales during the years ended December 31, 2020, 2019, and 2018, respectively.
We recorded $0.3 million of realized losses for the year ended December 31, 2020 related to our intent to sell
certain securities. We also recorded a credit allowance of $49 thousand for the year ended December 31, 2020.
For the years ended December 31, 2019, and 2018, we recorded $0.1 million and $1.8 million of OTTI losses in
earnings, respectively.
EQUITY SECURITIES
The cost and fair value of investments in equity securities as of December 31, 2020 and December 31, 2019 are
shown in tables 5.3a and 5.3b below.
Details of equity investment securities as of December 31, 2020
Table
5.3a
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
17,522
695
(2)
18,215
Details of equity investment securities as of December 31, 2019
Table
5.3b
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
17,188
154
(14)
17,328
Proceeds from the sale of equity securities were $25.7 million and $1.7 million during the years ended
December 31, 2020 and 2019, respectively. Gross gains of $1.8 million and $1.6 million were realized on those
sales during the year ended December 31, 2020 and 2019, respectively. Gross losses of $0.4 million and zero
were realized on those sales during the year ended December 31, 2020 and 2019, respectively. For the year
ended December 31, 2020 and December 31, 2019, we recognized $0.6 million and $0.2 million of net gains on
equity securities still held as of December 31, 2020 and December 31, 2019, respectively, which are reported in
Net realized investment (losses) gains on our consolidated statements of operations.
88 | MGIC Investment Corporation 2020 Annual Report
Notes
OTHER INVESTED ASSETS
Other invested assets consists of 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, 2020, that collateral consisted of fixed income securities included in our total investment portfolio,
and cash and cash equivalents, with a total fair value of $163.9 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, 2020 and 2019, 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 $5 million and $10 million as of December 31, 2020 and 2019, 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, 2020
Table
5.4a
(In thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Less Than 12 Months
12 Months or Greater
Total
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
$
2,690 $
(2) $
— $
— $
2,690 $
(2)
31,416
44,968
14,929
98,409
13,212
95,287
(256)
(1,728)
(18)
(773)
(789)
(261)
—
—
—
3,566
2,799
73,904
—
—
—
(65)
(336)
(431)
31,416
44,968
14,929
101,975
16,011
169,191
(256)
(1,728)
(18)
(838)
(1,125)
(692)
$
300,911 $
(3,827) $
80,269 $
(832) $
381,180 $
(4,659)
Unrealized loss aging for securities by type and length of time as of December 31, 2019
Table
5.4b
(In thousands)
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Less Than 12 Months
12 Months or Greater
Total
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
$
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)
(2,766)
(51)
(1,418)
81,816
264,862
25,393
215,895
74,240
278,432
$
624,334 $
(5,426) $
379,411 $
(4,476) $ 1,003,745 $
(857)
(3,008)
(178)
(3,227)
(779)
(1,643)
(9,902)
Based on current facts and circumstances, we believe the unrealized losses as of December 31, 2020 presented
in table 5.4a above are not indicative of the ultimate collectability of the current amortized cost of the securities.
We believe the gross unrealized losses are primarily attributable to widening credit spreads over risk free rates,
as a result of economic and market uncertainties arising from the COVID-19 pandemic, which includes demand
shocks in multiple sectors that originated in 2020. We also rely upon estimates of several credit and non-credit
factors in our review and evaluation of individual investments to determine whether a credit impairment exists.
At December 31, 2020 we recorded an allowance for expected credit losses of $49 thousand.
MGIC Investment Corporation 2020 Annual Report | 89
Notes
The unrealized losses in all categories of our investments as of December 31, 2019 were primarily caused by
changes in interest rates between the time of purchase and the respective year end. There were 109 and 217
securities in an unrealized loss position as of December 31, 2020 and 2019, respectively. As of December 31,
2020, the fair value as a percent of amortized cost of the securities in an unrealized loss position was 99% and
approximately 27% of the securities in an unrealized loss position were backed by the U.S. Government.
We report accrued investment income separately from fixed income, available-for-sale securities, and we have
determined an allowance for credit losses for accrued investment income is not required. Accrued investment
income is written off through net realized investment gains (losses) if, and at the time, the issuer of the security
defaults or is expected to default on payments
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
2020
2019
2018
$
157,065 $
165,523 $
140,539
620
1,648
275
159,608
(5,212)
406
4,444
974
171,347
(4,302)
228
3,423
816
145,006
(3,675)
$
154,396 $
167,045 $
141,331
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
Change in unrealized gains/losses
2020
2019
2018
$
$
169,135 $
220,139 $
(81,834)
—
—
—
169,135 $
220,139 $
(81,834)
NOTE 6
Fair Value Measurements
The following 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.
Cash Equivalents: Consists of money market funds and treasury bills with valuations derived from quoted
prices for identical assets in active markets that we can access. The remaining instruments in this
category are valued using market data for comparable instruments and are classified as Level 2.
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.
90 | MGIC Investment Corporation 2020 Annual Report
Notes
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
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") 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.
Other Investments. These securities primarily consist of commercial paper which are valued using market
data for comparable instruments of similar maturity and average yield.
Level 3 measurements
•
Real estate acquired is 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.
MGIC Investment Corporation 2020 Annual Report | 91
Notes
RECURRING FAIR VALUE MEASUREMENTS
Assets carried at fair value included those listed, by hierarchy level, in the following tables as of December 31,
2020 and 2019:
Assets carried at fair value by hierarchy level as of December 31, 2020
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
Debt foreign government
Other Investments (1)
Total fixed income securities
Equity securities
Cash Equivalents
Real estate acquired (2)
Total
$
265,693 $
149,339 $
116,354 $
2,249,869
2,844,288
206,686
431,166
327,502
310,490
4,709
21,193
6,661,596
18,215
288,941
1,092
—
—
—
—
—
—
—
—
149,339
18,215
275,668
—
2,249,869
2,844,288
206,686
431,166
327,502
310,490
4,709
21,193
6,512,257
—
13,273
—
$
6,969,844 $
443,222 $
6,525,530 $
—
—
—
—
—
—
—
—
—
—
—
—
1,092
1,092
Assets carried at fair value by hierarchy level as of December 31, 2019
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
Cash Equivalents
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
(1)
(2)
Consists of commercial paper included in "Investment Portfolio: Fixed income" with original maturities greater than ninety
days.
Real estate acquired through claim settlement, which is held for sale, is reported in "Other assets" on the consolidated
balance sheets.
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.
92 | MGIC Investment Corporation 2020 Annual Report
Notes
RECONCILIATIONS OF LEVEL 3 ASSETS
For assets measured at fair value using significant unobservable inputs (Level 3), a reconciliation of the
beginning and ending balances for the years ended December 31, 2020 and 2019 is shown in tables 6.2a and 6.2b
below. There were no losses included in earnings for the years ended December 31, 2020 and 2019 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, 2020
Table
6.2a
(In thousands)
Balance at December 31, 2019
Total realized/unrealized gains (losses):
Included in earnings and reported as losses incurred, net
Acquisitions
Sales
Balance at December 31, 2020
Debt Securities
Real Estate Acquired
— $
7,252
—
—
—
— $
660
8,609
(15,429)
1,092
$
$
Fair value roll-forward for financial instruments classified as Level 3 for the year ended December 31, 2019
Table
(In thousands)
6.2b
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
Debt Securities
Real Estate Acquired
13 $
14,535
—
—
(13)
— $
(476)
24,204
(31,011)
7,252
$
$
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 5.25% 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.
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, 2020 and 2019.
