MGIC Investment Corporation 2022 Annual Report | 1
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 ($)
Adjusted net operating income (1) ($ millions)
Adjusted net operating income per diluted share (1) ($)
2020
2021
2022
$
$
$
$
446.1 $
1.29 $
456.8 $
1.32 $
635.0 $
1.85 $
658.6 $
1.91 $
865.3
2.79
904.8
2.91
(1) We believe that use of the Non-GAAP measures of adjusted net operating income and adjusted 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 2022 Annual Report | 2
New Primary Insurance Written($ billions)$112.1$120.2$76.4202020212022Revenue($ millions)$1,199$1,186$1,173202020212022Losses incurred, net($ millions)$365$65$-254.6202020212022Direct Primary Insurance in Force($ billions)$246.6$274.4$295.3202020212022Book Value per Share$13.88$15.18$15.82202020212022Default Inventory(# loans)57,71033,29026,387202020212022 MGIC Investment Corporation and Subsidiaries
To Our Shareholders:
In 2022, MGIC celebrated its 65th year of providing critical, uninterrupted
support to the housing market by helping over 13 million individuals and families
achieve their dream of affordable and sustainable homeownership. We take
pride in knowing what we do matters.
I am pleased to report our 2022 financial results were the best in our 65-year
company history. Importantly, we delivered these exceptional financial results
while providing meaningful capital returns to our shareholders. During 2022, we
continued to demonstrate the benefits of our transformed business model and
the strength and flexibility of our capital position. Below are a few highlights of
2022:
•
•
•
•
•
•
Earned $865 million of net income ($2.79 per diluted share) for the year, a 36% increase as compared to
$635 million ($1.85 per diluted share) in 2021.
Finished the year with $76 billion of primary new insurance written (NIW); the third largest year for NIW
in our 65-year history.
Increased primary insurance in force (IIF) by 7.6%. Persistency increased to approximately 80%, up from
approximately 63% year over year. IIF and Persistency are two key drivers of future revenue.
Returned approximately $500 million of capital to our shareholders through a combination of common
stock repurchases and common stock dividends. Additionally, we increased the quarterly dividend by
25% in the third quarter of 2022.
Repurchased $89 million of our 2063 Junior Convertible Debentures, repaid MGIC’s Federal Home Loan
Bank Advance, and redeemed our senior notes due in 2023, reducing our leverage ratio to approximately
12% from 20%.
Expanded our reinsurance program by securing quota share reinsurance covering most of our NIW in
2022 and 2023, and by executing excess of loss reinsurance transactions through the capital markets
and the traditional reinsurance market. These transactions reduce the volatility of losses in weaker
economic environments and provide diversification and flexibility in our sources of capital.
In addition to providing strong financial results, we are committed to responsible corporate stewardship and
believe it is integral to our continued success. To help articulate our values, we publish annually on our website a
Corporate Sustainability Report (“CSR”). Our sustainability strategy focuses on initiatives that promote the long-
term sustainability of MGIC’s business. In the CSR, you will see how this strategy bears out across all areas of
the work we do at MGIC, from our internal focus on Diversity, Equity and Inclusion and the employee experience,
to our external emphasis on community involvement.
Looking ahead, we have the right team in place and have confidence in our transformed business model. Our
strength and flexibility position us to navigate the changing economic environment and the credit performance of
our insurance in force portfolio continues to be strong. We remain focused on executing and delivering on our
business strategies in 2023 and beyond, creating long-term success for the company and creating value for all
our stakeholders. We look forward to the new challenges and new accomplishments that 2023 will bring.
I want to thank all of our stakeholders - from our customers to our policyholders, investors, and business
partners for your continued support, trust, and confidence in MGIC. I also want to thank all MGIC’s talented co-
workers - thank you for your dedication, integrity, and ongoing support to our stakeholders, your local
communities, and to your fellow coworkers. We are truly one team and each of you make a difference and are
part of our success!
Thank you, again, for your continued trust and confidence and for investing in MGIC.
Tim Mattke
Chief Executive Officer
MGIC Investment Corporation 2022 Annual Report | 3
From left: Sal Miosi, President and Chief Operating Officer
Steve Thompson, Executive Vice President and Chief Risk Officer
Tim Mattke, Chief Executive Officer
Paula Maggio, Executive Vice President, General Counsel and Secretary
Nathan Colson, Executive Vice President and Chief Financial Officer
Jay Hughes, Executive Vice President - Sales and Business Development
MGIC Investment Corporation 2022 Annual Report | 4
MGIC Investment Corporation and Subsidiaries
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
We have reproduced below the “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” “Risk Factors” and "Financial Statements and Supplementary Data" that appeared in our Annual
Report on Form 10‑K for the year ended December 31, 2022, filed with the Securities and Exchange Commission
on February 22, 2023. Except for certain cross-references, we have not changed what appears below in those
sections from what was in our Form 10-K. As a result, those sections are not updated to reflect any events or
changes in circumstances that have occurred since our Annual Report on Form 10-K was filed with the SEC.
INTRODUCTION
As used below, “we” and “our” refer to MGIC Investment Corporation’s consolidated operations or to MGIC
Investment Corporation, as a separate entity, as the context requires. References to "we" and "our" in the context
of debt obligations refer to MGIC Investment Corporation. See the "Glossary of terms and acronyms" for
definitions and descriptions of terms used throughout this annual report. The Risk Factors discuss trends and
uncertainties affecting us and are an integral part of the MD&A.
The following is a discussion and analysis of the financial conditions and results of operations for the years
ended December 31, 2022 and 2021, including comparisons between 2022 and 2021. Comparisons between
2021 and 2020 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, 2021 filed with the SEC.
Forward Looking and Other Statements
As discussed under “Forward Looking Statements and Risk Factors” in this Annual Report, actual results may
differ materially from the results contemplated by forward looking statements. We are not undertaking any
obligation to update any forward looking statements or other statements we may make in the following
discussion or elsewhere in this document even though these statements may be affected by events or
circumstances occurring after the forward looking statements or other statements were made. Therefore, no
reader of this document should rely on these statements being current as of any time other than the time at
which this document was filed with the Securities and Exchange Commission.
MGIC Investment Corporation 2022 Annual Report | 5
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 MGIC, the principal subsidiary of MGIC Investment Corporation, we serve lenders throughout the United
States helping families achieve homeownership sooner by making affordable low-down-payment mortgages a
reality through the use of private mortgage insurance. At December 31, 2022 MGIC had $295.3 billion of primary
IIF.
Summary of financial results of MGIC Investment Corporation
(in millions, except per share data)
Selected statement of operations data
Net premiums earned
Investment income, net of expenses
Losses incurred, net
Other underwriting and operating 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
Year Ended December 31,
2022
2021
Change
$
1,007.1 $
1,014.4
167.5
(254.6)
236.7
40.2
1,090.0
224.7
865.3
2.79 $
1,140.0 $
904.8
2.91 $
$
$
$
156.4
64.6
198.4
36.9
801.8
166.8
635.0
1.85
831.7
658.6
1.91
(1) %
7 %
N/M
19 %
9 %
36 %
35 %
36 %
51 %
37 %
37 %
52 %
(1)
See "Explanation and Reconciliation of our use of Non-GAAP Financial Measures."
SUMMARY OF 2022 FINANCIAL RESULTS
Net income of $865.3 million for 2022 increased by
$230.4 million when compared to the prior year, and
diluted income per share of $2.79 increased by 51%
when compared to the prior year. The increase in net
losses
income primarily reflects a decrease
incurred, partially offset by a higher provision for
income taxes and other underwriting and operating
expenses, net. Diluted income per share increased
due to an increase in net income and a decrease in
the number of diluted weighted average shares
outstanding.
in
income
Adjusted net operating
for 2022 was
$904.8 million (2021: $658.6 million) and adjusted net
operating income per diluted share was $2.91 (2021:
$1.91). Adjusted net operating income for 2022 and
2021
loss on debt
extinguishment and net realized investment gains
(losses).
included adjustments for a
Losses incurred, net were $(254.6) million, a decrease
of $319.1 million compared with losses incurred of
$64.6 million for the prior year. While new delinquency
notices added approximately $149.6 million to losses
incurred in 2022, our re-estimation of loss reserves on
previously received delinquency notices resulted in
favorable development of approximately $404.1
in the
million, primarily related to a decrease
estimated claim rate on delinquencies. The favorable
development primarily resulted from greater than
expected cure rates, as borrower reinstatements and
servicer mitigation efforts resulted in more cures than
originally estimated. Additionally, home price
appreciation experienced in recent years has allowed
borrowers to cure their delinquencies through the sale
of their property. In 2021, new delinquency notices
added approximately $124.6 million
losses
incurred, while our re-estimation of loss reserves on
previously received delinquency notices resulted in
$60 million of favorable loss development primarily
due to the decrease in the claim rate on delinquencies
received prior to the COVID-19 pandemic. 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.
to
MGIC Investment Corporation 2022 Annual Report | 6
MGIC Investment Corporation and Subsidiaries
The increase in our provision for income taxes to
$224.7 million in 2022 compared to $166.8 million in
2021 was primarily due to an increase in income
before tax. Our effective tax rate for 2022 was 20.6%
compared to 20.8% for 2021.
Other underwriting and operating expenses, net
increased to $236.7 million in 2022 from $198.4
million in 2021 primarily due to higher expenses
related to our technology investments, particularly in
data and analytics, and an
in pension
expense. Pension expenses increased in 2022 as a
result of settlement accounting charges during 2022.
increase
BUSINESS ENVIRONMENT
Economic conditions
Due to higher interest rates and higher home prices in
2022, there was a decrease in home purchases in
2022 after a strong 2021. Higher interest rates also
decreased refinance activity during 2022, after a
robust 2021. This resulted in a decrease in our NIW, to
$76.4 billion in 2022 when compared to $120.2 billion
in 2021.
The level of 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 more
homeowners defaulting and our losses increasing, with
returns,” and
a corresponding decrease
“Changes in interest rates, house prices or mortgage
insurance cancellation requirements may change the
length of time that our policies remain in force."
in home prices may
in our
result
Mortgage insurance market
The past several years of
favorable housing
fundamentals and in our view, generally favorable risk
characteristics of our
loans
contributed to a growing insurance in force. Higher
interest rates and home prices, resulted in a decrease
in our NIW in 2022 when compared to 2021.
recently
insured
The percentage of our NIW with DTI ratios over 45%
and LTV's over 95%
in 2022 when
compared with 2021. The increase was primarily
driven by higher home prices and interest rates, and a
higher
purchase
transactions.
percentage
increased
of NIW
from
Refer to "Mortgage Insurance Portfolio" for additional
discussion of changes in our NIW mix during 2022.
Competition
PMI. The private mortgage insurance industry is highly
competitive and is expected to remain so. We believe
that we currently compete with other private
financial
requirements,
insurers based on premium
rates,
mortgage
strength
underwriting
(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
in
servicing of our mortgage insurance products.
lenders, and
innovation
to
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.
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
insurance, such as
traditional private mortgage
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.
MGIC Investment Corporation 2022 Annual Report | 7
MGIC Investment Corporation and Subsidiaries
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 2022 and
2021.
Refer to "Mortgage Insurance Portfolio" for additional
discussion on market share, the 2022 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 PMIERs, MGIC's
Available Assets under PMIERs totaled $5.7 billion, an
excess of $2.3 billion over its Minimum Required
Assets at December 31, 2022.
BUSINESS OUTLOOK FOR 2023
Our outlook for 2023 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 2023, the total average mortgage
origination forecasts from the Fannie Mae and MBA
indicate mortgage originations of $1.8 trillion in 2023,
compared to an estimated $2.3 trillion in 2022. Both
purchase originations and refinance transactions are
forecasted to decline in 2023 when compared to
2022. As a result of the decrease in forecasted
mortgage originations, we are expecting NIW to be
lower in 2023 compared to 2022.
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 7.6% in 2022 and is expected to be
relatively flat in 2023. Our book of IIF is an important
driver of our future revenues, and its growth is driven
by our ability to generate NIW and the retention of our
IIF, 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. In 2023, we expect interest
rates to remain elevated compared to recent years
and home prices to decline.
Results of operations
Premiums. Our direct premiums written and earned
are impacted by our IIF during the period and our in
force premium yield, both of which are expected to be
relatively flat
in 2023 when compared to 2022.
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 $195.3 million at December 31, 2022 from $241.7
million at December 31, 2021.
Our net premiums written and earned are primarily
impacted by the changes in the direct premiums
written and earned noted above and by the amount of
premiums we cede under our quota share and excess
of loss reinsurance transactions. The amount of
premiums we cede in 2023 will be affected by any
changes in our reinsurance coverage. Premiums we
cede under our quota share transactions is also
impacted by the profit commission we receive. The
amount of profit commission is variable year-to-year
and is dependent on the amount of losses incurred
ceded. In 2022, negative losses incurred increased the
profit commission we received, resulting in lower
ceded premiums. Increases in ceded losses incurred
will benefit our losses incurred line, but will result in
lower profit commission and higher ceded premiums.
Factors that affect the amount of premiums we earn
from our
in our
"Consolidated Results of Operations - Premium yield."
further discussed
IIF are
MGIC Investment Corporation 2022 Annual Report | 8
MGIC Investment Corporation and Subsidiaries
income
investment
income. Net
Investment
is a
material contributor to our results of operations. We
expect net investment income in 2023 to increase in
comparison to 2022, primarily due to higher average
investment yields. 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 relative to our cash from operations. The
magnitude of any change in our invested asset level
will be subject to the timing of our financing activities.
Losses. Losses incurred, net is impacted by the level
of new delinquency notices. Generally, on our primary
business, the highest claim frequency years have
been the third and fourth year after loan origination.
As of December 31, 2022, 80% of our primary RIF was
written subsequent to December 31, 2019, 85% of our
primary RIF was written subsequent to December 31,
2018, and 88% of our primary RIF was written
subsequent to December 31, 2017. The pattern of
claim frequency can be affected by many factors,
including persistency and deteriorating economic
conditions.
Our claims paid activity slowed at the start of the
COVID-19 pandemic primarily due to forbearance and
foreclosure moratoriums put in place. Claim activity
has not yet returned to pre-COVID-19 levels. We
expect net losses and LAE paid to increase, however,
the magnitude and timing of the
increases are
uncertain.
Underwriting and operating expenses, net. We expect
underwriting and operating expenses, net to be
modestly lower in 2023 compared to 2022. In recent
years, we have made additional investments in our
technology, particularly in data and analytics and will
in 2023.
continue to make similar
Pension expenses also increased in 2022 as a result
of settlement accounting charges incurred during
incur settlement
2022.
In 2023, we expect to
lump sum
accounting charges as a result of
settlements for employees who retired in the fourth
quarter of 2022.
investments
Income taxes. We expect our 2023 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. In 2023, MGIC could pay $92 million of
ordinary dividends without OCI approval, before taking
into consideration dividends paid in the preceding
twelve months. In 2022 and 2021, MGIC paid a cash
and/or investment security dividend of $800 million
and $400 million,
to our holding
company. Future dividend payments from MGIC to the
holding company will continue to be determined in
consultation with the board.
respectively,
Share repurchase programs
time. We
Repurchases may be made from time to time on the
open market (including through 10b5-1 plans) or
transactions. The
through privately negotiated
repurchase programs may be suspended for periods
or discontinued at any
repurchased
approximately 27.8 million shares in 2022 using
approximately $386 million of holding company
resources. In 2021, we repurchased approximately
19.0 million shares of our common stock using
approximately $291 million of holding company
resources. As of December 31, 2022, we had $114
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)
2020
Authorization
December
31, 2021
2021
Authorization
December
31, 2023
$
$
300 $
386 $
—
114
As of December 31, 2022, we had approximately 293
million shares of common stock outstanding which
was a decrease of 8.4% from December 31, 2021.
Dividends to shareholders
In the first and second quarters of 2022, we paid
quarterly cash dividends of $0.08 per share to
shareholders which totaled $51.0 million. In the third
and fourth quarters of 2022, we paid quarterly cash
dividends of $0.10 per share which totaled $60.7
million. On January 24, 2023, the Board of Directors
declared a quarterly cash dividend to holders of the
company's common stock of $0.10 per share payable
on March 2, 2023, to shareholders of record at the
close of business on February 17, 2023.
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.”
MGIC Investment Corporation 2022 Annual Report | 9
MGIC Investment Corporation and Subsidiaries
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.
insure
If MGIC ceases to be eligible to
loans
purchased by one or both of the GSEs, it would
significantly reduce the volume of our NIW, the
substantial majority of which is for loans delivered to
or purchased by the GSEs. In addition to the increase
in Minimum Required Assets associated with
delinquent loans, factors that may negatively impact
MGIC’s ability to continue to comply with the financial
requirements of the PMIERs include the following:
è The GSEs may make the PMIERs more onerous in the
future. The PMIERs provide that the factors that
determine Minimum Required Assets will be updated
periodically, or as needed if there is a significant change
in macroeconomic conditions or loan performance. We
do not anticipate that the regular periodic updates will
occur more frequently than once every two years. The
PMIERs state that the GSEs will provide notice 180 days
prior to the effective date of updates to the factors;
however, the GSEs may amend any portion of the
PMIERs at any time.
è The PMIERS may be changed in response to the final
regulatory capital framework for the GSEs which was
established in February 2022.
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 reinsurance subjects us to
counterparty credit risk. Our access to reinsurance
may be disrupted and the terms under which we are
able to obtain reinsurance may be less attractive than
from
in
rates,
circumstances such as higher
increased inflation, global events such as the Russia-
Ukraine war, and other factors. In 2022, execution of
transactions for XOL reinsurance through the ILN
market was more challenging primarily due to
increased pricing.
to volatility stemming
interest
the past due
is generally based on
requirement. Our existing
The calculated credit for XOL Transactions under
PMIERs
the PMIERs
requirement of the covered loans and the attachment
and detachment point of the coverage. PMIERs credit
is generally not given for the reinsured risk above the
PMIERs
reinsurance
transactions are subject to periodic review by the
GSEs and there is a risk we will not receive our current
level of credit in future periods for the risk ceded
under them. In addition, we may not receive the same
level of credit under future transactions that we
receive under existing transactions. If MGIC is not
allowed certain levels of credit under the PMIERs,
under certain circumstances, MGIC may terminate the
reinsurance transactions without penalties.
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
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 MPP. MGIC's "policyholder
position" includes its net worth or surplus and its,
contingency reserve.
in
in capital
is
MGIC Investment Corporation 2022 Annual Report | 10
MGIC Investment Corporation and Subsidiaries
At December 31, 2022, MGIC’s risk-to-capital ratio
was 10.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.5 billion above the
required MPP of $2.1 billion. Our risk-to-capital ratio
and MPP reflect full credit for the risk ceded under our
reinsurance transactions. It is possible that under the
revised State Capital Requirements discussed below,
MGIC will not be allowed full credit for the risk ceded
under such transactions. If MGIC is not allowed an
agreed level of credit under either the State Capital
Requirements or the PMIERs, MGIC may terminate the
reinsurance transactions, without penalty. At this
time, we expect MGIC to continue to comply with the
current State Capital Requirements; however, refer to
our risk factor titled “State capital requirements may
prevent us from continuing to write new insurance on
an uninterrupted basis” for more information about
matters that could negatively affect such compliance.
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 certain items were not
completely addressed by the framework, including the
treatment of ceded risk and minimum capital floors.
In October 2022, the NAIC working group released a
revised exposure draft of the Mortgage Guaranty
Insurance Model Act that does not include changes to
the capital requirements of the existing Model Act.
GSE REFORM
The FHFA has been the conservator of the GSEs since
2008 and has the authority to control and direct their
operations. The
increased role that the federal
government has assumed in the residential housing
finance system through the GSE conservatorship may
increase the likelihood that the business practices of
the GSEs change, including through administrative
action, in ways that have a material adverse effect on
us and that the charters of the GSEs are changed by
new federal legislation.
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
is difficult to estimate when
Congressional action would be final and how long any
associated phase-in period may last.
it
Freddie Mac's ("the GSEs"), federal legislation that
changes their charters or a restructuring of the GSEs
could reduce our revenues or increase our losses.”
COVID-19 PANDEMIC
The COVID-19 pandemic materially impacted our
2020 financial results, as we reserved for losses
associated with the increased delinquency notices
received. Through December 31, 2022, the vast
majority of those delinquency notices have cured,
resulting in a decrease in losses incurred as we
recognized favorable loss development.
the
loans. However, given
Forbearance for borrowers who were affected by
COVID-19 allows mortgage payments
to be
of time. Historically,
suspended for a period
forbearance plans have reduced the incidence of our
losses on affected
the
uncertainty surrounding
long-term economic
impact of COVID-19, it is difficult to predict the
ultimate effect of COVID-19 related forbearances on
our loss incidence. Whether a loan delinquency will
cure,
through modification, when
forbearance ends will depend on the economic
circumstances of the borrower at that time. The
severity of losses associated with delinquencies that
do not cure will depend on economic conditions at
that time, including home prices.
including
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. Claim
activity has not yet returned to pre-COVID-19 levels.
For additional information about how the COVID-19
pandemic may impact our future financial results,
business, liquidity, and/or financial condition, see our
Risk Factor titled “The COVID-19 pandemic may
materially impact our business and future financial
condition.”
FACTORS AFFECTING OUR RESULTS
are
financial
condition
impacted
Our current and future business, results of operations
by
and
macroeconomic conditions such as rising interest
rates, home prices, housing demand,
level of
employment,
inflation, restrictions and costs on
mortgage credit, and other factors. For additional
information on how on our business may be impacted
see our Risk Factor titled “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.”
For additional
the business
information about
practices of the GSEs, see our Risk Factor titled
“Changes in the business practices of Fannie Mae and
As noted above,
the COVID-19 pandemic may
adversely affect our future business, results of
operations, and financial condition.
MGIC Investment Corporation 2022 Annual Report | 11
MGIC Investment Corporation and Subsidiaries
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.
the
Cancellations, which reduce IIF. Cancellations
due to refinancings are affected by the level of
current mortgage interest rates compared to the
mortgage coupon rates throughout the in force
book, current home values compared to values
when the loans in the in force book were insured
and the terms on which mortgage credit is
available. Home price appreciation can give
homeowners
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
right
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.
reinsurance
Premiums ceded, net of profit commission under
our QSR Transactions, and premiums ceded
under our XOL Transactions, are primarily
affected by the percentage of our IIF subject to
our
transactions. The profit
commission under our QSR Transactions also
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 what
we have experienced on our QSR Transactions.
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 year loss ratios, its
elimination). See Note 9 – “Reinsurance” to our
consolidated
a
financial
discussion of our reinsurance transactions.
statements
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 the
factors discussed above.
Investment income
fixed
Our investment portfolio is composed principally of
investment grade
income securities. The
principal factors that influence investment income are
the size of the portfolio and its yield. As measured by
amortized cost (which excludes changes in fair value,
such as from changes in interest rates), the size of
the investment portfolio is mainly a function of cash
generated from (or used in) operations, such as net
income, net claim
investment
premiums written,
payments and expenses, and cash provided by (or
used for) non-operating activities, such as debt or
stock issuances or repurchases, and dividends.
Losses incurred
Losses incurred are the current expense that reflects
claim payments, costs 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 for delinquent loans. Prior to the COVID-19
level of new delinquencies has
pandemic,
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. The
state of the economy, local housing markets, and
the
MGIC Investment Corporation 2022 Annual Report | 12
MGIC Investment Corporation and Subsidiaries
factors,
various other
the COVID-19
pandemic, may result in delinquencies not following
the typical pattern. Losses incurred are generally
affected by:
including
•
•
•
•
•
•
•
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
incurred
losses.
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
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 transactions.
See Note 9 – “Reinsurance” to our consolidated
financial statements for a discussion of our
reinsurance transactions.
Underwriting and other expenses
Underwriting and other expenses includes items such
as employee compensation, fees for professional and
consulting services, depreciation and maintenance
expense, and premium taxes, and are reported net of
ceding commissions associated with our QSR
Transactions. Employee compensation expenses are
variable due to share-based compensation, changes
in benefits, and changes in headcount (which can
fluctuate due to volume of NIW). See Note 9 –
financial
“Reinsurance”
statements for a discussion of ceding commission on
our QSR Transactions.
consolidated
our
to
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.
Gains (losses) on investments and other financial
instruments
•
•
•
Fixed income securities. Investment gains and
losses reflect the difference between the amount
received on the sale of a fixed income security
and the fixed income security’s cost basis, as
well as any credit allowances and any
impairments on securities we intend to sell prior
to recovery of its amortized cost basis. The
amount received on the sale of fixed income
securities is affected by the coupon rate of the
security compared to the yield of comparable
securities at the time of sale.
Equity securities. Investment gains and losses are
accounted for as a function of the periodic
change in fair value.
instruments.
Financial
Investment gains and
losses on the embedded derivative on our Home
Re Transactions reflect the present value impact
of the variation in investment income on assets
on the
insurance-linked notes held by the
reinsurance trusts and the contractual reference
rate used to calculate the reinsurance premiums
we estimate we will pay over the estimated
remaining life.
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
MGIC Investment Corporation 2022 Annual Report | 13
MGIC Investment Corporation and Subsidiaries
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. The state of
the economy, local housing markets and various other
factors, including the COVID-19 pandemic, may result
in delinquencies not following the typical pattern.
CYBERSECURITY
access to the systems or disclosure of the sensitive
information, either through the actions of third parties
or 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.
For additional information about our IT systems and
cybersecurity, see our risk factor titled “Information
technology system failures or
interruptions may
materially impact our operations and adversely affect
our financial results" and "We could be materially
adversely affected by a cyber security breach or failure
of information security controls."
in some
As part of our business, we maintain large amounts of
confidential and proprietary information, including
personal information of consumers and employees,
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 personal information to adopt
to notify
information security programs, and
individuals, and
jurisdictions, regulatory
authorities, of security breaches involving personally
identifiable information. All information technology
systems are potentially vulnerable to damage or
interruption from a variety of sources, including by
cyber attacks, such as those involving ransomware.
