MGIC Investment
Corporation
Annual Report
2021
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) ($)
2019
2020
2021
$
$
$
$
673.8 $
1.85 $
669.7 $
1.84 $
446.1 $
1.29 $
456.8 $
1.32 $
635.0
1.85
658.6
1.91
(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 2021 Annual Report | 1
New Primary Insurance Written($ billions)$63.4$112.1$120.2201920202021Revenue($ millions)$1,214$1,199$1,186201920202021Losses incurred, net($ millions)$119$365$65201920202021Direct Primary Insurance in Force($ billions)$222.3$246.6$274.4201920202021Book Value per Share$12.41$13.88$15.18201920202021Default Inventory(# loans)30,02857,71033,290201920202021 the housing market,
including first-time, and
At MGIC, our main business objective is to provide critical support
to
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.
Dear Fellow Shareholders:
I am pleased to report that 2021 was another successful year for our company. The successes we enjoyed
reflect the solid credit quality of our growing insurance in force, a strong housing market, a decreasing
delinquency rate, our market presence, the current favorable economic conditions, and the hard work and
commitment to excellence of my fellow co-workers. Following are several of our 2021 accomplishments:
•
•
•
•
•
•
•
•
•
Earned $635 million of net income ($1.85 per diluted share) for the year, compared to $446
million ($1.29 per diluted share) in 2020.
Increased primary new insurance written (NIW) from $112.1 billion in 2020 to $120.2 billion in
2021 and increased primary insurance in force (IIF) by more than 11.3% year-over-year. The
NIW is consistent with the Company's risk and return goals.
Paid $400 million of cash dividends from our principal subsidiary, Mortgage Guaranty
Insurance Corporation (MGIC) to our holding company, after having temporarily suspended
such dividends through mid-2021 as a result of the COVID-19 pandemic.
Maintained financial strength and capital flexibility while returning approximately $385 million
in capital to shareholders:
Repurchased 5.6% of our shares that were outstanding at the beginning of the year.
Increased cash dividends to shareholders by 33% in the second half of 2021.
Repurchased $99 million of our 2063 Junior Convertible Debentures, which eliminated
approximately 7.5 million potentially dilutive shares.
Expanded our reinsurance program by reaching favorable terms to secure quota share
reinsurance coverage on NIW through 2023, and by executing two insurance linked note
transactions, providing a total of $797 million in excess-of-loss reinsurance coverage on a
portion of our 2020 and 2021 NIW. These transactions allow us to better manage our risk
profile and provide an alternative source of capital.
Continued to transform our business processes along a number of dimensions, including
pricing, data and analytics, inside sales and our underwriting platform.
The accomplishments described above were all achieved despite managing through the continuing effects
of the COVID-19 pandemic including transitioning our workforce to a flexible hybrid model from the remote
work environment, in a second straight year of record-breaking NIW.
Net income rebounded to $635.0 from $446.1 million in 2020 and earnings per diluted share increased to
$1.85 from $1.29 in 2020. The increase in net income primarily reflects a decrease in losses incurred,
partially offset by increases in the provision for income taxes, other underwriting and operating expenses,
net, and loss on debt extinguishment. The increase in diluted earnings per share also reflects a decrease
2 | MGIC Investment Corporation 2021 Annual Report
in the number of diluted weighted average shares outstanding. In 2021 we generated a 13.5% return on
shareholders’ equity and paid a common dividend with an approximate yield of 2%.
Throughout 2021, home prices continued to appreciate while interest rates remained relatively attractive
and housing stock remained constrained. The demand for single family purchase loans continued to be
robust, although we did begin to see refinance activity slow down, especially in the second half of the year,
as interest rates ticked up. While lower refinance activity typically results in less NIW, it is generally a
positive for persistency (the percentage of insurance remaining in force from the year prior) and IIF growth,
which is the source of future revenue. For the second consecutive year, the housing market was one of the
bright spots in the economy - it generated more than $4 trillion of purchase and refinance mortgage
originations and enabled us to write a record volume of new business. This record amount of NIW
combined with modestly higher persistency on our existing books of business increased our IIF by 11%
year-over-year.
Our record NIW was also the result of our value proposition for 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 each of 2021and 2020, and the private mortgage insurance (PMI)
industry’s share of that market was 43.2% in 2021, compared to 43.9% in 2020. We are proud to say that
we increased our market share within the PMI industry to 20.6% in 2021, compared to 18.7% in 2020.
The insurance we wrote in recent years has performed exceptionally well, in part due to strong credit
profiles of the insured loans and the vibrant economy, with its low unemployment and solid home price
appreciation. However, as the spike in delinquencies that resulted from the COVID-19 pandemic reminded
us, economic cycles can change and it is important to 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 our 2016 through
2021 books of business. 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 economic sense. In addition to reducing losses
in weaker economic environments (we ceded $10 million of incurred losses in 2021 compared to $78
million in 2020), these transactions diversify our sources of capital relief and enhance our returns.
MGIC’s balance sheet and capital position were strong entering the year and continued to strengthen
throughout 2021. At year-end 2021, MGIC had $3.4 billion more capital than required under state capital
requirements and $2.2 billion more available assets than required by the private mortgage insurer eligibility
requirements (PMIERs) of Fannie Mae and Freddie Mac (the GSEs).
As of December 31, 2021, our consolidated cash and investments totaled $6.9 billion, including $663
million of cash and investments at our holding company. The consolidated investment portfolio had a mix
of 84% taxable and 16% tax exempt securities, and a pre-tax yield of approximately 2.5%. Our total debt-to-
capital ratio was approximately 19% at December 31, 2021.
Our capital management strategy has resulted in a strong and dynamic capital position, which has allowed
us to successfully take advantage of the unexpectedly large 2020 and 2021 housing markets. Further, we
are positioned to take full advantage of the overall market opportunity for private mortgage insurance,
which we expect will be somewhat smaller in 2022.
Our current capital management strategy has three primary priorities:
•
•
•
Protect the health of the holding company and maintain maximum capital flexibility
Protect the health of MGIC and position it to succeed in the future
Return excess capital to shareholders above target liquidity levels of MGIC and the holding
company
MGIC Investment Corporation 2021 Annual Report | 3
We executed several capital management transactions in 2021 that improved the quality of our balance
sheet including the repurchase of $98.6 million in aggregate principal amount of our 9% Debentures at a
purchase price of $135.5 million, plus accrued interest. Although the repurchase resulted in a $36.9 million
loss on debt extinguishment, it also reduced our potentially dilutive shares by approximately 7.5 million
shares, eliminated approximately $9 million of annual interest expense, and lowered our overall debt to
capital ratio.
Reflecting MGIC’s strong balance sheet and capital position as well as its outlook for the future, our Board
authorized MGIC to pay dividends totaling of $400 million to our holding company in 2021. In the third
quarter of 2021, the MTG Board increased the common dividend by 33% to $0.08/share and for the full
year 2021, we returned $94.7 million in dividends to our shareholders.
The holding company repurchased approximately 19.0 million shares of common stock in 2021, or 5.6% of
the beginning number of shares outstanding, using the remaining authorization under the program that
was approved by our Board in 2020. In the fourth quarter of 2021, our board approved a separate $500
million share repurchase program that expires at the end of 2023 and we began to repurchase shares
under it in 2022.
Turning now to the regulatory environment, the federal government, through various agencies, including the
Federal Housing Finance Agency (FHFA), Consumer Financial Protection Bureau (CFPB), and the Federal
Housing Administration (FHA) continues to focus its housing policy efforts on promoting equitable access
to sustainable and affordable housing, mitigating foreclosure and eviction risk for homeowners impacted
by COVID-19, and ensuring a successful economic recovery, as opposed to making large scale changes to
the housing finance infrastructure. Our business is organized to deliver a product that helps borrowers get
the keys to their own homes, opening the door to the economic and social benefits of sustainable
homeownership and we believe that we are well-positioned to responsibly capitalize on these efforts.
We believe that sustainable housing options are possible without creating undue risk to the housing
system, provided the programs are thoughtfully constructed. We will continue to educate about the
benefits, and advocate for the increased use, of private capital, including private mortgage insurance, in the
residential housing and mortgage finance industry. The use of private capital reduces taxpayer exposure to
housing while maintaining a resilient housing finance system.
This year, 2022, marks the 65th year that MGIC has been supporting the U.S. housing market and helping
individuals and families achieve affordable and sustainable homeownership. In addition to offering a
compelling business proposition for our customers, we want to foster an environment where diversity is
embraced, and co-workers are positioned to succeed. This requires providing tools and resources for
people to fully develop in the organization, increasing opportunities for engagement, and endeavoring to
recruit diverse teams to best serve our customers.
At MGIC, we take pride in knowing that what we do matters. As pioneers of the modern form of private
mortgage insurance, MGIC has helped over 13.5 million families achieve homeownership sooner. This is a
touchstone we return to when we think about the work we do, how we do it, and why we do it.
Homeownership can be a powerful vehicle for financial stability and generational wealth, which means that
our impact extends well beyond the walls of our company, beyond our investors, beyond our customers,
even beyond the consumers who use our product. Our work supports resilient communities and the social
fabric at large. To help articulate our values, we annually publish on our website an Environmental, Social
and Governance Report.
I am confident in our positioning in this market, and we like the risk-reward equation that the current
conditions offer. We have the right team in place to build off of our solid foundation to continue to deliver
competitive offerings and best-in-class service to our customers and generate strong returns for our
shareholders through the core business as well as capital returns. That is why, when I look ahead, I am
very excited about the future of our company.
4 | MGIC Investment Corporation 2021 Annual Report
I would like to thank our shareholders, customers and business partners for their support in 2021. I
especially want to thank my fellow co-workers. Throughout our 65 years of providing support to first‑time
homebuyers, our people have been the cornerstone of the many accomplishments of MGIC. I am very
proud of our organization that, while navigating through all of the obstacles brought about by the COVID-19
pandemic, for the last two years we have delivered on our promise to customers and shareholders and in
those two years, combined, we: wrote $230 billion of NIW, grew our insurance in force by 23%, reduced the
number of fully dilutive shares by 10%, increased the common stock dividend by 33%, increased book value
by 22% and distributed $177 million in common stock dividends.
The continued efforts by our team to support our customers, their local communities and fellow co-
workers have been remarkable. I am humbled to lead an organization of co-workers with such high
dedication and integrity.
Respectfully,
Tim Mattke
Chief Executive Officer
From left: Jay Hughes, Executive Vice President - Sales and Business Development
Sal Miosi, President and Chief Operating Officer
Tim Mattke, Chief Executive Officer
Steve Thompson, Executive Vice President and Chief Risk Officer
Paula Maggio, Executive Vice President, General Counsel and Secretary
Nathan Colson, Executive Vice President and Chief Financial Officer
MGIC Investment Corporation 2021 Annual Report | 5
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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
$274.4 billion of primary IIF on a consolidated basis at
December 31, 2021.
Summary of financial results of MGIC Investment
Corporation
Year Ended
December 31,
2021
2020
Change
(in millions, except per
share data)
Selected statement of
operations data
Net premiums earned
$ 1,014.4 $ 1,021.9
(1) %
Investment income, net
of expenses
Losses incurred, net
Other operating and
underwriting expenses,
net
Loss on debt
extinguishment
Income before tax
Provision for income
taxes
Net income
Diluted income per
share
Non-GAAP Financial
Measures (1)
Adjusted pre-tax
operating income
Adjusted net operating
income
Adjusted net operating
income per diluted
share
156.4
64.6
154.4
364.8
1 %
(82) %
198.4
176.4
12 %
36.9
801.8
166.8
635.0
26.7
559.3
113.2
446.1
38 %
43 %
47 %
42 %
$
1.85 $
1.29
43 %
$ 831.7 $ 572.8
45 %
658.6
456.8
44 %
$
1.91 $
1.32
45 %
(1)
See "Explanation and Reconciliation of our use of Non-
GAAP Financial Measures."
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, 2021, filed with the Securities and
Exchange Commission on February 23, 2022. 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
in
updated
circumstances that have occurred since our Annual
Report on Form 10-K was filed with the SEC.
reflect any events or changes
to
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 contained 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
years ended December 31, 2021 and 2020, including
comparisons between 2021 and 2020. Comparisons
between 2020 and 2019 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,
2020 filed with the SEC.
Forward Looking and Other Statements
forward
As discussed under “Forward Looking Statements
and Risk Factors” in this Annual Report, actual results
may differ materially from the results contemplated
looking statements. We are not
by
undertaking any obligation to update any forward
looking statements or other statements we may make
in the following discussion or elsewhere in this
document even though these statements may be
affected by events or circumstances occurring after
the forward looking statements or other statements
were made. Therefore, no reader of this document
should rely on these statements being current as of
any time other than the time at which this document
was
the Securities and Exchange
Commission.
filed with
6 | MGIC Investment Corporation 2021 Annual Report
SUMMARY OF 2021 FINANCIAL RESULTS
BUSINESS ENVIRONMENT
Management's Discussion and Analysis
Net income of $635.0 million for 2021 increased by
$188.9 million when compared to the prior year, and
diluted income per share of $1.85 increased by 43%
when compared to the prior year. These increases
incurred,
primarily reflect a decrease
partially offset by increases in the provision for
income taxes, other underwriting and operating
expenses, net, and loss on debt extinguishment.
losses
in
Diluted income per share increased due to a an
increase in net income and a decrease in the number
of diluted weighted average shares outstanding.
income
Adjusted net operating
for 2021 was
$658.6 million (2020: $456.8 million) and adjusted net
operating income per diluted share was $1.91 (2020:
$1.32). Adjusted net operating income for 2021 and
2020
loss on debt
extinguishment and net realized investment gains.
included adjustments for a
Losses incurred, net were $64.6 million, compared to
$364.8 million the prior year. The decrease reflects
fewer delinquency notices in 2021 compared with
2020 which was impacted by the COVID-19 pandemic
and the resultant macroeconomic environment.
The decrease in losses incurred in 2021 was also due
loss reserve development of $60.0
to favorable
million primarily due to a decrease in the estimated
claim
rate on pre-COVID and peak COVID
delinquencies (those that occurred in the second and
third quarters of 2020). The favorable loss reserve
development was offset by the recognition of a
probable loss of $6.3 million related to litigation of our
claims paying practice. In 2020 we experienced
adverse loss reserve development of $19.6 million
primarily due to an increase in the estimate of claim
severity.
The increase in our provision for income taxes to
$166.8 million in 2021 compared to $113.2 million in
2020 was primarily due to an increase in income
before tax. Our effective tax rate for 2021 was 20.8%
compared to 20.2% for 2020.
Other operating and underwriting expenses, net
increased to $198.4 million in 2021 from $176.4
million
in
professional and consulting services, offset by an
increase in ceding commissions.
in 2020 primarily due
increases
to
We recorded a loss on debt extinguishment of $36.9
million in 2021 associated with the repurchase of a
portion of our 9% Debentures and $26.7 million in
2020 associated with the repurchases of a portion of
each of our 5.75% Notes and our 9% Debentures.
Economic conditions
Low interest rates, increasing household formations
and appreciating home values supported favorable
housing trends in 2021. These factors contributed to
an increase in home purchase activity in 2021, after a
strong 2020. Refinance activity was also robust
during 2021, but decreased throughout the year. The
continued favorable housing trends resulted in an
increase in our NIW, from $120.2 billion in 2021 when
compared to $112.1 billion in 2020.
future
financial
impact our
the COVID-19 pandemic may
While uncertain,
adversely
results,
business, liquidity and/or financial condition. The
magnitude of the impact will be influenced by various
factors, including the length and severity of the
pandemic in the United States, efforts to reduce the
transmission of COVID-19, 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 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 materially
impact our financial results, business, liquidity, and/or
financial condition."
Mortgage insurance market
The past several years of
fundamentals and
characteristics of our
contributed to a growing insurance in force.
in our view,
recently
favorable housing
risk
favorable
loans
insured
The percentage of our NIW with DTI ratios over 45%
and LTV's over 95%
in 2021
compared with 2020. The increase was primarily
driven by an increase in home price appreciation and
an increase in purchase activity with a corresponding
decrease in refinance activity.
increased slightly
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
MGIC Investment Corporation 2021 Annual Report | 7
Management's Discussion and Analysis
financial
requirements,
insurers based on premium
that we currently compete with other private
rates,
mortgage
underwriting
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
the effective use of
provided
technology and
the delivery and
servicing of our mortgage insurance products.
lenders and
innovation
to
in
Pricing practices
In recent years, the industry has materially reduced its
use of standard rate cards, which were fairly
consistent among competitors, and correspondingly
increased its 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. Our increased use of reinsurance over the
past several years, and the improved credit profile and
reduced loss expectations associated with loans
insured after 2008, have helped to mitigate the
negative effect of declining premium rates on our
expected returns. We expect our direct premium yield
to continue to decline as older policies with higher
premium rates run off, and are replaced with new
insurance policies, which generally have
lower
premium rates.
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
insurance, we
with traditional private mortgage
participate in these programs from time to time.
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.
8 | MGIC Investment Corporation 2021 Annual Report
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 2020 and
2021. The strong refinance markets in 2020 and 2021,
and PMI premium rate reductions, have contributed to
a PMI market share consistent with 2018 and 2019,
which were at its highest levels since the financial
crisis.
Refer to "Mortgage Insurance Portfolio" for additional
discussion of the 2021 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 $5.7 billion, an excess of $2.2 billion
over its Minimum Required Assets at December 31,
2021.
BUSINESS OUTLOOK FOR 2022
Our outlook for 2022 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 January 2022, the total mortgage origination
forecasts from the GSEs and MBA indicate average
mortgage originations of $3.1
in 2022,
compared to an average estimated $4.4 trillion in
2021. Purchase originations are expected to increase
in 2022, compared
refinance
transactions are expected to decrease. As a result of
the decrease in forecasted mortgage originations, we
are expecting NIW to be lower in 2022 compared to
2021. The reduction will be driven primarily by a
decrease in refinance activity.
to 2021, while
trillion
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 11.3% in 2021. We expect our IIF to
grow in 2022, but at a slower rate than what we
experienced 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.
Generally speaking, in a rising rate environment, total
mortgage originations may decline; however, absent
material accumulated home price appreciation since
the issuance of a policy, 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 interest rates may increase in 2022 and
home price appreciation is expected to slow in 2022
when compared to the record highs of 2021.
Results of operations
Premiums. Despite an increase in IIF, we expect our
2022 earned premiums (on a direct basis) to be lower
than they were in 2021. Overall, our premium rates
have been trending down in recent years, including in
2021, as the books of business written at lower rates
represent an increasing percentage of our total IIF.
Our 2022 net premiums written are expected to be
comparable to 2021, while our net premiums earned
are expected to decrease in 2022. 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, offset by
an increase in IIF. Net premiums earned are also
impacted by the amount of accelerated premiums
from single premium policy cancellations, which
generally decrease as refinance activity decreases.
Our unearned premium decreased to $241.7 million at
December 31, 2021 from $287.1 million at December
31, 2020. 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. The amount of premiums we
cede in 2022 will be affected by any changes in our
reinsurance coverage.
Factors that affect the amount of premiums we earn
from our
in our
"Consolidated Results of Operations - Premium yield."
further discussed
IIF are
Management's Discussion and Analysis
income
income
in 2022
investment
investment
income. Net
Investment
is a
material contributor to our results of operations. We
expect net
to be
comparable to 2021. The amount of investment
income will be impacted by the change in the yield we
can earn on investments and the level of invested
assets. The level of invested assets will primarily be
impacted by the amount of cash we expect to use in
financing activities
from
relative
operations. The magnitude of any change in our
invested asset level will be subject to the timing of our
financing activities.
to our cash
Losses. Losses incurred, net in 2021 were $64.6
million, a decrease of $300.2 million over the prior
year losses incurred of $364.8 million. The decrease
reflects fewer delinquency notices received in 2021
compared with 2020 which was impacted by the
COVID-19 pandemic. The decrease was also due to
favorable loss reserve development of $60.0 million
recognized
loss
development of $19.6 million
in 2020. Through
December 31, 2021, our re-estimation of reserves
resulted in favorable development on pre-COVID and
peak COVID delinquencies as a result of a decrease in
the estimated claim rate on those delinquencies. In
2020, we experienced adverse loss development of
$19.6 million primarily related to an increase in the
estimate of claim severity.
in 2021 compared to adverse
We expect our delinquency inventory to continue to
decrease in 2022, but at a slower rate than what we
experienced in 2021. As foreclosure moratoriums and
forbearance plans end, we expect to see an increase
in claims received and claims paid.
Underwriting and operating expenses, net. We expect
underwriting and operating expenses, net to increase
in 2022 as we invest in our technology and data and
analytics infrastructure to execute our strategies.
Income taxes. We expect our 2022 effective tax rate
to be approximately 21%.
CAPITAL
MGIC dividend payments to our holding company
regulation. Amounts
The ability of MGIC to pay dividends is restricted by
insurance
in excess of
prescribed limits are deemed “extraordinary” and may
not be paid if disapproved by the OCI. A dividend is
extraordinary when the proposed dividend amount,
plus dividends paid in the twelve months preceding
the dividend payment date exceed the ordinary
dividend level. At December 31, 2021 MGIC could pay
$122 million of ordinary dividends without OCI
approval, before taking into consideration dividends
paid in the preceding twelve months. In 2021 and
2020, MGIC paid a cash and/or investment security
dividend of $400 million and $390 million,
respectively, to our holding company. In 2020 MGIC
distributed to the holding company, as a dividend, its
MGIC Investment Corporation 2021 Annual Report | 9
Management's Discussion and Analysis
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
in consultation with the board.
Share repurchase programs
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. After suspending stock
repurchases due to the COVID 19 pandemic, we
repurchased approximately 19.0 million in the second
half of 2021 using approximately $291 million of
holding company resources. Prior to the COVID 19
pandemic, we repurchased approximately 9.6 million
shares of our common stock in the first quarter of
2020 using approximately $120 million of holding
company resources. As of December 31, 2021, we
had $500 million of authorization remaining to
repurchase our common stock through the end of
2023 under a share repurchase program approved by
our Board of Directors in October 2021.
The following table shows details of our share
repurchase programs.
Repurchase
Program
Expiration
Date
Repurchased
(in millions)
Authorization
Remaining
(in millions)
2019
Authorization
2020
Authorization
2021
Authorization
December
31, 2020
December
31, 2021
December
31, 2023
$
$
$
200 $
300 $
—
—
— $
500
As of December 31, 2021, we had approximately
320,336 million shares of common stock outstanding.
Dividends to shareholders
In the first and second quarters of 2021, we paid
quarterly cash dividends of $0.06 per share to
shareholders which totaled $41.1 million. In the third
and fourth quarters of 2021, we paid a quarterly cash
dividend of $0.08 per share which totaled $53.6
million. On January 25, 2022, the Board of Directors
declared a quarterly cash dividend to holders of the
company's common stock of $0.08 per share payable
on March 2, 2022, to shareholders of record at the
close of business on February 16, 2022.
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.”
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
reinsurance
transactions).
risk ceded under
for
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. 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
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:
is for
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.
the applicable GSE.
è There may be future implications for PMIERs as a
result of changes to the regulatory capital
requirements for the GSEs. In 2020, the FHFA
adopted a rule containing a capital framework for
the GSEs that generally would have become
effective on the date of termination of the FHFA’s
conservatorship of
In
September 2021, the FHFA issued a notice of
proposed rule-making that would modify that
capital framework. In light of recent home price
adjustments
countercyclical
appreciation,
included in the capital requirements could lead to
significantly higher capital requirements for loans
with loan-to-vale ("LTV") ratios greater than 80%.
When the final GSE capital requirements have
been determined and become effective, they may
affect the Minimum Required Assets required to
be held by mortgage insurers.
10 | MGIC Investment Corporation 2021 Annual Report
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
reinsurance
PMIERs
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.
requirement. Our existing
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)
in capital exceeds the
the percentage decrease
insured risk, or (ii) the
percentage decrease
percentage
less than the
increase
percentage increase in insured risk. Wisconsin does
not regulate capital by using a risk-to-capital measure
but instead requires a MPP. MGIC's "policyholder
position" includes its net worth or surplus and its,
contingency reserve.
in
in capital
is
At December 31, 2021, MGIC’s risk-to-capital ratio
was 9.5 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.4 billion above the
required MPP of $1.9 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
Management's Discussion and Analysis
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, 2021, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.5 to 1.
requirements
in
insurers that are provided for
The NAIC previously announced plans to revise the
for
minimum capital and surplus
mortgage
its
Mortgage Guaranty Insurance Model Act. In 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
the NAIC must propose
established by which
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.
GSE REFORM
The FHFA has been the conservator of the GSEs since
2008 and has the authority to control and direct their
increased role that the federal
operations. The
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.
As a result of the 2021 change in the Presidential
Administration, the June 2021 appointment of a new
Acting Director of the FHFA who has also been
nominated to become the full-time Director, and the
2021 U.S. Supreme Court decision that allows the
President to remove the FHFA Director at will, it is
uncertain what role the GSEs, FHA and private capital,
including private mortgage insurance, will play in the
residential housing finance system in the future. The
timing and impact on our business of any resulting
changes is uncertain. Many of the proposed changes
would require Congressional action to implement and
it is difficult to estimate when Congressional action
would be final and how long any associated phase-in
period may last.
For additional
the business
information about
practices of the GSEs, see our risk factor titled
“Changes in the business practices of the GSEs,
MGIC Investment Corporation 2021 Annual Report | 11
Management's Discussion and Analysis
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. While uncertain, the impact of
the COVID-19 pandemic on the Company’s future
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, efforts
transmission of
COVID-19, the level of unemployment, and the impact
of government initiatives and actions taken by the
and
GSEs
modification programs) to mitigate the economic
harm caused by the COVID-19 pandemic.
(including mortgage
forbearance
reduce
the
to
in a claim than a delinquent
In certain circumstances, the servicer of a loan may
be unable to contact the borrower regarding an
extension of the forbearance plan and it will expire
without being extended. 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
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.
loan
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, 2021 and
2020, 33% and 62% of our delinquency inventory was
reported to us as in forbearance plans, respectively.
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
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 the
receipt and payment of claims. Foreclosures on
mortgages purchased or securitized by the GSEs were
suspended through July 31, 2021. Under a CFPB rule
that was effective through December 31, 2021, with
limited exceptions, servicers were required to ensure
that at least one temporary procedural safeguard had
been met before referring 120-day delinquent loans
for foreclosure. With the expiration of the CFPB rule, it
is likely that foreclosures and claims will increase.
FACTORS AFFECTING OUR RESULTS
the COVID-19 pandemic may
As noted above,
adversely affect our future business, results of
operations, and financial condition. The extent of the
adverse effects will depend on the duration and
severity of the COVID-19 pandemic, the ultimate
related delinquencies and
effect of COVID-19
forbearances on our loss incidence, and the effect of
the pandemic on the U.S. economy and housing
market. We have addressed some of the potential
impacts throughout this document.
The future effects of changing climatic conditions on
our business is uncertain. For information about
possible effects, please refer to our Risk Factor titled
“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.”
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
12 | MGIC Investment Corporation 2021 Annual Report
the
right
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
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
loans.