Financial liabilities not carried at fair value
Table
6.3
(In thousands)
Financial assets
Other invested assets
Financial liabilities
FHLB Advance
5.75% Notes
5.25% Notes
9% Debentures
$
$
December 31, 2020
December 31, 2019
Carrying Value
Fair Value
Carrying Value
Fair Value
3,100 $
3,100 $
3,100 $
3,100
155,000 $
160,865 $
155,000 $
240,597
638,782
208,814
261,752
696,449
273,569
420,867
—
256,872
156,422
471,827
—
346,289
974,538
Total financial liabilities
$
1,243,193 $
1,392,635 $
832,739 $
The 5.75% Notes, 5.25% Notes, and 9% Debentures are obligations of our holding company, MGIC Investment
Corporation.
MGIC Investment Corporation 2020 Annual Report | 93
Notes
NOTE 7
Debt
DEBT OBLIGATIONS
Table 7.1 shows the carrying value of our long-term
debt obligations as of December 31, 2020 and 2019.
The net proceeds from the 5.25% Notes issuance
were used, in part, as (i) cash consideration to
purchase $182.7 million of our 5.75% Notes, and (ii)
cash consideration to purchase $48.1 million of our
9% Debentures. The balance of the proceeds remains
at the holding company.
Long-term debt obligations
Table
7.1
(In millions)
December 31,
2020
2019
FHLB Advance
FHLB Advance - 1.91%, due
February 2023
5.75% Notes, due August 2023
(par value: $242.3 million)
5.25% Notes, due August 2028
(par value: $650 million)
9% Debentures, due April 2063
$
155.0 $
155.0
240.6
420.9
638.8
208.8
—
256.9
Long-term debt, carrying value
$ 1,243.2 $
832.8
The 5.75% Senior Notes (“5.75% Notes”), 5.25% Senior
Notes ("5.25% Notes") and 9% Convertible Junior
Subordinated Debentures (“9% Debentures”) are
obligations of our holding company, MGIC Investment
Corporation. The Federal Home Loan Bank Advance
(“FHLB Advance”) is an obligation of MGIC.
2020 Transactions
In August 2020, we issued $650 million aggregate
principal amount of 5.25% Notes, which are due in
2028 and received net proceeds, after the deduction
of underwriting fees, of $640.3 million. In addition to
underwriting fees, we incurred approximately
$2.0 million of other expenses associated with the
issuance of these notes.
We repurchased $182.7 million in aggregate principal
amount of our 5.75% notes at a purchase price of
$197.8 million, plus accrued interest, using proceeds
from the 5.25% Notes issuance. The excess of the
purchase price over the carrying value, plus the write-
off of unamortized issuance costs on the par value, is
reflected as a loss on debt extinguishment of
$16.5 million on our consolidated statement of
operations.
We repurchased $48.1 million in aggregate principal
amount of our 9% Debentures at a purchase price of
$61.6 million, plus accrued interest, using proceeds
from the 5.25% Notes issuance. The repurchase of 9%
Debentures resulted in a $10.2 million loss on debt
extinguishment on our consolidated statement of
operations; a reduction in our shareholders' equity of
$2.7 million related to the reacquisition of the equity
component of the 9% Debentures; and a reduction in
our potentially dilutive shares by approximately
3.6 million shares.
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.
5.25% Notes
Interest on the 5.25% Notes is payable semi-annually
on February 15 and August 15. Prior to August 15,
2023, we may redeem the 5.25% Notes at an amount
equal to the sum of (a) the greater of: (i) the sum of
the principal amount and the make-whole amount;
and (ii) 102.625% of principal; and (b) accrued and
unpaid interest. The make-whole amount is the
excess of: (1) the present value of the remaining
principal, premium and interest payments that would
be payable with respect to the note if such note were
redeemed on August 15, 2023 (at 102.625% of
principal), computed using a discount rate equal to
the treasury rate specified in the notes, plus 50 basis
points, over (2) the outstanding principal amount of
such note.
On and after August 15, 2023, we may redeem the
notes at 102.625% of principal; on or after August 15,
2024, we may redeem the notes at 101.313% of
principal; and on or after August 15, 2025, we may
redeem the notes at 100% of principal; in each case,
plus accrued and unpaid
interest.
The 5.25% 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 5.25% Notes may declare them
immediately due and payable upon the occurrence of
certain events of default after the expiration of the
applicable
94 | MGIC Investment Corporation 2020 Annual Report
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 5.25% 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 5.25% Notes, including their covenants and events
of default. We were in compliance with all covenants
as of December 31, 2020.
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,
2020.
9% Debentures
The 9% Debentures are currently convertible, at the
holder's option, at a conversion rate, which is subject
to adjustment, of 75.5932 common shares per $1,000
principal amount of the 9% Debentures at any time
prior to the maturity date. This represents a
conversion price of approximately $13.23 per share. If
a holder elects to convert their 9% Debentures,
deferred interest, if any, owed on the 9% Debentures
being converted is also converted into shares of our
common stock. The conversion rate for any deferred
interest is based on the average price that our shares
traded at during a 5-day period immediately prior to
the election to convert.
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
Notes
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 $17.20 for at
least 20 of the 30 trading days preceding notice of the
redemption.
Interest on the 9% Debentures is payable semi-
annually in arrears on April 1 and October 1 of each
year. As long as no event of default with respect to
the debentures has occurred and is continuing, we
may defer interest, under an optional deferral
provision, for one or more consecutive interest
periods up to 10 years without giving rise to an event
of default. Deferred interest will accrue additional
interest at the rate then applicable to the debentures.
During an optional deferral period we may not pay or
declare dividends on our common stock.
When interest on the 9% Debentures is deferred, we
are required, not later than a specified time, to use
reasonable commercial efforts to begin selling
qualifying securities to persons who are not our
affiliates. The specified time is one business day after
we pay interest on the 9% Debentures that was not
deferred, or if earlier, the fifth anniversary of the
scheduled interest payment date on which the
deferral started. Qualifying securities are common
stock, certain warrants and certain non-cumulative
perpetual preferred stock. The requirement to use
such efforts to sell such securities is called the
Alternative Payment Mechanism.
The net proceeds of Alternative Payment Mechanism
sales are to be applied to the payment of deferred
interest, including the compound portion. We cannot
pay deferred interest other than from the net proceeds
of Alternative Payment Mechanism sales, except at
the final maturity of the debentures or at the tenth
anniversary of the start of the interest deferral. The
Alternative Payment Mechanism does not require us
to sell common stock or warrants before the fifth
anniversary of the interest payment date on which
that deferral started if the net proceeds (counting any
net proceeds of those securities previously sold under
the Alternative Payment Mechanism) would exceed
the 2% cap. The 2% cap is 2% of the average closing
price of our common stock times the number of our
outstanding shares of common stock. The average
price is determined over a specified period ending
before the issuance of the common stock or warrants
being sold, and the number of outstanding shares is
determined as of the date of our most recent publicly
released financial statements.
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
MGIC Investment Corporation 2020 Annual Report | 95
Notes
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.
This description is not intended to be complete in all
respects and 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, 2020. The 9% Debentures
rank junior to all of our existing and future senior
indebtedness.
INTEREST PAYMENTS
Interest payments were $54.3 million during 2020,
$50.8 million during 2019, and $51.3 million during
2018.
NOTE 8
Loss Reserves
As described in Note 3 – “Summary of Significant
Accounting Policies – Loss Reserves,” We establish
case reserves and loss adjustment expenses ("LAE")
reserves on delinquent loans that were reported to us
as two or more payments past due and have not
become current or resulted in a claim payment. 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.
IBNR reserves are established for estimated losses
from delinquencies we estimate have occurred prior
to the close of an accounting period, but have not yet
been 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 and the
continued impact of the COVID-19 pandemic, leading
to a reduction in borrowers’ income and thus their
ability to make mortgage payments, the impact of
past and future government initiatives and actions
taken by the GSEs (including mortgage forbearance
programs and foreclosure moratoriums), 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. Loss reserves in future periods will also be
dependent on the number of loans reported to us as
delinquent.