The Company discovers vulnerabilities and regularly
blocks a high volume of attempts
to gain
unauthorized access to its systems. Globally, attacks
are expected
in both
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. Such attacks may also increase as a
result of retaliation by Russia in response to actions
taken by the U.S. and other countries in connection
with Russia's military
The
Company operates under a hybrid workforce model
and such model may be more vulnerable to security
breaches.
to continue accelerating
invasion of Ukraine.
in place
to secure our
While we have information security policies and
information
systems
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
MGIC Investment Corporation 2022 Annual Report | 14
MGIC Investment Corporation and Subsidiaries
EXPLANATION AND RECONCILIATION OF OUR USE OF NON-GAAP FINANCIAL
MEASURES
NON-GAAP FINANCIAL MEASURES
(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
evaluation of
financial
performance thereby providing relevant information to
investors. These measures are not recognized in
accordance with GAAP and should not be viewed as
alternatives to GAAP measures of performance.
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, and infrequent or
unusual non-operating items where applicable.
Adjusted net operating income (loss) is defined as
GAAP net
income (loss) excluding the after-tax
effects of net realized investment gains (losses), gain
and losses on debt extinguishment, 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
making adjustments
interest expense on
for
convertible debt, whenever the impact is dilutive by (ii)
shares
common
average
diluted weighted
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.
(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)
Infrequent or unusual non-operating items. Items
that are non-recurring in nature and are not part
of our primary operating activities.
MGIC Investment Corporation 2022 Annual Report | 15
MGIC Investment Corporation and Subsidiaries
Non-GAAP reconciliations
Reconciliation of Income before tax / Net income to Adjusted pre-tax operating income / Adjusted net operating income:
Years Ended December 31,
2022
2021
(in thousands)
Pre-tax
Tax Effect
Net
(after-tax)
Pre-tax
Tax Effect
Net
(after-tax)
Income before tax / Net income
$ 1,090,034 $ 224,685 $ 865,349
801,777
166,794
634,983
Adjustments:
Net realized investment (gains) losses
Loss on debt extinguishment
Adjusted pre-tax operating income /
Adjusted net operating income
9,745
40,199
2,046
8,442
7,699
31,757
(7,009)
(1,472)
(5,537)
36,914
7,752
29,162
$ 1,139,978 $ 235,173 $ 904,805 $ 831,682 $ 173,074 $ 658,608
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
311,229
$
2.79
0.02
0.10
$
2.91
351,308
$
1.85
(0.02)
0.08
$
1.91
MGIC Investment Corporation 2022 Annual Report | 16
MGIC Investment Corporation and Subsidiaries
MORTGAGE INSURANCE PORTFOLIO
MORTGAGE ORIGINATIONS
The
is
total amount of mortgage originations
generally influenced by the level of new and existing
home sales, interest rates, 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 2022 as compared to
2021 reflects higher interest rates and home prices,
contributing to a decrease in home purchase activity
in 2022 after a strong 2021. Total mortgage
originations are forecasted to be lower in 2023, in
comparison to the last two years. Both purchase and
refinance markets are forecasted to decrease in 2023
when compared to estimates for 2022.
E - Estimated, F- Forecast
Source: Fannie Mae and MBA estimates/forecasts as of
January 2023. Amounts represent the average of all sources.
As a result of the forecasted decrease in mortgage
originations discussed above, our 2023 NIW
is
expected to be lower than 2022.
The total estimated mortgage insurance volume is
shown below.
Estimated total of PMI, FHA, USDA, and VA primary
mortgage insurance
(in billions)
Primary mortgage
insurance
Twelve Months
Ended December
31, 2022
Twelve Months
Ended December
31, 2021
$858
$1,352
Source: Inside Mortgage Finance - February 17, 2023 or SEC
filings. Includes HARP NIW.
MORTGAGE INSURANCE INDUSTRY
We compete against five other private mortgage
insurers, as well as government mortgage insurance
programs, including those offered by the FHA, VA, and
USDA. Refer to "Overview - Business Environment -
Competition" for a discussion of our competitive
position.
impacted by
PMI's market share
competition from government mortgage insurance
programs. The PMI industry's market share in 2022
increased compared to the market share in 2021.
is primarily
Estimated primary MI market share
(% of total primary
MI volume)
Twelve Months
Ended December
31, 2022
Twelve Months
Ended December
31, 2021
PMI
FHA
VA
USDA
47.2%
26.7%
24.5%
1.7%
43.2%
24.7%
30.2%
1.9%
Source: Inside Mortgage Finance - February 17, 2023 or SEC
filings. Includes HARP NIW.
MGIC's estimated market share within the PMI
industry is shown in the table below. Our risk-based
pricing engine, MiQ, allows for frequent granular
pricing changes including those to address our view
of emerging and evolving market conditions and risk.
We expect our market share to decline in first quarter
of 2023 due to actions taken in 2022 reflective of our
views of risk return. Additional discussion of the
competitive
industry refer to
"Overview - Business Environment - Competition" and
additional discussion of pricing practices refer to
"Overview - Business Environment - Pricing Practices"
landscape of the
MGIC Investment Corporation 2022 Annual Report | 17
Mortgage originations(in billions)$1,762$2,294$4,504$1,359$1,619$1,8824036752,622PurchaseRefinance2023 (F)2022 (E)2021$2,000$4,000 MGIC Investment Corporation and Subsidiaries
Estimated MGIC market share
Primary NIW by policy payment type
(% of total primary
private MI volume)
Twelve Months
Ended December
31, 2022
Twelve Months
Ended December
31, 2021
MGIC
18.9%
20.6%
Source: Inside Mortgage Finance - February 17, 2023 or SEC
filings. Includes HARP NIW.
NEW INSURANCE WRITTEN
The following tables provide information about loan
characteristics associated with our NIW.
The percentage of our NIW with DTI ratios over 45%
and LTV's over 95% increased in 2022 compared with
2021. The increases were primarily driven by higher
home prices and
interest rates, and a higher
percentage of NIW from purchase transactions.
Primary NIW by FICO score
(% of primary NIW)
2022
2021
Years Ended December 31,
760 and greater
740 - 759
720 - 739
700 - 719
680 - 699
660 - 679
640 - 659
639 and less
Total
43.1 %
18.5 %
14.9 %
10.9 %
7.3 %
3.3 %
1.3 %
0.7 %
100 %
45.6 %
17.5 %
13.7 %
11.1 %
7.3 %
2.7 %
1.6 %
0.5 %
100 %
Primary NIW by loan-to-value
(% of primary NIW)
95.01% and above
90.01% to 95.00%
85.01% to 90.00%
80.01% to 85%
Total
Years Ended December 31,
2022
2021
12.3 %
49.3 %
28.0 %
10.4 %
100 %
10.8 %
43.7 %
30.0 %
15.5 %
100 %
Primary NIW by debt-to-income ratio
(% of primary NIW)
45.01% and above
38.01% to 45.00%
38.00% and below
Total
Years Ended December 31,
2022
2021
21.3 %
32.3 %
46.4 %
100 %
13.6 %
30.0 %
56.4 %
100 %
(% of primary NIW)
Monthly premiums
Single premiums
Annual Premiums
Years Ended December 31,
2022
2021
95.7 %
4.3 %
— %
92.5 %
7.4 %
0.1 %
Primary NIW by type of mortgage
Years Ended December 31,
(% of primary NIW)
2022
2021
Purchases
Refinances
97.4 %
2.6 %
79.7 %
20.3 %
ratios greater
We consider a variety of loan characteristics when
accessing the risk of a loan. The following tables
provides information about loans with one or more of
the following characteristics associated with our NIW:
LTV
than 95%, mortgages with
borrowers having FICO scores below 680, including
those with borrowers having FICO scores of 620-679,
mortgages with borrowers having DTI ratios greater
than 45%, each attribute as determined at the time of
loan origination.
Primary NIW by number of attributes discussed above
(% of primary NIW)
2022
2021
Years Ended December 31,
One
Two or More
IIF AND RIF
31.5 %
3.6 %
26.2 %
1.5 %
Our IIF grew 7.6% in 2022, and 11.3% in 2021, as NIW
more than offset policy cancellations. Cancellation
activity is impacted by refinancing activity, policies
cancelled when borrowers achieve the required
amount of home equity, and cancellations due to
claim payment. Refinancing activity has historically
been affected by the level of mortgage interest rates
and
level of home price appreciation.
Cancellations generally move inversely to the change
interest rates, although they
in the direction of
generally lag a change in direction.
the
Persistency. Our persistency at December 31, 2022
was 79.8% compared to 62.6% at December 31, 2021.
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 IIF, which affects the vulnerability of the
IIF to refinancing; and the current amount of equity
that borrowers have in the homes underlying our IIF.
MGIC Investment Corporation 2022 Annual Report | 18
any remaining defaults under the pool would be
removed from our default inventory.
In connection with the GSEs' CRT programs, an
insurance subsidiary of MGIC provides insurance and
reinsurance covering portions of the credit risk related
to certain reference pools of mortgages acquired by
the GSEs. Our RIF, as reported to us, related to these
programs was approximately $226 million and $321
million as of December 31, 2022 and December 31,
2021, respectively.
MGIC Investment Corporation and Subsidiaries
Insurance in force and risk in force
($ in billions)
NIW
Cancellations
Increase in primary IIF
Direct primary IIF as of
December 31,
Direct primary RIF as of
December 31,
Years Ended December 31,
2022
2021
$
$
76.4
$
120.2
(55.5)
20.9
$
(92.4)
27.8
$
295.3
$
274.4
$
76.5
$
69.3
CREDIT PROFILE OF OUR PRIMARY RIF
later books possess significantly
Our 2009 and
improved risk characteristics when compared to our
2005-2008 books. Modification and
refinance
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, 2022, modifications accounted for
total primary RIF,
approximately 4.2% of our
compared to 5.4% at December 31, 2021. Loans
associated with 87% of all our modifications were
current as of December 31, 2022. For additional
information on the composition of our primary RIF see
"Business - Our Products and Services"
The composition of our primary RIF by policy year as
of December 31, 2022 and 2021 is shown below:
Primary risk in force
($ in millions)
2004 and prior
2005 - 2008
2009 - 2015
2016 - 2022
Total
December 31,
2022
December 31,
2021
411
3,083
1,753
71,225
76,472
500
3,728
2,865
62,244
69,337
POOL AND OTHER INSURANCE
reasons,
for a variety of
MGIC has written no new pool insurance since 2008,
including
however,
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 $276 million ($196 million on pool policies with
aggregate loss limits and $80 million on pool policies
without aggregate
limits) at December 31,
2022 compared to $305 million ($206 million on pool
policies with aggregate loss limits and $99 million on
limits)
pool policies without aggregate
at December 31, 2021. If claim payments associated
with a specific pool reach the aggregate loss limit, the
remaining IIF within the pool would be cancelled and
loss
loss
MGIC Investment Corporation 2022 Annual Report | 19
MGIC Investment Corporation and Subsidiaries
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, 2022. For a discussion of the Critical Accounting Estimates used by us that affect the
Consolidated Results of Operations, see "Critical Accounting Estimates" below.
Revenues
Revenues
(In millions)
Net premiums written
Net premiums earned
Investment income, net of expenses
Net gains (losses) on investments and other
financial instruments
Other revenue
Total revenues
Year Ended December 31,
2022
2021
% Change
$
$
$
960.7 $
1,007.1 $
167.5
(7.5)
5.6
969.0
1,014.4
156.4
5.9
9.0
1,172.8 $
1,185.7
(1)
(1)
7
N/M
(38)
(1)
NET PREMIUMS WRITTEN AND EARNED
Net premiums written and earned decreased 1%,
respectively, in 2022 compared with the prior year. The
decrease
in 2022
in premiums written and earned
compared to the prior year is primarily due to a decrease
in the direct premium yield, offset by a decrease in ceded
premiums written and earned.
Premium yields
Premium yield is net premiums earned 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 2022, and 2021.
Premium Yield
(in basis points)
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
Year Ended December 31,
2022
2021
39.4
0.1
1.0
40.5
(5.2)
35.3
42.2
(0.6)
3.2
44.8
(5.9)
38.9
(1) Total direct premiums earned, excluding premium refunds and
accelerated premiums
single premium policy
from
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 0.3 bps in 2022 and 0.4 bps in 2021
Changes in the net premium yields when compared to the
respective prior year periods reflect the following:
In force Portfolio Yield
è A larger percentage of our IIF is from book years with
lower premium rates due to a decline in premium rates in
recent years resulting from pricing competition, insuring
mortgages with lower risk characteristics, lower required
capital, the availability of reinsurance and certain policies
undergoing premium rate resets on their ten-year
anniversaries.
Premium Refunds
è Premium refunds are primarily driven by claim activity
and our estimate of refundable premiums on our
delinquency inventory. The low level of claims received
have resulted in a lower level of premium refunds. Our
estimate of refundable premium on our delinquency
inventory fluctuates with changes in our delinquency
inventory and our estimate of the number of loans in our
delinquency inventory that will result in a claim.
Accelerated earnings on single premium policies
è The lower level of refinance transactions has reduced the
benefit
from
from accelerated earned premium
cancellation of single premium policies prior to their
estimated policy life.
Ceded premiums earned, net of profit commission and assumed
premiums
è Ceded premiums earned, net of profit commission
adversely
impacts our net premium yield. Ceded
premiums earned, net of profit commission, are
associated with the QSR Transactions and the XOL
Transactions. Assumed premiums consists primarily of
premiums from GSE CRT programs. See “Reinsurance
Transactions“ below for further discussion on our
reinsurance transactions.
As discussed in our Risk Factor titled "Competition or
changes in our relationships with our customers could
MGIC Investment Corporation 2022 Annual Report | 20
MGIC Investment Corporation and Subsidiaries
reduce our revenues, reduce our premium yields and/or
increase our losses," the private mortgage insurance
industry is highly competitive and premium rates have
declined over the past several years. With the smaller
origination market, higher persistency rate, and continued
high credit quality for NIW expected in 2023, we expect
our in force portfolio premium yield to remain relatively flat
during 2023.
See "Overview – Factors Affecting Our Results" above for
additional factors that also influence the amount of net
premiums written and earned in a year.
REINSURANCE TRANSACTIONS
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 total effect on our pre-
tax income, as described below.
è We cede a fixed percentage of premiums earned and
received on insurance covered by the agreements.
in
è We receive the benefit of a profit commission through a
reduction
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
losses
incurred and a lower profit commission (or for certain
levels of
its
elimination).
in more benefit from ceded
losses of accident year
loss ratios,
è We receive the benefit of a ceding commission through a
reduction in underwriting expenses equal to 20% of
the profit
premiums ceded (before
commission).
the effect of
è We cede a fixed percentage of losses incurred on
insurance covered by the agreements.
The following table provides information related to our
QSR Transactions for 2022 and 2021.
Quota share reinsurance
(Dollars in thousands)
2022
2021
As of and For the Years Ended
December 31,
Statements of operations:
Ceded premiums written and
earned, net of profit
commission
% of direct premiums written
% of direct premiums earned
Profit commission
Ceding commissions
Ceded losses incurred
Mortgage insurance portfolio:
Ceded RIF (in millions)
$
86,435
$ 118,537
8 %
7 %
176,084
52,071
(19,837)
11 %
10 %
153,759
53,460
9,862
2015 QSR
2019 QSR
2020 QSR
2021 QSR
2022 QSR
Credit Union QSR
Total ceded RIF
$
$
—
—
3,902
6,809
5,027
2,261
889
1,539
4,754
7,470
—
1,594
$
17,999
$
16,246
Ceded premiums written, and earned net of profit
commission decreased in 2022 when compared with the
prior year primarily due to an increase in the profit
commission, which reduces ceded premiums written and
earned. The increase in profit commission was driven by
negative losses incurred in 2022.
Ceded losses incurred for the year ended December 31,
2022 reflect favorable
loss reserve development on
previously received delinquency notices. See "Losses
Incurred, net” below for discussion of our loss reserves.
We terminated our 2015 and 2019 QSR Transactions
effective December 31, 2022 and
incurred an early
fee of $2 million on our 2019 QSR
termination
Transaction. We terminated our 2017 and 2018 QSR
Transactions effective December 31, 2021 and incurred an
early termination fee of $5 million. The termination of the
QSR Transactions reduce the amount of IIF and RIF
subject to QSR transactions.
Covered Risk
The percentages 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 and the number of
active QSR Transactions.
MGIC Investment Corporation 2022 Annual Report | 21
MGIC Investment Corporation and Subsidiaries
Quota share reinsurance
As of and For the Years
Ended December 31,
2022
2021
NIW subject to QSR Transactions
87.4 %
81.9 %
New Risk Written subject to QSR
Transactions
IIF subject to QSR Transactions
RIF subject to QSR Transactions
93.0 %
67.9 %
73.0 %
90.5 %
78.4 %
77.9 %
The NIW subject to quota share reinsurance increased in
2022 compared to 2021. The increase was driven by a
decrease in refinance transactions which resulted in a
decrease in NIW with LTVs less than or equal to 85%,
which generally have lower coverage percentages, and are
excluded from the QSR Transactions.
2023 QSR Transaction.
We have agreed to terms on a quota share transaction
with a group of unaffiliated reinsurers covering most of
our NIW in 2023 (with an additional 10.0% quota share).
This is in addition to the reinsurance agreements executed
in 2022 that included a 15% quota share on eligible 2023
NIW.
MGIC Investment Corporation 2022 Annual Report | 22
MGIC Investment Corporation and Subsidiaries
Excess of loss reinsurance
We have Excess-of-loss transactions (“XOL Transactions”) with a panel of unaffiliated reinsurers executed through the
traditional reinsurance market (“Traditional XOL Transaction”) and with unaffiliated special purpose insurers (“Home Re
Transactions”).
The 2022 Traditional XOL Transaction provides $142.6 million of reinsurance coverage on eligible NIW in 2022. The
Traditional XOL Transaction has contractual termination date after approximately ten years, with an optional termination
date after seven years and quarterly thereafter. For the covered policies, we retain the first layer of the aggregate losses
paid, and the reinsurers 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. The reinsurance coverage is subject to
adjustment based on the risk characteristics of the covered loans. The reinsurance premiums ceded to the Traditional
XOL Transaction are based off the remaining reinsurance coverage levels.
The Home Re Transactions are executed with unaffiliated special purpose entities (“Home Re Entities”) through the
issuance of insurance linked notes (“ILNs”). At December 31, 2022 our Home Re Transactions provided $1.6 billion of loss
coverage on a portfolio of policies having an in force date from July 1, 2016 through March 31, 2019, and from January 1,
2020 through December 31, 2021; all dates inclusive. For this reinsurance coverage, we retain the first layer of the
respective aggregate losses paid, and a Home Re Entity will then provide second layer coverage up to the outstanding
reinsurance amount.
As of December 31, 2022, the premiums under most of our 2018-2021 reference the one-month LIBOR. As discussed in
our risk factor titled "The Company may be adversely impacted by the transition from LIBOR as a reference rate," the ICE
Benchmark Administration, the administrator of LIBOR, will cease publishing all USD LIBOR tenors on June 30, 2023.
The initial attachment and detachment, current attachment and detachment, and PMIERs required asset credit for each of
our XOL Transactions as of December 31, 2022, are as follows:
($ In thousands)
Home Re 2018-1
Home Re 2019-1
Home Re 2020-1
Home Re 2021-1
Home Re 2021-2
Home Re 2022-1
2022 Traditional XOL
Initial Attachment %
(1)
Initial Detachment %
(2)
Current Attachment
% (1)
Current Detachment
% (2)
PMIERs Required
Asset Credit
2.25%
2.50%
3.00%
2.25%
2.10%
2.75%
2.60%
6.50%
6.75%
7.50%
6.50%
6.50%
6.75%
7.10%
11.67%
14.79%
6.20%
3.28%
2.56%
2.96%
2.60%
$
21.66%
31.56%
8.76%
7.58%
7.31%
7.28%
7.10%
—
—
—
178,788
315,126
454,318
137,831
(1) The percentage represents the cumulative losses as a percentage of adjusted risk in force that MGIC retains prior to the XOL taking
losses.
(2) The percentage represents the cumulative losses as a percentage of adjusted risk in force that must be reached before MGIC begins
absorbing losses after the XOL layer
We ceded premiums on our XOL Transactions of $69.9 million and $44.5 million for the years ended December 31, 2022
and 2021, respectively.
See Note 9 - "Reinsurance," to our consolidated financial statements for additional discussion of our XOL Transactions.
INVESTMENT INCOME, NET
Net investment income increased 7% to $167.5 million in 2022 compared to $156.4 million in 2021. Net investment
income benefited from higher yields.
See "Balance Sheet Review" in this MD&A for further discussion regarding our investment portfolio.
NET GAINS (LOSSES) ON INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
Net gains (losses) on investments and other financial instruments in 2022 and 2021 were $(7.5) million and $5.9 million,
respectively.
OTHER REVENUE
Other revenue decreased to $5.6 million in 2022 from $9.0 million in 2021.
MGIC Investment Corporation 2022 Annual Report | 23
MGIC Investment Corporation and Subsidiaries
Losses and expenses
(In millions)
Losses incurred, net
Amortization of deferred policy acquisition costs
Other underwriting and operating expenses, net
Interest expense
Loss on debt extinguishment
Total losses and expenses
LOSSES INCURRED, NET
Year Ended December 31,
2022
2021
% Change
$
$
(254.6) $
12.4
236.7
48.1
40.2
82.8 $
64.6
12.6
198.4
71.4
36.9
383.9
N/M
(2)
19
(33)
9
(78)
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.
Estimation of losses is inherently judgmental. Even in a
stable environment, changes to our estimates could result
in a material impact to our consolidated results of
operations and financial position. The conditions that
affect the claim rate and claim severity include the current
and future state of the domestic economy, including
unemployment, and the current and future strength of
local housing markets; exposure on insured loans; the
amount of time between delinquency and claim filing; and
curtailments and rescissions. The actual amount of the
claim payments may be substantially different than our
loss reserve estimates. Our estimates could be adversely
affected by several factors, including a deterioration of
including
regional or national economic conditions,
unemployment,
in borrowers’
leading to a reduction
income and thus their ability to make mortgage payments,
the impact of past and future government initiatives and
actions
(including mortgage
the GSEs
forbearance programs and foreclosure moratoriums), and
a drop in housing values that could result in, among other
things, greater losses on loans, and may affect borrower
willingness to continue to make mortgage payments when
the net value of the home is below the mortgage balance.
Loss reserves in the future will also be dependent on the
number of loans reported to us as delinquent.
taken by
Prior to the COVID-19 pandemic, losses incurred have
followed a seasonal trend in which the second half of the
year has weaker credit performance than the first half,
with higher new notice activity and a lower cure rate. The
state of the economy, local housing markets and various
other factors, may result in delinquencies not following the
typical pattern.
losses
incurred
As discussed in our Risk Factors titled “The Covid-19
pandemic may materially impact our business, and future
financial condition," the magnitude of any future impact of
the COVID-19 pandemic on our
is
uncertain and cannot be predicted. 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, 2022 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.
loss
resulted
Losses
incurred, net decreased to $(254.6) million
compared to $64.6 million in 2021, primarily due to
favorable
reserve development. While new
delinquency notices added approximately $149.6 million
to losses incurred in 2022, our re-estimation of loss
reserves on previously received delinquency notices
in favorable development of approximately
resulted
$404.1 million primarily related to a decrease in the
estimated claim rate on delinquencies. The favorable
development primarily
than
expected cure rates, as borrower reinstatements and
servicer mitigation efforts resulted in more cures than
originally estimated. Additionally, home price appreciation
experienced in recent years has allowed borrowers to cure
their delinquencies through the sale of their property. In
2021, new delinquency notices added approximately
$124.6 million to losses incurred, and our re-estimation of
loss reserves on previously received delinquency notices
resulted in $60.0 million of favorable loss development,
primarily due to the decrease in the claim rate on
delinquencies received prior to the COVID-19 pandemic.
This was offset by the recognition of a probable loss of
$6.3 million related to litigation of our claims paying
from greater
MGIC Investment Corporation 2022 Annual Report | 24
MGIC Investment Corporation and Subsidiaries
practices and adverse development on LAE reserves and
reinsurance.
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,
2022
2021
Current year / New notices
Prior year reserve development
Losses incurred, net
$
$
149.6 $
124.6
(404.1)
(254.5) $
(60.0)
64.6
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 2022 when
compared to 2021 was primarily due to a decrease in
losses incurred as discussed above.
Year Ended December 31,
2022
2021
Loss ratio
(25.3) %
6.4 %
MGIC Investment Corporation 2022 Annual Report | 25
MGIC Investment Corporation and Subsidiaries
New notice claim rate
The table below presents our new delinquency notices received, delinquency inventory, percentage of delinquent 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
December 31, 2022
Policy Year
New Notices
Delinquency Inventory
% 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
2022
Total
Claim rate on new
notices (1)
3,695
11,702
3,115
2,090
2,797
3,289
3,199
5,067
6,656
1,378
42,988
8 %
2,471
8,317
2,017
1,249
1,719
2,060
1,823
2,558
3,307
866
26,387
13.4 %
11.9 %
12.4 %
15.9 %
16.9 %
17.8 %
21.7 %
35.4 %
43.9 %
37.1 %
20.9 %
18
19
12
10
10
9
9
7
5
3
12
Policy Year
New Notices
Delinquency Inventory
% of Delinquency
Inventory in Forbearance
Avg. Number of Missed
Payments of Delinquency
Inventory
December 31, 2021
2004 and prior
2005-2008
2009-2015
2016
2017
2018
2019
2020
2021
Total
3,893
13,070
4,040
2,375
3,384
3,902
4,163
5,623
1,982
42,432
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
Claim rate on new
notices (1)
(1) Claim rate is the respective full year weighted average rate and is rounded to the nearest whole percent.
8 %
Historically, forbearance plans have reduced the incidence of our losses on affected loans. However, given the uncertainty
surrounding the long-term economic impact of COVID-19, it is difficult to predict the ultimate effect of COVID-19 related
forbearances on our loss incidence. Whether a loan delinquency will cure, including through modification, when
forbearance ends will depend on the economic circumstances of the borrower at that time. The severity of losses
associated with delinquencies that do not cure will depend on economic conditions at that time, including home prices.