Cancellations of single premium policies, which
are generally non-refundable, result in immediate
recognition of any remaining unearned premium.
insured
the
•
•
•
the
loans,
pressures,
insured
Premium rates, which are affected by product
risk
type,
competitive
characteristics of
the
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. 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
ceded losses incurred on a “dollar for dollar”
basis and can be eliminated at ceded loss levels
higher than we experienced in 2021. As a result,
lower levels of losses incurred result in a higher
profit commission and less benefit from ceded
losses incurred; higher levels of losses incurred
result in more benefit from ceded losses incurred
and a lower profit commission (or for certain
levels of accident
its
elimination). See Note 9 – “Reinsurance” to our
consolidated
a
financial
discussion of our reinsurance transactions.
statements
ratios,
year
loss
for
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
Management's Discussion and Analysis
returned or expected to be returned in connection
rescissions, and
with claim payments 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
fixed
Our investment portfolio is composed principally of
income securities. The
investment grade
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
for delinquent
Losses incurred are the current expense that reflects
claim payments, cost of settling claims, and changes
in our estimates of payments that will ultimately be
made as a result of delinquencies on insured loans.
As explained under “Critical Accounting Estimates”
below, except in the case of a premium deficiency
reserve, we recognize an estimate of this expense
only
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:
loans. The
•
•
•
•
•
of
the
state
economy,
The
including
unemployment and housing values, each of
which affects the
loans will
become delinquent and whether loans that are
delinquent cure their delinquency.
likelihood that
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
losses
incurred.
increase
tending
to
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
MGIC Investment Corporation 2021 Annual Report | 13
Management's Discussion and Analysis
our estimates of future rescissions of policies
and curtailments of claims, and reversals of
rescissions and curtailments. We collectively
refer
rescissions and denials as
“rescissions” and variations of this term. We call
reductions to claims "curtailments."
to such
the condition of
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 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 include 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.
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)
•
•
income securities. Realized
investment
Fixed
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 and
any
impairments
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.
temporary"
"other
than
Equity securities. Realized investment gains and
losses are accounted for as a function of the
periodic change in fair value.
Loss on debt extinguishment
that are undertaken
Gains and losses on debt extinguishment result from
discretionary activities
to
enhance our capital position, improve our debt profile
and/or reduce potential dilution from our outstanding
convertible debt. Extinguishing our outstanding debt
obligations early through these discretionary activities
may result in losses primarily driven by the payment
of consideration in excess of our carrying value , 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.
MORTGAGE
FLOW CYCLE
INSURANCE EARNINGS AND CASH
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
including those related to
economic conditions,
pandemics, including COVID-19, and other natural
disasters may result in delinquencies not following
the typical pattern.
14 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
CYBERSECURITY
increasingly reliant on the efficient and
We are
information
uninterrupted operation of complex
technology systems. All
technology
information
systems are potentially vulnerable to damage or
interruption from a variety of sources, including by
third-party cyber attacks, including those involving
ransomware. The Company discovers vulnerabilities
and experiences malicious attacks and other
attempts to gain unauthorized access to its systems
on a regular basis. Globally, attacks are expected to
continue accelerating
frequency and
sophistication with increasing use by actors of tools
and techniques that will hinder the Company’s ability
to identify, investigate and recover from incidents. In
response to the COVID-19 pandemic, the Company
transitioned to a primarily virtual workforce model and
will likely continue to operate under a hybrid model in
the future. Virtual and hybrid workforce models may
be more vulnerable to security breaches.
in both
in place
to secure our
While we have information security policies and
systems
information
technology systems and to prevent unauthorized
access to or disclosure of sensitive information, there
can be no assurance with respect to our systems and
those of our third-party vendors that unauthorized
access to the systems or disclosure of the sensitive
information, either through the actions of third parties
or employees, will not occur.
For additional
the business
information about
practices of the GSEs, 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.”
MGIC Investment Corporation 2021 Annual Report | 15
Management's Discussion and Analysis
The following table shows five years of selected financial information.
Summary of operations
(In thousands, except per share data)
2021
2020
2019
2018
2017
As of and for the Years Ended December 31,
Revenues:
Net premiums written
Net premiums earned
Investment income, net
Realized investment (losses) gains, net
including net impairment losses
Other revenue
Total revenues
Losses and expenses:
Losses incurred, net
Underwriting and other expenses
Interest expense
Loss on debt extinguishment
Total losses and expenses
Income before tax
Provision for income taxes (1)
Net income
$
969,010 $
928,742 $ 1,001,308 $
992,262 $
997,955
1,014,419
1,021,943
1,030,988
156,438
154,396
167,045
6,582
8,236
13,752
9,055
5,306
10,638
975,162
141,331
(1,353)
8,708
934,747
120,871
231
10,205
1,185,675
1,199,146
1,213,977
1,123,848
1,066,054
64,577
211,047
71,360
36,914
383,898
801,777
166,794
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
$
634,983 $
446,093 $
673,763 $
670,097 $
355,761
Weighted average common shares
outstanding
351,308
359,293
373,924
386,078
394,766
Diluted income per share
$
1.85 $
1.29 $
1.85 $
1.78 $
0.95
Balance sheet data
Total investments
$ 6,606,749 $ 6,682,911 $ 5,758,320 $ 5,159,019 $ 4,990,561
Cash and cash equivalents
284,690
287,953
161,847
151,892
99,851
Total assets
Loss reserves
Short- and long-term debt
Convertible junior subordinated
debentures
Shareholders' equity
Book value per share
7,325,008
7,354,526
6,229,571
5,677,802
5,619,499
883,522
880,537
1,036,508
1,034,379
555,334
575,867
674,019
574,713
985,635
573,560
110,204
208,814
256,872
256,872
256,872
$ 4,861,382
4,698,986
4,309,234
3,581,891
3,154,526
$
15.18 $
13.88 $
12.41 $
10.08 $
8.51
(1)
In 2017, we remeasured our net deferred tax assets at the lower enacted corporate income tax rate under the Tax Act.
16 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
Other data
New primary insurance written ($ millions)
$ 120,204
$ 112,113
New primary risk written ($ millions)
$
30,324
$
26,759
$
$
63,421
15,811
$
$
50,526
12,657
$
$
49,123
12,217
2021
2020
2019
2018
2017
Years Ended December 31,
IIF (at year-end) ($ millions)
Direct primary IIF
RIF (at year-end) ($ millions)
Direct primary RIF
Direct pool RIF
With aggregate loss limits
Without aggregate loss limits
Primary loans in default ratios
Policies in force
Loans in default
$ 274,404
$ 246,572
$ 222,295
$ 209,707
$ 194,941
$
69,337
$
61,812
$
57,213
$
54,063
$
50,319
206
99
210
130
213
163
228
191
236
235
1,164,984
1,126,079
1,079,578
1,058,292
1,023,951
33,290
57,710
30,028
32,898
46,556
Percentage of loans in default
2.84 %
5.11 %
2.78 %
3.11 %
4.55 %
Insurance operating ratios (GAAP)
Loss ratio
Underwriting Expense ratio
Risk-to-capital ratio (statutory)
Mortgage Guaranty Insurance Corporation
Combined insurance companies
6.4 %
20.6 %
9.5:1
9.5:1
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
MGIC Investment Corporation 2021 Annual Report | 17
Management's Discussion and Analysis
EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP
FINANCIAL MEASURES
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.
(loss) per diluted share
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
the
income
financial
evaluation of
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.
company's
facilitate
core
the
Adjusted pre-tax operating income (loss) is defined
as GAAP income (loss) before tax, excluding the
effects of net realized investment gains (losses), gain
and losses on debt extinguishment, net impairment
losses recognized
infrequent or
unusual non-operating items where applicable.
in earnings and
Adjusted net operating income (loss) is defined as
GAAP net
income (loss) excluding the after-tax
effects of net realized investment gains (losses), gain
and losses on debt extinguishment, net impairment
losses recognized in earnings, 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 a
federal statutory 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
interest expense on
for
making adjustments
convertible debt, whenever the impact is dilutive by (ii)
average
diluted weighted
shares
common
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 2021 Annual Report
Management's Discussion and Analysis
Non-GAAP reconciliations
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income:
(in thousands)
Income before tax / Net income
Adjustments:
Years Ended December 31,
2021
2020
Pre-tax
Net
(after-tax)
Tax Effect
$ 801,777 $ 166,794 $ 634,983
Pre-tax
559,263
Tax Effect
113,170
Net
(after-tax)
446,093
Net realized investment (gains) losses
Loss on debt extinguishment
(7,009)
36,914
(1,472)
7,752
(5,537)
29,162
(13,245)
26,736
(2,781)
5,615
(10,464)
21,121
Adjusted pre-tax operating income /
Adjusted net operating income
$ 831,682 $ 173,074 $ 658,608 $ 572,754 $ 116,004 $ 456,750
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
351,308
1.85
$
(0.02)
0.08
$
1.91
359,293
1.29
$
(0.03)
0.06
$
1.32
MORTGAGE INSURANCE PORTFOLIO
MORTGAGE ORIGINATIONS
The
is
total amount of mortgage originations
generally influenced by the level of new and existing
home sales, the percentage of homes purchased for
cash, and the level of refinance activity. PMI market
share of total mortgage originations is influenced by
the mix of purchase and refinance originations. PMI
market share is also impacted by the market share of
total originations of the FHA, VA, USDA, and other
alternatives to mortgage insurance, including GSE
programs that may reduce or eliminate the demand
for mortgage insurance.
Total mortgage originations in 2020 and 2021 reflect
record highs in the housing market. Total mortgage
originations are forecasted to be strong in 2022,
although less so than the last two years. The 2022
refinance market is forecasted to decrease, while the
purchase market is forecasted to increase when
compared to estimates for 2021.
E - Estimated, F- Forecast
Source: GSEs and MBA estimates/forecasts as of January
2022. Amounts represent the average of all sources.
The total estimated mortgage insurance volume is
shown below.
MGIC Investment Corporation 2021 Annual Report | 19
Mortgage originations(in billions)$3,069$4,359$4,307$1,953$1,804$1,547$1,116$2,555$2,760PurchaseRefinance2022 (F)2021 (E)2020$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,
2021
Twelve Months
Ended
December 31,
2020
$1,050
$1,366
Source: Inside Mortgage Finance - November 11, 2021 or SEC
filings. Includes HARP NIW.
is primarily
PMI's market share
impacted by
competition from government mortgage insurance
programs. In consideration of the expected decrease
in mortgage originations, our 2022 NIW is expected to
decrease from 2021.
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, 2021 decreased compared to the market share for
the full year of 2020.
NEW INSURANCE WRITTEN
NIW for 2021 continued to have what we believe are
favorable risk characteristics. The following tables
provide information about characteristics of our NIW.
The percentage of our NIW with DTI ratios over 45%
and LTV's over 95%
in 2021
compared with 2020. The increase was primarily
driven by an increase in home price appreciation and
purchase activity with a corresponding decrease in
refinance activity.
increased slightly
Primary NIW by FICO score
(% of primary NIW)
2021
2020
Years Ended December 31,
760 and greater
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
640 - 659
639 and less
Total
Primary NIW by loan-to-value
45.6 %
17.5 %
13.7 %
11.1 %
7.3 %
2.7 %
1.6 %
0.5 %
100 %
47.1 %
18.2 %
13.3 %
10.3 %
7.3 %
2.1 %
1.1 %
0.6 %
100 %
Estimated primary MI market share
(% of total primary
MI volume)
Nine Months
Ended September
30, 2021
Twelve Months
Ended December
31, 2020
PMI
FHA
VA
USDA
43.4%
23.9%
30.9%
1.9%
43.9%
23.4%
30.9%
1.8%
(% 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,
2021
2020
10.8 %
43.7 %
30.0 %
15.5 %
100 %
8.6 %
39.1 %
32.1 %
20.2 %
100 %
Source: Inside Mortgage Finance - November 11, 2021.
Includes HARP NIW.
Primary NIW by debt-to-income ratio
Based on the current trajectory of our business, as
shown in the table below, we expect that our market
share within the PMI industry has increased in 2021
when compared to 2020. For additional discussion of
the competitive landscape of the industry refer to
"Overview - Business Environment - Competition."
(% of primary NIW)
45.01% and above
38.01% to 45.00%
38.00% and below
Total
Years Ended December 31,
2021
2020
13.6 %
30.0 %
56.4 %
100 %
11.3 %
30.8 %
57.9 %
100 %
Estimated MGIC market share
(% of total primary
private MI volume)
MGIC
Nine Months
Ended
September 30,
2021
Twelve Months
Ended
December 31,
2020
20.5%
18.7%
Source: Inside Mortgage Finance - November 11, 2021.
Excludes HARP NIW.
Primary NIW by policy payment type
(% of primary NIW)
Monthly premiums
Single premiums
Annual Premiums
Years Ended December 31,
2021
2020
92.5 %
7.4 %
0.1 %
91.0 %
8.9 %
0.1 %
20 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
Primary NIW by type of mortgage
Years Ended December 31,
The composition of our primary RIF by policy year as
of December 31, 2021 and 2020 is shown below:
(% of primary NIW)
2021
2020
Primary risk in force
($ in millions)
2004 and prior
2005 - 2008
2009 - 2015
2016 - 2021
Total
December 31,
2021
December 31,
2020
500
3,728
2,865
62,244
69,337
635
5,043
5,689
50,445
61,812
POOL AND OTHER INSURANCE
reasons,
for a variety of
MGIC has written no new pool insurance since 2008,
however,
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 $305 million ($206 million on pool policies with
aggregate loss limits and $99 million on pool policies
without aggregate
limits) at December 31,
2021 compared to $340 million ($210 million on pool
policies with aggregate loss limits and $130 million
on pool policies without aggregate
limits)
at December 31, 2020. 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.
loss
loss
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 $321 million and $287
million as of December 31, 2021 and December 31,
2020, respectively.
Purchases
Refinances
IIF AND RIF
79.7 %
20.3 %
64.3 %
35.7 %
the
Our IIF grew 11.3% in 2021, and 10.9% in 2020, as NIW
more than offset policy cancellations. Cancellation
activity is primarily due to refinancing activity, but is
also impacted by policies cancelled when borrowers
required amount of home equity,
achieve
to claim payment, and by
cancellations due
rescissions. Refinancing activity has historically been
affected by the level of mortgage interest rates and
the level of home price appreciation. Cancellations
generally move inversely to the change in the direction
of interest rates, although they generally lag a change
in direction.
Persistency. Our persistency at December 31, 2021
was 62.6% compared to 60.5% at December 31, 2020.
Since 2000, our year-end persistency ranged from a
high of 84.7% at December 31, 2009 to a low of 47.1%
at December 31, 2003.
Insurance in force and risk in force
($ in billions)
NIW
Cancellations
Increase in primary IIF
Years Ended December 31,
2021
2020
$
$
120.2
$
112.1
(92.4)
27.8
$
(87.8)
24.3
Direct primary IIF as of
December 31,
$
274.4
$
246.6
Direct primary RIF as of
December 31,
$
69.3
$
61.8
CREDIT PROFILE OF OUR PRIMARY RIF
Our 2009 and
later books possess significantly
improved risk characteristics when compared to our
refinance
2005-2008 books. Modification and
programs, such as HAMP and HARP, which expired at
the end of 2016 and 2018, respectively, but have been
replaced by other GSE modification programs, make
outstanding loans more affordable to borrowers with
the goal of reducing the number of foreclosures. As of
December 31, 2021, modifications accounted for
approximately 5.4% of our
total primary RIF,
compared to 7.8% at December 31, 2020. Loans
associated with 86% of all our modifications were
current as of December 31, 2021. For additional
information on the composition of our primary RIF see
"Business - Our Products and Services"
MGIC Investment Corporation 2021 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,
2021. For a discussion of the Critical Accounting
Estimates used by us that affect the Consolidated
Results of Operations, see
"Critical Accounting
Estimates" below.
(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 0.4 bps in 2021 and 0.5 bps in 2020
Revenues
Revenues
Changes in our premium yields when compared to the
respective prior year periods reflect the following:
Year Ended December 31,
In force Portfolio Yield
(In millions)
2021
2020
Net premiums written
$
969.0 $
928.7
Net premiums earned
$
1,014.4 $
1,021.9
Investment income, net of
expenses
Net realized investment
(losses) gains
Other revenue
Total revenues
156.4
154.4
6.6
8.2
13.8
9.1
$
1,185.7 $
1,199.1
NET PREMIUMS WRITTEN AND EARNED
NPW increased 4% while NPE decreased 1%, in 2021
compared with the prior year, The increase in net
premiums written was due to an increase in insurance
in force partially offset by the effects of a decrease in
the direct premium yield and an increase in ceded
premiums written, net of profit commission. The
decrease in net premiums earned was due to a
decrease in accelerated premiums earned from single
premium policy cancellations, given the decrease in
refinance activity, partially offset by the increase in
net premiums written.
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 2021, and 2020.
Premium Yield
(in basis points)
2021
2020
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
42.2
(0.6)
3.2
44.8
(5.9)
38.9
46.7
(0.5)
5.0
51.2
(7.6)
43.6
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,
the availability of reinsurance and certain policies
undergoing premium rate resets on their ten-year
anniversaries.
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 Accelerated earned premium from cancellation of
single premium policies prior to their estimated
policy life, primarily due to increased refinancing
activity increase our yield.
earned,
Ceded premiums earned, net of profit commission
and assumed premiums
è Ceded premiums
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
reinsurance
transactions.
further discussion on our
losses,"
increase our
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
the private mortgage
insurance industry is highly competitive and premium
rates have declined over the past several years. We
expect that our in force portfolio yield will continue to
decline as older
insurance policies with higher
premium rates run off or have their premium rates
reset, or are replaced with new insurance policies,
which generally have lower premium rates. While our
increased use of reinsurance over the past several
years has helped to mitigate the negative effect of
22 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
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.
Quota share reinsurance
(Dollars in thousands)
2021
2020
As of and For the Years
Ended December 31,
See "Overview – Factors Affecting Our Results" above
for additional factors that also influence the amount
of net premiums written and earned in a year.
Statements of operations:
Ceded premiums written and
earned, net of profit
commission
$ 118,537
$ 167,930
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.
% of direct premiums written
% of direct premiums earned
11 %
10 %
15 %
14 %
Profit commission
153,759
72,452
Ceding commissions
53,460
48,077
Ceded losses incurred
9,862
78,012
è We cede a fixed percentage of premiums earned
insurance covered by the
and received on
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 incurred 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 incurred result in a higher
profit commission and less benefit from ceded
losses incurred, higher levels of ceded losses
incurred result in more benefit from ceded losses
incurred 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.
Mortgage insurance portfolio:
Ceded RIF (in millions)
2015 QSR
2017 QSR
2018 QSR
2019 QSR
2020 QSR
2021 QSR
Credit Union QSR
Total ceded RIF
$
889
$ 1,625
—
—
1,539
4,754
7,470
1,594
1,330
1,333
2,779
6,169
—
770
$ 16,246
$ 14,006
Ceded losses incurred for the year ended December
31, 2021 reflect favorable loss reserve development
on previously received delinquency notices and a
decrease in new delinquency notices reported on
insurance covered by our QSR Transactions. Ceded
loss incurred for 2020 reflect the increase in new
delinquency notices due to the
impact of the
COVID-19 pandemic on insurance covered by our QSR
Transactions. See "Losses Incurred, net” below for
discussion of our loss reserves.
The following table provides information related to
our quota share agreements for 2021 and 2020.
Covered Risk
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
As of and For the
Years Ended
December 31,
2021
2020
NIW subject to QSR Transactions
81.9 %
74.4 %
New Risk Written subject to QSR
Transactions
IIF subject to QSR Transactions
RIF subject to QSR Transactions
90.5 %
78.4 %
77.9 %
85.5 %
75.9 %
81.8 %
MGIC Investment Corporation 2021 Annual Report | 23
Management's Discussion and Analysis
The NIW subject to quota share reinsurance increased
in 2021 compared to 2020 due to a decrease in NIW
with LTVs less than or equal to 85% and amortization
terms less than or equal to 20 years, which generally
have lower coverage percentages, and are excluded
from the QSR Transactions.
We terminated our 2017 and 2018 QSR Transactions
effective December 31, 2021 and incurred an early
termination fee of $5 million. The termination reduces
the amount of IIF and RIF subject to QSR transactions.
2022 and 2023 QSR Transaction.
We have executed an agreement with a group of
unaffiliated reinsurers for reinsurance transactions
to our existing QSR
with similar structures
transactions that will cover most of our NIW in 2022
(with an additional 15.0% quota share) and 2023 (with
a 15% quota share). This is in addition to the
that
reinsurance agreements executed
included a 15.0% quota share on eligible 2022 NIW
and the Credit Union QSR Transaction that covers
NIW on loans originated by credit unions with a 65%
quota share.
in 2021
Excess of loss reinsurance
Our excess-of-loss reinsurance agreements provide
$1.4 billion of loss coverage on an existing portfolio
of in force policies having an in force dates from July
1, 2016 through March 31, 2019, and January 1, 2020
through May 28, 2021, all dates inclusive. For the
reinsurance coverage, we retain the first layer of the
respective aggregate losses paid, and a Home Re
Entity will then provide the second layer coverage up
to the outstanding reinsurance amount.
As of December 31, 2021, the remaining first layer
retention and remaining excess of loss reinsurance
coverage under our Home Re Transactions was as
follows:
($ In thousands)
Remaining First
Layer Retention
Remaining
Excess of Loss
Reinsurance
Coverage
Home Re 2018-1
$
165,365 $
Home Re 2019-1
Home Re 2020-1
Home Re 2021-1
Home Re 2021-2
183,917
275,204
211,142
190,159
218,343
208,146
234,312
387,830
398,429
Total ceded premiums for 2021 and 2020 were $44.5
million and $20.8 million, respectively.
When a “Trigger Event” is in effect, payment of
principal on the notes that were sold by the Home Re
Entity to raise capital to supports its reinsurance
obligation will be suspended and the reinsurance
coverage available to MGIC under the transactions
will not be reduced by such principal payments. As of
December 31, 2021 a "Trigger Event" has occurred on
our Home Re 2018-1 and Home Re 2019-1 ILN
transactions because the reinsured principal balance
loans that were reported 60 or more days
of
in each
delinquent exceeded the
transaction. A "Trigger Event" has also occurred on
the Home Re 2021-2 ILN transactions because the
credit enhancement of the most senior tranche is less
than the target credit enhancement.
limit specified
See Note 9 - "Reinsurance," to our consolidated
financial statements for additional information on the
Home Re Entities.
INVESTMENT INCOME, NET
income
investment
Net
increased 1% to $156.4
million in 2021 compared to $154.4 million in 2020.
The increase in investment income was due to an
increase in the average investment portfolio, partially
offset by a decrease in the average investment yield.
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 2021 and
2020 were $6.6 million and $13.8 million, respectively.
The decrease in net realized investment gains was
primarily due to a decrease in the number of fixed
income and equity securities sold.
OTHER REVENUE
Other revenue decreased to $8.2 million in 2021 from
$9.1 million in 2020.
Losses and expenses
Losses and expenses
(In millions)
Year Ended December 31,
2021
2020
Losses incurred, net
$
64.6 $
364.8
Amortization of deferred
policy acquisition costs
Other underwriting and
operating expenses, net
Interest expense
Loss on debt
extinguishment
Total losses and
expenses
12.6
198.4
71.4
36.9
12.4
176.4
59.6
26.7
$
383.9 $
639.9
24 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
such as the settlement agreements discussed in Note
to our
“Litigation and Contingencies”
17 –
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 decreased to $64.6 million
compared to $364.8 million in 2020. The decrease
reflects fewer delinquency notices received in 2021
compared with 2020 which was impacted by the
COVID-19
resultant
macroeconomic environment.
pandemic,
and
the
resulted
reserves
The decrease was also due to favorable loss reserve
development of $60.0 million recognized in 2021
compared to adverse loss development of $19.6
million in 2020. Through December 31, 2021, our re-
estimation of
favorable
development on pre-COVID and peak COVID
delinquencies as a result of a decrease
in the
estimated claim rate on those delinquencies. This
was offset by the recognition of a probable loss of
$6.3 million related to litigation of our claim paying
practices. In 2020, we experienced adverse loss
development of $19.6 million primarily related to an
increase in the estimate of claim severity.
in
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)
Year Ended December 31,
2021
2020
Current year / New notices
$
124.6 $
345.2
Prior year reserve
development
(60.0)
19.6
Losses incurred, net
$
64.6 $
364.8
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 decrease in the loss ratio in
2021 when compared to 2020 was primarily due to a
decrease in losses incurred discussed above.
Loss ratio
Year Ended December 31,
2021
6.4 %
2020
35.7 %
LOSSES INCURRED, NET
As discussed in “Critical Accounting Estimates” 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 delinquency 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 have not yet been reported to
us. IBNR reserves are established using estimated
delinquencies, claim rates and claim severities.
loss
than our
Estimation of losses is inherently judgmental. The
conditions that affect the claim rate and claim
severity include the current and future state of the
domestic economy, including unemployment and the
current and future strength of local housing markets.
The actual amount of the claim payments may be
substantially different
reserve
estimates. Our estimates could be adversely affected
by several factors,
including a deterioration of
regional or national economic conditions, including
impact of the
unemployment and the continued
COVID-19 pandemic,
in
leading
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.
to a reduction
As discussed in our Risk Factor titled “The Covid-19
pandemic may materially impact our future financial
results, business, liquidity and/or 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, 2021 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
MGIC Investment Corporation 2021 Annual Report | 25
Management's Discussion and Analysis
New notice claim rate
The number of new delinquency notices received for
the year ended December 31, 2021 decreased 60%
compared to 2020 and new delinquency notices
received in second half of 2021 were below pre-
COVID-19 pandemic levels. The new notice claim rate
in 2021 was consistent with the new notice claim rate
in 2020.
the
loans. However, given
Many of the loans in our delinquency inventory have
entered forbearance plans. Historically, forbearance
plans have reduced the incidence of our losses on
the uncertainty
affected
surrounding
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, including
through modification, when its forbearance plan ends
will depend on the economic circumstances of the
losses
borrower at that time. The severity of
long-term economic
associated with loans whose delinquencies do not
cure will depend on economic conditions at that time,
including home prices compared to home prices at
the time of placement of coverage. Forbearance
information is based on the most recent information
provided by the GSEs, as well as loan servicers, and
we believe substantially all forbearances are related
to COVID-19. While the forbearance
information
provided by the GSEs refers to delinquent loans in
forbearance as of
the
information provided by loan servicers may be more
current. As of December 31, 2021, 33% of our
delinquency inventory was in such plans.
the prior month-end,
The table below presents our new delinquency notices
received, delinquency inventory, percentage of loans
in forbearance, and the average number of missed
payments for the loans in our delinquency inventory
by policy year.