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. It is reasonably possible that given the
uncertainty of the impacts of the COVID 19 pandemic,
our reserve estimate may continue to be impacted.
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, 2020, 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 +/- $16 million. A one
percentage point increase/decrease in the average
claim rate reserve factor would change the loss
reserve amount by approximately +/- $34 million.
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
delinquency 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.
96 | MGIC Investment Corporation 2020 Annual Report
Losses incurred on delinquencies that occurred in the
current year increased in 2020 compared to 2019 due
to an increase in the new delinquency notices
reported and IBNR reserve estimates, due to the
impact of the COVID-19 pandemic. Given the
uncertainty surrounding the long-term economic
impact of COVID-19, it is difficult to predict the
ultimate effect of COVID-19 related delinquencies and
forbearances on our loss incidence.
Losses incurred on delinquencies that occurred in the
current year decreased in 2019 compared to 2018
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
Notes
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, before the second quarter of 2020,
we had begun to experience a decline in the average
time it takes servicers to process foreclosures, which
had reduced the average time to receive a claim
associated with new delinquencies that do not cure.
All else being equal, the longer the period between
delinquency and claim filing, the greater the severity.
In light of the uncertainty caused by the COVID-19
pandemic, specifically the foreclosure moratoriums
and forbearance plans, the average time it takes to
receive a claim may increase.
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 each at December 31, 2020
and 2019.
Table 8.1 provides a reconciliation of beginning and ending loss reserves for each of the past three years:
Development of loss reserves
Table
(In thousands)
8.1
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:
2020
2019
2018
$
555,334 $
674,019 $
21,641
533,693
33,328
640,691
985,635
48,474
937,161
345,170
19,604
364,774
189,581
(71,006)
118,575
203,928
(167,366)
36,562
Current year
Prior years
Reinsurance terminations
Total losses paid
Net reserve at end of year
Plus reinsurance recoverables
Reserve at end of year
3,069
109,923
(20)
112,972
785,495
95,042
4,018
235,551
(13,996)
225,573
533,693
21,641
$
880,537 $
555,334 $
7,298
327,743
(2,009)
333,032
640,691
33,328
674,019
(1)
A positive number for prior year loss development indicates a deficiency of prior year reserves. 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.
MGIC Investment Corporation 2020 Annual Report | 97
Notes
Table 8.2 below shows the development of reserves in 2020, 2019 and 2018 for previously received
delinquencies.
Reserve development on previously received delinquencies
Table
(In thousands)
8.2
(Decrease) in estimated claim rate on primary
delinquencies
Increase (decrease)in estimated severity on primary
delinquencies
Change in estimates related to pool reserves, LAE
reserves, reinsurance and other
Total prior year loss development (1)
2020
2019
2018
$
$
(2,536) $
(111,848) $
(212,738)
13,535
8,605
(434)
41,276
28,528
16,844
19,604 $
(71,006) $
(167,366)
(1)
A positive number for prior year loss development indicates a deficiency of prior year loss reserves. A negative number for
prior year loss development indicates a redundancy of prior year loss reserves.
For the year ended December 31, 2020, we experienced adverse development on previously received
delinquencies primarily related to severity and adjustments to LAE reserves. For the years ended December 31,
2019 and 2018, we experienced favorable development on previously received delinquencies. This development
was, in part, due to the resolution of approximately 69% and 73% for the years ended December 31, 2019 and
2018, respectively, of the prior year delinquency inventory, with improved cure rates. During 2019 and 2018, 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 year ended 2018 was offset, in part, by an increase in the estimated severity on
previously reported delinquencies remaining in the delinquency inventory.
DELINQUENT INVENTORY
A roll-forward of our primary delinquent inventory for
the years ended December 31, 2020, 2019, and 2018
appears in table 8.3 below. The information
concerning new notices and cures is compiled from
monthly reports received from loan servicers. The
level of new notice and cure activity reported in a
particular month can be influenced by, among other
things, the date on which a servicer generates its
report, the number of business days in a month and
transfers of servicing between loan servicers.
Primary delinquency inventory roll-forward
Table
8.3
2020
2019
2018
30,028
32,898
46,556
106,099
54,239
54,448
(76,107)
(52,035)
(60,511)
(2,245)
(4,267)
(5,750)
(65)
(168)
(267)
—
(639)
(1,578)
57,710
30,028
32,898
Beginning delinquent
inventory
New Notices
Cures
Paid claims
Rescissions and
denials
Other items
removed from
inventory
Ending delinquent
inventory
COVID-19 Activity
New delinquency notices increased in 2020 because
of the impacts of the COVID-19 pandemic, including
the high level of unemployment and economic
uncertainty resulting from measures to reduce the
transmission of COVID-19. In the last half of 2020, we
experienced an increase in cures associated with our
COVID-19 new delinquency notices. Government
initiatives and actions taken by the GSEs provide for
payment forbearance on mortgages to borrowers
experiencing hardship during the COVID-19 pandemic.
These forbearance plans generally allow for mortgage
payments to be suspended for up to 360 days: an
initial forbearance period of up to 180 days and, if
requested by the borrower, an extension of up to 180
days. For loans in a COVID-19 forbearance plan as of
February 28, 2021, the plan may be extended for an
additional three months, subject to certain limits.
Other items removed from inventory
During 2019 and 2018 our losses paid included
amounts paid upon commutation of coverage on
policies. The impacts of the commutations of
coverage on policies and/or settlements 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.
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.
98 | MGIC Investment Corporation 2020 Annual Report
The number of consecutive months that a borrower
has been delinquent is shown in table 8.4 below.
NOTE 9
Reinsurance
Notes
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 through December
31, 2020.
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)
2020
2019
2018
Years ended December 31,
Premiums earned:
Direct
Assumed
Ceded
Net premiums
earned
Losses incurred:
Direct
Assumed
Ceded
Net losses
incurred
$ 1,199,824 $ 1,155,240 $ 1,084,748
10,848
5,085
1,805
(188,729)
(129,337)
(111,391)
1,021,943
1,030,988
975,162
442,194
130,100
43,060
555
(125)
331
(77,975)
(11,400)
(6,829)
$ 364,774 $ 118,575 $ 36,562
Primary delinquency inventory - consecutive months
delinquent
Table
8.4
December 31,
2020
2019
2018
3 months or less
11,542
9,447
9,829
4 - 11 months
12 months or more (1)
Total
34,620
9,664
9,655
11,548
10,917
13,414
57,710
30,028
32,898
3 months or less
4 - 11 months
12 months or more
20 %
60 %
20 %
32 %
32 %
36 %
30 %
29 %
41 %
Total
100 %
100 %
100 %
Primary claims
received inventory
included in ending
delinquent inventory
159
538
809
(1)
Approximately 31%, 36%, and 38% of the delinquent
inventory that has been delinquent for 12 consecutive
months or more has been delinquent for at least 36
consecutive months as of December 31, 2020, 2019
and 2018, respectively.
The increase in delinquency inventory that is 4-11
consecutive months delinquent is primarily due to the
number of new delinquency notices received in the
second quarter of 2020 resulting from the impacts of
the COVID-19 pandemic. This was partially offset by
an increase in cures in the third and fourth quarter of
2020.
POOL INSURANCE DEFAULT INVENTORY
Pool insurance default inventory was 680 at
December 31, 2020, 653 at December 31, 2019, and
859 at December 31, 2018.
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. For
information about discussions and legal proceedings
with customers with respect to our claims paying
practices, see Note 17 – “Litigation and
Contingencies.”
MGIC Investment Corporation 2020 Annual Report | 99
Notes
QUOTA SHARE REINSURANCE
We have entered into quota share reinsurance ("QSR")
agreements with panels of third-party reinsurers to
cede a fixed quota share percentage on premiums
earned and received and losses incurred on insurance
covered by the transactions. We receive the benefit of
a ceding commission equal to 20% of premiums
ceded before profit commission. We also receive the
benefit of a profit commission through a reduction of
premiums we cede. The profit commission varies
inversely with the level of losses on a “dollar for
dollar” basis and can be eliminated at annual loss
ratios higher than we have experienced on our QSR
agreements.