MGIC Investment Corporation 2022 Annual Report | 26
MGIC Investment Corporation and Subsidiaries
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 trends over time, because
the development of the delinquencies may vary from period to period without establishing a meaningful trend. An increase
in loss mitigation activities, primarily third party acquisitions (sometimes referred to as “short sales”), has resulted in a
decrease in the average claim paid and the average claim paid as a percentage of exposure in recent years. At the start of
the COVID-19 pandemic, the level of claims received decreased. Claim activity and the average claims paid as a
percentage of exposure has not yet returned to pre-COVID-19 levels. The magnitude and timing of the increases are
uncertain.
The majority of loans insured prior to 2009 (which represent 41% of the loans in the delinquency 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.
Claims severity trend
Period
Q4 2022
Q3 2022
Q2 2022
Q1 2022
Q4 2021
Q3 2021
Q2 2021
Q1 2021
Average exposure on
claim paid
$
38,903 $
37,625
44,106
38,009
43,485
42,468
40,300
46,807
Average claim paid
% Paid to exposure
Average number of missed
payments at claim received
date
28,492
23,461
27,374
27,662
32,722
36,138
34,068
36,725
73.2 %
62.4 %
62.1 %
72.8 %
75.2 %
85.1 %
84.5 %
78.5 %
41
46
41
45
42
34
36
34
Note: Table excludes material settlements. Settlements include amounts paid in settlement of disputes for claims paying practices
and/or commutations of policies.
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 2022 Annual Report | 27
MGIC Investment Corporation and Subsidiaries
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
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
2022
2021
11,484
8,026
6,877
26,387
44 %
30 %
26 %
100 %
9,529
9,208
14,553
33,290
28 %
28 %
44 %
100 %
(1) Approximately 28% and 13% of the loans in the primary
delinquency inventory with 12 payments or more delinquent
have at least 36 payments delinquent as of December 31, 2022,
and 2021, respectively.
NET LOSSES AND LAE PAID
Net losses and LAE paid were flat in 2022 compared to
2021, while direct losses paid decreased slightly in 2022
compared to 2021. Our claims paid activity slowed at the
start of
to
forbearance and foreclosure moratoriums put in place. We
expect net losses and LAE paid to increase, however, the
magnitude and timing of the increases are uncertain.
the COVID-19 pandemic primarily due
The losses and LAE paid on reinsurance terminations
decreased in 2022 when compared to 2021. The decrease
is primarily due to the losses and LAE recoverable from
reinsurers at time of termination of the 2015 and 2019
(effective December 31, 2022),
QSR Transactions
compared to the
losses and LAE recoverable from
reinsurers at time of termination of the 2017 and 2018
QSR transaction (effective December 31, 2021). In a
reinsurance termination, amounts for any incurred but
unpaid losses are due to us from the reinsurer
The table below presents our net losses and LAE paid for
2022 and 2021.
Net losses and LAE paid
(in millions)
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
2022
2021
$
35 $
8
—
43
(1)
42
8
50
(18)
$
32 $
43
14
—
57
(2)
55
14
69
(36)
33
Average claim paid
$ 26,715 $ 34,956
(1)
(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 terminations
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, 2022 and 2021 and for the top 5
jurisdictions (based on December 31, 2022 delinquency
inventory) appears in the following table.
Primary average RIF - delinquent loans
2022
2021
Florida
Texas
Illinois
Pennsylvania
New York
All other jurisdictions
$
59,515 $
53,364
41,640
40,993
74,760
51,693
Total all jurisdictions
$
52,511 $
56,227
51,037
40,798
39,523
74,836
51,652
51,887
The primary average RIF on all loans was $64,784 and
$59,518 at December 31, 2022 and December 31, 2021,
respectively. The increase is primarily due to an increase
in loans from recent years which generally have larger loan
balances.
MGIC Investment Corporation 2022 Annual Report | 28
MGIC Investment Corporation and Subsidiaries
LOSS RESERVES
Our primary delinquency inventory was 26,387 at December 31, 2022, representing a decrease of 21% from December 31,
2021. We also experienced a decrease in the average direct reserve per default as shown in the table below. The average
direct reserve per default is influenced by the number of consecutive months a borrower has been delinquent. Generally, a
defaulted loan with more missed payments is more likely to result in a claim. The number of delinquencies in inventory
with twelve or more missed payments at December 31, 2022 decreased when compared to the prior year. (See Note 8
-"Loss Reserves," table 8.4.) The average direct reserve per default is also impacted by the average RIF on delinquent
loans as shown above.
The gross reserves as of December 31, 2022, and 2021 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
December 31,
2022
2021
$
498
56
554
$
795
82
877
26,387
2.22 %
$ 20,994
267
33,290
2.84 %
$ 26,156
211
Other gross loss reserves (2) (In millions)
4
7
(1)
(2)
Since a number of our pool policies include aggregate loss limits and/or deductibles, we do not disclose an average direct reserve
per default for our pool business.
Other gross loss reserves includes direct and assumed reserves that are not included within our primary loss reserves.
MGIC Investment Corporation 2022 Annual Report | 29
MGIC Investment Corporation and Subsidiaries
The primary delinquency
top 15
jurisdictions (based on December 31, 2022 delinquency
inventory) at December 31, 2022, and 2021 appears in
table the below.
inventory for
the
Primary delinquency inventory by jurisdiction
2022
2021
Florida *
Texas
Illinois *
Pennsylvania *
New York *
California
Ohio *
Michigan
Georgia
New Jersey *
North Carolina
Maryland
Indiana
Virginia
Minnesota
All other jurisdictions
Total
2,414
1,935
1,640
1,525
1,399
1,336
1,322
965
954
841
753
719
622
582
573
8,807
26,387
2,948
2,572
2,082
1,672
1,674
1,852
1,458
1,144
1,272
1,169
987
929
736
766
725
11,304
33,290
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 delinquency inventory by policy year at
December 31, 2022 and 2021 appears in the following
table.
Primary delinquency inventory by policy year
2022
2021
2004 and prior
2004 and prior %:
2005
2006
2007
2008
2005 - 2008 %
2009
2010
2011
2012
2013
2014
2015
2009 - 2015 %
2016
2017
2018
2019
2020
2021
2022
2,471
9 %
1,438
2,388
3,680
811
32 %
51
31
43
72
243
633
944
8 %
1,249
1,719
2,060
1,823
2,558
3,307
866
2016 and later %:
Total
51 %
26,387
2,829
8 %
1,703
2,928
4,973
1,278
33 %
84
56
79
143
441
1,055
1,542
10 %
2,004
2,949
3,412
3,340
3,308
1,166
—
49 %
33,290
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
increasing claims
economic conditions can result
following a period of declining claims. As of December 31,
2022, 80% of our primary RIF was written subsequent to
December 31, 2019, 85% of our primary RIF was written
subsequent to December 31, 2018, and 88% of our primary
RIF was written subsequent to December 31, 2017.
in
UNDERWRITING AND OTHER EXPENSES, NET
Underwriting and other expenses includes items such as
employee compensation costs, fees for professional and
consulting services, depreciation and maintenance
expense, and premium taxes, and are reported net of
ceding commissions.
Underwriting and other expenses, net for 2022 increased
to $236.7 million from $198.4 million in 2021. The
increase was primarily due to higher expenses related to
our technology
in data and
analytics, and an increase in pension expense. Pension
expenses increased in 2022 as a result of settlement
accounting charges during 2022. In 2023, we expect to
incur settlement accounting charges as a result of lump
investments, particularly
MGIC Investment Corporation 2022 Annual Report | 30
MGIC Investment Corporation and Subsidiaries
sum settlements for employees who retired in the fourth
quarter of 2022.
Year Ended December 31,
2022
2021
Underwriting expense ratio
25.2 %
20.6 %
The underwriting expense ratio is the ratio, expressed as a
percentage, of the underwriting and operating expenses,
net and amortization of DAC of our combined insurance
operations (which excludes underwriting and operating
expenses of our non-insurance subsidiaries) to net
premiums written. The underwriting expense
ratio
increased in 2022 compared with 2021 due to an increase
in underwriting expenses and slight decreases in net
premiums written.
LOSS ON DEBT EXTINGUISHMENT
In 2022, we recorded a loss on debt extinguishment of
$40.2 million, related to the repurchases of a portion our
9% Debentures, the redemption of our 5.75% Senior Notes,
and the repayment of the outstanding principal balance of
the FHLB Advance. In 2021, we recorded a loss on debt
extinguishment of $36.9 million associated with the
repurchase of most of our 9% Debentures.
See Note 7
statements for a discussion on our debt.
- "Debt" to our consolidated financial
INTEREST EXPENSE
Interest expense for 2022 was $48.1 million compared to
$71.4 million for 2021. The decrease is due to the debt
transactions discussed above.
INCOME TAX EXPENSE AND EFFECTIVE TAX RATE
Income tax provision and effective tax rate
(In millions, except rate)
2022
2021
Income before tax
$
1,090
$
Provision for income taxes
Effective tax rate
225
20.6 %
802
167
20.8 %
The increase in our provision for income taxes for 2022
compared to 2021 was primarily due to an increase in
income before tax. Our effective tax rate for 2022 and
2021 approximated the federal statutory income tax rate
of 21%.
See Note 12 – “Income Taxes” to our consolidated
financial statements for a discussion of our tax position.
MGIC Investment Corporation 2022 Annual Report | 31
MGIC Investment Corporation and Subsidiaries
BALANCE SHEET REVIEW
The following sections focus on the assets and liabilities experiencing major developments in 2022.
Consolidated balance sheets - Assets
As of December 31,
2022
2021
% Change
$
5,424,688 $
(in thousands)
Investments
Cash and cash equivalents
Premiums receivable
Reinsurance recoverable on loss reserves
Reinsurance recoverable on paid losses
Deferred incomes taxes, net
Other assets
Total Assets
INVESTMENT PORTFOLIO
327,384
58,000
28,240
18,081
124,769
232,631
$
6,213,793 $
6,606,749
284,690
56,540
66,905
36,275
—
273,849
7,325,008
(18)
15
3
(58)
(50)
N/M
(15)
(15)
The investment portfolio decreased to $5.4 billion as of December 31, 2022 (2021: $6.6 billion), primarily due to a
decrease in the fair value of our investment portfolio due to the increase in the prevailing market interest rates
and the reduction of debt outstanding.
The return we generate on our investment portfolio is an important component of our consolidated financial
results. Our investment portfolio primarily consists of a diverse mix of highly rated fixed income securities. The
investment portfolio is designed to achieve the following objectives:
Operating Companies (1)
è Preserve PMIERs assets
è Maximize total return with emphasis on book yield,
subject to our other objectives
Holding Company
è Provide liquidity with minimized realized loss
è Maintain highly liquid, low volatility assets
è Limit portfolio volatility
è Duration 3.5 to 5.5 years
(1)
Primarily MGIC
è Maintain high credit quality
è Duration maximum of 2.5 years
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, 2022 and
2021 is shown in the following table.
Portfolio duration and embedded investment yield
December 31,
Duration (in years)
Pre-tax yield (1)
After-tax yield (1)
2022
4.3
3.0%
2.5%
(1)
Embedded investment yield is calculated on a yield-to-worst basis.
2021
4.5
2.5%
2.1%
MGIC Investment Corporation 2022 Annual Report | 32
MGIC Investment Corporation and Subsidiaries
The credit risk of a security is evaluated through analysis of the security's underlying fundamentals, including the
issuer's sector, scale, profitability, debt coverage, and ratings. The investment policy guidelines limit the amount
of our credit exposure to any one issue, issuer and type of instrument. The following table shows the security
ratings of our fixed income investments as of December 31, 2022 and 2021.
Fixed income security ratings
% of fixed income securities at fair value
Period
December 31, 2022
December 31, 2021
AAA
18%
18%
Security Ratings (1)
AA
28%
26%
A
34%
36%
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 used; if two FICO scores are available, the lower of the two is used; if only one FICO score is available, it is
used.
Our investment portfolio was invested in comparable security types for the years ended December 31, 2022 and
December 31, 2021. See Note 5 – “Investments” to our consolidated financial statements for additional
disclosure on our investment portfolio.
Investments outlook
The Federal Open Market Committee (“FOMC”) raised the federal funds rate seven times throughout 2022 from
0.25% to 4.5% as it weighed the ongoing economic impacts of tight labor markets, supply chain disruptions and
other macroeconomic factors that elevated inflationary measures. In February, 2023 the FOMC increased the
federal funds rate by an additional 0.25% and signaled continued restrictive monetary policy in response to
inflationary pressures. Market yields have increased in response to the FOMC’s actions, which has resulted in a
decrease
investment valuations. The actions of the FOMC and other ongoing
macroeconomic factors could create significant economic uncertainty, such as increasing recessionary
concerns, which may result in a widening of credit spreads. Market volatility resulting from these factors may
continue to impact our investment valuations and returns.
in our fixed
income
We seek to manage our exposure to interest rate risk and volatility by maintaining a diverse mix of high-quality
securities with an intermediate duration profile.
While higher interest rates may adversely impact the fair values of our fixed income investments, they present a
near-term opportunity for investment into securities with yields in excess of the book yield on our portfolio.
Increases in market-based portfolio yields are expected to result in higher net investment income in future
periods. In addition to fixed income securities, we also hold cash and cash equivalents which yield returns that
trend with changes in the federal funds rate.
As of December 31, 2022, approximately 6% of the fair value of our investment portfolio consisted of securities
referencing LIBOR. As discussed in our risk factor titled "The Company may be adversely impacted by the
transition from LIBOR as a reference rate," the ICE Benchmark Administration, the administrator of LIBOR, will
cease publishing all USD LIBOR tenors on June 30, 2023.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents increased to $327.4 million, as of December 31, 2022 (2021: $284.7 million), as net
cash generated from operating was substantially used in financing activities.
DEFERRED INCOME TAXES
Our net deferred tax asset was $124.8 million at December 31, 2022 and is separately stated in our consolidated
balance sheets as Deferred income taxes, net. Our net deferred income tax liability was $39.4 million at
December 31, 2021 and is included as a component of Other liabilities in our consolidated balance sheets. The
change in our deferred income tax asset and liability was primarily due to the tax effect of unrealized losses
generated by the investment portfolio during 2022. We owned $661.7 million and $426.3 million of tax and loss
bonds at December 31, 2022 and December 31, 2021, respectively. See Note 12 – “Income Taxes” to our
consolidated financial statements for additional disclosure on the components of our deferred tax assets and
liabilities.
MGIC Investment Corporation 2022 Annual Report | 33
MGIC Investment Corporation and Subsidiaries
REINSURANCE RECOVERABLE ON PAID LOSSES
Reinsurance recoverable on paid losses decreased to $18.1 million at December 31, 2022 (2021: $36.3 million).
The decrease in the reinsurance recoverable on paid losses is primarily due from the losses recoverable from
reinsurers at time of termination of the 2015 and 2019 QSR Transactions (effective December 31, 2022),
compared to the losses recoverable from reinsurers at time of termination of the 2017 and 2018 QSR transaction
(effective December 31, 2021). In a reinsurance termination, amounts for any incurred but unpaid losses are due
to us from the reinsurers.
OTHER ASSETS
Other assets decreased to $111 million as of December 31, 2022 (2021: $134 million), primarily driven by a
change in the net funded status of our employee benefit plans. See Note 11 - "Benefit Plans" to our consolidated
financial statements for additional disclosure on our employee benefit plans.
Consolidated balance sheets - Liabilities and equity
(In thousands)
Liabilities
Loss reserves
Unearned premiums
Long-term debt
Other liabilities
Total Liabilities
Shareholders' equity
Common stock
Paid-in capital
Treasury stock
AOCI, net of tax
Retained earnings
Total
As of December 31,
2022
2021
% Change
$
$
$
557,988 $
195,289
662,810
154,966
1,571,053 $
371,353 $
1,798,842
(1,050,238)
(481,511)
4,004,294
$
4,642,740 $
883,522
241,690
1,146,712
191,702
2,463,626
371,353
1,794,906
(675,265)
119,697
3,250,691
4,861,382
(37)
(19)
(42)
(19)
(36)
—
—
56
(502)
23
(4)
LOSS RESERVES AND REINSURANCE RECOVERABLE ON LOSS RESERVES
Our loss reserves include estimates of losses and settlement expenses on (1) loans in our delinquency inventory
(known as case reserves), (2) IBNR delinquencies, and (3) LAE. Our gross reserves are reduced by reinsurance
recoverable on loss reserves to calculate a net reserve balance. Loss reserves decreased to $558.0 million as of
December 31, 2022, from $883.5 million of December 31, 2021. Reinsurance recoverables on loss reserves were
$28.2 million and $66.9 million as of December 31, 2022 and December 31, 2021, respectively. The decrease in
loss reserves from 2022 to 2021 is primarily due to favorable development of $404.1 million on previously
received delinquency notices, partially offset by loss reserves established on new delinquency notices. The
reinsurance recoverable on loss reserves is impacted by the change in direct reserves and the percentage of our
delinquency inventory covered by reinsurance transactions.
LONG-TERM DEBT
Our long-term debt decreased to $662.8 million as of December 31, 2022 from $1,146.7 million as of
December 31, 2021 as we paid down our long-term debt in 2022. We repurchased $89.1 million in aggregate
principal amount of our 9% Debentures, repaid the outstanding balance of the FHLB Advance of $155.0 million
and we redeemed the $242.3 million of aggregate principal outstanding on our 5.75% Senior Notes due in 2023.
UNEARNED PREMIUM
Our unearned premium decreased to $195.3 million as of December 31, 2022 from $241.7 million as of
December 31, 2021 primarily due to the run-off of our existing portfolio of single premium policies outpacing the
level of NIW from single premium policies.
MGIC Investment Corporation 2022 Annual Report | 34
MGIC Investment Corporation and Subsidiaries
OTHER LIABILITIES
Other liabilities decreased to $155.0 million as of December 31, 2022 (2021: $191.7 million), primarily due to
decreases in our deferred income tax liability, accrual for premium refunds, and interest payable. These were
partially offset by an increase in our liability for pension obligation.
SHAREHOLDER'S EQUITY
The decrease in shareholders' equity represents a decrease in the fair value of our investments portfolio
discussed above, repurchases of our common stock, and dividends paid to shareholders, partially offset by net
income in 2022.
MGIC Investment Corporation 2022 Annual Report | 35
MGIC Investment Corporation and Subsidiaries
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 payments. The following
table summarizes these three cash flows on a
consolidated basis for the last two years.
Summary of consolidated cash flows
(In thousands)
2022
2021
Years ended December 31,
Total cash provided by
(used in):
Operating activities
$
650,012 $
696,317
Investing activities
410,485
(160,749)
Financing activities
(1,032,542)
(527,290)
Increase (decrease) in cash
and cash equivalents and
restricted cash and cash
equivalents
Operating activities
$
27,955 $
8,278
The following list highlights the major sources and
uses of cash flow from operating activities:
Sources
+ Premiums received
+ Loss payments from reinsurers
+ Investment income
Uses
- Claim payments
- Premium ceded to reinsurers
-
Interest expense
- Operating expenses
- 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
results
loss. Based on historical
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
largest cash outflow
insured
in an
claim payments made within one to three years. Our
claims paid activity slowed at the start of the
COVID-19 pandemic primarily due to forbearance and
foreclosure moratoriums put in place. We expect net
losses and LAE paid to
increase, however, the
magnitude and timing of the increases are uncertain.
We invest our net cash flow 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.
totaling
We also have purchase obligations
approximately $22 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 $10 million for our
purchase obligations.
In connection with our reinsurance transactions, we
cede, or pay out, part of the premiums we receive to
our reinsurers and collect cash when claims subject
to our reinsurance coverage are paid.
in
income
Net cash provided by operating activities in 2022
decreased compared to 2021 primarily due to an
increase
in
underwriting and operating expenses paid, a decrease
in investment income collected, and a decrease in
premiums received. This was partially offset by a
decrease
reinsurance
losses paid, net of
settlements and a decrease in interest payments.
taxes paid,
increase
in
Investing activities
The following list highlights the major sources and
uses of cash flow from investing activities:
Sources
+ Proceeds from sales of investments
+ Proceeds from maturity of fixed income securities
Uses
- Purchases of investments
- Purchases of property and equipment
We maintain an investment portfolio that is primarily
invested in a diverse mix of fixed income securities.
As of December 31, 2022, our portfolio had a fair
value of $5.4 billion, a decrease of $1.2 billion, or
17.9% from December 31, 2021. Net cash flows
provided by investing activities in 2022 primarily
reflect sales and maturities of fixed income and
equity securities during the year that exceeded
in financing
purchases as proceeds were used
MGIC Investment Corporation 2022 Annual Report | 36
MGIC Investment Corporation and Subsidiaries
activities. Net cash used in investing activities in 2021
primarily reflects purchases of fixed income and
equity securities during the year that exceeded sales
of such securities as cash from operations was
available for additional investment. In addition to
investment portfolio activities, our investing activities
included investment in our technology infrastructure
to enhance our ability to conduct business and
execute our strategies.
Financing activities
The following list highlights the major sources and
uses of cash flow from financing activities:
Sources
+ Proceeds from debt and/or common stock issuances
Uses
- Repayment/repurchase of debt
- Repurchase of common stock
- Payment of dividends to shareholders
- Payment of withholding taxes related to share-based
compensation net share settlement
Net cash flows used in financing activities in 2022
primarily reflects repurchase of our common stock,
repayment of our 5.75% Notes and our FHLB Advance,
the repurchase of a most of our 9% Debentures and
payment of dividends to shareholders. 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.
For a further discussion of matters affecting our cash
flows, see "Balance Sheet Review" above and "Debt at
our Holding Company and Holding Company Liquidity"
below.
CAPITALIZATION
Capital Risk
Capital risk is the risk of adverse impact on our ability
to comply with capital requirements (regulatory and
GSE) and to maintain the
level, structure and
composition of capital required for meeting financial
performance objectives.
A strong capital position is essential to our business
strategy and is important to maintain a competitive
position in our industry. Our capital strategy focuses
on long-term stability, which enables us to build and
invest
in a stressed
environment.
in our business, even
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, 2022, and 2021.
(In thousands, except ratio)
2022
2021
Common stock, paid-in capital,
retained earnings, less treasury
stock
Accumulated other
comprehensive loss, net of tax
$ 5,124,251 $ 4,741,685
(481,511)
119,697
Total shareholders' equity
4,642,740
4,861,382
Long-term debt, par value
671,086
1,157,500
Total capital resources
$ 5,313,826 $ 6,018,882
Ratio of long-term debt to
shareholders' equity
14.5 %
23.8 %
in shareholders' equity
in 2022
The decrease
represents a decrease
in the fair value of our
investments portfolio, repurchases of our common
stock, and dividends paid, partially offset by net
income in 2022. See Note 13 - "Shareholders' Equity"
for further information.
DEBT AT OUR HOLDING COMPANY AND HOLDING
COMPANY LIQUIDITY
Debt obligations - holding company
company, MGIC
The 5.25% Notes and 9% Debentures are obligations
of our holding
Investment
Corporation, and not of its subsidiaries. We have no
debt obligations due within the next twelve months.
As of December 31, 2022, our 5.25% Notes had $650
million of outstanding principal due in 2028 and our
MGIC Investment Corporation 2022 Annual Report | 37
MGIC Investment Corporation and Subsidiaries
9% Debentures had $21.1 million of outstanding
principal due in April 2063.
In 2022, we repurchased $89.1 aggregate principal of
our 9% debentures,
the outstanding
principal balance on our 5.75% Notes, and repaid the
outstanding balance of our FHLB advance.
redeemed
The 9% Debentures are a convertible debt issuance.
Subject to certain limitations and restrictions, holders
of the 9% Debentures may convert their notes into
shares of our common stock at their option prior to
certain dates prescribed under the terms of their
issuance, in which case our corresponding obligation
will be eliminated prior to the scheduled maturity.
See Note 7 - "Debt" for further information on our
outstanding debt obligations and
transactions
impacting our consolidated financial statements in
2022 and 2021.
Liquidity analysis - holding company
As of December 31, 2022, and December 31, 2021, we
had approximately $647 million and $663 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 cash
requirements. The payment of dividends from MGIC
are the principal source of holding company cash
inflow 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 markets is another potential source of holding
company liquidity. The ability to raise capital in the
is subject to prevailing market
public markets
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 5.25% Notes
and 9% Debentures
approximating $36.0 million, based on the debt
outstanding at December 31, 2022. We believe our
holding company has sufficient sources of liquidity to
meet its payment obligations for the foreseeable
future.
During 2022 and 2021, we used approximately $386
million and $291 million respectively, of available
holding company cash to repurchase shares of our
common stock. Through February 17, 2023 we used
approximately $42.6 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 of our share repurchase
programs.
In 2022, we used $110.9 million to pay cash dividends
to shareholders. On January 24, 2023, our Board of
Directors declared a quarterly cash dividend of $0.10
per common share to shareholders of record on
February 17, 2023, payable on March 2, 2023.
Our holding company cash and
decreased $16 million,
December 31, 2022.
investments
to $647 million as of
Significant cash and investments inflows during the
year:
•
•
•
$800 million dividends received from MGIC,
$94 million intercompany tax receipts, and
$8 million of investment income.
Significant cash outflows during the year:
•
•
•
•
•
$386 million of net share
transactions,
repurchase
$248 million of 5.75% Notes redemption,
$121 million of 9% Debenture repurchases,
$111 million of cash dividends paid to
shareholders, and
$53 million of interest payments on our 5.75%
Notes, 5.25% Notes, and 9% Debentures.
The net unrealized losses on our holding company
investment portfolio were approximately $14.0 million
at December 31, 2022 and the portfolio had a
modified duration of approximately 1.1 years.
Scheduled debt maturities beyond the next twelve
months include $650 million of our 5.25% Notes in
2028 and $21.1 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
77.962 common shares per $1,000 principal amount
of debentures. This represents a conversion price of
approximately $12.83 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
MGIC Investment Corporation 2022 Annual Report | 38
MGIC Investment Corporation and Subsidiaries
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
$16.67 (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
the redemption date. Under
Debenture, we may pay cash in lieu of issuing shares.
terms of
the
See Note 7 – “Debt” to our consolidated financial
statements for additional information about our long
term debt. 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 5.25% 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.