New notices and delinquency inventory during the period
Policy Year
New Notices in 2021
December 31, 2021
Delinquency Inventory
as of 12/31/21
% 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
2021
Total
Claim rate on new notices (1)
3,893
13,070
4,040
2,375
3,384
3,902
4,163
5,623
1,982
42,432
8 %
2,829
10,882
3,400
2,004
2,949
3,412
3,340
3,308
1,166
33,290
21.4 %
24.3 %
34.9 %
43.5 %
46.6 %
49.3 %
58.1 %
63.4 %
40.9 %
39.5 %
19
19
13
12
12
12
11
8
4
14
Policy Year
New Notices in 2020
December 31, 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
6,079
26,838
13,513
9,497
13,139
15,040
16,904
5,089
Total
Claim rate on new notices (1)
106,099
7 %
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
(1) - Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
26 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
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," our loss reserves estimates take into consideration current trends over
time, because the development of the delinquencies may vary from period to period without establishing a
meaningful trend. In light of the forbearance and foreclosure moratorium programs associated with the
COVID-19 pandemic, the average number of missed payments at the time a claim is received and expected to be
received increased in 2021 and will increase in 2022. Although foreclosure moratoriums are expiring, under a
CFPB rule that was generally effective through December 31, 2021, with limited exceptions, servicers were
required to ensure that at least one temporary safeguard had been met before referring 120-day delinquent loans
for foreclosure. With the expiration of the CFPB rule, it is likely that foreclosures and claims will increase.
The majority of loans insured prior to 2008 (which represent 41% of the loans in the delinquent inventory) are
covered by master policy terms that, except under certain circumstances, do not limit the number of years that
an insured can include interest when filing a claim. Under our current master policy terms, an insured can include
accumulated interest when filing a claim only for the first three years the loan is delinquent. In each case, the
insured must comply with its obligations under the terms of the applicable master policy.
The quarterly trend in claims severity for each of the three years in the period ended December 31, 2021 is shown
in the following table.
Claims severity trend
Period
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Q4 2020
Q3 2020
Q2 2020
Q1 2020
Q4 2019
Q3 2019
Q2 2019
Q1 2019
Average exposure on
claim paid
$
43,485 $
42,468
40,300
46,807
48,321
47,780
44,905
46,247
46,076
42,821
46,950
42,277
Average claim paid
% Paid to exposure
Average number of
missed payments at
claim received date
32,722
36,138
34,068
36,725
40,412
40,600
42,915
47,222
46,302
44,388
46,883
43,930
75.2 %
85.1 %
84.5 %
78.5 %
83.6 %
85.0 %
95.6 %
102.1 %
100.5 %
103.7 %
99.9 %
103.9 %
42
34
36
34
32
27
32
33
34
35
34
35
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying
practices and/or commutations of policies.
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. In the fourth quarter of 2021, the average
number of missed payments at the time claims were received increased compared to the previous quarter as
foreclosure moratoriums expired resulting in an increase in our claims received. However, at December 31, 2021,
claims received are still below levels experienced prior to the second quarter of 2020. 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 subsequent to the second quarter of 2020. The magnitude and timing
of the increases are uncertain.
See Note 8 – “Loss Reserves” to our consolidated financial statements and “Critical Accounting Estimates”
below for a discussion of our losses incurred and claims paying practices (including curtailments).
MGIC Investment Corporation 2021 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
2021
9,529
9,208
2020
14,183
35,977
14,553
7,550
33,290
57,710
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) Approximately 13% and 31% of the loans in the primary
delinquency
inventory with 12 payments or more
delinquent have at least 36 payments delinquent as of
December 31, 2021, and 2020, respectively.
The increase in loans in the delinquency inventory that
are 12 months or more payments delinquent
compared to December 31, 2020 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 second half of 2020 and
throughout 2021.
NET LOSSES AND LAE PAID
Net losses and LAE paid decreased 71% in 2021
compared to 2020 primarily due to lower claim
activity on our primary business due to foreclosure
moratoriums and payment forbearance plans in place.
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.
28 %
28 %
44 %
(1)
25 %
62 %
13 %
100 %
100 %
(2)
See Note 8 - "Loss Reserves" for additional information
on our settlements of disputes for claims paying
practices and/or commutations of policies
See Note 9 - "Reinsurance" for additional information on
our reinsurance termination
The table below presents our net losses and LAE paid
for 2021 and 2020.
Net losses and LAE paid
(in millions)
2021
2020
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)
Net losses and LAE paid
$
43
$
98
14
—
57
(2)
55
14
69
(36)
—
2
100
(4)
96
18
114
—
$
33
$
114
Primary losses paid for the top 15 jurisdictions (based
on 2021 losses paid) and all other jurisdictions for
2021 and 2020 appears in the table below.
Primary paid losses by jurisdiction
(In millions)
Puerto Rico *
Florida *
New York *
Illinois *
Maryland
New Jersey *
Pennsylvania *
Connecticut *
Ohio *
Indiana *
Massachusetts
Louisiana *
Iowa *
Texas
Virginia
All other jurisdictions
Total primary (excluding
settlements)
2021
2020
$
6 $
5
5
4
3
3
2
2
2
1
1
1
1
1
1
5
$
43 $
5
13
11
9
7
8
4
2
3
1
2
1
1
2
2
27
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.
28 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
LOSS RESERVES
Our primary default rate at December 31, 2021 was
2.84% (2020: 5.11% ). There were 33,290 loans in our
delinquency
inventory at December 31, 2021,
compared to 57,710 at December 31, 2020.
The primary delinquency inventory at December 31,
2020 reflects the adverse economic impact of the
COVID-19 pandemic
in 2020. New delinquency
notices received in 2021 were 42,432 compared with
106,099 in 2020. As of December 31, 2021 and
December 31, 2020, 33% and 62%, respectively, of our
delinquency inventory were reported to us as subject
to forbearance plans.
loan with fewer missed
Generally, a defaulted
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,
through
modification, when its forbearance plan ends will
depend on the economic circumstances of the
borrower at that time.
including
The primary average claim paid for the top 5
jurisdictions (based on 2021 losses paid) for 2021
and 2020 appears in table below.
Primary average claim paid
Puerto Rico *
$
44,924 $
42,650
2021
2020
Florida *
New York *
Illinois *
Maryland
All other jurisdictions
All jurisdictions
45,599
59,610
100,403
111,112
32,982
48,979
26,068
34,956
43,339
63,665
35,770
43,901
Note: Asterisk denotes jurisdictions in the table above that
predominately use a judicial foreclosure process, which
generally increases the amount of time it takes for a
foreclosure to be completed.
The primary average claim paid can vary materially
from period to period based upon a variety of factors,
including the local market conditions, average loan
amount, average coverage percentage, the amount of
time between delinquency and claim filing, and our
loss mitigation efforts on loans for which claims are
paid.
The primary average RIF on delinquent loans as of
December 31, 2021 and 2020 and for the top 5
jurisdictions
(based on December 31, 2021
delinquency inventory) appears in the following table.
Primary average RIF - delinquent loans
Florida
Texas
Illinois
California
New York
All other jurisdictions
All jurisdictions
2021
2020
$
56,227 $
56,956
51,037
40,798
89,935
74,836
47,538
51,887
53,194
41,451
89,202
73,509
49,888
53,804
The primary average RIF on all loans was $59,518 and
$54,891 at December 31, 2021 and December 31,
2020, respectively.
MGIC Investment Corporation 2021 Annual Report | 29
Management's Discussion and Analysis
The primary and pool loss reserves as of December 31, 2021, and 2020 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,
2021
2020
$
795
82
877
$
789
82
871
33,290
2.84 %
$ 26,156
211
57,710
5.11 %
$ 15,100
159
4
2
6
1
313
185
498
1
6
2
8
2
442
238
680
10
(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, 2021 increased when compared to the average as of
December 31, 2020 because the delinquency inventory as of December 31, 2021 included loans with more
missed payment, which generally have higher anticipated claim rates.
30 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
The primary delinquency inventory for the top 15
(based on December 31, 2021
jurisdictions
delinquency inventory) at December 31, 2021, and
2020 appears in table the below.
The primary delinquency inventory by policy year at
December 31, 2021 and 2020 appears in the following
table.
Primary delinquency inventory by policy year
Primary delinquency inventory by jurisdiction
2021
2020
2004 and prior
2004 and prior %:
2005
2006
2007
2008
2021
2020
2,829
3,885
8 %
6 %
1,703
2,928
4,973
1,278
2,462
4,265
8,011
2,346
Florida *
Texas
Illinois *
California
New York *
Pennsylvania *
Ohio *
Georgia
New Jersey *
Michigan
North Carolina
Maryland
Virginia
Louisiana *
Indiana
2,948
2,572
2,082
1,852
1,674
1,672
1,458
1,272
1,169
1,144
987
929
766
757
736
5,936
4,617
3,460
3,584
2,416
2,593
2,541
2,422
1,960
1,842
1,686
1,556
1,377
979
1,163
All other jurisdictions
Total
11,272
33,290
19,578
57,710
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.
2005 - 2008 %
33 %
30 %
2009
2010
2011
2012
2013
2014
2015
84
56
79
143
441
1,055
1,542
159
99
151
357
929
2,089
3,133
2009 - 2015 %
10 %
12 %
2016
2017
2018
2019
2020
2021
2,004
2,949
3,412
3,340
3,308
1,166
2016 and later %:
49 %
4,599
6,746
7,468
7,929
3,082
—
52 %
Total
33,290
57,710
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, 2021, 78% of our primary
RIF was written subsequent to December 31, 2018,
82% of our primary RIF was written subsequent to
December 31, 2017, and 86% of our primary RIF was
written subsequent to December 31, 2016.
MGIC Investment Corporation 2021 Annual Report | 31
Management's Discussion and Analysis
COVID-19 Delinquency Activity
At March 31, 2020, before the COVID-19 pandemic
impacted our delinquency inventory, our delinquency
inventory was 27,384. As a result 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, we experienced an
in our
delinquency inventory.
increase
Forbearance programs enacted by the GSEs provide
for payment forbearance on mortgages to borrowers
experiencing a hardship during
the COVID-19
pandemic. The forbearance information provided by
the GSEs will be with respect to delinquent loans in
forbearance as of the prior month-end, while the
information provided by loan servicers may be more
current. As of December 31, 2021 and December 31,
2020 33% and 62%, respectively, of our delinquency
inventory was reported as subject to a forbearance
plan. We believe
represent
forbearances related to COVID-19. The following
tables present characteristics of our primary
delinquency inventory in forbearance plans.
substantially all
The number of payments
in
forbearance is delinquent as of December 31, 2021
and 2020 is shown in the following table.
that a borrower
Primary delinquency inventory in forbearance - by jurisdiction
2021
2020
Florida *
Texas
Illinois *
California
New York *
Pennsylvania *
Ohio *
Georgia
New Jersey *
Michigan
North Carolina
Maryland
Virginia
Louisiana *
Indiana
1,071
1,002
701
805
406
458
357
495
387
341
336
340
291
294
176
4,150
3,285
2,162
2,668
1,088
1,294
1,228
1,721
1,174
1,151
1,081
994
935
562
538
All other jurisdictions
Total
3,677
11,137
11,847
35,878
The primary delinquency inventory in forbearance by
policy year at December 31, 2021, and 2020 appears
in the table below.
Forbearance delinquency inventory - number of payments
delinquent
Primary delinquency inventory in forbearance by policy
year
2021
2020
2021
2020
3 payments or less
4 - 11 payments
12 payments or more
Total
3 payments or less
4 - 11 payments
12 payments or more
Total
2,565
4,594
3,978
11,137
23 %
41 %
36 %
100 %
6,580
28,153
1,145
35,878
18 %
79 %
3 %
100 %
The primary delinquency inventory in forbearance for
the top 15 jurisdictions (based on December 31, 2021
delinquency inventory) at December 31, 2021 and
2020 appears in the following table.
2004 and prior
2004 and prior %:
2005
2006
2007
2008
483
4 %
352
601
921
288
937
3 %
671
1,293
3,330
1,197
2005 - 2008 %
20 %
18 %
2009
2010
2011
2012
2013
2014
2015
20
7
18
40
114
278
546
2009 - 2015 %
9 %
2016
2017
2018
2019
2020
2021
740
1,066
1,304
1,482
2,238
639
2016 and later %:
67 %
84
38
66
229
583
1,389
2,180
13 %
3,490
5,180
5,927
6,670
2,614
—
67 %
Total
11,137
35,878
32 | MGIC Investment Corporation 2021 Annual Report
Management's Discussion and Analysis
The increase in our provision for income taxes for
2021 compared to 2020 was primarily due to an
increase in income before tax. Our effective tax rate
for 2021 and 2020 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.
UNDERWRITING AND OTHER EXPENSES, NET
Underwriting and other expenses include items such
as employee compensation costs,
for
professional and consulting services, depreciation
and maintenance expense, and premium taxes, and
are reported net of ceding commissions.
fees
Underwriting and other expenses for 2021 increased
to $198.4 million from $176.4 million in 2020. The
increase is primarily due to increases in professional
and consulting services related to our investments in
our technology and data and analytics infrastructure,
partially offset by an increase in ceding commission
on our QSR transactions.
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
insurance operations (which excludes
combined
underwriting and operating expenses of our non-
insurance operations) to NPW, and is presented in the
table below for the past two years.
The underwriting expense ratio increased in 2021
compared with 2020 due
in
underwriting expenses and other expenses, net,
partially offset by higher NPW.
increase
to an
Underwriting expense ratio
20.6 %
19.2 %
Year Ended December 31,
2021
2020
INTEREST EXPENSE
Interest expense
for 2021 was $71.4 million
compared to $59.6 million for 2020. 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 in 2020 and the 9% Debentures in
2021 and 2020.
LOSS ON DEBT EXTINGUISHMENT
We recorded a loss on debt extinguishment of $36.9
million in 2021 associated with the repurchase of a
portion of our 9% Debentures and $26.7 million in
2020 associated with the repurchase of a portion of
each of our 5.75% Notes and our 9% Debentures.
See Note 7 - "Debt" to our consolidated financial
statements for a discussion on our debt.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
Income tax provision and effective tax rate
(In millions, except rate)
2021
2020
Income before tax
Provision for income taxes
Effective tax rate
$
802
167
$
559
113
20.8 %
20.2 %
MGIC Investment Corporation 2021 Annual Report | 33
Operating Companies (1)
Holding Company
As of December
31,
è Preserve PMIERs
assets
$
Change
è Maximize total return
with emphasis on yield,
subject to our other
objectives
è Provide liquidity with
minimized realized
loss
è Maintain highly liquid,
low volatility assets
Management's Discussion and Analysis
BALANCE SHEET REVIEW
Shareholders' equity
Shareholders' equity
(In millions)
2021
2020
Shareholders' equity
Common stock
Paid-in capital
Treasury stock
$ 371 $
371 $
—
1,795
1,862
(675)
(393)
(67)
(282)
Accumulated Other
Comprehensive Income
(Loss), net of tax
120
217
Retained earnings
3,251
2,642
(97)
609
Total
4,861 $ 4,699 $
162
increase
in shareholders' equity
The
in 2021
compared with the prior year was primarily due to net
income, offset in part by the repurchase of shares of
our common stock and quarterly dividends paid to
shareholders.
Total assets and total liabilities
As of December 31, 2021, total assets were $7.3
billion and total liabilities were $2.5 billion. Compared
to December 31
,2020, total assets decreased
modestly and total liabilities decreased by $0.2 billion.
The following sections focus on the assets and
liabilities experiencing major developments in 2021.
INVESTMENT PORTFOLIO
The investment portfolio decreased to $6.6 billion as
of December 31, 2021 (2020: $6.7 billion), primarily
due to lower unrealized gains.
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 2021 Annual Report
è Limit portfolio volatility è Maintain high credit
quality
è Duration 3.5 to 5.5
è Duration maximum of
years
2.5 years
(1)
Primarily MGIC
To achieve our portfolio objectives, our asset
allocation considers the risk and return parameters of
the various asset classes in which we invest. This
asset allocation is informed by, and based on, the
following factors:
è economic and market outlooks;
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, 2021
and 2020 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,
2021
4.5
2.5%
2.1%
2020
4.3
2.6%
2.1%
(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
investment policy
coverage, and
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, 2021 and
2020.
ratings. The
Fixed income security ratings
% of fixed income securities at fair value
Security Ratings (1)
Period
December 31, 2021
December 31, 2020
AAA
18%
23%
AA
26%
22%
A
36%
35%
BBB
20%
20%
(1)
Ratings are provided by one or more of: Moody's,
Standard & Poor's and Fitch Ratings. If three ratings are
available, the middle rating is shown; otherwise the
lowest rating is shown.
Our investment portfolio was invested in comparable
security types for the years ended December 31, 2021
and December 31, 2020. See Note 5 – “Investments”
for
financial statements
to our consolidated
additional disclosure on our investment portfolio.
Investments outlook
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.
Changes in interest rates affect the carrying value and
returns of our fixed income investments. We seek to
interest rate risk and
manage our exposure to
volatility by maintaining a diverse mix of high-quality
securities with an intermediate duration profile.
The Federal Open Market Committee (“FOMC”)
maintained the targeted federal funds rate at 0
percent to 1/4 percent throughout 2021 as it weighed
impacts of the Covid-19
the ongoing economic
Pandemic, employment and
the
inflation and
associated risks to the economic outlook. In response
to rising inflation, and a desire to normalize monetary
policy, the FOMC has signaled increases to the federal
funds rate in 2022. Yields have increased in the
capital markets
the FOMC’s
announcements, which has recently resulted in a
lower level of unrealized gains on our fixed income
investments.
response
to
in
While higher interest rates may adversely impact the
fair values of our fixed income investments, they
present an opportunity to reinvest investment income
and proceeds from security maturities into higher
yielding investments. 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, 2021, approximately 6% 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
the
rate,"
administrator of LIBOR, ceased publishing the one-
week and two-month tenors of the USD LIBOR tenors
and intends to cease publishing the other USD LIBOR
tenors on June 30, 2023.
ICE Benchmark Administration,
the
Management's Discussion and Analysis
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $285 million,
as of December 31, 2021 (2020: $288 million), as net
cash generated from operating was substantially
used in financing activities and net purchases of
investments.
REINSURANCE RECOVERABLE ON PAID LOSSES
Reinsurance recoverable on paid losses increased to
$36.3 million at December 31, 2021 (2020: $0.7
million) primarily due to the termination of our 2017
and 2018 QSR transaction as of December 31, 2021.
The reinsurers participating in the 2017 and 2018 QSR
transaction were responsible for any loss and LAE
reserves incurred at the time of termination.
(2)
reserves)
(known as case
LOSS RESERVES
Our loss reserves include estimates of losses and
settlement expenses on (1) loans in our delinquency
IBNR
inventory
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 slightly to
$884 million as of December 31, 2021, from $881
million of December 31, 2020. Reinsurance
recoverables on our estimated losses and settlement
expenses were $67 million and $95 million as of
December 31, 2021 and December 31, 2020,
respectively. The increase in loss reserves is primarily
due to additional loss reserves established on new
delinquency notices received in 2021, partially offset
by favorable development on pre-COVID and peak
COVID delinquencies as a result of a decrease in the
estimated ultimate claim rate on those delinquencies.
The
reserves
decreased primarily due to the termination of the
2017 and 2018 QSR transaction.
recoverable on
reinsurance
loss
LONG-TERM DEBT
Our long-term debt decreased to $1,146.7 million as
of December 31, 2021 from $1,243.2 million as of
In December 2021 we
December 31, 2020.
in aggregate principal
repurchased $98.6 million
amount of our 9% Debentures due 2063.
UNEARNED PREMIUM
Our unearned premium decreased to $241.7 million
as of December 31, 2021 from $287.1 million as of
December 31, 2020 primarily due to single premium
policy cancellations exceeding the
level of new
business from single premium policies.
OTHER LIABILITIES
Other liabilities decreased to $192 million as of
December 31, 2021 (2020: $245 million), primarily due
to decreases in our deferred income tax liability,
(net of ceding
reinsurance premium payable
commission and profit commission),
liability for
pension obligations and
investment securities
payable. These were partially offset by an increase in
our accrual for premium refunds.
MGIC Investment Corporation 2021 Annual Report | 35
Management's Discussion and Analysis
LIQUIDITY AND CAPITAL RESOURCES
CONSOLIDATED CASH FLOW ANALYSIS
We have three primary types of cash flows: (1)
operating cash flows, which consist mainly of cash
generated by our insurance operations and income
earned on our investment portfolio, less amounts paid
for claims, interest expense and operating expenses,
(2) investing cash flows related to the purchase, sale
investments and purchases of
and maturity of
property and equipment and (3) financing cash flows
impact our capital
generally from activities that
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)
2021
2020
Years ended December 31,
Total cash provided by
(used in):
Operating activities
$ 696,317 $
732,309
Investing activities
Financing activities
(160,749)
(772,506)
(527,290)
167,821
Increase (decrease) in cash
and cash equivalents and
restricted cash and cash
equivalents
Operating activities
$
8,278 $
127,624
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
However, due to the foreclosure moratoriums and
in place, we have
payment forbearance plans
experienced a decrease in losses and LAE paid
through 2021. As the various moratoriums and
forbearance plans end, we expect net losses and LAE
paid to increase, however, the magnitude and timing
of the increases are uncertain.
invest our claims paying
We
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.
resources
We also have purchase obligations
totaling
approximately $40 million which consist primarily of
contracts related to our continued investment in our
information technology infrastructure in the normal
course of business. The majority of these obligations
are under contracts that give us cancellation rights
with notice. In the next twelve months we anticipate
we will pay approximately $12 million for our
purchase obligations.
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 2021
decreased compared to 2020 primarily due to an
increase
interest expense and
underwriting and operating expenses. This was
partially offset by a decrease in losses paid and an
increase in premium received.
in tax payments,
Investing activities
The following list highlights the major sources and
uses of cash flow from investing activities:
- Premium ceded to reinsurers
Sources
-
Interest expense
- Operating expenses
- Tax payments
installment basis
Our largest source of cash is from premiums received
from our insurance policies, which we receive on a
for most policies.
monthly
Premiums are received at the beginning of the
coverage period for single premium and annual
premium policies. Our
is
generally for claims that arise when a delinquency
loss. Based on historical
results
experience, we expect our future claim payments
associated with established case loss reserves to pay
out at or within 5 years, with the majority of future
claim payments made within one to three years.
largest cash outflow
insured
in an
+ Proceeds from sales of investments
+ Proceeds from maturity of fixed income securities
Uses
- Purchases of investments
- Purchases of property and equipment
We maintain an investment portfolio that is primarily
invested in a diverse mix of fixed income securities.
As of December 31, 2021, our portfolio had a fair
value of $6.6 billion, a decrease of $0.1 billion, or
(1.1)% from December 31, 2020. Net cash flows used
in investing activities in 2021 and 2020 primarily
reflect purchases of fixed income securities in an
amount that exceeded our proceeds from sales and
36 | MGIC Investment Corporation 2021 Annual Report
maturities of such securities during the year as cash
for additional
from operations was available
investment.
investment portfolio
activities, our investing activities included investment
in our technology infrastructure to enhance our ability
to conduct business and execute our strategies.
In addition
to
Financing activities
The following list highlights the major sources and
uses of cash flow from financing activities:
Sources
+ Proceeds from debt and/or common stock
issuances
Uses
- Repurchase of common stock
- Payment of dividends to shareholders
- Repayment/repurchase of debt
- Payment of withholding taxes related to share-
based compensation net share settlement
Net cash flows used in financing activities in 2021
primarily reflect repurchases of our common stock,
repurchase of a portion of our 9% Debentures,
payment of dividends to shareholders and the
payment of withholding taxes related to share-based
compensation net share settlement.
In 2020,
financing activities also included cash received from
the issuance of our 5.25% Notes.
* * *
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
level, structure and
GSE) and to maintain the
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 a stressed
environment.
in our business, even
Management's Discussion and Analysis
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
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, 2021, and 2020.
(In thousands, except
ratio)
Common stock, paid-
in capital, retained
earnings, less
treasury stock
Accumulated other
comprehensive loss,
net of tax
Total shareholders'
equity
Long-term debt, par
value
Total capital
resources
Ratio of long-term
debt to shareholders'
equity
2021
2020
$ 4,741,685
$ 4,482,165
119,697
216,821
4,861,382
4,698,986
1,157,500
1,256,110
$ 6,018,882
$ 5,955,096
23.8 %
26.7 %
The increase in total shareholders' equity in 2021
from 2020 was primarily due to net income during
2021, offset by our repurchases of our common
stock, and dividends paid to shareholders. See Note
13 - "Shareholders' Equity" for further information.
MGIC Investment Corporation 2021 Annual Report | 37
Management's Discussion and Analysis
DEBT AT OUR HOLDING COMPANY AND HOLDING
COMPANY LIQUIDITY
Debt obligations - holding company
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, 2021, 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 $110.2 million of outstanding
principal due in April 2063.
In February 2022, we repurchased $42.0 million
aggregate principal amount of our 9% Debentures at a
purchase prices of $57.3 million, plus accrued
interest.
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 December 2021, we repurchased $98.6 million in
aggregate principal of our 9% Debentures.
See Note 7 - "Debt" for further information on our
outstanding debt obligations and
transactions
impacting our consolidated financial statements in
2021 and 2020.
Liquidity analysis - holding company
As of December 31, 2021, and December 31, 2020, we
had approximately $663 million and $847 million,
respectively, in cash and investments at our holding
company. These resources are maintained primarily
to service our debt
interest expense, pay debt
maturities, repurchase shares, pay dividends to
shareholders, and to settle intercompany obligations.
While these assets are held, we generate investment
income that serves to offset a portion of our interest
expense. Investment income and the payment of
dividends from our insurance subsidiaries are the
principal sources of holding company cash inflow.
MGIC is the principal source of dividends, and their
payment is restricted by insurance regulation. See
Note 14 - “Statutory Information” to our consolidated
financial statement for additional information about
MGIC’s dividend
restrictions. The payment of
dividends from MGIC is also influenced by our view of
the appropriate level of excess PMIERs Available
Assets to maintain. Raising capital in the public
is another potential source of holding
markets
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.
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 $58 million, based on
the debt
outstanding at December 31, 2021. We believe our
holding company has sufficient sources of liquidity to
meet its payment obligations for the foreseeable
future.
During the last half of 2021 and the first quarter of
2020, we used approximately $291 million and $120
million respectively, of available holding company
cash to repurchase shares of our common stock. In
2022, through February 18, we used approximately
$76 million of available holding company cash to
repurchase shares of our common stock. The
repurchase programs may be suspended or
discontinued at any time. 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 2021 we used $94 million to pay cash dividends to
shareholders. On January 25, 2022, our Board of
Directors declared a quarterly cash dividend of $0.08
per common share to shareholders of record on
February 16 2022, payable on March 2, 2022.
Our holding company cash and
investments
decreased $184 million in 2021, to $663 million as of
December 31, 2021.
Significant cash and investments inflows during the
year:
•
•
$400 million of dividends received from MGIC,
and
$17 million of investment income.
Significant cash outflows during the year:
•
•
•
•
$291 million of share repurchase transactions,
$94 million
shareholders,
in cash dividends paid
to
in
$136 million
repurchases of our 9%
Debentures ($98.6 million in principal amount),
and
$69 million of interest payments on our 5.75%
Notes, 5.25% Notes and 9% Debentures.
38 | MGIC Investment Corporation 2021 Annual Report
The net unrealized gains on our holding company
investment portfolio were approximately $2.6 million
at December 31, 2021 and the portfolio had a
modified duration of approximately 1.7 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 $110.2
million of our 9% Debentures in 2063. 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 76.5496 common shares
per $1,000 principal amount of debentures. This
represents a conversion price of approximately
$13.06 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 $16.98 (adjusted
pro rata for changes in the conversion price) for at
least 20 of the 30 trading days preceding notice of the
redemption. We expect to provide a redemption notice
for the Debentures when this requirement is met and
would expect the majority of the holders of the
Debentures would elect to convert their Debentures
into common stock before the redemption date.