Each of our QSR agreements typically have annual
loss ratio caps of 300% and lifetime loss ratios of
200%.
Table 9.2 below provides additional detail regarding our QSR agreements.
Reinsurance
Table
9.2
Quota Share Contract
2015 QSR
2017 QSR
2018 QSR
2019 QSR
2020 QSR - 1 Year
2020 QSR - 2 Year
Credit Union QSR (2)
Policy Year
Prior to 2017
2017
2018
2019
2020
2020 - 2021
2020-2025
Quota Share %
15.0%
30.0%
30.0%
30.0%
12.5%
17.5%
65.0%
Annual Loss Ratio to
Exhaust Profit
Commission (1)
68.0%
60.0%
62.0%
62.0%
62.0%
62.0%
50.0%
Contractual
Termination Date
December 31, 2031
December 31, 2028
December 31, 2029
December 31, 2030
December 31, 2031
December 31, 2032
December 31, 2039
(1) We will receive a profit commission provided the annual loss ratio on loans covered under the transaction remains below
this ratio.
(2) Eligible credit union business written before 2020 was covered by our 2019 and prior QSR Transactions.
We have agreed to terms with a group of unaffiliated reinsurers for a reinsurance transaction with an effective
date of January 1, 2021 with a similar structure to our existing QSR transactions that will cover most of our NIW
in 2021 (with an additional 12.5% quota share) and 2022 (with a 15% quota share). Generally, we will receive an
annual profit commission provided the annual loss ratio on the loans covered under the transaction remain
below 57.5%.
We can elect to terminate the quota share reinsurance agreements under specified scenarios without penalty
upon prior written notice, including if we will receive less than 90% (80% for the Credit Union QSR Transaction) 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. Early termination of the QSR
agreements can also be elected by us for a fee, or under specified scenarios for no fee upon prior written notice.
Table 9.3 provides additional detail regarding optional termination dates and optional reductions to our quota
share percentage. The optional reduction to the quota share percentage would give us an option to reduce our
quota share percentage from the original percentage as shown in table 9.2.
Reinsurance
Table
9.3
Quota Share Contract
Optional Termination Date
(1)
2015 QSR
2017 QSR
2018 QSR
2019 QSR
2020 QSR - 1 Year
2020 QSR - 2 Year
June 30, 2021
December 31, 2021
December 31, 2021
December 31, 2021
December 31, 2022
December 31, 2023
Optional Quota Share %
Reduction Date (2)
NA
NA
NA
July 1, 2020
July 1, 2021
July 1, 2021
Quota Share % Reduction
NA
NA
NA
25% or 20%
10.5% or 8%
14.5% or 12%
(1) We can elect early termination of the QSR agreement beginning on this date, and bi-annually thereafter for the 2015 QSR,
2019 QSR, and 2020 QSR. Early termination of the 2018 QSR can be elected annually after this date.
(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.
100 | MGIC Investment Corporation 2020 Annual Report
Notes
Table 9.4 provides a summary of our quota share reinsurance agreements for 2020, 2019, and 2018.
Quota share reinsurance
Table
9.4
(In thousands)
Years ended December 31,
2020
2019
2018
Ceded premiums written and earned, net of profit commission
$
167,930 $
111,550 $
108,337
Ceded losses incurred
Ceding commissions (1)
Profit commission
78,012
48,077
72,452
11,395
48,793
6,543
51,201
139,179
147,667
(1)
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements
of operations.
Ceded premiums written and earned, net of profit
commission, increased in 2020 due to the decrease in
profit commission. The decrease in profit
commission was a result of higher ceded losses
incurred, primarily due to an increase in the
delinquency inventory due to the impacts of the
COVID-19 pandemic.
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.
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.
The reinsurance recoverable on loss reserves was
$95.0 million as of December 31, 2020 and $21.6
million as of December 31, 2019. 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. Each of the
reinsurers under our quota share reinsurance
agreements described above 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. An allowance
for credit losses was not required for 2020.
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.
A "Trigger Event" has occurred on each our outstanding ILN transactions. On the 2018 and 2019 ILN
transactions a “Trigger Event” has occurred because the reinsured principal balance of loans that were reported
60 or more days delinquent exceeded 4% of the total reinsured principal balance of loans under each transaction.
A “Trigger Event” has occurred on our 2020 ILN transaction because the credit enhancement of the most senior
tranche is less than the target credit enhancement. While the “Trigger Event” is in effect, payment of principal on
the related notes will be suspended and the reinsurance coverage available to MGIC under the transactions will
not be reduced by such principal payments.
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.
MGIC Investment Corporation 2020 Annual Report | 101
Notes
Table 9.5 provides a summary of our excess of loss reinsurance agreements as of December 31, 2020,
December 31, 2019 and December 31, 2018.
Excess of Loss Reinsurance
Table 9.5
(In thousands)
Issue Date
Policy Inforce Dates
Termination Option Date (1)
Initial First Layer Retention
Initial Excess of Loss Reinsurance Coverage
2020
Remaining First Layer Retention
Remaining Excess of Loss Reinsurance Coverage
2019
Remaining First Layer Retention
Remaining Excess of Loss Reinsurance Coverage
2018
Remaining First Layer Retention
Remaining Excess of Loss Reinsurance Coverage
Home Re 2020-1, Ltd. Home Re 2019-1, Ltd. Home Re 2018-1, Ltd.
October, 2020
May 1, 2019
October 1, 2018
January 1, 2020 - July
31, 2020
January 1, 2018 -
March 31, 2019
July 1, 2016 -
December 31, 2017
October 25, 2030
May 25, 2026
October 25, 2025
275,283
412,917
275,283
412,917
—
—
—
—
185,730
315,739
184,514
208,146
185,636
271,021
—
—
168,691
318,636
166,005
218,343
167,779
260,957
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.
In February 2021, MGIC entered into a $398.8 million
excess-of-loss reinsurance agreement (executed
through an insurance linked note transaction) that
covers policies with inforce dates from August 1,
2020 through December 31, 2020.
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, 2020 and December 31,
2019, were not material to our consolidated balance
sheet, and the change in fair values during the year
ended December 31, 2020 and December 31, 2019
were not material to our consolidated statements of
operations. Total ceded premiums were $20.8 million,
$17.6 million, and $2.8 million for the years ended
December 31, 2020, 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, 2020, 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
102 | MGIC Investment Corporation 2020 Annual Report
Notes
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.
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.
Table 9.6 presents the total assets of Home Re
Entities as of December 31, 2020 , December 31, 2019
and December 31, 2018.
Home Re Entities total assets
Table
9.6
(In thousands)
Home Re Entity
December 31, 2020
Home Re 2018-01 Ltd.
Home Re 2019-01 Ltd.
Home Re 2020-01 Ltd.
December 31, 2019
Home Re 2018-01 Ltd.
Home Re 2019-01 Ltd.
December 31, 2018
Home Re 2018-01 Ltd.
Total VIE Assets
$
$
$
$
$
$
218,343
208,146
412,917
269,451
283,150
318,636
MGIC Investment Corporation 2020 Annual Report | 103
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, 2020, 2019 and 2018 are included in table 10.1 below.