DEBT AT SUBSIDIARIES
MGIC is a member of the FHLB, which provides MGIC
access to an additional source of liquidity via a
secured lending facility. In the first quarter of 2022,
we prepaid the outstanding principal balance of
$155.0 million on the FHLB Advance and incurred a
prepayment fee of $1.3 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, 2022, MGIC’s Available Assets
under PMIERs totaled approximately $5.7 billion, an
excess of approximately $2.3 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
Traditional XOL Transactions
Total capital credit for
Reinsurance Transactions
December 31,
2022
2021
$ 1,228 $ 1,129
948
138
765
—
$ 2,314 $ 1,894
Our 2023 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
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
We compute our risk-to-capital ratio on a separate
company statutory basis, as well as on a combined
insurance operations basis. The risk-to-capital ratio is
our net RIF divided by our policyholders’ position. Our
net RIF includes both primary and pool RIF and
excludes risk on policies that are currently in default
and for which case
loss reserves have been
established and the risk covered by reinsurance. The
risk amount includes pools of loans with contractual
aggregate loss limits and without these limits. MGIC's
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
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.
reserve. The
contingency
MGIC Investment Corporation 2022 Annual Report | 39
MGIC Investment Corporation and Subsidiaries
The table below presents MGIC's risk-to-capital
calculation.
revenues, reduce our premium yields and / or increase
our losses.”
Risk-to-capital - MGIC
(In millions, except ratio)
RIF - net (1)
Statutory policyholders' surplus
December 31,
2022
2021
$ 56,292 $ 50,298
$
921 $ 1,217
Statutory contingency reserve
4,597
4,056
Statutory policyholders' position
$ 5,518 $ 5,273
Risk-to-capital
10.2:1
9.5:1
(1)
RIF – net, as shown in the table above, is net of
reinsurance and exposure on policies currently
delinquent $1.4 billion at December 31, 2022 and $1.8
billion at December 31, 2021 and for which case loss
reserves have been established.
The 2022 increase in MGIC's 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 in statutory policyholders' position was
primarily due to an increase in statutory contingency
reserves and net income during 2022, offset by
dividends paid to our holding company of $800
million. The increase in our RIF, net of reinsurance,
was primarily due to an increase in our IIF and the
termination of our 2015 and 2019 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
A3
BBB+
A-
Stable
Stable
Stable
MAC financial strength ratings
Rating Agency
A.M. Best
Rating Outlook
A-
Stable
For further information about the importance of
MGIC’s ratings and rating methodologies, see our risk
factor
in our
relationships with our customers could reduce our
“Competition or changes
titled
MGIC Investment Corporation 2022 Annual Report | 40
MGIC Investment Corporation and Subsidiaries
CRITICAL ACCOUNTING ESTIMATES
The accounting estimate described below requires
significant
the
preparation of our consolidated financial statements.
judgments and estimates
in
ranges of outcomes that are reasonably likely to
occur.
LOSS RESERVES
uncertainty
The estimation of case loss reserves is subject to
significant
inherent
and
judgement by management. Changes
to our
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
insurance entities
accounting and
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
case loss reserves for future claims on insured loans
which are not currently delinquent.
reporting by
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
determine reserves does not include quantitative
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
isolated to
one economic condition cannot be
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
economic condition
influences our ultimate paid
losses differently, even if apparently similar in nature.
Furthermore, changes in economic conditions may
not necessarily be reflected in our loss development
in the quarter or year in which the changes occur.
Actual claim
in
lag changes
economic conditions by at
least nine to twelve
months.
results generally
Our estimates are also affected by any agreements
we enter into regarding our claims paying practices as
discussed in Note 17 – “Litigation and Contingencies”
to our consolidated financial statements.
Our estimate of loss reserves is sensitive to changes
in claim rate and claim severity; it is possible that
even a relatively small change in our estimated claim
rate or 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, 2022,
assuming all other factors remain constant, a $1,000
increase/decrease
in the average claim severity
reserve factor would change the reserve amount by
approximately +/- $10 million. A one percentage point
increase/decrease in the average claim rate reserve
factor would change
reserve amount by
the
approximately +/- $15 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 2022 Annual Report | 41
MGIC Investment Corporation and Subsidiaries
Historical development of loss reserves
(In thousands)
Losses incurred
related to prior
years (1)
Reserve at end
of prior year
2022
2021
2020
2019
2018
(404,130)
(60,015)
19,604
(71,006)
(167,366)
883,522
880,537
555,334
674,019
985,635
(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.
MGIC Investment Corporation 2022 Annual Report | 42
MGIC Investment Corporation and Subsidiaries
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
CFPB
Consumer Financial Protection Bureau
CLO
Collateralized loan obligations
CMBS
Commercial mortgage-backed securities
COVID-19 Pandemic
An outbreak of the novel coronavirus disease, later
named COVID-19. The outbreak of COVID-19 was
the World Health
declared a pandemic by
in the
Organization and a national emergency
United States in March 2020
CRT
Credit risk transfer. The transfer of a portion of
mortgage credit risk to the private sector through
different forms of transactions and structures
/ D
DAC
Deferred insurance policy acquisition costs
Debt-to-income ("DTI") ratio
The ratio, expressed as a percentage, of a
borrower's total debt payments to gross income
Delinquent Loan
loan
A loan that is past due on a mortgage payment. A
delinquent
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
FCRA
Fair Credit Reporting Act
FHA
Federal Housing Administration
FHFA
Federal Housing Finance Agency
FHLB
Federal Home Loan Bank of Chicago, of which
MGIC is a member
FICO score
A measure of consumer credit risk provided by
credit bureaus, typically produced from statistical
models by Fair Isaac Corporation utilizing data
collected by the credit bureaus
Freddie Mac
Federal Home Loan Mortgage Corporation
MGIC Investment Corporation 2022 Annual Report | 43
MGIC Investment Corporation and Subsidiaries
/ G
GAAP
Generally Accepted Accounting Principles in the
United States
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 XOL
transactions through the ILN market.
Loan-to-value ("LTV") ratio
The ratio, expressed as a percentage, of the dollar
amount of the first mortgage loan to the value of
the property at the time the loan became insured
and does not reflect subsequent housing price
Subordinate
appreciation
mortgages may also be present
depreciation.
or
Long-term debt:
5.75% Notes
5.75% Senior Notes
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
Home Re Transactions
Excess-of-loss reinsurance transactions with the
Home Re Entities
FHLB Advance or the Advance
1.91% Fixed rate advance from the FHLB
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.
Loss ratio
The ratio, expressed as a percentage, of the sum of
net incurred losses and loss adjustment expenses
to net premiums earned
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
MGIC Investment Corporation 2022 Annual Report | 44
MGIC Investment Corporation and Subsidiaries
Minimum Required Assets
PMIERs
The minimum amount of Available Assets that
must be held under the PMIERs, which is based on
an insurer's book of RIF and is calculated from
tables of factors with several risk dimensions,
reduced for credit given for risk ceded under
reinsurance transactions, and subject to a floor of
$400 million
Private Mortgage Insurer Eligibility Requirements
issued by each of Fannie Mae and Freddie Mac to
set forth requirements that an approved insurer
must meet and maintain to provide mortgage
loans delivered to or
guaranty
acquired by Fannie Mae or Freddie Mac, as
applicable
insurance on
MPP
Premium Rate
Minimum Policyholder Position, as required under
certain state
“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
The contractual rate charged for coverage under
our insurance policies
Premium Yield
The ratio of premium earned divided by the average
IIF outstanding for the period measured
Not applicable for the period presented
Primary Insurance
NAIC
The
National
Commissioners
NIW
Association
of
Insurance
New Insurance Written, is the aggregate original
principal amount of the mortgages that are insured
during a period
N/M
Data, or calculation, deemed not meaningful for the
period presented
NPL
Non-performing loan, which is a delinquent loan, at
any stage in its delinquency
/ O
OCI
Office of the Commissioner of Insurance of the
State of Wisconsin
/ P
Persistency
The percentage of our insurance remaining in force
from one year prior
PMI
Private Mortgage Insurance (as an industry or
product type)
that
provides mortgage
Insurance
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
in a single bulk
transaction
individually
insured
is
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
2015 QSR
Our QSR transaction that provided coverage on
eligible NIW written prior to 2017
2017 QSR
Our QSR transaction that provided coverage on
eligible NIW in 2017
2018 QSR
Our QSR transaction that provided coverage on
eligible NIW in 2018
2019 QSR
Our QSR transaction that provided coverage on
eligible NIW in 2019
MGIC Investment Corporation 2022 Annual Report | 45
MGIC Investment Corporation and Subsidiaries
2020 QSR
Our QSR transactions that provide coverage on
eligible NIW in 2020
/ T
TILA
Truth in Lending Act
2021 QSR
Our QSR transactions that provide coverage on
eligible NIW in 2021
Traditional XOL Transaction
Excess-of-loss reinsurance transaction with a group
of unaffiliated reinsurers that provides coverage on
eligible NIW in 2022
2022 QSR
Our QSR transactions that provide coverage on
eligible NIW in 2022
/ U
Underwriting expense ratio
The ratio, expressed as a percentage, of the
underwriting and operating expenses, net and
amortization of DAC of our combined insurance
(which excludes underwriting and
operations
operating
non-insurance
our
expenses
subsidiaries) to net premiums written
of
Underwriting profit
Net premiums earned minus incurred losses and
underwriting and operating expenses
USDA
U.S. Department of Agriculture
/ V
VA
U.S. Department of Veterans Affairs
VIE
Variable interest entity
/ X
XOL Transactions
Excess-of-loss reinsurance transactions executed
the
through
Traditional XOL Transaction
the Home Re Transactions and
2023 QSR
Our QSR transactions that provide coverage on
eligible NIW in 2023
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
/ R
RESPA
Real Estate Settlement Procedures Act
RIF
Risk in force, which for an individual loan insured by
us, is equal to the unpaid loan principal balance, as
reported to us, multiplied by the insurance coverage
percentage. RIF
is sometimes referred to as
exposure
Risk-to-capital
Under certain state regulations, the ratio of RIF, net
of reinsurance and exposure on policies currently in
default and for which loss reserves have been
established, to the level of statutory capital
RMBS
Residential mortgage-backed securities
/ S
State Capital Requirements
Under certain state regulations, the minimum
amount of statutory capital relative to risk in force
(or similar measure)
MGIC Investment Corporation 2022 Annual Report | 46
Quantitative and Qualitative Disclosures About Market Risk
Our investment portfolio is essentially a fixed income
portfolio and is exposed to market risk. Important
drivers of the market risk are credit spread risk and
interest rate risk.
Credit spread risk is the risk that we will incur a loss
due to adverse changes in credit spreads. Credit
spread
income
is the additional yield on fixed
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,
instrument. Guideline and
issuer and
investment portfolio detail is available in "Business –
Section C, Investment Portfolio" in Item 1 of our
Annual Report on Form 10-K for the year ended
December 31, 2022 field with teh SEC on February 22,
2023.
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, 2022, the modified duration
of our fixed income investment portfolio was 4.3
years, which means that an instantaneous parallel
shift in the yield curve of 100 basis points would
result in a change of 4.3% in the fair value of our fixed
income portfolio. For an upward shift in the yield
curve, the fair value of our portfolio would decrease
and for a downward shift in the yield curve, the fair
value would
increase. A discussion of portfolio
strategy appears in "Management's Discussion and
Investment
Analysis – Balance Sheet Review–
Portfolio" in Item 7.
MGIC Investment Corporation 2022 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.
Our actual results could be affected by the risk factors
below. These risk factors are an integral part of this
annual report. These risk factors may also cause
actual results to differ materially from the results
contemplated by forward looking statements that we
may make. Forward looking statements consist of
statements which relate to matters other than
historical fact, including matters that inherently refer
to future events. Among others, statements that
include words such as “believe,” “anticipate,” “will” or
“expect,” or words of similar import, are forward
looking statements. We are not undertaking any
obligation to update any forward looking statements
or other statements we may make even though these
statements may be affected by events or
circumstances occurring after the forward looking
statements or other statements were made. No
reader of this annual report should rely on these
statements being current at any time other than the
time at which this annual report was filed with the
Securities and Exchange Commission.
Risk Factors Relating to Global Events
The Russia-Ukraine war and/or other global events
may adversely affect the U.S. economy and our
business.
invasion of Ukraine has
Russia's
increased the
already-elevated inflation rate, added more pressure
to strained supply chains, and has increased volatility
in the domestic and global financial markets. The war
has impacted, and may impact, our business in
various ways,
including the following which are
described in more detail in the remainder of these risk
factors:
•
•
•
The terms under which we are able to obtain
excess-of-loss ("XOL") reinsurance through the
insurance-linked notes ("ILN") market and the
reinsurance market have been
traditional
negatively impacted and terms under which we
are able to access those markets in the future
may be limited or less attractive.
The risk of a cybersecurity incident that affects
our company may have increased.
An extended or broadened war may negatively
the domestic economy, which may
impact
increase unemployment and
inflation, or
decrease home prices, in each case leading to an
increase in loan delinquencies.
•
The volatility in the financial markets may impact
the performance of our investment portfolio and
our investment portfolio may include investments
in companies or securities that are negatively
impacted by the war.
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 result
increasing, with a
defaulting and our
corresponding decrease in our returns.
losses
Losses result from events that reduce a borrower’s
ability or willingness to make mortgage payments,
such as unemployment, health issues, changes in
family status, and decreases in home prices that
result in the borrower's mortgage balance exceeding
the net value of the home. 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.
to predict given
in an
levels of unemployment may result
High
increasing number of loan delinquencies and an
increasing number of insurance claims; however,
is difficult
unemployment
the
the current market environment,
in
uncertainty
including as a result of global events such as the
COVID-19 pandemic, the Russia-Ukraine war, and the
possibility of an economic recession. Since the
beginning of 2021,
increased
dramatically. The impact that higher inflation rates
will have on loan delinquencies is unknown.
inflation has
is moderating:
The seasonally-adjusted Purchase-Only U.S. Home
Price Index of the Federal Housing Finance Agency
is based on single-family
(the “FHFA”), which
properties whose mortgages have been purchased or
securitized by Fannie Mae or Freddie Mac, indicates
that home prices fell 0.1% nationwide in November,
2022 compared to October, 2022. The 12 month
change in home prices remains at historically high
rates, but the rate of growth
it
increased by 6.7% in the first eleven months of 2022,
after increasing 17.9%, 11.7%, and 5.9% in 2021, 2020
and 2019, respectively. The national average price-to-
income ratio exceeds its historical average, in part as
a result of recent home price appreciation outpacing
increases in income. Affordability issues and the
significant increase in interest rates in recent months
has put downward pressure on home prices. Recent
third-party forecasts predict that home prices will
decline further. This decline may occur even absent a
deterioration in economic conditions due to declines
in demand for homes, which in turn may result from
changes in buyers’ perceptions of the potential for
future appreciation, restrictions on and the cost of
mortgage credit due to more stringent underwriting
standards, higher interest rates, changes to the tax
MGIC Investment Corporation 2022 Annual Report | 48
deductibility of mortgage interest, decreases in the
rate of household formations, or other factors.
•
Changes in the business practices of Fannie Mae and
Freddie Mac's ("the GSEs"), federal legislation that
changes their charters or a restructuring of the GSEs
could reduce our revenues or increase our losses.
("SPCPs")
insurance,
The substantial majority of our NIW is for loans
purchased by the GSEs; therefore, the business
practices of the GSEs greatly impact our business. In
June 2022 the GSEs each published their Equitable
Housing Finance Plans. The Plans seek to advance
equity in housing finance over a three year period and
include potential changes to the GSEs’ business
Specifically relating to
practices and policies.
mortgage
(1) Fannie Mae’s Plan
contemplates the creation of special purchase credit
program(s)
to historically
underserved borrowers with a goal of lowering costs
for such borrowers through lower than standard
mortgage insurance requirements; and (2) Freddie
Mac’s Plan contemplates the creation of SPCPs
targeted to historically underserved borrowers with
the goals of (a) working with mortgage insurers to
reduce costs for high LTV borrowers, and (b) updating
mortgage insurance cancellation requirements. To the
extent the business practices and policies of the GSEs
regarding mortgage insurance coverage, costs and
cancellation change, including more broadly than
through SPCPs, such changes may negatively impact
the mortgage insurance industry.
targeted
Other business practices of the GSEs that affect the
mortgage insurance industry include:
•
•
•
the
("PMIERs"),
The GSEs' private mortgage insurer eligibility
requirements
financial
requirements of which are discussed in our risk
factor titled “We may not continue to meet the
GSEs’
eligibility
requirements and our returns may decrease if we
are required to maintain more capital in order to
maintain our eligibility.”
private mortgage
insurer
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."
level of private mortgage
The
insurance
coverage, subject to the limitations of the GSEs’
charters, when private mortgage insurance is
used as the required credit enhancement on low
down payment mortgages (the GSEs generally
require a level of mortgage insurance coverage
that is higher than the level of coverage required
by their charters; any change in the required level
of coverage will impact our new risk written).
The amount of loan level price adjustments and
guaranty fees (which result in higher costs to
borrowers) that the GSEs assess on loans that
require private mortgage
insurance. The
requirements of the new GSE capital framework
may lead the GSEs to increase their guaranty
fees. In addition, the FHFA has indicated that it is
reviewing the GSEs' pricing in connection with
preparing them to exit conservatorship and to
ensure
that pricing subsidies benefit only
affordable housing activities.
• Whether
the GSEs select or
the
mortgage lender’s selection of the mortgage
insurer providing coverage.
influence
•
•
•
•
•
•
•
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.
terms on which mortgage
The
insurance
coverage can be canceled before reaching the
cancellation thresholds established by law and
the business practices associated with such
cancellations. For more
information, see the
above discussion of the GSEs' Equitable Housing
Plans and our risk factor titled “Changes in
interest rates, house prices or 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
in
insurers’ claims paying practices,
mortgage
rescission practices or rescission settlement
practices with lenders.
intervene
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
loans available to be
affect the
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
MGIC Investment Corporation 2022 Annual Report | 49
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 conservatorships
may
the business
likelihood
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.
increase
that
the
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
the
resulting changes are uncertain. Many of
proposed changes would
require Congressional
action to implement and it is difficult to estimate
when Congressional action would be final and how
long any associated phase-in period may last.
We may not continue to meet the GSEs’ private
mortgage insurer eligibility requirements and our
returns may decrease if we are required to maintain
more capital in order to maintain our eligibility.
We must comply with a GSE's PMIERs to be eligible to
insure loans delivered to or purchased by that GSE.
The PMIERs include financial requirements, as well as
business, quality control and certain transaction
approval requirements. The financial requirements of
the PMIERs require a mortgage insurer’s “Available
Assets” (generally only the most liquid assets of an
insurer) to equal or exceed its “Minimum Required
Assets” (which are 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, 2022, MGIC’s Available Assets totaled
$5.7 billion, or $2.3 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 quota share reinsurance
("QSR") and XOL 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 XOL
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 “Consolidated Results of Operations
– Reinsurance Transactions” in Part 7 for information
about the calculated PMIERs credit for our XOL
transactions. 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
increases for
loan delinquencies
reasons discussed in these risk factors, or otherwise,
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
The PMIERs may be changed in response to the
final regulatory capital framework for the GSEs
that was published in February 2022.
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.
MGIC Investment Corporation 2022 Annual Report | 50
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.
loss reserve estimates are subject to
Because
uncertainties, paid claims may be substantially
different than our loss reserves.
incorporate anticipated cures,
When we establish case reserves, we estimate our
ultimate loss on delinquent loans by estimating the
number of such loans that will result in a claim
payment (the "claim rate"), and further estimating the
amount of the claim payment (the "claim severity").
Changes to our claim rate and claim severity
estimates could have a material impact on our future
results, even in a stable economic environment. Our
estimates
loss
mitigation activity, rescissions and curtailments. The
establishment of loss reserves is subject to inherent
uncertainty and requires significant
judgment by
management. Our actual claim payments may differ
substantially from our loss reserve estimates. Our
estimates could be affected by several factors,
including a change in regional or national economic
conditions as discussed in these risk factors and a
change in the length of time loans are delinquent
before claims are received. Generally, the longer a
loan is delinquent before a claim is received, the
greater the severity. As a result of foreclosure
moratoriums and forbearance programs related to
COVID-19, the average time it takes to receive claims
has increased. Economic conditions may differ from
region to region. Information about the geographic
dispersion of our risk
in force and delinquency
inventory can be found in our Annual Reports on Form
10-K and our Quarterly Reports on Form 10-Q. Prior to
the COVID-19 pandemic, losses incurred generally
followed a seasonal trend in which the second half of
the year has weaker credit performance than the first
half, with higher new default notice activity and a
lower cure rate.
We are subject to comprehensive regulation and other
requirements, which we may fail to satisfy.
for
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 investors. Mortgage insurers, 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 or others would not have a
material adverse effect on us. To the extent that we
fee provisions of
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
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
and data and analytics, has
to additional
regulatory scrutiny of premium rates and of other
in pricing and
matters such as discrimination
underwriting, data privacy and access to insurance.
For more
capital
requirements, see our risk factor titled “State capital
requirements may prevent us from continuing to write
insurance on an uninterrupted basis.” For
new
information about regulation of data privacy, see our
risk factor titled “We could be materially adversely
affected by a cyber security breach or failure of
information security controls.” For more details about
in which our subsidiaries are
the various ways
regulated, see “Business - Regulation” in Item 1.
information
about
state
led
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.
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
MGIC Investment Corporation 2022 Annual Report | 51
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
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
increased reinsurance rates or reduced
lead to
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 State Capital Requirements and the
PMIERs.
increase
loans; however, the
The PMIERs require us to maintain significantly more
"Minimum Required Assets" for delinquent loans than
for performing
in
Minimum Required Assets is not as great for certain
delinquent loans in areas that the Federal Emergency
Management Agency has declared major disaster
areas and for certain loans whose borrowers have
been affected by COVID-19. 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.
Reinsurance may not always be available or its cost
may increase.
We have
reinsurance
in place QSR and XOL
transactions providing various amounts of coverage
on 85% of our risk in force as of December 31, 2022.
Refer to Part 8, Note 9 – “Reinsurance” and Part 7
“Consolidated Results of Operations – Reinsurance
Transactions” for more information about coverage
under our reinsurance transactions. 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 reinsurance transactions subject us
to counterparty credit risk, and the GSEs may change
the past due
to volatility stemming
interest
the credit they allow under the PMIERs for risk ceded
under our reinsurance transactions. Most of our XOL
transactions were entered into in capital market
transactions with special purpose insurers that issued
notes linked to the reinsurance coverage ("Insurance
Linked Notes" or "ILNs"). Our access to reinsurance
may be disrupted and the terms under which we are
able to obtain reinsurance may be less attractive than
from
in
circumstances such as higher
rates,
increased inflation, global events such as the Russia-
Ukraine war, and other factors. In 2022, execution of
transactions for XOL reinsurance through the ILN
market was more challenging, with increased pricing,
down-sized
fewer
transactions executed by mortgage insurers. If we are
unable to obtain reinsurance for our insurance written,
the capital required to support our insurance written
will not be reduced as discussed above 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.
transactions, and generally
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 when a "premium
deficiency" is recorded. 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,
2022, we had established case reserves and reported
losses incurred for 26,387 loans in our delinquency
inventory and our IBNR reserve totaled $21 million.
The number of loans in our delinquency inventory may
increase from that level as a result of economic
conditions relating to current global events or other
factors and our losses incurred may increase.
State capital requirements may prevent us from
continuing to write new insurance on an uninterrupted
basis.
The insurance laws of 16 jurisdictions, including
Wisconsin, MGIC's domiciliary state,
require a
mortgage insurer to maintain a minimum amount of
MGIC Investment Corporation 2022 Annual Report | 52
jurisdictions,
they vary among
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
the most
common State Capital Requirements allow for a
maximum risk-to-capital ratio of 25 to 1. A risk-to-
capital ratio will
if (i) the percentage
decrease in capital exceeds the percentage decrease
in insured risk, or (ii) the percentage increase in
capital is less than the percentage increase in insured
risk. Wisconsin does not regulate capital by using a
requires a
risk-to-capital measure but
(“MPP”). MGIC's
minimum policyholder position
“policyholder position”
its net worth or
includes
surplus, and its contingency reserve.
increase
instead
reinsurance and excess of
ILN market and
At December 31, 2022 MGIC’s risk-to-capital ratio was
10.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements, and its
policyholder position was $3.5 billion above the
required MPP of $2.1 billion. Our risk-to-capital ratio
and MPP reflect full credit for the risk ceded under our
quota share
loss
traditional
transactions
reinsurance market with unaffiliated reinsurers. It is
possible
revised State Capital
the
Requirements discussed below, MGIC will not be
allowed full credit for the risk ceded under such
transactions. If MGIC is not allowed an agreed level of
credit under the State Capital Requirements, MGIC
may terminate the reinsurance transactions, without
penalty.
that under
the
in
Insurance Model Act.
The NAIC previously announced plans to revise the
State Capital Requirements that are provided for in its
Mortgage Guaranty
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 certain items were
not completely addressed by the framework, including
the treatment of ceded risk and minimum capital
floors. In October 2022, the NAIC working group
released a revised exposure draft of the Mortgage
Guaranty Insurance Model Act that does not include
changes to the capital requirements of the existing
Model Act.
While MGIC currently meets
the State Capital
Requirements of Wisconsin and all other jurisdictions,
it could be prevented from writing new business in the
future in all jurisdictions if it fails to meet the State
Capital Requirements of Wisconsin, or it could be
prevented from writing new business in a particular
jurisdiction
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
if
insurance
to write new
the PMIERs may affect
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
its
Requirements or
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.
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
risk-
underwriting standards,
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
affected if lenders and investors select alternatives to
private mortgage insurance.”
loans
to
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,
MGIC Investment Corporation 2022 Annual Report | 53
•
•
lenders using Federal Housing Administration
("FHA"), U.S. Department of Veterans Affairs
("VA") and other government mortgage insurance
programs, and
lenders originating mortgages using piggyback
structures to avoid private mortgage insurance,
such as a first mortgage with an 80% loan-to-
value ("LTV") ratio and a second mortgage with a
10%, 15% or 20% LTV ratio rather than a first
mortgage with a 90%, 95% or 100% LTV ratio that
has private mortgage insurance.