Under the terms of the Debenture, we may pay cash in
lieu of issuing shares.
See Note 7 – “Debt” to our consolidated financial
statements for additional
information about the
conversion
terms of our 9% Debentures. 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
Management's Discussion and Analysis
consolidated financial statements for other possible
uses of holding company resources.
DEBT AT SUBSIDIARIES
MGIC is a member of the FHLB. Membership in the
FHLB provides MGIC access to an additional source
of liquidity via a secured lending facility. MGIC has
outstanding a $155.0 million fixed rate advance from
the FHLB. Interest on the advance is payable monthly
at a fixed annual rate of 1.91%. The principal of the
advance matures on February 10, 2023 but may be
prepaid at any time. Such prepayment would be below
par if interest rates have risen after the advance was
originated, or above par if interest rates have declined.
The advance is secured by eligible collateral in the
form of pledged securities from the
investment
portfolio, whose market value must be maintained at
a minimum of 102% of the principal balance of the
advance. Annual debt services on the FHLB debt as of
December 31, 2021, is approximately $3 million.
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, 2021, MGIC’s Available Assets
under PMIERs totaled approximately $5.7 billion, an
excess of approximately $2.2 billion over its Minimum
Required Assets; and MGIC is in compliance with the
requirements of the PMIERs and eligible to insure
loans delivered to or purchased by the GSEs.
Maintaining a sufficient level of excess Available
Assets will allow MGIC to remain in compliance with
the PMIERs financial requirements.
The table below presents the PMIERS capital credit
for our reinsurance transactions.
PMIERs - Reinsurance Credit
(In millions)
QSR Transactions
Home Re Transactions
Total capital credit for
Reinsurance Transactions
December 31,
2021
2020
$ 1,129 $ 1,002
765
482
$ 1,894 $ 1,484
Our 2022 QSR transaction terms are generally
comparable to our existing QSR transactions and will
also provide PMIERs capital credit. Refer to Note 9 -
"Reinsurance"
financial
statements
information on our
reinsurance transactions.
for additional
consolidated
our
to
The PMIERs generally require us to hold significantly
more Minimum Required Assets for delinquent loans
than for performing loans and the Minimum Required
MGIC Investment Corporation 2021 Annual Report | 39
in statutory policyholders' position was primarily due
to an increase in statutory contingency reserves and
net income during 2021, offset by dividends paid to
our holding company of $400 million. The increase in
our RIF, net of reinsurance, was primarily due to an
increase in our IIF and the termination of our 2017
and 2018 QSR Transaction, offset by a decrease 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 increase if the percentage
increase in capital exceeds the percentage decrease
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
Stable
Stable
MAC financial strength ratings
Rating Agency
A.M. Best
Rating Outlook
A-
Stable
information about the
For further
importance of
MGIC’s ratings and rating methodologies, see our risk
in our
factor
relationships with our customers could reduce our
revenues, reduce our premium yields and / or increase
our losses.”
“Competition or changes
titled
Management's Discussion and Analysis
Assets required to be held increases as the number of
payments missed on a delinquent loan increases.
We plan to continuously comply with the PMIERs
through our operational activities or through the
contribution of funds from our holding company,
subject to demands on the holding company's
resources, as outlined above.
RISK-TO-CAPITAL
loss
limits and without these
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
limits.
aggregate
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 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 earned
premiums in a calendar year.
The table below presents our combined insurance
companies’ risk-to-capital calculation (which includes
a reinsurance affiliate).
Risk-to-capital - Combined insurance companies
(In millions, except ratio)
RIF - net (1)
Statutory policyholders' surplus
December 31,
2021
2020
$ 50,748 $ 44,868
$ 1,221 $ 1,340
Statutory contingency reserve
4,127
3,586
Statutory policyholders' position
$ 5,348 $ 4,926
Risk-to-capital
9.5:1
9.1:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent ($1.8 billion at December 31, 2021 and $2.9
billion at December 31, 2020) and for which case loss
reserves have been established.
increase
in our combined
The 2021
insurance
companies risk-to-capital was due to an increase in
RIF, net of reinsurance, partially offset by an increase
in our statutory policyholder's position. The increase
40 | MGIC Investment Corporation 2021 Annual Report
CRITICAL ACCOUNTING ESTIMATES
The accounting estimates described below require
significant
the
preparation of our consolidated financial statements.
judgments and estimates
in
LOSS RESERVES
uncertainty
The estimation of case loss reserves is subject to
inherent
significant
and
to our
judgement by management. Changes
estimates could result in a material impact to our
consolidated results and financial position, even in a
stable economic environment.
requires
Case Reserves
reserves are established
Case
for estimated
insurance losses 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
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.
reporting by
Management's Discussion and Analysis
determine reserves does not include quantitative
ranges of outcomes that are reasonably likely to
occur.
rates,
interest
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 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
in which we conduct business. Each
regions
influences our ultimate paid
economic condition
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.
in
lag changes
Actual claim
economic conditions by at
least nine to twelve
months.
results generally
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,
claim severity, levels of defaults by geography and
average loan exposure. As a result, the process to
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 –
to our
“Litigation and Contingencies”
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 claim 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, 2021,
assuming all other factors remain constant, a $1,000
in the average claim severity
increase/decrease
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
reserve amount by
the
approximately +/- $19 million. Historically, it has not
been uncommon for us to experience variability in the
development of the loss reserves through the end of
the following year at this level or higher, as shown by
the historical development of our loss reserves in the
table below:
MGIC Investment Corporation 2021 Annual Report | 41
Management's Discussion and Analysis
Historical development of loss reserves
(In thousands)
Losses incurred
related to prior
years (1)
Reserve at end of
prior year
2021
2020
2019
2018
2017
(60,015)
19,604
(71,006)
(167,366)
(231,204)
880,537
555,334
674,019
985,635
1,438,813
(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.
42 | MGIC Investment Corporation 2021 Annual Report
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
CECL
Current expected credit losses covered under ASC
326
Debt-to-income ("DTI") ratio
The ratio, expressed as a percentage, of a borrower's
total debt payments to gross income
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
Delinquency Rate
The percentage of insured loans that are delinquent
Direct
Before giving effect to reinsurance
/E
EPS
Earnings per share
/ F
Fannie Mae
Federal National Mortgage Association
CFPB
FCRA
Consumer Financial Protection Bureau
Fair Credit Reporting Act
CLO
FHA
Collateralized loan obligations
Federal Housing Administration
CMBS
FHFA
Commercial mortgage-backed securities
Federal Housing Finance Agency
COVID-19 Pandemic
FHLB
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
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
Credit risk transfer. The transfer of a portion of
mortgage credit risk to the private sector through
different forms of transactions and structures
Freddie Mac
Federal Home Loan Mortgage Corporation
/ D
DAC
Deferred insurance policy acquisition costs
/ G
GAAP
Generally Accepted Accounting Principles
United States
in the
MGIC Investment Corporation 2021 Annual Report | 43
Glossary
GSEs
Collectively, Fannie Mae and Freddie Mac
/ H
HAMP
Home Affordable Modification Program
HARP
Home Affordable Refinance Program
Home Re Entities
Unaffiliated special purpose insurers domiciled in
Bermuda that participate in our aggregate excess of
loss reinsurance agreements.
Home Re Transactions
Excess-of-loss reinsurance transactions with the
Home Re Entities
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
subsequent housing price
appreciation or depreciation. Subordinate mortgages
may also be present
reflect
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% Notes
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
subsidiary of MGIC Investment Corporation
Insurance Corporation, a
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
reinsurance
transactions, and subject to a floor of $400 million
risk ceded under
for
44 | MGIC Investment Corporation 2021 Annual Report
Glossary
MPP
PMI
state
Minimum Policyholder Position, as required under
certain
“policyholder
requirements. The
position” of a mortgage insurer is its net worth or
surplus, contingency reserve and a portion of the
reserves for unearned premiums
/ N
N/A
Not applicable for the period presented
Private Mortgage Insurance (as an industry or product
type)
PMIERs
Insurer Eligibility Requirements
Private Mortgage
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
NAIC
The
Commissioners
National
NIW
Association
of
Insurance
Pre-COVID-19 delinquencies
A delinquent loan reported to us prior to the second
quarter of 2020
New Insurance Written, is the aggregate original
principal amount of the mortgages that are insured
during a period
Premium Rate
The contractual rate charged for coverage under our
insurance policies
N/M
Data, or calculation, deemed not meaningful for the
period presented
NPE
The amount of premiums earned, net of premiums
assumed and ceded under reinsurance agreements
NPL
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
NPW
The amount of premiums written, net of premiums
assumed and ceded under reinsurance agreements
/ O
OCI
Office of the Commissioner of Insurance of the State
of Wisconsin
OTTI
Other than temporary impairment
/ P
Premium Yield
The ratio of premium earned divided by the average
IIF outstanding for the period measured
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
Profit Commission
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
Peak-COVID-19 delinquencies
2015 QSR
A delinquent loan reported to us in the second and
third quarter of 2020
Our QSR transaction that provides coverage on
eligible NIW written prior to 2017
Persistency
2017 QSR
The percentage of our insurance remaining in force
from one year prior
Our QSR transaction that provided coverage on
eligible NIW in 2017
MGIC Investment Corporation 2021 Annual Report | 45
Glossary
2018 QSR
Our QSR transaction that provided coverage on
eligible NIW in 2018
2019 QSR
Our QSR transaction that provides coverage on
eligible NIW in 2019
2020 QSR
Our QSR transactions that provides coverage on
eligible NIW in 2020
2021 QSR
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"
Our QSR transactions that provides coverage on
eligible NIW in 2021
TILA
2022 QSR
Our QSR transactions that provides coverage on
eligible NIW in 2022
/ U
Underwriting expense ratio
Truth in Lending Act
Credit Union QSR
Our QSR transaction that provides coverage on
eligible NIW
institutions
originated from April 1, 2020 through December 31,
2025
from credit union
The ratio, expressed as a percentage, of
the
underwriting and operating expenses, net and
amortization of DAC of our combined insurance
(which excludes underwriting and
operations
operating
non-insurance
our
expenses
subsidiaries) to NPW
of
/ R
RESPA
Real Estate Settlement Procedures Act
Underwriting profit
NPE minus incurred losses and underwriting and
operating expenses
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
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
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
VIE
Variable interest entity
46 | MGIC Investment Corporation 2021 Annual Report
Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolio is essentially a fixed income
portfolio and is exposed to market risk. Important
drivers of the market risk are credit spread risk and
interest rate risk.
Credit spread risk is the risk that we will incur a loss
due to adverse changes in credit spreads. Credit
income
is the additional yield on fixed
spread
securities above the risk-free rate (typically referenced
as the yield on U.S. Treasury securities) that market
participants
for
assuming credit, liquidity and/or prepayment risks.
to compensate
require
them
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
instrument. Guideline and
investment portfolio detail is available in "Business –
Section C, Investment Portfolio" in in Item 1 of our
Annual Report on Form 10-K for the year ended
December 31, 2021 filed with the SEC on February 23,
2022.
type of
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, 2021, the modified duration
of our fixed income investment portfolio was 4.5
years, which means that an instantaneous parallel
shift in the yield curve of 100 basis points would
result in a change of 4.5% in the fair value of our fixed
income portfolio. For an upward shift in the yield
curve, the fair value of our portfolio would decrease
and for a downward shift in the yield curve, the fair
value would
increase. A discussion of portfolio
strategy appears in "Management's Discussion and
Analysis – Balance Sheet Review–
Investment
Portfolio."
MGIC Investment Corporation 2021 Annual Report | 47
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.
yet been reported to us (which is included in what
we refer to as “IBNR”). 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.
to matters other
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
than
statements which relate
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 materially impact our
liquidity and/or
future financial results, business,
financial condition.
The COVID-19 pandemic had a material impact on our
2020 financial results. While uncertain, the impact of
the COVID-19 pandemic on the Company’s future
financial results, business, 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
transmission of
States, efforts
COVID-19, the level of unemployment, and the impact
of government initiatives and actions taken by Fannie
Mae and Freddie Mac
(including
mortgage forbearance and modification programs) to
mitigate the economic harm caused by COVID-19.
"GSEs")
reduce
(the
the
to
The COVID-19 pandemic may 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
delinquencies 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
• 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 we must pay over time will
generally increase.
Our access to the reinsurance and capital markets
may be limited and the terms under which we are
able to access such markets may be
less
attractive
terms of our previous
transactions.
than
the
Risk Factors Relating to the Mortgage Insurance
Industry and its Regulation
Downturns in the domestic economy or declines in
in more homeowners
home prices may
defaulting and our
increasing, with a
corresponding decrease in our returns.
losses
result
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 mortgage balance exceeds the value
of the home, net of sales-related expenses. A
deterioration in economic conditions, including an
increase in unemployment, generally increases the
likelihood that borrowers will not have sufficient
income to pay their mortgages and can also adversely
affect home prices, which in turn can influence the
willingness of borrowers with sufficient resources to
make mortgage payments when the mortgage balance
exceeds the value of the home, net of sales-related
expenses.
“FHFA”), which
The seasonally-adjusted Purchase-Only U.S. Home
Price Index of the Federal Housing Finance Agency
(the
is based on single-family
properties whose mortgages have been purchased or
securitized by Fannie Mae or Freddie Mac, indicates
that home prices increased by 15.9% in the first eleven
months of 2021, after increasing by 11.5%, 5.4%, 5.7%
and 6.3% in 2020, 2019, 2018 and 2017, respectively.
The price-to-income ratio in some markets exceeds its
historical average, in part as a result of recent home
price appreciation outpacing increases in income.
Home prices may decline even absent a deterioration
48 | MGIC Investment Corporation 2021 Annual Report
in economic conditions due to declines in demand for
homes, which in turn may result from changes in
buyers’ perceptions of
future
appreciation, restrictions on and the cost of mortgage
credit due to more stringent underwriting standards,
higher interest rates, changes to the tax deductibility
in the rate of
of mortgage
household formations, or other factors.
interest, decreases
the potential
for
the current market environment,
levels of unemployment may result
in an
High
loan delinquencies and an
increasing number of
increasing number of insurance claims; however, the
increases are difficult to predict given the uncertainty
in
including
uncertainty about the length and severity of the
the
COVID-19
transmission of COVID-19; effects of forbearance
programs enacted by the GSEs, various states and
municipalities; and effects of past and
future
government stimulus programs.
pandemic;
reduce
efforts
to
for
Forbearance
federally-insured mortgages
(including those delivered to or purchased by the
GSEs) allows for mortgage payments to be suspended
for up to 18 months: an initial forbearance period of up
to six months; if requested by the borrower following
contact by the servicer, an extension of up to six
months; and, for loans in a COVID-19 forbearance plan
as of February 28, 2021, an additional extension of up
to six months, subject to certain limits. In certain
circumstances, the servicer will be unable to contact
the borrower
the
forbearance plan and it will expire without being
extended, or further extended, as applicable. 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.
regarding an extension of
the
the uncertainty surrounding
Historically, forbearance plans have reduced the
incidence of our losses on affected loans. However,
given
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 46,684 loans in our
delinquency inventory as of June 30, 2020 that were
reported to us as in forbearance, 85% are no longer in
the default inventory as of December 31, 2021; 4% are
still in the delinquency inventory and reported to us as
in forbearance; and 11% are still in the delinquency
inventory but no
in
forbearance. At December 31, 2021, 11,137, or 33%, of
the loans in our delinquency inventory were reported to
us as in forbearance and of those, 40%, 12%, 12% and
10% have reached the fifteen-month, twelve-month,
nine-month and six-month anniversaries of their
loan
forbearance plans, respectively. Whether a
delinquency will cure, including through modification,
when forbearance ends will depend on the economic
circumstances of the borrower at that time. The GSEs
have introduced specific loan workout options for
longer reported
to us as
Risk Factors
borrowers whose COVID-19 forbearance plans end. If
a servicer is unable to contact a borrower to determine
a loan workout option, the forbearance plan will end
and the loan may remain delinquent. The severity of
losses associated with delinquencies that do not cure
will depend on economic conditions at that time,
including home prices.
Foreclosures on mortgages purchased or securitized
by the GSEs were suspended through July 31, 2021.
Under a CFPB rule that was effective through
December 31, 2021, with limited exceptions, servicers
were required to ensure that at least one temporary
procedural safeguard had been met before referring
120-day delinquent loans for foreclosure. With the
expiration of the CFPB rule, it is likely that foreclosures
and claims will increase.
We may not continue to meet the GSEs’ private
insurer eligibility requirements and our
mortgage
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
reinsurance
agreements).
risk ceded under
for
Based on our interpretation of the PMIERs, as of
December 31, 2021, MGIC’s Available Assets totaled
$5.7 billion, or $2.2 billion in excess of its Minimum
Required Assets. MGIC is in compliance with the
PMIERs and eligible to insure loans purchased by the
GSEs. 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 points 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. Refer to our
Quarterly Supplements, which are posted on our
investor website, for the calculated PMIERs credit for
each of our excess of loss reinsurance transactions.
We are not including the information contained in
those Supplements or on our investor website as a
MGIC Investment Corporation 2021 Annual Report | 49
Risk Factors
part of, or incorporating it by reference into, this
Report. 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. If
the number of loan delinquencies caused by the
COVID-19 pandemic or other factors increases, it may
cause our Minimum Required Assets to exceed our
Available Assets. We are unable to predict the ultimate
number of loans that will become delinquent.
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:
•
•
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,
imposing
restrictions specific to our company.
including by
There may be future implications for PMIERs as a
result of changes to the regulatory capital
requirements for the GSEs. In 2020, the FHFA
adopted a rule containing a capital framework for
the GSEs that generally would have become
effective on the date of termination of the FHFA’s
conservatorship of
In
September 2021, the FHFA issued a notice of
proposed rule-making that would modify that
capital framework. When the final GSE capital
the applicable GSE.
requirements have been determined and become
effective, they may affect 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
(which we include in “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 incurred on loans that are not currently
delinquent may have a material impact on future
results as delinquencies emerge. As of December 31,
2021, we had established case reserves and reported
losses incurred for 33,290 loans in our delinquency
inventory and our IBNR reserve totaled $27 million.
The number of loans in our delinquency inventory may
increase from that level as a result of the COVID-19
pandemic, and our losses incurred may increase. The
impact of the COVID-19 pandemic on the number of
incurred will be
delinquencies and our
influenced by various
those
discussed in our risk factor titled "The COVID-19
pandemic may materially impact our financial results,
business, liquidity and/or financial condition."
losses
factors,
including
loss reserve estimates are subject
Because
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
50 | MGIC Investment Corporation 2021 Annual Report
loss
than our
incorporate anticipated cures,
amount of the claim payment (the "claim severity").
loss
Our estimates
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
reserve estimates. Our
different
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. As a result of foreclosure
moratoriums and forbearance programs, the average
time it takes to receive claims has increased. 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 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
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.
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 and 2021.
geographic
certain
in
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, or accepting credit risk without credit
enhancement,
lenders and other investors holding mortgages in
portfolio and self-insuring,
lenders using Federal Housing Administration
("FHA"), U.S. Department of Veterans Affairs
Risk Factors
("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% 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.
require
charters generally
The GSEs’
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
in primary mortgage
lenders
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
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 23.9% in the
first three quarters of 2021, 23.4% in 2020 and 28.2%
in 2019. Beginning in 2012, the FHA’s share has been
as low as 23.4% (in 2020) and as high as 42.1% (in
2012). 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
MGIC Investment Corporation 2021 Annual Report | 51
Risk Factors
focus 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
the Presidential
circumstances. The
Administration on equitable housing finance and
sustainable housing opportunities
the
likelihood of a reduction in 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.
increases
The VA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 30.9% in the
first three quarters of 2021, 30.9% in 2020 and 25.2%
in 2019. Beginning in 2012, the VA’s share has been as
low as 22.8% (in 2013) and as high as 30.9% (in 2020
and the first three quarters of 2021). 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,
and because eligible borrowers have opted to use the
VA program when refinancing their mortgages.
Changes in the business practices of the GSEs, federal
their charters or a
legislation
restructuring of the GSEs could reduce our revenues or
increase our losses.
that changes
The substantial majority of our NIW is for loans
purchased by the GSEs; therefore, the business
practices of the GSEs greatly impact our business. The
GSEs have been requested to submit Equitable
Housing Finance Plans to the FHFA. The plans are to
identify and address barriers to sustainable housing
opportunities, including the GSEs’ goals and action
plans to advance equity in housing finance for the next
three years. The action plans, when finalized, may
include methods to reduce mortgage costs for
including
historically
mortgage insurance costs. The GSEs’ action plans will
likely change certain of the GSEs’ business practices
and those changes may affect the mortgage insurance
industry. The GSEs’ business practices that currently
affect the mortgage insurance industry include:
underserved
borrowers,
•
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
low down
required credit enhancement on
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. In January
2022, the FHFA announced targeted increases in
the loan level price adjustments for certain high-
balance loans and second home mortgages. The
GSE capital framework, when finalized, may lead
the GSEs to increase their guaranty fees.
• Whether
the GSEs select or
the
lender’s selection of the mortgage
influence
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 and the business
practices associated with such cancellations. For
information, see our risk factor titled
more
interest rates, house prices or
“Changes
in
mortgage
insurance cancellation requirements
may change the length of time that our policies
remain in force.”
The programs established by the GSEs intended
to avoid or mitigate loss on insured mortgages
and
in which mortgage
servicers must implement such programs.
the circumstances
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
mortgage
in
insurers’ claims paying practices,
intervene
52 | MGIC Investment Corporation 2021 Annual Report
•
•
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 established
The benchmarks established by the FHFA for
loans to be purchased by the GSEs, which can
insured. In
affect the
loans available to be
December 2021,
the
benchmark levels for 2022-2024 purchases of
low-income home mortgages, very low-income
home mortgages and
refinance
mortgages, each of which exceeded the 2021
benchmarks. The FHFA also established two new
sub-goals: one targeting minority communities
and
low-income
neighborhoods.
low-income
targeting
other
the
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.
As a result of the 2021 change in the Presidential
Administration, the June 2021 appointment of a new
Acting Director of the FHFA who has also been
nominated to become the full-time Director, and the
2021 U.S. Supreme Court decision that allows the
President to remove the FHFA Director at will, it is
uncertain what role the GSEs, FHA and private capital,
including private mortgage insurance, will play in the
residential housing finance system in the future. The
timing and impact on our business of any resulting
changes is uncertain. Many of the proposed changes
would require Congressional action to implement and
it is difficult to estimate when Congressional action
would be final and how long any associated phase-in
period may last.
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 78% of our
risk in force as of December 31, 2021. As of December
31, 2021, our QSR transactions with unaffiliated
reinsurers cover most of our insurance written from
2013 through 2016 and 2019 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
30%, based on risk in force as of December 31, 2021.
We elected to terminate our QSR Transactions
Risk Factors
covering 2017 and 2018 policy years, effective
transactions at
December 31, 2021. Our XOL
December 31, 2021 provided XOL
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 May 28,
2021, 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, the capital required to
support our NIW will increase and our returns may
decrease absent an increase in our 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.
for
insurers,
fee provisions of
investors. Mortgage
the protection of our
We are subject to comprehensive regulation, including
by state insurance departments. Many regulations are
designed
insured
policyholders and consumers, rather than for the
benefit of
including
MGIC, have in the past been involved in litigation and
regulatory actions related to alleged violations of the
anti-referral
the Real Estate
Settlement Procedures Act ("RESPA"), and the notice
provisions of the Fair Credit Reporting Act ("FCRA").
While these proceedings in the aggregate did not
result in material liability for MGIC, there can be no
assurance that the outcome of future proceedings, if
any, under these laws would not have a material
adverse effect on us. To the extent that we are
construed to make independent credit decisions in
connection with our contract underwriting activities,
we also could be subject to increased regulatory
requirements under the Equal Credit Opportunity Act
("ECOA"), FCRA, and other laws. Under relevant laws,
examination may also be made of whether a mortgage
insurer's underwriting decisions have a disparate
impact on persons belonging to a protected class in
violation of the law.
Although their scope varies, state insurance laws
generally grant broad supervisory powers to agencies
or officials to examine insurance companies and
enforce rules or exercise discretion affecting almost
every significant aspect of the insurance business,
insurance
including payment for the referral of
MGIC Investment Corporation 2021 Annual Report | 53
Risk Factors
about
information
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, and of algorithms, artificial intelligence
lead to additional
and data and analytics, may
regulatory scrutiny of premium rates and of other
matters such as discrimination
in pricing and
underwriting, data privacy and access to insurance.
capital
For more
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
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, 2021 filed with the
SEC on February 23, 2022..
information
state
While we have established policies and procedures to
comply with applicable laws and regulations, many
such laws and regulations are complex and 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.
liquidity
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,
risk-
issues or
retention and/or capital
requirements affecting
lenders; the level of home mortgage interest rates;
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
first-time
homebuyers. A decline in the volume of low down
payment home mortgage originations could decrease
demand for mortgage insurance and limit our NIW. For
other factors that could decrease the demand for
mortgage insurance, see our risk factor titled “The
amount of insurance we write could be adversely
loans
to
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.
insurance
laws of 16
jurisdictions,
including
The
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
insured risk, or (ii) the
percentage decrease
less than the
increase
percentage
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”). MGIC's “policyholder position” includes its
net worth or surplus, and its contingency reserve.
in
in capital
is
At December 31, 2021 MGIC’s risk-to-capital ratio was
9.5 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.4 billion above the
required MPP of $1.9 billion. At December 31, 2021,
the risk-to-capital ratio of our combined insurance
operations was 9.5 to 1. Our risk-to-capital ratio and
MPP reflect full credit for the risk ceded under our
quota share
loss
transactions with unaffiliated reinsurers. It is possible
that under the revised State Capital Requirements
discussed below, MGIC will not be allowed full credit
for the risk ceded under such transactions. If MGIC is
not allowed an agreed level of credit under the State
Capital Requirements, MGIC may
the
reinsurance transactions, without penalty.
reinsurance and excess of
terminate
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.
While MGIC currently meets
the State Capital
Requirements of Wisconsin and all other jurisdictions,
it could be prevented from writing new business in the
future in all jurisdictions if it fails to meet the State
54 | MGIC Investment Corporation 2021 Annual Report
if
insurance
to write new
Capital Requirements of Wisconsin, or it could be
prevented from writing new business in a particular
jurisdiction
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
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. 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.
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 46% of
loans
underlying our insurance in force as of December 31,
2021) because they do not have the same sources of
liquidity that bank servicers have.
the
While there has been no disruption in our premium
receipts through the end of December 2021, 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,
the COVID-19
pandemic, many states have enacted moratoriums on
the cancellation of insurance due to non-payment. The
response
to
in
Risk Factors
specific provisions of the moratoriums vary from
state-to-state.