Components of other comprehensive income (loss)
Table
10.1
(In thousands)
2020
2019
2018
Net unrealized investment gains (losses) on securities without an
allowance for credit losses
$
169,135 $
220,139 $
Income tax (expense) benefit
Net of taxes
Net changes in benefit plan assets and obligations
Income tax (expense) benefit
Net of taxes
Total other comprehensive income (loss)
Total income tax expense, net
(35,519)
133,616
13,288
(2,791)
10,497
182,423
(38,310)
(46,229)
173,910
29,129
(6,117)
23,012
249,268
(52,346)
Total other comprehensive income, net of tax
$
144,113 $
196,922 $
(81,834)
17,188
(64,646)
(19,958)
4,191
(15,767)
(101,792)
21,379
(80,413)
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, 2020, 2019 and 2018 are included in table 10.2 below.
Reclassifications from Accumulated Other Comprehensive Income (Loss)
Table
10.2
(In thousands)
2020
2019
2018
Reclassification adjustment for net realized gains (losses)
included in net income (1)
$
13,862 $
3,637 $
Income tax (expense) benefit
Net of taxes
Reclassification adjustment related to benefit plan assets and
obligations (2)
Income tax benefit
Net of taxes
Total reclassifications
Total income tax benefit, net
(2,912)
10,950
(15,968)
3,353
(12,615)
(2,106)
441
(763)
2,874
(8,097)
1,701
(6,396)
(4,460)
938
Total reclassifications, net of tax
$
(1,665) $
(3,522) $
(7,037)
1,477
(5,560)
(2,232)
469
(1,763)
(9,269)
1,946
(7,323)
(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.
104 | MGIC Investment Corporation 2020 Annual Report
Notes
A roll-forward of AOCI (AOCL) for the years ended December 31, 2020, 2019, and 2018, 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
Total AOCL
Balance, December 31, 2017, net of tax
$
29,275 $
(73,058) $
(43,783)
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
Balance, December 31, 2019, net of tax
Other comprehensive income (loss) before
reclassifications
Less: Amounts reclassified from AOCL
(18)
(70,206)
(5,560)
(35,389)
176,784
2,874
138,521
144,566
10,950
Balance, December 31, 2020, net of tax
$
272,137 $
—
(17,530)
(1,763)
(88,825)
16,616
(6,396)
(65,813)
(2,118)
(12,615)
(55,316)
(18)
(87,736)
(7,323)
(124,214)
193,400
(3,522)
72,708
142,448
(1,665)
216,821
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, 2020, 2019, and 2018 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, 2020 and 2019.
Components of net periodic benefit cost
Table
11.1
(In thousands)
12/31/2020
12/31/2019
12/31/2018
12/31/2020
12/31/2019
12/31/2018
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
1. Company Service Cost
$
7,342 $
8,345 $
10,530 $
1,263 $
1,345 $
13,036
15,705
15,095
832
1,130
1,160
834
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
(22,139)
(19,466)
(22,250)
(7,407)
(5,785)
(6,359)
—
(1,761)
—
4,584
—
3,375
—
—
—
(5,312)
(3,310)
(4,365)
—
—
—
(247)
6,578
6,331
4,570
10,369
(281)
8,412
8,131
12,715
1,933
(351)
6,937
6,586
9,961
—
—
51
(783)
(732)
—
(34)
—
(34)
—
(4,104)
(250)
(4,354)
(6,044)
(3,344)
(8,719)
—
—
—
8. Total Expense for Year
$
14,939 $
14,648 $
9,961 $
(6,044) $
(3,344) $
(8,719)
MGIC Investment Corporation 2020 Annual Report | 105
Notes
Development of funded status
Table
11.2
(In thousands)
Actuarial Value of Benefit Obligations
1. Measurement Date
2. Accumulated Benefit Obligation
Funded Status/Asset (Liability) on the Consolidated
Balance Sheet
1. Projected Benefit Obligation
2. Plan Assets at Fair Value
3. Funded Status - Overfunded/Asset
4. Funded Status - Underfunded/Liability
Accumulated other comprehensive (income) loss
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
12/31/2020
12/31/2019
12/31/2020
12/31/2019
12/31/2020
12/31/2019
12/31/2020
12/31/2019
$
423,305 $
412,939 $
28,714 $
27,496
$
(423,713) $
(413,350) $
(28,714) $
(27,496)
411,245
402,691
119,024
N/A
N/A $
90,310 $
(12,468)
(10,659)
N/A
99,590
72,094
N/A
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2020
12/31/2019
12/31/2020
12/31/2019
$
98,899 $
99,826 $
(30,565) $
(18,005)
(988)
—
(1,237)
—
2,673
—
2,724
—
$
97,911 $
98,589 $
(27,892) $
(15,281)
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 2020 and 2019.
Change in projected benefit / accumulated benefit
Table
11.4
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2020
12/31/2019
12/31/2020
12/31/2019
1. Benefit Obligation at Beginning of Year
$
413,350 $
376,153 $
27,496 $
28,085
2. Company Service Cost
3. Interest Cost
4. Plan Participants' Contributions
5. Net Actuarial (Gain)/Loss
6. Benefit Payments from Fund (1)
7. Benefit Payments Directly by Company
8. Plan Amendments
9. Other Adjustment
10. Settlement (Gain)/Loss
11. Benefit Obligation at End of Year
7,342
13,036
—
36,196
(40,260)
(5,953)
2
—
—
8,345
15,705
—
47,113
(30,829)
(3,105)
(5)
—
(27)
1,263
832
425
660
(1,975)
—
—
13
—
1,345
1,130
382
(2,075)
(826)
—
—
(545)
—
$
423,713 $
413,350 $
28,714 $
27,496
(1)
Includes lump sum payments of $27.5 million and $18.5 million in 2020 and 2019, 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 2020 compared to 2019
was primarily due to a decrease in the discount rate used to calculate the obligation partially offset by benefits
106 | MGIC Investment Corporation 2020 Annual Report
Notes
paid from the fund. Table 11.7 below includes the actuarial assumptions used to calculate the benefit obligations
of our plans for 2020 and 2019.
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 2020 and 2019.
Change in plan assets
Table
11.5
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2020
12/31/2019
12/31/2020
12/31/2019
1. Fair Value of Plan Assets at Beginning of Year
$
402,691 $
359,719 $
99,590 $
77,762
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
12,453
10,205
—
(40,260)
(5,953)
42,314
—
—
(30,829)
(3,105)
70,262
(3,561)
—
425
(1,975)
—
21,409
(425)
—
382
(826)
—
22,654
(382)
8. Fair Value of Plan Assets at End of Year
$
411,245 $
402,691 $
119,024 $
99,590
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
12/31/2020
12/31/2019
12/31/2020
12/31/2019
$
98,589 $
108,808 $
(15,281) $
3,629
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)
247
(16,948)
2
16,021
—
281
(8,412)
(5)
(150)
(1,933)
(51)
782
—
34
—
—
(13,342)
(18,944)
—
—
3. AOCI in Current Year
$
97,911 $
98,589 $
(27,892) $
(15,281)
The projected benefit obligations, net periodic benefit costs and accumulated postretirement benefit obligation
for the plans were determined using the following weighted average assumptions.
MGIC Investment Corporation 2020 Annual Report | 107
Notes
Actuarial assumptions
Table
11.7
Weighted-Average Assumptions Used to Determine
Benefit Obligations at year end
1. Discount Rate
2. Rate of Compensation Increase
3. Cash balance interest crediting rate
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
12/31/2020
12/31/2019
12/31/2020
12/31/2019
2.75 %
3.00 %
2.50 %
3.30 %
5.75 %
3.00 %
N/A
N/A
N/A
3.45 %
3.00 %
3.20 %
4.40 %
5.75 %
3.00 %
N/A
N/A
N/A
2.35 %
3.20 %
N/A
N/A
N/A
N/A
3.20 %
7.50 %
N/A
4.25 %
7.50 %
N/A
6.00 %
6.00 %
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 11.8 below.
Plan assets
Table
11.8
1. Equity Securities
2. Debt Securities
3. Total
Pension Plan
Other Postretirement Benefits
12/31/2020
12/31/2019
12/31/2020
12/31/2019
21 %
79 %
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.