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 lenders in primary
mortgage market transactions to satisfy this credit
enhancement requirement. In 2018, the GSEs initiated
secondary mortgage market programs with loan level
mortgage default coverage provided by various
(re)insurers that are not mortgage insurers governed
by PMIERs, and that are not selected by the lenders.
These programs, which currently account for a small
percentage of
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 Fannie Mae and Freddie Mac's
("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
The GSEs (and other investors) have also used other
forms of credit enhancement that did not involve
insurance, such as
traditional private mortgage
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 26.7% in
2022, 24.7% in 2021, and 23.4% in 2020. 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 federal
legislation and programs; returns expected to be
obtained by lenders for Ginnie Mae securitization of
FHA-insured loans compared to those obtained from
selling loans to the GSEs for securitization; and
differences in policy terms, such as the ability of a
borrower to cancel insurance coverage under certain
circumstances. On February 22, 2023, the FHA
announced a 30 bps decrease
its mortgage
insurance premium rates. This rate reduction will
negatively impact our NIW; however, given the many
factors that influence the FHA's market share, it is
difficult to predict the extent of 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.
in
The VA's share of the low down payment residential
mortgages that were subject to FHA, VA, USDA or
primary private mortgage insurance was 24.5% in
2022, 30.2% in 2021, and 30.9% in 2020. Beginning in
2012, the VA’s share has been as low as 22.8% (in
2013) and as high as 30.9% (in 2020). We believe that
the VA’s market share grows as the number of
borrowers that are eligible for the VA’s program
increases, and when eligible borrowers opt to use the
VA program when refinancing their mortgages. The
VA program offers 100% LTV ratio loans and charges
a one-time funding fee that can be included in the loan
amount.
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 rate
may decrease the profitability from single premium
policies because they will remain in force longer and
may
incidence of claims that 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
incidence of claims, while a high
persistency on those policies will increase future
premiums but may increase the incidence of claims.
increase the
the
Our persistency rate was 79.8% at December 31,
2022, 62.6% at December 31, 2021, and 60.5% at
December 31, 2020. Since 2000, our year-end
MGIC Investment Corporation 2022 Annual Report | 54
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:
•
•
•
Borrowers with significant equity may be able to
refinance their loans without requiring mortgage
insurance.
(“HOPA”)
The Homeowners Protection Act
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 more
information about the GSEs guidelines and
business practices, and how they may change,
see our risk factor titled “Changes in the business
practices of Fannie Mae and Freddie Mac's ("the
legislation that changes their
GSEs"), federal
charters or a restructuring of the GSEs could
reduce our revenues or increase our losses.”
We are susceptible to disruptions in the servicing of
mortgage loans that we insure and we rely on third-
party
the
reporting
mortgage loans we insure.
information
regarding
for
We depend on reliable, consistent third-party servicing
of the loans that we insure. An increase in delinquent
loans may result in liquidity issues for servicers. When
a mortgage loan that is collateral for a mortgage
backed security ("MBS") becomes delinquent, the
is usually required to continue to pay
servicer
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, especially for non-bank servicers (who
service approximately 46% of the loans underlying our
insurance in force as of December 31, 2022) because
they do not have the same sources of liquidity that
bank servicers have.
While there has been no disruption in our premium
receipts through the end of 2022, 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
generally allow us to cancel coverage on loans that
are not delinquent if the premiums are not paid within
a grace period.
An increase in delinquent loans or a transfer of
servicing resulting from liquidity issues, may increase
the operational burden on 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 servicers and originators of
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,
the
including
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 consistently
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.
Risk Factors Relating to Our Business Generally
If our risk management programs are not effective in
identifying, or adequate in controlling or mitigating,
the risks we face, or if the models used in our
businesses are inaccurate, it could have a material
adverse impact on our business, results of operations
and financial condition.
Our enterprise risk management program, described
in "Business - Our Products and Services - Risk
Management" in Item 1, may not be effective in
identifying, or adequate in controlling or mitigating,
the risks we face in our business.
techniques used
We employ proprietary and third-party models for a
wide range of purposes, including the following:
projecting losses, premiums, expenses, and returns;
pricing products (through our risk-based pricing
system); determining
to
the
underwrite insurance; estimating reserves; evaluating
risk; determining internal capital requirements; and
performing stress testing. These models rely on
estimates, projections, and assumptions that are
inherently uncertain and may not always operate as
true when
This can be especially
intended.
extraordinary events occur, such as the COVID-19
pandemic, the Russia-Ukraine war, periods of extreme
inflation, or environmental disasters
to
changing climatic conditions. In addition, our models
are being continuously updated over time. Changes in
models or model assumptions could lead to material
changes
in our future expectations, returns, or
financial results. The models we employ are complex,
related
MGIC Investment Corporation 2022 Annual Report | 55
which could increase our risk of error in their design,
implementation, or use. Also, the associated input
data, assumptions, and calculations may not always
be correct or accurate and the controls we have in
place to mitigate these risks may not be effective in
all cases. The risks related to our models may
assumptions,
increase
methodologies, or modeling platforms. Moreover, we
may
through
enhancements to refine or otherwise change existing
assumptions and/or methodologies.
information we
change
receive
when
use
we
technology
Information
or
interruptions may materially impact our operations
and adversely affect our financial results.
failures
system
We are heavily dependent on our
information
technology systems to conduct our business. Our
ability to efficiently operate our business depends
significantly on the reliability and capacity of our
systems and technology. The failure of our systems
and technology to operate effectively could affect our
ability to provide our products and services to
customers, reduce efficiency, or cause delays in
operations. Significant capital investments might be
required to remediate any such problems. We are also
dependent on our ongoing relationships with key
technology providers, including provisioning of their
products and technologies, and their ability to support
those products and technologies. The inability of
these providers to successfully provide and support
those products could have an adverse impact on our
business and results of operations.
and
transforming
for evaluating
their operation. The
the process of upgrading certain
in
We are
information
and
systems,
automating certain business processes, and we
continue to enhance our risk-based pricing system
risk. Certain
and our system
information systems have been in place for a number
of years and it has become increasingly difficult to
support
implementation of
technological and business process improvements,
as well as their integration with customer and third-
party systems when applicable, is complex, expensive
If we fail to timely and
and time consuming.
successfully
the new
technology systems, if the third party providers upon
which we are 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.
implement and
integrate
We could be materially adversely affected by a cyber
security breach or failure of information security
controls.
in some
As part of our business, we maintain large amounts of
confidential and proprietary information, including
personal information of consumers and employees,
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 personal information to adopt
information security programs, and
to notify
individuals, and
jurisdictions, regulatory
authorities, of security breaches involving personally
identifiable information. All information technology
systems are potentially vulnerable to damage or
interruption from a variety of sources, including by
cyber attacks, such as those involving ransomware.
The Company discovers vulnerabilities and regularly
blocks a high volume of attempts
to gain
unauthorized access to its systems. Globally, attacks
are expected
in both
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. Such attacks may also increase as a
result of retaliation by Russia in response to actions
taken by the U.S. and other countries in connection
with Russia's military
The
Company operates under a hybrid workforce model
and such model may be more vulnerable to security
breaches.
to continue accelerating
invasion of Ukraine.
in place
to secure our
While we have information security policies and
information
systems
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. 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,
those
involving ransomware, some of the costs we incur
may not be recoverable through insurance, or legal or
other processes, and this may have a material
adverse effect on our results of operations.
including
MGIC Investment Corporation 2022 Annual Report | 56
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
insurance policies or other
lender-paid mortgage
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.
in 2022 to 19.0%
The percentage of our NIW from all single premium
policies was 4.3% in 2022 and 7.4% in 2021, and has
ranged from 4.3%
in 2017.
Depending on the actual life of a single premium
policy and its premium rate relative to that of a
monthly premium policy, a single premium policy may
generate more or less premium than a monthly
premium policy over its life.
receive
As discussed in our risk factor titled "Reinsurance may
not always be available or its cost may increase," we
have in place various QSR transactions. Although the
transactions reduce our premiums, they have a lesser
impact on our overall results, as losses ceded under
the transactions reduce our losses incurred and the
reduce our
ceding commissions we
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 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 the reinsurers 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
to accommodations we made
limited due
in
connection with the COVID-19 pandemic. We 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, including by
agreeing with certain approval recommendations
from a GSE automated underwriting system. We also
make exceptions to our underwriting requirements on
loan-by-loan basis and for certain customer
a
programs. Our underwriting
requirements are
available on our website at http://www.mgic.com/
underwriting/index.html.
Even when home prices are stable or
rising,
mortgages with certain characteristics have higher
probabilities of claims. As of December 31, 2022,
mortgages with these characteristics in our primary
risk in force included mortgages with LTV ratios
greater than 95% (15.0%), mortgages with borrowers
having FICO scores below 680 (7.2%), including those
with borrowers having FICO scores of 620-679 (6.2%),
mortgages with limited underwriting, including limited
borrower documentation (0.8%), and mortgages with
borrowers having DTI ratios greater than 45% (or
where no ratio is available) (15.6%), each attribute as
determined at the time of loan origination. Loans with
more than one of these attributes accounted for 4.4%
of our primary risk in force as of December 31, 2022,
and 4.1% of our primary risk in force as of December
31, 2021. When home prices increase, interest rates
increase and/or the percentage of our NIW from
purchase
increases, our NIW on
mortgages with higher LTV ratios and higher DTI
ratios may increase. Our NIW on mortgages with LTV
ratios greater than 95% increased from 11% in 2021 to
12% in 2022 and our NIW on mortgages with DTI
ratios greater than 45% increased from 14% in 2021 to
21% in 2022.
transactions
the numbers of which have
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 from the results that would
have been determined using different methods; we
accept GSE appraisal waivers for certain refinance
loans,
increased
significantly beginning in 2020; and we accept GSE
appraisal flexibilities 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
is
possible that our automated processes result in our
it
MGIC Investment Corporation 2022 Annual Report | 57
insuring loans that we would not otherwise have
insured under our prior processes.
Approximately 72% of our 2022 and 72% of our 2021
NIW was originated under delegated underwriting
programs pursuant to which the loan originators had
authority on our behalf to underwrite the loans for our
mortgage insurance. For loans originated through a
delegated underwriting program, we depend on the
originators' compliance with our guidelines and rely
on the originators' representations that the loans
being insured satisfy the underwriting guidelines,
eligibility criteria and other requirements. While we
have established systems and processes to monitor
whether certain aspects of our underwriting
guidelines were being followed by the originators,
such systems may not ensure that the guidelines
were being strictly followed at the time the loans were
originated.
The widespread use of risk-based pricing systems by
the private mortgage insurance industry (discussed in
our risk factor titled "Competition or changes in our
relationships with our customers could reduce our
revenues, reduce our premium yields and / or increase
our losses") makes it more difficult to compare our
premium rates to those offered by our competitors.
We may not be aware of industry rate changes until
we observe that our mix of new insurance written has
changed and our mix may fluctuate more as a result.
that more mortgage
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
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 on increasing homeownership
opportunities for borrowers is likely to have this
effect. Lenders could pressure mortgage insurers to
insure such loans, which are expected to experience
to
higher claim
incorporate these higher expected claim rates into our
underwriting and pricing models, there can be no
assurance
the
associated investment income will be adequate to
compensate for actual losses paid even under our
current underwriting requirements.
rates. Although we attempt
the premiums earned and
that
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
increase
be offset by premium increases on policies in force or
mitigated by our non-renewal or cancellation of
insurance coverage. Our premiums are subject to
approval by state regulatory agencies, which can
delay or limit our ability to increase premiums on
future policies. In addition, our customized rate plans
may delay our ability to increase premiums on future
policies covered by such plans. The premiums we
charge, the investment income we earn and the
amount of reinsurance we carry may not be adequate
to compensate us for the risks and costs associated
with the insurance coverage provided to customers.
An
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."
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 the departing
individuals; that
replacements could be hired, if necessary, on terms
that are favorable to us; or that we can successfully
transition such replacements in a timely manner. We
currently have not entered into any employment
agreements with our officers or key personnel.
Volatility or lack of performance in our stock price
may affect our ability to retain our key personnel or
attract replacements should key personnel depart.
Without a properly skilled and experienced workforce,
our costs, including productivity costs and costs to
replace employees may increase, and this could
negatively impact our earnings.
MGIC Investment Corporation 2022 Annual Report | 58
Competition or changes in our relationships with our
customers could reduce our revenues, reduce our
premium yields and / or increase our losses.
The private mortgage insurance industry is highly
competitive and is expected to remain so. We believe
we currently compete with other private mortgage
insurers based on premium
rates, underwriting
requirements, financial strength (including based on
credit or
ratings), customer
relationships, name recognition, reputation, strength
of management teams and field organizations, the
ancillary products and services provided to lenders,
and the effective use of technology and innovation in
the delivery and servicing of our mortgage insurance
products.
financial strength
limited periods of time. As a result, our NIW may
fluctuate more than it had in the past. Regarding the
concentration of our new business, our top ten
customers accounted for approximately 33% and 36%
in the twelve months ended December 31, 2022 and
December 31, 2021, respectively.
We monitor various competitive and economic
factors while seeking to balance both profitability and
market share considerations in developing our pricing
strategies. Premium rates on NIW will change our
premium yield (net premiums earned divided by the
average
in force) over time as older
insurance policies run off and new insurance policies
with premium rates that are generally lower are
written.
insurance
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
those of our
premium
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
improved credit profile and
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) 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
reduced
the
loss
insured after
expectations associated with
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 its cost may increase"
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
in more homeowners
home prices may
defaulting and our
increasing, with a
returns,” and
corresponding decrease
“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
losses
result
loans
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
increase
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
if U.S. corporate
advantages that may
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."
forms of
alternative
insurance,
including
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
condition by the GSEs and/or our customers,
potentially resulting in a decrease in the amount
of our NIW.
in
to participate
the non-GSE
Our ability
residential mortgage-backed securities market
(the size of which has been limited since 2008,
but may grow in the future), could depend on our
ability to maintain and improve our investment
grade ratings for our insurance subsidiaries. We
could be competitively disadvantaged with some
market participants because
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 A3 (with
a stable outlook) and from Standard & Poor’s is
BBB+ (with a stable outlook).
the
MGIC Investment Corporation 2022 Annual Report | 59
•
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.
for
Standard & Poor’s is considering changes to its rating
methodologies
including mortgage
insurers,
insurers. It is uncertain what impact the changes will
have, whether they will prompt similar moves at other
rating agencies, or the extent to which they will impact
how external parties evaluate the different rating
levels.
We are subject to the risk of legal proceedings.
to determine
insurance policy
loan and servicing files
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 herein as “rescissions”). In addition, our
insurance policies generally provide that we can
reduce a claim if the servicer did not comply with its
(such
obligations under our
reduction referred to as a “curtailment”). In recent
years, an immaterial percentage of claims received
have been resolved by rescissions. In 2022 and in
2021, curtailments reduced our average claim paid by
approximately 6.3% and 4.4%, respectively. The
COVID-19-related
foreclosure moratoriums and
forbearance plans, along with increased home prices,
resulted in decreased claims paid activity beginning in
the second quarter of 2020. It is difficult to predict the
level of curtailments once foreclosure activity returns
to a more
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.
level. Our
typical
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. 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 loss.
loss
We have been named as a third-party defendant in a
lawsuit that involves refunds of mortgage insurance
premiums under the Homeowners Protection Act. We
are monitoring litigation addressing similar issues in
which we have not been named a defendant. We are
unable to assess the potential impact of any such
litigation at this time. In addition, from time to time,
we are
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.
in other disputes and
financial position or
involved
The COVID-19 pandemic may materially impact our
business and future financial condition.
The COVID-19 pandemic materially impacted our
2020 financial results. While the initial impact of
COVID-19 on our business has moderated, the extent
to which COVID-19 may materially
impact our
business and future financial condition is uncertain
and cannot be predicted. The magnitude of any future
impact could 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, government
initiatives and actions taken by the GSEs (including
mortgage forbearance and modification programs),
and the overall effects of COVID-19 on the economy.
The COVID-19 pandemic may impact our business in
other ways, as described in more detail in these risk
factors.
loans. However, given
Forbearance for borrowers who were affected by
COVID-19 allows mortgage payments
to be
of time. Historically,
suspended for a period
forbearance plans have reduced the incidence of our
losses on affected
the
uncertainty surrounding
long-term economic
impact of COVID-19, it is difficult to predict the
ultimate effect of COVID-19 related forbearances on
our loss incidence. Whether a loan delinquency will
cure,
through modification, when
forbearance ends will depend on the economic
circumstances of the borrower at that time. The
including
the
MGIC Investment Corporation 2022 Annual Report | 60
severity of losses associated with delinquencies that
do not cure will depend on economic conditions at
that time, including home prices.
Our success depends, in part, on our ability to manage
risks in our investment portfolio.
by
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. Prevailing
market rates have increased for various reasons,
including inflationary pressures, which has reduced
the fair value of our investment portfolio. The value of
investment portfolio may also be adversely
our
increased
affected
bankruptcies, and credit spreads widening.
In
addition, the collectability and valuation of our
municipal bond portfolio may be adversely affected
by budget deficits, and declining tax bases and
revenues
local
municipalities. Our investment portfolio also includes
commercial
securities,
mortgage-backed
collateralized
loan obligations, and asset-backed
securities, which could be adversely affected by
declines
in
unemployment, geopolitical risks and/or financial
market disruption, including a heightened collection
risk on the underlying loans. As a result of these
matters, we may not achieve our
investment
objectives and a reduction in the market value of our
investments could have an adverse effect on our
liquidity, financial condition and results of operations.
in real estate valuations,
downgrades,
experienced
increases
ratings
state
and
by
income
could adversely affect our results of operations.
investments before their maturity, which
Our holding company debt obligations are material.
in cash and
At December 31, 2022, we had approximately $647
investments at our holding
million
company and our holding company’s long-term debt
obligations were $671 million in aggregate principal
amount. Annual debt service on the long-term debt
obligations outstanding as of December 31, 2022, is
approximately $36 million.
insurance
regulation.
its PMIERs
requirements and
The long-term debt obligations are owed by our
holding company, MGIC Investment Corporation, and
not its subsidiaries. The payment of dividends from
MGIC is the principal source of our holding company
cash inflow. Other sources of holding company cash
inflow include settlements under intercompany tax
and expense sharing agreements, investment income
and raising capital in the public markets. Although
MGIC holds assets in excess of its minimum statutory
capital
financial
requirements, the ability of MGIC to pay dividends is
In general,
restricted by
dividends in excess of prescribed limits are deemed
“extraordinary” and may not be paid if disapproved by
the OCI. In 2023, MGIC can pay $92 million of ordinary
dividends without OCI approval, before taking into
consideration dividends paid in the preceding twelve
months. A dividend
the
proposed dividend amount plus dividends paid in the
last twelve months from the dividend payment date
exceed the ordinary dividend level. In the twelve
months ended December 31, 2022, MGIC paid $800
million in dividends to the holding company. Future
dividend payments
the holding
company will be determined in consultation with the
board of directors, and after considering any updated
estimates about our business.
is extraordinary when
from MGIC
to
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
income securities whose
investment grade fixed
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
Repurchases of our common stock may be made
from time to time on the open market (including
through 10b5-1 plans) or through privately negotiated
transactions. In 2022, we repurchased approximately
27.8 million shares, using approximately $386 million
of holding company resources. As of December 31,
2022, we had $114 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.
Your ownership in our company may be diluted by
additional capital that we raise.
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
MGIC Investment Corporation 2022 Annual Report | 61
York began publishing in 2018. Because SOFR is
calculated based on different criteria than LIBOR,
SOFR and LIBOR may diverge.
it
that
involve
financial
While
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
instruments
transactions
referencing LIBOR. First, as of December 31, 2022,
approximately 6% of the fair value of our investment
portfolio consisted of securities referencing LIBOR.
Second, as of December 31, 2022, approximately
$0.4 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
to
Minimum Required Assets we are
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 XOL reinsurance agreements executed
through
linked noted transactions 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 2022, our total premiums on such transactions
were approximately $36.4 million).
insurance
required
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.
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
(including
in our share
in expectations of
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
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
investors have
common stock because
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).
the
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 includes the Secured Overnight Financing Rate
(“SOFR”), which the Federal Reserve Bank of New
MGIC Investment Corporation 2022 Annual Report | 62
Management's Report on Internal Control Over Financial Reporting
to provide
reliability of
is designed
regarding
Our management is responsible for establishing and
maintaining adequate internal control over financial
reporting (as defined in Exchange Act Rule 13a-15(f)
and 15d-15(f)). Our internal control over financial
reasonable
reporting
financial
the
assurance
reporting and the preparation of financial statements
for external purposes in accordance with generally
accepted accounting principles. Because of
its
inherent limitations, however, internal control over
reporting may not prevent or detect
financial
misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk
that controls may become inadequate because of
the degree of
changes
compliance with the policies or procedures may
deteriorate.
in conditions, or
that
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,
2022.
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, 2022, as stated in their report which
appears herein.
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, 2022 that
have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
MGIC Investment Corporation 2022 Annual Report | 63
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,
2022 and 2021, and
related consolidated
statements of operations, of comprehensive income
(loss), of shareholders' equity and of cash flows for
each of the three years in the period ended
December 31, 2022, 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, 2022, based on
criteria established in Internal Control - Integrated
issued by the Committee of
Framework (2013)
Treadway
Sponsoring Organizations
Commission (COSO).
the
of
In our opinion, the consolidated financial statements
in all material
referred to above present fairly,
respects, the financial position of the Company as of
December 31, 2022 and 2021, and the results of its
operations and its cash flows for each of the three
years in the period ended December 31, 2022 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, 2022, 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
in
control over
Management’s Report on
Internal Control over
Financial Reporting appearing under Item 9A. Our
responsibility
the
Company’s consolidated financial statements and on
the Company's internal control over financial reporting
based on our audits. We are a public accounting firm
registered with the Public Company Accounting
Oversight Board (United States) (PCAOB) and are
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
reasonable
the
consolidated financial statements are free of material
misstatement, whether due to error or fraud, and
internal control over financial
whether effective
reporting was maintained in all material respects.
about whether
assurance
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.
MGIC Investment Corporation 2022 Annual Report | 64
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
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, 2022, the Company’s
recorded
reserves were $558 million. A
significant portion of total loss reserves relate to
primary case reserves established for the Company’s
primary
insurance business. Case reserves are
established by estimating the number of loans in the
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
based
including
rescissions of policies, curtailments of claims, and
loan modification activity. The conditions that affect
the claim rate and claim severity include the current
experience,
historical
upon
and future state of the domestic economy, including
unemployment and the current and future strength of
local housing markets; exposure on insured loans; the
amount of time between delinquency and claim filing;
and curtailments and rescissions.
The 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
included, among others,
performing
Addressing
in
procedures and evaluating audit evidence
connection with forming our overall opinion on the
consolidated financial statements. These procedures
included testing the effectiveness of controls relating
to the valuation of loss reserves, including controls
over the development of significant assumptions
related to the claim rate and claim severity. These
procedures also
the
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
the
independent
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 22, 2023
We have served as the Company’s auditor since 1985,
which includes periods before the Company became
subject to SEC reporting requirements.