A future increase in delinquent loans caused by the
COVID-19 pandemic or other factors, as well as the
possible transfer of servicing resulting from liquidity
increase the operational burden on
issues, may
servicers, 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 policy
status information from servicers for single premium
policies, and may not be aware that the mortgage
loans insured by such policies have been repaid. We
periodically attempt to determine if coverage is still in
force on such policies by asking the last servicer of
record or through the periodic reconciliation of loan
information with certain servicers. It may be possible
that our reports continue to reflect, as active, policies
on mortgage loans that have been repaid.
Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the
length of time that our policies remain in force.
The premium from a single premium policy
is
collected upfront and generally earned over the
estimated life of the policy. In contrast, premiums
from monthly and annual premium policies are
received each month or year, as applicable, 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. A higher than
expected persistency
the
profitability from single premium policies because
they will remain in force longer and may increase the
incidence of claims than was estimated when the
policies were written. A low persistency rate on
monthly and annual premium policies will reduce
future premiums but may also reduce the incidence of
claims, while a high persistency on those policies will
increase the
increase future premiums but may
incidence of claims.
rate may decrease
Our persistency rate was 62.6% at December 31, 2021,
60.5% at December 31, 2020 and 75.8% at
MGIC Investment Corporation 2021 Annual Report | 55
Risk Factors
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. 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; and the current amount of equity that
borrowers have in the homes underlying our insurance
in force. The amount of equity affects persistency in
the following ways:
increase in delinquencies or a decrease in home prices
in the affected areas. If we were to attempt to limit our
new insurance written in affected 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.
•
•
•
Borrowers with significant equity may be able to
refinance their loans without requiring mortgage
insurance.
The Homeowners Protection Act
(“HOPA”)
requires servicers to cancel mortgage insurance
when a borrower’s LTV ratio meets or
is
scheduled to meet certain levels, generally based
on the original value of the home and subject to
various conditions.
The GSEs’ mortgage
insurance cancellation
guidelines apply more broadly than HOPA and
also consider a home’s current value. For
example, borrowers may request cancellation of
mortgage insurance based on the home’s current
value if certain LTV and seasoning requirements
are met and the borrowers have an acceptable
payment history. For loans seasoned between two
and five years, the LTV ratio must be 75% or less,
and for loans seasoned more than five years the
less. For more
LTV ratio must be 80% or
information about
the GSEs guidelines and
business practices, and how they may change,
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.”
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, rising sea levels and/or fresh water
shortages 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 and/or flood
insurance, or the
increased cost of such insurance, could lead to an
the
increase
The PMIERs require us to maintain significantly more
"Minimum Required Assets" for delinquent loans than
for performing
in
loans; however,
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. 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."
In January 2021, the FHFA issued a Request for Input
(“RFI”) regarding Climate and Natural Disaster Risk
Management at the Regulated Entities (i.e., the GSEs
and the Federal Home Loan Banks). The FHFA has
instructed the GSEs to designate climate change as a
priority concern and actively consider its effects in
their decision making. It is possible that efforts to
manage this risk by the FHFA, GSEs (including through
GSE guideline or mortgage insurance policy changes)
or others could materially impact the volume and
characteristics of our NIW (including its policy terms),
home prices
in certain areas and defaults by
borrowers in certain areas.
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.
When we set our premiums at policy issuance, we
have 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
income we earn and the amount of
investment
56 | MGIC Investment Corporation 2021 Annual Report
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, 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 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
ratings), customer
credit or
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.
financial strength
rates are higher
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
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).
than
In recent years, the industry has materially reduced its
use of standard rate cards, which were fairly
consistent among competitors, and correspondingly
increased its 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. Our increased use of reinsurance over the past
several years, and the improved credit profile and
loans
reduced
insured after 2008, have helped to mitigate the
negative effect of declining premium rates on our
expected returns. However, refer to our risk factor
titled "Reinsurance may not always be available or
loss expectations associated with
Risk Factors
affordable" for a discussion of the risks associated
with the availability of reinsurance, and our risk factors
titled “Downturns in the domestic economy or declines
in more homeowners
in home prices may result
increasing, with a
defaulting and our
losses
corresponding decrease
returns,” and
“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” for a
discussion about risks associated with our NIW.
in our
The widespread use of risk-based pricing systems by
the private mortgage insurance industry makes it more
difficult to compare our rates to those offered by our
competitors. We may not be aware of industry rate
changes until we observe that our volume of 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
the
more
concentration of our new business, our top ten
customers accounted for approximately 36% in 2021
and 41% in 2020.
the past. Regarding
it had
than
in
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
in force) over time as older
insurance policies run off and new insurance policies
with premium rates that are generally lower are
written.
insurance
Certain of our competitors have access to capital at a
lower cost than we do (including, through off-shore
intercompany reinsurance vehicles, which have tax
advantages that may increase if U.S. corporate income
taxes increase). 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
by
participating
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."
including
of
alternative
insurance,
forms
in
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 NIW
could be negatively affected.
•
A downgrade in our financial strength ratings
could result in increased scrutiny of our financial
MGIC Investment Corporation 2021 Annual Report | 57
Risk Factors
•
•
condition by the GSEs and/or our customers,
potentially resulting in a decrease in the amount
of our NIW.
improve our
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
investment grade
ratings for our insurance subsidiaries. We could
be competitively disadvantaged with some market
participants because the financial strength ratings
of our insurance subsidiaries are lower than those
of some competitors. MGIC's financial strength
rating from A.M. Best is A- (with a stable outlook),
from Moody’s is Baa1 (with a stable outlook) and
from Standard & Poor’s is BBB+ (with a stable
outlook).
In addition, although
require minimum
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
the
regulatory action.
PMIERs do not
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.
In December 2021, Standard & Poor’s announced a
proposed change to their rating methodologies for
insurers, including mortgage insurers. It is uncertain
what
impact the proposed change would have,
whether it will be adopted in its current form, whether
it will prompt similar moves at other rating agencies,
or the extent to which it will impact how external
parties evaluate the different rating levels.
We are involved in legal proceedings and are subject to
the risk of additional legal proceedings in the future.
files
to determine
loan and servicing
Before paying an insurance claim, generally we review
the
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”).
immaterial
percentage of claims received have been resolved by
recent years, an
In
rescissions. In 2021 and 2020, curtailments reduced
our average claim paid by approximately 4.4% and
3.6%, respectively. The COVID-19-related foreclosure
moratoriums and forbearance plans have decreased
our claims paid activity beginning in the second
quarter of 2020. It is difficult to predict the level of
curtailments once the foreclosure moratoriums and
forbearance
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.
end. Our
plans
loss
loss
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
legal
dispute ultimately may be determined by
loss
proceedings. Under ASC 450-20, until a
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
is probable and can be
reasonably estimated, we record our best estimate of
our probable loss, including recording a probable loss
of $6.3 million in 2021. In those cases, until settlement
legal proceedings are concluded
negotiations or
(including
receipt of any necessary GSE
the
approvals), it is possible that we will record an
additional
in
discussions and/or proceedings with respect to our
claims paying practices. Although it is possible that, if
not resolved by negotiation, 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 $27 million
more than the amount of probable loss we have
recorded. 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.
loss. We are currently
involved
In addition to the matters described above, from time
to time, we are involved in other disputes and 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 disputes
and legal proceedings will not have a material adverse
effect on our
results of
operations.
financial position or
58 | MGIC Investment Corporation 2021 Annual Report
Risk Factors
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 Products and Services
Our enterprise risk management program, described in
"Business
- Risk
Management" in Item 1 of our Annual Report on Form
10-K for the year ended December 31, 2021 filed with
the SEC on February 23, 2022, 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
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 certain assumptions,
which could impact our expectations about future
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 or accurate, 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
recruit suitable
to develop or
would be able
replacements for
that
individuals;
the departing
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
into any employment
currently have not entered
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.
limited staff
In response to the COVID-19 pandemic, the Company
transitioned to a virtual workforce model with certain
essential activities supported by
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. As our employees begin to return to
the office, they may be exposed to health risks, which
liability. We have
to potential
may expose us
established an interim succession plan for each of our
key executives, should an executive be unable to
perform his or her duties.
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.
MGIC Investment Corporation 2021 Annual Report | 59
Risk Factors
The percentage of our NIW from all single-premium
policies was 7.4% in 2021 and 8.9% in 2020 and has
ranged from approximately 5.7% in 2021 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
less premium than a monthly
generate more or
premium policy over its life.
losses
incurred and
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
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 incurred. 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 special purpose insurers provide 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 paid 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. In the third
quarter of 2021, Fannie Mae indicated that it was
easing its credit assessments and guidelines to help
increase homeownership opportunities for borrowers.
We have aligned with these changes, which will result
in our insuring some loans with FICO scores lower
than 620. 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.
including
Even when home prices are stable or rising, mortgages
with certain characteristics have higher probabilities of
claims. As of December 31, 2021, 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 (7.9%),
those with
borrowers having FICO scores of 620-679 (6.8%),
mortgages with limited underwriting, including limited
borrower documentation (1.0%), and mortgages with
borrowers having DTI ratios greater than 45% (or
where no ratio is available) (13.6%), each attribute as
determined at the time of loan origination. Loans with
more than one of these attributes accounted for 2% of
our primary risk in force as of December 31, 2021, and
less than one percent of our NIW in each of 2021 and
the
2020. When home prices
percentage of our NIW from purchase transactions
increases, our NIW on mortgages with higher LTV
ratios and higher DTI ratios may increase.
increase and/or
the
from
results
From time to time, we change the processes we use to
underwrite loans. For example: we rely on information
provided to us by lenders that was obtained from
certain of the GSEs’ automated appraisal and income
verification tools, which may produce results that
differ
that would have been
determined using different methods; we accept GSE
appraisal waivers for certain refinance loans, the
numbers of which have
increased significantly
beginning in 2020 and remain elevated; and we accept
GSE appraisal
that allow property
valuations in certain transactions to be based on
appraisals that do not involve an onsite or interior
inspection of
the property. Our acceptance of
automated GSE appraisal and income verification
tools, GSE appraisal waivers and GSE appraisal
flexibilities may affect our pricing and
risk
assessment. We also continue to further automate our
underwriting processes and it is possible that our
automated processes result in our insuring loans that
we would not otherwise have insured under our prior
processes.
flexibilities
Approximately 72.2% of our 2021 NIW and 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
60 | MGIC Investment Corporation 2021 Annual Report
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.
on
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. The focus of the new FHFA
leadership
homeownership
increasing
opportunities for borrowers is likely to have this effect.
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 paid even under our current underwriting
requirements.
Our holding company debt obligations materially
exceed our holding company cash and investments.
in cash and
At December 31, 2021, we had approximately $663
investments at our holding
million
company and our holding company’s debt obligations
were $1.0 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 $110 million of
9% Convertible Junior Subordinated Debentures due in
2063 ("9% Debentures"). Annual debt service on the
5.75% Notes, 5.25% Notes and 9% Debentures
is
outstanding as of December 31, 2021,
approximately $58 million.
Investment Corporation, and not of
The 5.75% Senior Notes, 5.25% Senior Notes and 9%
Debentures are obligations of our holding company,
MGIC
its
subsidiaries. The payment of dividends from our
insurance subsidiaries (primarily MGIC) which, other
than investment income and raising capital in the
public markets, is the principal source of our holding
company cash inflow. Although MGIC holds assets in
excess of its minimum statutory capital requirements
and its PMIERs financial requirements, the ability of
MGIC to pay dividends is restricted by insurance
Risk Factors
In general, dividends
regulation.
in excess of
prescribed limits are deemed “extraordinary” and may
not be paid if disapproved by the OCI. The level of
ordinary dividends that may be paid without OCI
approval is determined on an annual basis. A dividend
is extraordinary when the proposed dividend amount,
plus dividends paid in the twelve months preceding
the dividend payment date exceed the ordinary
dividend level. At December 31, 2021 MGIC could pay
$122 million of ordinary dividends without OCI
approval, before taking into consideration dividends
paid in the preceding twelve months. In 2021, MGIC
paid $400 million
in dividends of cash and
investments to the holding company. Future dividend
payments from MGIC to the holding company will be
determined in consultation with the board of directors,
and after considering any updated estimates about the
economic impacts of the COVID-19 pandemic on our
business.
In the fourth quarter of 2021, we repurchased $99
million in aggregate principal amount of our 9%
Debentures, using $136 million of holding company
resources, eliminating 7.5 million potentially dilutive
common shares, reducing annual interest expense by
$8.9 million and resulting in a $37 million loss on debt
extinguishment. We may continue to repurchase our
debt obligations on the open market (including
through 10b5-1 plans) or through privately negotiated
transactions. In addition, we may redeem our 9%
Debentures as discussed in 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."
19.0 million
second half of 2021, we
Repurchases of our common stock may be made from
time to time on the open market (including through
through privately negotiated
10b5-1 plans) or
transactions. In 2020 we repurchased approximately
9.6 million shares of our common stock, using
approximately $120 million of holding company
resources. After suspending stock repurchases due to
the uncertainty caused by the COVID-19 pandemic, in
repurchased
the
approximately
using
approximately $291 million of holding company
resources. As of December 31, 2021, we had $500
million of authorization remaining to repurchase our
common stock through the end of 2023 under a share
repurchase program approved by our Board of
Directors in October 2021. If any capital contributions
to our subsidiaries are required, such contributions
would decrease our holding company cash and
investments. As described in our Current Report on
Form 8-K filed with the SEC 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.
shares,
MGIC Investment Corporation 2021 Annual Report | 61
Risk Factors
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.
financial statements. As noted above, we have
repurchased shares of our common stock in 2021 and
intend to do so again in the future. In addition, we
repurchased a portion of our debt obligations in 2021
and may do so again in the future.
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, 2021, we had outstanding $110
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 76.5496 common
shares per $1,000 principal amount of debentures.
This represents a conversion price of approximately
$13.06 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.
interest,
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
if the closing sale price of our
unpaid
common stock exceeds $16.98 (adjusted pro rata for
changes in the conversion price) 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
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
interest, see Note 7 – “Debt” to our consolidated
financial statements.
is also convertible
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
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.
incurred
in our share
expectations of
(including
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;
future
changes
financial
in
performance
losses on our
insurance in force); changes in estimates of securities
analysts or rating agencies; actual or anticipated
repurchase program or
changes
in operating performance or
dividends; changes
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
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).
stock because
the
We could be adversely affected if personal information
on consumers
improperly
that we maintain
disclosed, our information technology systems are
damaged or their operations are interrupted, or our
automated processes do not operate as expected.
is
As part of our business, we maintain large amounts of
personal information of consumers, including on our
servers and those of cloud computing services.
Federal and state laws designed to promote the
protection of such information require businesses that
collect or maintain consumer information to adopt
information security programs, and
to notify
jurisdictions, regulatory
individuals, and
authorities, of security breaches involving personally
identifiable information.
in some
62 | MGIC Investment Corporation 2021 Annual Report
increasingly reliant on the efficient and
We are
information
uninterrupted operation of complex
technology systems. All
technology
information
systems are potentially vulnerable to damage or
interruption from a variety of sources, including by
third-party cyber attacks, including those involving
ransomware. The Company discovers vulnerabilities
and experiences malicious attacks and other attempts
to gain unauthorized access to its systems on a
regular basis. Globally, attacks are expected to
frequency and
continue accelerating
sophistication with increasing use by actors of tools
and techniques that will hinder the Company’s ability
to identify, investigate and recover from incidents. In
response to the COVID-19 pandemic, the Company
transitioned to a primarily virtual workforce model and
will likely continue to operate under a hybrid model in
the future. Virtual and hybrid workforce models may
be more vulnerable to security breaches.
in both
through
While we have
information security policies and
systems in place to secure our information technology
systems and to prevent unauthorized access to or
disclosure of sensitive information, there can be no
assurance with respect to our systems and those of
our third-party vendors that unauthorized access to
the systems or disclosure of the sensitive information,
either
third parties or
the actions of
employees, will not occur. Due to our reliance on
information technology systems, including ours and
those of our customers and third-party service
providers, and to the sensitivity of the information that
we maintain, unauthorized access to the systems or
disclosure of the information could adversely affect
our reputation, severely disrupt our operations, result
in a loss of business and expose us to material claims
for damages and may require that we provide free
credit monitoring services to individuals affected by a
security breach.
Should we experience an unauthorized disclosure of
information or a cyber attack, including those involving
ransomware, some of the costs we incur may not be
recoverable through
legal or other
processes, and this may have a material adverse
effect on our results of operations.
insurance, or
We are in the process of upgrading certain information
systems, and transforming and automating certain
business processes, and we continue to enhance our
risk-based pricing system and our system
for
evaluating risk. Certain information systems have
been in place for a number of years and it has become
increasingly difficult to support their operation. The
implementation of
technological and business
process improvements, as well as their integration
third-party systems when
with customer and
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
Risk Factors
reliant do not perform as expected, if our legacy
systems fail to operate as required, or if the upgraded
systems and/or transformed and automated business
processes do not operate as expected, it could have a
material 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.
by
ratings
downgrades,
Our investment portfolio is an important source of
revenue and is our primary source of claims paying
resources. Although our investment portfolio consists
mostly of highly-rated fixed income investments, our
investment portfolio is affected by general economic
conditions and tax policy, which may adversely affect
the markets for credit and
interest-rate-sensitive
securities, including the extent and timing of investor
participation in these markets, the level and volatility
of interest rates and credit spreads and, consequently,
the value of our fixed income securities. The value of
investment portfolio may also be adversely
our
increased
affected
bankruptcies and credit spreads widening
in
distressed industries. 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
in unemployment and/or
valuations,
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.
increases
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.
MGIC Investment Corporation 2021 Annual Report | 63
Risk Factors
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 publish one-week and two-month
tenor USD LIBOR and that after June 30, 2023, it would
no longer publish all other USD LIBOR tenors. Efforts
are underway to identify and transition to a set of
alternative reference rates. The set of alternative rates
the Secured Overnight Financing Rate
includes
(“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, 2021, approximately 6% 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, 2021, approximately $0.5 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, the
premiums under most of our 2018-2021 excess-of-
loss reinsurance agreements 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 2021, our total
premiums on such transactions were approximately
$39.5 million).
64 | MGIC Investment Corporation 2021 Annual Report
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, 2021 that have
materially affected, or are
to
materially affect, our internal control over financial
reporting.
reasonably
likely
financial
reporting
internal control over
Our management is responsible for establishing and
maintaining adequate internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)).
Our
is
designed to provide reasonable assurance regarding
the reliability of financial reporting and the preparation
in
of financial statements for external purposes
accordance with generally accepted accounting
principles. Because of
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.
inherent
its
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,
2021.
an
LLP,
PricewaterhouseCoopers
independent
registered public accounting firm, has audited the
consolidated financial statements and effectiveness
of internal control over financial reporting as of
December 31, 2021, as stated in their report which
appears herein.
MGIC Investment Corporation 2021 Annual Report | 65
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders of MGIC
Investment Corporation
Opinions on the Financial Statements and Internal
Control over Financial Reporting
the
We have audited the accompanying consolidated
balance sheets of MGIC Investment Corporation and
its subsidiaries (the “Company”) as of December 31,
2021 and 2020, and
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,
2021,
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, 2021, 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, 2021 and 2020, and the results of its
operations and its cash flows for each of the three
years in the period ended December 31, 2021 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, 2021, based on criteria
established in Internal Control - Integrated Framework
(2013) issued by the COSO.
Basis for Opinions
is
included
financial
reporting,
to express opinions on
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
in
Management’s Report on
Internal Control over
Financial Reporting appearing under Item 9A. Our
the
responsibility
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
independent with respect to the
required to be
the U.S. federal
Company
securities
rules and
regulations of
the Securities and Exchange
Commission and the PCAOB.
in accordance with
laws and
the applicable
We conducted our audits in accordance with the
standards of the PCAOB. Those standards require
that we plan and perform the audits to obtain
assurance
about whether
reasonable
the
consolidated financial statements are free of material
misstatement, whether due to error or fraud, and
whether effective
internal control over financial
reporting was maintained in all material respects.
Our audits of the consolidated financial statements
included performing procedures to assess the risks of
material misstatement of the consolidated financial
statements, whether due to error or fraud, and
performing procedures that respond to those risks.
Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in
the consolidated financial statements. Our audits also
included evaluating the accounting principles used
and significant estimates made by management, as
well as evaluating the overall presentation of the
consolidated financial statements. Our audit of
internal control over financial reporting
included
obtaining an understanding of internal control over
financial reporting, assessing the risk that a material
weakness exists, and testing and evaluating the
design and operating effectiveness of internal control
based on the assessed risk. Our audits also included
performing such other procedures as we considered
necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control over
Financial Reporting
regarding
to provide
reliability of
A company’s internal control over financial reporting
reasonable
is a process designed
assurance
financial
the
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
the degree of
compliance with the policies or procedures may
deteriorate.
in conditions, or
that
66 | MGIC Investment Corporation 2021 Annual Report
included, among others,
related to the claim rate and claim severity. These
the
procedures also
involvement of professionals with specialized skill
and knowledge to assist in developing an independent
estimate of the primary case reserves and comparing
this independent estimate to management’s recorded
primary case reserves to evaluate the reasonableness
of the recorded primary case reserves. Developing the
independent
the
completeness and accuracy of data provided by
management
developing
assumptions related to the claim rate and claim
severity.
independently
estimate
involved
testing
and
/s/ PricewaterhouseCoopers LLP
Milwaukee, Wisconsin
February 23, 2022
We have served as the Company’s auditor since 1985.
Critical Audit Matters
financial
statements
The critical audit matter communicated below is a
matter arising from the current period audit of the
consolidated
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 – Primary Case Reserves
loss
insured mortgage
As described in Notes 3 and 8 to the consolidated
financial statements, the Company establishes case
reserves for estimated insurance losses when notices
of delinquency on
loans are
received. As of December 31, 2021, the Company’s
reserves were $884 million. A
recorded
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
delinquency 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. The Company’s
case reserve estimates are primarily established
including
based
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 delinquency and claim filing;
and curtailments and rescissions.
experience,
historical
upon
The principal considerations for our determination
that performing procedures relating to the valuation of
loss reserves – primary case reserves is a critical
audit matter are (i) the significant
judgment by
management when developing the estimate of the
primary case reserves; (ii) a high degree of auditor
judgment, subjectivity, and effort
in performing
procedures and evaluating the audit evidence relating
to the claim rate and claim severity significant
assumptions; and (iii) the audit effort involved the use
of professionals with specialized skill and knowledge.
involved
the matter
performing
Addressing
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
MGIC Investment Corporation 2021 Annual Report | 67
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Investment portfolio:
Fixed income, available-for-sale, at fair value (amortized cost, 2021 -
$6,397,658; 2020 - $6,317,164)
Equity securities, at fair value (cost, 2021 - $15,838; 2020 - $17,522)
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:
December 31,
Note
2021
2020
5 / 6
$ 6,587,581 $ 6,661,596
16,068
3,100
18,215
3,100
6,606,749
6,682,911
284,690
287,953
20,268
51,902
66,905
36,275
56,540
45,614
21,671
8,727
49,997
95,042
669
56,044
47,144
21,561
134,394
104,478
$ 7,325,008 $ 7,354,526
$
883,522 $
880,537
241,690
155,000
881,508
110,204
191,702
287,099
155,000
879,379
208,814
244,711
2,463,626
2,655,540
9
9
8
7
7
7
17
13
Common stock (one dollar par value, shares authorized 1,000,000; shares issued
2021 - 371,353; 2020 - 371,353; shares outstanding 2021 - 320,336; 2020 -
338,573)
Paid-in capital
Treasury stock at cost (shares 2021 - 51,017; 2020 - 32,779)
371,353
371,353
1,794,906
1,862,042
(675,265)
(393,326)
Accumulated other comprehensive income, net of tax
10
119,697
216,821
Retained earnings
Total shareholders' equity
Total liabilities and shareholders' equity
3,250,691
2,642,096
4,861,382
4,698,986
$ 7,325,008 $ 7,354,526
See accompanying notes to consolidated financial statements.
68 | MGIC Investment Corporation 2021 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2021
2020
2019
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
$
1,123,117 $
1,106,632 $
1,124,196
8,924
(163,031)
969,010
45,409
10,837
(188,727)
928,742
93,201
1,014,419
1,021,943
156,438
6,582
8,236
154,396
13,752
9,055
6,446
(129,334)
1,001,308
29,680
1,030,988
167,045
5,306
10,638
1,185,675
1,199,146
1,213,977
64,577
12,602
198,445
36,914
71,360
383,898
801,777
166,794
364,774
12,380
176,398
26,736
59,595
639,883
559,263
113,170
634,983 $
446,093 $
118,575
12,001
182,768
—
52,656
366,000
847,977
174,214
673,763
1.90 $
1.85 $
1.31 $
1.29 $
1.91
1.85
334,330
339,953
352,827
351,308
359,293
373,924
$
$
$
9
9
5
5
8 / 9
7
7
12
4
4
4
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2021 Annual Report | 69
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
(In thousands)
Net income
Years Ended December 31,
Note
2021
2020
2019
$
634,983 $
446,093 $
673,763
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
5/10
11
(122,099)
24,975
(97,124)
133,616
10,497
144,113
Comprehensive income
$
537,859 $
590,206 $
173,910
23,012
196,922
870,685
See accompanying notes to consolidated financial statements.
70 | MGIC Investment Corporation 2021 Annual Report
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common stock
Note
2021
2020
2019
Years Ended December 31,
Balance, beginning and end of year
371,353
371,353
371,353
Paid-in capital
Balance, beginning of year
Cumulative effect of debt with conversion options
accounting standards update
Balance, beginning of period, as adjusted
Reacquisition of convertible junior subordinated
debentures-equity component
7
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
13
Reissuance of treasury stock, net under share-
based compensation plans
Balance, end of year
Accumulated other comprehensive income (loss)
Balance, beginning of year
Other comprehensive (loss) income
10
Balance, end of year
Retained earnings
Balance, beginning of year
Cumulative effect of debt with conversion options
accounting standards update
Balance, beginning of period, as adjusted
Net income
Cash dividends
Balance, end of year
1,862,042
1,869,719
1,862,536
(68,289)
1,793,753
—
—
1,869,719
1,862,536
—
(2,673)
—
(15,956)
17,109
(18,807)
13,803
(11,715)
18,898
1,794,906
1,862,042
1,869,719
(393,326)
(290,818)
8,879
(675,265)
216,821
(97,124)
119,697
(283,196)
(119,997)
9,867
(393,326)
72,708
144,113
216,821
(175,059)
(114,126)
5,989
(283,196)
(124,214)
196,922
72,708
2,642,096
2,278,650
1,647,275
68,289
2,710,385
634,983
(94,677)
—
—
2,278,650
1,647,275
446,093
(82,647)
673,763
(42,388)
3,250,691
2,642,096
2,278,650
Total shareholders' equity
$
4,861,382 $
4,698,986 $
4,309,234
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2021 Annual Report | 71
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and other amortization
Deferred tax expense
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
Years Ended December 31,
2021
2020
2019
$ 634,983 $ 446,093 $ 673,763
66,014
5,188
36,914
57,812
27,475
26,736
48,784
11,096
—
(6,582)
(13,752)
(5,306)
(1,905)
(292)
(1,704)
28,137
(73,401)
11,687
(35,606)
(496)
(110)
(19,245)
852
(457)
(3,030)
4,586
1,427
(497)
(643)
4,945
2,985
325,203
(118,685)
(45,409)
(93,203)
(29,683)
7,200
5,429
18,820
(500)
(11,500)
6,271
21,916
1,057
24,791
696,317
732,309
609,532
(1,531,129)
(2,636,972)
(1,394,126)
473,904
836,851
229,796
900,591
1,030,926
748,165
—
—
(307)
(4,115)
(3,311)
(5,636)
(160,749)
(772,506)
(422,108)
—
—
—
640,250
(179,735)
(2,969)
—
—
—
—
—
—
Purchase of convertible junior subordinated debentures
(98,610)
(36,392)
Payment of original issue discount- convertible junior subordinated debentures
—
(15,049)
Cash portion of loss on debt extinguishment
(36,914)
(25,266)
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
(290,818)
(119,997)
(125,766)
(94,219)
(82,061)
(41,914)
—
(2,020)
—
(6,729)
(8,940)
(5,726)
(527,290)
167,821
(173,406)
Net increase (decrease) in cash and cash equivalents and restricted cash and cash
equivalents
8,278
127,624
14,018
Cash and cash equivalents and restricted cash and cash equivalents at beginning of
year
296,680
169,056
155,038
Cash and cash equivalents and restricted cash and cash equivalents at end of year
$ 304,958 $ 296,680 $ 169,056
See accompanying notes to consolidated financial statements.