108 | MGIC Investment Corporation 2020 Annual Report
Notes
To determine the fair value of securities in Level 1 and Level 2 of the fair value hierarchy, independent pricing
sources have been used. One price is provided per security based on observable market data. To ensure
securities are appropriately classified in the fair value hierarchy, we review the pricing techniques and
methodologies of the independent pricing sources and believe that their policies adequately consider market
activity, either based on specific transactions for the issue valued or based on modeling of securities with similar
credit quality, duration, yield and structure that were recently traded. A variety of inputs are used by the
independent pricing sources including benchmark yields, reported trades, non-binding broker/dealer quotes,
issuer spreads, two sided markets, benchmark securities, bids, offers and reference data including market
research publications. Inputs may be weighted differently for any security, and not all inputs are used for each
security evaluation. Market indicators, industry and economic events are also considered. This information is
evaluated using a multidimensional pricing model. In addition, on a quarterly basis, we perform quality controls
over values received from the pricing source (the “Trustee”) which include comparing values to other
independent pricing sources. In addition, we review annually the Trustee’s auditor’s report on internal controls in
order to determine that their controls around valuing securities are operating effectively. We have not made any
adjustments to the prices obtained from the independent sources.
Tables 11.9a and 11.9b 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, 2020 and 2019. There were no securities that used
Level 3 inputs.
Pension plan assets at fair value as of December 31, 2020
Table
11.9a
(In thousands)
Domestic Mutual Funds
Corporate Bonds
U.S. Government Securities
Municipal Bonds
Foreign Bonds
Pooled Equity Accounts
Total Assets at fair value
Pension plan assets at fair value as of December 31, 2019
Table
11.9b
(In thousands)
Domestic Mutual Funds
Corporate Bonds
U.S. Government Securities
Municipal Bonds
Foreign Bonds
Pooled Equity Accounts
Total Assets at fair value
Level 1
Level 2
Total
$
4,842 $
— $
—
26,407
—
—
—
231,190
—
32,891
33,368
82,547
4,842
231,190
26,407
32,891
33,368
82,547
$
31,249 $
379,996 $
411,245
Level 1
Level 2
Total
$
7,325 $
— $
—
32,166
—
—
—
203,684
2,511
38,998
34,024
83,983
7,325
203,684
34,677
38,998
34,024
83,983
$
39,491 $
363,200 $
402,691
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%.
MGIC Investment Corporation 2020 Annual Report | 109
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:
Equities (long only)
Real estate
Commodities
Fixed income/Cash
Minimum
Maximum
70 %
0 %
0 %
0 %
100 %
15 %
10 %
10 %
Given the long term nature of this portfolio and the
lack of any immediate need for significant cash flow,
it is anticipated that the equity investments will
consist of growth stocks and will typically be at the
higher end of the allocation ranges above.
Investment in international mutual funds is limited to
a maximum of 30% of the equity range. The allocation
as of December 31, 2020 included 3% that was
primarily invested in equity securities of emerging
market countries and another 20% was invested in
securities of companies primarily based in Europe and
the Pacific Basin.
Tables 11.12 and 11.13 show the current and estimated
future contributions and benefit payments.
Company contributions
Table
11.12
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
12/31/2020
12/31/2020
$
12,453 $
6,200
—
—
(In thousands)
Company
Contributions for
the Year Ending:
1. Current
2. Current + 1
Notes
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
● Durable
company
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 11.10a and 11.10b set forth the other
postretirement benefits plan assets at fair value as of
December 31, 2020 and 2019. All are Level 1 assets.
Other postretirement benefits plan assets at fair value as
of December 31, 2020
Table
11.10a
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
91,454
27,570
119,024
Other postretirement benefits plan assets at fair value as
of December 31, 2019
Table
11.10b
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
77,640
21,950
99,590
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
110 | MGIC Investment Corporation 2020 Annual Report
1. Current
$
46,213 $
1,975
Loss reserves
Benefits payments - total
Table
11.13
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2020
12/31/2020
Actual Benefit
Payments for the
Year Ending:
Expected Benefit
Payments for the
Year Ending:
2. Current + 1
3. Current + 2
4. Current + 3
5. Current + 4
6. Current + 5
30,082
29,929
30,076
29,567
28,852
1,765
1,995
2,157
2,241
2,357
7. Current + 6 - 10
135,830
10,916
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 $8.0 million, $7.4
million and $6.0 million in 2020, 2019 and 2018,
respectively.
NOTE 12
Income Taxes
Net deferred tax (liabilities) assets, included on the
Consolidated Balance Sheet at December 31, 2020
and 2019 as a component of Other liabilities and
Other assets, respectively, are as follows:
Deferred tax assets and liabilities
Table
12.1
(In thousands)
2020
2019
Total deferred tax assets
$
38,443 $
63,533
Total deferred tax liabilities
(98,485)
(57,791)
Net deferred tax (liability)
asset
$
(60,042) $
5,742
Notes
Table 12.2 includes the components of the net
deferred tax (liability) asset as of December 31, 2020
and 2019.
Deferred tax components
Table
12.2
(In thousands)
2020
2019
Unearned premium reserves
$
23,163 $
30,487
Benefit plans
Unrealized appreciation in
investments
Mortgage investments
Deferred compensation
AMT credit carryforward
(13,977)
(10,790)
3,542
2,175
(72,341)
(36,822)
—
6,776
—
8,359
9,270
8,303
Other, net
(7,205)
(5,240)
Net deferred tax (liability)
asset
$
(60,042) $
5,742
We believe that all gross deferred tax assets at
December 31, 2019 and 2020 are fully realizable and
no valuation allowance has been established.
If the federal income tax rate increases, our net
deferred tax liability or asset would increase. In
addition, we would set up a deferred tax liability
related to tax and loss bonds for the difference in the
new federal income tax rate and the 21% federal
income tax rate at which the tax and loss bonds were
purchased.
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)
2020
2019
2018
Current Federal
$ 85,574 $ 162,911 $ (16,272)
Deferred Federal
28,244
11,860
185,598
Other
(648)
(557)
4,727
Provision for income
taxes
$ 113,170 $ 174,214 $ 174,053
The CARES Act provides financial relief to individuals
and businesses in the form of loans, grants, and tax
changes, among other types of assistance. The tax
changes in the CARES Act did not materially impact
our financial results.
Current federal income tax payments were $79.6
million, $158.3 million, and $12.2 million in 2020, 2019
and 2018, respectively. At December 31, 2020 we
owned $271.0 million of tax and loss bonds.
MGIC Investment Corporation 2020 Annual Report | 111
Notes
Table 12.4 reconciles the federal statutory income tax
rate to our effective tax provision rate.
Effective tax rate reconciliation
Table
12.4
Federal statutory income tax
rate
Additional income tax benefit
related to IRS litigation
Tax exempt municipal bond
interest
Other, net
2020
2019
2018
21.0 % 21.0 %
21.0 %
— %
— %
(0.3) %
(0.9) %
(0.6) %
(0.7) %
0.1 %
0.1 %
0.6 %
Effective tax rate
20.2 % 20.5 %
20.6 %
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.
We have not recorded any uncertain tax positions
during 2019 and 2020 and have no unrecognized tax
benefits at December 31, 2019 and December 31,
2020. 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 2016.
NOTE 13
Shareholders' Equity
CHANGE IN ACCOUNTING PRINCIPLE
As of January 1, 2018, the updated guidance of
"Recognition and Measurement of Financial Assets
and Financial Liabilities" became effective. The
application of this guidance resulted in an immaterial
cumulative effect adjustment to our 2018 beginning
accumulated other comprehensive (loss) income and
retained earnings to recognize unrealized gains on
equity securities.