MGIC Investment Corporation 2022 Annual Report | 65
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands)
Assets
Investment portfolio:
Fixed income, available-for-sale, at fair value (amortized cost, 2022
- $5,926,785; 2021 - $6,397,658)
Equity securities, at fair value (cost, 2022 - $15,924; 2021 -
$15,838)
Other invested assets, at cost
Total investment portfolio
Cash and cash equivalents
Restricted cash and cash equivalents
Accrued investment income
Reinsurance recoverable on loss reserves
Reinsurance recoverable on paid losses
Premiums receivable
Home office and equipment, net
Deferred insurance policy acquisition costs
Deferred income taxes, net
Other assets
Total assets
Liabilities and shareholders' equity
Liabilities:
Loss reserves
Unearned premiums
Federal Home Loan Bank Advance
Senior notes
Convertible junior subordinated debentures
Other liabilities
Total liabilities
Contingencies
Shareholders' equity:
Note
2022
2021
December 31,
5 / 6
$
5,409,698 $
6,587,581
14,140
850
16,068
3,100
5,424,688
6,606,749
327,384
284,690
5,529
55,178
28,240
18,081
58,000
41,419
19,062
124,769
111,443
20,268
51,902
66,905
36,275
56,540
45,614
21,671
—
134,394
$
6,213,793 $
7,325,008
$
557,988 $
195,289
—
641,724
21,086
154,966
883,522
241,690
155,000
881,508
110,204
191,702
1,571,053
2,463,626
9
9
12
8
7
7
7
17
13
Common stock (one dollar par value, shares authorized 1,000,000;
shares issued 2022 - 371,353; 2021 - 371,353; shares outstanding
2022 - 293,433; 2021 - 320,336)
Paid-in capital
Treasury stock at cost (shares 2022 - 77,920; 2021 - 51,017)
Accumulated other comprehensive (loss) income, net of tax
10
Retained earnings
Total shareholders' equity
371,353
1,798,842
(1,050,238)
(481,511)
4,004,294
4,642,740
Total liabilities and shareholders' equity
$
6,213,793 $
371,353
1,794,906
(675,265)
119,697
3,250,691
4,861,382
7,325,008
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 66
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Note
2022
2021
2020
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 gains (losses) on investments and
other financial instruments
9
9
5
5
$
1,108,570 $
1,123,117
$
1,106,632
8,535
(156,373)
960,732
46,401
1,007,133
8,924
(163,031)
969,010
45,409
1,014,419
10,837
(188,727)
928,742
93,201
1,021,943
167,476
156,438
154,396
(7,463)
5,639
5,861
(1)
8,957 (1)
12,576
(1)
10,231 (1)
1,172,785
1,185,675
1,199,146
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
8 / 9
(254,565)
12,366
236,697
40,199
48,054
82,751
1,090,034
224,685
865,349 $
64,577
12,602
198,445
36,914
71,360
383,898
801,777
166,794
634,983
2.83 $
2.79 $
1.90
1.85
305,847
311,229
334,330
351,308
364,774
12,380
176,398
26,736
59,595
639,883
559,263
113,170
446,093
1.31
1.29
339,953
359,293
$
$
$
7
7
12
4
4
4
$
$
$
(1) Certain amounts have been reclassified to conform with current year presentation
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 67
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Net income
Years Ended December 31,
Note
2022
2021
2020
$
865,349 $
634,983 $
446,093
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
(558,534)
(42,674)
(601,208)
(122,099)
24,975
(97,124)
Comprehensive income
$
264,141 $
537,859 $
133,616
10,497
144,113
590,206
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 68
MGIC INVESTMENT CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
Common stock
Note
2022
2021
2020
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
Reissuance of treasury stock, net under
share-based compensation plans
Equity compensation
Balance, end of year
Treasury stock
Balance, beginning of year
Purchases of common stock
Reissuance of treasury stock, net under
share-based compensation plans
Balance, end of year
13
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
13
1,794,906
1,862,042
1,869,719
—
1,794,906
—
(20,835)
24,771
(68,289)
1,793,753
—
(15,956)
17,109
—
1,869,719
(2,673)
(18,807)
13,803
1,798,842
1,794,906
1,862,042
(675,265)
(385,714)
10,741
(1,050,238)
119,697
(601,208)
(481,511)
(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
3,250,691
2,642,096
2,278,650
—
3,250,691
865,349
(111,746)
4,004,294
68,289
2,710,385
634,983
(94,677)
3,250,691
—
2,278,650
446,093
(82,647)
2,642,096
Total shareholders' equity
$
4,642,740 $
4,861,382 $
4,698,986
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 69
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 (benefit)
Equity compensation
Loss on debt extinguishment
Net (gains) losses on investments and other financial instruments
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
Additions to property and equipment
Net cash provided by (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
Payment of original issue discount- convertible junior subordinated
debentures
Redemption of 5.75% senior notes
Repayment of FHLB advance
Cash portion of loss on debt extinguishment
Repurchase of common stock
Dividends paid
Payment of debt issuance costs
Payment of withholding taxes related to share-based compensation
net share settlement
Net cash (used in) provided by financing activities
Net increase in cash and cash equivalents and restricted cash and cash
equivalents
Years Ended December 31,
2022
2021
2020
$
865,349 $
634,983 $
446,093
54,252
(4,367)
24,771
40,199
7,463
(3,276)
38,665
18,194
(1,460)
2,609
4,724
(325,534)
(46,401)
(11,800)
(8,549)
(4,827)
66,014
5,188
17,109
36,914
57,812
27,475
13,803
26,736
(5,861)
(12,576)
(1,905)
28,137
(35,606)
(496)
(110)
(19,245)
2,985
(45,409)
7,200
5,429
990
(292)
(73,401)
852
(457)
(3,030)
4,586
325,203
(93,203)
(500)
6,271
6,937
650,012
696,317
732,309
(674,406)
(1,531,129)
(2,636,972)
399,661
688,484
(3,254)
410,485
473,904
900,591
(4,115)
836,851
1,030,926
(3,311)
(160,749)
(772,506)
—
—
—
—
—
—
—
(242,296)
(155,000)
(39,514)
(385,573)
(110,947)
—
—
—
—
(36,914)
(290,818)
(94,219)
—
(10,094)
(6,729)
(1,032,542)
(527,290)
640,250
(179,735)
(2,969)
(36,392)
(15,049)
—
—
(25,266)
(119,997)
(82,061)
(2,020)
(8,940)
167,821
Purchase of convertible junior subordinated debentures
(89,118)
(98,610)
27,955
8,278
127,624
MGIC Investment Corporation 2022 Annual Report | 70
Cash and cash equivalents and restricted cash and cash equivalents at
beginning of year
Cash and cash equivalents and restricted cash and cash equivalents at
end of year
304,958
296,680
169,056
$
332,913 $
304,958 $
296,680
See accompanying notes to consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 71
MGIC Investment Corporation and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1
Nature of Business
NOTE 2
Basis of Presentation
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
the default and subsequent
associated with
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"),
BASIS OF PRESENTATION
The accompanying consolidated financial statements
have been prepared in accordance with accounting
principles generally accepted in the United States of
America ("GAAP"), as codified in the Accounting
Standards Codification ("ASC"). Our consolidated
financial statements include the accounts of MGIC
Investment Corporation and
its majority-owned
subsidiaries. Intercompany transactions and balances
have been eliminated. In accordance with GAAP, we
are required to make estimates and assumptions that
affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at
the date of the consolidated financial statements and
the reported amounts of revenues and expenses
during the reporting periods. Actual results could
differ from those estimates.
Through certain non-insurance subsidiaries, we also
provide certain services for the mortgage finance
industry, such as contract underwriting.
SUBSEQUENT EVENTS
We have considered subsequent events through the
date of this filing.
At December 31, 2022, our direct primary insurance in
force ("IIF") was $295.3 billion, which represents the
principal balance in our records of all mortgage loans
that we insure, and our direct primary risk in force
("RIF") was $76.5 billion, which represents the IIF
multiplied by the insurance coverage percentage.
The substantial majority of our NIW is 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
"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, 2022, 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.
insurer’s
The COVID-19 pandemic materially impacted our
2020 financial results as we reserved for losses
associated with the increased delinquency inventory.
Through December 31, 2022 the vast majority of
those delinquency notices have cured resulting in
reserve development. We have
favorable
addressed the impacts of COVID-19 throughout this
document.
loss
MGIC Investment Corporation 2022 Form 10-K | 72
inputs
Market indicators, industry, and economic events are
also considered. The
listed above are
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
under GAAP
value
measurements. The valuation hierarchy is based on
the transparency of inputs to the valuation of a
financial instrument as of the measurement date. To
determine the fair value of securities available-for-sale
in Level 1 and Level 2 of the fair value hierarchy,
independent pricing sources, as described 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
for the
issue valued or based on modeling of
securities with similar credit quality, duration, yield
and structure that were recently traded.
MGIC Investment Corporation and Subsidiaries
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, 2022, 2021, and
2020, 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
MGIC Investment Corporation 2022 Annual Report | 73
MGIC Investment Corporation and Subsidiaries
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,
that are
other
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
government
obligations
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
investment. See Note 6
- "Fair Value
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 and embedded derivatives
related to our Home Re Transactions. The
fair value of real estate acquired is the
lower of our acquisition cost or a
percentage of the appraised value. The
percentage applied to the appraised value
is based upon our historical sales
experience adjusted for current trends. The
fair value of our embedded derivatives
reflects the present value impact of the
variation
income on the
assets held by the reinsurance trusts and
the contractual reference rate on Home Re
Transactions used
the
reinsurance premiums we estimate we will
pay over the estimated remaining life.
investment
calculate
to
in
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
identification of
income based upon specific
securities. Any changes in the credit allowance are
also be reported in income within "Net gains (losses)
on investments and other financial instruments" on
the consolidated statement of operations.
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.
Any change in fair value of equity securities are also
be reported in income within "Net gains (losses) on
investments and other financial instruments" on the
consolidated statement of operations. .
Other invested assets. Other invested assets are
carried at cost. These assets
represent our
investment in Federal Home Loan Bank of Chicago
("FHLB") stock, which due to restrictions, is required
to be redeemed or sold only to the security issuer at
par value.
Investment
income separately
Income. We report accrued
Accrued
investment
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. A
credit loss is recorded, subject to reversal, in the
consolidated statement of operations within "Net
gains (losses) on investments and other financial
MGIC Investment Corporation 2022 Annual Report | 74
MGIC Investment Corporation and Subsidiaries
loss due to other factors
instruments." 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.
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.
is shown net of
Home office and equipment
accumulated depreciation of $57.1 million, $55.4
million and $51.2 million as of December 31, 2022,
2021 and 2020, respectively. Depreciation expense for
the years ended December 31, 2022, 2021 and 2020
was $4.9 million, $5.6 million and $6.3 million,
respectively.
DEFERRED INSURANCE POLICY ACQUISITION COSTS
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
are net of any ceding commissions
received
associated with our reinsurance agreements. For
each underwriting year of business, these costs are
amortized to income in proportion to estimated gross
profits over the estimated life of the policies. We
utilize anticipated
in our
investment
calculation. This includes accruing interest on the
unamortized balance of DAC. The estimates for each
underwriting year are reviewed quarterly and updated
when necessary to reflect actual experience and any
changes to key variables such as persistency or loss
development.
income
LOSS RESERVES
Loss reserves include case reserves, incurred but not
reported ("IBNR") reserves, and
loss adjustment
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
reporting by
and
excludes mortgage
its guidance
insurance from
relating to loss reserves, we establish loss reserves
using
the
the general principles contained
insurance standard. However, consistent with industry
in
standards for mortgage insurers, we do not establish
case reserves for future claims on insured loans that
are not currently delinquent.
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
including
based
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
is based on
liability
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
us. Consistent with case reserves for reported
delinquencies, IBNR reserves are also established
using estimated claim rates and claim severities.
LAE reserves are established for the estimated costs
of settling claims, including legal and other expenses,
and general expenses of administering the claims
settlement process.
Our loss reserve estimates are also affected by any
agreements we enter into regarding our claims paying
practices, as discussed in Note 17 – “Litigation and
financial
Contingencies”
statements.
consolidated
to our
Loss reserves are ceded to reinsurers under our
reinsurance
"Reinsurance"
discussion below. Also see Note 8 – “Loss Reserves”
and Note 9 – “Reinsurance.”)
agreements.
(See
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
loss
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
MGIC Investment Corporation 2022 Annual Report | 75
MGIC Investment Corporation and Subsidiaries
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, 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
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
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
recognition
full knowledge of all relevant
information. We
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. Effective
January 1, 2023, these plans are frozen (no future
benefits will be accrued for participants due to
employment and no new participants will be added).
Retirement benefits were based on compensation and
years of service, utilizing a cash balance formula.
Under
formula, participants’
accounts were credited each year with an employer
contribution. Participants will continue to earn interest
credits on their retirement benefits. 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.
the cash balance
We offer both medical and dental benefits for retired
domestic employees, their eligible spouses and
dependents. Eligibility for coverage
is based on
meeting certain years of service and retirement age
qualifications. We accrue the estimated costs of
retiree medical and dental benefits over the period
during which employees render the service that
qualifies them for benefits. (See Note 11 – “Benefit
Plans.”)
REINSURANCE
the
through
We cede insurance risk through the use of quota
share reinsurance transactions and excess of loss
reinsurance transactions. We have excess of loss
traditional
transactions executed
reinsurance market and with Home Re, special
purpose insurers. Premiums and losses incurred are
ceded pursuant to the terms of our quota share
reinsurance
transactions. Reinsurance premiums
ceded under our traditional reinsurance transaction
are based off the remaining reinsured coverage levels.
Reinsurance premiums ceded under our Home Re
transactions are composed of coverage,
initial
expense and supplemental premiums. The coverage
MGIC Investment Corporation 2022 Annual Report | 76
MGIC Investment Corporation and Subsidiaries
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
amounts
reinsurance
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.”)
reinsurance
recoverables.
We assess whether a credit loss allowance is required
for our
In assessing
whether a credit allowance should be established, we
consider several factors including, but not limited to,
the credit ratings of individual reinsurers, investor
reports for our excess of loss transactions, collateral
held in trust accounts in which MGIC is the sole
beneficiary, and aging of outstanding reinsurance
recoverable balances.
Assumed
reinsurance
received from the ceding company.
is based on
information
See Note 9 – “Reinsurance" for discussion of our
variable interest entity ("VIE") policy on the Home Re
Transactions.
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-
that contain non-
based compensation awards
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
RSUs are considered outstanding.
RELATED PARTY TRANSACTIONS
In 2022, there were no material 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.
Prospective Accounting Standards
Table 3.1 shows the relevant new amendments to
accounting standards, which are not yet effective or
adopted.
Standard / Interpretation
Table 3.1
Amended Standards
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,
2023
ASC 848 Reference Rate Reform
•
ASU 2020-06 - Reference Rate
Report (Topic 848): Deferral of
the Sunset Date of Topic 848.
January 1,
2023
Inflation Reduction Act
•
Inflation Reduction Act of 2022
January 1,
2023
Targeted Improvements for Long Duration Contracts:
ASU 2018-12
In August 2018, the FASB issued guidance which
simplifies the amortization of deferred insurance
policy acquisition costs. It also provides updates to
the
recognition, measurement, presentation and
disclosure 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
MGIC Investment Corporation 2022 Annual Report | 77
MGIC Investment Corporation and Subsidiaries
In November 2020, FASB
margins.
issued ASU
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 have evaluated the
impact of the
adoption of
this guidance will have on our
consolidated financial statements, and determined it
will not have a material impact.
Reference Rate Reform: ASU 2022-06
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 provided 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. In
December 2022, the FASB
issued ASU 2022-06,
extending the election and application from March 12,
2020
(originally
December 31, 2022). 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.
through December 31, 2024
Inflation Reduction Act
Inflation Reduction Act of 2022
includes
The
provisions for a 1% excise tax on net stock
repurchases and a 15% corporate minimum tax. Both
of these taxes are effective in 2023. We do not
expect these tax provisions to have a material impact
on our consolidated financial statements.
MGIC Investment Corporation 2022 Annual Report | 78
MGIC Investment Corporation and Subsidiaries
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)
2022
2021
2020
Years Ended December 31,
Basic earnings per share:
Net income
Weighted average common shares outstanding - basic
Basic earnings per share
Diluted earnings per share:
Net income
Interest expense, net of tax (1):
9% Debentures
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
$
$
$
$
865,349 $
634,983 $
305,847
334,330
2.83 $
1.90 $
446,093
339,953
1.31
865,349 $
634,983 $
446,093
3,228
14,343
868,577 $
649,326 $
305,847
334,330
1,917
3,465
311,229
1,782
15,196
351,308
17,004
463,097
339,953
1,589
17,751
359,293
1.29
Diluted income per share
$
2.79 $
1.85 $
(1) Interest expense has been tax effected at a rate of 21%.
For the years ended December 31, 2022, 2021, and 2020, all of our 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.
MGIC Investment Corporation 2022 Annual Report | 79
MGIC Investment Corporation and Subsidiaries
NOTE 5
Investments
FIXED INCOME SECURITIES
Our fixed income securities consisted of the following as of December 31, 2022 and 2021:
Details of fixed income investment securities by category as of December 31, 2022
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
Commercial paper
Total fixed income securities
Amortized
Cost
Gross
Unrealized
Gains
Gross
Unrealized
Losses
Fair Value
$
145,581 $
2 $
(9,683) $
135,900
2,400,261
2,416,475
126,723
223,743
257,785
337,656
4,486
14,075
4,866
1,043
(256,073)
2,149,054
(196,377)
2,221,141
5
10
22
5
—
—
(6,041)
(25,744)
(20,591)
(7,829)
(699)
(3)
120,687
198,009
237,216
329,832
3,787
14,072
$ 5,926,785 $
5,953 $
(523,040) $ 5,409,698
Details of fixed income investment securities by category as of December 31, 2021
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
Total fixed income securities
Amortized
Cost
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
830
2,397
5,736
609
—
(7,396)
(13,776)
(1,008)
(3,278)
(1,936)
(106)
(99)
2,534,653
2,765,982
150,710
309,110
319,130
360,939
13,650
$
6,397,658 $
218,390 $
(28,467) $
6,587,581
We had $11.8 million and $13.4 million of investments at fair value on deposit with various states as of
December 31, 2022 and 2021, respectively, due to regulatory requirements of those state insurance departments.
In connection with our insurance and reinsurance activities within MAC and MIC, insurance subsidiaries of MGIC,
we are required to maintain assets in trusts for the benefit of contractual counterparties, which had investments
at fair value of $128.4 million and $189.8 million at December 31, 2022 and 2021, respectively. The decrease is
primarily due to a decline in collateral required as the risk in force covered by these insurance and reinsurance
activities has decreased.
MGIC Investment Corporation 2022 Annual Report | 80
MGIC Investment Corporation and Subsidiaries
The amortized cost and fair values of fixed income securities at December 31, 2022, by contractual maturity, are
shown in table 5.2 below. 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, 2022
Amortized Cost
Fair Value
$
452,188 $
1,358,606
1,890,875
1,279,209
4,980,878
126,723
223,743
257,785
337,656
445,210
1,288,152
1,713,608
1,076,984
4,523,954
120,687
198,009
237,216
329,832
Total as of December 31, 2022
$
5,926,785 $
5,409,698
EQUITY SECURITIES
The cost and fair value of investments in equity securities as of December 31, 2022 and December 31, 2021 are
shown in tables 5.3a and 5.3b below.
Details of equity investment securities as of December 31, 2022
Table
5.3a
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
15,924
—
(1,784)
14,140
Details of equity investment securities as of December 31, 2021
Table
5.3b
(In thousands)
Equity securities
Cost
Gross gains
Gross losses
Fair Value
15,838
264
(34)
16,068
MGIC Investment Corporation 2022 Annual Report | 81
MGIC Investment Corporation and Subsidiaries
NET GAINS (LOSSES) ON INVESTMENTS AND OTHER FINANCIAL INSTRUMENTS
The net gains (losses) on investments and other financial instruments and the proceeds from the sale of fixed
income securities classified as available-for-sale are shown in table 5.4 below.
Details of net gains (losses) on investments and other financial instruments
Table
5.4
(in thousands)
Fixed income securities
Gains on sales
Losses on sales
Change in credit allowance
Impairments
Equity securities gains (losses)
Gains (losses) on sales
Market adjustment
Change in embedded derivative on Home Re Transactions (1)
Other
Gains (losses) on sales
Market adjustment
December 31,
2022
December 31,
2021
December 31,
2020
7,152
(15,477)
—
(1,415)
(7)
(2,013)
4,269
2
26
8,980
(1,942)
49
—
4
(463)
(721)
(33)
(13)
5,861
21,272
(8,809)
(49)
(331)
1,344
552
(1,176)
(231)
4
12,576
Net gains (losses) on investments and other financial instruments
(7,463)
Proceeds from sales of fixed income securities
Proceeds from sales of equity securities
397,553
97
471,783
2,621
803,401
25,693
(1) See Note 6 "Fair Value Measurements" for discussion of the embedded derivative on the Home Re Transactions.
OTHER INVESTED ASSETS
Our other invested assets balances includes an investment in Federal Home Loan Bank ("FHLB") stock that is
carried at cost, which due to its nature approximates fair value. Ownership of FHLB stock provides access to a
secured lending facility. In the first quarter of 2022, we repaid the outstanding principal balance of our Federal
Home Loan Bank Advance ("FHLB Advance") and accordingly reduced our investment in FHLB stock. At
December 31, 2021, the FHLB Advance amount was secured by $167.2 million of eligible collateral. As a result of
the prepayment of the FHLB Advance in 2022, we are no longer required to maintain collateral.
MGIC Investment Corporation 2022 Annual Report | 82
MGIC Investment Corporation and Subsidiaries
UNREALIZED INVESTMENT LOSSES
Tables 5.5a and 5.5b below summarize, for all available-for-sale investments in an unrealized loss position as of
December 31, 2022 and 2021, the aggregate fair value and gross unrealized loss by the length of time those
securities have been continuously in an unrealized loss position. The fair value amounts reported in tables 5.5a
and 5.5b 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, 2022
Table
5.5a
(In thousands)
U.S. Treasury securities and
obligations of U.S. government
corporations and agencies
Obligations of U.S. states and political
subdivisions
Less Than 12 Months
12 Months or Greater
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$
67,531 $
(3,583) $
76,246 $
(6,100) $ 143,777 $
(9,683)
1,344,272
(157,903)
360,956
(98,170)
1,705,228
(256,073)
Corporate debt securities
1,488,255
(109,976)
758,732
(86,401)
2,246,987
(196,377)
ABS
RMBS
CMBS
CLOs
Foreign government debt
Commercial paper
Total
53,201
77,563
166,973
213,461
—
—
(1,008)
(8,572)
67,073
(5,033)
120,274
136,179
(17,172)
213,742
(12,951)
70,792
(4,644)
114,459
—
—
3,787
3,816
(7,640)
(3,185)
(699)
(3)
237,765
327,920
3,787
3,816
(6,041)
(25,744)
(20,591)
(7,829)
(699)
(3)
$ 3,411,256 $ (298,637) $ 1,592,040 $ (224,403) $ 5,003,296 $ (523,040)
Unrealized loss aging for securities by type and length of time as of December 31, 2021
Table
5.5b
(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)
(10)
(730)
(49)
(35)
—
467,561
876,082
101,616
212,227
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)
The change in net unrealized gains (losses) of investments is shown in table 5.6 below.
Change in net unrealized gains (losses)
Table
5.6
(In thousands)
Fixed income securities
2022
2021
2020
$
(707,005) $
(154,555) $
169,135
MGIC Investment Corporation 2022 Annual Report | 83
MGIC Investment Corporation and Subsidiaries
There were 1,226 and 610 securities in an unrealized loss position as of December 31, 2022 and 2021,
respectively. Based on current facts and circumstances, we believe the unrealized losses as of December 31,
2022 presented in table 5.5a above are not indicative of the ultimate collectability of the current amortized cost
of the securities. The unrealized losses in all categories of our investments were primarily caused by an increase
in prevailing interest rates. 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. 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 5.7 below.
Net investment income
Table
5.7
(In thousands)
Fixed income securities
Equity securities
Cash equivalents
Other
Investment income
Investment expenses
Net investment income
2022
2021
2020
$
166,306 $
160,030 $
157,065
437
5,049
51
171,843
(4,367)
471
75
22
160,598
(4,160)
$
167,476 $
156,438 $
620
1,648
275
159,608
(5,212)
154,396
MGIC Investment Corporation 2022 Annual Report | 84
MGIC Investment Corporation and Subsidiaries
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 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, with 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 2022 Annual Report | 85
MGIC Investment Corporation and Subsidiaries
Assets measured at fair value, by hierarchy level, as of December 31, 2022 and 2021 are shown in tables 6.1a
and 6.1b below. 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 in this Form 10-K.
Assets carried at fair value by hierarchy level as of December 31, 2022
Table
6.1a
(In thousands)
Fair Value
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
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
Total
$
135,900
$
116,897 $
19,003
2,149,054
2,221,141
120,687
198,009
237,216
329,832
3,787
14,072
5,409,698
14,140
328,756 (1)
—
—
—
—
—
—
—
—
116,897
14,140
324,129
2,149,054
2,221,141
120,687
198,009
237,216
329,832
3,787
14,072
5,292,801
—
4,627
$
5,752,594
$
455,166 $
5,297,428
Assets carried at fair value by hierarchy level as of December 31, 2021
Table
6.1b
(In thousands)
Fair Value
Quoted Prices in Active
Markets for Identical
Assets
(Level 1)
Significant Other
Observable Inputs
(Level 2)
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
Total
(1) Includes restricted cash equivalents
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)
—
—
—
—
—
—
—
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
—
—
$
6,857,879
$
372,451 $
6,485,428
Certain financial instruments, including insurance contracts, are excluded from these fair value disclosure
requirements. The carrying values of cash and cash equivalents (Level 1) and accrued investment income (Level
2) approximated their fair values. Additional fair value disclosures related to our investment portfolio are
included in Note 5 - "Investments."
In addition to the assets carried at fair value discussed above, we have embedded derivatives carried at fair value
related to our Home Re Transactions that are classified as Other liabilities or Other assets in our consolidated
balance sheets. The estimated fair value related to our embedded derivatives reflects the present value impact of
MGIC Investment Corporation 2022 Annual Report | 86
MGIC Investment Corporation and Subsidiaries
the variation in investment income on the assets held by the reinsurance trusts and the contractual reference
rate on the Home Re Transactions used to calculate the reinsurance premiums we estimate we will pay over the
estimated remaining life. These liabilities or assets are categorized in Level 3 of the fair value hierarchy. At
December 31, 2022 and 2021, the fair value of the embedded derivatives was an asset of $2.5 million and a
liability of $1.8 million, respectively. (See Note 4 - "Reinsurance" for more information about our reinsurance
programs.)
Real estate acquired through claim settlement is carried at fair values and is reported in “Other assets” on the
consolidated balance sheet. These assets are categorized as Level 3 of the fair value hierarchy. Purchases of
real estate acquired was $3.5 million and $4.8 million for the years ended December 31, 2022, and 2021,
respectively. Sales of real estate acquired was $4.0 million and $4.8 million for the years ended December 31,
2022, and 2021, respectively.
FINANCIAL LIABILITIES NOT MEASURED AT FAIR VALUE
Other invested assets include an investment in FHLB stock that is carried at cost, which due to restrictions that
require it to be redeemed or sold only to the security issuer at par value, approximates fair value. The fair value of
other invested assets is categorized as Level 2.
Financial liabilities include our outstanding debt obligations. The fair values of our 5.25% Notes and 9%
Debentures were based on observable market prices. In all cases the fair values of the financial liabilities below
are categorized as level 2.
Table 6.3 presents the carrying value and fair value of our financial assets and liabilities disclosed, but not
carried, at fair value as of December 31, 2022 and 2021.
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, 2022
December 31, 2021
Carrying Value
Fair Value
Carrying Value
Fair Value
850 $
850 $
3,100 $
3,100
— $
—
641,724
21,086
— $
—
600,938
28,085
155,000 $
241,255
640,253
110,204
157,585
256,213
686,875
151,000
Total financial liabilities
$
662,810 $
629,023 $
1,146,712 $
1,251,673
MGIC Investment Corporation 2022 Annual Report | 87
MGIC Investment Corporation and Subsidiaries
NOTE 7
Debt
DEBT OBLIGATIONS
Table 7.1 shows the carrying value of our long-term
debt obligations as of December 31, 2022 and 2021.
Long-term debt obligations
Table
7.1
(In millions)
December 31,
2022
2021
FHLB Advance - 1.91%, due
February 2023
$
— $ 155.0
5.75% Notes, due August 2023
—
241.3
5.25% Notes, due August 2028
(par value: $650 million)
9% Debentures, due April 2063
641.7
21.1
640.2
110.2
Long-term debt, carrying value
$ 662.8 $ 1,146.7
The 5.25% Senior Notes ("5.25% Notes") and 9%
Convertible Junior Subordinated Debentures (“9%
Debentures”) are obligations of our holding company,
MGIC Investment Corporation.