72 | MGIC Investment Corporation 2021 Annual Report
Notes to Consolidated Financial Statements
NOTE 1
Nature of Business
NOTE 2
Basis of Presentation
BASIS OF PRESENTATION
The accompanying consolidated financial statements
have been prepared in accordance with accounting
principles generally accepted in the United States of
America ("GAAP"), as codified in the Accounting
Standards Codification ("ASC"). Our consolidated
financial statements include the accounts of MGIC
Investment Corporation and
its majority-owned
subsidiaries. Intercompany transactions and balances
have been eliminated. In accordance with GAAP, we
are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and
the reported amounts of revenues and expenses
during the reporting periods. Actual results could
differ from those estimates.
The COVID-19 pandemic had a material impact on our
2020 financial results. While uncertain, the impact of
the COVID-19 pandemic on the Company’s future
financial results, business, 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, efforts
transmission of
COVID-19, the level of unemployment, and the impact
of government initiatives and actions taken by Fannie
Mae and Freddie Mac
(including
mortgage forbearance and modification programs) to
mitigate the economic harm caused by COVID-19.
"GSEs")
reduce
(the
the
to
SUBSEQUENT EVENTS
We have considered subsequent events through the
date of this filing.
through Mortgage Guaranty
MGIC Investment Corporation is a holding company
Insurance
which,
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
insurance
loans. Primary mortgage
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
insurance
subsidiaries of MGIC, provide insurance for certain
mortgages under Fannie Mae and Freddie Mac (the
"GSEs") credit risk transfer programs.
Indemnity Corporation
("MIC"),
Through certain non-insurance subsidiaries, we also
provide certain services for the mortgage finance
industry, such as contract underwriting.
At December 31, 2021, our direct primary insurance in
force ("IIF") was $274.4 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 $69.3 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, 2021, 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.
MGIC Investment Corporation 2021 Annual Report | 73
inputs
Market indicators, industry, and economic events are
listed above are
also considered. The
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
independent pricing sources
throughout this process, which include reviewing
tolerance reports, trading information, data changes,
and directional moves compared to market moves.
the
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
for
fair
disclosure of
A three-level valuation hierarchy has been established
value
under GAAP
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 below,
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
issue valued or based on modeling of
for the
securities with similar credit quality, duration, yield
and structure that were recently traded.
NOTE 3
Significant Accounting Policies
CASH AND CASH EQUIVALENTS
We consider money market funds and investments
with original maturities of three months or less to be
cash equivalents.
RESTRICTED CASH AND CASH EQUIVALENTS
Restricted cash and cash equivalents consists of
cash and money market funds held in trusts for the
benefit
under
reinsurance agreements or for other contractual
restrictions.
counterparties
contractual
of
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
recurring basis.
predominantly measured on a
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
inputs observable or unobservable market
as
parameters
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.
including yield curves,
For the years ended December 31, 2021, 2020, and
2019, we did not elect to measure any financial
instruments acquired, or
issued, such as our
outstanding debt obligations, at fair value for which
the primary basis of accounting is not fair value.
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,
two-sided
broker/dealer quotes,
markets, benchmark securities, bids, offers, and
reference
research
publications.
including market
issuer spreads,
data
74 | MGIC Investment Corporation 2021 Annual Report
The three levels are defined as follows:
è Level 1 Quoted prices for identical instruments in
that we can access.
active markets
Financial assets using Level 1
inputs
primarily include U.S. Treasury securities,
money market funds, treasury bills, and
certain equity securities.
than quoted prices,
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
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
include
obligations
government
corporations and agencies, corporate
bonds, mortgage-backed securities, asset-
backed securities, most municipal bonds,
and commercial paper.
inputs primarily
U.S.
of
The independent pricing sources used for
our Level 2 investments vary by type of
- "Fair Value
investment. See Note 6
Measurements" for further information.
è Level 3 Valuations
from
derived
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
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.
the
is
INVESTMENTS
Fixed income securities. Our fixed income securities
are classified as available-for-sale and are reported at
fair value. The related unrealized investment gains or
losses are, after considering the related tax expense
or benefit,
recognized as a component of
accumulated other comprehensive income (loss) in
shareholders' equity. Realized investment gains and
losses on fixed income securities are reported in
income based upon specific
identification of
securities sold as well as any credit allowance (2021
and 2020), and any
temporary"
impairments ("OTTI") (2019).
"other
than
Notes
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
represent our
carried at cost. These assets
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.
We report accrued investment income separately
from securities. 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.
Unrealized losses and allowance for credit losses
Each quarter we determine whether securities in an
unrealized loss position are impaired by considering
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 a change in rating to 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 an impaired security if we intend to sell, if it is
more likely than not that we will be required to sell it
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, but
when a sale is not intended or is not likely, the loss is
separated into the portion 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
investment gains and
operations within realized
losses, while the
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.
loss due to other factors
MGIC Investment Corporation 2021 Annual Report | 75
Notes
For 2019, our evaluation of whether a decline in fair
values was other-than-temporary also
included
reviewing the extent and duration of the decline.
Based on our evaluation, if the fair value of a security
was below its amortized cost at the time of our intent
to sell, the security was classified as other-than-
temporarily impaired and the full amount of the
impairment was recognized as a loss in the statement
of operations. Otherwise, when a security was
considered to be other-than-temporarily impaired, the
loss was separated into the portion of the loss that
represented the credit loss and the portion that was
due to other factors. The credit loss portion was
recognized as a loss in the statement of operations,
while the loss due to other factors was recognized in
accumulated other comprehensive loss, net of taxes.
A credit loss was 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 was less than the cost basis of the
security. If the security was determined to be other-
than-temporary-impaired the security was classified
as other-than-temporarily
full
amount of the impairment was recognized as a loss in
the statement of operations.
impaired and
the
HOME OFFICE AND EQUIPMENT
financial
Home office and equipment is carried at cost net of
depreciation. For
reporting purposes,
depreciation is determined on a straight-line basis for
the home office and equipment over estimated lives
ranging from 3 to 45 years. For income tax purposes,
we use accelerated depreciation methods.
Home office and equipment
is shown net of
accumulated depreciation of $55.4 million, $51.2
million and $43.0 million as of December 31, 2021,
2020 and 2019, respectively. Depreciation expense for
the years ended December 31, 2021, 2020 and 2019
was $5.6 million, $6.3 million and $6.5 million,
respectively.
DEFERRED
COSTS
INSURANCE POLICY ACQUISITION
the successful
Costs directly associated with
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
received
are net of any ceding commissions
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
in our
investment
utilize anticipated
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
income
changes to key variables such as persistency or loss
development.
LOSS RESERVES
Loss reserves include case reserves, incurred but not
loss adjustment
reported ("IBNR") reserves, and
expense ("LAE") reserves.
Case reserves and 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
insurance entities specifically
and
reporting by
excludes mortgage
its guidance
insurance from
relating to loss reserves, we establish loss reserves
the
the general principles contained
using
insurance standard. However, consistent with industry
standards for mortgage insurers, we do not establish
case reserves for future claims on insured loans that
are not currently delinquent.
in
Case reserves are established by estimating the
number of loans in our delinquency 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.
Our case reserve estimates are primarily established
based
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
is based on
information provided by the ceding companies.
reinsurance assumed
experience,
historical
upon
for
IBNR reserves are established for delinquencies
estimated to have occurred prior to the close of an
accounting period, but have not yet been reported to
reported
us. Consistent with
delinquencies, IBNR reserves are also established
using estimated claim rates and claim severities.
reserves
for
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.
Our loss reserve 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.
Loss reserves are ceded to reinsurers under our
reinsurance agreements. (See Note 8 – “Loss
Reserves” and Note 9 – “Reinsurance.”)
76 | MGIC Investment Corporation 2021 Annual Report
PREMIUM DEFICIENCY RESERVE
After our loss reserves are established, we perform
premium deficiency tests using our best estimate of
future premium,
losses and LAE paid. Premium
deficiency reserves are established, if necessary,
when the present value of expected future losses and
LAE paid exceeds the present value of expected
future premium and already established reserves.
REVENUE RECOGNITION
We write policies which are guaranteed renewable at
the insured's option on a monthly, single, or annual
premium basis. We have no ability to re-underwrite or
reprice these policies. 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. Premiums written on
annual premium policies are earned on a monthly pro
rata basis. 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. 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 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.
We assess whether a credit loss allowance is required
for our premium receivable. We consider collectability
trends and industry development, among other things.
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.
INCOME TAXES
Deferred income taxes are provided under the liability
method, which recognizes the future tax effects of
temporary differences between amounts reported in
the consolidated financial statements and the tax
bases of these items. The estimated tax effects are
computed at the enacted federal statutory income tax
rate. Changes in tax laws, rates, regulations, and
Notes
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.
for
threshold
recognition
The recognition of a tax position is determined using
a two-step approach. The first step applies a more-
likely-than-not
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
information. We
full knowledge of all relevant
recognize interest accrued and penalties related to
unrecognized tax benefits in our provision for income
taxes.
reserves
that are
recorded for
Federal tax law permits mortgage guaranty insurance
companies to deduct from taxable income, subject to
certain limitations, the amounts added to contingency
loss
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 employees, as well as a
supplemental executive retirement plan. Retirement
benefits are based on compensation and years of
service, utilizing a cash balance formula. 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, 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.”)
MGIC Investment Corporation 2021 Annual Report | 77
Notes
REINSURANCE
share
quota
reinsurance
We cede insurance risk through the use of quota
share reinsurance transactions and aggregate excess
of
loss reinsurance transactions. Premiums and
losses incurred are ceded pursuant to the terms of
our
transactions.
Reinsurance premiums ceded under our excess of
loss transactions 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 remaining reinsurance coverage
levels, and the investment income collected on the
collateral assets held in the reinsurance trust account
and used to collateralize the Home Re Entity's
reinsurance obligation to MGIC.
under
ceded
Loss reserves are reported before taking credit for
reinsurance
amounts
transactions. 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, net of ceding commission and
profit commission 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.”)
recorded
life of reinsurance recoverable,
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
is
immediately
In assessing
to
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 excess of loss transactions, collateral
held in trust accounts in which MGIC is the sole
beneficiary, and aging of outstanding reinsurance
recoverable balances.
income.
it
Assumed
reinsurance
received from the ceding company.
is based on
information
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, although awards to
our non-employee directors vest immediately. (See
Note 15 – “Share-based Compensation Plans.”)
EARNINGS PER SHARE
Basic earnings per share ("EPS") is calculated by
dividing net income by the weighted average number
of shares of common stock outstanding. The
computation of basic EPS includes as "participating
securities" an immaterial number of unvested share-
based compensation awards
that contain non-
forfeitable rights to dividends or dividend equivalents,
whether paid or unpaid, under the "two-class" method.
Our participating securities are composed of vested
restricted stock and restricted stock units ("RSUs")
with non-forfeitable rights to dividends. Diluted EPS
includes the components of basic EPS and also gives
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 are
converted to 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
considered
and RSUs
outstanding.
stock
are
RELATED PARTY TRANSACTIONS
In 2021, MGIC distributed to the holding company, as
a dividend, its investment in MGIC Credit Assurance
Corporation. In 2020 MGIC Reinsurance Corporation
of Wisconsin, a subsidiary of MGIC, merged with
MGIC. There were no related party transactions during
2019.
RECENT
DEVELOPMENTS
ACCOUNTING
AND
REPORTING
Accounting standards effective in 2021, or early
adopted, and relevant to our financial statements
Simplifying the Accounting for Income Taxes: ASU
2019-12
Effective January 1, 2021, we adopted FASB guidance
on a prospective basis which simplifies Accounting
for Income Taxes (Topic 740) by removing certain
exceptions to Topic 740. The adoption of this
guidance did not have a material impact on our
consolidated financial statements.
Clarification of Accounting for Equity Securities: ASU
2020-01
Effective January 1, 2021, we adopted ASU 2020-01,
which clarifies certain interactions of accounting for
equity securities under Topic 321, accounting for
the equity method of
equity securities under
78 | MGIC Investment Corporation 2021 Annual Report
accounting in Topic 323, and accounting for certain
forward contracts and purchased options in Topic
815. The amendment clarifies the consideration of
observable
or
discounting the equity method of accounting. The
adoption of this guidance did not have a material
impact on our consolidated financial statements.
transactions
applying
before
Improvements
Codification
to Subtopic 310-20,
Receivables - Nonrefundable Fees and Other Costs:
ASU 2020-08
Effective January 1, 2021, we adopted 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
for certain
the amortization period
purchased callable debt securities held at a premium
by requiring that an entity 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 clarified that the issuer of a callable
debt security should use the next call date versus the
earliest call date in amortizing premium. The adoption
of this guidance did not have a material impact on our
consolidated financial statements.
Accounting for Convertible Instruments and Contracts
in an Entity’s Own Equity: ASU 2020-06
for certain
the accounting
Effective January 1, 2021, we adopted ASU 2020-06
using a modified retrospective basis. ASU 2020-06
simplifies
financial
instruments with characteristics of
liabilities and
equity. It also includes amendments to EPS guidance.
The updated guidance reduced the number of
accounting models for convertible debt instruments
and convertible preferred stock, and eliminated the
cash conversion feature within ASU 470. As a result
of these changes, more convertible instruments will
be reported as a single unit on the balance sheet. We
previously accounted for our 9% Debentures under the
cash conversion feature, which required us to account
for the conversion features of our 9% Debentures
within Paid-in Capital. The adoption of this guidance
resulted
in a $68.3 million cumulative effect
adjustment to our 2021 beginning Retained Earnings
and Paid-in Capital to reflect the 9% Debentures as if
we had always accounted for them as a liability in
their entirety.
The updated guidance also includes updates to the
EPS calculation. It requires an entity 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
Notes
year to date weighted average shares. The guidance
also includes improvements to the disclosures for
convertible instruments and EPS. The adoption of this
guidance did not have a material impact on our
consolidated financial statement disclosures.
Reference Rate Reform: ASU 2020-04
In March 2020, the FASB issued ASU 2020-04 to
provide temporary optional guidance to ease the
potential burden in accounting for (or recognizing the
effects of) reference rate reform. It provides optional
expedients and exceptions for applying generally
accepted accounting principles to contracts, hedging
relationships and other transactions affected by
reference rate reform if certain criteria are met. This
standard may be elected and applied prospectively
over time from March 12, 2020 through December 31,
2022 as reference rate reform activities occur. The
adoption of, and future elections under, this standard
are not expected to have a material impact on our
consolidated financial statements as the standard will
ease, if warranted, the requirements for accounting
for the future effects of reference rate reform. We
continue to monitor the impact the discontinuance of
LIBOR or other reference rates will have on our
contracts and other transactions.
Prospective Accounting Standards
Table 2.1 shows the relevant new amendments to
accounting standards, which are not yet effective or
adopted.
Standard / Interpretation
Table 2.1
Amended Standards
ASC 944
Long-Duration Contracts
Effective
date
•
ASU 2018-12 - Financial Services
- Insurance (Topic 944):
Targeted Improvements to the
Accounting for Long-Duration
Contracts
January 1,
2022
Targeted Improvements for Long Duration Contracts:
ASU 2018-12
presentation
In August 2018, the FASB issued guidance which
simplifies the amortization of deferred acquisition
costs. It also provides updates to the recognition,
measurement,
disclosure
and
requirements for
long duration contracts, which
generally do not apply to mortgage insurance. The
updated guidance requires deferred acquisition costs
to be amortized on a constant level basis over the
expected term of the related contracts, versus in
proportion to premium, gross profits, or gross
issued ASU
margins.
2020-11 deferring the effective date, so that it applies
for annual periods beginning after December 15,
2022, including interim periods within those annual
periods. We are currently evaluating the impacts the
In November 2020, FASB
MGIC Investment Corporation 2021 Annual Report | 79
Notes
adoption of
this guidance will have on our
consolidated financial statements, but do not expect
it to have a material impact.
NOTE 4
Earnings Per Share
Table 4.1 reconciles basic and diluted EPS amounts:
Earnings per share
Table
4.1
(In thousands, except per share data)
Basic earnings per share:
Net income
Weighted average common shares outstanding - basic
Basic earnings per share
Diluted earnings per share:
Net income
Interest expense, net of tax (1):
9% Debentures
Diluted income available to common shareholders
Weighted-average shares - basic
Effect of dilutive securities:
Unvested restricted stock units
9% Debentures
Weighted average common shares outstanding - diluted
Diluted income per share
Years Ended December 31,
2021
2020
2019
$
634,983 $
446,093 $
673,763
334,330
339,953
352,827
$
1.90 $
1.31 $
1.91
$
634,983 $
446,093 $
673,763
14,343
17,004
18,264
$
649,326 $
463,097 $
692,027
334,330
339,953
352,827
1,782
15,196
351,308
1,589
17,751
359,293
2,069
19,028
373,924
$
1.85 $
1.29 $
1.85
(1) Interest expense for the years ended December 31, 2021, 2020 and 2019 has been tax effected at a rate of 21%.
For the years ended December 31, 2021, 2020, and 2019, 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.
80 | MGIC Investment Corporation 2021 Annual Report
Notes
NOTE 5
Investments
FIXED INCOME SECURITIES
Our fixed income securities consisted of the following as of December 31, 2021 and 2020:
Details of fixed income investment securities by category as of December 31, 2021
Table
5.1a
(In thousands)
U.S. Treasury securities and obligations of U.S.
government corporations and agencies
Obligations of U.S. states and political
subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Foreign government debt
Total fixed income securities
Amortized
Cost
Allowance
for
Expected
Credit Loss
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$ 133,990 $
— $
285 $
(868) $ 133,407
2,408,688
2,704,586
150,888
309,991
315,330
360,436
13,749
—
—
—
—
—
—
—
133,361
75,172
(7,396)
2,534,653
(13,776)
2,765,982
830
2,397
5,736
609
—
(1,008)
(3,278)
(1,936)
(106)
(99)
150,710
309,110
319,130
360,939
13,650
$ 6,397,658 $
— $ 218,390 $
(28,467) $ 6,587,581
Details of fixed income investment securities by category as of December 31, 2020
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
Foreign government debt
Commercial paper
Amortized
Cost
Allowance
for
Expected
Credit Loss
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
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)
2,249,869
(1,728)
2,844,288
(18)
(838)
(1,125)
(692)
—
—
206,686
431,166
327,502
310,490
4,709
21,193
Total fixed income securities
$ 6,317,164 $
(49) $
349,140 $
(4,659) $ 6,661,596
The decrease in gross unrealized gains and the increase in gross unrealized losses in our fixed income securities
from December 31, 2020 to December 31, 2021 were principally related to an increase in market yields which
may include increased risk-free interest rates or wider credit spreads since the time of initial purchase.
We had $13.4 million and $14.1 million of investments at fair value on deposit with various states as of
December 31, 2021 and 2020, respectively, due to regulatory requirements of those states' insurance
departments. In connection with our insurance and reinsurance activities within insurance subsidiaries of MGIC,
we are required to maintain assets in trusts for the benefit of contractual counterparties. The fair value of the
investments and restricted cash and cash equivalents on deposit in these trusts was $189.8 million and $165.9
million at December 31, 2021 and 2020, respectively.
MGIC Investment Corporation 2021 Annual Report | 81
Notes
Table 5.2 compares the amortized cost and fair values of fixed income securities, by contractual maturity, as of
December 31, 2021. Actual maturities will differ from contractual maturities because borrowers may have the
right to call or prepay obligations with or without call or prepayment penalties. Because most mortgage and
asset-backed securities provide for periodic payments throughout their lives, they are listed in separate
categories.
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, 2021
Amortized Cost
Fair Value
$
338,988 $
1,751,297
1,745,569
1,425,159
5,261,013
150,888
309,991
315,330
360,436
341,604
1,795,249
1,824,307
1,486,532
5,447,692
150,710
309,110
319,130
360,939
Total as of December 31, 2021
$
6,397,658 $
6,587,581
Proceeds from sales of fixed income securities classified as available-for-sale were $471.8 million, $803.4
million, and $228.1 million during the years ended December 31, 2021, 2020, and 2019, respectively. Gross gains
of $9.0 million, $21.3 million, and $7.1 million and gross losses of $1.9 million, $8.8 million, and $3.5 million were
realized on those sales during the years ended December 31, 2021, 2020, and 2019, respectively.
We recorded no realized losses for the year ended December 31, 2021 related to our intent to sell certain
securities. 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.
EQUITY SECURITIES
The cost and fair value of investments in equity securities as of December 31, 2021 and December 31, 2020 are
shown in tables 5.3a and 5.3b below.
Details of equity investment securities as of December 31, 2021
Table
5.3a
(In thousands)
Equity securities
Details of equity investment securities as of December 31, 2020
Table
5.3b
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
15,838
264
(34)
16,068
Cost
Gross gains
Gross losses
Fair Value
17,522
695
(2)
18,215
Proceeds from the sale of equity securities were $2.6 million, $25.7 million, and $1.7 million during the years
ended December 31, 2021 2020, and 2019, respectively. Gross gains of $6.0 thousand, $1.8 million, and $1.6
million were realized on those sales during the year ended December 31, 2021, 2020, and 2019, respectively.
Gross losses of $2.3 thousand, $0.4 million, and zero were realized on those sales during the year ended
December 31, 2021, 2020, and 2019, respectively. For the year ended December 31, 2021, 2020, and 2019 we
recognized $0.5 million in net losses, $0.6 million and $0.2 million of net gains on equity securities still held as of
December 31, 2021, 2020, and 2019, respectively, which are reported in Net realized investment gains (losses) on
our consolidated statements of operations.
82 | MGIC Investment Corporation 2021 Annual Report
Notes
OTHER INVESTED ASSETS
Other invested assets represents our 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, 2021, that collateral consisted of fixed income securities included in our total investment portfolio,
and cash and cash equivalents, with a total fair value of $167.2 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, 2021 and 2020, 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 $28.5 million and $4.7 million as of December 31, 2021 and 2020, 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, 2021
Table
5.4a
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of U.S. states and political
subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Foreign government debt
Total
Less Than 12 Months
12 Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
91,154 $
(790) $
2,616 $
(78) $
93,770 $
(868)
452,021
865,085
100,064
180,586
89,889
177,663
13,649
(7,189)
(13,260)
(998)
(2,548)
(1,887)
(71)
(99)
15,540
10,997
1,552
31,641
1,511
21,973
—
(207)
(516)
467,561
876,082
(10)
101,616
(730)
212,227
(49)
(35)
—
91,400
199,636
13,649
(7,396)
(13,776)
(1,008)
(3,278)
(1,936)
(106)
(99)
$ 1,970,111 $
(26,842) $
85,830 $
(1,625) $ 2,055,941 $
(28,467)
Unrealized loss aging for securities by type and length of time as of December 31, 2020
Table
5.4b
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of U.S. states and political
subdivisions
Corporate debt securities
ABS
RMBS
CMBS
CLOs
Total
Less Than 12 Months
12 Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
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)
Based on current facts and circumstances, we believe the unrealized losses as of December 31, 2021 presented
in table 5.4a above are not indicative of the ultimate collectability of the current amortized cost of the securities
and that the securities are not impaired. The gross unrealized losses in all categories of our investments were
caused by changes in market yields, between the time of purchase and the respective fair value measurement
date. 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.
MGIC Investment Corporation 2021 Annual Report | 83
Notes
The unrealized losses in all categories of our investments as of December 31, 2020 were 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 included demand shocks in multiple sectors that originated in 2020.
There were 610 and 109 securities in an unrealized loss position as of December 31, 2021 and 2020,
respectively. As of December 31, 2021, the fair value as a percent of amortized cost of the securities in an
unrealized loss position was 99% and approximately 15% of the securities in an unrealized loss position were
backed by the U.S. Government. 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. All of the securities in an unrealized loss position are current with
respect to their interest obligations.
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
2021
2020
2019
$ 160,030 $ 157,065 $ 165,523
471
75
22
620
1,648
275
406
4,444
974
160,598
159,608
171,347
(4,160)
(5,212)
(4,302)
$ 156,438 $ 154,396 $ 167,045
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
2021
2020
2019
$ (154,555) $ 169,135 $ 220,139
84 | MGIC Investment Corporation 2021 Annual Report
Notes
NOTE 6
Fair Value Measurements
Recurring 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.
• Fixed income securities:
U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies: Securities with
valuations derived from quoted prices for identical instruments in active markets that we can access are
categorized in Level 1 of the fair value hierarchy. Securities valued by surveying the dealer community,
obtaining relevant trade data, benchmark quotes and spreads and incorporating this information in the
valuation process are categorized as Level 2 of the fair value hierarchy.
Corporate Debt Bonds are valued by surveying the dealer community, obtaining relevant trade data,
benchmark quotes and spreads and incorporating this information into the valuation process. These
securities are generally categorized in Level 2 of the fair value hierarchy.
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. These securities are generally categorized in Level 2 of the fair value
hierarchy.
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. These securities are generally categorized in Level 2 of the fair value hierarchy.
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. These securities are generally categorized in Level 2 of
the fair value hierarchy.
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. These securities are generally categorized in Level 2 of the fair value hierarchy.
Collateralized loan obligations ("CLOs") 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. These securities are generally categorized in Level 2 of the
fair value hierarchy.
Foreign government debt is valued by surveying the dealer community, obtaining relevant trade data,
benchmark quotes and spreads and incorporating this information into the valuation process. These
securities are generally categorized in Level 2 of the fair value hierarchy.
Commercial Paper, which has an original maturity greater than 90 days, is valued using market data for
comparable instruments of similar maturity and average yields. These securities are categorized in Level 2
of the fair value hierarchy.
• Equity securities: Consist of actively traded, exchange-listed equity securities, including exchange traded
funds (“ETFs”) and Bond Mutual Funds, with valuations derived from quoted prices for identical assets in
active markets that we can access. These securities are valued in Level 1 of the fair value hierarchy.
• 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. These securities are valued in level 1 of the
fair value hierarchy. Instruments in this category valued using market data for comparable instruments are
classified as level 2 in the fair value hierarchy.