SHARE REPURCHASE PROGRAM
During the first quarter of 2020 we repurchased
approximately 9.6 million shares of our common
stock at a weighted average cost per share of $12.47,
which included commissions. We may repurchase up
to an additional $291 million of our common stock
through the end of 2021 under a share repurchase
program approved by our Board of Directors in
January 2020.
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. As of December 31, 2019, the
authorized share repurchase program had
approximately $111 million remaining.
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, and in light of the
uncertainty caused by the COVID-19 pandemic, we
have temporarily suspended stock repurchases, but
may resume them in the future.
Cash dividends
In 2020, we paid quarterly cash dividends of $0.06 per
share to shareholders which totaled $82.6 million. On
January 26, 2021, the Board of Directors declared a
quarterly cash dividend to holders of the company's
common stock of $0.06 per share payable on March
3, 2021, to shareholders of record at the close of
business on February 17, 2021.
112 | MGIC Investment Corporation 2020 Annual Report
NOTE 14
Statutory Information
STATUTORY ACCOUNTING PRINCIPLES
The statutory financial statements of our insurance
companies are presented on the basis of accounting
principles prescribed, or practices permitted, by the
Office of the Commissioner of Insurance of the State
of Wisconsin (the "OCI"), which has adopted the
National Association of Insurance Commissioners
("NAIC") Statements of Statutory Accounting
Principles ("SSAP") as the basis of its statutory
accounting principles. In converting from statutory to
GAAP, typical adjustments include deferral of policy
acquisition costs, the inclusion of net unrealized
holding gains or losses in shareholders' equity relating
to fixed income securities, and the inclusion of
statutory non-admitted assets.
In addition to the typical adjustments from statutory
to GAAP, mortgage insurance companies are required
to maintain contingency loss reserves equal to 50% of
premiums earned under SSAP and principles
prescribed by the OCI. 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 2020, MGIC's withdrew $30.4 million from its
contingency reserve. 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
The statutory net income loss, policyholders' surplus
and contingency reserve liability of the insurance
subsidiaries of our holding company are shown 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 insurance subsidiaries
Table
1
4
.
1
(In
thousands)
Statutory net
income
Statutory
policyholder
s' surplus
Contingency
reserve
As of and for the Years Ended December 31,
2020
2019
2018
$
65,201 $
305,857 $
375,484
1,339,509
1,619,069
1,683,058
3,585,864
3,021,055
2,442,996
For the years ended December 31, 2020, 2019, and
2018 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
Years Ended December 31,
(In thousands)
2020
2019
2018
Dividends
paid by MGIC
to the parent
company (1)
$ 390,000
280,000
220,000
(1) Dividends paid in cash and/or investment securities. Also
in 2020, MGIC distributed to the holding company, as a
dividend, its ownership in the 9% Debentures held at an
amortized cost of $139.5 million.
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
MGIC Investment Corporation 2020 Annual Report | 113
Notes
worth or surplus, contingency reserve, and a portion
of the reserves for unearned premiums.
At December 31, 2020, MGIC’s risk-to-capital ratio
was 9.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $3.2 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 reinsurance 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 financial
requirements of 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, 2020, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.1 to 1.
The NAIC has previously announced plans to revise
the State Capital Requirements 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 MGIC does not obtain a waiver of such
requirements. It is possible that regulatory action by
one or more jurisdictions, including those that do not
have specific State Capital Requirements, may
prevent MGIC from continuing to write new insurance
in such jurisdictions. If we are unable to write
business in all jurisdictions, lenders may be unwilling
to procure insurance from us anywhere. In addition, a
lender’s assessment of the future ability of our
insurance operations to meet the State Capital
Requirements or the PMIERs may affect its
willingness to procure insurance from us. A possible
future failure by MGIC to meet the State Capital
Requirements or the PMIERs will not necessarily
mean that MGIC lacks sufficient resources to pay
claims on its insurance liabilities. While we believe
MGIC has sufficient claims paying resources to meet
its claim obligations on its IIF on a timely basis, you
should read the rest of these financial statement
footnotes for information about matters that could
negatively affect MGIC’s claims paying resources,
including the effects of the COVID-19 pandemic.
DIVIDEND RESTRICTIONS
During 2020, MGIC paid $390 million in cash and/or
investment security dividends to our holding
company. In the third quarter of 2020, MGIC
distributed to the holding company, as a dividend, its
ownership in the 9% Debentures held at an amortized
cost of $139.5 million, which was non-admitted for
statutory reporting.
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 2021, we will notify the OCI to
ensure it does not object.
Under the PMIERS guidance, any dividend paid by
MGIC to our holding company, through June 30, 2021,
requires GSE approval.
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, 2020, MGIC’s increase in
contingency reserves was $559 million and statutory
net loss was $643 million. As of December 31, 2020,
MGIC's statutory policyholders' surplus was $1,336
million. MGIC's statutory net loss includes a realized
114 | MGIC Investment Corporation 2020 Annual Report
loss of $692 million resulting from its merger with
MGIC Reinsurance Corporation of Wisconsin. This is
eliminated on the consolidated statement of
operations.
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, 2020. When the 2020 plan was adopted,
no further awards could be made under our previous
2015 plan. The purpose of the 2020 plan is to
motivate and incentivize 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 2020 plan is 11.0 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 2020 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,
2030 under the 2020 plan. The vesting provisions of
options, restricted stock and restricted stock units are
determined at the time of grant. Awards forfeited
under the 2015 plan after April 23, 2020 will increase
the 2020 plan's limit of shares available for future
grant. At December 31, 2020, 11.1 million shares were
available for future grant under the 2020 plan. The
excess of available shares for future grant above the
maximum number of shares that may be issued under
the 2020 plan is the result of awards under the 2015
plan being forfeited subsequent to April 23, 2020.
The compensation cost that has been charged
against income for share-based plans was $13.8
million, $18.9 million, and $20.9 million for the years
ended December 31, 2020, 2019 and 2018,
respectively. The related income tax benefit
recognized for share-based plans was $1.7 million,
$2.7 million, and $3.0 million for the years ended
December 31, 2020, 2019, and 2018, respectively.
Notes
Table 15.1 summarizes restricted stock or restricted
stock unit (collectively called “restricted stock”)
activity during 2020.
Restricted stock
Table
15.
1
Weighted
Average Grant
Date Fair Market
Value
Restricted stock
outstanding at
December 31, 2019
$
Granted
Vested
Forfeited
Restricted stock
outstanding at
December 31, 2020
Shares
4,150,394
1,672,060
(1,564,843)
(118,368)
12.81
13.62
11.67
13.24
$
13.57
4,139,243
At December 31, 2020, the 4.1 million shares of
restricted stock outstanding consisted of 3.1 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 2019 and 2018 was
$11.92 and $15.69, 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 2020, 2019
and 2018 was $20.4 million, $13.7 million, and $19.1
million, respectively.
As of December 31, 2020, there was $25.8 million of
total unrecognized compensation cost related to non-
vested share-based compensation agreements
granted under the plans. Of this total, $19.8 million of
unrecognized compensation costs relate to
performance shares and $5.9 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 1.7 years.
MGIC Investment Corporation 2020 Annual Report | 115
Notes
NOTE 16
Leases
We lease 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, 2020.
Minimum future operating lease payments
Table
16.1
(In thousands)
2021
2022
2023
2024
2025 and thereafter
Total
Amount
836
687
311
81
—
1,915
$
$
Total lease expense under operating leases was $1.9
million in 2020, $2.1 million in 2019, and $1.9 million
in 2018.