2022 Transactions
repurchased $89.1 million
During 2022, we
in
aggregate principal of our 9% Debentures at a
purchase price of $121.2 million plus accrued
interest. The repurchase of our 9% Debentures
resulted
loss on debt
extinguishment on our consolidated statement of
operations and a reduction of 6.8 million potentially
dilutive shares.
in a $32.1 million
The Federal Home Loan Bank Advance (the “FHLB
Advance”) was an obligation of MGIC. In the first
quarter of 2022, we repaid the outstanding principal
balance of the FHLB Advance at a prepayment price
of $156.3 million, incurring a prepayment fee of
$1.3 million.
the carrying value, plus
In July 2022, we redeemed the outstanding principal
balance of the 5.75% Senior Notes (“5.75% Notes”)
through a make-whole price of $248.4 million plus
accrued interest. The excess of the make-whole price
the write-off of
over
unamortized issuance costs on the par value, resulted
in a $6.8 million loss on debt extinguishment. The
make-whole amount was calculated as 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 were an obligation
of our holding company.
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
reflected as a
loss on debt extinguishment of
$16.5 million on our consolidated statement of
operations.
We repurchased $48.1 million in aggregate principal
amount of our 9% Debentures at a purchase price of
$61.6 million, plus accrued interest, using proceeds
from the 5.25% Notes issuance. The repurchase of 9%
Debentures resulted in a $10.2 million loss on debt
extinguishment on our consolidated statement of
operations; a reduction in our shareholders' equity of
$2.7 million related to the reacquisition of the equity
component of the 9% Debentures; and a reduction in
our potentially dilutive shares by approximately
3.6 million shares.
5.25% Notes
Interest on the 5.25% Notes is payable semi-annually
on February 15 and August 15. Prior to August 15,
2023, we may redeem the 5.25% Notes at an amount
equal to the sum of (a) the greater of: (i) the sum of
the principal amount and the make-whole amount;
and (ii) 102.625% of principal; and (b) accrued and
unpaid
is the
interest. The make-whole amount
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.
MGIC Investment Corporation 2022 Annual Report | 88
rank junior to all of our existing and future senior
indebtedness.
INTEREST PAYMENTS
Interest payments were $53.7 million during 2022,
$71.7 million during 2021 and $54.3 million during
2020.
MGIC Investment Corporation and Subsidiaries
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, 2022.
9% Debentures
to
the maturity date. This
Interest on the 9% Debentures is payable semi-
annually on April 1 and October 1 each year. The 9%
Debentures are currently convertible, at the holder's
option, at a conversion rate, which is subject to
adjustment, of 77.9620 common shares per $1,000
principal amount of the 9% Debentures at any time
prior
represents a
conversion price of approximately $12.83 per share. If
a holder elects to convert their 9% Debentures,
deferred interest, if any, owed on the 9% Debentures
being converted is also converted into shares of our
common stock. The conversion rate for any deferred
interest is based on the average price that our shares
traded at during a 5-day period immediately prior to
the election to convert.
The 9% Debentures include a 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 $16.67 (adjusted pro rata for changes in the
conversion price) for at least 20 of the 30 trading days
preceding notice of the redemption.
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, 2022. The 9% Debentures
MGIC Investment Corporation 2022 Annual Report | 89
MGIC Investment Corporation and Subsidiaries
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
reserves are established by
inventory. Case
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.
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, 2022, assuming all other factors remain
constant, a $1,000 increase/decrease in the average
severity reserve factor would change the loss reserve
amount by approximately +/- $10 million. A one
percentage point increase/decrease in the average
claim rate reserve factor would change the loss
reserve amount by approximately +/- $15 million.
losses
relating
relating
incurred
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
losses
that
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
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
loan exposure, changes
level of
delinquencies by geography and changes in average
loan exposure.
in the relative
Losses incurred on delinquencies that occurred in the
current year increased in 2022, compared to 2021.
The increase is primarily due to an increase in
estimated severity on current year delinquencies. In
in IBNR reserve
addition, there was a decrease
estimates by $5.9 million
IBNR
estimates increased by $2.3 million in 2022.
in 2021, while
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
reserves are also
been
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
unemployment, leading to a reduction in borrowers’
income and thus their ability to make mortgage
payments, the impact of past and future government
initiatives and actions taken by the GSEs (including
mortgage forbearance programs and foreclosure
moratoriums), and a drop in housing values which
may affect borrower willingness to continue to make
mortgage payments when the value of the home is
below the mortgage balance. Loss reserves in future
periods will also be dependent on the number of loans
reported to us as delinquent.
Changes to our estimates could result in a material
impact to our consolidated results of operations and
in a stable economic
financial position, even
the
the
environment. Given
macroeconomic
the
environment,
effectiveness of loss mitigation efforts, change in
home prices, and changes in unemployment, our loss
reserve estimates may continue to be impacted.
of
including
uncertainty
In considering the potential sensitivity of the factors
underlying our estimate of loss reserves, it is possible
MGIC Investment Corporation 2022 Annual Report | 90
MGIC Investment Corporation and Subsidiaries
In 2022, we experienced favorable loss development of $404.1 million on previously received delinquencies
primarily related to a decrease in the estimated claim rate. The favorable development primarily resulted from
greater than expected cure rates, as borrower reinstatements and servicer mitigation efforts resulted in more
cures than originally estimated. Additionally, home price appreciation experienced in recent years has allowed
borrowers to cure their delinquencies through the sale of their property. For the year ended December 31, 2021
we experienced favorable loss development of $60.0 million on previously received notices primarily due to the
decrease in the claim rate on delinquencies received prior to the COVID-19 pandemic. 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.
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. At the start of the COVID-19
pandemic, the level of claims received decreased and the average time it took to receive a claim increased. Claim
activity has not yet returned to pre-COVID-19 levels.
Table 8.1 provides a reconciliation of beginning and ending loss reserves as of and for the past three years:
Development of loss reserves
Table
8.1
(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
2022
2021
2020
$
883,522 $
880,537 $
555,334
66,905
816,617
95,042
785,495
21,641
533,693
149,565
(404,130)
(254,565)
124,592
(60,015)
64,577
345,170
19,604
364,774
362
49,626
(17,684)
32,304
529,748
28,240
664
68,769
(35,978)
33,455
816,617
66,905
3,069
109,923
(20)
112,972
785,495
95,042
$
557,988 $
883,522 $
880,537
(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 reinsurance termination, amounts for any incurred but unpaid losses are due to us from the reinsurers. 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 to losses incurred. (See Note 9 - "Reinsurance")
MGIC Investment Corporation 2022 Annual Report | 91
MGIC Investment Corporation and Subsidiaries
The prior year development of the reserves in 2022, 2021 and 2020 is reflected in the table 8.2 below.
Reserve development on previously received delinquencies
Table
8.2
(In thousands)
2022
2021
2020
(Decrease) in estimated claim rate on primary delinquencies
$
(400,577) $
(82,904) $
(2,536)
Increase (decrease) in estimated claim severity on primary delinquencies
(21,995)
310
13,535
Change in estimates related to pool reserves, LAE reserves, reinsurance and
other
Total prior year loss development (1)
18,442
22,579
8,605
$
(404,130) $
(60,015) $
19,604
(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.
MGIC Investment Corporation 2022 Annual Report | 92
MGIC Investment Corporation and Subsidiaries
DELINQUENCY INVENTORY
in
A roll-forward of our primary delinquency inventory for
the years ended December 31, 2022, 2021, and 2020
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
2022
2021
2020
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
3 months or less
4 - 11 months
12 months or more (1)
Total
December 31,
2022
8,820
8,217
9,350
26,387
2021
7,586
7,990
17,714
33,290
2020
11,542
34,620
11,548
57,710
Beginning delinquent
inventory
New Notices
Cures
Paid claims
Rescissions and
denials
Other items removed
from inventory
Ending delinquent
inventory
33,290
57,710
30,028
42,988
42,432
106,099
3 months or less
4 - 11 months
(48,262)
(64,896)
(76,107)
12 months or more
(1,305)
(1,223)
(2,245)
Total
33 %
31 %
36 %
23 %
24 %
53 %
20 %
60 %
20 %
100 %
100 %
100 %
(35)
(38)
(65)
(289)
(695)
—
Primary claims
received inventory
included in ending
delinquent inventory
267
211
159
26,387
33,290
57,710
(1)
During 2022 and 2021, our losses paid included
amounts paid upon commutation of coverage on
pools of non-performing loans. As a result of these
payments 289
the
delinquency
inventory with an amount paid of
$4.6 million in 2022. During 2021, 695 items were
removed from delinquency inventory with an amount
paid of $13.8 million.
items were
removed
from
Approximately 36%, 20%, and 31% 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, 2022, 2021
and 2020, respectively.
COVID-19 Pandemic Delinquencies
the high
We experienced an increase in new delinquency
notices in the second and third quarters of 2020
because of the impacts of the COVID-19 pandemic,
including
level of unemployment and
economic uncertainty resulting from measures to
reduce the transmission of COVID-19. Forbearance
programs enacted by the GSEs provided for payment
forbearance on mortgages to borrowers experiencing
a hardship during
the COVID-19 pandemic.
Historically, forbearance plans have reduced the
incidence of our losses on affected loans. Through
December 31, 2022
the
delinquencies received in the second and third quarter
of 2020 have cured.
the vast majority of
POOL INSURANCE DEFAULT INVENTORY
insurance default
Pool
inventory was 391 at
December 31, 2022, 498 at December 31, 2021, and
680 at December 31, 2020.
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 $25.5 million and $37.3 million at
December 31, 2022 and 2021, respectively. The
decrease is driven by a decrease in delinquency
MGIC Investment Corporation 2022 Annual Report | 93
MGIC Investment Corporation and Subsidiaries
inventory as well as a decrease inventory that is
twelve or more months delinquent.
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 these risks. The purpose of ceded reinsurance is to protect us, at a cost, against losses arising from our
mortgage guaranty policies covered by the agreement and to manage our capital requirements under PMIERs.
Reinsurance is currently placed on a quota share and excess of loss basis but we also had immaterial captive
reinsurance agreements that were in effect through December 31, 2020.
Table 9.1 below shows the effect of all reinsurance agreements on premiums earned and losses incurred as
reflected in the consolidated statements of operations.
Reinsurance
Table
9.1
(In thousands)
Premiums earned:
Direct
Assumed
Ceded - quota share reinsurance (1)
Ceded - excess-of-loss reinsurance
Total ceded
Net premiums earned
Losses incurred:
Direct
Assumed
Ceded - quota share reinsurance
Losses incurred, net
Other Reinsurance Impacts:
Profit commission on quota share reinsurance (1)
Ceding commission on quota share reinsurance
Years ended December 31,
2022
2021
2020
$
1,154,728 $
1,167,592 $
1,199,824
8,778
(86,435)
(69,938)
(156,373)
9,858
(118,537)
(44,494)
(163,031)
10,848
(167,930)
(20,799)
(188,729)
1,007,133 $
1,014,419 $
1,021,943
(274,072) $
74,496 $
(330)
19,837
(57)
(9,862)
(254,565) $
64,577 $
442,194
555
(77,975)
364,774
176,084 $
153,759 $
52,071
53,460
72,425
48,077
$
$
$
$
(1) Ceded premiums earned are shown net of profit commission.
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.
Each of our QSR transactions typically have annual loss ratio caps of 300% and lifetime loss ratios of 200%.
MGIC Investment Corporation 2022 Annual Report | 94
MGIC Investment Corporation and Subsidiaries
Table 9.2 below provides additional detail regarding our QSR transactions in effect during 2022.
Reinsurance
Table
9.2
Quota Share Contract
2015 QSR (2)
2019 QSR (2)
2020 QSR
2020 QSR and 2021 QSR
2020 QSR and 2021 QSR
2021 QSR and 2022 QSR
2021 QSR and 2022 QSR
2022 QSR and 2023 QSR
2022 QSR and 2023 QSR
Credit Union QSR (3)
Covered Policy
Years
Prior to 2017
2019
2020
2020
2021
2021
2022
2022
2023
2020-2025
Quota Share %
Annual Loss Ratio to
Exhaust Profit
Commission (1)
Contractual
Termination Date
15.0 %
30.0 %
12.5 %
17.5 %
17.5 %
12.5 %
15.0 %
15.0 %
15.0 %
65.0 %
68.0 %
62.0 %
62.0 %
62.0 %
61.9 %
57.5 %
57.5 %
62.0 %
62.0 %
50.0 %
December 31, 2031
December 31, 2030
December 31, 2031
December 31, 2032
December 31, 2032
December 31, 2032
December 31, 2033
December 31, 2033
December 31, 2034
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) 2015 and 2019 QSR Transactions were terminated effective December 31, 2022.
(3) Eligible credit union business written before April 1, 2020 was covered by our 2019 and prior QSR Transactions.
We have agreed to terms with a group of unaffiliated reinsurers for a reinsurance transaction with an effective
date of January 1, 2023 with a similar structure to our existing QSR transactions that will cover most of our NIW
in 2023 (with an additional 10.0% quota share). Generally, we will receive an annual profit commission provided
the annual loss ratio on the loans covered under the transaction remain below 58.5%.
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
Covered
Policy Years
2020 QSR
2020 QSR and 2021 QSR
2020 QSR and 2021 QSR
2021 QSR and 2022 QSR
2021 QSR and 2022 QSR
2022 QSR and 2023 QSR
2022 QSR and 2023 QSR
2020
2020
2021
2021
2022
2022
2023
Optional Termination
Date (1)
June 30, 2023
June 30, 2023
December 31, 2023
December 31, 2023
December 31, 2024
December 31, 2024
December 31, 2025
Optional Quota Share %
Reduction Date (2)
Optional
Reduced Quota
Share %
January 1, 2023
10.5% or 8%
January 1, 2023
14.5% or 12%
January 1, 2023
14.5% or 12%
January 1, 2023
10.5% or 8%
July 1, 2023
12.5% or 10%
July 1, 2023
12.5% or 10%
July 1, 2024
12.5% or 10%
(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.
MGIC Investment Corporation 2022 Annual Report | 95
MGIC Investment Corporation and Subsidiaries
We incurred an early termination fee of $2.2 million for the termination of our 2019 QSR Transaction effective
December 31, 2022 and $5.0 million for the termination of our 2017 and 2018 QSR Transactions effective
December 31, 2021. We also terminated our 2015 QSR Transaction effective December 31, 2022. The
reinsurance recoverable on paid losses due from reinsurers for loss and LAE reserves incurred at the time of
termination includes $17.7 million as of December 31, 2022 from reinsurers participating in the 2015 and 2019
QSR Transactions and included $36.0 million as of December 31, 2021 due from reinsurers participating in the
2017 and 2018 QSR Transactions.
Ceded premiums written and earned, net of profit commission, decreased in 2022 due to the increase in profit
commission. The increase in profit commission was a result of ceded losses incurred. Ceded losses incurred for
the year ended December 31, 2022 primarily reflect favorable loss reserve development. See Note 8 - “Loss
Reserves” for discussion of our loss reserves.
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
$28.2 million as of December 31, 2022 and $66.9 million as of December 31, 2021. 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 2022 or 2021.
EXCESS OF LOSS REINSURANCE
We have Excess-of-loss transactions (“XOL Transactions”) with a panel of unaffiliated reinsurers executed
through the traditional reinsurance market (“Traditional XOL Transaction”) and with unaffiliated special purpose
insurers (“Home Re Transactions”).
The 2022 Traditional XOL Transaction provides reinsurance coverage on eligible NIW in 2022. For the covered
policies, we retain the first layer of the aggregate losses paid, and the reinsurers 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. The reinsurance coverage is subject to adjustment based on the risk
characteristics of the covered loans.
We can elect to terminate our Traditional XOL Transaction under specified scenarios without penalty upon prior
written notice, including if we will receive less than the full credit amount under the PMIERs, full financial
statement credit or full credit under applicable regulatory capital requirements for the risk ceded in any required
calculation period. The reinsurance premiums ceded to the Traditional XOL Transaction are based off the
remaining reinsurance coverage levels. The reinsured coverage levels are secured by funds on deposit from
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.
The Home Re Transactions are executed 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
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.
MGIC Investment Corporation 2022 Annual Report | 96
MGIC Investment Corporation and Subsidiaries
When a “Trigger Event” is in effect, as defined in the related insurance-linked notes transaction agreements,
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, 2022, a "Trigger
Event" has occurred on our Home Re 2019-1 transaction 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 2022-1 transaction
because the credit enhancement of the most senior tranche is less than the target credit enhancement.
Table 9.4a and 9.4b provides a summary of our XOL Transactions as of December 31, 2022, December 31, 2021
and December 31, 2020.
Excess of Loss Reinsurance
9.4a
($ in
thousands)
Home Re
2022-1,
Ltd.
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 Policy In force Dates
Optional Call/
Termination Date (1)
Legal
Maturity
Initial First
Layer
Retention
Initial Excess of Loss
Reinsurance Coverage
April 26,
2022
May 29, 2021 -
December 31, 2021
August 3,
2021
January 1, 2021 -
May 28, 2021
February 2,
2021
August 1, 2020 -
December 31, 2020
October 29,
2020
January 1, 2020 -
July 31, 2020
May 25,
2019
January 1, 2018 -
March 31, 2019
October 30,
2018
July 1, 2016 -
December 31, 2017
April 25, 2028
12.5 years
$325,589
$473,575
July 25, 2028
12.5 years
190,159
398,429
January 25, 2028
12.5 years
211,159
398,848
October 25, 2027
10 years
275,283
412,917
May 25, 2026
10 years
185,730
315,739
October 25, 2025
10 years
168,691
318,636
2022
Traditional
XOL
April 1,
2022
January 1, 2022 -
December 30, 2022
January 1, 2030
10 years
82,523
142,642
(1) We have the right to terminate the Home Re Transactions under certain circumstances and on any payment date on or after
the respective Optional Call date. We can elect early termination of the Traditional XOL Transaction beginning on this date,
and quarterly thereafter.
9.4b
Remaining First Layer Retention
Remaining Excess of Loss Reinsurance
Coverage
($ in thousands)
December 31,
2022
December 31,
2021
December 31,
2020
December 31,
2022
December 31,
2021
December 31,
2020
Home Re 2022-1, Ltd.
$
325,576 $
— $
— $
473,575 $
— $
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.
2022 Traditional XOL
190,097
211,102
274,871
183,540
164,849
82,517
190,159
211,142
275,204
183,917
165,365
—
—
—
275,283
184,514
166,005
—
352,084
277,053
113,247
208,146
140,993
142,642
398,429
387,830
234,312
208,146
218,343
—
—
—
—
412,917
208,146
218,343
—
MGIC Investment Corporation 2022 Annual Report | 97
MGIC Investment Corporation and Subsidiaries
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 and Home Re 2022-1 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 freestanding derivative. The fair
values of the derivatives at December 31, 2022 and
December 31, 2021, were not material to our
consolidated balance sheet, and the change in fair
values during the years ended December 31, 2022,
December 31, 2021 and December 31, 2020 were not
material
to our consolidated statements of
operations. (see Note 5 - "Investments" and Note 6 -
"Fair Value Measurements" ).
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,
outside the terms of the reinsurance agreement, 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, 2022, December 31, 2021 and
December 31, 2020, 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
in
transactions. The VIE assets are deposited
to
the
trust agreements. The
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
agreements are governed by, and construed
in
accordance with, the laws of the State of New York. If
the trustee of the reinsurance trusts failed to
distribute claim payments to us as provided in the
reinsurance trusts, we would incur a loss related to
our losses ceded under the reinsurance 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 9.5 presents the total assets of the Home Re
Entities as of December 31, 2022 , December 31, 2021
and December 31, 2020.
Home Re Entities total assets
Table
9.5
(In thousands)
Home Re Entity
December 31, 2022
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.
Home Re 2022-1 Ltd.
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 2018-1 Ltd.
Home Re 2019-1 Ltd.
Home Re 2020-1 Ltd.
Total VIE Assets
$
$
$
146,822
208,146
119,159
285,039
357,340
473,575
218,343
208,146
251,387
398,848
398,429
218,343
208,146
412,917
The reinsurance trust agreements provide that the
trust assets may generally only be invested in certain
money market funds that (1) invest at least 99.5% of
MGIC Investment Corporation 2022 Annual Report | 98
MGIC Investment Corporation and Subsidiaries
their total assets in cash or direct U.S. federal
government obligations, such as U.S. Treasury bills,
as well as other short-term securities backed by the
full faith and credit of the U.S. federal government or
issued by an agency of the U.S. federal government,
(2) 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
(3) are permitted investments under the applicable
credit for reinsurance laws and applicable PMIERs
credit for reinsurance requirements.
The total calculated PMIERs credit for risk ceded
under our XOL 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" ).
MGIC Investment Corporation 2022 Annual Report | 99
MGIC Investment Corporation and Subsidiaries
NOTE 10
Other Comprehensive Income (Loss)
The pretax components of our other comprehensive income (loss) and related income tax benefit (expense) for
the years ended December 31, 2022, 2021 and 2020 are included in table 10.1 below.
Components of other comprehensive income (loss)
Table
10.1
(In thousands)
2022
2021
2020
Net unrealized investment (losses) gains arising during the period
$
(707,005) $
(154,555) $
169,135
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)
148,471
32,456
(558,534)
(122,099)
(54,017)
11,343
(42,674)
31,613
(6,638)
24,975
(761,022)
(122,942)
159,814
25,818
(35,519)
133,616
13,288
(2,791)
10,497
182,423
(38,310)
Total other comprehensive income (loss), net of tax
$
(601,208) $
(97,124) $
144,113
The pretax and related income tax benefit (expense) components of the amounts reclassified from our
accumulated other comprehensive income (loss) ( "AOCI") to our consolidated statements of operations for the
years ended December 31, 2022, 2021 and 2020 are included in table 10.2 below.
Reclassifications from Accumulated Other Comprehensive Income (Loss)
Table
(In thousands)
10.2
Reclassification adjustment for net realized
(losses) gains (1)
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)
2022
2021
2020
$
(9,860) $
10,455 $
2,070
(7,790)
(16,750)
3,518
(13,232)
(26,610)
5,588
(2,195)
8,260
(9,779)
2,053
(7,726)
676
(142)
Total reclassifications, net of tax
$
(21,022) $
534 $
13,862
(2,912)
10,950
(15,968)
3,353
(12,615)
(2,106)
441
(1,665)
(1)
(2)
(Decreases) increases Net gains (losses) on investments and other financial instruments on the consolidated statements
of operations.
Decreases (increases) Other underwriting and operating expenses, net on the consolidated statements of operations.
MGIC Investment Corporation 2022 Annual Report | 100
MGIC Investment Corporation and Subsidiaries
A roll-forward of AOCI for the years ended December 31, 2022, 2021, and 2020, including amounts reclassified
from AOCI, 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 AOCI
Balance, December 31, 2019, net of tax
$
138,521 $
(65,813) $
72,708
Other comprehensive income (loss) before
reclassifications
Less: Amounts reclassified from AOCI
Balance, December 31, 2020, net of tax
Other comprehensive income (loss) before
reclassifications
Less: Amounts reclassified from AOCI
Balance, December 31, 2021, net of tax
Other comprehensive income (loss) before
reclassifications
Less: Amounts reclassified from AOCI
144,566
10,950
272,137
(113,839)
8,260
150,038
(566,324)
(7,790)
(2,118)
(12,615)
(55,316)
17,249
(7,726)
(30,341)
(55,906)
(13,232)
Balance, December 31, 2022, net of tax
$
(408,496) $
(73,015) $
142,448
(1,665)
216,821
(96,590)
534
119,697
(622,230)
(21,022)
(481,511)
MGIC Investment Corporation 2022 Annual Report | 101
MGIC Investment Corporation and Subsidiaries
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. Effective January 1, 2023, these plans are frozen (no future benefits will
be accrued for participants due to employment and no new participants will be added). Participants in these
plans are fully vested in their benefits as of December 31, 2022. We also offer both medical and dental benefits
for retired domestic employees, and 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, 2022, 2021, and 2020 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, 2022 and 2021.
Components of net periodic benefit cost
Table
11.1
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
(In thousands)
Company Service Cost
Interest Cost
12/31/2022
12/31/2021
12/31/2020
12/31/2022
12/31/2021
12/31/2020
$
7,153 $
7,569 $
7,342 $
1,307 $
1,508 $
1,263
12,461
11,276
13,036
694
648
832
Expected Return on Assets
(18,064)
(20,657)
(22,139)
(10,502)
(8,863)
(7,407)
Amortization of:
Net Transition Obligation/
(Asset)
Net Prior Service Cost/(Credit)
Net Losses/(Gains)
Cost of Settlements and
Curtailments
Net Periodic Benefit Cost
Development of funded status
Table
11.2
—
(163)
5,726
—
(239)
5,490
—
(247)
6,578
—
489
—
213
—
51
(3,103)
(1,697)
(783)
13,801
6,012
10,369
—
—
—
$
20,914 $
9,451 $
14,939 $
(11,115) $
(8,191) $
(6,044)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
(In thousands)
12/31/2022
12/31/2021
12/31/2022
12/31/2021
Actuarial Value of Benefit Obligations
Measurement Date
12/31/2022
12/31/2021
12/31/2022
12/31/2021
Accumulated Benefit Obligation
$
274,975 $
390,747 $
29,580 $
25,635
Funded Status/Asset (Liability) on the
Consolidated Balance Sheet
Benefit Obligation
Plan Assets at Fair Value
Funded Status - Overfunded/Asset
Funded Status - Underfunded/Liability
Accumulated other comprehensive (income) loss
Table
11.3
$
(274,975) $
(391,698) $
(29,580) $
(25,635)
250,674
N/A
(24,301)
391,555
111,154
N/A $
81,574 $
(143)
N/A
140,839
115,204
N/A
(In thousands)
Net Actuarial (Gain)/Loss
Net Prior Service Cost/(Credit)
Net Transition Obligation/(Asset)
Total at Year End
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
12/31/2022
12/31/2021
12/31/2022
12/31/2021
$
$
89,711 $
84,045 $
(13,781) $
(47,352)
3,245
—
(747)
—
13,249
—
2,461
—
92,956 $
83,298 $
(532) $
(44,891)
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/
MGIC Investment Corporation 2022 Annual Report | 102
MGIC Investment Corporation and Subsidiaries
(Income) for the year. The gain or loss in excess of a 10% corridor is amortized by the average remaining life
expectancy for the pension and supplemental executive retirement plans and by the average remaining service
period of participating employees expected to receive benefits under the other postretirement benefits plan.