MGIC Investment Corporation 2021 Annual Report | 85
Notes
• 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. These securities are categorized in level 3 of the fair value hierarchy.
Assets measured at fair value included those listed, by hierarchy level, in the following tables as of December 31,
2021 and 2020. The fair value of the assets is estimated using the process described above, and more fully in
Note 3 - "Significant Accounting Policies" to the consolidated financial statements.
Assets carried at fair value by hierarchy level as of December 31, 2021
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
Foreign government debt
Total fixed income securities
Equity securities
Cash Equivalents
Real estate acquired (1)
Total
$
133,407 $
102,153 $
31,254 $
2,534,653
2,765,982
150,710
309,110
319,130
360,939
13,650
6,587,581
16,068
254,230
1,507
—
—
—
—
—
—
—
102,153
16,068
254,230
—
2,534,653
2,765,982
150,710
309,110
319,130
360,939
13,650
6,485,428
—
—
—
$
6,859,386 $
372,451 $
6,485,428 $
—
—
—
—
—
—
—
—
—
—
—
1,507
1,507
Assets carried at fair value by hierarchy level as of December 31, 2020
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
Foreign government debt
Commercial paper
Total fixed income securities
Equity securities
Cash Equivalents
Real estate acquired (1)
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
(1)
Real estate acquired through claim settlement, which is held for sale, is reported in "Other assets" on the consolidated
balance sheets.
Certain financial
insurance contracts, are excluded from fair value disclosure
requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level
instruments,
including
86 | MGIC Investment Corporation 2021 Annual Report
Notes
2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are
included in Note 5 - "Investments."
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, 2021 and 2020 is shown in table 6.2 below.
There were no losses included in earnings for the years ended December 31, 2021 and 2020 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,
Table
6.2
(In thousands)
Beginning balance
Purchases
Sales
Included in earnings and reported as losses incurred, net
Real Estate Acquired
2021
2020
$
1,092 $
4,836
(4,806)
385
7,252
8,609
(15,429)
660
1,092
Ending balance
$
1,507 $
FINANCIAL LIABILITIES NOT CARRIED AT FAIR VALUE
Other invested assets represents our 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% and 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. 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 assets and liabilities disclosed, but not
carried, at fair value as of December 31, 2021 and 2020.
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, 2021
December 31, 2020
Carrying Value
Fair Value
Carrying Value
Fair Value
$
$
3,100 $
3,100 $
3,100 $
3,100
155,000 $
157,585 $
155,000 $
241,255
640,253
110,204
256,213
686,875
151,000
240,597
638,782
208,814
160,865
261,752
696,449
273,569
Total financial liabilities
$
1,146,712 $
1,251,673 $
1,243,193 $
1,392,635
The 5.75% Notes, 5.25% Notes, and 9% Debentures are obligations of our holding company, MGIC Investment
Corporation.
MGIC Investment Corporation 2021 Annual Report | 87
Notes
NOTE 7
Debt
DEBT OBLIGATIONS
Table 7.1 shows the carrying value of our long-term
debt obligations as of December 31, 2021 and 2020.
Long-term debt obligations
Table
7.1
(In millions)
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
December 31,
2021
2020
$ 155.0 $ 155.0
241.3
240.6
640.2
110.2
638.8
208.8
Long-term debt, carrying value
$ 1,146.7 $ 1,243.2
The 5.75% Senior Notes (“5.75% Notes”), 5.25% Senior
Notes ("5.25% Notes") and 9% Convertible Junior
(“9% Debentures”) are
Subordinated Debentures
obligations of our holding company, MGIC Investment
Corporation. The Federal Home Loan Bank Advance
(“FHLB Advance”) is an obligation of MGIC.
2021 Transactions
In December 2021, we repurchased $98.6 million in
aggregate principal amount of our 9% Debentures at a
purchase price of $135.5 million, plus accrued
interest. The repurchase of 9% Debentures resulted in
a $36.9 million loss on debt extinguishment on our
consolidated statement of operations and a reduction
in our potentially dilutive shares by approximately
7.5 million shares.
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
incurred approximately
$2.0 million of other expenses associated with the
issuance of these notes.
fees, we
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
loss on debt extinguishment of
reflected as a
$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.
FHLB Advance
MGIC borrowed $155.0 million in the form of a fixed
rate advance from the Federal Home Loan Bank of
Chicago ("Advance"). Interest on the Advance is
payable monthly at an annual rate, fixed for the term
of the Advance, of 1.91%. The principal of the
Advance matures on February 10, 2023. MGIC may
prepay the Advance at any time. Such prepayment
would be below par if interest rates have risen after
the Advance was originated, or above par if interest
rates have declined. The Advance is secured by
eligible collateral whose market value must be
maintained at 102% of the principal balance of the
Advance. MGIC provided eligible collateral from its
investment portfolio.
5.75% Notes
Interest on the 5.75% Notes is payable semi-annually
on February 15 and August 15 of each year. We have
the option to redeem these notes, in whole or in part,
at any time or from time to time prior to maturity at a
redemption price equal to the greater of (i) 100% of
the aggregate principal amount of the notes to be
redeemed and (ii) the make-whole amount, which is
the sum of the present values of the remaining
scheduled payments of principal and
interest
discounted at the treasury rate defined in the notes
plus 50 basis points and accrued interest.
The 5.75% Notes have covenants and events of
default customary for securities of this nature, 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%
including their covenants and events of
Notes,
88 | MGIC Investment Corporation 2021 Annual Report
default. We were in compliance with all covenants as
of December 31, 2021.
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
is the
interest. The make-whole amount
unpaid
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 and events of
default customary for securities of this nature, 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 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, 2021.
9% Debentures
to
the maturity date. This
The 9% Debentures are currently convertible, at the
holder's option, at a conversion rate, which is subject
to adjustment, of 76.5496 common shares per $1,000
principal amount of the 9% Debentures at any time
prior
represents a
conversion price of approximately $13.06 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.
Notes
The 9% Debentures include a feature that allows us, at
our option, to make a cash payment to converting
holders in lieu of issuing shares of common stock
upon conversion of the 9% Debentures. We may
redeem the 9% Debentures in whole or in part from
time to time, at our option, at a redemption price equal
to 100% of the principal amount of the 9% Debentures
being redeemed, plus any accrued and unpaid
interest, if the closing sale price of our common stock
exceeds $16.98 (adjusted pro rata for changes in the
conversion price) 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
interest, under an optional deferral
may defer
provision, for one or more consecutive
interest
periods up to 10 years without giving rise to an event
of default. Deferred interest will accrue additional
interest at the rate then applicable to the debentures.
During an optional deferral period we may not pay or
declare dividends on our common stock.
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.
MGIC Investment Corporation 2021 Annual Report | 89
Notes
We are not required to issue under the Alternative
Payment Mechanism a total of more than 10 million
shares of common stock, including shares underlying
qualifying warrants. In addition, we may not issue
under the Alternative Payment Mechanism qualifying
preferred stock
if the total net proceeds of all
issuances would exceed 25% of the aggregate
principal amount of the debentures.
The Alternative Payment Mechanism does not apply
interest
during any period between scheduled
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, 2021. The 9% Debentures
rank junior to all of our existing and future senior
indebtedness.
In February 2022, we repurchased $42.0 million
aggregate principal amount of our 9% Debentures at
purchase prices of $57.3 million, plus accrued
interest.
INTEREST PAYMENTS
Interest payments were $71.7 million during 2021,
$54.3 million during 2020 and $50.8 million during
2019.
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. Such
loans are referred to as being in our delinquency
inventory. Case
reserves are established by
estimating the number of loans in our delinquency
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 estimated losses
from delinquencies we estimate have occurred prior
to the close of an accounting period, but have not yet
been
reserves are also
established using estimated claim rates and claim
severities
reported
to us.
IBNR
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 (all else being
equal, the longer the period between delinquency and
claim filing, the greater the severity); 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
impact of the
unemployment and the continued
COVID-19 pandemic,
in
leading
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.
to a reduction
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. Given the uncertainty surrounding the
long-term impact of COVID-19, it is difficult to predict
related
the ultimate effect of
delinquencies and
loss
incidence.
forbearances on our
the COVID-19
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 claim 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, 2021, 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 +/- $19 million.
relating
incurred
to delinquencies
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
that
losses
occurred in the current year represents the estimated
amount to be ultimately paid on such delinquencies.
The amount of
to
delinquencies that occurred in prior years represents
the difference between the actual claim rate and
claim severity associated with those delinquencies
resolved
in the current year compared to the
estimated claim rate and claim severity at the prior
year-end, as well as a re-estimation of amounts to be
incurred
relating
losses
90 | MGIC Investment Corporation 2021 Annual Report
Notes
ultimately paid on delinquencies continuing from the
end of the prior year. This re-estimation of the claim
rate and claim 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
level of
loan exposure, changes
delinquencies by geography and changes in average
loan exposure.
in the relative
second and third quarter of 2020). This was offset by
the recognition of a probable loss of $6.3 million
related to litigation of our claims paying practices and
adverse development on LAE
reserves and
reinsurance. For the year ended December 31, 2020
we experienced adverse
loss development of
$19.6 million on previously received delinquencies
primarily related to claim severity and adjustments to
LAE reserves.
Losses incurred on delinquencies that occurred in the
current year decreased in 2021 compared to 2020 due
to a decrease in new delinquency notices reported.
New delinquency notices and IBNR reserve estimates
increased in 2020 due to the impact of the COVID-19
pandemic.
In 2021, we experienced favorable loss development
of $60.0 million on previously received delinquencies
primarily due to the decrease in the claim rate on pre-
COVID-19 and peak COVID-19 delinquencies (those
delinquencies for which notices were received in the
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. In light of
the uncertainty caused by the COVID-19 pandemic,
foreclosure moratoriums and
specifically
forbearance plans, the average time it takes to receive
a claim has increased.
the
Table 8.1 provides a reconciliation of beginning and ending loss reserves as of and for the past three years:
Development of loss reserves
8.1
Table
(In thousands)
Reserve at beginning of year
Less reinsurance recoverable
Net reserve at beginning of year
Losses incurred:
Losses and LAE incurred in respect of delinquent notices received in:
Current year
Prior years (1)
Total losses incurred
Losses paid:
Losses and LAE paid in respect of delinquent notices received in:
Current year
Prior years
Reinsurance terminations (2)
Total losses paid
Net reserve at end of year
Plus reinsurance recoverables
Reserve at end of year
2021
880,537 $
2020
555,334 $
2019
674,019
$
95,042
785,495
21,641
533,693
33,328
640,691
124,592
(60,015)
64,577
345,170
19,604
364,774
189,581
(71,006)
118,575
664
68,769
(35,978)
33,455
816,617
66,905
3,069
109,923
(20)
112,972
785,495
95,042
4,018
235,551
(13,996)
225,573
533,693
21,641
$
883,522 $
880,537 $
555,334
(1)
(2)
A positive number for prior year loss development indicates a deficiency of prior year reserves. A negative number for
prior year loss development indicates a redundancy of prior year loss reserves. See the following table for more
information about prior year loss development.
In a termination, amounts for any incurred but unpaid losses are paid to us. As a result, the amount due from the
reinsurers is reclassified from reinsurance recoverable on loss reserves to reinsurance recoverable on paid losses,
resulting in no impact on losses incurred. (See Note 9 - "Reinsurance")
MGIC Investment Corporation 2021 Annual Report | 91
Notes
The prior year development of the reserves in 2021, 2020 and 2019 is reflected in the table 8.2 below.
Reserve development on previously received delinquencies
8.2
Table
(In thousands)
2021
2020
2019
(Decrease) in estimated claim rate on primary delinquencies
$
(82,904) $
(2,536) $ (111,848)
Increase (decrease)in estimated claim severity on primary delinquencies
Change in estimates related to pool reserves, LAE reserves, reinsurance and other
Total prior year loss development (1)
310
22,579
13,535
8,605
(434)
41,276
$
(60,015) $
19,604 $
(71,006)
(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.
92 | MGIC Investment Corporation 2021 Annual Report
Notes
Historically as a delinquency ages it is more likely to
result in a claim. The number of consecutive months
that a borrower has been delinquent is shown in table
8.4 below.
Primary delinquency inventory - consecutive months
delinquent
Table
8.4
December 31,
2021
2020
2019
3 months or less
7,586
11,542
9,447
4 - 11 months
12 months or more (1)
7,990
34,620
9,664
17,714
11,548
10,917
Total
33,290
57,710
30,028
3 months or less
4 - 11 months
12 months or more
23 %
24 %
53 %
20 %
60 %
20 %
32 %
32 %
36 %
Total
100 %
100 %
100 %
Primary claims
received inventory
included in ending
delinquent inventory
211
159
538
Approximately 20%, 31%, and 36% 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, 2021, 2020
and 2019, respectively.
The increase in loans in the delinquency inventory that
are 12 months or more consecutive months
delinquent compared to December 31, 2020
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
second half of 2020 and throughout 2021.
POOL INSURANCE DEFAULT INVENTORY
insurance default
inventory was 498 at
Pool
December 31, 2021, 680 at December 31, 2020, and
653 at December 31, 2019.
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 $37 million and $30 million at
December 31, 2021 and 2020, respectively.
DELINQUENCY INVENTORY
in
A roll-forward of our primary delinquency inventory for
the years ended December 31, 2021, 2020, and 2019
appears
information
table 8.3 below. The
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
Beginning delinquent
inventory
New Notices
Cures
Paid claims
Rescissions and
denials
Other items
removed from
inventory
Ending delinquent
inventory
2021
2020
2019
57,710
30,028
32,898
42,432
106,099
54,239
(64,896)
(76,107)
(52,035)
(1,223)
(2,245)
(4,267)
(38)
(65)
(168)
(695)
—
(639)
33,290
57,710
30,028
(1)
During 2021 and 2019, our losses paid included
amounts paid upon commutation of coverage on
pools of non-performing loans ("NPLs"). As a result of
these payments 695 items were removed from the
delinquency
inventory with an amount paid of
$13.8 million in 2021. During 2019, 639 items were
removed from delinquency inventory with an amount
paid of $30.0 million.
COVID-19 Activity
the
to reduce
including the high
Our delinquency notices increased beginning in the
second quarter of 2020 because of the impacts of the
COVID-19 pandemic,
level of
unemployment and economic uncertainty resulting
from measures
transmission of
COVID-19. Starting in the third quarter 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 18 months: an
initial forbearance period of up to six months; if
requested by the borrower, an extension of up to six
months; and, for loans in a COVID-19 forbearance
plan as of February 28, 2021, an additional extension
up to six months, subject to certain limits.
MGIC Investment Corporation 2021 Annual Report | 93
Each of our QSR transactions typically have annual
loss ratio caps of 300% and lifetime loss ratios of
200%.
Notes
NOTE 9
Reinsurance
Our consolidated financial statements reflect the
effects of assumed and ceded
reinsurance
transactions. Assumed reinsurance refers to the
acceptance of certain insurance risks that other
insurance companies have underwritten. Ceded
reinsurance involves transferring certain insurance
risks (along with,
in the case of quota share
reinsurance, the related earned premiums) we have
underwritten to other insurance companies who agree
to share
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
reinsurance
agreements that were in effect through December 31,
2020.
immaterial captive
these
Table 9.1 below shows the effect of all reinsurance
agreements on premiums earned and losses incurred
in the consolidated statements of
as reflected
operations.
Reinsurance
Table
9.1
(In thousands)
2021
2020
2019
Years ended December 31,
Premiums earned:
Direct
Assumed
Ceded
Net premiums
earned
Losses incurred:
Direct
Assumed
Ceded
Net losses
incurred
$ 1,167,592 $ 1,199,824 $ 1,155,240
9,858
10,848
5,085
(163,031)
(188,729)
(129,337)
1,014,419
1,021,943
1,030,988
74,496
442,194
130,100
(57)
555
(125)
(9,862)
(77,975)
(11,400)
$ 64,577 $ 364,774 $ 118,575
QUOTA SHARE REINSURANCE
We have entered into quota share reinsurance ("QSR")
transactions with panels of third-party reinsurers to
cede a fixed quota share percentage of 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
transactions.
94 | MGIC Investment Corporation 2021 Annual Report
Notes
Table 9.2 below provides additional detail regarding our QSR transactions in effect during 2021.
Reinsurance
Table
9.2
Quota Share Contract
Policy Year
Quota Share %
2015 QSR
2017 QSR (2)
2018 QSR (2)
2019 QSR
2020 QSR
Prior to 2017
2017
2018
2019
2020
2020 QSR and 2021 QSR
2020 - 2021
2021 QSR
2022 QSR
Credit Union QSR (3)
2021
2022
2020-2025
15.0%
30.0%
30.0%
30.0%
12.5%
17.5%
12.5%
15.0%
65.0%
Annual Loss
Ratio to Exhaust
Profit
Commission (1)
68.0%
60.0%
62.0%
62.0%
62.0%
62.0%
57.5%
57.5%
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, 2032
December 31, 2033
December 31, 2039
(1) We will receive a profit commission provided the annual loss ratio on policies covered under the transaction remains
below this ratio.
(2) 2017 and 2018 QSR Transactions were terminated effective December 31, 2021.
(3) Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions.
We have executed an agreement with a group of unaffiliated reinsurers for a reinsurance transaction with an
effective date of January 1, 2022 with a similar structure to our existing QSR transactions that will cover most of
our NIW in 2022 (with an additional 15.0% quota share) and 2023 (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 62.0%.
We can elect to terminate the QSR Transactions 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 which can, in each case be elected by us for a fee. 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 to the percentage showed in 9.3.
Reinsurance
Table
9.3
Quota Share Contract
2015 QSR
2019 QSR
2020 QSR
2020 QSR and 2021 QSR, 2020 Policy
year
2020 QSR and 2021 QSR, 2021 Policy
year
2021 QSR
Optional Termination Date (1)
June 30, 2021
Optional Quota Share
% Reduction Date (2)
NA
Quota Share % Reduction
NA
25% or 20%
10.5% or 8%
July 1, 2020
July 1, 2021
December 31, 2021
December 31, 2022
December 31, 2022
December 31, 2023
December 31, 2023
July 1, 2021
14.5% or 12%
July 1, 2022
July 1, 2022
14.5% or 12%
10.5% or 8%
2022 QSR
(1) We can elect early termination of the QSR transaction beginning on this date, and bi-annually thereafter.
(2) We can elect to reduce the quota share percentage beginning on this date, and bi-annually thereafter.
July 1, 2023
December 31, 2024
12.5% or 10%
MGIC Investment Corporation 2021 Annual Report | 95
Notes
Table 9.4 provides a summary of our QSR Transactions, excluding captive agreements, for 2021, 2020, and 2019.
Quota share reinsurance
Table
9.4
(In thousands)
2021
2020
2019
Ceded premiums written and earned, net
of profit commission
$
118,537 $
167,930 $
Years ended December 31,
Ceded losses incurred
Ceding commissions (1)
Profit commission
9,862
53,460
153,759
78,012
48,077
72,452
111,550
11,395
48,793
139,179
(1)
Ceding commissions are reported within Other underwriting and operating expenses, net on the consolidated statements
of operations.
We incurred an early termination fee of $5 million for the termination of our 2017 and 2018 QSR Transactions
effective December 31, 2021. The reinsurance recoverable on paid losses as of December 31, 2021 includes
$36 million due from the reinsurers participating in the 2017 and 2018 QSR Transactions for loss and LAE
reserves incurred at the time of termination.
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, ceded premiums, ceding commissions, profit
commission, and ceded loss paid and LAE paid are settled net on a quarterly basis. The ceded premiums due
after deducting the related ceding commission and profit commission is reported within "Other liabilities" on the
consolidated balance sheets. The reinsurance recoverable on loss reserves related to our QSR Transactions was
$66.9 million as of December 31, 2021 and $95.0 million as of December 31, 2020. The reinsurance recoverable
balance is secured by funds on deposit from the reinsurers, the minimum amount of which is based on the
greater of 1) a reinsurer's funding requirements under PMIERs or 2) ceded reserves and unpaid losses. 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 2021.
96 | MGIC Investment Corporation 2021 Annual Report
Notes
EXCESS OF LOSS REINSURANCE
We have aggregate excess of loss reinsurance transactions (“Home Re Transactions”) with unaffiliated special
purpose insurers (“Home Re Entities”). For the reinsurance coverage periods, we retain the first layer of the
respective aggregate losses paid, and a Home Re special purpose entity will then provide second layer coverage
up to the outstanding reinsurance coverage amount. We retain losses paid in excess of the outstanding
reinsurance coverage amount. Subject to certain conditions, the reinsurance coverage decreases over a period of
either 10 or 12.5 years, depending on the transaction, as the underlying covered mortgages amortize or are
repaid, or mortgage insurance losses are paid.
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. Each ILN is 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.
When a “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.
As of December 31, 2021 a "Trigger Event" has occurred on our Home Re 2018-1 and Home Re 2019-1 ILN
transactions because the reinsured principal balance of loans that were reported 60 or more days delinquent
exceeded a percentage of the total reinsured principal balance of loans specified under each transaction. A
"Trigger Event" has also occurred on the Home Re 2021-2 ILN transactions because the credit enhancement of
the most senior tranche is less than the target credit enhancement.
Table 9.5 provides a summary of our Home Re Transactions as of December 31, 2021, December 31, 2020 and
December 31, 2019.
Excess of Loss Reinsurance
Table 9.5
($ in thousands)
Home Re 2021-2,
Ltd.
Home Re 2021-1,
Ltd.
Home Re 2020-1,
Ltd.
Home Re 2019-1,
Ltd.
Home Re 2018-1,
Ltd.
Issue Date
August 3, 2021
February 2, 2021
October 29, 2020
May 25, 2019
October 30, 2018
Policy Inforce Dates
Optional Call Date (1)
Legal Maturity
Initial First Layer
Retention
Initial Excess of Loss
Reinsurance Coverage
2021
Remaining First Layer
Retention
Remaining 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
January 1, 2021 -
May 28, 2021
August 1, 2020 -
December 31,
2020
January 1, 2020 -
July 31, 2020
January 1, 2018 -
March 31, 2019
July 1, 2016 -
December 31,
2017
July 25, 2028
January 25, 2028
October 25, 2027
May 25, 2026
October 25, 2025
12.5 years
12.5 years
190,159
211,159
10 years
275,283
10 years
185,730
10 years
168,691
398,429
398,848
412,917
315,739
318,636
190,159
211,142
275,204
183,917
165,365
398,429
387,830
234,312
208,146
218,343
—
—
—
—
—
—
—
—
275,283
184,514
166,005
412,917
208,146
218,343
—
—
185,636
167,779
271,021
260,957
(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after
the respective Optional Call date.
MGIC Investment Corporation 2021 Annual Report | 97
Notes
the Home Re Entity's
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 remaining reinsurance coverage levels, and the
investment income collected on the collateral assets
in reinsurance trust account and used to
held
collateralize
reinsurance
obligation
to MGIC. The amount of monthly
reinsurance coverage premium ceded will fluctuate
due to changes in the reference rate and changes in
money market rates that affect investment income
collected on the assets in the reinsurance trust. The
Home Re 2021-2 Transactions references SOFR, while
the remaining Home Re Transactions reference the
one-month LIBOR. As a result, we concluded that each
Home Re Transaction contains an embedded
derivative that is accounted for separately as a
the
freestanding derivative. The fair values of
derivatives at December 31, 2021 and December 31,
2020, were not material to our consolidated balance
sheet, and the change in fair values during the years
ended December 31, 2021, December 31, 2020 and
December 31, 2019 were not material to our
consolidated statements of operations. Total ceded
premiums under the Home Re transaction were $44.5
million, $20.8 million, and $17.6 million for the years
ended December 31, 2021, December 31, 2020 and
December 31, 2019.
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 that could be significant to the Home
Re Entity, consolidation of the Home Re Entities is not
required.
We are required to disclose our maximum exposure to
loss, which we consider to be an amount that we
could be required to record in our statements of
operations, as a result of our involvement with the
VIEs under our Home Re Transactions. As of
December 31, 2021, December 31, 2020 and
December 31, 2019, 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 the VIEs under our reinsurance transactions. We
are unable to determine the timing or extent of claims
from losses that are ceded under the reinsurance
to
the
trust agreements. The
transactions. 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 transactions. 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,
trust
pursuant
in
agreements are governed by, and construed
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 transactions
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 transactions should its claims
not be paid. We consider our exposure to loss from
our reinsurance transactions with the VIEs to be
remote.
Table 9.6 presents the total assets of the Home Re
Entities as of December 31, 2021 , December 31, 2020
and December 31, 2019.
Home Re Entities total assets
Table
9.6
(In thousands)
Home Re Entity
December 31, 2021
Home Re 2018-1 Ltd.
Home Re 2019-1 Ltd.
Home Re 2020-1 Ltd.
Home Re 2021-1 Ltd.
Home Re 2021-2 Ltd.
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.
Total VIE Assets
$
$
$
218,343
208,146
251,387
398,848
398,429
218,343
208,146
412,917
269,451
283,150
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
98 | MGIC Investment Corporation 2021 Annual Report
Notes
The total calculated PMIERs credit for risk ceded
under our Home Re Transactions is generally based
on the PMIERs requirement of the covered policies
and the attachment and detachment points of the
coverage, all of which fluctuate over time. (see Note 1
- "Nature of Business" and Note 2 - "Basis of
Presentation" ).
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.
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, 2021, 2020 and 2019 are included in table 10.1 below.
Components of other comprehensive income (loss)
10.1
Table
(In thousands)
2021
2020
2019
Net unrealized investment (losses) gains on securities without an allowance
for credit losses
$
(154,555) $
169,135 $
220,139
Income tax benefit (expense)
Net of taxes
Net changes in benefit plan assets and obligations
Income tax benefit (expense)
Net of taxes
Total other comprehensive income (loss)
Total income tax benefit (expense)
32,456
(122,099)
31,613
(6,638)
24,975
(122,942)
25,818
(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 (loss), net of tax
$
(97,124) $
144,113 $
196,922
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, 2021, 2020 and 2019 are included in table 10.2 below.
Reclassifications from Accumulated Other Comprehensive Income (Loss)
Table
10.2
(In thousands)
2021
2020
2019
Reclassification adjustment for net realized (losses) gains included in net
income (1)
$
10,455 $
13,862 $
Income tax benefit (expense)
Net of taxes
Reclassification adjustment related to benefit plan assets and obligations (2)
Income tax benefit (expense)
Net of taxes
Total reclassifications
Income tax benefit (expense)
Total reclassifications, net of tax
(2,195)
8,260
(9,779)
2,053
(7,726)
676
(142)
(2,912)
10,950
(15,968)
3,353
(12,615)
(2,106)
441
3,637
(763)
2,874
(8,097)
1,701
(6,396)
(4,460)
938
$
534 $
(1,665) $
(3,522)
(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.
MGIC Investment Corporation 2021 Annual Report | 99
Notes
A roll-forward of AOCI (AOCL) for the years ended December 31, 2021, 2020, and 2019, 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, 2018, net of tax
$
(35,389) $
(88,825) $
(124,214)
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
Balance, December 31, 2020, net of tax
Other comprehensive income (loss) before
reclassifications
Less: Amounts reclassified from AOCL
176,784
2,874
138,521
144,566
10,950
272,137
(113,839)
8,260
16,616
(6,396)
(65,813)
(2,118)
(12,615)
(55,316)
17,249
(7,726)
Balance, December 31, 2021, net of tax
$
150,038 $
(30,341) $
193,400
(3,522)
72,708
142,448
(1,665)
216,821
(96,590)
534
119,697
NOTE 11
Benefit Plans
We have a non-contributory defined benefit pension plan covering substantially all 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, 2021, 2020, and 2019 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, 2021 and 2020.