NOTE 17
Litigation and Contingencies
Before paying an insurance claim, generally 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 or deny a claim on the loan (both
referred to as “rescissions”). In addition, our insurance
policies generally provide that we can reduce a claim
if the servicer did not comply with its obligations
under our insurance policy (such reduction referred to
as a "curtailment"). In recent quarters, an immaterial
percentage of claims received in a quarter have been
resolved by rescissions. In 2020 and 2019 ,
curtailments reduced our average claim paid by
approximately 3.6% 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. We are
currently involved in discussions and/or proceedings
with respect to our claims paying practices. Although
it is reasonably possible that, when all of these
matters are resolved, we will not prevail on all matters,
we are unable to make a reasonable estimate or
range of estimates of the potential liability. We
estimate the maximum exposure where a loss is
reasonably possible to be approximately $40 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
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
116 | MGIC Investment Corporation 2020 Annual Report
performed. The related contract underwriting remedy
expense for each of the years ended December 31,
2020, 2019, and 2018, was immaterial to our
consolidated financial statements.
Notes
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.
NOTE 18
Unaudited Quarterly Financial Data
Unaudited quarterly financial data - current year:
Table:
18.1a
2020:
(In thousands, except per
share data)
Quarter
First
Second
Third
Fourth
Full
Year
Net premiums earned
$
260,901 $
243,562 $
256,113 $
261,367 $
1,021,943
Investment income, net
of expenses
Realized gains (losses)
Other revenue
Loss incurred, net
Underwriting and other
expenses, net
Loss on debt
extinguishment
Provision for income tax
Net income
Income per share (a) (b):
Basic
Diluted
41,347
1,891
2,754
60,956
57,698
—
38,434
149,805
0.44
0.42
Unaudited quarterly financial statements - prior year:
Table:
18.1b
2019:
(In thousands, except per
share data)
37,252
2,259
380
40,686
64,253
26,736
33,518
130,811
0.39
0.38
39,679
6,701
4,026
217,374
60,111
—
2,436
14,047
0.04
0.04
Quarter
36,118
2,901
1,895
45,758
154,396
13,752
9,055
364,774
66,311
248,373
—
38,782
151,430
0.45
0.44
26,736
113,170
446,093
1.31
1.29
Full
Year
First
Second
Third
Fourth
Net premiums earned
$
249,762 $
247,102 $
267,857 $
266,267 $
1,030,988
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
40,585
(526)
1,830
39,064
61,650
38,996
151,941
0.43
0.42
42,423
307
2,485
21,836
59,270
43,433
167,778
0.47
0.46
42,715
4,205
3,606
33,985
61,278
46,186
176,934
0.50
0.49
41,322
1,320
2,717
23,690
65,227
45,599
177,110
0.51
0.49
167,045
5,306
10,638
118,575
247,425
174,214
673,763
1.91
1.85
(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 2020 Annual Report | 117
Directors
MGIC Investment Corporation
Analisa M. Allen
Timothy A. Holt
Information Technology Consultant
Former Senior Vice President &
Gerson Lehrman Group
Chief Investment Officer
Former CIO of Data & Analytics
Aetna, Inc.
JP Morgan Chase's Consumer Bank
Diversified health care benefits
company
Daniel A. Arrigoni
Melissa B. Lora
Former President
Taco Bell International
Restaurant company
Timothy J. Mattke
Chief Executive Officer
Former President & Chief
Kenneth M. Jastrow, II
MGIC Investment Corporation
Executive Officer
Corporate Director & Private Investor
U.S. Bank Home Mortgage Corp.
Home loan originator
and servicer
Former Chairman &
Chief Executive Officer
Temple-Inland Inc.
Gary A. Poliner
Former President
Northwestern Mutual Life Ins. Co.
Paper & forest products company
Financial services company
with financial services and
real estate interests
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
Julie K. Sperber
Controller & Chief Accounting Officer
Martha F. Tsuchihashi
Assistant Secretary
C. Edward Chaplin
Former President & CFO
MBIA Inc.
Provider of financial guarantee
insurance
Curt S. Culver
Chairman
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
Jay C. Hartzell
President
University of Texas at Austin
Michael E. Lehman
Interim Chief Operating Officer
of the School of Business
University of Wisconsin
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
Nathan R. Abramowski
Treasurer
Heidi A. Heyrman
Assistant Secretary
Brian M. Remington
Assistant Secretary
118 | MGIC Investment Corporation 2020 Annual Report
Officers
Mortgage Guaranty Insurance Corporation
Chief Executive Officer
Timothy J. Mattke
Luis A. Contreras
National Accounts
President and Chief Operating Officer
Salvatore A. Miosi
Geoffrey F. Cooper
Product Development
Christopher T. Perry
Sales
Tara E. Radmann
Business Automation
Margaret M. Crowley
Brian M. Remington
Marketing and Customer Experience
Loss Mitigation, Assistant
Executive Vice Presidents
Nathaniel H. Colson
Chief Financial Officer
James J. Hughes
Sales and Business Development
Paula C. Maggio
General Counsel and Secretary
Steven M. Thompson
Chief Risk Officer
Senior Vice Presidents
Annette M. Adams
Dean D. Dardzinski
Managing Director
Stephen M. Dempsey
Managing Director
Mary L. Elkins
Systems Development
Daniel J. Garcia-Velez
Business Development
Chief Human Resources Officer
Heidi A. Heyrman
Robert J. Candelmo
Chief Information Officer
Sean A. Dilweg
Government Relations
Michael J. Zimmerman
Investor Relations
Vice Presidents
Nathan R. Abramowski
Treasurer
Terry A. Aikin
Managing Director
Robert K. Bates
Sales Strategy
Jane S. Coleman
National Accounts
Regulatory Relations, Assistant General
Counsel and Assistant Secretary
Dianna L. Higgins
Internal Audit
Michael E. Jacobson
Product Strategy
Gary J. Johnson
Data Science
Mark J. Krauter
National Accounts
Michael L. Kull
Managing Director
Elyse M. Mitchell
National Accounts
General Counsel and Assistant
Secretary
David H. Schroeder
Claims & Policy Servicing
John R. Schroeder
Corporate Development
Bryan D. Specht
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
Sean R. Valcamp
Chief Technology Officer
Kathleen E. Valenti
Chief Compliance Officer
Jennifer A. Westphal
Chief Information Security Officer
Stacey B. Murphy
Talent and Total Rewards
Jerry L. Wormmeester
National Accounts
MGIC Investment Corporation 2020 Annual Report | 119
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 2020 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. The criteria
considered when selecting this peer group included whether the company: 1) is a mortgage insurer, or direct
competitor; 2) has significant exposure to residential real estate; 3) is in an industry in which we compete for
talent; and 4) is reasonably similar in size to us, in terms of revenues and market capitalization.
2015
2016
2017
2018
2019
2020
Russell 2000 Financial Index
100
127
131
113
136
129
S&P 500
100
110
131
123
158
184
Peer Index (AMBC, ACGL, AGO, ESNT, FAF, FBC,
FNF, GNW, MBI, NMIH, OCN, PFSI & RDN)
MGIC
100
120
143
129
188
167
100
115
160
118
160
142
120 | MGIC Investment Corporation 2020 Annual Report
Russell 2000 Financial IndexS&P 500Peer Index (AMBC, ACGL, AGO, ESNT, FAF, FBC, FNF, GNW, MBI, NMIH, OCN, PFSI & RDN)MGIC201520162017201820192020100125150175200 MGIC Stock
MGIC Investment Corporation Common Stock is
listed on the New York Stock Exchange under the
symbol MTG. At March 12, 2021, 339,248,595
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 12, 2021, the number of shareholders
of record was 246. In addition, we estimate that
there are approximately 40,250 beneficial owners of
shares held by brokers and fiduciaries.
Shareholder Information
The Annual Meeting
The Annual Meeting of Shareholders of MGIC
Investment Corporation will be held on April 29,
2021, at 10:00 a.m. Central time, via webcast at:
www.virtualshareholdermeeting.com/MTG2021.
10-K Report
Copies of the Annual Report on Form 10-K for the
year ended December 31, 2020, 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 2020 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
800-937-5449
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 2020 Annual Report | 121