Table 11.4 shows the changes in the projected benefit obligation for the years ended December 31, 2022 and
2021.
Change in projected benefit / accumulated benefit
Table
11.4
(In thousands)
12/31/2022
12/31/2021
12/31/2022
12/31/2021
Pension and Supplemental Executive
Retirement Plans
Other Postretirement Benefits
Benefit Obligation at Beginning of Year
$
391,698 $
423,713 $
25,635 $
Company Service Cost
Interest Cost
Plan Participants' Contributions
Net Actuarial (Gain)/Loss
Benefit Payments from Fund
Benefit Payments Paid Directly by Company
Plan Amendments
Curtailments
Settlement Payments from Fund (1)
Other Adjustment
7,153
12,461
—
(83,240)
(13,165)
(114)
3,247
(352)
7,569
11,276
—
(10,018)
(12,866)
(362)
2
—
(42,713)
(27,616)
—
—
1,307
694
463
(8,123)
(1,504)
—
11,278
—
—
(170)
Benefit Obligation at End of Year
$
274,975 $
391,698 $
29,580 $
28,714
1,508
648
456
(3,574)
(1,963)
—
—
—
—
(154)
25,635
(1)
Represents lump sum payments from our pension plan to eligible participants, who were former employees with vested
benefits.
The actuarial gains for 2022 and 2021, reported above, for the pension and supplemental executive retirement
plans and the other postretirement benefits plan were primarily due to an increase in the discount rate used to
calculate the obligations. The discount rate increased to 5.60% at December 31, 2022 from 3.05% at December
31, 2021. See Table 11.7 for the actuarial assumptions used to calculate the benefit obligations of our plans for
2022 and 2021.
MGIC Investment Corporation 2022 Annual Report | 103
MGIC Investment Corporation and Subsidiaries
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) for the years ended December 31, 2022 and 2021.
Change in plan assets
Table
11.5
(In thousands)
12/31/2022
12/31/2021
12/31/2022
12/31/2021
Fair Value of Plan Assets at Beginning of Year
$
391,555 $
411,245 $
140,839 $
119,024
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
Actual Return on Assets
Company Contributions
Plan Participants' Contributions
Benefit Payments from Fund
Benefit Payments Paid Directly by Company
Settlement Payments from Fund
Other Adjustment
(91,303)
6,414
—
(13,165)
(114)
(42,713)
—
13,992
7,162
—
(12,866)
(362)
(27,616)
—
(28,088)
23,773
—
463
—
456
(1,504)
(1,963)
—
—
(556)
—
—
(451)
Fair Value of Plan Assets at End of Year
$
250,674 $
391,555 $
111,154 $
140,839
Change in accumulated other comprehensive income (loss)
("AOCI")
Table
11.6
(In thousands)
AOCI in Prior Year
Increase/(Decrease) in AOCI
Recognized during year - Prior Service (Cost)/
Credit
Recognized during year - Net Actuarial
(Losses)/Gains
Occurring during year - Prior Service Cost
Occurring during year - Net Actuarial Losses/
(Gains)
Pension and Supplemental
Executive Retirement Plans
Other Postretirement Benefits
12/31/2022
12/31/2021
12/31/2022
12/31/2021
$
83,298 $
97,911 $
(44,891) $
(27,892)
745
239
(489)
(213)
(20,109)
3,247
(11,502)
2
3,103
11,277
25,775
(3,352)
30,468
1,697
—
(18,483)
(44,891)
AOCI in Current Year
$
92,956 $
83,298 $
(532) $
MGIC Investment Corporation 2022 Annual Report | 104
MGIC Investment Corporation and Subsidiaries
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
12/31/2022
12/31/2021
12/31/2022
12/31/2021
5.60 %
3.00 %
3.97 %
3.70 %
5.25 %
3.00 %
N/A
N/A
N/A
3.05 %
3.00 %
2.80 %
2.80 %
5.25 %
3.00 %
N/A
N/A
N/A
5.60 %
2.85 %
N/A
N/A
N/A
N/A
2.85 %
7.50 %
N/A
2.35 %
7.50 %
N/A
7.00 %
6.50 %
5.00 %
2031
5.00 %
2028
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
Equity Securities
Debt Securities
Total
Pension Plan
Other Postretirement Benefits
12/31/2022
12/31/2021
12/31/2022
12/31/2021
20 %
80 %
100 %
21 %
79 %
100 %
100 %
— %
100 %
100 %
— %
100 %
Fair value is disclosed using a fair value hierarchy that prioritizes the inputs to valuation techniques used to
measure fair value as described in Note 6 - "Fair Value Measurements".
The following describes the valuation methodologies used for pension plan and other postretirement benefits
plan assets at fair value.
•
•
•
Domestic Mutual Funds: Securities are priced at the net asset value ("NAV"), which is the closing price
published by the mutual fund on the reporting date. These financial assets are categorized as Level 1 in the
fair value hierarchy.
U.S. Government Securities: See Note 6 - "Fair Value Measurements" for a discussion of the valuation
methodologies for U.S. Treasury Securities and Obligations of U.S. Government Corporations and Agencies.
Corporate Debt: See Note 6 - "Fair Value Measurements" for a discussion of the valuation methodologies for
Corporate Debt.
MGIC Investment Corporation 2022 Annual Report | 105
MGIC Investment Corporation and Subsidiaries
•
Foreign Debt: These financial assets are represented by corporate debt securities issued by entities
domiciled outside of the United States. See Note 6 - "Fair Value Measurements" for a discussion of the
valuation methodologies for Corporate Debt.
• Municipal Bonds: See Note 6 - "Fair Value Measurements" for a discussion of the valuation methodologies
for Obligations of U.S. States & Political Subdivisions.
•
Pooled Equity Accounts: Pooled Equity Account assets are represented by the units held by the plan. The
redemption value is determined based on the NAV of the underlying units. The NAV is derived from the
aggregate fair value of the underlying investments less any liabilities as of the reporting date. These
financial assets are categorized as Level 2 in the fair value hierarchy.
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, 2022 and 2021. There were no securities that used
Level 3 inputs.
Pension plan assets at fair value as of December 31, 2022
Table
11.9a
(In thousands)
Domestic mutual funds
U.S. government securities
Corporate debt securities
Corporate debt securities and other
Non-government foreign debt securities
Municipal bonds
Pooled equity accounts
Total Assets at fair value
Pension plan assets at fair value as of December 31, 2021
Table
(In thousands)
11.9b
Domestic mutual funds
U.S. government securities
Corporate debt Securities
Corporate debt securities and other
Non-government foreign debt securities
Municipal bonds
Pooled equity accounts
Total Assets at fair value
Level 1
Level 2
Total
$
67 $
13,328
— $
—
—
—
—
—
146,854
20,793
18,336
51,296
67
13,328
146,854
20,793
18,336
51,296
$
13,395 $
237,279 $
250,674
Level 1
Level 2
Total
$
4,071 $
32,947
— $
—
—
—
—
—
221,033
34,103
20,093
79,308
4,071
32,947
221,033
34,103
20,093
79,308
$
37,018 $
354,537 $
391,555
The pension plan has implemented a strategy to reduce risk through the use of a targeted funded ratio. The
liability driven component is key to the asset allocation. The liability driven component seeks to align the duration
of the fixed income asset allocation with the expected duration of the plan liabilities or benefit payments. Overall
asset allocation is dynamic and specifies target allocation weights and ranges based on the funded status.
An improvement in funded status results in the de-risking of the portfolio, allocating more funds to fixed income
and less to equity. A decline in funded status would result in a higher allocation to equity. The maximum equity
allocation is 40%.
MGIC Investment Corporation 2022 Annual Report | 106
MGIC Investment Corporation and Subsidiaries
The equity investments use combinations of mutual
funds, ETFs, and pooled equity account structures
focused on the following strategies:
Strategy
Objective
Return seeking
growth
Funded ratio
improvement over
the long term
Return seeking
bridge
Downside
protection in the
event of a
declining equity
market
Investment types
● 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, 2022 and 2021. All are Level 1 assets.
Other postretirement benefits plan assets at fair value as
of December 31, 2022
Table
11.10a
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
89,584
21,570
111,154
Other postretirement benefits plan assets at fair value as
of December 31, 2021
Table
11.10b
(In thousands)
Domestic Mutual Funds
International Mutual Funds
Total Assets at fair value
$
$
Level 1
112,770
28,069
140,839
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
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, 2022 included 2% that was
primarily invested in equity securities of emerging
market countries and another 17% was invested in
securities of companies primarily based in Europe and
the Pacific Basin.
the year ended December 31, 2022, we
For
the pension and
to
contributed $6.4 million
supplemental executive retirement plans. We do not
expect to make a contribution to the pension plan in
2023 and distributions
the supplemental
executive retirement plan will be funded as incurred.
We did not make a contribution to the other
postretirement benefits plan in 2022 and we do not
expect to make a contribution in 2023.
from
Expected future benefit payments from the plans are
shown in Table 11.12 below.
Expected future benefit payments
Table
11.12
Pension and
Supplemental
Executive
Retirement Plans
Other
Postretirement
Benefits
(In thousands)
12/31/2022
12/31/2022
Current + 1
Current + 2
Current + 3
Current + 4
Current + 5
23,966
23,309
23,104
23,363
23,194
2,211
2,476
2,780
2,886
2,929
Current + 6 - 10
102,588
16,102
PROFIT SHARING AND 401(K)
We have a profit sharing and 401(k) savings plan for
employees. At the discretion of the Board of Directors,
we may make a contribution to the plan of up to 5% of
each participant's eligible compensation. We provide
a matching 401(k) savings contribution for employees
of 100% up to the first 4% contributed. We recognized
expenses related to these plans of $7.6 million in
2022 and $8.0 million
in both 2021 and 2020.
Effective January 1, 2023, we will provide a matching
MGIC Investment Corporation 2022 Annual Report | 107
MGIC Investment Corporation and Subsidiaries
401(k) savings contribution for employees of 200% up
to the first 2% contributed and 100% of the next 2%
contributed.
NOTE 12
Income Taxes
Net deferred tax assets (liabilities) as reported on the
consolidated balance sheet as of December 31, 2022
and 2021 are shown in table 12.1 below. At December
31, 2021 the deferred tax liability is included as a
component of Other liabilities on the consolidated
balance sheet.
Deferred tax assets and liabilities
Table
12.1
(In thousands)
2022
2021
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
2022
2021
2020
21.0 % 21.0 %
21.0 %
(0.5) %
(0.6) %
(0.9) %
0.1 %
0.4 %
0.1 %
Total deferred tax assets
$ 144,819 $
32,331
Other, net
Total deferred tax liabilities
(20,050)
(71,743)
Effective tax rate
20.6 % 20.8 %
20.2 %
We have not recorded any uncertain tax positions
during 2022 and 2021 and have no unrecognized tax
benefits at December 31, 2022 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 2019.
Net deferred tax asset
(liability)
$ 124,769 $
(39,412)
Table 12.2 includes the components of the net
deferred tax asset (liability) as of December 31, 2022
and 2021.
Deferred tax components
Table
12.2
(In thousands)
2022
2021
Unearned premium reserves
$ 16,209 $ 19,116
Benefit plans
Loss reserves
(9,444)
(21,360)
1,785
4,034
Unrealized depreciation
(appreciation) in investments
108,588
(39,883)
Deferred policy acquisition cost
(4,003)
(4,551)
Deferred compensation
Research and experimental costs
Other, net
6,806
9,719
6,118
—
(4,891)
(2,886)
Net deferred tax asset (liability)
$ 124,769 $ (39,412)
We believe that all gross deferred tax assets at
December 31, 2022 and 2021 are fully realizable and
no valuation allowance has been established.
Table 12.3 summarizes the components of the
provision for income taxes:
Provision for (benefit from) income taxes
Table
12.3
(In thousands)
2022
2021
2020
Current federal
$ 228,259 $ 161,055 $ 85,574
Deferred federal
Other
Provision for
income taxes
(5,235)
1,661
4,392
1,347
28,244
(648)
$ 224,685 $ 166,794 $ 113,170
Current federal income tax payments were $236.5
million, $155.3 million, and $79.6 million in 2022, 2021
and 2020, respectively. At December 31, 2022 we
owned $661.7 million of tax and loss bonds.
MGIC Investment Corporation 2022 Annual Report | 108
MGIC Investment Corporation and Subsidiaries
NOTE 13
Shareholders' Equity
NOTE 14
Statutory Information
CHANGE IN ACCOUNTING POLICY
STATUTORY ACCOUNTING PRINCIPLES
As of January 1, 2021, we adopted the updated
guidance for "Accounting for Convertible Instruments
and Contracts
in an Entity’s Own Equity”. The
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 2022, we
repurchased approximately 27.8 million shares of our
common stock at a weighted average cost per share
of $13.89, which included commissions. We may
repurchase up to an additional $114 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 2023, through February
17, we repurchased approximately 3.1 million shares
of our common stock at a weighted average cost per
share of $13.65, which included commissions.
In 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.
2020, we
repurchased
approximately
During
9.6 million shares of our common stock at a weighted
average cost per share of $12.47, which included
commissions.
The statutory financial statements of our insurance
companies are presented on the basis of accounting
principles prescribed, or practices permitted, by the
Office of the Commissioner of Insurance of the State
of Wisconsin (the "OCI"), which has adopted the
National Association of Insurance Commissioners
("NAIC") Statements of Statutory Accounting
Principles ("SSAP") as the basis of its statutory
accounting principles. In converting from statutory to
GAAP, typical adjustments include deferral of policy
acquisition costs, the inclusion of net unrealized
holding gains or losses in shareholders' equity relating
to fixed income securities, and the inclusion of
statutory non-admitted assets.
In addition to the typical adjustments from statutory
to GAAP, mortgage insurance companies are required
to maintain contingency loss reserves equal to 50% of
premiums earned under SSAP and principles
prescribed by the OCI. Such amounts cannot be
withdrawn for a period of ten years except as
permitted by insurance regulations. With regulatory
approval, a mortgage guaranty insurance company
may make early withdrawals from the contingency
reserve when
losses exceed 35% of
premiums earned in a calendar year. For the year
ended 2022, 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
CASH DIVIDENDS
In the first and second quarters of 2022, we paid
quarterly cash dividends of $0.08 per share to
shareholders which totaled $51.0 million. In the third
and fourth quarters of 2022, we paid quarterly cash
dividends of $0.10 per share which
totaled
$60.7 million. On January 24, 2023, the Board of
Directors declared a quarterly cash dividend to
holders of the company's common stock of $0.10 per
share payable on March 2, 2023, to shareholders of
record at the close of business on February 17, 2023.
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.
recognizes only statutory accounting
The OCI
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
in other states. Specifically, Wisconsin
found
in
domiciled companies
the
income
contingency
record changes
the
through
reserves
loss
MGIC Investment Corporation 2022 Annual Report | 109
MGIC Investment Corporation and Subsidiaries
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.
The statutory net income, policyholders’ surplus, and
contingency
insurance
subsidiaries, including MGIC, are shown in table 14.1.
liability of our
reserve
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
minimum policyholder position
("MPP"). MGIC's
“policyholder position”
its net worth or
includes
surplus, and its contingency loss reserve.
instead
Statutory financial information of insurance subsidiaries
Table
14.1
As of and for the Years Ended
December 31,
(In thousands)
2022
2021
2020
Statutory net income
$ 440,944 $ 295,811 $ 65,201
Statutory
policyholders' surplus
924,977
1,220,714
1,339,509
Contingency reserve
4,669,724
4,126,604
3,585,864
The decrease in statutory policyholders' surplus from
December 31, 2021 to December 31, 2022 is primarily
due to dividend payments to the parent company
(discussed below), offset by statutory net income.
For the years ended December 31, 2022, 2021, and
2020 there were no contributions made to MGIC or
distributions from other insurance subsidiaries to us.
Dividends paid by MGIC are shown in table 14.2
below.
Surplus contributions and dividends of insurance
subsidiaries
Table
14.2
(In thousands)
2022
2021
2020
Years Ended December 31,
Dividends paid by
MGIC to the parent
company (1)
$ 800,000
400,000
390,000
its
(1) Dividends paid in cash and/or investment securities. Also,
in 2021 MGIC distributed to the holding company, as a
dividend,
in MGIC Credit Assurance
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 insurance laws of 16 jurisdictions, including
Wisconsin, our domiciliary state, require a mortgage
insurer to maintain a minimum amount of statutory
capital relative to the RIF (or a similar measure) in
order for the mortgage insurer to continue to write
new business. We refer to these requirements as the
“State Capital Requirements” and, together with the
GSE
“Financial
Requirements,
Requirements.” While they vary among jurisdictions,
the most common State Capital Requirements allow
for a maximum risk-to-capital ratio of 25 to 1. A risk-
to-capital ratio will increase if (i) the percentage
decrease in capital exceeds the percentage decrease
in insured risk, or (ii) the percentage increase in
Financial
the
that under
At December 31, 2022, MGIC’s risk-to-capital ratio
was 10.2 to 1, below the maximum allowed by the
jurisdictions with State Capital Requirements and its
policyholder position was $3.5 billion above the
required MPP of $2.1 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.
It
Insurance Model Act.
The NAIC previously announced plans to revise the
State Capital Requirements that are provided for in its
Mortgage Guaranty
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 certain items were
not completely addressed by the framework, including
the treatment of ceded risk and minimum capital
floors. In October 2022, the NAIC working group
released a revised exposure draft of the Mortgage
Guaranty Insurance Model Act that does not include
changes to the capital requirements of the existing
Model Act.
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
MGIC Investment Corporation 2022 Annual Report | 110
MGIC Investment Corporation and Subsidiaries
payment date. Before making any dividend payments
in 2023, we will notify the OCI to ensure it does not
object.
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,
2022, 6.9 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 $24.7
million, $17.1 million, and $13.8 million for the years
ended December 31, 2022, 2021 and 2020,
respectively. The
tax benefit
recognized for share-based plans was $2.1 million,
$1.8 million, and $1.7 million for the years ended
December 31, 2022, 2021, and 2020, respectively.
Table 15.1 summarizes restricted stock or restricted
stock unit (collectively called “restricted stock”)
activity during 2022.
income
related
(1) Approximately 67% of the shares granted in 2022 are
subject to performance conditions under which the target
number of shares granted may vest up to 200%.
At December 31, 2022, the 3.6 million shares of
restricted stock outstanding consisted of 2.8 million
shares that are subject to performance conditions
(“performance shares”), 0.7 million shares that are
subject only to service conditions (“time vested
shares”), and 0.1 million shares related to non-
employee director shares. The weighted-average
grant date fair value of restricted stock granted during
2021 and 2020 was $12.83 and $13.62, 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 2022, 2021 and 2020 was $23.3 million, $15.1
million, and $20.4 million, respectively.
share-based
compensation
As of December 31, 2022, there was $17.0 million of
total unrecognized compensation cost related to non-
vested
compensation agreements
granted under the plans. Of this total, $12.3 million of
unrecognized
to
performance shares and $4.7 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 1.6 years.
relate
costs
Restricted stock
Table
15.1
Weighted
Average Grant
Date Fair
Market Value
Shares
Restricted stock
outstanding at December
31, 2021
Granted (1)
Vested
Forfeited
$
12.88
4,146,088
15.45
1,273,979
12.35
13.00
(1,549,098)
(294,290)
Restricted stock
outstanding at December
31, 2022
$
14.02
3,576,679
MGIC Investment Corporation 2022 Annual Report | 111
involved
in other disputes and
unable to assess the potential impact of any such
litigation at this time. In addition, from time to time,
we are
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
MGIC Investment Corporation and Subsidiaries
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, 2022.
Minimum future operating lease payments
Table
16.1
(In thousands)
2023
2024
2025
2026
2027 and thereafter
Total
Amount
908
831
667
152
—
2,558
$
$
Total lease expense under operating leases was $1.2
million in 2022, $1.3 million in 2021, and $1.9 million
in 2020.
NOTE 17
Litigation and Contingencies
to determine
loan and servicing files
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 herein 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
(such
reduction referred to as a "curtailment").
insurance policy
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. In those cases, until settlement
negotiations or
legal proceedings are concluded
receipt of any necessary GSE
the
(including
approvals), it is possible that we will record an
additional loss.
loss
We have been named as a third-party defendant in a
lawsuit that involves refunds of mortgage insurance
premiums under the Homeowners Protection Act. We
are monitoring litigation addressing similar issues in
which we have not been named a defendant. We are
MGIC Investment Corporation 2022 Annual Report | 112
MGIC Investment Corporation and Subsidiaries
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
Teresita M. Lowman
Strategic Advisor
Launch Factory
Technology incubator
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
Multinational conglomerate
Michael E. Lehman
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
Former Executive Vice President & CFO
Moody’s Analytics, Inc.
Former Chief Executive Officer
Sun Microsystems
MGIC Investment Corporation
Risk measurement and
management firm
MGIC Investment Corporation 2022 Annual Report | 113
MGIC Investment Corporation and Subsidiaries
Officers
MGIC Investment Corporation
Chief Executive Officer
Timothy J. Mattke
President and Chief Operating Officer
Salvatore A. Miosi
Senior Vice President
Dianna L. Higgins
Investor Relations
Vice Presidents
Nathan R. Abramowski
Executive Vice Presidents
Treasurer
Nathaniel H. Colson
Chief Financial Officer
Paula C. Maggio
General Counsel and Secretary
Heidi A. Heyrman
Assistant Secretary
Brian M. Remington
Assistant Secretary
Leslie A. Schunk
Assistant Secretary
Julie K. Sperber
Controller & Chief Accounting Officer
Michael J. VanHoorn
Assistant Treasurer
MGIC Investment Corporation 2022 Annual Report | 114
MGIC Investment Corporation and Subsidiaries
Officers
Mortgage Guaranty Insurance Corporation
Chief Executive Officer
Jane S. Coleman
Timothy J. Mattke
National Accounts
Stacey B. Murphy
Talent and Total Rewards
President and Chief Operating Officer
Luis A. Contreras
Christopher T. Perry
Salvatore A. Miosi
National Accounts
Sales
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
Geoffrey F. Cooper
Product Development
Margaret M. Crowley
Marketing
Dean D. Dardzinski
Managing Director
Christina A. Ficks
Customer Experience
Tara E. Radmann
Business Automation
Brian M. Remington
Loss Mitigation, Assistant
General Counsel and Assistant
Secretary
David H. Schroeder
Claims & Policy Servicing
Leslie A. Schunk
Daniel J. Garcia-Velez
Securities Law, Assistant General
Regional Sales and Marketing
Counsel and Assistant Secretary
Chief Human Resources Officer
Heidi A. Heyrman
Bryan D. Specht
Robert J. Candelmo
Chief Information Officer
Dianna L. Higgins
Investor Relations
Michael E. Jacobson
Product Strategy
Vice Presidents
Nathan R. Abramowski
Treasurer
Terry A. Aikin
Managing Director
Robert K. Bates
Sales Strategy
Richard F. Chang
Internal Audit
Regulatory Relations, Assistant General
Underwriting
Counsel and Assistant Secretary
Gary J. Johnson
Data Science
Julie K. Sperber
Controller and
Chief Accounting Officer
Srinidhi Kadasinghanahalli
Systems Development
Jennifer M. Steffens
Credit Policy and Quality Control
Mark J. Krauter
National Accounts
Michael L. Kull
Managing Director
Sean R. Valcamp
Chief Technology Officer
Kathleen E. Valenti
Chief Compliance Officer
Eric D. Leaver
Michael J. VanHoorn
Mortgage Modeling Analytics
Assistant Treasurer
Elyse M. Mitchell
National Accounts
Jennifer A. Westphal
Chief Information Security Officer
MGIC Investment Corporation 2022 Annual Report | 115
MGIC Investment Corporation and Subsidiaries
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 2022 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.
Russell 2000 Financial Index
S&P 500
Peer Index (ACGL, AGO, ESNT, FAF, FBC, FNF,
GNW, NMIH, OCN, PFSI, RDN,STC, & WD)
MGIC
2017
2018
2019
2020
2021
2022
100
100
100
100
89
96
88
74
111
126
129
101
108
149
119
92
141
191
154
108
119
157
148
100
MGIC Investment Corporation 2022 Annual Report | 116
Russell 2000 Financial IndexS&P 500Peer Index (ACGL,AGO,ESNT,FAF,FBC,FNF,GNW,NMIH,OCN,PFSI, RDN,STC, & WD)MGIC20172018201920202021202250100150200
MGIC Investment Corporation and Subsidiaries
Shareholder Information
The Annual Meeting
The Annual Meeting of Shareholders of MGIC
Investment Corporation will be held on April 27, 2023,
at 9:00 a.m. Central time, via webcast at:
www.virtualshareholdermeeting.com/MTG2023.
10-K Report
Copies of the Annual Report on Form 10-K for the
year ended December 31, 2022, filed with the
Securities and Exchange Commission, are available
without charge to shareholders on request from:
Secretary
MGIC Investment Corporation
P. O. Box 488
Milwaukee, WI 53201
from
The Annual Report on Form 10-K referred to above
includes as exhibits certifications
the
Company’s Chief Executive Officer and Chief Financial
Officer under Section 302 of the Sarbanes-Oxley Act.
Following the 2022 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
listing
Company of
standards of the Exchange.
the corporate governance
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) 347-2635
MGIC Stock
MGIC Investment Corporation Common Stock is listed
on the New York Stock Exchange under the symbol
MTG. At March 10, 2023, 290,084,746 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.
its
The Company is a holding company and the payment
is
of dividends from
restricted by insurance regulations. For a discussion
- "Statutory
of these restrictions, see Note 14
Information,
our
Dividend
consolidated financial statements.
insurance subsidiaries
Restrictions”
to
As of March 10, 2023, the number of shareholders of
record was 293. In addition, we estimate that there
are approximately 66,419 beneficial owners of shares
held by brokers and fiduciaries.
MGIC Investment Corporation 2022 Annual Report | 117