Components of net periodic benefit cost
Table
11.1
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
(In thousands)
12/31/2021
12/31/2020
12/31/2019
12/31/2021
12/31/2020
12/31/2019
1. Company Service Cost
$
7,569 $
7,342 $
8,345 $
1,508 $
1,263 $
2. Interest Cost
11,276
13,036
15,705
648
832
1,345
1,130
3. Expected Return on Assets
(20,657)
(22,139)
(19,466)
(8,863)
(7,407)
(5,785)
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
8. Total Expense for Year
—
—
(1,812)
(1,761)
—
4,584
—
—
—
(6,707)
(5,312)
(3,310)
—
(239)
5,490
5,251
3,439
6,012
—
(247)
6,578
6,331
4,570
10,369
—
(281)
8,412
8,131
12,715
1,933
—
213
(1,697)
(1,484)
(8,191)
—
—
51
(783)
(732)
—
(34)
—
(34)
(6,044)
(3,344)
—
—
$
9,451 $
14,939 $
14,648 $
(8,191) $
(6,044) $
(3,344)
100 | MGIC Investment Corporation 2021 Annual Report
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
Notes
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2021
12/31/2020
12/31/2021
12/31/2020
12/31/2021
12/31/2020
12/31/2021
12/31/2020
$
390,747 $
423,305 $
25,635 $
28,714
$
(391,698) $
(423,713) $
(25,635) $
(28,714)
391,555
411,245
140,839
119,024
N/A
(143)
N/A $
115,204 $
90,310
(12,468)
N/A
N/A
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2021
12/31/2020
12/31/2021
12/31/2020
$
84,045 $
98,899 $
(47,352) $
(30,565)
(747)
—
(988)
—
2,461
—
2,673
—
$
83,298 $
97,911 $
(44,891) $
(27,892)
The amortization of gains and losses resulting from differences in actual experience 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 2021 and 2020.
Change in projected benefit / accumulated benefit
Table
11.4
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2021
12/31/2020
12/31/2021
12/31/2020
1. Benefit Obligation at Beginning of Year
$
423,713 $
413,350 $
28,714 $
27,496
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
7,569
11,276
—
(10,018)
(40,482)
(362)
2
—
—
7,342
13,036
—
36,196
(40,260)
(5,953)
2
—
—
1,508
648
456
(3,574)
(1,963)
—
—
(154)
—
1,263
832
425
660
(1,975)
—
—
13
—
$
391,698 $
423,713 $
25,635 $
28,714
(1)
Includes lump sum payments of $27.6 million and $27.5 million in 2021 and 2020, respectively, from our pension plan to
eligible participants, which were former employees with vested benefits.
The actuarial gain for 2021 for the pension and supplemental executive retirement plans was primarily due to an
increase in the discount rate used to calculate the obligation. The actuarial loss for 2020 for the pension and
supplemental executive retirement plans was primarily due to a decrease in the discount rate used to calculate
MGIC Investment Corporation 2021 Annual Report | 101
Notes
the obligation. The actuarial gain for 2021 for other postretirement plans was primarily due to an increase in the
discount rate used to calculate the obligation. The actuarial loss for 2020 for the postretirement benefits plan
was primarily due to the decrease in the discount rate used to calculate the obligation. Table 11.7 below includes
the actuarial assumptions used to calculate the benefit obligations of our plans for 2021 and 2020.
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 2021 and 2020.
Change in plan assets
Table
11.5
(In thousands)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2021
12/31/2020
12/31/2021
12/31/2020
1. Fair Value of Plan Assets at Beginning of Year
$
411,245 $
402,691 $
119,024 $
99,590
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
7,162
—
(40,482)
(362)
13,992
—
12,453
—
(40,260)
(5,953)
42,314
—
—
456
—
425
(1,963)
(1,975)
—
23,773
(451)
—
21,409
(425)
8. Fair Value of Plan Assets at End of Year
$
391,555 $
411,245 $
140,839 $
119,024
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
12/31/2021
12/31/2020
12/31/2021
12/31/2020
$
97,911 $
98,589 $
(27,892) $
(15,281)
a. Recognized during year - Prior Service (Cost)/Credit
239
247
b. Recognized during year - Net Actuarial (Losses)/Gains
(11,502)
(16,948)
c. Occurring during year - Prior Service Cost
2
2
(213)
1,697
—
(51)
782
—
d. Occurring during year - Net Actuarial Losses/(Gains)
(3,352)
16,021
(18,483)
(13,342)
3. AOCI in Current Year
$
83,298 $
97,911 $
(44,891) $
(27,892)
102 | MGIC Investment Corporation 2021 Annual Report
Notes
The projected benefit obligations, net periodic benefit costs and accumulated postretirement benefit obligation
for the plans were determined using the following weighted average assumptions.
Actuarial assumptions
Table
11.7
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
12/31/2021
12/31/2020
12/31/2021
12/31/2020
3.05 %
3.00 %
2.80 %
2.80 %
5.25 %
3.00 %
N/A
N/A
N/A
2.75 %
3.00 %
2.50 %
3.30 %
5.75 %
3.00 %
N/A
N/A
N/A
2.85 %
2.35 %
N/A
N/A
N/A
N/A
2.35 %
7.50 %
N/A
3.20 %
7.50 %
N/A
6.50 %
6.00 %
5.00 %
2028
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
12/31/2021
12/31/2020
12/31/2021
12/31/2020
21 %
79 %
100 %
21 %
79 %
100 %
100 %
— %
100 %
100 %
— %
100 %
In accordance with fair value guidance, we applied the following fair value hierarchy in order to measure fair
value of our benefit plan assets:
è Level 1 Quoted prices for identical instruments in active markets that we can access. Financial assets using
Level 1 inputs include equity securities, mutual funds, money market funds, certain U.S. Treasury
securities and exchange traded funds ("ETFs").
è Level 2 Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments
in markets that are not active; and inputs, other than quoted prices, that are observable in the marketplace
for the instrument. The observable inputs are used in valuation models to calculate the fair value of the
instruments. Financial assets using Level 2 inputs include certain municipal, corporate and foreign bonds,
obligations of U.S. government corporations and agencies, and pooled equity accounts.
MGIC Investment Corporation 2021 Annual Report | 103
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, 2021 and 2020. There were no securities that used
Level 3 inputs.
Pension plan assets at fair value as of December 31, 2021
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, 2020
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
$
4,071 $
— $
—
32,947
—
—
—
221,033
—
20,093
34,103
79,308
4,071
221,033
32,947
20,093
34,103
79,308
$
37,018 $
354,537 $
391,555
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
The pension plan has implemented a strategy to reduce risk through the use of a targeted funded ratio. The
liability driven component is key to the asset allocation. The liability driven component seeks to align the duration
of the fixed income asset allocation with the expected duration of the plan liabilities or benefit payments. Overall
asset allocation is dynamic and specifies target allocation weights and ranges based on the funded status.
An improvement in funded status results in the de-risking of the portfolio, allocating more funds to fixed income
and less to equity. A decline in funded status would result in a higher allocation to equity. The maximum equity
allocation is 40%.
104 | MGIC Investment Corporation 2021 Annual Report
Notes
The primary focus in developing asset allocation
ranges for the portfolio is the assessment of the
portfolio's investment objectives and the level of risk
that is acceptable to obtain those objectives. To
achieve these objectives the minimum and maximum
allocation ranges for fixed income securities and
equity securities are:
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, 2021 included 2% that was
primarily invested in equity securities of emerging
market countries and another 18% was invested in
securities of companies primarily based in Europe and
the Pacific Basin.
Tables 11.12 and 11.13 show the current and
estimated future contributions and benefit payments.
Company contributions
Table
11.12
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2021
12/31/2021
Company
Contributions for the
Year Ending:
1. Current
2. Current + 1
$
7,162 $
6,500
—
—
The equity investments use combinations of mutual
funds, ETFs, and pooled equity account structures
focused on the following strategies:
Strategy
Objective
Investment types
Return seeking
growth
Return seeking
bridge
Funded ratio
improvement
over the long
term
Downside
protection in the
event of a
declining equity
market
● Global quality
growth
● Global low
volatility
● Enduring asset
● Durable company
income
government
investments can
agency,
The fixed income objective is to preserve capital and
to provide monthly cash flows for the payment of plan
liabilities. Fixed
include
government,
corporate,
mortgage-backed, asset-backed, and municipal
securities, and other classes of bonds. The duration
of the fixed income portfolio has an objective of being
within one year of the duration of the accumulated
benefit obligation. The fixed income investments have
an objective of a weighted average credit of A3/A-/A-
by Moody’s, S&P, and Fitch, respectively.
Tables 11.10a and 11.10b set forth the other
postretirement benefits plan assets at fair value as of
December 31, 2021 and 2020. All are Level 1 assets.
Other postretirement benefits plan assets at fair value as
of December 31, 2021
Table
11.10a
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
112,770
28,069
140,839
Other postretirement benefits plan assets at fair value as
of December 31, 2020
Table
11.10b
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
91,454
27,570
119,024
is designed to
Our postretirement plan portfolio
achieve the following objectives over each market
cycle and for at least 5 years:
è Total return should exceed growth
Consumer Price Index by 5.75% annually
in the
è Achieve competitive investment results
MGIC Investment Corporation 2021 Annual Report | 105
Notes
Benefits payments - total
Table
11.13
Pension and
Supplemental
Executive
Retirement
Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2021
12/31/2021
Actual Benefit
Payments for the Year
Ending:
1. Current
$
40,844 $
1,963
Expected Benefit
Payments for the Year
Ending:
2. Current + 1
3. Current + 2
4. Current + 3
5. Current + 4
6. Current + 5
7. Current + 6 - 10
28,806
29,023
28,247
28,320
28,815
131,716
1,713
1,888
2,000
2,148
2,108
9,854
Deferred tax components
Table
12.2
(In thousands)
2021
2020
Unearned premium reserves
$ 19,116 $
23,163
Benefit plans
Loss reserves
Unrealized appreciation in
investments
Deferred Policy Acquisition
Cost
Deferred compensation
Other, net
(21,360)
(13,977)
4,034
3,542
(39,883)
(72,341)
(4,551)
6,118
(2,886)
(4,528)
6,776
(2,677)
Net deferred tax liability
$ (39,412) $
(60,042)
We believe that all gross deferred tax assets at
December 31, 2020 and 2021 are fully realizable and
no valuation allowance has been established.
Table 12.3 summarizes the components of the
provision for income taxes:
PROFIT SHARING AND 401(K)
Provision for (benefit from) income taxes
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 in
2021 and 2020 respectively, and $7.4 million in 2019.
Table
12.3
(In thousands)
2021
2020
2019
Current Federal
$ 161,055 $ 85,574 $ 162,911
Deferred Federal
4,392
28,244
11,860
Other
1,347
(648)
(557)
Provision for income
taxes
$ 166,794 $ 113,170 $ 174,214
NOTE 12
Income Taxes
tax
Net deferred
the
liabilities
Consolidated Balance Sheet at December 31, 2021
and 2020 as a component of Other liabilities are as
follows:
included on
Deferred tax assets and liabilities
Table
12.1
(In thousands)
2021
2020
Total deferred tax assets
$
32,331 $
38,443
Total deferred tax liabilities
(71,743)
(98,485)
Net deferred tax liability
$
(39,412) $
(60,042)
Table 12.2 includes the components of the net
deferred tax liability as of December 31, 2021 and
2020.
Current federal income tax payments were $155.3
million, $79.6 million, and $158.3 million in 2021, 2020
and 2019, respectively. At December 31, 2021 we
owned $426.3 million of tax and loss bonds.
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
Tax exempt municipal bond
interest
Other, net
2021
2020
2019
21.0 % 21.0 %
21.0 %
(0.6) %
(0.9) %
(0.6) %
0.4 %
0.1 %
0.1 %
Effective tax rate
20.8 % 20.2 %
20.5 %
We have not recorded any uncertain tax positions
during 2020 and 2021 and have no unrecognized tax
benefits at December 31, 2020 and December 31,
2021. 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 2018.
106 | MGIC Investment Corporation 2021 Annual Report
NOTE 13
Shareholders' Equity
CHANGE IN ACCOUNTING POLICY
As of January 1, 2021, we adopted the updated
guidance for "Accounting for Convertible Instruments
in an Entity’s Own Equity”. The
and Contracts
application of this guidance resulted in a $68.3 million
cumulative effect adjustment to our 2021 beginning
retained earnings and paid in capital to reflect the 9%
Debenture as if we had always accounted for the debt
as a liability in its entirety.
SHARE REPURCHASE PROGRAMS
Repurchases may be made from time to time on the
open market (including through 10b5-1 plans) or
through privately negotiated transactions. In the last
half of 2021 we
repurchased approximately
19.0 million shares of our common stock at a
weighted average cost per share of $15.30, which
included commissions. We may repurchase up to an
additional $500 million of our common stock through
the end of 2023 under a share repurchase program
approved by our Board of Directors in October 2021.
In 2022, through February 18, we repurchased
approximately 4.9 million shares of our common
stock at a weighted average cost per share of $15.50,
which included commissions.
Prior to the COVID-19 pandemic, In 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.
2019, we
repurchased
During
approximately
8.7 million shares of our common stock at a weighted
average cost per share of $13.13, which included
commissions.
CASH DIVIDENDS
In the first and second quarters of 2021, we paid
quarterly cash dividends of $0.06 per share to
shareholders which totaled $41.1 million. In the third
and fourth quarters of 2021, we paid quarterly cash
dividends of $0.08 per share which
totaled
$53.6 million. On January 25, 2022, the Board of
Directors declared a quarterly cash dividend to
holders of the company's common stock of $0.08 per
share payable on March 2, 2022, to shareholders of
record at the close of business on February 16, 2022.
Notes
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
losses exceed 35% of
reserve when
premiums earned in a calendar year. For the year
ended 2021, MGIC did not withdraw amounts from its
contingency reserve. Changes in contingency loss
the statutory statement of
reserves
reserves are not
operations. Contingency
reflected as liabilities under GAAP and changes in
contingency loss reserves do not impact the GAAP
statements of operations.
incurred
impact
loss
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.
MGIC Investment Corporation 2021 Annual Report | 107
Notes
The statutory net income, policyholders’ surplus, and
insurance
contingency
subsidiaries, which agrees to amounts utilized in our
risk-to-capital calculations, are shown in table 14.1.
liability of our
reserve
Statutory financial information of insurance subsidiaries
Table
14.1
As of and for the Years Ended
December 31,
(In thousands)
2021
2020
2019
Statutory net income
$ 295,811 $ 65,201 $ 305,857
Statutory policyholders'
surplus
1,220,714
1,339,509
1,619,069
Contingency reserve
4,126,604
3,585,864
3,021,055
For the years ended December 31, 2021, 2020, and
2019 there were no surplus contributions made to
MGIC or distributions
insurance
subsidiaries to us. Dividends paid by MGIC are shown
in table 14.2 below.
from other
Surplus contributions and dividends of insurance
subsidiaries
Table
14.2
(In thousands)
Dividends paid by MGIC to
the parent company (1)
Years Ended December 31,
2021
2020
2019
$ 400,000 390,000
280,000
its
(1) Dividends paid in cash and/or investment securities. Also
in 2021 MGIC distributed to the holding company, as a
in MGIC Credit Assurance
dividend,
Corporation at an amount of $8.9 million. 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.
investment
STATUTORY CAPITAL REQUIREMENTS
the
Financial
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
“Financial
Requirements,
GSE
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-
if (i) the percentage
capital ratio will
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
requires a
risk-to-capital measure but
("MPP"). MGIC's
minimum policyholder position
“policyholder position”
its net worth or
includes
surplus, and its contingency loss reserve.
increase
instead
At December 31, 2021, MGIC’s risk-to-capital ratio
was 9.5 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $3.4 billion above the
It
that under
required MPP of $1.9 billion. The calculation of our
risk-to-capital ratio and MPP reflect credit for the risk
ceded under our reinsurance transactions.
is
possible
revised State Capital
the
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, 2021, the risk-to-capital ratio of our
combined insurance operations (which includes a
reinsurance affiliate) was 9.5 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.
DIVIDEND RESTRICTIONS
MGIC
is subject to statutory regulations as to
payment of dividends. The maximum amount of
dividends that MGIC may pay in any twelve-month
period without regulatory approval by the OCI is the
lesser of adjusted statutory net income or 10% of
statutory policyholders' surplus as of the preceding
calendar year end. Adjusted statutory net income is
defined for this purpose to be the greater of statutory
net income, net of realized investment gains, for the
calendar year preceding the date of the dividend or
statutory net income, net of realized investment gains,
for the three calendar years preceding the date of the
dividend less dividends paid within the first two of the
preceding
three calendar years. The maximum
dividend that could be paid is reduced by dividends
paid in the twelve months preceding the dividend
payment date. Before making any dividend payments
in 2022, we will notify the OCI to ensure it does not
object.
The OCI
recognizes only statutory accounting
principles prescribed, or practices permitted, by the
State of Wisconsin for determining and reporting the
financial condition and results of operations of an
insurance company. The OCI has adopted certain
prescribed accounting practices that differ from those
108 | MGIC Investment Corporation 2021 Annual Report
loss
reserves
record changes
the
through
in other states. Specifically, Wisconsin
found
the
in
domiciled companies
contingency
income
statement as a change in underwriting deduction. As
a result, in periods in which MGIC is increasing
contingency loss reserves, statutory net income is
reduced. For the year ended December 31, 2021,
MGIC’s increase in contingency loss reserves was
$534 million and statutory net income was $290
million. As of December 31, 2021, MGIC's statutory
policyholders' surplus was $1,217 million.
NOTE 15
Share-based Compensation Plans
We have certain share-based compensation plans.
Under the fair value method, compensation cost is
measured at the grant date based on the fair value of
the award and is recognized over the service period
which generally corresponds to the vesting period.
Awards under our plans generally vest over periods
ranging from one to three years, although awards to
our non-employee directors vest immediately.
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. 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. At December 31,
2021, 8.8 million shares were available for future
grant under the 2020 plan.
The compensation cost that has been charged
against income for share-based plans was $17.1
million, $13.8 million, and $18.9 million for the years
ended December 31, 2021, 2020 and 2019,
respectively. The
tax benefit
recognized for share-based plans was $1.8 million,
$1.7 million, and $2.7 million for the years ended
December 31, 2021, 2020, and 2019, respectively.
Table 15.1 summarizes restricted stock or restricted
stock unit (collectively called “restricted stock”)
activity during 2021.
income
related
Restricted stock
Table
15.1
Weighted
Average
Grant Date
Fair Market
Value
Restricted stock outstanding
at December 31, 2020
$
Granted (1)
Vested
Forfeited
13.57
12.83
14.97
13.87
Notes
Shares
4,139,243
1,370,542
(1,330,129)
(33,568)
Restricted stock
outstanding at December
31, 2021
$
12.88
4,146,088
(1) Approximately 71% of the shares granted in 2021 are
subject to performance conditions under which the target
number of shares granted may vest up to 200%.
At December 31, 2021, 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 2020 and 2019 was
$13.62 and $11.92, 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 2021, 2020
and 2019 was $15.1 million, $20.4 million, and $13.7
million, respectively.
share-based
compensation
As of December 31, 2021, there was $38.1 million of
total unrecognized compensation cost related to non-
vested
compensation agreements
granted under the plans. Of this total, $32.6 million of
to
unrecognized
performance shares and $5.5 million relates to time
vested shares. A portion of the unrecognized costs
associated with the performance shares may or may
not be recognized in future periods, depending upon
whether or not
the performance and service
conditions are met. The cost associated with the time
vested shares is expected to be recognized over a
weighted-average period of 1.7 years.
relate
costs
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, 2021.
MGIC Investment Corporation 2021 Annual Report | 109
Notes
Minimum future operating lease payments
Table
16.1
(In thousands)
2022
2023
2024
2025
2026 and thereafter
Total
Amount
771
416
211
45
—
1,443
$
$
Total lease expense under operating leases was $1.3
million in 2021, $1.9 million in 2020, and $2.1 million
in 2019.
NOTE 17
Litigation and Contingencies
claims paying practices. Although it is possible that, if
not resolved by negotiation, 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 $27 million
more than the amount of probable loss we have
recorded. 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
files
recent
years, an
rescissions.
to determine
loan and servicing
Before paying an insurance claim, generally we review
the
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").
immaterial
percentage of claims received in a quarter have been
resolved by
In 2021 and 2020,
curtailments reduced our average claim paid by
respectively. The
approximately 4.4% and 3.6%,
COVID-19-related
and
forbearance plans have decreased our claims paid
activity beginning in the second quarter of 2020. It is
difficult to predict the level of curtailments once the
foreclosure moratoriums and forbearance plans end.
Our
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.
loss reserving methodology
foreclosure moratoriums
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
legal
dispute ultimately may be determined by
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, including
recording a probable loss of $6.3 million in 2021. In
those cases, until settlement negotiations or legal
proceedings are concluded (including the receipt of any
necessary GSE approvals), it is possible that we will
record an additional loss. We are currently involved in
discussions and/or proceedings with respect to our
in
involved
Mortgage insurers, including MGIC, have in the past
been
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 ,
FCRA, and other
laws,
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.
laws. Under
relevant
Through a non-insurance subsidiary, we provide an
outsourced underwriting service to our customers
known as contract underwriting. As part of the contract
underwriting activities, that subsidiary is responsible
for the quality of the underwriting decisions
in
accordance with the terms of the contract underwriting
agreements with customers. That subsidiary may be
required to provide certain remedies to its customers if
certain standards relating to the quality of our
underwriting work are not met, and we have an
established reserve for such future obligations. Claims
for remedies may be made a number of years after the
underwriting work was performed. The related contract
underwriting remedy expense for each of the years
ended December 31, 2021, 2020, and 2019, was
immaterial to our consolidated financial statements.
In addition to the matters described above, we are
involved in other disputes and 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 disputes and legal proceedings
will not have a material adverse effect on our financial
position or results of operations.
110 | MGIC Investment Corporation 2021 Annual Report
Directors
MGIC Investment Corporation
Analisa M. Allen
Jay C. Hartzell
Information Technology Consultant
President
Gerson Lehrman Group
University of Texas at Austin
Former CIO of Data & Analytics
JP Morgan Chase's Consumer Bank
Timothy A. Holt
Melissa B. Lora
Former President
Taco Bell International
Restaurant company
Daniel A. Arrigoni
Chief Investment Officer
Chief Executive Officer
Former President & Chief
Aetna, Inc.
MGIC Investment Corporation
Former Senior Vice President &
Timothy J. Mattke
Executive Officer
Diversified health care benefits
U.S. Bank Home Mortgage Corp.
company
Home loan originator
and servicer
C. Edward Chaplin
Former President & CFO
MBIA Inc.
Jodeen A. Kozlak
Founder and CEO
Kozlak Capital Partners, LLC
Former Senior Vice President
of Human Resources
Provider of financial guarantee
Alibaba Group
insurance
Curt S. Culver
Chairman
Former Chief Executive Officer
MGIC Investment Corporation
Multinational Conglomerate
Michael E. Lehman
Former Executive Vice President & CFO
Sun Microsystems
Moody’s Analytics, Inc.
Risk measurement and
management firm
Gary A. Poliner
Former President
Northwestern Mutual Life Ins. Co.
Financial services company
Sheryl L. Sculley
Former City Manager (CEO)
City of San Antonio
Mark M. Zandi
Chief Economist
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
Julie K. Sperber
Controller & Chief Accounting Officer
Martha F. Tsuchihashi
Assistant Secretary
MGIC Investment Corporation 2021 Annual Report | 111
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
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
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
Michael E. Jacobson
Product Strategy
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
Gary J. Johnson
Data Science
Sri Kadasinghanahalli
Systems Development
Mark J. Krauter
National Accounts
Michael L. Kull
Managing Director
Elyse M. Mitchell
National Accounts
Stacey B. Murphy
Talent and Total Rewards
112 | MGIC Investment Corporation 2021 Annual Report
Performance Graph
The graph below compares the cumulative total return on (a) our Common Stock, (b) a composite peer group
index selected by us, (c) the Russell 2000 Financial Services Index and (d) the S&P 500.
Our peer group index consists of the peers against which we analyzed our 2021 executive compensation: Arch
Capital Group Ltd., Assured Guaranty Ltd., Essent Group Ltd., Fidelity National Financial Inc., First American
Financial Corp., Flagstar Bancorp Inc., Genworth Financial Inc., NMI Holdings Inc., Ocwen Financial Corp.,
PennyMac Financial Services Inc., Radian Group, Stewart Information Services Corp., and Walker and Dunlop, Inc.
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; 4) chose us as a benchmarking peer, and 5) is reasonably similar in size to us, in terms of
revenues and market capitalization.
2016
2017
2018
2019
2020
2021
Russell 2000 Financial Index
100
115
102
128
153
176
S&P 500
100
122
116
153
181
233
Peer Index (ACGL, AGO, ESNT, FAF, FBC, FNF,
GNW, NMIH, OCN, PFSI, RDN, STC & WD)
MGIC
100
119
108
158
140
177
100
138
103
140
127
149
MGIC Investment Corporation 2021 Annual Report | 113
Russell 2000 Financial IndexS&P 500Peer Index (ACGL,AGO,ESNT,FAF,FBC,FNF,GNW,NMIH,OCN,PFSI, RDN,STC, & WD)MGIC201620172018201920202021100150200250300 MGIC Stock
MGIC Investment Corporation Common Stock is
listed on the New York Stock Exchange under the
symbol MTG. At March 11, 2022, 314,786,451
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
for
dividend restrictions that apply when we elect to
Junior
interest on our Convertible
defer
Subordinated Debentures.
financial statements
is a holding company and the
The Company
payment of dividends
insurance
subsidiaries is restricted by insurance regulations.
For a discussion of these restrictions, see Note 14 -
"Statutory Information, Dividend Restrictions” to our
consolidated financial statements.
from
its
As of March 11, 2022, the number of shareholders
of record was 291. In addition, we estimate that
there are approximately 55,800 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 28,
2022, at 9:00 a.m. Central time, via webcast at:
www.virtualshareholdermeeting.com/MTG2022.
10-K Report
Copies of the Annual Report on Form 10-K for the
year ended December 31, 2021, filed with the
Securities and Exchange Commission, are
available without charge
to shareholders on
request from:
Secretary
MGIC Investment Corporation
P. O. Box 488
Milwaukee, WI 53201
from
The Annual Report on Form 10-K referred to above
includes as exhibits certifications
the
Company’s Chief Executive Officer and Chief
the
Financial Officer under Section 302 of
Sarbanes-Oxley Act. Following the 2021 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
standards of
Exchange.
listing
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
114 | MGIC Investment Corporation 2021 Annual Report
MGIC Investment Corporation
MGIC Plaza
Milwaukee, WI 53202
mtg.mgic.com
©2022 MGIC Investment Corporation
All rights reserved
21-50334 3/22